Income Tax Appellate Tribunal - Kolkata
Loknath Saraf Securities Ltd., Kolkata vs Department Of Income Tax
आयकर अपीलीय अधीकरण, Ûयायपीठ - " C" कोलकाता,
IN THE INCOME TAX APPELLATE TRIBUNAL "C" BENCH: KOLKATA
(सम¢) ौी महावीर िसंह, Ûयायीक सदःय एवं ौी, ौी आकबर बाशा, लेखा सदःय)
[Before Hon'ble Sri Mahavir Singh, JM & Hon'ble Shri Akber Basha, AM]
आयकर अपील संÉया / I.T.A No. 695/Kol/2008
िनधॉरण वषॅ/Assessment Year: 2002-03
Deputy Commissioner of Income-tax Vs. Loknath Saraf Securities Ltd.
Circle-6, Kolkata. (PAN-AAACL 4567 A)
(अपीलाथȸ/Appellant) (ू×यथȸ/Respondent)
&
C.O.No. 36/Kol/2008
आयकर अपील संÉया / I.T.A No. 695/Kol/2008
िनधॉरण वषॅ/Assessment Year: 2002-03
Loknath Saraf Securities Ltd. Vs. Deputy Commissioner of Income-tax
Circle-6, Kolkata.
(Cross Objector) (ू×यथȸ/Respondent)
&
आयकर अपील संÉया / I.T.A No. 696/Kol/2008
िनधॉरण वषॅ/Assessment Year: 2004-05
Deputy Commissioner of Income-tax Vs. Loknath Saraf Securities Ltd.
Circle-6, Kolkata.
(अपीलाथȸ/Appellant) (ू×यथȸ/Respondent)
&
C.O.No. 37/Kol/2008
आयकर अपील संÉया / I.T.A No. 696/Kol/2008
िनधॉरण वषॅ/Assessment Year: 2004-05
Loknath Saraf Securities Ltd. Vs. Deputy Commissioner of Income-tax
Circle-6, Kolkata.
(Cross Objector) (ू×यथȸ/Respondent)
&
आयकर अपील संÉया / I.T.A No. 1935/Kol/2008
िनधॉरण वषॅ/Assessment Year: 2002-03
Loknath Saraf Securities Ltd. Vs. Assistant Commissioner of Income-tax,
Circle-6, Kolkata.
(अपीलाथȸ/Appellant) (ू×यथȸ/Respondent)
For the Appellant/Department: Sri D. R. Sindhal
For the Assessee/Cross Objector: Shri R. Salarpuria
2 ITA 695, 696 & 1935/K/2008 Loknath Saraf Securities Ltd.
A.Y. 02-03 & 04-05
C.O. Nos. 36 & 37/K/2008
आदे श/ORDER
महावीर िसंह :
Per Mahavir Singh/महावीर Appeal in ITA Nos.695 & 696/K/2008 by revenue and cross objection Nos.36 & 37/K/2008 are arising out of the orders of CIT(A)-VI, Kolkata in Appeal Nos. 95&122/CIT(A)-VI/06-07/C-6 both dated 25.02.2008 respectively. ITA No 1935 / K / 2008 by assessee is arising out of the order of CIT, Kol-II u/s 263 of Income Tax Act, 1961(hereinafter referred to as "the Act"), Kolkata vide dated 9.9.2008 for Assessment Year 2002-03. Assessments in were framed by ACIT, Circle-6, Kolkata for Assessment Years 2002-03 and 2004-05 u/s.147/143(3) and 143(3) of the Act vide his orders dated 16.10.2006 and 28.12.2006 respectively. For the sake of brevity and clarity, we dispose of all these appeals and cross objections by this consolidated order.
2. The first two common issues in appeal of revenue in ITA No. 695/K/2008 is against the order of CIT(A) in not confirming the action of AO regarding invocation of Explanation to section 73 of the Act for holding the profit of business of assessee as that of speculation profit and also dealing in futures and options as speculation profit. For this, revenue has raised the following ground nos. 1 and 2:
"1. That the Ld. CIT(A) has erred in law as well as on facts by observing the Explanation to Section 73 of the I. T. Act, 1961 is not applicable in the case of the assessee.
2. That the Ld. CIT(A) has erred in law as well as on facts by observing that the income of Rs.13,65,965/- on account of dealing in futures and options cannot be treated as speculation profit."
3. The brief facts leading to the above issue are that the assessee company is in the business of share broking, following mercantile system of accounting and it has disclosed income from share dealing in various types including jobbing, dealing in futures and options and regular trading in shares apart from interest on fixed deposits and dividend income. The assessee has also disclosed income earned from brokerage as a stock broker and also deals in shares for self also. The Assessing Officer in his assessment order noted that the regular assessment for Assessment Year 2003-04 was completed on 13.12.2005 and on the basis of the same, he made following conclusions:
"1. The facts as per returned figures and as per tax audit report.
A. The trading account of shares as disclosed by the assessee in its final accounts enclosed with the return are as follows:
3 ITA 695, 696 & 1935/K/2008 Loknath Saraf Securities Ltd.
A.Y. 02-03 & 04-05 C.O. Nos. 36 & 37/K/2008 Sale of shares Rs.136,35,22,792/-
Add: Closing stock Rs. 17,34,63,376/-
Rs.153,69,86,168/-
Less : Opening stock Rs. 52,08,000/-
Add : Purchase Rs.154,28,61,426/-
Loss in share trading Rs. 1,10,83,258/-
B. Other than the above, the assessee disclosed the following as income from operations:
Future and options difference Rs.13,65,965/-
Brokerage Rs. 9,34,921/-
Dividend Rs. 2,86,000/-
Interest received on fixed deposit Rs.26,87,682/-
Miscellaneous income Rs. 15,722/-
Short term capital gain Rs. 3,231/-
C. In the expenditure side, the assessee disclosed-
i) Operative, administrative and other exp. Rs.1,02,36,787/-
ii) Interest to others Rs. 71,55,208/-
iii) Depreciation as per company accounts Rs. 5,84,972/-
iv) Expenditure written off Rs. 46,500/-
v) Expenses relating to previous year Rs. 35,06,608/-
D. The operative, administrative and other expenses of Rs.1,02,36,787/- included loss on a/c. of self difference/jobbing for Rs.58,86,269/- and a loss on sale of motor car for Rs.11,899/-
E. The tax auditor in its report stated as follows: i) Out of expenditure written off in the profit and loss account for Rs.46,500/-
only Rs.18,500/- qualified for admissible expenses u/s. 35D.
ii) The expenses included a sum of Rs.49,789/- as penalty charges paid to stock exchanges for delay in depositing certain papers/short delivery proceeding.
iii) Liability pre-existed, disallowed in assessment of any preceding assessment year and was paid during the year to qualify for deduction in the current year
- as NIL.
iv) The expenditures relating to previous year were accounted for on cash basis and included Rs.10,792/- as service tax of earlier years.
II. Other observations and findings. i) In reply to queries, raised by the Assessing Officer for invocation of
explanation below sec. 73 in assessee's case for asstt. year 2003-04, the A/R in its written
ii) submissions stated that explanation below sec. 73 is applicable only when sec.
73 itself applies, as the explanation of 4 ITA 695, 696 & 1935/K/2008 Loknath Saraf Securities Ltd.
A.Y. 02-03 & 04-05 C.O. Nos. 36 & 37/K/2008
iii) any section without applications of that particular section is not justified.
Taking that the same reply will be put forward in the year under consideration too, it is refuted as below.
Explanation below sec. 73 was introduced as a deeming provision, therefore, even if there is no speculation transaction per se, it can be invoked. Secondly, share broker or assessee engaged in only share trading is not excluded from application of this explanation. Thirdly, there are two exception clauses for applications of this section. The first one being, such assessees whose gross total income consists mainly of incomes chargeable to heads other than salary and income from profits and gains of business. In the assessee's present case, as per computation of income filed by itself, does not show that, gross total income consists mainly of any source other than business. Even if we consider, interest on fixed deposits and dividend income to be taken as other sources of income, the amounts are hopelessly less than that from business. It may be reminded that the jurisdictional High Court has already laid down the principle that to consider quantum of income for any of the sources even negative figures are to be taken for comparison of quantum irrespective of profit or loss.
The other exception clause is for assessees whose principal business is of money lending. The assessee in its own statements have admitted to be one of the leading stock brokers of the different exchanges in India and its principal business had never been money lending.
Thus, the loss in share trading definitely attracts the deeming provision of explanation below sec. 73 and the loss is treated as speculation loss."
