ITAT allows derivative trading losses on NSE platform, deletes penalty under Section 271(1)(c)

ITAT Delhi allowed assessee's appeal regarding derivative trading losses on NSE platform. The tribunal found CIT(A) erroneously disallowed losses by failing to consider open positions from previous year that matured during assessment year and carried-forward positions. The derivative losses were supported by scrip-wise statements and registered broker confirmations. ITAT held the accounting treatment of recognizing profits/losses in open contracts aligned with standard practices, and CIT(A)'s approach would create absurd double-counting results. Tribunal directed AO to allow derivative losses as business losses and deleted penalty under Section 271(1)(c), finding no culpability given proper documentary evidence and SEBI broker confirmations.

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Issues Involved:
1. Disallowance of loss in derivative trading.
2. Enhancement of income by the Commissioner of Income Tax (Appeals) [CIT(A)].
3. Imposition of penalty under Section 271(1)(c).

Summary:

1. Disallowance of Loss in Derivative Trading:
The assessee, a public limited company engaged in financial activities, claimed a business loss of Rs. 7,80,08,374/- from derivative transactions on the NSE platform. The Assessing Officer disallowed this loss, alleging it was unsupported by documentary evidence. The CIT(A) not only upheld this disallowance but also proposed an enhancement of income by Rs. 5,30,39,741/- based on data from the NSE, concluding that the assessee had a net gain instead of a loss. The Tribunal found that the CIT(A) failed to consider the opening and closing positions of derivative contracts, leading to an erroneous conclusion. The Tribunal accepted the assessee's method of accounting for profits/losses on a 'mark to market' basis and directed the Assessing Officer to allow the claimed derivative losses as business losses.

2. Enhancement of Income by CIT(A):
The CIT(A) enhanced the assessee's income by Rs. 5,30,39,741/- based on the difference between total purchases and sales reported by the NSE. The Tribunal observed that the CIT(A) did not account for the opening and closing positions of derivative contracts, which are essential for accurately determining profits/losses. The Tribunal found that the CIT(A)'s approach led to absurd results and set aside the enhancement, directing the acceptance of the assessee's reported losses.

3. Imposition of Penalty under Section 271(1)(c):
The penalty under Section 271(1)(c) was imposed on the basis of the disallowed derivative losses and the consequent enhancement of income. Given the Tribunal's decision to accept the assessee's claimed losses, the penalty lost its foundation. The Tribunal noted that the assessee's actions were supported by documentary evidence and confirmed by SEBI-registered brokers. Consequently, the Tribunal deleted the penalty, finding no mistake or culpability in the assessee's actions.

Conclusion:
The Tribunal allowed both appeals of the assessee, directing the acceptance of the claimed derivative losses and the deletion of the penalty under Section 271(1)(c). The order was pronounced on 13/12/2023.

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