M/S. ENAM SECURITIES PVT. LTD, MUMBAI V. THE CIT (A)-IV, MUMBAI

ITA 4425/MUM/2007

• Counselvise Citation: 442519914 RSA 2007
• Duration Of Justice: 3 year(s) 11 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-05-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: J
• Next Hearing Date: 11-05-2011
• Assessment Year: 2004-2005
• Appeal Filed On: 08-06-2007
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: RAJNIKANT CHANIYARI
• Assessee Lawyers: S K SINGH
• Keywords: Capital asset; Business income; Business expenditure; Transactions in derivatives; Earning of tax free income; Cost of acquisition; Speculation loss; Bad and doubtful debts
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH J, MUMBAI BEFORE SHRI N.V.VASUDEVAN(J.M) & SHRI J.SUDHAKAR R EDDY (A.M) ITA NO.4425/MUM/07(A.Y. 2004-05) M/S. ENAM SECURITIES PVT. LTD., 24, BD RAJBAHADUR COMPOUND, 1 ST FLOOR, AMBALAL DOSHI MARG, MUMBAI 400001 PAN:AAACE 5146N (APPELLANT) VS. THE DCIT 4(1), MUMBAI. (RESPONDENT) ITA NO.4882/MUM/07(A.Y. 2004-05) THE DCIT 4(1), MUMBAI. (APPELLANT) VS. M/S. ENAM SECURITIES PVT. LTD., 24, BD RAJBAHADUR COMPOUND, 1 ST FLOOR, AMBALAL DOSHI MARG, MUMBAI 400001 PAN:AAACE 5146N (RESPONDENT) ASSESSEE BY : SHRI RAJNIKANT CHANIYARI ASSESSEE BY : SHRI S.K.SINGH ORDER PER N.V.VASUDEVAN, J.M, ITA NO.4425/M/07 IS AN APPEAL BY THE ASSESSEE WHIL E ITA NO.4882/M/07 IS AN APPEAL BY THE REVENUE. BOTH THE SE APPEALS ARE DIRECTED AGAINST THE ORDER DATED 23/4/2007 OF CIT(A) IV, MUM BAI RELATING TO ASSESSMENT YEAR 2004-05. FIRST WE SHALL TAKE UP FO R CONSIDERATION ASSESSEES APPEAL. GROUND NO.1 RAISED BY THE ASSES SEE READS AS FOLLOWS: ITA NO.4425&4882/MUM/2007(A.Y. 2004-05) 2 1(A) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED ASST. COMMISSIONER OF INCOME TAX (HEREINAF TER REFERRED TO AS ACIT) HAS ERRED IN TREATING SHARE TRADING LOSS OF R S. 30,64,092/- AS SPECULATION LOSS AND LEARNED COMMISSIONER OF INCOME -TAX (APPEALS)(HEREINAFTER REFERRED TO AS CIT(A)) HAS ER RED IN CONFIRMING THE ACTION OF THE LEARNED ACIT. THE LEARNED ACIT BE DI RECTED TO TREAT SHARE TRADING LOSS OF RS. 30,64,092/- AS BUSINESS LOSS AN D THE SAME BE ALLOWED TO BE SET OFF AGAINST BUSINESS INCOME OF TH E APPELLANT AND REDUCE THE TOTAL INCOME ACCORDINGLY. (B) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LEARNED ACIT HAS ERRED IN DISALLOWING THE EXPENSES OF RS. 12,39,336/- TREATING THE SAME AS EXPENSES ATTRIBUTABLE TO SPECU LATION BUSINESS AND CIT(A) HAS ERRED IN CONFIRMING THE ACTION OF TH E LD. ACIT. THE LD. ACIT BE DIRECTED NOT TO TREAT RS. 12,39,336/- AS EX PENSES ATTRIBUTABLE TO THE SPECULATION BUSINESS AND ALLOW RS. 12,39,336 /- AS BUSINESS EXPENSES AND REDUCE THE TOTAL INCOME ACCORDINGLY. 2. THE ASSESSEE IS A COMPANY ENGAGED IN THE BUSINES S OF SHARE BROKING AND INVESTMENT IN SECURITIES. THE ASSESSEE CLAIME D DEDUCTION FOR NET LOSS ON ACCOUNT OF SHARES WHICH WERE RECEIVED ON ACCOUNT OF DEALING ERRORS, OBJECTIONS AND ON DEVOLVED STOCK OF RS. 30,64,092/- . THE AO DISALLOWED THE LOSS TREATING THE SAME AS SPECULATION LOSS. THE AO CONSIDERED THE LOSS OF RS. 30,64,092/- AS SPECULATION LOSS U/S. 73 OF THE INCO ME TAX ACT, 1961 AND ALLOWED THE SAME TO BE SET OFF AGAINST THE FUTURE S PECULATION PROFITS. THE LOSS OF RS. 30,64,092/- WAS