4. The Assessing Officer invoked explanation to section 73 of the Act and finally held that loss is speculation loss is not to be excluded from the income of assessee's business income in view of Explanation to sec. 73 of the Act and as per computation of income filed by the assessee it does not indicate that the gross total income consists mainly of any other sources or other than business of speculation. Aggrieved against this finding, assessee preferred appeal before CIT(A) and CIT(A) noting the fact that it has business activity of share trading which had suffered loss of Rs.1,10,83,258/- and also earned profit under futures and options amounting to Rs.13,65,965/- and profit in share trading, jobbing profit, profit on futures trading and options trading and premium paid on account of futures and options are part of its share business and accordingly, considering Explanation to sec. 73 of the Act allowed the claim of the assessee as business loss from share business activity by giving following finding:
"In the light of above, the provisions of Sec.73 read with explanation thereto are not applicable to the appellant company. In view of the above, A.O is directed to allow the loss in share business against the share trading and future option business with other business of the company. The entire business loss be treated as loss from share business activity and allowed to be carried forward for set off with share business of the appellant in subsequent years as per provisions of Sec.70 & 71 of I. T. Act. Accordingly, ground no. 2 is allowed."
5 ITA 695, 696 & 1935/K/2008 Loknath Saraf Securities Ltd.
A.Y. 02-03 & 04-05 C.O. Nos. 36 & 37/K/2008 Aggrieved against this finding, revenue is in appeal before us.
5. We have heard rival submissions and gone through facts and circumstances of the case. The Ld. CIT DR Shri D. R. Sindhal argued that the order of Assessing Officer has not been controverted by CIT(A) and he stated that the Explanation to Sec. 73 of the Act is a deeming provision and there are two exceptions in Explanation, first being, whether assessee's gross total income consists mainly of income chargeable heads other than salary and income from profit and gains from business. The Ld. CIT DR stated that in assessee's case, it is clear from computation of income filed by it that, gross total income consists mainly income of any source other than business and even interest on fixed deposit and dividend are taken as other source of income, the amounts are less than that from business income. The other exception clause is for the assessee's, whose principal business is of money lending. He stated that the assessee admitted before the Assessing Officer that it is a leading stock broker and engaged in different exchanges and its principal business was never money lending. He narrated the facts from the assessee's paper book and he has gone to the accounts of the assessee for the relevant assessment year as well as one to the prior and next year. While making comparison, the Ld. CIT-DR drew our attention to loans and investments at page 4 of assessee's paper book and stated that there is investment on loans and advances to the extent of Rs.1,81,75,668/- as against the investment of earlier year in loans and advances at Rs.3,79,06,380/-. The Ld. CIT- DR further stated that in case the assessee's share business is speculative business, the loss cannot be allowed against normal business income in view of Explanation to sec. 73 of the Act. He drew our attention to Explanation to sec. 73 of the Act. He further argued that the CIT(A) has not given any independent finding on the issue and no facts are discussed in this case except the provisions of the Act. Finally, the Ld. CIT DR argued that seeing the nature of sale of shares and opening stock of shares and purchase and loss suffered in share trading clearly revealed that assessee had entered into speculative transaction and not in the business of share transaction. Hence, according to Ld. CIT DR, the explanation to sec. 73 is clearly applicable to this case. Accordingly, he urged the bench to confirm the order of Assessing Officer.
6. The Ld. Counsel for the assessee, on the other hand, has narrated the facts that the Assessing Officer himself has noted that the assessee has disclosed income from share dealing of various types including jobbing, dealings in futures and options, regular trading in shares, 6 ITA 695, 696 & 1935/K/2008 Loknath Saraf Securities Ltd.
A.Y. 02-03 & 04-05 C.O. Nos. 36 & 37/K/2008 earned brokerage income as share broker for other clients and for self apart from interest income on fixed deposits and dividend. The Ld. Counsel for the assessee further stated from the very account as narrated by the Assessing Officer on page 2 of his assessment order (now reproduced above in para-3 page-3) which clearly reveals that the assessee is engaged in business of sale and purchase of shares and during the course of normal business of sale of shares, it has incurred loss in share trading. He argued that assessee is one of the leading stock-broker with different exchanges in India and its principal business was never of money lending. The Ld. Counsel for the assessee further stated that the Assessing Officer himself has assessed profit earned under futures and options amounting to Rs.13,65,965/- as income from business. He argued that it is not the case of the revenue that the assessee is a company controlled by a business house and the share transactions in question are effected with a view to manipulate or reduce its income. It is also not the case of the revenue that the assessee has declared this loss in share trading activity in order to reduce the tax incidence. The Ld. Counsel for the assessee relied on the case law of Hon'ble Calcutta High Court in the case of CIT Vs. Arvind Investments Ltd. 192 ITR 365 (Cal) and also of this Tribunal Mumbai Bench in the case of Samba Trading & Inv. P. Ltd. Vs. ACIT 58 ITD 360 (Mum). The Ld. Counsel for the assessee also relied on the case of coordinate Bench in the case of Wonder Max Vinimay (P) Ltd. Vs. ITO, ITA No. 188 (Kol) of 2009 for Assessment Year 2005-06 dated 24.12.2009.
7. We find from the case records that the assessee suffered loss of Rs.1,10,83,258/- in the activity of share trading and also earned profit in futures and options amounting to Rs.13,65,965/-. The assessee has earned income in the shape of profit in share trading, jobbing profits, profit on futures and options, premium paid on account of futures and options, which are part of assessee's share business. The assessee is a share broker traded in various exchanges on its own being a registered stock exchange broker and from the records it has gathered that the assessee has traded in assessment year 2002-03 and disclosed the following details of sales and purchases:
2002-2003 2001-2002
Description Quantity Value Quantity Value
shares (Nos)
Opening Stock 627253 173,563,376 42500 5,208,000
Purchases 13090809 2,496,679,441 7041387 1,542,861,426
Sales 13712062 2,640,911,814 6456634 1,363,522,792
Closing Stock 6000 731,798 627253 173,463,376
7 ITA 695, 696 & 1935/K/2008 Loknath Saraf Securities Ltd.
A.Y. 02-03 & 04-05
C.O. Nos. 36 & 37/K/2008
8. We find from the facts that the assessee is engaged in the business of sale and purchase of shares as a broker, who is registered with various stock exchanges. The assessee is entering into share trading in these exchanges for various clients for and from the records it clearly reveals that apart from normal share trading it is also making trading for its own purposes and earned profits on futures and options. We find that different treatment to transactions separately does constitute business activity and when the assessee is a share broker, trading in exchanges for clients or for its own purposes he safeguards futures and options transactions and entered into jobbing transactions, purchase and sale of shares and the entire activity in share business, i.e. by registered stock broker, constitute business activity and the same cannot be said that the assessee is engaged in the business of speculation thereby earning speculation profit. We find from the facts that there is no transaction of investing the surplus fund lying with the assessee temporarily for a brief period, which give a conclusion that the assessee is in speculation profit. There is no instance brought to our notice by revenue that the assessee has entered into speculation transaction of shares, by virtue of which they have speculated in transactions without making any investment or they have not received the deliveries or not traded on behalf of the clients. Carrying on a business is something different from entering into speculation transaction and in order to constitute business there should be an organized activity and not this speculation transaction from which speculation profit is earned.
9. Coming to Explanation to Section 73 of the Act, which introduced a legal fiction and it is also clear that explanation does not apply to an investment company or a company whose principal business is of banking or money lending. If the business of a company which does not fall within the excluded categories consisted of purchase and sale of shares of other companies then such a company shall be deemed to be carrying on speculation business for the purpose of section 73 of the Act to the extent to which business consists of purchase and sale of shares but in the present case, the assessee's business consists of purchase and sale of shares for clients or investment for itself and not dealing in purchases and sale of share speculation. We find that Hon'ble Calcutta High Court in the case of Arvind Investment Ltd. (supra) has considered this issue while discussing Explanation to Sec. 73 of the Act as under:
"Sub-section (1) of section 73 restricts the scope of section 70 which permits the setting off of loss from one source against the profit from another source falling under the same head of income and sub-section (1) of section 73 categorically declares that any loss arising from speculation business shall not be set off except against profits and gains of another speculation business. In other words, if there is a speculation loss and also gain from another source of non speculation business then such speculation loss cannot be set off against the profit from a non-speculation business.
