M/S. HINCON HOLDINGS LTD, MUMBAI V. THE DCIT- CIR 10(3), MUMBAI

ITA 3728/MUM/2008

• Counselvise Citation: [2010] 119 COUNSELVISE.COM (IT) 6316 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 5 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-11-2010
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: H
• Next Hearing Date: 04-11-2010
• Assessment Year: 2001-2002
• Appeal Filed On: 28-05-2008
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: MRS JOTHILAKSHMI NAYAK
• Assessee Lawyers: H P MAHAJANI
• Keywords: Speculation loss

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI H BENCH BEFORE SHRI T.R.SOOD, ACCOUNTANT MEMBER & SMT.ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER I.T.A.NOS.3278 & 331/MUM/2008 - A.Y 2001-02 HINCON HOLDINGS LIMITED, HINCON HOUSE LBS MARG, VIKHROLI (WEST), MUMBAI 400 083 PAN: AAACH 2592 M VS. DY. COMMISSIONER OF I.T., CIRCLE 19(3), MUMBAI. (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI H.P.MAHAJANI. RESPONDENT BY : MRS.JOTHILAKSHMI NAYAK. O R D E R PER T.R.SOOD, AM: THESE APPEALS OF THE ASSESSEE ARE CONSOLIDATED AND DISPOSED OF BY THIS COMMON ORDER. 2. I.T.A.NO.3278/M/08 : IN THIS APPEAL, SOME ADDITIONAL GROUNDS HAVE BEEN RAISED AND PERUSAL OF THE SAME SHOW THAT THEY ARE MAINLY VARIOUS FACETS OF THE ARGUMENTS. WHEN THIS WAS CONF RONTED TO THE LD. COUNSEL OF THE ASSESSEE HE SUBMITTED THAT HE DOES N OT WISH TO PRESS THE ADDITIONAL GROUNDS AND, THEREFORE, SAME ARE DIS MISSED AS NOT PRESSED. 3. OUT OF THE OTHER THREE NORMAL GROUNDS, GROUND NO .1 WAS NOT PRESSED AND, THEREFORE, SAME IS DISMISSED AS NOT PR ESSED. THE OTHER TWO GROUNDS RAISED ARE AS UNDER: GROUND NO.2 ON FACTS AND IN CIRCUMSTANCES OF THE CASE AND IN LA W, THE LEARNED COMMISSIONER OF INCOME TAX [APPEALS] HAS ERRED IN U PHOLDING THE 2 APPLICATION OF THE EXPLANATION TO SECTION 73 OF THE ACT TO THE SHARE TRADING ACTIVITIES OF THE COMPANY & THEREBY DEEMING THE SAI D ACTIVITY AS SPECULATION BUSINESS ACTIVITY. GROUND NO.3 . ON THE FACTS AND IN CIRCUMSTANCES OF THE CASE AND I N LAW THE LEARNED COMMISSIONER OF INCOME TAX [APPEALS] HAS ERRED IN N OT ALLOWING ANY EXPENDITURE AGAINST THE OTHER INCOME OF ` `` ` .13,38,L850/-. 4. GROUND NO.2: AFTER HEARING BOTH THE PARTIES, WE FIND THAT DURIN G ASSESSMENT PROCEEDINGS, AO NOTICED THAT THERE WAS A LOSS AMOUNTING TO ` `` ` .56,26,619/- ON ACCOUNT OF SHARE TRADING BUSINESS. THEREFORE, AO INVOKED EXPLANATION TO SEC.73 AND HELD THAT THIS LO SS WAS ON ACCOUNT OF SPECULATION AND, ACCORDINGLY, DISALLOWED THE SAME. 5. ON APPEAL, THE ACTION OF THE AO WAS CONFIRMED BY THE LD. CIT[A]. 6. BEFORE US, LD. COUNSEL OF THE ASSESSEE SUBMITTED THAT IN VIEW OF THE DECISION OF THE HON'BLE BOMBAY HIGH COURT IN TH E CASE OF M/S PRASAD AGENTS PRIVATE LTD. VS. ITO 180 TAXMAN 178, THIS ISSUE IS PRINCIPALLY AGAINST THE ASSESSEE. HOWEVER, AT THE S AME TIME, LOSS SUFFERED ON ACCOUNT OF SALE AND PURCHASE IF MUTUAL FUNDS AMOUNTING TO ` `` ` .1,57,064/- CANNOT BE COVERED UNDER EXPLANATION TO SEC.73 AND THE SAME SHOULD NOT HAVE BEEN HELD TO BE LOSS ON ACCOUN T OF SPECULATION BUSINESS ACCORDINGLY. 