DCIT, New Delhi V. M/s. A.R. Chadha & Co. India Pvt. Ltd., New Delhi

ITA 5210/DEL/2011

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 65564 (ITAT-DELHI)
• Duration Of Justice: 10 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-10-2012
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 09-08-2012
• Assessment Year: 2008-2009
• Appeal Filed On: 23-11-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: MRS ANUSHA KHURANADR
• Keywords: Business income; Principle of natural justice; Rule of consistency; Question of law; Speculation loss
• Section: 43(5); 12

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI A BENC H BEFORE SHRI R.K.GUPTA, JM SHRI A.N. PAHUJA, AM ITA NO.5210/DEL/2011 ASSESSMENT YEAR: 2008-09 DCIT,CIRCLE-1(1), ROOM NO- 390., CR BUILDING,I.P. ESTATE, NEW DELHI V/S. M/S A.R.CHADHA & CO. INDIA PVT. LTD. OFFICE NO-8, 1 ST FLOOR ,ATMA RAM MANSION (SCINDIA HOUSE), CONNAUGHT CIRCUS, NEW DELHI [PAN : AAACA110 8L] (APPELLANT) (RESPONDENT) ASSESSEE BY SH. RANJAN CHOPRA, AR REVENUE BY MRS. ANUSHA KHURANA,DR DATE OF HEARING 09-08-2012 DATE OF PRONOUNCEMENT 05-10-2012 O R D E R A.N.PAHUJA:- THIS APPEAL FILED ON 23.11.2011 BY THE REVENUE AGAI NST AN ORDER DATED 26.09.2011 OF THE LD. CIT(A)-IV, NEW DELHI, R AISES THE FOLLOWING GROUNDS:- 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE, THE LD. CIT(A) ERRED IN LAW AND ON FACTS IN DELETING THE ADDITION OF ` 12,06,604/- ON ACCOUNT OF COMPUTATION OF ANNUAL LETTING VALUE C OMPUTED BY AO. 2.(I) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) ERRED IN LAW AND ON FACTS IN DELETING THE ADDITION OF ` 15,48,775/- ON ACCOUNT OF EXPENDITURE NOT PERTAINING TO BUSINES S. (II) THE LD. CIT(A) HAS ERRED IN NOT APPRECIATING T HAT INDIRECT EXPENSES CANNOT BE ALLOCATED EVERY YEAR IN AN ASSUMED FIXED RATIO AS DONE BY THE ASSESSEE BUT HAVE TO BE DONE ON REASONABLY E VERY YEAR DEPENDING UPON CERTAIN BASE AND THE AO WAS JUSTIFIE D IN ADOPTING THE INCOME UNDER VARIOUS HEADS AS THE BASIS FOR ALL OCATING THE INDIRECT EXPENSES. I.T.A .NO. 5210/DEL/2011 2 3(I) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE, THE LD. CIT(A) ERRED IN LAW AND ON FACTS IN DIRECTING TO AO TO ALL OW THE SET OFF OF SPECULATION LOSS OF ` 1,27,35,432/-. (II) THE CIT(A) HAS ERRED IN NOT APPRECIATING THAT STOCK FUTURES AND OPTIONS BEING DERIVATIVES OF SHARES, HAVE TO BE TRE ATED AT PAR WITH SHARES FOR THE PURPOSE OF EXPLANATION TO SECTION 73 OF THE ACT. 4. THE APPELLANT CRAVES LEAVE FOR RESERVING THE RIG HT TO AMEND, MODIFY, ALTER, ADD OR FOREGO ANY GROUND(S) OF APPEAL AT ANY TIME BEFORE OR DURING THE HEARING OF THIS APPEAL. 2. ADVERTING FIRST TO GROUND NO.1 IN THE APPEAL, FA CTS, IN BRIEF, AS PER RELEVANT ORDERS ARE THAT RETURN DECLARING INCOME OF ` 2,13,75,904/- FILED ON 27-09-2008 BY THE ASSESSEE, OWNING HOUSE PROPERTY AND HAVING I NVESTMENT IN SHARES, AFTER BEING PROCESSED ON 29.09.2008 U/S 143(1) OF THE IN COME TAX ACT, 1961[HEREINAFTER REFERRED TO AS THE ACT],WAS SELE CTED FOR SCRUTINY WITH THE SERVICE OF A NOTICE U/S 143(2) OF THE ACT, ISSUED ON 17-08-2009. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFF ICER[AO IN SHORT] NOTICED THAT THE ASSESSEE HAD ADOPTED ALV OF ITS PROPERTY A T M BLOCK, CONNAUGHT PLACE, NEW DELHI AT ` 20,590/-. RELYING UPON HIS FINDINGS IN THE AY 1996- 97, THE AO ADOPTED RENTAL VALUE AT ` 17,32,500/-,RESULTING IN DETERMINATION OF PROPERTY INCOME OF ` 12,06,604/-. . 