Devendra Exports Private Limited, CHENNAI V. ACIT, CHENNAI

ITA 450/CHNY/2011

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 61213 (ITAT-CHENNAI)
• Duration Of Justice: 1 year(s) 3 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-06-2012
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Next Hearing Date: 28-05-2012
• Assessment Year: 2005-2006
• Appeal Filed On: 08-03-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: DR YOGESH KAMAT
• Assessee Lawyers: R VIJAYARAGHAVAN
• Keywords: Transactions in derivatives; Speculation loss
• Section: 43(5)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH, CHENNAI BEFORE SHRI N.S.SAINI, ACCOUNT ANT MEMBER AND SHRI VIKAS AWASTHY, JUDICIAL MEMBER ITA NO.450/MDS/2011 (ASSESSMENT YEAR: 2005-06) DEVENDRA EXPORTS PRIVATE LTD. 35/B/2, II MAIN ROAD, AMBATTUR INDUSTRIAL ESTATE, CHENNAI-600 058. PAN:AAACD1193N VS. THE ASSISTANT COMMISSIONER OF INCOME TAX, COMPANY CIRCLE-1(4), CHENNAI-34. (APPELLANT) (RESPONDENT) APPELLANT BY : MR. R.VIJAYARAGHAVAN, ADVOCAT E RESPONDENT BY : DR. YOGE SH KAMAT, JCIT DATE OF HEARING : 28 TH MAY, 2012 DATE OF PRONOUNCEMENT : 22 ND JUNE, 2012 O R D E R PER VIKAS AWASTHY, JUDICIAL MEMBER: THE PRESENT APPEAL HAS BEEN FILED BY THE ASSESSEE IMPUGNING THE ORDER OF THE CIT(A)-III, CHENNAI DAT ED 07.12.2010. 2. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSE E IS A PRIVATE COMPANY ENGAGED IN THE BUSINESS OF MANUFACT URING AND TRADING OF AUTOMOBILE PARTS. THE ASSESSEE FILED RETURN OF INCOME RELEVANT TO THE ASSESSMENT YEAR 2005-06 ON 30.10.2005. THE RETURN OF INCOME OF THE ASSESSEE WA S ITA NO.450/MDS/ 2011 2 PROCESSED UNDER SECTION 143(1) ON 23.05.2006. SUBSEQUENTLY, THE CASE OF THE ASSESSEE WAS SELECTED FOR SCRUTINY AND NOTICE UNDER SECTION 143(2) WAS ISSUED TO THE ASSESSEE ON 23.05.2006. THE ASSESSING OFFICER VIDE ASSESSMENT ORDER DATED 12.12.2007 MADE ADDITIONS ON THE FOLLOWING COUNTS:- I) SHORT TERM CAPITAL LOSS IN RESPECT OF SPECULATION BUSINESS (DERIVATIVE TRADING) ` 66,52,030 II) COMMISSION TO FOREIGN AGENTS ` 2,94,071 III) DISALLOWANCE U/S.14A ON DIVIDEND INCOME ` 7,832 IV) INTEREST ON DELAY OF PAYMENT OF DIVIDEND TAX ` 4,039 AGGRIEVED AGAINST THE ASSESSMENT ORDER, THE ASSESS EE FILED AN APPEAL BEFORE THE CIT(A) ASSAILING THE ORD ER PASSED BY THE ASSESSING OFFICER. NOW THE ASSESSEE IS IN SE COND APPEAL BEFORE THE TRIBUNAL CHALLENGING THE FINDINGS OF THE CIT(A). 3. THE ASSESSEE HAS ASSAILED THE ORDER OF THE CIT(A ) ON THE FOLLOWING GROUNDS:- 1. THE CIT(A) HAS ERRED IN NOT FOLLOWING THE DECISION OF THE JURISDICTIONAL TRIBUNAL IN THE CASE ITA NO.450/MDS/ 2011 3 OF PATERSON SECURITIES PVT.LTD. REPORTED IN 7 TAXMANN 129 IN HOLDING THE TRANSACTIONS IN DERIVATIVES NOT TO BE CONSIDERED AS SPECULATION LOSS AND TO BE ALLOWED AS A BUSINESS LOSS OF THE ASSESSEE. 