ARRIVED AT AS UNDER: PARTICULARS AMOUNT (RS .) LOSS FROM F&O TRANSACTIONS (64,308) LOSS ON ACCOUNT OF DEALING ERRORS, AND OBJECTIONS (3,451,075) PROFIT FROM DEVOLVED SHARES 451,292 NET LOSS (3,064,092) 3. BEFORE CIT(A), THE ASSESSEE SUBMITTED THAT THE A SSESSEE WAS A SHARE BROKER AND IN ITS CAPACITY AS A SHARE BROKER IT BUY S AND SELLS SHARES ON BEHALF OF THE CLIENTS. IT DID NOT TRADE IN SHARES ON ITS OWN AND THE AOS CONTENTION THAT THE ASSESSEE ACTED IN TWO DIFFERENT AND DISTINCT ROLES, ONE AS ITA NO.4425&4882/MUM/2007(A.Y. 2004-05) 3 A SHARE BROKER AND ANOTHER AS A TRADER OF SHARES WA S NOT CORRECT. THE ASSESSEE SUBMITTED THAT IN THE COURSE OF CARRYING O UT THE BUSINESS OF SHARE BROKING, THE DEALING ERRORS DO HAPPEN FOR VARIOUS R EASONS, RESULTING IN CERTAIN SHARES WHICH ARE REQUIRED TO BE COMPULSORIL Y PURCHASED BY THE ASSESSEE AS PER STOCK EXCHANGE BYE LAWS. THE ASSES SEE CONTENDED THAT LOSS INCURRED ON PURCHASE AND SALE OF SHARES WAS NO T ON ACCOUNT OF BUSINESS ACTIVITY OF PURCHASE AND SALE OF SHARES WHICH IS A PRE-CONDITION FOR APPLICATION OF EXPLANATION TO SECTION 73. THUS, TH E ASSESSEE IS NOT COVERED BY EXPLANATION TO SECTION 73 OF THE INCOME TAX ACT, 1961 (THE ACT). THE ASSESSEE SUBMITTED THAT FROM A BARE READING OF THE EXPLANATION, IT WOULD BE APPARENT THAT WHAT IT PRIMARILY DEALS WITH IS THE N ATURE OF BUSINESS TO BE DEEMED TO BE SPECULATION BUSINESS AND NOT THE SP ECULATION INCOME OR LOSS WHICH IS A NATURAL COROLLARY OF SUCH BUSINESS . 4. THE CIT(A) HOWEVER HELD THAT THE MAIN NATURE OF BUSINESS OF THE ASSESSEE AS PER THE MAIN OBJECTIVE CLAUSE IN THE MEMORANDUM OF ASSOCIATION IS TRADING AND BROKING IN SHARES AND STOCK AND IT HAS SHOWN LOSS ON ACCOUNT OF TRADING IN SHARES. THE PROVISIONS OF EXPLANATION T O SECTION 73 OF THE ACT ARE, THEREFORE, APPLICABLE TO ITS CASE. 5. SINCE LOSS FROM TRADING IN SHARES WAS TREATED AS SPECULATION LOSS AS COROLLARY TO THE SAME THE AO EXCLUDED THE EXPENS ES DEBITED IN THE P&L ACCOUNT WHICH WOULD HAVE BEEN INCURRED BY THE ASSES SEE FOR THE PURPOSE OF CARRYING ON THE SPECULATION BUSINESS. IN THIS REG ARD THE AO FOUND THAT THE ASSESSEE DID NOT MAINTAIN ANY SEPARATE BOOKS OF ACC OUNT OF EXPENSES RELATING TO SHARE TRADING AND OTHER BUSINESS ACTIVI TIES. SINCE NO SEPARATE ACCOUNT OF EXPENSES PERTAINING TO THE SHARE-TRADING AND OTHER BUSINESS ACTIVITIES HAVE BEEN MAINTAINED THE A.O FOUND IT DI FFICULT TO BIFURCATE THE EXPENSES ATTRIBUTABLE TO BOTH THE BUSINESS ACTIVITI ES CARRIED OUT BY THE ITA NO.4425&4882/MUM/2007(A.Y. 2004-05) 4 ASSESSEE. IN THE FITNESS OF THINGS, HE HELD IT WOU LD BE APPROPRIATE TO ALLOCATE THE EXPENSES ON THE BASIS OF THE TURNOVER OF THE VA RIOUS ACTIVITIES. TURNOVER RS. 9602.44 CRORES (INCLUDING F&O) SHARE TRADING TURNOVER RS. 103.28 CRORES THE ASSESSEE HAD CLAIMED TOTAL EXPENSES AMOUNTING T O RS. 29,05,88,777/- . OUT OF THIS THE FOLLOWING EXPENSES WERE DIRECTLY RE LATED TO THE SHARE BROKING AND UNDERWRITING / PROFESSIONAL FEES INCOME SHOWN B Y THE ASSESSEE OR HAS BEEN CONSIDERED SEPARATELY IN THE COMPUTATION OF IN COME. SR.NO. ITEM AMOUNT 1. SUB BROKERAGE UNDERWRITING COMMISSION 711971 67 2. PROFESSIONAL FEES 61372247 3. LOSS ON SALE OF LT INVESTMENT 18688616 4. LOSS ON SALE OF FIXED ASSETS 216930 5. LOSS ON SHARE TRADING TRANSACTION 