3. ON APPEAL, THE LD. CIT(A), FOLLOWING THE DECISIO N OF THE ITAT IN THE AY 2006-07 AND DECISION OF HIS PREDECESSOR IN THE AY 2007-08, DELETED THE ADDITION MADE BY THE AO. 4 THE REVENUE IS NOW IN APPEAL BEFORE US AGAINST THE AFORESAID FINDINGS OF THE LD. CIT(A). THE LD. DR SUPPORTED THE ORDER OF THE A O WHILE THE LD. AR ON BEHALF OF THE ASSESSEE RELIED UPON THE DECISION DATED 06-05-2 010 OF THE ITAT IN THE ASSESSEES OWN CASE FOR THE AY 2006-07 IN ITA NO. 2 0/DEL/2010 WHEREIN FOLLOWING THE DECISION OF ITAT FOR THE AYS 1998-99, 2003-04 AND 2004-05, THE ITAT DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE. I.T.A .NO. 5210/DEL/2011 3 5.. WE HAVE HEARD BOTH THE PARTIES AND GONE THROUGH THE FACTS OF THE CASE AS ALSO THE AFORESAID DECISION OF THE ITAT. WHILE ADJ UDICATING AN IDENTICAL ISSUE IN THE AY 2006-07, THE ITAT CONCLUDED AS UNDER :- 2. BEFORE US, IT WAS THE COMMON CASE OF BOTH THE PA RTIES THAT THE GROUNDS STAND COVERED BY THE ORDER OF THE TRIBU NAL IN I.T.A NOS. 4037 & 4038/D/2007 FOR ASSESSMENT YEARS 2003-04 & 2 004-05 DATED 13-03-2009. IN FACT, A MENTION HAS BEEN MADE IN TH IS REGARD IN THE GROUNDS THEMSELVES WHERE IT IS MENTIONED THAT THE R EVENUE IS CONTESTING THESE GROUNDS BEFORE THE HONBLE DELHI H IGH COURT. THE DECISION OF THE TRIBUNAL IN REGARD TO GROUND NO.1 I S CONTAINED IN PARAGRAPH 9, WHICH IS REPRODUCED BELOW:- 9. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. IT IS NOTICED THAT THE ISSUE IN THIS GROUND IS SQUARELY COVERED BY THE DECISION OF THIS TRIBUNAL IN THE ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 1998-99, WHEREIN IT HAS BEEN HELD AS FOLLOWS: HERE IN THIS CASE, THE FINDING WAS AGAINST THE REVENUE IN EARLIER YEARS AS PER ORDERS OF THE CIT(A) BUT THOSE ORDER HAVE BEE N ACCEPTED BECAUSE APPEAL IS PREFERRED BEFORE THE TRIBUNAL ON THESE GROUNDS. THEREFORE, THE REVENUE IN SUBSEQUENT YEAR CANNOT TAKE THE DIFFERENT VIEW ON THE MATTER. ON PRINCIPLE OF CONSISTENCY THE REVENUE AUTHORITIES SHOULD ADOPT THE SAME VIEW ON THE SAME MATTER IN ISSUE. THE ONLY REASON GIVEN BY THE ASSESSING OFFICER FOR MAKING THE ADDITION WAS HIS FINDING IN THE ASSESSMENT YEAR 1996- 97 WHICH HAVE BEEN SET ASIDE BY THE CIT(A) AND THE FINDINGS OF THE CIT(A) HAVE BECOME FINAL. THEREFORE, NO BASIS IS LEFT WITH THE ASSESSING OFFICER FOR MAKING THE ENHANCEMENT IN THE ALP ADOPTED BY THE ASSESSEE. WE ACCORDINGLY ARE OF THE VIEW THAT THE ORDERS OF THE AUTHORITIES BELOW CANNOT SUSTAIN UNDER LAW. WE ACCORDINGLY SET ASIDE THE ORDERS OF THE AUTHORITIES BELOW AND THE ADDITIONS ARE DELETED AND THE APPEAL FOR THE ASSESSEE IS ALLOWED. RESPECTFULLY FOLLOWING THE DECISION OF THE COORDINA TE BENCH OF THIS TRIBUNAL IN THE ASSESSEES OWN CASE FOR THE ASSESSM ENT YEAR 1998-99, THE ADDITION AS CONFIRMED BY THE CIT(A) STANDS DELETED. CONSEQUENTLY, GROUND NO-4 OF THE ASSESSEES APPEALS FOR THE ASSESSMENT Y EARS 2003-04 AND 2004- 05 STAND ALLOWED. 2.2 AS A CO-ORDINATE BENCH HAS ALREADY TAKEN A VIEW ON THESE GROUNDS AND SUCH VIEW HAS NOT BEEN REVERSED BY THE HONBLE I.T.A .NO. 5210/DEL/2011 4 JURISDICTIONAL HIGH COURT, WE THINK IT FIT TO FOLLO W THE EARLIER ORDER OF THE TRIBUNAL FOR DISPOSING OF THIS APPEAL. CONSEQU ENTLY, BOTH THE GROUNDS ARE DISMISSED. 