2013-TIOL-334-HC-AHM-IT
IN THE HIGH COURT OF GUJARAT
AT AHMEDABAD
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
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[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).5. A.C.I.T. Vs. Rajesh Jhavri, 291 ITR, Page 500 (SC) = (2007-TIOL-95-SC-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.
--
Regards,
Pawan Singla
BA (Hon's), LLB
Audit Officer
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