D.C.I.T. Cir-6, Kolkata, Kolkata V. M/s. Noble Enclave & Towers (P) Ltd., Kolkata

ITA 1241/KOL/2008

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 54623 (ITAT-KOLKATA)
• Duration Of Justice: 3 year(s) 4 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-11-2011
• Appeal Filed By: Department
• Bench Allotted: B
• Assessment Year: 2005-2006
• Appeal Filed On: 30-06-2008
• Court: TRIBUNAL
• Department Lawyers: S K ROY
• Assessee Lawyers: D S DAMLE
• Keywords: Capital asset; Business income; Business expenditure; Speculation loss
• Section: 2; 2(14); 14A; 43(5)

Judgement Text

, , , , , , ,, , IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH : KOLKATA [ . . . . . . . . , ,, , , ,, , . . . . . .. . ! ! ! ! , ' ' ' ' ] [BEFORE HONBLE SHRI B. R. MITTAL, JM & HONBLE SHRI S.V. MEHROTRA, AM] #$ #$ #$ #$ / I.T.A NO. 1241/KOL/2008 %& '() %& '() %& '() %& '()/ // / ASSESSMENT YEAR : 2005-06 DY. COMMISSIONER OF INCOME TAX -VS.- M/S . NOBLE ENCLAVE & TOWERS (P) LIMITED CIRCLE-6, KOLKATA. KOLKATA [PAN : AAACN 9112 F] [ +, +, +, +, /APPELLANT ] ]] ] [ ./+, ./+, ./+, ./+,/ // / RESPONDENT ] ] ] ] +, +,+, +, / FOR THE APPELLANT : SHRI S.K. ROY ./+, ./+, ./+, ./+, / FOR THE RESPONDENT : SHRI D. S. DAMLE 0%'1 2 3' 0%'1 2 3' 0%'1 2 3' 0%'1 2 3' /DATE OF HEARING : 18.08.2011 4( 2 3' 4( 2 3' 4( 2 3' 4( 2 3' /DATE OF PRONOUNCEMENT :04/11/2011 5 /ORDER . . . . . .. . ! ! ! ! , ' ' ' ' PER S. V. MEHROTRA, A. M. THE DEPARTMENT HAS PREFERRED THIS APPEAL FOR ASSES SMENT YEAR 2005-06 AGAINST ORDER OF LD. CIT(A)-VI, KOLKATA DATED 22.04.2008. 2. THE ASSESSEE, A PRIVATE LIMITED COMPANY, IN THE RELEVANT ASSESSMENT YEAR, CARRIED ON THE BUSINESS OF CORPORATE FINANCE AND SHARE DEALING. TH E ASSESSMENT WAS COMPLETED, INTER ALIA, MAKING FOLLOWING ADDITIONS/DISALLOWANCES :- A) MANAGEMENT FEES : RS.12,98,906/- B) LOSS ON DERIVATIVE TRADE : RS. 91,860/- C) BROKERAGE PAID FOR DERIVATIVE TRADING : RS. 73,935/- 3. BEING AGGRIEVED WITH THE ORDER OF ASSESSING OFFI CER, ASSESSEE PREFERRED APPEAL BEFORE LD. CIT(A) WHO ALLOWED ASSESSEES APPEAL IN RESPECT OF AFOREMENTIONED DISALLOWANCES. ITA NO. 1241/KOL/2008 2 4. BEING AGGRIEVED WITH THE ORDER OF LD. CIT(A), T HE DEPARTMENT IS IN APPEAL BEFORE US. 5. GROUND NO.1 READS AS UNDER :- IN THE FACTS AND UNDER THE CIRCUMSTANCES OF THE CA SE THE CIT(A) HAS ERRED IN LAW WHILE IN GIVING RELIEF TO THE ASSESSEE BY HOLDING LOSS ON ACCOUNT OF DERIVATIVES TRADING AS SHORT TERM CAP ITAL LOSS NOT ATTRACTING SEC. 43(5). 6. BRIEF FACTS APROPOS THIS ISSUE ARE THAT ASSESSEE HAD DEBITED IN THE PROFIT & LOSS ACCOUNT A SUM OF RS.91,860/- AS LOSS ON DERIVATIVE TRADE. ASS ESSING OFFICER FURTHER NOTICED THAT IN THE COMPUTATION OF TOTAL INCOME, ASSESSEE HAD ADDED BAC K THE SAME AND SUBSEQUENTLY CLAIMED SUCH LOSS TO BE DEDUCTED FROM SHORT TERM CAPITAL LOSS SU FFERING SECURITY TRANSACTION TAX. HE REQUIRED THE ASSESSEE TO EXPLAIN AS TO HOW THE DERIVATIVE LO SS WAS ALLOWABLE WHEN THE