5.1 IN THE LIGHT OF VIEW TAKEN BY THE CO-ORDINATE B ENCHES IN THE PRECEDING YEARS ON THE IDENTICAL ISSUE, ESPECIALLY WHEN THE R EVENUE HAVE NOT PLACED BEFORE US ANY MATERIAL, CONTROVERTING THE AFORESAID FINDINGS OF THE LD. CIT(A) SO AS TO ENABLE US TO TAKE A DIFFERENT VIEW IN THE MAT TER, WE ARE NOT INCLINED TO INTERFERE. THEREFORE, GROUND NO.1 IN THE APPEAL IS DISMISSED. 6. GROUND NO..2 RELATES TO DISALLOWANCE OF EXPEN SES OF ` 15,48,775/-. THE AO NOTICED THAT THE ASSESSEE REFLECTED 87% OF ITS I NCOME BY WAY OF RENTALS WHILE REMAINING 13% WAS MISCELLANEOUS INCOME, COMPRISING DIVIDEND AND CAPITAL GAINS. SINCE THE ASSESSEE HAD OFFERED RENTAL INCOM E UNDER THE HEAD INCOME FROM THE HOUSE PROPERTY, THE AO DISALLOWED 75% OF THE EXPENDITURE, AMOUNTING TO ` 57,69,977/-,RESULTING IN DISALLOWANCE OF 1 ` 5,48,775/-, THE ASSESSEE HAVING ALREADY DISALLOWED EXPENSES OF ` 42,21,202/- . 7. ON APPEAL, THE LD. CIT(A) IS ALLOWED THE CLAIM IN THE FOLLOWING TERMS:- I HAVE CAREFULLY CONSIDERED THE ASSESSMENT ORDER A ND THE SUBMISSIONS MADE BY THE LD. AR. THE AO HAS DISALLO WED 75% OF ADMINISTRATIVE EXPENSES ON ESTIMATE ON THE GROUND T HAT THE ASSESSEE HAS INCOME FROM HOUSE PROPERTY, CAPITAL GA INS AND DIVIDEND. HOWEVER, IT IS ARGUED BY THE LD. AR THAT THE APPELLANT IS ENGAGED IN THE BUSINESS OF PURCHASE AND SALE OF STO CK FUTURES AND OPTIONS (DERIVATIVES) ON NSE. THE SAID BUSINESS IS ALSO TREATED AS NON-SPECULATIVE BUSINESS IN TERMS OF SECTION 43(5)( D) OF THE ACT. THEREFORE, THE AOS CONTENTION THAT THE APPELLANT D OES NOT CARRY OUT ANY BUSINESS IS INCORRECT. OUT OF THE TOTAL EXPEND ITURE OF RS. 77,65,791/-, THE APPELLANT HAS SUO MOTO DISALLOWED A SUM OF RS. 42,21,202/- IN ITS COMPUTATION OF INCOME WHICH CONS ISTS OF 100% OF DONATION AND HOUSE TAX AND 40% OF OFFICE AND ADMINI STRATIVE EXPENSES. IT IS SUBMITTED THAT THE APPELLANT HAS C ONSISTENTLY FOLLOWED THE SYSTEM OF ALLOCATING DIRECT EXPENSES T O THE RESPECTIVE HEADS OF HOUSE PROPERTY AND BUSINESS INCOME. A S REGARDS THE INDIRECT EXPENSES, THE SAME ARE ALLOCATED IN THE RA TIO OF 2:3 (I.E 40 I.T.A .NO. 5210/DEL/2011 5 % / 60 %) TO HOUSE PROPERTY AND BUSINESS HEADS RESPECTIVELY. THE PORTION RELATING TO HOUSE PROPERTY HAS BEEN D ISALLOWED BY THE ASSESSEE ITSELF, WHILE ONLY THE PORTION PERTAINING TO BUSINESS HAS BEEN CLAIMED IN THE PROFIT & LOSS ACCOUNT. IT IS A RGUED THAT THE ABOVE METHOD OF ACCOUNTING IS BEING FOLLOWED CONSIS TENTLY BY THE ASSESSEE IN THE EARLIER YEARS AND THE SAME HAS BEEN ACCEPTED BY THE DEPARTMENT INCLUDING IN SCRUTINY ASSESSMENTS DO NE IN EARLIER YEARS. IT IS ALSO ARGUED THAT CERTAIN EXPENSES ARE REQUIRED FOR MAINTENANCE OF THE CORPORATE STRUCTURE OF THE ASSES SEE AND THE SAME CANNOT BE DISALLOWED AS SUCH. UNDER THE FACTS AND CIRCUMSTANCES AS DISCUSSED ABOVE, I FIND THAT THE I MPUGNED DISALLOWANCE OF RS. 15,48,775/- MADE BY THE AO IS N OT JUSTIFIED. THE SAME, IS, THEREFORE, DELETED. 8.. THE REVENUE IS NOW IN APPEAL BEFORE US AGAINST THE AFORESAID FINDINGS OF THE LD. CIT(A). THE LD. DR SUPPORTED THE ORDER OF T HE AO WHILE THE LD. AR ON BEHALF OF THE ASSESSEE RELIED UPON THE FINDINGS OF THE LD. CIT(A). 