Income Tax Appellate Tribunal - Mumbai
B.M. Gandhi Securities Pvt. Ltd, Mumbai vs Department Of Income Tax on 15 February, 2008
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCHES, 'I', MUMBAI
BEFORE S/SHRI D.K. AG ARW AL (JM) AND T.R.SOOD (A.M )
ITA No.2842/M um/2008
(Assessment Year:2004-05)
M/s B.M.Gandhi Securities Incom e Tax Officer
Pvt.Ltd., 4(1)(2),
9A, Homi Mody Street, Aayakar Bhavan,
Fort, V/s Maharshi Karve Road,
Mumbai-400023 Mumbai-400020
P AN:AABCB3557B
APPELLAN T RESPONDENT
ITA No.2959/M um/2008
(Assessment Year:2004-05)
Dy.Commissioner of M/s B.M.Gandhi
Incom e Tax, Securities Pvt.Ltd.,
4(1), 9A, Homi Mody Street,
Room No.640, 6 t h Floor, V/s Fort,
Aayakar Bhavan, Mumbai-400023
Maharshi Karve Road, P AN:AABCB3557B
Mumbai-400020
APPELLAN T RESPONDENT
Assessee by : Ms.Reepal G.Tralshawala
Revenue by : Shri S.K.Singh
O R D E R
PER D.K. AGAR WAL (JM) These cross-appeals by the assessee and Revenue are di rected against the order dated 15.2.2008 passed by the learned Commissioner of Incom e Tax (A) for the assessment year 2004-05. Both these appeals are dispose d of by this common order for the sake of convenience. IT A No. 2 842/M u m/ 200 8
2 and 2959/Mu m/200 8 (Assessment Year:2004-05)
2. Briefly stated facts of the case are that the assessee firm is engaged in the business of share and stock broking. It is a Mem ber of the Stock Exchange, Mumbai. The assessee com pan y derives income from brokerage, share trading i ncome, dividend and interest. Return was filed declaring total incom e of Rs.35,72,910/-. However, the assessment was completed at an income of Rs.11,183,550/- vide order dated 22.12.2006 passed under section 143(3) of the Income Tax Act, 1961(in short the Act). On appeal, the learned Commissioner of Income Tax (A) partly allowed the appeal.
3. Being aggrieved by the order of the learned Commissioner of Income Tax (A), the assessee and Revenue both are in appeal bef ore us.
ITA No.2842/Mum/2008(B y assessee)
4. Ground No.1,2, 3 and 4 taken by the assessee read as under:
"1) The Commissioner (Appeals) erred in confirming the disallowance of bad debts/business loss of Rs.14,27,169/-
2) The Commissioner (Appeals) erred in holding as under:
"4.13 The alternate claim of the appellant that if the deduction is not allowable as bad debts, the same [ 2 IT A No. 2 842/M u m/ 200 8 3 and 2959/Mu m/200 8 (Assessment Year:2004-05) are admissible as business loss u/s 28 of the Act because the sam e has been incurred in ordinary course of business is not well found"
3) The Commissioner (Appeals) ought to have allowed the business loss of Rs.15,79,267/- being the am ount which could not be recovered from Mr.Dilip Mohatta in the course of the business, more particularl y when the Commissioner (Appeals) has held that the debt with respect to Mr. Dilip Mohatta had becom e bad.
