PRATIBHUTI VINIHIT LTD, MUMBAI V. ASST CIT 4(2), MUMBAI

ITA 2045/MUM/2012

• Counselvise Citation: [2015] 120 COUNSELVISE.COM (IT) 9272 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 11 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-03-2015
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Next Hearing Date: 02-03-2015
• Assessment Year: 2008-2009
• Appeal Filed On: 28-03-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: PERMANAND J
• Assessee Lawyers: PRADIP KEDIA
• Keywords: Transactions in derivatives; Futures and options
• Section: 143(3)

Judgement Text

, INCOME TAX APPELLATE TRIBUNAL,MUMBAI - C BENCH. , ! , BEFORE S/SH.VIJAY PAL RAO, JUDICIAL MEM BER & RAJENDRA,ACCOUNTANT MEMBER /. ITA NO.2045/MUM/2012, ' ' ' ' # # # # / ASSESSMENT YEAR-2008-09 M/S PRATIBHUTI VINIHIT LTD., CHHAJED KEDIA & ASSOCIATES 208, BLUE MOON CHAMBERS, NAGINDAS MASTER ROAD, NEAR WELCOME RESTAURANT, FORT, MUMBAI-400023 PAN:AAACP6298A VS ACIT 4(2), AAYAKAR BHAVAN, M.K.ROAD, MUMBAI-20 ( $% / APPELLANT) ( &'$% / RESPONDENT) '() '() '() '() * * * * / ASSESSEE BY : SHRI PRADIP KEDIA + * / REVENUE BY : SHRI PERMANAND J. ' ' ' ' + ++ + ), ), ), ), / DATE OF HEARING : 02.03.2015 -.# + ), / DATE OF PRONOUNCEMENT : 11-03-2015 ' ' ' '1961 1961 1961 1961 + + + + 254 254 254 254( (( (1 11 1) )) ) )7) )7) )7) )7) 8 8 8 8 ORDER U/S.254(1)OF THE INCOME-TAX ACT,1961(ACT) PER RAJENDRA,AM ! ! ! ! ' ' ' ' : CHALLENGING THE ORDER DATED 05.01.2012 OF CIT-8,MUM BAI,THE ASSESSEE HAS FILED FOLLOWING GROUNDS OF APPEAL: 1. THE LEARNED CIT(A) ERRED IN LAW AND ON FACTS IN SUSTAINING DISALLOWANCE RS. 7,34,837/- BEING EXPENDITURE INCURRED TOWARDS PAYMENT OF 'TRANSACTIO N CHARGES' TO NSE/BSE BY RESORTING TO S.40(A)(IA) FOR NON DEDUCTION OF TDS ON SUCH PAYMEN TS. 1.1 THE LEARNED CIT(A) FAILED TO APPRECIATE THAT TH E TDS IS NOT DEDUCTIBLE ON SUCH PAYMENTS UNDER CHAPTER XVIIB OF THE ACT AND THUS PROVISIONS OF S.4 0(A)(IA) OUGHT NOT TO HAVE BEEN APPLIED. 1.2 THE LEARNED CIT(A) FURTHER FAILED TO APPRECIATE THAT PAYMENT FOR 'TRANSACTION CHARGES' TO NSE/ BSE DOES NOT FALL WITHIN THE AMBIT OF 'FEE FOR TECH NICAL SERVICES' S.194J AS ALLEGED. 1.3 WITHOUT PREJUDICE, THE LEARNED CIT(A) FURTHER O UGHT TO HAVE APPRECIATED THAT THE TAX ON INCOME CHARGEABLE IN THE HANDS OF RECIPIENTS I.E. NSE IN R ELATION TO SUCH PAYMENTS HAS BEEN DULY COLLECTED BY THE REVENUE IN ANY CASE AND THUS DISALLOWANCE IS UNCALLED FOR. 2. THE LEARNED CIT(A) ERRED IN LAW AND ON FACTS IN SUSTAINING THE DISALLOWANCE OF LOSS INCURRED IN DERIVATIVE TRADING (F&O) IN SHARES RS.51,48,545/- B Y INCORRECTLY TREATING THE SAME AS NOTIONAL LOSS OF OPEN POSITION IN THE FUTURES & OPTIONS. 