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<h1>Non-speculative F&O business losses may be set off against capital gains and other income under s.71(2)</h1> <h3>Kamal Kant Versus Income Tax officer ward 54 (1) Civic Centre Delhi</h3> ITAT DELHI - AT held that non-speculative business losses from futures and options trading are permissible to set off against capital gains and other ... Set off of loss from futures & options (F&O) trading - . AR of the assessee submitted that as per section 71(2) of the Act the loss of the assessee under the head of Business and profession can be set off with the income under the “Capital Gain” - HELD THAT:- Losses in futures & Option derivative trading business which are non-speculative business losses would be set off against capital gains on sale of shares and other income earned by assessee. In the instant case the assessee has filed the return of income within prescribed time and claimed the losses of business of trading of the shares & securities against the income from Capital gain on account of transaction relating to Land building which would be set off as per the section of 71(2) of the Act. The assessee has claimed the set off in the original return of income. AO should set off the claim of the assessee as claimed by him. Matter set a side and remand back to the AO to verified the details submitted by the assessee. The appeal of the assessee is liable to be allowed for statistical purpose. ISSUES PRESENTED AND CONSIDERED 1. Whether a loss from futures & options (F&O) trading assessed as a non-speculative business loss under the head 'Profits and gains of business or profession' can be set off against income chargeable under the head 'Capital gains' pursuant to section 71(2) of the Income-tax Act. 2. Whether omission or technical error in processing of the income-tax return by the Central Processing Centre (CPC), including alleged non-disclosure in specific ITR fields (e.g., column 51 of Profit & Loss schedule), can defeat an otherwise valid claim for set-off made in the original return. 3. Whether the claim for set-off of F&O business losses is affected by the statutory prohibition contained in section 71(2A) (i.e., set-off against salary), and whether the classification of F&O losses as non-speculative for this purpose is appropriate. 4. Whether interest under sections 234A, 234B and 234C should be levied where set-off claimed in original return has not been given effect to by CPC and rectification under section 154 was refused (issue limited to whether Tribunal decided or remitted the interest question). ISSUE-WISE DETAILED ANALYSIS Issue 1: Set-off of non-speculative F&O business loss against capital gains under section 71(2) Legal framework: Section 71(2) permits set-off of losses under one head of income against income under any other head, subject to statutory exceptions. Section 43(5)(d) (as relied on) addresses treatment of derivatives and classification of such losses as business losses. Section 71(2A) creates a specific bar to setting off business/professional losses against salary income. Precedent treatment: The Tribunal followed a coordinate-bench decision which held that non-speculative business losses from F&O trading may be set off against capital gains and other heads of income except salary, relying on the plain language of section 71(2) and the specific exclusion in section 71(2A). Interpretation and reasoning: The Tribunal emphasized the plain and clear language of section 71(2) that allows losses incurred under any head other than 'Capital gains' to be set off against income under any other head including 'Capital gains'. The Tribunal distinguished the limited and specific non-obstante prohibition in section 71(2A) which only bars set-off of business losses against salary income; since capital gains are not within that prohibition, the statutory text permits set-off in the present circumstances. The Tribunal accepted the characterization of the F&O loss as a non-speculative business loss (referencing section 43(5)(d) reasoning as applied by the coordinate bench) and therefore eligible for set-off under section 71(2). Ratio vs. Obiter: Ratio - where a loss from F&O trading is properly assessable as a non-speculative business loss, section 71(2) permits its set-off against capital gains; section 71(2A) only excludes set-off against salary. Obiter - ancillary observations about the mechanics of filing or format of ITR fields that do not alter the statutory entitlement. Conclusions: The Tribunal held that the claim for set-off of non-speculative F&O business losses against capital gains was permissible under section 71(2) and that the assessing authority should give effect to the set-off subject to verification of details. The Tribunal set aside the orders denying set-off and remanded the matter to the Assessing Officer for verification and adjustment in accordance with section 71(2). Issue 2: Effect of CPC processing/ITR field omissions and rectification under section 154 on entitlement to set-off Legal