2018 (5) TMI 1324 - AT - Income Tax

Taxability as long term capital gain - provisions of section 50C applicability - Held that - As we have held that what was sold, was stock-in-trade and hence assessable under the head business income, the provisions of section 50C will not apply for the impugned assessment years. Hence this finding of the Ld. CIT(A) is also upheld. Thus the ground of revenue in these appeals for the assessment year 2008-09 is dismissed. Speculation loss as trading loss of the assessee - Held that - This grounds taken by the revenue on the deletion of disallowance of loss incurred on future trading of foreign exchange by the CIT(A) is hereby dismissed. See Nand Nandan Agrawal vs DCIT 2018 (2) TMI 253 - ITAT AGRA .

Issues Involved:
1. Classification of income from the sale of space as long-term capital gain or business income.
2. Applicability of Section 50C of the Income Tax Act.
3. Treatment of "speculation loss" as trading loss.

Detailed Analysis:

Issue 1: Classification of Income from the Sale of Space

The primary issue revolves around whether the income from the sale of space should be classified under long-term capital gains or business income. The assessee converted 6049 sq. ft. of space in the Poddar Court building into stock-in-trade and sold 5707 sq. ft. The Assessing Officer (AO) observed that the property had been used for letting out and earning house property income, and had never been shown as a business asset. Therefore, the AO treated the income as long-term capital gains.

However, the CIT(A) disagreed, stating that the conversion of capital assets into stock-in-trade is permissible under Section 45(2) of the Income Tax Act. The CIT(A) directed that the profit on sale should be treated as long-term capital gain up to the date of conversion and as business income thereafter. This was based on the fair market value at the date of conversion, which should be considered as the full value of consideration received for computing capital gains.

Issue 2: Applicability of Section 50C

The AO applied Section 50C to determine the sale consideration based on the stamp duty valuation, arguing that the sales were made at a lower rate than the fair market value. The CIT(A) countered this by stating that Section 50C applies only to capital assets and not to stock-in-trade. Therefore, the business income should be calculated based on the actual sale consideration minus the market value at the date of conversion.

Issue 3: Treatment of "Speculation Loss" as Trading Loss

For the assessment year 2010-11, the issue was whether the "speculation loss" incurred on future trading in forex should be allowed as a trading loss. The CIT(A) referred to CBDT instruction no 3/2010 and held that the loss is allowable as a business loss. This view was supported by various ITAT decisions, including IVF Advisors Pvt. Ltd. vs ACIT and Nand Nandan Agrawal vs DCIT, which held that derivatives, including foreign currency options, are not speculative in nature and should be treated as business transactions.

Conclusion:

1. Classification of Income: The ITAT upheld the CIT(A)'s decision that the profit on the sale of building space should be treated as long-term capital gain up to the date of conversion and as business income thereafter, as per Section 45(2) of the Income Tax Act.

2. Applicability of Section 50C: The ITAT agreed with the CIT(A) that Section 50C does not apply to stock-in-trade, and hence, the business income should be calculated based on the actual sale consideration.

3. Treatment of "Speculation Loss": The ITAT upheld the CIT(A)'s decision to allow the "speculation loss" on future trading in forex as a trading loss, consistent with the principles laid down in various ITAT decisions.

Both appeals by the Revenue were dismissed, and the decisions of the CIT(A) were upheld. The order was pronounced in the open court on 18th May, 2018.

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