7. ON THE OTHER HAND, LD. DR STRONGLY RELIED ON THE ORDERS OF THE AUTHORITIES BELOW. 8. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS CAREFUL LY AND FIND THAT THE ASSESSEE HAS SUFFERED SOME LOSS ON ACCOUNT OF S HARE TRADING AS 3 WELL AS MUTUAL FUNDS. THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF M/S PRASAD AGENTS PVT. LTD. VS. ITO [SUPRA] HAS HEL D THAT IN THE CASE OF SHARE TRADING, LOSS HAS TO BE TREATED AS SPECULATIO N LOSS UNDER EXPLANATION TO SEC.73. THEREFORE, WE DECIDE THIS IS SUE PRINCIPALLY AGAINST THE ASSESSEE. HOWEVER, AT THE SAME TIME WE FIND FORCE IN THE SUBMISSIONS OF THE LD. COUNSEL OF THE ASSESSEE THAT THIS EXPLANATION CANNOT BE EXTENDED TO SALE AND PURCHASE OF MUTUAL F UNDS. EXPLANATION TO SECTION 73 READS AS UNDER: EXPLANATION. WHERE ANY PART OF THE BUSINESS OF A COMPANY [OTHER THAN A COMPANY WHOSE GROSS TOTAL INCOME CONSISTS MAINLY OF INCOME WHICH IS CHARGEABLE UNDER THE HEADS INTEREST ON SECURITIES , INCOME FROM HOUSE PROPERTY, CAPITAL GAINS AND INCOME FROM OTHER S OURCES], OR A COMPANY THE PRINCIPAL BUSINESS OF WHICH IS THE BUSINESS OF BANKING OR THE GRANTING OF LOANS AND ADVANCES) CONSISTS IN THE PURCHASE AND SA LE OF SHARES OF OTHER COMPANIES, SUCH COMPANY SHALL, FOR THE PURPOSES OF THIS SECTION, BE DEEMED TO BE CARRYING ON A SPECULATION BUSINESS TO THE EXT ENT TO WHICH THE BUSINESS CONSISTS OF THE PURCHASE AND SALE OF SUCH SHARES. THE READING OF ABOVE EXPLANATION CLEARLY SHOWS THAT THE EXPLANATION APPLIES TO PURCHASE AND SALE OF SHARES OF OTHER COM PANIES. SINCE THIS IS A DEEMING PROVISION, THEREFORE, IT HAS TO BE CONSTR UED STRICTLY. THEREFORE, WE SET ASIDE THE ORDER OF THE LD. CIT[A] AND REMIT THE MATTER BACK TO THE FILE OF THE AO WITH A DIRECTION THAT THE LOSS FROM SHARE TRADING BUSINESS SHOULD BE RECOMPUTED AND THE LOSS SUFFERED ON ACCOUNT OF SALE AND PURCHASE OF MUTUAL FUNDS SHOULD NOT BE COVERED BY EXPLANATION TO SEC.73. 9. GROUND NO.3 : BEFORE US, LD. COUNSEL OF THE ASSESSEE SUBMITTED THAT WHILE COMPUTING THE LOSS OF SHARE TRADING BUSI NESS AO HAS MADE MISTAKES BY INCLUDING THE RENTAL INCOME AND OTHER I NCOME OF 4 ` `` ` .12,92,127/- AND ` `` ` .46,273/- AND CLUBBED THE SAME WITH THE SHARE LOSS. HE INVITED OUR ATTENTION TO THE ASSESSMENT OR DER AND POINTED OUT THAT THIS INCOME HAS BEEN SEPARATELY ASSESSED WHICH IS WRONG AND LOSS SHOULD HAVE BEEN DETERMINED WITHOUT CONSIDERING THI S INCOME. 10. ON THE OTHER HAND, LD. DR RELIED ON THE ORDERS OF THE LOWER AUTHORITIES. 