9. WE HAVE THE HEARD BOTH THE PARTIES AND GONE THRO UGH THE FACTS OF THE CASE. INDISPUTABLY, THE ASSESSEE CONSISTENTLY FOLL OWED THE SYSTEM OF ALLOCATING DIRECT EXPENSES TO THE RESPECTIVE HEADS VIZ. HOUSE PROPERTY AND BUSINESS INCOME WHILE INDIRECT EXPENSES WERE ALLOCATED IN TH E RATIO OF 40:60 BETWEEN HOUSE PROPERTY AND BUSINESS INCOME. SINCE THE PORT ION OF EXPENSES RELATING TO HOUSE PROPERTY INCOME HAD ALREADY BEEN DISALLOWED B Y THE ASSESSEE SUO MOTO, KEEPING IN VIEW THE PAST HISTORY AND METHOD FOLLOW ED BY THE ASSESSEE, THE LD. CIT(A) WAS OF THE OPINION THAT THE AO WAS NOT JUSTI FIED IN MAKING FURTHER DISALLOWANCE OF EXPENSES SINCE CERTAIN EXPENSES WE RE REQUIRED FOR MAINTENANCE OF THE CORPORATE STRUCTURE OF THE ASSESSEE. IN VIEW OF CONSISTENT PRACTICE FOLLOWED BY THE ASSESSEE, ESPECIALLY WHEN THE REVENUE HAVE NOT PLACED BEFORE US ANY MATERIAL ,CONTROVERTING THE AFORESAID FINDINGS OF T HE LD. CIT(A) SO AS TO ENABLE US TO TAKE DIFFERENT VIEW IN THE MATTER, WE ARE NOT IN CLINED TO INTERFERE. THEREFORE, GROUND NO.2 IN THE APPEAL IS ALSO DISMISSED. I.T.A .NO. 5210/DEL/2011 6 10. GROUND NO. 3 RELATES TO CLAIM OF SET OFF OF LOS S ` 1,27,35,432/-. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE AO NOTICED TH AT THE ASSESSEE HAD CLAIMED SPECULATION LOSS OF ` 1,27,35,432/- FROM SHARES RESULTING IN BUSINESS LO SS OF ` 1,65,46.553/-. SINCE THE LOSS WAS SPECULATIVE IN N ATURE, THE AO DISALLOWED THE CLAIM ,HOLDING THAT CLAIM SHALL BE ALLOWED ONLY IN TERMS OF PROVISIONS OF SECTION 73(1) OF THE ACT. 11. ON APPEAL, THE LD. CIT(A) ALLOWED THE CLAIM, HO LDING AS UNDER:- 8.2 I HAVE CAREFULLY CONSIDERED THE ASSESSMENT OR DER AND THE SUBMISSION MADE BY THE LD. AR. THE AO HAS DISALLOW ED SET OFF OF THE ABOVE LOSS AGAINST OTHER INCOME OF THE ASSESSEE BY TREATING IT AS A LOSS FROM SPECULATION BUSINESS U/S 73(1) OF THE ACT . IT IS ARGUED BY THE LD. AR THAT THE AO HAS MADE THE ABOVE DISALLOWA NCE WITHOUT RAISING ANY QUESTION DURING THE ASSESSMENT PROCEEDI NGS WHICH IS AGAINST THE PRINCIPLE OF NATURAL JUSTICE. IT IS FU RTHER SUBMITTED BY THE LD. AR THAT ALTHOUGH THE SAID LOSS OF RS. 1,27,35,4 32/- WAS SHOWN BY THE APPELLANT AS SPECULATION LOSS IN ITS BOOKS O F ACCOUNTS, THE SAID LOSS PERTAINS TO PURCHASE AND SALE OF STOCK FUTURES AND OPTIONS ON NSE WHICH ARE IN THE NATURE OF DERIVATIVES TRADED O N RECOGNIZED STOCK EXCHANGE AND ARE EXCLUDED FROM THE DEFINITION OF SPECULATIVE TRANSACTION IN TERMS OF SECTION 43(5)(D) OF THE AC T. IT IS FURTHER SUBMITTED THAT TO BE COVERED UNDER THE MISCHIEF OF EXPLANATION TO SECTION 73 OF THE ACT, THE APPELLANT NEEDS TO QUALI FY AS OTHER THAN A COMPANY WHOSE GROSS TOTAL INCOME CONSISTS MAINLY OF INCOME WHICH IS CHARGEABLE UNDER THE HEADS INTERESTS ON S ECURITIES, INCOME FROM HOUSE PROPERTY, CAPITAL GAINS AND INCOME FROM OTHER SOURCES, OR A COMPANY THE PRINCIPAL BUS INESS OF WHICH IS THE BUSINESS OF BANKING OR THE GRANTING OF LOANS AND ADVANCES. IT IS ARGUED THAT THE GROSS TOTAL INCOME OF THE APPELLANT COMPANY CONSISTS MAINLY OF INCOME FROM HOUSE PROPER TY AND INCOME FROM OTHER SOURCES AND AS SUCH THE APPELLANT COMPAN Y IS NOT COVERED BY THE ABOVE EXPLANATION TO SECTION 73 OF T HE ACT. WITHOUT PREJUDICE TO THE ABOVE, IT IS ARGUED THAT SPECULAT ION BUSINESS AS PER THE DEEMING PROVISION OF EXPLANATION TO SECTION 73 REFERS ONLY PURCHASE AND SALE OF SHARES, BUT IN PURCHASE AND S ALE OF STOCK FUTURES AND OPTIONS (DERIVATIVES) WHICH ARE DIFFERE NT FROM SHARES OF ANY COMPANY AND HENCE, BY THIS COUNT ALSO, THE APPE LLANT DOES NOT QUALIFY FOR DENIAL OF SET OFF U/S 73(1) OF THE ACT. THE APPELLANT HAS RELIED UPON A LARGE NUMBER