2025 (10) TMI 692 - AT - Income Tax

Additions for mark-to-market unrealized securities gains not taxable as capital gains or business income; Section 115BBE treated as consequential

ITAT held that additions based on mark-to-market valuation of unsold securities, representing unrealized gains, cannot be taxed as capital gains or ... Addition of amount of gain held to have not been offered by the assessee - AO noted that based on the MTM summary or Global Report for the period 01.04.2015 to 31.03.2016, the assessee earned profit of Rs. 34,50,071/- but as against that figure, the assessee had shown profit of Rs. 2,84,330/- plus deduction claimed. HELD THAT:- We note from the chart filed that the alleged profit is on account of the valuation of the unsold scrips in the hands of the assessee and the said gain being not realized being in stock the unrealized gain cannot be taxed in the hands of the assessee. The assessee also filed chart vide submission dated 03.09.2025 that the scripts which are outstanding as loss and the profit loss has already been offered in the subsequent year. In the light of these facts, not disputed before us. We direct the ld. AO to delete the addition being the gain not realized during the year under consideration, which cannot be taxed under the head capital gain or as income under the head profit and gains of business or profession and as such the ground no. 1 raised by the assessee is allowed. Charge of tax as per 115BBE of the Act being consequential in nature does not require any finding. Grant the credit of TCS of his liquor business and the income of the said tax deducted has already been offered - For this ground as there was no finding in the orders of the lower authority, we remit to the ld. AO the issue of credit for decision in accordance with law. ISSUES PRESENTED AND CONSIDERED 1. Whether unrealized gains shown in broker 'MTM/Global Report' on unsettled share/derivative transactions as at year-end are taxable as income or capital gains when assessee follows mercantile system of accounting. 2. Whether addition made by the Assessing Officer based on broker reports to the extent of difference between MTM profit and profit returned by assessee is sustainable and whether section 115BBE(1)(a) can be invoked when no proceedings under sections 68-69C were specifically made. 3. Whether tax collected at source (TCS) deducted under another person's PAN but relating to business income included in the assessee's return is allowable as credit under Rule 37BFA (credit for TCS) and whether the issue requires remand when not decided below. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Taxability of unrealized MTM/global report gains on unsettled share/derivative transactions Legal framework: Mercantile system of accounting recognizes income and expenses on accrual (transaction) basis. Treatment of derivatives, F&O and intraday depends on whether transactions are delivery-based or settled otherwise; speculative transaction rules (s.43(5) context) and principles concerning contract settlement and realization (circular and authorities cited) govern whether unrealized MTM profits constitute income in the year. Precedent treatment: The judgment cites principles from earlier authorities and circulars distinguishing contracts eventually settled otherwise than by actual delivery and recognizing that futures/derivatives settled otherwise than by delivery may be speculative (and treated differently). Decisions referred to emphasize substance of transaction, settlement mechanics and ultimate realization as determinative. Interpretation and reasoning: The Tribunal examined the broker MTM/global reports showing a total profit of Rs. 34,50,071, of which Rs. 27,48,814 related to transactions not squared up (unsettled) as at year-end. Assessee produced contract notes and settlement-wise details to show that unrealized MTM gains were realized (or losses crystallized) in subsequent year(s). The AO and CIT(A) treated the trade date as determinative under mercantile accounting, concluding that orders placed on 30/31 March effected business and created accrued profit. The Tribunal, after perusal of the chart and evidence, accepted that the alleged profit arose from valuation of unsold scrips and constituted unrealized gains not realized during the year, and therefore could not be taxed either as capital gains or as business income for that year. Ratio vs. Obiter: Ratio - unrealized gains shown in MTM/global reports attributable to unsettled transactions at year-end are not taxable in the year if the transaction remains unsettled and the profit is not realized in that year; evidence of subsequent settlement and accounting treatment is relevant. Obiter - observations on general accounting principles and nature of derivatives/futures as per cited circulars and cases clarifying speculative vs. non-speculative treatment. Conclusion: The addition of Rs. 31,59,558 (difference between broker MTM profit and profit returned) is deleted; the Tribunal allows the ground challenging the addition, finding the gain was unrealized during the year and not taxable in that year. Issue 2 - Validity of AO's addition and applicability of section 115BBE(1)(a) Legal framework: Section 115BBE imposes special tax treatment where total income includes income referred to in sections 68, 69, 69A-69D as reflected in the return; subsection (2) precludes deductions in respect of expenditure or allowance for such income. Additions under the Act are required to be made under appropriate sections; invoking s.115BBE is consequential upon making additions under the specified sections. Precedent treatment: Authorities and provisions cited in the record indicate that s.115BBE applies to income falling under ss.68-69D and that proper invocation of the relevant charging provisions is necessary before applying s.115BBE consequences. Interpretation and reasoning: The AO applied s.115BBE(1)(a) to tax the added amount at 30% and disallowed related deductions, but the assessment order did not clearly specify that the addition arose under ss.68-69C or similar provisions. The Tribunal treated the charge under s.115BBE as consequential to the deletion of the substantive addition: since the primary addition (unrealized MTM gain) is disallowed, no further finding on s.115BBE was necessary. Ratio vs. Obiter: Ratio - where the foundational addition is deleted, any consequent application of s.115BBE is unnecessary; invocation of s.115BBE requires that the underlying addition fall within the sections specified in s.115BBE(1). Obiter - critique of AO's failure to specify the statutory basis for the addition when applying s.115BBE. Conclusion: No independent finding on applicability of s.115BBE is required after deletion of the primary addition; the ground challenging application of s.115BBE is rendered academic/consequential and does not survive once the addition is removed. Issue 3 - Claim for TCS credit under Rule 37BFA where TCS deducted under another person's PAN but income included by assessee Legal framework: Rule 37BFA provides mechanism for claiming credit of TCS where collections are reflected in the books/returns of the taxpayer; general tax credit principles require proof that the withheld amount pertains to the taxpayer's income and appropriate documentary evidence. Precedent treatment: The assessee relied on earlier orders where credit was directed to taxpayer who disclosed the income despite TCS being deducted under another PAN. Those decisions suggest that where the assessee has included the income and substantiated the connection, credit may be allowed. Interpretation and reasoning: The Tribunal noted that lower authorities had not decided this claim on merits. The assessee produced an agreement and declaration showing that business income of the liquor shop (allotted in another person's name) was included in his income, and sought credit for TCS deducted under that other person's PAN. Because there was no adjudication of the TCS credit by AO/CIT(A), the Tribunal remitted the issue to the AO for decision in accordance with law, directing verification of the evidence and allowing credit if legally and factually established. Ratio vs. Obiter: Ratio - when factual and documentary support is available for TCS claimed though deducted under another PAN, the assessing authority should examine and decide the claim; absence of determination below warrants remand. Obiter - references to earlier orders supportive of allowing credit where income is disclosed. Conclusion: The claim for TCS credit of Rs. 3,14,257 is remitted to the Assessing Officer for decision in accordance with law; no immediate direction to allow or disallow was made by the Tribunal. Cross-references Findings on Issue 1 directly negate the basis for the consequential tax treatment urged under Issue 2; Issue 3 is independent and was remitted for factual verification since it was not adjudicated by lower authorities. Disposition The appeal is partly allowed: the addition of Rs. 31,59,558 is deleted (unrealized MTM gains not taxable in that year); no separate finding on s.115BBE is necessary; the TCS credit claim is remitted to the Assessing Officer for fresh decision in accordance with law.