Income Tax Appellate Tribunal - Mumbai
Classic Shares & Stock Broking Services ... vs Asst Cit Cen Cir 40, Mumbai on 12 April, 2017
IN THE INCOME TAX APPELLATE TRIBUNAL
"G" Bench, Mumbai
Before Shri B.R. Baskaran (AM)& Sandeep Gosain (JM)
I.T.A. No. 1617/Mum/2017
(Assessment Year 2003-04)
I.T.A. No. 6876/Mum/2008
(Assessment Year 2005-06)
Classic Shares & Stock ACIT CC-40
Broking Services Ltd. Vs. Aayakar Bhavan
Radha Bhavan, 1 s t Floor M.K. Road
121, Nagindas Master Road Mumbai-400020.
Mumbai-400 023.
(Appellant) (Respondent)
PAN No. AACCC5745P
Assessee by S/Shri Rajiv Khandelwal
& Neelkanth Khandelwal
Department by Dr.P. Naniel
Date of Hearing 30.3.2017
Date of Pronouncement 12.4.2017
ORDER
Per B.R. Baskaran (AM) :-
The appeals filed by the assessee for A.Y. 2003-04 & 2004-05 are directed against the orders passed respectively by the learned CIT(A)- 47/Central-VII, Mumbai. Both the appeals were heard together and hence they are being disposed of by this common order, for the sake of convenience.
2. We shall first take up the appeal relating to A.Y. 2003-04, wherein the assessee is contesting the disallowance of loss of ` 12.27 lakhs arising out of share transactions.
3. We have heard the parties and perused the record. The assessee is engaged in the business of share broking, share trading and investing in shares. The assessee belongs to Ketan parekh group. This is the second round of proceedings. In the first round, the Tribunal had set aside the issue of 2 C l a ss i c S h a r e & St o c k Br o ki n g Se r vi c e s L t d .
disallowance of business loss of ` 12,27,248/- arising out of share transactions to the file of the Assessing Officer for fresh adjudication. Accordingly, the Assessing Officer passed the order wherein he again disallowed the claim of ` 12,27,248/- on the reasoning that the loss has been incurred on account of invocation of shares and lower market rate relating to the shares, which were involved in Securities Scam, 2001. The Assessing Officer has further stated that the assessee has not taken any steps to prove that the loss claimed by the assessee was genuine in nature.
4. In the first appellate proceedings, the learned CIT(A) confirmed the disallowance of loss on the reasoning that the assessee has failed to furnish the relevant details. Aggrieved, the assessee has filed this appeal before us.
5. Learned AR submitted that the loss claimed by the assessee mainly consisted of loss on valuation of shares of Global Trust Bank Ltd. He submitted that the assessee had purchased 1 lakh shares of Global Trust Bank Ltd., during the year ended on 31.3.2001 at ` 63 lakhs. The assessee has treated the same as its stock in trade. The assessee has been following the method of valuation of stock as "Cost or market price whichever is lower". During the year ended on 31.3.2002, the price of shares of Global trust back fell down and accordingly the assessee valued the shares of Global Trust Bank Ltd at ` 26,35,000/-. Accordingly it claimed loss towards diminution in value at ` 36,65,000/- in AY 2002-03. During the year ended on 31.3.2003, i.e. the year under consideration, the market value of the shares of Global Trust Bank Ltd. went down further and accordingly the assessee valued shares at ` 13,70,000/- as on 31.3.2003 and claimed loss of ` 12,65,000/- towards diminution in the value of shares. The learned AR submitted that the assessee has been following above said method of valuation of stock consistently over the years. He also submitted that the method of valuation of stock followed by the assessee has been accepted by the Assessing Officer in A.Y. 2001-02 and the AO has allowed loss arising on account of diminution in value of stock. The 3 C l a ss i c S h a r e & St o c k Br o ki n g Se r vi c e s L t d .
assessee submitted that it has also earned profit on shares invocated by financial institution and accordingly claimed net loss of ` 12,27,248/-. He further submitted that the claim of the assessee is supported by the decision rendered by Hon'ble Bombay High Court in the case of CIT Vs. Bank of Baroda (262 ITR 334) and by Hon'ble Supreme Court in the case of Uco Bank (240 ITR
355) (SC). Accordingly he submitted that the impugned loss has been claimed by the assessee in accordance with the method of accounting/method of valuation regularly followed by the assessee. The Learned AR also submitted that the loss of ` 36,65 lakhs claimed by the assessee in A.Y. 2002-03 was disallowed by the Assessing Officer in that year, but the same was allowed by the learned CIT(A) in the order passed by him on 13.1.2017.