OF CASE LAWS IN THIS REG ARD. I.T.A .NO. 5210/DEL/2011 7 8.3 ON CAREFUL CONSIDERATION OF THE MATTER, I FIND THAT THE CASE OF THE APPELLANT WOULD NOT BE COVERED BY THE MISCHIEF OF EXPLANATION TO SECTION 73, ON BOTH COUNTS, FIRSTLY, SINCE MAJOR PA RT OF THE INCOME OF THE APPELLANT CONSISTS OF INCOME FROM HOUSE PROPERT Y AND INCOME FROM OTHER SOURCES (AS IS EVIDENT FROM THE COMPUTAT ION OF TOTAL INCOME IN THE ASSESSMENT ORDER ITSELF), AND SECONDL Y SINCE THE APPELLANT HAS ENGAGED IN TRADING OF FUTURES AND OPT IONS WHICH IS DIFFERENT FROM TRADING IN SHARES. IT IS TO BE APPR ECIATED THAT STOCK FUTURES AND OPTIONS ARE DISTINCT AND SEPARATE FROM SHARES OF A COMPANY. THE SHARES OF A COMPANY GIVE THE SHAREHOL DER OWNERSHIP OF THE ASSETS AND LIABILITIES OF THE COMPANY AND RI GHT TO PARTICIPATE IN PROFITS OF THE COMPANY BY WAY OF DIVIDENDS. AS AGA INST THE ABOVE, THE STOCK FUTURES AND OPTIONS DO NOT CONFER ON THE HOLDER ANY OWNERSHIP OF THE COMPANYS ASSETS AND LIABILITIES O R RIGHT TO PARTICIPATE IN THE PROFITS OF THE COMPANY. THE STO CK FUTURES AND OPTIONS SIMPLY GIVE THE HOLDER THE RIGHT/OBLIGATION TO BUY/SELL THE SHARES OF A COMPANY AT A FUTURE DATE AT A PREVIOUSL Y AGREED PRICE. AS PER THE SYSTEM FOLLOWED IN INDIA FOR DERIVATIVES TRADING IN THE STOCK EXCHANGES, THE BUYER OF STOCK FUTURES/ OPTIONS SQUA RES OFF THE TRANSACTION ON THE SETTLEMENT DATE OF PRIOR TO THE SETTLEMENT DATE BY PAYING/ RECEIVING THE DIFFERENCE BETWEEN THE AGREED PRICE AND THE MARKET PRICE (SPOT PRICE) ON THE DATE OF SETTLEMENT WITHOUT HAVING TO PHYSICALLY SETTLE THE TRANSACTION BY PURCHASE AND S ELL OF SHARES. SO, THE TRADING IN DERIVATIVES BASICALLY INVOLVES CASH SETTLEMENT OF DIFFERENCE OF PRICE, AND NO PHYSICAL DELIVERY OF SH ARES AND IS ACCORDINGLY DIFFERENT FROM BUYING AND SELLING OF SH ARES. FURTHER, I FIND THAT THE EXPLANATION TO SECTION 73(1) RELATING TO T RADING IN SHARES IS A DEEMING PROVISIONS, AND AS PER RULES OF INTERPRETAT ION OF STATUTE, DEEMING PROVISIONS IS TO BE INTERPRETED STRICTLY AN D HENCE IT CANNOT BE GIVEN AN EXTENDED MEANING TO INCLUDED DERIVATIVE TR ADING. 8.3.1 I ALSO FIND THAT IN THE SIMILAR MATTER RELATI NG TO UNITS OF UTI, IT WAS HELD BY HON'BLE SUPREME COURT THAT SINCE UNITS OF UTI COULD NOT BE SAID TO BE SHARES, BUSINESS OF BUYING AND SELLIN G OF UNITS OF UTI ASSESSEE COMPANY DID NOT AMOUNT TO A SPECULATION BU SINESS FOR DENIAL OF SET OFF OF LOSS SUFFERED BY ASSESSEE COMP ANY IN SUCH BUSINESS U/S 73 OF THE ACT. THE RELEVANT PORTION O F THE ORDER OF THE HON'BLE SUPREME COURT IS EXTRACTED BELOW: A DEEMING PROVISION OF THIS NATURE, AS FOUND IN SEC TION 32(3), SHOULD BE APPLIED FOR THE PURPOSE FOR WHICH THE SAID DEEMING PROVISION IS SPECIFICALLY ENACTED, WHICH IN THE INSTANT CASE WAS CONFINED ONL Y TO DEEMING THE UTI AS A COMPANY AND THE INCOME FROM THE UNITS AS A DIVIDE ND. IF AS A MATTER OF FACT, THE LEGISLATURE HAD CONTEMPLATED MAKING THE U NIT AS ALSO A DEEMED SHARE, THEN IT WOULD HAVE STATED SO. IN THE ABSENC E OF ANY SUCH SPECIFIC DEEMING IN REGARD TO THE UNITS AS SHARES, IT WOULD BE ERRONEOUS TO EXTEND THE PROVISIONS OF SECTION 32(3) TO THE UNITS OF THE UTI FOR THE PURPOSE OF I.T.A .NO. 5210/DEL/2011 8 HOLDING THAT THE UNIT IS A SHARE. FOR THESE REASON S, THE FINDING OF THE HIGH COURT ON THIS POINT WAS TO BE UPHELD. THE ABOVE VIEW OF THE APEX COURT HAS BEEN FOLLOWED