2013 (1) TMI 284 - AT - Income Tax

Speculative loss not allowed to be set off against the business income - loss under consideration is not covered under proviso (c) of section 43(5) - assessee derived income from share of profit from firm, loss from speculation, income (Loss) from trading on MCX and income from other sources - Held that - In the instant case, assessee is a dealer by virtue of membership and buys and sells the commodity on every movement of the price of the commodity, which makes his activity as jobbing activity. Trading-cum-clearing member means a person who is admitted by the Exchange as the member of the Exchange conferring a right to trade and clear through the Clearing House of the Exchange as a clearing member and who may be allowed to make deals for himself as well as on behalf of his clients and clear and settle such deals only. Since, his ordinary course of business as a member is to trade in MCX market along with acting as clearing house for his clients, as per the rules of MCX, he is trading in the same market, and therefore it is his ordinary course of business as such a member. Moreover, when the main object of the member is well defined, and he is working in accordance to the same, it needs to be concluded that he is working as in his ordinary course of business as such member. Perusal of this shows that loss incurred by appellant, a member of MCX, a forward market exchange, due to jobbing to guard against loss from future price fluctuation arising in the ordinary course of its business as such member surely fell within the purview of exception contained in Cl. (c) of proviso to S. 43(5), hence could not be said to be speculative loss and should be considered as business loss. Perusal shows that after appraising the fact, it was concluded that transactions under consideration are of jobbing nature but same have not incurred during the regular course of business. In this regard, already submitted that said inference of regular course of business has been drawn without reading the entire sentence as whole as the word as such member is also there and it is undoubted fact that transaction have been entered as member and it is regular course of his business as member to entered such transactions, further it is important to note that only upon sale or purchase, there cannot be any loss or profit, only upon subsequent purchase or sale, loss or profit can be arrived. Therefore, saying that the details of transactions in the nature of jobbing is provided and details of transactions other than jobbing has not provided is factually wrong because only purchase or sales cannot be jobbing, academically sale and purchase or purchase and sale cumulatively complete the transactions and same can be considered as jobbing and details of which has admittedly been provided during the assessment proceedings. Therefore, to that extent, finding is incorrect. Relying on Komal Exports Vs. Assistant Commissioner of Income Tax 2007 (11) TMI 437 - ITAT DELHI & CIT Vs. Shri Sharwan Kumar Agarwal 2000 (12) TMI 70 - ALLAHABAD HIGH COURT frequency of transaction which have been done by the assessee and loss incurred establish that the transactions were in the nature of jobbing and loss incurred establish that the transactions were in the nature of jobbing and loss was incurred in the course of business by a member of forward commodity market. In the facts and circumstances of the case of the assessee squarely falls within the purview of cl. (c) of proviso to s. 43(5). Hence the loss incurred by the assessee connote be said to be speculative loss. It is an admitted fact that AO has already considered the transaction is in the nature of jobbing, in this regard relying upon the decision in the case of First Securities Pvt. Ltd. Vs. ACIT 2009 (5) TMI 798 - ITAT BANGALORE wherein held that as per proviso (c) to sec 43(5) the transactions in nature of jobbing not to be treated as speculative transaction and once a transaction is not speculative, any loss arising out of such transaction is business loss which can be set off against business profits. Thus case of assessee falls under clause (c) of section 43(5) and, therefore, the loss incurred by assessee has to be treated as business loss eligible for set off against other business income of the year - in favour of assessee.

Summary

Issues Involved:
1. Validity of orders under section 153A/143(3).
2. Premature initiation of penalty proceedings under section 271AAA.
3. Classification of losses under section 43(5) of the Income Tax Act, 1961, specifically whether they are speculative or business losses.

Detailed Analysis:

1. Validity of Orders under Section 153A/143(3):
The first issue raised by the assessee was against the passing of orders under section 153A/143(3), which was claimed to be bad in law. However, this ground was not pressed by the assessee during the proceedings. Consequently, the appellate tribunal dismissed this ground as not pressed.

2. Premature Initiation of Penalty Proceedings under Section 271AAA:
Similarly, the assessee raised an issue regarding the premature initiation of penalty proceedings under section 271AAA. This ground was also not pressed by the assessee and was dismissed by the tribunal as not pressed.

3. Classification of Losses under Section 43(5):
The primary issue in both appeals was whether the losses incurred by the assessee from transactions on the Multi Commodity Exchange (MCX) should be classified as speculative losses or business losses under section 43(5) of the Income Tax Act, 1961.

Facts and Arguments:
- The assessee, a member of MCX, reported losses from trading in commodities on the MCX, which he claimed should be treated as business losses under the proviso (c) of section 43(5).
- The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] treated these losses as speculative, primarily because the transactions were settled otherwise than by actual delivery.
- The assessee argued that as a member of MCX, the transactions were in the nature of jobbing or arbitrage to guard against losses in the ordinary course of business, thus falling under the exception provided in section 43(5)(c).

Tribunal's Findings:
- The tribunal noted that the AO and CIT(A) failed to correctly interpret clause (c) of section 43(5).
- Clause (c) specifies that a contract entered into by a member of a forward market or stock exchange in the course of any transaction in the nature of jobbing or arbitrage to guard against loss in the ordinary course of business as such member should not be deemed speculative.
- The tribunal found that the assessee's transactions were indeed in the nature of jobbing and were conducted as a member of MCX, thus qualifying for the exception under section 43(5)(c).
- The tribunal relied on various case laws, including the decisions in Komal Exports vs. ACIT and CIT vs. Sharwan Kumar Agarwal, which supported the assessee's position that such transactions should be treated as business losses.

Conclusion:
- The tribunal concluded that the losses incurred by the assessee from transactions on the MCX should be treated as business losses and not speculative losses.
- The tribunal directed the AO to allow the claim of the assessee for both assessment years 2008-09 and 2009-10.

Additional Issue for AY 2009-10:
- The assessee also contested an addition of Rs. 6,88,972 on account of unexplained investment in gold and silver.
- The tribunal partially allowed this ground, sustaining an addition of Rs. 2.5 lakhs while deleting the remaining addition, recognizing that it is customary in Hindu families to receive gold and silver on various occasions.

Final Decision:
- The appeals were allowed in part. The tribunal directed the AO to treat the losses as business losses and allowed partial relief regarding the unexplained investment in gold and silver.