4) The order of the Commissioner (Appeals) confirming the disallowance of Rs.14,27,169/- out of bad debts/ business loss is bad in law and without jurisdiction"
5. The brief facts of the above issues are that during the course of assessment proceedings, the AO i nteralia observed that in the audited accounts the assessee company has debited bad debts/ business loss of Rs.32,75,585/-. In the course of the busi ness as a share broker, the assessee compan y could not recover outstandin g balances from the following four parties and therefore, the said balances were written off as bad debts / business loss by the assessee firm in the year under consideration :
S.No. Name of parties Amount
1 Mr.Dilip Malhotra Rs.29,49,053.46
2 Mr. Bharat Shah Rs.1,15,077.50
3 M/s Om Investment Rs.3,63,553.75
4 Mrs.Sunita Kothari Rs.18,394.56
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IT A No. 2 842/M u m/ 200 8
4 and 2959/Mu m/200 8
(Assessment Year:2004-05)
The AO disallowed the aforesaid bad debts/ business loss on the ground that the part of the debit bal ance of the client which does not pertain to brokerage i ncome but it pertains to value of shares purchased by the client is not covered by section 36(2) and therefore, it is outside the purvi ew of section 36(1)(vii). The AO further observed that t he debts have not becom e bad in the year under consideration and the assessee has not adduced satisfactory evidence. The AO further observed that the claim of the assessee com pany as business l oss under section 28 also could not be allowed as the assessee company di d not adduce evidence in support of its claim to fulfil the parameters of genuineness of the loss, establishment of the fact that the loss is irrecoverable and establishing that the loss crystallized in the relevant previous year and accordingly he disallowed bad debts/business loss of Rs.32, 75,585/-. On appeal, the learned Commissioner of Income Tax (A) after examining the evidence filed by the assessee observed that the amount due from Mr.Dilip Malhotra, Mr.Bharat Shah and M/s Om Investment have become bad. The bad debts is allowable under secti on 36(1)(vii) subject to provisions of section 36(2) which states that the deduction can be allowed in a case where such debt or part thereof has been taken into account in computing the incom e of the assessee of any previous [ 4 IT A No. 2 842/M u m/ 200 8 5 and 2959/Mu m/200 8 (Assessment Year:2004-05) year. He further observed that i n the present case, only the am ount of brokerage received from the three parties can be considered to have been taken into account i n computing the income of the assessee of any previous year. The am ount of bad debts and brokerage earned are as under :-
S.No. Name of parties Bad debts Brokerage Difference claimed earned
(a) (b) (c) (d) (e) 1 Mr.Dilip 29,49,053 13,69,786 15,79,267 Malhotra 2 Mr. Bharat 1,15,077 1,29,113 (-)14,036 Shah 3 M/s Om 3,63,553 7,42,846 (-)3,79,293 Investment Accordingly, the learned Commissioner of Income Tax (A) allowed the bad debts in the account of Mr.Dilip Malhotra Rs.13,69,786/-, Mr. Bharat Shah Rs.1,15,077/- and M/s Om Investment Rs.3,63,553/- aggregating to Rs.18,48,416/- and confirmed the balance disallowance of Rs.14,27,169/-.
6. At the time of hearing, both parties have agreed that the issue stands covered in favour of the assessee and against the Revenue by the decision of the Tribunal in assessee's own case in DCIT V/s M/s B.M.Gandhi Securities P.Ltd. in ITA No.5693/Mum/2006 (AY-2003-04) order dated 3.12.2010 and also by the decision of the Special Bench of the Tribunal in DCIT V/s Shreyas S.Morakhia (2010) 5 ITR [ 5 IT A No. 2 842/M u m/ 200 8 6 and 2959/Mu m/200 8 (Assessment Year:2004-05) (Trib) 1 (Mum)(SB), therefore the issue may be decided accordingly. At this stage, the learned counsel for the assessee further submits that in view of the above, he does not wants to press the ground No.3 taken by the assessee.
7. Having carefully heard the submissions of the rival parties and perusing the m aterial available on record, we find that there is no dispute that the am ount due, claim ed as bad debts was money receivable by the assessee as share broker from his clients against the purchase of share made on their behalf. It is also not in dispute that the brokerage payable by the cli ents was a part of that debt and that part had been taken into account in computati on of the income of the assessee.
