ACIT 3(1)(2), MUMBAI V. EDELCAP SECURITIES LTD, MUMBAI

ITA 4263/MUM/2016

• Counselvise Citation: [2017] 126 COUNSELVISE.COM (IT) 8606 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 4 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-11-2017
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: Not Allotted
• Assessment Year: 2011-2012
• Appeal Filed On: 21-06-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Earning of tax free income; Initiation of penalty proceedings
• Section: 142(1); 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL K BENCH, MUMBAI BEFORE SHRI RAJENDRA , AM AND SHRI AMARJIT SINGH, JM / I .T.A. NO. 4263 / MUM/ 20 1 6 ( / ASSESSMENT YEAR: 2011 - 12 ) ACIT 3(1)(2) R.NO. 607, AAYAKAR BHAVAN MU MBAI PIN:400020 / VS. EDELCAP SECURITES LTD. 14 TH FLOOR, EXPRESS TOWER, NARIMAN POINT MUMBAI PIN:400021 ./ ./ PAN/GIR NO. : AABCE 9000 A ( / APPELLANT ) .. ( / RESPONDENT ) / DATE OF HEARING : 26 . 10 .2017 / DATE OF PRONOUNCEMENT : 09. 11 . 2017 / O R D E R PER AMARJIT SINGH, J M: THE REVENUE HAS FILED THE PRE SENT APPEAL AGAINST THE ORDER DATED 16 .0 3 .201 6 , PASSED BY THE COMMISSIONER OF INCOME TAX (APPEALS) - 8 MUMBAI [HEREINAFTER REFERRED TO AS THE CIT(A)] R ELEVANT TO THE AY.20 1 1 - 1 2 . 2 . THE REVENUE HAS RAISED THE FOLLOWING GROUNDS: - ON THE FACTS AND CIRCUMST ANCES OF THE CASE AND IN LAW, THE CIT(A) ERRED IN DELETING THE ADDITION OF RS.5,20,75,140/ - MADE BY ASSESSING OFFICER ON ACCOUNT OF MARK TO MARKET LOSS CLAIMED BY THE ASSESSEE IN DERIVATIVE TRANSACTIONS WITHOUT APPRECIATING THE FACT THAT THE LOSS CLAIMED O N THE BASIS OF VALUE OF DERIVATIVE AS ON 31 ST MARCH IS MERELY A NOTI ONAL LOSS AND THE ACTUAL LOSS OR THE REVENUE BY: S HRI SAURABH DESHPANDE ( DR ) ASSESSEE BY : SHRI RAJAN VORA ITA NO. 4263 /MUM/2016 A.Y. 201 1 - 12 2 PROFIT IN RESPECT OF SUCH DERIVATIVE TRANSACTIONS WOULD GET CRYSTALLIZED ONLY AT THE TIME OF SETTLEMENT OF SUCH TRANSACTION . ON THE FACTS AND CIRCUMST ANCES OF THE CASE AND IN LAW, THE CIT(A) ERRED IN EXCLUDING THE STOCK - IN - TRADE FROM THE TOTAL INVESTMENT TO BE CONSIDERED FOR THE PURPOSES OF COMPUTING DISALLOWANCE IN ACCORDANCE WITH RULE 8D, WITHOUT APPRECIATING THAT THE INVESTMENT IN STOCK IN TRADE IS N OTHING BUT BUSINESS INVESTMENT AND THAT RULE 8D DOES NOT EXCLUDE BUSINESS INVESTMENT FROM THE PURVIEW OF INVESTMENT. THE APPELLANT PRAYS THAT THE ORDER OF LD. CIT(A) ON THE ABOVE GROUND BE SET ASIDE AND THAT OF ASSESSING OFFICER BE RESTORED. THE APPELLANT CRAVES LEAVE TO AMEND OR ALTER ANY GROUND OR ADD A NEW GROUND WHICH MAY NECESSARY. 