2.1 THE LEARNED CIT(A) FURTHER ERRED IN NOT APPRECI ATING MARKET MECHANISM IN RESPECT OF OPEN POSITION IN FUTURES CONTRACT ON NSE IN RESPECT OF S UCH LOSS. 2.2 THE LEARNED CIT(A) OUGHT TO HAVE APPRECIATED TH AT AS PER NSE MECHANISM, THE ASSESSEE IS OBLIGED TO MAKE DAILY MARK TO MARKET SETTLEMENT IN RESPECT OF ALL ADMITTED DEALS IN FUTURE CONTRACTS EVEN IF THE POSITION REMAINS OPEN AND CARRIED FORWA RD RESULTING IN CRYSTALLIZATION OF PROFIT/LOSS ON THE SAME VERY DAY. 2.3 THE LEARNED CIT(A) FURTHER OUGHT TO HAVE APPREC IATED THAT THE ACTION OF AO IN DISALLOWING LOSS IN F&O POSITION REMAINING OPEN AT THE END OF YEAR I S TAX NEUTRAL AND MERE DEFERRAL OF ALLOWANCE OF LOSS FROM THIS YEAR TO NEXT ASST. YEAR WHEN IT IS A LLEGEDLY CRYSTALLIZED AS PER AO. HE FAILED TO APPRECIATE THAT THE REVENUE IS NOT AFFECTED AT ALL BY THE METHOD OF ACCOUNTING CONSISTENTLY FOLLOWED BY THE ASSESSEE. 2.4 THE LEARNED CIT(A) ERRED IN MAKING GROSSLY INCO RRECT AND BASELESS FACTUAL ASSERTION IN PARA 3.2 OF ITS ORDER THAT WHILE LOSS HAS BEEN ACCOUNTED FOR ON MTM BASIS, THE PROFITS HAVE BEEN IGNORED, AND AS CONSEQUENCE, ARRIVED AT A FINDING TAINTED WITH P ERVERSITY. 3. THE APPELLANT SUBMITS THAT THE ABOVE GROUNDS OF APPEAL ARE ALTERNATIVE, INDEPENDENT AND WITHOUT PREJUDICE TO ONE ANOTHER. 2 ITA NO. 2045/M/2012 M/S PRATIBHUTI VINIHIT LTD. 4. THE APPELLANT CRAVES LEAVE TO ADD, AMEND, ALTER OR DELETE ANY OF THE ABOVE GROUNDS OF APPEAL. A SSESSEE-COMPANY,ENGAGED IN THE BUSINESS OF SHARE BR OKING,FILED ITS RETURN OF INCOME ON 29.09. 2008,DECLARING INCOME OF RS.(-) 1,05,23,962/-.ASSES SING OFFICER(AO) COMPLETED THE ASSESSMENT ON 29.11.2010 U/S. 143(3) OF THE ACT DETERMINING THE I NCOME OF THE ASSESSEE AT RS.(-)45,08, 070/-. 2. FIRST GROUND OF APPEAL IS ABOUT DISALLOWANCE OF V-S AT CHARGES OF RS.86,250/- AND TRANSACTION CHARGES OF RS.7,34,837/-U/S.40(A)(IA) OF THE ACT FO R NON-DEDUCTION OF TDS U/S.194J OF THE ACT. WHILE COMPLETING THE SCRUTINY ASSESSMENT,THE AO NOT ICED THAT ASSESSEE HAD PAID A SUM OF RS. 7.34 LAKHS TO STOCK EXCHANGE TOWARDS TRANSACTION CHARGES .HE CONSIDERED THESE EXPENSES AS FEE FOR TECHNICAL SERVICES AND DISALLOWED THE SAME,INVOKING THE PROVISIONS OF SECTION 40(A)(IA) OF THE ACT, AS THE ASSESSEE HAD FAILED TO DEDUCT TAX AT SOURCE. 3. AGGRIEVED BY THE ORDER OF THE AO, THE ASSESSEE PREF ERRED AN APPEAL BEFORE THE FIRST APPELLATE AUTHORITY(FAA).REFERRING TO THE DECISION OF HON'BLE MUMBAI HIGH COURT IN THE CASE OF M/S KOTAK SECURITIES LTD.