Income Tax Appellate Tribunal - Rajkot
Smt. Bhanuben Chimanlal Malavia vs Income Tax Officer on 30 December, 2005
Equivalent citations: (2006)100TTJ(RAJKOT)337
ORDER
R.C. Sharma, A.M.
1. This is an appeal filed by the assessee against the order of the CIT(A)-XIX, Ahmedabad, dt. 2nd Nov., 2004 for the asst. yr. 2001-02 in the matter of order passed under Section 143(3) of the IT Act.
2. The following effective grounds have been taken by the assessee :
(i) Upholding the decision of the AO in respect of the addition made by treating agricultural income of Rs. 24,448 declared by the appellant as non-agricultural income from undisclosed sources, disregarding the submissions made by the appellant,
(ii) Holding that the revised return of income under Section 139(5) cannot be a loss return, thus bearing the character of a return of income filed under Section 139(3).
(iii) Holding that the transactions of purchase and sale of units of Kothari Pioneer Mutual Fund are in the nature of business transactions and not in the nature of investment in capital assets.
(iv) In applying the ratio of Hon'ble Supreme Court in the case of McDowell & Co. Ltd. v. CTO (1985) 47 CTR (SC) 126 : (1985) 154 ITR 148 (SC), even though the facts of the appellant's case are clearly distinguishable from the facts of the case decided by Hon'ble Supreme Court. He has also grievously erred in not considering the post McDowell developments wherein the Courts (including the Supreme Court) have clearly held that McDowell does not apply in each and every case, when some tax benefits have accrued, and that was never the intention of McDowell.
(v) In holding that the scope and ambit of Section 14A not only covers the expenditure being claimed as deduction, while computing the total income under Chapter IV, but also the claim of set off/carry forward of the capital loss suffered in due course of time,
(vi) In upholding the disallowance of expenditure of Rs. 15,329 on account of finance charges and of Rs. 11,000 on account of bank charges.
(vii) The learned CIT(A) has further erred in confirming the additions after changing the basis, which has been done without giving the appellant a reasonable opportunity of rebutting the same.
3. The first grievance relates to treatment of agricultural income as income from undisclosed sources. Rival contentions have been heard and records perused. The assessee is having agricultural land at Bagasara city and during the year 2000-01, the assessee has earned the agricultural income amounting to Rs. 24,448. The assessee has produced Form Nos. 7/12 and 8A, dt. 23rd Feb., 2001, duly signed by the Talati of Bagasara City. The assessee also produced before the AO copy of the bill of Ajay Trading Co., in respect of sale of agriculture product made by the assessee and in view of this, it was the submission of the assessee that agricultural income shown by the assessee is correct and should be treated as exempt accordingly.
4. The AO disbelieved the claim of the assessee regarding agricultural income at Rs. 24,448 for the following three reasons :
(a) The income was shown for the first time,
(b) No details regarding expenditure incurred for cultivating the land and earning agricultural income were shown.
(c) As per sale bill produced by the assessee from M/s Ajay Trading Co., the agricultural produce is "Tal" whereas as per agricultural record, the crops grown during the year was 'Mandvi'.
