ITAT deletes estimated margin money addition while upholding derivative loss disallowance under section 43(5)

The ITAT Delhi ruled in favor of the assessee regarding derivative transaction losses. The AO had denied set-off of derivative losses against wine shop profits, treating them as speculative transactions under section 43(5) since they weren't conducted through SEBI-registered intermediaries. The AO also made additions for alleged margin money payments on estimated basis. The ITAT found that while the derivative loss of Rs 14,43,040/- was properly disallowed as speculative, the separate addition for estimated margin money payments was unjustified. The assessee provided ledger accounts and contract notes as evidence, and the loss payments were traceable to maintained books of accounts. The tribunal deleted the additional estimation-based addition, accepting only the original derivative loss disallowance.

---

---

Issues involved:
The only effective issue in this appeal is whether the disallowance made on account of derivative loss was justified.

Comprehensive details of the judgment:

1. The Assessee had claimed a loss on derivatives, which the Assessing Officer (AO) disallowed as speculative transactions under section 43(5) of the Income Tax Act. The AO denied the set off of the derivative loss against the profits of the wine shop, as the transactions were not carried out through a registered intermediary.

2. The AO treated certain investments made on behalf of the Assessee in derivative transactions as unexplained investments under section 69 of the Act. The Assessee explained that these transactions were carried out through recognized stock exchanges and submitted details of transactions with sub-brokers.

3. The Commissioner of Income Tax (Appeals) considered the evidence and estimated margin monies at 10% of total transactions, sustaining an addition of Rs 12,72,098. However, the Assessee argued that no margin money was deposited with sub-brokers and the losses were funded through regular banking channels.

4. The Assessee provided ledger account copies of sub-brokers and contract notes, showing that the losses incurred were physically funded by the Assessee through her bank account. The total loss of Rs 14,43,040 was paid from the Assessee's bank account on specific dates.

5. The Tribunal accepted the Assessee's contentions and held that the disallowance of Rs 14,43,040 was justified and already done by the AO. As the Assessee did not appeal against this disallowance, no separate addition on account of alleged margin monies was necessary. Therefore, the addition of Rs 12,72,098 was deleted, and the appeal of the Assessee was allowed.

Separate Judgment: None.

Judges: Shri M. Balaganesh, Accountant Member and Shri Anubhav Sharma, Judicial Member.

---