NATURE OF SUCH LOSS WAS SPECULATIVE. THE ASSESSEE EXPLAINED THAT SUCH L OSS WAS NOT SPECULATIVE TRANSACTION AS PER SECTION 43(5)(D) OF THE ACT. HOWEVER, ASSESSING OFF ICER TREATED THE SAID LOSS AS SPECULATIVE LOSS IN VIEW OF PROVISION OF SECTION 43(5)(D) READ WITH SE CTION 2(AE) OF SECURITY CONTROL (REGULATION ACT, 1956. LD. CIT(A) ALLOWED THE ASSESSEES APPEAL FOR THE FOLLOWING REASONS :- (I) INCOME FROM DERIVATIVE TRANSACTION WAS NOT ONLY ASSESSABLE UNDER THE HEAD PROFIT AND GAINS FROM BUSINESS BUT COULD ALSO ASSESSED UN DER CAPITAL GAIN AS CONTRACTUAL RIGHTS GIVING OPTION FELL WITHIN THE AM BIT OF CAPITAL ASSET AS DEFINED UNDER SECTION 2 SUB-SECTION (14) OF THE INCOME TAX ACT. (II) THE DERIVATIVE CONTRACTS ARE NOT IN THE NATUR E OF CONTRACT FOR PURCHASE AND SALE OF ANY COMMODITY. THE DERIVATIVE CONTRACTS ONLY GRANT OPTIONS TO THE PARTIES AND DO NOT INVOLVE PURCHASE AND SALE OF COMMODITY WHICH IS A CONDITION PRECEDENT FOR SECTION 43(5) OF THE ACT. (III) ITAT, MUMBAI BENCH VIDE ITS ORDER DATED 25.09 .2007 IN ITA NO.3182/MUM/2004 HAS HELD THAT SECTION 43(5) HAS NO APPLICATION TO D ERIVATIVE TRANSACTIONS. 7. LD. DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT I N DERIVATIVE TRANSACTION, THE CONTRACT IS TO SET OFF THE DIFFERENCE IN PRICE WITHOUT TAKING ANY DELIVERY. THEREFORE, IT IS TO BE TREATED AS ITA NO. 1241/KOL/2008 3 SPECULATIVE TRANSACTION. HE FURTHER SUBMITTED THAT THE SPECIAL BENCH IN THE CASE OF SHREE CAPITAL SERVICES LTD. VS. ACIT [2009] 318 ITR (AT) 1 (KOLKA TA) [SB} HAS HELD THAT INSERTION OF CLAUSE(D) TO SECTION 43(5) BY THE FINANCE ACT, 2005 W.E.F 1-4 -2006 IS PROSPECTIVE IN OPERATION AND, THEREFORE, SPECIAL BENCH DECISION IS OF NO HELP TO THE ASSESSEE FOR THE ASSESSMENT YEAR 2005-06.. 8. LD. COUNSEL APPEARING ON BEHALF OF THE ASSESSEE SUBMITTED THAT LD. CIT(A) ALLOWED THE ASSESSEES APPEAL ON TWO COUNTS, FIRSTLY, SINCE AS SESSEE HAD SHOWN INCOME UNDER THE HEAD SHORT TERM CAPITAL GAIN FROM ITS INVESTMENT ACTIVITY. TH EREFORE, DERIVATIVE TRANSACTION WAS ALSO TREATED AS PART OF INVESTMENT ACTIVITY AND, HENCE, SECTION 43(5) WAS NOT APPLICABLE WHICH IS APPLICABLE ONLY IN THE CASE OF PROFITS AND GAINS OF BUSINESS O R PROFESSION. SECONDLY IN THE CASE OF DCIT VS. M/S. SSKI INVESTORS SERVICES (P) LTD., TRIBUNAL HAS HELD THAT LOSS ON ACCOUNT OF DERIVATIVES CAN NOT BE TREATED AS SPECULATIVE LOSS. LD. COUNSEL FU RTHER SUBMITTED THAT SECTION 2 SUB-SECTION (14) WHICH DEFINES CAPITAL ASSET IS AN INCLUSIVE DEFIN ITION AND AN ENFORCEABLE CONTRACT IS AN ASSET HELD BY AN ASSESSEE. HE FURTHER SUBMITTED THAT IT I S NOT A TRANSFERABLE RIGHT AND THE CONTRACT EXTINGUISHES ON SETTLEMENT. HE FURTHER REFERRED TO SECTION 2(AC) AND (H)(IA) OF SECURITIES CONTRACT REGULATION ACT, 1956 WHICH READS AS UNDER :- SECTION (2) AC) DERIVATIVE INCLUDES - (A) A SECURITY DERIVED FROM A DEBT INSTRUMENT, SHAR E, LOAN, WHETHER SECURED OR UNSECURED, RISK INSTRUMENT OR CONTRACT FOR DIFFERENCES O R ANY