framework: The taxpayer asserted the loss and set-off in the original return; CPC processing omitted the set-off (technical/formatting issue). Rectification under section 154 was sought but refused by the AO/CPC; NFAC dismissed the appeal on grounds including alleged nondisclosure in specified ITR fields. Precedent treatment: The Tribunal adhered to the coordinate bench approach that a technical or processing omission at CPC does not defeat a statutory entitlement where the claim was properly made in the original return and where the statutory prerequisites (classification of loss, etc.) are satisfied. Interpretation and reasoning: The Tribunal noted that the loss and set-off were claimed in the original return filed within time. Given the statutory entitlement under section 71(2), a mere technical error in CPC processing or alleged non-filling of a particular schedule field should not be allowed to override substantive rights. Accordingly, rather than dismissing on form/processing grounds, the appropriate course is to remit to the Assessing Officer to verify the details furnished and, if warranted, to allow the set-off. Ratio vs. Obiter: Ratio - where a valid claim for set-off is made in the original return, procedural or processing omissions at CPC cannot be permitted to deny the substantive statutory relief; the proper remedy is verification and rectification by the AO. Obiter - comments about specific ITR field numbers and internal CPC processes. Conclusions: The Tribunal held that the lower authorities erred in upholding denial based on CPC processing/ITR field contentions. The matter was remanded to the AO to verify submitted details and to allow set-off if substantiated. The appeal was allowed for statistical purposes and the orders denying relief set aside. Issue 3: Interaction of section 71(2) with section 71(2A) and classification of F&O losses as non-speculative Legal framework: Section 71(2) permits inter-head set-off; section 71(2A) contains an express bar (with a non-obstante clause) to setting off business losses against salary. Classification of F&O losses as non-speculative business loss (e.g., under the reasoning of section 43(5)(d) as applied by precedent) determines availability of set-off under section 71(2). Precedent treatment: The Tribunal followed the coordinate-bench authority which recognized F&O trading losses as non-speculative business losses and applied section 71(2) accordingly, while observing that section 71(2A) only excludes set-off against salary. Interpretation and reasoning: The Tribunal treated section 71(2A) as a specific exception that does not negate the broader entitlement under section 71(2) vis-à-vis capital gains. The Tribunal accepted the factual/legal classification of the F&O loss as non-speculative, thereby bringing it within the ambit of section 71(2) subject to the section 71(2A) limitation (which was not applicable to capital gains in this case). Ratio vs. Obiter: Ratio - section 71(2A) does not prevent set-off of non-speculative business losses against capital gains; classification of F&O losses as non-speculative brings such losses within section 71(2). Obiter - discussion of policy or legislative intent beyond statutory text. Conclusions: The Tribunal concluded that the statutory scheme permits the claimed set-off and the AO should implement it after verification; the statutory bar in section 71(2A) does not apply to bar set-off against capital gains. Issue 4: Levy of interest under sections 234A, 234B and 234C Legal framework: Sections 234A/234B/234C relate to interest for delay in filing, under-payment of advance tax and deferment of advance tax installments respectively and are linked to the correctness of returned income and tax liability after adjustments. Precedent treatment: The Tribunal did not make a final adjudication on the interest levies on the present facts but remitted the substantive set-off issue to the AO for verification and adjustment. The interest consequence therefore remained dependent on the outcome of remand proceedings. Interpretation and reasoning: Because the Tribunal found that the substantive set-off claim must be verified and given effect to if substantiated, any question of interest attached to tax demand would have to be revisited in the light of the adjusted computation. The Tribunal did not uphold or reverse the interest levies in the impugned order but effectively required reassessment before interest determination. Ratio vs. Obiter: Obiter/inconclusive - the Tribunal did not lay down a definitive proposition on the levy of interest; the interest issues were left to be reconsidered by the AO after giving effect to the set-off (if allowed). Conclusions: The Tribunal remitted the matter to the Assessing Officer for verification and direction to allow set-off if supported; consequential issues including interest under sections 234A/234B/234C are to be determined by the AO after such verification. The appeal was allowed for statistical purposes and the orders denying set-off were set aside.