The ACIT,Ahmedabad Circle-3, Ahmedabad V. Canon Capital & Finance Ltd., Ahmedabad

ITA 4367/AHD/2003

• Counselvise Citation: [2009] 114 COUNSELVISE.COM (IT) 7778 (ITAT-AHMEDABAD)
• Duration Of Justice: 5 year(s) 7 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-07-2009
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 22-07-2009
• Assessment Year: 1998-1999
• Appeal Filed On: 09-12-2003
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Business income; Business expenditure; Speculation loss; Bad and doubtful debts; Speculative transactions; TDS; Set aside
• Section: 28

Judgement Text

FIT FOR PUBLICATION IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH A BEFORE SHRI R.V. EASWAR, VICE PRESIDENT AND SHRI N.S. SAINI, ACCOUNTANT MEMBER DATE OF HEARING : 22/07/09 DRAFTED ON: 28/07/ 09 ITA NO.4367/AHD/2003 ASSESSMENT YEAR : 1998-99 THE ACIT CIRCLE-3 AHMEDABAD VS. CANON CAPITAL & FINANCE LTD. 204, SARAP NAVJIVAN PRESS LANE ASHRAM ROAD AHMEDABAD PAN/GIR NO. : AAACC 6315 P (APPELLANT) .. (RESPONDENT) APPELLANT BY : SHRI GOVIND SINGHAL, SR.DR RESPONDENT BY: SHRI S.N. SOPARKAR O R D E R PER N.S.SAINI , ACCOUNTANT MEMBER :- THIS APPEAL IS BY THE REVENUE AGAINST THE ORDER O F THE LD.CIT(APPEALS)-VII, AHMEDABAD DATED 26/09/200 3 PASSED FOR ASSESSMENT YEAR 1998-99. 2. GROUND NO.1 OF THE APPEAL, READS AS UNDER:- 1. THE LD. CIT(A) HAS ERRED IN LAW & ON FACTS IN DIRE CTING TO ALLOW CLAIM OF BAD DEBTS OF RS.9,73,146/- ITA NO.4367/AHD/2003 THE ACIT VS. CANON CAPITAL & FINANCE LTD. ASST.YEAR 1998-99 - 2 - 3. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSI NG OFFICER OBSERVED THAT THE ASSESSEE RECEIVED A LOAN OF RS.3 0 LAKHS FROM SARDAR DAIRY PVT.LTD. IN THE ASSESSMENT YEAR 1995-96 AND THE ASSESSEE HAS PAID INTEREST OF RS.1,33,330/- (NET OF TDS OF RS.39,825/-). THE GROSS INTEREST OF RS.1,73,15 5/- WAS SHOWN BY SARDAR DAIRY PVT.LTD. AND ALSO VERIFIED FROM FO RM NO.26A FILED BY THE ASSESSEE. IN THE SUBSEQUENT ASSESSME NT YEAR 1996-97, INTEREST WAS PAID ON THE LOAN OF RS.30 LAK HS OF RS.2,18,367/- (NET OF TDS OF RS.43,104/-). HOWEVE R, INSTEAD OF DEBITING INTEREST SO PAID THE ACCOUNTANT CREDITED T HE LOAN AMOUNT IN SARDAR DAIRY P.LTD.S ACCOUNT. FOR TH E TDS AMOUNT OF RS.43,104/- A SEPARATE JOURNAL ENTRY WAS PASSED IN THE SAID ACCOUNT. IN THE ASSESSMENT YEAR 1997-98, ENTIRE LOAN OF RS.30 LAKHS WAS REPAID WITH INTEREST AND TO TAL AMOUNT WAS PAID BY RS.35,66,232/-. WHILE MAKING THIS PAY MENT, INTEREST OF RS.2,16,535/- RELATING ASSESSMENT YEAR 1996-97 WAS ALSO PAID. HOWEVER, AGAIN THE ACCOUNTANT INSTEAD OF DEBITING SUCH PAYMENT IN THE INTEREST ACCOUNT CREDI TED THE ITA NO.4367/AHD/2003 THE ACIT VS. CANON CAPITAL & FINANCE LTD. ASST.YEAR 1998-99 - 3 - ENTIRE AMOUNT TO THE PARTYS ACCOUNT. THUS, BAL ANCE OF RS.2,16,535/- CONTINUED IN THE ASSESSEES ACCOUNT A S RECEIVABLE FROM SARDAR DAIRY PVT.LTD. THIS MIST AKE WAS REALIZED IN THE ASSESSMENT YEAR 1998-99 AND AS THE AMOUNT WAS NOT RECOVERABLE FROM THE PARTY, IT WAS WRITTEN OFF IN THE PARTYS ACCOUNT. THIS AMOUNT OF RS.2,16,535/- WHI CH OTHERWISE SHOULD HAVE BEEN DEBITED AS INTEREST IN E ARLIER YEAR WAS CLAIMED AS DEDUCTION AS AN EXPENSE UNDER SECTIO N 28 OF THE INCOME TAX ACT, 1961 IN THE YEAR UNDER APPEAL. 4. SIMILARLY, THE ASSESSEE RECEIVED AN AMOUNT OF R S.10 LAKHS IN ASSESSMENT YEAR 1995-96 FROM SARITA DAIRY PVT.LTD. THE ASSESSEE PAID INTEREST OF RS.53,754/- (TDS RS.12,5 94). IN THE SUBSEQUENT ASSESSMENT YEAR 1996-97, NO INTEREST WAS PAID OR DEBITED IN THE BOOKS BY THE PARTY. IN THE ASSES SMENT YEAR 1997-98 ENTIRE LOAN WAS PAID BACK WITH INTEREST TOT ALLING TO RS.11,85,465/- WHICH INCLUDED INTEREST OF RS.1,87,4 09/-. HERE AGAIN, INTEREST ACCOUNT WAS NOT DEBITED DUE TO ITA NO.4367/AHD/2003 THE ACIT VS. CANON CAPITAL & FINANCE LTD. ASST.YEAR 1998-99 - 4 - ACCOUNTANTS MISTAKE AND THE SAME REMAINED IN THE PARTYS ACCOUNT. THIS OUTSTANDING AMOUNT OF RS.1,87,409/- WAS NOTICED IN ASSESSMENT YEAR 1998-99 AND WAS WRITTEN OFF IN THE BOOKS AND WAS CLAIMED DEDUCTION UNDER SECTION 28 OF THE INCOME TAX ACT, 1961. 