Income Tax Appellate Tribunal - Mumbai
Classic Shares & Stock Broking Services ... vs Assessee
IN THE INCOME TAX APPELLATE TRIBUNAL "K Bench, Mumbai Before Shri D. K.Agarwal (JM) and Shri Rajendra Singh(AM) ITA No.191/M/2008 Assessment Year 2002-03 ITA No.1135/M/2008 Assessment year 2003-04 M/s.Classic Shares & Stock Broking Services Ltd. The ACIT Central Cir.40, Mumbai Radha Bhavan, 1st floor, Aayakar Bhavan, M.K.Marg 121 Nagindas Master Road, Mumbai 400 023 Mumbai 400 020. PAN : AABCS 4255 R Appellant Respondent Assessee by : Shri Rajiv Khandelwal Revenue by : Dr. P. Daniel ORDER
PER RAJENDRA SINGH (AM) These appeals by the assessee are directed against the orders dated 11.12.2007 and 29.1.2008 of CIT(A) for the assessment years 2002-03 and 2003-04. As these appeals were heard together and also involve some common issues, these are being disposed off by a single consolidated order for the sake of convenience. The disputes raised in these appeals relate to treatment of interest income, genuineness of loss from share transactions, deemed speculation loss and charge of interest under section 234B.
2. We first take up the ground relating to genuineness of loss from share transactions which is common in both the appeals. The assessee in assessment year 2002-03 had claimed aggregate loss of Rs.2,30,47,482/- from share transactions which consisted of loss of Rs.82,69,632/- from delivery based transactions and Rs.1,47,77,850/- from non delivery based transactions. In assessment year 2003-04 the loss claimed was only from delivery based transactions amounting to Rs.12,27,248/-. During the assessment proceedings the AO asked the assessee to file challan-wise details of share trading along with contract notes. The assessee however could furnish only the details of share traded and not the broker's bills and contract notes. AO noted that similar loss claimed by the assessee in the earlier year was subject matter of JPC report and loss in assessment year 2001-02 was disallowed as the assessee could not be prove the genuineness of loss by filing necessary details and evidence. The AO therefore following the decision in assessment year 2001-02 disallowed the claim of losses in these years also. In appeal CIT(A) noted that in assessment year 2001-02 similar claim had been examined in detail by the AO and the assessee could not prove the genuineness of loss. The AO had taken into account the adverse finding of the Special Auditors as well as the fact that the transactions were not carried out from the terminals of the exchange. The decision of the AO in assessment year 2001-02 had already been confirmed by the CIT(A) and therefore following the said decision of CIT(A) confirmed the orders of the AO in these years also aggrieved by which the assessee is in appeal before the tribunal.
2.1 Before us the Learned AR for the assessee submitted that the decision taken by the authorities below in assessment year 2001-02 has already been considered by the tribunal in the appeal for that year and vide order dated 17.10.10 in ITA No.7279 the tribunal had already restored the issue to the file of AO. The Learned DR on the other hand placed reliance on the orders of AO and pointed out that some of the bills of share transactions placed in the paper book related to assessment year 2001-02 and not for these years.