5. By the impugned order, the CIT(A) confirmed the action of the AO.
6. We have considered rival contentions, carefully gone through the orders of the authorities below and find from record that during the course of assessment proceedings, the assessee had submitted a copy of land records in respect of agricultural land owned by it and sale bill of agricultural produce sold. From all these documents it was found that assessee had sold items produced on the said land to M/s Ajay Trading Co. Therefore, growing of agricultural produce and its sales have not been denied nor the fact that the assessee was owning 1.3 acres of land for a number of years. The only allegation of the AO is that for the first time the assessee had shown this income. The AO was also of the view that product sold by the assessee does not resemble the product shown in the land records. Merely because the assessee had shown agricultural income for the first time and that land records show produce of different products cannot be reason for denying the income earned out of agricultural activities. No material was brought on record by the Department to the effect that the agricultural, produce produced by the assessee on land was not sold by the assessee or that the produce has not been purchased by M/s Ajay Trading Co. or that the sales bill issued by M/s Ajay Trading Co. was bogus. Therefore it cannot be presumed that the assessee has not cultivated any crop. As the assessee has claimed the net income as agricultural income which is very reasonable looking to the area of agricultural land held by the assessee, non-furnishing of details regarding expenditure incurred in cultivation cannot be a ground for total disallowance of agricultural income. Even if it is assumed that expenditure on cultivation was more than what has been shown by the assessee, will ultimately go to increase the net agricultural income, which is tax-free. It is also not the case of the Revenue that production and sale of Tal was not there or that the party, M/s Ajay Trading Co., has denied the purchase of the same from the assessee. Moreover the fact that the assessee has for the first time shown agricultural income cannot be a ground for disallowance of agricultural income genuinely earned by the assessee.
7. In view of the above and keeping in view the totality of facts and circumstances of the case we direct the AO to treat Rs. 20,000 as agricultural income out of net agricultural income of Rs. 24,448 shown by the assessee.
8. The next grievance of the assessee relates to disallowance of short-term capital loss on sale of units of M/s Kothari Pioneer Mutual fund. From the record we find that the assessee purchased units of M/s Kothari Pioneer Mutual fund on 17th Jan., 2001 for Rs. 1,00,00,000. The assessee earned dividend of Rs. 16,04,621 from said mutual fund on 18th Jan., 2001. On 19th Jan., 2001 the said units were redeemed for Rs. 81,41,303. Thus, the assessee incurred a short-term capital loss of Rs. 18,58,697. It is submitted that loss of Rs. 18,58,697 has been disallowed by the AO because this loss is suffered for earning tax-free dividend income and this is clearly colourable device for avoidance of tax within the purview of judgment of Hon'ble Supreme Court in the case of McDowell & Co. Ltd. v. CTO . The assessee relied on the decision of Hon'ble Gujarat High Court in the case of Banyan & Berry v. CTT (1996) 131 CTR (Guj) 127, wherein the scope of the applicability of the Supreme Court decision came up for consideration before the Hon'ble Gujarat High Court. The assessee has relied on the following extracts in the order of the Hon'ble Gujarat High Court in this case :
The Court nowhere said that every action or paction on the part of the taxpayer which results in reduction of tax liability to which he may be subjected in future, is to be viewed with suspicion and be treated as a device for avoidance of tax irrespective of legitimacy or genuineness of the act; an inference which unfortunately, in our opinion, the Tribunal apparently appears to have drawn from the enunciation made in McDowell's case (supra). Ratio of any decision has to be understood in the context it has been made. The facts and circumstances which led to McDowell's decision (supra) leaves us in no doubt that the principle enunciated in the above case has not affected the freedom of citizen to act in a manner of doing any trade, activity or planning his affairs with circumspection, within the framework of law, unless the same fall in the category of colorable device which may properly be called a device or a dubious method or a subterfuge clothed with apparent dignity.
9. During the course of scrutiny assessment, the AO observed that in the original return of income filed on 30th Oct., 2001 the assessee disclosed total income at Rs. 1,39,829 comprising interest from the firm--Rs. 14,168, rent income--Rs. 37,000 and other income--Rs. 88,661, After the service of notice under Section 142 on 29th Oct., 2002, a revised return has been filed showing total income of Rs. 1,39,829 as per the original return, agricultural income of Rs. 24,448 and net loss of Rs. 15,67,127 under the head 'Capital gains' as short-term capital loss. In the working of short-term capital loss, the assessee has shown short-term capital gain of Rs. 2,91,570 on sale of various shares and loss of Rs. 18,58,697 on purchase and sale of various shares of M/s Kothari Pioneer Mutual Fund. In addition to this, in the revised return, the assessee has shown dividend income of Rs. 16,04,621 from M/s Kothari Pioneer Mutual Fund and it is claimed as exempt. The AO noted that the assessee purchases shares worth Rs. 1 crore on 17th Jan., 2001 and on 19th Jan., 2001 the said shares were sold for Rs. 81,41,302. Thus, the assessee has incurred loss of Rs. 18,58,697. During the course of assessment proceedings, it was explained that on payment of margin money of Rs. 5,17,754 the assessee got loan of Rs. 1 crore on 17th Jan., 2001 from Birla Global Finance Ltd. for. purchase of shares of M/s Kothari Pioneer Mutual Fund. On 18th Jan., 2001, dividend of Rs. 16,04,621 was declared by M/s Kothari Pioneer Mutual Fund which was shown as re-invested and on the same day, the shares of Rs. 1 crore were redeemed at Rs. 81,41,302 and the shares of Rs. 16,04,621 on reinvestment of dividend were also redeemed for the same price.