OTHER FROM OF SECURITY; (B) A CONTRACT WHICH DERIVES ITS VALUE FROM T HE PRICES, OR INDEX OF PRICES, OF UNDERLYING SECURITIES; (H) SECURITIES INCLUDE - (IA) DERIVATIVE. WITH REFERENCE TO ABOVE DEFINITIONS, LD. COUNSEL SU BMITTED THAT LIKE ANY OTHER SECURITIES, DERIVATIVE ALSO ARE TO BE TREATED AS CAPITAL ASS ET. LD. COUNSEL HAD ALSO FILED BEFORE US EXTRACT FROM WHEREIN PROPERTY HAS BEEN ELABORATELY EXPLAINE D. IN SUM AND SUBSTANCE LD. COUNSEL SUBMITTED THAT SECTION 2(14) DEFINING CAPITAL ASSE T ENCOMPASSES WITHIN ITS AMBI ENFORCEABLE CONTRACT WHICH IS A PROPERTY HELD BY AN ASSESSEE . 9. WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE P ARTIES AND HAVE PERUSED THE RECORDS OF ITA NO. 1241/KOL/2008 4 THE CASE. ASSESSING OFFICER TREATED THE DERIVATIVE LOSS AS SPECULATION LOSS IN VIEW OF SECTION 43(5)(D). HOWEVER, LD. CIT(A) TREATED THE DERIVATIV E LOSS AS SHORT TERM CAPITAL LOSS BY TREATING DERIVATIVES AS CAPITAL ASSET.. TWO ISSUES ARISES F OR ADJUDICATION - I) FIRSTLY, WHETHER THE DERIVATIVE CAN BE TREATED A S CAPITAL ASSET IN TERMS OF SECTION 2(14) OF THE ACT. II) SECONDLY, WHETHER NECESSARILY TRANSACTIONS IN D ERIVATIVES SHOULD BE TREATED AS BUSINESS TRANSACTIONS OR EVEN AN INV ESTOR CAN ALSO ENTER INTO DERIVATIVE . TRANSACTIONS. BEFORE WE PROCEED TO CONSIDER THESE TWO ISSUES, WE MAY OBSERVE THAT IN VIEW OF THE DECISION OF SPECIAL BENCH IN THE CASE OF SHREE CAPITAL SERVICES LTD. VS. ACIT [2009] 318 ITR (AT) 1 (KOLKATA) [SB), IT CAN NOT BE DISPUTED THAT IN THE RELEVANT ASSESSMENT YEAR UNDER CONSIDERATION, THE DERIVATIVE TRANSACTION WAS TO BE TREATED AS SPECULA TIVE LOSS UNDER SECTION 43(5) OF THE ACT. HOWEVER, IN THE PRESENT APPEAL, CONTENTION OF THE A SSESSEE IS ENTIRELY DIFFERENT. THE ASSESSEE CONTENDS THAT IT CARRIED ON DERIVATIVE TRANSACTION AS INVESTOR AND, THEREFORE, LOSS INCURRED BY IT FRO M THESE INVESTMENTS WAS SHORT TERM CAPITAL LOSS AND, THEREFORE, THE PROVISIONS OF SECTION 43(5)(D) HAD NO APPLICATION AS THE SAID LOSS WAS NOT TO BE COMPU TED UNDER THE HEAD PROFITS OR GAINS OF BUSINESS OR PROFESSION. THE SAID LOSS AS PER ASSESSEE, IS T O BE COMPUTED UNDER THE HEAD CAPITAL GAINS. AS FAR AS FIRST ISSUE IS CONCERNED, IN VIEW OF THE DEF INITION OF DERIVATIVE IN SECURITIES CONTRACT REGULATION ACT, 1956, NOTED IN PARA 8 ABOVE, IT IS TO BE HELD THAT DERIVATIVE IS A CAPITAL ASSET AS IT HAS BEEN TREATED AS SECURITY. NOW, IN ORDER TO DECIDE THE SECOND ISSUE, WE HAVE TO KEEP IN MIND THE BASIC DIFFERENCE BETWEEN INVESTMENT AND TRADING.IN ORDER TO DECIDE WHETHER A PARTICULAR HOLDING IS HELD BY AN ASSESSEE AS ITS BU SINESS STOCK OR AS PART OF ITS INVESTMENT FOLLOWING ASPECTS HAVE TO BE TAKEN INTO CONSIDERATI ON:- - INTENTION OF ASSESSEE- WHETHER TO TRADE OR INVEST - VALUE OF ASSET- WHETHER INVESTIBLE ASSET OR MERELY TRADEABLE - PERIOD OF HOLDING - NATURE OF TRANSACTION-WHETHER SPECULATIVE OR DELIVE RY BASED NORMALLY, WHEN A STOCK IS HELD AS PART OF INVESTM ENT THEN THE PRIMARY