3 . THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSE E COMPANY FILED ITS RETURN OF INCOME ON 17.09.2011 DECLARING TOTAL INCOME TO THE TUNE OF RS.53,72,53,125/ - . THEREAFTER, THE CASE WAS SELECTED FOR SCRUTINY AND NOTICE U/S 143(2) OF THE I.T. ACT, DATED 25.09.2012 WAS ISSUED AND SERVED UPON THE ASSESSEE. THEREAFTER, THE NOTICE U/S 142(1) OF THE ACT WAS ALSO ISSUED ON 11.07.2013. THE ASSESSEE COMPANY WAS STATED TO BE ENGAGED I N THE BUSINESS OF THE COMPANY WAS THE MEMBER OF INTERCONNECTED STOCK EXCHANGE REGISTERED WITH SECURITIES AND EXCHANGE BOARD OF INDIA . T HE COMPANY WAS ENGAGED IN TRADING AND ARBITRAGE OF COMMODITIES SECURITIES AND DERIVATIVE INSTRUMENTS AND ALSO PROVIDING B ROKING AND ADVISORY SERVICE. THE ASSESSEE CLAIM ED THE PRO VISION FOR MARK TO MARKET LOSS ON FUTURE/OPTION OF RS.5,20,75,140/ - WHICH WAS DECLINED BY THE AO AND THE SAID AMOUNT WAS ADDED TO THE INCOME OF THE ASSESSEE. THE AO ALSO DISALLOWED AN AMOUNT OF RS. 5,55,86,120/ - IN VIEW OF THE PROVISION U/S 14A OF THE ACT . T HE TOTAL INCOME OF THE ASSESSEE WAS ASSESSED TO THE TUNE OF RS.64,49,14,390/ - . . THE ASSESSEE FILED AN APPEAL BEFORE THE CIT(A) WHO ALLOWED THE CLAIM OF THE ASSESSEE, THEREFORE, THE REVENUE HAS FIL ED THE PRESENT APPEAL BEFORE US. ITA NO. 4263 /MUM/2016 A.Y. 201 1 - 12 3 ISSUE NO. 1: - 4. UNDER THIS ISSUE THE REVENUE HAS CHALLENGED THE DELETION OF THE ADDITION OF RS. 5,20,75,140/ - MADE BY AO ON ACCOUNT OF MARK TO MARKET LOSS CLAIMED BY THE ASSESSEE IN DERIVATIVE TRANSACTION. THE LD. REPRESENT ATIVE OF THE REVENUE HAS ARGUED THAT THE LOSS CLAIMED ON THE BASIS OF THE VALUE DERIVATIVE AS ON 31 ST MARCH IS MERELY A NOTIONAL LOSS AND THE ACTUAL LOSS OR THE PROFIT OF SUCH DERIVATIVE TRANSACTION WOULD BE CRYSTALLIZED ONLY AT THE TIME OF SETTLE MENT OF S UCH TRANSACTION, T HEREFORE, THE FINDING OF THE CIT(A) ON THIS ISSUE IS WRONG AGAINST LAW AND FACTS AND IS LIABLE TO BE SET ASIDE. HOWEVER, ON THE OTHER HAND, THE LD. REPRESENTATIVE OF THE ASSESSEE HAS STRONGLY RELIED UPON THE FINDING OF THE CIT(A) IN QUEST ION. WE HAVE HEARD THE ARGUMENT ADVANCED BY THE LD. REPRESENTATIVE OF THE PARTIES AND PERUSED THE RECORD. WE NOT ICED THAT THE ASSESSEE INITIALLY CLAIMED THE MARK TO MARKET (MTM) PROVISION FOR AMOUNT ON DERIVATIVE