ASHOK APPARELS P. LTD, MUMBAI V. ACIT CIR 6(1), MUMBAI

ITA 1741/MUM/2009

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 48609 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 1 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-04-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Assessment Year: 2005-2006
• Appeal Filed On: 17-03-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: VINAY SETHY
• Keywords: Speculation loss
• Section: 14A; 43(5)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH A, MUMBAI BEFORE SHRI R,S. SYAL, A.M. AND SHRI V. DURGA RAO, J.M. ITA NO. 1741/MUM/2009 ASSESSMENT YEAR: 2005-06 M/S ASHOK APPARELS PVT. LTD., APPELLANT PHONEIX MILLS COMPOIND 462, SENAPATI BAPAT MARG, LOWER PAREL, MUMBAI 400 013 VS. THE ASSTT. COMMISSIONER OF INCOME-TAX, RESPONDENT CIRCLE 6(1), AAYAKAR BHAVAN, MUMBAI. ITA NO. 1793/MUM/2009 ASSESSMENT YEAR: 2005-06 THE ASSTT. COMMISSIONER OF INCOME-TAX, APPELLANT CIRCLE 6(1), AAYAKAR BHAVAN, MUMBAI. VS. M/S ASHOK APPARELS PVT. LTD., RESPONDENT PHONEIX MILLS COMPOIND 462, SENAPATI BAPAT MARG, LOWER PAREL, MUMBAI 400 013 ASSESSEE BY : MR. MANVENDRA GOYAL REVENUE BY : MR. VINAY SETHY . ORDER PER V. DURGA RAO, J.M.: THESE ARE THE CROSS APPEALS DIRECTED AGAINST THE O RDER OF CIT(A)- VI, MUMBAI, PASSED ON 13/01/2009 FOR THE ASSESSMENT YEAR 2005-06. ITA NO. 1741/MUM/2009 APPEAL BY THE ASSESSEE ITA NO. 1741 & 1793/MUM/2009 ASHOK APPARELS P. LTD. 2 2. THE ASSESSEE HAS RAISED THE FOLLOWING GROUND OF APPEAL IN ITS APPEAL:- ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE HONBLE CIT(A) ERRED IN CONFIRMING THE ACTION O F THE ACIT IN DISALLOWING THE ENTIRE INTEREST EXPENDITURE OF RS. 69,62,190 UNDER SECTION 14A OF THE ACT ON THE GROUNDS THAT TH E ASSESSEE HAS USED INTEREST BEARING BORROWED FUNDS FOR INVEST ING IN SHARES. THE APPELLANT PRAYS THAT THE DISALLOWANCE MADE BY T HE ASSESSING OFFICER FURTHER CONFIRMED BY THE CIT(A) MAY KINDLY BE DELETED. 3. BRIEFLY THE FACTS OF THE CASE ARE THAT THE ASSES SING OFFICER HAD NOTED THAT THE ASSESSEE HAD ITS OWN FUNDS BY SHARE CAPITAL OF RS. 11,12,200/- AND RESERVE & SURPLUS OF RS. 14,40,39,3 21/-, TOTALING TO RS. 14,41,51,521/-, AGAINST WHICH THE ASSESSEE COMP ANY HAD INVESTED IN SHARES AMOUNTING TO RS. 16,38,43,700/-. NEEDLESS TO SAY THAT BY NO STRETCH OF REASONING AND IMAGINATION ASSESSEE CO ULD HAVE MADE INVESTMENT WORTH RS. 16.38 CRORES OUT OF HIS OWN FU NDS OF RS. 14.41 CRORES UNLESS HE UTILIZES THE INTEREST BEARING BORR OWED FUNDS. THE ASSESSING OFFICER POINTED OUT THAT THE RESERVE SHOW N ABOVE WAS AFTER CONSIDERING