2. THE CIT(A) HAS ERRED IN NOT GIVING THE BENEFIT OF THE CLARIFICATION U/S.43(5) OF THE AMENDED PROVISIONS W.E.F. 1.4.2006 HOLDING THAT THE DERIVATIVE TRANSACTION IS NOT A SPECULATIVE TRANSACTION, IF THE SAME IS DONE THROUGH THE STOCK EXCHANGE. 3. THE CIT(A) HAS ERRED IN CONFIRMING THE DISALLOWANCE OF ` 2,94,701/- OF THE ACCRUED COMMISSION NOT RELATING TO THE YEAR IN APPEAL, THOUGH IT IS THE ACCOUNTING PRACTICE CONSISTENTLY FOLLOWED BY THE ASSESSEE AS WELL AS SUPPORTED BY ACCOUNTING PRINCIPLES. 4. ALTERNATIVELY, THE CIT(A) SHOULD HAVE GIVEN THE CLEAR FINDING THAT THE AMOUNT SHOULD BE ALLOWED IN THE SUBSEQUENT YEAR AS AN EXPENDITURE. HENCE THE SAME IS AGAINST THE LAW AND FACTS OF THE CASE. 4. MR. R.VIJAYARAGHAVAN, COUNSEL APPEARING ON BEHAL F OF THE ASSESSEE SUBMITTED THAT GROUND NOS. 1 AND 2 AR E SQUARELY COVERED BY THE ORDER OF THE MUMBAI BENCH O F THE TRIBUNAL IN THE CASE OF GAJENDRA KUMAR T.AGARWAL VS . ITO., REPORTED AS 2011-TIOL-337-ITAT-MUM. HE SUBMITTED TH AT SPECULATION LOSS FROM DERIVATIVES CAN BE SET OFF AG AINST THE INCOME EARNED FROM DERIVATIVES AFTER AMENDMENT IN T HE ACT WITH EFFECT FROM 1.4.2006. AS REGARDS GROUNDS NO.3 & 4, HE ITA NO.450/MDS/ 2011 4 SUBMITTED THAT THE CIT(A) HAS WRONGLY CONFIRMED THE DISALLOWANCE OF THE ACCRUED COMMISSION NOT RELATING TO THE PERIOD UNDER REFERENCE. IN ORDER TO SUPPORT HIS CO NTENTIONS, HE HAS RELIED ON THE JUDGEMENT OF THE HONBLE SUPRE ME COURT OF INDIA IN THE CASE OF BHARAT EARTH MOVERS VS.CIT REPORTED AS 245 ITR 428(SC). 5. ON THE OTHER HAND, DR. YOGESH KAMAT REPRESENTING THE DEPARTMENT STRONGLY SUPPORTED THE ORDER OF THE CIT( A) AND SUBMITTED THAT THE IMPUGNED ORDER IS WELL REASONED AND DETAILED ORDER AND NO INTERFERENCE IN THE SAID ORDE R IS CALLED FOR. HE FURTHER SUBMITTED THAT A LOSS FROM TRADING IN DERIVATIVES CONSTITUTES SPECULATIVE LOSS WHICH CANN OT BE SET OFF AGAINST SHORT TERM CAPITAL GAIN. HE ALSO SUBMITTED THAT AS REGARDS COMMISSION TO OVERSEAS AGENTS IS CONCERNED, IT IS PAID AGAINST EA CH ORDER OR ON PERIODICAL INTERVALS BUT ONLY AFTER REALIZATION OF RESPECTIVE BILL AMOUNTS. THE LIABILITY OF COMMISSION HAD NOT C RYSTALLIZED ON THE AMOUNT DISALLOWED BY THE CIT(A). 