INSTRUMENT WHICH WAS DISALLOWED BY THE AO . IN APPEAL, T HE CIT(A) ALLOWED THE CLAIM OF THE ASSESSEE ON THE GROUND OF THE DECISION OF THE HONBLE ITAT IN SEVERAL CASES. THE CIT(A) HAS RELIED UPON THE FOLLOWING CASES: - 1. EDELWEISS CAPITAL LIMITED VS. ITO (ITA. NO.5324/M/2007) 2. EDELWEISS SECURITIES LIMITED VS. ADDLL. CIT(ITA 2193/M/2009) 3. DCIT VS. EDELWEISS SECURITIES LIMITED(ITA 7792/M/2012) 4. DCIT VS. ECL FINANCE LIMITED (ITA 7656/M/2011) ITA NO. 4263 /MUM/2016 A.Y. 201 1 - 12 4 5. DCIT VS. KOTAK MAHINDRA INVESTMENT LIMITED(ITA 1502/M/2012 6. SHRI RAMESH KUMAR DAMANI VS. ADDLL. CIT (IT A 809/M/2009) 7. M/S EKANSHA ENTERPRISES P. LTD. VS. DCIT (ITA 809/M/2012) 8. ACIT VS. SURYAKANT D. NISSAR (ITA 2750/M/2010) 9. DCIT VS. EDELWEISS SECURITIES LIMITED (ITA 5939/M/2011) 5. THE FINDING OF THE CIT(A) IS HEREBY TO REPRODUCE AS UNDER: - 5.1. 1 T HESE GROUNDS PERTAINS TO DISALLOWANCE OF PROVISION ON MARK TO MARKET ON TRADING OF DERIVATIVE INSTRUMENT OF RS.5,20,75,140/ - BY TREATING IT AS NOTIONAL LOSS. THIS ISSUE HAS BEEN DEALT WITH UNDER PARA 4 OF ASSESSING OFFICERS ORDER. ESSENTIAL HE HAS TREATED THE SAME AS NOTIONAL LOSS FOR WHICH LIABILITY HAS NOT CRYSTALLIZED AND HAS HELD IT AS NON DEDUCTIBLE. 5.1.2 I FIND THAT THIS IS COVERED ISSUE IN FAVOUR OF THE APPELLANT IN JURISDICTIONAL MUMBAI ITAT IN THE FOLLOWING CASES RELIED UPON BY THE APPELLANT: 1. E DELWEISS CAPITAL LIMITED VS. ITO (ITA. NO.5324/M/2007) 2. EDELWEISS SECURITIES LIMITED VS. ADDLL. CIT(ITA 2193/M/2009) 3. DCIT VS. EDELWEISS SECURITIES LIMITED(ITA 7792/M/2012) 4. DCIT VS. ECL FINANCE LIMITED (ITA 7656/M/2011) 5. DCIT VS. KOTAK MAHINDRA IN VESTMENT LIMITED(ITA 1502/M/2012 6. SHRI RAMESH KUMAR DAMANI VS. ADDLL. CIT (ITA 809/M/2009) 7. M/S EKANSHA ENTERPRISES P. LTD. VS. DCIT (ITA 809/M/2012) 8. ACIT VS. SURYAKANT D. NISSAR (ITA 2750/M/2010) 9. DCIT VS. EDELWEISS SECURITIES LIMITED (ITA 5939/M /2011) ITA NO. 4263 /MUM/2016 A.Y. 201 1 - 12 5 IN VIEW OF THE DIRECT DECISIONS ON THE ISSUE FROM JURISDICTIONAL ITAT THE DISALLOWANCE OF RS.5,20,75,140/ - MADE ON THIS ACCOUNT IS DELETED. THESE GROUNDS OF APPEAL ARE ALLOWED. 