2019 (1) TMI 583 - AT - Income Tax

Disallowance of loss claimed on account of derivative trading - Held that - We note that the assessee has carried out the derivative transactions through the USEI which has approval from the SEBI in the year 2010 onwards and this Exchange has been recognized by CBDT vide notification no. 12/2011 dated 25.02.2011. Assessee carried out currency derivative transaction in USEI which is a currency derivative arm of the Bombay Stock Exchange. The USEI is promoted by BSI and other 21 PSU banks and it deals only in currency derivative and interest swap options. AO erred in finding that the assessee was not regular trader in the derivative market because the AO himself during the course of search has found that assessee is actively engaged in derivative trading and ₹ 4,02,02,600/- was assessed to tax from the derivative trading for AY 2013-14 (previous assessment year) . When the assessee claimed the loss in this assessment year the AO has taken an about-turn and did not accept the same, which action of the AO cannot be countenanced. We note that the AO s allegation that the SEBI has suspended the broker through whom the assessee had transacted the derivative business is not correct. AO has not given a copy of the broker s statement/adverse material to the assessee, so the statement of the broker which is adverse against the assessee cannot be relied upon by the AO for drawing adverse inference against the assessee. Hon ble Supreme Court in the case of Kishanchand Chellaram Vs. CIT (1980 (9) TMI 3 - SUPREME COURT) held that any information gathered by the AO without confronting the same to the assessee did not have any evidentiary value and cannot be used for the purpose of assessment or other proceedings. Assessee s plea to the AO to cross examine the so called broker whose statement was recorded by the AO was also not done by the AO which omission also makes the order of AO bad in the eyes of law. AO s action for taxing the derivative income for AY 2013-14 and not accepting the loss for AY 2014-15 cannot be countenanced and, therefore, we do not find any infirmity in the order of the Ld. CIT(A) directing deletion of the addition made on this count and, therefore, the revenue s ground of appeal is dismissed. Addition made on account of section 14A read with Rule 8D - Held that - Since the assessee has not received any exempt income the disallowance u/s. 14A read with Rule 8D of the Rules was not warranted as held in CIT Vs. Cheminvest Ltd. (2015 (9) TMI 238 - DELHI HIGH COURT), wherein it has held that sec. 14A envisages that there should be actual receipt of income which is not includible in total income and the said section will not apply where there is no exempt income received or receivable during the relevant year - decided against revenue

Summary

Issues:
1. Disallowance of loss claimed by the assessee on account of derivative trading.
2. Deletion of addition made on account of section 14A read with Rule 8D.

Issue 1 - Disallowance of loss claimed by the assessee on account of derivative trading:
The revenue appealed against the Ld. CIT(A)'s order deleting the disallowance of loss claimed by the assessee on derivative trading amounting to ?3,49,14,478. The AO disallowed the loss, citing reasons such as the assessee not being a regular trader, high brokerage charges, suspicion of manipulation, and trading in pairs with minimal time gaps. However, during a search action, it was found that the assessee was actively engaged in derivative trading, and a substantial amount was assessed to tax for the previous assessment year. The AO relied on a broker's statement without providing it to the assessee or allowing cross-examination, which was deemed improper by the ITAT. The Tribunal noted that the AO's inconsistency in treating derivative income for different assessment years and lack of evidence against the assessee led to the deletion of the addition by the Ld. CIT(A).

Issue 2 - Deletion of addition made on account of section 14A read with Rule 8D:
The second and third grounds of appeal were related to the deletion of the addition made under section 14A read with Rule 8D by the Ld. CIT(A). However, it was established that the assessee did not receive any exempt income during the relevant year. Citing the decision in CIT Vs. Cheminvest Ltd., the ITAT held that section 14A does not apply in the absence of exempt income. As the revenue failed to refute the fact that the assessee had not received any exempt income, the ITAT upheld the Ld. CIT(A)'s decision to delete the addition. Consequently, the appeal of the revenue was dismissed by the ITAT.

In conclusion, the ITAT upheld the Ld. CIT(A)'s decision to delete the disallowance of loss claimed by the assessee on derivative trading and the addition made under section 14A read with Rule 8D due to the absence of exempt income. The Tribunal found no infirmity in the Ld. CIT(A)'s orders and dismissed the revenue's appeal accordingly.