8 ITA 695, 696 & 1935/K/2008 Loknath Saraf Securities Ltd.
A.Y. 02-03 & 04-05 C.O. Nos. 36 & 37/K/2008 Sub-section (2) of section 73 restricts the scope of section 72 which provides for carrying forward and setting off of business losses. If any loss computed in respect of a speculation business has not been wholly set off, such loss may be carried forward and set off against profits and gains of any speculation business in the following assessment years.
The Explanation to section 73 introduces a legal fiction. The section applies only to a company. It does not apply to individuals, firms, Hindu undivided families or associations of persons. The Explanation also does not apply to an investment company or a company whose principal business is banking or money-lending.
If the business of a company which does not fall within the excluded categories consists of purchase and sale of shares of other companies, then such a company shall be deemed to be carrying on speculation business for the purpose of section 73 to the extent to which the business consists of the purchase and sale of such shares.
and further Hon'ble jurisdictional High Court held that "The phrase "to the extent to which the business consisted of purchase and sale of such shares" also does not indicate that the Legislature had several other actual and existing non-speculative activities of business in mind. It merely indicates that the business activity which consists of purchase and sale of shares will be treated as speculation business. If the entire business activity of a company consists of purchase and sale of shares of other companies, then the entire business will be treated as peculation business. But, if, apart from purchase and sale of shares, the company has other business activities, then those other activities will not treated as speculation business.
The circular on which reliance has been placed also does not advance the case of the assessee in any way. The object as stated in the circular is to curb the device to manipulate and reduce the taxable income of a company under the management of a controlling group of persons. But the circular has clearly stated in paragraph 19.1 that "the business of purchase and sale of shares by companies which are not investment or banking companies or companies carrying on the business of granting loans and advances will be treated on the same footing as speculation business".
Therefore, the circular does not leave any room for doubt that the Explanation will apply to the business of purchase and sale of shares of certain companies. Nowhere in the circular has any indication been given that where the only business of a company consists of purchase and sale of shares, the Explanation will not apply."
10. We find that in the present case the assessee is in the business of purchase and sale of shares but the revenue nowhere proved or brought to our notice any instance that it has entered 9 ITA 695, 696 & 1935/K/2008 Loknath Saraf Securities Ltd.
A.Y. 02-03 & 04-05 C.O. Nos. 36 & 37/K/2008 into any speculative transaction. We find that Hon'ble Calcutta High Court in the case of Arvind Investment Ltd. (supra) has clearly made a distinction that Explanation does not apply to an investment company or a company whose principal business is banking or money lending and if the business of a company which does not fall within the excluded categories consisting of purchase and sale of shares of other companies, then such a company shall be deemed to be carrying on speculation business and to which Explanation to Section 73 of the Act will extend. But in the present case, the assessee is carrying on buying and selling of shares of certain companies no speculative transaction of purchase and sale were followed by delivery of scrip and as such cannot be treated as speculative transaction as defined in section 43(5) of the Act. The provision of section 43(5) of the Act defines speculative transaction to mean a transaction in which a contract for the purchase or sale of any commodity, including any stock or shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrip. Here, in the present case, the assessee is actually dealing in purchase and sale of shares for clients and it is its normal and regular business. It cannot be called as speculative business earning speculative profits. Similar are the reasons for the issue of futures and options as both the authorities have relied on the same, taking a consistent view, we confirm the order of CIT(A) on both the issues.
11. The next issue in ITA No.695/K/2008 is as regards to the order of CIT(A) deleting the disallowance of Rs.28,000/- made u/s. 35D of the Act by admitting fresh evidence in violation of Rule 46A of the I. T. Rules, 1962. For this, the revenue has raised following ground no.3:
"3. That the Ld. CIT(A) has erred in law as well as on facts by directing the Assessing Officer to delete the disallowance of Rs.28,000/- made u/s. 35D and also admitting fresh evidence in violation of Rule 46A."
In support of order of CIT(A), assessee in its Cross Objection No.36/K/2008 has raised the following ground no.3:
"3. For that in view of the facts and circumstances of the case the Ld. CIT(A) was wholly correct and justified in allowing the relief on the issues which are disputed in the Departmental appeal and that there was no violation of Rule 46A of the I. T. Rules while deleting the disallowance of Rs.28,000/- made in assessment u/s. 35D of the Act. The Department's appeal being devoid of merit is liable to be dismissed."
12. We have heard rival contentions and gone through facts and circumstances of the case. We find that the AO has disallowed a sum of Rs.28,000/- but for that no reasons were given. The CIT(A) allowed the claim of the assessee by stating that the sum of Rs.28,000/- was paid to Calcutta Stock Exchange towards trading in the course of business and this being 10 ITA 695, 696 & 1935/K/2008 Loknath Saraf Securities Ltd.
A.Y. 02-03 & 04-05 C.O. Nos. 36 & 37/K/2008 preliminary and miscellaneous expenses written off. We find no fault in the order of CIT(A) and the issue of the revenue appeal is dismissed. The ground of Cross Objection of the assessee is supportive of the order of CIT(A) and hence, it is dismissed as infructuous.
13. The first issue in CO No.36/K/2008 is regarding jurisdiction i.e. reopening of assessment u/s. 147 r.w.s. 148 of the Act upheld by CIT(A). For this, the assessee has raised following ground no.1:
"1.For that in view of the facts and circumstances of the case the Ld. CIT(A) was wholly wrong and unjustified in upholding the action of the A.O. in initiating the proceeding u/s. 147 of the I. T. Act by issue of notice u/s. 148 and subsequently completing the assessment u/s. 143(3)/147 without considering and appreciating the fact that all the material facts including the trading a/c of shares necessary for the assessment were fully and truly disclosed in the return and no new material or evidence was brought on record to justify the reopening the assessment on a single issue. Actions of both the A.O. and the Ld. CIT(A) were wholly arbitrary, unreasonable, uncalled for and bad in law. The order u/s. 143(3)/147 being wholly bad, illegal and void ab initio both on facts and in law is liable to be quashed/cancelled."
14. The brief facts leading to the above issue are that the assessee company filed its return of income for Assessment Year 2002-03 on 28.10.2002 disclosing income from share dealing of various types including jobbing, dealing in futures and options, regular trading in shares, interest on fixed deposits and dividend apart from brokerage earned as share broker. This return was processed u/s. 143(1) of the Act on 26.5.2003. Subsequently, Assessing Officer noted from the assessment record that Explanation to Section 73 of the Act is attracted as the assessee is in the speculation business and by virtue of which he has suffered speculation loss. Accordingly, he recorded the reasons by dated 27.3.2006 as under:
"27.03.06 : From the P&L A/c it has been observed that the assessee has sold shares worth Rs.136,35,22,792. The net profit/loss on share trading is as below:
Sale 136,35,22,792
Add: Cl. Stock 17,34,63,376
153,69,86,168
Less Purchase & Op. stock 154,80,69,426
Loss 1,10,83,258
The above loss on share trading has been set off with Interest Income which falls under Income from Other Sources. Explanation to Sec. 73 is attracted in assessee's case and the above loss is to be treated as speculation loss. The assessee also does not fall under the two exemptions in explanation to Sec.73 which is squarely applicable in assessee's case.
I have reason to believe that the amount of Rs.1,10,83,258 should be added to business income and is to be treated as speculation loss which cannot be set off with business profits. Therefore, the amount above has escaped assessment.
11 ITA 695, 696 & 1935/K/2008 Loknath Saraf Securities Ltd.
A.Y. 02-03 & 04-05 C.O. Nos. 36 & 37/K/2008 Issue notice u/s, 148 of the I. T. Act."
and on the basis of these reasons he reopened the assessment and assessee was also made aware of the reasons vide letter dated 23.8.2006. In response to notice u/s. 148 of the Act, the assessee filed return of income repeating the same income/loss on 19.4.2006. The Assessing Officer framed assessment u/s. 147 r.w.s 143(3) of the Act and disallowed this loss of Rs.1,10,83,258/- incurred in share trading. Aggrieved, assessee preferred appeal before CIT(A) and in appeal, he confirmed the action of the Assessing Officer reopening the assessment by giving following finding in para 2.3 and 2.4 of his appellate order:
"2.3. I have considered the submission made by the appellant as well as the observation made by the A.O. The appellant in its submission has relied on a decision of ITAT, Mumbai in ITA 672 and 673/Mumbai/2004 dated 24.08.2007. The appellant in its submission has argued that the fact of trading in shares and resultant loss was explicitly disclosed in the P&L Account and the same was in full knowledge of the A.O. and hence the proceedings u/s. 147 so made is void ab initio.
