Income Tax Appellate Tribunal - Mumbai
Satco Securities & Finanacial Services ... vs Assessee
ITA Nos 4067 & 4094 of 2007
Satco Securities & Fin.Services Ltd Mumbai
IN THE INCOME TAX APPELLATE TRIBUNAL
"J" Bench, Mumbai
Before Shri D.K. Agarwal, Judicial Member
and Shri B. Ramakotaiah, Accountant Member
ITA No.4067/Mum/2007
(Assessment Year: 2001-02)
Satco Securities & Financial Services Income Tax Officer
Ltd., 224, 291 Kesar Building 4(2)(2)
Princess Street Aayakar Bhavan
Mumbai 400 002 Vs Mumbai 400020
PAN - AAACS 6813 N
Appellant Respondent
ITA No.4094/Mum/2007
(Assessment Year 2001-02)
Income Tax Officer Satco Securities & Fin.
4(2)(2) Services Ltd, 224,291
Aayakar Bhavan Kesar Bldg, Princess St.
Mumbai 400020 Vs Mumbai 400002
PAN - AAACS 6813 N
Appellant Respondent
Assessee by: Shri Haridas Bhat
Revenue by: Shri Parthsarathi Naik, DR
Date of Hearing: 23/11/11
Date of Pronouncement: 09/12/11
ORDER
Per B. Ramakotaiah, A.M.
These are cross appeals by assessee and revenue against the order of the CIT-IV Mumbai dated 29.03.2007. The assessee in its appeal has raised five grounds. Ground No.1 pertains to the issue of reopening under section 147 of the Act. Ground No.2 pertains to treatment of loss of `31,72,921/- arising out of the revaluation of closing stock as speculation loss and Ground No.3 disallowance of expenditure to the tune of `6.00 lakhs attributable to the Page 1 of 13 ITA Nos 4067 & 4094 of 2007 Satco Securities & Fin.Services Ltd Mumbai speculation activities and Ground No.4 pertain to the disallowance of interest under section 40A(2)(b) of `4,65,000/-. Ground No.5 being general in nature. The revenue in its appeal is contesting the CIT (A) orders in giving the benefit of "Vandha loss" of `17,72,886/- treated as the speculation loss by the Assessing Officer as business loss. In Ground No.2 the revenue is contesting reduction of expenditure attributable to speculation loss from `10.00 lakhs to `6.00 lakhs. Since these issues are inter connected, they are decided as under.
2. The issue of reopening under section 147: Briefly stated, the assessee filed return of income declaring total loss of `75,239/- and the assessment under section 143(3) was completed on 31.03.2003 determining the total income at `39,49,962/- which was subject matter of appeal on the issues of depreciation on BSE Membership card, SEBI turnover fees and computer software charges. It was noticed by the Assessing Officer that the assessee has not considered the loss as speculation loss and initiated proceedings under section 147, taking necessary approval from the Additional Commissions of Income Tax, Range-4 and notice under section 148 was issued on 23.03.2006 i.e. within 4 years from the end of the Assessment Year. The assessee objected to the reassessment which was rejected by a letter No.ITO4(2)(2)/1242(1)2006-07 dated 30.06.2006 by the AO. In the reassessment proceedings, the share trading loss was considered as speculative loss and an amount of `10/- lakhs was also apportioned as expenditure towards speculation activity. The assessee contested the reopening of assessment before the CIT (A) and the CIT (A) by giving the following findings rejected the contentions:
"2.2 I have considered the submissions made by the appellant but I do not agree with the same. Section 147 gives wide powers to the Assessing Officer to issue notice under section 148 of the Act. The deeming Page 2 of 13 ITA Nos 4067 & 4094 of 2007 Satco Securities & Fin.Services Ltd Mumbai provisions as per clause (b) of Explanation 2 to section 147 specifies that where a return has been filed but no assessment has been made and it is noticed by the Assessing Officer that the assessee has understated the income or has claimed excessive loss, deduction allowance or relief in the return, it shall be deemed to be a case where income chargeable to tax has escaped assessment. In the instant case, the Assessing Officer had reason to believe that certain claim had been allowed in excess to the appellant. The provisions of section 147 as amended w.e.f. 1.04.1998 are contextually different and the cumulative conditions spelt out in clauses (a) and (b) of section 147 prior to its amendment are not present in the amended provision. The only condition for action is that the Assessing Officer should have reasons to believe that income has escaped assessment. Hon'ble Delhi High Court has held in Bawa Abhai Singh vs. Dy. CIT (2001) 117 Taxman 12 that such belief can be reached in any manner and it not qualified by a pre-condition of faith and true disclosure of material fact by an assessee as contemplated in the pre-amended section 147(a). Viewed in that angle, power to reopen assessment is much wider under the amended provision and can be exercised even after the assessee has disclosed fully and truly all material facts. As regards the appellant's contention that the assessee had fully disclosed the facts in the computation of income, every disclosure is not and cannot be treated to be true and full disclosure. Hon'ble Supreme Court has held in Sri Krishna (P) Ltd. vs. Income Tax Officer (1996) 221 ITR 538 that a disclosure may be false one or true one. It may or may not be full disclosure. What is required is a full and true disclosure of all material facts necessary for making assessment for that year. In view of the above discussion, I believe that the Assessing Officer was fully justified in invoking the provisions of section 147 of the Act as he had sufficient reason to believe that certain income had escaped assessment. Accordingly the action of the Assessing Officer is upheld".