BY THE HONBLE MADRAS HIGH COURT IN THE CASE OF CIT VS. LAKSHMI MI LLS CO. LTD. (2007) 158 TAXMAN 420, WHEREIN IT WAS HELD AS UNDER : WITH RESPECT TO THE SECOND QUESTION OF LAW, VIZ., WHETHER IN THE FACTS AND CIRCUMSTANCES OF THE CASE, THE TRIBUNAL WAS RIGHT I N HOLDING THAT LOSS ON ACCOUNT OF SALE OF THE UNIT WITHIN ONE MONTH OF ITS PURCHASE IS NOT A SPECULATIVE LOSS, IT IS FAIRLY CONCEDED BY THE LEAR NED COUNSEL FOR THE REVENUE THAT THE ISSUE RAISED IN THIS QUESTION IS COVERED A GAINST THE REVENUE BY THE DECISION OF THIS COURT IN APOLLO TYRES LTD. VS. CIT [2002] 255 ITR 273 (SC), WHEREIN IT IS HELD AS UNDER.. FOLLOWING THE AFORES AID DECISION OF THE APEX COURT, WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE TRIBUNAL AND AS SUCH, WE UPHOLD THE SAME. THE SAID VIEW HAS ALSO BEEN FOLLOWED BY THE HONBLE ITAT, DELHI IN THE CASE OF MULTIPLEX TRADING & INDUSTRIAL CO. LTD. VS. ITO (2009) IN ITA NO. 863(DEL) OF 2006, WHEREIN IT WAS HELD THAT: UNITS OF MUTUAL FUNDS CANNOT BE EQUATED WITH SHARE OF THE COMPANY. HENCE, LOSS ON PURCHASE AND SALE OF UNITS OF MUTUAL FUND CANNOT BE TREATED AS LOSS FROM SPECULATION BUSINESS. 8.3.2 IN VIEW OF THE ABOVE CLEAR FACTUAL AND LEGAL POSITION, I FIND THAT THE IMPUGNED DISALLOWANCE OF SET OFF OF DERIVATIVES LOSS BY THE ASSESSING OFFICER CANNOT BE SUSTAINED EITHER IN LAW . FURTHER, AS REGARDS THE APPELLANT SHOWING IT AS SPECULATION LO SS IN ITS BOOKS OF ACCOUNT, IT IS SETTLED LAW THAT THE TAX TREATMENT O F ANY TRANSACTION IS TO BE BASED ON THE ACTUAL NATURE OF TRANSACTION AND TH E CORRESPONDING PROVISIONS OF INCOME TAX LAW AND NOT SIMPLY ON THE ACCOUNTING TREATMENT GIVEN TO IT BY THE ASSESSEE IN ITS BOOKS OF ACCOUNT. IT HAS BEEN SUBMITTED BY THE LD. AR THAT THIS ISSUE WAS AL SO NOT RAISED BY THE AO DURING THE ASSESSMENT PROCEEDINGS. UNDER TH E FACTS AND CIRCUMSTANCES AS DISCUSSED ABOVE, I DIRECT THAT THE AO TO VERIFY THE ACTUAL NATURE OF THE TRANSACTIONS UNDERTAKEN BY THE APPELLANT WHICH HAS GIVEN RISE TO THE LOSS OF RS. 1,27,35,432/- AND IF THE SAME RELATES TO PURCHASE AND SALE OF STOCK FUTURES AND OPTIONS O N RECOGNIZED STOCK EXCHANGES, THE AO WILL ALLOW SET OFF OF THE S AME FROM OTHER INCOME (EXCEPT CAPITAL GAINS AND SALARY) IN TERMS O F SECTION 71 OF THE ACT. 12. THE REVENUE IS NOW IN APPEAL BEFORE US BEFORE US AGAINST THE AFORESAID FINDINGS OF THE LD. CIT(A). THE LD. DR CONTENDED THAT LOSS IN DERIVATIVES BEING SPECULATIVE IN NATURE, COULD NOT BE ALLOWED TO BE SET OFF AGAINST OTHER INCOME. I.T.A .NO. 5210/DEL/2011 9 ON THE OTHER HAND, THE LD. AR ON BEHALF OF THE ASSE SSEE SUBMITTED THAT THE CLAIM OF THE ASSESSEE DID NOT COME WITHIN THE PURVIEW OF SPECULATION LOSS. IN THIS CONNECTION, THE LD. AR RELIED UPON DECISION IN THE CASE OF SHREE CAPITAL SERVICES LTD. VS. ASSTT. CIT (ITA NO. 1294/KOL/2008, DT. 31S T JULY, (2009) REPORTED AT (2009) 124 TTJ (KOL)(SB) 740 ,FOLLOWED IN GK ANAND BROS. BUILDWELL (P) LTD. VS. ITO,34 SOT 439(DEL.) 13.. WE HAVE HEARD BOTH THE PARTIES AND GONE THROUG H THE FACTS AS ALSO THE AFORESAID DECISIONS RELIED UPON BY THE LD. AR ON BE HALF OF THE ASSESSEE. AS IS APPARENT FROM THE AFORESAID FACTS, THE AO DISALLOWE D THE CLAIM OF SET OFF OF SPECULATION LOSS OF 1,27,35,432/- FROM SHARES AGAIN ST OTHER INCOME. APPARENTLY, THE AO DID NOT ANALYSE THE NATURE OF TRANSACTIONS A S TO WHETHER LOSS SUFFERED BY THE