(ITA NO.3111 OF 2009), HE HELD THAT TRANSACTION CHARGES PAID BY THE ASSESSEE TO THE STOCK EXCHANGE CONSTITUTED FEE FOR TECHNICAL SERVIC ES AND WAS COVERED BY THE PROVISIONS OF SECTION 194J OF THE ACT,THAT THE ASSESSEE WAS LIABLE TO DED UCT TAX AT SOURCE,THAT SUM OF RS.7.34 LAKHS,BEING TRANSACTION CHARGES,WAS RIGHTLY DISALLOWED BY THE A O U/S. 40(A)(IA) OF THE ACT.HE FINALLY CONFIRMED THE DISALLOWANCE MADE BY THE AO. 4. BEFORE US,THE AUTHORISED REPRESENTATIVE(AR) CONTEND ED THAT PROVISIONS OF SECTION 40(A)(IA)WERE TO BE APPLIED RETROSPECTIVELY,THAT THE DEDUCTEE HAD PAID THE TAXES,THAT NO TAX WAS PAYABLE WITH REGARD TO TRANSACTION CHARGES AS ON THE LAST DATE O F THE ACCOUNTING YEAR.HE RELIED UPON THE CASES OF ARCADIA SHARES AND STOCK BROKERS PVT.LTD.(ITA/1871/ MUM-AY.2006-07,DATED 22.12. 2014),AMIT NARESH SINHA(ITA/4154/MUM/2013-AY.2009-10,DATED 10. 09.2014) AND G. SHANKAR (ITA/1832/ BANG/ 2013 -AY.2005-06,DATED 10.10.2014)DEPARTMENTA L REPRESENTATIVE(DR) SUPPOR -TED THE ORDER OF THE FAA. 5. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL BEFORE US.WE FIND THAT IN THE CASE OF AMIT NARESH SHAH TO WHICH ONE OF US WAS A PARTY, IT HAS BEEN HELD THAT IF THE TAX HAS BEEN PAID AND IS NOT PAYABLE ON THE LAST DAY OF THE AY.,THEN PROVISIONS OF SECTION 40(A)(IA)WOULD NOT BE APPLICABLE.THE MATTER OF AMIT NARESH SHAH WAS DECID ED AFTER THE JUDGMENT,IN THE CASE OF JANPIRYA ENGINEERS SYNDICATE,WAS DELIVERED BY THE HONBLE AP HIGH COURT.WE FIND THAT SECOND PROVISO TO SECTION 40(A)(IA)HAS BEEN HELD TO BE APPLICABLE RET ROSPECTIVELY BY VARIOUS BENCHES OF THE TRIBUNAL. IN OTHER WORDS,IF THE OTHER PARTY PAYS THE TAX THEN THE FAILURE OF THE ASSESSEE TO DEDUCT TAX AT SOURC E HAS TO BE IGNORED.CONSIDERING THE FACTS AND CIRCUMS TANCES OF THE CASE AND THE ABOVE MENTIONED LEGAL POSITION,WE ARE OF THE OPINION THAT THERE WAS NO DEFAULT ON PART OF THE ASSESSEE. GROUND NO.1 IS DECIDED IN FAVOUR OF THE ASSESSEE. 6. SECOND GROUND OF APPEAL IS ABOUT SUSTAINING THE DIS ALLOWANCE OF LOSS INCURRED IN DERIVATIVE TRADING(F&O SEGMENT)IN SHARES,AMOUNTING TO RS.51.48 LAKHS.DURING THE ASSESSMENT PROCEEDINGS, THE AO FOUND THAT THE ASSESSEE HAD BOOKED LOSSES ON ACCOUNT OF MARK TO MARKET VALUATION OF OPEN POSITION IN RESPECT OF FUTURES, THAT IN RESPECT OF FORWARD CONTRACT LOSS HAD ACTUALLY MATERIALISED ON THE DATE WHEN THE CONTRACT WAS SQUARED OFF,THAT IN BETWEEN IT ONLY REMAINED A NOTIONAL PROFIT/ NOTIONAL LOSS WHICH VARIED ON A DAY TO DAY BASIS,TH AT SUCH NOTIONAL LOSS WAS NOT ALLOWABLE UNDER THE ACT. REFERRING TO THE JUDGMENT OF HON'BLE MADRAS HI GH COURT IN THE CASE OF INDIAN OVERSEAS BANK(151 ITR 446) AND THE CASE OF KAMANI MATERIAL P RODUCT PVT. LTD. (208 ITR 1017)OF HON'BLE BOMBAY HIGH COURT,HE HELD THAT RS.51.48 LAKHS HAD T O BE ADDED BACK TO THE INCOME OF THE ASSESSEE. 