3. It was contended before us that reopening was bad in law as the original assessment was already completed and the Assessing Officer deemed to have considered the speculation loss. The assessee relied on the decisions of the Hon'ble Bombay High Court Page 3 of 13 ITA Nos 4067 & 4094 of 2007 Satco Securities & Fin.Services Ltd Mumbai in the case of Cartini India Ltd vs. Add. CIT 314 ITR 275 and the decision of Idea Cellular vs. DCIT 301 ITR 407 and Rose Services Apartment (P) Ltd vs. DCIT 56 DTR (Del) 353 of the Hon'ble Delhi High Court. However, the learned Departmental Representative relied on the orders of the CIT and further on the principles established by the Hon'ble Supreme Court in the case of Honda Seil Power Products Ltd vs. DCIT in special leave appeal No.19085/2011 dated 29.7.2011.
4. After considering the rival submissions and examining the record, we are of the opinion that the Assessing Officer has neither inquired nor examined the issue of speculation loss at the time of completing the original assessment. Moreover, assessee has not placed on record any evidence that this issue was examined in the original assessment so as to come to a conclusion that the Assessing Officer formed an opinion on the issue. In the absence of any evidence to the contrary, findings of the CIT (A) are to be upheld. Further the Hon'ble Supreme Court in the case of Honda Seil Power Products (supra) has also upheld the reopening on similar facts and further Hon'ble Bombay High Court in the case of Indian Humes Pipe Co. Ltd, vs. CIT in writ petition No.1017 of 2011 dated 8.11.11 considered the scope of 'full and true disclosure of material facts' to hold that it should be 'specific disclosure' of each fact. As the assessee has not demonstrated before us that the issue of speculation loss was examined in the original assessment and considering that the reopening was done within 4 years from the end of the Assessment Year, we uphold the order of the CIT (A) and reject assessee's contentions. Case law relied upon by the assessee do not apply to the facts as they were rendered in the contest of reopening after 4 years from the end of Assessment Year for which it has to be demonstrated that there is failure on the part of the assessee to fully disclose the material facts, or there was evidence Page 4 of 13 ITA Nos 4067 & 4094 of 2007 Satco Securities & Fin.Services Ltd Mumbai that assessing officer formed an opinion in the assessment proceedings. Since proviso to Section 147 does not apply as the reopening was done within 4 years, we are of the opinion that the Assessing Officer has correctly invoked the provisions of section 147 Explanation 2(c) and therefore this ground of the assessee is rejected. It was also noticed that the Assessing Officer rejected the objections by a separate order dated 30.6.2006 and the assessee has not placed on record the reasons recorded by the Assessing Officer in that order and challenge made by the assessee to that order. Ground no. 1 is rejected.
5. Ground No.2 & 3 of the Assessee appeal and Ground No.1 & 2 of Revenue's appeal: The issue in these four grounds by the assessee and revenue are with reference to the treatment of loss claimed by the assessee to the extent of `49,45,786/- . The details are as under:
Decrease in stock - (-) 31,72,921.20
Loss of sale of Inv - (-) 17,83,971.59
Profit on sale of Inv. - (+) 58,431.99
Loss on F&O segment - (-) 47,326.00
Total = (-) 49,45,786.80
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6. The Assessing Officer considered the Explanation to Section 73 and held that the assessee company deemed to be carrying on speculation business to the extent to which business consisted of purchase and sale of such shares. Before the CIT (A), it was submitted that most of the purchase and sale of shares arose due to mistake in entering the share trading transactions on behalf of the clients which the clients did not accept due to the mistake in entries and therefore, those transactions generally considered in the market as "Vandha" transactions are taken up by the assessee in order to continue its brokerage business and therefore the loss Page 5 of 13 ITA Nos 4067 & 4094 of 2007 Satco Securities & Fin.Services Ltd Mumbai arising therein is 'Vandha loss' which is not speculative loss. Accepting the assessee's submissions, the CIT (A) gave relief on the loss claim on sale of shares to the extent of `17,83,971/- which the revenue is contesting in its appeal, whereas the CIT (A) confirmed the loss arising out of valuation of stock as speculation loss which assessee is contesting. In addition to the above, the Assessing Officer allocated the expenditure of `10.00 lakhs as attributable to such activities. Consequent to the relief given by the CIT to the extent of "Vandha loss" he reduced the allocation of expenditure to `6.00 lakhs.