2.4. I have considered the matter in detail and I have also perused the order of Hon'ble Apex Court in ACIT Vs. Rajesh Javeri Stock Brokers Private Ltd. 291 ITR 500 (SC) and I find that in such decision Hon'ble Court had held that if ingredients of Section 147 are fulfilled, failure to take steps u/s. 143(2) does not take away the power to reopen the assessment even in a case where intimation u/s. 143(1) has been issued and as such A.O's power to proceed for income escaping assessment even if there is no proceeding u/s. 147 is not wasted. In view of the above and also in view of the decision of Hon'ble Supreme Court (supra) the action of the A.O. is upheld and accordingly, ground no. 1 is dismissed."
15. Before us the Ld. Counsel for the assessee relied on the case law of Mumbai ITAT "D" Bench in the case of Tarak L. Gandhi Vs. ITO (2009) 27 SOT 72 (Mum.) and stated that the similar issue has been adjudicated upon by Mumbai Tribunal and finally held as under:
Submission of the learned counsel for the Revenue is that assessee had claimed excessive loss either failing under cl. (b) above or had computed excessive loss thereby falling under sub-cl. (iv) of cl. (c) above. No doubt the decision of' Delhi Third Member Bench of this Tribunal in O.P. Chawla's case (supra) which held that an attempt on the part of the AO to probe into a return without any fresh fact or change in law would only be a reason to suspect and not reason to believe, even in a case where original return was processed under s. 143(1)(a) of the Act, was rendered, without specifically noting the law laid down by the Hon'ble Supreme Court in Rajesh Jhaveri Stock Brokers (P) Ltd.'s case (supra). Hon'ble Supreme Court has held that 'reason' in the phrase 'reason to believe' would mean cause or justification. AO should, any case have cause or justification to know or suppose that income had escaped assessment. Though in an assessment which was originally done under s. 143(l) of the Act, only first condition regarding reason to believe would be suffice for reopening the assessment, the issue here is, whether assessee having declared its loss under the head 'Profits and gains of business or profession', just for the purpose of bifurcation of the interest expenses, if the AO chooses to issue notices under s. l47 of the Act, would it be reason to believe or suppose that income had escaped assessment. As the assessee rightly pointed out, 12 ITA 695, 696 & 1935/K/2008 Loknath Saraf Securities Ltd.
A.Y. 02-03 & 04-05 C.O. Nos. 36 & 37/K/2008 bifurcation of interest expenses would not result in any excess claim or loss. In our opinion, assessee had not claimed any excessive loss nor had it computed any excessive loss. A.O stated in the reasons given in the assessment order that the basis for reopening assessment was to bifurcate the interest expenses and such bifurcation would make a substantial material difference to the loss declared by the assessee in these years. However, we find that there is no difference at all in the loss declared by the assessee in any of these years but tile only result is that the loss shown by the assessee under the head 'Income from business/profession', consequent to the bifurcation of interest, got bifurcated between that head and the head 'Income from other sources'. Applicability of carry forward provisions regarding losses under the various heads would have no bearing on deciding whether an assessee had claimed excessive loss in its return. As long as the loss returned by the assessee remains the same, before on after the bifurcation of the interest, details of all of which, were available from the returns filed by the assessee, reason to believe that there was any income chargeable to tax had escaped assessment, could not be there. Hence at the stage of notice, there was no relevant material on which a reasonable person would have formed a requisite belief that any income chargeable to tax had escaped assessment. In fact, the AO has not stated anywhere that he had any reason to believe that income chargeable to tax had escaped assessment. In the case of Dr. Amin's Pathology Laboratory (supra) of the jurisdictional High Court, the AO had found that there was unpaid expenses which ought to have been disallowed but were not disallowed. In the case of' Smt. Gurinder Kaur (supra) decided by the Delhi Bench of' this Tribunal, and referred by learned Departmental Representative, 'reason' to believe was a report of' Investigation Wing that certain gifts alleged to have been received by the assessee from NRI, were bogus and assessee had made cash payments for obtaining such gifts. This decision has also no relevance to the facts here. Of course it has been held by the Hon'ble apex Court in Rajesh Jhaveri Stock Brokers (P) Ltd's case (supra), that where returns were originally accepted under s. 143(1)(a) of the Act, only the first stipulation regarding reason to believe alone was required for initiating the reassessment proceedings. However, as mentioned above, we find that there was no existence of any reason which could give rise to a belief that any income chargeable to tax had escaped assessment. In the result, we are of the opinion that the notices under s.148 were without jurisdiction for all the three years and therefore assessments made on such notices are quashed. Assessee, therefore, succeeds in its ground number two for a1l the three assessment years."
16. On the other hand, the Ld. CIT-DR supported the orders of the lower authorities.
17. We find from the arguments of both the sides and from the case records that the assessment was reopened by issuing notice u/s. 147 r.w.s.148 of the Act, after recording of reasons as noted above. The original return was processed u/s. 143(1) of the Act on 26.05.2003, in which the assessee has disclosed income from share dealing of various types including jobbing, dealing in futures and options, regular trading in shares, interest on fixed deposits and dividend apart from brokerage earned as share broker. Main contention of the assessee is that the AO as well as CIT(A) has confirmed the reopening without considering the facts that all material facts including trading account of shares necessary for assessment was fully and truly disclosed in the return of income and no new material or evidence was brought on record to justify the reopening of assessment on this single issue. We are of the view that 13 ITA 695, 696 & 1935/K/2008 Loknath Saraf Securities Ltd.
A.Y. 02-03 & 04-05 C.O. Nos. 36 & 37/K/2008 the proviso to section 147 of the Act will not apply to the present case as no assessment u/s. 143(3) of the Act was framed originally. It means that AO has not formed any opinion which can be said that there is a change of opinion. The Ld. Counsel for the assessee placed reliance on the case law of this Tribunal in the case of Tarak L. Gandhi (Supra) stating that in the present case also the revenue could not point out that by way of claim of loss will make substantial material difference to the income of the assessee. However, we are of the view that the Hon'ble Apex Court in the case of ACIT Vs. Rajesh Jhaveri Stock Brokers (P) Ltd. (2007) 291 ITR 500 (SC) has clearly held that reason in the phrase "reason to believe" would mean cause or justification for reopening and AO should, in any case, have cause or justification to know or suppose that income has escaped assessment. Accordingly, the return which was originally processed u/s. 143(1) of the Act only first condition regarding reason to believe would be suffice for reopening of the assessment. Therefore, explanation to section 147 clause (c) sub-clause (iv) of the Act will apply here and accordingly, we uphold the actions of the lower authorities reopening the assessment. This issue of the assessee's Cross Objection is dismissed.
18. The next issue in respect of Cross Objection No.36/K/2008 is regarding disallowance of operative, administrative and other expenses u/s. 14A of the Act. For this the assessee has raised the following ground no.2:
"2. For that in view of the facts and circumstances of the case the Assessing Officer was wholly wrong and unjustified in making adhoc, arbitrary disallowance of operative, administrative and other expenses to the tune of Rs.28,000/- u/s. 14A of the I. T. Act purely on estimate and presumption attributing it to the earning of exempt dividend income of Rs.2,86,000/- and the Ld. CIT(A) was equally wrong and unjustified in confirming the disallowance to the extent of Rs.10,000/- without considering and appreciating the fact that no expense was incurred for earning the dividend and no material or evidence was brought on record to establish the nexus between such expense and the earning of dividend income. Actions of both the A.O and the Ld. CIT(A) were wholly arbitrary, unreasonable, uncalled for and bad in law. Even otherwise the disallowance made was highly excessive and wholly unreasonable."
19. Briefly stated facts of the case are that the Assessing Officer disallowed Rs.28,600/- u/s. 14A of the Act by observing in the assessment order that the assessee earned dividend of Rs.2,86,000/- which is exempt income and as it does not have any shares as investment but all as trading shares, earning of dividend is considered as embedded in the business activity of the assessee. He thus, disallowed u/s. 14A of the Act a sum of Rs.28,600/- being 10% of the dividend earned. Aggrieved, assessee preferred appeal before CIT(A) and in appeal, CIT(A) 14 ITA 695, 696 & 1935/K/2008 Loknath Saraf Securities Ltd.
A.Y. 02-03 & 04-05 C.O. Nos. 36 & 37/K/2008 restricted the disallowance u/s. 14A of the Act at Rs.10,000/- as against Rs.28,600/-. Being further aggrieved, the assessee raised the above ground through this Cross Objection.
