2023 (12) TMI 1226 - AT - Income Tax

Disallowance of loss in derivative transactions on the platform of National Exchange of India (NSE) - as submitted by the assessee before the CIT(A) that the loss in derivative segment arose as a result of transactions made through registered brokers on the platform of NSE which are duly verifiable from the records and the Assessing Officer has rejected the claim of loss cursorily without any opportunity to the assessee to corroborate its claim - HELD THAT - The derivative loss claimed by the assessee is supported threadbare by scrip-wise tabular statement. The mis-match between derivative loss claimed qua the working of the CIT(A) is found to be explained and is on account of unilateral omission on part of the CIT(A) to take cognizance of the losses arising on account of open position at the beginning of the year which matured during the year in question and likewise open position which remained unmatured and carried forward in the subsequent financial year. The approach of the assessee to recognize profits/losses in open contracts appears to be prima facie in tune with the accounting practices. The effect of open position if not taken will give rise to totally absurd conclusions. The profit/loss carried already reported for a part of the period in the preceding accounting year will get accounted for again during the year. Similarly, the profits/losses accounted for covering a part of the financial period during the year will again get accounted for in the subsequent year on termination of derivative contracts at the time of maturity. The action of the CIT(A) is apparently flawed and has lead to manifestly absurd results. The action of the CIT(A) cannot be justified in any manner and thus liable to be set aside. The derivative loss claimed by the assessee appears fully justified and requires to be accepted. The plea on behalf of revenue that such loss from open position has no effect on profit and loss is devoid of any merit. We thus set aside the order of the CIT(A) and direct the Assessing Officer to allow the claim towards derivative losses as business losses of the assessee as claimed. Penalty u/s 271(1)(c) on the impugned derivative losses disallowed - The imposition of penalty under Section 271(1)(c) has thus lost the very premise to hold its sustainability. The penalty u/s 271(1)(c) in question thus cannot be sustained in law. Besides, the action of the assessee is fully supported by the documentary evidences, the confirmation from the registered SEBI brokers and the audited financial statement showing presence of open interest in derivative scrips both at the beginning of the year as well as at the end of the year. This being so, in the absence of any mistake or culpability in the action of the assessee, the imposition of penalty cannot be justified by any stretch of imaginations. We thus set aside the impugned first appellate order and delete the penalty.

Summary

Issues Involved:
1. Disallowance of loss in derivative trading.
2. Enhancement of income by the Commissioner of Income Tax (Appeals) [CIT(A)].
3. Imposition of penalty under Section 271(1)(c).

Summary:

1. Disallowance of Loss in Derivative Trading:
The assessee, a public limited company engaged in financial activities, claimed a business loss of Rs. 7,80,08,374/- from derivative transactions on the NSE platform. The Assessing Officer disallowed this loss, alleging it was unsupported by documentary evidence. The CIT(A) not only upheld this disallowance but also proposed an enhancement of income by Rs. 5,30,39,741/- based on data from the NSE, concluding that the assessee had a net gain instead of a loss. The Tribunal found that the CIT(A) failed to consider the opening and closing positions of derivative contracts, leading to an erroneous conclusion. The Tribunal accepted the assessee's method of accounting for profits/losses on a 'mark to market' basis and directed the Assessing Officer to allow the claimed derivative losses as business losses.

2. Enhancement of Income by CIT(A):
The CIT(A) enhanced the assessee's income by Rs. 5,30,39,741/- based on the difference between total purchases and sales reported by the NSE. The Tribunal observed that the CIT(A) did not account for the opening and closing positions of derivative contracts, which are essential for accurately determining profits/losses. The Tribunal found that the CIT(A)'s approach led to absurd results and set aside the enhancement, directing the acceptance of the assessee's reported losses.

3. Imposition of Penalty under Section 271(1)(c):
The penalty under Section 271(1)(c) was imposed on the basis of the disallowed derivative losses and the consequent enhancement of income. Given the Tribunal's decision to accept the assessee's claimed losses, the penalty lost its foundation. The Tribunal noted that the assessee's actions were supported by documentary evidence and confirmed by SEBI-registered brokers. Consequently, the Tribunal deleted the penalty, finding no mistake or culpability in the assessee's actions.

Conclusion:
The Tribunal allowed both appeals of the assessee, directing the acceptance of the claimed derivative losses and the deletion of the penalty under Section 271(1)(c). The order was pronounced on 13/12/2023.