11. AFTER CONSIDERING THE RIVAL SUBMISSIONS, WE FIN D THAT THERE SEEMS TO BE SOME MISTAKE BECAUSE RENTAL INCOME AND INTERE ST INCOME HAS BEEN SEPARATELY ASSESSED BY THE AO. THEREFORE, WE S ET ASIDE THE ORDER OF THE LD. CIT[A] AND REMIT THE MATTER BACK TO THE FILE OF THE AO FOR RE- EXAMINATION OF THE ISSUE AND MAKE THE COMPUTATION O F LOSS UNDER EXPLANATION TO SEC.73 IN ACCORDANCE WITH LAW. 12. IN THE RESULT, APPEAL IN I.T.A.NO.3728/M/08 IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. 13. I.T.A.NO.331/M/08 : IN THIS APPEAL THE ASSESSEE HAS RAISED THE FOLLOWING GROUND OF APPEAL- ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN L AW THE LEARNED COMMISSIONER OF INCOME TAX [APPEALS] HAS ERRED IN C ONFIRMING LEVY OF PENALTY OF ` `` ` .4,68,597 [ ` `` ` . FOUR LAC SIXTY EIGHT THOUSAND FIVE HUNDRED AND NINETY SEVEN ONLY] UNDER SECTION.271[1][C] PF THE I NCOME TAX ACT, 1961, REJECTING THE CONTENTION OF THE APPELLANT THAT IT H AD NEITHER CONCEALED NOR FURNISHED INACCURATE PARTICULARS OF INCOME. 14. AFTER HEARING BOTH THE PARTIES, WE FIND THAT ON THE ABOVE NOTED DISALLOWANCE OF SPECULATION LOSS, A SHOW CAUSE NOTI CE FOR LEVY OF PENALTY U/S.271[1][C] WAS ISSUED BY THE DEPARTMENT. IN RESPONSE TO THE SAME, ASSESSEE SUBMITTED THAT THIS WAS A BONA F IDE CLAIM AND ALL 5 THE PARTICULARS HAVE ALREADY BEEN DISCLOSED. THEREF ORE, PENALTY WAS NOT LEVIABLE. RELIANCE WAS PLACED ON THE DECISION OF TH E HON'BLE MADRAS HIGH COURT IN THE CASE OF CIT VS. SIVANAND STEELS L TD. 256 ITR 353. HOWEVER, AO OBSERVED THAT THE ABOVE CASE LAW WAS ON A DIFFERENT POINT AND IN THE PRESENT CASE THE PROVISION WAS UNA MBIGUOUS AND, THEREFORE, PENALTY U/S.271[1][C] AT THE MINIMUM OF ` `` ` .4,68,597/- WAS LEVIED. 15. THE ACTION OF THE AO WAS CONFIRMED BY THE LD. C IT[A]. 16. BEFORE US, LD. COUNSEL OF THE ASSESSEE SUBMITTE D THAT PRINCIPALLY THE BUSINESS OF THE ASSESSEE COMPANY WAS ADVANCING OF LOANS AND, THEREFORE, THE EXPLANATION WAS NOT ATTRACTED TO THE ASSESSEES CASE. FURTHER, HE REFERRED TO THE CIRCULAR ISSUED BY THE BOARD THROUGH WHICH THE PROVISIONS OF EXPLANATION TO SEC.73 WAS EXPLAIN ED AND AT PARA 19.2 OF THE SAID CIRCULAR HAD EXPLAINED THAT THE OBJECT OF THE PROVISION WAS TO CURB THE DEVICE SOMETIMES RESORTED TO BY THE BUS INESS HOUSES CONTROLLING GROUPS OF COMPANIES TO MANIPULATE AND R EDUCE THE TAXABLE INCOME OF COMPANIES UNDER THEIR CONTROL. HE THEN PO INTED OUT THAT THE ASSESSEE HAD NOT SUFFERED THE LOSSES FROM GROUP COM PANIES BUT THE LOSSES WERE SUFFERED FROM SALE OF SHARES OF OTHER C OMPANIES AND LIST OF THE SAME WAS FILED BEFORE THE LOWER AUTHORITIES. HE THEN REFERRED TO THE ANNUAL ACCOUNTS FILED ALONG WITH THE QUANTUM AP PEAL AND POINTED OUT THAT ALL THE DETAILS OF INCOME AS WELL AS DETAI LS OF SHARES PURCHASED AND SOLD WERE FILED AND, THEREFORE, ALL THE PARTICU LARS WERE DISCLOSED TO THE DEPARTMENT AND NOTHING WAS CONCEALED. THEREFORE , THE CASE 6 CANNOT FALL INTO THE CATEGORY OF CONCEALMENT OF PAR TICULARS U/S.271[1][C]. IN ANY CASE, ORIGINALLY THERE WAS A DECISION AVAILABLE FROM DELHI BENCH OF THE