2022 (5) TMI 954 - AT - Income Tax

Addition u/s 43(5) - Loss in commodity derivatives trading business was non-speculative - Addition invoking the provisions of clause (e) of the first proviso to section 43 (5) holding that derivatives trading in commodities is a kind of speculation in commodity trading business and that loss suffered in derivatives commodity trading can be set off only against its own head, and not against the business head - CIT(A) erred in confirming the action of the Assessing Officer in not setting off the same against other business income - HELD THAT - As per the details of loss from derivatives business incurred by the assessee, such derivatives were with regard to Crude oil, Nickel, etc., and Currency derivatives. The confirmations from the recognised Associations were filed, as previously noted. Nowhere have the authorities below denied that the commodity derivatives are commodity derivatives as prescribed under Chapter VII of the Finance Act, 2013. In this regard, clause (i) of Explanation 2 to section 43(5) specifically states that for the purposes of clause (e) of the first proviso of section 43(5), the expression commodity derivatives shall have the meaning as assigned to it in Chapter VII of the Finance Act, 2013. In the impugned order, the ld. CIT(A), without considering this aspect of the matter, has confirmed the Assessing Officer s observations, holding that the assessee could do two businesses, but the accounts should have been maintained separately; that the assessee has wrongly set off loss of speculative business with regular business; and that the assessee does not have the expertise of doing trading in commodities. Firstly, no case of intermingling of expenses stands made out. The loss from trading in commodity derivatives has been identified to the last rupee. The issue is as to whether such loss can be set off against other business loss. Next, as discussed herein above, in keeping with clause (e) of the first proviso to section 43(5), the loss incurred is not a speculative loss. Now, coming to the issue as to whether the loss from trading in commodity derivatives, which, as above, is not a speculative loss, has rightly been set off by the assessee against regular business profits from medical derivatives business. Reading clause (e) of the first proviso to section 43(5), and sections 70(1) and 73(1) of the I.T. Act together, it emerges that in the assessee s case, since a derivatives commodity trading transaction is not a speculative transaction, loss arising therefrom can very well be set off against the profit of the medical derivatives business of the assessee. Rather, it is only against such business profit that the business loss from the derivatives commodity trading can be set off. Clause (e) of the first proviso to section 43(5) of the I.T. Act was inserted by the Finance Act, 2013, w.e.f. 1.4.2014. The assessment year under consideration is 2015 16. Thus, this provision is squarely applicable to the assessee s case. None of the case laws relied on by the ld. CIT(A) is applicable to the present case, since they do not relate to clause (e) of the first proviso to section 43(5) of the I.T. Act. Thus the grievance of the assessee is found to be justified and is accepted as such. The Grounds raised are, hence, accepted. The addition made by the Assessing Officer, as confirmed by the ld. CIT(A), is cancelled. Appeal of assessee allowed.

Summary

Issues Involved:
1. Acceptance of Income Returned
2. Scope of Limited Scrutiny
3. Allowance of Loss in Derivative Business
4. Set Off of Non-Speculative Loss

Issue 1: Acceptance of Income Returned
The appellant challenged the order of the ld. CIT(A) for assessment year 2015-16, arguing that the Income Returned should have been accepted. The Assessing Officer made an addition by invoking provisions of the I.T. Act, stating that derivatives trading in commodities is speculative, and losses can only be set off against the same head. The ld. CIT(A) upheld this addition, leading to the appeal.

Issue 2: Scope of Limited Scrutiny
The appellant contended that the lower court went beyond the scope of limited scrutiny, leading to an erroneous order. The appellant argued that the order was liable to be quashed due to factual and legal errors in the case.

Issue 3: Allowance of Loss in Derivative Business
The appellant argued that the loss incurred in the derivative business was non-speculative and should have been allowed to be set off against other business income. The appellant maintained that all conditions for non-speculative loss were met, and the loss should be allowed as per section 43(5) of the I.T. Act.

Issue 4: Set Off of Non-Speculative Loss
The main issue revolved around whether the loss from trading in commodity derivatives, which was deemed non-speculative under section 43(5), could be set off against regular business profits. The appellant argued that as per sections 70(1) and 73(1) of the I.T. Act, the non-speculative loss could be set off against the profit of the medical derivatives business.

In the detailed analysis, the judgment highlighted the specific provisions of the I.T. Act, including section 43(5) and clause (e) of the first proviso, to determine the eligibility of the transactions as non-speculative. The judgment meticulously examined the fulfillment of conditions for eligible transactions in commodity derivatives and emphasized that the transactions met the criteria outlined in the law. It was concluded that the loss incurred in derivative trading was not speculative and could be set off against other business income. The judgment clarified the applicability of relevant provisions and overruled the lower court's decision, ultimately allowing the appeal and canceling the addition made by the Assessing Officer.