In other words, the loss of Rs. 18,58,697 is suffered for earning tax-free income and according to the AO amounted to colourable device for avoidance of tax. For these reasons and for reasons discussed in para 9 of the assessment order, the claim of the assessee relating to loss of Rs. 18,58,697 was not considered as genuine loss and to that extent of dividend income was ignored and only the balance amount of Rs. 2,10,820 was allowed to be set off against other income under the head 'Capital gain'.
10. By the impugned order, the CIT(A) confirmed the action of the AO for holding the transaction as colourable device. The CIT(A) also held that the loss suffered as a result of sale is nothing but expenditure, Section 14A is applicable to the case of the assessee and, therefore, since this expenditure is in connection with earning of tax-free income, it cannot be allowed as deduction.
11. It was vehemently argued by the learned Authorised Representative Mr. B.R. Popat, that the assessee is not hit by the decision of McDowell as the transaction entered into by the assessee was in the ordinary course of conducting the business and according to law, he was entitled to do so and it cannot be branded as colourable device for avoidance of tax. It was further submitted that the AO. intended to make the disallowance of loss by virtue of Section 94(7) of the IT Act, 1961 but this section is effective w.e.f. 1st April, 2002. As regards the applicability of Section 14A of the IT Act, to the case of the assessee, it is the submission of the assessee that provisions of Section 14A are not applicable to the case. Section 14A applies to any expenditure incurred by the assessee and in the case of the assessee, he has suffered a short-term, capital loss and thus provisions of Section 14A are not applicable.
12. The learned Authorised Representative has further drawn our attention to the order of the Tribunal, Special Bench in the case of Wallford Shares & Stock Brokers Ltd. v. ITO (2005) 96 TTJ (Mumbai) (SB) 673 : (2005) 96 ITD 1 (Mumbai)(SB), wherein it was held that such transaction cannot be considered as colourable device and the assessee's claim for short-term capital loss was allowed as arising out of genuine business transaction.
13. We have carefully gone through the impugned order of the Tribunal, Special Bench and found that following was the observation of the Special Bench :
The Revenue's argument 'B' was that the assessee purchased units of mutual fund during the two assessment years just on the eve of record date when the amount of dividend declared had become a foregone conclusion. It was argued that the assessee bought units cum-dividend and sold units ex-dividend and, therefore, the difference between sale price and purchase price should be treated as cost of earning dividend and not a loss incurred by the assessee on its transaction of purchase and sale of units.
There is considerable difference between the equity shares and mutual fund units. While shares of a company are traded in a stock exchange based on several factors impacting demand and supply for the stock, the units of a mutual fund are traded on the NAV of the mutual fund. When the amount of dividend declared by a company in respect of its equity shares becomes known or reasonably well anticipated, the factum and quantum of dividend is factored in by the market in the price of equity share around that time. The price of the unit of a mutual fund depends on its NAV and not the amount of dividend announced/declared. Therefore, the amount of dividend announced by the mutual fund would not affect the price at which the assessee purchased the units. It was another matter that the assessee's sale price was affected because of outflow of dividend distributed by the mutual funds resulting into considerable lowering of NAV. Thus, as far as the purchase price paid by the assessee was considered, it could not be said that the assessee paid higher price because the units were pregnant with the amount of dividend announced by the mutual fund. At that point of time, the assessee would have paid the same price for those units, had there been no announcement of dividend by mutual funds. Therefore, it could not be said that the assessee paid additional purchase price because of the dividend declared by the mutual funds. Dividend as a return of investment is not regarded, as a rule, recovery of purchase price. As a corollary, dividend cannot be regarded as erosion of sale price. The receipt of income on units of mutual funds by the assessee did not represent one fixed time event. One should not reject the time-tested method of computation of the result of a transaction of purchase and sale of an income bearing asset to be computed on the basis of difference between the sale price and purchase price unaffected by the returns on investment received in the meantime.
