2017 (7) TMI 35 - AT - Income Tax

Adjustment of derivatives loss - non-speculative transaction - Held that - Direct the AO not to consider the derivatives loss suffered by the assessee as speculative in nature. See IVF Advisors Private Limited Versus The Asstt. Commissioner of Income Tax 2015 (5) TMI 706 - ITAT MUMBAI

Issues Involved:
1. Adjustment of derivatives loss amounting to ?15,50,100/-.
2. Legality of the adjustment under Section 143(1) of the Income Tax Act.
3. Nature of the derivatives loss as speculative or business loss.
4. Applicability of Section 71 for setting off business loss against other heads of income.

Detailed Analysis:

1. Adjustment of Derivatives Loss Amounting to ?15,50,100/-:
The assessee filed a return declaring an income of ?23,52,140/-. The Assessing Officer (AO) made an adjustment of ?15,50,100/- under Section 143(1) of the Income Tax Act, disallowing the claimed business loss from currency derivatives. The CIT(A) upheld this adjustment, leading to the assessee's appeal.

2. Legality of the Adjustment Under Section 143(1) of the Income Tax Act:
The assessee argued that the AO exceeded his powers under Section 143(1) by disallowing the business loss, which is only permissible for arithmetical errors or incorrect claims apparent from the return. The assessee contended that the AO's action was arbitrary, without jurisdiction, and contrary to the provisions of the Act. The CIT(A) supported the AO's adjustment, reasoning that the AO could make adjustments or disallowances under Section 143(1) as per the law.

3. Nature of the Derivatives Loss as Speculative or Business Loss:
The primary contention was whether the loss from currency derivatives was speculative or a regular business loss. The assessee argued that the transactions were carried out on a recognized stock exchange and met all conditions under Section 43(5) proviso (d) of the Act, thus qualifying as business transactions. The CIT(A), however, classified currency derivatives as speculative transactions, citing that currency is a commodity and its derivatives are speculative under Section 43(5) of the Act.

4. Applicability of Section 71 for Setting Off Business Loss Against Other Heads of Income:
The assessee claimed that the loss from currency derivatives should be set off against other heads of income under Section 71 of the Act. The CIT(A) rejected this, holding that speculative losses cannot be set off against other income. The assessee cited various judicial precedents and CBDT circulars to support their claim that the loss was not speculative and should be eligible for set off.

Judgment:
The Tribunal considered the submissions and reviewed similar cases, particularly the ITAT Mumbai decisions in IVF Advisors Private Limited vs. The Asstt. Commissioner of Income Tax and Inventurus Knowledge Services (P.) Ltd. vs. Income Tax Officer. These cases established that derivatives, including currency derivatives, are not speculative if conducted on recognized stock exchanges and meet specified conditions.

The Tribunal found that the assessee's transactions met these conditions and should not be treated as speculative. Consequently, the Tribunal set aside the CIT(A)'s order and directed the AO to treat the derivatives loss as a business loss, allowing the set off against other income under Section 71.

Conclusion:
The Tribunal allowed the appeal, ruling that the derivatives loss was not speculative and should be set off against other income, reversing the CIT(A)'s decision and the AO's adjustment under Section 143(1). The order emphasized adherence to legal provisions and judicial precedents in determining the nature of derivatives transactions.

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