MITANK TRADOMG COMPANY P. LTD, MUMBAI V. ITO 6(3)(4), MUMBAI

ITA 2914/MUM/2011

• Counselvise Citation: 291419914 RSA 2011
• Duration Of Justice: 4 year(s) 4 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-08-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 10-02-2015
• Assessment Year: 2006-2007
• Appeal Filed On: 13-04-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: VIJAY KUMAR SONI
• Keywords: Business income; Business expenditure; Speculation loss; Bad and doubtful debts
• Section: 43(5); 28

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES B , MUMBAI BEFORE SHRI JOGINDER SINGH, JUDICIAL MEMBER & SHRI ASHWANI TANEJA, ACCOUNTANT MEMBER . / ITA NO.2914/MUM/2011 ( / ASSESSMENT YEAR : 2006-07 ) MITANK TRADING COMPANY (P) LTD. 402/403, LOTUS HOUSE, NEXT TO LIBERTY CINEMA, 33-A NEW MARINE LINES, MUMBAI -400020 .. / APPELLANT V/S ITO - 6( 3 ) ( 4 ) , 524, AAYAKAR BHAVAN, MUMBAI- .... / RESPONDENT . / PERMANENT ACCOUNT NUMBER AABCM8231D APPELLANT BY : SHRI MADHUR AGARWAL (AR) REVENUE BY : SHRI VIJAY KUMAR SONI (DR) ! '# / DATE OF HEARING 10.08.2015 $% &' ! '# / DATE OF ORDER 28.08.2015 / ORDER PER ASHWANI TANEJA, A.M. THE PRESENT APPEAL HAS BEEN FILED BY THE ASSESSEE AGA INST ORDER DATED 29.12.2010, PASSED BY THE LD. COMMISSIONER OF INCOME TAX (APPEALS)12,MUMBAI PASSED FOR THE ASSESSMENT YEAR 2006-07. THE ASSESSEE HAS RAISED FOLLOWING GROUNDS OF APPEAL:- 1. THE LEARNED CIT (A) HAS UPHELD THE ORDER OF THE ASSESSING OFFICER IN RESPECT OF DISALLOWANCE U/S. 1 4A. MITANK TRADING COM PANY 2 2. THE LEARNED CIT (A) HAS ERRED IN CONCLUDING THAT TH E SET OFF OF THE SPECULATION LOSS CANNOT BE ALLOWED IN A Y .2006-07 SINCE THE EXPLANATION TO SECTION 73 HAS TO BE APPLIED YEAR AND YEAR AND THE SET OFF OF THE LOSS CANNOT BE ALLOWED IN THE YEAR IN CASE THE CONDITIONS LAID DOWN IN THE EXPLANA TION ARE NOT SATISFIED IRRESPECTIVE OF THE FACT THAT ALL THE OTHE R CIRCUMSTANCES WHEN THE EXPLANATION TO SECTION 73 WAS APPLIED IN A.Y.2001-02 AND THAT IN AY.2006-07 ARE CONSTANT. 3. THE LEARNED CIT (A) HAS ERRED IN NOT ALLOWING TH E CLAIM OF BAD DEBTS AMOUNTING TO RS.14,39,878/-. THE LEARNED C IT (A) HAS CONCLUDED THAT THE ADVANCE GIVEN TO THE BROK ER IS OF A CAPITAL NATURE, IRRESPECTIVE OF THE FACT THAT THE INC OME DERIVED FROM THE SAID ADVANCE IS TREATED AS BUSINESS INCOME AND NOT INCOME UNDER THE HEAD 'INTEREST ON SECURITIES'. SINCE THE INCOME IS IN THE NATURE OF BU SINESS INCOME, THE BAD DEBTS HAVE BEEN CLAIMED AS A DEDUCTIO N U/S.36(1)(VII). 4. THE APPELLANT CRAVES LEAVE TO ADD, ALTER, AMEND, VARY MODIFY AND DELETE ANY OR ALL OF THE ABOVE GROUNDS OF APPEAL. 2. GROUND NO.1 IS NOT PRESSED BY THE LEARNED COUNSEL AND THEREFORE THE SAME IS DISMISSED. 