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2025 (4) TMI 1254 - AT - Income TaxDisallowance of Speculation loss - Addition u/s 68 by treating that the transaction was bogus - HELD THAT - We can be said that commodity income made by the assessee cannot be treated as a bogus as there is no rules regulations which states that the off market transaction needs to be reported to the exchange. As a result of the order passed by the AO confirmed by the CIT(A) on speculation loss as well as addition u/s 68 of the Act cannot be said to be legal. Accordingly the same is hereby directed to be deleted. Addition u/s 56(2) - assessee received gift of the amount from M/s Anand Akash Sureka being the father and a member of Hindu undivided family - AO disallowed by upholding that the father did not come under the definition of relatives - submission of the assessee is that family was HUF and each of HUF family members have a separate legal status so the father should be considered as a relative - HELD THAT -We find force in the argument of assessee that the assessee is entitled to claim deduction u/s 56(2) of the Act even the gift received from the father. Accordingly the order passed by the AO confirmed by the Ld. CIT(A) is set aside and addition made under the same section is hereby directed to be deleted. Addition of amount from Aakash Sureka Educational Trust u/s 56(2) - HELD THAT - The present facts of the case are concerned trust had duly filed its return of income and he paid taxes. The amount transferred to the beneficiary had already subjected to the taxation. The trust was formed as per the provision of Indian Trust Act. Once trust has paid taxes was earned in earlier years it means beneficiary has paid the said taxes and therefore the addition made in the present case is liable to be deleted. Keeping in view the above discussion the addition made by the AO confirmed by the Ld. CIT(A) is hereby deleted.
1. ISSUES PRESENTED and CONSIDERED
The core legal questions considered by the Tribunal in these appeals are: (a) Whether the set off of speculation loss against commodity derivative business profit is permissible under the Income Tax Act, particularly in light of Section 43(5) and its Explanation 2. (b) Whether the commodity derivative profits earned by the assessee through transactions not carried out on the recognized exchange platform (ICEX) can be treated as genuine business income or must be added as unexplained cash credit under Section 68 of the Act. (c) Whether the amount received by the assessee as a gift from his father's Hindu Undivided Family (HUF) is taxable under Section 56(2) of the Act or exempt as a capital receipt given the familial relationship and nature of HUF. (d) Whether the amount received by the assessee from a trust created by his mother is taxable under Section 56(2) of the Act, considering the trust's status, taxation of income at trust level, and the nature of the transfer to the beneficiary. (e) Whether the additions made by the Assessing Officer (AO) estimating drawings on a presumptive basis are contestable, though the assessee did not challenge these additions in appeal. 2. ISSUE-WISE DETAILED ANALYSIS (a) Set off of Speculation Loss against Commodity Derivative Business Profit Relevant Legal Framework and Precedents: Section 43(5) defines speculative transactions and excludes eligible transactions in commodity derivatives carried out in a recognized association from being treated as speculative. Explanation 2 clarifies that only transactions through recognized associations qualify as non-speculative. Precedents cited include decisions from Calcutta High Court and Gujarat High Court, which recognize the genuineness of off-market transactions if supported by documentary evidence and absence of malafide. Court's Interpretation and Reasoning: The AO disallowed the set off of speculation loss against commodity derivative profit, reasoning that the profit was from non-speculative business income under Section 43(5). However, the AO also found that the transactions were not carried out on the recognized ICEX platform, which is a condition for non-speculative treatment. The Tribunal noted that the AO admitted the exchange confirmed non-execution of transactions on their platform. The assessee submitted contract notes, ledger entries, and bank transactions evidencing genuine dealings through the broker. Key Evidence and Findings: The broker's records and contract notes were undisputed. The AO did not find any suspicious activity or defect in the broker's books. The exchange's confirmation of non-execution on their platform was the sole basis for treating the transactions as bogus. Application of Law to Facts: The Tribunal relied on judicial precedents holding that off-market transactions, when supported by proper documentation and genuine consideration, cannot be treated as bogus merely because they are not executed on recognized exchanges. The absence of any rule mandating reporting of off-market transactions to the exchange was emphasized. Treatment of Competing Arguments: The Revenue's reliance on the exchange's denial was rejected as insufficient to negate the genuineness of transactions. The assessee's evidence and legal precedents were accepted. Conclusion: The Tribunal held that the commodity income cannot be treated as bogus, and the set off of speculation loss is allowable. The additions on this ground were deleted. (b) Addition of Commodity Derivative Profit as Unexplained Cash Credit under Section 68 This issue is intertwined with the above. Since the commodity profits were held genuine, the addition under Section 68 as unexplained cash credit was unwarranted. The Tribunal accordingly deleted the addition. (c) Taxability of Gift Received from Father's HUF under Section 56(2) Relevant Legal Framework and Precedents: Section 56(2)(vii) taxes gifts received without consideration from non-relatives. The definition of "relative" excludes HUF as a separate entity vis-`a-vis individual members. However, judicial precedents including ITAT Ahmedabad Bench in Gyanchand M. Bardia vs. ITO and Rajkot Bench decisions were examined to interpret the scope of "relative" and the nature of HUF. Court's Interpretation and Reasoning: The Tribunal analyzed the Hindu Law concept of HUF as a fluctuating body of lineal descendants with undivided interest in family property. Although HUF is a separate taxable entity under Income Tax law, it is not a juristic person distinct from its members under Hindu Law. Members have pre-existing