2013-TIOL-334-HC-AHM-IT
IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
Special Civil Application No. 357 of 2013
TRANSWIND INFRASTRUCTURE PVT
LTD
Vs
INCOME TAX OFFICER-WARD 8 (1)
Akil Kureshi And Sonia Gokani, JJ
Dated : April 16, 2013
Appellant Rep. by : Mr S N Soparkar, Sr Adv with Mr B S Soparkar, Adv
Respondent Rep. by : Ms. Paurami B Sheth, Adv
Respondent Rep. by : Ms. Paurami B Sheth, Adv
Income Tax - Sections 40(a)(ia), 143(2),
147, 148 - reassessment - TDS -
labour charges - contractor - Whether when the assessee has not
deducted TDS on labour charges, even though statutorily required
under the Act, the assessing authority can deduct TDS on adhoc
basis - Whether in such a case re-examination of facts by means of
reopening is tenable in law - Whether during reassessment
proceedings, an assessing authority has the power to review -
Whether when once a claim is fully examined, power of reopening is also
available.
Assessee,
an indian company had filed ROI for AY 2007-08 declaring total income
of Rs. 36,27,970/- and had claimed labour expenditure of Rs. 9.48
crores. As per the petitioner, on the balance labour payment of Rs. 3.05
crores, provision of TDS was not applicable and, therefore, no TDS was
made.
During assessment, AO had discarded petitioner’s contention that TDS
was not applicable for the remaining labour charges. AO made ad-hoc
disallowance of Rs. 25,60,000/- at 8% of the total payments in his order
of assessment. On appeal, CIT(A) had deleted such additions on the
ground that TDS provision was not applicable. The Revenue had filed
appeal against such order of CIT(A) which was pending before the
Tribunal. On 30.12.2012, the AO had issued notice u/s 148 on the ground
that it was noticed that the assessee was engaged in the business of
contractor with different agencies. On verification of the P & L
account, it was noticed that the assessee had incurred total labour
payment expenditure of Rs. 9,48,23,819/- out of which the assessee had
deducted TDS on labour payment of Rs. 6,48,55,517/- and the balance
labour payment amounting to Rs. 3,05,68,302/- was paid to other labour
on which TDS was not deducted. Therefore as per
section 40(a)(ia) the expenditure would be allowed as deduction from
the taxable income, only if tax is deducted and paid in to government
account. Therefore the payments amounting to Rs. 3,05,68,302/- paid on
work contract section 40(a)(ia) which required to be disallowed as
assessee company had not deducted tax and paid to the government
account. The reasons for reopening was also provided to the assessee.
Failure to do so resulted in under assessment of Rs. 3,05,68,302/-. AO
therefore had every reason to believe that by reason of omission on the
part of the assessee to disclose fully and truly all material relevant
for the assessment, the income of the assessee has escaped assessment
within the meaning of section 147. Objections filed by assessee were
rejected by the Tribunal.
Held that,
++ it is not as if that the AO framing scrutiny
assessment had overlooked this aspect of the matter but, having enquired
with the assessee and having concluded that tax at source though
required, was not deducted, made disallowance on ad-hoc basis which,
according to the revenue, was not in order. Entire amount should have
been disallowed from the claim of expenditure. From the arguments
mentioned, it can be seen that the AO was acutely conscious about the
petitioner not having deducted tax on labour payment charges of Rs. 3.05
crores and the petitioner’s contention that it was so done because
provision for TDS was not applicable. He was not convinced by such
explanation. He, however, for some strange reasons did not apply the
provision of Section 40(a)(ia) instead made ad-hoc disallowance of Rs.
25,60,000/- @ 8% of the total labour payment charges. Whatever be the
legality of such assessment, fact remains that, in the
scrutiny assessment, the AO had thoroughly and fully scrutinized the
assessee’s claim of deduction of labour expenditure. To the extent he
was inclined to disallow the same, he did so. By no stretch of
imagination it can be stated that the issue was not at large before the
AO in the original scrutiny assessment. Any reexamination of such a
question at this stage would only amount to change of opinion. Remedy
of reopening the assessment, therefore, was simply not available;
++ in the decision of the SC in case of CIT Vs. Kelvinator of India Ltd. (2010-TIOL-06-SC-IT)
the Apex Court observed that on going through the changes, quoted
above, made
to Section 147, we find that, prior to Direct Tax Laws (Amendment)
Act, 1987, re-opening could be done under above two conditions and
fulfillment of the said conditions alone conferred jurisdiction on the
AO to make a back assessment, but in section 147 [with effect from 1st
April, 1989], they are given a go-by and only one condition has
remained, viz., that where the AO has reason to believe that income has
escaped assessment, confers jurisdiction to reopen the assessment.
Therefore, post-1st April, 1989, power to re-open is much wider.
However, one needs to give a schematic interpretation to the words
“reason to believe” failing which, we are afraid, Section 147 would
give arbitrary powers to the AO to re-open assessments on the basis of
“mere change of opinion”, which cannot be per se reason to re-open. We
must also keep in mind the conceptual difference between power to
review and power to re-assess. The AO has no power to
review; he has the power to re-assess. But re-assessment has to be
based on fulfillment of certain pre-condition and if the concept of
“change of opinion” is removed, as contended on behalf of the
Department, then, in the garb of re-opening the assessment, review
would take place. One must treat the concept of “change of opinion” as
an in-built test to check abuse of power by the AO. Hence, after 1st
April, 1989, AO has power to re-open, provided there is “tangible
material” to come to the conclusion that there is escapement of income
from assessment. Reasons must have a live link with the formation of the
belief. Our view gets support from the changes made to Section 147, as
quoted hereinabove. Under the Direct Tax Laws (Amendment) Act, 1987,
Parliament not only deleted the words “reason to believe” but also
inserted the word “opinion” in Section 147. However, on receipt of
representations from the Companies against
omission of the words “reason to believe”, Parliament re-introduced the
said expression and deleted the word “opinion” on the ground that it
would vest arbitrary powers in the AO. If the Revenue was of the
opinion that the AO erroneouly and to the prejudice of the interest of
the Revenue allowed certain claim, in a given situation, it would have
been open for the appropriate authority to exercise revisional powers.
However, once the claim was fully examined, power of reopening was
simply not available. In the result, impugned noticed dated 30.03.2012
is quashed. Petition is allowed and disposed of accordingly.
Assessee's appeal allowed
Case followed:
CIT Vs. Kelvinator of India Ltd. (2010-TIOL-06-SC-IT)
JUDGEMENT
Per : Akil Kureshi, J :
1. Heard learned counsel for the parties for final disposal of the
petition. Petitioner has challenged a notice dated 30.03.2012 as at
Annexure A to the petition issued by the respondent-Assessing Officer
under Section 148 of the Income Tax Act,1961.
2.
Petitioner is a company registered
under the Companies Act. For the assessment year 2007-2008,
petitioner filed its return of income on 29.10.2007 declaring total
income of Rs. 36,27,970/-. In such return, the petitioner had
claimed labour expenditure of Rs. 9.48 crores (rounded off). As per
the petitioner, on the balance labour payment of Rs. 3.05 crores
(rounded off), provision of TDS was not applicable and, therefore, no
tax was deducted at source.
3. Assessing Officer framed scrutiny assessment under Section 143(2)
of the Act. He discarded petitioner’s contention that TDS was not
applicable for the remaining labour charges. He made ad-hoc
disallowance of Rs. 25,60,000/- at 8% of the total payments in his
order of assessment dated 30.12.2009.
4. Petitioner challenged the said disallowance before the CIT(A),
who, by his order dated 15.12.2010, deleted such additions on the
ground that TDS provision was not applicable. We are informed that the
Revenue has filed appeal against such order of CIT(A) which is
pending before the Tribunal.
5. On 30.12.2012, the respondent issued impugned notice. The
petitioner was supplied reasons recorded for issuance of such notice
which read as under:
“In this case on verification of case record it is noticed that the assessee is engaged in the business of contractor with different agencies. On verification of the P & L account it is notice that the assessee has incurred total labour payment expenditure of Rs. 9,48,23,819/- out of which the assessee had deducted TDS on labour payment of Rs. 6,48,55,517/- and the balance labour payment amounting to Rs. 3,05,68,302/- was paid to other labour on which TDS was not deducted. Therefore as per section40(a)(ia) of the IT Act the expenditure would be allowed as deduction from the taxable income, only if tax is deducted and paid in to government account. Therefore the payments amounting to Rs. 3,05,68,302/- paid on work contract section 40(a)(ia) of the IT Act which required to be disallowed as assessee company has not deducted tax and paid to the government account.Failure to do so resulted in under assessment of Rs. 3,05,68,302/-. In view of the above, escapement of Rs. 3,05,68,302/-. I have therefore, every reason to believe that by reason of omission on the part of the assessee to disclose fully and truly all material relevant for the assessment, the income of the assessee has escaped assessment within the meaning of section 147 of the I.T. Act, for the A.Y. 2007-08.”
6.
Petitioner thereupon raised objections under communication dated
21.05.2012 to the notice of reopening. Such objections were, however,
rejected by the respondent by an order dated 26.12.2012. Hence, the
petition.
7. From the record and from the submissions of the counsel for the
parties we notice that the only ground indicated in the reasons
recorded by the Assessing Officer is that on the labour payment
charges of Rs. 3.05 crores, though required, TDS was not deducted.
Therefore, under Section 40(a)(ia) of the Act, entire expenditure had
to be disallowed. He, therefore recorded that “failure to do so
resulted in
under assessment of Rs. 3,05,68,302/-”.
8.
From the tenor of the reasons itself, we gather that it is not as if
that the Assessing Officer framing scrutiny assessment had
overlooked this aspect of the matter but, having enquired with the
assessee and having concluded that tax at source though required, was
not deducted, made disallowance on ad-hoc basis which, according to
the revenue, was not in order. Entire amount should have been
disallowed from the claim of expenditure.
9. In addition to the above conclusions, we also notice that in the
assessment order itself, the Assessing Officer had discussed this
issue in following manner:
“6. Disallowance out of labour payments:During the year under consideration, the assessee had incurred total labour payment expenditure of Rs. 9,48,23,819/-. Out of this expenditure the assessee has deducted TDS on labour payment of Rs. 6,42,55,517/- and the balance labour payment of Rs. 3,05,68,302/- has been paid to the other labourers on which the provision of TDS is not applicable.As per order sheet entry dated 24.12.2009, the assessee was asked to file the details regarding the labour payments on which no TDS has been deducted which are supported only by self made vouchers. The authorized representative of the assessee company attended on 29.12.2009 and filed a reply to the show cause. The reply has been considered but is not found to be fully accpetable.The assessee has incurred expenditure of Rs. 3,05,68,302/- in respect of labour payments on which the TDS has not been deducted. The assessee has only submitted the self made vouchers in support of its claim. As the assessee has not filed any other evidence regarding the labour payment but looking at nature of business of the assessee company a lump sum addition of Rs. 25,60,000/- @ 8% of the toatl labour payment is made to the assessee company.(Total disallowance of Rs. 25,60,000/-)”
10.
From the above, it can be seen that the Assessing Officer was
acutely conscious about the petitioner not having deducted tax on
labour payment charges of Rs. 3.05 crores and the petitioner’s
contention that it was so done because provision for TDS was not
applicable. He was not convinced by such explanation. He, however, for
some strange reasons did not apply the provision of Section
40(a)(ia) of the Act instead made ad-hoc disallowance of Rs.
25,60,000/- @ 8% of the total labour payment charges.
11. Whatever be the legality of such assessment, fact remains that,
in the scrutiny assessment, the Assessing Officer had thoroughly and
fully scrutinized the assessee’s claim of deduction of labour
expenditure. To the extent he was inclined to disallow the same, he
did so. By no stretch of imagination it can be stated that the issue
was not at large before the Assessing Officer in the original
scrutiny assessment. Any reexamination of such a question at this
stage would only amount to change of opinion. Remedy of reopening the
assessment, therefore, was simply not available. In the decision of
the Supreme Court in case of Commissioner of Income Tax Vs. Kelvinator of India Ltd. reported in [2010] 320 ITR 561 (SC) = (2010-TIOL-06-SC-IT) the Apex Court observed as under:
“On going through the changes, quoted above, made to Section 147 of the Act, we find that, prior to Direct Tax Laws (Amendment) Act, 1987, re-opening could be done under above two conditions and fulfillment of the said conditions alone conferred jurisdiction on the Assessing Officer to make a back assessment, but in section 147 of the Act [with effect from 1st April, 1989], they are given a go-by and only one condition has remained, viz., that where the Assessing Officer has reason to believe that income has escaped assessment, confers jurisdiction to reopen the assessment. Therefore, post-1st April, 1989, power to re-open is much wider. However, one needs to give a schematic interpretation to the words “reason to believe” failing which, we are afraid, Section 147 would give arbitrary powers to the Assessing Officer to re-open assessments on the basis of “mere change of opinion”, which cannot be per se reason to re-open. We must also keep in mind the conceptual difference between power to review and power to re-assess. The Assessing Officer has no power to review; he has the power to re-assess. But re-assessment has to be based on fulfillment of certain pre-condition and if the concept of “change of opinion” is removed, as contended on behalf of the Department, then, in the garb of re-opening the assessment, review would take place. One must treat the concept of “change of opinion” as an in-built test to check abuse of power by the Assessing Officer. Hence, after 1st April, 1989, Assessing Officer has power to re-open, provided there is “tangible material” to come to the conclusion that there is escapement of income from assessment. Reasons must have a live link with the formation of the belief. Our view gets support from the changes made to Section 147 of the Act, as quoted hereinabove. Under the Direct Tax Laws (Amendment) Act, 1987, Parliament not only deleted the words “reason to believe” but also inserted the word “opinion” in Section 147 of the Act. However, on receipt of representations from the Companies against omission of the words “reason to believe”, Parliament re-introduced the said expression and deleted the word “opinion” on the ground that it would vest arbitrary powers in the Assessing Officer.”
12.
If the Revenue was of the opinion that the Assessing Officer
erroneouly and to the prejudice of the interest of the Revenue allowed
certain claim, in a given situation, it would have been open for the
appropriate authority to exercise revisional powers. However, once
the claim was fully examined, power of reopening was simply not
available.
13. In the result, impugned noticed dated 30.03.2012 is quashed. Petition is allowed and disposed of accordingly.
No penalty merely because claim of the assessee was disallowed u/s.40(a)(ia)
It
is a fact that assessee has claimed expenses aggregating to
Rs.16,17,766/- and same were disallowed by the AO while completing the assessment under section 143(3) of the Act on
the ground that assessee failed to deduct TDS. We observe that the
genuineness of the claim of the assessee has not been disputed by the
department. Therefore, it cannot be said that assessee has claimed
expenses which are false or
not genuine. Assessee has furnished all the relevant facts concerning
the claim made by it in the return filed. AO has levied penalty in respect of said amountmerely because said claim of the assessee was disallowed u/s.40(a)(ia) of the
Act as assessee failed to deduct TDS thereon. The Apex Court in the
case of Reliance Petroproducts Ltd (supra) has held that a mere making
of the claim which is not sustainable in the law, by itself will not
amount to furnishing inaccurate particulars of income. In the present case,
admittedly, assessee made a claim but the same was rejected and
disallowed not for the reason that the claim was not genuine or was
fabricated but in view of provisions of law that assessee did not deduct
TDS thereon. We are of the considered that view that the ratio
of judgment of Hon’ble Apex Court in the case of Reliance Petroproducts
Ltd (supra) squarely applies to the facts of
the case before us and, therefore, levy of penalty is not justified. We
also observe that similar issue has also been considered by ITAT
Ahmedabad in the case of Mazda Ltd (supra), wherein, levy
of penaltyu/s.271(1)(c) of the Act was cancelled which was levied on
account of disallowance of claim fordeduction of royalty
and technical know how as per section 40(a)(ia) of the Act., as the
assessee failed to deduct TDS on above payments. The ratio of the said
case also applies squarely to the case before us.
ITAT “E” BENCH, MUMBAI
BEFORE S/SHRI
B.R.MITTAL,(JM) AND D.KARUNAKAR RAO (AM)
I.T.A. No.2922/M/2012
Assessment Year: 2007-08)
Tanushree Basu Vs. ACIT
Date of Hearing : 16.05.2013
Date of Pronouncement : 22.05.2013
Date of Pronouncement : 22.05.2013
O R D E R
Per B.R.MittaI, JM:
The
assessee has filed this appeal for assessment year 2007-08 against
order dated 9.2.2012 of ld CIT(A) confirming levy of penalty of
Rs.5,44,540/- u/s.271(1)(c) of the Act.
2. The relevant facts are that assessee filed the return of income declaring total income of
Rs.46,35,990/-, which was assessed u/s. 143(3) of the Act at
Rs.62,53,760/-. Assessee is a
proprietor of M/s. TCB Production and engaged in the business of
production of advertising commercial. The Assessing Officer made the
disallowance of Rs.16,17,766/- u/s.40(a)(ia) of the I.T.Act for
non deduction of tax by the assessee on various expenses and added the
same to thetotal income of the assessee. In view of aforesaid
disallowance u/s.40(a)(ia) of the Act, AO initiatedpenalty proceedings
u/s.271(1)(c) of the Act by rejecting the contention of the assessee
that she was under bonafide belief that the impugned expenses were not
subject of TDS. AO stated that it is unbelievable that assessee who is
into entertainment industry for quite sometime is totally unaware both
about the industry norms as well as the provisions of income tax. AO stated that it is absolutely false that she was under the bonafide belief that the impugned amount
of Rs.16,17,766/- were not liable to TDS. Therefore, assessee is
deemed to have concealed the particulars of her income. AO
levied penalty @ 100% of tax sought to be evaded on Rs.16,17,766, which
comes to Rs.5,44,540/- u/s.271(1)(c) of the Act. Being aggrieved,
assessee filed appeal before ld CIT(A).
3. Ld CIT(A)
confirmed the action of AO by observing that payments of expenses made
on account of studio and location hire, equipment hire and editing
expenses were covered by provisions of section 194-I or 194C or 194J
of the Act and assessee was required to deduct TDS on such payments. Ld
CIT(A) has stated that assessee has got audited books of account.
However, the auditor has not mentioned about the amounts which were
disallowable u/s.40(a)(ia) of the Actwhereas the above expenses are
clearly disallowable under the provisions of that section as no TDS was
deducted thereon. Therefore, assessee
deliberately claimed the deduction which was not allowable as the
assessee has failed not to deduct TDS thereon. Ld CIT(A) has stated that
had there been no scrutiny assessment u/s.143(3) of the Act, the
particulars of income in the return of income had escaped assessment by
claiming false claim. Hence, assessee is in further appeal before the
Tribunal.
4. At the time of hearing, ld A.R.
submitted that assessee has not concealed any particulars of income and
the penalty has been levied merely by disallowing expenses on which no
TDS was deducted due to bonafide belief that same was not liable to TDS
provision. It was submitted that the genuineness of the payments made by
the assessee is not disputed by the authorities below. Ld A.R. placed
reliance on the decision of ITAT Ahmedabad Bench in the case of ACIT vs.
Mazda Ltd (2012) 33 CCH 047 (Ahd Trib) and submitted that the
Tribunal cancelled the penalty which was levied on account of
disallowance of royalty payment and technical know how expenses after
invoking section 40(a)(ia) of the Act. He submitted that case of the
assessee is similarto the factsof the case of Mazda Ltd (supra). Ld A.R.
furnished a copy of the order of the Tribunal to substantiate his
submission. Ld A.R. placed reliance the decision of Hon’ble Supreme Court in
the case of CIT vs. Reliance Petroproducts P.Ltd., 322 ITR 158(SC) and
submitted that merely on account of disallowance of the claim by itself
does not amount to furnishing inaccurate particulars of income. He
submitted that levy of penalty should be cancelled.
5. On the other hand, ld D.R. relied on orders of authorities below.
6.
We have considered submissions of ld representatives of parties and
perused orders of
authorities below. It is a fact that assessee has claimed expenses
aggregating to Rs.16,17,766/- and same were disallowed by the AO while
completing the assessment under section 143(3) of the Act on the ground
that assessee failed to deduct TDS. We observe that the genuineness of
the claim of the assessee has not been disputed by the department.
Therefore, it cannot be said that assessee has claimed expenses which
are false or not genuine. Assessee has furnished all the relevant facts
concerning the claim made by it in the return filed. AO has
levied penalty in respect of said amount merely because said claim of
the assessee was disallowed u/s.40(a)(ia) of the Act as assessee failed
to deduct TDS thereon. The Apex Court in the case of Reliance
Petroproducts Ltd (supra) has held that a mere making of the claim which
is not sustainable in the law, by itself will not amount to furnishing
inaccurate
particulars of income. In the present case, admittedly, assessee made a
claim but the same was rejected and disallowed not for the reason that
the claim was not genuine or was fabricated but in view of provisions of
law that assessee did not deduct TDS thereon. We are of the considered
that view that the ratio of judgment of Hon’ble Apex Court in the case
of Reliance Petroproducts Ltd (supra) squarely applies to the facts of
the case before us and, therefore, levy of penalty is not justified. We
also observe that similar issue has also been considered by ITAT
Ahmedabad in the case of Mazda Ltd (supra), wherein, levy
of penaltyu/s.271(1)(c) of the Act was cancelled which was levied on
account of disallowance of claim fordeduction of royalty and technical
know how as per section 40(a)(ia) of the Act., as the assessee failed to
deduct TDS on above payments. The ratio of the said case
also applies squarely to the case before us.
