2018 (1) TMI 242 - AT - Income Tax

Disallowance of loss - loss suffered due to brazen embezzlement during the course of share trading business by the errant officials of Religare Securities Ltd - Held that - As perused the award dated 10.06.2008 filed by the assessee it appears that the claim of the assessee against M/s. Religare Securities Ltd was that they had incurred a loss in the matter of trading on behalf of the assessee in future and option segment and that because of the negligence in not taking proper position in future and option segment of buying and selling securities, the loss has occurred. The plea of M/s. Religare Securities Ltd was that the assessee did not give proper instructions of taking position in future and option segment and therefore he cannot disown the loss. M/s. Religare Securities Ltd had not disputed the quantum of loss as of ₹ 15,76,022/-. The arbitrator ultimately found no substance in the claim of the assessee and dismissed the claim of the assessee against M/s. Religare Securities Ltd. This evidence is sufficient to prove the claim of the assessee that he had incurred a loss of ₹ 15,76,022/-. The loss is directed to be allowed as deduction. Ground no.1 is allowed. Addition on account of interest on IL & FS for margin funding in Future and Option Trading of Share - Held that - The assessee claims that interest need not be capitalized as cost of investment . Therefore the claim for allowing as revenue expenditure ought to have been allowed by the Revenue authorities. Therefore direct the AO to allow the claim of the assessee. However it is made clear that the assessee cannot claim this interest as cost of investment in future. The assessee has made a statement across the bar that the assessee undertakes not to make such a claim. Ground No.2 is accordingly allowed.

Summary

Issues:
1. Disallowance of loss due to embezzlement during share trading business.
2. Disallowance of interest on margin funding in Future and Option Trading of Share.

Issue 1: Disallowance of loss due to embezzlement during share trading business:
The appellant, an individual advocate, filed a return of income for A.Y. 2009-10 declaring a total income of ?4,33,400, claiming a deduction of ?15,80,125 as a loss from share trading. The appellant alleged that M/s. Religare Securities Ltd. carried out unauthorized transactions resulting in a loss of ?15,80,213.70, which should be allowed as a deduction. The AO disallowed ?7,13,392 of the loss, as evidence for this portion was not furnished. The CIT(A) upheld this decision. On appeal, the Tribunal allowed the claim, considering an arbitrator's award stating that the loss was due to negligence by M/s. Religare Securities Ltd. The Tribunal found the evidence sufficient to prove the loss and allowed it as a deduction.

Issue 2: Disallowance of interest on margin funding in Future and Option Trading of Share:
The appellant claimed a deduction of ?85,743 as interest paid to IL & FS for margin funding in Future and Option Trading. The AO disallowed this amount as it was capitalized as part of the investment. The CIT(A) rejected the claim, citing the absence of an auditor's certificate supporting the revised balance sheet. The Tribunal, however, allowed the claim, directing the AO to allow the interest as a revenue expenditure. The appellant agreed not to claim this interest as a cost of investment in the future. Therefore, the Tribunal allowed this ground of appeal.

In conclusion, the appeal by the appellant was partly allowed, with the Tribunal ruling in favor of the appellant on both issues.