2013 (1) TMI 675 - AT - Income Tax

ITAT directs fresh examination on capital loss, upholds CIT(A)'s decision on non-recognition of profit.

The ITAT set aside the issues of treatment of short-term capital loss as business loss and disallowance under section 14A for fresh examination by the AO, ... Loss on sale of shares – Capital loss or business loss - Assessee engaged in business of trading and investment - AO assessed the same as short term capital loss instead of business loss – Held that:- the frequency & number of transactions are undisputedly too low, earning of dividend appears to be a dominant intention in acquisition of the two units of MFs, obviously the scrips are few, figures appear of high value, it does not appear that the assessee has the intention of holding on to the units as investment, the conduct of the assessee in dealing with the shares over the years is also relevant factor and adequate facts for determining the same are not brought on to the records etc. Therefore, assessee is required to file adequate data for establishing the claim. AO is directed to admit evidences or additional evidences that may help for substantiating the claims – Remand back to AO Loss on F&O contracts - Assessee has claimed loss on open position of F&O contract - did not offer the profit for taxing on similar open position of F&O contact on the last day of the previous year – Held that:- The notional loss is allowable as long as there are no contingencies are attached and the notional gains should be allowed in the year of realization based on the principle of prudence. The question is what if there is difference between the anticipated profits quantified in an year and the actual profits realized thereafter. On finding that there is no dispute on the fact that the appreciated value of stocks is realized and afforded to tax in the next year – In favour of assessee Disallowance u/s 14A – Rule 8D – Expense in relation to exempt income - Earned dividend income and claimed exemption in view of the provisions of section 10(34) – Reckoning of units of MF as stock in trade or as investment - Held that:- Following the decision in case of India Advantage Securities Ltd. (2012 (11) TMI 458 - ITAT, MUMBAI) that assessee had not retained the shares with the intention of earning dividend income which was incidental due to his sale of shares which remained unsold by the assessee therefore disallowance u/s 14A did not upheld. AO needs to collect additional facts for deciding the principle of res judicata and the rule of consistency. Till the time, the actual nature of the transaction is decided; the quantification issues u/s 14A has to wait for sake of harmony in adjudication. – Remand back to AO Issues Involved:1. Treatment of short-term capital loss as business loss.2. Non-recognition of profit on open position of Futures & Options (F&O) contracts.3. Disallowance under section 14A read with Rule 8D of the Income Tax Act, 1961.Detailed Analysis:1. Treatment of Short-Term Capital Loss as Business Loss:The primary issue was whether the loss of Rs. 42,01,31,205/- incurred by the assessee on the sale of mutual fund units should be treated as a business loss or a short-term capital loss. The Assessing Officer (AO) treated it as a short-term capital loss, citing the limited number of transactions (three) and the significant dividend income earned as evidence of the assessee's intent to earn dividends rather than engage in business activity. The AO also suspected a colorable device to evade taxes.The CIT(A) reversed the AO's decision, treating the loss as a business loss based on the assessee's consistent treatment of such transactions as stock-in-trade in their books, the use of borrowed funds for investment, and the principle of consistency upheld in the case of CIT v. Gopal Purohit [2011] 336 ITR 287.Upon appeal, the ITAT noted the need for a detailed comparison of facts across different assessment years to apply the principle of consistency and res judicata. The ITAT found the CIT(A)'s order inadequate for not bringing facts of many years onto the record. The ITAT set aside the issue for fresh examination by the AO, directing the AO to consider additional evidence and provide a reasoned decision.2. Non-Recognition of Profit on Open Position of F&O Contracts:The AO added Rs. 2,50,32,898/- to the assessee's income, arguing that the assessee should have recognized notional gains on open F&O positions at the end of the financial year. The CIT(A) deleted this addition, relying on the Tribunal's decision in the case of Edelweiss Capital Ltd., which held that anticipated profits should not be recognized until realized, following the principle of prudence.The ITAT upheld the CIT(A)'s decision, emphasizing that anticipated profits are not to be recognized until realized, consistent with the principle of prudence and the Supreme Court's judgment in Chainrup Sampatram v. CIT [1953] 24 ITR 481 (SC).3. Disallowance Under Section 14A Read with Rule 8D:The AO disallowed Rs. 1,56,23,811/- under section 14A read with Rule 8D, relating to the expenditure incurred to earn exempt dividend income. The CIT(A) upheld this disallowance.The ITAT noted that the quantification of disallowance under section 14A depends on the classification of mutual fund units as stock-in-trade or investment. Since the issue of classification was set aside for fresh examination, the ITAT also set aside the issue of disallowance under section 14A for reconsideration by the AO, directing the AO to reassess the disallowance based on the final classification of the mutual fund units.Conclusion:The ITAT set aside the issues of treatment of short-term capital loss as business loss and disallowance under section 14A for fresh examination by the AO, directing the AO to consider additional evidence and provide a reasoned decision. The ITAT upheld the CIT(A)'s deletion of the addition for non-recognition of profit on open F&O positions, following the principle of prudence. The appeals were partly allowed for statistical purposes.