SODHANI SECURITES LTD, MUMBAI V. ITO 4(2)(2), MUMBAI

CO 157/MUM/2009

• Counselvise Citation: [2010] 122 COUNSELVISE.COM (IT) 5135 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 23 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 31-08-2010
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: J
• Next Hearing Date: 11-08-2010
• Assessment Year: 2004-2005
• Appeal Filed On: 07-08-2009
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Keywords: Business income; Business expenditure; Bad and doubtful debts
• Section: 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL 'J' BENCH, MUMBAI BEFORE SHRI R.S. PADVEKAR, JUDICIAL MEMBER AND SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER ITA NO. 5217/MUM/2007 (ASSESSMENT YEAR: 2004-05) INCOME TAX OFFICER - 4(2)(2) M/S. SODHANI SECURITI ES LTD. ROOM NO. 644, 6TH FLOOR K. BUILDING, 3RD FLOOR AAYAKAR BHAVAN, M.K. ROAD VS. WALCHAND HIRACHAND MARG MUMBAI 400020 BALLARD ESTATE, MUMBAI 400036 PAN - AABCS 9766 K APPELLANT RESPONDENT CO NO. 157/MUM/2009 (ASSESSMENT YEAR: 2004-05) M/S. SODHANI SECURITIES LTD. INCOME TAX OFFICER - 4(2)(2) K. BUILDING, 3RD FLOOR ROOM NO. 644, 6TH FLOOR WALCHAND HIRACHAND MARG VS. AAYAKAR BHAVAN, M.K. ROAD BALLARD ESTATE, MUMBAI 400036 MUMBAI 400020 PAN - AABCS 9766 K CROSS OBJECTOR APPELLANT IN APPEAL REVENUE BY: SHRI SURENDER KUMAR ASSESSEE BY: NONE O R D E R PER B. RAMAKOTAIAH, A.M. THIS APPEAL BY THE REVENUE IS AGAINST THE ORDER OF THE CIT(A) IV, MUMBAI DATED 12.05.2007. THE CROSS OBJECTION IS ON AN ALTERNATE CONTENTION ON BAD DEBTS TO BE ALLOWED AS LOSS. 2. REVENUES GROUNDS ARE AS UNDER: - 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LD. CIT(A) HAS ERRED IN HOLDING THAT IT IS NOT OBLI GATORY ON THE PART OF THE ASSESSEE TO PROVE THAT THE DEBT WRITTEN OFF BY HIM IS INDEED A BAD DEBT FOR THE PURPOSE OF ALLOWANCE U/S. 36(1)(VI I). 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN RELYING ON THE JUDGEMENT OF SPE CIAL BENCH OF ITAT IN OMAN INTERNATIONAL BANK IN ALLOWING THE BAD DEBTS U/S. 36(1)(VII) INSPITE OF THE FACT, THAT THE ASSESSEE D ID NOT FULFIL THE CONDITIONS LAID DOWN U/S. 36(2) OF THE I.T. ACT, 19 61. ITA NO. 5217/M/07 & CO 157/M/09 M/S. SODHANI SECURITIES LTD. 2 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LD. CIT(A) ERRED IN: A) TREATING THE LOSS OF RS.58,21,327/- AS BUSINESS LOSS INSTEAD OF CAPITAL LOSS TREATED BY THE AO. B) WHILE TREATING THE LOSS AS THE BUSINESS LOSS, T HE LD. CIT(A) ERRED IN HOLDING THAT THE MUTUAL FUND UNITS AS WELL AS THE SHARES ON SALE OF WHICH THE APPELLANT INCURRED LOSS WERE ACCOUNTED FOR STOCK IN TRADE IN THE BOOKS OF ACCOUN TS AND SINCE THE SAME WAS DISPOSED OF DURING THE YEAR THEY DID NOT FIND PLACE IN THE BALANCE-SHEET. WHILE HOLDING SO H E COMPLETELY IGNORED WITHOUT REJECTING THE FINDING OF THE AO THAT THE UNITS WERE SHOWN IN THE BALANCE-SHEET AS INVESTMENTS AND NOT UNDER THE HEADING STOCK IN TRA DE. C).... G)... 4. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LD. CIT(A) ERRED IN ALLOWING THE PENALTY OF RS.33,6 57/- LEVIED BY NSE/NSCCL. THE LD. CIT(A) FAILED TO APPRECIATE THAT THE PENALTY LEVIED BY NSE/NSCCL ARE FOR THE OFFICE VIOLATION OF THE LAW. GROUND NOS. 3(C) TO (G) ARE ARGUMENTS IN SUPPORT OF GROUND 3(A) AND (B) AND GROUND NOS. 5 & 6 ARE GENERAL IN NATURE. 3. GROUND NOS. 1 & 2 ARE AGAINST THE DISALLOWANCES OF BAD DEBTS OF ` 22,92,995/-. THE A.O. DISALLOWED THE BAD DEBTS HOLD ING THAT THE SAME HAD NOT ACTUALLY BECOME BAD AND MERELY WRITING OFF THE DEBTS IN THE BOOKS OF ACCOUNT DID NOT MAKE THE SAME AS BAD. HE ALSO HELD THAT NOTHING HAD BEEN BROUGHT ON RECORD TO SHOW FINANCIAL POSITION/IRRECO VERABILITY OF THE AMOUNTS. THE A.O. FURTHER HELD THAT AMENDMENT TO THE SECTION 36(1)(VII) W.E.F. 01.04.1989 DOES NOT MEAN THAT THE ASSESSEE DOES NOT HAVE TO ESTABLISH THAT THE DEBT HAS BECOME BAD. AMENDMENT WAS BROUGHT IN O NLY TO ELIMINATE THE DISPUTE IN THE MATTER OF DETERMINING THE YEAR IN WH ICH A BAD DEBT CAN BE ALLOWED. BEFORE THIS AMENDMENT THE ASSESSEE WAS TO PROVE THAT THE DEBT HAS BECOME BAD IN THE RELEVANT PREVIOUS YEAR. REQUIREME NT OF PROVING THAT THE DEBT HAS BECOME BAD THUS STAYS AS IT WAS EARLIER. HE ALSO DID NOT ALLOW THE CLAIM OF THESE AMOUNTS AS BUSINESS LOSS OF THE ASSE SSEE. HE WAS OF THE OPINION THAT ALLOWABILITY AS BUSINESS LOSS IS NOT P ERMISSIBLE BY LAW AS THE SAID OUTSTANDING AMOUNTS WERE ON ACCOUNT OF LOANS/A DVANCES GIVEN TO THE SAID PARTIES BY THE ASSESSEE COMPANY AND BEING THE GIVING OF ITA NO. 5217/M/07 & CO 157/M/09 M/S. SODHANI SECURITIES LTD. 3 LOANS/ADVANCES IS NOT THE BUSINESS TRANSACTION, THE AMOUNT WRITTEN OFF AMOUNTED TO CAPITAL LOSS AND NOT BUSINESS LOSS. THE REFORE, THE CONDITION LAID DOWN IN SUB-SECTION (2) OF SECTION 36 WAS NOT FULFI LLED. HE OBSERVED THAT THERE WAS NO DOUBT THAT WHAT WAS WRITTEN OFF WAS CL AIMED AS BAD DEBT UNDER THE SPECIFIC PROVISION OF THE ACT BUT SAME COULD NO T BE CONSIDERED FOR ALLOWANCE UNDER ANY OTHER PROVISIONS. OTHERWISE ALS O, HE HELD THAT THE LOSS HAD NOT CRYSTALLIZED DURING THE YEAR UNDER CONSIDER ATION. 4. BEFORE THE CIT(A) THE ASSESSEE FILED THE DETAILS OF VARIOUS BAD DEBTS, STEPS TAKEN TO RECOVER AND RELIED ON THE DECISION I N THE CASE OF CIT VS. T. VIRBHADRA RAO, K. KOTESHWARA RAO & CO. 155 ITR 152 AND VARIOUS OTHER CASES OF THE TRIBUNAL INCLUDING THE SPECIAL BENCH D ECISION IN THE CASE OF DCIT VS. OMAN INTERNATIONAL BANK SOAG 100 ITD 285(M UM) (SB). THE CIT(A) RELIED ON THE DECISION OF THE ITAT IN ACIT V S. OLYMPIA SECURITIES ITA NO. 4053/M/2002 FOR A.Y. 1997-98 FOR THE PURPOSE OF INTERPRETING THE PROVISIONS OF SECTION 36(1)(VII) IN