6. On the contrary, learned Departmental Representative submitted that the appellate order passed by the learned CIT(A) for A.Y. 2002-03 was recent one and the Revenue has still got time to challenge the decision taken by the learned CIT(A). He further submitted that the allegation on the group during security scam is that they have manipulated the price of shares of Global Trust Bank Ltd. Since the shares prices have been manipulated by the assessee's group, the impugned loss arising on account of valuation of securities cannot be considered as genuine loss. Accordingly he submitted that the learned CIT(A) was justified in confirming the disallowance of loss.
7. We have heard the rival contentions and perused the record. We noticed that the assessee is following method of valuation of stock at "Cost or Market value whichever is less. There appears to be no dispute with regard to the fact that the above said system of valuation of stock has been followed by the assessee consistently over the years. With regard to the valuation of shares of Global Trust Bank Ltd., the assessee has attached stock exchange market quotation as on 31.3.2003 and we noticed that the assessee has valued the stock at the market rate prevailed on that date.
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8. We noticed that the only objection of the Revenue in allowing the claim of the assessee was that the impugned shares form part of Securities Scam and hence loss claimed by the assessee cannot be considered to be a genuine loss. However, we notice that the loss claimed by the assessee was not of trading transaction, but on account of valuation of stock as per the method of valuation consistently followed by the assessee. The assessee has also established that it has valued the shares of Global Trust bank Ltd as per the closing rate traded in the stock exchange as at the year end. There is no dispute with regard to the fact that the impugned shares form part of the stock in trade of the assessee. Even if the shares under consideration formed part of shares acquired during the stock scam period, yet the fact remains that the loss claimed by the assessee relates to valuation of closing stock and the loss has arisen on account of diminution in the value of stock only. Since the valuation of stock in trade has been done as per the accounting system followed by the assessee and since the value adopted is supported by stock exchange quotation, we are of the view that the same cannot be considered as non-genuine loss. Accordingly we are of the view that the impugned loss should be allowed while computing the income of the assessee. Accordingly, we set aside the order passed by the learned CIT(A) and direct the Assessing Officer to allow the loss of ` 12,27,248/- claimed by the assessee.
9. We shall now take up the appeal filed by the assessee for A.Y. 2005-06. The first issue urged therein relates to disallowance of Rs.13.70 lakhs arising out of valuation of shares of Global Trust Bank Ltd, which was held by the assessee as its stock in trade. Identical issue was considered by us in the earlier paragraphs while disposing of the appeal relating to AY 2003-04 and for the reasons discussed therein, we have held that the loss arising due to valuation of stock in trade on account of diminution in the value of shares should be allowable as deduction. One more reason given by the AO in this year is that the assessee did not carry on the business during the year under consideration, since the license has been cancelled by SEBI. It was brought to 5 C l a ss i c S h a r e & St o c k Br o ki n g Se r vi c e s L t d .
our notice that the assessee had challenged the cancellation in SAT and thereafter before Hon'ble Supreme Court. The Ld A.R submitted that the order of Hon'ble Supreme Court was received much later to the year under consideration. He further submitted that an identical issue was considered by the co-ordinate bench in AY 2007-08 (ITA No.5244/Mum/2011 dated 26-09- 2012) and held that the assessee should be considered to be carrying on business. In this regard, the co-ordinate bench has followed the decision rendered by the Tribunal in the case of M/s KNP Securities (P) Ltd (ITA No.5008 & 5009/Mum/2007), which in turn had relied upon the decision rendered by Hon'ble Madras High Court in the case of CIT Vs. Vellore Electric Corporation Ltd (243 ITR 529). Identical view was taken in the assessee's own case in AY 2002-03 and 2003-04 (ITA No.191/Mum/2008 and ITA No.1135/Mum/2008 dated 19-11-2010). In AY 2002-03 and 2003-04, it has been noted down by the Tribunal that the order of Hon'ble Supreme Court has been received in subsequent years and hence it was held that the business of the assessee was not closed in those years.