7. In
view of above, we hold that levy of penalty, in the facts and
circumstances o f the case, is not in accordance with law and same is
deleted by allowing ground o appeal taken by assessee.
8. In the result, appeal filed by assessee is allowed.
Order pronounced in the open court on 22nd May, 2013
Capital gain invested within extended period for filing of return is also eligible for Sec. 54F deductions
IT
: Where assessee paid
substantial amount of sale consideration of a residential house for
purchase of another residential property within extended period of
limitation of filing of return under section 139, his claim for
deduction under section 54F was to be allowed
■■■
[2013] 33 taxmann.com 38 (Punjab & Haryana)
HIGH COURT OF PUNJAB AND HARYANA
Commissioner of Income-tax, Rohtak
v.
Jagtar Singh Chawla*
HEMANT GUPTA AND Ms. Ritu Bahri, JJ.
IT Appeal No. 71 of 2012 (O&M)†
MARCH 20, 2013
Section
54F, read with section 139, of the Income-tax Act, 1961 - Capital
gains - Exemption of, in case of investment in residential house
[Purchase of property] - Assessment year 2007-08 - Assessee sold his
agricultural land and residential house vide sale deed dated 20-6-2006 -
On same date, assessee claimed to have written a letter to Bank to
deposit said amount in capital gain
account, - However, amount earned by assessee was deposited in a
'Flexi General Account', which was saving as well as fixed deposit
account - Subsequently, assessee purchased a residential house from
sale proceed so received - Revenue authorities rejected assessee's
claim for deduction under section 54F on ground that assessee failed to
deposit sale proceeds of capital asset in capital gain account in
terms of section 54F(4) within period of one year of sale or acquire a
new asset within one year i.e., in terms of section 139(1) - Whether
since assessee had proved payment of substantial amount of sale
consideration for purchase of a residential property on or before
31-3-2008, that is within extended period of limitation of filing of
return, he was not liable to pay any capital gain tax - Held, yes
[Paras 12 and 13] [In favour of assessee]
CASES REFERRED TO
CIT v. Rajesh Kumar Jalan [2006] 286 ITR 274/157 Taxman 398 (Gau.) (para 9) and Fathima Bai v. ITO [IT Appeal No. 435 of 2004, dated 17-10-2008] (para 10).
Inderpreet Singh for the Appellant.
ORDER
Hemant Gupta, J.
- The Revenue is in appeal under Section 260A of the Income Tax Act,
1961 (for short 'the Act') against an order dated 30.6.2011 passed by
the Income Tax Appellate Tribunal, Delhi Bench 'D' New Delhi (for short
'the Tribunal') in ITA No. 4923/Del/2010 for the assessment year
2007-08.
2. The Revenue has sought the following substantial question of law:-
"Whether
on the facts and circumstances of the case, the Hon'ble ITAT, New
Delhi is justified in law in reversing the finding
of CIT(A) in confirming the addition of Rs.76,85,829/- made by the
Assessing Officer by disallowing the claim of exemption u/s 54F of the
I.T. Act as the assessee failed to deposit the unutilized consideration
of capital gains in the Capital Gains Accounts Scheme as per the limit
prescribed under the Act?
3.
As per facts on record, the assessee sold his agricultural land and
residential house at Karnal for Rs.2,16,00,000/- and Rs.8,25,000/-
respectively, vide sale deed dated 20.6.2006. On the same date, the
assessee claims to have written a letter to the Bank to deposit the
said amount in the capital gain account, but it appears that the said
amount was not deposited in the capital gain account. However, the same
was deposited in a "Flexi General Account", which is a saving as well
as fixed deposit account. The assessee purchased a residential house
from the sale proceeds so received.
4.
The Revenue disallowed the claim of the assessee under Section 54F of
the Act and added a sum of Rs.76,85,829/- under the head 'long term
capital gains', vide order dated 24.12.2009 (Annexure A-1). The said
order of the Assessing Officer was upheld by the Commissioner of Income
Tax (Appeals) Rohtak, vide its order dated 20.9.2010 (Annexure A-II).
However, in further Appeal, the Tribunal vide its order dated
30.06.2011 (Annexure A-III) set aside the order of the Commissioner of
Income Tax (Appeals) Rohtak, on the ground that the assessee has
purchased the residential house within the period prescribed under
Section 139 of the Act and thus, the addition is not sustainable.
5. Feeling aggrieved against the order of the
Tribunal, the Revenue preferred the present appeal.
6.
Learned counsel for the appellant has vehemently contended that the
assessee was required to deposit the sale proceeds of capital asset in
the capital gain account in terms of Sections 54F(4) of the Act, within
the period of one year of the sale or was required to acquire a new
asset within one year i.e. in terms of Section 139(1) of the Act.
Since, the assessee has not exercised any of the two options, the order
of the Tribunal is not sustainable whereas the orders of the Assessing
Officer as well as Commissioner of Income Tax (Appeals) Rohtak are
legal.
7.
Before we proceed further, the relevant provisions of the Act i.e.
sub-section (4) of Section 54F and Section 139(1) & (4) of the Act,
are required
to be reproduced. The same are as under:-
"54F** | ** | ** |
(4)
The amount of the net consideration which is not appropriated by the
assessee towards the purchase of the new asset made within one year
before the date on which the transfer of the original asset took place,
or which is not utilized by him for the purchase or construction of
the new asset before the date of furnishing the return of income under
Section 139, shall be deposited by him before furnishing such return
such deposit being made in any case not later than the due date
applicable in the case of the assessee for furnishing the return of
income under sub-section (1) of Section 139 in an account in any such
bank or institution as may be
specified in, and utilized in accordance with, any scheme which the
Central Government may, by notification in the Official Gazette, frame
in this behalf and such return shall be accompanied by proof of such
deposit; and, for the purpose of sub-section (1), the amount, if any,
already utilized by the assessee for the purchase or construction of
the new asset together with the amount so deposited shall be deemed to
be the cost of the new asset.
** | ** | ** |
139. (1) Every person -
(a) | being a company (or a firm); or | |
(b) | being a person other than a company or a firm, if his total income or the total income of any other person in respect of which he is assessable under this Act during the previous year exceeded the maximum amount which is not chargeable to the income tax, shall on or before the due date, furnish a return of his income or the income of such other person during the previous year, in the prescribed form and verified in the prescribed manner and setting forth such other particulars as may be prescribed. |
** | ** | ** |
(4)
Any person who has not furnished a return within the time allowed to
him under sub-section(1), or within the time allowed under a notice
issued under sub section (1) of Section 142, may furnish the return for
any previous year at any time before the expiry of one year from the
end of the relevant assessment year or before the completion of the
assessment year, whichever is earlier."
8.
The provisions of Section 54F(4) of the Act are pari-materia with
Section 54(2) of the Act. Section 54 deals with the profit on sale of a
residential house, whereas Section 54F deals with the transfer of any
long term capital
assets not being a residential house.
9. A Division Bench of the Gauhati High Court in a case reported as CIT v. Rajesh Kumar Jalan [2006] 286 ITR 274/157 Taxman 398,
held that only Section 139 of the Act is mentioned in Section 54(2) of
the Act in the context that the unutilized portion of the capital gain
on the sale of property used for residence should be deposited before
the date of furnishing the return of the Income Tax under Section 139
of the Act and that it would include extended period to file return in
terms of Sub Section 4 of Section 139 of the Act. It was held as
under:-
"From
a plain reading of sub-section (2) of Section 54 of the Income-tax
Act, 1961, it is clear that only section 139 of the Income-tax Act,
1961, is mentioned in section 54(2) in the context that the unutilized
portion of the capital gain on the sale of property used for residence
should be deposited before the date of furnishing the return of the
Income-tax under section 139 of the Income-tax Act. Section 139 of the
Income-tax Act, 1961, cannot be meant only section 139(1), but it means
all sub-sections of section 139 of the Income-tax Act, 1961. Under
sub-section (4) of section 139 of the Income-tax Act any person who has
not furnished a return within the time allowed to him under sub-section
(1) of Section 142 may furnish the return for any previous year at any
time before the expiry of one year from the end of the relevant
assessment year or before the completion of the assessment year
whichever is earlier."
10. The said judgment was relied upon by a Division Bench of the Karnataka High Court in Fathima Bai v. ITO, ITA No.435 of 2004 Decided on 17th October 2008, wherein it was held to the following effect:-
"11.
The extended due date under section 139(4) would be 31.3.1990. The
assessee did not file the return within the extended due date, but
filed the return on 27.2.2000. However, the assessee had utilized the
entire capital gains by purchase of a house property within the
stipulated period of section 54(2) i.e., before the extended due date
for return under section 139. the assessee technically may have
defaulted in not filing the return under section 139(4). But, however,
utilized the capital gains for purchase of
property before the extended due date under section 139(4). The
contention of the revenue that the deposit in the scheme should have
been made before the initial due date and not the extended due date is
an untenable contention."
11.
A Division Bench of this Court in which one of us (Hemant Gupta, J.)
was a member, had an occasion to consider the provisions of Section
54(2) of the Act, wherein it has been held that sub-section (4) of
Section 139 of the Act is in fact a proviso to Section 139(1) of the
Act. Therefore, since the assessee has invested the sale proceeds in a
residential house within the extended period of limitation, the capital
gain is not payable. The judgments in Rajesh Kumar Jalan's case (supra) and Fathima Bai's case (supra) were referred to. It has been held as under:-
"Having
heard learned counsel for the parties, we are of the opinion that
sub-section (4) of Section 139 of the Act is, in act, a proviso to
sub-section (1) of Section 139 of the Act. Section 139 of the Act fixes
the different dates for filing the returns for different assesses. In
the case of assessee as the respondent, it is 31st day of July, of the
Assessment Year in terms of clause (c) of the Explanation 2 to
sub-section 1 of Section 139 of the Act, whereas sub-section (4) of
Section 139 provides for extension in period of due date in certain
circumstances. It reads as under:-
"(4)
Any person who has not furnished a return within the time allowed to
him under sub-section (1), or within the time allowed under a notice
issued under sub-section (1) of Section 142, may
furnish the return for any previous year at any time before the expiry
of one year from the end of the relevant assessment year or before the
completion of the assessment whichever is earlier;
Provided
that where the return relates to a previous year relevant to the
assessment year commencing on the 1st day of April, 1988, or any
earlier assessment year, the reference to one year aforesaid shall be
construed as a reference to two years from the end of the relevant
assessment year."
A
reading of the aforesaid sub-section would show that if a person has
not furnished the return of the previous year within the time allowed
under sub-section (1) i.e. before 31st day of July of the Assessment
Year, the assessee can file return before the expiry
of one year from the end of ever relevant Assessment Year."
12.
In the present case, the assessee has proved the payment of substantial
amount of sale consideration for purchase of a residential property on
or before 31.3.2008, that is within extended period of limitation of
filing of return. Only a sum of Rs.24 lacs was paid out of total sale
consideration of Rs. Two Crores on 23.4.2008, though possession was
delivered to the assessee on execution of the power of attorney on
30.3.2008. Since the assessee, has acquired a residential house before
the end of the next Financial Year in which sale has taken place,
therefore, the assessee is not liable to pay any capital gain. Such is
the view taken by the Income Tax Appellate Tribunal.
13. In view of the above, we
do not find any merit in the present appeal. Hence, the same is dismissed.
Sunil
Exemption u/s. 10(23C)(vi) can be claimed without applying for registration u/s. 12A
HIGH COURT OF ALLAHABAD
Commissioner of Income-tax
v.
Jeevan Deep Charitable Trust
IT Appeal No. 471 of 2011
Date of pronouncement – 29.10.2012
ORDER
1. The
present appeal has been filed under Section 260-A of the Income-tax
Act, 1961, hereinafter referred to as “the Act” against the order dated
08.12.2009 passed by the Income Tax Appellate Tribunal, Allahabad. The Revenue has proposed the following three substantial questions of law said to be arisen out of the order of the Tribunal.
“(1)
Whether on the facts and in the circumstances of the case, the
Tribunal is justified in law in coming to the conclusion that
registration granted to the
assessee has been cancelled u/s 12-AA(3) of the Act merely on the
ground that approval u/s 10(23C) (vi) of the Act had been denied to the
assessee by completely overlooking and ignoring the fact that the CIT
had cancelled the registration after having satisfied himself that the
activities of the assessee society were not charitable in nature?
(2)
Whether on the facts and in the circumstances of the case, the
Tribunal is justified in law in holding that the assessee is eligible
for continued registration despite the fact that the assessee does not
fulfill the requirement of being a charitable institution?
(3)
Whether on the facts and in the circumstances of the case, the
Tribunal is justified in law in not taking into consideration the
decisions relied upon by the CIT in his order u/s 12-AA (3) of the Act
while cancelling the registration of the
assessee society?”
2. Briefly stated that the facts giving rise to the present appeal are as follows:
The
respondent-assessee was granted registration under Section 12A of the
Act being a charitable institution. It claimed exemption under Section
10(23C)(vi) of the Act on the ground that the income earned by it is
relating to educational institution as the institution is solely for
the educational purposes. The claim of exemption under Section
10(23C)(vi) of the Act was disallowed by the Chief Commissioner of
Income Tax, Varanasi vide order dated 25th February, 2009 on the ground
that in the objects of the institution there are certain other
objects, which proves that the institution has not solely been
established for educational purposes. Relying on the said order
proceeding under Section 12AA(3) of the Act was initiated and vide
order dated 12th
October, 2009, the Commissioner of Income Tax, Varanasi cancelled the
registration granted to the respondent-assessee under Section 12A of
the Act. Feeling aggrieved by the order dated 12th October, 2009
cancelling the registration granted under Section 12A of the Act, the
respondent-assessee preferred an appeal before the Income Tax Appellate
Tribunal, Allahabad which was registered as I.T.A. No.252(Alld)09. The
Tribunal vide impugned order dated 8th December, 2009 had allowed the
appeal and set aside the order of the Commissioner of Income Tax dated
12th October, 2009 and the registration had been restored. The Tribunal
had come to the conclusion that the proceeding under Section 10(23C)
(vi) of the Act is an independent proceeding and cannot be made the
sole ground for cancellation of the registration granted under Section
12A of the Act. It further found that the deduction under Section 11 of
the Act has been allowed to the
respondent-assessee herein for the Assessment Year 2006-07 and in the
assessment order passed for the Assessment Year 2004-05 exemption under
Section 11 of the Act was disallowed, which order was reversed in
appeal by the Commissioner of Income Tax (Appeal), Varanasi, allowing
the deduction under Section 11 of the Act vide order dated 3.10.2007,
which order has been accepted by the Revenue as no second appeal was
preferred against the said order.
3.
We have heard Sri Dhananjay Awasthi, learned Standing Counsel for the
Revenue and Sri Kunal Ravi Singh, learned counsel appearing for the
respondent-assessee.
4. Sri
Awasthi, learned counsel, submitted that as the institution has been
established solely for the educational purposes and is a profit earning
institution exemption under Section 10(23C) (vi) of the Act having
been rightly denied to it as it
ceased to be a charitable institution., therefore, the Tribunal has
erred in restoring the registration. The submission is wholly
misconceived. Admittedly, one of the objects of the trust was for
running educational institutions and imparting education. The trust , however, has other objects also, which are reproduced below:
“(i) Development of Scientific Education amongst Indian Children.
(ii) Modern Education with moral duty and character building in accordance with Indian culture as well as development of educational atmosphere.
(iii) To provide as well as arrange commercial and practical education to children.
(iv) Development as well as publicize the Indian culture and arts.
(v) To establish the school and management thereof from Primary education to Intermediate Education.
(vi)
To publicize as well as to educate and propagate the Cottage
Industries as well as industries based on village amongst the youth so
that they may lead their life independently and freely.”
5.
In our considered opinion, exemption under Section 10(23C)(vi) of the
Act can be claimed by an assessee without applying for registration
under Section 12A of the Act as it is not required to fulfil the
conditions mentioned under Section 11 of the Act while
claiming exemption under Section 10(23C) (vi) of the Act. Further in
the order passed by the Commissioner of Income Tax, there is no whisper
that the assessee has not fulfilled any of the conditions of the
Section 11 of the Act for claiming it to be a charitable institution.
He had solely relied on the order of the Chief Commissioner of Income
Tax passed under Section 10(23C) (vi) of the Act while denying the
exemption under the aforesaid sub-section. We are, therefore, of the
considered opinion that the Tribunal had rightly restored the
registration on the ground that in the Assessment Years 2004-05 and
2006-07 benefit of exemption/deduction under Section 11 of the Act was
allowed to the respondent-assessee.
6.
In view of the foregoing discussion, we do not find any error in the
impugned order passed by the Income Tax Appellant Tribunal, Allahabad.
The appeal fails and is dismissed.
IT
: In order to claim exemption under section 10B, assessee has to prove
its eligibility in initial year of production only and not in every
year of claim
■■■
[2013] 33 taxmann.com 223 (Ahmedabad - Trib.)
IN THE ITAT AHMEDABAD BENCH 'D'
Deputy Commissioner of Income-tax, Cir-4., Baroda
v.
Tyco Valves & Control India (P.) Ltd.*
MUKUL KR. SHRAWAT, JUDICIAL MEMBER
AND ANIL CHATURVEDI, ACCOUNTANT MEMBER
AND ANIL CHATURVEDI, ACCOUNTANT MEMBER
IT Appeal NOS. 2981 (AHD.) OF 2008 & 322 (Ahd.) of 2009
CO No. 44 (Ahd.) of 2009
[ASSESSMENT YEARS 2003-04 & 2004-05]
CO No. 44 (Ahd.) of 2009
[ASSESSMENT YEARS 2003-04 & 2004-05]
NOVEMBER 2, 2012
Section
10B of the Income-tax Act, 1961 - Export oriented undertaking
[Eligibility of] - Assessment years 2003-04 and 2004-05 - Whether in
order to claim exemption under section 10B, assessee has to prove its
eligibility in initial year of production only and not in every year of
claim - Held, yes - Assessee claimed exemption under section 10B -
Assessing Officer rejected assessee's claim holding that
assessee had employed used machinery value of which exceeded 20 per
cent of total value of machinery employed by assessee - It was noted
from records that said claim was allowed in past and year under
consideration was found to be 5th year of claim - Moreover, there was
no evidence on record establishing that assessee had purchased used
machinery during relevant assessment year - Whether in view of above,
Assessing Officer was not justified in rejecting assessee's claim -
Held, yes [Paras 6 and 6.2] [In favour of assessee]
FACTS
■ | The assessee was a manufacturer of types castings, gate walls and flow control devices. It had a unit at Chennai which was registered as 100 per cent EOU. The assessee filed its return claiming exemption under section 10B in respect of said unit. | |
■ | The Assessing Officer rejected assessee's claim holding that during relevant year the assessee had employed used machinery value of which exceeded 20 per cent of the total value of the machinery employed by the assessee. | |
■ | The Commissioner (Appeals) found that assessee's claim was allowed in the past and the year under consideration was found to be the 5th year of the claim. | |
■ | According to the Commissioner (Appeals), since there was no new material, rejection of assessee's claim in relevant assessment year was not justified. | |
■ | On revenue's appeal: |
HELD
■ | Section 10B does not give any indication that in each year of claim its eligibility should be newly established; because the relevance of the phrase 'newly established undertaking' is only to identify initial year of period for which assessee is eligible for claim of exemption under section 10B. | |
■ | In the instant case, in absence of any disturbance in respect of relief granted in initial year, there is no legal justification to disturb the continuous deduction of section 10B in any of the subsequent assessment year. The first year is the year in which the inquiry about the formation of the undertaking is required to be made by the Assessing Officer. Although it is possible, as in the present case, that in any of the subsequent years the assessee had acquired new plant & machinery, may be of substantial value, as also there may be increase the turnover or efficiency, nonetheless the Act subscribes that the undertaking must not be formed by the splitting up or the reconstruction of a business already in existence. | |
■ | The Act also subscribes that the profits shall not to be included in the total income in respect of the prescribed consecutive assessment year beginning with the assessment years undertaking begins to manufacture an article. Therefore, the initial year is the year to establish the eligibility of the claim. [Para 6] | |
■ | As far as the question of alleged purchase of the machinery in question is concerned, the first appellate authority has given a finding of fact that it was not evident from the records that the transaction relating to the machinery constituted outright sale. Because of these facts and other evidences, such as the agreement, etc. it is held that the Assessing Officer has wrongly presumed that the transaction in question was a purchase of machinery by Chennai Unit. Because of this finding of facts a conclusion can be drawn that the rejection of deduction under section 10B was bad in law. [Para 6.1] | |
■ | In the result, the findings of Commissioner (Appeals), are confirmed and, therefore the claim of deduction under section 10B is directed to be allowed. [Para 6.2] |
CASES REFERRED TO
Saurashtra Cement & Chemical Industries Ltd. v. CIT [1980] 123 ITR 669/[1979] 2 Taxman 22 (Guj.) (para 5), Tata Communications Internet Services Ltd. v. ITO
[2010] 39 SOT 106 (Delhi) (para 5), Bajaj Tempo Ltd. v. CIT [1992] 196 ITR 188/62 Taxman 480 (SC) (para 5), Gateway Technolabs (P.) Ltd. [IT Appeal Nos. 2473 & 2519 (Ahd.) of 2006, dated 4-9-2009 (para 6), CIT v. Nayyars Minerals Exports (P.) Ltd. [1998] 231 ITR 864 (HP) (para 6.2), CIT v. N.C.