3064092 6. DONATIONS 29627500 7. SUNDRY DEBIT BALANCES W/O. 195140 TOTAL 175361692 REDUCING THIS AMOUNT OF RS.175361692/-, THE NET EXP ENDITURE OF THE BUSINESS ACTIVITY OF THE ASSESSEE WORKS OUT TO RS.1 1,52,27,085/-, WHICH EXPENDITURE IS OF GENERAL NATURE AND CAN BE ATTRIBU TED TO THE ENTIRE BUSINESS ACTIVITY OF THE ASSESSEE. OUT OF THIS, THE EXPENDI TURE ATTRIBUTABLE TO THE SHARE TRADING ACTIVITY WAS ESTIMATED ON THE BASIS O F THE RESPECTIVE TURN OVER AS GIVEN BELOW: NET EXPENDITURE OF BUSINESS (AS DISCUSSED ABOVE.) = RS. 115227085/- EXPENSES ATTRIBUTABLE TO SHARE TRADING = NET EXPENDITURE X SHARE TRADING TURNOVER TOTAL TURN OVER = 115227085 X 103.28 9602.44 = 12,39,336/- THE EXPENSES OF RS. 12,39,336/- AS COMPUTED ABOVE, WAS HELD TO BE ATTRIBUTABLE TO THE SHARE TRADING BUSINESS ACTIVITY OF THE ASSESSEE. THIS AMOUNT WAS INCLUDED AS PART OF THE TOTAL SHARE TRAD ING LOSS TO BE TREATED AS ITA NO.4425&4882/MUM/2007(A.Y. 2004-05) 5 SPECULATIVE IN NATURE AND ADDED TO THE TOTAL INCOME DECLARED BY THE ASSESSEE. 6. ON APPEAL BY THE ASSESSEE THE CIT(A) CONFIRMED T HE ORDER OF THE AO ON THIS ADDITION ALSO. AGGRIEVED BY THE ORDER OF THE CIT(A) ON THE ABOVE TWO ASPECTS, THE ASSESSEE HAS RAISED GROUND NO.1 (A) AN D (B) BEFORE THE TRIBUNAL. 7. BEFORE US LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT SIMILAR ISSUE HAD COME FOR CONSIDERATION IN ASSESSEES OWN CASE I N A.Y 2001-02 IN ITA NO.4222/M/04. IN THAT YEAR IN RESPECT OF A SIMILA R LOSS THE ASSESSEE CONTENDED THAT EXPLANATION TO SEC. 73 EXCLUDES INVE STMENT COMPANY. HOWEVER, W.E.F. 1/4/88 THE EXCLUSION IS BASED ON T HE HEAD OF INCOME AND NOT THE ACTIVITY OF THE ASSESSEE. THEREFORE, THE ASSESSEE CONTENDED THAT THE INCOME OF THE ASSESSEE UNDER VARIOUS HEADS SHOULD B E CONSIDERED EVERY YEAR AND IF THE INCOME CONSISTS MAINLY OF INCOME UNDER T HE HEADS INTEREST ON SECURITIES, INCOME FROM HOUSE PROPERTY, CAPITAL GAINS AND INCOME FROM OTHER SOURCES THE EXPLANATION TO SEC. 73 WILL NOT BE APPLICABLE. THE TRIBUNAL ON SUCH SUBMISSIONS HELD AS FOLLOWS:- WE FIND FROM THE RECORDS THAT THE LOSS OF SHARE T RADING AMOUNTS TO RS.65,65,956/- WHEREAS THE INCOME FROM BUSINESS AMO UNTED TO RS.2,45,19,168/- AND LONG TERM CAPITAL GAINS AMOUNT ED TO RS. 18,49,85,085/-. EVEN IN THE ASSESSMENT YEAR OUT OF THE GROSS INCOME OF RS.22,15,96,539/- CAPITAL GAINS AMOUNTED TO RS. 18,49,85,085/- THE EXPLANATION TO SEC. 73 IS VERY CLEAR. THE EXPL ANATION EXCLUDES FROM ITS PURVIEW, A COMPANY WHOSE GROSS TOTAL INCOME CON SISTS MAINLY OF INCOME CHARGEABLE UNDER THE HEAD INTEREST OF SECUR ITIES, INCOME FROM HOUSE PROPERTY, CAPITAL GAINS AND INCOME F ROM OTHER SOURCES. AS POINTED OUT THE GROSS TOTAL INCOME IN THE CASE OF THE ASSESSEE OF RS.22,15,96,539/- CONSISTS MAINLY OF LO NG TERM CAPITAL GAINS RS. 18,49,85,085/-. THE EXPLANATION DOES NOT PRESCRIBE THE EXAMINATION OF THE ACTIVITIES OF THE ASSESSEE COMPA NY BUT ONLY DIRECTS THE EXAMINATION OF THE COMPOSITION OF THE GROSS TOT AL INCOME OF THE YEAR. IN THE CIRCUMSTANCES, RESPECTFULLY FOLLOWIN G THE DECISION OF THE MUMBAI TRIBUNAL IN THE CASE OF BLOOM TRADING COMPAN Y PVT. LTD. (ITA 6629/BOM/1991) AND AKIL FABRICS LTD. (ITA 8902/BOM/ 92) AS ALSO OTHER CASES REFERRED TO IN THE ORDER OF THE CIT(A) , WE UPHOLD THE ITA NO.4425&4882/MUM/2007(A.Y. 2004-05) 6 CONCLUSION OF CIT(A) THAT ON THE BASIS OF ASSESSME NT COMPLETED PROVISIONS OF 73 WILL NOT BE APPLICABLE IN AS MUCH AS GROSS TOTAL INCOME OF THE ASSESSEE CONSISTS MAINLY OF CAPITAL G AINS. WE DISMISS THE DEPARTMENTAL GROUND ON THIS ISSUE. 