10. We notice that the Ld CIT(A) has discussed the matters relating to cancellation of registration in paragraph 31 of his order. It is recorded by Ld CIT(A) that the SEBI has passed the order cancelling the certificate of registration granted to the assessee on 16-05-2002. The appeal preferred by the assessee before SAT was dismissed by SAT on 04-05-2007, i.e. after the end of the financial year relating to AY 2005-06. Hence, consistent with the view taken by the co-ordinate benches in the assessee's own cases and group cases referred above, we hold that the loss claimed by the assessee should be allowed. Accordingly we set aside the order passed by Ld CIT(A) on this issue and direct the AO to allow the impugned loss.
11. The next issue contested by the assessee relates to the assessment of interest income of Rs.10.32 lahs under the head Income from Other sources as against the claim of the assessee that the same should be assessed under the head Income from Business. The Ld CIT(A) has noted in paragraph 8 of his 6 C l a ss i c S h a r e & St o c k Br o ki n g Se r vi c e s L t d .
order that the above said interest has been earned out of fixed deposits lying with BSE, NSE and CSE as security deposit for base minimum capital and for other requirements of the Exchanges. We notice that an identical issue was considered by the co-ordinate benches in assessee's own case in AY 2002-03, 2003-04 and 2007-08 (referred supra). Since the assessee was held to be continuing its business activities and since these deposits have been made in connection trading activities of the assessee, the co-ordinate benches have held that the interest income should be treated to incidental business income and accordingly directed the AO to assess the same as business income of the assessee. In this regard, the Tribunal has taken support of decision of Hon'ble Madras High Court rendered in the case of Vellore Electrical Corporation Ltd (243 ITR 529). By following the decision rendered by the co-ordinate benches in the assessee's own case, we set aside the order passed by Ld CIT(A) on this issue and direct the AO to assess the interest income as business income of the assessee.
12. The next issue contested by the assessee relates to assessment of Prior period income. We notice that the assessee did not get the interest accrued details on the deposits held by it from banks and hence did not account for the same in the respective years. During the year under consideration, the bank account statement was received and accordingly accounted for entire interest income under the head "Prior period items". The assessee has also accounted for certain expenses under the head and the net income was disclosed in the Profit and Loss account. The assessee also claimed credit for TDS deducted out of interest income.
13. We heard the parties on this issue. In our view, the interest income should be in the respective years only, as the AO is not entitled to assess an item of income which does not belong to that year. Accordingly we direct the AO to exclude the income of other years and they may be assessed in the respective years in accordance with law. The TDS credit should also be restricted to the extent of relevant income assessed during the year under 7 C l a ss i c S h a r e & St o c k Br o ki n g Se r vi c e s L t d .
consideration and the remaining amount of TDS should be allowed credit in the respective years of assessment. The deduction of prior period expenses may also be considered in the respective years. We order accordingly. The order of Ld CIT(A) is modified accordingly.
14. The next issue relates to the disallowance of expenses of Rs.8,24,409/- made by Ld CIT(A). The first appellate authority disallowed the expenditure claim on the reasoning that the assessee did not carry on any business activities. In the earlier paragraphs, by following the orders passed by co- ordinate benches, we have held that the assessee should be considered as carrying on business activities. Hence the expenditure claimed by the assessee should be allowed. Accordingly we set aside the order passed by Ld CIT(A) on this issue.
15. The last issue contested by the assessee relates to the applicability of Explanation 73 to the assessee. In AY 2002-03 & 2003-04 (supra), the co- ordinate bench of Tribunal has held that the provisions of Explanation 73 would apply to the assessee in that year, since the interest income was directed to assessed as business income. In the instant year also, we have held that the interest income should be assessed as business income. However, the Ld A.R requested that this matter may be set aside to the file of the AO for examining the applicability of Explanation 73 to the assessee during the instant year. Hence the above said provisions would apply to the assessee as the assessee did not have income from other sources. However, if the assessee is able to demonstrate before the AO to his satisfaction that the provisions would not apply to the assessee, the AO may decide the issue in accordance with the law.
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16. In the result, the appeal of the assessee is treated as allowed.
Order has been pronounced in the Court on 12.4.2017.
Sd/- Sd/-
(SANDEEP GOSAIN) (B.R.BASKARAN)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Mumbai; Dated : 12/4/2017
Copy of the Order forwarded to :
1. The Appellant
2. The Respondent
3. The CIT(A)
4. CIT
5. DR, ITAT, Mumbai
6. Guard File.
BY ORDER,
//True Copy//
(Dy./Asstt. Registrar)
PS ITAT, Mumbai