THIS YEARS PROFIT AS PER P&L A/C. OF R S. 5.31 CRORES WHICH WAS AVAILABLE TO THE ASSESSEE ONLY AT THE END OF TH E YEAR. AS A RESULT OF ONLY INFERENCE THAT COULD BE DRAWN WAS THAT THE INTEREST BEARING BORROWED FUND HAD BEEN USED BY THE ASSESSEE ONLY AN D ONLY FOR THE PURPOSE OF INVESTMENT IN SHARES WHICH FETCHED EXEMP TED INCOME BY WAY OF DIVIDEND. THE ASSESSING OFFICER WAS OF THE V IEW THAT THE DIVIDEND INCOME DERIVED WAS RS. 5,14,635/- WHICH WA S OF NO CONSEQUENCE AS FAR AS ATTRIBUTION OF INVESTMENT OF BORROWED FUND IN THE SHARES AND THEREBY INTEREST PAID ON IT CONCERNE D AND, THEREFORE, PROVISIONS OF SECTION 14A REQUIRED TO BE INVOKED FO R DISALLOWING THE INTEREST ATTRIBUTABLE TO THIS INVESTMENT. THE ASSES SING OFFICER ALSO MENTIONED THAT DURING THE YEAR UNDER CONSIDERATION SALE OF INVESTMENT HAD FETCHED THE ASSESSEE EXEMPTED INCOME U/S 10(38) IN THE FORM OF LONG TERM CAPITAL GAIN ON THE SALE OF S HARES. ACCORDINGLY, THE ASSESSING OFFICER INVOKED THE PROVISIONS OF SEC TION 14A AND DISALLOWED INTEREST OF RS. 69,62,190/- BY RELYING O N VARIOUS CASE LAWS. ON APPEAL, AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE, THE ITA NO. 1741 & 1793/MUM/2009 ASHOK APPARELS P. LTD. 3 CIT(A) CONFIRMED THE DISALLOWANCE MADE BY THE ASSES SING OFFICER U/S 14A OF THE ACT FOLLOWING THE SPECIAL BENCH DECISION OF ITAT MUMBAI DECISION IN THE CASE OF DAGA CAPITAL & MANAGEMENT C O. PVT. LTD. AGGRIEVED, THE ASSESSEE CARRIED THE MATTER IN APPEA L BEFORE THE ITAT. 4. BEFORE US THE LEARNED REPRESENTATIVES OF THE PAR TIES HAVE FAIRLY CONCEDED THAT THIS ISSUE IS SQUARELY COVERED BY THE JUDGMENT OF THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF GO DREJ & BOYCE MFG. CO. LTD., [2010] 328 ITR 81 (BOM.) WHEREIN THE HON BLE COURT HELD AS UNDER:- THAT THE PROVISIONS OF RULE 8D OF THE RULES WHICH H AVE BEEN NOTIFIED WITH EFFECT FROM MARCH 24, 2008, WOULD APP LY WITH EFFECT FROM ASSESSMENT YEAR 2008-09. EVEN PRIOR TO ASSESSM ENT YEAR 2008-09, WHEN RULE 8D WAS NOT APPLICABLE, THE AO HA D TO ENFORCE THE PROVISIONS OF SUB-SECTION (1) OF SECTION 14A. F OR THAT PURPOSE, THE AO IS DUTY BOUND TO DETERMINE THE EXPENDITURE W HICH HAS BEEN INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. THE AO MUST ADOPT A REASONABLE BASIS OR METHOD CONSISTENT WITH ALL THE RELEVANT FA CTS AND CIRCUMSTANCES AFTER FURNISHING A REASONABLE OPPORTU NITY TO THE ASSESSEE TO PLACE ALL GERMANE MATERIAL ON THE RECOR D. THE PROCEEDINGS FOR ASSESSMENT YEAR 2002-03 WOULD STAND REMANDED TO THE AO. THE AO SHOULD DETERMINE AS TO WHETHER TH E ASSESSEE HAD INCURRED ANY EXPENDITURE (DIRECT OR INDIRECT) I N RELATION TO DIVIDEND INCOME/INCOME FROM MUTUAL FUNDS WHICH DOES NOT FORM PART OF THE TOTAL INCOME AS CONTEMPLATED UNDER SECT ION 14A. THE AO CAN ADOPT A REASONABLE BASIS FOR EFFECTING THE A PPORTIONMENT. WHILE MAKING THAT DETERMINATION, THE AO SHOULD PROV IDE A REASONABLE OPPORTUNITY TO THE ASSESSEE OF PRODUCING ITS ACCOUNTS AND RELEVANT OR GERMANE MATERIAL HAVING A BEARING O N THE FACTS AND CIRCUMSTANCES OF THE CASE. 5. IN VIEW OF THE RATIO LAID DOWN BY THE HONBLE JU RISDICTIONAL HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD. ( SUPRA), WE REMIT THE MATTER BACK TO THE FILE OF THE AO WITH A DIRECTION DECIDE THE ISSUE AFRESH IN THE LIGHT OF THE SAID JUDGMENT OF THE HON BLE JURISDICTIONAL HIGH COURT AFTER PROVIDING REASONABLE OPPORTUNITY O F BEING HEARD TO THE ASSESSEE. ITA NO. 1741 & 1793/MUM/2009 ASHOK APPARELS P. LTD. 4 6. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES. ITA NO. 1793/MUM/2009 APPEAL BY THE REVENUE 4. THE REVENUE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL:- 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE LEARNED CIT(A) ERRED IN DIRECTING THE ASSESSIN G OFFICER NOT TO TREAT THE LOSS ON ACCOUNT OF TRADING IN DERIVATIVE AS SPECULATION LOSS, BUT TO TREAT THE SAME AS BUSINESS LOSS, WITHO UT APPRECIATING THE FACT THAT THE CONTRACTS IN DERIVATIVE TRADING A RE SETTLED WITHOUT DELIVERY OF GOODS/COMMODITY. THE APPELLANT PRAYS THAT THE ORDER OF THE CIT(A) ON THE ABOVE GROUND BE SET ASIDE AND THAT OF ASSESSING OFFICER B E RESTORED. 5. BRIEFLY THE FACTS OF THE CASE ARE THAT THE ASSES SING OFFICER HAD NOTED THAT THE ASSESSEE HAD DEBITED AN AMOUNT OF RS . 25,50,090/- AS LOSS IN TRADING DERIVATIVES. ACCORDING TO THE ASSES SING OFFICER THE LOSS WAS PURELY A SPECULATION LOSS AS THE CONTRACTS WERE SETTLED WITHOUT DELIVERY OF GOODS OF THE CONTRACTS. AS SUCH, THE AS SESSING OFFICER CONSIDERED THE LOSS AS SPECULATION LOSS. BEFORE THE CIT(A), THE AR OF THE ASSESSEE SUBMITTED THAT THE ASSESSING OFFICER W AS NOT JUSTIFIED IN TREATING THE LOSS OF RS. 25,50,090/- AS SPECULATION LOSS. HE RELIED UPON VARIOUS DECISIONS OF THE ITAT INCLUDING THE DE CISION OF ITAT, BANGALORE IN THE CASE OF BHARAT KUMAR VS. DCIT VID E ITA NO. 1455 OF 2002 FOR AY 2001-02 DATED 31/01/2055. AFTER CONSIDE RING THE SUBMISSIONS OF THE ASSESSEE AS WELL AS THE DECISION S RELIED UPON BY THE ASSESSEE, THE CIT(A) DIRECTED THE ASSESSING OFF ICER NOT TO TREAT THE LOSS ON ACCOUNT OF TRADING IN DERIVATIVES AS SPECUL ATION LOSS, BUT BUSINESS LOSS. AGGRIEVED, THE REVENUE IS IN APPEAL BEFORE THE ITAT. 6. THE LEARNED DEPARTMENTAL REPRESENTATIVE HAS RELI ED UPON THE ORDER OF THE ASSESSING OFFICER AND CANVASSED THAT T HE ISSUE IS COVERED BY THE JUDGMENT OF THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE ITA NO. 1741 & 1793/MUM/2009 ASHOK APPARELS P. LTD. 5 OF CIT VS. BHARAT RS. RUIA (HUF) VIDE INCOME TAX AP PEAL NO. 1539 OF 2010, JUDGMENT DATED 18/04/2011. 