undivided rights in the family property. The Tribunal noted that amounts received by members from HUF property are not gifts but capital receipts, as members have inherent rights in the property. The provisions of Section 56(2)(vii) do not apply to such intra-family transfers. The Tribunal relied on detailed legal reasoning from the cited ITAT decision, explaining that the family relationship and undivided interest exclude the application of gift taxation. Key Evidence and Findings: The gift was from father's HUF, and no evidence suggested it was without consideration or a device to evade tax. Application of Law to Facts: The amount received was held to be a capital receipt exempt from tax under Section 56(2). Treatment of Competing Arguments: The Revenue's view that the father was not a relative under Section 56(2) was rejected based on the legal analysis of HUF and family relationships. Conclusion: The addition under Section 56(2) on the gift from father's HUF was deleted. (d) Taxability of Amount Received from Educational Trust under Section 56(2) Relevant Legal Framework and Precedents: Section 56(2)(vi) applies to sums received without consideration. The Indian Trust Act governs the creation and operation of trusts. Judicial precedents including ACIT vs. Mrs. Sandhya A Pratap (ITAT Mumbai) and CIT vs. Managing Trustee, Nagore Daraha were considered. Court's Interpretation and Reasoning: The trust was a discretionary trust created by the assessee's mother for the benefit of the assessee. The trust had filed returns and paid tax on its income. The amount received by the assessee was from the trust's corpus or income already subjected to tax at the trust level. The Tribunal noted that Section 161 and 166 provide for assessment of income in the hands of trustees and beneficiaries respectively. The amount received by the beneficiary on dissolution or distribution from the trust is not "without consideration" and hence not taxable under Section 56(2). Key Evidence and Findings: The trust deed, tax returns of the trust, and the fact of taxation at trust level were key factors. Application of Law to Facts: The addition was held to be unjustified as it amounted to double taxation. Treatment of Competing Arguments: The Revenue's contention that the trust was not a relative and not registered under Sections 12A/12AA was not sufficient to uphold the addition. Conclusion: The addition under Section 56(2) on amount received from the educational trust was deleted. (e) Addition on Account of Drawings Estimated by AO The assessee did not challenge the AO's addition estimating drawings on a presumptive basis. The Tribunal declined to adjudicate this issue and held it against the assessee. 3. SIGNIFICANT HOLDINGS "Business Loss- Allowability Genuineness of loss on off market transactions- Assessee company found to be treated in off market share transactions with its related group of persons as well as with unrelated groups of persons. AO disallowed losses on impugned transactions by simple purchase bills or sales bill ignoring market rates. This done to avoid tax. Moreover, neither any amount was paid nor any shares were transferred in the name of purchasers, only account entries were made. Held: Necessary entries were made in the account books of both sides i.e. purchaser and seller and delivery receipts were also passed demonstrating contemporaneous sale and purchase of the shares. It was not even the case of the Revenue that such off market transactions were not permissible. When off market transactions were permitted in law, and there was no evidence to suggest that artificially they were sold at rates lower than the prevailing market rates and AO could not bring on record any material to show that the transactions were not genuine, the findings of Ld. CIT(A) as well as Tribunal that impugned transactions were genuine, called for no interference." "When the transaction which has been concluded within four corners of Law cannot be treated as colorable device unless the revenue brings any material to prove such an allegation. In this case, as will appear from the aforesaid details and documents filed, the price at which the shares were sold had not been not only intimated to the SEBI but even to Calcutta Stock Exchange both by the Acquirer and seller. It is an accepted fact that whenever share in the Stock Exchange are sold as off market transaction, it is sold at the intrinsic value of shares and that is what has happened in this assessee's case under consideration. When purchase and sale of shares were supported by proper contract notes, deliveries of shares were received, the shares were purchased and sold through recognized broker and the sale considerations were received by account payee cheques, the transactions cannot be treated as bogus." "The expression Hindu Undivided Family must be construed in the sense in which it is understood under the Hindu law as has been in the case of Surjit Lal Chhabda vs. CIT 101 ITR 776 (SC). Actually a Hindu Undivided family constitutes all persons lineally descended from a common ancestor and includes their mothers, wives or widows and unmarried daughters. All these persons fall in the definition of relative as provided in Explanation to clause (vi) of Section 56(2) of the Act. The observation of the Ld. CIT(A) that HUF is as good as a body of individuals and cannot be termed as relative is not acceptable." "Any amount received by a member of the HUF, even out of the capital or estate of the HUF cannot be said to be income of the member exigible to taxation. Since such a member himself has a preexisting right in the property of the HUF, hence, it cannot be said to be a gift without consideration by the HUF or by the other members of the HUF to that recipient member. In such circumstances, the provisions of section 56(2)(vii) are not attracted in case an individual member receives any sum either during the subsistence of the HUF for his needs or on partition of the HUF in lieu of his share in the joint family property." "The amount received in pursuance of dissolution of trust cannot be termed to be an amount received by the beneficiaries without consideration. The fact that the trust had borne the tax at maximum marginal rate on its income has also not been controverted. Therefore, the addition cannot be upheld on the applicability of clause (vi) of Sub-section (2) of Section 56 as the money received by the assessee is not without consideration." Final determinations:
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