2015 (11) TMI 1303 - AT - Income Tax

Disallowance of notional loss on F&O foreign currency transaction - CIT(A) allowed the claim - Held that - CIT(A) rightly demolished the conclusion of the Assessing Officer that the said loss is a notional loss and represents marked to market is not correct. We are also in agreement with the conclusion of the CIT(A) that the claim of the assessee is not in pursuance to the notional entry which has been passed on the last date of the financial year and represents the value as per market value as on 31st March. Ld. CIT(A) explicitly held that the entry was passed out of running account whereby profit and loss which have been incurred on settlement day and amount have been debited and credited on account of loss or profit as the case may be. Ld. CIT(A) finally granted relief to the assessee by holding that as per Circular regarding notional loss is not applicable to the transaction which was undertaken by the assessee as F&O transaction. On logical analysis of the order of the first appellate authority on this issue, we reach to a logical conclusion that the Assessing Officer made addition regarding the Board Circular which is not actually applicable to the facts and circumstances of the present case, therefore, the CIT(A) was right in concluding this issue in favour of the assessee. We are unable to see any perversity or any other valid reason to interfere with the order of the ld. CIT(A). - Decided against revenue Disallowance of claim of exemption u/s 54F - CIT(A) allowed the claim - Held that - CIT(A) was right in concluding that during the course of assessment proceedings, the assessee filed the relevant details of capital gain and its utilization along with copies of the bank account statement and from these details, it is amply clear that the money of capital gain has been deposited in mutual fund and on redemption of the mutual fund, it has been deposited in the capital gain account scheme. It was also noticed that the assessee on sale of original assets has deposited the proceeds in his bank account. From there, he deposited the money temporarily with mutual funds and before the due date of deposit in Capital Gain Scheme, encashed the mutual funds and deposited the amount in Capital Gain Scheme as required by the relevant provisions of the Act. On vigilant and careful consideration of contention of the Assessing Officer as well as conclusion of the CIT(A) as noted above, we are of the view that the Assessing Officer rejected the claim of the assessee u/s 54 of the Act without any justified reason and on incorrect premise which was rightly allowed by the CIT(A) after properly appreciating and considering the facts and circumstances of the case in the light of explanation of the assessee. We are unable to see any infirmity or any other valid reason to interfere with the order of the ld. CIT(A) and uphold the same. - Decided against revenue

Summary

Issues Involved:
1. Allowance of notional loss on F&O foreign currency transaction.
2. Claim of exemption under Section 54F of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

Ground No. 1: Allowance of Notional Loss on F&O Foreign Currency Transaction

The revenue contended that the CIT(A) erred in allowing a notional loss of Rs. 37,73,273 on F&O foreign currency transactions. The Assessing Officer (AO) had treated this loss as notional based on Board's Instruction No. 3/2010 dated 23.3.10, disallowing it under the business head and preventing it from being set off against other income or carried forward.

The assessee argued that the loss incurred was actual, not notional, arising from real transactions in foreign exchange derivatives. The assessee provided evidence from the transaction ledger and bank statements to substantiate the actual loss. The CIT(A) found that the transactions were genuine and involved actual losses, not marked-to-market losses. The CIT(A) observed that the transactions were settled on the settlement day with corresponding debits and credits, thus qualifying as actual losses allowable under Section 43(5) of the Act.

The Tribunal upheld the CIT(A)'s decision, agreeing that the AO incorrectly treated the losses as notional. The Tribunal found no reason to interfere with the CIT(A)'s conclusion that the Board's circular on notional loss did not apply to the assessee's transactions. Hence, the Tribunal dismissed the revenue's appeal on this ground.

Ground No. 2: Claim of Exemption under Section 54F

The revenue argued that the CIT(A) erred in allowing the exemption claim of Rs. 2,00,87,987 under Section 54F, asserting that the assessee did not meet the conditions prescribed under the section. The AO had denied the exemption, citing that the assessee owned more than one residential property on the date of transfer of the original asset, which disqualified him from the exemption.

The assessee countered that he owned only one property, having gifted another property to his wife before the relevant date. The CIT(A) noted that the gift deed was registered, transferring all rights to the wife, and thus, the assessee was not the owner on the date of transfer. The CIT(A) also found that the AO's assumption of a farmhouse being a residential property was baseless, as it was merely agricultural land with no construction.

The Tribunal agreed with the CIT(A)'s findings, confirming that the assessee complied with all conditions of Section 54F. The Tribunal also noted that the capital gain proceeds were correctly deposited in the capital gain account scheme before the due date, despite being temporarily invested in mutual funds. The Tribunal found the AO's rejection of the exemption claim unjustified and upheld the CIT(A)'s decision to allow the exemption.

Conclusion:

The Tribunal dismissed the revenue's appeal on both grounds, upholding the CIT(A)'s decisions regarding the allowance of the actual loss on F&O foreign currency transactions and the exemption claim under Section 54F. The Tribunal found no valid reason to interfere with the CIT(A)'s conclusions, affirming that the assessee met the necessary legal requirements and conditions.