ASSESSEE WAS FROM SHARES OR DERIVATIVES OR TRAN SACTIONS WERE ACTUALLY OF THE NATURE MENTIONED IN SEC. 43(5) OF THE ACT NOR EXAMI NED AS TO WHETHER OR NOT TRANSACTIONS WERE ELIGIBLE TRANSACTIONS WITHIN THE MEANING OF CLAUSE (D) OF THE PROVISO TO THE SAID SECTION. ON APPEAL, THE ASSESSE E CLAIMED THAT THE SAID LOSS OF ` 1,27,35,432/- WAS SHOWN AS SPECULATION LOSS IN ITS BOOKS OF ACCOUNTS, THE LOSS BEING RELATED TO PURCHASE AND SALE OF STOCK FU TURES AND OPTIONS ON NSE, WHICH WERE IN THE NATURE OF DERIVATIVES TRADED ON R ECOGNIZED STOCK EXCHANGE AND WERE EXCLUDED FROM THE DEFINITION OF SPECULATI VE TRANSACTION IN TERMS OF SECTION 43(5)(D) OF THE ACT. THERE IS NOTHING TO SUGGEST AS TO WHETHER OR NOT TH E LD. CIT(A) ANALYSED THE NATURE OF TRANSACTIONS OR DERIVATIVES AS TO WHETHER THESE WERE FORWARDS, FUTURES, OPTIONS OR SWAP AND W HETHER INDEX DERIVATIVES NOR ANALYSED AS TO WHETHER THE TRANSACTIONS FELL WITHI N THE AMBIT OF PROVISIONS OF SEC. 43(5) OF THE ACT OR WERE ELIGIBLE TRANSACTIONS WITHIN THE MEANING OF CLAUSE (D) OF THE PROVISO TO THE SAID SECTION. THE LD. CIT (A) CONCLUDED THAT CASE OF THE ASSESSEE WOULD NOT BE COVERED BY THE MISCHIEF OF EX PLANATION TO SECTION 73, ON BOTH COUNTS, FIRSTLY, SINCE MAJOR PART OF THE INCOM E OF THE ASSESSEE CONSISTED OF INCOME FROM HOUSE PROPERTY AND INCOME FROM OTHER SO URCES AND SECONDLY SINCE THE ASSESSEE WAS ENGAGED IN TRADING OF FUTURES AND OPTIONS WHICH IS DIFFERENT FROM TRADING IN SHARES. BUT THE AO NOWHERE ANALYSE D THE NATURE OF TRANSACTIONS, I.T.A .NO. 5210/DEL/2011 10 THE ASSESSEE ITSELF HAVING TREATED THE AFORESAID L OSS AS SPECULATION LOSS IN ITS BOOKS. APPARENTLY, THE APPLICABILITY OF PROVISIONS OF SEC. 43(5) OF THE ACT OR CLAUSE (D) OF THE PROVISO TO SAID SECTION HAS NEITH ER BEEN EXAMINED BY THE AO NOR THE LD. CIT(A). HERE, WE MAY HAVE A LOOK AT THE RELEVANT PROVISIONS OF SEC. 43(5) OF THE ACT, WHICH READ AS UNDER: (5) 'SPECULATIVE TRANSACTION' MEANS A TRANSACTION I N WHICH A CONTRACT FOR THE PURCHASE OR SALE OF ANY COMMODITY, INCLUDING STOCKS AND SHARES, IS PERIODICALLY OR ULTIMATELY SE TTLED OTHERWISE THAN BY THE ACTUAL DELIVERY OR TRANSFER OF THE COMM ODITY OR SCRIPS: PROVIDED THAT FOR THE PURPOSES OF THIS CLAUSE- (A) A CONTRACT IN RESPECT OF RAW MATERIALS OR MERCHANDISE ENTERED INTO BY A PERSON IN THE COURSE OF HIS MANUFACTURING OR MERCHANTING BUSINESS TO GUARD AGAINST LOSS THROUGH FUTURE PRICE FLUCTUATIONS IN RESPECT OF HIS CONTRACTS FOR ACTUAL DELIVERY OF GOO DS MANUFACTURED BY HIM OR MERCHANDISE SOLD BY HIM; OR (B) A CONTRACT IN RESPECT OF STOCKS AND SHARES ENTE RED INTO BY A DEALER OR INVESTOR THEREIN TO GUARD AGAIN ST LOSS IN HIS HOLDINGS OF STOCKS AND SHARES THROUGH P RICE FLUCTUATIONS; OR (C) A CONTRACT ENTERED INTO BY A MEMBER OF A FORWAR D MARKET OR A STOCK EXCHANGE IN THE COURSE OF ANY TRANSACTION IN THE NATURE OF JOBBING OR ARBITRAGE T O GUARD AGAINST LOSS WHICH MAY ARISE IN THE ORDINARY COURSE OF HIS BUSINESS AS SUCH MEMBER; OR (D) AN ELIGIBLE TRANSACTION IN RESPECT OF TRADING I N DERIVATIVES REFERRED TO IN CLAUSE (AC) OF SECTION 2 OF THE SECU RITIES CONTRACTS (REGULATION) ACT, 1956 (42 OF 1956), CARR IED OUT IN A RECOGNISED STOCK EXCHANGE; SHALL NOT BE DEEMED TO BE A SPECULATIVE TRANSACTION ; EXPLANATION. - FOR THE PURPOSES OF THIS CLAUSE, THE EXPRESSIONS - (I) 'ELIGIBLE TRANSACTION' MEANS ANY