2016 (5) TMI 585 - AT - Income Tax

Set off of loss from one source against income from another source under the same head of income - adjustment of non-speculative business loss incurred on F & O derivative trading business - Held that - On perusal of the Section 71 of the Act , it is observed that it deals with set-off of losses incurred under one head of income against another head of income. The language of Section 71(2) of the Act is plain and clear and it allows the losses incurred under any head other than under the head capital gains to be set off against income under any other head of income including head capital gains . The language is clear and plain and we do not see any bar or prohibition on adjustment of losses incurred by the assessee in F & O trading business against the short term capital gains earned by the assessee on sale of shares and other income earned by the assessee except salary income as there is a specific bar and prohibition raised by the statute by virtue of Section 71(2A) of the Act which debar adjustment of losses incurred under the head Profits and gains of business or profession to be set off against salary income. Section 71(2A) has a non-obstante clause and creates a bar notwithstanding what is contained in Section 71(1) and 71(2) of the Act. The assessee has incurred losses in F & O trading in derivatives which is assessable as non-speculative business loss under the head Profit and Gains of business or profession and bar as contained in Section 71(2A) of the Act shall operate and the assessee will not be entitled to set off losses in F & O derivative trading business against salary income earned by the assessee , while assessee will be entitled to set-off such losses in F & O derivative trading business losses which are non-speculative business losses against capital gains on sale of shares and other income earned by the assessee except salary income Belated return filed - Held that - Assessee did not file return of income with Revenue with-in due date stipulated u/s 139(1) of the Act , rather the return was filed belatedly u/s 139(4) of the Act. Provisions of Section 139(3) of the Act read with Section 80 of the Act ,post amendment by the Direct Tax Laws (Amendment) Act ,1987 w.e.f. 01-04-1989, clearly stipulate that for losses sustained by the tax-payer under the head Profit and gains of business or profession or Capital gains whereby the tax-payer claims to take benefit of carry forward of such losses u/s 72(1),73(2) , 74(1),74(3) or 74A(3) of the Act , the tax-payer has to file return of income as per provisions of Section 139(1) of the Act within due date specified in Section 139(1) of the Act and any non-compliance will disentitle carry forward of such losses by virtue of Section 139(3) read with Section 80 of the Act. The recourse in such a case is to approach CBDT u/s 119 of the Act for allowability of carry forward of such losses which are claimed vide belated return of income filed with Revenue. Admittedly, the assessee in the instant case did not file return of income within due date as prescribed u/s 139(1) of the Act and hence , the assessee will not be allowed to carry forward un-adjusted business loss arising from F & O derivative trading business chargeable to tax under the head Profit and gain of business or profession which remained un-adjusted after adjusting the same under the other heads of income except salary income , as per our decision in preceding para s

Summary

Issues Involved:
1. Set-off of F&O/Derivatives segment loss against short-term profit in shares or other income.
2. CIT(A)'s failure to address the set-off issue specifically.
3. Legality of the assessment under Sections 147/148.
4. Levy of interest under Sections 234A, 234B, and 234C.
5. Carry forward of F&O segment loss.

Issue-wise Detailed Analysis:

1. Set-off of F&O/Derivatives Segment Loss Against Short-term Profit in Shares or Other Income:
The assessee incurred a loss of ?55,14,312 in the F&O/Derivatives segment and sought to set it off against a short-term profit of ?48,39,634 made in shares. The AO disallowed this set-off, citing Section 70 of the Income Tax Act, which governs the set-off of losses under the same head of income. The AO also rejected the assessee's reliance on Section 71(2), which allows set-off of losses under one head against income under another head. The Tribunal observed that the loss from F&O trading is a non-speculative business loss under Section 43(5)(d) and should be set off against other heads of income, including short-term capital gains, as per Section 71(2). However, this set-off cannot be applied against salary income due to the prohibition in Section 71(2A).

2. CIT(A)'s Failure to Address the Set-off Issue Specifically:
The CIT(A) did not specifically address the issue of set-off of F&O losses against short-term capital gains or other income. The Tribunal noted that the CIT(A) should have considered the provisions of Section 71(2) and allowed the set-off of non-speculative business loss against other heads of income, excluding salary income.

3. Legality of the Assessment Under Sections 147/148:
The Tribunal did not address this issue in detail as the assessee's counsel did not press it. Therefore, this ground was dismissed.

4. Levy of Interest Under Sections 234A, 234B, and 234C:
This ground was considered consequential and did not require separate adjudication. Hence, it was dismissed.

5. Carry Forward of F&O Segment Loss:
The assessee filed the return of income belatedly on 31-03-2010, beyond the due date specified under Section 139(1). As per Section 139(3) read with Section 80, the assessee must file the return within the due date to carry forward business losses. Since the return was filed late, the assessee is not entitled to carry forward the unadjusted business loss from F&O trading. The Tribunal upheld this view, stating that the assessee should approach the CBDT under Section 119 for relief.

Conclusion:
The Tribunal allowed the set-off of F&O derivative trading losses against short-term capital gains and other income, excluding salary income, as per Section 71(2). However, the assessee is not entitled to carry forward the unadjusted business loss due to the late filing of the return. The appeal was partly allowed, addressing grounds 1, 2, and 5, while grounds 3 and 4 were dismissed. The order was pronounced in the open court on 30th March 2016.