2012 (8) TMI 69 - AT - Income Tax

Transactions in derivatives - Short term capital loss in respect of speculation business - Held that - As that speculation loss from derivatives can be set off against the income earned from derivatives after amendment in the Act with effect from 1.4.2006 thus assessee is entitled to the relief and the loss suffered by the assessee during derivative trading should be allowed as short term capital loss and the same can be set off against the short term capital gain during the year - in favour of assessee. Disallowance of commission paid to foreign agents - Held that - As decided in Bharat Earth Movers Versus Commissioner of Income-Tax 2000 (8) TMI 4 - SUPREME COURT if a business liability has definitely arisen in the accounting year, the deduction should be allowed although the liability may have to be quantified and discharged at a future date what should be certain is the incurring of the liability - As the liability to pay commission has arisen by virtue of sales in the financial year 2004-05 relevant to the assessment year 2005-06. The realization of sale amount in the next financial year will not make much difference as the liability to pay commission had crystallized in the financial year 2004-05 itself after sale - in favour of assessee.

Issues:
1. Treatment of short term capital loss in respect of speculation business (Derivative Trading)
2. Disallowance of commission to foreign agents
3. Disallowance under section 14A on dividend income
4. Interest on delay of payment of dividend tax

Analysis:

Issue 1: Treatment of short term capital loss in respect of speculation business (Derivative Trading)
The assessee challenged the order of the CIT(A) on the grounds that the transactions in derivatives should be considered as business loss, not speculation loss. The counsel for the assessee relied on a Mumbai Tribunal order and the Supreme Court judgment in support of their argument. The department contended that losses from trading in derivatives constitute speculative losses and cannot be set off against short term capital gains. The Tribunal referred to a previous case and held that losses incurred in dealing in derivatives prior to 2006-07 can be set off against profits earned in subsequent years. The Tribunal also noted that losses in derivative trading are eligible for set off against normal business profits post-amendment in Section 43(5) from April 1, 2006. The Tribunal emphasized the need to avoid a construction that reduces the statute to futility and allowed the short term capital loss to be set off against short term capital gain during the year.

Issue 2: Disallowance of commission to foreign agents
The assessee contested the disallowance of accrued commission not relating to the period under reference, citing accounting principles and a Supreme Court judgment. The Tribunal agreed with the assessee, stating that if a business liability has definitely arisen in the accounting year, the deduction should be allowed even if the liability is quantified and discharged in the future. The Tribunal found that the liability to pay commission had arisen in a previous financial year, and the realization of sale amount in the subsequent year did not affect the crystallized liability. Therefore, the Tribunal reversed the decision of the CIT(A) and allowed the ground raised by the assessee.

Conclusion:
The Tribunal set aside the CIT(A)'s order and allowed the appeal of the assessee, permitting the set off of short term capital loss against short term capital gain and reversing the disallowance of commission to foreign agents. The judgment highlighted the importance of statutory provisions and the need to uphold the intention of the legislature to make the statute effective and operative.

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