2018 (4) TMI 562 - AT - Income Tax

Not allowing the set off of brought forward non speculative loss against the current years speculative income - Set off of loss from one head against income from another - Held that - There is no blanket bar as such in adjustment of carry forward non speculation business loss against current year speculation profit. These provisions provide that loss in speculation business cannot be set against any income under the head Business or profession nor against income under any other head, but it can be set off only against profits, if any, of another speculation business. Section 73 effects complete segregation of speculation losses, which stand distinct and separate and can be mixed for set off purpose, only with speculation profits. The said circular of the Board (which has been held by the Hon ble High Court to be still holding the field) provide that if speculation losses for earlier years are carried forward and if in the year of account a speculation profit is earned by the assessee, then such speculation profits for the current accounting year should be adjusted against carried forward of speculation losses of the earlier year, before allowing any other losses to be adjusted against those profits. Hence, it is clear that there is no bar in adjustment of unabsorbed business losses from speculation profit of the current year, provided the speculation losses for the year and earlier has been first adjusted from speculation profit. In the present case, no case has been made out by the Revenue that the current or earlier speculation losses have not been adjusted from the speculation profit. Addition made on account of mismatch of AIR data with income offered by the assessee - assessee had claimed the TDS on the same and had not offered the income for taxation - Held that - When the assessee contradicts the AIR information, the Assessing Officer should verify the same. Here we find that though the assessee is contradicting the AIR information by stating that these transactions do not relate to it, the assessee has duly taken credit of the concerned TDS. Thus, the assessee cannot blow hot and cold and shift the onus to the Revenue. The assessee having taken credit of the TDS has to prove that the transaction did not belong to him if it claims that the relevant income do not relate to it. Hence, we remit this issue also to the file of the Assessing Officer. Assessing Officer is directed to give the assessee an opportunity to prove that the credit for the said TDS has been wrongly taken and these incomes do not belong to it. Needless to add, the assessee should be granted adequate opportunity of being heard. Mark to market loss in this case is allowable.

Summary

Issues Involved:
1. Set off of brought forward non-speculative loss against current year's speculative income.
2. Addition due to mismatch of AIR data with income offered by the assessee.
3. Addition on account of mark-to-market loss claimed by the assessee in derivative transactions.

Issue-wise Detailed Analysis:

1. Set off of brought forward non-speculative loss against current year's speculative income:

The assessee contended that as per sections 72 and 73 of the Income Tax Act, it correctly set off the brought forward non-speculative loss against the current year's speculative income. The Assessing Officer (AO) rejected this claim, stating that the assessee had no brought forward speculation loss available. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, interpreting that non-speculative losses must be set off under section 72 against profits of any business or profession except speculation business, which falls under section 73. The ITAT, however, found that there is no blanket bar in adjusting carry forward non-speculative business loss against current year speculation profit, provided speculation losses for the year and earlier have been first adjusted from speculation profit. The ITAT cited Circular No. 23-D and various case laws, including decisions from the Hon’ble Calcutta High Court and Hon’ble Bombay High Court, supporting the assessee's claim. Consequently, the ITAT set aside the orders of the lower authorities and decided in favor of the assessee.

2. Addition due to mismatch of AIR data with income offered by the assessee:

The AO noted discrepancies between AIR data and the income offered by the assessee, leading to additions for interest and rent income not reconciled by the assessee. The CIT(A) directed the AO to verify the revised Form 26AS for discrepancies related to Edelvalue Partners and to delete the additions for amounts related to Divya Strips & Profile Pvt. Ltd. The ITAT upheld the CIT(A)’s direction for verification of the revised Form 26AS but found the deletion of additions for Divya Strips & Profile Pvt. Ltd. inappropriate. The ITAT remitted the issue back to the AO, directing the AO to give the assessee an opportunity to prove that the credit for the said TDS was wrongly taken and that the incomes did not belong to it.

3. Addition on account of mark-to-market loss claimed by the assessee in derivative transactions:

The AO disallowed the mark-to-market loss claimed by the assessee, considering it as notional and contingent in nature. The CIT(A) deleted the disallowance, relying on several ITAT decisions in favor of the assessee's group companies. The ITAT affirmed the CIT(A)’s decision, noting that the derivatives were held as stock-in-trade and valued on the principle of cost or market value, whichever is lower. The ITAT referenced the Hon’ble Supreme Court decisions and ITAT's previous rulings, which supported the claim that anticipated losses in valuation of closing stock should be allowed. The ITAT also noted that CBDT Circular No. 3/2010, which disallowed such losses, was not binding on appellate authorities and contradicted the Hon’ble Supreme Court's decisions. Thus, the ITAT upheld the CIT(A)’s order allowing the mark-to-market loss.

Conclusion:

The ITAT ruled partly in favor of the assessee, allowing the set off of brought forward non-speculative loss against current year's speculative income and the mark-to-market loss in derivative transactions, while remitting the issue of income mismatch due to AIR data back to the AO for further verification.