Income Tax Appellate Tribunal - Mumbai
Siddhesh Capital Market Services ... vs Dcit 3(3), Mumbai on 24 March, 2017
आयकर अपीलीय अिधकरण, अिधकरण मुंबई "ई" खंडपीठ मे Income-tax Appellate Tribunal -"E"Bench Mumbai सव ी राजे ,लेखा सद य एवं अमरजीत सह, याियक सद य Before S/Sh.Rajendra,Accountant Member and Amarjit Singh,Judicial Member आयकर अपील सं./I.T.A./1259/Mum/2012, िनधा रण वष /Assessment Year: 2008-09 Siddhesh Capital Market Services DCIT Circle-3(3) Pvt.Ltd.,122, Maker Chamber III Mumbai.
Vs. Nariman Point,Mumbai-400 021.
PAN:AACCS 4582 N
(अपीलाथ /Appellant) ( यथ / Respondent)
आयकर अपील सं./I.T.A./2583/Mum/2014, िनधा रण वष /Assessment Year: 2008-09 DCIT Circle-3(3) Siddhesh Capital Market Services Pvt.Ltd.
Vs.
Mumbai. Mumbai-400 021.
(अपीलाथ /Appellant) ( यथ / Respondent)
राज
व क ओर से / Revenue by: Shri Anand Mohan-CIT-DR
अपीलाथ क ओर से /Assessee by: Shri Jay Bhansali
सुनवाई क तारीख / Date of Hearing: 21/03/2017
घोषणा क तारीख / Date of Pronouncement: 24.03.2017
लेखा सद य राजे
के अनुसार PER RAJENDRA, AM-
Challenging the order dated 13/09/2011 and 10/01/2014 of the CIT (A) - 7, Mumbai the assessee and the Assessing Officer (AO) have filed the above-mentioned appeals for the year under consideration. The assessee has filed the appeal against the addition made by the AO in quantum proceedings, whereas, the AO has challenged the deletion of penalty levied u/s.271 of the Act.For the sake of convenience, we are disposing of both the appeals by a single common order.Assessee-company,engaged in the business of finance, trading, investment, filed its return of income on 29/09/2008, declaring Loss of Rs. 30.52 crores.The AO completed the assessment, on 26/11/2010, u/s.143 (3) of the Act, determining its income at Rs. 3.72 crores. Vide its application dt. 23.2.16 the assessee made an application for additional ground. It was argued that facts are already on record that it does not warrant any fresh investigation into facts. Before us, the Authorised Representative (AR) made the same submissions and the Departmental Representative (DR) left the issue to the discretion of the Bench. We find that the additional ground raised by the assessee is purely a legal ground and states that the CIT(A) had erred in not holding that the assessee was covered by exceptions provided in the Explanation to section 73 of the Act.Therefore, we admit the additional Ground raised by the assessee.
ITA/1259/Mum/12(By Assessee) :
2. Effective ground of appeal is about upholding valuation loss of Rs.34.26 crores on stock of shares as speculation loss u/s.73 of the Act. During the assessment proceedings,the AO 1259&2583/M/12&14(08-09) M/s. Siddesh Capital Market Services P.Ltd.
directed the assessee to explain as to why the loss initiated should not be treated speculation loss. In its response, the assessee referred to Explanation 1 to section 73 of the Act and stated that its business consisted of only share trading, that the object behind the section was to prevent profits of non-share trading business to be set off against the share trading losses. It referred to the cases of A. B. Shanti (225 ITR 258); Allied Motors Private Ltd(224ITR677) and Podar Cement Private Ltd. (226 ITR 625) and argued that the assessee had not adopted any device to manipulate and reduce the taxable income, that the assessee had made profit on sale of shares, that the loss was on account of valuation of stock and not on trading, that the loss on valuation was on account of consistent inventory policy followed by it for valuation of inventories, that the trading loss incurred by it comprised of actual profit/loss and mark to market losses, that the assessee had realised profit of Rs.22.35 lakhs on sale/purchase of shares, that the loss was on account of valuation, that it had purchased equity shares when the sharemarket was all-time high, that subsequently due to global turmoil and recession market were falling when the shares were valued at lower of cost or market price at the balance sheet date as per the consistent accounting policy followed by it, that there was a book loss, that the loss on account of valuation of stock had been reversed in the subsequent years in valuation or sales when market improved.