INTENTION OF ASSESSEE IS TO EARN DIVIDEND FROM THE SAID INVESTMENT. IT I S TRUE THAT AN INVESTOR CAN ALSO LIQUIDATE SECURITI ES IN SHORT SPAN OF TIME IN ORDER TO SWITCH OVER TO OT HER BETTER PROFIT YIELDING INVESTMENTS BUT THE MAIN INTENTION IS ALWAYS TO DERIVE INCOME WITH REAS ONABLE CERTAINTY FROM INVESTMENT. FURTHER, AN INVESTOR NORMALLY TAKES THE DELIVERY OF SHARES AND DOES NOT INDULGE INTO SPECULATIVE KIND OF ITA NO. 1241/KOL/2008 5 TRANSACTION. THESE TRANSACTIONS ARE NORMALLY ENTERE D INTO BY TRADERS. A DERIVATIVE IS AN INSTRUMENT HAVING FOLLOWING CHARACTERISTICS:- A. A DERIVATIVES CASH FLOWS OR FAIR VALUE MUST FLUCTU ATE OR VARY BASED ON THE CHANGES IN AN UNDERLYING VARIABLE. B. THE CONTRACT MUST BE BASED ON A NOTIONAL AMOUNT OF QUANTITY. THE NOTIONAL AMOUNT IS THE FIXED AMOUNT OR QUANTITY THAT DETERMI NES THE SIZE OF CHANGE CAUSED BY THE MOVEMENT OF THE UNDERLYING. C. THE CONTRACT CAN BE READILY SETTLED BY NET CASH PAY MENT. THE DERIVATIVE INSTRUMENT CAN BE USED AS A TOOL FOR HEDGING OR CAN BE A TRADING TRANSACTION UNRELATED TO HEDGING. IF IT IS NOT USED AS AN HEDGI NG INSTRUMENT, THE GAIN OR LOSS ON THE DERIVATIVE INSTRUMENT IS REQUIRED TO BE RECOGNIZED AS PROFIT OR LOSS IN CURRENT EARNINGS. THUS, THE VERY NATURE OF THIS CONTRACT SUGGESTS TH AT ASSESSEE IS INVOLVED IN DAY TO DAY OPERATION OF SHARE TRADING ACTIVITY SO AS TO KEEP A TRACK OF PRICE TREND. ADMITTEDLY, IN DERIVATIVE TRANSACTION, THE DIFFERENCE IN PRICE IS SETTLED. TH EREFORE, KEEPING IN VIEW THE VERY NATURE OF TRANSACTION, WHICH IS RISK ADVENTURE. IT CAN NOT BE SAID THAT DERIVATIVE TRANSACTIONS WERE PART OF INVESTMENT PORTFOLIO OF ASSESSEE. FURTHER, THE INTE NTION OF THE ASSESSEE IS TO BE GATHERED FROM HIS CONDUCT SUCH AS TREATMENT GIVEN TO THE TRANSACTION IN ITS ACCOUNTS. IN THIS REGARD, WE FIND THAT IN THIS CASE, ASSESSEE HAD INITIALLY DEBITED THE LOSS ON DERIVATIVE TRADE IN ITS PROFIT & LOSS ACCOUNT BU T SUBSEQUENTLY, WHILE FILING THE COMPUTATION OF TOTAL INCOME CLAIMED THE SAME AS SHORT TERM CAPITAL LOSS. THEREFORE, IN OUR OPINION, ASSESSING OFFICER HAD RIGHTLY TREATED THE DERIVATIVE TRANSACTION LOSS AS BEING COVERED UNDER THE HEAD PROFIT AND GA INS OF BUSINESS OR PROFESSION AND NOT UNDER THE HEAD CAPITAL GAINS. IN VIEW OF ABOVE DISCUSSI ON, THIS GROUND OF APPEAL OF THE DEPARTMENT IS ALLOWED. 10. GROUND NO.2 READS AS UNDER :- IN THE FACTS AND UNDER THE CIRCUMSTANCES OF THE CA SE THE LD. CIT(A) HAS ERRED IN LAW WHILE IN GIVING RELIEF TO THE ASSE SSEE BY HOLDING THAT TAX AT SOURCE WAS NOT DEDUCTIBLE ON PAYMENT OF BROKERAGE PAID TO AN AGENCY FOR FACILITATING DERIVATIVES TRADE. TH IS WAS FOUND TO HE DEFEATING THE SPIRIT OF SEC. 194H. 11. BRIEF FACTS APROPOS THIS ISSUE ARE THAT ASSESSI NG OFFICER NOTICED THAT ASSESSEE HAD PAID BROKERAGE AMOUNTING TO RS.73,935/- TO M/S. KOTAK SE CURITIES LIMITED ON DERIVATIVE TRANSACTIONS. HOWEVER, NO TDS HAD BEEN DEDUCTED. HE, THEREFORE, D ISALLOWED ASSESSEES CLAIM US 40(A)(IA) OF ITA NO. 1241/KOL/2008 6 THE ACT. LD. CIT(A) ALLOWED THE ASSESSEES CLAIM, I NTER ALIA, OBSERVING THAT SECTION 194H WAS NOT APPLICABLE TO BROKERAGE PAID TO STOCK BROKERS. 