5. FURTHER, THE ASSESSEE CLAIMED RS.5,69,472/- RECE IVABLE FROM VISHWA FINANCE AS BAD DEBTS. THE ASSESSING O FFICER DISALLOWED THE SAME FOR THE REASON THAT IT WAS NOT A BAD DEBT AS INCOME OF THE SAME HAVE NOT BEEN INCLUDED IN COM PUTING THE TOTAL INCOME. THE ASSESSING OFFICER DISALLOWE D THE CLAIM UNDER SECTION 28 OF THE INCOME TAX ACT, 1961 TO THE ASSESSEE ON THE GROUND THAT NO DETAILS REGARDING THE DISPUTE AND NON- AVAILABILITY OF THE AMOUNT FROM THE PARTIES WERE FI LED. 6. IN APPEAL, THE LD. CIT(APPEALS) CALLED FOR A REM AND REPORT FROM THE ASSESSING OFFICER AS DURING THE COU RSE OF APPEAL HEARING THE LD. AUTHORISED REPRESENTATIVE OF THE ASSESSEE FILED VARIOUS DETAILS AND WRITTEN SUBMISSI ONS. THE ITA NO.4367/AHD/2003 THE ACIT VS. CANON CAPITAL & FINANCE LTD. ASST.YEAR 1998-99 - 5 - ASSESSING OFFICER SUBMITTED REMAND REPORT DATED 13/ 11/2001 AND 08/03/2002. THE ASSESSING OFFICER STATED THAT AMOUNT WRITTEN OFF BY THE ASSESSEE ARE IN THE NATURE OF IN TEREST WHICH WERE CREDITED BUT SUBSEQUENTLY NOT REALIZED. THER EFORE, THE AMOUNT FROM THE PARTIES, NAMELY; SARDAR DAIRY PVT.L TD. AND SARITA DAIRY PVT.LTD. CANNOT BE ALLOWED DEDUCTION U NDER SECTION 28 OF THE INCOME TAX ACT, 1961. AS REGARD S VISHWA FINANCE, NO ADVERSE COMMENTS WERE MADE BY THE ASSES SING OFFICER. THE LD. CIT(APPEALS) DELETED THE ADDITION BY OBSERVING AS UNDER:- 4. I HAVE CAREFULLY EXAMINED THE WRITTEN SUBMISSIO N AND DETAILS FILED BY THE ASSESSEES REPRESENTATIVE AS WELL AS OF THE ASSESSING OFFICERS REMAND REPORT AND OTH ER PAPERS COLLECTED DURING THE PROCEEDINGS. THE FACT S EMERGING ARE VERY CLEAR. THE CLAIM OF BAD DEBT OF COURSE WAS NOT CORRECT. HOWEVER, QUESTION NOW REMAINS OF ALLOWING THE SAME AS BUSINESS EXPENSES UNDER SECTION 28. THE EXPENDITURE WHICH IS INCURRE D WHOLLY AND EXCLUSIVELY FOR THE BUSINESS CAN BE ALLO WED UNDER THIS SECTION. THE FACT IS ALSO NOT IN DISPUT E THAT ITA NO.4367/AHD/2003 THE ACIT VS. CANON CAPITAL & FINANCE LTD. ASST.YEAR 1998-99 - 6 - BOTH THE PARTIES HAVE CONFIRMED THAT THERE WERE NO SPECIFIC AGREEMENTS IN WRITING ABOUT CHARGING OR PAYMENT OF INTEREST OR RATE OF INTEREST. THE ASSES SEE COMPANY HAD RECEIVED THE AMOUNT FOR SOME BUSINESS PURPOSE, BUT AS THE SAME DID NOT MATERIALIZE AND SO IT AGREED TO PAY THE INTEREST. INTEREST IN THE FIRST YEAR WAS PAID AND SO DEBITED, CLAIMED AND ALLOWED AS INTERE ST EXPENSES. BUT IN THE SUBSEQUENT YEARS DUE TO THE MISTAKE OF THE ACCOUNTANT OR FOR ANY OTHER REASON T HE SAME WAS NOT SEPARATELY DEBITED AS INTEREST EXPENSE S ACCOUNT AND WAS NOT SO CLAIMED OR ALLOWED AS EXPENSES ALSO. THEREFORE, THE AMOUNT SO PAID IN EX CESS OF THE ORIGINAL AMOUNT REMAINED OUTSTANDING AND WAS REFLECTING AS IF RECOVERABLE FORM THESE PARTIES. IN FACT THESE AMOUNTS WERE NOT TO BE RECOVERED AS AGREED BY THE ASSESSEE AND THE CONCERNED PARTIES. THESE AMOUNTS WERE NOT AT ALL OUTSTANDING AND AS THE ENTI RE AMOUNT OF PRINCIPLE ALONG WITH INTEREST HAD BEEN REPAID, THE SAME HAS TO BE ALLOWED. THE QUESTION IS THAT IT CANNOT BE ALLOWED AS INTEREST EXPENSES BECA USE THE ASSESSEE HAS NOT SO DEBITED AND CLAIMED AS INTE REST EXPENSES. THEREFORE, NOW WHAT HAS BEEN WRITTEN OF F BY THE ASSESSEE IS NOTHING BUT THE EXCESS AMOUNT PAID OR AGREED AMOUNT PAID IN THE EARLIER YEAR , WHICH IN F ACT IS ITA NO.4367/AHD/2003 THE ACIT VS. CANON CAPITAL & FINANCE LTD. ASST.YEAR 1998-99 - 7 - NOT RECOVERABLE. SUCH AMOUNT PAID WAS CERTAINLY I N NORMAL COURSE OF BUSINESS ACTIVITIES AS PAYMENT OF INTEREST ON SUCH LOAN RECEIVED IN EARLIER YEAR IT HAS BEEN ALLOWED AS INTEREST EXPENSES. ONCE THE PAYMENT IS CONSIDERED AS ALLOWABLE EXPENDITURE INCURRED FOR TH E PURPOSE OF BUSINESS EXCESS AMOUNT PAID IN EARLIER Y EARS AND REMAINING OUTSTANDING; NOW WRITTEN OFF IS IN MY VIEW AN ALLOWABLE EXPENDITURE; AS THIS AMOUNT WAS NOT RECOVERABLE. THE CONTRA ACCOUNTS OF BOTH THE PART IES CONFIRM SUCH ACCOUNT. SUCH EXPENSES CLAIMED BY THE ASSESSEE HAS TO BE ALLOWED AS DEDUCTION UNDER SECTI ON 28. THE ASSESSING OFFICER IS THEREFORE, DIRECTED TO ALLOW THE AMOUNT OF RS.2,16,535/- IN RESPECT OF SARDAR DA IRY PVT.LTD. AND RS.1,87,409/- IN RESPECT OF SARITA DAI RY PVT.LTD. AS ALLOWABLE BUSINESS EXPENDITURE UNDER SE CTION 28 OF THE INCOME TAX ACT. 4.1. SO FAR AS AMOUNT WITH VISHWA FINANCE OF RS.5,69,472/- IS CONCERNED, THE FACTS ARE CLEAR AND NOT IN DISPUTE. THE PERUSAL OF THE ACCOUNT FILED BY THE ASSESSEE FOR THREE YEARS CLEARLY SHOWS THAT AN AMOU NT OF RS.5,69,472/- WAS OUTSTANDING AND RECEIVABLE FROM T HIS PARTY AS ON 31/03/1997. FROM 1-4-1997 ONWARDS TIL L THIS ASSESSMENT YEAR THERE WERE NO TRANSACTIONS ENTERED INTO ITA NO.4367/AHD/2003 THE ACIT VS. CANON CAPITAL & FINANCE LTD. ASST.YEAR 1998-99 - 8 - BETWEEN THE PARTY AND THE ASSESSEE. SINCE THE PART Y WAS NOT PAYING THE AMOUNT IN SPITE OF REPEATED REQUESTS AND FOLLOW UP THE ASSESSEE HAS WRITTEN OFF THIS AMOUNT IN THE ACCOUNTS FOR THE YEAR ENDING 31-3-199 8 I.E. IN A.Y. 1998-99. AFTER AMENDMENT IN SEC.36(1 )(VII) WITH EFFECT FROM 1-4-1989 IT IS NOW CLEAR THAT ONCE THE ASSESSEE WRITES OFF IRRECOVERABLE AMOUNT IN ITS PRO FIT & LOSS ACCOUNT THE SAME HAS TO BE ALLOWED AS BAD DEBT . THE REQUIREMENT OF ESTABLISHING THE DEBT BECAME BAD IN A PARTICULAR YEAR HAS BEEN DISPENSED WITH EFFECT FORM 1-4-1989. THIS VIEW HAS BEEN CONFIRMED BY THE ITAT CHENNAI BENCH IN THE CASE OF NEWDEAL FINANCE INVESTMENT LTD. VS. DCIT 74 (ITD 469) AS FILED BY T HE AUTHORISED REPRESENTATIVE. IN ANY EVENT BOOKS OF ACCOUNT OF THE ASSESSEE CLEARLY SHOWS THAT THE AMOU NT OUTSTANDING OF RS.5,69,472/- HAD IN FACT NOT BEEN RECOVERABLE AND HAS BEEN WRITTEN OFF IN THE BOOKS O F ACCOUNT. ONCE THE ASSESSEE WRITES OFF THE SAME IN THE BOOKS AS BAD DEBT AS HELD BY HON'BLE GUJARAT HIGH COURT IN TWO JUDGEMENTS FILED BY THE ASSESSEE IN CA SE OF SARANGPUR COTTON MFG. CO.LTD. VS. CIT (143 ITR 166) AND KAMLA COTTON CO. VS. 226 ITR 605. IN VIEW OF THIS , CLAIM OF RS.5,69,472/- IS DIRECTED TO BE ALLOWED. ITA NO.4367/AHD/2003 THE ACIT VS. CANON CAPITAL & FINANCE LTD. ASST.YEAR 1998-99 - 9 - 7. THE LD. DEPARTMENTAL REPRESENTATIVE SUPPORTED TH E ORDER OF THE ASSESSING OFFICER. 