8. WE HAVE CONSIDERED THE SUBMISSIONS AND WE FIND T HAT NO SUCH PLEA WAS PUT FORTH IN A.Y.2001-02 HAS BEEN RAISED BY THE ASSESSEE IN THE PRESENT ASSESSMENT YEAR. WE HAVE ALSO LOOKED INTO THE COMP UTATION OF TOTAL INCOME AS DONE BY THE AO IN THE ORDER UNDER ASSESSMENT. P RIMA FACIE IT APPEARS THAT THIS PLEA IS NOT SUSTAINABLE. NEVERTHELESS WE REMAND THE ISSUE TO THE AO FOR FRESH CONSIDERATION IN THE LIGHT OF THE ORDE R OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR A.Y. 2001-02 REFERRED TO AB OVE. IN OTHER RESPECT WE CONFIRM THE ORDER OF THE CIT(A). 9. AS FAR AS THE EXPENSE ATTRIBUTABLE TO EARNING IN COME FROM SPECULATION BUSINESS IS CONCERNED, WE ARE OF THE VIEW THAT THE BASIS OF DETERMINATION OF SUCH EXPENSES AS DONE BY THE AO IS REASONABLE. WE, THEREFORE, UPHOLD THE ORDER OF THE CIT(A) ON THIS ISSUE. WE HOWEVER, MAK E IT CLEAR THAT THIS ISSUE WILL BE SUBJECT TO THE OUTCOME IN THE SET ASIDE PRO CEEDINGS BEFORE THE AO ON WHETHER THE LOSS FROM SHARE TRADING HAS TO BE TREAT ED AS SPECULATION LOSS OR BUSINESS LOSS. THUS GROUND NO.1 IS ORDERED ACCORDI NGLY. 10. GROUND NO.2 WAS NOT PRESSED AND THE SAME IS DIS MISSED AS NOT PRESSED. 11. THE GROUND NO. 3 OF THE ASSESSEE AND GROUND NO.4 OF THE REVENUE CAN BE CONVENIENTLY DECIDED TOGETHER. THESE GROUN DS READ AS UNDER: GROUND NO.3- ASSESSEES APPEAL :- ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED ACIT HAS ERRED IN DISALLOWING THE EXPENSES INCURRED IN RELATION TO EXEMPT INCOME OF RS. 9,24,117/- AND LEA RNED CIT(A) ERRED IN RESTRICTING THE DISALLOWANCE TO RS. 4,50,000/-. THE LD. ACIT BE ITA NO.4425&4882/MUM/2007(A.Y. 2004-05) 7 DIRECTED TO DELETE THE ADDITION OF RS.4,50,000/- MA DE TO THE TOTAL INCOME AND REDUCE THE TOTAL INCOME ACCORDINGLY. GROUND NO.4 REVENUES APPEAL:- ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE CIT(A) HAS ERRED IN RESTRICTING THE DISALLOWANCE ON ACCOUN T OF EXPENSES ATTRIBUTABLE TO EARNING OF DIVIDEND INCOME TO RS.4, 50,000/- AND ALLOWING THE RELIEF OF RS. 4,74,117/-. 12. THE ASSESSEE RECEIVED DIVIDEND INCOME OF RS. 1, 84,82,340/-. THE AO DISALLOWED SUM OF RS. 9,24,117/- AS EXPENDITURE INC URRED FOR EARNING THE INCOME WHICH IS NOT CHARGEABLE TO TAX INVOKING THE PROVISIONS OF SECTION 14A OF THE INCOME TAX ACT,1961 (THE ACT). 13. ON APPEAL BY THE ASSESSEE, THE CIT(A) FOUND THA T IN A.Y 2002-03 ON AN IDENTICAL ISSUE THE CIT(A) REDUCED THE DISALLOWANCE FROM 5% OF EXEMPT DIVIDEND INCOME TO 1.6% OF THE EXEMPT DIVIDEND INCO ME. THE CIT(A) ON A SIMILAR REASONING RESTRICTED THE DISALLOWANCE TO RS .4,50,000/- 14. AGGRIEVED BY THE ORDER OF THE CIT(A) REDUCING THE DISALLOWANCE MADE BY THE AO THE REVENUE HAS PREFERRED GROUND NO.4. T HE ASSESSEE IS AGGRIEVED BY THE ORDER OF THE CIT(A) SUSTAINING DISALLOWANCE TO THE EXTENT OF RS. 4.50,000/- AND HAS RAISED GROUND NO.3 BEFORE THE TR IBUNAL. 15. WE HAVE HEARD THE RIVAL SUBMISSIONS. WE ARE OF THE VIEW THAT THE DISALLOWANCE SUSTAINED BY THE CIT(A) IS REASONABLE AND WE THEREFORE, DISMISS GROUND NO.3 OF THE ASSESSEE AND GROUND NO.4 RAISED BY THE REVENUE. 