ITO,Ward-12(1), Kolkata, Kolkata V. M/s. Bijco Holdings Ltd, Kolkata

ITA 1036/KOL/2012

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 87602 (ITAT-KOLKATA)
• Duration Of Justice: 2 year(s) 5 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-01-2015
• Appeal Filed By: Department
• Bench Allotted: B
• Assessment Year: 2007-2008
• Appeal Filed On: 11-07-2012
• Court: TRIBUNAL
• Department Lawyers: AY VIDE HIS
• Keywords: Business income; Speculation loss
• Section: 143(3); 14A; 43(5)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH: KOLKATA [ BEFORE HON BLE SHRI MAHAVIR SINGH, J . M . & HON BLE SHRI SHAMIM YAHYA , A .M. ] I.T. A . NO. 1036 /KOL/20 12 : ASSESSMENT YEAR : 2007 - 0 8 ITO, WARD - 12(1) , KOLK ATA VS - BIJCO HOLDINGS LTD.,KOLKATA ( APPELLANT ) PAN : AAKCS 5342Q .. ( RESPONDENT ) DATE OF CONCLUDING THE HEA RING : 18 . 12 .201 4 DATE OF PRONOUNCING THE ORDER : 09.01 .201 5 APPEARANCES : F OR THE DEPARTMENT : SMT. M.M.GHOSH , JCIT, SR.DR : FOR THE ASSESSEE : SHRI SUBASH AGARWAL, ADVOCATE O R D E R PER SHRI MAHAVIR SINGH : THIS APPEAL BY THE REVENUE IS ARISING OUT OF THE ORDER OF CI T(A) - XII, KOLKATA IN APPEAL NO.891 / CIT(A) - XII/12(1)/2009 - 1 0 D ATED 24.04 .2 012 . ASSESSMENT WAS FRAMED BY ITO, WARD - 12(1), KOLKATA U/S. 143(3) OF THE INCOME - TAX ACT, 1961 (HEREINAFTER REFERRED TO AS THE ACT) FOR AY 2007 - 08 VIDE HIS ORDER DATED 21.12.2009. 2 . THE FIRST ISSUE IN THIS APPEAL OF REVENUE IS AGAINST THE OR DER OF CIT(A) DELETING THE ADDITION MADE BY THE AO DISALLOWING LOSS IN TRADING OF SHARES BY INVOKING EXPLANATION TO SECTION 73 OF THE ACT. FOR THIS, THE REVENUE HAS RAISED THE FOLLOWING THREE GROUNDS . 1. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) HAS ERRED IN INTERPRETING THE EXPLANATION TO SECTION 73 OF THE IT ACT . 2. THAT ON THE FACTS AND IN CIRCUMSTANCES OF THE CASE , THE LD. CIT( A) HAS ERRED IN HOLDING THAT THE PRINCIPAL BUSINESS OF THE ASSESSEE IS GRANTING LOANS AND ADVA NCES. 3. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) HAS ERRED IN ALLOWING LOSS IN TRADING OF SHARES AS NORMAL BUSINESS LOSS, OBSERVING THAT THE PROVISIONS OF SECTION 73 IS NOT APPLICABLE IN THIS CASE. 2 I.T.A. NO.1036 /KOL/2012 M/S.BIJCO HOLDINGS (P) LTD. A.Y. 2007 - 08 3 . BRIEFLY STATED FACTS ARE THAT THE ASSESSEE IS ENGAGED IN THE BUSINESS OF SHARE TRADING AND ADVANCING LOANS ON INTEREST. BASICALLY, THE ASSESSEE COMPANY IS A NON BANKING FINANCIAL COMPANY AS CERTIFIED BY RESERVE BANK OF INDIA. THE ASSESSEE FOR THE RELEVANT ASSESSMENT YEAR 2007 - 08 REFLECTED INCOME FROM SHARE TRADING, INVESTMENT IN SHARES AND SECURITIES AND ALSO FINANCING. THE AO NOTICED FROM THE PROFIT & LOSS A/C. THAT IT HAD EARNED INTEREST INCOME OF RS.3,53,956/ - AND ALSO NOTICED THAT THE ASSESSEE HAS SUFFERED LOSS OF RS.50,51 ,968/ - IN SHARE TRADING BUSINESS. THE RELEVANT COMPUTATION WORKED OUT BY THE AO READS AS UNDER: SALE OF SHARES : RS.5,30,84,053/ - ADD : CLOSING STOCK OF SHARES : RS. 6,17,576/ - RS.5,37,01,629/ - LESS: OPENING STOCK : RS.3,76,36 ,588/ - PURCHASE OF SHARES : RS.2,11,17,009/ - RS.5,87,53,597/ - LOSS ON SHARE TRADING : RS. 50,51,968/ - TO FIND OUT THE PRINCIPAL BUSINESS, THE AO HAS GIVEN COMPLETE DETAILS OF AVAILABILITY OF FUNDS, APPLICATION OF FUNDS ON LOANS AND ADVANCES AND A PPLICATION OF FUNDS ON INVESTMENT IN SHARES AS WELL AS CRITERIA OF INCOME. THE RELEVANT DETAILED WORK DONE BY THE AO READS AS UNDER: A. FUNDS AVAILABLE CAPITAL & RESERVE & SURPLUS INCLUDING LOANS: AS ON 31/03/2005 : RS.11,62,50,888/ - AS ON 31/3/2006 : RS. 9,74,99,086/ - AS ON 31/3/2007 : RS. 5,85,90,633/ - B . APPLICATION OF FUNDS ON LOANS & ADVANCES ALONG WITH RATIO TO TOTAL CAPITAL (I) LOANS & ADVANCES AS ON 31/03/2005 : RS.NIL ( --------- ) (II) LOANS & ADVANCES AS ON 31/3/2006 : RS .41,92,946/ - (4.30% OF FUNDS) (III)LOANS & ADVANCES AS ON 31/3/2007:RS.1, 02,74,528/ - (17.54% OF FUNDS C . APPLICATION OF FUNDS ON INVESTMENT IN SHARES (HELD AS INVESTMENT AS WELL AS STOCK - IN - TRADE) ALONG WITH RATIO TO TOTAL CAPITAL FOR THE THREE YE ARS ARE AS UNDER: (I) INVESTMENT IN SHARES AS ON 31/3/2005 : RS.14,59,29,985/ - (125.53% OF FUND) (II) INVESTMENT IN SHARES AS ON 31/3/2006: RS.7,91,47,888/ - (81.18% OF FUND) (III)INVESTMENT IN SHARES AS ON 31/3/2006: RS.4,18,88,876/ - (71.49% OF FU ND) 3 I.T.A. NO.1036 /KOL/2012 M/S.BIJCO HOLDINGS (P) LTD. A.Y. 2007 - 08 ACCORDINGLY, ACCORDING TO AO, THE ASSESSEE S FUND DEPLOYMENT IN PURCHASE OF SHARES IS WORKED OUT TO 125.53% OF THE TOTAL CAPITAL WHEREAS NO FUND WAS UTILIZED FOR GRANTING OF LOANS AND ADVANCES DURING THE RELEVANT FINANCIAL YEAR 2005 - 06. ALSO FOR THE RE LEVANT FINANCIAL YEAR 2005 - 06 RELEVANT TO ASSESSMENT YEAR 2006 - 07, THE DEPLOYMENT OF FUND IN ACQUIRING SHARES EITHER AS STOCK - IN - TRADE OR INVESTMENT WAS TO THE TUNE OF RS.81.18%, WHEREAS THE DEPLOYMENT OF FUND IS ONLY 4.30% IN THE RELEVANT ASSESSMENT YEAR 2007 - 08 RELEVANT TO FINANCIAL YEAR 2006 - 07 BUT FUND DEPLOYMENT IN SHARES COMES TO 71.49% WHEREAS LOANS AND ADVANCES IS ONLY AT 17.54%. IN VIEW OF THE ABOVE FACTS, THE AO HELD THAT LOSS SUFFERED IN SHARE TRADING BUSINESS IS COVERED UNDER EXPLANATION TO SECT ION 73 OF THE ACT AND THEREBY HE TREATED THE LOSS OF RS . 50,51,968/ - AS DEEMED SPECULATION LOSS IN TERMS OF EXPLANATION TO SECTION 73 OF THE ACT AND DISALLOWED TO BE SET OFF AGAINST OTHER BUSINESS INCOME I.E. INTEREST INCOME EARNED FROM LOANS AND DERIVATIV E PROFITS. AGGRIEVED, THE ASSESSEE PREFERRED APPEAL BEFORE THE CIT(A). 