2022 (11) TMI 1056 - AT - Income Tax

Rectification of mistake u/s 154 - Addition made on account of set off of speculation loss against business income - HELD THAT - The assessee s claim of the set-off of the impugned loss against business income in assessment as correctly allowed by the AO upon verification, accepted by the ld. CIT(A), was, on examination, found to be de hors both the facts of the case and the law in the matter. There had been, after the initial inquiry, which was again a general inquiry in respect of large expenses , no further verification or even finding by the AO in assessment, who had failed to take note of s. 43(5) of the Act, much less examine the satisfaction of the requirements thereof. Section 43(5) being clearly attracted on the basis of facts borne out by the record, i.e., commodity derivative trading, which is, by definition, speculative, unless, of course, it is qua eligible transactions, defined thereunder and, further, carried through the members of a recognised association, on which commodity transaction tax has been charged. There is in fact no claim of satisfaction of these attributes, or even reference to s. 43(5). The set off of the impugned loss against the assessee s other income without reference to s. 43(5) is clearly a mistake apparent from record which includes a mistake of law as well. The AO thus had the necessary jurisdiction for rectification in respect of the adjustment of the said loss, and the notice dated 14/12/2016 u/s 154, discussed in detailed at para 3.5 of this order, is, thus, a valid notice in the eyes of law. AO, however, rather than ascertaining in the rectification proceedings if the impugned transactions did indeed satisfy the requirement/s of s.43(5) r/w clause (e) of proviso thereto, i.e., defining speculative transaction, issued a finding without any verification and indeed de hors the material on record, stating the impugned loss as on unlisted shares and speculative. Her order therefore, cannot, be approved, and the mistake that imbued the assessment order accordingly continues to obtain. The same ought to have been corrected by the ld. CIT(A), enjoying coterminous powers, in appeal. Both the rectification order, as well as the appellate order holding original assessment as not mistaken, i.e., without impugning the notice for rectification, found valid, its merit apart, cannot have our approval and, thus, be upheld. Both the orders are accordingly set aside, and the matter restored to the file of the AO for causing an adjudication in accordance with law. Lest it may be argued that the matter cannot be in rectification proceedings remitted back with clear directions, reference may be made to the decision in T.S. Rajam v. CED 1967 (9) TMI 139 - MADRAS HIGH COURT which is in respect of estate duty, with cognate provision. The whole premise of rectification proceedings, it needs to be appreciated, and as even explained therein, is toward causing justice, for which reference may also be profitably made to L.Hirday Narain 1970 (7) TMI 2 - SUPREME COURT - The facts of this case, as indeed some others, are striking and illustrative, to which reference may therefore be made, though are not being recounted here so as not to burden this order further (viz. Karamchand Premchand (P.) Ltd 1992 (12) TMI 42 - SUPREME COURT AND T.S. Rajam (supra)). Revenue s appeal is allowed for statistical purpose and the assessee s CO is partly allowed for statistical purposes.

Summary

Issues Involved:
1. Admissibility of rectification under Section 154 of the Income Tax Act, 1961.
2. Nature of the loss claimed by the assessee - whether it is speculative or business loss.
3. Validity of the assessment and rectification orders.

Issue-wise Detailed Analysis:

1. Admissibility of Rectification under Section 154:
The Revenue appealed against the order by the Commissioner of Income Tax (Appeals) [CIT(A)] that allowed the assessee's appeal contesting the rectification of its assessment under section 143(3). The assessee's cross-objection challenged the admissibility of the rectification. Section 154 allows for rectification of any mistake apparent from the record. The Tribunal noted that a mistake of law is as much a mistake as a mistake of fact. The Tribunal found that the assessment was completed without considering Section 43(5) of the Act, which defines speculative transactions. This oversight constituted a mistake apparent from the record, thus validating the initiation of rectification proceedings.

2. Nature of the Loss Claimed by the Assessee:
The assessee, a partnership firm in the mining business, claimed a loss of Rs. 13,87,12,982 from foreign currency trading and commodity derivative trading. The Assessing Officer (AO) disallowed this loss, treating it as speculative. The CIT(A) held that the foreign currency trading loss was a business loss related to the assessee's export activities and should be set off against business income. The Tribunal found that the loss on commodity derivative trading should be treated as business loss under Section 43(5)(e) of the Act, which excludes certain commodity derivative transactions from being classified as speculative. However, the Tribunal noted that the AO did not verify whether the transactions met the conditions under Section 43(5)(e), such as being carried out through a recognized association and being chargeable to commodities transaction tax.

3. Validity of the Assessment and Rectification Orders:
The Tribunal observed that the AO did not make any further inquiry or verification in the assessment proceedings after the assessee's initial submission. The AO's rectification order was based on the incorrect assumption that the loss was on trading in unlisted shares and speculative in nature. The Tribunal found that the CIT(A) failed to apply the correct law and facts, as the assessment was completed without considering the statutory provisions of Section 43(5). The Tribunal concluded that both the rectification order and the appellate order by the CIT(A) were de hors the facts and law, and thus could not be upheld.

Conclusion:
The Tribunal set aside both the rectification order and the appellate order by the CIT(A) and remitted the matter back to the AO for fresh determination in accordance with the law. The AO was directed to verify if the transactions met the conditions under Section 43(5)(e) and to issue definite findings of fact after allowing the assessee a reasonable opportunity of being heard. The Tribunal emphasized the need for the AO to make a proper inquiry and verification to bring the assessment in conformity with the law.