3. GROUND NO.2 DEALS WITH THE GRIEVANCE OF THE ASSESSEE WITH REGARD TO THE ACTION OF LD. CIT(A) IN DENYING THE BENE FIT OF SET OFF OF THE SPECULATION LOSS ON THE GROUND THAT EXPLANATION TO S ECTION 73 HAS TO BE APPLIED ON YEAR TO YEAR BASIS AND THE SET OFF O F THE LOSS CANNOT BE ALLOWED IN THE YEAR IN CASE THE CONDITIONS LAID DOWN IN THE EXPLANATION ARE NOT SATISFIED, IRRESPECTIVE OF THE FAC T THAT ALL THE OTHER CIRCUMSTANCES WHEN THE EXPLANATION TO SECTION 73 WAS APPLIED IN A.Y. 2001-02 AND THAT IN A.Y. 2006-07 ARE SAME. 4. THE BRIEF FACTS ARE THAT THE ASSESSEE COMPANY DER IVED INCOME FROM INTEREST AND TRADING IN SHARES DURING THE YEAR U NDER MITANK TRADING COM PANY 3 CONSIDERATION. THE ASSESSEE FILED RETURN DISCLOSING INTEREST INCOME FROM THE DIVIDEND INCOME AND SHARE TRADING PROFIT. T HE ASSESSEE ALSO CLAIMED THE SET OFF OF LOSS BROUGHT FORWARD FROM EA RLIER YEARS WHICH WAS SPECULATION LOSS IN TERMS OF EXPLANATION TO SEC. 73 OF THE INCOME TAX ACT 1961. THE SAID LOSS PERTAINED TO THE ASSESSME NT YEAR 2001- 02. THE AO DENIED THE BENEFIT OF SET OFF ON THE GROU ND THAT THE LOSS DETERMINED IN ASSESSMENT YEAR 2001-02 WAS OF SPECUL ATION NATURE BUT CURRENT YEARS PROFIT FROM SHARE TRADING IS NOT SPECUL ATIVE PROFIT AND THEREFORE LOSS FROM SPECULATION BUSINESS CANNOT BE SET OFF AGAINST THE PROFIT OF NON-SPECULATION BUSINESS. BEING AGGRIEVED, THE ASSESSEE CARRIED THE MATTER BEFORE THE LD. CIT(A) BUT THE LD. CIT(A) CONFIRMED THE ACTION OF AO IN DENYING THE BENEFIT OF SET OFF OF TH E LOSS BROUGHT FORWARD FROM ASSESSMENT YEAR 2001-02. THUS, THE ASS ESSEE FILED AN APPEAL BEFORE THE TRIBUNAL. 5. DURING THE HEARING BEFORE US, LD. COUNSEL ON BEH ALF OF THE ASSESSEE COMPANY ARGUED THAT THE ACTION OF THE AO IN D ENYING THE BENEFIT IS CONTRARY TO LAW. THE LD. COUNSEL SUBMITT ED THAT THE ISSUE IS NOW NO MORE RES-INTEGRA, AS THIS ISSUE HAS BEEN , SETTLED BY HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. LOKMAT NEWSPAPERS P. LTD. 322 ITR 43(BOM) . ON THE OTHER HAND, THE LD. DR SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW AND REQUESTED FOR CONFIRMATION OF THE ORDER OF LD. CIT(A). 6. WE HAVE GONE THROUGH THE ORDERS OF THE AUTHORITIE S BELOW AND HAVE ALSO CONSIDERED SUBMISSIONS MADE BY BOTH THE SI DES. IT IS SEEN BY US THAT THE LOSS WAS CARRIED FORWARD IN A.Y. 200 1-02 BECAUSE OF THE PROVISIONS OF EXPLANATION TO SECTION 73. SINCE THEN, THE BUSINESS OF THE ASSESSEE REMAINED SAME. THIS FACT IS NOT DISPUTED. A PPLYING THE SAME MITANK TRADING COM PANY 4 LOGIC, THE BUSINESS IN THE CURRENT YEAR ON THE SHARE TRADING FOR THE PURPOSE OF SET OFF OF BROUGHT FORWARD LOSS SHOULD AL SO BE DEEMED AS SPECULATION BUSINESS, AS HAS BEEN HELD BY THE HONB LE BOMBAY HIGH COURT IN THE CASE OF LOKMAT NEWSPAPERS P. LTD. (SUPRA ). THE RELEVANT PORTION OF THE JUDGMENT IS REPRODUCED BELOW: QUOTE: THE EXPLANATION TO SECTION 73 CREATES A DEEMING FIC TION. THE