4 . THE CIT(A) ALLOWED THE CLAIM OF THE ASSESSEE BY GIVING FOLLOWING FINDINGS: 5. THE GROUND NOS. 3 AND 4 ARE THE SAME. THE FACTS OF THIS CASE ARE THAT THE ASSESSEE - COMPANY IS A NON - BANKING FINANCE COMPANY AS CERTIFIED BY THE RESERVE BANK OF INDIA. DURING THE YEAR UNDER CONSIDERATION THE ASSESSEE - COMPANY HAS CARRIED ON BUSINESS OF TRADING IN SHARE AND GIVING LOANS OF INTEREST. IN THE 3CD REPORT FOR THE CONCERNED YEAR THE SAME WAS MENT IONED AS THE NATURE OF BUSINESS CARRIED ON. DURING THE COURSE OF ITS SCRUTINY ASSESSMENT THE A.O ISSUED A SHOW CAUSE WHY THE LOSS FROM THE SALE OF TRADING SHARES NOT BE TREATED AS A SPECULATION LOSS BY APPLYING THE PROVISION OF EXPLANATION TO SEC. 73 OF TH E IT ACT, 1961. THE ASSESSEE IN HIS REPLY STATED THAT THE ASSESSEE COMPANY IS FALLING UNDER THE EXEMPTED CATEGORY FOR APPLICATION OF EXPLANATION TO SEC. 73 OF THE IT ACT, 1961 SINCE THE PRINCIPLE BUSINESS OF THE COMPANY IS GIVING LOANS AND ADVANCES. AS ON 31 - 03 - 2007 THE COMPANY HAS GIVEN LOANS AND ADVANCES OF RS.1,02,74,528/ - COMPARED TO A STOCK IN TRADE OF SHARES FOR RS.6,17,576/ - . THE AO DID NOT AGREE WITH THE ASSESSEE AND DISALLOWED SET OFF LOSS ON SALE OF SHARES AGAINST INTEREST INCOME I HAVE GONE THR OUGH THE FINDINGS OF THE AO AND WRITTEN SUBMISSION FILED BY THE AR DURING THE APPEAL PROCEEDING. I FIND THAT THE INTENTION OF THE LEGISLATURE IN INSERTING THE EXPLANATION AFTER SECTION 73 WAS TO CHECK THE EVASION OF TAX BY THE BUSINESS HOUSES CONTROLLING G ROUP OF COMPANIES, WHO WERE INTERNALLY HOLDING SHARES OF DIFFERENT GROUP COMPANIES AND THEY INTERNALLY EXCHANGE THE SHARES FOR TAX EVASION. THE EXPLANATION TO SECTION 73 WAS INTRODUCED ON THE BASIS OF REPORT OF WANCHOO COMMITTEE PREPARED IN DECEMBER, 1971. ON THE BASIS OF SUCH REPORT, THE THEN FINANCE MINISTER MOVED THE PROPOSAL IN THE LOK SABHA ON 15.5.73 IN TAXATION LAWS (AMENDMENT) BILL, 1973. AFTER THE DEBATE, THE MATTER WAS REFERRED TO SELECT COMMITTEE. THEREAFTER, ON THE BASIS OF 4 I.T.A. NO.1036 /KOL/2012 M/S.BIJCO HOLDINGS (P) LTD. A.Y. 2007 - 08 SELECT COMMITTEE REPO RT, EXPLANATION TO SECTION 73 WAS INTRODUCED IN TAXATION LAWS (AMENDMENT) BILL, 1975 AND FINALLY IT WAS BROUGHT ON STATUTE BOOK W.E.F. 1.4.77. THUS FOLLOWING TESTS MUST BE ADHERED TO BEFORE APPLYING PROVISION OF EXPLANATION TO SECTION 73 WHETHER THE LOSS S INCURRED BY A BUSINESS HOUSE OR NOT WHETHER THE LOSS HAS BEEN INCURRED TO AVOID TAX DURING THE COURSE OF SCRUTINY ASSESSMENT THE LD. ITO DID NOT FOUND ANY SUCH TRANSACTIONS WHEREIN ABOVE TWO MAIN CONDITIONS WERE FULFILLED. THE LD. ITO DID NOT FIND ANY MA TERIAL FINDING THAT THE TRANSACTIONS IN PURCHASE AND SALE OF SHARES WERE MADE TO AVOID TAX. INSTEAD ALL THE TRANSACTIONS WERE OF PURCHASE AND SALE OF SHARES WERE MADE AT NATIONAL STOCK EXCHANGE AND BOMBAY STOCK EXCHANGE. THUS, I FIND THAT THE EXPLANATIO N TO SEC. 73 OF THE IT ACT, 1961 IS NOT APPLICA