12. LD. DEPARTMENTAL REPRESENTATIVE REFERRED TO PAG ES 7 & 8 OF THE PAPER BOOK WHEREIN THE CERTIFICATES FROM HDFC PORTFOLIO MANAGEMENT AND KOT AK SECURITIES PORTFOLIO MANAGEMENT ARE CONTAINED. HE SUBMITTED THAT AS PER THE SAID CERTIF ICATES ASSESSEE HAD PAID MANAGEMENT FEES TO THESE BODIES AS THEY HAD RENDERED HIGHLY TECHNICAL SERVICES. HE, THEREFORE, SUBMITTED THAT TDS WAS REQUIRED TO BE DEDUCTED AS PER BOARDS CIRCULAR . 13. LD. COUNSEL APPEARING ON BEHALF OF THE ASSESSEE REFERRED TO EXPLANATION (1) TO SECTION 194H WHEREIN THE COMMISSION OR BROKERAGE HAS BEEN C LARIFIED AND POINTED OUT THAT EXCEPTION IS, THEREFORE, REGARDING SECURITIES. 14. WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE PARTIES AND HAVE PERUSED THE RECORDS OF THE CASE. EXPLANATION (1) TO SECTION 194H READS AS UNDER :- (I) COMMISSION OR BROKERAGE INCLUDES ANY PAYMENT RECEIVED OR RECEIVABLE, DIRECTLY OR INDIRECTLY, BY A PERSON ACT ING ON BEHALF OF ANOTHER PERSON FOR SERVICES RENDERED (NOT BEING PROFESSIONA L SERVICES) OR FOR ANY SERVICES IN THE COURSE OF BUYING OR SELLING OF GOOD S OR IN RELATION TO ANY TRANSACTION RELATING TO ANY ASSET, VALUABLE ARTICLE S OR THING, NOT BEING SECURITIES ; ADMITTEDLY, AS PER DEFINITION OF DERIVATIVE CONTAIN ED IN SECTION 2 SUB-SECTION (AC) READ WITH SECTION 2 SUB-SECTION (H) (IA) AS REPRODUCED EARLIE R, THE DERIVATIVES ARE SECURITIES AND, THEREFORE, CLEARLY COVERED BY THE EXCEPTION PROVIDED IN EXPLAN ATION (1) TO SECTION 194H. WE, THEREFORE, CONFIRM THE ORDER OF LD. CIT(A) ON THIS ISSUE. 15. GROUND NOS. 3 & 4 READ AS UNDER :- 3. IN THE FACTS AND UNDER THE CIRCUMSTANCES OF TH E CASE THE CIT(A) HAS ERRED IN FACTS WHILE GIVING RELIEF TO THE ASSESSEE ON ACCOUNT OF DISALLOWANCE U/S L4A BY DIRECTING THAT THE INSURANC E PREMIUM PAID ON ACCOUNT OF KEY MAN INSURANCE POLICY IS TO BE EXCLUD ED FROM THE TOTAL OF MANAGEMENT EXPENSES OVER WHICH PROPORTIONATE DISALL OWANCE WAS MADE BY THE AO WHILE DETERMINING AMOUNT OF DISALLOWANCE U/S 14A 4. IN THE FACTS AND UNDER THE CIRCUMSTANCES OF THE CASE THE LD. CIT(A) HAS ERRED IN FACTS WHILE GIVING RELIEF TO THE ASSESSEE ON ACCOUNT OF ITA NO. 1241/KOL/2008 7 DISALLOWANCE U/S. L4A, BY DIRECTING THAT PROPORTION ATE EXPENSE INCURRED AS MANAGEMENT FEES PAYABLE TO PORTFOLIO MANAGER IS TO BE EXCLUDED FOR WORKING OUT OF DISALLOWANCE U/S L4A. 16. BRIEF FACTS APROPOS THESE TWO ISSUE ARE THAT AS SESSING OFFICER NOTICED THAT IN THE COMPUTATION OF TOTAL INCOME, ASSESSEE CLAIMED TOTAL DEDUCTION ON ACCOUNT OF MANAGEMENT FEE PAID AMOUNTING TO RS.12,98,906/- AND THE SAME WAS DEDUCT ED FROM THE INCOME/LOSS UNDER THE HEAD SHORT TERM CAPITAL GAIN. HE NOTICED THAT THE MAN AGEMENT FEES WAS PAID AND RELATED TO ALL THE TRANSACTIONS IN SHARES FROM WHICH EITHER DIVIDEND W AS RECEIVED OR