2024 (8) TMI 533 - AT - Income Tax

Disallowing the set off of the loss in respect of derivative transaction by treating the same as speculative transaction - HELD THAT - The provisions of section 43(5)(e) of the Act has been brought into the Statute book w.e.f. 1.4.2014. Section 43(5)(e) of the Act talks of commodity derivatives. Foreign currency transaction admittedly is commodity derivatives. Here also, the requirement of section 43(5)(e) is that the transactions are to be made through recognised Stock Exchange. A perusal of the order of the CIT(A) clearly shows that even though the assessee has made the claim of Rs. 43(5)(d) before the CIT(A), cunningly, the CIT(A) switched over his findings by relying upon the provisions of section 43(5)(a) of the Act, which was not a claim before him. In these circumstances, as the evidences in regard to nature of the transaction and the recognised stock exchange, if any, through whom the transactions have been carried out by the assessee are not before us, the issues in these appeals are restored to the file of the AO for the relevant assessment years to specifically examine whether the derivatives have been dealt with by the assessee for the assessment years 2015-16 and whether such derivatives are transacted through the recognised stock exchange as defined in Section 43(5)(d). In respect of foreign exchange loss in both the years, the issue is restored to the file of the AO to examine and give a clear finding in regard to the compliance of provisions of section 43(5)(e) of the Act. If in both the years, the transactions carried out by the assessee are found in order in terms of section 43(5)(d) and 43(5)(e), the same is to be treated as normal business transactions and not as speculative transaction. Unsecured loans raised in assessment year 2016-17 - Admittedly, the account confirmation as has been shown in the paper book contains the PAN No. of Outram Properties Pvt Ltd. This being so, this issue is restored to the file of the AO for re- adjudication and verification as to whether Outram Properties Pvt Ltd have filed their return of income for the relevant assessment year. AO shall examine the financial capacity of Outram Properties Pvt Ltd., and decide the issue after granting the assessee adequate opportunity of being heard to the assessee. AO is directed to adjudicate the above issues in terms of the direction given above after allowing adequate opportunity of hearing to the assessee.

Summary

Issues:
1. Disallowance of set off of loss in derivative transactions as speculative transactions.
2. Disallowance of unsecured credit for a loan.
3. Corresponding effect of disallowance in subsequent assessment year.

Issue 1: Disallowance of set off of loss in derivative transactions as speculative transactions:
The appellant contested the disallowance of set off of losses in derivative transactions by the Assessing Officer, claiming it should be treated as a business loss under section 43(5)(d) of the Income Tax Act. The appellant argued that the losses were not speculative but related to transactions through recognized Stock Exchanges. However, the Tribunal noted that no evidence was presented to prove that the transactions were exclusively derivatives and conducted through recognized Stock Exchanges. The Tribunal highlighted the provisions of section 43(5)(d) and 43(5)(e) of the Act, emphasizing the necessity for transactions to be through recognized Stock Exchanges. As evidence regarding the nature of transactions and the Stock Exchanges involved was lacking, the Tribunal remanded the issue back to the Assessing Officer for further examination.

Issue 2: Disallowance of unsecured credit for a loan:
The Assessing Officer disallowed an unsecured credit for a loan, claiming non-response from the creditor and lack of evidence. The appellant argued that the loan was repaid, interest was paid, and TDS was deducted, thus the disallowance was unwarranted. The Tribunal directed the Assessing Officer to re-examine the issue, ensuring Outram Properties Pvt Ltd's income tax return filing and financial capacity verification, granting the appellant a fair opportunity to present their case.

Issue 3: Corresponding effect of disallowance in subsequent assessment year:
The Tribunal noted the lack of consideration by the Assessing Officer regarding the corresponding effect of disallowance in the subsequent assessment year when the loan was repaid. Consequently, the Tribunal directed the Assessing Officer to address this oversight during the re-examination process.

In conclusion, the Tribunal partially allowed the appeals for statistical purposes and directed the Assessing Officer to re-adjudicate the issues mentioned above, providing the appellant with adequate opportunity for a fair hearing.