BLE IN THE CASE OF THE ASSESSEE . I FURTHER FIND THAT UNDER THE EXPLANATION TO SECTION 73 OF THE IT ACT, 1961 EXEMPTION HAS BEEN GIVEN TO COMPANY HAVING PRINCIPLE BUSINESS AS BANKING OR BUSINESS AS GRANTING OF LOANS AND ADVANCES. AS THE ASSESSEE IS A NON - BANKING FINANCE COMPANY MAINLY ENGAGED IN THE BUSINESS OF GRANTING OF LOANS AND ADVANCES WHICH IS EVIDENT FROM THE AMOUNT INVOLVED FOR LOANS AND ADVANCES IN COMPARISON TO AMOUNTS INVOLVED FOR SHARE TRANSACTION. I FIND THE KOLKATA BENCH ITAT HAS DECIDED THE SIMILAR GROUNDS IN THE CASE OF ACIT 1(1) VS. G.P. TRADING PVT. LTD. ITA NO. 223(CAL)/91 IN WHICH THE LD. TRIBUNAL HAS HELD THAT FUNDS DEPLOYMENT CRITERIA SHOULD BE CONSIDERED FOR DETERMINING THE PRINCIPLE BUSIN ESS OF A COMPANY. I, THEREFORE, FIND THAT AO S FINDINGS ON THIS GROUND CANNOT BE SUSTAINED AS A RESULT THEREOF, THE ASSESSEE S APPEAL ON THIS GROUND IS ALLOWED. AGGRIEVED, NOW THE REVENUE IS IN APPEAL BEFORE THE TRIBUNAL. 5 . WE HAVE HEARD RIVAL CONTENTI ONS AND GONE THROUGH FACTS AND CIRCUMSTANCES OF THE CASE. BEFORE US, THE LD. SR.DR, SMT. M.M.GHOSH RELIED ON THE ASSESSMENT ORDER AND THE FINDINGS GIVEN BY THE AO WHEREAS THE LD. COUNSEL FOR THE ASSESSEE RAISED A NEW ISSUE THAT HE HAS NO GRIEVANCE AGAINST THE ASSESSMENT ORDER BUT IN CASE THE AO TREATS THE LOSS ARISING FROM SHARES AS SPECULATION LOSS, IN THAT EVENTUALITY, IN VIEW OF THE PROVISIONS OF SECTION 43(5)(B) OF THE ACT, THE PROFITS FROM DERIVATIVES IS TO BE SET OFF, SINCE BOTH THE TRANSACTIONS ARE S P ECULATIVE IN NATURE. FOR THIS PROPOSITION, LD. COUNSEL FOR THE ASSESSEE RELIED ON THE JUDGMENT OF THE HON BLE DELHI HIGH COURT IN THE CASE OF CIT VS. DLF COMMERCIAL DEVELOPERS LTD. IN ITA NO.94 OF 2013 DATED 11.07.2013, WHEREIN IN HAS BEEN HELD AS UNDER: 11. THE STATED OBJECTIVE OF SECTION 73 APPARENT FROM THE TENOR OF ITS LANGUAGE IS TO DENY SPECULATIVE BUSINESSES THE BENEFIT OF CARRY FORWARD OF LOSSES. EXPLANATION TO SECTION 73(4) HAS BEEN ENACTED TO CLARIFY BEYOND ANY SHADOW OF DOUBT THAT SHARE 5 I.T.A. NO.1036 /KOL/2012 M/S.BIJCO HOLDINGS (P) LTD. A.Y. 2007 - 08 BUSI NESS OF CERTAIN TYPES OR CLASSES OF COMPANIES ARE DEEMED TO BE SPECULATIVE . THAT IN ANOTHER PART OF THE STATUTE, WHICH DEALS WITH COMPUTATION OF BUSINESS INCOME, DERIVATIVES ARE EXCLUDED FROM THE DEFINITION OF SPECULATIVE TRANSACTIONS, ONLY UNDERLINES THAT SUCH EXCLUSION IS LIMITED FOR THE PURPOSE OF THOSE PROVISIONS OR SECTIONS TO BORROW THE MADRAS HIGH COURT S EXPRESSION, DERIVATIVES ARE ASSETS, WHOSE VALUES ARE DERIVED FROM VALUES OF UNDERLYING ASSETS ; IN THE PRESENT CASE, BY ALL ACCOUNTS THE DERIVATIV ES ARE BASED ON STOCKS AND SHARES, WHICH FALL SQUARELY WITHIN THE EXPLANATION TO SECTION 73(4). THEREFORE, IT IS IDLE TO CONTEND THAT DERIVATIVES DO NOT FALL WITHIN THAT PROVISION, WHEN