Budharaja & Co. [1993] 204 ITR 412/70 Taxman 312 (SC) (para 8),CIT v. Kantilal Chhotalal [2000] 246 ITR 439/[2001] 117 Taxman 526 (Bom.) (para 9.1) and Hero Cycles Ltd. v. Asstt. CIT [2005] 142 Taxman 87 (Chd.)(Mag.) (para 9.1).
D.P. Gupta and P. Oram for the Appellant. J.P. Shah for the Respondent.
ORDER
[A] Revenue's appeal, ITA No.2981/Ahd/2008 for A.Y. 2003-04
Mukul Kr. Shrawat, Judicial Member :
Before we deal with the legal issue in question, it is pertinent to
mention that for A.Y. 2003-04 earlier an order has been passed by ITAT
"D" Bench Ahmedabad dated 4.2.2011
and this appeal of the Revenue, i.e. ITA 2981/Ahd/2008 was partly
allowed for statistical purposes. We have noted that the impugned ground
No. 2 was reproduced by the Tribunal and it was adjudicated vide para 7
to 10 and thereupon held that the matter requires reconsideration at
the stage of the AO. There were alleged to be certain factual error
from the side of the assessee, yet to be examined, therefore, the
matter was restored back to the file of the Assessing Officer.
Questioning the setting aside a miscellaneous petition was moved and
that petition was allowed by ITAT "D" Bench Ahmedabad in MA No.
182/Ahd/2011 (ITA No. 2981/Ahd/2008 - A.Y. 2003-04) vide order dated
2.3.2012 and ground No. 2 was directed to be decided afresh. Since the
said earlier order of the Tribunal dated 4.2.2011 has been recalled for
the limited purpose to adjudicate upon ground No.2, hence this order.
2. Ground No.2 is reproduced below:-
The
learned CIT(A) erred on facts and in law in allowing deduction u/s.10B
observing that the activities carried on by the assessee were
manufacturing overlooking the fact that it was polishing the valves
which is in contradiction to Apex Court's ratio laid down in CIT v. N.C. Budhiraja (1993) 204 ITR 412 (SC).
2.
The learned CIT(A) erred on facts and in law in allowing deduction
u/s.10B observing that the assessee had purchased the machineries,
completely
disregarding the fact that the assessee had employed used machinery
value of which exceeded 20% of the total value of the machinery
employed by the assessee:
2.1
The A.O. in the impugned assessment order passed u/s. 143(3) dated
30.3.2006 has made an observation that the assessee had claimed an
exemption u/s. 10B of the Act of Rs. 2,79,90,231/- in respect of
Chennai Unit. The said claim of exemption was later on revised at Rs.
2,53,24,882/-. The AO has disallowed the claim u/s. 10B by assigning a
reason that the Chennai Unit had more than 20% of the value of the
plant and machinery consisting old machinery used earlier for the
production purposes. The main objection of the AO was that section 10B
requires that the industrial unit should not be formed by the transfer
of previously used machinery. An another fact has also been noted that
the original
cost of the plant & machinery of Chennai Unit as per the
balance-sheet drawn as on 01/04/2002 was at Rs. 8,23,63,972/-. In a
show-cause notice issued by the AO, he has acknowledged the fact that
the assessee had claimed that during the F.Y. 2001-02, the assessee had
taken plant & machinery on lease for Chennai Unit from Sakhi
Raimondi Valves (India) Ltd. It was an "Associate Concern" of the
assessee covered u/s. 40A(2)(b) of IT Act. The AO has also acknowledged
that the Chennai Unit was set up in F.Y. 1998-99 and most of the
machinery were purchased in the year 1996. According to him, both those
machineries were acquired during that period. At that juncture, the AO
has also noted that while finalizing the assessment of M/s. Sakhi
Raimondi it was informed that the said assessee had transferred the
machinery to the assessee's Chennai Unit, therefore it was not on lease
basis but it was an outright purchase. He has therefore proposed
to disallow the exemption u/s. 10B on the ground that on the date of
transfer, i.e. in the year 1998 the machinery was transferred for a sum
of Rs. 4,03,13,086/- which was in excess of the required percentage of
20% as per Explanation-2 of section 10B of the Act. He has concluded
that a secondary machinery was used due to which the exemption claimed
in respect of the profits of Chennai Unit and consequent thereupon
exemption u/s. 10B of Rs. 2,79,90,231/- was rejected. The matter was
carried before the first appellate authority.
3.
Ld. CIT(A) has first of all corrected the figure and noted that the AO
had denied the claim of deduction u/s. 10B of Rs. 2,53,24,882/-. It was
noted by ld. CIT(A) that the assessee is a manufacturer of various
types castings, gate-walls and flow control devices. The assessee has a
Plant at Chennai and that Unit is registered
as 100% EOU, thus covered for deduction u/s. 10B of IT Act in respect
of the profits of the said Unit. At this juncture, ld. CIT(A) has noted
that the said claim was allowed to the assessee in the past and the
year under consideration was found to be the 5th year of the claim. An
another fact has also been brought to the notice of ld. CIT(A) that in
the case of the assessee in the past the matter had gone upto Hon'ble
Gujarat High Court and in a Special Civil Application Nos. 29650 &
29651 of 2007 vide an order dated 11.4.2008 an issue was raked-up that
the assessee although a manufacturing concern and eligible for deduction
u/s.10B which was allowed u/s.143(3) but vide a notice u/s.148 for
A.Ys. 2000-01, 2001-02 & 2002-03, it was reopened for the denial of
the said claim. The Hon'ble Court has opined that for A.Y. 2001-02, the
deduction was already allowed and it was found eligible for claim u/s.
10B of IT Act and since there was no
new material, therefore reopening after the four years was not
justifiable. The argument of the assessee was, therefore, that the
activity of the assessee was approved by the Hon'ble High Court and
once the claim was allowed in the past, then for subsequent year the
claim should not be denied. The ld. CIT(A) has accepted that legal
position and vide para 3.3.1 concluded as under:-
"3.3.1
In view of the clear finding of the jurisdictional High Court in
appellant's own case, there is no scope for doubt on this account.
Accordingly, it is held that the A.O. was not justified in denying the
claim of deduction u/s. 10B on the ground that the assessee was not
engaged in the manufacture of an article or thing. With regard to the
alternate argument that the value of used machines exceeded 20% of the
total value, it is interesting to note that the
appellant has shown payment of lease rental in respect of plant and
machinery leased from M/s. Sakhi Raimondi Valves (India) Ltd. The A.O
has concluded that the lease was not in fact a lease but a case of
outright purchase of the machines, based on the findings of the A.O. of
Sakhi Raimondi to the effect that the transactions involving the
impugned plant and machinery constituted outright sales and not a
leasing operation. In the case of the present appellant there is no
finding to show that the lease transactions were sham and merely a
cover to camouflage the outright purchase of the machinery. This
inference has been drawn only by reference to the order of the ACIT,
Circle-10(2), Mumbai, i.e. the A.O. of Sakhi Raimondi. This issue has
been decided by the ld. CIT(A) in Sakhi's case vide order dated
17-6-2008. The ld. CIT(A), in appeal No. CIT(A)-VI/ACIT.10(2)/Trs.
29/07-08 for A.Y. 2003-04, has held that the conclusion reached by the
A.O.
that the transaction relating to the machinery constituted outright
sale is not evident from the records. The receipt of share application
money from a group company of the present appellant cannot be equated
to receipt of sales consideration. It was held that the receipt by
Sakhi Raimondi was lease rental only and not sales consideration in
respect of plant and machinery. When the findings of the A.O. in the
case of Sakhi Raimondi has been overturned by the ld. CIT(A), the
consequential addition made in the case of the present appellant cannot
survive. The A.O. in this case has based the addition on the treatment
accorded to the impugned transaction by the A.O. of Sakhi Raimondi as a
transaction of sale and purchase. Since the very basis of the addition
has been overturned, it is held that the A.O. was not justified in
treating the lease transaction as outright purchase. Hence, the A.O. is
directed to allow the claim amounting to Rs.
2,53,24,882/- u/s.10B."
4.
Being aggrieved, the Revenue is before us and ld. CIT-DR Mr. D.P.
Gupta appeared and vehemently supported the view taken by the AO. He
has argued that the reason for denial for the year under consideration
was that the transaction in respect of the said machinery had taken
place in the year under consideration. The assessee has kept on
changing its stand. It was initially informed that the machinery was
purchased but later on during appellate proceedings the stand of the
assessee was that the machinery was taken on lease. According to him, a
lease agreement was placed before ld. CIT(A), however that was not
before the AO, therefore in the interest of natural justice the matter
deserves to be restored back to the file of the AO. At this juncture, he
has placed reliance on the earlier finding of the Tribunal given vide
para-10
of the IT Act through which it was observed that the lease agreement
was required to be examined whether it was equivalent to an outright
sale or not and also to take into account the decision of the Tribunal
to be pronounced in the case of M/s. Sakhi Riamondi.
5.
From the side of the Respondent-assessee, ld. AR Mr. J.P. Shah appeared
and at the outset, placed reliance on an order of Hon'ble Gujarat High
Court pronounced in the case of Saurashtra Cement & Chemical Industries Ltd. v. CIT [1980] 123 ITR 669/[1979] 2 Taxman 22 (Guj.). He has also placed reliance on Tata Communications Internet Services Ltd. v. ITO [2010] 39 SOT 106 (Delhi) and Bajaj Tempo Ltd. v. CIT [1992] 196 ITR 188/62 Taxman 480 (SC).
His main plank of argument was that such a deduction could not be
denied in the succeeding year without disturbing relief granted for the
initial year. Using his eloquence; Mr. Shah has also argued that it was
not all an outright purchase but purely a lease transaction as is
evident from the lease agreement which was duly established before the
Revenue Authorities. Rather in the case of M/s. Sakhi Raimondi, from
whom it was alleged that the
machinery was purchased, while deciding the first appeal for A.Y.
2003-04, ld. CIT(A)-VI, Mumbai vide an order dated 17.6.2008 has held
that although AO had treated the lease transaction of the machinery as
outright sales but that was not evident from the record. There was no
question of any capital gain as well, quoted by ld. CIT(A). Ld. AR has
drawn our attention para 3.6 of the said order, wherein it was
concluded that the lease rentals received by M/s. Sakhi Raimondi was in
fact lease rentals and not outright sale. Ld. AR has then informed that
the said decision of ld. CIT(A) was contested by the Revenue and ITAT
"E" Bench Mumbai in ITA No. 5479/Mum./2008 for A.Y. 2003-04 order dated
23.03.2010 has contested other issues but not contested the aforesaid
finding of Lease Rental of ld. CIT(A). Mr. Shah has then pleaded that
an inference can be drawn that the fact of earning of lease rental was
thus accepted by the Revenue Department being not
challenged before the Tribunal.
6.
We have heard both the sides at some length. We have also perused the
orders referred before us. Before we appreciate the facts of the case,
we may like to place on record the scope of the introduction of section
10B in the Statute. Under the provisions of section 10A of the
Income-tax Act, a five year tax holiday is allowed to industrial
undertakings manufacturing or producing articles or things in a free
trade zone subject to certain conditions. The exemption is available to
industrial undertakings which have begun or begin to manufacture or
produce articles or things during the previous year relevant to the
assessment year commencing on or after April 1, 1981. The tax holiday
is at the option of the assessee for five consecutive assessment years
falling within the block of eight years beginning within the
assessment year relevant to the previous year in which the industrial
undertaking begins to manufacture or produce articles or things. The
term "manufacture" includes processing or assembling or recording of
programmes on any disc, tape, perforated media or other information
storage device. The above tax holiday was not available to a hundred per
cent export-oriented undertaking. Such undertakings were eligible only
for deduction out of their export profits under section 80HHC of the
Income-tax With a view to providing further incentive for earning
foreign exchange, a new section 10B has been inserted by the Act, so as
to secure that the income of a hundred per cent, export-oriented
undertaking shall be exempt from tax for a period of five consecutive
assessment year falling within the block of eight assessment years. The
exemption provided under the new section is similar to the one
provided to industrial undertakings operating in free
trade zones. The exemption under the new provisions will be subject to
the following conditions:-
(i) | That the unit manufactures or produces any articles or things. The term "manufacture" will include any processing or assembling or recording of programmes on disc, tape, perforated, media or other information storage device; | |
(ii) | That the unit has not been formed by the splitting up or reconstruction of an existing business; | |
(iii) | That it has not been formed by the transfer to a new business of machinery or plant previously used for any purpose. |
Unlike
the provisions of section 10A of the Income-tax Act, even the existing
hundred per cent export-oriented undertakings will be eligible to avail
of the tax holiday for a full period of five assessment years in a
block of eight years.
Therefore,
the start point of the limitation for claiming the benefit flowing from
section 10B would commence from the year of manufacture or production
of the undertaking. If the conditions prescribed in the section are not
satisfied in the year of commencement of production, it would not be
able to claim such deduction in the subsequent years, unless the said
initial test on the date of the starting point has been satisfied.
Section
10B therefore do not give any indication that in each year of claim
it's eligibility should be newly established; because the relevance of
the phrase "newly established undertaking" is only to identify initial
year of period for which assessee is eligible for claim of exemption
u/s.10B of IT Act. Therefore, at the outset, it is justifiable to
concentrate on the fact that whether the Chennai Unit was established in
the year under consideration or not. On examination of the facts
recorded by the AO, it was noticed that the Chennai Unit was
established/acquired in the year 2000-01. This fact was rather noted by
the Hon'ble Gujarat High Court in the aforecited decision dated
11.4.2008 and made an observation that the year 2001-02 was found to be
the first year of the claim of deduction u/s. 10B of IT Act. Due to
this reason, reliance can be placed on Saurashtra Cement & Chemical Industries Ltd. (supra)
and thus we hold that in the
absence of any disturbance in respect of relief granted in initial
year, there was no legal justification to disturb the continuous
deduction of section 10B in any of the subsequent assessment year. The
first year is the year in which the inquiry about the formation of the
undertaking is required to be made by the AO. Although it is possible,
as in the present case, that in any of the subsequent years the
assessee had acquired new plant & machinery, may be of substantial
value, as also may be increase the turnover or efficiency, nonetheless
the act subscribes that the undertaking must not be formed by the
splitting up or the reconstruction of a business already in existence.
The Act also subscribes that the profits shall not to be included in the
total income in respect of the prescribed consecutive assessment years
beginning with the assessment years undertaking begins to manufacture
an article. Therefore, the initial year is the year to
establish the eligibility of the claim. Even the Ahmedabad Benches are
also consistently subscribing this view as held in the case of Gateway Technolabs (P.) Ltd. ITAT "C" Bench Ahmedabad (in ITA No. 2473 & 2519/Ahd/2006 - AY 2003-04) order dated 4.9.2009.
6.1
As far as the question of alleged purchase of the machinery in
question is concerned, there are few facts which indicate that the AO
has wrongly held that it was an outright purchase by the Chennai Unit.
In this regard, the first appellate authority has given a finding of
fact that it was not evident from the records that the transaction
relating to the machinery constituted outright sale. Likewise, as also
simultaneously in the case of M/s. Sakhi Raimondi the first appellate
authority has given a clear-cut finding that lease-rentals were
received, relevant order of ld. CIT(A) has
already been referred supra. Because of these facts and other
evidences, such as the agreement, etc. we hereby hold that the AO has
wrongly presumed that the transaction in question was a purchase of
machinery by Chennai Unit. Because of this finding on facts a
conclusion can be drawn that the rejection of deduction u/s.10B was bad
in law.
6.2
An alternate plea has also been raised by ld. AR that the machinery
which was taken on hire had costed less than the 20% of the total value
of the machinery, therefore the impugned restrictive clause of section
10(b) was otherwise incorrectly invoked by the AO. For this proposition
case laws cited was CIT v. Nayyars Minerals Exports (P.) Ltd. [1998] 231 ITR 864 (HP).
A calculation in this regard has also been furnished; however, at this
stage of second appeal no verification about the correctness of the
said calculation is possible. Let it be as it is; notwithstanding this
alternate plea do not survive anymore because we have already taken a
view in assessee's favour as discussed in above paras. In the result, we
hereby confirm the findings of ld. CIT(A), therefore the claim of
deduction u/s. 10B is directed to be allowed.
7.
In the result, ground No.2 which was recalled for readjudication is
hereby decided in favour of the assessee and against the Revenue,
however the final outcome of the order as already held by the ITAT "D"
Bench Ahmedabad in respect of ITA No.2981/Ahd/2008 vide order dated
4.2.2011 shall stand as it was, hence Revenue's
appeal is partly allowed for statistical purposes.
[B] Revenue's appeal, ITA No.322/Ahd/2009 for A.Y. 2004-05
8. The following grounds have been raised by the Revenue in its appeal:-
1. | The learned CIT(A) erred on facts and in law in allowing deduction u/s.10B observing that the activities carried on by the assessee were manufacturing overlooking the fact that it was polishing the valves which is in contradiction to Apex Court's ratio laid down in CIT v. N.C. Budharaja [1993] 204 ITR 412/70 Taxman 312 (SC). | |
2. | The learned CIT(A) erred on facts and in law in allowing deduction u/s. 10B observing that the assessee had purchased the machineries, completely disregarding the fact that the assessee had employed used machinery value of which exceeded 20% of the total value of the machinery employed by the assessee. | |
3. | The learned CIT(A) erred on facts and in law in holding that interest income of Rs. 1,30,66,020/- was not to be included in the total turn over for the purpose of computation of deduction u/s. 80HHC of the Act. | |
4. | The learned CIT(A) erred in deleting the addition of commission of Rs. 15,08,500/- by admitting fresh evidence in contravention to rule 46A, though the assessee could to substantiate its claim before the assessing officer to prove the legitimacy of the expenditure. |
8.1
Ground Nos. 1 & 2 are in respect of disallowance of deduction u/s.
10B of the IT Act. Regarding Sr. No. 1 now the Revenue is agitating
the manufacturing process as well by contending that "polishing of
valves" may not tantamount to manufacturing activity. In this regard,
we are governed by the findings of the Hon'ble Jurisdictional High
Court pronounced in assessee's own case cited supra order dated
11.4.2008; wherein it is held as
under:-
"At
page 6 of the petition, the petitioner has shown various manufacturing
steps which the raw castings have to undergo [viz. Turning, boring,
milling, radial drillings and boring, de-burning, etc.]. He purchased
raw valves and thereafter put them under the aforesaid process.
Therefore, after processing that raw valves, that becomes altogether a
new product, which is distinct from raw casting and is commercially
marketable, and that comes under the manufacturing activity. Mr. Shah
placed reliance on the decision of the Madras High Court in the case of CIT v. Perfect Liners [1983] 142 ITR 654. Following its earlier decision
i.e. CIT v. M.R. Gopal [1965] 58 ITR 598,
the Madras High Court has taken the view that the word "manufacture"
has to be understood in a wide sense. After the rough casting was
polished, the product was a new product which was utilized as a
component in internal combustion engines. It is to be seen whether after
some processes under which the raw goods have undergone, the type is
different from the original goods which were put under the process.
Here, considering the processes of the raw valves for final use, when
the different product has come out, then it cannot be said that it is
the same goods, as the raw goods could not be used without the processes
under which the goods of the assessee have gone. Therefore, once it was
allowed after seeing all these facts and when there was no concealment
of facts for deduction under section 10B of the Act, we see no
justification in issuing notices under section 148 for reopening of the
assessment."
This entire issue has already been dealt with by us in Revenue's appeal for A.Y. 2003-04 (supra). Therefore, on identical facts both the grounds of the Revenue for this year as well are hereby dismissed.
9.
Apropos to Ground No. 3, it was noted that the AO had included certain
amount in the total turnover while computing the deduction u/s. 80HHC
of IT Act. Due to this increase in the total turnover, i.e.
denominator, the resultant figure of deduction u/s. 80HHC got reduced.
One of the item which was included pertained to interest on deposit
with
banks amounting to Rs. 1,30,66,020/-. Identical addition was made in
A.Y. 2003-04 and while deciding the Revenue's appeal the Respected
Coordinate Bench in the order cited supra dated 4.2.2011 has held as
under:-
"15.
We have heard the parties. In our considered view there is no case for
interference in the order of ld. CIT(A). The reasons are that interest
only constitutes income and it can never be part or equivalent to
turnover. Further it is assessable under the head income from other
sources and in no case it will form part of computation mechanism as
provided under section 80HHC unless it is held as business income and if
it is so then 90% thereof would be required to be excluded. Hon'ble
Delhi High Court in CIT v. Delhi Brass & Metal Works (2009) 313 ITR 352 (Del)
has held that when there is no immediate nexus of interest on F.D. with
export even they are to be treated as income from other sources.
Accordingly ld. CIT(A) was justified in excluding interest from
computation mechanism of section 80HHC. As a result, this ground of
Revenue is rejected."