EXPLANATION POSTULATES A SITUATION WHERE THE ASSESSEE IS A COMP ANY AND WHERE ANY PART OF THE BUSINESS OF THE COMPANY CONSISTS OF THE PURCHASE AN D SALE OF SHARES OF OTHER COMPANIES. IN SUCH A CASE, THE ASSESSEE IS FOR THE PURPOSES OF SECTION 73 DEEMED TO BE CARRYING ON A SPECULATION BUSINESS, TO THE EX TENT TO WHICH THE BUSINESS CONSISTS OF THE PURCHASE AND SALE OF SHARES THE DEFINITION OF THE EXPRESSION 'SPECULATIVE TRANS ACTION' IN SECTION 43(5) WHICH DEFINES IT TO MEAN A TRANSACTION IN WHICH A C ONTRACT FOR THE PURCHASE OR SALE OF ANY COMMODITY, INCLUDING STOCKS AND SHAR ES, IS PERIODICALLY OR ULTIMATELY SETTLED OTHERWISE THAN BY THE ACTUAL DEL IVERY OR TRANSFER OF THE COMMODITY OR SCRIPS, CANNOT BE READ INTO THE PROVIS IONS OF SECTION 73 HAVING REGARD TO THE PLAIN MEANING OF THE EXPLANATI ON TO SECTION 73. THE CONTENTION THAT A LOSS WHICH ARISES ON ACCOUNT OF A TRANSACTION OF THE SALE AND PURCHASE OF SHARES WOULD CONSTITUTE A LOSS FROM A SPECULATION BUSINESS FOR THE PURPOSES OF THE EXPLANATION BUT TH AT THE PROFIT WHICH ARISES FROM A TRANSACTION INVOLVING THE ACTUAL DELIVERY OF SHARES WOULD NOT CONSTITUTE A PROFIT FOR THE PURPOSES OF SUB-SECTION S (1) AND (2) OF SECTION 73 IN RESPECT OF WHICH A SET-OFF CAN BE GRANTED, INTRO DUCES A RESTRICTION INTO THE SCOPE AND AMBIT OF THE DEEMING FICTION WHICH IS CREATED BY THE EXPLANATION TO SECTION 3, WHICH IS NOT CONTEMPLATED BY PARLIAMENT. THE DEEMING FICTION CREATED BY THE EXPLANATION TO SECTI ON 73 ARISES SPECIFICALLY IN THE CONTEXT OF THE PROVISIONS OF SECTION AND IS CONFINED TO THAT PURPOSE ALONE. WHETHER IT IS A PROFIT OR LOSS THAT HAS RESU LTED FROM CARRYING ON SUCH BUSINESS, IS A CONSIDERATION ALIEN TO THE MEANING O F WHAT CONSTITUTES A SPECULATION BUSINESS BY THE EXPLANATION TO SECTION 73. ONCE AN ASSESSEE IS DEEMED TO BE CARRYING ON A SPECULATION BUSINESS OR THE PURPOSE OF SECTION 73, ANY LOSS COMPUTED IN RESPECT OF THAT PECULATION , CAN BE SET OFF ONLY AGAINST THE PROFITS AND GAINS OF ANOTHER SPECULATIO N BUSINESS. SIMILARLY, FOR THE PURPOSES OF SUB-SECTION (2),THE LOSS IN RESPECT OF A SPECULATION BUSINESS WHICH HAS NOT BEEN SET OFF EITHER IN WHOLE OR IN PA RT, CAN BE CARRIED FORWARD AND CAN BE SET OFF AGAINST PROFITS AND GAIN S OF ANY SPECULATION BUSINESS'. THE EXPRESSION 'ANY SPECULATION BUSINESS ' MEANS A SPECULATION BUSINESS OF THE ASSESSEE IN RESPECT OF WHICH PROFIT S AND GAINS FOR THE ASSESSMENT YEAR IN QUESTION HAVE ARISEN AND THERE I S NO JUSTIFICATION TO RESTRICT THE CONTENT OF THAT SPECULATION BUSINESS W HERE PRO- FITS HAVE ARISEN BY EXCLUDING A BUSINESS INVOLVING ACTUAL DELIVERY O F SHARES. NO SUCH RESTRICTION IS FOUND IN THE EXPLANATION. IN OTHER W ORDS, ONCE THE ASSESSEE IS MITANK TRADING COM PANY 5 CARRYING ON A SPECULATION BUSINESS AND THE PROFITS AND GAINS HAVE