M/s.F.G.Investments P. Ltd, Kochi V. The Pr CIT, Kochi

ITA 40/COCH/2021

• Counselvise Citation: [2022] 106 COUNSELVISE.COM (IT) 7683 (ITAT-COCHIN)
• Duration Of Justice: 1 year(s) 5 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-09-2022
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: DB
• Assessment Year: 2014-2015
• Appeal Filed On: 29-03-2021
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SHANTAM BOSE
• Keywords: Business income; Revision of order; Depreciation; Earning of tax free income; Speculation loss; Speculative transactions; Rule 8D; Set aside
• Section: 147; 148; 263; 28; 43B; 143(3); 14A; 43(5); 143(1); 73; 153

Judgement Text

ITA No.40/Coch/2021 M/s. F.G. Investments Pvt. Ltd. Kochi IN THE INCOME TAX APPELLATE TRIBUNAL BENCH: COCHIN BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SMT. BEENA PILLAI, JUDICIAL MEMBER ITA No.40/Coch/2021 Assessment Year: 2014-15 M/s. F.G. Investments Pvt. Ltd. 28/292B, Caltex Place S.A. Road Kochi 682 036 PAN NO : AAACF4540K Vs. Principal CIT Kochi APPELLANT RESPONDENT Appellant by : Shri V.M. Veeramani, A.R. Respondent by : Shri Shantam Bose, D.R. Date of Hearing : 13.09.2022 Date of Pronouncement : 13.09.2022 O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER: This appeal by assessee is directed against order of Principal CIT passed u/s 263 of the Income-tax Act,1961 ['the Act' for short] dated 1.2.2021. The assessee has raised following grounds of appeal:- 1. “The Order of the Principal Commissioner of Income Tax under section 263 is against law and facts 2. The Principal Commissioner of Income Tax erred in his conclusion that the assessment order u/s 147 was erroneous since the assessing officer accepted the argument of the appellant that the amendment to explanation to section 73 by Finance Act (No.2) of 2014 was retrospective and hence ITA No.40/Coch/2021 M/s. F.G. Investments Pvt. Ltd. Kochi Page 2 of 10 applied to assessment year 2014-15 . The Principal Commissioner of Income Tax failed to the note the detailed reasoning given in the assessment order that though the assessment was reopened to consider disallowance of speculation loss as per explanation to section 73. the assessment was completed in view of the ITAT order in ITA 36/Coch/2018 dated 26.9.2018 of the appellant for the assessment year 2013-14 which was binding on the assessing officer. Thus the assessing officer had passed the assessment on proper application of mind and expressly stated the same in the assessment. Hence the assessment was not erroneous and hence the revision is invalid 3. Principal Commissioner of Income Tax erred in his conclusion that the assessing officer had omitted to consider the disallowance under section 14A. The appellant was subject to tax audit and in the tax audit report, your appellant had reported expenses against exempt income as nil and the same was accepted by the assessing officer. Hence, on this ground also the revision was not in order 4. Principal Commissioner of Income Tax erred in revising the order to withdraw excess depreciation on fixed assets which was apparent on the records and could have been rectified under section 154” 2. Facts of the case are that the Assessee Company, M/s F.G. Investments Pvt. Ltd. is carrying on business as a trader in shares and stock broker. It filed its return of income for the AY 2014-15 on 17.09.2014 with returned income at Rs.Nil/- with a claim for carry forward of current year loss of Rs.11,46,336/-. The case was reopened by issuing a notice u/s 148 of the Income-tax Act,1961 ['the Act' for short] on 17.03.2018 for escapement of income to the tune of Rs.14,88,373/- by allowing wrong set off of loss in speculation business against business income as against the provisions contained in Explanation to section 73 of the Act. The reopened assessment was completed on 19.12.2018 by accepting the current year loss of Rs.71,46,337/- reported in the return dated 22.03.2018 filed in response to notice u/s 148 of the Act. 2. From perusal of records, it was noticed by the Ld. CIT(A) that the Assessment order under section 143(3) r.w.s. 147 of the Act ITA No.40/Coch/2021 M/s. F.G. Investments Pvt. Ltd. Kochi Page 3 of 10 dated 19.12.2018, passed by the Assessing Officer is erroneous in so far as it is prejudicial to the interest of revenue for the reasons mentioned below: "The Assessee Company, M/s F.G. Investments Pvt. Ltd. is carrying on business as a trader in shares and stock broker. It filed its return of income for