TRANSACTION,- I.T.A .NO. 5210/DEL/2011 11 (A) CARRIED OUT ELECTRONICALLY ON SCREEN-BASED SYST EMS THROUGH A STOCK BROKER OR SUB-BROKER OR SUCH OTHER INTERMEDIARY REGISTERED UNDER SECTION 12 OF THE SEC URITIES AND EXCHANGE BOARD OF INDIA ACT, 1992 (15 OF 1992), IN ACCORDANCE WITH THE PROVISIONS OF THE SECURITIES CO NTRACTS (REGULATION) ACT, 1956 (42 OF 1956), OR THE SECURIT IES AND EXCHANGE BOARD OF INDIA ACT, 1992 (15 OF 1992) OR T HE DEPOSITORIES ACT, 1996 (22 OF 1996) AND THE RULES, REGULATIONS OR BYE-LAWS MADE OR DIRECTIONS ISSUED U NDER THOSE ACTS OR BY BANKS OR MUTUAL FUNDS ON A RECOGNI SED STOCK EXCHANGE ; AND (B) WHICH IS SUPPORTED BY A TIME STAMPED CONTRACT N OTE ISSUED BY SUCH STOCK BROKER OR SUB-BROKER OR SUCH O THER INTERMEDIARY TO EVERY CLIENT INDICATING IN THE CONT RACT NOTE THE UNIQUE CLIENT IDENTITY NUMBER ALLOTTED UNDER ANY AC T REFERRED TO IN SUB-CLAUSE (A) AND PERMANENT ACCOUNT NUMBER A LLOTTED UNDER THIS ACT; (II) 'RECOGNISED STOCK EXCHANGE' MEANS A RECOGNISED STOCK EXCHANGE AS REFERRED TO IN CLAUSE (F) OF SECTION 2 OF THE SECURITIES CONTRACTS (REGULATION) ACT, 1956 (42 OF 1956), AND WHICH FULFILS SUCH CONDITIONS AS MAY BE PRESCRI BED AND NOTIFIED BY THE CENTRAL GOVERNMENT FOR THIS PURPOSE ; 13.1 IN THE DECISION RELIED UPON BY THE LD. AR IN SHREE CAPITAL SERVICES LTD. (SUPRA) WHICH RELATED TO AY 2004-05, THE SPECIAL BE NCH CONCLUDED THAT THAT THE TERM 'DERIVATIVES' IN WHICH UNDERLYING ASSET IS SHA RES, WOULD FALL WITHIN THE MEANING OF 'COMMODITY' USED IN S. 43(5) OF THE ACT AND THAT CL. (D) OF S. 43(5) INTRODUCED BY FINANCE ACT, 2005 W.E.F. 1ST APRIL, 2 006 WAS PROSPECTIVE IN NATURE AND WOULD BE EFFECTIVE FROM THE DATE FROM WHICH THE LEGISLATURE MADE IT EFFECTIVE, I.E. AY2006-07 ONWARDS. THE CASE OF THE ASSESSEE BE FORE US RELATES TO AY 2008- 09 AND THEREFORE, APPLICABILITY OF AFORESAID CL. (D ) OF S. 43(5) OF THE ACT IS REQUIRED TO BE EXAMINED. SINCE NEITHER THE AO NOR THE LD. CI T(A) EXAMINED THE APPLICABILITY OF SAID CLAUSE (D) NOR RELEVANT FACTS AND FIGURES ARE BEFORE US, WE CONSIDER IT FAIR AND APPROPRIATE TO SET ASIDE THE O RDER OF THE LD. CIT(A) AND RESTORE THE MATTER TO THE FILE OF THE A O FOR DECIDING THE AFORESAID ISSUE RAISED IN GROUND NO.3 IN THE APPEA L BEFORE US, I.T.A .NO. 5210/DEL/2011 12 AFRESH IN ACCORDANCE WITH LAW, AFTER ALLOWING SUFFI CIENT OPPORTUNITY TO THE ASSESSEE. NEEDLESS TO SAY THAT WHILE REDECID ING THE ISSUE, THE AO SHALL PASS A SPEAKING ORDER, BRINGING OUT CL EARLY AS TO THE NATURE OF DERIVATIVES AND AS TO WHETHER OR NOT THE TRANSACTIONS IN THE SAID DERIVATIVES WERE SPECULATIVE IN NATURE OR WERE ELIGIBLE TRANSACTIONS WITHIN THE MEANING OF CLAUSE (D) OF TH E PROVISO TO THE SECTION 43(5) OF THE ACT . WITH THESE OBSERVATIONS, GROUND NO. 3 IN THE APPEAL IS DISPOSED OF. 14. NO ADDITIONAL GROUND HAS BEEN RAISED BEFORE U S IN TERMS OF RESIDUARY GROUND NO.4 IN THE APPEAL, ACCORDINGLY, THIS GROUND IS DISMISSED. 15. NO OTHER PLEA OR ARGUMENT WAS MADE BEFORE US. 16. IN THE RESULT, APPEAL IS PARTLY ALLOWED BUT FOR STATISTICAL PURPOSES.. SD/- SD/- (R.K.GUPTA) (A.N.PAHUJA) JUDICIAL MEMBER ACC OUNTANT MEMBER COPY FORWARDED TO: 1. ASSESSEE 2. DCIT,CIRCLE-1(1), ROOM NO-390., CR BUILDING,I.P. ESTATE, NEW DELHI 3. CIT CONCERNED 4. CIT(APPEALS)-IV,NEW DELHI 5. DR: ITAT A BENCH, NEW DELHI 6. GUARD FILE ASSISTANT REGISTRAR ITAT, NEW DELHI