8. THE LD. AUTHORISED REPRESENTATIVE OF THE ASSESSE E SUBMITTED THAT ASSESSEE HAS CLAIMED THE AMOUNT AS BAD DEBTS UNDER SECTION 36 OR IN THE ALTERNATIVE TO ALL OW THE SAME AS A BUSINESS LOSS UNDER SECTION 28 OF THE INCOME TAX ACT, 1961. HE SUBMITTED THAT, AT THE OUTSET, THE ASSES SEE AGREES THAT SO FAR AS SARDAR DAIRY LTD. AND SARITA DAIRY L TD. ARE CONCERNED, THERE WERE NO REGULAR SHARE BUSINESS TRA NSACTIONS AND SALE PROCEEDS AS COMMONLY UNDERSTOOD WERE NOT T HERE IN THE EARLIER YEAR. HOWEVER, THE IMPORTANT THING TO BE NOTICED HERE IS THAT THE ASSESSEE-COMPANY IS A SHAR E BROKING COMPANY AS WELL AS FINANCE- COMPANY. THE MEMORAND UM AND ARTICLES OF ASSOCIATION AND OBJECT CLAUSE CLEAR LY SPECIFY THIS BUSINESS CLAUSE. THE PROFIT & LOSS ACCOUNT ALSO CLEARLY SHOWS INTEREST RECEIVED AND INTEREST PAID ON VARIOU S FINANCIAL TRANSACTIONS. WITH REGARD TO SARDAR DAIRY LTD., AN AMOUNT OF ITA NO.4367/AHD/2003 THE ACIT VS. CANON CAPITAL & FINANCE LTD. ASST.YEAR 1998-99 - 10 - RS.17,12,427/- WAS PAID ON 18/09/1996 AND RS.18,55, 805/- WAS PAID ON 20/09/1996. AFTER DEDUCTING RS.3,51,697/- STANDING TO THE CREDIT OF THEIR ACCOUNT, NET OUTSTANDING DEBIT BALANCE WAS RS.32,16,535/- TOWARDS WHICH THEY MADE PAYMENT OF RS.30 LAKHS ONLY AND THE BALANCE AMOUNT OF RS.1,26, 535/- WAS OUTSTANDING PAYABLE AS ON 31/03/1997. THE PAYMENTS WERE IN CONNECTION WITH SECURITY TRANSACTIONS WITH THEM, BUT THE TRANSACTIONS DID NOT MATERIALIZE AND AN AMOUNT OF R S.30 LAKHS WAS RETURNED BACK BY THEM AND, THEREFORE, BUSINESS LOSS OF RS.2,16,535/- WAS WRITTEN OFF TO THE PROFIT & LOSS ACCOUNT. FURTHER, THE TRANSACTIONS ARE REGULAR SINCE THREE Y EARS AND INTEREST WAS BEING RECEIVED AND PAID AND TDS WERE B EING DEDUCTED. THE TRANSACTION OF ODD AMOUNT SUGGEST THAT THEY WERE IN THE NATURE OF SECURITY TRANSACTION AND DEPOSITS. MERELY BECAUSE TRANSACTIONS DID NOT TAKE PLACE, IT CANNOT BE SAID THAT THESE TRANSACTIONS WERE NOT IN NORMAL COU RSE OF BUSINESS. IT WAS ARGUED THAT TRADING LOSS HAS WID ER CONNOTATION THAT A DEBT AND IF SUCH AMOUNT IS NOT ITA NO.4367/AHD/2003 THE ACIT VS. CANON CAPITAL & FINANCE LTD. ASST.YEAR 1998-99 - 11 - RECOVERABLE, THE HON'BLE GUJARAT HIGH COURT IN THE CASE OF CIT VS. ABDUL RAZAK & CO. 136 ITR 825 HAS HELD THA T THE SAME IS TO BE ALLOWED AS A TRADING LOSS. SAME ARE THE FACTS WITH REGARD TO SARITA DAIRY LTD. WHEREIN AMOUNT OF RS.11 ,85,465/- WAS PAID ON 27/08/1996 AND ADDING THERETO PENDING D EBIT BALANCE OF RS.1,944/- TOTAL OUTSTANDING WAS RS.1,87 ,409/- AGAINST WHICH THE PARTY MADE PAYMENT OF RS.10 LAKH S ONLY AND BALANCE AMOUNT OF RS.1,87,409/- WAS OUTSTANDING FROM THEM ON 31/03/1997. THE PAYMENT WERE IN CONNECTI ON WITH SECURITY TRANSACTIONS TO BE ENTERED INTO WITH THEM, BUT THE TRANSACTION DID NOT MATERIALIZE FROM THEM AND AN AM OUNT OF RS.10 LAKHS WAS RETURNED BY THEM AND THEREFORE, BUS INESS LOSS OF RS.1,87,409/- WAS INCURRED WHICH WAS WRITTEN OFF IN THE PROFIT & LOSS ACCOUNT. 9. AS REGARDS VISHWA FINANCE, IT WAS SUBMITTED THAT RS.5,69,472/- WAS OUTSTANDING AS ON 31/03/1997. IT WAS FURTHER SUBMITTED THAT THE ASSESSEE HAS NOT CARRIED OUT AN Y BUSINESS ITA NO.4367/AHD/2003 THE ACIT VS. CANON CAPITAL & FINANCE LTD. ASST.YEAR 1998-99 - 12 - TRANSACTION WITH THE PARTY AFTER 31/03/1997. SIN CE THE PARTY WAS NOT PAYING THE TRADE DEBT OF RS.5,69,472/- IN RESPECT OF BUSINESS TRANSACTION, THE SAME WAS WRITTEN OFF IN A SSESSMENT YEAR 1998-99 AND CLAIMED AS BAD DEBTS. IT WAS SUBM ITTED THAT THE ONLY CONDITION FOR ALLOWING OF BAD DEBT U NDER SECTION 36(1)(VII) OF THE INCOME TAX ACT, 1961 WAS THAT THE AMOUNT HAS TO BE WRITTEN OFF AS IRRECOVERABLE IN TH E ACCOUNTS OF THE ASSESSEE IN THE RELEVANT PREVIOUS YEAR. TH E CONDITION REGARDING ESTABLISHMENT OF DEBT HAVING BECOME BAD I N THE PREVIOUS YEAR WAS DELETED BY THE AMENDMENT OF SECTI ON 36(1)(VII) BY DIRECT TAXES LAWS (AMENDMENT) ACT, 19 87, W.E.F. 01/04/1989. THEREFORE, THERE WAS NO ONUS ON THE AS SESSEE TO PROVE THAT THE DEBT HAS BECOME BAD. THE ASSESSEE R ELIED ON THE DECISION OF ITAT CHENNAI BENCH A IN THE CASE OF NEWDEAL FINANCE INVESTMENT LTD. VS. DCIT 74 ITD 469 . FURTHER, IT WAS SUBMITTED THAT ONCE THE DEBT IS WRITTEN OFF AS IRRECOVERABLE BY THE ASSESSEE, IT IS PRIMA-FACIE PR OOF OF DEBT HAVING BECOME BAD AND THE SAME IS ALLOWABLE AS BAD DEBT ITA NO.4367/AHD/2003 THE ACIT VS. CANON CAPITAL & FINANCE LTD. ASST.YEAR 1998-99 - 13 - UNLESS IT IS PROVED BY THE REVENUE OTHERWISE. FOR THIS, RELIANCE WAS PLACED ON THE DECISION OF HON'BLE GUJA RAT HIGH COURT IN THE CASE OF SARANGPUR COTTON MANUFACTURING LTD. VS. CIT 143 ITR 166 AND OF KAMLA COTTON COMPANY VS. CI T 226 ITR 605 (GUJ.). HENCE, IT WAS SUBMITTED THAT THE CLA IM FOR BAD DEBT OF RS.5,69,472/- BE ALLOWED TO THE ASSESSEE. 10. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERU SED THE ORDERS OF THE LOWER AUTHORITIES AND THE MATERIALS A VAILABLE ON RECORD. IN THE INSTANT CASE, THE ASSESSING OFFICER OBSERVED THAT ASSESSEE HAS CLAIMED AS BAD DEBT RS.2,16,535/- RECEIVABLE FROM M/S.SARDAR DAIRY PVT.LTD. RS.1,87,4 09/- RECEIVABLE FROM M/S.SARITA DAIRY PVT.LTD. AND RS.5, 69,472/- RECEIVABLE FROM M/S.VISHWA FINANCE. IN RESPECT OF THE FIRST TWO PARTIES, IT WAS EXPLAINED BY THE ASSESSEE THAT THE ASSESSEE TOOK LOAN FROM THE SAID TWO PARTIES AND RE PAID THE PRINCIPLE AMOUNT ALONG WITH INTEREST ACCRUED THEREO N DURING THE FINANCIAL YEAR 1996-97. HOWEVER, DUE INADVERT ENT ITA NO.4367/AHD/2003 THE ACIT VS. CANON CAPITAL & FINANCE LTD. ASST.YEAR 1998-99 - 14 - OMISSION ENTRY OF INTEREST EXPENDITURE WAS NOT ENTE RED IN THE BOOKS WHICH RESULTED IN PAYMENT OF INTEREST MADE T O THE SAID PARTY AS BEING REFLECTED AS ADVANCE TO THE SAID PAR TIES. THE ASSESSEE, AFTER FINDING THIS MISTAKE AND OBSERVING THAT ACTUALLY NO AMOUNT IS RECEIVABLE FROM THESE AFORESA ID TWO PARTIES HAS WRITTEN OFF THE AMOUNT AS BAD DEBTS IN THE BOOKS OF THE YEAR UNDER CONSIDERATION AND SQUARED UP THE ACCOUNTS OF THE PARTIES. THE ASSESSING OFFICER DI SALLOWED THE CLAIM ON THE GROUND THAT ASSESSEE COULD NOT ADDUCE ANY EVIDENCE TO SHOW THAT THE CORRESPONDING LOANS WERE FOR BUSINESS PURPOSES. ON APPEAL, THE LD. CIT(APPEAL S) DELETED THE ABOVE ADDITION ON THE GROUND THAT THE INTEREST EXPENDITURE ON THE LOAN TAKEN FROM THE AFORESAID PA RTIES WERE ALLOWED AS BUSINESS EXPENDITURE TO THE ASSESSE E IN THE FIRST YEAR OF THE LOAN. THE LD. CIT(APPEALS) OBSE RVED THAT ONLY IN THE SECOND YEAR DUE TO SOME MISTAKE, INTEREST WA S NOT DEBITED IN THE BOOKS AND, THEREFORE, THE SAME LEAD TO A SITUATION WHERE THE PAYMENT OF INTEREST WAS REFLECT ED AS ITA NO.4367/AHD/2003 THE ACIT VS. CANON CAPITAL & FINANCE LTD. ASST.YEAR 1998-99 - 15 - ADVANCE TO THE PARTIES. IN THE ABOVE SITUATION, A CCORDING TO THE LD. CIT(APPEALS) AS THE PAYMENT WAS MADE FOR BU SINESS PURPOSES, THE SAME WAS TO BE ALLOWED AS DEDUCTION T O THE ASSESSEE IN THE YEAR UNDER CONSIDERATION. WE FIND THAT THE ASSESSEE IS A COMPANY AND ITS SYSTEM OF ACCOUNTING IS ACCRUAL OR MERCANTILE. UNDER THE SCHEME OF TH E INCOME TAX ACT EACH YEAR IS A SEPARATE UNIT OF ASSESSMENT AND INCOME OF ONE YEAR CAN BE ASSESSED TO TAX ONLY IN T HAT YEAR AND SIMILARLY THE EXPENDITURE OF ONE YEAR CAN BE AL LOWED AS DEDUCTION ONLY IN THE YEAR TO WHICH SUCH EXPENDITUR E PERTAINS AS PER THE SYSTEM OF ACCOUNTING FOLLOWED BY THE ASS ESSEE. EXPENDITURE OF ONE YEAR CANNOT BE ALLOWED AS DEDUCT ION IN ANY OTHER YEAR MERELY BECAUSE DUE TO SOME ERROR OR OMISSION ON THE PART OF THE ASSESSEE OR HIS ACCOUNTANT, EXPE NDITURE WAS NOT CLAIMED IN THE CORRECT YEAR. IN THE INSTA NT CASE, IT IS NOT IN DISPUTE THAT RS.1,87,409/- AND RS.2,16,535/- WAS ACTUALLY THE INTEREST EXPENDITURE OF ASSESSMENT YEAR 1996-97 AND, THEREFORE, THE SAME COULD NOT BE ALLOWED AS DEDUCTI ON IN THE ITA NO.4367/AHD/2003 THE ACIT VS. CANON CAPITAL & FINANCE LTD. ASST.YEAR 1998-99 - 16 - ASSESSMENT OF THE ASSESSMENT YEAR UNDER CONSIDERATI ON. AN AMOUNT WHICH IS, IN FACT, INTEREST EXPENDITURE AND WHICH CANNOT BE ALLOWED AS INTEREST EXPENDITURE IN THE YE AR UNDER CONSIDERATION CANNOT BE ALLOWED AS A BUSINESS LOSS SIMPLY BECAUSE THE ASSESSEE HAS TREATED THE SAME AS BUSINE SS LOSS IN ITS BOOKS OF ACCOUNT. THEREFORE, IN OUR CONSIDERE D VIEW, THE LD. CIT(APPEALS) WAS NOT JUSTIFIED IN DELETING THE DISALLOWANCE OF RS.1,87,409/- AND RS.2,16,535/-. 