THE CASE OF SHA RE BROKER AND ALLOWED THE SAME. 5. AFTER CONSIDERING THE FACTS AND ARGUMENTS WE AGREE WITH THE FINDING OF THE LD.CIT(A). MOREOVER THE DECISION OF THE SPECIA L BENCH IN THE CASE OF OMAN INTERNATIONAL SOAG IN 100 ITD 288 WAS UPHELD B Y THE HON'BLE JURISDICTIONAL HIGH COURT IN THE SAME CASE REPORTED IN 313 ITR 128. REVENUES GROUND IS TO BE REJECTED AS REVENUE IS OB JECTING TO THE APPLICATION OF SPECIAL BENCH DECISION. HENCE THE GROUND NO.1 AN D 2 ARE REJECTED. 6. GROUND NO. 3 IS AGAINST DISALLOWANCE OF LOSS ON SAL E OF SHARES/UNITS AMOUNTING TO ` 58,21,327/- AND TREATING THE SAME AS SHORT TERM CAP ITAL LOSS AS AGAINST THE CLAIM OF THE ASSESSEE COMPANY AS BUS INESS LOSS AND DISALLOWING THE SAME TO BE SET OFF AGAINST THE BUSI NESS INCOME OF THE ASSESSEE COMPANY OF ` 1,04,21,094/-. THE A.O. OBSERVED THAT THE ASSESSEE HAD HELD CERTAIN SHARES AS INVESTMENTS IN THE BALAN CE SHEET OF THE EARLIER YEAR AND SUCH SHARES WERE NOT CONVERTED INTO STOCK- IN-TRADE IN ORDER TO CONSIDER THE CLAIM OF THE TRADING LOSS/PROFIT. HE A LSO STATED THAT ON PERUSAL OF DETAILS OF PROFIT/LOSS ON SALE OF SHARES/UNITS I T IS SEEN THAT THE MAJOR PORTION OF LOSS IS ON ACCOUNT OF SALE OF MUTUAL FUN D UNITS. BUT ITS VERY ITA NO. 5217/M/07 & CO 157/M/09 M/S. SODHANI SECURITIES LTD. 4 NATURE ACQUIRING UNIT OF MUTUAL FUND IS AN INVESTME NT TOO. EVEN THE SECURITIES EXCHANGE REGULATION ACT, 1956, WHILE DEF INING THE WORD SECURITIES (IB) INCLUDES UNITS OR ANY OTHER INSTRUM ENTS ISSUED BY ANY COLLECTIVE INVESTMENT SCHEME TO THE INVESTORS IN SU CH SCHEME. THEREFORE, EVEN THE SCRA ENVISAGES ONLY INVESTMENT IN UNITS AN D MUTUAL FUNDS AND NOT ANY TRADING. THE A.O. HAS RELIED ON CIT VS. SAT LAJ COTTON MILLS SUPPLY AGENCY LTD. (1975) 100 ITR 706 WHERE IT IS REMARKED THAT IF THERE IS REPETITION AND CONTINUITY, THE ASSESSEE WOULD BE CA RRYING ON A BUSINESS AND THE QUESTION WHETHER THE ACTIVITY IS AN ADVENTURE I N THE NATURE OF TRADE CAN HARDLY ARISE. IN THE CASE OF ASSESSEE NOTICING THAT THE TRANSACTIONS ARE NOT REPETITIOUS AND THE TRANSACTIONS IN SHARE WERE FEW AND SPARSE, THE AO TREATED THE LOSS ON SALE OF MUTUAL FUND UNITS AND S HARES AS CAPITAL LOSS UNDER THE HEAD CAPITAL GAINS AND DID NOT ALLOW THE SET OFF OF THE SAME AGAINST OTHER INCOME. 7. ASSESSEE CONTENDED THAT THE MEMORANDUM AND ARTICLES OF ASSOCIATION PERMITS THE COMPANY FOR DOING THE BUSINESS IN SHARE S AND SECURITIES, ETC. AND IT WAS FURTHER SUBMITTED THAT ON THE INVESTMENT S MADE AND SHOWN IN THE BALANCE SHEET IN EARLIER YEAR THE ASSESSEE HAD SHOWN PROFIT OF ` 4,017/- UNDER CAPITAL GAIN AND THE LOSS WAS CLAIMED PERTAIN ING TO CURRENT YEAR TRANSACTIONS WHICH ARE IN THE NATUR4E OF SHORT TERM TRADING. IT WAS ALSO FURTHER SUBMITTED THAT SIMILAR TRANSACTIONS IN EARL IER YEAR WAS ACCEPTED AS BUSINESS