6 . ON APPRAISAL OF THE ABOVE SAID FINDING , WE NOTICED THAT THE CLAIM O F THE ASSESSEE HAS DULY COVERED BY THE ASSESSEES OWN CASE IN ITA. NO. 2193/M/2009 IN WHICH THE CLAIM OF THE ASSESSEE HAS BEEN ALLOWED. THE OTHER LAW MENTIONED ABOVE AND RELIED UPON BY THE CIT(A) ALSO SPEAKS ABOUT ALLOWANCE BY CLAIM OF THE ASSESSEE. SINCE, THE ISSUE IN QUESTION HAS DULY BEEN COVERED BY THE ABOVE MENTIONED CASES. THEREFORE, WE ARE OF THE VIEW THAT THE FINDING OF THE CIT(A) IS QUITE CORRECT AND IS NOT LIABLE TO BE INTERFERE WITH AT THIS APPELLATE STAGE. ACCORDINGLY, T HIS ISSUE IS HEREBY DECIDE D IN FAVOUR OF THE ASSESSEE AGAINST THE REVENUE. ISSUE NO. 2: - 7 . ISSUE NO. 2 IS IN CONNECTION WITH THE DISALLOWANCE OF RS.5,55,86,120/ - IN THE PROVISION U/S 14A OF THE ACT, 1961. THE ASSESSEE EARNED THE EXEMPT INCOME TO THE TUNE OF RS.36,61,416/ - IN THE F ORM OF DIVIDEND ON SHARES/MF/DEBENTURES HELD STOCK EXCHANGED . T HE FINDING OF THE CIT(A) IS HEREBY MENTIONED BELOW.: - 5.2.1 THESE GROUNDS PERTAIN TO DISALLOWANCE OF RS555,86120/ - U/S 14A OF THE INCOME TAX ACT, 1961 R.W. RULE BD AS AGAINST RS. 198,4911 - SU O MOTO DISALLOWANCE MADE BY THE APPELLANT. THE ASSESSING OFFICER HAS DISCUSSED THIS ISSUE AT PARA 5.1 ONWARDS OF HIS ORDER. HE HAS REPRODUCED THE APPELLANT'S SUBMISSION BEFORE HIM VIDE ITS LETTER DATED 04.10.2013. THE APPELLANT HAS ESSENTIALLY TAKEN THE SA ME ARGUMENTS BEFORE THE ASSESSING OFFICER AS. IN ITS CONTENTIONS ABOVE. HENCE DETAILED MENTION OF THE SAME IS NOT MADE HERE. 5.2.2 THE APPELLANT COMPANY IS MAINLY ENGAGED IN THE BUSINESS OF SHARE TRADING ACTIVITY. DURING THE YEAR UNDER CONSIDERATION, THE A PPELLANTS HAVE EARNED EXEMPT INCOME OF RS 36,61416/ - IN THE ITA NO. 4263 /MUM/2016 A.Y. 201 1 - 12 6 FORM OF DIVIDEND ON SHARES/ME/DEBENTURES HELD AS STOCK IN TRADE AND CLAIMED THE SAME TO BE EXEMPT UNDER SECTION 10(34). THIS FACT IS ADMITTED BY THE ASSESSING OFFICER AT PARA 54 OF HIS ORDER. HE H AS REJECTED CONTENTION OF THE APPELLANT THAT DIVIDEND ON SHARES ETC., HELD AS STOCK IN TRADE CANNOT BE SUBJECTED TO DISALLOWANCE U/S 14A AND HAS IGNORED THE VARIOUS DECISIONS OF JURISDICTIONAL COURTS ON THE MATTER. 5.3.3 I FIND THAT THE HON'BLE ITAT, MUMBA I, IN THE CASE OF DEVKANT SYNTHETICS (INDIA) PVT LTD V/S ITO - 3(1)(2) IN ITA NO. 2663, 2664 AND 2665 OF 2015 DATED 28.10.2015 DECIDED THE NON - APPLICABILITY SECTION 14A R.W. RULE 80 IN THE CASE WHERE THE INVESTMENTS ARE HELD AS STOCK - IN - TRADE. THIS DECISION WAS BACKED BY JUDGEMENT OF HON'BLE BOMBAY HIGH COURT IN CIT VS. INDIA ADVANTAGES SECURITIES LTD. - JA 1131/13 AND RECENTLY EMPHATICALLY REITERATED BY THE HON'BLE COURT IN W.P. 1753 OF 2016 IN HDFC BANK LTD. VS DCII. THIS ISSUE HAS NOW REACHED LEGAL FINALIT Y IN RESPECT OF NON - APPLICABILITY OF SECTION 14A IN RESPECT OF DIVIDEND INCOME FROM SECURITIES HELD AS STOCK IN TRADE. 