16. IN THE RESULT, THE APPEAL BY THE ASSESSEE IS PA RTLY ALLOWED FOR STATISTICAL PURPOSES. ITA NO.4882/M/07: REVENUES APPEAL 17. GROUND NO.1 RAISED BY THE REVENUE READS AS FOLL OWS: ITA NO.4425&4882/MUM/2007(A.Y. 2004-05) 8 1.(A)ON THE FACTS AND CIRCUMSTANCES OF THE CASE A ND IN LAW, THE LD.CIT(A) ERRED IN DELETING THE DISALLOWANCE OF RS. 64,62,294/- MADE ON ACCOUNT OF LONG TERM CAPITAL LOSS ARRIVED AT AFT ER INDEXATION HOLDING THAT ASSESSEES CASE SQUARELY FALLS WITHIN CLAUSE ( 1) OF SEC. 2(47) OF THE ACT, AND ACCORDINGLY, REDEMPTION OF SHARES WILL FAL L WITHIN THE MEANING OF TRANSFER IN RELATION TO THE CAPITAL ASSET AND TH EREFORE, THE ASSESSEE IS ENTITLED TO CLAIM INDEXATION ON SUCH REDEMPTION OF SHARES. 18. THE ASSESSEE MADE CLAIM OF LONG TERM CAPITAL L OSS AMOUNTING TO RS. 64,62,294/- ON ACCOUNT OF REDEMPTION OF PREFERENCE SHARES OF GROUP COMPANIES DETAILS OF WHICH ARE AS UNDER: S.NO. NO. OF SHARES COMPANY DATE OF PURCHASE COST OF ACQUISITION DATE OF SALE SALE CONSIDERATION INDEXED COST CAPITAL GAIN/ LOSS AFTER INDEXATION. 1. 240000 ADVANCE COMPUFLOW PVT. LTD. 24.7.1993 2400000 24.12.2003 2400000 4554098 (-) 21 54098 2. 240000 ENAM INVESTMENTS SERVICES P. LTD. 24.7.1993 2400000 24.12.2003 2400000 4554098 (-)215 4098 3. 240000 TALMA CHEMICALS INDUSTRIES PVT. LTD. 24.7.1993 2400000 24.12.2003 2400000 4554098 9-)215 4098 19. THE AO WAS OF THE VIEW THAT REDEEMABLE PREFEREN CE SHARES WERE IN THE NATURE OF BONDS/DEBENTURES AND THEREFORE, THE BENEF IT OF COST INFLATION INDEX AS PER THE PROVISO TO SECTION 48 IS NOT AVAILABLE. THE AO ALSO HELD REDEMPTION OF PREFERENCE SHARES CANNOT BE TREATED A S TRANSFER OF THE CAPITAL ASSET AS PER SECTION 2(47) OF THE ACT. FURTHER THE AO ALSO HELD THAT THE REDEEMABLE PREFERENCE SHARES WERE ISSUE BY THE SIST ER CONCERN OF THE ASSESSEE. ACCORDING TO THE AO PREFERENCE SHARES WE RE ISSUE IN 1992 AND COULD BE REDEEMED WITHIN 10 YEARS. THE ASSESSEE C OULD HAVE REDEEMED THE SHARES AT ANY POINT OF TIME. THE ASSESSEE CHOSE TO REDEEM THE SAME IN THIS YEAR AND CLAIMED A LOSS TO SET OFF THE LOSS AGAINST OTHER TAXABLE INCOME OF THE ASSESSEE. ACCORDING TO THE AO THE ASSESSEE WAS IND ULGING IN A TAX PLANNING EXERCISE WHICH IS NOT PERMISSIBLE AS LAID DOWN BY T HE HONBLE SUPREME COURT ITA NO.4425&4882/MUM/2007(A.Y. 2004-05) 9 IN THE CASE OF MC DOWELL & CO., 154 ITR 148 (SC). FOR ALL THE ABOVE REASONS THE AO DID NOT ALLOW THE BENEFIT OF INDEXATION. 20. ON APPEAL BY THE ASSESSEE THE CIT(A) FOLLOWED T HE ORDER OF HIS PREDECESSOR IN ASSESSEES OWN CASE FOR A.Y 2002-03 WHEREBY THE BENEFIT OF INDEXATION WAS ALLOWED TO THE ASSESSEE. 21. AGGRIEVED BY THE ORDER OF THE CIT(A) THE REVENU E HAS RAISED GROUND NO.1 BEFORE THE TRIBUNAL. 22. AT THE TIME OF HEARING OF THIS APPEAL IT WAS PO INTED OUT THAT THIS ISSUE HAD COME UP FOR CONSIDERATION IN ASSESSMENT YEAR 20 02-03 IN ASSESSEES OWN CASE IN ITA NO.3474/M/06 AND THE TRIBUNAL ON ID ENTICAL ISSUE HELD AS FOLLOWS: 12. RIVAL CONTENTIONS HEARD. ON A CAREFUL CONSID ERATION OF THE FACTS AND CIRCUMSTANCES OF THE CASE AND ON A PERUSAL OF P APERS ON RECORD AND THE ORDER OF THE AUTHORITIES BELOW AS WELL AS T HE CASE LAWS CITED WE HOLD AS FOLLOWS. 