20. After hearing rival contentions and going through facts and circumstances of the case, we find that the Assessing Officer made the disallowance of Rs.28,600/- u/s. 14A of the Act and CIT(A) restricted the disallowance at Rs.10,000/- by observing that for earning exempt income the organization has to incur certain expenses regarding the various staff, management, remuneration, cost of stationery, bank charges etc. therefore, it cannot be said that no expenditure was directly incurred. We also find that that section 14A of the Act introduced with retrospective effect is attracted by the claim of interest expenditure on borrowed fund utilised for investment in shares. The CIT(A) restricted the disallowance at Rs.10,000/- u/s. 14A of the Act. The assessee's counsel at the time of hearing before us submitted that the amendments brought to Section 14A of the Act, by the Finance Act, 2006 w.e.f. 1.4.2007, are retrospective in nature and hence, would apply to the present case although the same is for Assessment Year 2002-03. We find that Hon'ble Bombay High Court in the case of Godrej Boycee Mfg. Co. Ltd. vs. DCIT [2010] 328 ITR 81 (Bom.) at pages 138 & 139 vide sub paras
(v) to (vii) held that rule 8D is prospective as under:
"(v) The provisions of rule 8D of the Income-tax Rules which have been notified with effect from March 24, 2008, shall apply with effect from the assessment year 2008-09;
(vi) Even prior to the assessment year 2008-09, when rule 8D was not applicable, the Assessing Officer has to enforce the provisions of sub-section (1) of Section 14A. For that purpose, the Assessing Officer is duty bound to determine the expenditure which has been incurred in relation to income which does not form part of the total income under the Act. The Assessing Officer must adopt a reasonable basis or method consistent with all the relevant facts and circumstances after furnishing a reasonable opportunity to the assessee to place all germane material on the record;
(vii) The proceedings for the assessment year 2002-03 shall stand remanded back to the Assessing Officer. The Assessing Officer shall determine as to whether the assessee has incurred any expenditure (direct or indirect) in relation to dividend income/income from mutual funds which does not form part of the total income as contemplated under Section 14A. The Assessing Officer can adopt reasonable basis for effecting the apportionment. While making that determination, the Assessing Officer shall provide a reasonable opportunity to the assessee of producing its accounts and relevant and germane material having a bearing on the facts and circumstances of the case"
In view of facts of this case and the principle laid down by Hon'ble Bombay High Court in the case of Godrej Boycee Mfg. Co. Ltd. (supra), that Rule 8D is applicable for and from assessment year 2008-09 and prior to that the Assessing Officer can make estimate in the 15 ITA 695, 696 & 1935/K/2008 Loknath Saraf Securities Ltd.
A.Y. 02-03 & 04-05 C.O. Nos. 36 & 37/K/2008 given facts and circumstances. Hence, we restrict the disallowance to 1% in relation to earning of exempt dividend income and direct the Assessing Officer to calculate the expenditure on that basis. This ground of assessee's appeal is partly allowed.
21. The first issue of Revenue's appeal in ITA No. 696/K/2008 is against the order of CIT(A) in deleting the disallowance made by Assessing Officer on account of expenditure of premium in respect of future and options. For this, the revenue has raised the following ground nos. 1 and 2:
"1. That the Ld. CIT(A) has erred in law as well as on facts by directing the Assessing Officer to delete the disallowance of expenditure on account of premium for Rs.4,45,19,455/- in respect of future and options.
2. That the Ld. CIT(A) has erred in law as well as on facts by observing that the expenditure on account of future and options is to be treated to be incurred in course of share trading business."
22. As this issue, we have already decided in ITA No. 695/K/2008, for AY 2002-03 vide para 10 of this order, hence taking a consistent view, we decide this issue against revenue and dismiss the ground of appeal.
23. The next common issue in ITA No.696/K/2008 and C.O. Nos. 37/K/2008 is as regards to section 14Aof the Act. For this, the revenue has raised the following ground no.3:
"3. That the Ld. CIT(A) has erred in law as well as on facts by restricting the disallowance to \Rs.1,50,000/- u/s. 14A as against Rs.10,24,315/-."
The assessee has also raised in its Cross Objection the following ground no.1:
"1. For that in view of the facts and circumstances of the case the Assessing Officer was wholly wrong and unjustified in making adhoc, arbitrary disallowance of operative, administrative and other expenses to the tune of Rs.10,24,315/- u/s. 14A of the I. T. Act purely on estimate and presumption attributing it to the earning of exempt dividend income of Rs.71,86,525/- and the Ld. CIT(A) was equally wrong and unjustified in confirming the disallowance to the extent of Rs.1,50,000/- without considering and appreciating the fact that no expense was actually incurred for earning the dividend and no material or evidence was brought on record to establish the nexus between such expense and the earning of dividend income. Actions of both the A.O and the Ld. CIT(A) were wholly arbitrary, unreasonable, uncalled for and bad in law. Even otherwise the disallowance made was highly excessive and wholly unreasonable."
Since we have restricted the disallowance to 1% of the dividend income in relation to earning of exempt dividend income vide para 20 of this order, the same ratio is also applicable in these grounds also. We order accordingly.
16 ITA 695, 696 & 1935/K/2008 Loknath Saraf Securities Ltd.
A.Y. 02-03 & 04-05 C.O. Nos. 36 & 37/K/2008
24. The first issue in ITA No.1935/K/2008 of the assessee is against the order of CIT, passed u/s. 263 of the Act revising the assessment, is barred by limitation. For this, the assessee has raised the following ground Nos.1 and 2:
"1. For that in view of the facts and in circumstances the Order u/s. 263 is wholly bad, illegal and void abinitio both on points of law as well as facts and proceedings u/s. 263 in this case in respect of prior period expenses is barred by limitation in as much as original assessment in this case was completed on 26.05.2003 accepting the prior period expenses and proceedings u/s. 147 having been initiated specifically for applicability of provisions of Explanation to section 73 and order u/s. 147/143(3) dated 16.10.2006 having been specifically made in respect of provisions of Explanation to Section 73, the period of limitation for the purposes of section 263 commenced from 26.05.2003 i.e. the date of original assessment and not from 16.10.2006 i.e. the date of assessment u/s. 147/143(3) and hence the period of limitation for initiating proceedings u/s. 263 prior period expenses having expired on 31.03.2006, proceedings u/s. 263 in this case in respect of prior period expenses is barred by limitation and hence in view of the facts and in the circumstances such order u/s. 263 is liable to be quashed / cancelled / set aside and in view of the facts and in the circumstances it may kindly be held accordingly.
2. For that in view of the facts and in the circumstances the Order u/s. 263 having been made without proper consideration of the submissions made by your petitioner in paras 2 to 8 of the written submission, order u/s. 263 is wholly bad, illegal and void abinitio and in view of the facts and circumstances the CIT is wholly unjustified in not taking into consideration and discussing the various case laws brought to the notice of the CIT in written submission and the CIT is wholly unjustified in ignoring such decisions and hence order u/s. 263 is wholly bad, illegal and void abinitio and hence in view of the facts and in the circumstances such order u/s. 263 is liable to be quashed / cancelled / set aside and in view of the facts and in the circumstances it may kindly be held accordingly."
25. The brief facts relating to the above issue are that the assessee company filed its return of income originally on 28.10.2002 declaring total loss at Rs.2,75,11,159/- as business loss and Rs.1,13,187/- as Short Term Capital Loss. Subsequently, the return was processed u/s. 143(1) of the Act on 26.5.2003. Subsequently, the Assessing Officer after recording reasons initiated proceedings u/s. 147 r.w.s. 148 of the Act and according to him the transactions are speculative transactions and hence, the business loss is speculation loss as hit by explanation to Section 73 of the Act, hence, he computed business loss at Rs.1,26,96,737/- and further computed speculation loss at Rs.97,27,293/-. The subject matter was taken to appeal to the CIT(A) and further to Tribunal, which is now adjudicated vide ITA No. 695/K/2008 and CO No.36/K/2008. Further, CIT, Kol-2 on examination of records noted that following prior period expenses should have been disallowed and added back to the returned income, which was not done at the time of framing of reassessment u/s. 147 r.w.s. 143(3) of the Act:
17 ITA 695, 696 & 1935/K/2008 Loknath Saraf Securities Ltd.
A.Y. 02-03 & 04-05 C.O. Nos. 36 & 37/K/2008 SEBI Turnover Fees Rs.29,90,963/-
SEBI SAT Charges Rs. 3,01,515/-
Service Tax Rs. 10,791/-
Transaction Charges Rs. 1,76,173/-
ALBM Rs. 22,162/-
Others Rs. 5,003/-
Rs.35,06,607/-
CIT, Kol-2 issued show cause notice to that effect, vide show cause notice No.CIT/Kol- II/U/s.263/C-50/2007-08/809 dated 12.5.2008. Before CIT, the assessee contended that the proceedings initiated u/s. 263 of the Act on the basis of reassessment order u/s. 147 r.w.s. 143(3) of the Act dated 16.10.2006 ignoring that the original assessment was framed on 26.5.2003 and hence, the present proceeding u/s. 263 of the Act is barred by limitation. Before CIT it was specifically contended that the reassessment proceedings u/s. 147/143(3) of the Act was completed after recording of specific reasons and reassessment was framed in respect to application of explanation to section 73 of the Act for treating certain business loss as speculation loss as is apparent from the reasons recorded for initiating proceedings u/s. 147 r.w.s 148 of the Act. In view of these facts, the Ld. Counsel before CIT contended that the show cause notice is in respect of specific items other than items for which proceedings u/s. 147 of the Act has been initiated and hence, initiation of action u/s. 263 of the Act is clearly barred by limitation, as limitation in the present proceedings i.e. 263 of the Act will start from the date of original assessment i.e. 26.5.2003 and not from the date of reassessment order dated 16.10.2006. Before CIT the case law of Hon'ble Apex Court in the case of CIT Vs. Alagendran Finance Ltd. (2007) 293 ITR 1 (SC). The CIT called for the report from the Assessing Officer and the Assessing Officer in his report dated 7.8.2008 stated as under:
"At para 2 of the said letter the assessee sought to reason that the initiated proceeding has got barred by limitation of time. Again at para 4 of the letter the assessee itself admits that the issue of prior period expense was a part of the second assessment order passed u/s. 147 on 16.10.2006. Therefore, the mistake detected which was prejudicial to the interest of revenue was in the order dt. 16.10.2006. Therefore, clearly revision u/s. 263 lies in this case.
Secondly, the issue of prior period had not been dealt properly in that order thus, it cannot be held to be an issue already decided by the C1T(A).
It may also be clarified further that initially after detection of the mistake an attempt had been taken to rectify it u/s.154 as the prior period expenditure items were available in the tax audit report. To this the assessee challenged that allowability of prior period items being a matter of deliberation and not a matter of arithmetic correction. Thereafter the proceedings had been dropped when the assessee had been clearly informed that the mistake would be rectified by invoking proper remedial action and the 18 ITA 695, 696 & 1935/K/2008 Loknath Saraf Securities Ltd.
A.Y. 02-03 & 04-05 C.O. Nos. 36 & 37/K/2008 proposal was sent fur perusal of the CIT for invocation of his power u/s.263. The assessee had been informed then that it cannot take the plea that the issue had been deliberated upon and thereafter a conscious decision had been taken to allow the prior period items.
Therefore, in my 'view the proceedings initiated u/s.263 absolutely valid.
Coming to the facts to the case, the assessee has not extended any comment on the issue of allowability of any one of the six items. It is submitted that SEBI turnover fees, VSAT expenses, service tax, transaction charges payable to Stock Exchange, ALBM or fees payable to Stock Exchange are all quantifiable item within the financial year, as all are fees/charges chargeable by various authorities. Except for service tax of Rs. 10,791/- none of the other expenditures are covered u/s. 43B, so they are not allowable in the year of payment. The charging of prior period items is not allowable as per sec. 145(1) of the I. T. Act."
The CIT finally set aside the issue and directed the Assessing Officer to reassess by making additions of the above stated prior period expenses totaling to Rs.35,06,607/-. Aggrieved, now assessee is in appeal before us.
26. As regards the limitation, the Ld. Counsel for the assessee Shri R. Salarpuria argued that the return was processed u/s. 143(1) of the Act in the present case on 26.5.2003 and resultant refund was issued on 30.5.2003 amounting to Rs.6,57,051/-. He argued that from the original assessment i.e. 26.5.2003, the limitation ends on 31.5.2005 and CIT has taken the limitation from the reassessment proceedings framed u/s. 147 r.w.s. 143(3) of the Act on 16.10.2006. The Ld. Counsel for the assessee stated that the reassessment proceedings were initiated for specific reasons recorded and reassessment was framed u/s. 147 r.w.s.143(3) of the Act for such specific purpose for alleged escapement of income by application of explanation to section 73 of the Act for treating business losses as speculation losses as is apparent from the reasons recorded as well as the reassessment framed u/s. 147 r.w.s 143(3) of the Act. He argued that the present show cause notice is in respect of items other than items for which proceedings u/s. 147 of the Act was initiated and hence, the proposed initiation of section 263 of the Act is clearly barred by limitation which will start from the date of original assessment framed u/s. 143(1) of the Act dated 26.5.2003. In view of this, the Ld. Counsel stated that this is a covered case by the decision of Hon'ble Apex Court in the case of Alagendran Finance Ltd. (Supra).
27. On the other hand, Ld. CIT-DR Shri D. R. Sindhal relied on the revision order passed by the CIT and argued that the limitation in this case starts from the reassessment framed u/s. 147/143(3) of the Act. He stated that as such the processing of return u/s. 143(1)(a) of the Act 19 ITA 695, 696 & 1935/K/2008 Loknath Saraf Securities Ltd.
A.Y. 02-03 & 04-05 C.O. Nos. 36 & 37/K/2008 is not assessment and for this he cited the case law of Hon'ble Apex Court in the case of ACIT Vs. Rajesh Jhaveri Stock Brokers P. Ltd. (2007) 291 ITR 500 (SC), he stated that the Hon'ble Apex Court has interpreted the provisions of section 143(1) by holding that w.e.f. 1.6.1999 under the first proviso to the newly substituted section 143(1)of the Act, except as provided in the provision itself, the acknowledgment of the return shall be deemed to be an intimation under section 143(1) where (a) either no sum is payable by the assessee, or (b) no refund is due to him. Ld. CIT-DR stated that Hon'ble Apex Court noted that the acknowledgment is not done by any Assessing Officer, but mostly by ministerial staff and it cannot therefore be said that an "assessment" is done by them. He stated that Hon'ble Court held that the intimation under section 143(1)(a) of the Act was deemed to be a notice of demand under section 156 of the Act for the apparent purpose of making machinery provisions relating to recovery of tax applicable and by such application only recovery indicated to be payable in the intimation became permissible. Finally Hon'ble Court held that nothing more can be inferred from the deeming provisions. Therefore, there being no assessment under section 143(1) (a) of the Act, the question of change of opinion does not arise. Accordingly, the Ld. CIT-DR stated that while making an assessment an AO is free to make any addition after grant of opportunity to the assessee but while making adjustment under the first proviso to section 143(1)(a) of the Act no addition is permissible and AO has to process the return as it is and accordingly, intimation u/s. 143(1)(a) of the Act cannot be treated as an order of assessment. Accordingly, the Ld. CIT-DR stated that once the intimation u/s. 143(1)(a) of the Act is no assessment, limitation for invoking the provision of section 263 of the Act starts from the date of assessment or reassessment and reassessment in the present case was framed vide order dated 16.10.2006 and revision proceedings by the CIT, Kol-2 was completed vide order dated 9.9.2008, well within the limitation provided under the Act. Hence, he urged the bench to dismiss the ground of limitation raised by the assessee.
28. First of all, we have gone through the decision of Hon'ble Apex Court in the case of Rajesh Jhaveri Stock Brokers P. Ltd. (Supra), wherein Hon'ble Apex Court has discussed the issue as regards to formation of opinion in case of reassessment vis-à-vis intimation u/s. 143(1)(a) of the Act. Hon'ble Apex Court held as under:
"One thing further to be noticed is that intimation under section 143(1)(a) is given without prejudice to the provisions of section 143(2). Though technically the intimation issued was deemed to be a demand notice issued under section 156, that did not per se preclude the right of the Assessing Officer to proceed under section 143(2). That right is preserved and is not taken away. Between the period from April 20 ITA 695, 696 & 1935/K/2008 Loknath Saraf Securities Ltd.