2.2 We have perused the records and considered the rival contentions carefully. The dispute is regarding genuineness of loss from share transactions, both delivery based and non delivery based, claim by the assessee. These cases related to Ketan Parekh group which had been subject matter of JPC probe. The same issue had arisen in assessment year 2001-02 in which similar loss had been disallowed as non genuine. The appeal for assessment year 2001-02 had already been decided by the tribunal in ITA No.7279/M/2007. The tribunal in the order noted that the AO had disallowed the claim only on the ground of observation of JPC and SEBI without examining the individual details. The tribunal also referred to the decision of the coordinate bench of the tribunal dated 25.11.2009 in case of Sai Mangal Investrade, another company of the same group in which the tribunal had found the transaction genuine. The tribunal also observed there were special audit in this case report of which was not placed on record. The tribunal therefore set aside the order of CIT(A) and restored the matter to the file of AO for passing a fresh order after necessary examination and after allowing opportunity of hearing to the assessee. The facts in the present years are identical as AO has passed orders in these cases based on the decision in assessment year 2001-02. However during the hearing of these appeals, the perusal of different share transactions bills placed in the paper book at page 5 to 39 a showed that several bills of share transactions were dated 27.3.2001 and therefore whether loss arising from such transactions can be allowed in the years under appeal or in assessment year 2001-02 is required to be examined. Similar transactions appearing in the month of March, 2002. The Learned AR submitted that these transactions were shown in the subsequent year on the basis of system followed by the assessee as per stock exchange requirement. It is required to be examined whether the assessee was following mercantile system of accounting as in case of mercantile system, transactions have to be declared in the year in which these had taken place irrespective of the fact whether the amounts have been received in the subsequent year or the assessee for the purpose of accounting was following a different system in conformity with the system followed by the stock exchanges. Therefore while examining the genuineness of transactions, these aspects are also required to looked into. As identical issue in assessment year 2001-02 has been restored by the tribunal to the file of AO we set aside the order of CIT(A) for these years also and restore the matter to the file of AO for passing a fresh order after necessary examination in the light of observations made above and in the order of tribunal in assessment year 2001-02 and after allowing opportunity of hearing to the assessee.
3. The second dispute which is relevant only for assessment year 2002-03 is regarding disallowance of Rs.10,28,150/- being the sundry balances written off. AO during the assessment proceedings noted that the assessee had given only party-wise details of sundry balances written off. The assessee failed to give justification for write off and also failed to show that the amounts were declared as income in the earlier years. AO therefore disallowed the claim which was confirmed by CIT(A) aggrieved by which the assessee is in appeal before the Tribunal.
3.1 We have heard both the parties perused the records and considered the matter carefully. The claim has been allowed on the ground that the assessee could not file details to show that the amounts had been taken into account in the computation of income in the earlier years. In our view matter requires fresh examination as CIT(A) has passed the order ex parte and has confirmed the disallowance in the absence of details and evidence. Since we have already restored the issue raised in ground No.1 to the file of AO, this issue is also set aside to the file of AO for passing a fresh order after allowing one more opportunity of hearing to the assessee.
4. The third dispute which is relevant only for assessment year 2003-04 is regarding treatment of interest income of Rs.39,50,810/- as income from other sources instead of business income declared by the assessee. The interest income had arisen from FDRs kept with bank for giving bank guarantee to the stock exchanges. The assessee claimed that the deposits were for the purpose of business and therefore interest income should be treated as business income. The AO however rejected the claim and assessed the interest income as income from other sources. In appeal CIT(A) observed that the assessee was not in the business of finance. The assessee was a dealer in shares and there was no direct nexus between the interest income and the business activities of the assessee. CIT(A) accordingly confirmed the order of AO treating the interest income as income from other sources. Aggrieved by the said decision the assessee is in appeal before the Tribunal.
4.1 Before us the Learned AR for the assessee submitted that there were no disputes that the assessee was engaged in share trading. It was also submitted that the assessee was debarred from share trading business by SEBI in April 2001. However the order of SEBI had not become final as the same had not challenged. The assessee therefore continued to keep the deposits for the purpose of business as the business was not closed. The license of the assessee had been cancelled only in the year 2005 and the same had been challenged before SAT. Though SAT also dismissed the appeal of the assessee and the order of the SAT subsequently upheld by the Hon'ble Supreme Court, in the relevant year the matter was still pending in dispute and the assessee therefore had to maintain establish and keep the deposits for the purpose of business. It was accordingly argued that claim of the assessee should be allowed. Reliance was placed on the decision of the tribunal in case of KNP Securities Pvt. Ltd., another member of the same group, in which the tribunal in ITA Nos.2008 and 2009/M/2007 relating to assessment years 2003-04 and 2004-05 held that the business of the assessee had not been closed and accordingly the tribunal allowed the claim of expenses. Following the said decision, it was argued that since the business was in existence, deposits made were in connection with the business and interest income has to be treated as business income. The Learned DR on the other hand placed reliance on the orders of authorities below.