5.3.4 THE RATIO OF THE ABOVE DECISIONS OF HON'BLE TRIBUNAL AND BOMBAY HIGH COURT SQUARELY APPLIES TO THE FACTS OF THE APPELLANT'S CASE, HENCE NO DISALLOWANCE U/S 14A THE INCOME TAX ACT, 1961 R.W. RULE 8D IS, THEREFORE, RESTRICTED TO THE SUO MOTO DISALLOWANCE OFFERED OF RS.1,98,491/ - . THESE GROUNDS OF APPEAL ARE ALLOWED. 5.4..1 THIS IS AGAINST INITIATION OF PENALTY PROCEEDINGS U/S 271(1)(C ) OF THE ACT. BEING PREMATURE, THIS GROUND IS DISMISSED. 8 . ON APPRAISAL OF THE ABOVE MENTIONED FINDING, WE NOTICED THAT THE CIT(A) HAS FOLLOWED THE DECISION OF THE HONBLE ITAT IN THE CASE OF DEVKANT SYNTHETICS (INDIA) PVT. LTD. VS. ITO - 3(1)(2) IN ITA. NO./ 2663, 2664 & 2665 OF 2015 DATED 28.10.2015 IN WHICH IT IS SPECIFICALLY HELD THAT WHERE THE INVESTM ENT WAS HELD AS STOCK IN TRADE THEN THE PROVISION U/S 14A R.W. RULE 8D OF THE ACT WAS NOT APPLICABLE. THIS ISSUE HAS ALSO BEEN DECIDED IN FAVOUR OF ASSES SEE BY THE BOMBAY HIGH COURT IN THE CASE OF CIT VS. INDIA ADVANTAGES SECURITIES LTD. ITA 1131/13 AND IN THE CASE OF HDFC BANK LTD. VS. DCIT 1753 OF 2016 . I N THE SAID CIRCUMSTANCES, THE ITA NO. 4263 /MUM/2016 A.Y. 201 1 - 12 7 PROVISION OF SECTION 14A R.W. RULE 8D OF THE ACT WAS NOT APPLICABLE UP ON THE INVESTMENT HELD AS STOCK AND TRADE. THE ASSESSEE HIMSELF ASSESSED THE EXPENSES TO THE EARNED THE EXEMPT INCOME 1,98,491/ - . THE CIT(A) HAS RESTRICTED THE EXPENSES TO THE EXTENT ONLY. IN THE SAID CIRCUMSTANCES, WE ARE OF THE VIEW THAT THE CIT(A) HAS P ASSED THE ORDER JUDICIOUSLY AND CORRECTLY WHICH IS NOT REQUIRED TO INTERFERE WITH AT THIS APPELLATE STAGE . ACCORDINGLY, THIS ISSUE IS BEING DECIDED IN FAVOUR OF THE ASSESSEE AGAINST THE REVENUE. ISSUE NO. 3 & 4: - 9 . ISSUE NO. 3 & 4 ARE GENERALLY IN NATURE WHICH NOWHERE REQUIRED ANY ADJUDICATION. 10 . IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS HERE BY ORDERED TO BE DISMISSED . ORDER PRONOUNCED IN THE OPEN COURT ON 09. 11 . 2017 . SD/ - SD/ - ( RAJENDRA ) (AMARJIT SINGH) / ACCOUNTANT MEMBER / JUDICIAL MEMBER MUMBAI; DATED : 09. 11 .2017 V.P. SINGH ITA NO. 4263 /MUM/2016 A.Y. 201 1 - 12 8 / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. ( ) / THE CIT(A) - 4. / CIT 5. , , / DR, ITAT, MU MBAI 6. / GUARD FILE. / BY ORDER, //TRUE COPY// / / (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI