2018 (7) TMI 61 - AT - Income Tax

Nature of loss - allowability as busniss loss - assessee settled the account with the client and agreed to bear the losses - Held that - Since the assessee is in share business and looking to the future business prospects and in order to retain the client agreed to bear the loss to the extent of ₹ 3,78,440/- and claimed the same as expenditure. Existing position of the client Mr. Jagdish Jhawar was squared off in January 2004 and to settle the matter and maintain trade relationship, the assessee had agreed to bear the loss on which settlement was agreed upon in March 2004 and the amount was claimed as expenditure/loss. We also find that the trades with this client were resumed from 15.03.2004 and the assessee had earned brokerage from the said client immediately in the next year amounting to ₹ 3,29,492/- in respect of F&O trade and brokerage at ₹ 1,40,870/- in respect of share trading. We find that due to the said relationship only the assessee was able to make good the loss suffered due to settlement with the client. CIT(A) confirmed the disallowance by holding that the transaction cannot be held to be revenue in nature. Loss borne by the assessee is in the nature of a business loss. The business and commercial expediency of making the settlement with the client and agreeing to bear the loss to the extent of ₹ 3,78,440/- is very well established on records. - decided partly in favour of assessee.

Summary

Issues:
- Disallowance of expenses claimed as revenue expenditure
- Treatment of loss as speculative loss
- Business loss versus capital expenditure

Analysis:
1. The appeal was against the order of Ld. CIT(A)-I, Indore, for assessment year 2004-05. Grounds 2 & 3 were dismissed as not pressed, and ground 4 was of a general nature. The main issue was ground no. 1, where the disallowance of ?3,78,440 out of total expenses of ?4,57,450 was contested by the appellant.

2. The assessee, a member of the National Stock Exchange, claimed the amount towards Error & Omissions account in its profit and loss account. The AO disallowed the amount treating it as speculative loss not set off against speculation income. The Ld. CIT(A) confirmed the disallowance, leading to the appeal before the Tribunal.

3. The appellant contended that the amount was incurred solely for business purposes and should be allowed as a revenue expenditure under section 37. They explained the settlement with a client, bearing losses to maintain the business relationship, which led to resuming trades and earning brokerage income.

4. The Ld. Counsel argued that the loss borne by the assessee was a business loss, not a speculative loss. The Tribunal found that the settlement with the client was for business and commercial expediency, allowing the claim as a revenue expenditure. The Tribunal deleted the addition of ?3,78,440, partly allowing the appeal.

5. The Tribunal held that the loss borne by the assessee was in the nature of a business loss, considering the circumstances and the commercial expediency of the settlement with the client. The decision was based on the established records of the case, leading to the deletion of the disallowed amount.

6. In conclusion, the Tribunal partly allowed the appeal, emphasizing the business nature of the loss incurred by the assessee and the commercial expediency involved in the settlement with the client. The judgment highlighted the distinction between business losses and capital expenditures, ultimately ruling in favor of the appellant.