PADMAKSHI FINANCIAL SERVICES PVT.LTD. (NOW KNOWN AS PADMAKSHI FINANCIAL SERVICES PVT LTD.), MUMBAI V. DCIT., CIR.-4(2), MUMBAI

ITA 6054/MUM/2011

• Counselvise Citation: [2012] 119 COUNSELVISE.COM (IT) 9424 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 2 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-11-2012
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 31-10-2012
• Assessment Year: 2004-2005
• Appeal Filed On: 30-08-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: A B KOLI
• Keywords: Transactions in derivatives

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH C, MUMBAI BEFORE SHRI D. KARUNAKARA RAO , ACCOUNTANT MEMBER AND SHRI VIVEK VARMA, JUDICIAL MEMBER ITA NO. 6054/MUM/2011 (ASSESSMENT YEAR: 2004-05) PADMAKSHI FINANCIAL SERVICES PVT. LTD. (NOW KNOWN AS PADMAKSHI FINANCIAL SERVICES LTD.), 101, MAKER TOWER F, 10 TH FLOOR, CUFFE PARADE, MUMBAI -400 005 PAN AABCP 2260 K VS DY. COMMISSIONER OF INCOME-TAX CIRCLE - 4(2), AAYAKAR BHAVAN, MAHARSHI KARVE MARG, MUMBAI -400 020 (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI JITENDRA JAIN RESPONDENT BY : SHRI A.B. KOLI DATE OF HEARING: 31.10.2012 DATE OF PRONOUNCEMENT: 21.11.2012 O R D E R PER VIVEK VARMA, JM: THE APPEAL HAS BEEN FILED AGAINST THE ORDER OF CIT(A) II, MU MBAI, DATED 15.11.2010, WHEREIN THE CIT(A) HAS SUSTAINED THE LEVY OF PENALTY OF RS. 2,71,248 U/S 271(1)(C) OF THE I.T. ACT. 2. AT THE TIME OF FILING OF THE APPEAL, IT WAS FOUND THAT THE APPEAL IS DELAYED BY 216 DAYS AND A DEFECT MEMO WAS ISSUED, WHICH WAS RESPONDED TO BY THE ASSESSEE BY FILING OF THE REASONS FOR THE DELAY ALONG WITH THE AFFIDAVIT, CITING THE REASONS FOR THE DELAY. TH E MAIN REASON REVOLVES AROUND THE OFFICE BOY, WHO RECEIVED THE A PPEAL ORDER OF THE CIT(A) AND SAT OVER IT, TILL THE CA ASKED FOR THE SAME. AT THE TIME OF HEARING, THE REASONS WERE READ BY THE AR AND OBJECTION S WERE SOUGHT FROM THE DEPARTMENT. THE DR, DUTIFULLY OBJECTED TO THE CO NDONATION PADMAKSHI FINANCIAL SERVICES PVT. LTD. NOW KNOWN AS PADMAKSHI FINANCIAL SERVICES LTD. ITA 6054/MUM/2011 2 REQUEST FILED BY THE ASSESSE. ON CONSIDERING THE GENUINENE SS OF THE REASONS NARRATED BY THE ASSESSEE, WE CONDONE THE DELA Y AND PROCEED WITH THE APPEAL, AS FILED BY THE ASSESSEE. THE ASSESSEE FILED GOA WHICH HAVE BEEN REVISED ON 24.07.2012. WE, THEREFORE, PROCEED ON THE REVISED GROUNDS OF APPEAL, WHICH ESSENTIALLY REVOLVE AROUN D THE LEVY OF PENALTY UNDER SECTION 271(1)(C) OF THE ACT IN RESPECT OF COU PLE OF ADDITIONS, NAMELY : 1. PROVISION FOR LOSS ON A/C OF FUTURE & OPTIONS & 2. DISALLOWANCE FOR VIOLATION OF SECTION 94(7) 4. AT THE TIME OF HEARING, REFERRING TO THE FIRST ISSUE, THE A R POINTED OUT THAT F&O ISSUE IS SQUARELY COVERED BY THE ORDER O F COORDINATE BENCH IN THE CASE OF EDELWEISS CAPITAL LTD. VS. ITO, IN ITA