6. WE HAVE HEARD THE SUBMISSIONS MADE BY THE PARTI ES AND HAVE GONE THROUGH THE CASE LAWS CITED BY THE CO UNSEL FOR ITA NO.450/MDS/ 2011 5 THE ASSESSEE. IN GAJENDRA KUMAR T.AGARWALS CASE, T HE CO- ORDINATE BENCH OF THE TRIBUNAL HAS HELD AS UNDER:- 22 . IN THE LIGHT OF THE VIEWS SO EXPRESSED BY H O N B L E JURISDICTIONAL HIGH C O U R T , WE MUST P R O C EE D O N THE BASIS THAT THE LOSSES INCURRED IN THE ASSESSMENT YEARS PRIOR T O 2006 - 07 , IN DEALING IN D E R IV A T IV E S , MUST BE HELD TO BE LOSSES OF SPECULATION B US I N E SS . TO THAT E X T E N T , THE ISSUE IS COVERED AGAINST THE ASS E SS EE . H O W E V E R , THE QUESTION WHETHER SUCH LOSSES OF DEALING I N D E R IV A T IV E S , WHICH HAVE BEEN TREATED AS LOSSES OF SPECULATION B US I N E SS , CAN BE SET OF AGAINST T H E PROFITS OF THE SAME BUSINESS ACTIVITY IN THE ASSESSMENT YEAR 2006 - 07 , DID NOT REALLY COME UP F O R ADJUDICATION BEFORE H O N B L E JURISDICTIONAL HIGH C O U R T , AND THEIR LORDSHIPS DID NOT ALSO HA V E ANY OCCASION TO EXAMINE THE SCOPE OF STATUTORY PROVISIONS REGARDING CARRY FORWARD AND SET OFF OF BUSINESS LOSSES AND THE MANNER IN WHICH H O N B L E COURTS HAVE INTERPRETED THE SA M E . IN OUR HU M B L E UND E R S T AND I N G , T H E R E F O R E , THIS DECISION CANNOT BE VIEWED AS AN AUTHORITY FOR THE PROPOSITION T HA T LOSSES INCURRED IN DEALING IN D E R IV A T IV E S , PRIOR TO THE ASSESSMENT YEAR 2006 - 07 , CANNOT BE SET OFF AGAINST THE PROFITS OF THE SAME BUSINESS IN THE ASSESSMENT YEAR 2006-07 OR LATER ASS E SS M E N T Y E A R S . T HA T ASPECT OF THE MATTER DID NOT COME UP FOR CONSIDERATION BEFORE THEIR L O R DSH I PS . S I M I L A R L Y , T H E SCOPE OF PROVISIONS FOR SET OFF AND CARRY FORWARD OF ITA NO.450/MDS/ 2011 6 LOSSES DID NOT COME UP FOR CONSIDERATION BEFORE A COORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF ACIT VS S H R EE G O P A L PUROHIT (33 SOT 1 ) . T H E COORDINATE BENCH APPARENTLY PROCEEDED ON THE ASSUMPTION THAT IF A LOSS IS CHARACTERIZED AS SPECULATION L O SS , IN ASSESSMENT PROCEEDINGS FOR THE ASSESSMENT YEAR IN WHICH LOSS WAS I N C U RR E D , AND PROFITS FROM THE SAME BUSINESS IN A SUBSEQUENT YEAR IS CHARACTERIZED AS NON-SPECULATION BUSINESS P R O F I T , THE FORMER CANNOT BE SET OFF AGAINST THE LATTER AN ASSU M P T I O N , AS WE HAVE SEEN EARLIER I N THIS D E C I S I O N , IS CONTRARY TO THE LAW LAID DOWN BY H O N B L E SUPREME COURTS IN MANMOHAN D AS S C AS E ( SUP R A ) . NONE OF THESE DECISIONS THUS DEAL WITH THE ISSUE WHICH HAS COME UP FOR OUR C O NS I D E R A T I O N . 