IN CONNECTION WITH EARNING SHORT TERM/LONG TERM CAPITAL GAINS/LOSS WITH STT OR WITHO UT STT. HE FURTHER NOTICED THAT ASSESSEE HAD SHOWN DIVIDEND INCOME OF RS.53,34,694/- AND LONG TE RM CAPITAL GAIN SUFFERING STT OF RS.20,05,599/, WHICH WERE EXEMPT UNDER SECTION 10(3 4) & 10(38) OF THE ACT RESPECTIVELY. AFTER CONSIDERING THE DETAILS OF EXPENDITURE, ASSESSING O FFICER DISALLOWED RS.1,21,677/- ON ACCOUNT OF PROPORTIONATE MANAGEMENT EXPENSES & RS.2,80,864/- O UT OF BUSINESS EXPENSES BEING 10% OF TOTAL EXPENDITURE OF RS.28,08,638/- UNDER SECTION 14A OF THE ACT. BEFORE LD. CIT(A), IT WAS, INTER ALIA, THAT SUBMITTED THAT EXPENDITURE OF RS.28,08,638/-, INTER ALIA, INCLUDED RS.20,00,000/- BEING INSURANCE PREMIUM PAID UNDER KEYMAN INSURANCE POLIC Y. IT WAS FURTHER SUBMITTED THAT AS PER SECTION 2(24) READ WITH SECTION 28(VI) OF THE ACT, ANY RECEIPT UNDER KEYMAN INSURANCE POLICY IS TAXABLE AS BUSINESS INCOME. THEREFORE, SUM OF RS.20 .00 LAKHS PAID TOWARDS INSURANCE PREMIUM WAS NOT RELATABLE TO EARNING OF INCOME NOT CHARGEAB LE TO TAX. THEREFORE, ASSESSING OFFICER SHOULD NOT HAVE TAKEN INTO ACCOUNT THIS EXPENDITURE WHILE ESTIMATING DISALLOWANCE UNDER SECTION 14A OF THE ACT. AS REGARDS, DISALLOWANCE OF RS.1,21,677/- OUT OF MANAGEMENT EXPENSES, IT WAS CLARIFIED THAT ASSESSEE HAD PLACED ITS INVESTIBLE SURPLUS FUN DS WITH SEBI APPROVED FUND MANAGERS UNDER PORTFOLIO MANAGEMENT SCHEME. FOR MANAGING INVESTMEN T PORTFOLIO, ASSESSEE PAID FUND MANAGEMENT FEES WHICH WERE PAID AT PERIODIC INTERVA LS. THE FEES WERE CALCULATED WITH REFERENCE TO APPRECIATION ACHIEVED IN THE INVESTMENTS DURING THE DEFINED PERIOD. FROM THE FUNDS PLACED BY FUND MANAGERS IN DIFFERENT UNITS AND SHARES, ASSESS EE EARNED DIVIDEND. HOWEVER, ON THE INCOME EARNED BY WAY OF DIVIDEND, ASSESSEE DID NOT PAY MAN AGEMENT FEES TO THE FUND MANAGER. LD. CIT(A) AFTER CONSIDERING THE ASSESSEES SUBMISSIONS , DIRECTED THE ASSESSING OFFICER TO EXCLUDE RS.20.00 LAKHS FROM THE GENERAL OVERHEAD EXPENSES A ND COMPUTE THE DISALLOWANCE ON THE BALANCE AMOUNT. AS REGARDS MANAGEMENT FEES PAID TO FUND MAN AGER, LD. CIT(A) OBSERVED THAT SINCE THE EXPENDITURE ON MANAGEMENT FEES DID NOT PERTAIN TO D IVIDEND INCOME, THERE WAS NO JUSTIFICATION TO ITA NO. 1241/KOL/2008 8 DISALLOW RS.1,21,677/- OUT OF MANAGEMENT FEES. 17. LD. DEPARTMENTAL REPRESENTATIVE RELIED ON THE O RDER OF ASSESSING OFFICER. 18. LD. COUNSEL APPEARING ON BEHALF OF THE ASSESSEE RELIED ON THE ORDER OF LD. CIT(A). 19. WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE PARTIES AND HAVE PERUSED THE RECORDS OF THE CASE. AS FAR AS, GROUND NO.3 ASSAILING THE EXC LUSION OF INSURANCE PREMIUM PAID OF RS.20.00 LAKHS UNDER KEYMAN INSURANCE PREMIUM IS CONCERNED, WE DO NOT FIND ANY REASON TO INTERFERE WITH THE ORDER OF LD. CIT(A) BECAUSE THE FACTS ARE NOT D ISPUTED AND THE PROCEEDS OF KEYMAN INSURANCE POLICY ARE FULLY TAXABLE UNDER SECTION 28(VI) OF TH E ACT. THEREFORE, THE EXPENDITURE RELATING TO