2014 (12) TMI 1249 - AT - Income Tax

Claim of set off of loss of earlier years incurred on derivative transactions to adjust against profit earned on derivative transactions of current year - Held that - It is not in dispute that the assessee has earned profit from the same business in which losses were incurred in the earlier years. The loss brought forward during all these years and gain made during the year is having same nature. There is no change in the nature earning of income during the year. In all the preceding years he was incurring losses in futures and options transactions but in current year he made gain. Nothing was brought on record by AO to allege that profit earned during the year was not out of future and option transaction. Thus the assessee was entitled to set off the carried forward losses of earlier assessment years against profits of the same business in this assessment year. The classification of business for the limited purpose of set off of past losses into speculative and non-speculative is to be done on uniform basis and losses incurred in the same business in earlier assessment years are to be treated as eligible for set off against profit of the same business in the subsequent assessment years. For this reason also the assessee deserves to be allowed to set off of brought forward losses from business of dealing in derivatives incurred in assessment years prior to assessment year 2006-2007 against profit of the same business in current assessment year 2006-2007. Thus speculative losses made on future option transactions in earlier years are eligible to be allowed to set off against the business income of future option transactions of current year. Based on the same in the present case the assessee is entitled to set off the carried forward losses of earlier year from the same business against profit of the business in this assessment year. - Decided in favour of assessee

Summary

Issues:
Claim of set off of loss of earlier years against profit earned on derivative transactions of the current year.

Analysis:
The appeal was filed by the assessee against the order of CIT(A) for the Assessment Year 2008-09, regarding the claim of set off of loss of earlier years against the profit earned on derivative transactions of the current year. The AO declined the claim stating that carry forward loss from speculation business cannot be set off against business income in the current year. The CIT(A) upheld the AO's decision, leading to the appeal before ITAT.

The assessee had entered into derivative transactions in the form of Futures and Options and incurred speculative losses since A.Y.2004-2005. The total losses incurred in the preceding assessment years amounted to Rs. 50,64,262. However, during the A.Y.2008-2009, the assessee earned a profit of Rs. 57,45,716 from similar derivative transactions. The assessee claimed set off of the brought forward losses against the current year's profit, which was denied by the AO, stating no provision in the Act allowed such adjustment.

ITAT found that the assessee had engaged in similar derivative transactions in the current year as well. The nature of the income, i.e., losses and gains from Futures and Options, remained consistent across the years. The AO failed to prove that the profit earned in the current year was not from derivative transactions. Therefore, the assessee was entitled to set off the losses from earlier years against the profit from the same business activity in the current year.

Referring to a previous Mumbai ITAT decision, it was established that losses incurred in derivative transactions up to a certain year could be set off against income from derivative transactions in subsequent years. Following this precedent, ITAT concluded that the assessee should be allowed to set off the carried forward losses from dealing in derivatives against the profit from the same business in the current assessment year.

In light of the above analysis and legal precedents, ITAT found no merit in the lower authorities' decision to deny the set off of losses from earlier years against the profit of the current year. Consequently, the appeal of the assessee was allowed, and the order was pronounced in favor of the assessee on 02/12/2014.