7. IN THE APPELLATE PROCEEDINGS,THE ASSESSEE RELIED UP ON THE JUDGMENT OF THE HON'BLE APEX COURT DELIVERED IN THE CASE OF WOODWARD GOVERNOR INDIA P. LTD. (312 ITR 254). AFTER CONSIDERING THE ASSESSMENT ORDER AND THE SUBMISSION OF THE ASSESSEE THE FAA HELD THE THE ASSESSEE HAD DEBITED IN P 3 ITA NO. 2045/M/2012 M/S PRATIBHUTI VINIHIT LTD. & L ACCOUNT, PROVISIONS FOR LOSS ON MARKED TO MARKE T (M TOM) OF OPEN-CONTRACTS IN EQUITY INDEX/ STOCK FUTURES,THAT PROFIT ON ACCOUNT OF M TO M HAVE BEEN IGNORED ON THE BASIS OF PRUDENCE PRINCIPLE,THAT THE ICAI GUIDANCE NOTE ON ACCOUNTING FOR EQUITY INDEX AND EQUITY STOCK FUTURES AND OPTIONS DESCRIBED FUTURES LIKE A FORWARD CONTRA CT,THAT FUTURES DID NOT HAVE ANY COST OF THEIR OWN AT THE TIME OF EXECUTION OF THE CONTRACT, THAT NO A SSET OR LIABILITY WAS CREATED ON PURCHASE OR SALE O F THE FUTURES AND THE FUTURES CONTRACT WAS NOT RECOGN ISED AS SUCH AT INCEPTION IN THE BOOKS OF ACCOUNT UNLIKE WHEN SECURITY WAS PURCHASED IN CASH MARKET,T HAT ON PURCHASE OF SECURITY ASSETS WERE RECORDED IN THE BOOKS IRRESPECTIVE OF THE PAYMENT M ADE FOR IT,THAT NO SUCH ACCOUNTING WOULD TAKE PLACE FOR FUTURES,THAT M TO M ADJUSTMENTS WERE IN T HE NATURE OF ADVANCES,THAT THE M TO M LOSS AT BEST COULD BE UNASCERTAINED LIABILITY OR A PROVISIO N FOR LOSS,THAT THE FUTURE CONTRACTS WERE IN THE NATURE OF READY-FORWARD CONTRACTS,THAT IN SUCH TYPE S OF CONTRACTS THE PROFIT OR LOSS COULD NOT ACCRUE UNTIL AND UNLESS THE CONTRACTS WERE SETTLED, THAT THE ASSESSEE WAS ONLY DEBITING THE LOSSES AND NOT CREDITING THE PROFIT ON ACCOUNT OF MARK TO MARK ET VALUATION IN HIS P&L A/C.FINALLY, HE HELD THAT MARKED TO MARKET LOSS OF RS. 51,48,545/- CLAIMED BY THE ASSESSEE HAD BEEN RIGHTLY DISALLOWED BY THE AO. 8. BEFORE US,IT WAS SUBMITTED THAT AS PER THE SETTLEME NT PROCEDURE LAID DOWN BY THE NSE,IT WAS INCUMBENT ON THE BROKER TO MAKE MTM SETTLEMENT FOR FUTURE CONTRACTS ON DAILY BASIS, THAT THE RESULTANT LOSS/PROFIT WERE TO BE DEBITED OR CREDITE D, THAT A COPY OF SETTLEMENT PROCEDURE OF NSE WAS FURNISHED BEFORE THE AO, THAT THE LOSS INCURRED EVE N IN RESPECT OF OPEN POSITION WAS CRYSTALISED ON DAY TO DAY BASIS, THAT THE ONLY LIBERTY GRANTED TO THE HOLDER OF THE F&O POSITION WAS THAT HE COULD CARRY FORWARD THE POSITION UP TO