23 . IN VIEW OF THE ABOVE D I S C USS I O NS , THOUGH SUBJECT TO CERTAIN CONDITIONS WHICH ARE NOT R E L E V AN T FOR THE PRESENT PU R P O S E S , THE ASSESSEE WAS INDEED ENTITLED TO SET OFF THE LOSS I N C U RR E D , IN T H E ASSESSMENT YEARS PRIOR TO THE ASSESSMENT YEAR 2006 - 07 , IN THE BUSINESS OF DEALING IN D E R IV A T IV E S , AGAINST THE PROFITS EARNED IN THE ASSESSMENT YEAR 2006-07 AND LATER ASSESSMENT YE A R S . X X X X X X 27 . AS A RESULT OF THE AMENDMENT IN SECTION 43(5) WITH EFFECT FROM 1 ST A P R I L 2006 , LOSSES INCURRED IN DERIVATIVE TRADING ARE HELD TO BE ELIGIBLE FOR BEING SET OFF AGAINST N O R M A L BUSINESS P R O F I T S , AS DERIVATE TRADING ITSELF IS TREATED AS A NON- SPECULATIVE B US I N E SS , AND ITA NO.450/MDS/ 2011 7 L O SS E S O F ANY NON- SPECULATIVE BUSINESSES CAN BE ADJUSTED PROFITS OF ANY NON-SPECULATIVE B US I N E SS . I R O N I C A LL Y , H O W E V E R , THIS APPARENTLY WELL- INTENDED MEASURE OF RELIEF TO THE ASSESSEE HAS RESULTED I N AN ABSURD SITUATION IN WHICH PAST LOSSES OF DERIVATIVES TRADING CANNOT BE SET OFF A G A I NS T PROFITS OF DERIVATIVES TRADING I T S E L F . WHAT WAS MEANT TO BE A SOURCE OF RELIEF HAS TURNED INTO A C AUS E OF M I S E R Y . THAT IS CLEARLY AN A B SU R D I T Y . AS TO WHAT SHOULD BE DONE IN SUCH A SI T UA T I O N , WE F I ND GUIDANCE FROM THE OBSERVATIONS MADE BY H O N B L E S UP R E M E C O U R T , IN THE CASE CIT VS H I N DU S T AN BULK C A RR I E R S LTD (259 ITR 449 ) , AS F O LL O W S : A CONSTRUCTION WHICH REDUCES THE STATUTE TO A FUTILITY HAS TO BE A V O I D E D . A S T A T U T E OR ANY ENACTING PROVISION THEREIN MUST BE SO CONSTRUED AS TO MAKE IT EFFECTIVE AN D OPERATIVE ON THE PRINCIPLE EXPRESSED IN MAXIM UT RES MAGIS VALEAT QUAM P E R E A T I.E., A LIBERAL CONSTRUCTION SHOULD BE PUT UPON WRITTEN I N S T R U M EN T S , SO AS T O UPH O L D T H E M , IF P O SS I B L E , AND CARRY INTO EFFECT THE INTENTION OF THE P A R T I E S . [ S EE B R OOM S L EG A L MAXIMS (10TH E D I T I O N ) , PAGE 361, C R A I E S ON S T A T U T ES (7TH E D I T I O N ) PAGE 95 AND MAXWELL ON S T A T U T ES (11TH E D I T I O N ) PAGE 221.] A STATUTE IS DESIGNED TO BE WORKABLE AND THE INTERPRETATION T H E R E O F BY A C O U R T SH O U L D BE TO SECURE THAT OBJECT UNLESS ITA NO.450/MDS/ 2011 8 CRUCIAL OMISSION OR CLEAR DIRECTION MAKES THAT EN D UNATTAINABLE - WHITNEY V. C O MM I SS IO N E R OF INLAND REVENUE [1926] AC 37 P. 52 R E F E RR E D TO IN CIT V. S. TEJA SINGH AIR 1959 SC 352, G U R S A H A I S A I G A L V. CIT AIR 1963 SC 1062 . THE C O U R T S WILL HAVE TO REJECT THAT CONSTRUCTION WHICH WILL D E F EA T THE P L A I N INTENTION OF THE L E G I S L A T U R E EVEN THOUGH THERE MAY BE SOME INEXACTITUDE IN T H E LANGUAGE USED - S A L M O N V. DUNCOMBE [1886] 11 AC 627 P. 634 (PC), C U R T I S V. STOVIN [ 1889 ] 22 CBD 513 R E F E RR E D TO IN S. TEJA S I N G H S CASE ( S U P R A ) . IF THE CHOICE IS BETWEEN TWO I N T E R P R E T A T I O N S , THE NARROWER OF WHICH WOULD FAIL T O ACHIEVE THE MANIFEST PURPOSE OF THE LEGISLATION WE SHOULD A V O I D . W H ENE V E R IT IS POSSIBLE TO DO SO, IT MUST BE DONE TO CONSTRUE THE PROVISIONS W H I C H APPEAR TO CONFLICT SO THAT THEY H A R MO N I S E . IT SHOULD NOT BE LIGHTLY ASSUMED T H A T PARLIAMENT HAD GIVEN WITH ONE HAND WHAT IT TOOK AWAY WITH THE O T H E R . 