12.1 THE GENUINENESS AND CREDIBILITY OF THE CAPITAL TRANSACTION BETWEEN THE ASSESSEE COMPANY AND M/S. ENAM FINANCE CONSULTANTS PVT. LTD. HAS NOT BEEN DISPUTED OR FOUND FAULT WITH FOR THE LAST 10 YEARS. BOTH ARE ARTIFICIAL JUDICIAL PERSONS UNDER THE COMPANIES ACT AND THE TRANSACTION IS A LEGAL TRANSACTION ENTERED INTO BETWEEN TWO LEGAL ENTITIES. THE SOLE REASON ON WHICH THE REVEN UE IS ALLEGING THAT THIS TRANSACTION IS A SHAM, IS THAT THE MANAGEMENT IS COMMON. THIS ALLEGATION IS MADE ONLY AT THE TIME OF REDEMPTION O F THESE PREFERENCE SHARES AND THAT TOO, WITHOUT ANY BASIS OR EVIDENCE. THERE IS ABSOLUTELY NO BASIS WHATSOEVER FOR THE AO TO COME T O SUCH A CONCLUSION. THE ENTIRE REASONING OF THE ASSESSING OFFICER IS BASED ON PURE SURMISES AND CONJECTURES. THUS WE UPHOLD THE F INDING OF THE CIT(A) THAT THE TRANSACTION IN QUESTION IS A GENUIN E TRANSACTION. 12.2 COMING TO THE ISSUE AS TO WHETHER THE REDEMPT ION OF PREFERENCE SHARES RESULTS IN A TRANSFER AS CONTEMPLATED IN SECTION 2(47) OF THE ACT, THE HONBLE SUPREME COURT HAS CONSIDERED THE I SSUE IN THE CASE OF KARTIKEYA SARABHAI VS. CIT (SUPRA) AS WELL AS IN THE CASE OF ANAKALI SARABHAI VS. CIT (SUPRA). RESPECTFULLY FOLLOWING T HE APEX COURT DECISION WE UPHOLD THE FINDING OF THE FIRST APPELLA TE AUTHORITY THAT ITA NO.4425&4882/MUM/2007(A.Y. 2004-05) 10 THERE IS A TRANSFER AS CONTEMPLATED IN SECTION 2 (47) OF THE ACT ON REDEMPTION OF THESE PREFERENCE SHARES. 12.3 COMING TO THE ISSUE WHETHER NON CUMULATIVE RE DEEMABLE PREFERENCE SHARES CAN BE EQUATED WITH DEBENTURES OR BOND, WE ARE OF THE CONSIDERED OPINION THAT THE REVENUE AUTHORITIES HAVE NOT PROPERLY APPRECIATED THE PROVISIONS OF THE COMPANIES ACT, 1 956. SHARE CAPITAL ISSUED IN THE FORM OF NON-CUMULATIVE REDEEMABLE PRE FERENCE SHARES CAN NEVER BE EQUATED WITH DEBENTURES OF BONDS . SE CTION 85 OF THE COMPANIES ACT ENVISAGES TWO TYPES OF CAPITAL, I.E. EQUITY SHARE CAPITAL AND PREFERENCE SHARES CAPITAL. SECTION 2912) OF TH E COMPANIES ACT 1956 DEFINES DEBENTURE. BASICALLY DEBENTURE IS A LOAN TAKEN BY A COMPANY. THE REASONING OF THE ASSESSING OFFICER IN EQUATING THE PREFERENCE SHARE CAPITAL WITH DEBENTURE IS TOTALLY FLAWED. THUS, THE GROUND ON WHICH THE ASSESSING OFFICER SEEKS TO DENY BENEFIT OF INDEXATION TO THE ASSESSEE IS BAD IN LAW. IN OUR C ONSIDERED OPINION, THE FIRST APPELLATE AUTHORITY WAS RIGHT IN HOLDING THAT THE ASSESSEE IS ENTITLED TO INDEXATION AS PROVIDED IN SECTION 48 OF THE INCOME-TAX ACT. RESPECTFULLY FOLLOWING THE DECISION OF THE TRIBUNAL RECORDED ABOVE WE UPHOLD THE ORDER OF THE CIT(A) AND DISMISS GROUND NO.1 RAI SED BY THE REVENUE. 23. GROUND NO.2 RAISED BY THE REVENUE READS AS FOLL OWS: 2. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE CIT(A) ERRED IN ALLOWING THE PENALTY OF RS. 3,36,260/- LEV IED BY STOCK EXCHANGE AND NSCCL. THE LD. CIT(A) FAILED TO APPR ECIATE THAT THE PENALTY LEVIED BY THE STOCK EXCHANGE AND NSCCL ARE FOR THE OFFENCE FOR VIOLATION OF THE LAW. 24, THE AO NOTICED THAT THE ASSESSEE HAD DEBITED A SUM OF RS. 3,36,260/- BEING PENALTY PAID TO BSE AND NSCCL. THESE PENALTI ES WERE PAID FOR LATE PAYING OR PAY OUT OR FOR NON PAYMENT OR LATE PAYMEN T OF MARGIN MONEY ETC. ACCORDING TO THE ASSESSEE THESE WERE IN THE NORMAL COURSE OF BUSINESS OF THE ASSESSEE AND DOES NOT INVOLVE ANY INFRACTION OF ANY LAW AND WAS COMPENSATORY IN NATURE AND