THE SAME CANNOT COME WITHIN THE AMBIT OF SECTION 14A. A CCORDINGLY, FOR MAKING DISALLOWANCE UNDER SECTION 14A RS.20.00 LAKHS WAS RIGHTLY DIRECTED TO BE EXCLUDED FROM GENERAL BUSINESS EXPENDITURE. BY LD. CIT(A) 19.1 AS REGARDS DISALLOWANCE OF RS.1,21,677/- OUT O F MANAGEMENT FEE, AS PER MANDATE OF SECTION 14A, EXPENDITURE INCURRED IN RELATION TO TH E EARNING OF INCOME IS TO BE DISALLOWED. THEREFORE, THERE HAS TO BE DIRECT NEXUS WITH THE EA RNING OF DIVIDEND INCOME. IT IS NOT DISPUTED THAT FUND MANAGEMENT FEES PAID HAD NO NEXUS WITH THE EAR NING OF DIVIDEND BUT WAS CALCULATED AND PAID WITH REFERENCE TO APPRECIATION ACHIEVED IN THE INVE STMENT DURING THE DEFINED PERIOD. THEREFORE, THE DISALLOWANCE UNDER SECTION 14A WAS NOT WARRANTED. 20. IN THE RESULT, GROUND NOS.3 & 4 ARE DISMISSED. 21. GROUND NO.5 READS AS UNDER :- IN THE FACTS AND UNDER THE CIRCUMSTANCES OF THE CAS E THE CIT(A) HAS ERRED IN LAW WHILE GIVING RELIEF TO THE ASSESSEE ON ACCOU NT OF ADJUSTMENT OF SHORT TERM CAPITAL LOSS (STT PAID) WITH SHORT TERM CAPITA L GAIN (WITHOUT STT), WHEREAS NO SUCH ADJUSTMENT WAS MADE AGAINST SHORT T ERM CAPITAL GAIN (STT PAID). THE LD. CIT(A) ERRED IN HOLDING THAT TH ERE IS NO NEED TO MAINTAIN ANY CHRONOLOGY IN SUCH ADJUSTMENT. HE HAS TRIED IN DECIDING SO, SINCE THERE WERE DIFFERENT TAX RATES FOR STCG, BASE D ON PAYMENT ) OF STT. 22. BRIEF FACTS APROPOS THIS ISSUE ARE THAT ASSESSI NG OFFICER COMPUTED SHORT TERM CAPITAL GAIN AND SHORT TERM CAPITAL LOSS SUFFERED BY ASSESSEE SE PARATELY FOR THE PERIODS 01.04.2004 TO ITA NO. 1241/KOL/2008 9 30.09.2004 & 01.10.2004 TO 31.03.2005. HE ALLOWED T HE SET OFF OF THE SHORT TERM CAPITAL LOSS AGAINST SHORT TERM CAPITAL GAINS EARNED DURING 01.1 0.2004 TO 311.03.2005 AND IMPOSED TAX UNDER SECTION 111A ON THE NET SHORT TERM CAPITAL GAINS. A SSESSEE, BEING NOT SATISFIED WITH THE MANNER IN WHICH SET OFF WAS ALLOWED, SUBMITTED BEFORE THE LD. CIT(A) THAT ASSESSEE HAD EARNED SHORT TERM CAPITAL GAINS WHICH WAS AS FOLLOWS :- SR. LOSS PERIOD UNDER WHICH INCOME EARNED NATURE INCOME 1. 01.04.2004 TO 30.09.2004 STCG RS.12,40,016/- 2. 01.10.2004 TO 31.03.2005 STCG RS.84,93,251/- (ST T PAID) 3. 01.10.2004 TO 31.03.2005 STCG (-)RS.24,47,215/- (STT PAID) IT WAS SUBMITTED THAT AS PER SECTION 70, ASSESSEE I S ENTITLED TO SET OFF LOSS UNDER SHORT TERM CAPITAL GAINS AGAINST INCOME FROM SHORT TERM CAPITAL GAINS. SECTION 70 NOWHERE PROVIDES THAT SHORT TERM CAPITAL LOSS ARISING FROM STT PAID TRANSACTIONS CAN ONLY BE SET OFF AGAINST SHORT TERM CAPITAL GAIN ARISING FROM STT PAID TRANSACTION. THE ONLY STATUTO RY REQUIREMENT OF SECTION 70 IS THAT SHORT TERM CAPITAL LOSS CAN BE SET OFF ONLY AGAINST INCOME FR OM SHORT TERM CAPITAL GAIN OR LONG TERM CAPITAL GAIN. NO PARTICULAR MODE OR MANNER OF SET OFF IS P ROVIDED IN THE ACT. THEREFORE, ASSESSING OFFICER SHOULD HAVE ADOPTED THAT CHRONOLOGICAL ORDER OR MAN NER WHICH WAS MOST BENEFICIAL TO THE ASSESSEE. THE ASSESSEE RELIED ON BOARD OF