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2023 (2) TMI 455 - AT - Income TaxScope of Limited scrutiny - Addition of short-term capital gain on the purchase and sale of shares - HELD THAT - Transactions in dealing of shares/securities and derivatives are distinct and independent to each other. Therefore, it cannot be said that the short-term capital gain shown by the assessee is in the category of derivative transaction for which the proceedings under section 143(3) of the Act were initiated. The scope of the proceedings in the instant set of facts was limited to the examination of the investment and income thereon with respect to derivative transactions. Consequently, we hold that the authorities below have exceeded their jurisdiction by disturbing and making the addition of the short-term capital gain to the total income of the assessee as the same was not subject matter of dispute in the scope of Limited scrutiny. Claim of bad debt - As per the AO, the bad debts represent only the money transactions without having any business relation - We note that these bad debts were not connected with the activity of derivative and therefore the same cannot fall within the scope of limited scrutiny as discussed above. The Ld. DR before us has not brought anything on record justifying that the Limited Scrutiny was converted by the Assessing Officer under normal scrutiny after obtaining necessary approval from the appropriate authority. Loss i.e. MCX trading loss has been shown by the assessee just to avoid tax liability on the income and to match the amount of profits shown in the income tax return - we note that these items have direct connection with the activities of derivative and therefore the same fall within the scope of assessment proceedings in the given set of facts. As such the entire issue should have been limited to the extent of the dispute raised in the notice under section 143(2) of the Act for the limited scrutiny but the AO in the present case has exceeded his jurisdiction as discussed above. Thus, the issue raised by the assessee in the CO is partly allowed. Deduction on account of bad debts written off - observation of the learned CIT-A that the debtors pertains to the current period, therefore, the same cannot be allowed as deduction - HELD THAT - We are not convinced with the finding of the learned CIT-A for the reason that there is no prohibition under the provisions of the Act to deny the deduction of the bad debts on the reasoning that it pertains to the current period. Admittedly, the bad debts has actually been written off in the books of accounts of the assessee and part recovery was made in the later year which was offered to tax. Furthermore, if any addition is made in the year under consideration then it would lead to the double addition which is not warranted under the provisions of law. Accordingly we hold that the order passed by the learned CIT-A is unsustainable. Thus the ground of appeal of the assessee is allowed. Disallowance of the expenses representing the indirect expenses - As it is transpired that the expenses were incurred in the course of the business of the assessee. However, we find that as per the ledger account furnished by the assessee, the expenses stand at ₹ 13,53,121.69 whereas as per the statement of Edelweiss Broking Ltd. stand at ₹ 13,22,308 leading to the difference of Rs. 30,813.00 only which is of negligible value. Thus it cannot be said that the expenses were not incurred for the purpose of the business. Accordingly we do not find any infirmity in the order of the learned CIT-A. Hence, the ground of appeal of the Revenue is dismissed. MCX loss - AO before rejecting the contention of the assessee could have verified from the broker who is registered with the exchange. In the absence of any verification by the AO, genuineness of the loss claimed by the assessee cannot be doubted. As such, the AO without pointing out any defect in the loss claimed by the assessee has rejected the same. Accordingly, we do not find any infirmity in the order of the learned CIT-A. Hence the ground of appeal of the revenue is hereby dismissed.
Issues Involved:
1. Classification of income from share trading, futures, options, and speculative transactions. 2. Treatment of short-term capital gains. 3. Deductibility of bad debts. 4. Allowability of other business expenses. 5. Allowability of MCX trading loss. 6. Jurisdiction of the Assessing Officer (AO) in limited scrutiny cases. Detailed Analysis: 1. Classification of Income: The assessee argued that the activities of share trading, futures, options, and speculative transactions represent business activities and should not be classified as income from other sources. The AO, however, classified these incomes under the head "other sources" based on historical treatment and found undisclosed income from these activities amounting to Rs. 3,05,78,785. 2. Treatment of Short-Term Capital Gains: The AO classified short-term capital gains of Rs. 1,34,12,254 as business income. The assessee contended that these should be treated as capital gains since the transactions were shown under the investment head. The CIT-A agreed with the assessee, noting that the shares were held as investments and thus the gains should be classified as short-term capital gains. 3. Deductibility of Bad Debts: The assessee claimed a deduction for bad debts amounting to Rs. 18,50,000, arguing that the debts were written off due to irrecoverability. The AO and CIT-A disallowed this claim, stating that the assessee was not in the money-lending business and the debts were premature. The Tribunal disagreed, noting that there is no prohibition against claiming current period bad debts and that part recovery in subsequent years was offered to tax, thus allowing the deduction. 4. Allowability of Other Business Expenses: The AO disallowed other business expenses of Rs. 15,25,765, but the CIT-A allowed these expenses, noting that they were incurred wholly and exclusively for business purposes. The Tribunal upheld the CIT-A's decision, finding the expenses to be legitimate and supported by evidence. 5. Allowability of MCX Trading Loss: The AO disallowed an MCX trading loss of Rs. 2,73,39,075, questioning its genuineness. The CIT-A allowed the loss, noting that the assessee provided detailed explanations and supporting documents. The Tribunal upheld this decision, stating that the AO failed to verify the loss with the broker and did not point out any defects in the claim. 6. Jurisdiction of AO in Limited Scrutiny Cases: The Tribunal examined whether the AO exceeded his jurisdiction by addressing issues beyond the scope of limited scrutiny. The Tribunal found that the AO had indeed exceeded his jurisdiction by making additions related to short-term capital gains and speculative profits, which were not within the scope of the limited scrutiny notice. The Tribunal held that the entire issue should have been limited to the examination of derivative transactions and related incomes. Conclusion: - The Tribunal allowed the assessee's appeal regarding the bad debts and upheld the CIT-A's decision on other business expenses and MCX trading loss. - The Tribunal dismissed the Revenue's appeal and partially allowed the assessee's cross-objection, noting that the AO exceeded his jurisdiction in the limited scrutiny case. - The final order was pronounced on 03/02/2023 at Ahmedabad.
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