7. After considering the arguments of the rival parties and examining the facts as placed in the paper book from pages Nos. 43 to 52, we are of the opinion that order of CIT(A) on the issue of treating Valuation loss as speculative loss does not require any modification. It is not in dispute that the shares are treated as assessee's own shares and that too trading shares. The Hon'ble ITAT Ahmedabad Bench in the case of Krishnalaxmi Multi Trade (P) Ltd vs. ACIT in ITA No.3877/Ahd/2004 in Assessment Year 2000- 01, placed on record by DR, has held as under:
"6. We have carefully considered arguments of both the sides and perused the material placed before us. Section 73 of the Income Tax Act deals with the loss in speculation business. The section reads as under:
(1) Any loss, computed in respect of a speculation business carried on by the assessee, shall not be set off except against profits and gains, if any, of another speculation business.
(2) Where for any assessment year any loss computed in respect of a speculation business has not been wholly set off under sub-section (1), so much of the loss as is not so set off or the whole loss where the assessee had no income from any other speculation business, shall, subject to the other provisions of this Chapter, be carried forward to the following assessment year, and --Page 6 of 13
ITA Nos 4067 & 4094 of 2007 Satco Securities & Fin.Services Ltd Mumbai
(i) It shall be set off against the profits and gains, if any, of any speculation business carried on by him assessable for that assessment year; and
(ii) If the loss cannot be wholly so set off, the amount of loss not so set off shall be carried forward to the following assessment year and so on.
(3) In respect of allowance on account of depreciation or capital expenditure on scientific research, the provisions of sub-section (2) of section 72 shall apply in relation to speculation business as they apply in relation to any other business.
(4) No loss shall be carried forward under this section for more than eight assessment years immediately succeeding the assessment year for which the loss was first computed.
Explanation : Where any part of the business of a company other than a company whose gross total income consists mainly of income which is chargeable under the heads "Interest on securities", "Income from house property", "Capital gains" and "Income from other sources", or a company the principal business of which is the business of banking or the granting of loans and advances) consists in the purchase and sale of shares of other companies, such company shall, for the purposes of this section, be deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sale of such shares".
As per sub-section 1 of Section 73 any loss computed in respect of speculation business carried on by the assessee shall not be set off except against the profit and gain of the speculation business. Explanation to section 73 is a deeming provision, which would be applicable if the following conditions are satisfied;
i) The assessee is a company
ii) Part of the business of the assessee is consisting of purchase and sale of shares of other company; If the above two conditions are satisfied, then the assessee shall be deemed to be carrying on the speculation business to the extent such business is Page 7 of 13 ITA Nos 4067 & 4094 of 2007 Satco Securities & Fin.Services Ltd Mumbai consisted of purchase and sale of shares. There are some exceptions also, under which, this Explanation would not be applicable. However, it is not the claim of the assessee that its case falls under any of such exceptions, therefore, those exceptions do not require to be dealt with in this appeal. Now, admittedly, the assessee is a company and part of its business is consisting of purchase and sale of shares of other company. The assessee suffered loss in such business, therefore, the Explanation to Section 73 would be applicable. The only dispute is how to compute the profit of such speculation business. It is contended by the learned counsel that the loss from the purchase and sale of the shares is to be separately considered and loss on account of valuation of closing stock of the shares is to be separately considered. We are unable to accept the above contentions of the learned counsel. If the contention of the learned counsel is accepted, it would amount to holding that there are two sources of income- one is the trading business of purchase and sales of shares and other valuation of the closing stock. It is settled position of law that the valuation of the closing stock is not a separate source of income. The true purpose of valuing and crediting the closing stock in the trading account is to balance so as to cancel out the entries relating to same stock from both the sides of the account. There are various methods for valuation of closing stock. Apart from cost, the assessee can value the closing stock at market value or "cost or market value whichever is lower". But merely because the assessee had valued the stock at market value, which is lower than the cost, it cannot be said that the loss arisen from the valuation of the closing stock. The loss is from the trading business of purchase and sale of shares and the valuation of the closing stock at less than the cost is the accounting for the anticipated loss from the business of purchase and sale of shares. Therefore, the contention of the learned counsel that the loss from the purchase and sale of shares and loss from the valuation of