WAS ALLOWABLE AS DEDUCTI ON. THE AO HOWEVER HELD THAT THE PAYMENTS WERE PENAL IN NATURE AND COU LD NOT BE ALLOWED AS A DEDUCTION. ITA NO.4425&4882/MUM/2007(A.Y. 2004-05) 11 25. ON APPEAL BY THE ASSESSEE THE CIT(A) DELETED TH E ADDITION MADE BY THE AO HOLDING THAT THE PAYMENT IN QUESTION WAS PURELY A COMPENSATORY PAYMENT AND NOT A PENALTY FOR INFRACTION OF LAW. 26. BEFORE US IT IS NOT IN DISPUTE THAT THIS ISSUE WAS CONSIDERED BY THE TRIBUNAL IN ASSESSEES OWN CASE IN ITA NO.4178/M/09 FOR A.Y. 2005-06, WHEREIN THE TRIBUNAL AFTER RELYING ON THE FOLLOWING DECISIONS HELD THAT THE PAYMENTS WERE IN THE REGULAR COURSE OF BUSINESS AND NOT FOR INFRACTION OF LAW. 1. GOLDCREST CAPITAL MARKET LTD. VS. ITO, 36 DTR 1 77 (MUM) 2. ITO VS. VRM SHARE BROKING PVT. LTD. 27 SOT 469 (MUM) 3. MASTER CAPITAL SERVICES LTD. VS. DCIT, 108 TTJ 389 (CHD) 4. CLASSIC SHARES & STOCK BROKING SERVICES LTD. (IT A NOS. 2324& 4258/MUM/2004) 5. ITO VS. GDB SHARE AND STOCK BROKING SERVICES LT D. 3 SOT 569 (KOL) RESPECTFULLY FOLLOWING THE AFORESAID DECISION WE U P HOLD THE ORDER OF CIT(A) AND DISMISS GROUND NO.2 RAISED BY THE REVENUE. 27. GROUND NO.3 RAISED BY THE REVENUE READS AS FOLL OWS: 3(A) ON THE FACTS AND CIRCUMSTANCES OF THE CASE AN D IN LAW, THE CIT(A) HAS ERRED IN DELETING THE ADDITION OF RS. 1,95,140/ - ON ACCOUNT OF BAD DEBTS WITHOUT APPRECIATING THE FACT THAT THERE IS N O EVIDENCE ON RECORD INDICATING THAT THE LOSS HAS CRYSTALLIZED DURING TH E YEAR. (B) ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE CIT(A) HAS ERRED IN DELETING THE ADDITION OF RS. 1,95,140/ - ON ACCOUNT OF BUSINESS LOSS WITHOUT APPRECIATING THE FACT THAT TH E ASSESSEE HAS FAILED TO BRING ON RECORD THE FACT THAT THE DEBT HAD BECOM E REALLY BAD, SO AS TO BE RE-RECOVERABLE WITHIN THE PROVISIONS OF SECTI ON 36(1)(VIII) OF THE ACT, AND ALSO HELD THAT MERELY WRITING OFF AN AMOUN T FROM THE BOOKS OF ACCOUNTS DID NOT MAKE THE SAME AS ELIGIBLE FOR DEDU CTION. ITA NO.4425&4882/MUM/2007(A.Y. 2004-05) 12 28. AT THE TIME OF HEARING THE PARTIES AGREED THAT THE TRIBUNAL CONSIDERED SIMILAR ISSUE IN ASSESSEES OWN CASE IN ITA NO.4178 /M/09 FOR A.Y 2005-06. THE TRIBUNAL SET ASIDE THE ISSUE TO THE AO OBSERVIN G AS FOLLOWS. 14. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS MADE BY BOTH THE SIDES, PERUSED THE ORDERS OF THE ASSESSING OFFICER AND THE CIT(A) AND THE PAPER BOOK FILED ON BEHALF OF THE ASSESSEE. WE FIND THAT THE ASSESSING OFFICER DISALLOWED THE CLAIM OF THE ASSE SSEE PRESUMING THE SAME AS BAD DEBT WRITTEN OFF. HOWEVER, IT IS THE CONTENTION OF THE ASSESSEE THAT THE SAME IS ON ACCOUNT OF ROUNDING UP OF SUCH INCOME AND THERE ARE BOTH POSITIVE AND NEGATIVE ITEMS AND ONLY THE NET AMOUNT HAS BEEN WRITTEN OFF WHICH IS CONSISTENTLY B EING FOLLOWED BY THE ASSESSEE COMPANY. SINCE THE ASSESSING OFFICER HAS NOT CONSIDERED THE SAME FROM THIS ANGLE AND SINCE THE ORDER OF THE CIT(A) IS ALSO VERY BRIEF AND CRYPTIC, WE, IN THE INTEREST OF JUSTICE, DEEM IT PROPER TO RESTORE THE ISSUE TO THE FILE OF THE A.O FOR FRESH ADJUDICATION OF THE ISSUE. NEEDLESS TO SAY, THE A.O SHALL GIVE DUE OPP ORTUNITY OF BEING HEARD TO THE ASSESSEE AND DECIDE THE ISSUE AS PER L AW. GROUNDS OF APPEAL NO.2 BY THE REVENUE IS ACCORDINGLY ALLOWED F OR STATISTICAL PURPOSES. 