the AY 2014-15 on 17.09.2014 with returned income as Nil with a claim for carry forward of current year loss of Rs.11,46,336/-. The return was processed u/s 143(1) on 29.03.2016, accepting the returned income. The case was reopened by issuing a notice u/s 148 on 17.03.2018 for escapement of income to the tune of Rs.14,88,373/- by allowing wrong set off of loss in speculation business against business income as against the provisions contained in Explanation to section 73 of the IT Act. The reopened assessment was completed on 19.122018 by accepting the current year loss of Rs.11,46,337/- reported in the return dated 22.03.2018 filed in response to notice u/s 148. The assessment was completed by accepting the contention made by the assessee that in the case of assessee whose principal business is trading of shares, an amendment has come into effect from 01.04.2015 with respect to Explanation to section 73 by Finance (No.20 Act, 2014) which is clarificatory in nature and therefore would operate retrospectively from 01.04.1977 from which date the explanation to section 73 was placed on the statute. As a consequence, the loss in speculative business which was allowed to be set off against business income by the AO is not in order. Deemed speculation loss allowed to be set off was Rs.26,34,709/-. Accordinaly, the income from business which is to be charged to tax during AY 2014-15 comes to Rs.14,88,373/-. To this extent, the assessment order is erroneous in so far as it is prejudicial to the interest of revenue. During the previous year, the assessee had claimed a total depreciation of Rs.2,33,853/- under the Income Tax Act and the same is claimed as cany forward to subsequent years. However, it is seen that for AY 2013-14, CA has not verified that any depreciation under the IT Act has ITA No.40/Coch/2021 M/s. F.G. Investments Pvt. Ltd. Kochi Page 4 of 10 been made. The opening WDV values adopted in AY 2013-14 are not closing WDVs of the respective blocks as in .2012-13. The WDV adopted for AY 2013-14 in 15% block of Plant and Machinery' Is Rs._9,15,163/- instead of Rs.7,77,888/- (closing of AY 2012-13) 50% block is Rs.2,27,322/- instead of Rs.1,13,661/- 60% block Rs. 54,147/- instead of Rs.21,561/- and in F&F - 10% block, opening is shown as Rs.1,77,593/- instead of Rs.1,59,834/- (closing WDV of 12-13). On reworking the depreciation in respect of AY 2014-15 by adopting the correct opening and closing WDVs for the AY 2013-14, there is excess depreciation claimed of Rs.16,004/- in P&M- 15% block, R5.28,415/- in P&M 50% block, Rs.7,797/- in P&M 60% block and Rs.1,598/- in F&F - 10% block. Thus total excess claim of depreciation works out to be RS.53,838/-. AO has omitted to look into this aspect of the case. During the previous year, assessee had earned dividend income of Rs.97,709/- which is exempt u/s 10(34). This triggers the applicability of section 14A of the IT Act. However, it is seen that no disallowance u/s 14A(1) by applying Rule 8D as per section 14(2)/(3) has been made during the assessment. The omission to consider the above aspects during assessment has resulted in under assessment of income in the hands of the assessee for AY 2014-15. 3. The Principal CIT observed that the assessee has reported exempt income being dividend amounting to Rs.97,709/- in the ITR filed. AO has omitted to consider application of Rule 8D r.w.s. 14A during the course of assessment proceedings before him. Regarding wrong adoption of WDV, the assessee has fairly accepted it is a mistake on its part. AO has failed to notice this anomaly during the course of assessment. As regards deemed speculation loss, it was noticed by the Ld. CIT(A) that the AO has completed the assessment by accepting the contention of the assessee that amendment came into effect from 01.04.2015 with respect to explanation to section 73 which is clarificatory in nature and ITA No.40/Coch/2021 M/s. F.G. Investments Pvt. Ltd. Kochi Page 5 of 10 would therefore operate retrospectively from 01.04.1977, i.e. date the explanation to section 73 was placed in the statute. Consequently, loss in speculative business which was allowed to be set-off against business income by the AO is not correct. It is apparent that the AO in the impugned assessment order has incorrectly assumed the facts of the case and has incorrectly applied the law as applicable to the issue at hand. He has failed to note the important aspects of the case and has committed an error in the assessment which is also prejudicial to the interests of the revenue, thus, necessitated the present revisionary proceedings under section 263 of the Act. Therefore, and in this view of the matter, Ld. CIT(A) opined that it is clear that the AO has passed an erroneous order, which is prejudicial to the interests of the revenue. 