EXPIRATION DATE OF THE CONTRACT, THAT IT HAD NO EFFECT PER-SAY ON RECOGNITION OF PROFIT/LOSS FROM THE INCOME-TAX POIN T OF VIEW, THAT LOSS/PROFIT GOT CRYSTALLISED ON DAY TO DAY BASIS.HE REFERRED TO THE ORDER OF THE TRIBUN AL DELIVERED IN ASSESSEES OWN CASE FOR EARLIER AY.DR SUPPORTED THE ORDER OF THE FAA. 8.WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED T HE MATERIAL BEFORE US.WE FIND THAT WHILE DECIDING THE IDENTICAL ISSUE FOR THE AY.2006-07(ITA /2749/MUM/2010,DATED 29.07.2011),THE TRIBUNAL HAS HELD AS UNDER: ' SIMILARLY, AS REGARDS THE MARKET LOSS CLAIMED AT TH E END OF THE ACCOU7NTING YEAR REFERABLE TO DERIVATIVE SHARING IN TRADES LEARNED CIT(A) FOLLOWE D THE DECISION OF THE APEX COURT IN THE CASE OF WOODWARD GOVERNOR INDIA P. LTD. 312 ITR 254 (SC) TO HOLD THAT MARK TO MARKET LOSSES IN CASE OF STOCK FUTURE AS ON BALANCE SHEET DATE IS ALLOWABLE. 3. LEARNED DR WAS UNABLE TO DISTINGUISH THE DECISIO NS RELIED UPON BY THE LEARNED CIT(A). HOWEVER, AS REGARDS GROUND NO.2 HE RELIED UPON THE INSTRUCTI ONS OF THE CBDT TO SUBMIT THAT SUCH NOTIONAL LOSS SHOULD BE TREATED AS CONTINGENT IN NATURE AND CANNOT BE ALLOWED AS DEDUCTION (INSTRUCTION NO.3J2010 DATED 23-3-2010). 4. HAVING REGARD TO THE CIRCUMSTANCES OF THE CASE, WE DO NOT FIND ANY INFIRMITY IN THE ORDER PASSED BY THE LEARNED CIT(A). ADMITTEDLY, THE FIRST ISSUE IS SQUARELY COVERED BY THE DECISION OF THE ITAT IN THE CASE OF KOTAK SECURITIES (SUPRA) AND WITH REGAR D TO SECOND ISSUE, LEARNED CIT(A) FOLLOWED THE DECISION OF THE APEX COURT (SUPRA) AND THE LEARNED DR WAS UNABLE TO POINT OUT AS TO HOW THE AFORECITED DECISIONS ARE NOT APPLICABLE TO THE FACT S OF THE INSTANT CASE. UNDER THE CIRCUMSTANCES, 'HE UPHOLD THE ORDER OF THE LEARNED CIT(A) AND DISMISS THE APPEAL FILED BY THE REVENUE'. RESPECTFULLY,FOLLOWING THE ABOVE ORDER,WE DECIDE GR OUND NO.2 IN FAVOUR OF THE ASSESSEE. AS A RESULT,APPEAL F ILED BY THE ASSESSEE STANDS ALLOWED. ( 9 '() + : + ) ;<. ORDER PRONOUNCED IN T HE OPEN COURT ON 11TH, MARCH,2015 . 8 + -.# > ?' 11 @ , 201 5 . + 7 A SD/- SD/- ( / VIJAY PAL RAO) ( ! ! ! ! / RAJENDRA) / JUDICIAL MEMBER /ACCOUNTANT MEMBER 4 ITA NO. 2045/M/2012 M/S PRATIBHUTI VINIHIT LTD. / MUMBAI, ?' /DATE: .03 . 2015. SK 8 8 8 8 + ++ + &) &) &) &) B #) B #) B #) B #) / COPY OF THE ORDER FORWARDED TO : 1. ASSESSEE / $% 2. RESPONDENT / &'$% 3. THE CONCERNED CIT(A)/ C D , 4. THE CONCERNED CIT / C D 5. DR C BENCH, ITAT, MUMBAI / E7 &)' , . . . 6. GUARD FILE/ 7 F ') ') ') ') &) &)&) &) //TRUE COPY// 8' / BY ORDER, G / ; DY./ASST. REGISTRAR , /ITAT, MUMBAI.