After considering the submission of the assessee, the AO held that as per Explanation 1 to section 73 loss on sale of shares had to be treated as speculation loss, that explanation was deeming fiction. Referring to the case of Eastern Aviation & Industries Ltd. (208/1023), the AO held that the loss suffered by the assessee during the previous year of Rs.34.26 crores was to be treated as loss of speculative business.
3.Aggrieved by the order of AO the assessee preferred an appeal before the First Appellate Authority(FAA).Before him the assessee made elaborate submissions. After considering the same, the FAA held that the issue involved stood covered against the assessee by judgment of Hon'ble Jurisdictional High Court in the case of Lokmat Newspapers Pvt.Ltd.(332ITR
43).Taking note of the aforesaid judgment he dismissed the appeal filed by the assessee.
4.During the course of hearing before us,the AR stated that loss suffered by the assessee was part of the normal business conducted by it,that the loss resulted from the valuation of stock, that the only business of assessee was dealing in shares, that the intention of introducing explanation to section 73, as per the Circular 204 of 24.07.96 was to curb the device to manipulate and reduce the taxable income of companies under their control, that the facts of Lokmat Newspaper (P.) Ltd.were not applicable to the facts of the case under appeal, that the 2 1259&2583/M/12&14(08-09) M/s. Siddesh Capital Market Services P.Ltd.
case of the assessee is covered by the exception to explanation. He referred to Pg-8 of the PB and stated that assessee had earned profit of Rs.2.20 crores under the head 'income from capital gains'. He also referred to the order passed by AO for the AY 2013-14 where similar kind of disallowance was not made.He relied on the case of HSBC Securities and Captal Markets India (P.)Ltd.(208taxmann 439) of the Hon'ble Bombay High Court.The DR supported the order of the FAA.
5.We have heard the rival submissions and perused the material before us.We find that the assessee had claimed loss on account of valuation of closing stock on the last date of AY, that the AO invoked the provisions of section 73 and held that the transactions entered into by the assessee were of speculative nature, that the FAA confirmed his order, that both the authorities did not consider the argument about the exception to the explanation to section 73, that the assessee had earned profit of Rs.2,20,67,126/-, that it had STCG on sale of mutual funds to the tune of Rs.2.68 crores. It is a fact that shares traded by the assessee were not of any of the good companies.The assessee had in the normal course of business purchased the shares. Because of the turmoil in the share market in the year under consideration the assessee suffered huge loss.It was valuing its stock on cost or market price whichever was lower and had accordingly valued the shares.The resultant loss, in these circumstances, cannot be considered speculative loss as held by AO and confirmed by FAA.In our opinion facts of Lokmat case are applicable to the facts of present case. We would like to reproduce the substantial question of law raised by the Hon'ble Bombay High Court in the case of HSBC Securities and Capital Markets (P.) Ltd. (supra). First we are reproducing the question raised before the Hon'ble Court and it reads as under:
"Whether on the facts and in the circumstances of the case and in law the Hon'ble I.T.A.T. was justified in holding the trading loss of Rs. 84,51,000/- as Ordinary Business Loss as against Speculation Loss as held by the Assessing Officer by relying on the decision of the ITAT Delhi bench in the case of Aman Portfolio Pvt. Ltd. 93 ITD 324ignoring the decision of the Divisional Bench of ITAT Delhi in the case of Frontline Capital Services Ltd. 96 TTJ 201 and also the decision of the ITAT Delhi Bench in the case of Rohini Capital Services Ltd. 92 ITD 317while deciding that the Explanation to Sec. 73 of the Income-Tax Act, 1961 cannot be invoked in the case of the assessee ?"
Facts of the case the relevant portion of the judgment are as follow:
4. On 1.12.1997, the respondent filed its return for the assessment year 1997-1998 declaring a total loss of Rs. 1,95,12,651/-. On 12.3.1998, the respondent filed a revised return declaring a total loss of Rs. 1,24,92,940/-. In the revised return, the assessee showed loss of Rs.
1,65,29,711/- arising out of the purchase and loss of shares. The AO by an assessment order dated 29.3.2000 under section 143(3) inter alia recorded as under:
"The assessee's gross total income as per the second revised return was loss of Rs. 1,65,29,711/-. The composition of the same is as under :3
1259&2583/M/12&14(08-09) M/s. Siddesh Capital Market Services P.Ltd.
Business Profit (-) Rs. 1,72,31,711/-
Income from other sources Rs. 7,02,000/-
(-) Rs. 1,65,29,711/-"
5. The assessee filed an appeal against the assessment order.
XXXXX The CIT by an order dated 10.1.2001 partly allowed the appeal.
6. The respondent therefore, filed ITA No.3386/Mum/2001. By the impugned order dated 14.7.2005, the ITAT partly allowed the appeal. The respondent's contention based on section 73 was upheld. Following the judgment of the ITAT Delhi Bench in Aman Portfolio (P.) Ltd. v. Dy. CIT [2005] 92 ITD 324, it was held that section 73 could not be invoked against the respondent. This however, was on the basis that the explanations to section 73 applies only to the losses arising out of the transaction resorted to by the business houses controlling a group of companies. Whereas the transactions referred to by the respondent were not carried out with any interest of controlling group companies.
XXXXX
8. In the present case, section 73 would not apply in view of the fact that the explanation thereto, does not operate in respect of a company whose gross total income consists mainly of income which is chargeable under the heads of "interest on securities", "income from housing property", "capital gains" and "income from other sources". We have set out the relevant part of the assessment order which indicates that in the relevant year, the income from other sources was the only chargeable income, as the respondent had suffered a business loss otherwise.
In that view of the matter, the judgment of the Division Bench of this Court in the case of Darshan Securities (P.) Ltd. (supra) supports the respondent's case. In that case, during the relevant assessment year, the assessee had a loss of about Rs. 2.33 crores in the share trading and had dividend income of about Rs. 4.80 lacs. The Division Bench held in paragraphs 6, 7, 8 and 9 as under :
"6. The explanation to Section 73 introduces a deeming fiction. The deeming fiction stipulates that where any part of the business of a company consists in the purchase and sale of shares of other companies, such company shall, for the purposes of the section be deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sales of such shares. The deeming fiction applies only to a company and the provision makes it clear that the deeming fixation (sic) extends only for the purposes of the section. The bracketed portion of the explanation, however carves out an exception. The exception is that the provision of the explanation shall not apply to a company whose gross total income consists mainly of income which is chargeable under the heads "Interest on securities", "Income from house property", "Capital gains" and "Income from other sources" or a company whose principal business is of banking or the granting of loans and advances.
7. The submission which has been urged on behalf of the Revenue is that in computing the gross total income for the purpose of the explanation to Section 73, income under the heads of profits and gains of business or profession must be ignored. Alternatively, it has been urged that where the income from business includes a loss in the trading of shares, such a loss should not be allowed to be set off against the income from any other source under the head of profits and gains of business or profession.
8. In our view, the submission which has been urged on behalf of the Revenue cannot be accepted. Leaving aside for a moment, the exception, which is carved out by the explanation to Section 73, the explanation creates a deeming fiction by which a company is deemed to be carrying on a speculation business where any part of its business consists in the purchase and sale of shares of other companies. Now, the exception which is carved out applies to a situation where the gross total income of a company consists mainly of income which is chargeable under the heads "Interest on securities", "Income from house property", "Capital 4 1259&2583/M/12&14(08-09) M/s. Siddesh Capital Market Services P.Ltd.
gains" and "Income from other sources". Now, ordinarily income which arises from one source which falls under the head of profits and gains of business or profession can be set off against the loss which arises from another source under the same head. Sub-Section (1) of Section 73 however sets up a bar to the setting off of a loss which arises in respect of speculation business against the profits and gains of any other business. Consequently, a loss which has arisen on account of speculation business can be set off only against the profits and gains of another speculation business. However, for Sub-Section (1) of Section 73 to apply the loss must arise in relation to a speculation business. The explanation provides a deeming definition of when a company is deemed to be carrying on a speculation business. If, the submission of the Revenue is accepted, it would lead to an incongruous situation, where in determining as to whether a company is carrying on a speculation business within the meaning of the explanation, sub-section (1) of Section 73 is applied in the first instance. This would in our view not be permissible as a matter of statutory interpretation, because the explanation is designed to define a situation where a company is deemed to carry on speculation business. It is only thereafter that sub-section (1) of section 73 can apply. Applying the provisions of Section 73(1) to determine whether a company is carrying on speculation business would reverse the order of application. That would be impermissible, nor, is it contemplated by Parliament. For, the ambit of Sub-Section (1) of Section 73 is only to prohibit the setting off of a loss which has resulted from a speculation business, save and accept against the profits and gains of another speculation business. In order to determine whether the exception that is carved out by the explanation applies, the legislature has first mandated a computation of the gross total income of the Company. The words "consists mainly" are indicative of the fact that the legislature had in its contemplation that the gross total income consists predominantly of income from the four heads that are referred to therein. Obviously, in computing the gross total income the normal provisions of the Act must be applied and it is only thereafter, that it has to be determined as to whether the gross total income so computed consists mainly of income which is chargeable under the heads referred to in the explanation.