3.1 Ld. CIT(A) further observed that the above omission by the Assessing Officer in the Assessment Order is erroneous in so far as it is prejudicial to the interest of revenue. Therefore, the Assessment Order on the above issues was set aside by him to the Assessing Officer for de-novo examination and to pass a speaking order in accordance with law as per time limit specified under Section 153 of the Act, after affording due opportunity to the assessee. Against this assessee is in appeal before us. 4. With regard to accepting the contention of the assessee that amendment came into effect from 1.4.2015 with respect to Explanation to section 73 of the Act, which is clarificatory in nature and therefore, operate retrospectively from 1.4.1977. The Ld. A.R. submitted that the original assessment in the case of the assessee was completed under section 143(1) of the Act dated 29.3.2016. The assessment was re-opened by issue of notice under section 148 of ITA No.40/Coch/2021 M/s. F.G. Investments Pvt. Ltd. Kochi Page 6 of 10 the Act. As per the 'reasons recorded, the re-opening was resorted to consider the application of explanation to section 73. 4.1 The Ld. A.R further submitted that the AO has considered the same and by a speaking order contained in paragraphs 6, 7 and 8 of the assessment order dated 19.12.2018, where the AO has clearly mentioned that the re-opening was made based on the revision order under section 263 of the Act for the earlier assessment year for the same assessee and the Tribunal having quashed the revision and hence the AO was bound to follow the said Tribunal order. Ld. A.R. submitted that from the above it can be noted that there was no error in the assessment order and the AO had completed the assessment based on the facts and law at the relevant point of time and he submitted that the AO was bound to follow the Tribunal’s order for the earlier year and alleged that revision under section 263 of the Act was bad in law 4.2 Further, Ld. A.R. submitted that AO had merely followed the Cochin bench of Tribunal’s decision in the assessee's own case for the earlier year and the same was not countered in the s.263 order. Ld. PCIT has merely concluded summarily that "... consequently, loss in speculation business which was allowed to be set off against business income by the AO is not correct.........”. Ld. PCIT has not clearly brought out as to how the AO is wrong or in error. Hence the order under section 263 of the Act is not in order. Ld. A.R. relied on the decision of ITAT Cochin in ITA No.286/Coch/2020 dated 14.3.2022 in the case of Tulashi Subash vs. ITO. 5. The Ld. D.R. relied on the order of Ld. Principal CIT. 6. We have heard the rival submissions and perused the materials available on record. As rightly pointed out by the Ld. A.R., the issue relating to applicability of Explanation to section 73 of the Act, which would operate retrospectively from 1.4.1997 though the ITA No.40/Coch/2021 M/s. F.G. Investments Pvt. Ltd. Kochi Page 7 of 10 amendment was made w.e.f. 1.4.2015 as this issue has been considered by this Tribunal in assessee’s own case in assessment year 2013-14 in ITA No.36/Coch/2018, wherein assessee filed appeal against the order passed by Ld. Principal CIT u/s 263 of the Act dated 11.11.2018, wherein observed as under: 5. We have heard the rival submissions and perused the record. Admittedly, in this case, the assessment was completed u/s. 143(3) of the Act. While completing the assessment, the Assessing Officer allowed set off of deemed speculation loss from trading of shares amounting to Rs.35,95,624/- out of the business income of the assessee amounting to Rs.13,57,647/-. The CIT opined that in view of Explanation to section 73 introduced by Finance (No. 2) Act, 2014 which is applicable form assessment year 2015-16, the assessee cannot be granted set off of deemed speculation loss from trading of shares out of the business income of the assessee. The contention of the Ld. AR is that insertion of the amendment in Explanation to section 73 of the Act by the Finance (No. 2) Act, 2014 is curative and classificatory in nature. Therefore, the loss incurred in trading of shares by the assessee shall