11. IN RESPECT OF THE REMAINING AMOUNT OF RS.5,69,4 72/- IN THIS GROUND OF APPEAL, IT IS OBSERVED THAT THE ASSE SSEE HAS CLAIMED THE SAME AS BAD DEBT. THE ASSESSING OFFIC ER DISALLOWED THE SAME ON THE GROUND THAT THE SAME IS NOT ALLOWABLE UNDER SECTION 36(1)(VII) OF THE INCOME TA X ACT, 1961 FOR THE REASON THAT ASSESSEE HAS NOT BEEN ABLE TO E STABLISH THAT THE AMOUNT IN QUESTION WAS INCLUDED AS INCOME IN ANY EARLIER YEAR. THE ASSESSING OFFICER ALSO OBSERVED THAT THE AMOUNT IN QUESTION COULD NOT BE ALLOWED AS BUSINESS LOSS ITA NO.4367/AHD/2003 THE ACIT VS. CANON CAPITAL & FINANCE LTD. ASST.YEAR 1998-99 - 17 - BECAUSE THE ASSESSEE HAS BROUGHT NO MATERIAL TO SHO W THAT THE AMOUNT HAS, IN FACT, BECOME IRRECOVERABLE. ON APPEAL, THE LD. CIT(APPEALS) OBSERVED THAT SINCE LAST THREE YEARS, THERE WAS NO RECOVERY IN THIS ACCOUNT. THE OUTSTA NDING AMOUNT WAS SAME WHICH WAS AS ON 31/03/1997. ON FI NDING THE ABOVE FACT, THE LD. CIT(APPEALS) BEING SATISFIE D THAT THE AMOUNT IN QUESTION HAS BECOME BAD ALLOWED DEDUCTION IN RESPECT OF THE SAME. WE FIND THAT THE ASSESSEE HA S CLAIMED THAT THE AMOUNT OF RS.5,69,472/- RECEIVABLE FROM M/ S.VISHWA FINANCE IS TRADE DEBT. THIS FACT WAS NOT DISPUTED BY THE REVENUE. FURTHER, THE ASSESSEE HAS ALSO SHOWN THA T NO BUSINESS TRANSACTION WAS DONE WITH THIS PARTY IN LA ST THREE YEARS AND NO AMOUNT WAS RECOVERED DURING THE LAST T HREE YEARS. THE LD. DEPARTMENTAL REPRESENTATIVE HAS N OT DISPUTED THE ABOVE FINDING. IN VIEW OF THE ABOVE F ACT, IN OUR CONSIDERED OPINION, THE ACT OF WRITING OFF OF THE D EBT AS IRRECOVERABLE BY THE ASSESSEE ITSELF PRIMA-FACIE SH OWS THAT THE AMOUNT WAS IRRECOVERABLE. THIS INFERENCE CAN BE RE BUTTED BY ITA NO.4367/AHD/2003 THE ACIT VS. CANON CAPITAL & FINANCE LTD. ASST.YEAR 1998-99 - 18 - THE REVENUE BY BRINGING COGENT MATERIAL ON RECORD. HOWEVER, IN THE INSTANT CASE, WE FIND THAT THE REVE NUE HAS NOT BEEN ABLE TO DISCHARGE THE SAID ONUS BY BRINGIN G ANY RELEVANT MATERIAL ON RECORD. FURTHER, IT IS NOT T HE CASE OF THE REVENUE THAT THE DEBT IN QUESTION WAS IN THE CAPITA L FIELD. IN THE ABOVE CIRCUMSTANCE, IN OUR CONSIDERED VIEW, THE LOSS OF DEBT WHICH ARE INCIDENTAL TO THE BUSINESS OF THE AS SESSEE AND WHICH ARE IN THE REVENUE FIELD ARE ALLOWABLE AS DED UCTION TO THE ASSESSEE IF NOT IN SECTION 36(1)(VII) OF THE IN COME TAX ACT, 1961, THEN UNDER SECTION 28 OF THE INCOME TAX ACT, 1961. OUR ABOVE VIEW FINDS SUPPORT FROM THE DECISION OF THE H ON'BLE GUJARAT HIGH COURT IN THE CASE OF SARANGPUR COTTO N MFG. CO.LTD. VS. CIT 143 ITR 166 (GUJ.). THUS, WE DO NO T FIND ANY ERROR IN THE ORDER OF THE LD. CIT(APPEALS) IN DELET ING THE DISALLOWANCE OF RS.5,69,472/-. THUS, THIS GROUND O F REVENUES APPEAL IS PARTLY ALLOWED. 12. GROUND NO.2 OF THE REVENUES APPEAL READS AS U NDER:- ITA NO.4367/AHD/2003 THE ACIT VS. CANON CAPITAL & FINANCE LTD. ASST.YEAR 1998-99 - 19 - 1.1. THE LD. CIT(A) HAS FURTHER ERRED IN OVER LOOKING THE BELOW MENTIONED DECISION OF THE ITAT: DY. CIT VS. INDIA THERMIT CORPORATION LTD. (1996) 56 ITD 307 A DEBT WHICH IS WRITTEN OFF, CANNOT BE CLAIMED AS DEDUCTION UNDER SECTION 36(1)(VII) WITHOUT ESTABLISHING IT TO BE BAD. BEFORE THE AMENDMENT, THE ASSESSEE WAS TO PROVE THAT THE DEBT HAD BECOME BAD IN THE RELEVANT PREVIOUS YEAR. SUCH REQUIREMENT LEAD TO ENORMOUS LITIGATION AND, THEREFORE, THE AMENDMENT WAS BROUGHT SO AS TO ELIMINATE THE CONTROVERSY WITH REGARD TO THE YEAR IN WHICH THE DEBT HAD BECOME BAD. IF THE DEBT HAD BECOME BAD, IT WOULD BE ALLOWED IN THE YEAR IN WHICH IT WAS WRITTEN OFF BY THE ASSESSEE. HOWEVER, NOWHERE DID IT SAY THAT ANY DEBT COULD BE WRITTEN OFF AND CLAIMED AS BAD DEBT. HAD THAT BEEN THE INTENTION OF LEGISLATURE, IT WOULD HAVE MENTIONED ANY DEBT OR PART THEREOF WHICH IS WRITTEN OFF AS IRRECOVERABLE. 2. THE LD.CIT(A) HAS FURTHER ERRED IN DIRECTING TO AL LOW FAULT LOSSES AMOUNTING TO RS.18,89,985/-. THE APPELLANT PRAYS THAT THE ORDER OF CIT(A) ON THE ABOVE GROUNDS BE SET ASIDE AND THAT OF THE A.O. BE RESTORED. THE APPELLANT CRAVES LEAVE TO AMEND OR A LTER ANY GROUND OR ADD A NEW GROUND WHICH MAY BE NECESSARY. ITA NO.4367/AHD/2003 THE ACIT VS. CANON CAPITAL & FINANCE LTD. ASST.YEAR 1998-99 - 20 - 13. THE BRIEF FACTS OF THE CASE ARE THAT THE ASS ESSING OFFICER OBSERVED THAT THE ASSESSEE HAS CLAIMED RS.20,99,87 1/- AS FAULT LOSS IN HIS PROFIT & LOSS ACCOUNT WHICH INCLU DES LOSS OF RS.2,09,886/- AS LOSS SUFFERED BY THE ASSESSEE-COMP ANY IN ORDER TO REDUCE THE OUTSTANDING ON NSE TERMINAL ON 16/05/1997 FAILING WHICH THE TERMINAL WOULD HAVE BE EN CLOSED BY THE N.S.E. THE ASSESSING OFFICER ALLOWED THIS AMOUNT AS A BUSINESS LOSS SINCE ACCORDING TO HIM, I T HAD BEEN INCURRED WHILE CARRYING ON THE BUSINESS AS STOCK BR OKER WITH N.S.E. HOWEVER, THE ASSESSING OFFICER DISALLOWED THE BALANCE AMOUNT OF RS.18,89,985/- ON THE GROUND THA T THE ASSESSEE HAS INCURRED SUCH LOSSES NOT ON NSE (NATIO NAL STOCK EXCHANGE) BUT ON ASE (AHMEDABAD STOCK EXCHANGE) SETTLEMENT NOS.11 TO 18 IN THE FINANCIAL YEAR1997-9 8. THE ASSESSING OFFICER FURTHER OBSERVED THAT THIS TRADIN G HAS BEEN CARRIED OUT BY THE ASSESSEE IN ITS OWN ACCOUNT AND, THEREFORE, HE DISALLOWED THE SAME ON THE GROUND THAT IT IS CLE ARLY ITA NO.4367/AHD/2003 THE ACIT VS. CANON CAPITAL & FINANCE LTD. ASST.YEAR 1998-99 - 21 - SPECULATIVE IN NATURE. THE ASSESSEE SUBMITTED D ETAILS BEFORE THE ASSESSING OFFICER AND PLEADED THAT IT IS NOT SP ECULATIVE LOSS, BUT IS A LOSS ON ACCOUNT OF FAULT LOSS SUFFER ED WITH NSE TERMINAL AND WHEN THE TRANSACTION WAS SHIFTED TO AS E TERMINAL, THE DIFFERENTIAL AMOUNT HAS RESULTED INTO LOSS. THIS ARGUMENT DID NOT FIND FAVOURS WITH THE ASSESSING OF FICER AND HE DISALLOWED THE LOS AS SPECULATION LOSS BUT ALLOW ED THE SAME TO BE CARRIED FORWARD SEPARATELY. 14. IN APPEAL BEFORE THE LD. CIT(APPEALS), THE ASSE SSEE VEHEMENTLY ARGUED AND SUBMITTED THAT THE ASSESSING OFFICER HAS NOT CORRECTLY APPRECIATED THE CORRECT FACTS AND CLAIM OF THE GENUINE BUSINESS LOSS. IT WAS SUBMITTED THAT I T IS IMPORTANT TO APPRECIATE THE NATURE OF SUCH FAULT LOSSES. TH E ASSESSEE- COMPANY IS A RECOGNIZED AND REGISTERED BROKER IN N SE AS WELL AS ASE. THE TRANSACTIONS OF NSE ARE DONE ON MONIT OR AND LIMIT, I.E. VOLUME OF THE TRANSACTIONS THAT CAN BE DONE BY THE ASSESSEE IS DECIDED BY NSE AS PER ITS NORMS. SUC H LIMIT IS ON ITA NO.4367/AHD/2003 THE ACIT VS. CANON CAPITAL & FINANCE LTD. ASST.YEAR 1998-99 - 22 - DAILY BASIS. SUCH LIMIT IS FIXED ON THE BASIS OF EACH BROKER, VOLUME TRADED/TRANSACTED, SECURITY DEPOSIT GIVEN, P ART PERFORMANCE & REGULARITY AND NUMBER OF SUCH OTHER FACTORS. THEREFORE, THE ASSESSEE CANNOT EXCEED A CERTAIN VO LUME OF THE TRANSACTIONS DURING THE DAY. IF IT EXCEEDS, N SE WOULD IMMEDIATELY ISSUE WARNING TO SHUT-DOWN THE MONITOR / TERMINAL BY WHICH NO FURTHER TRANSACTIONS CAN BE DONE ON THE SAME DAY. IT MAY SO HAPPEN THAT DURING A DAY VARIOUS TRANSACTIONS OF PURCHASES AND SALES ARE EFFECTED BY THE ASSESSEE THROUGH THE TERMINAL. IF THE LIMIT EXCEE DS THE PRESCRIBED LIMIT WARNING WOULD COME AND THE ASSESSE E IS REQUIRED TO SETTLE OR SQUARE OFF THE TRANSACTION. BY DOING THIS, THE LIMIT WOULD GO DOWN AND THE ASSESSEE WOULD CONT INUE TO OPERATE THE TRANSACTIONS. WHILE SETTLING DOWN SU CH TRANSACTIONS, SAY 10000 RELIANCE SHARES ARE PURCHAS ED BY THE LAST CUSTOMER IN THE EVENING OF A PARTICULAR DAY SA Y AT RS.300/- PER SHARE, THE VOLUME WOULD BE RS.30 LAKHS . IF THE LIMIT DOES NOT PERMIT MORE THAN RS.15 LAKHS, THEN T HE ASSESSEE ITA NO.4367/AHD/2003 THE ACIT VS. CANON CAPITAL & FINANCE LTD. ASST.YEAR 1998-99 - 23 - WOULD BE COMPELLED TO SELL/TRANSFER 3000 RELIANCE S HARE LIMIT AT THE THEN PREVAILING PRICE ON THE TERMINAL. IF T HE PRICE IN THE TERMINAL AT THAT TIME SAY IS RS.290/-, THEN THE ASS ESSEE WOULD SUFFER LOSS OF 10 X 5000 RELIANCE SHARE = RS.50,000 /-. DURING NUMBER OF OCCASIONS FROM 01/04/1997 TO 27/05/1997 A SSESSEE SUFFERED SUCH LOSSES ON NSE TERMINAL TO THE TUNE OF RS.2,09,866/-. THIS LOSS BEING GENUINE BUSINESS LO SS, THE ASSESSING OFFICER ALLOWED THE SAME. 15. HOWEVER, THE ASSESSING OFFICER HAS NOT ALLOWED IDENTICAL LOSS SUFFERED BY THE ASSESSEE BY WAY OF TRANSFERRIN G SUCH SETTLEMENT TO ASE. TO EXPLAIN, SAY, ON THE SAME IL LUSTRATION ABOVE, THE ASSESSEE-COMPANY INSTEAD OF SQUARING OFF 5000 RELIANCE SHARES ON THE DAY, TRANSFERRED 5000 RELIAN CE SHARES OF THE CUSTOMER TO AHMEDABAD STOCK EXCHANGE TRANSA CTION AT RS.299/- PER SHARE. AFTER TRANSFERRING WITH AS E, ON THE DATE OF SETTLEMENT WHEN THE TRANSACTIONS ARE SQUARED UP AT THE PREVAILING PRICE, THE CONSEQUENTIAL LOSS SUFFERED O N ACCOUNT ITA NO.4367/AHD/2003 THE ACIT VS. CANON CAPITAL & FINANCE LTD. ASST.YEAR 1998-99 - 24 - OF TRANSFER FROM NSE TO ASE IS ON THE PART AND RES PONSIBILITY OF THE APPELLANT COMPANY. THIS IS BECAUSE SO FAR AS THE CUSTOMER IS CONCERNED HIS TRANSACTION IN ASSESSEES BOOK WOULD CONTINUE AT AGREED RATE. BUT BECAUSE OF THE LIMIT PRESCRIBED BY NSE THE ASSESSEE-COMPANY WOULD CONTIN UE THE OUTSTANDING POSITION WITHOUT ACTUALLY SELLING WITH A VIEW TO SEE THAT EVEN IN ASE ON THE SETTLEMENT DAY PRICE WOULD NOT FALL OR REDUCE. BUT IF IT IS ACTUALLY REDUCED, THEN THE L OSS SUFFERED IS OF THE ASSESSEE. THE ASSESSEE-COMPANY HAS TO SQUAR E UP THE TRANSACTION AS PER INSTRUCTION OF THE CLIENT AT THE VERY DAY ON WHICH HE WANTS TO SETTLE THE TRANSACTION. BUT SO F AR AS THE ASSESSEE IS CONCERNED, HE HAS TO BEAR THE LOSS OR E NJOY THE PROFIT, IF PRICE INCREASE AT HIS ACCOUNT. SUCH CON SEQUENTIAL LOSS SUFFERED ON EACH TRANSACTION BECAUSE OF PERFOR CE I.E. BY RULES AND REGULATIONS OF NSE BY WHICH THE ASSESSEE IS BOUND TO FOLLOW, THE LOSS SUFFERED IS A BUSINESS LOSS. THIS IS TO BE SEEN FROM BUSINESS PRUDENCE AND BUSINESS EXPEDIENCY POIN T ALSO. IF THE ASSESSEE-COMPANY DOES NOT DO SO THEN OUT OF 10000 ITA NO.4367/AHD/2003 THE ACIT VS. CANON CAPITAL & FINANCE LTD. ASST.YEAR 1998-99 - 25 - RELIANCE SHARE TRANSACTION 5000 SHARE TRANSACTION H E HAS TO DENY OR REVERT BACK TO THE CLIENT. THIS CANNOT BE DONE IN NORMAL COURSE OF BUSINESS. THEREFORE, TO DO AND CO NTINUE THE BUSINESS THE ASSESSEE WAS FORCED/DUTY BOUND TO TRAN SFER THE TRANSACTIONS FROM NSE AND ASE AND CONSEQUENTLY SUFF ERED LOSSES. IT MAY HAPPEN IN SOME CASES WHEN THE ASSES SEE MAY HAVE EARNED PROFIT AND THIS WAS SO IN FACT IN EARLI ER YEAR AND THEREFORE, QUESTION OF ITS DISALLOWANCE DOES NOT AR ISE IN THE YEAR 1997-98. COPY OF THE ACCOUNT OF TOTAL LOSS S UFFERED ON THIS ACCOUNT, LOSS ALLOWED BY THE ASSESSING OFFICER , SAME NATURE WITH NSE TERMINAL OF RS.2,09,886/- AND CORRESPONDENCES FROM AND TO THE NSE ARE FILED FOR A PARTICULAR SETTLEMENT WITH FULL DETAILS. 16. IN APPEAL, THE LD. CIT(APPEALS) DIRECTED THE AS SESSING OFFICER TO ALLOW THE FAULT LOSSES OF RS.18,89,985/- , BY OBSERVING AS UNDER:- ITA NO.4367/AHD/2003 THE ACIT VS. CANON CAPITAL & FINANCE LTD. ASST.YEAR 1998-99 - 26 - 7. I HAVE CAREFULLY GONE THROUGH THE ASSESSMENT ORDER, WRITTEN SUBMISSION MADE BY THE ASSESSEE AND VARIOUS PAPERS FILED BY THE A.R. FROM TIME TO TIME. I HAVE ALSO EXAMINED THE LETTERS OF NATIONAL STOCK EXCHANG E, DETAILS FILED OF SETTLEMENT-WISE INCOME AND LOSSES AND HAVE ALSO NOTED THAT UNDER THE SAME ACCOUNT IN IMMEDIATELY PREVIOUS YEAR 1997-98 THE ASSESSEE HAS SHOWN A PROFIT, WHICH HAS BEEN TAXED AS BUSINESS INCOME AND NOT AS A SPECULATION INCOME SEPARATELY. NOTWITHSTANDING THIS, THE POINT THAT IS TO BE DECID ED IS WHETHER THE ASSESSEE HAD PURCHASED AND SOLD SECURIT IES WITHOUT DELIVERY OR MADE SOME SPECULATION ACTIVITY ON ITS ACCOUNT AND THEREBY THE RESULTANT LOSS SUFFERED IN VARIOUS CASES AS SPECULATION LOSS. 8. THE ASSESSEE HAS ALSO SUFFERED A SEPARATE SHARE TRADING LOSS OF RS.27,33,299/-, WHICH IS DISALLOWED BY THE ASSESSING OFFICER AND IS SEPARATELY CHALLENGED IN T HIS APPEAL BY THE ASSESSEE. BUT SO FAR AS THIS LOSS IS CONCERNED, THE ASSESSEE HAS CLAIMED THE SAME AS A BUSINESS LOSS ON THE GROUND THAT IT IS A FAULT ON THIS PARTY WHILE ACCEPTING SAUDA I.E. ORDER FROM THE CLI ENT AND THEREFORE, THE SAME IS IN NORMAL COURSE OF BUSI NESS. I HAVE EXAMINED ALL THEE DETAILS AND SUBMISSIONS FILE D BY THE ASSESSEE IN DETAIL. THE ARGUMENTS AND DETAILS FILED ITA NO.4367/AHD/2003 THE ACIT VS. CANON CAPITAL & FINANCE LTD. ASST.YEAR 1998-99 - 27 - ARE CONVINCING AND GO TO PROVE THAT THE ASSESSEE HA S NOT DONE ANY SPECULATION ACTIVITY. THE TRANSACTION OF SHARES OF RELIANCE INDUSTRIES LTD. AND TISCO LTD., WHICH WAS MAXIMUM PURCHASED AND SOLD BY THE CLIENTS WITH THE ASSESSEE COMPANY WERE THE SHARES, WHICH WERE ACCEPTED BY THE EMPLOYEES OF THE COMPANY ON NSE TERMINAL AT A PARTICULAR PRICE. ONCE HAVING CONFIR MED THE PURCHASE OR SALE TRANSACTION WITH THE CLIENT AT A PARTICULAR PRICE IF IT CANNOT BE TRANSACTED THROUGH THE TERMINAL OF NSE, THE ASSESSEE-COMPANY HAD ON OPTION EITHER TO REFUSE THE CLIENTS ABOVE TRANSACTION AT THE AGREED PRICE OR TO TRANSFER THE SAME TO ASE. THE R EFUSAL OF TRANSACTION WITH CLIENT CAN LEAD TO NEGATIVE EFF ECT BY WAY OF DISREPUTE WITH THE CLIENT AND ALSO A PROBABL E CHANCE OF LOSING THE CLIENTS. THEREFORE, AS A PRUD ENT BUSINESSMAN THE AGREED TRANSACTION WAS COMPLETED WITH AHMEDABAD STOCK EXCHANGE TERMINAL WITH WHICH THE ASSESSEE-COMPANY IS ALSO A MEMBER. THE PRICE W ITH NSE AND ASE ARE NORMALLY DIFFERENT AND THEREFORE, S UCH DIFFERENCE IN PRICE HAD BEEN SUFFERED BY THE ASSESS EE. THERE ARE CASES WHERE, WHEN THE PRICE OF ASE IS HIG HER, THE TRANSACTION HAS RESULTED IN INCOME ALSO AND THE SAME HAS BEEN SO SHOWN AS INCOME BY THE ASSESSEE. IN VIEW OF THIS, I AM CONVINCED THAT THE FAULT LOSS SU FFERED ITA NO.4367/AHD/2003 THE ACIT VS. CANON CAPITAL & FINANCE LTD. ASST.YEAR 1998-99 - 28 - BY THE ASSESSEE OF RS.18,89,985/- IS IN NORMAL COUR SE OF BUSINESS FOR DOING AND RUNNING THE BUSINESS AND, THEREFORE, THE SAME IS ALLOWABLE AS BUSINESS EXPEND ITURE. THE A.O. IS DIRECTED TO ALLOW THE SAID LOSS OF RS.18,89,985/-. 17. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE ORDERS OF THE LOWER AUTHORITIES AND THE MATERIALS A VAILABLE ON RECORD. IN THE INSTANT CASE, THE ASSESSEE WHO IS ENGAGED IN THE BUSINESS OF SHARE BROKING HAS CLAIMED RS.18,89, 985/- AS FAULT LOSS. THE ASSESSEE IS A MEMBER OF NATIONAL STOCK EXCHANGE (NSE) AS WELL AS AHMEDABAD STOCK EXCHANGE (ASE). THE ASSESSEE EXPLAINED BEFORE THE ASSESSIN G OFFICER THAT IN RESPECT OF VOLUME OF TRANSACTIONS, SOME LIM IT HAS BEEN FIXED BY THE NSE. THE ASSESSEE OPERATES THE TERMIN AL IN HIS OFFICE AS WELL AS TERMINALS PLACED AT THE OFFICE OF SUB-BROKERS. THE ASSESSEE EXPLAINED THAT BECAUSE OF TRADING FROM VARIOUS TERMINALS, IT IS NOT ALWAYS POSSIBLE TO KEEP TRACK OF THE VOLUME OF TRANSACTIONS ENTERED INTO. AT TIMES, THE VOLUM E OF BUSINESS ITA NO.4367/AHD/2003 THE ACIT VS. CANON CAPITAL & FINANCE LTD. ASST.YEAR 1998-99 - 29 - EXCEEDS THE LIMIT FIXED BY NSE, THEN THE ASSESSEE I S REQUIRED TO SQUARE UP A PORTION OF OUTSTANDING ENTRIES TO COME WITHIN THE LIMIT AS PER THE WARNING DISPLAYED BY THE NSE. IN SUCH CIRCUMSTANCES, AS CONTRACTS ARE ALREADY CONFIRMED T O THE CLIENT, SO WHATEVER TRANSACTION