TRANSACTIONS. AFTER CONSIDERING THE SAME T HE CIT(A) GAVE THE FOLLOWING FINDINGS: - 3.3 I HAVE CONSIDERED THE SUBMISSIONS MADE BY THE APPELLANT AND GONE THROUGH THE ASSESSMENT ORDER. THE AO DISALLOWE D THE CLAIM OF THE APPELLANT WITHOUT ANY LOGICAL REASONING. IT IS A FA CT THAT THE APPELLANT IS DEALING IN SHARES AND MUTUAL FUNDS BOTH AS STOCK IN TRADE AND INVESTMENTS. THE STOCK IN TRADE IS SHOWN IN THE BAL ANCE SHEET AS CURRENT ASSETS AND INVESTMENTS AS INVESTMENTS. THE INTENTIO N IS VERY CLEAR. DURING THE YEAR UNDER CONSIDERATION, THE APPELLANT SOLD CERTAIN INVESTMENTS AND PROFIT OF RS.4,017/- WAS SHOWN AS C APITAL GAIN. THE MUTUAL FUND UNITS AS WELL AS SHARES ON SALE OF WHIC H THE APPELLANT INCURRED LOSS WERE PURCHASED DURING THE YEAR ITSELF AND ACCOUNTED FOR STOCK IN TRADE IN THE BOOKS OF ACCOUNT. SINCE THE S AME WERE DISPOSED OFF DURING THE YEAR ITSELF, THESE DID NOT FIND PLACE IN THE BALANCE SHEET. HERE THE INTENTION OF THE APPELLANT HAS TO BE BELIEVED I N VIEW OF THE FACT THAT THESE UNITS AND SHARES WERE PURCHASED FOR A SHORT D URATION FOR PURPOSE ITA NO. 5217/M/07 & CO 157/M/09 M/S. SODHANI SECURITIES LTD. 5 OF TRADING. HAD THE INTENTION BEEN TO KEEP THE SAME AS INVESTMENTS, THE APPELLANT WOULD NOT HAVE DISPOSED OFF THE SAME WITH IN A PERIOD OF 3-4 MONTHS. THE APPELLANTS CONTENTION CARRIES WEIGHT A LSO IN VIEW OF THE FACT THAT IN THE EARLIER YEAR, SUCH PROFIT/LOSS WAS TREA TED AS BUSINESS INCOME /LOSS. THERE IS NO REASON GIVEN BY THE AO FOR DEVIA TING FROM HIS OWN STAND ON THE ISSUE. IN VIEW OF THESE FACTS AND THE ARGUMENTS ADVANCED BY THE APPELLANT, I BELIEVE THAT LOSS ACCRUED TO TH E APPELLANT ON SALE OF MUTUAL FUND UNITS AND SHARES WAS ON ACCOUNT OF TRAD ING BUSINESS AND THE AO IS DIRECTED TO TREAT THE SAME AS BUSINESS LO SS ALLOWABLE TO BE SET OFF AGAINST OTHER BUSINESS INCOME. ACCORDINGLY, THE ADDITION OF RS.58,21,327/- IS DELETED . 8. AFTER CONSIDERING THE FACTS AND ARGUMENTS OF BOTH T HE COUNSELS WE ARE IN AGREEMENT WITH THE FINDINGS OF THE CIT(A). NOTHI NG WAS BROUGHT ON RECORD TO DEVIATE FROM THE FINDINGS. ACCORDINGLY WE CONFIR M THE ORDER OF THE CIT(A) AND REJECT GROUND NO. 3 OF THE REVENUE. 9. GROUND NO. 4 IS AGAINST DISALLOWANCE OF PENAL INTER EST OF ` 33,657/- PAID TO NSE, WHICH THE ASSESSEE CLAIMED WAS INCIDEN TAL TO TRADE/BUSINESS AND IN THE NATURE OF FINES FOR DELAY/NON-COMPLIANCE OF CONTRACTUAL OBLIGATION AND NOT AS A LEVY FOR PENALTY BY A STATUTORY AUTHOR ITY. DURING THE ASSESSMENT PROCEEDINGS, THE AO NOTICED THAT THE ASS ESSEE HAD DEBITED AN AMOUNT OF ` 33,657/- TOWARDS PENALTY FINE TO NSE/NSCCL. THE ASS ESSEE EXPLAINED THAT THE SAID PENALTY/FINE AROSE OUT OF T HE CONTRACTUAL LIABILITY WITH THE STOCK EXCHANGE AND HENCE THE SAME WAS ALLO WABLE. HOWEVER, THE AO DID NOT ACCEPT THE EXPLANATION AND OBSERVED THAT