8. In Shreyas S.Morakhia (supra) it has been held (page 4 of headnotes) as under :-
"Held, that the amount receivable by the assessee, a share broker, from his clients against transactions of purchase of shares on their behalf constituted a trading debt. The brokerage incom e arising from such transactions very much formed part of the debt and whe n the amount of such brokerage had been taken into account in com putation of income of the assessee of the relevant previous year or any earlier year, it satisfied the condition stipulated in section 36(2)(i) and the assessee was entitled to deduction under section 36(1)(vii) by wa y of bad debts after having written off the said debts from his books of account as irrecoverable. "
[ 6 IT A No. 2 842/M u m/ 200 8 7 and 2959/Mu m/200 8 (Assessment Year:2004-05) In the absence of any disti nguishing features brought on record by the learned D.R., we respectfully following the decision of the Tribunal (supra) hold that since the assessee has satisfied the condition stipulated in section 36(2)(i) and the assessee was entitled to deduction under section 36(1)(vii) by way of bad debts after having written off the said debts from his books of account as irrecoverable and accordingly ground No.1,2 and 4 taken by the assessee are allowed and the Ground No.3 taken b y the assessee is rejected being not pressed.
ITA No.2959/Mum/2008(B y Revenue)
9. Grounds of appeal No.1,2, and 4 taken by the Revenue read as under :
"1. On the facts and in the circumstances of the case and i n law, the ld. CIT(A) erred in allowing set off against current ye ar's share trading profit of the brought forward speculation loss and current year's speculation loss on account of deeming provisions of Explanation to section 73 of the IT Act.
2. On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in allowing the expenses of Rs.11,72,037/- as attributable to speculati on business.
4. On the facts and in the circumstances of the case and in law, the impugned order of the ld. CIT(A) is contrary to law and consequentl y on merits it deserves t o be set aside and that of the AO restored."
[ 7 IT A No. 2 842/M u m/ 200 8 8 and 2959/Mu m/200 8 (Assessment Year:2004-05)
10. Briefly stated facts of the above issue are that the AO observed that (para 3 of the Asstt. order) :
"The assessee has derived income of Rs.69,88,920/- from trading in shares. This am ount is credited to the Profit and Loss Account. The assessee has however, considered the said income from share trading as Speculation income which has been set off against the brought forward shares trading loss of earlier years to the extent of Rs.19,64,469/-. The assessee has also allocated expenses of Rs.25,79,285/- towards such share trading activity and the net amount of Rs.24,45,166/- is off ered as Specul ation Income."
The AO after consideri ng the assessee's explanation has held as under :
"3.8 In the case of the assessee, for the assessment year 2001-02 the loss incurred from purchase and sale of shares of other companies has been held to be deemed speculati on loss by invoking the provision of Explanation to section 73 irrespective of the fact that such transactions are delivery based or not. This is specially due to the legal fiction introduced in the said provisions. Having said so, the business of purchase and sale of shares of other companies, does not become a Speculation busi ness for all assessm ent years perpetually.
3.9 The provisions of Explanation to section 73 can be invoked only when the assessee incurs a loss considering the fact that the said Explanation is introduced i n section 73-Losses in Speculation business which forms part of Chapter VI-Aggregation of incom e and set off of loss. In other words, the said provisions are invoked to deci de whether the loss incurred is speculati on or not.
3.10 It is essential to take into cognizance that the legislature has not introduced the legal fiction of deemed speculation business in section 28 or in the [ 8 IT A No. 2 842/M u m/ 200 8 9 and 2959/Mu m/200 8 (Assessment Year:2004-05) Explanation 2 to section 28. The very fact that such legal fiction was introduced in secti on 73 of Chapter VI of the IT Act, 1961, i ndicates the intention of the legislature to apply such legal fiction to only losses and not profits.
3.11 In the present case, the assessee seeks set off speculati on loss incurred during the year and brought forward speculati on losses against the non-speculation share trading income Hence, the relevant provisions which have to be considered are the provisions of sub section 1 and 2 to section 73 of the IT Act, 1961 and not the provisions of Explanation to section 73.
3.12 The provisions of sub-section 1 to section 73 of the IT Act, 1961 refer to profits and gains of another speculati on business against which the speculation loss of a speculation business is set off. The provisions of sub-section 2 to secti on 73 of the IT Act, 1961 refer to profits and gains of speculation business against which the loss of a speculation business is set off.
