2019 (3) TMI 1465 - AT - Income Tax

Benefit of set off of unaccounted loss incurred in the undisclosed transaction against the business income derived by the assessee in transactions involving trading of derivatives - HELD THAT - Transactions in the exchange was recorded in the name of the assessee, details have been given in the assessment order and has found as a fact that the assessee had not recorded the sales which resulted in profit as well as resulted in loss out of such transaction. AO being a quasi judicial body had to act in a fair, just and reasonable manner and should have only taxed the right income (even if undisclosed). We note that the profit as well as the loss are from the derivative trading only and therefore, have to be deemed as business income by virtue of sec. 43(5). In such a scenario, not allowing the set off of the loss component from the profit from the same transaction though un-recorded, is not just, fair or reasonable order of the AO. Therefore, relying on the ratio laid by the Hon ble Supreme Court in Ch. Atchaiah 1995 (12) TMI 1 - SUPREME COURT as well as in the case of Maneka Gandhi Vs. Union of India 1978 (1) TMI 161 - SUPREME COURT in which order the law has been laid down that a public authority should discharge his duties in a fair, just and reasonable, manner and the principle of due process of law was recognized by the Hon ble Supreme Court. So, we uphold the order of the CIT(A) directing the AO to restrict the addition after giving set off of the loss which does not require any interference from our part and so we confirm the same. Addition u/s 14A - HELD THAT - AO the assessee in its submission dated 10.02.2015 had explained that out of the total STT, sum of ₹ 2,24,983/- was directly attributable to the investments and that the said amount had already been disallowed and added back to the total income. As regards the STT of ₹ 6,84,939/- paid on derivatives, it brought to our notice that the aforesaid amount was erroneously disallowed by the AO presuming it to be as direct expenditure under Rule 8D(2)(i). We note that the AO seems to have not understood that STT was directly & intrinsically related to the activity of trading in derivatives, which yielded only taxable income, and which was also assessed to tax at normal rates. These charges had no correlation either with investments or for that matter with earning of dividend. In the circumstances the STT being not relatable to investments was wrongly disallowed by the AO under Section 14A read with Rule 8D(2)(i). Therefore the AO is directed to delete the impugned disallowance to the extent of ₹ 6,84,939/-. Appeal of revenue is dismissed and assessee s Rule 27 application is allowed as discussed above

Summary

Issues:
1. Set off of unaccounted loss against business income in derivative trading.
2. Disallowance made under section 14A read with Rule 8D of the Income-tax Rules, 1962.

Issue 1: Set off of unaccounted loss against business income in derivative trading

The appeal by the Revenue was against the Ld. CIT(A)'s order allowing the benefit of set off of unaccounted loss of ?91,36,945 against the business income of ?92,61,341 derived by the assessee in derivative trading for AY 2012-13. The AO found discrepancies in the transactions carried out by the assessee through an authorized broker and determined undisclosed income from derivative transactions. The AO observed unrecorded purchases and sales resulting in profit and loss. The AO disallowed the set off of the loss against business income, leading to the determination of undisclosed income. The ITAT noted that both profit and loss were from derivative trading and should be deemed as business income. The ITAT upheld the Ld. CIT(A)'s order directing the AO to restrict the addition to ?1,76,525 after allowing the set off of the loss, emphasizing the need for a fair and reasonable approach as per legal principles.

Issue 2: Disallowance under section 14A read with Rule 8D

The Revenue challenged the Ld. CIT(A)'s decision on disallowance made under section 14A read with Rule 8D regarding exempt dividend income. The AO disallowed certain expenses based on Rule 8D(2)(i) and (iii), leading to a dispute between the Revenue and the assessee. The ITAT found that the AO's disallowance of Securities Transaction Tax (STT) related to derivatives trading was incorrect as it was not directly linked to exempt income. The ITAT directed the AO to delete the disallowance related to STT paid on derivatives trading. The ITAT confirmed the Ld. CIT(A)'s decision on the application of Rule 8D(2)(iii) for calculating disallowance and allowed the assessee's Rule 27 application regarding the disallowance under Rule 8D(2)(i) after clarifications on specific charges.

In conclusion, the ITAT dismissed the Revenue's appeal and allowed the assessee's Rule 27 application, providing detailed reasoning for each issue involved in the judgment.