The Revenue's argument related to the provisions of Section 14A, which has been inserted by the Finance Act, 2001 with retrospective effect from 1st April, 1962. On a plain reading of the provisions of Section 14A, it is clear that if any part of the expenditure claimed by the assessee as deduction against his income chargeable to tax is found or determined to have been incurred by the assessee in relation to income received by the assessee from the mutual funds, the expenditure claimed by the assessee as deduction against his income chargeable to tax has to be disallowed to that extent.
It does not appear to be correct to say that provisions of Section 14A impinge on the provisions of Section 10(33). These provisions operate in relation to the expenditure an assessee claims in the computation of his income chargeable to tax. Such expenditure if found to have been incurred in relation to income exempt under Chapter III shall be disallowed by virtue of the provisions of Section 14A. In the instant case, the assessee had claimed expenditure on purchase of the units of CMF and SMF against subsequent sale of those units. Those sale proceeds were income chargeable to tax under Chapter IV and were not exempt under any provision of Chapter III. Purchase price of units is an expenditure to which disallowance provision of Chapter IV would squarely apply. Further there is no conflict between Chapter III and Section 14A and even if there is one, the meaning of the provisions of Section 14A being unmistakably clear, the provisions have to be given effect to by way of harmonious construction. Provisions of Section 14A cannot be considered defunct or redundant for the reason only that these provisions should have been inserted in Chapter III and not Chapter IV. After all both Chapter III and Chapter IV are an integral part of the same enactment.
Further, there was no expenditure incurred by assessee in respect of the income from units. It could not also be accepted that provisions of s, 14A being special provisions and the expression being 'in relation to', a different conclusion should be arrived at. Therefore, the amount of dividend received by the assessee could not be adjusted for arriving at the net result of the computation in relation to the assessee's transactions of purchase and sale of units of mutual funds.
The provisions of Section 94(7) have been brought on the statute book by the Finance Act, 2001 w.e.f. 1st April, 2002. In other words, the Parliament did not deem it fit to intervene in the transactions that had already taken place. It was open to resort to giving retrospective effect to the provisions of Section 94(7), but the Parliament had chosen not to do that, Further, provisions of Section 94(7) do not stipulate any cost in relation to the income pay out by a mutual fund. Further Circular No. 14 of 2001 (2002) 172 CTR (St). 13 itself states that prior to the promulgation of the provisions of Section 94(7), it was legally permissible to claim the losses in the manner the assessee had done.
The instruction issued by the CBDT from F. No. 178/32/2003-ITA-I on 23rd Feb., 2004 did not support the case of the Revenue. It is clearly mentioned in the said instruction that ordinarily disallowance of loss in similar circumstances in respect of assessment years prior to the asst. yr. 2002-03 would amount to applying the provisions of Section 94(7) retrospectively. The Board, therefore, cautions its officers that such an assessment should be made only after in-depth investigation and proper recording and marshalling of all relevant facts because the provisions of Section 94(7) are prospective only.
Therefore, the assessee was entitled to have the loss arising from these transactions set off against its income from any other transactions or source.
14. As the facts and circumstances of the case under consideration are the same, as per our considered view the issue is squarely covered by the decision of Special Bench, as discussed above. The transaction was not a colourable device and no disallowance could be made under Section 94(7) which is effective from asst. yr. 2002-03 and Section 14A is also not applicable to the instant case. We, therefore, allow this ground of assessee.