not be treated as deemed speculation loss and it is a normal business loss. Hence, the same could be adjusted with the business income of the assessee. We find force in this argument of the Ld. AR as this issue was considered by the ITAT, Mumbai Bench in the case of Fiduciary Shares & Stocks Private Ltd. vs. ACIT (159 ITD 554) and it was held as under: “Section 73 stipulates that any loss computed in respect of speculation business shall not be set-off except against profits and gains o f speculation business. Section 43(5) clarifies 'speculative transaction' to mean a transaction in which a contract for purchase or sale of any commodity including stock and shares is periodically or ultimately settled otherwise than by actual delivery. Explanation 2 to section 28 stipulates that where speculative transactions carried on by an assessee are of such a nature so as to constitute a business, the speculation business shall be deemed to be distinct and separate from other business. Sections 73, 43(5) and Explanation 2 to section 28 of the Act are on the statute since 01-04-1962. Pursuant to the Wanchoo Committee Report of December, 1971, Explanation to section 73 was inserted by the Taxation Laws (Amendment) Act, 1975 with effect from 01-04- 1977. Therefore, prior to 01-04-1977, if any assessee was carrying on any speculative transactions, i.e. a contract ultimately settled otherwise than by actual delivery; which are of such a nature to constitute a business, then such transactions are considered as speculation business. If the assessee incurs a loss in such business, then the loss from such speculation business can be adjusted only against profits of another speculation business as provided under section 73 of the Act. In other words, transactions prior to 01-04-1977, which were delivery based, were not treated as speculative transactions and hence the loss arising from such transactions was allowed to be adjusted against the income of the year under ITA No.40/Coch/2021 M/s. F.G. Investments Pvt. Ltd. Kochi Page 8 of 10 consideration. After the insertion of Explanation to section 73 of the Act, companies other than investment companies or finance companies carrying on business of purchase and sale of shares, then the loss from such business would be treated as speculation business loss. Therefore, by virtue of the insertion of Explanation to section 73 of the Act, if companies whose principal business is of purchase and sale o f shares suffer losses from share trading, then such loss from share trading is to be treated as speculative business loss. The intention behind the insertion of Explanation to section 73 of the Act has been explained by the CBDT, Circular No. 204 dated 24-07-1976 was to curb the methods/devices sometimes resorted to by business house controlling groups of companies to manipulate and reduce the taxable income o f companies under their control by showing loss on purchase and sale o f shares of group companies. It appears that the intention of the Legislature, from a perusal of the Wanchoo Committee Report and CBDT Circular No. 204 dated 24-071976, was not to treat purchase and sale of shares by companies whose main business is trading in shares as speculative business and therefore the Explanation to section 73 of the Act should be read only to the extent of the purpose for which it was inserted. The subsequent amendment made by Finance (No.2) Act, 2014 in the Explanation to section 73 of the Act appears to be made in order to clarify the real intention behind the insertion thereof, by removing the obvious hardship caused to various assessees whose main business is trading in shares. The amendment has removed the anomaly and brought the ambit of the Explanation to section 73 of the Act in line with the intention of the Legislature by placing the companies whose principal business is trading in shares as part of the exception to Explanation to section 73 of the Act, because such companies were not the companies for whom the Explanation was inserted. The insertion of the amendment in the Explanation to section 73 of the Act by the Finance (No. 2) Act. 2014, is curative and classificatory in nature. If the amendment is applied prospectively from assessment year 2015-16, a piquant situation would arise that an assessee who has earned profit from purchase and sale of shares in assessment year 2015- 16 would be treated as normal business profit and not speculation business profit in view of the exception carried out