ARE REQUIRED TO BE REVERSED ARE AGAIN CARRIED OUT AT ASE TO FULFILL THE COMMITM ENT GIVEN TO THE CLIENT AND IN THIS PROCESS, ASSESSEE SOMETIMES SUFFERS LOSS AND SOMETIMES ALSO GAIN. THE LOSS AND GAIN SO SUFF ERED ARE DISCLOSED UNDER THE HEAD FAULT LOSS. ACCORDING TO THE ASSESSEE, SUCH LOSSES ARE INCIDENTAL TO THE TRADE A ND, THEREFORE, ALLOWABLE. ACCORDING TO THE ASSESSING O FFICER, THE TRANSACTIONS SO ENTERED INTO BY THE ASSESSEE ARE IN THE NATURE OF SPECULATIVE TRANSACTIONS WHICH ARE SQUARED UP O THERWISE THAN BY ACTUAL DELIVERY AND, THEREFORE, NOT ALLOWAB LE AS DEDUCTION FROM NORMAL BUSINESS INCOME. IN THIS VI EW OF THE MATTER, THE ASSESSING OFFICER DISALLOWED DEDUCTION FOR RS.18,89,985/-. THE LD. CIT(APPEALS) FOR THE REAS ONS QUOTED ABOVE, DELETED THE DISALLOWANCE AND TREATED THE LOS S AS ITA NO.4367/AHD/2003 THE ACIT VS. CANON CAPITAL & FINANCE LTD. ASST.YEAR 1998-99 - 30 - INCIDENTAL TO THE NORMAL BUSINESS OF THE ASSESSEE. WE FIND THAT THE EXPLANATION OF THE ASSESSEE WAS NOT FOUND TO BE NON-GENUINE BY THE REVENUE. THE ONLY CONTENTION OF THE REVENUE IS THAT THE TRANSACTION IN WHICH THE LOSS I S SUFFERED BY THE ASSESSEE ARE SETTLED OTHERWISE THAN BY ACTUAL D ELIVERY AND, THEREFORE, THE LOSS IS SPECULATIVE IN NATURE A ND, THEREFORE, CANNOT BE ALLOWED AS SET OFF AGAINST NORMAL BUSINE SS INCOME. WE DO NOT FIND ANY FORCE IN THE ABOVE ARGUM ENT OF THE REVENUE. TO ELABORATE IN THE FACTS OF THE INSTA NT CASE, WE TAKE HELP OF AN EXAMPLE. SUPPOSE ASSESSEE PURCHASED 500 SHARES OF RIL ON BEHALF OF CLIENT A AND LATER ON DURING THE DAY NSE INFORMS THE ASSESSEE THAT ITS VOLUME OF TRA NSACTIONS HAS EXCEEDED THE LIMIT AND THE ASSESSEE IS REQUIRED TO SQUARE UP A PART OF THE OUTSTANDING TRANSACTIONS. DUE TO T HE ABOVE SITUATION THE ASSESSEE IS REQUIRED TO SELL 500 SHAR ES OF RIL. LET US ASSUME THAT THE SHARES WERE PURCHASED @ RS.100/- P ER SHARE ON BEHALF OF THE CLIENT. LATER ON THE ASSESSEE SELL S THESE SHARES @ RS.99/- PER SHARE. THE ASSESSEE TO FULFILL ITS CO MMITMENT TO ITA NO.4367/AHD/2003 THE ACIT VS. CANON CAPITAL & FINANCE LTD. ASST.YEAR 1998-99 - 31 - THE CLIENT A PURCHASES SAMR NUMBER OF SHARES FROM ASE. IN THE ABOVE FACTS THE ASSESSEE BY MERELY MAKING PART OF TRANSACTION IN NSE DOES NOT INCUR ANY LOSS OR DOES NOT MAKE ANY PROFIT. THE LOSS INCURRED OR PROFIT IS MADE ONL Y WHEN CORRESPONDING TRANSACTION IS MADE AT ASE. IN THE GI VEN EXAMPLE IF THE ASSESSEE PURCHASES THESE SHARES AT R S.99.50 PER SHARE IN ASE ONLY AT THAT POINT OF TIME IT INCU RS LOSS @ RS.0.50 PER SHARE AND IF THE ASSESSEE PURCHASE SHAR ES AT AN AMOUNT LESS THAN RS.99/- PER SHARE THEN MAKES INCOM E. THE TRANSACTION MADE AT ASE ARE COMPLETED BY ACTUAL DEL IVERY OF SHARES. THUS EITHER THE LOSS INCURRED OR PROFIT EAR NED IN BOTH ACTUAL DELIVERY OF SHARES ARE TAKEN. THEREFORE IN OUR CONSIDERED OPINION THE ASSESSING OFFICER WAS NOT JU STIFIED IN HOLDING THAT NO DELIVERY OF SHARES ARE INVOLVED IN THE TRANSACTION WHICH RESULTED IN LOSS TO THE ASSESSEE. FURTHER, IT IS NOT IN DISPUTE THAT SUCH LOSS WAS INCIDENTAL TO THE NORMAL TRADE OF THE ASSESSEE AND THE SAME DOES NOT INVOLVE ANY VIOLATION OF LAW. IT HAS BEEN HELD IN THE CASE OF A RCH FINANCE ITA NO.4367/AHD/2003 THE ACIT VS. CANON CAPITAL & FINANCE LTD. ASST.YEAR 1998-99 - 32 - LTD VS ACIT 165 TAXMAN 188 (DELHI) (MAG) AND IN THE CASE OF MASTER CAPITAL SERVICES LTD. VS DCIT (2007) 108 TTJ (CHD) 389 THAT VIOLATION OF REGULATION OR RULES OF STOCK EXCH ANGE IN THE TRADE OF A SHARE BROKER ARE INCIDENTAL TO THEIR NAT URE OF BUSINESS AND THE SAME IS NOT AN OFFENCE. IT IS ALSO OBSERVED THAT ASSESSEE MADE INCOME IN THE SIMILAR TRANSACTIO NS ENTERED INTO IN THE IMMEDIATELY PRECEDING YEAR WHIC H WAS ACCEPTED BY THE REVENUE AS NORMAL BUSINESS PROFIT O F THE ASSESSEE. IN VIEW OF THE ABOVE IN OUR CONSIDERED OP INION LOSS SO SUFFERED BY THE ASSESSEE SHARE BROKER IS ALLOWAB LE DEDUCTION FROM THE NORMAL BUSINESS INCOME. WE THERE FORE DO NOT FIND ANY GOOD REASON TO INTERFERE WITH THE ORDE R OF THE LD. CIT(APPEALS) WHICH IS CONFIRMED AND THE GROUND OF A PPEAL OF THE REVENUE IS DISMISSED. 18. IN THE RESULT, THE APPEAL OF THE REVENUE IS PARTLY ALLOWED. ITA NO.4367/AHD/2003 THE ACIT VS. CANON CAPITAL & FINANCE LTD. ASST.YEAR 1998-99 - 33 - ORDER SIGNED, DATED AND PRONOUNCED IN THE COURT ON 31 ST JULY,2009. SD/- SD/- ( R.V. EASWAR ) ( N.S. SAINI ) VICE PRESIDENT ACCO UNTANT MEMBER AHMEDABAD; DATED 31/07/2009 T.C. NAIR COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT. 2. THE RES PONDENT 3. THE CIT CONCERNED. 4. THE LD. CIT( APPEALS)-VII, AHMEDABAD 5. THE DR, AHMEDABAD BENCH.6. THE GUARD FILE. BY ORDER, //TRUE COPY// (DY./ASSTT.REGISTRAR), ITAT, AHMEDABAD FIT FOR PUBLICATION SD/- SD/- ( R.V. EASWAR ) ( N.S. SAINI ) VICE PRESIDENT ACCO UNTANT MEMBER