NO. 5324/MUM/2007, WHEREIN IN QUANTUM, IT WAS HELD, 7. WE HAVE CONSIDERED THE FACTS AND THE RIVAL CONT ENTIONS. IN THE SCHEDULE ANNEXED TO AND FORMING PART OF THE BALANCE SHEET AND PROFIT & LOSS ACCOUNT FOR THE YEA R UNDER APPEAL (PAGE 13 OF PAPER BOOK), THE ASSESSEE HAS MADE THE FOLLOWING NOTE: - H. EQUITY FUTURES INDEX /STOCK (A) INITIAL MARGIN - EQUITY DERIVATIVE INSTRUMENTS , REPRESENTING INITIAL MARGIN PAID, AND MARGIN DEPOS ITS, REPRESENTING ADDITIONAL MARGIN OVER AND ABOVE INITI AL MARGIN, FOR ENTERING INTO CONTRACTS FOR EQUITY INDE X/STOCK FUTURES, WHICH ARE RELEASED ON FINAL SETTLEMENT/SQUARING-UP OF UNDERLYING CONTRACTS, ARE DISCLOSED UNDER LOANS AND ADVANCES. (B) EQUITY INDEX/STOCK FUTURES ARE MARKED-TO-MARKE T ON A DAILY BASIS. DEBIT OR CREDIT BALANCE DISCLOSED UNDE R LOANS AND ADVANCES OR CURRENT LIABILITIES, RESPECTI VELY, IN THE MARK-TO MARKET MARGIN EQUITY INDEX/STOCK FUTURES ACCOUNT, REPRESENTS THE NET AMOUNT PAID OR RECEIVED ON THE BASIS OF MOVEMENT IN THE PRICES OF INDEX / STOCK FUTURES TILL THE BALANCE SHEET DATE. AMOUNT PAID TO BROKERS IN ADDITION TO MARK-TO-MARKET MARGINS IS DISCLOSED AS MARGIN DEPOSITS UNDER LOANS AND ADVANCES. (C) AS ON THE BALANCE SHEET DATE, PROFIT/LOSS ON O PEN POSITIONS IN INDEX/STOCK FUTURES ARE ACCOUNTED FOR AS FOLLOWS: CREDIT BALANCE IN THE MARK-TO-MARKET MARGIN EQUITY INDEX / STOCK FUTURES ACCOUNT, BEING ANTICIPATED PROFIT, IS IGNORED AND NO CREDIT FOR TH E SAME IS TAKEN IN THE PROFIT AND LOSS ACCOUNT. DEBIT BALANCE IN THE MARK-TO-MARKET MARGIN EQUITY INDEX / STOCK FUTURES ACCOUNT, BEING PADMAKSHI FINANCIAL SERVICES PVT. LTD. NOW KNOWN AS PADMAKSHI FINANCIAL SERVICES LTD. ITA 6054/MUM/2011 3 ANTICIPATED LOSS, IS ADJUSTED IN THE PROFIT AND LOSS ACCOUNT. (D) ON FINAL SETTLEMENT OR SQUARING-UP OF CONTRACT S FOR EQUITY INDEX / STOCK FUTURES, THE PROFIT OR LOSS IS CALCUL ATED AS THE DIFFERENCE BETWEEN SETTLEMENT / SQUARING-UP PRI CE AND CONTRACT PRICE. ACCORDINGLY, DEBIT OR CREDIT BA LANCE PERTAINING TO THE SETTLED / SQUARED-UP CONTRACT IN MARK- TO-MARKET MARGIN EQUITY INDEX / STOCK FUTURES ACCOUNT IS RECOGNIZED IN THE PROFIT AND LOSS ACCOU NT. THE AFORESAID NOTE GIVES A FAIR PICTURE OF THE NATU RE OF THE PROVISION. THE PROVISION IN SUBSTANCE HAS BEEN MADE TO COVER THE ANTICIPATED LOSS IN THE DERIVATES TRADING. THERE IS NO DISPUTE THAT THE ASSESSEE HOLDS DERIVATIVES AS ITS STOCK-IN- TRADE AND THERE IS ALSO NO DISPUTE THAT IT FOLLOWS THE PRINCIPLE COST OR MARKET PRICE, WHICHEVER IS LOWER IN VALUING THE DERIVATIVES. WHEN THE DERIVATIVES ARE H ELD AS STOCK-IN-TRADE THEN WHATEVER RULES APPLY TO THE VAL UATION OF STOCK-IN-TRADE WILL HAVE TO BE NECESSARILY APPLY TO THEIR VALUATION ALSO. IT IS A WELL SETTLED POSITION IN LAW THAT WHILE ANTICIPATED LOSS IS TAKEN INTO ACCOUNT IN VALUING T HE CLOSING STOCK, ANTICIPATED