by the amendment in Explanation to section 73 of the Act. In these circumstances, speculation business loss incurred by trading in shares in earlier years will not be allowed to be set- off against such profit from purchase and sale of shares to such companies in assessment year 2015-16. For this reason also, the amendment inserted to Explanation to section 73 of the Act by Finance (No. 2) Act, 2014 is to be applied retrospectively from the date of the insertion to Explanation to section 73 of the Act. [Para 5.6.3] Thus, the amendment inserted in Explanation to section 73 by Finance (No. 2) Act, 2014 with effect from 01-04-2015 is clarificatory in nature and would therefore operate retrospectively from 01-04-1977 from which date the Explanation to section 73 was placed on the statute since this amendment to section 73 of the Act'.... or a company the ITA No.40/Coch/2021 M/s. F.G. Investments Pvt. Ltd. Kochi Page 9 of 10 principal business of which is the business of trading in shares 'brings in the assessee whose principal business is trading of shares. Therefore, the loss incurred in share trading business by such companies, i.e. like the assessee will not be treated as speculation business loss but normal business loss, and hence the same loss can be adjusted against other business income or income from any other sources of the year under consideration. In this view of the matter, the Assessing Officer is directed to allow the assessee's claim for setting off the loss from 'share trading business' against 'other business income' and income from any other sources during the year under consideration.”. 5.1 In view of the above order of the Tribunal, the amendment inserted to Explanation to section 73 by Finance (No. 2) Act, 2014 is to be applied retrospectively from the date of insertion to Explanation to section 73 of the Act. In coming to this view, we take support from the judgment of the Supreme Court in the case of CIT vs. Alom Extrusions Ltd. (319 ITR 306) wherein Their Lordships were considering the amendment made by the Finance Act, 2003 by omitting the second proviso to section 43B of the Act w.e.f. 01/04/2004 and bringing about uniformity in the first proviso by equating tax, duty cess and fees with contribution to welfare funds viz. Provident Fund, etc. The Supreme Court held that the aforesaid amendment in section 43B of the Act by Finance Act, 2003 is curative in nature and would therefore apply retrospectively w.e.f. 01/04/1988. 5.2 In the present case, the principle business of the assessee is trading in shares. Hence, deemed speculative loss from trading in shares is to be set off of against the business income of the assessee. This ground of the assessee is allowed.” 7. Being so, same issue cannot be taken up by Ld. Principal CIT in assessment year 2014-15 as this issue was already decided by the Tribunal in assessment year 2013-14. Hence, we decide this issue in favour of the assessee and against the revenue. 8. Coming to the issue relating to disallowance u/s 14A of the Act and excess allowance of depreciation on fixed assets, these issues are not subject matter of reassessment, which is evident from the reason recorded for reopening of the assessment. Hence, no revision u/s 263 of the Act is possible against the reassessment order passed on 19.12.2018. The Ld. A.R. also made argument that if the Ld. Principal CIT wants to consider this issue, he ought to have considered the issue in intimation u/s 143(1) of the Act dated 29.3.2016 for which the available time is up to 19.12.2018. However, in the present case, Ld. Principal CIT has passed the order on ITA No.40/Coch/2021 M/s. F.G. Investments Pvt. Ltd. Kochi Page 10 of 10 1.2.2021, hence, it is barred by time. In our opinion, this issue is squarely covered by the judgement of Hon’ble Kerala High Court in the case of CIT (Exemptions) Vs. Choice Foundation reported in 440 ITR 106 (Ker.), wherein held that “Revision should have been made within the time limit from the date of intimation u/s 143(1) of the Act. On this ground also these two issues are to be decided in favour of the assessee. 9. In the result, appeal of the assessee is allowed. Order pronounced in the open court on 13 th Sept, 2022 Sd/- (Beena Pillai) Judicial Member Sd/- (Chandra Poojari) Accountant Member Bangalore, Dated 13 th Sept, 2022. VG/SPS Copy to: 1. The Applicant 2. The Respondent 3. The CIT 4. The CIT(A) 5. The DR, ITAT, Bangalore. 6. Guard file By order Asst. Registrar, ITAT, Bangalore.