15. With regard to filing of return under Section 139(5), the learned Departmental Representative, Mr. A.K. Singh, argued that the assessee did not disclose the short-term capital loss and the corresponding receipt of dividend while furnishing the original return of income under Section 139(1) of the Act. It was only at the stage of revising the return of income that the short-term capital loss (and the corresponding receipt of dividend, being the exempt income) was claimed as having been incurred, so as to carry forward the same to the next assessment year. It was the argument of the learned Departmental Representative that the scope of Section 139(5) is limited to revising the return of income furnished under Section 139(1) and not in respect of the return of loss which has not been furnished under Section 139(3), This being so, even the revised return of income should bear the character of the return of income furnished under Section 139(1) and the same cannot change its colours, so as to become the return of negative income, being furnished under Section 139(3). As an alternative argument, the learned Departmental Representative strongly contended that the revised return was furnished after the receipt of the scrutiny notice issued by the Department under Section 143(2) of the Act, and after the return of income was processed under Section 143(1). Attention was accordingly drawn to the provisions of Section 139(5) of the Act, as per which the return can be revised at any time before the expiry of one year from the end of the relevant assessment year or before the completion of the assessment, whichever is earlier. The processing of the return of income, in the opinion of the Departmental Representative, amounted to completion of the assessment, albeit in a summary manner, and the return could not have been revised thereafter. It was also argued that powers of revising the return of income are limited to rectifying only the mistakes which are in the nature of omission or any wrong statement made in the original return of income, if discovered subsequently and the same cannot be extended to cover the situation under which the assessee sought to revise the return of income. The claim of carry forward of the short-term capital loss with corresponding disclosure of the exempt income in the nature of dividend in the revised return of income was thus not permissible within the statutory provisions of Section 139(5) and the same cannot thus be allowed.
16. With regard to the validity of the revised return, it was argued by the learned Departmental Representative, Mr. Singh, that there are two separate, relevant sections for furnishing original return of income-- Section 139(1) for return of income showing positive income and Section 139(3) when the assessee has sustained loss either under the head "Income from business or profession" or "Capital gains". It was thus argued that Section 139(5) permits revising only those returns, which have been filed under Section 139(1) and not under Section 139(3).
17. On the other hand learned Authorised Representative Mr. B.R. Popat argued that the original return of income was furnished on 30th Oct., 2001, disclosing the total income at Rs. 1,39,829. As such, the assessee was legally permitted to revise his return of income latest by 31st March, 2003 or before completion of the assessment year, whichever is earlier. It was further submitted that the assessment of the case was completed as late as on 26th March, 2004, whereas the return of income furnished originally was revised on 31st Oct., 2002. It was thus a validly revised return of income, and cannot be ignored or objected on this ground. As per learned Authorised Representative, the return of income having been revised after the original return was processed under Section 143(1), the processing of the return of income is merely a clerical act on the part of the Department and the same cannot, therefore, be treated as assessment, within the meaning of what has been specified in Section 139(5). In support of this, it was further argued by the Authorised Representative that prior to 1st June, 1999, Section 143(1)(a) of the IT Act expressly permitted the AO to carry out certain adjustments, as specified at the first proviso to that section, at the very stage of processing the return of income, so as to practically re-calculate the Income or the loss declared by the assessee, without subjecting the return to the scrutiny. Despite the fact that the AO could make several specified adjustments in the return of income so furnished, Courts have held that such an order or the intimation passed under Section 143(1)(a) could not be treated as an assessment. Reliance was placed on Pradeep Kumar Har Saran Lal v. AO , Peico Electronics & Electricals Ltd. and Anr. v. Dy. CIT , Apogee International Ltd. v. Union of India and Anr. , Mahanagar Telephone Nigam Ltd. v. Chairman, CBDT and Anr. , Gujarat Poly-Avx Electronics Ltd. v. Dy. CIT and Lakhanpal National Ltd. v. Dy. CIT in this regard.