PROFIT IN THE SHAPE OF APPRECIAT ED VALUE OF THE CLOSING STOCK IS NOT BROUGHT INTO THE ACCOUNT, AS N O PRUDENT TRADER WOULD CARE TO SHOW INCREASED PROFIT BEFORE I TS REALIZATION. THIS IS THE THEORY UNDERLYING THE RULE THAT THE C LOSING STOCK IS TO BE VALUED AT COST OR MARKET PRICE WHICHEVER IS T HE LOWER, AND IT IS NOW GENERALLY ACCEPTED AS AN ESTABLISHED RULE OF COMMERCIAL PRACTICE AND ACCOUNTANCY. THIS IS WHAT THE SUPREME COURT HELD IN THE CASE OF CHAINRUP SAMPATRA M VS. COMMISSIONER OF INCOME TAX, WEST BENGAL (1953) 24 I TR 481 (SC), SPEAKING THROUGH HONBLE JUSTICE PATANJALI SA STRI, THE THEN CHIEF JUSTICE OF INDIA (PAGE 485 486 OF THE REPOR T). AT PAGE 486 THE SUPREME COURT FURTHER OBSERVED THAT LOSS D UE TO A FALL IN PRICE BELOW COST IS ALLOWED EVEN IF SUCH LOSS HA S NOT BEEN ACTUALLY REALIZED. QUOTING FROM THE CASE OF WHIMST ER & CO. VS. COMMISSIONERS OF INLAND REVENUE (1926) 12 TAX CASES 813, THE SUPREME COURT OBSERVED THAT THE PROFITS THAT ARE CH ARGEABLE TO TAX ARE THOSE REALIZED IN THE YEAR AND THAT AN EXCE PTION IS RECOGNIZED WHERE A TRADER PURCHASED AND STILL HOLDS GOODS WHICH ARE FALLEN IN VALUE IN WHICH CASE THOUGH NO L OSS HAS BEEN REALIZED NOR IT HAS OCCURRED, NEVERTHELESS AT THE C LOSE OF THE YEAR HE IS PERMITTED TO TREAT THESE GOODS AS OF THEIR MA RKET VALUE. THIS DECISION OF THE SUPREME COURT GOVERNS THE FACT S OF THE PRESENT CASE. IT IS TO THE ASSESSEES STRENGTH THAT THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA IN ITS GUIDELINES HA VE ALSO APPROVED OF THE RULE OF PRUDENCE WHICH REALLY MEANS THAT WHILE ANTICIPATED LOSSES CAN BE TAKEN NOTE OF WHILE VALUI NG THE CLOSING STOCK, ANTICIPATED PROFITS CANNOT BE RECOGNIZED. TH E ANTICIPATED LOSS, IN THE LIGHT OF THE JUDGMENT OF THE SUPREME C OURT CITED ABOVE, CANNOT BE TREATED AS A CONTINGENT LIABILITY. 5. SINCE THE DISALLOWANCE IN THE INSTANT CASE ALSO PERTAINS TO DIMINUTION IN VALUE OF STOCK IN TRADE (SIT), THE ISSUE IS SQUA RELY COVERED. PADMAKSHI FINANCIAL SERVICES PVT. LTD. NOW KNOWN AS PADMAKSHI FINANCIAL SERVICES LTD. ITA 6054/MUM/2011 4 6. THE AR FURTHER POINTED OUT THAT IN THE SUBSEQUENT Y EAR, THE CIT(A) HAD ALLOWED THE APPEAL ON MERITS ON IDENTICAL ISSUE, A ND THEREFORE, IT IS NOT A CASE WHERE PENALTY CAN BE LEVIED. 7. THE DR PLACED RELIANCE ON THE ORDERS OF THE REVENUE AUTHORITIES. 8. WE HAVE PERUSED THE ORDERS AND ALSO THE ORDER OF TH E COORDINATE BENCH, REFERRED TO BY THE AR. THE ISSUE IS VALUATION OF SI T OF F&O, THE ASSESSEE IS STATUTORILY BOUND TO FOLLOW THE GUIDE LINES PRE SCRIBED BY THE ICAI, WHICH HAS BEEN FOLLOWED & THE ISSUE IS NOT IN DISP UTE. THE ONLY BASIS, AS GATHERED, FROM THE ORDERS OF THE REVENUE AUTHORITIES IS THE METHOD OF VALUATION, I.E. COST OR MARKET VALUE WHICHEVER IS LOWER. 