A.Y. 02-03 & 04-05 C.O. Nos. 36 & 37/K/2008 1, 1989, and March 31, 1998, the second proviso to section 143(1)(a), required that where adjustments were made under the first proviso to section 143(1)(a), an intimation had to be sent to the assessee notwithstanding that no tax or refund was due from him after making such adjustments. With effect from April 1, 1998, the second proviso to section 143(1)(a) was substituted by the Finance Act, 1997, which was operative till June 1, 1999. The requirement was that an intimation was to be sent to the assessee whether or not any adjustment had been made under the first proviso to section 143(1) and notwithstanding that no tax or interest was found due from the assessee concerned. Between April 1, 1998, and May 31, 1999, sending of an intimation under section 143(1)(a) was mandatory. Thus, the legislative intent is very clear from the use of the word "intimation" as substituted for "assessment" that two different concepts emerged. While making an assessment, the Assessing Officer is free to make any addition after grant of opportunity to the assessee. By making adjustments under the first proviso to section 143(1)(a), no addition which is impermissible by the information given in the return could be made by the Assessing Officer. The reason is that under section 143(1)(a) no opportunity is granted to the assessee and the Assessing Officer proceeds on his opinion on the basis of the return filed by the assessee. The very fact that no opportunity of being heard is given under section 143(1)(a) indicates that the Assessing Officer has to proceed accepting the return and making the permissible adjustments only. As a result of insertion of the Explanation to section 143 by the Finance (No. 2) Act of 1991 with effect from October 1, 1991, and subsequently with effect from June 1, 1994, by the Finance Act, 1994, and ultimately omitted with effect from June 1, 1999, by the Explanation as introduced by the Finance (No. 2) Act of 1991 an intimation sent to the assessee under section 143(1)(a) was deemed to be an order for the purposes of section 246 between June 1, 1994 and May 31, 1999, and under section 264 between October 1, 1991, and May 31, 1999. It is to be noted that the expressions "intimation" and "assessment order" have been used at different places. The contextual difference between the two expressions has to be understood in the context the expressions are used. Assessment is used as meaning sometimes "the computation of income", sometimes "the determination of the amount of tax payable" and sometimes "the whole procedure laid down in the Act for imposing liability upon the tax payer". In the scheme of things, as noted above, the intimation under section 143(1)(a) cannot be treated to be an order of assessment. The distinction is also well brought out by the statutory provisions as they stood at different points of time. Under section 143(1)(a) as it stood prior to April 1, 1989, the Assessing Officer had to pass an assessment order if he decided to accept the return, but under the amended provision, the requirement of passing of an assessment order has been dispensed with and instead an intimation is required to be sent. Various circulars sent by the Central Board of Direct Taxes spell out the intent of the Legislature, i.e., to minimize the Departmental work to scrutinize each and every return and to concentrate on selective scrutiny of returns. These aspects were highlighted by one of us (D. K. Jain J.) in Apogee International Limited v. Union of India [1996] 220 ITR 248 (Delhi). It may be noted above that under the first proviso to the newly substituted section 143(1), with effect from June 1, 1999, except as provided in the provision itself, the acknowledgment of the return shall be deemed to be an intimation under section 143(1) where (a) either no sum is payable by the assessee, or (b) no refund is due to him. It is significant that the acknowledgment is not done by any Assessing Officer, but mostly by ministerial staff. Can it be said that any "assessment" is done by them? The reply is an emphatic "no". The intimation under section 143(1)(a) was deemed to be a notice of demand under section 156, for the apparent purpose of making machinery provisions relating to recovery of tax applicable. By such application only recovery indicated to be payable in the intimation became permissible. And nothing more can be inferred from 21 ITA 695, 696 & 1935/K/2008 Loknath Saraf Securities Ltd.
A.Y. 02-03 & 04-05 C.O. Nos. 36 & 37/K/2008 the deeming provision. Therefore, there being no assessment under section 143(1)(a), the question of change of opinion, as contended, does not arise."
We find from the above judgment of Hon'ble Apex Court in the case of Rajesh Jhaveri Stock Brokers P. Ltd. (Supra) that the issue was regarding reopening and particularly change of opinion where no assessment was framed. With due respect to the above decision of the Hon'ble Apex Court, we are of the view that the intimation u/s. 143(1)(a) of the Act is no assessment but subsequently Hon'ble Apex Court in the case of Alagendran Finance Ltd. (Supra) considering the provisions of section 263 explanation (c),(2) has considered the period of limitation commences from the date of original assessment and not from the reassessment, since the letter had not had anything to do with the issues under reassessment. The Hon'ble Apex Court held that a bare perusal of the order passed by Commissioner of Income-tax would clearly demonstrate that only that part of the order of assessment which related to lease equalisation fund was found to be prejudicial to the interests of the revenue. The proceedings for reassessment have nothing to do with the said head of income and the doctrine of merger, therefore, would not apply in a case of this nature. Before Hon'ble Apex Court assessments for the assessment years 1994-95, 1995-96 and 1996-97, which were completed in 1997-98 were there and in the orders of assessment assessee's claim relating to lease equalisation fund was accepted and thereafter reassessments were framed with respect to three other items but not the items relating to lease equalisation fund. Hon'ble Apex Court held that the proceedings for reassessments have nothing to do with the issue of lease equalisation fund. Hon'ble Calcutta High Court in the case of CIT Vs. Kanubhai Engineers (P) Ltd. (2000) 241 ITR 665 (Cal) has dealt with the similar issue and same principle was reiterated by holding that in proceedings under section 147 of the Act, the Income-tax Officer may bring to charge items of income which had escaped assessment other than or in addition to that item or items which have led to the issuance of the notice under section 148of the Act. Where reassessment is made under section 147 of the Act in respect of income which has escaped assessment, the Income-tax Officer's jurisdiction is confined to only such income which has escaped assessment or has been under assessed and does not extend to revising, re-opening or reconsidering the whole assessment or permitting the assessee to re-agitate questions which had been decided in the original assessment proceedings. It is only the underassessment which is set aside and not the entire assessment when reassessment proceedings are initiated. When the assessment is reopened, the original assessment under section 143(3) of the Act remains and it could not be said that the original assessment is non-est on account of the reopening of 22 ITA 695, 696 & 1935/K/2008 Loknath Saraf Securities Ltd.
A.Y. 02-03 & 04-05 C.O. Nos. 36 & 37/K/2008 the assessment. When the original assessment remains the Commissioner of Income-tax had every right to revise the order if it was erroneous and prejudicial to the interests of the Revenue. But the original assessment was made on November 18, 1985, and the reassessment under section 147 of the Act was made on January 8, 1987 and the Commissioner of Income- tax revised the original assessment order under section 263 on March 8, 1988, directing the Income-tax Officer to charge interest under section 215 of the Act. The assessee contended that as the original assessment order had merged with the reassessment order, the Commissioner of Income-tax could not revise the original assessment order under section 263of the Act. Hon'ble High Court held that the Commissioner of Income-tax could revise the original assessment order under section 263of the Act.
29. Even order u/s. 143(1)(a) is amenable to revision u/s. 263 of the Act and this view has been held by Hon'ble Madras High Court in the case of CIT Vs Smt. R. G. Umaranee (2003) 262 ITR 507 (Mad), wherein it is held that the order of Tribunal holding that the Commissioner has no jurisdiction to revise u/s. 263 an order u/s. 143(1)(a)of the Act, is not correct and is legally not sustainable. Similar view is held by Hon'ble Bombay High Court in the case of CIT Vs. Anderson Marine & Sons Pvt. Ltd. (2004) 266 ITR 694 (Bom). In view of the above factual matrix of the case and legal position as noted above, we are of the view that where an assessment has been made and the same had become the subject matter of the reassessment, the question that arose was whether revision is possible in respect of a matter in the original assessment, but not in the reassessment with the time limit reckoned with reference to the reassessment order. In respect of a similar matter of rectification, the Supreme Court in Hind Wire Industries Ltd. V. CIT (1995) 212 ITR 639 held that the original mistake continues in all orders, though not a specific subject matter in the last order, so that the date of the last order can be taken for purposes of the time limit, following a sales tax decision in International Cotton Corporation (P) Ltd. v. CTO [1975] 35 STC I (SC). The doctrine of merger was also sought to be relied upon even for revisional powers as was sanctified for rectification powers and it is in this context that the status of the reassessment vis-a-vis the original assessment became the subject matter of adjudication in Alagendran Finance Ltd. (Supra) The issue whether reassessment replaces the original assessment in its entirety or it is only a supplementary assessment with the original assessment remaining intact came to be incidentally considered as a matter relevant for resolving the issue. This issue was inconclusive, since there was some conflict as between the decisions of the Supreme Court. In V. Jaganmohan Rao v. CIT and CEPT [1970] 75 ITR 373, the Supreme Court took the view 23 ITA 695, 696 & 1935/K/2008 Loknath Saraf Securities Ltd.