the closing stock is to be treated separately cannot be accepted. There is only one trading account in respect of the business of purchase and sale of shares. In such trading account profit/loss is to be worked out of course, after taking the value of the stock as per the method of accounting for valuation of the closing stock being regularly followed by the assessee. After such valuation of closing stock, whatever profit or loss arises, it would Page 8 of 13 ITA Nos 4067 & 4094 of 2007 Satco Securities & Fin.Services Ltd Mumbai be profit/loss from the business of purchase and sales of the shares. There cannot be any artificial division of such loss between the loss from trading in shares and los from valuation of closing stock. While taking this view, we derive support from the decision of the Hon'ble Apex Court in the case of Chairrup Sampatram vs. CIT 24 ITR 481 (SC) wherein Their Lordships held:
"It is a misconception to think that any profit "arises out of the valuation of the closing stock" and the situs of its arising or accrual is where the valuation is made. Valuation of unsold stock at the close of an accounting period is a necessary part of the process of determining the trading results of that period and can in no sense be regarded as the "source" of such profits. Nor can the place where such valuation is made be regarded as the situs of their accrual. The source of the profits and gains of a business is indubitably the business and the place of their accrual is where the business is carried on. As such profits can be correctly ascertained according to the method adopted by an as only after bringing into the trading account his closing stock wherever it may exist, the whole of the profits must be taken to accrue or arise at the place of carrying on the business".
7. The learned Counsel for the assessee had relied upon two decisions of the ITAT Mumbai Benches in the case of Pioneer Equity Trade Pvt. Ltd (supra) and Modella Woollens Ltd (supra). However, we find that facts in both the above cases were different in as much as there was no purchase and sale of shares during the relevant year. Since there was no purchase and sales of shares during the year under appeal before the ITAT, the ITAT has taken the view that Explanation to section 73 was not applicable. The ITAT, Delhi Benches in the case of Income Tax Officer vs. Big Apple Clothing Pvt Ltd., (2010) 5 ITR (Trib) 44(Delhi) has taken the view that the Explanation to section 73 would be applicable even when the loss is arising because of the valuation of shares. In the case under appeal before us, admittedly, there are large number of transactions of purchase and sale of shares during the year under consideration. Therefore, there is no dispute that explanation to section 73 is applicable. Only question in this appeal before us is with regard to determination of loss from the business of purchase and sale of shares. Thus, the facts in the case under appeal before us are altogether different than the facts in the cases relied upon by the learned counsel Page 9 of 13 ITA Nos 4067 & 4094 of 2007 Satco Securities & Fin.Services Ltd Mumbai of the learned DR. Only dispute in this appeal before us is with regard to determination of loss from share trading business. For the detailed discussion in Para No.6 above, we hold that while determining loss from share trading business, loss from valuation of closing stock cannot be excluded. Valuation of closing stock is integral part of preparation of trading account. In view of the above, we reject the ground No.2 of the assessee's appeal".
8. This view is also supported by the Hon'ble Bombay High Court in the case of Prasad Agents (P) Ltd vs. Income Tax Officer in ITA No.196 of 2009 dated 20.3.2009 on the issue
(i) whether on the facts and circumstances of the case and in law, the Tribunal was justified in treating `6,00,877/- as speculation loss by dint of the Explanation to section 73 of the Act ?
(ii) (ii) Whether on the facts and in the circumstances of the case and in law, the Tribunal was correct in treating the loss of `6,00,877/- originating from and traceable simply and barely to the valuation of stock of shares as covered by the ken of the Explanation to section 73 of the Act ?
The Hon'ble Bombay High Court held vide Para 9 as under:
"9. In our opinion there can be no difference between the losses suffered in the course of trading by delivery and losses in terms of the book value. As long as the assessee is carrying on business of trading by way of purchase and sale of shares even if in respect of any financial year, there are no transaction and yet the company has stock in trade of shares, the book value will have to be considered for the purpose of considering the profit and loss in case of speculative business. There can be no doubt that the explanation to section 73 cannot be read to mean only when there is a purchase and sale of shares in the course of the financial year. The explanation will cover both shares which are stock in trade and shares which are traded in the course of the financial year for the purpose of considering the loss Page 10 of 13 ITA Nos 4067 & 4094 of 2007 Satco Securities & Fin.Services Ltd Mumbai and profit for that year. The Tribunal, in our opinion, has correctly answered the issue by holding that the loss of profit on account of valuation amounts to revenue losses or revenue receipt. The second question, therefore, also will have to be answered against the assessee and in favour of the Revenue".