7. IN THE LIGHT OF THE FINDINGS OF THE CO-ORDINATE BENCH OF THE TRIBUNAL, WE ARE OF THE OPINION THAT THE ASSESS EE IS ALSO ENTITLED TO THE RELIEF AND THE LOSS SUFFERED BY THE ASSESSEE ITA NO.450/MDS/ 2011 9 DURING DERIVATIVE TRADING SHOULD BE ALLOWED AS SHOR T TERM CAPITAL LOSS AND THE SAME CAN BE SET OFF AGAINST TH E SHORT TERM CAPITAL GAIN DURING THE YEAR. 8. AS REGARDS DISALLOWANCE OF ` 2,94,701/- ON ACCOUNT OF COMMISSION PAID TO FOREIGN AGENTS IS CONCERNED, THE CASE OF THE ASSESSEE IS SQUARELY COVERED BY THE JUDGEMENT O F HONBLE SUPREME COURT OF INDIA IN THE CASE OF BHARA T EARTH MOVERS (SUPRA). THE HONBLE SUPREME COURT IN CASE OF BHARAT EARTH MOVERS HAS HELD AS UNDER:- THE LAW IS SETTLED: IF A BUSINESS LIABILITY HAS DEFINITELY ARISEN IN THE ACCOUNTING YEAR, THE DEDUCTION SHOULD BE ALLOWED ALTHOUGH THE LIABILITY MAY HAVE TO BE QUANTIFIED AND DISCHARGED AT A FUTURE DATE. WHAT SHOULD BE CERTAIN IS THE INCURRIN G OF THE LIABILITY. IT SHOULD ALSO BE CAPABLE OF BEIN G ESTIMATED WITH REASONABLE CERTAINTY THOUGH THE ACTUAL QUANTIFICATION MAY NOT BE POSSIBLE. IF THESE REQUIREMENTS ARE SATISFIED THE LIABILITY IS NOT A CONTINGENT ONE. THE LIABILITY IS IN PRAESENTI THOUG H IT WILL BE DISCHARGED AT A FUTURE DATE. IT DOES NOT MAKE ANY DIFFERENCE IF THE FUTURE DATE ON WHICH THE LIABILITY SHALL HAVE TO BE DISCHARGED IS NOT CERTAI N. ITA NO.450/MDS/ 2011 10 9. IN THE INSTANT CASE, THE LIABILITY TO PAY COMMIS SION ` 2,94,701/- HAS ARISEN BY VIRTUE OF SALES IN THE FIN ANCIAL YEAR 2004-05 RELEVANT TO THE ASSESSMENT YEAR 2005-06. TH E REALIZATION OF SALE AMOUNT IN THE NEXT FINANCIAL YE AR WILL NOT MAKE MUCH DIFFERENCE AS THE LIABILITY TO PAY COM MISSION HAD CRYSTALLIZED IN THE FINANCIAL YEAR 2004-05 ITSELF A FTER SALE. WE, THEREFORE, REVERSE THE DECISION OF THE CIT(A) ON TH IS ISSUE AND ALLOW THE GROUND RAISED BY THE ASSESSEE. 10. IN VIEW OF THE ABOVE, WE SET ASIDE THE IMPUGNED ORDER DATED 7.12.2010 PASSED BY THE CIT(A) AND ALLOW TH E APPEAL OF THE ASSESSEE. ORDER PRONOUNCED IN THE OPEN COURT ON FRIDAY, TH E 22 ND DAY OF JUNE, 2012 AT CHENNAI. SD/- SD/- ( N.S. SAINI ) ( VIKAS AWASTHY ) ACCOUNTANT MEMBER JUDICIAL MEMBER CHENNAI, DATED THE 22 ND JUNE, 2012. SOMU COPY TO: (1) APPELLANT (2) RESPONDENT (3) CIT (4) CIT(A) (5) D.R. (6) G.F .