ARISEN FROM THAT BUSINESS DURING THE COURSE OF THE ASSESSM ENT YEAR, THE ASSESSEE IS ENTITLED TO SET OFF THE LOSSES CARRIED FORWARD FROM A SPECULATION BUSINESS ARISING OUT OF A PREVIOUS ASSESSMENT YEAR. UNQUOTE: 7. THUS, PERUSAL OF AFORESAID OBSERVATIONS OF HONB LE HIGH COURT CLARIFIES THIS PRINCIPLE THAT ONCE THE ASSESSEE IS CA RRYING ON A SPECULATION BUSINESS AND THE PROFITS AND GAINS HAVE ARISEN FROM THAT BUSINESS DURING THE COURSE OF THE ASSESSMENT YEAR, TH E ASSESSEE IS ENTITLED TO SET OFF THE LOSSES CARRIED FORWARD FROM A SPECULATION BUSINESS ARISING OUT OF A PREVIOUS ASSESSMENT YEAR. T HUS, APPLYING THIS JUDGMENT OF THE JURISDICTIONAL HIGH COURT, THE ASSESSE E IS ENTITLED FOR THE SET OFF OF THE IMPUGNED AMOUNT OF AMOUNT OF LOSS BROUGHT FORWARD FROM ASSESSMENT YEAR 2001-02. NO CONTRARY JUDGMENT HA S BEEN BROUGHT TO OUR NOTICE BY THE LD. DR. THUS, RESPECTFULLY FOLLOWING THE JUDGMENT OF HONBLE BOMBAY HIGH COURT, WE DECIDE THI S ISSUE IN FAVOUR OF THE ASSESSEE COMPANY. THUS, THE AO IS DIRE CTED TO ALLOW THE SET OFF THE BROUGHT FORWARD LOSS. 8. GROUND NO.3 DEALS WITH THE ACTION OF LD. CIT(A) IN NOT ALLOWIN G THE CLAIM OF BAD DEBTS AMOUNTING TO RS.14,39,878/-. 9. THE BRIEF FACTS ARE THAT THE ASSESSEE MADE A CLAIM OF BAD DEBTS OF RS.14,39,878/-, BUT THE SAME WAS HELD TO INADMISSIB LE BY THE AO ON THE GROUND THAT THE SAID AMOUNT WAS ON ACCOUNT OF THE P RINCIPAL AMOUNT OF THE LOAN ADVANCED FOR BADLA FINANCE ACCOUN T. ACCORDING TO THE AO, IT WAS CAPITAL IN NATURE AND NOT BEING PART OF TRADING, IT WAS NOT ALLOWABLE TO BE DEDUCTED FROM THE TOTAL INCOME. T HE LD. CIT(A) CONFIRMED THE ACTION OF AO ON THE GROUND THAT ADVANCE G IVEN TO THE BROKER IS OF CAPITAL NATURE, DISREGARDING THE SUBMIS SIONS OF THE MITANK TRADING COM PANY 6 ASSESSEE THAT THE INCOME DERIVED FROM THE SAID ADVANCE IS TREATED AS BUSINESS INCOME AND NOT INCOME UNDER THE HEAD OF INTE REST ON SECURITIES AND THAT SINCE THE INCOME IS IN THE NATURE OF BUSINESS INCOME, THE BAD DEBTS WERE CLAIMED AS DEDUCTION U/S 3 6(1)(VII). 10. DURING THE COURSE OF HEARING BEFORE US, THE ASSE SSEE, INTER ALIA, RAISED AN ALTERNATIVE PLEA THAT IN ANY CASE THE IMPUGN ED AMOUNT OF BAD DEBTS WAS ALLOWABLE AS BUSINESS EXPENDITURE TO T HE ASSESSEE COMPANY. IN SUPPORT OF HIS ARGUMENTS, THE LD. COUNSE L VEHEMENTLY ARGUED THAT THIS LOSS HAS BEEN INCURRED BY THE ASSES SEE COMPANY IN THE NORMAL COURSE OF BUSINESS AND IN THE INTEREST OF JU STICE, AND FAIR PLAY, THE ASSESSEE SHOULD BE ALLOWED TO CLAIM THE SAM E AS AN EXPENSE AGAINST HIS BUSINESS INCOME. IF IT IS NOT DONE SO, TH E ASSESSEE WOULD END UP IN MAKING PAYMENT OF TAX ON THE PROFITS WHICH HAVE NOT BEEN EARNED. ON THE OTHER HAND, THE LD. DR SUPPORTED THE O RDERS OF THE AUTHORITIES BELOW AND SUBMITTED THAT THE ASSESSEE IS N OT CLEAR ABOUT THE PROVISION IN WHICH THE CLAIM IS ALLOWABLE AND REQ UESTED THAT THE ORDER OF THE LD. CIT(A) SHOULD BE UPHELD. 