3.13 The provisions of section 73 do not define the term "speculation business'. The ref erence of 'speculation business' in Explanation to section 73 is of no help to the assessee as it does not define it except to introducing a legal fiction of deemed speculation business, which again will be invoked only if assessee has incurred a loss. There is nothing in the language of the Explanation to section 73 to suggest that a share trading business will be deemed speculation business perpetually for all subsequent assessment years once it is held to be such deemed speculation business in the circumstances of having incurred a loss in any particular assessment year"
11. On appeal, the learned Commissioner of Income Tax (A) directed the AO to treat profit from share trading transaction as speculation profit and set off speculation loss of the current year and brought forward speculation loss [ 9 IT A No. 2 842/M u m/ 200 8 10 and 2959/Mu m/200 8 (Assessment Year:2004-05) against the speculati on incom e and further directed to allow the expenses as per the finding given in Ground No.1 as above.
12. At the time of hearing, the learned D.R. submits that for the reasons as discussed in the assessment order, the learned Commissioner of Income Tax (A) was not justified in allowing the relief to the assessee. He, therefore, submits that the order passed by the AO be restored.
13. On the other hand, the learned counsel for the assessee while relyi ng on the order of the learned Commissioner of Incom e Tax (A) further submits that the issue stands covered against the Revenue and in favour of the assessee by the decision of the Hon' ble jurisdictional High Court in CIT V/s Lokmat Newspapers P.Ltd (2010) 322 ITR 43 (Bom). He therefore submits that the order passed by the learned Commissioner of Incom e Tax (A) be upheld.
14. W e have carefully heard the submissions of the rival parties and perused the material available on record. We find that the facts are not in dispute. W e f urther find that the learned Commissioner of Income Tax(A) held that the finding of the AO that Explanation to section 73 can be invoked onl y [ 10 IT A No. 2 842/M u m/ 200 8 11 and 2959/Mu m/200 8 (Assessment Year:2004-05) when the assessee incurs the loss is not correct as the provisions of Explanation to section 73 refers to deeming of business as speculation busi ness. In a business there may be a profit or loss. A deeming provision of Explanation to section 73 is applicable in both the cases of profit or loss. The deeming provi sion of Explanation to section 73 would therefore apply to current year's profits on purchase an d sale of shares and the same is required to be deemed to be from speculation business and hence he directed the AO to treat profit from share trading transaction as speculation profit and set off speculation loss of the current year and brought forward speculation loss against the speculation income and f urther directed to allow the expenses.
15. In Lokmat Newspapers P.Ltd (supra) it has been held (pages 44-45 headnote) :-
"The Explanation to section 73 of the Income-tax Act, 1961 creates a deeming fiction that where the assessee is a com pany and where an y part of the business of the company consists of the purchase and sale of shares of other com panies, the assessee is for the purposes of section 73 deemed to carry on a speculation business, to the extent to which the business consists of the purchase and sale of shares.
The definition of the expression "speculative transaction"
in section 43(5) which defines it to m ean a transaction in which a contract for the purchase or sale of any comm odity, including stocks and shares, is periodicall y or ultimately settled otherwise than by the actual delivery [ 11 IT A No. 2 842/M u m/ 200 8 12 and 2959/Mu m/200 8 (Assessment Year:2004-05) or transfer of the commodity or scrips, cannot be read into t he provisions of section 73 having regard to the plain m eaning of the Explanation to section 73. The contenti on that a loss which arises on account of a transaction of the sale and purchase of shares would constitute a loss from a speculation business for the purposes of the Explanation but that the profit which arises from a transaction involving the actual delivery of shares would not constitute a profit for the purposes of sub-sections (1) and (2) of section 73 in respect of which a set-off can be granted, introduces a restriction into the scope and ambit of the deeming fiction which is created by the Explanation to section 73, which is not contemplated b y Parliament. The deeming fiction created by the Explanati on to section 73 arises specifically in the context of the provisions of section 73 and is confined to that purpose alone. W hether it is a profit or loss that has resulted from carrying on such business, is a