9. In view of the jurisdictional High Court judgment, we uphold the order of the CIT (A) which is in conformity with the above judgment of the Hon'ble High Court. Therefore, the ground No.2 raised by the assessee regarding the loss of `31,72,921/- is rejected. Consequent to the rejection of the above, the assessee's contention about expenditure attributable to the speculation activities to the extent of `6.00 lakhs is also be dismissed as the assessee is not contesting the quantification of the expenditure but only on the principle that the business loss so claimed cannot be held to be covered by Explanation to section73. Therefore, assessee's grounds No.2 & 3 are accordingly rejected.
10. Coming to the issue of Vandha loss contested by Revenue the same required to be examined by the Assessing Officer. As seen from the balance sheet placed on record, the assessee has shown stock in trade to the extent of `21,89,579/- under the head current assets as against `32,61,097/- of earlier year. There is nothing on record to examine whether this 'stock in trade' shown is pertaining to Vandha transactions so claimed or assessee own trading transactions. It is also noticed that the assessee also had jobbing profit of `11,39,213/-. Vide Para 3.1, CIT (A) also noted that 'the assessee submitted that considering the combined nature of business expenses towards brokerage business as well as trading in shares on its own account, the expenditure to be segregated'. This indicates that there is trading in shares on its own account which aspect has not been considered by the CIT(A). In view of this, we are of the opinion that the grounds raised by the revenue regarding Vandha loss to be treated as speculation loss is to be examined Page 11 of 13 ITA Nos 4067 & 4094 of 2007 Satco Securities & Fin.Services Ltd Mumbai whether the loss arose in Vandha transactions or in assessee's own trading transactions. It is noticed that the CIT has considered the total loss of `49,45,786/- minus decrease in stock value to the extent of `31,72,921/- as business loss. As seen from the table extracted above, there is a profit on sale of investment to the extent of `58,431/- which should be considered along with the loss on sale of investment and loss in F & O transactions, where there is no delivery. Therefore, the Assessing Officer is also directed to examine the nature of loss correctly and determine the issue accordingly. To that extent the order of the CIT (A) is set aside and the matter restored to the file of the Assessing Officer to examine the facts.
11. With reference to the Revenue's ground No.2 about the deletion of `4.00 lakhs by the CIT (A), since the issue of Vandha/ speculation loss contested in Ground No.1 of the Revenue is restored to the file of the Assessing Officer for fresh examination on facts, the issue of expenditure attributable to such activity is also restored to the file to decide accordingly. With these directions, the ground numbers 2 & 3 of the assessee are rejected and revenue's ground No.1 and 2 are allowed for statistical purposes.
12. Ground No.4 in assessee's appeal is with reference to disallowance of `4,65,000/- under section 40A in lieu of interest paid to Shri Amanlal Melwani, one of the Directors, following the order of the CIT (A) for Assessment Year 2002-03. At the outset it was submitted that this issue is covered in favour of the assessee by the orders of the ITAT in other years and accordingly the addition should be deleted. As seen from the order placed for Assessment Year 2040-05 in ITA No.4289/Mum/2007, dated 12.11.2009 there is a finding that the issue was decided in favour of the assessee by the ITAT and respectfully following the above, the assessee's ground is allowed. The Assessing Officer is directed to allow the interest as claimed.
Page 12 of 13ITA Nos 4067 & 4094 of 2007 Satco Securities & Fin.Services Ltd Mumbai
13. In the result, assessee's appeal is partly allowed and appeal of the Revenue is allowed for statistical purposes.
Order pronounced in the open court on 9th December, 2011.
Sd/- Sd/-
(D.K.Agarwal) (B. Ramakotaiah)
Judicial Member Accountant Member
Vnodan/sps
Mumbai, dated 9th December, 2011.
Copy to:
1. The Appellant
2. The Respondent
3. The concerned CIT(A)
4. The concerned CIT
5. The DR, "J " Bench, ITAT, Mumbai
By Order
Assistant Registrar
Income Tax Appellate Tribunal,
Mumbai Benches, MUMBAI
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