2020 (1) TMI 1018 - AT - Income Tax

Estimation of income of trading transaction in derivatives U/s 44AD - Non accepting the returned loss - whether converting a loss into estimated profit not only is unjustified but also, unwarranted as per the statutory provisions and the loss from trading transaction in derivatives deserves to be well recognized, accepted and has to be allowed - HELD THAT - When the Assessing Officer without disputing the amount of equity loss has stated in the said gain/loss statement issued by the share broker as on 31.3.2016, then the amount of loss from other share transaction cannot be disallowed or disbelieved. On estimation of profit @ 8% by the AO, it is of the view that this action is baseless, meaningless and has not been supported by any documents or corroborative evidence. Therefore, such kind of estimation cannot be held as sustainable and thus,demolish the same. Respectfully following the proposition rendered by ITAT Delhi in the case of Felex Enterprises Pvt Ltd 2013 (9) TMI 1247 - ITAT DELHI , direct the Assessing Officer that the amount of ₹ 22,30,251.19 should be allowed to the assessee as normal business loss. Disallowance of set off of business loss U/s 71 - HELD THAT - AO has wrongly estimated the net income of the assessee and was not correct in treating the loss as speculative loss and same has to be treated as normal business loss. Therefore, as per provisions of section 71(1) of the Act, where in respect of any assessment year, the net result of the computation of income under any head of income, other than capital gains , is a loss and the assessee has income assessable under the head capital gains such loss may, subject to the provisions of the Chapter -VI, be entitled to, if the amount of such loss set off against his income, if any, assessable for that assessment year under any head of income. Therefore, keeping in view the said subsection( 1) of Section 71 direct the Assessing officer to allow set off the loss incurred by the assessee from trading transaction in derivatives from other heads of income. Accordingly, the Assessing Officer is directed to recalculate the taxable income of the assessee. Ground No.3 is allowed.

Summary

Issues Involved:
- Estimation of income from trading transaction in derivatives under section 44AD
- Disallowance of set off of business loss under section 71

Estimation of Income from Trading Transaction in Derivatives under Section 44AD:
The appeal was filed against the CIT(A)'s order for the assessment year 2016-17. The Assessing Officer estimated the income from trading in derivatives at 8% of the total turnover as per section 44AD of the Income Tax Act. The CIT(A) upheld this addition, leading to the appeal before the Tribunal. The assessee contended that as a salaried employee with derivative trading turnover below ?1 crore, no tax audit was required. The assessee maintained that losses were incurred in derivative transactions, thus no income arose. The Tribunal noted that the Assessing Officer's estimation lacked supporting evidence. The Tribunal referenced a previous ITAT Delhi case to allow the loss from derivative transactions as normal business loss. The Tribunal found the estimation baseless and unsustainable, directing the Assessing Officer to allow the loss as normal business loss. Consequently, Ground No.2 of the appeal was allowed.

Disallowance of Set Off of Business Loss under Section 71:
Regarding Ground No.3 of the appeal, the assessee argued that the Assessing Officer incorrectly denied the set off of business loss, which is a legitimate set off allowed by the statute. The assessee contended that the loss from trading in derivatives should be set off against regular income from other heads. The Assessing Officer allowed the short-term capital loss to be carried forward but denied the set off of the loss from derivative transactions. The Tribunal, after allowing Ground No.2 of the appeal, concluded that the loss should be treated as normal business loss, not speculative loss. Therefore, under section 71(1) of the Act, the Tribunal directed the Assessing Officer to allow the set off of the loss from derivative transactions against income from other heads. Accordingly, the Tribunal instructed the Assessing Officer to recalculate the taxable income of the assessee, resulting in the allowance of Ground No.3 of the appeal.

In conclusion, the Tribunal allowed the appeal of the assessee, emphasizing the correct treatment of losses from derivative transactions as normal business losses and directing the Assessing Officer to allow the set off of such losses against income from other heads.