TRIBUNAL IN THE CASE OF AMA N PORTFOLIO PVT. LTD. VS. DCIT 92 ITD 324 WHEREIN IT WAS HELD THAT EXPLAN ATION TO SEC.73 WAS NOT APPLICABLE WHERE SHARE TRANSACTIONS WERE NO T ON ACCOUNT OF GROUP COMPANIES. THIS DECISION WAS FOLLOWED BY THE MUMBAI TRIBUNAL IN THE CASE OF DCIT VS. MODELLA WOOLLENS LTD. 9 SOT 62. THESE DECISIONS WERE OVER-RULED ONLY LATER ON BY A SPECIA L BENCH OF THE TRIBUNAL. FURTHER, THE DECISION OF HON'BLE BOMBAY H IGH COURT IN THE CASE OF M/S PRASAD AGENTS PVT. LTD. [SUPRA] WAS DEL IVERED LATER ON I.E. MARCH 20, 2009. THUS, AT THE RELEVANT POINT OF TIME THERE WERE DIVERGENT VIEWS OF THE TRIBUNAL AND THE ASSESSEE HA S BONA FIDE BELIEF THAT SUCH CLAIM WAS ALLOWABLE. 17. HE ALSO REFERRED TO THE DECISION OF THE HON'BLE DELHI HIGH COURT IN THE CASE OF AURIC INVESTMENT & SECURITIES LTD. 1 63 TAXMAN 533, WHEREIN PENALTY IN SIMILAR CIRCUMSTANCES WAS DELETE D. SIMILARLY, THE PENALTY WAS DELETED IN SIMILAR CIRCUMSTANCES IN THE CASE OF HON'BLE MADHYA PRADESH HIGH COURT IN THE CASE OF CIT VS. S. P.K.STEEL PVT. LTD. 144 TAXMAN 469. 18. ON THE OTHER HAND, LD. DR REFERRED TO THE APPEL LATE ORDER IN QUANTUM PROCEEDINGS AND SUBMITTED THAT THE CIT[A] H AD REFERRED TO THE MEMORANDUM OF ARTICLES OF THE ASSOCIATION AND E XTRACTED THE FOLLOWING MAIN OBJECTS: 7 TO CARRY ON THE BUSINESS AS AN INVESTMENT COMPANY AND TO UNDERWRITE, SUB- UNDERWRITE, TO INVEST IN, OTHERWISE AN HOLD, SELL B UY OR OTHERWISE DEAL IN SHARES, DEBENTURE STOCK, BONDS, UNITS OBLIGATIONS A ND SECURITIES ISSUED OR GUARANTEED BY INDIAN OR FOREIGN GOVT., STATES, DOMI NIONS, SOVEREIGNS, MUNICIPALITIES, OR PUBLIC AUTHORITIES OR BONDS AND SHARES, STOCKS DEBENTURES, DEBENTURE-STOCKS, BONDS, OBLIGATIONS AND SECURITIES ISSUED OR GUARANTEED BY ANY COMPANY, CORPORATION, FIRM OR PERSON WHETHER IN CORPORATED OR ESTABLISHED IN INDIA OR ELSEWHERE AND TO MANAGE INV ESTMENT POOLS, MUTUAL FUNDS, SHARES, STOCKS, SECURITIES, FINANCE SUBJECT TO THE NECESSARY GOVERNMENT APPROVAL, HOWEVER, THE COMPANY SHALL NOT CARRY ON A NY CHIT FUND ACTIVITIES. THE ABOVE PARA CLEARLY SHOWS THAT ASSESSEE COULD NO T HAVE POSSIBLY ENGAGED IN THE BUSINESS OF GIVING LOANS. SHE FURTHE R SUBMITTED THAT CIT[A] HAS FURTHER FOUND THAT DURING ASSESSMENT YEA R NO LOANS HAVE BEEN GIVEN, THEREFORE, IT CANNOT BE SAID THAT ASSES SEE HAD BONA FIDE BELIEF THAT THE EXPLANATION TO SEC.73 WAS NOT ATTRA CTED IN THIS YEAR. 19. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS CAREFU LLY. WE FIND THAT THOUGH THE LD. DR IS CORRECT IN POINTING OUT THAT A SSESSEE COULD NOT HAVE TAKEN THIS PLEA THAT ASSESSEE WAS IN THE BUSIN ESS OF GIVING LOANS BECAUSE THERE WAS NO OBJECT IN THE MEMORANDUM OF AS SOCIATION. IN ANY CASE, ASSESSEE HAD NOT ADVANCED ANY LOANS DURIN G THE YEAR. HOWEVER, AT THE SAME TIME DURING THE RELEVANT POINT OF TIME THERE WERE DIVERGENT VIEWS IN RESPECT OF INTERPRETATION O F EXPLANATION TO SEC.73, FOR