9.1
Even for A.Y. 2002-03 (ITAT "C" Bench Ahmedabad) while deciding
assessee's appeal bearing ITA No. 981/Ahd/2006 order dated 10.12.2009,
it was held that the interest income was not to be considered for total
turnover by following CIT v. Kantilal Chhotalal [2000] 246 ITR 439/[2001] 117 Taxman 526 (Bom.) and Hero Cycles Ltd. v. Asstt. CIT [2005] 142 Taxman 87 (Chd.)(Mag.).
Respectfully following the decisions of the Coordinate Benches as also
the verdict of the Hon'ble Courts, we hereby affirm the findings of the
ld. CIT(A) and dismiss this ground of the Revenue.
10.
Apropos to Ground No. 4, the assessee has stated that a sum of Rs.
15,08,500/- was paid to several parties and the tax thereon wherever
required has also been deducted. We
have noted that in a cryptic manner the AO had disallowed the claim.
However, when the matter reached to ld. CIT(A), it was held that the
payments were made to independent unrelated parties. It was also held
that the payments were made to procure the business. In support, the
details of the commission agents and the details of the TDS payments
were also placed on record. On that basis, ld. CIT(A) has held that the
AO had not found payment of commission as a bogus payment. He has also
commented that the AO had not examined the commission agents. A relief
was granted which is now challenged by the Revenue. Now before us, all
those details have been furnished running from page Nos. 92 to 112 of
the paper-book. The assessee has furnished statement of sale
commission, describing the name of the commission agent and the services
rendered by those parties. For example, Sai Enterprises was paid
commission against MSEB order. Likewise, WIT Electronics
was paid for IFCO Kandla Order. There is a long list of those parties
giving the description of documents, voucher numbers, date of payment,
their PAN numbers, amount of invoices, the rate of commission, etc. The
rate of commission had vary from 2.2% to 5% and in few cases it had
reached upto 16%. The details of the debit-notes and the commission
paid through those debit-notes have also been enclosed. We have been
informed that certain basic information about the payment of commission
was very much part of the record as also had been enquired by the
Auditor, hence very much part of the assessment record. So the argument
is that if the AO had any doubt, then he could have investigated.
Without any investigation he has wrongly disallowed claim. We find
force in the submissions of ld. AR considering the surrounding
circumstances and the evidences placed on record. We, therefore,
confirm the factual finding of ld. CIT(A) and dismiss this ground of
the Revenue.
11. In the result, the Revenue's appeal is dismissed.
[C] Assessee's CO No.44/Ahd/2009 (in ITA No.322/Ahd/2009)
The following grounds have been raised by the Assessee in its cross objection:-
Tyco
Valves & Controls India Private Limited [hereinafter referred to as
'the respondent'] objects to the appeal preferred by the Deputy
Commissioner of Income tax, Baroda - Circle 4 [hereinafter referred to
as 'the appellant'] and the order dated November 27, 2008 passed under
section 250 of the Income Tax Act, 1961 [hereinafter referred to as 'the
Act'] by the
Commissioner of Income Tax (Appeals)-III, Baroda [hereinafter referred
to as (CIT (Appeals)] for the Income Tax assessment year 2004-05 on
the following grounds:
I. Cross-Objection to Ground no.2 of the Appeal preferred by the appellant
The
respondent submits that the appellant has erred in raising the ground
relating to use of second hand machinery as he had not called for any
details or explanation from the respondent in the course of assessment
proceedings and has no where mentioned about the same in the assessment
order. However, the CIT (Appeals) has, after considering this very
issue, allowed the deduction under section 10.
The respondent prays that the order of CIT (Appeals) be upheld in this matter.
II. Cross-Objection to Ground no.10 of the CIT (Appeals) order
The
respondent submits that the CIT (Appeals) has erred in making an ad-hoc
disallowance of Rs. 1,00,000 out of miscellaneous expenses.
The respondent prays that the ad-hoc disallowance be deleted.
Your
respondents crave leave to add, to amend, to alter, to substitute, to
modify and/or withdraw any or all the above grounds of cross-objections
as they may be advised to do so at or
before the time of hearing of the cross-objection.
12.
Having heard the submissions of both the sides, we have noted that the
part relief was granted by ld. CIT(A) in the following manner:-
"11.3
I have considered the submissions of the counsel and facts of the case.
Since most of these expenses are incurred on cash basis and incurred
for snacks, food and hotel expenses etc. Various gift items were also
purchased for different persons including guest. Since the business
purpose of these expenses cannot be fully verifiable part disallowance
is justified. However looking to the quantum of expense 10% disallowance
is on higher side. I restrict the same to Rs.1 lac. The balance
disallowance of Rs. 5,70,800/- is deleted."
12.1
We find no fallacy in the aforesaid view taken by ld. CIT(A), hence
hereby confirmed. Ground raised by the Cross Objection is dismissed.
13. We summarize the result as under:-
(a) | Revenue's appeal, ITA No.2981/Ahd/2008 for A.Y. 2003-04 is partly allowed for statistical purposes. | |
(b) | Revenue's appeal, ITA No. 322/Ahd/2009 for A.Y. 2004-05 is dismissed. | |
(c) | Assessee's Cross Objection No. 44/Ahd/2009 is dismissed. |
IT
: Where assessee carried out jobbing transactions in regular course of
his business, as a member of MCX, loss suffered in said transactions
would fall under sub-clause (c) of section 43(5) which is eligible for
set off against business income of relevant year
■■■
[2013] 33 taxmann.com 53 (Jaipur - Trib.)
IN THE ITAT JAIPUR BENCH 'B'
Prakash Chand Jain
v.
Deputy Commissioner of Income-tax, Central Circle-III*
R.K. Gupta, JUDICIAL MEMBER
AND N.K. Saini, ACCOUNTANT MEMBER
AND N.K. Saini, ACCOUNTANT MEMBER
IT APPEAL NOS. 1149 & 1150 (JP.) OF 2011
[ASSESSMENT YEARS 2008-09 & 2009-10]
[ASSESSMENT YEARS 2008-09 & 2009-10]
OCTOBER 18, 2012
Section 43(5) of the Income-tax Act, 1961 - Speculative transactions
[Jobbing transactions] - Assessment years 2008-09 and 2009-10 - Assessee
was carrying on business of brokerage as a member of MCX - Besides
doing brokerage business for clients, assessee was also carrying on
business in individual capacity on MCX - Assessee incurred certain loss
while carrying on business in individual capacity - Assessee claimed
set off of said loss against income under other heads in terms of
provisions of section 43(5)(c) - Revenue authorities rejected assessee's
claim taking a view that transactions entered into by assessee were
speculative in nature under section 43(5) - Whether since transactions
entered into by assessee were in nature of jobbing carried out in
regular course of his business
as a member of MCX, said transactions certainly fell under clause (c)
of section 43(5), and, therefore, assessee's claim for set off of loss
was to be allowed - Held, yes [Para 11.1] [In favour of assessee]
FACTS
■ | The assessee was carrying on business of brokerage as a member of Multi Commodity Exchange (MCX). Besides doing brokerage business for clients, assessee was also carrying on business in individual capacity on MCX. From the business in individual capacity on MCX, assessee declared certain loss. | |
■ | The assessee claimed that he was eligible for set off of said loss against income under other heads in terms of provisions of section 43(5)(c). | |
■ | The revenue authorities opined that the transactions entered into by assessee on MCX in his own account were speculative transactions within the meaning of section 43(5). | |
■ | Accordingly, the revenue authorities rejected assessee's claim of set off. | |
■ | On appeal: |
HELD
■ | In main provision of section 43(5) it has been provided that speculative transaction means a transaction in which a contract for purchase or sale of any commodity including stock and shares is periodically or ultimately settled otherwise than by the actual delivery or transfer of commodity or scrip. Thereafter under clauses (a), (b) and (c) the exceptional clause is provided. Under clause (c) it has been provided that a contract entered into by a member of a forward market or stock exchange in the course of any transaction in the nature of jobbing or arbitrage to guard against loss which may arise in the ordinary course of his business as such member. | |
■ | Both the lower authorities i.e. Assessing Officer and the Commissioner (Appeals) could not understand the clause (c) in right perspective. The Assessing Officer says that the assessee could not prove the transaction as there is no delivery. However, at various points of time the Assessing Officer accepts the assessee's transaction as jobbing in nature but they are not done during the regular course of business. | |
■ | Clause (c) specifically provides that if any member of a stock exchange entered into transaction either of loss or profit that will be treated as business transaction. All these transactions are transacted through MCX which is an organized stock exchange. If a member wants to enter into transaction of a future date then the transaction has to be done through stock exchange and if the same member wants to settle said transaction by selling or purchasing then again transaction has to be done through stock exchange which has been done in this case. | |
■ | It is seen that the assessee member gave an order for trading to buy gold of future date i.e. 5-4-2008. For the sake of clarification, this transaction was ordered on 5-3-2008. Thereafter assessee thought proper to settle this transaction, again after few hours the assessee gave order to the stock exchange to sell the same for a future date. | |
■ | Both these transactions are done by stock exchange and whatever the profit or loss is there that has been settled by the stock exchange in account of the assessee member. No doubt remains that assessee had done its transaction on regular basis which cannot be termed that they are not regular course of business as provided in clause (c) of section 43(5). | |
■ | The Assessing Officer himself admitted that the nature of transaction entered into by the assessee is in nature of jobbing. However, as delivery was not given, therefore, he treated this transaction as speculative in nature. It has been also mentioned that no contract was filed in written. This observation of the Assessing Officer is without any basis because the assessee is a member of stock exchange called MCX and all the transactions are done by him as jobbing transaction which has been admitted by the Assessing Officer also. Therefore, there is no question of any delivery or question of any written contract. These are regular transactions and as per clause (c) this transaction has to be treated as done in the regular course of business. | |
■ | The Assessing Officer has also mentioned somewhere in his order that case of the assessee may fall under clause (d) of section 43(5). Clause (d) of section 43(5) deals with derivative transaction, therefore, the assessee's case does not fall under clause (d) of section 43(5). [Para 11] | |
■ | In view of these facts and circumstances, it is opined that case of assessee falls under clause (c) of section 43(5) and, therefore, the loss incurred by assessee has to be treated as business loss eligible for set off against other business income of relevant year. Accordingly, the Assessing Officer is directed to allow the claim of the assessee for both the years. [Para 11.1] |
CASE REVIEW
Shree Capital Services Ltd. v. Asstt. CIT[2009] 121 ITD 498 (para 11.1) distinguished.
CASES REFERRED TO
Komal Export v. Asstt. CIT[2008] 19 SOT 602 (Delhi) (para 11.1), First Securities (P.) Ltd. v. Asstt. CIT [IT Appeal Nos. 1339 & 1340 (Bang.) of 2008, dated 22-5-2009] (para 11.1) and Shree Capital Services Ltd. v. Asstt. CIT[2009] 121 ITD 498 (Kol.) (para 11.1).
Vinod Gupta for the Appellant. Sunil Mathur for the Respondent.
ORDER
R.K. Gupta, Judicial Member - These are two appeals by the assessee against the order of ld. CIT (A) relating to assessment years 2008-09 and 09-10.
2. Common issues are involved in both these appeals, therefore, they are disposed off together.
3. Ground
No. 1 in both the appeals, which is against passing order under
section 153A/143(3) is bad in law was not pressed. Therefore,
ground no. 1 for both the appeals is dismissed as not pressed.
4.
Ground Nos. 3 and 4 in both the appeals respectively relate to penalty
initiation proceedings under section 271AAA is pre-mature, was also not
pressed. Therefore, these grounds are also dismissed as not pressed.
5.
Ground No. 2 in both the appeals is against in holding that loss under
consideration is not covered under proviso (c) of section 43(5) of the
Act and further erred in considering the business loss of Rs.
1,34,62,163/- and Rs. 68,25,182/- as speculative loss respectively.
This loss was not allowed to be set off against the business income.
6. Brief facts of the case as noted by ld. CIT (A) in his
order in para 2.1 to 2.6.5 at pages 2 to 16 are as under :-
"2.1
Facts of the case are that in the case of Tulip group of Jaipur to
which the assessee belongs a search was conducted on 23/01/2009. Various
books of accounts, loose papers and incriminating documents and assets
have been found and seized as per annexure prepared during the course
of search. On the basis of search action, notice u/s 153A was issued on
05.03.2009 for the assessment year 2003-04 to 2008-09 which was duly
served upon the assessee on 09.03.2009. In response to this, the
assessee has furnished return of income for the assessment year 2008-09
and 2009-10 on 30.09.2009 declaring income at Rs. Nil and Rs.
1,18,07,540/- respectively.
As
the main issue involved in both the
appeals are common, these appeals are decided by this common order.
Facts for both years are broadly same. However for the sake of
convenience, facts and figures of A.Y 2008-09 are mentioned herein
below in respect of issue of speculative loss under consideration.
The
assessee derived income from share of profit from firm, loss from
speculation, income (Loss) from trading on MCX and income from other
sources.
2.2
As per details filed, the assessee is carrying on business of brokerage
in the name of Prakash Chand Jain, MCX. He is member of MCX and besides
doing brokerage business for clients also carrying on business in
individual capacity on MCX. From the business in individual capacity on
MCX, loss of Rs.1,34,62,167/- was declared in the
computation of income in A.Y 2008-09. The income & expenditure
account from the said business for this year is as per details given
below:
Income | Expenditure | |||||
1. | Income from Brokerage | Rs. 2,04,105 | 1. | Administrative expenses | Rs. 4,08,920 | |
2. | Other income | Rs. 2,06,938 | 2. | Finance Expenses | Rs. 1,798 | |
3. | Gross receipt from Arbitrage and jobbing | Rs. 44,10,470 | 3. | Depreciation | Rs. 4,00,849 | |
4. | Net Loss | Rs. 1,34,62,163 | 4. | Gross payment for arbitrage and jobbing | Rs. 1,74,72,210 | |
5. | Total | Rs. 1,82,83,677 | 5. | Total | Rs. 1,82,83,677 |
From
the above table it is seen that the assessee incurred speculative loss
from transaction in business on MCX and the total loss claimed from the
said business was at Rs.1,34,62,163/- as stated above.
The
assessee vide letter filed on 16/12/2010 claimed that he was eligible
for set-off of this loss against income from business under other head
in
terms of provisions of section 43(5) (c) of the Act.
2.3 The provisions of section 43(5) (c) of the Act exclude certain transactions from the definition of speculative transactions-
(v)
A contract entered into by a member of forward market or of a stock
exchange in the course of any transaction in the nature of jobbing or
arbitrage provided such transaction is entered into to guard against
loss which may arise in the ordinary course of his business as such
member.
The
benefit of the exception cannot be extended to all transactions of such
members but only to those transactions in the nature of arbitrage or
jobbing which are entered
into to guard against loss which may arise in the ordinary course of
business. Jobbing involves buying and selling on own account with
differences arising from fluctuations in prices constituting income or
loss from the transactions. In case of arbitrage, transactions are
carried out by the member at different markets or at different
exchanges with a view to gaining from the differences in the prices
prevailing at both the markets or exchanges.
The
assessee vide notice u/s 142(1) of the Act dated 16/12/2010 was
required to furnish details of transactions carried on by him in the
ordinary course of business and details of transactions in the nature of
jobbing or arbitrage to guard against loss which may arise in the
ordinary course of business as a member of MCX for claiming benefit
under clause (c) of section 43(5) of the Act.
2.4 In compliance to this notice assessee submitted replies which are broadly as under:-
(i) | In reference to your query regarding allowability of loss of Rs.1,30,61,314/- under the head Prakash Chand Jain (MCX), the amount representing business loss in the MCX business which were adjusted with other business income. In this regard, we submit as follows : | |
That the assessee is an individual and partner in M/s. TULIP, apart from this, he is also member of Multi-Commodity Exchange (known as MCX) and running a proprietorship concern under the name and style of M/s. Prakash Chand Jain, MCX, the said concern is engaged in the business of MCX as member wherein concern earns brokerage as well as also having income or loss on account of jobbing of the commodities traded in said exchange. The assessee apart from said business as member of MCX, also have transacted through some other members of Commodity Exchange and resultant loss of Rs. 3,41,435/- have been shown as speculative business loss in the return filed with the income tax department. It is important to note and clear from the perusal of the computation of the income as well as trading, profit & loss account of proprietorship concern M/s. Prakash Chand Jain, MCX, that loss of (Rs. 1,34,62,163.19 - 4,00,849/- depreciation = Rs. 1,30,61,314/-) have been claimed as regular business loss and same get adjusted against income from M/s. TULIP. | ||
(ii) | That the perusal of the Trading and Profit & Loss Account of M/s. Prakash Chand Jain, MCX shows that during the year under consideration, the gross receipts from jobbing was Rs. 44,10,469.76 and gross payment on account of jobbing was Rs. 1,74,72,210.06, the transaction wise statements are enclosed herewith for your kind perusal. It is clear from the statements that all these jobbing receipts or payments are related to the transactions made on account of himself by the assessee rather than on account of clients. | |
MCX is a public limited company, governed under Forward Contract (Regulation) Act, 1952 and working under regulatory body Known as Forward Market Commission established under said Act to ensure compliance of the law. Company operating a commodity exchange wherein persons having membership only can transact. The membership of the exchange is given only to those members who are interested in transacting in the prescribed commodities; the transaction in this market is entered into in the name of the members only. There is a pre-determined criterion for becoming member in the exchange, wherein, he is abides by the rules and regulation prescribed in this respect. MCX operate commodity exchange through specialized software on real time basis and every member has access to the server of the exchange through his own terminal. The entire working of the exchange is online and on real time basis in very transparent manner. According to the practices prevalent and business module designed by the MCX, a member can buy or sale any commodity transacted on said exchange for any quantity according to the available margins and for any future date, out of options provided by the exchange. Mostly MCX provides three future optional dates. Further at the time of buy or sale, member have to choose one date on which delivery of the commodity shall be made or taken, further member always have right to settle the purchase transaction by making sale before opted date and sale transaction by making purchase before opted date. Further, actual delivery of the commodity is also possible in the market. In this type of forward market members enters into a forward transaction and to safe guard their interest jobbing and arbitrage is carried out, such jobbing and arbitrage is carried to protect the that interest, which is entered in by the members, with a view to minimize the future probable loss, looking to the prevailing price of the commodity. Assessee is not only a broker, infact he is member of exchange and the scope of work of member is much more wider than that just of a broker. | ||
(iii) | The loss under consideration is a regular business loss and not results of speculative transaction as per the definition of speculative transaction given in the section 43(5) of the Income Tax Act, 1961. To clarify the nature of transaction and legal provision for considering a transaction as speculative. We reproduced the legal provision in this regard provided in section 43(5) as follows : | |
"speculative transaction" means a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips; | ||
Provided that for the purposes of this clause-- |
(a) | a contract in respect of raw materials or merchandise entered into by a person in the course of his manufacturing or merchandising business to guard against loss through future price fluctuations in respect of his contracts for actual delivery of goods manufactured by him or merchandise sold by him; or | |
(b) | a contract in respect of stocks and shares entered into by a dealer or investor therein to guard against loss in his holdings of stocks and shares through price fluctuations; or | |
(c) | a contract entered into by a member of a forward market or a stock exchange in the course of any transaction in the nature of jobbing or arbitrage to guard against loss which may arise in the ordinary course of his business as such member; |
shall not be deemed to be a speculative transaction; | ||
In the instant case, assessee is a member of Multi Commodity Exchange (MCX) and have considered all such transactions entered as member as non-speculative for the purpose of income-tax act by virtue of clause (c) of Section 43(5) of Income-tax Act, 1961. | ||
Close perusal of said clause shows that - | ||
Contract must be entered by a member of forward market or a stock exchange. Such contracts must be made in course of any transaction in nature of jobbing or arbitrage. | ||
Such contract must be to guard against loss which may arise in the ordinary course of his business, as such member. | ||
It is relevant here to examine the facts of the assessee with the legal provisions contained in above referred clauses. | ||
(iv) | It is a matter of fact that assessee is a member of MCX. MCX is an exchange provides opportunity to it's member to trade commodity on future dates, therefore, the MCX is a forward market and assessee under consideration is a member of forward market qualifying the first criteria of exception provided in clause (c) of section 45(3) of Income-tax Act, 1961. The forward market itself implies a market of future providing opportunity of trading in future. We also reproduced here the definition of forward market given in the lexicon law dictionary as follows : | |
"Forward Market - a market in which participants agree to trade some commodity, security or foreign exchange at a fixed price at some future date." | ||
Perusal of the transactions entered by the assessee on the MCX on his own account shows that he has made first purchase/sale transaction of a commodity for a particular quantity to be settled either by delivery or by cross transaction on a particular future date for a fixed price determined at the time of transaction. Thereafter, on every day, the difference between prevalent price on particular date with fixed price of entered transaction for future date have been either paid or received according to the difference and debited/credited to gross jobbing account. It is clear from the nature of transaction that first a transaction of future date has been made and thereafter, on every day loss/profit have been booked according to the prevalent price. From the nature of transaction, it is emerged that - |
(a) | on the date of profit/loss, there was an outstanding transaction of future date, | |
(b) | the contract of profit/loss have been made to guard against loss which may arise on settlement of already entered transaction for future date. | |
(c) | The transactions have been entered in regular course of business because assessee is a member of forward market wherein entering into transaction of future date is normal phenomena and forward market meant for future transaction only. Therefore, transaction entered by member to guard against loss which may arises on settlement of future transactions is also part of regular business and transaction entered during the regular course of business. | |
(d) | The assessee have frequently entered into the contracts to guard against losses which may arise in respect to transaction entered to be settled on future date, clearly shows that it has been carried out with the motive to gain profit out of every turn of price in the market. Such act is clearly a act of jobber to maximize the profit by entering transaction according to changing market scenario. |
(v) | Lexicon law dictionary defines "stock jobber" which is: "stock jobber a dealer in stock; one who buys and sells stocks on his own account on speculations". | |
A jobber sells and buys on his own account and takes advantage of every turn of price | ||
In the instant case, assessee is a dealer by virtue of membership and buys and sells the commodity on every movement of the price of the commodity, which makes his activity as jobbing activity | ||
From the foregoing discussion of the legal position, as well as the facts of the case, it is clear that activity of the assessee is squarely falls under clause (c) to the section 43(5), which covers those transactions settled otherwise than by physical delivery even than not considered as speculative transactions under the income tax act. | ||
(vi) | Similar view has been taken by Hon'ble ITAT Delhi, in Komal Exports v. Assistant Commissioner of Income Tax, 19 SOT 602 (2008). Similar judgments was pronounced in CIT v. Shri Sharwan Kumar Agarwal,[2001] 249 ITR 0233. | |
(vii) | The assessee under consideration was given membership of MCX w.e.f. 28.03.2007 and the effective date for permitting to do operation was 29.08.2007 and since, the Cl. (c) of S. 43(5) is applicable on member of forward exchange. The transaction entered into by the assessee before the period 29.08.2007 and even after with M/s Tradeswift Comdex Private Limited & Moti Commodity Futures Private Limited not as a member have been shown and considered as Speculation Business Loss which amounted to Rs. 3,41,435/- for the year under consideration and not set off of same loss has been claimed. It is clear from the legal provisions that a transaction can be fall under clause (c) of section 43(5) only if it is entered by the member of forward market, hence return of the previous year as well current year have been filed correctly and according to the legal provision and factual position of assessee as narrated herein before. | |
Perusal of the above shows that loss incurred by assessee, a member of MCX, a forward market exchange, due to jobbing to guard against loss from future price fluctuation arising in the ordinary course of its business surely fell within the purview of exception contained in Cl. (c) of proviso to S. 43(5), hence could not be said to be speculative loss and should be considered as business loss. | ||
(viii) | The assessee under consideration is a member in MCX having Trading-Cum-Clearing Membership, which is also evident from the certificate of membership, already submitted in your office. | |
Since, Trading-cum-clearing member means a person who is admitted by the Exchange as the member of the Exchange conferring a right to trade and clear through the Clearing House of the Exchange as a clearing member and who may be allowed to make deals for himself as well as on behalf of his clients and clear and settle such deals only. Since, his ordinary course of business as a member is to trade in MCX market along with acting as clearing house for his clients, as per the rules of MCX, he is trading in the same market, and therefore it is his ordinary course of business as such a member. Moreover, when the main object of the member is well defined, and he is working in accordance to the same, it needs to be concluded that he is working as in his ordinary course of business. | ||
(ix) | Perusal of the above shows that loss incurred by assessee, a member of MCX, a forward market exchange, due to jobbing to guard against loss from future price fluctuation arising in the ordinary course of its business as member surely fell within the purview of exception contained in Cl. (c) of proviso to S. 43(5), hence could not be said to be speculative loss and should be considered as business loss. |
2.5
"AR. further submitted before A.O. that it is important to note and
clear from the membership
certificate that Mr. Prakash Chand Jain in his individual capacity is
member of MCX not M/s. Prakash Chand Jain or M/s. Prakash Chand Jain,
MCX. The financial result of MCX have been prepared under the trade
name Prakash Chand Jain, MCX only to distinguish the individual affairs
from the business affairs of Mr. Prakash Chand Jain, therefore, it is
not correct that any trade concern is member of MCX rather Mr. Prakash
Chand Jain is member of the MCX.