REVENUE C IRCULAR NO. 26(LXVGI-3 OF 1955) DATED 07.07.1955 WHEREIN IT HAS BEEN EXPLAINED THAT SECTION 24(1) OF INCOME TAX ACT, 1922, PERMITTED SET OFF OF LOSS UNDER ONE HEAD AGAINST INCOME UNDER TWO OR MORE HEADS OF INCOME. THERE WAS NOTHING IN SECTION 24(1) TO INDICATE THAT A PARTICU LAR MODE OF SET OFF SHOULD BE FOLLOWED. IT FURTHER EXPLAINED THAT IN ABSENCE OF ANY SUCH INDIC ATION THE GENERAL RULE TO BE FOLLOWED IN ALL FISCAL ENACTMENTS WAS THAT WHERE WORDS USED WERE NE UTRAL IN IMPORT, A CONSTRUCTION MOST BENEFICIAL TO THE ASSESSEE SHOULD BE ADOPTED. THE B OARD, THEREFORE, CLARIFIED THAT THE DEPARTMENT SHOULD ADOPT THAT MODE WHICH WILL GIVE THE ASSESSEE THE MAXIMUM BENEFIT . 23. WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE PARTIES AND HAVE PERUSED THE RECORDS OF THE CASE. WE FIND THAT THIS ISSUE IS COVERED BY THE DECISION OF HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. RUNGAMATEE TREXIM (P) LTD. VIDE ITA NO.812 OF 2008, WHEREIN IT HAS BEEN, INTER ALIA, HELD AS UNDER :- ON PERUSAL OF THE PROVISION OF SECTION 70, I FIND THAT THERE IS NO ITA NO. 1241/KOL/2008 10 PROHIBITION NOR THE ACT COMPELS THE ASSESSEE TO FIR ST SET OFF SHORT TERM CAPITAL GAIN WITH STT AGAINST SHORT TERM CAPITAL LO SS WITH STT AND THEN ALLOWS SET OFF AGAINST SHORT TERM CAPITAL GAIN WITH OUT STT. IN ABSENCE OF ANY SPECIFIC MODE OF SET OFF PROVIDED IN THE ACT AN D IN ABSENCE OF ANY PROHIBITION AND IN ABSENCE OF ANY SPECIFIC CHRONOLO GY FOR SET OFF PRESCRIBED IN THE ACT, THE ASSESSEE WAS ENTITLED TO EXERCISE HIS OPTION WITH REGARD TO THE CHRONOLOGY OF SET OFF WHICH WAS MOST BENEFICIAL TO THE ASSESSEE. IT IS SETTLED PROPOSITION OF LAW THAT WHE N A PROVISION OF THE ACT GIVES OPTION TO THE ASSESSEE, SUCH OPTION SHOULD BE EXERCISED WHICH WILL FAVOUR THE ASSESSEE AND NOT THE REVENUE. THE A/R FO R THE ASSESSEE WAS WELL JUSTIFIED IN RELYING ON THE DECISION OF THE CALCUTT A HIGH COURT AND THE CIRCULAR OF THE BOARD DATED 7.7.1955 SINCE THE PRIN CIPLES LAID DOWN THEREIN APPEARED TO BE FULLY APPLICABLE. RESPECTFULLY, FOLLOWING THE SAME, THIS GROUND IS AL SO DISMISSED. 24. IN THE RESULT, APPEAL OF THE DEPARTMENT IS PART LY ALLOWED. 5 '0 5 '0 5 '0 5 '0 6 0% 7 8 6 0% 7 8 6 0% 7 8 6 0% 7 8 3' 3' 3' 3' ORDER PRONOUNCED IN THE COURT ON SD/- SD/- [ . . . . . . . . , ,, , ] [ . . . . . .. . ! ! ! ! , ' ' ' ' ] [ B. R. MITTAL ] [ S.V. MEHROTRA ] JUDICIAL MEMBER ACCOUNTANT MEMBER D ATED : 4 TH NOVEMBER, 2011. 5 2 .9 :9(/ COPY OF THE ORDER FORWARDED TO: 1. +, /APPELLANT : DY. COMMISSIONER OF INCOME TAX, CIRCL E-6, AAYAKAR BHAWAN, P-7, CHOWRINGHEE SQUARE, KOLKATA-700 069. 2 ./+, / RESPONDENT : M/S. NOBLE ENCLAVE & TOWERS (P) LTD ., 2, RED CROSS PLACE, KOLKATA-700 001 . 3. 5 - % / CIT, 4. 5% ()/ CIT(A), KOLKATA. 5. '7 .%/ DR, KOLKATA BENCHES, KOLKATA [/9 ./ TRUE COPY] 5%0/ BY ORDER, #C /ASSTT REGISTRAR [KKKC 'DE %FC G' /SR.PS] PRONOUNCED ON 04/11/11 SD/- SD/- [JUDICIAL MEMBER] [ACCOUNTANT MEMBER] 04/11/2011