9. Consequently, in the present case the gross total income of the assessee was required to be computed inter alia by computing the income under the head of profits and gains of business or profession as well. Both the income from service charges in the amount of Rs. 2.25 crores and the loss in share trading of Rs. 2.23 crores, would have to be taken into account in computing the income under that head, both being sources under the same head. The assessee had a dividend income of Rs. 4.7 lacs (income from other sources). The Tribunal was justified, in coming to the conclusion that the assessee fell within the purview of the exception carved out in the explanation to Section 73 and that consequently the assessee would not be deemed to be carrying on a speculation business for the purpose of Sec. 73(1)."
Respectfully following the above judgment we decide the effective as well as the additional Ground of appeal in favour of the assessee.
ITA/2583/Mum/14 :
6.Effective Ground of appeal raised by the AO is about deleting the penalty of Rs.9.96 crores for furnishing inaccurate particulars of income u/s. 271(1)( c) of the Act.While completing the assessment the AO held that loss of Rs.34.26 crores in share trading was to be treated as speculation business loss and not business loss .Therefore vide his order dt.28.3.2013, he levied penalty of Rs.9,96,98,988/-.
7.In the appellate proceeding,the FAA held that it was not a case of furnishing of inaccurate particulars or concealment of income,that AO had treated the business loss as speculative 5 1259&2583/M/12&14(08-09) M/s. Siddesh Capital Market Services P.Ltd.
loss, that there was no justification for invoking the provisions of section 271(1) (c) in such cases.He relied upon the case Reliance Petro Products (322ITR158) and allowed the appeal of the assessee.
8.Before us, the DR stated that matter could be decided on merits. The AR referred to the case of Claridges Investments & Finance P.Ltd.(ITA410/Mum/2011)AY 2003-04 dated 7.5.2015.
We have heard the rival submissions and perused the material before us. While deciding the appeal filed by the assessee we have held that transaction entered into by the assessee were not of speculative nature that the loss was allowable as business loss. Therefore, penalty order would not survive.
As a result appeal filed by assessee stands allowed and appeal of AO is dismissed. फलतः िनधा रती ारा दािखल क गई अपील मंजूर क जाती है और िनधा रती अिधकारी क अपील नामंजूर क जाती है.
Order pronounced in the open court on 24th March , 2017.
आदेश क घोषणा खुले यायालय म दनांक 24 माच , 2017 को क गई ।
Sd/- Sd/-
(अमरजीत सह / Amarjit Singh ) (राजे
/ Rajendra)
याियक सद
य / JUDICIAL MEMBER लेखा सद य / ACCOUNTANT MEMBER
मुंबई Mumbai;
दनांक/Dated : 24.03.2017.
Jv.Sr.PS.
आदेश क ितिलिप अ ेिषत/Copy of the Order forwarded to :
1.Appellant /अपीलाथ 2. Respondent / यथ
3.The concerned CIT(A)/संब अपीलीय आयकर आयु , 4.The concerned CIT /संब आयकर आयु
5.DR " E " Bench, ITAT, Mumbai /िवभागीय ितिनिध, खंडपीठ,आ.अ. याया.मुंबई
6.Guard File/गाड फाईल स यािपत ित //True Copy// आदेशानुसार/ BY ORDER, उप/सहायक पंजीकार Dy./Asst. Registrar आयकर अपीलीय अिधकरण, मुंबई /ITAT, Mumbai.
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