It
is also relevant to mention that a proprietor cannot do any business
with himself because he can represent only one physical entity.
From
the foregoing discussion, it is clear that all transactions have been
carried out by Mr. Prakash Chand Jain, as member and not as a client,
therefore,
jobbing loss arose by transacting such transactions is as member and
generated during the regular course of business, hence falls under
explanations 'C'
From
the facts narrated hereinbefore and clarification made, we hope that
you will find on fact that these transaction have been carried not on
client id, therefore, cannot fall under clause - (d) of Section 43(5)."
Further,
it is an admitted fact that your goodself has already considered the
transaction is in the nature of jobbing, in this regarded we rely upon
the decision of Hon'ble ITAT Banglore in the case of First Securities Pvt. Ltd. v. SCIT,
2009-TIOL-443-ITAT-MUM, wherein, it was held as per provisio (c) to sec
43(5) the transactions in nature of jobbing not to be
treated as speculative transaction and once a transaction is not
speculative, any loss arising out of such transaction is business loss
which can be set off against business profits."
2.6
The A.O. observed that the submission of the assessee was examined and
perusal of the same revealed that the assessee carried on transaction
of jobbing in his individual capacity on the said exchange. As stated
above query letter was again issued vide notice u/s 142(1) of the Act
dated 24/12/2010 requiring him to furnish details of transactions
carried on by him in the ordinary course of business and details of
transactions in the nature of jobbing or arbitrage to guard against loss
which may arise in the ordinary course of business as a member of MCX
which he failed to provide in compliance to the notice u/s 142(1) of
the Act earlier issued on 16/12/2010
in his reply reproduced above.
It
was stated vide letter filed on 27/12/2010 that the assessee as a
member of the MCX was allowed jobbing in his own account besides doing
brokerage business. Chart of certain jobbing transactions in his own
account was enclosed.
2.6.1(i) Reliance was placed by him on the decision of Hon'ble ITAT Delhi in Komal Exports v. ACIT reported in 19 SOT 602 (2008).
However, the fact of case of the assessee is distinguishable from the
case decided by the Hon'ble ITAT referred to above. In that case the
said concern was engaged in pepper export business, incurred some
hedging expenses while procuring the said commodity from an organization
(IPSTA), which was controlled and monitored by the forward market
commission, claiming that said hedging was purely done to cover future
loss on account of price fluctuation in pepper which was one of the most
volatile commodity of export. The AO disallowed the expense treating as
speculative transaction. The ITAT was not agreed with the finding of
the AO and held that as per section 43(5) of the Act speculative
transactions means a transactions which a contract for the purchase or
sale of any commodity including stocks and shares, is periodically or
ultimately settled otherwise then by actual delivery or transfer of the
commodity or script. However, the exception has been provided in clause
(a), (b) and (c) to the proviso of the said section. The assessee was
mainly doing the export business of pepper to
overseas buyers of different countries. It was member of IPSTA, a
recognized forward market exchange which was controlled and monitored by
the forward market commission. The loss was incurred by the assessee
as a member of IPSTA due to jobbing to guard against the loss arisen in
the ordinary course of its business. Therefore, the case of the
assessee squarely fall within the purview of clause (c) of proviso to
section 43(5) and was not a speculative loss.
2.6.1(ii) The other case relied by the assessee was CIT v. Sh. Sharwan Kumar Agarwal [2001] 249 ITR 233
The
facts of the case are that the assessee a share broker and member of UP
stock exchange, Kanpur carried on transactions with other members in
the nature of jobbing or arbitrage. The Hon'ble High Court held that the
onus was on the revenue to establish that the assessee was not entitled
to exception covered by clause (c) of the proviso to section 43(5) of
the Act. It was further mentioned that the revenue has not sought any
question to be referred in regard to proviso, clause (c) to sub section 5
of section 43(5) of the I.T. Act.
The
ratio of this case is not applicable to the facts of the case of the
assessee. In that case proper material was not gathered by the
Department so that the assessee was not entitled to the exception clause
(c) to sub section 5 of section 43(5) of the I.T. Act. In the case of
the
assessee evidence in support of transaction in the nature of jobbing
alone has been filed however, transactions carried on during the
regular course of business has not been identified.
2.6.1(iii)
Further, other case relied by the assessee was decided by Bangalore
Bench of the Hon'ble ITAT in ITA no. 1339 & 1340 (BNG)/2008 dated
22/05/2009 in the case of First Securities (P.) Ltd. v. ACIT,
Central Circle-1(4), Bangalore. In this case the jobbing transactions
carried on by a member of Bangalore stock exchange was treated as
covered by clause (c) of section 43(5) of the Act and eligible for
exclusion from the definition of speculative transactions.
2.6.2
The ratio of this case is also no help to the assessee as there are
a number of judgments wherein such transactions have been treated as
covered by clause (d) of section 43(5) of the Act. A few instances are
as under-
1. Special Bench decision:- A recent tribunal decision of the Kolkata Special Bench in Shree Capital Services Ltd. v. ACIT
[ITA no. 1294 {Kol} of 2008 dated 31-7-2009 for A.Y. 2004-05] has upset
the apple carts of many in the share trading community. The issues
before the Special Bench were primarily two fold. Firstly, whether loss
from transactions in share derivatives was a speculation loss within
the meaning of section 43 [5] of the Income Tax Act, 1961, more
particularly because there was apparently no delivery observed.
Secondly, whether the Finance Act 2005 amendment to section 43 [5], by
insertion of new clause [d] in the proviso with effect from 1-4-2006,
was clarificatory
in nature? By this clause [d], transactions in derivatives carried on
approved stock exchanges are treated as non speculative transactions.
The fact of the case are stated as under-
The two questions before this Special Bench are:-
"Whether the transaction in derivatives falls within the meaning of speculative transaction as provided u/s. 43(5)? and
If
answer to the above question is in the affirmative, i.e. the
transaction in derivatives is held to be speculation transaction u/s.
43(5), whether clause (d) of Sec. 43(5) introduced by Finance
Act, 2005 w.e.f. 1.4.2006 is clarificatory in nature and therefore,
retrospective in operation ?
The
Special Bench observed that speculative transaction is a transaction in
which contract for purchase and sale of any commodity is settled
otherwise than by actual delivery. It is not in dispute that in the case
of transaction in derivatives, the transaction is always settled
otherwise than by actual delivery. However, it was contended by the
Counsel that Sec. 43(5) is applicable only in respect of contract for
purchase and sale of commodity. His contention was that the derivative
is not a commodity and, therefore, Sec. 43(5) would not be applicable at
all. The Departmental Representative has furnished the printout taken
from the Website of SEBI explaining the term "derivative", which reads
as under :-
"The
term "Derivative" indicates that it has no independent value, i.e. its
value is entirely "derived" from the value of the underlying asset. The
underlying asset can be securities, commodities, bullion, currency,
live stock or anything else. In other words, Derivative means a forward,
future, option or any other hybrid contract of pre-determined fixed
duration, linked for the purpose of contract fulfillment to the value of
a specified real or financial asset or to an index of securities."
It
was fairly admitted by the assessee's counsel that the underlying
assets in the derivatives dealt with by the assessee were shares of
certain companies.
Before interpreting the term
"commodity", it would be useful to refer to the decision of Hon'ble Apex Court in the case of CIT v. B. Suresh
relied upon by the Departmental Representative, which gives an
important guideline for interpreting the words keeping in view the
technical advancement. Their Lordships have held that due to
technological advancement, one has to change his thinking about various
concepts like goods, merchandise and articles. The above observation
would be squarely applicable while interpreting the word "commodity".
In
Sec. 43(5), the term "commodity" has been given a wide meaning because
it is mentioned that any commodity includes stocks and shares.
Therefore, even if in common parlance the term "commodity" may not
include any stocks and shares, but the legislature for the purpose of
sec. 43(5) provided that the term "commodity" would
include stocks and shares. This makes the intention of the legislature
clear that they used the term "commodity" in a very wide manner. Sec.
43(5) was brought on the Statute decades back when there was no concept
of trading in derivatives. Therefore, naturally the Legislature would
not mention the word 'derivatives' in Sec. 43(5).
However,
it has been provided that the term 'commodity' would include stock and
shares. Thus the securities represented by stock and shares are
included in the term 'commodity'. The derivatives are also securities.
Derivative derives its value from the underlying assets. In other words,
the underlying assets are represented by derivatives. When the
underlying asset of any derivative, is share and stock for all practical
purposes, the treatment given to such derivatives should be similar to
stock and
securities.
In
this case, it is admitted that the underlying asset is shares.
Therefore derivatives will also fall within the meaning of 'commodity'
used in Sec. 43(5). Finance Act, 2005 has provided that certain
transactions in respect of trading in derivatives shall not be deemed to
be speculative transactions within the meaning of Sec. 43(5). If the
transaction in derivatives does not fall within the definition of
'speculation transaction' u/s. 43(5), then there was no question of
exempting certain type of transaction in derivatives from the scope of
speculative transaction u/s. 43(5). If it is held that the transaction
in derivatives does not fall in Sec. 43(5), it will make clause (d) and
Explanation thereto below Sec. 43(5) introduced by Finance Act, 2005 to
be redundant. It cannot be presumed that the Government has introduced
a
clause, i.e. clause (d) as well as Explanation thereto, which was
redundant and infructuous.
In
view of above, the Special Bench held that the term 'derivatives' in
which underlying asset is shares, will fall within the meaning of
'commodity' used in Sec. 43(5) of the Act.
The
next question is whether clause (d) of Sec. 43(5) introduced by Finance
Act, 2005 w.e.f. 1.4.2006 is clarificatory and, therefore,
retrospective in nature.
It
is evident that the transaction in derivatives in exempted from the
purview of speculative transaction u/s. 43(5) because of recent systemic
and technological changes introduced by stock exchange. The above
intention of the Legislature is also clear from the fact that all the
transaction in derivatives have not been exempted from the ambit of
speculative transaction u/s. 43(5) but only the eligible transactions of
trading in derivatives carried out in a recognised stock exchange are
exempt. By way of Explanation, the Legislature has also defined the term
'eligible transaction' and "recognized stock exchange". The Legislature
has also provided the Rules, i.e. Rule 6DDA and Rule 6DDB prescribing
the conditions which a stock exchange is required to fulfill to get
notified as a recognized stock exchange for the purpose of clause (d) of
proviso to Sec. 43(5). This rule is inserted w.e.f. 01.7.2005. From the
above it is abundantly clear that clause (d) of Sec.43(5) cannot be
said to be clarificatory in nature.
The
counsel for the assessee has relied upon
several decisions to buttress his claim that clause (d) of Sec. 43(5)
is clarificatory in nature. However, the facts in all those cases were
altogether different than the facts relating to Sec.43(5).
It
is clear that if it is a necessary implication from the language
employed that the Legislature intended a particular section to have
retrospective operation, the court will give it such an operation. But
in this case, the Legislature made the amendment because of the
technological advancement introduced by the stock markets resulting in
more transparency in the dealings. Therefore, the circumstances under
which amendment was brought into existence do not lead to the inference
that it was retrospective.
In
view of the above, it is held that
clause (d) of Sec. 43(5) is prospective in nature and will be
effective from the date which the Legislature made it effective, i.e.
1.4.2006 and will be applicable to assessment year 2006-07 onwards.
In the result, the assessee's appeal is dismissed."
2.6.3
Assessee, in-spite of repeated query could not provide details of
transactions carried on by him in the ordinary course of business
different from the transactions carried on in the nature of jobbing in
which loss of Rs 1,34,62,163/- was incurred by him. It is pertinent to
mention here that the brokerage business carried on by him as a member
of the exchange, is not covered in the definition of business carried on
during regular course as specified in clause (c) of proviso to section
43(5)of the Act as there is no risk involved in brokerage business.
Further, the assessee also has not made such claim.
In
the light of above discussion it is held that the assessee carried on
business of jobbing in various commodities on MCX in his individual
capacity. The regular business, a necessary ingredient to qualify for
exclusion from speculation transaction in terms of clause (c) of proviso
to section 43(5) is missing.
2.6.4 A.O. further observed that
However, the case of the assessee is covered clause (d) of proviso to section 43(5) of the Act which stipulates as under-
[(d)an
eligible transaction in respect of trading in derivatives referred to
in clause [(ac)] of section 2 of the Securities Contracts (Regulation)
Act, 1956 (42 of 1956) carried out in a recognised stock exchange;]
shall not be deemed to be a speculative transaction.
[Explanation. - For the purposes of this clause, the expressions -
(i) | "eligible transaction" means any transaction, - |
(A) | carried out electronically on screen-based systems through a stock broker or sub-broker or such other intermediary registered under section 12 of the Securities and Exchange Board of India Act, 1992 (15 of 1992) in accordance with the provisions of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) or the Securities and Exchange Board of India Act, 1992 (15 of 1992) or the Depositories Act, 1996 (22 of 1996) and the rules, regulations or bye-laws made or directions issued under those Acts or by banks or mutual funds on a recognised stock exchange; and | |
(B) | which is supported by a time stamped contract note issued by such stock broker or sub-broker or such other intermediary to every client indicating in the contract note the unique client identity number allotted under any Act referred to in sub-clause (A) and permanent account number allotted under this Act; |
(ii) | "recognized stock exchange" means a recognized stock exchange as referred to in clause (f) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) and which fulfils such conditions as may be prescribed and notified by the Central Government for this purpose;] |
2.6.5
There are two main commodity exchanges in India - Multi Commodity
Exchange
of India Ltd (MCX) and National Commodity & Derivative Exchange
Ltd NCDEX where one can trade in derivative contract of different items
- from pulse to metal. Till now, the transactions in derivative
segments were regarded as "Speculative transaction" which has a great
bearing on the taxation of one's income as the loss out of speculation
is not allowed to be adjusted with any other income. Speculation loss
is allowed to be adjusted with only speculation gain.
Section
43(5) of the I T Act defines what is speculative transaction. The
government vide Finance Act 2005 inserted a proviso (d) in section 5 to
provide that trade in derivative segments of recognized stock exchange
shall not be regarded as "speculative transaction". The recognition of
the stock exchange for the purpose of Futures and Options trades in
shares was notified vide
notification no SO 89(E) dated 25/01/2006. As per this notification
NSE and BSE are recognised stock exchange for trade in Futures and
Option. Therefore, now if the trade is done through these stock
exchanges, the trade will not be regarded as Speculative Transaction
with effect from 25/01/2006.
Now the CBDT has issued Notification No. 46/2009, dated 22-5-2009
by which Multi Commodity Exchange of India Ltd (MCX) has been
recognized under section 43(5) (d) which means that the trade in
derivatives through MCX exchange will now be regarded as Business
transaction and therefore, the loss, if in unfortunate event of
incurring loss will be allowed to be adjusted with any other business
income or from other heads. If you trade through,
NCDEX, you will not have this facility.
The notification 46/2005 dated 22-5-2009 is given below
In
exercise of the powers conferred by clause (ii) in the Explanation to
clause (d) of the proviso to sub-section (5) of section 43 of the
Income-tax Act, 1961 (43 of 1961), read with rule 6DDB of the Income-tax
Rules, 1962, the Central Government hereby notifies MCX Stock Exchange
Ltd. as a recognized stock exchange for the purpose of the said clause
with effect from the date of publication of this notification in the
Official Gazette.
MCX
Stock Exchange Ltd. shall separately maintain data regarding all
transactions registered in the system in
which client codes have been allowed to be changed for periodical
inspection by the Director-General of Income-tax (Investigation) having
jurisdiction over such exchange and provide copies of the relevant
information as and when required.
The
Central Government may withdraw the recognition granted to MCX Stock
Exchange Ltd. if any of the conditions specified in rule 6DDA of the
Income-tax Rules, 1962, subject to which the recognition is granted, is
violated.
This
notification shall remain in force until the approval granted by the
Securities and Exchange Board of India is withdrawn or expires, or this
notification is rescinded by the Central Government as provided in
sub-rule (5) of rule 6DDB of the Income-tax Rules, 1962.
The
case of the assessee is not covered within the period of above
mentioned notification. Therefore, the assessee is also not covered by
provisions of clause (d) to section 43(5) of the Act. The loss of
Rs.1,34,62,163/- claimed by the assessee in the transactions of jobbing
in various commodities on MCX is therefore, disallowed and added to his
income. Penalty proceedings u/s 271AAA of the Act is initiated for
filing inaccurate particulars of income."
These
facts are noted by ld. CIT (A) for assessment year 2008-09 and on
similar basis the AO has disallowed claim of loss for assessment year
2009-10 also. Since facts are common, therefore, ld. CIT (A) has
disposed off the issue for both the years by passing a common order.
Detailed submissions were filed before ld.
CIT (A) which has been incorporated in the order of ld. CIT (A) in
para 3.1 to 3.12 at pages 16 to 24. These submissions are more or less
similar to the submissions filed before the AO. Reliance has also been
placed by ld. A/R on various case laws, before the ld. CIT (A). After
considering the submissions, ld. CIT (A) found that since assessee
could not prove that his activity fall under clause (c) of section
43(5), in his view the case of assessee falls under clause (a) rather it
can be said that assessee's case falls under main provision of section
43(5) as assessee failed to establish that the transaction of sale and
purchases were done on delivery basis. The findings of ld. CIT (A) have
been recorded in paras 4 to 8 at pages 24 to 34 which are reproduced
here as under :-
"4.