EXAMPLE, IN THE CASE OF AMAN PORTFOLIO RELIANCE WAS PLACED ON PARA-19.2 OF THE CIRCULAR WHICH READS AS UNDER: 19.2 THE OBJECT OF THIS PROVISION IS TO CURB DEVIC E SOMETIMES RESORTED TO BY BUSINESS HOUSES CONTROLLING GROUPS OF COMPANIES TO MANIPULATE AND REDUCE THE TAXABLE INCOME OF COMPANIES UNDER THEIR CONTROL . AFTER QUOTING THE ABOVE PARA, IT WAS HELD THAT IF T HE SHARES WERE PURCHASED IN NON GROUP OF COMPANIES, THEN EXPLANATI ON TO SEC.73 WAS NOT ATTRACTED. THIS DECISION WAS FOLLOWED LATER ON BY THE MUMBAI BENCH 8 OF THE TRIBUNAL IN THE CASE OF MODELLA WOOLLENS LTD . [SUPRA]. THE ISSUE WAS REALLY SETTLED OUT LATER BY THE SPECIAL BENCH A S WELL AS THE HON'BLE BOMBAY HIGH COURT. FURTHER THE ASSESSEE HAS FILED A LL THE PARTICULARS REGARDING THE LOSS AND THE PARTICULARS REGARDING SA LE AND PURCHASE OF THE SHARES. THE LIST OF SALE AND PURCHASE OF SHARES CLEARLY SHOWS THAT SHARES OF LISTED COMPANIES WERE PURCHASED, WHICH AP PARENTLY SEEMS TO HAVE NO CONNECTION WITH THE ASSESSEE. THEREFORE, WE ARE OF THE VIEW THAT THE ASSESSEE HAD DISCLOSED ALL THE PARTICULARS REGARDING THIS TRANSACTION AND SINCE THERE WERE DIVERGENT OPINIONS OF THE VARIOUS BENCHES OF THE TRIBUNAL, ASSESSEE CAN BE SAID TO HA VE BONA FIDE BELIEF THAT EXPLANATION TO SEC.73 WOULD NOT BE ATTRACTED I N THE FACTS OF THIS YEARS CASE. 20. WE HAVE ALSO GONE THROUGH THE DECISION OF THE H ON'BLE DELHI HIGH COURT IN THE CASE OF CIT VS. AURIC INVESTMENTS AND SECURITIES LTD. [SUPRA] RELIED ON BY THE LD. COUNSEL OF THE ASSESSE E. IN THAT CASE DURING A.Y 2001-02, AO FOUND THAT ASSESSEE HAS CLAI MED CERTAIN LOSS ON TRADING OF SHARES, BUT THE SAME WAS TO BE TREATE D AS SPECULATIVE IN NATURE AND, THEREFORE, COULD BE ADJUSTED ONLY AGAIN ST SPECULATIVE INCOME. PENALTY PROCEEDINGS U/S.271[1][C] OF THE IN COME TAX ACT, 1961 WERE INITIATED AND ULTIMATELY PENALTY WAS LEVI ED BY THE AO. WHILE ADJUDICATING THE ISSUE, THE HON'BLE DELHI HIGH COUR T HAS HELD AS UNDER: HELD, DISMISSING THE APPEAL, THAT THERE WAS NOTHIN G ON RECORD TO SHOW THAT IN FURNISHING ITS RETURN OF INCOME, THE ASSESS EE HAD EITHER CONCEALED ITS INCOME OR HAD FURNISHED ANY INACCURAT E PARTICULARS OF INCOME. THE MERE TREATMENT OF THE BUSINESS LOSS AS SPECULATION LOSS BY 9 THE ASSESSING OFFICER DID NOT AUTOMATICALLY WARRANT THE INFERENCE OF CONCEALMENT OF INCOME. THE CANCELLATION OF PENALTY WAS VALID. THEREFORE, IN THE LIGHT OF THE ABOVE NOTED DECISION AS WELL AS FACTS OF THE CASE, WE ARE OF THE VIEW, THAT THIS IS NOT A FI T CASE FOR LEVY OF PENALTY AND ACCORDINGLY WE SET ASIDE THE ORDER OF T HE LD. CIT[A] AND DELETE THE PENALTY LEVIED BY THE AO. 20. IN THE RESULT, APPEAL IN I.T.A.NO.331/M/08 IS A LLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 24 TH DAY OF NOVEMBER, 2010. SD/- SD/- (ASHA VIJAYARAGHAVAN) (T.R.SOOD) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI:24 TH NOVEMBER, 2010. P/-*