18. We have considered the rival contentions carefully, gone through the orders of authorities below and also deliberated on the case laws cited by the learned Authorised Representative and Departmental Representative at Bar in the factual matrix of the case. From the record we find that the original return of income was furnished on 30th Oct., 2001, disclosing the total income at Rs. 1,39,829. As such, the assesses was legally entitled to revise his return of income latest by 31st March, 2003 or before completion of the assessment, whichever is earlier. In the instant case, the assessment of the case was completed as late as on 26th March, 2004, whereas the return of income furnished originally was revised on 31st Oct., 2002. It was thus a validly revised return of income, and cannot be ignored or objected on this ground. So far as Departmental Representative's argument of filing of return after the original return was processed under Section 143(1), we are of the considered opinion that by the Finance Act 1999, w.e.f. 1st June, 1999, Section 143(1)(a) has been substituted by the new Section 143(1), whereby the powers of the AOs have been further restricted so as not to allow them even to carry out the prima facie adjustments while processing the return of income. Thus, when even the order or the intimation under Section 143(1)(a) is not being treated as an assessment, processing of the return of income under Section 143(1) could not be treated as an assessment either and the mere fact of the return of income having been already processed cannot disentitle the assessee from furnishing the revised return of income, within the otherwise prescribed time-limit. Jurisdictional High Court in the case of S.R. Koshti v. CIT clearly held that intimation issued under Section 143(1) for the asst. yr. 2001-02, is not an order of assessment and a revised return can be filed even after issue of intimation under Section 143(1). Furthermore, it is only under two circumstances, as specified under Section 143(1)(i) and Section 143(1)(ii) that the AO is retired to send the intimation of the order under Section 143(1) to the assessee. In all other situations, it has been provided in the first proviso to Section 143(1) itself that the acknowledgement of the return of income shall be deemed to be an intimation under this sub-section where either no sum is payable by the assessee or no refund is due to him.
19. Furthermore Section 139(5) clearly speaks of "any omission or any wrong statement", meaning thereby that the omission or the wrong statement may be of any type, and there cannot be any reservation or restrictions in the meaning of these terms. The purpose of Section 139(5) is to enable the assessee to voluntarily and suo motu correct any omission or any wrong statement, so as not to damage a person acting without mala fide intentions. The only condition to be taken care of while doing this is that the same can be done only before the completion of the assessment and within the specified timeframe. The very purpose of the statute is thus to ensure that any admission of omission or wrong statement has to be voluntary one, within the specified time-limit and must have been made before the same has been detected by the Department in the assessment order. Nowhere in the section, or anywhere else in the IT Act for that matter, it has been provided that the return of income to be revised must not bear the character of the return of which includes a loss in it--either from business or profession or from capital gain.
20. Regarding the contention of the Departmental Representative as to the nature of the transaction being of business or profession, and not of capital gain, which has been discussed even by the CIT(A), and taken by the assessee as her third ground of appeal, we found that this treatment is completely against the clear finding of AO, which is very much there on record. In para 9 of the assessment order, the AO disallowed the short-term capital loss only to the extent of the corresponding dividend income, while clearly and in specific terms, allowed the balance loss amounting to Rs. 2,10,820 to be carried forward as the loss under the head "Capital gain". When there is a clear finding on the part of the AO as to this part of the transaction being clearly in the nature of capital gain, the CIT(A) was not justified in treating the balance part of the same transaction as falling under the head "Business or profession". After all, the result of a singular transaction cannot be divided into two parts, so as to have one fraction falling under one head and the other into other head,
21. From the order of the AO we found that he has not considered the filing of loss return belatedly and, therefore, declining the claim of carry forward of short-term capital loss. In the interest of justice we restore the issue of revised return which was of loss, but filed well within the statutory provisions of Section 139(5), to the file of the AO for deciding de novo keeping in view our above observations and discussions.
In the result, the appeal of the assessee is allowed in part as indicated above.