I have considered the submission of the ld. A.R. and have perused
the material on record. Brief facts of the case are that the appellant
was given the membership of MCX on 28.3.2007 and was permitted to do
operation w.e..f 29.8.2007. Prior to that the appellant was engaged in
speculative business through Trade Swift Comdex Pvt. Ltd and also
through M/s Moti Commodities Futures Pvt. Ltd. and incurred loss of
Rs.3,41,435/-. for F.Y 2007-08 relevant to A.Y 2008-09. This loss has
been rightly admitted as speculative loss and has been carried forward.
Apart from that from 29.8.2007 onward, the appellant being the member
of MCX, himself entered into speculation transaction of commodities on
MCX and it has incurred a whopping loss of Rs. 1,34,62,163/- in A.Y
2008-09 & Rs. 68,25,182/- in A.Y 2009-10.This loss has been treated
to be non-speculative by the appellant claiming that same is covered
under the exception provided in clause (c ) of section 43(5), whereas
the A.O. has held this to be loss on account of
speculative transaction by holding that same is neither covered in
exception provided in clause (c ) or not covered in clause (d) of
section 43(5). Issue before me to be decided is whether the transaction
carried out by the appellant as member of the Commodity Exchange MCX
are speculative transaction or not, as per the definition provided in
section 43(5) of I.T. Act. For the sake of clarity relevant portion of
section 43(5) is reproduced below:-
Sec. 43(5)
"Speculative
transaction means a transaction in which a contract for the purchase or
sale of any commodity, including stocks and share is periodically or
ultimately settled otherwise than by the actual delivery or transfer of
the commodity or scrips"
4.1
On verbal enquiry from the A.R during the course of appeal proceedings,
he was fair enough to concede that in none of the two years i.e A.Y
2008-09 and A.Y 2009-10, no any transaction of purchase and sale of the
commodity have been settled by way of actual delivery of commodity
except only one/two units of gold (1 unit = 1 gm), for which also he was
not sure. Thus it is evident that in all these transactions carried out
by the appellant even as member of MCX in his own account, the contract
for the purchase or sale has been either periodically or ultimately
settled otherwise then by the actual delivery of the commodity. Thus all
these transactions are squarely covered within the definition of
speculative transactions u/s 43(5). To this extent A.R of the appellant
also has nothing to say. However, the A.R. has vehemently argued that
the transactions are covered within the
exception provided in sub clause (c) of section 43(5). For ready
reference it is better to reproduce clause (c) or clause (d) which is
as below:-
"Speculative
transaction means a transaction in which a contract for the purchase or
sale of any commodity, including stocks and share is periodically or
ultimately settled otherwise than by the actual delivery or transfer of
the commodity or scrips
"provided that for the purpose of this clause -
(a) | ……………. | |
(b) | ………….. | |
(c) | A contract entered into by a member of a forward market or a stock exchange in the course of any transaction in the nature of jobbing or arbitrage to guard against loss may arise in the ordinary course of his business as such member or | |
(d) | An eligible transaction in respect of trading in derivatives referred to a clause[(ac) ] of section 2 of the Securities Contracts Regulation Act 1956 (42 of 1956) carried out in a recognized stock exchange] |
shall not be deemed to
be a speculative transaction"
4.2.
The legislative intention behind inclusion of this exception (c) was
that many times the actual user of the metal or other commodity in the
ordinary course of his business of purchasing the metal or commodity had
to sometime enter into a contract of forward market. To guard against
any loss at the time of actual purchase of the metal or commodity in
future, sometimes due to volatility in the market. this transaction is
settled by jobbing which would be in the nature of speculative
transaction, but this particular transaction done in the particular
circumstances for guarding against the loss which may arise in the
ordinary course of his business of purchase of metal or commodity, has
been excluded from the purview of section 43(5) that too by a deeming
provision. This was done so that the actual user or
regular buyer of the metal or commodity are not put to disadvantage
even in such specific circumstances, which may sometimes arise, where
they are forced to do the transaction of jobbing only to guard against
the loss which otherwise would have arisen due to purchase being
entered into at a higher price and thereby such transactions entered
into sometimes, though being speculative in nature, but are deemed to
be non-speculative.
Now
obviously the transaction in the ordinary course of business of such
member should be to actually purchase the metal or commodity or to
actually sell the metal or commodity and obviously to take or give
delivery.
4.3. With this background, we have to consider the facts of the appellant case.
It
can be seen that clause (c) where exception for any speculative
transaction has been provided has envisaged two type of activity or has
got two limbs. One limb is that expectation of loss in the ordinary
course of business of member which is the purchase and sale of metal or
commodity and second limb is entering into transaction of jobbing
(speculative in nature) that too particularly to guard against the
expected loss in the transaction referred in the first limb. Then and
only then such speculative transaction of jobbing shall not be deemed to
be speculative transaction. In the instant case, it is seen that there
has to be two different types of transactions; one is the transaction
in the ordinary course of business by way of actual delivery and other
in some of the cases the speculative transaction by way of jobbing to
safeguard the expected
loss against such transaction of delivery and moreover there has to be
linkage between the two.
These
three things have to be established by A.R. i.e it is for the appellant
to prove that which transaction was in his ordinary course of business,
which needed to be safeguarded and that is why he entered into
particular transaction of jobbing, which has got link with particular
transaction of future delivery. A.O. has very specifically mentioned
that the appellant was many times asked to furnish the details of those
transactions which are entered by him in the ordinary course of
business, which were guarded against the loss by entering into jobbing,
but appellant failed to furnish these details.
4.4
It may be mentioned that A.R. of the
appellant himself mentioned in the written submission and has
appreciated the fact that clause (c) envisages that there should be a
contract in the nature of jobbing and secondly that contract must be to
guard against the loss which may arise in the ordinary course of his
business, then such transaction of jobbing, though they are speculative
in nature, but will be deemed to be non-speculative. However the A.R.
of the appellant has failed to identify as to which transaction of
speculative nature by way of jobbing was entered into to guard against
the loss expected to arise in which other transaction carried out in
the ordinary course of business. A.R. has then tried to argue that such
speculative transaction entered by the member is part of regular
business carried out as member. If that is so, then also the second
category of the transactions i.e the transactions in which loss was
expected, which have to be guarded against, are not identified
by A.R and are at all missing.
4.5
It is seen from the facts already discussed and also further mentioned
below, that all the transactions running into thousands and thousands
in number carried out by the appellant have been settled without
delivery except one or two transaction of one/two unit of gold of one
gram. Thus there is no transaction in the ordinary course of business
of purchase and sale of commodities by the appellant as member of MCX.
4.6
The A.R. has referred that the A.O. has accepted that the assessee
carried on the transaction of jobbing, as per para 8.2 pages 15 of the
A.O's order whereas transaction done in the regular course of business
has not been identified by the A.R. A.R. answered this query by
mentioning that the
loss under consideration is regular business loss. If the loss under
consideration is considered as regular business loss, then also as
mentioned elsewhere in this order, as this regular business loss has
occurred on the transactions where the contract has been settled
otherwise than actual delivery or transfer of the commodity, then also
whole of the business loss is obviously arising out of speculative
transactions and thus cannot be set off against business income.
4.7.
A.R. has further tried to argue that the appellant entered into
transaction of purchase or sale of commodity at a future date at a fixed
price & thereafter on every day the difference between prevalent
prices with the fixed price is received or paid by entering into jobbing
transaction. Thus on any and every subsequent days profit/loss is
booked. On the perusal of the
transaction details of 15 sample days called by the undersigned, it is
seen that the facts so stated by the A.R. are not found to be correct
that on particular day transaction for particular quantity is entered
and thereafter on various subsequent days, the transaction is settled/
squared off. On most of the days future transactions of sale or
purchase entered into by the appellant have been broadly squared off on
the same day e.g on 16.10.07, there are total 133 quantity/unit for
which transaction of sale was entered and simultaneously there are 129
units for which transaction of purchase was entered, thereby squaring
off almost all the transaction on the same day without keeping them for
actual purchase or sale of the commodity at a certain future date. On
8.11.2011, total 149 units were contracted to be purchased on future
date and out of these all 149 units were contracted to be sold on the
same day. On other days also around 80-90%
units/quantity contracted to be purchased, has been sold on the very
same day.
Thus
all these primary transactions are speculative in nature. These
transactions have not at all been done to guard against the expected
loss arising in ordinary course of business of purchase or sell of metal
or commodity by the member of MCX.
4.8
It is seen and also uncontroverted that all the transactions which are
entered into by the appellant in his own name in MCX have been settled
either periodically or ultimately otherwise then by actual delivery.
Thus these all transactions will be within the purview of the
speculative transaction as defined in section 43(5). It is seen from the
details of transactions of 15 entries of loss furnished by the A.R., on
being
asked by the undersigned, that these speculative transactions are for
Gold, Crude oil, Silver, Copper and Zinc etc. The appellant has never
taken delivery of any of the commodities/metal, nor has ever given
delivery of any of the commodity/metal during the two years under
consideration except one or two unit of gold once/twice.
4.9
Another important aspect noticed is that appellant has entered into
short sell on most of the days. So much so that out of 15 sample days
for which details were called for, on as many as 13 days, the appellant
has first entered into sale transaction, obviously without having the
possession of commodity with himself. It only proves that the action of
the appellant in all these cases were only to enter into speculative
transaction which were to be squared off during the same day itself or
lateron without any
intention of delivery. Thus it is evident that the primary
transactions itself are of speculative nature and are thus covered u/s
43(5) and thereby exception (c) does not apply.
On
further probing done by the undersigned, it was noticed that on a
single sample day i.e on 16.10.07, the appellant has entered into 66
transactions of sale of gold, first, without having actual units of gold
with him (commonly known as short-sale). It was only later on that he
purchased almost equal number of units of gold on same day and
ultimately incurred loss. Thus it is purely the speculative loss. Even
other transactions of purchase have been squared off by broadly
equivalent transaction of sale on the same day without any delivery.
Thus these other transactions of purchase and subsequent sale are also
speculative in nature and also cannot be said to be made
for guarding against expected loss in the actual delivery transaction.
As per the details given by A.R. loss incurred on transactions on
16.10.07 was Rs. 1,47,609/-.
4.10.
Similarly on another sample day i.e on 8.11.07, appellant entered into
25 transactions of short-sale of gold, 35 transactions of short sale of
Crude oil and 11 transactions of short sale of Silver as complied by
A.R. of the appellant, on being asked by the undersigned. It is
pertinent to mention here that on 8.11.2007, the appellant incurred loss
of Rs. 1,19,095/- on account of these transactions, which are purely
speculative in nature. By no means, the transaction of short sale can
ever be covered under clause (c) particularly in the case of appellant,
who has no intention and also actually has not given delivery or taken
delivery of the commodities.
4.11
Similar is the position on other sample day i.e on 14.11.07, where
transaction of short sale of gold are 16, short sale of Crude Oil are
27, Short sale of Silver are 25 and short sale of Copper are 13 in
number, which can by no stretch of imagination be covered under clause
(c). Even other transaction of forward purchases has been squared off on
the same day and thus those are also speculative in nature and also
cannot be covered under sub clause (c). Total loss incurred on
14.11.2007 is Rs. 2, 32,757/-.
4.12
On 2.1.2008, appellant entered into 155 transactions of short sale of
gold, 5 transaction of short sale of silver and total loss incurred on
2.1.2008 was Rs. 21,19,680/-.
On
22.1.08, appellant entered into 290 transaction of short sale of gold
and 15 transaction of short sale of copper and loss incurred on the day
was Rs. 34,28,310/-.
5.
Thus it is evident that the facts of the case of the appellant clearly
proves that the transactions entered into by appellant on MCX in his
own account are speculative transactions within the meaning of section
43(5) and the appellant has failed to established by giving details of
jobbing transaction as well as details of transaction done in the
ordinary course of his business where loss was expected and then linkage
of jobbing transaction which was done to guard against such loss (as
has been envisaged in clause (c)) and on the contrary the facts as
mentioned above clearly proves that these transactions can not at all to
be covered within the
exception provided under sub clause (c) of section 43(5) as claimed by
the appellant.
6. Facts of the cited case of Komal Export v. ACIT19 SOT 602 (2008)
decided by Hon'ble ITAT Delhi are distinguishable. In that case, the
said concern was engaged in export business of pepper which incurred
some hedging expenses while procuring the said commodity from an
organization IPSTA namely Indian Pepper Spice Trade Association claiming
that hedging was purely done to cover future loss. The assessee engaged
in export business of pepper to overseas buyer had to purchase the
pepper and it was to guard against the loss arising in
procuring/purchasing the commodity i.e is in the ordinary course of his
business. Accordingly Hon'ble ITAT has held that same is covered under
the purview of clause (c) of section 43(5).
6.1.
As already mentioned earlier that intention behind introducing clause
(c) to provide exception was primarily to include such specific
speculative transaction which the assessee were forced to do to
safeguard the expected loss in the ordinary course of actual purchase
and sale of commodity with delivery. However, the facts of the case of
appellant are quite different. There is no any actual purchase or sale
of commodity with delivery which was to be safeguarded against expected
loss in the case of appellant.
6.2. The decision in the case of M/s First
Securities Pvt. Ltd v. ACIT (ITAT Bangalore) (200) TIOL 443
cited by the A.R. in support of the argument had been perused by me. It
is seen that in the above case, the A.O. in his remand report, had
accepted that the transaction in which assessee has suffered loss are
in nature of jobbing and arbitrage and are duly covered by proviso (c)
to section 43(5). This being the fact, the Hon'ble ITAT held that the
loss is not speculative in nature and therefore section 73(1)
prohibiting the loss to be set off against the business income, will
not come into operation. Whereas in the instant case of appellant the
A.O. has held that the transactions are not covered in clause (c) to
section u/s 43(5) and accordingly, the above cited decision is not
applicable.
7.
The A.O. has highlighted that the said transactions are also not
covered within
clause (d) of section 43(5) as discussed by him from para 9.3 to para
9.7. Moreover, in any case, the A.R. of the appellant has also not
given any specific arguments and reasons and explanation that his case
is covered under clause (d), as the MCX was not the recognized exchange
for clause (d) till notification dtd. 22.5.2009, i.e in the period F.Y
2007-08 and 2008-09 relevant to A.Y 2008-09 and A.Y 2009-10. A.R. has
just mentioned that in case of conflict between the two provisions such
conflict should be resolved in favour of assessee. However, it is seen
by the undersigned that there is no conflict between the provisions of
clause (c) and clause (d). Moreover, in any case, the appellant is not
at all covered at the relevant point of time in clause (d) because MCX
was not the recognized stock exchange at the relevant point of time and
the same was recognized vide notification dated 22.05.2009 for the
purpose of clause (d) of section
43(5).
8.
In view of the facts and circumstances and the legal position on the
issue under consideration, claim of loss on account of speculative
transaction in commodities amounting to Rs. 1,34,62,163/- in A.Y 2008-09
is held to be covered u/s 43(5) and set off of the same so disallowed
by the A.O. from the business income is upheld.
7.
During the appellate proceedings here before the Tribunal, ld. Counsel
of the assessee filed copy of written submission, copy of which was
given to ld. D/R also. The assessee explained his case on the basis of
written submissions filed. The written submissions filed here before
the Tribunal are more or less same as filed before ld. CIT (A). The
difference in the written submission is that in the written submission
filed
here before the Tribunal, ld. A/R has controverted the findings of ld.
CIT (A) also by explaining the reasons in detail.
8.
The ld. D/R on the other hand, firstly placed reliance on the orders
of AO and ld. CIT (A). Attention of the Bench was drawn on pages 2 &
3 of the order of the AO for assessment year 2009-10 and page 3 for
assessment year 2008-09. Attention of the Bench was also drawn on
clause (c) of section 43(5) and it was submitted that this section is
not meant for the transaction as done by the AO. The assessee has
failed to established its case for proving that his case falls under
exceptional clause (c) of section 43(5). Comments from the book
Commentary of Chaturvedi & Pithisaria were also filed on this
issue. It was further submitted that onus is on the assessee to prove
that transactions are of jobbing/hedging which he failed
to do so. Attention of the Bench was drawn on para 4.7 at page 29 of
order of ld. CIT (A) and it was further added that there should be a
contract for transacting the transactions. Regarding case laws, ld. CIT
D/R stated that all the cases have already been found distinguishable
by ld. CIT (A) as discussed by him in his order. In all these cases
facts are different. It was also submitted that the decision of Hon'ble
Allahabad High Court in case of Sharwan Kumar Agarwal, the High Court
has not examined the facts in detail. Therefore, reliance on this case
cannot be made as facts are not clear.
9.
In reply, the ld. Counsel of the assessee stated that loss is on
account of such transaction transacted by the member of the MCX. MCX is
recognized by CBDT. Whenever a member made a transaction for future
date, that has been entered in the MCX and thereafter if
the same member wants to sale the commodity purchased of a future date,
then also the member approaches MCX who then sell the commodity
purchased by assessee of future date and whatever the profit or loss
attracted on that account after deducting certain charges, MCX settle
the account of the member. In support of this contention a sample copy
of contract specifications of Gold by MCX was filed. A copy of
certificate membership of MCX proving that assessee is a member of MCX
was also filed. Sample copy of future date transactions were also filed
by ld. A/R and has stated that all the details were filed before AO and
ld. CIT (A).
10.
We have heard rival submissions and considered them carefully. It will
be useful to reproduce the written submissions filed on behalf of the
assessee as written submissions filed before ld. CIT (A) has not been
reproduced
in this order. The written submissions filed on behalf of the assessee
at pages 2 to 17 are as under :-
"1. | As per the rules prescribed by MCX, there are five different types of membership available and it is an admitted fact that the appellant under consideration is a member in MCX having Trading-Cum-Clearing Membership, and such member can do business on his own account and it is not necessary to do the business on account of client only. Under the facts, it is clear that he is not only authorised to do the work on behalf of client but also on own account as well. | |
2. | The appellant is an individual earns brokerage as well as also having income or loss on account of jobbing of the commodities traded in said exchange as member. It is important to note here that the membership of MCX is in his individual name. | |
3. | The appellant under consideration was given membership of MCX w.e.f. 28.03.2007 and the effective date for permitting to do operation was 29.08.2007. The transaction entered into by the appellant before 29.08.2007 and even after with M/s Tradeswift Comdex Private Limited not as a member have been shown and considered as Speculation Business Loss which amounted to Rs. 3,41,435/- for the A.Y.2008-09 and set off of same loss has not been claimed. | |
Submission of the appellant:- | ||
1. | MCX is a public limited company, governed under Forward Contract (Regulation) Act, 1952 and working under regulatory body Known as Forward Market Commission established under said Act to ensure compliance of the law. Company operating a commodity exchange wherein persons having membership only can transact. The membership of the exchange is given only to those members who are interested in transacting in the prescribed commodities; the transaction in this market is entered into in the name of the members only. There is a pre-determined criterion for becoming member in the exchange, wherein, he is abides by the rules and regulation prescribed in this respect. MCX operate commodity exchange through specialized software on real time basis and every member has access to the server of the exchange through his own terminal. The entire working of the exchange is online and on real time basis in very transparent manner. According to the practices prevalent and business module designed by the MCX, a member can buy or sale any commodity transacted on said exchange for any quantity according to the available margins and for any future date, out of options provided by the exchange. MCX provides various future optional dates. Further at the time of buy or sale, member have to choose one date on which delivery of the commodity shall be made or taken, and member always have right to settle the purchase transaction by making sale before opted date and sale transaction by making purchase before opted date. In the contact specification rules of MCX the entire working mechanism as stated herein above is available for ready reference and had discussed before lower authorities. Further, actual delivery of the commodity is also possible in the market. In this type of forward market members enters into a forward transaction and to safe guard their interest jobbing is carried out, such jobbing is carried to protect the that interest, which is entered in by the members, with a view to minimize the future probable loss, looking to the prevailing price of the commodity. Appellant is not only a broker, in fact he is member of exchange and the scope of work of member is much more wider than that just of a broker. | |
2. | The loss under consideration is a regular business loss and not results of speculative transaction as per the definition of speculative transaction given in the section 43(5) of the Income Tax Act, 1961. To clarify the nature of transaction and legal provision for considering a transaction as speculative, we reproduced the legal provision in this regard provided in section 43(5) as follows : | |
"speculative transaction" means a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips; | ||
Provided that for the purposes of this proviso-- |
(a) | a contract in respect of raw materials or merchandise entered into by a person in the course of his manufacturing or merchanting business to guard against loss through future price fluctuations in respect of his contracts for actual delivery of goods manufactured by him or merchandise sold by him; or | |
(b) | a contract in respect of stocks and shares entered into by a dealer or investor therein to guard against loss in his holdings of stocks and shares through price fluctuations; or | |
(c) | a contract entered into by a member of a forward market or a stock exchange in the course of any transaction in the nature of jobbing or arbitrage to guard against loss which may arise in the ordinary course of his business as such member; |
shall not be deemed to be a speculative transaction; | ||
Perusal of the legal definition shows that if a transaction ultimately settled otherwise than actual delivery or transfer of the commodities same shall falls under the section 43(5) of the Income-tax Act, 1961. However, that may further falls under the category of provisos (a), (b), (c) or (d) given under the section 43(5) of the Income-tax Act, 1961 and if falls under any of such provisos than these transactions shall not be deemed as speculative transaction for the purpose of Income-tax Act. | ||
Under the circumstances, it is abundantly clear that every transaction settled otherwise than actual delivery or transfer of commodities shall not be speculative transaction for the purpose of Income Tax Act. | ||
In the instant case, appellant is a member of Multi Commodity Exchange (MCX) and have considered all such transactions entered as member as non-speculative for the purpose of Income Tax Act by virtue of proviso (c) of Section 43(5) of Income Tax Act, 1961. | ||
Close perusal of said proviso shows that - |
(i) | Contract must be entered by a member of forward market or a stock exchange. | |
(ii) | Such contracts must be made in course of any transaction in nature of jobbing or arbitrage. | |
(iii) | Such contract must be to guard against loss which may arise in the ordinary course of his business, as such member. |
It is relevant here to examine the facts of the appellant with the legal provisions contained in above referred provisos. |
(i) | It is a matter of fact that appellant is a member of MCX. MCX is an exchange provides opportunity to it's member to trade commodity on future dates, therefore, the MCX is a forward market and appellant under consideration is a member of forward market qualifying the first criteria of exception provided in proviso (c) of section 45(3) of Income-tax Act, 1961. The forward market itself implies a market of future providing opportunity of trading in future. We also reproduced here the definition of forward market given in the lexicon law dictionary as follows : | |
"Forward Market - a market in which participants agree to trade some commodity, security or foreign exchange at a fixed price at some future date." | ||
(ii)&(iii) | Perusal of the transactions entered by the appellant on the MCX on his own account shows that he has made first purchase/sale transaction of a commodity for a particular quantity to be settled either by delivery or by cross transaction on a particular future date for a fixed price determined at the time of transaction. Thereafter, on every day, the difference between prevalent price on particular date with fixed price of entered transaction for future date have been either paid or received according to the difference and debited/credited to gross jobbing account. It is clear from the nature of transaction that first a transaction of future date has been made and thereafter, on every day loss/profit has booked according to the prevalent price. From the nature of transaction, it is emerged that - |
(e) | on the date of profit/loss, there was an outstanding transaction of future date, | |
(f) | the contract of profit/loss have been made to guard against loss which may arise on settlement of already entered transaction for future date. | |
(g) | The transactions have been entered in regular course of business because appellant is a member of forward market wherein entering into transaction of future date is normal phenomena and forward market meant for future transaction only. Therefore, transaction entered by member to guard against loss which may arises on settlement of future transactions is also part of regular business and transaction entered during the regular course of business as such member. | |
(h) | The assessee have frequently entered into the contracts to guard against losses which may arise in respect to transaction entered to be settled on future date, clearly shows that it has been carried out with the motive to gain profit out of every turn of price in the market. Such act is clearly a act of jobber to maximize the profit by entering transaction according to changing market scenario. | |
Lexicon law dictionary defines "stock jobber" which is: "stock jobber a dealer in stock; one who buys and sells stocks on his own account on speculations". | ||
A jobber sells and buys on his own account and takes advantage of every turn of price | ||
In the instant case, assessee is a dealer by virtue of membership and buys and sells the commodity on every movement of the price of the commodity, which makes his activity as jobbing activity | ||
(i) | Trading-cum-clearing member means a person who is admitted by the Exchange as the member of the Exchange conferring a right to trade and clear through the Clearing House of the Exchange as a clearing member and who may be allowed to make deals for himself as well as on behalf of his clients and clear and settle such deals only. Since, his ordinary course of business as a member is to trade in MCX market along with acting as clearing house for his clients, as per the rules of MCX, he is trading in the same market, and therefore it is his ordinary course of business as such a member. Moreover, when the main object of the member is well defined, and he is working in accordance to the same, it needs to be concluded that he is working as in his ordinary course of business as such member. |
Perusal
of the above shows that loss incurred by appellant, a member of MCX, a
forward market exchange, due to
jobbing to guard against loss from future price fluctuation arising in
the ordinary course of its business as such member surely fell within
the purview of exception contained in Cl. (c) of proviso to S. 43(5),
hence could not be said to be speculative loss and should be considered
as business loss.