11. WE HAVE HEARD BOTH THE PARTIES. THIS FACT IS NOT DISPUTED THAT THE IMPUGNED AMOUNT REPRESENTS BAD DEBTS. THE GENUINENES S OF THE CLAIM HAS NOT BEEN DOUBTED. THE ONLY OBJECTION OF THE AUTHOR ITIES BELOW WAS THAT THE IMPUGNED AMOUNT WAS NOT ALLOWABLE AS DEDUCTION U/S 36(1)(VII). IN OUR CONSIDERED VIEW THE IMPUGNED AMO UNT IS ALLOWABLE TO THE ASSESSEE AS BUSINESS LOSS, IN ANY CASE. WE DER IVE SUPPORT FROM THE JUDGMENT OF HONBLE BOMBAY HIGH COURT IN THE CASE OF HARSHAD J CHOKSI VS CIT 349 ITR 250. RELEVANT PARA FROM THIS J UDGMENT IS REPRODUCED HEREIN BELOW: MITANK TRADING COM PANY 7 SECTION 28 OF THE INCOME TAX ACT, 1961, IMPOSES A CHARGE ON THE PROFITS OR GAINS OF BUSINESS OR PROFESSION. THE EXPRESSION PROFITS AND GAINS OF BUSINESS OR PROFESSION IS TO BE UNDERSTOOD IN ITS ORDINARY COMMERCIAL MEANING AND DOES NOT MEAN TOTAL RECEIPTS. WHAT HAS TO BROUGHT TO TAX IS THE NET AMOUNT EARNED BY CARRYING ON A PROFESSION OR A BUSINESS WHICH NECESSARILY REQUIRES DEDUCTING EXPENSES AND LOSSES INCURRED IN CARRYING ON BUSINESS OR PROFESSION. THE SUPREME COURT IN THE MA TTER OF BADRIDAS DAGA VS. CIT [1958] 34 ITR 10(SC) HAS HELD THAT IN ASSES SING THE AMOUNT OF PROFITS AND GAINS LIABLE TO TAX, ONE MUST NECESSARI LY HAVE REGARD TO THE ACCEPTED COMMERCIAL PRACTICE THAT DEDUCTION OF SUCH EXPENSES AND LOSSES IS TO BE ALLOWED, IF IT ARISES IN CARRYING ON BUSINESS AND IS INCIDENTAL TO IT. THERE IS NO BAR IN CLAIMING A LOSS AS A BUSINESS LO SS, IF IS INCIDENTAL TO CARRYING ON OF A BUSINESS. THE FACT THAT CONDITIONS FOR DEDUCTION AS BAD DEBT WERE NOT SATISFIED BY THE ASSESSEE WOULD NOT P REVENT HIM FROM CLAIMING DEDUCTION AS A BUSINESS LOSS. 12. IN OUR CONSIDERED OPINION, AFORESAID AMOUNT OF A DVANCE GIVEN BY THE ASSESSEE WAS INCIDENTAL TO ITS BUSINESS ACTIVITIE S. RESPECTFULLY FOLLOWING THE AFORESAID JUDGMENT OF JURISDICTIONAL H IGH COURT, WE HOLD THAT BAD DEBTS AMOUNTING TO RS.14,39,878/- IS ALLOWABLE TO THE ASSESSEE AS BUSINESS LOSS HAVING BEEN INCURRED IN T HE NORMAL COURSE OF TRADING OF SHARES. GROUND NO.3 IS ALLOWED AND AO IS DIRECTED TO GIVE BENEFIT OF DEDUCTION OF RS.14,39,878/-. 12. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PA RTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 28 TH DAY OF AUGUST, 2015. SD/- SD/- (JOGINDER SINGH) (ASHWANI TANEJA) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI, DATED:28 .08.2015 PATEL MITANK TRADING COM PANY 8 $% ! '() *)' / COPY OF THE ORDER FORWARDED TO : (1) +' / THE ASSESSEE; (2) , / THE REVENUE; (3) -'() / THE CIT(A); (4) -' / THE CIT, MUMBAI CITY CONCERNED; (5) )01 '2, # 2, / THE DR, ITAT, MUMBAI; (6) 14 5 / GUARD FILE. ' / TRUE COPY $% / BY ORDER 6 / 7 , / (DY./ASSTT. REGISTRAR) # 2, / ITAT, MUMBAI