2016 (6) TMI 556 - AT - Income Tax

Allowance of loss arising on cancellation of contract due to price fluctuation where no actual delivery of cotton commodity - treating a loss to be speculative in nature u/s. 43(5) - Held that - There is no dispute that this assessee is already in cotton ginning business. It entered into cotton supply contracts. The same would be cancelled in lieu of passing of credit notes due to price fluctuations. The Assessing Officer treated these figures as speculative transactions u/s. 43(5) of the Act not entitled as allowable loss. Learned departmental representative strongly argues that the loss in question is in speculative business not allowable u/s. 73(1) of the Act since the same has to be set off only against profits and gains of another speculative business and not those of the regular business. We are not impressed with this business. Our view is that section 73 of the Act for the purpose of setting off of loss is to be jointly read with section 28 defining categories profits and gains of business and profession as well as section 43(5) of the Act stipulating speculative transactions. Section 28 explanation 2 makes it very clear that where speculative transactions carried on by an assessee are of such a nature to constitute a business, the said business is to be taken as distinct and separate from any other business. We repeat that this assessee is already in cotton ginning business. The Revenue fails to dispel the CIT(A) s findings that these transactions are only 4% of the total transactions forming part of the regular business. We are of the opinion that these transactions do not constitute a separate business but part of the main business itself. We hold therefore that the assessee s loss in question has been righty allowed in the lower appellate proceedings. - Decided in favour of assessee.

Summary

Issues involved:
1. Allowance of loss treated as speculative in nature under section 43(5) of the Income Tax Act, 1961.

Comprehensive Analysis:
1. The Revenue's appeal for A.Y. 2009-10 challenged the correctness of the CIT(A)'s order allowing a loss of ?33,18,790, reversing the Assessing Officer's action treating it as speculative under section 43(5) of the Act.
2. The assessee company dealt with cotton bales processing and debited settlement expenses of ?33,18,790 in P & A, involving payments to various parties for cancelled cotton purchase contracts due to price fluctuations. The Assessing Officer considered these transactions speculative as they lacked actual cotton delivery, resulting in the addition of the sum in the assessment order.
3. The CIT(A) reversed the Assessing Officer's decision, allowing the loss by determining that the transactions were not speculative business but part of the main business itself, constituting only 4% of total transactions. The CIT(A) held that the loss should be considered a business loss rather than a speculative loss, as the transactions were isolated and not forming a separate business entity.
4. The Tribunal upheld the CIT(A)'s decision, emphasizing that the loss was rightly allowed in the lower appellate proceedings as the transactions did not constitute a separate business but were part of the main business activities. The Tribunal rejected the Revenue's argument that the loss should be set off only against profits from another speculative business, holding that the loss was allowable as a business loss.

In conclusion, the Tribunal dismissed the Revenue's appeal, confirming the CIT(A)'s findings and allowing the loss as a business loss rather than a speculative loss under section 43(5) of the Income Tax Act, 1961.