3. Ld. CIT (A) has given his finding in Para 4 of his Order. On perusal it is found that -
(i) | Loss arose out of transactions, entered not as member either for the period pertaining prior to getting membership or entered through other members have claimed as speculative loss. Therefore, only loss arose out of transaction entered as Member have been claimed as non speculative. (Para 4) | |
(ii) | The transactions have been settled periodically or ultimately otherwise than by actual delivery of commodity although it is entered as Member of MCX in his own account same is speculative. (Para 4.1) |
3.1
Ld. CIT (A) has analyzed the Proviso (c) of Section 43(5) in Para 4.2
of his Order and according to said analysis, the facts of the case have
been examined. Therefore, it is important to discuss the basis on which
the entire order is founded; hence same is reproduced as follows:
"4.2
The legislative intention behind inclusion of
this exception (c) was that many times the actual user of the metal or
other commodity in the ordinary course of his business of purchasing
the metal or commodity had to sometime enter into a contract of forward
market. To guard against any loss at the time of actual purchase of the
metal or commodity in future, sometimes due to volatility in the
market. This transaction is settled by jobbing which would be in the
nature of speculative transaction, but this particular transaction done
in the particular circumstances for guarding against the loss which
may arise in the ordinary course of his business of purchase of metal
or commodity, has been excluded from the purview of section 43(5) that
too by a deeming provision. This was done so that the actual user or
regular buyer of the metal or commodity are not put to disadvantage even
in such specific circumstances, which may sometimes arise, where they
are forced to do the transaction of jobbing
only to guard against the loss which otherwise would have arisen due
to purchase being entered into at a higher price and thereby such
transaction entered into sometimes, though being speculative in nature,
but are deemed to be non-speculative.
Now
obviously the transaction in the ordinary course of business of such
member should be to actually purchase the metal or commodity or to
actually sell the metal or commodity and obviously to take or give
delivery.
4.3 With this background, we have to consider the facts of the appellant case………"
(i) | Perusal of the above shows that analysis have been done based on certain alleged legislative intention whereas strict and literal requirement to qualify a contract to be covered under proviso (c) of Section 43(5) was furnished before him. Rather entire emphasis has been made on such alleged legislative intent. Further it appears that the word used in said proviso ordinary course of business has been inferred that there would be some other business alleged as actual user of metal or other commodity. It is important here to note that the term ordinary course of his business is qualified in said proviso by adding the word as such member. Therefore, putting some other words in place of the word already available in the proviso cannot give the right inference and accordingly it is observed by the CIT (A) that there is no transaction have been entered in regular course of business as actual user for which such jobbing has been done and further detail of such actual user transaction have not furnished. The inference has been drawn due to ignoring the term as such member as clarified hereinbefore, hence such finding, is also incorrect. Further as per said interpretation transaction must be done by actual user whereas said proviso required it should be entered by member. | |
(ii) | Broadly the analysis of CIT (A) says that if actual user of any commodity entered into jobbing transaction under forceful circumstances than only transaction shall qualified for proviso (c). Here we would like to draw the attention towards Proviso (a) of sub-section 43(5) and for ready reference, we reproduced the same hereinbelow: | |
"(a) a contract in respect of raw materials or merchandise entered into by a person in the course of his manufacturing or merchanting business to guard against loss through future price fluctuations in respect of his contracts for actual delivery of goods manufactured by him or merchandise sold by him; or" |
Perusal
of the same shows a merchant dealing in a particular merchandise if to
guard against loss against future price fluctuation in respect of
already entered contract for actual delivery, entered into any contract
settled otherwise than actual delivery, shall qualify to fall under
proviso (a). In nut shell the transaction according to CIT (A) which can
qualify under proviso (c) is clearly fall under proviso (a), therefore,
if we accept the interpretation of CIT (A) than proviso (c) shall be
redundant, hence, it further shows that CIT (A) has erred in
interpreting the said proviso (c). It is settled legal position that
section should be interpreted strictly and literally, only if there is
ambiguity than only intent can be used to interpret, however, in the
instant case, such intent is also not shown by the legislatures with
respect to proviso (c). In fact all provisos of said section cover
different nature of transaction and have its own purpose and intent.
Further,
while examining the facts not only these facts have been examined with
respect to wrong interpretation of the said proviso but also emphasis
have been made on actual delivery whereas it is clear from the fact that
appellant have right to settle the transaction through delivery also.
It
is further pointed out that there is loss on account of various short
sells which cannot be covered under proviso (c), we have already
clarified that there is no such requirement in said proviso that there
should be first purchase or first sell. It only requires that (i)
contract must be entered only by member of forward market, (ii) contract
must be in course of transaction in nature of jobbing, and (iii) to
guard against loss, which may arise in the ordinary course of his
business as such member.
Under
the facts and circumstances it is clear that that legal provision has
not rightly interpreted and consequently facts of the case have also not
examined in right perspective.
a. It is an admitted fact that the loss
under consideration is incurred only from the transaction transacted as Member.
3.3 It is relevant here to see the finding of the Ld. A.O., in his order passed after perusing the facts, which are as follows:
(a) | "The submission of the appellant was examined and perusal of the same revealed that the appellant carried on transaction of jobbing in his individual capacity on the same exchange." (Refer Para 8.2 on page no. 15 of the AO's order). | |
(b) | "In the case of the appellant evidence in support of transaction in the nature of jobbing alone has been however, transactions carried on during the regular course of business has not been identified." (Refer Para 8.5 on Page no. 16 of the AO's order) | |
(c) | "In the light of above discussion it is held that the appellant carried on business of jobbing in various commodities on MCX in his individual capacity. The regular business, a necessary ingredient to qualify for exclusion from speculation transaction in terms of proviso (c) of proviso to section 43(5) is missing." (Refer Para 9.2 on Page no. 19 of the AO's order). |
Perusal
shows that after appraising the fact, it was concluded that
transactions under consideration are of jobbing nature
but same have not incurred during the regular course of business. In
this regard, we have already submitted that said inference of regular
course of business has been drawn without reading the entire sentence as
whole as the word "as such member" is also there and it is undoubted
fact that transaction have been entered as member and it is regular
course of his business as member to entered such transactions, further
it is important to note that only upon sale or purchase, there cannot
be any loss or profit, only upon subsequent purchase or sale, loss or
profit can be arrived. Therefore, saying that the details of
transactions in the nature of jobbing is provided and details of
transactions other than jobbing has not provided is factually wrong
because only purchase or sales cannot be jobbing, academically sale and
purchase or purchase and sale cumulatively complete the transactions
and same can be considered as jobbing and details of which has
admittedly been provided during the assessment proceedings. Therefore,
to that extent, finding is incorrect.
4. In this regard, we place our reliance on following judgments:-
(a) | Hon'ble ITAT Delhi, in Komal Exports v. Assistant Commissioner of Income Tax,19 SOT 602 (2008), has laid down a principal in such type of transactions stating that: The question for consideration is whether the loss incurred by the assessee has arisen out of speculative transaction or not. The expression 'speculative transaction' has been defined in s. 43(5). As per said section speculation transaction means a transaction in which a contract for the purchase or sale of any commodity including stock and shares, is periodically or ultimately settled otherwise than any actual delivery or transfer of the commodity or scrips. Proviso (c) of provision to s. 43(5) excepts hedges in the nature of 'jobbing' or an 'arbitrage' entered into by a member of a forward market or stock exchange to guard against loss which may arise in the ordinary course of his business as such member. A jobber sells or buys on his own account and takes advantage of every turn of the price. Jobbing takes place between one member and another on the same stock exchange, whereas arbitrage is done between different exchanges, may be Indian or foreign. The jobber takes advantage of the hourly fluctuations in prices in the same exchange whereas the arbitragist take advantage of the different price levels at different exchanges. Proviso (c) extends o give relief to hedging transactions in all such forward market or stock exchange. As per materials placed on record the case of the assessee falls within the provisions of cl. (c) to the proviso to s. 43(5). According to said cl. (c) a contract entered into by a member of a forward market or stock exchange in the course of any transaction in the nature of jobbing or arbitrage to guard against loss which may arise in the ordinary course of his business a such member. Shall not be deemed to be a speculation transaction. Thus the exception as contemplated under said cl. (c) is available not only to member of stock exchange but is also available to a member of forward market. In order to come within the ambit of c. 43(5) proviso (c) 43(5) the transaction should specifically be (a) entered into by a member of forward market or stock exchange and (b) in the nature of jobbing and arbitrage, and (c) to guard against loss which may arise in the ordinary course of his business as such member. Thus cl. (c) excepts hedges in the nature of jobbing and arbitrage entered into by a member of a forward market or stock exchange to guard against loss which may arise in the ordinary course of his business as such member. A jobber sells and buys on his own account and takes advantage of every turn of price. The difference between jobbing and arbitrage lies in this that whereas jobbing takes place between one member and an another on same stock exchange, arbitrage is done between different exchange price levels at different exchanges. Again, whereas jobbing is applied in shares and stocks, arbitrage is applied to transaction in shares and stock as well as bills of exchange. In the instant case, the assessee company mainly doing the export business of pepper to overseas buyers of different countries. The assessee is a member of Indian Pepper Spice Trade Association (IPSTA). IPSTA is a recognized forward market exchange which is controlled and monitored by the forward market commission. The loss incurred by the assessee, as a member of IPSTA, a forward market due to jobbing to guard against the loss arisen in the ordinary course of its business. Frequency of transaction which have been done by the assessee and loss incurred establish that the transactions were in the nature of jobbing and loss incurred establish that the transactions were in the nature of jobbing and loss was incurred in the course of business by a member of forward commodity market. The AO had directly made inquiry from IPSTA and in reply it was categorically accepted that assessee had entered into transaction with it. The transactions so entered were for safeguarding its interest against the future price fluctuation. In the facts and circumstances of the case of the assessee squarely falls within the purview of cl. (c) of proviso to s. 43(5). Hence the loss incurred by the assessee connote be said to be speculative loss. Similar judgments was pronounced in CIT v. Shri Sharwan Kumar Agarwal, [2001] 249 ITR 0233. | |
(b) | Further, it is an admitted fact that Ld AO has already considered the transaction is in the nature of jobbing, in this regard we rely upon the decision of Hon'ble ITAT Bangalore in the case of First Securities Pvt. Ltd. v. SCIT, 2009-TIOL-443-ITAT-MUM, wherein, it was held as per proviso (c) to sec 43(5) the transactions in nature of jobbing not to be treated as speculative transaction and once a transaction is not speculative, any loss arising out of such transaction is business loss which can be set off against business profits. | |
Ld CIT (A) have distinguished the above referred judgments by observing that facts are distinguishable however, it is important to see that in these judgments proviso (c) of Section 43(5) have discussed in detail and also interpretation of the same has been drawn therefore, the discussion about the interpretation and inference drawn there from is relevant here to take the correct interpretation of the said proviso. | ||
(c) | In the case of LDK Shares and Securities Pvt. Ltd. Vs Assessee on 21st November, 2011 in the Income Tax Appellate Tribunal, Agra Bench, Agra Before Shri H.S. Sidhu, Judicial Member and Shri B.P. Jain, Accountant Member ITA No. 1050/Del/2008 Assessment Year : 2003-04 - | |
"7. Even if the said futures and options are considered to be commodities, shares and securities then proviso (b) and (c) to section 43(5) of the Income Tax Act, specifically exclude transaction of hedging, jobbing, etc. entered into by a dealer in shares and particularly member of a Stock Exchange. In this regard, the assessee has placed reliance on the decision of Hon'ble Allahabad High Court in the case of CIT v. Shri Sharwal Kumar Agarwal249 ITR 233. Departments SLP in this case has been dismissed by Hon'ble Supreme Court which is reported at 292 ITR 3. In such circumstances and facts of the case, we direct the A.O. to allow the claim of the assessee. Therefore, order of Ld. CIT(A) is reversed on the issue. Thus, ground no. 2 of the assessee is allowed." |
5. Further the case, Shree Capital Services Ltd. v. ACIT
[ITA no. 1294 {Kol} of 2008, of Kolkata ITAT], relied upon by the Ld.
AO is clearly distinguishable on the facts that; In that case the
question was whether the appellant is covered in proviso (d) of the said
section or not, whereas in the instant case the question is regarding
the applicability of proviso (c) only.
5.1
Ld. A.O. has concluded that the case of the appellant is covered under
Proviso (d) of the provision to the Section 43(5) of the Act Further,
according to the requirement of the said proviso, transactions must be
entered on the recognised exchange, whereas, MCX have been recognised by
the CBDT w.e.f. 22.5.2009, therefore, the transactions under
consideration is not qualified to be covered under said proviso. In this
regard, it is submitted that firstly, the facts of the case is covered
under proviso (c) because it is a case of member of forward market
which is specific requirement of the said proviso. Whereas, proviso (d)
is in respect to trading in derivatives, it is important to note here
that it is not required in said proviso that said trading must be done
by the member means it may be done by
anybody. Moreover, appellant is not dealing in derivatives rather
dealing in commodities. Therefore, to conclude that the facts of the
case is covered by the proviso (d) of Section 43(5) is because of wrong
assumption of fact.
Under
the facts and circumstances, it is required to reverse the factual
finding of the Ld. A.O. as wel as CIT (A) and consequently, to delete
the addition made on this account."
11.
After going through the written submissions and the orders of the AO as
well as of ld. CIT (A) and after taking into consideration the
submissions of ld. D/R, we find that assessee deserves to succeed on
this ground. Clause (c) of section 43(5) has been reproduced somewhere
above in this order while discussing the facts as well as while
reproducing
the written submissions filed on behalf of the assessee. In main
provision of section 43(5) it has been provided that speculation
transaction means a transaction in which a contract for purchase or
sale of any commodity including stock and shares is periodically or
ultimately settled otherwise then by the actual delivery or transfer of
commodity or scrip. Thereafter under clause (a), (b) and (c) the
exceptional clause is provided. Under clause (c) it has been provided
that a contract entered into by a member of a forward market or stock
exchange in the course of any transaction in the nature of jobbing or
arbitrage to guard against loss which may arise in the ordinary course
of his business as such member. In our considered view, both the lower
authorities i.e. AO and ld. CIT (A) could not understand the clause (c)
in right perspective. The AO says the assessee could not prove the
transaction as there is no delivery. However, at various points
of time the AO accepts the assessee's transaction as jobbing in nature
but they are not done during the regular course of business. Clause
(c) specifically provides that if any member of a stock exchange
entered into transaction either of loss or profit that will be treated
as business transaction. All these transactions are transacted through
MCX which is an organized stock exchange. If a member wants to enter
into transaction of a future date then the transaction has to be done
through stock exchange and if the same member wants to settle those
transactions by selling or purchasing then again transaction has to be
transacted through stock exchange which has been done in this case. A
sample copy dated 5.3.2008 is placed on record. By this sample copy it
is seen that the assessee member gave an order for trading to buy gold
of future date i.e. 5th April, 2008. For the sake of clarification, this
transaction was ordered on 5.3.2008.
Thereafter assessee thought proper to settle this transaction, again
after few hours the assessee gave order to the stock exchange to sell
the same for a future date. Both these transactions are done by stock
exchange and whatever the profit or loss is there that has been settled
by the stock exchange in account of the assessee member. No doubt
remains that assessee had done its transaction on regular basis which
cannot be termed that they are not regular course of business as
provided in clause (c) of section 43(5). The ld. CIT (A) also accepted
that transaction has been done but in his view this transaction either
falls under the main clause of section 43(5) or clause (a). Section
43(5) is about speculative transaction. Therefore, ld. CIT (A) has
treated this transaction as speculative in nature and in clause (a) a
contract in respect of raw material or merchandise entered into by a
person in the course of his manufacturing or merchandising
business to guard against loss through future price fluctuation in
respect of his contract for actual delivery of goods manufactured by
him or merchandise sold by him. This clause cannot be applied on the
assessee as assessee is not doing the business of manufacturing or
merchandising business but doing the transaction for himself of future
date through stock exchange and this falls under clause (c) where it is
clearly mentioned that a contract entered into by a member of a forward
market or a stock exchange in the course of any transaction in nature
of jobbing or arbitrage to guard against loss which may arise in the
ordinary course of business as such member. The AO himself admitted
that the nature of transaction entered into by the assessee is in
nature of jobbing. However, as delivery was not given, therefore, he
treated this transaction as speculative in nature. It has been also
mentioned that no contract was filed in written. In our
considered opinion this observations of the AO are without any basis
because the assessee is a member of stock exchange called MCX and all
the transactions are done by him as jobbing transaction which has been
admitted by the AO also. Therefore, there is no question of any delivery
or question of any written contract. These are regular transactions and
as per clause (c) this transaction has to be treated as done in the
regular course of business. AO has also mentioned somewhere in his order
that case of the assessee may fall under clause (d) of section 43(5).
Clause (d) of section 43(5) deals with derivative transaction,
therefore, the assessee's case does not fall under clause (d) of section
43(5) of the Act.