7. AFTER HEARING THE LEARNED COUNSEL FOR THE ASSESS EE AND PERUSING THE MATERIAL ON RECORD, WE FIND THAT THIS ISSUE IN DISPUTE IS COVERED AGAINST THE ASSESSEE BY THE JUDGMENT OF THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. BHARAT R. RUIA (H UF) (SUPRA). BEFORE THE HONBLE COURT THE FOLLOWING QUESTIONS OF LAW WE RE FRAMED:- A)WHETHER THE TRANSACTIONS IN EXCHANGE TRADED FINAN CIAL DERIVATES ARE SPECULATIVE TRANSACTIONS AS DEFINED IN SECTION 43(5) OF THE INCOME TAX ACT, 1961 ? B) IF SO WHETHER CLAUSE (D) INSERTED TO THE PROVISO TO SECTION 43(5) OF THE ACT W.E.F 1-4-2006 WOULD APPLY TO SUCH TRANS ACTIONS UNDERTAKEN IN THE ASSESSMENT YER 2003-04 ? 8. AFTER CONSIDERING THE SAID QUESTIONS, THE HONBL E COURT HELD THAT THE EXCHANGE TRADED DERIVATIVE TRANSACTIONS CARRIED ON BY THE ASSESSEE DURING AY 2003-04 ARE SPECULATIVE TRANSACT IONS COVERED UNDER SECTION 43(5) OF THE ACT AND THE LOSS INCURRE D IN THOSE TRANSACTIONS ARE LIABLE TO BE TREATED AS SPECULATIV E LOSS AND NOT BUSINESS LOSS. THE COURT FURTHER HELD THAT CLAUSE ( D) TO THE PROVISO TO SECTION 43(5) WITH EFFECT FROM 01/04/2006 IS PROSPE CTIVE IJN NATURE AND THE ITAT WAS IN ERROR IN HOLDING THAT CLAUSE (D) TO THE PROVISO TO SECTION 43(5) APPLIED RETROSPECTIVELY SO AS TO APPLY TO THE TRANSACTIONS CARRIED ON BY THE ASSESSEE DURING AY 2003-04. RESPECTFULLY FOLLOWING THE JUDGMENT OF THE JURISDICTIONAL HIGH COURT IN THE CA SE OF BHARAT R. RUIA (SUPRA) WE SET ASIDE THE ORDER OF THE CIT(A) A ND THAT OF THE ORDER OF THE ASSESSING OFFICER IS RESTORED. ACCORDINGLY, THE GROUND RAISED BY THE REVENUE IS ALLOWED. 9. IN THE RESULT, THE APPEAL OF THE REVENUE IS ALLO WED. ITA NO. 1741 & 1793/MUM/2009 ASHOK APPARELS P. LTD. 6 10. TO SUM UP, THE APPEAL OF THE ASSESSEE IS ALLOWE D FOR STATISTICAL PURPOSES AND THE APPEAL OF THE REVENUE IS ALLOWED. PRONOUNCED IN THE OPEN COURT ON THIS DAY OF 29 TH APRIL, 2011. SD/- SD/- (R.S.SYAL) (V. DURGA R AO) ACCOUNTANT MEMBER JUDI CIAL MEMBER MUMBAI, DATED: 29 TH APRIL, 2011 COPY TO:- 1) THE APPELLANT. 2) THE RESPONDENT. 3) THE CIT (A) CONCERNED. 4) THE CIT CONCERNED. 5) THE DEPARTMENTAL REPRESENTATIVE, A BENCH, I.T .A.T., MUMBAI. BY ORDER //TRUE COPY// ASST. REGISTRAR, I.T.A.T., MUMBAI. KV