THE SAID AMOUNTS WERE PAID TOWARDS FINES/PENALTIES LEVIED BY THE STOCK EX CHANGE FOR CERTAIN DEFAULT. THE SAID PENALTIES WERE LEVIED BY NSE WHICH IS A RE GULATORY BODY AND ITS LAWS ARE BINDING ON THE TRADING MEMBERS. UNDER SUCH CIRCUMSTANCES, THE PENALTY/FINE PAID TO NSE IS FOR INFRINGEMENT OF LAW S AND HENCE NOT ALLOWABLE. FURTHER RELIANCE IN THIS REGARD WAS PLAC ED ON THE DECISION OF THE SUPREME COURT IN THE CASE OF CIT VS. DHANALAXMI BAN K LTD. 271 ITR 2 (ST) (SC). HE, THEREFORE, DISALLOWED THE AMOUNT AND ADDE D THE SAME TO THE INCOME OF THE ASSESSEE. 10. THE ASSESSEE SUBMITTED BEFORE THE CIT(A) THAT THE C HARGES ARE INCIDENTAL TO TRADE/BUSINESS AND IN THE NATURE OF F INE FOR DELAY/NON- COMPLIANCE OF CONTRACTUAL OBLIGATIONS AND NOT A PEN ALTY OF STATUTORY NATURE. ITA NO. 5217/M/07 & CO 157/M/09 M/S. SODHANI SECURITIES LTD. 6 IT RELIED ON THE DECISION OF ADDL. CIT VS. RUSTAM J EHANGIR VAKIL MILLS LTD. 103 ITR 298 (GUJ). THE CIT(A) DELETED THE ADDITION. HENCE THE GROUND. 11. AFTER CONSIDERING THE ARGUMENTS OF THE LEARNED D.R. AND THE LEARNED COUNSEL WE AGREE WITH THE ORDER OF THE CIT(A). THE PAYMENT HAS BEEN MADE BY THE ASSESSEE FOR IRREGULARITY IN FOLLOWING CERTA IN REGULATIONS OF THE BSE REGARDING SOME CONTRACTUAL OBLIGATIONS. IT IS NOT F OR INFRACTION OF ANY LAW WHICH MAKES IT PENAL IN NATURE. IT HAS BEEN THE CON SISTENT VIEW OF THE ITAT THAT SUCH PAYMENTS DO NOT AMOUNT TO PENALTY OR FINE FOR INFRINGEMENT OF ANY LEGAL PROVISION. SINCE THE PAYMENTS WERE ONLY COMPE NSATORY IN NATURE MADE IN THE COURSE OF BUSINESS, THE SAME WERE ALLOWABLE BUSINESS EXPENDITURE.. THE ORDER OF THE CIT(A) IS THEREFORE CONFIRMED AND THE GROUND NO.4 IS REJECTED. CROSS OBJECTION 12. THE CROSS OBJECTION IS WITH REFERENCE TO THE ALTERN ATE CLAIM OF ALLOWING THE BAD DEBTS AS BUSINESS LOSS UNDER SECTION 28 WHI CH THE CIT(A) HAS ALLOWED IN EARLIER YEAR AND WAS CONFIRMED BY THE IT AT. IN VIEW OF THE SPECIAL BENCH DECISION IN THE CASE OF DCIT VS SHREYAS S MOR AKHIA IN ITA NO.3374/MUM/04 DATED16.07.2010, THE AMOUNTS ARE ALL OWABLE AS BAD DEBTS WHICH THE CIT(A) HAS CORRECTLY ALLOWED AND WA S CONFIRMED IN GROUND NOS. 1, 2 & 3 OF THE REVENUE APPEAL. IN VIEW OF THI S, THE CROSS OBJECTION IS ACADEMIC IN NATURE, HENCE TREATED AS INFRUCTUOUS. 13. IN THE RESULT, BOTH THE REVENUE APPEAL AND THE CROS S OBJECTION ARE DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 31 ST AUGUST 2010. SD/- SD/- (R.S. PADVEKAR) (B. RAMAKOTAIAH) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI, DATED: 31 ST AUGUST 2010 ITA NO. 5217/M/07 & CO 157/M/09 M/S. SODHANI SECURITIES LTD. 7 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A) IV, MUMBAI 4. THE CIT IV, MUMBAI CITY 5. THE DR, J BENCH, ITAT, MUMBAI BY ORDER //TRUE COPY// ASSISTANT REGISTRAR ITAT, MUMBAI BENCHES, MUMBAI N.P.