A.Y. 02-03 & 04-05 C.O. Nos. 36 & 37/K/2008 that the entire assessment was within the purview of the Assessing Officer during reassessment. In a later decision in CIT v. Sun Engineering Works P. Ltd. [1992] 198 ITR 297 (SC), it was decided that the Assessing Officer's jurisdiction was confined to the income that has escaped assessment and that it cannot justify revision, reopening or reconsideration of the entire assessment. Reconciliation was sought between these two views before a Bench of three judges of the Supreme Court in ITO v. K. L. Srihari (HUF) [2001] 250 ITR 193 on a reference by the Bench, which initially heard the case. But in the case before Ho'ble Supreme Court in the facts of the case after perusal of both the assessment and reassessment orders was satisfied and found that the High Court was right on the dispute involved in the case before it in that the earlier assessment order had been effaced by the subsequent order and closed the case with the observation "in these circumstances, we do not consider it necessary to go into the question that is raised and the same is left open". The decision of the Supreme Court in the case of Alagendran Finance Ltd. (Supra) has not noticed the decision in K. L. Srihari's case (supra), which, at any rate, can be considered only as one rendered in the facts of the case as it actually left the issue open. There are a number of other decisions of the High Courts taking one or the other view, the Supreme Court choosing the decision of the Madras High Court in CWT Vs. A. K. Thanga Pillai [2001] 252 ITR 260 for its approval in sorting out the controversy.
The view of the Madras High Court, it was observed, was in consensus with the decision of the Supreme Court in Sun Engineering Works P. Ltd.'s case (Supra) treating the reassessment as a supplementary assessment. It follows that the time limit for revision has to be reckoned with reference to the first assessment in respect of any decisions prejudicial to the Revenue, so that the extended time limit was not available for revision under section 263 as decided in Alagendran Finance Ltd. 's case (Supra). Though the decision of the Supreme Court in this case was rendered by the Bench of two judges, it did refer for its conclusion to its own decision in CIT v. Shri Arbuda Mills Ltd. [1998] 231 ITR 50 (SC) and pointed out to the retrospective amendment made to section 264 with effect from June 1, 1998, inserting an Explanation by extending the jurisdiction to all matters, which have not been considered even in an assessment subject to appeal placing a restraint on the theory of merger. Such a provision found in section 264 is not available under section 263. Even for this reason, it was found that the merger theory could have no application for revisional powers under section 263. The ruling in Sun Engineering Works P. Ltd.'s case (Supra) was, therefore, preferred. Accordingly, the law as to the powers of reassessment apart from powers of revision is now to be treated as settled in Alagendran Finance Ltd.'s case (Supra), though it is confined to revisional powers 24 ITA 695, 696 & 1935/K/2008 Loknath Saraf Securities Ltd.
A.Y. 02-03 & 04-05 C.O. Nos. 36 & 37/K/2008 under section 263. Hence, in our view, the revision order passed by CIT, Kol-2 is barred by limitation and we quash the same.
30. The next issue in this appeal of the assessee is against the order of CIT passed u/s. 263 of the Act that the Assessing Officer has taken one possible view and even on merits the service tax, SEBI SAT Charges, SEBI Turnover Fees, Transaction charges, ALBM and others. For this the assessee has raised following ground nos. 3 to 6:
"3. Without prejudice to Grounds No. 1 & 2 above and even otherwise, prior period expenses having been allowed by the AO in the original assessment as well as order u/s. 147/143(3) after having made a specific query in this regard in order u/s. 147/143(3) and after having obtained all this details in this regard and after fully satisfying himself regarding allowability of the revenue expenditure during the year and the AO having taken one of the possible views, provisions of section 263 did not validly lie in this case and in view of the facts and in the circumstances it may kindly be held accordingly.
4. Without prejudice to what has been stated in Grounds No. 1, 2 & 3 above and eve otherwise, the matter regarding allowability of such expenditure having been full explained in Para 11 of the written submission, the CIT is wholly unjustified i stating in his order that no Explanation was offered for allowability of such expenditure and in any case without prejudice and even otherwise the entire sum of Rs. 35,06,607/- being Tax, Duty Cess or Fees was fully allowable during the year on the basis of actual payment and hence also order u/s. 263 is wholly bad, illegal and void abinitio.
5. Without prejudice to Grounds No. 1, 2, 3 & 4 above and even otherwise, Rs.35,06,607/- considered by the CIT in his order u/s. 263 for the purposes of section 263 included Service Tax of Rs. 10,792/- which had already been disallowed by the AO in the assessment and hence proceedings u/s. 263 having been initiated for the same is wholly bad and moreover the said sum of Rs. 10,792/- being the expenses for prior year having been allowed by the CIT(A) by his Appellate order dated 25.02.2008, the order of the AO on the issue of prior period expenses had fully merged with the order of the CIT(A) and hence also provisions of section 263 did not validly lie in this case and in view of the facts and circumstances order u/s. 263 is wholly bad, illegal and void abinitio and hence in view of the facts and in the circumstances such order u/s. 263 is liable to be quashed / cancelled / set aside and in view of the facts and in the circumstances it may kindly be held accordingly.
6. Without prejudice to what has been stated in Grounds No. 1, 2, 3, 4 & 5 above and even otherwise, the entire expenditure of Rs. 35,06,607/- being Tax Duty Cess or Fees being fully allowable u/s. 43B of the Income-tax Act it may kindly be held accordingly and the order of the CIT in this regard may kindly be amended and/or the AO may kindly be directed to allow the same."
31. After hearing rival contentions on merits, we find that the expenditures sought to be disallowed i.e. SEBI turnover fee, SEBI SAT charges, Service Tax, Transaction charges, ALBM and others are in the nature of items falling under section 43B of the Act except others (which is very nominal at Rs.5003/-). We find that even initially the AO tried to put these items for disallowances u/s. 154 of the Act by treating the same as mistake apparent from 25 ITA 695, 696 & 1935/K/2008 Loknath Saraf Securities Ltd.
A.Y. 02-03 & 04-05 C.O. Nos. 36 & 37/K/2008 record as the prior period expenditure items were available in the Tax Audit Report. The assessee challenged the allowability of prior period items being a matter of deliberation, therefore, the AO dropped the rectification proceedings initiated u/s. 154 of the Act and the proposal was sent to the CIT for invocation of his powers u/s. 263 of the Act. We find that these fees are payable to stock exchange and all are quantifiable items within the financial year, as all are fee charges payable to various authorities and paid within the due date of filing of return and accordingly falling u/s. 43B of the Act. We find that the issue now is crystally clear that these expenditures falling u/s. 43B of the Act are allowable, hence while processing the return u/s. 143(1)(a) of the Act dated 26.5.2003 was as per law and processing was neither erroneous nor prejudicial to the interest of revenue so as to provoke the revenue to initiate action u/s. 263 of the Act for revision of the same. Accordingly, on merits also we hold that the disallowances made by CIT(A) is without legal force. Accordingly, we quash the same. The appeal of the assessee is allowed.
6. In the result, ITA No.695/K/2008, revenue's appeal is dismissed, CO. No.36/K/2008, assessee's CO is partly allowed, ITA No.696/K/2008 revenue's appeal is partly allowed, CO No.37/K/2008 assessee's CO is partly allowed and ITA No.1935/K/2008 assessee's appeal is allowed.
7. Order pronounced in open court on 20.6.2011.
Sd/- Sd/-
आकबर बाशा, लेखा सदःय महावीर िसंह, Ûयायीक सदःय
(Akber Basha) (Mahavir Singh)
Accountant Member Judicial Member
तारȣख)
तारȣख) Dated 20th June, 2011
(तारȣख Pronounced by
Sd/- (CDR) Sd/- (M.Singh)
वǐरƵ िनǔज सिचव Jd.(Sr.P.S.) AM JM
आदे श कȧ ूितिलǒप अमेǒषतः- Copy of the order forwarded to:
1. अपीलाथȸ/APPELLANT - DCIT/ACIT, Circle-6, Kolkata.
2 ू×यथȸ/ Respondent - Loknath Saraf Securities Ltd., 6, Lyons Range,
Kolkata-700 001.
3. आयकर किमशनर (अपील)/ The CIT(A), Kolkata
4. आयकर किमशनर/ CIT Kolkata
5. ǒवभािगय ूितनीधी / DR, Kolkata Benches, Kolkata
स×याǒपत ूित/True Copy, आदे शानुसार/ By order,
सहायक पंजीकार/Asstt. Registrar.