29. THE FACTS ARE IDENTICAL IN THE PRESENT ASSESSME NT YEAR AND, THEREFORE, RESPECTFULLY FOLLOWING THE ORDER OF THE TRIBUNAL RE FERRED TO ABOVE WE SET ASIDE THE ORDER OF CIT(A) AND REMAND THE ISSUE TO THE AO FOR FRESH CONSIDERATION IN THE LIGHT OF THE DIRECTIONS GIVEN BY THE TRIBUNAL R EFERRED TO ABOVE. 30. GROUND NO.4 HAS ALREADY BEEN DECIDED WHILE DECI DING THE GROUND NO.3 OF THE ASSESSEE. 31. GROUND NO.5 RAISED BY THE REVENUE READS AS FOLL OWS: 5. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE CIT(A) HAS ERRED IN DIRECTING TO REDUCE THE SUB-BROKERAGE OF RS.62,87,825/- WHEN THE ISSUE IS STILL SUBJUDICE AND NOT CONCLUSIV E. 32. THE ASSESSEE HAD SHOWN SUB-BROKERAGE PAYABLE IN ITS BOOKS OF ACCOUNT. IN ASSESSMENT YEAR 2002-03 A SUM OF RS. 6 2,87,825/-, WHICH WAS SHOWN AS LIABILITY BY THE ASSESSEE UNDER THE HEAD S UB-BROKERAGE PAYABLE ITA NO.4425&4882/MUM/2007(A.Y. 2004-05) 13 WAS TREATED AS A LIABILITY WHICH NO LONGER EXISTS A ND WAS ADDED TO THE TOTAL INCOME OF THE ASSESSEE. BEFORE A.O IN A.Y 2002-03 THE ASSESSEE HAD POINTED OUT THAT THE AMOUNT OF RS. 62,87,825/- WAS ALREADY ADDED BY THE ASSESSEE IN THE COMPUTATION OF INCOME FOR A.Y 2004-05. THIS SUBMISSION DID FIND FAVOUR OF THE AO AND THE AO IN A.Y 2002-03 MADE THE ADDITION OF RS. 62,87,825/-. IN THE PRESENT A.Y THE ASSESSEE POINT ED OUT THAT SINCE THE AFORESAID AMOUNT HAS BEEN TAXED IN A.Y 2002-03 ITS TOTAL INCOME SHOULD BE REDUCED BY THIS AMOUNT. THE AO HOWEVER FOUND THAT THE ASSESSEE HAD CONTESTED THE ADDITION MADE IN A.Y 2002-03 AND HE, THEREFORE, DID NOT ACCEPT THE PLEA OF THE ASSESSEE. IN THE PRESENT ASSESSMEN T YEAR THE ASSESSEE SUBMITTED BEFORE THE CIT(A) THAT THE ADDITION HAVIN G BEEN MADE IN 2002-03 THE AO SHOULD HAVE REDUCED THE TOTAL INCOME AS CLAI MED BY THE ASSESSEE. THE CIT(A) HELD THAT SINCE THE ADDITION HAS BEEN M ADE IN A.Y 2002-03 THE TOTAL INCOME OF THE ASSESSEE SHOULD BE REDUCED BY R S. 62,87,825/-. 33. AT THE TIME OF HEARING OF THIS APPEAL IT WAS BR OUGHT TO OUR NOTICE THAT THE ADDITION MADE BY THE AO IN A.Y 2002-03 HAS SINC E BEEN DELETED BY THE TRIBUNAL IN ITA NO.3233/M/2000. 34. IN VIEW OF THE ABOVE, THE DIRECTION OF THE CIT( A) TO REDUCE THE INCOME OF THE ASSESSEE FOR A.Y 2004-05 BY RS.62,87,825/- CANN OT BE SUSTAINED. CONSEQUENTLY THE ORDER OF THE CIT(A) ON THIS ISSUE IS REVERSED. GROUND NO.5 IS ALLOWED. 35. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES, WHILE APPEAL OF THE REVENUE IS PARTLY ALL OWED. ORDER PRONOUNCED IN THE OPEN COURT ON THE 20 TH DAY OF MAY, 2011. SD/- SD/- (J.SUDHAKAR REDDY ) (N.V.VASUDEVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATED. 20 TH MAY.2011 ITA NO.4425&4882/MUM/2007(A.Y. 2004-05) 14 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT CITY CONCERNED 4. THE CIT(A)- CONCERNED 5. THE D.RJ BENCH. (TRUE COPY) BY ORDER ASST. REGISTRAR, I TAT, MUMBAI BENCHES MUMBAI. VM. ITA NO.4425&4882/MUM/2007(A.Y. 2004-05) 15 DETAILS DATE INITIALS DESIGNATION 1 DRAFT DICTATED ON 11/5/11 SR.PS/PS 2 DRAFT PLACED BEFORE AUTHOR 12/5/11 SR.PS/PS 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER JM/AM 5. APPROVED DRAFT COMES TO THE SR.PS/PS SR.PS/PS 6. KEPT FOR PRONOUNCEMENT ON SR.PS/PS 7. FILE SENT TO THE BENCH CLERK SR.PS/PS 8 DATE ON WHICH THE FILE GOES TO THE HEAD CLERK 9 DATE OF DISPATCH OF ORDER