11.1
The Ld. CIT (A) somewhere in his order has observed that the actual
user of any commodity enter into jobbing transaction under forceful
circumstances, then only those transactions shall be qualified for
clause (c). We are not understandable that how forcefully transactions
can be identified as transactions of jobbing. Undisputedly, the
transactions by assessee are of jobbing transactions for the safeguard
of future loss and, therefore, it clearly falls under clause (c) of
section 43(5). Various case laws relied upon by Ld. A/R before the
Assessing Officer as well as before Ld. CIT (A) and now here before the
Tribunal support the case of the assessee. The ratio of these cases
have been discussed in the written submissions filed on behalf of the
assessee which are reproduced somewhere above in this order, therefore,
we are not repeating ratio of those case laws once again. The
contention of Ld. D/R that decision of Hon'ble Allahabad High Court is
not in detail. Whether the order of Hon'ble Allahabad High Court is
detailed or not but it deals with the clause (c) of section 43(5)
and it has been held that if the transaction entered into by assessee
through stock exchange are of jobbing nature then they fall under
clause (c). Similar view has been expressed in case of Komal Export v. Asstt. CIT[2008] 19 SOT 602 (Delhi) and also Bangalore Bench of the Tribunal in case of First Securities (P.) Ltd., v. Asstt. CIT [IT Appeal Nos. 1339 & 1340 (Bang.) of 2008, dated 22-5-2009] and in case of LDK Shares and Securities Pvt. Ltd.
These cases have been discussed in the written submissions. Therefore,
we are not repeating again. Regarding the decision in case of Shree Capital Services Ltd. v. Asstt. CIT[2009] 121 ITD 498 (Kol.)
relied upon by Assessing Officer, it is seen that this decision is in
fact falls under clause (d) and not clause (c). Therefore, the decision
of Kolkata Bench in case of Shree Capital Services Pvt. Ltd. (supra)
is not applicable in the facts of the present case. In view of these
facts and circumstances and in view of various case laws , we are of the
considered view that case of assessee falls under clause (c) of section
43(5) and, therefore, the loss incurred by assessee has to be treated
as business loss eligible for set off against other business income of
the year. Accordingly we direct the Assessing Officer to allow the claim
of the assessee for both the years.
12. There is no other ground of appeal in assessment year 2008-09.
13.
There is one more ground in appeal for assessment year 2009-10 which
is against confirming the addition of Rs. 6,88,972/- on account of
unexplained investment in gold and silver.
14. Brief facts in this regard are recorded in para 9.1. at page 34 in the order of Ld. CIT (A) which are as under :-
"9.1
Brief facts of the case are that out of the jewelry worth Rs.
66,73,428/- considered to be belonging to the appellant, appellant
explained the source of most of the jewellery before the A.O. However,
in respect of 134.500 gms gold, 29.368 kg silver amounting to Rs.
1,42,678/- and Rs.
5,46,244/- respectively. Claim was made that these are received from
ancestors and from various friends and relatives and considering the
age and status of the assessee, the availability of this much jewelry is
also justified. The A.O. observed that till A.Y 2003-04, the appellant
was pensioner having small source of income and wealth created in the
hands of assessee was from the period when he started business of
multilevel marketing in the name of M/s Tulip. Therefore, acquisition
of jewellery in the past is not substantiated and thus same was added as
unexplained investment totaling to Rs. 6,88,922/-."
15.
Brief submissions were filed before ld. Commissioner of Income Tax(A).
However, Ld. Commissioner of Income-tax (A) was in agreement with the
finding of Assessing Officer. Accordingly he confirmed the order of
Assessing Officer.
16. Same submissions have been filed by Ld. Counsel of the assessee before the Tribunal.
17. On the other hand, Ld. D/R placed reliance on the order of Ld. CIT (A).
18.
After considering the submissions and perusing the material on record,
we find that total jewellery worth Rs. 66,73,428/- were found during
the course of search. Except in respect of 134.500 gms gold and 29,368
kg of silver amounting to Rs. 1,42,678/- and Rs. 5,46,244/-
respectively, the assessee could not give any explanation
satisfactorily to the Assessing Officer. To this extent the gold
jewellery and silver items were acquired by the assessee in past which
was stated to be received from close relative either at
the time of marriage or on various religious occasions. In our
considered view, this is customary in Hindu family to have received some
gold jewellery or silver items on the occasion of marriage or any
other occasions. Therefore, we confirm that the disallowance made by
Assessing Officer and confirmed by Ld. CIT (A) was not justified.
However, we feel that the disallowance made by Assessing Officer and
confirmed by Ld. CIT (A) was not justified. However, we feel that
assessee could not file proper explanation or evidences, therefore, we
sustain an addition of Rs. 2.5 lacs on this account and remaining is
deleted. This ground of the assessee is allowed in part.
19. In the result, both the appeals are allowed in part.
2013-TIOL-337-HC-ALL-IT
IN THE HIGH COURT OF ALLAHABAD
Writ Tax No. 1086 of 2007
Writ Tax No. 1156 of 2007
Writ Tax No. 1157 of 2007
Writ Tax No. 1156 of 2007
Writ Tax No. 1157 of 2007
MAHESH KUMAR GUPTA
SMT RUKMANI DEVI
YOGESH KUMAR GUPTA
SMT RUKMANI DEVI
YOGESH KUMAR GUPTA
Vs
COMMISSIONER OF INCOME TAX &
ANOTHER
Prakash Krishna And Ram Surat Ram (Maurya), JJ
Dated : April 17, 2013
Appellant Rep. by : Nikhil Agrawal, Dhruv Agrawal
Respondent Rep. by : S.C. B J Agrawal, D Awasthi
Respondent Rep. by : S.C. B J Agrawal, D Awasthi
Income
Tax - Writ - Sections 148, 149(1)(b), 151(1), 230A(i) - FD - UTI bonds -
freehold - leasehold - land - lease - STCG - Whether in case the
permission to reopen an assessment u/s 148, beyond the normal time limit
of four years, has been taken from Joint or Additional CIT, it cannot
be challenged on any other ground - Whether such reopening is valid even
if the JCIT/ACIT was not aware
about the amount of escaped income which was liable to tax - Whether in
order to get covered by the exception of section 149(1), recording of
facts by the assessing authority is of paramount importance.
Assessee, Mahesh
Kumar Gupta is an individual. Sri Pyare Lal Gupta was the
leaseholder of plot situated at Allahabad under the Government
Grants Act, 1985. Lease of the plot expired in the year, 1962 and
was renewed on 7th of May, 1990 for a further period of thirty years
with further renewal's clause. It was renewed in the name of Smt.
Rukmani Devi, Sri Yogesh Kumar Gupta, brother, and in the name of
petitioner Mahesh Kumar Gupta. The leasehold rights were subsequently
got converted into freehold rights on 27th of August, 1990. It appears
that these persons decided to sell a parcel of the land and they
applied for and
were granted sanction by the Department u/s 230(A)(i). The parcel of
the land was sold for a sum of Rs.8,25,000/- and each petitioner
got Rs.2,75,000/- in his share. The present writ petition arises
out of the reassessment notice u/s 148 dated 23rd of March, 2007
for the AY 2000-2001 on the basis that the assessee had sold the
property in allahabad after converting leasehold land into freehold
and the capital gain/loss arrived at was offered for duration as
long term capital gains. As the assessee sold the property within three
years after converting the land into freehold resulting into short
term capital gains, thus assessment was reopened on this basis. In
response to the notice u/s 148, petitioner had filed ROI and also
objections challenging the initiation of reassessment proceedings on
various grounds.
Before
HC, assessee's counsel had
submitted that the notice u/s 148 was dated 23rd of March, 2007
and it was related to the AY 2000-2001. A period of four years from
the end of the relevant AY was normal period within which assessing
authority can issue a notice unless the case falls under the clause
(b),(c ). It was argued that in the present case, there was no
material before the department to show that the income which was
said to had been escaped, amounts to or was likely to amount to
Rs.1 Lakhs or more. On the other hand, Revenue had filed a counter
affidavit, in which it was stated that an assessee had not
disclosed the income under the head 'capital gains' in the return filed
on 30th of August, 2000 and sale consideration was above Rs.10
Lakhs, the income escaped was more than Rs.1 Lakh, vide para 3 of
the counter affidavit. It appeared that the respondents had no idea
about the sale consideration and that was the reason
few paragraphs afterwards in para 5 it had been stated that the
sale consideration was around Rs.6 Lakhs. The whole basis of the
counter affidavit was that the assessee had not acted in accordance
with law and it was obligatory upon him to pay the taxes on STCG
income which had escaped the assessment. In the counter affidavit,
no material had been disclosed to show that at the time of seeking
sanction for extension of period of limitation as provided for u/s
149, the AO or the sanctioning authority had any material in their
possession that the income chargeable to tax which had escaped the
assessment amounts to or was likely to amount to Rs.1 Lakh or more.
Held that,
++
the reason assigned for reopening is that the petitioner after
converting the leasehold
land into freehold sold the property within three years after
converting the land into freehold resulting into short term capital gain
in view of the Karnataka HC's decision referred to above. What income
is said to have been escaped does not find mention therein. Even
assuming for the sake of argument, the income was liable to be taxed as
short term gain unless there is any material before the authority
concerned that it exceeds the limit of Rs. 1 Lakh, extended period of
limitation of six years will not be available to the department. The
normal period of limitation is four years for giving the notice u/s 148
and where the escaped income is likely to amount to Rs.1 Lakh or more,
the extended period of limitation of six years would be attracted. This
objection of the petitioner has been rejected by the impugned order on
the ground that since the permission has been granted by the JCIT/
ACIT, statutory requirement stands
fulfilled;
++
the stand of the department as is evident from the above quoted
paragraph has no legs to stand. The Joint/Additional Commissioner,
Income Tax was not aware about the fact that the income chargeable to
tax which has escaped the assessment is Rs.1 Lakh or more for the
relevant AY. The proviso to section 151 (1) fortifies our view which
says that after the expiry of four years from the end of the relevant AY
no notice u/s 148 shall be issued or unless the Chief Commissioner or
Commissioner is satisfied on the reasons recorded by the AO that it is a
fit case for issue of such notice. On a true and proper constructions
of the proviso it is imperative that the AO in his reason should state
that the escaped income is likely to be Rs.1 Lakh or more so that the
Chief Commissioner or the Commissioner may record his satisfaction. The
sanctioning authority must be
aware that it has exercised power of extended period of limitation
under 149 (1) (b). Exception has been carved out by clause (b) to
section 149(1) in respect the income chargeable to tax which has
escaped assessment, amounts to Rs.1 Lakh or more. To fall within
exception clause the relevant facts should have been recorded by the AO
in its order while recording the reason so that a sanctioning authority
may apply its mind to the proposition while granting the sanction;
++
the only point urged and pressed before us is whether in absence of
anything in the reasons recorded to suggest that the income chargeable
to tax which has escaped the assessment is Rs. one lakh or more having
not been mentioned the reassessment notice given after four years of the
close of the assessment order is valid or not. For the reasons given
above, we find sufficient force in the argument of
the counsel for the petitioner that on the basis of the reasons
recorded by the Assessing Officer, the initiation of the reassessment
proceedings relevant to the Assessment Year 2000-2001 by means of the
notice dated 23.3.2007 after more than four years is clearly barred by
time. In the result, all the three writ petitions succeed and are
allowed and the impugned notices dated 23rd of March, 2007 are hereby
quashed. No order as to costs.
Assessee's writ allowed
JUDGEMENT
Per : Prakash Krishna, J. :
These three writ petitions were heard together and are being disposed of by a common
judgment. Out of all these three petitions two are on behalf of the brothers and third one is on behalf of their mother.
Sri
Pyare Lal Gupta was the leaseholder of plot situate at 3 Edmonstone
Road, Allahabad (now known as Tashkand Marg, Allahabad) under the
Government Grants Act, 1985. Lease of the plot expired in the year, 1962
and was renewed on 7th of May, 1990 for a further period of thirty
years with further renewal's clause. It was renewed in the name of Smt.
Rukmani Devi, Sri Yogesh Kumar Gupta, brother, and in the name of
petitioner Mahesh Kumar Gupta. The leasehold rights were subsequently
got converted into freehold rights on 27th of August, 1990. It appears
that these persons decided to sell a parcel of the land and they applied
for and were granted sanction by the Income Tax Department under
section 230(A) (i) of the Income Tax Act. The parcel of the land was
sold
for a sum of Rs.8,25,000/- and each petitioner got Rs.2,75,000/- in his
share.
The dispute relates to the assessment year 2000-2001 in all these
petitions. The petitioners filed returns which were accepted. The
further allegation is that the sale consideration was invested in fixed
deposit and UTI Bonds etc. with which we are presently not concerned.
The present writ petition arises out of the reassessment notice under
section 148 of the Income Tax Act. The said notice is dated 23rd of
March, 2007 for the assessment year 2000-2001. In response to the notice
the petitioner has filed the return of income and also his/her
objections challenging the very initiation of reassessment proceedings
on various grounds. The objections having been dismissed by the order
dated 29th of June, 2007, impugned in these
petitions.
Heard Sri Nikhil Agrawal, learned counsel for the petitioners and Sri D. Awasthi, learned standing counsel for the respondents.
The only point urged before us is that the impugned notice under
section 148 of the Income Tax Act is barred by time. Therefore, the
proceedings for reassessment should be dropped.
The controversy centres around the interpretation of section 149 (1)
(b) of the Income Tax Act. For the sake of convenience, the relevant
portion of section 149 is reproduced below:-
Time limit for notice.
149. (1) No notice under section 148 shall be issued for the relevant assessment year,--(a) if four years have elapsed from the end of the relevant assessment year, unless the case falls under sub- clause (b) or sub- clause (c);(b) if four years, but not more than six years, have elapsed from the end of the relevant assessment year unless the income chargeable to tax which has escaped assessment amounts to or is likely to amount to rupees one lakh or more for that year;Explanation.-- In determining income chargeable to tax which has escaped assessment for the purposes of this sub-section, the provisions of Explanation 2 of section 147 shall apply as they apply for the purposes of that section.](2) The provisions of sub- section (1) as to the issue of notice shall be subject to the provisions of section 151.(3) If the person on whom a notice under section 148 is to be served is a person treated as the agent of a non- resident under section 163 and the assessment, reassessment or recomputation to be made in pursuance of the notice is to be made on him as the agent of such non- resident, the notice shall not be issued after the expiry of a period of six years from the end of the relevant assessment year.
Sri Nikhil Agrawal, learned counsel for the petitioner, submits that
the notice under section 148 is dated 23rd of March, 2007 and it relates
to the assessment year 2000-2001. A period of four years from the end
of the relevant assessment year is normal period within which assessing
authority can issue a notice unless the case falls under the
clause (b) (c ). Clause-(b) gives extended period of six years from
the end of the relevant assessment year unless the income chargeable to
tax which has escaped the assessment amounts to or is likely to amount
one Lakh of rupees or more for that year. The argument is that in the
case on hand, there is no material before the department to show that
the income which is said to have been escaped, amounts to or is likely
to amount to Rs.1 Lakhs or more. Attention of the Court was invited
towards its earlier order dated 7th of August, 2007, which is
reproduced below:-
"The original record of the sanction by the Addl. Commissioner has been produced by learned counsel for the Income Tax Department. It does not show that while according sanction, mind had been applied by the Addl. Commissioner whether the income which was believed to have escaped assessment exceeded Rupees One Lakh. In fact there was no suggestion from the side of the proposing officer that the amount was above Rupees One Lakh.The limitation for issuing notice will be enhanced from four years to six years, only if income escaping assessment was in excess of Rupees One Lakh. The notice has admittedly been issued beyond four years and within six years.Counter affidavit may be filed within two weeks, rejoinder affidavit may be filed within two weeks thereafter.List thereafter.The original file has been returned to the learned standing counsel of the Income Tax Department."
A counter affidavit has been filed on behalf of
the respondents. There it has been stated that an assessee has not
disclosed the income under the head 'capital gains' in the return filed
on 30th of August, 2000 and sale consideration was above Rs.10 Lakhs,
the income escaped was more than Rs.1 Lakh, vide para 3 of the counter
affidavit. It appears that the respondents have no idea about the sale
consideration and that is the reason few paragraphs afterwards in para 5
it has been stated that the sale consideration was around Rs.6 Lakhs.
The whole basis of the counter affidavit is that the assessee did not
act in accordance with law and it was obligatory upon him to pay the
taxes on short term capital gain income which has escaped the
assessment. In the counter affidavit, no material has been disclosed
therein to show that at the time of seeking sanction for extension of
period of limitation as provided for under
section 149 the Assessing Authority or the sanctioning authority had
any material in their possession that the income chargeable to tax
which has escaped the assessment amounts to or is likely to amount to
Rs.1 Lakh or more.
At this stage, we may consider the reasons recorded by the Income Tax
Officer for reopening the assessment. The same is reproduced below:-
"During the Assessment Year 2000-2001 the assessee Shri Mahesh Kumar Gupta sold the property (land) situated at 13-D Tashkant Marg, Allahabad after converting leasehold land into freehold and the capital gain/loss arrived at was offered for duration as long term capital gains.The assessee sold the property within three years after converting the land into freehold resulting into short term capital gains in view of the judgment of Hon'ble Karnataka High Court in the case of CIT vs. Dr. V.V. Mody (218 ITR page 1) = (2003-TIOL-368-HC-KAR-IT).I have, therefore, reason to believe that the income chargeable to tax under the head Short Term Capital Gains has escaped assessment."
The reason assigned for reopening is that the petitioner after
converting the leasehold land into freehold sold the property within
three years after converting the land into freehold resulting into short
term capital gain in view of
the Karnataka High Court's decision referred to above. What income is
said to have been escaped does not find mention therein. Even assuming
for the sake of argument, the income was liable to be taxed as short
term gain unless there is any material before the authority concerned
that it exceeds the limit of Rs. 1 Lakh, extended period of limitation
of six years will not be available to the department. The normal period
of limitation is four years for giving the notice under section 148 and
where the escaped income is likely to amount to Rs.1 Lakh or more, the
extended period of limitation of six years would be attracted. This
objection of the petitioner has been rejected by the impugned order on
the ground that since the permission has been granted by the
Joint/Additional Commissioner, Income Tax, statutory requirement stands
fulfilled vide para-3 of the order which is reproduced below:-
"You have also objected that it is not mentioned in the reasons of taking action U/S 148 that the escaped income is more that 100000/-. In this connection this to inform that it is mentioned in notice U/S148 itself that the notice is being issued after proper sanction of Joint/Addl. Commissioner of Income Tax. This fulfills the requirement of law, your have provided the reasons of initiating action U/S148 not computation of income. The computation of income will be provided after proper hearing & giving proper opportunities to be heard."
The stand of the department as is evident from the above quoted
paragraph has no legs to stand. The Joint/Additional Commissioner,
Income Tax was not aware about the fact that the income chargeable to
tax which has escaped the assessment is Rs.1 Lakh or more for the
relevant Assessment Year.
The proviso to section 151 (1) fortifies our view which says that
after the expiry of four years from the end of the relevant Assessment
Year no notice under section 148 shall be issued or unless the Chief
Commissioner or Commissioner is satisfied on the reasons recorded by
the Assessing Officer that it is a fit case for issue of such notice.
On a true and proper constructions of the proviso it is imperative that
the Assessing Officer in his reason should state that the escaped
income is likely to be Rs.1 Lakh or more so that the Chief Commissioner
or the Commissioner may record his satisfaction. The sanctioning
authority must be aware that it has exercised power of extended period
of limitation under 149 (1) (b) of the Act. Exception has been carved
out by clause (b) to section 149(1) in respect the income chargeable to
tax which has escaped assessment, amounts to Rs.1 Lakh or more. To
fall within exception clause the relevant facts should
have been recorded by the Assessing Authority in its order while
recording the reason so that a sanctioning authority may apply its mind
to the proposition while granting the sanction.
The learned counsel for the department after close of the argument has
filed the following judgements for consideration of this Court:-
1. GKN Driveshafts (India) Ltd. Vs. Income Tax Officer and others, 259 ITR, page 18 = (2002-TIOL-634-SC-IT).2. Dr. H.S. Bawa Vs. CIT, 25 Taxman, 15 (P & H).3. Vikram Kothari HUF Vs. State of U.P., 10 Taxman, 280 (Alld).4. Export Credit Guarantee Corporation of India Vs. Addl. Commissioner of Income Tax, 30 Taxman, 211 (Bom) = (2013-TIOL-56-HC-MUM-IT).6. C.C.I.T. Vs. Kanhaiya Lal Kapoor, 147 Taxman, 12 (Alld).7. Pooran Mal Vs. Director of Inspection, New Delhi, 93, ITR 505.8. Deep Chand Daga Vs. I.T.O., 77 ITR, 661 (MP).9. Fisher Xomox Sanmar Ltd. Versus Assistant Commissioner of Income-tax, 294 ITR 620 (Mad.)
None of the judgments referred to above have any
connection to the point in issue even remotely. They relate either to
the question of non-disclosure of income or failure on the part of the
assessee to disclose the income fully or truly and what amounts to
"reason to believe an information". None of these points were urged
before us and we failed to understand the filing of the rulings by the
counsel as referred to herein above.
The only point urged and pressed before us is whether in absence of
anything in the reasons recorded to suggest that the income chargeable
to tax which has escaped the assessment is Rs. one lakh or more having
not been mentioned the reassessment notice given after four years of the
close of the assessment order is valid or not.
For the reasons given above, we find
sufficient force in the argument of the learned counsel for the
petitioner that on the basis of the reasons recorded by the Assessing
Officer, the initiation of the reassessment proceedings relevant to the
Assessment Year 2000-2001 by means of the notice dated 23.3.2007 after
more than four years is clearly barred by time.
In the result, all the three writ petitions succeed and are allowed and
the impugned notices dated 23rd of March, 2007 are hereby quashed.
No order as to costs.