THE UNDERLYING ASSET ITSELF DOES NOT QUALIFY FOR THE BENEFIT, AS THEY (DERIVATIVES ONCE REMOVED FROM IT AND ENTIRELY DEPENDENT ON STOCKS AND SHARES, FOR DETERMINATION OF THEIR VALUE). IN VIEW OF THE ALTERNATIVE PLEA OF THE ASSESSEE, WE ARE IN AGREEMENT WITH THE ARGUMENT OF LD. COUNSEL FOR THE ASSESSEE THAT THE INCOME FRO M DERIVATIVES IS DEFINED IN SECTION 43(5) OF THE ACT AND SINCE IT EXCLUDES SUCH TRANSACTIONS FROM THE NATURE OF SPECULATIVE TRANSACTION AND AO TREATS THAT THE TRANSACTION HAS NOT BEEN EXCLUDED FROM SECTION 73 OF THE ACT, THEREFORE, THE ASSESSEE WAS ENTITLE D TO CLAIM THE LOSS OF SHARES AGAINST THE INCOME OF DERIVATIVES. RESPECTFULLY FOLLOWING THE DECISION OF HON'BLE DELHI HIGH COURT IN THE CASE OF DLF COMMERCIAL DEVELOPERS LTD. SUPRA, WE ALLOW THE ALTERNATIVE CLAIM OF THE ASSESSEE AND DIRECT THE AO TO ALLOW THIS LOSS AGAINST DERIVATIVE INCOMES. THIS ISSUE OF REVENUE S APPEAL IS DISMISSED BUT ON ALTERNATIVE PLEA OF THE ASSESSEE. 6 . THE NEXT ISSUE IN THIS APPEAL OF REVENUE IS AGAINST THE ORDER OF CIT(A) IN RESTRICTING THE DISALLOWANCE AT RS.4,600/ - AS AGAINS T THE DISALLOWANCE MADE BY THE AO AT RS.14,83,717/ - BY INVOKING THE PROVISIONS OF SECTION 14A OF THE ACT READ WITH RULE 8D OF THE IT RULES, 1962 FOR EARNING THE EXEMPTED INCOME . FOR THIS, THE REVENUE HAS TAKEN THE FOLLOWING GROUND NO.3. 4. THAT ON THE FAC TS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) HAS ERRED IN RESTRICTING THE DISALLOWANCE OF RS.14,83,717/ - U/S - 14A TO RS.4,600/ - BY NOT APPLYING THE FORMULA AS PER RULE 8D CORRECTLY AS APPLIED BY THE ASSESSING OFFICER. 7 . WE HAVE HEARD RIVAL CON TENTIONS AND GONE THROUGH THE FACTS AND CIRCUMSTANCES OF THE CASE. WE FIND THAT RELEVANT ASSESSMENT YEAR INVOLVED IS 2007 - 08 AND RULE 8D WILL NOT APPLY BEING PROSPECTIVE AS HELD BY HON BLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD. VS . D CIT [2010] 328 ITR 81 (BOM.). WE FIND THAT THE 6 I.T.A. NO.1036 /KOL/2012 M/S.BIJCO HOLDINGS (P) LTD. A.Y. 2007 - 08 TRIBUNAL IS CONSISTENTLY ESTIMATING THE NET PROFIT @1% OF THE EXEMPTED INCOME AND WE FIND NO INFIRMITY IN THE ORDER OF THE CIT(A). HENCE, THIS ISSUE OF REVENUE S APPEAL IS DISMISSED. 8 . IN THE RESULT, THE AP PEAL OF THE REVENUE IS DISMISSED. THIS ORDE R IS PRONOUNCED IN THE C OURT ON 09TH JANUARY , 2015 . SD/ - SD/ - ( SHAMIM YAHYA ) ( MAHAVIR SINGH ) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED : 09TH JANUARY, 2015 TALUKDAR(SR.P.S.) COPY OF THE ORDER FORWARDED TO: 1 . M/S. BIJCO HOLDINGS LTD., AISHWARYA APARTMENTS, 29A, BALLYGUNGE CIRCULAR ROAD, KOLKATA 700 0 19 2. ITO, WARD - 12(1) , KOLKATA 3 . THE CIT(A), 4. CIT, 5 . DR, KOLKATA BENCHES, KOLKATA TRUE COPY, BY ORDER, ASSTT. REGISTRAR , ITAT, KOLKATA 7 I.T.A. NO.1036 /KOL/2012 M/S.BIJCO HOLDINGS (P) LTD. A.Y. 2007 - 08