consideration alien to the meaning of what constitutes a speculati on business by the Explanation to section 73. Once an assessee is deemed to be carrying on a speculati on business for the purpose of section 73, any loss computed in respect of that speculation business, can be set off only against the profits and gains of another speculation business. Similarl y, for the purposes of sub-section (2), the loss in respect of a speculation business which has not been set off either in whole or in part, can be carried forward and can be set of f against profits and gains "of any speculation business". The expression "any speculation business" means a speculati on business of the assessee in respect of which profits and gai ns for the assessm ent year in question have arisen and there is no justification to restrict the content of that specul ation business where profits have arisen by excluding a business i nvolving act ual delivery of shares. No such restriction is found in the Explanation. In other words, once the assessee is carrying on a speculation business and the profits and gains have arisen from that business during the course of the assessment year, the assessee is entitled to set off the losses carried forward from a speculation business arising out of a previous assessment year. For the assessm ent year 2003-04, the assessee showed a profit on the sale of shares and securities held as stock-in-trade, offered it as a profit of speculation [ 12 IT A No. 2 842/M u m/ 200 8 13 and 2959/Mu m/200 8 (Assessment Year:2004-05) business, set it off against speculation loss brought forward from the assessm ent years 1996-97 to 1998-99 and showed the balance as speculati on income. The Assessing Officer did not treat the income which arose from the sale of shares as income from a speculation business on the ground that the assessee had settled its transactions of sale and purchase of shares through physical delivery, and ref used to allow set-off of the income from the sale of shares against the loss on account of speculation business, brought forward from the assessment years 1996-97 to 1998-99. The Commissioner of Income-tax (Appeals) confirmed the order of the Assessing Officer. The Tribunal held that the profit from the sale of shares fell within the purview of the Explanation to section 73 and was to be set off against brought f orward losses. On appeal :
Held, dismissing the appeal, that the view of the Tribunal was consistent with the provisions of section 73."
In the absence of any distinguishing feature brought on record by the Revenue, we respectfully following the decision of the Hon'ble j urisdicti onal High Court in Lokmat Newspapers P.Ltd (supra) hold that the profit from sale of shares fell within the purview of the Explanation to Section 73 and was to be set off against the current year's and brought forward speculation losses and accordingly we are inclined to uphold the findi ngs of the learned Commissioner of Income Tax (A) in allowing the relief to the assessee. The ground No.1,2 and 4 t aken by the Revenue are theref ore rejected.
[ 13 IT A No. 2 842/M u m/ 200 8 14 and 2959/Mu m/200 8 (Assessment Year:2004-05)
16. Ground No.3 taken by the Revenue reads as under :
"3. On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred i n restricting the disallowance to Rs.14,27,169/- as against assessee company, holding that the assessee company has fulfilled the conditions l aid down in section 36(1(vii).
17. After hearing rival parties and perusing the m ateri al available on record and keepi ng in view of our findings recorded in assessee's appeal in paragraphs 7 and 8 of this order, the ground taken by the Revenue is therefore rejected.
18. In the result, the assessee's appeal is partly allowed and Revenue's appeal stands dismissed.
Order pronounced in the open court on 24 t h June, 2011.
Sd/- Sd/-
(T.R.SOOD) (D.K. AG AR WAL)
ACCOUNTAN T M EMBER JUDICI AL MEM BER
Mumbai, Dated 24th June, 2011
SRL:
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15 and 2959/Mu m/200 8
(Assessment Year:2004-05)
Cop y to:
1. Appellant
2. Respondent
3. CIT Concerned
4. CIT(A) concerned
5. DR concerned Bench
6. Guard file.
BY ORDER
ASSTT. REGISTRAR,
ITAT, MUMBAI
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IT A No. 2 842/M u m/ 200 8
16 and 2959/Mu m/200 8
(Assessment Year:2004-05)
Date Initials
1. Draft dictated on 13.6.2011 Sr.PS
2. Draft placed before author 14.6.2011 Sr.PS
3. Draft proposed & placed AM
before the Second Member
4. Draft discussed/approved by AM
Second Member
5. Approved Draft comes to the Sr.PS
Sr. PS
6. Kept for pronouncement on Sr.PS
7. File sent to the Bench Clerk Sr.PS
8. Date on which file goes to the
Head Clerk
9 Date on which file goes to AR
10. Date of dispatch of Order
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