ITAT directs AO to assess losses as business loss, allow set off against income, and review interest expenditure

The ITAT allowed the appeal of the assessee, directing the AO to assess loss from derivative transactions as a business loss, accept short term capital loss from delivery-based share transactions, allow set off of losses against other income, review interest expenditure based on loan use, and recognize the change of self-occupied property chosen by the assessee. The ITAT disagreed with the lower authorities' treatment of losses, interest expenditure, and self-occupied property selection, setting aside their orders.

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Issues:
1. Loss from trading in derivatives treated as speculative loss instead of business loss.
2. Loss from trading in delivery based share transactions treated as speculative loss instead of short term capital gains.
3. Rejection of claim of set off of Long term capital gains and Income from other sources against the above said losses.
4. Disallowance of interest expenditure.
5. Rejection of claim for change of Self Occupied Property for the purpose of computing Income from House Property.

Issue 1 - Loss from trading in derivatives:
The assessee claimed the loss as a business loss, but the AO treated it as speculative loss. The Ld CIT(A) upheld this view based on Explanation 73 of the Act. However, the ITAT found that the AO did not provide reasoning for treating the losses as speculative. As the exception in sec. 43(5) applied to these transactions, the ITAT directed the AO to assess the loss from derivative transactions as a business loss, setting aside the Ld CIT(A)'s order.

Issue 2 - Loss from trading in delivery based share transactions:
The ITAT noted that the assessee actually incurred the short term capital loss on sale of securities taken on delivery basis. The Ld CIT(A) suggested the loss was to set off against Long Term Capital Gains, but the ITAT disagreed, stating that such planning is permissible within the law. Therefore, the ITAT directed the AO to accept the short term capital loss as declared by the assessee.

Issue 3 - Set off of losses:
As the ITAT held that the losses cannot be treated as speculative, it directed the AO to allow set off losses against other income as per the Act.

Issue 4 - Disallowance of interest expenditure:
Regarding interest expenditure, the ITAT found that the user of loan proceeds determines the allowability of interest expenditure. Therefore, the ITAT restored this issue to the AO for proper examination in accordance with sec 36(1)(iii) of the Act.

Issue 5 - Change of Self Occupied Property:
The assessee sought to substitute a property as self-occupied, but the AO and Ld CIT(A) rejected this change. The ITAT held that there is no prohibition in the Act against changing the self-occupied property once selected. Therefore, the ITAT directed the AO to adopt the property chosen by the assessee as self-occupied.

In conclusion, the ITAT allowed the appeal of the assessee, setting aside the orders of the lower authorities on various issues related to the treatment of losses, interest expenditure, and self-occupied property selection.

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