4.2 We have perused the records and considered the matter carefully. The dispute is regarding nature of interest income received by the assessee from the FDRs pledged with the banks for issue of bank guarantee to the stock exchange in connection with the trading business of the assessee. The assessee had been debarred by SEBI for share transactions business in 2001 due to allegations of irregularities and manipulations. The case of the assessee is that the order of SEBI had been challenged. The license of the assessee had been cancelled only in the year 2005 and the order canceling the license had also been challenged by the assessee which was dismissed by SAT much later and the order of SAT was also confirmed by the Hon'ble Supreme Court. But these were subsequent activities and in the year under consideration the business of the assessee had not closed and it was only suspended in view of the adverse order by SEBI. We find similar situation had been considered by the tribunal in case of KNP securities Pvt. Ltd. (supra) another concern of Ketan Parekh group in which similar claim was made by the assessee that business was in existence and not closed. The tribunal following the judgment of Hon'ble High Court of Madras in case of CIT Vs Vellore Electrical Corporation Ltd. (243 ITR 529) held that the business had not closed and the claim of expenditure had to be allowed. Respectfully following the said decision of the tribunal we hold that the business of the assessee had not been closed in the relevant year and therefoe FDRs had to be treated as pledged in connection with the business which was in existence and therefore the interest income had to be treated as incidental business income. We accordingly set aside the order of CIT(A) and allowed the claim of the assessee.
5. The fourth dispute which is only relevant for assessment year 2003-04 is regarding treatment of business loss of Rs.19,08,876/- by the AO as speculation loss and not adjusting the same against the interest income of Rs.39,50,810/-. Briefly stated the facts of the case are that the assessee during the year had shown loss of Rs.19,08,876/- which was on account of valuation of closing stock of shares and also due to invocation of shares by the lenders for non payment of dues. The assessee as mentioned earlier had been debarred from share trading. The AO treated the business loss as speculation loss applying the provisions of Explanation to section 73 and did not adjust the same against the interest income declared by the assessee and allowed the loss to be carried forward. In appeal CIT(A) confirmed the order of AO aggrieved by which the assessee is in appeal before the tribunal.
5.1 Before us the Learned AR for the assessee submitted that in case interest income of Rs.39,50,810/- was treated as income from other sources the gross total income of the assessee would mainly consist of income under the head 'other sources' and in that case Explanation to section 73 would not apply and therefore loss has to be treated as business loss and not speculation loss. But in case interest income was treated as business income then it would be speculation loss as held by the authorities below. The Learned DR placed reliance on the order of the authorities below.
5.2 We have perused the records and considered the matter carefully. The dispute is regarding treatment of loss arising from valuation of closing stock of shares and due to invocation of shares by the lenders amounting to Rs.19,08,876/-. The loss has been treated as speculation loss by the authorities below applying the provisions of Explanation to section 73. The said Explanation does not apply in case where gross total income of the assessee mainly consists of income under the head 'other sources', 'house property income' etc. In this case while dealing with the earlier ground we have held that interest income of Rs.39,50,810/- has to be treated as business income. Therefore gross total income of the assessee mainly consists of business income and Explanation to section 73 would apply. Since the Explanation applies loss has to be treated as speculation loss. We therefore uphold the action of CIT(A) treating the loss as speculation and allowing the same to be carried forward.
6. The fifth dispute which is relevant only for assessment year 2003-04 is regarding charge of interest under section 234B. This is only consequential and therefore the AO will re-compute the interest at the time of giving effect to this order.
7. In the result appeal of the assessee for assessment year 2002-03 is allowed for statistical purpose whereas that for assessment year 2003-04 is partly allowed.
The decision was pronounced in the open court on 19.11.2010.
Sd/- Sd/-
( D. K. AGARWAL ) (RAJENDRA SINGH)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Date : 19.11.2010
At :Mumbai
Copy to :
The Appellant
The Respondent
The CIT(A), Mumbai concerned
The CIT, Mumbai City concerned
The DR "K" Bench, ITAT, Mumbai
// True Copy//
By Order
Assistant Registrar
ITAT, Mumbai Benches, Mumbai
Alk
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