9. FROM THE ABOVE, PRINCIPAL HAS BEEN SETTLED, THAT WHEN DERIVATIVE S, FUTURE AND OPTIONS ARE HELD AS SIT, WHATEVER RATES APP LY TO THE VALUATION OF SIT OF SHARES, SAME WILL APPLY TO F&O AS WELL. TH AT BEING THE LEGAL POSITION, IN OUR OPINION, THE ASSESSEE HAS CORRECT LY FOLLOWED THE PRINCIPLES, AND THE DIMINUTION IN VALUE OF STOCKS ARE TRE ATED IN ACCORDANCE WITH LAW. 9. IT HAS BEEN BROUGHT OUT ATTENTION THAT THE ISSUE HA S BEEN ACCEPTED BY THE FIRST APPELLATE AUTHORITY IN THE SUBSEQUE NT YEAR AND SINCE THE ISSUE IS SQUARELY COVERED BY THE DECISION OF ED ELWEISS CAPITAL LTD. AND ALSO, THAT THE ISSUE IS PURELY A LEGAL ISSUE, ACCOR DING TO US, PENALTY IS NOT EXIGIBLE. 10. WE, THEREFORE, SET ASIDE THE ORDER OF THE CIT(A) ON THIS ISSUE & DIRECT THE AO TO CANCEL THE PENALTY ON THE F&O ISSUE. 11. PENALTY HAS ALSO BEEN LEVIED ON THE VIOLATION OF SECTION 94(7). PADMAKSHI FINANCIAL SERVICES PVT. LTD. NOW KNOWN AS PADMAKSHI FINANCIAL SERVICES LTD. ITA 6054/MUM/2011 5 12. AT THE TIME OF HEARING, THE AR POINTED OUT THAT SECT ION 94(7), WHEREIN THE DISALLOWANCE WERE MADE, PERTAINS TO INVESTMEN T AND NOT ON SIT AND SINCE THE ASSESSEE IS IN TRADING OF STOCKS & SECURITIES, SECTION DOES NOT APPLY AND HENCE PENALTY IS NOT ATTRAC TED. IT WAS POINTED OUT BY THE AR THAT THE ISSUE WAS NOT AGITATED BEFORE THE CIT(A), BECAUSE OF SMALLNESS OF QUANTUM. 13. WE HAVE PERUSED THE RELEVANT SECTION, WHICH READS, SECTION 94(7) WHERE (A) ANY PERSON BUYS OR ACQUIRES ANY SECURITIES OR UNIT WITHIN A PERIOD OF THREE MONTHS PRIOR TO THE RECORD DATE; (B) SUCH PERSON SELLS OR TRANSFERS (I) SUCH SECURITIES WITHIN A PERIOD OF THREE MONTHS AFTER SUCH DATE; OR (II) SUCH UNIT WITHIN A PERIOD OF NINE MONTHS AFTE R SUCH DATE;] (C) THE DIVIDEND OR INCOME ON SUCH SECURITIES OR U NIT RECEIVED OR RECEIVABLE BY SUCH PERSON IS EXEMPT, THEN, THE LOSS , IF ANY, ARISING TO HIM ON ACCOUNT OF SUCH PURCHASE AND SALE OF SECURIT IES OR UNIT, TO THE EXTENT SUCH LOSS DOES NOT EXCEED THE AMOUNT OF DIVI DEND OR INCOME RECEIVED OR RECEIVABLE ON SUCH SECURITIES OR UNIT, SHALL BE IGNORED FOR THE PURPOSES OF COMPUTING HIS INCOME CHARGEABLE TO TAX. . 14. IN THE EXPLANATION, THE MEANING OF SECURITIES, SAYS, INCLUDES STOCKS AND SHARES . BUT THE ABOVE SUB SECTION PERTAINS TO DIVIDEND STRIPPING AND WHICH CAN BE DONE ONLY WHEN THE SECURITIES ARE HELD AS INVESTMENTS. 15. THE AR, THEREFORE, PLEADED THAT WHEN THE RELEVANT S ANCTION ITSELF IS NOT ATTRACTED, PENALTY CANNOT BE LEVIED. 16. THE DR RELIED ON THE ORDERS OF THE REVENUE AUTHORITIES. 17. WE HAVE HEARD THE ARGUMENTS AND HAVE PERUSED THE MATERIAL PLACED AND WE HAVE TO AGREE WITH THE AR THAT, SUB SECT ION (7), UNDER PADMAKSHI FINANCIAL SERVICES PVT. LTD. NOW KNOWN AS PADMAKSHI FINANCIAL SERVICES LTD. ITA 6054/MUM/2011 6 WHICH THE DISALLOWANCE HAS BEEN MADE, DOES NOT APPLY TO TRADING ACTIVITY. IN ANY CASE, IT IS NOT THE CASE OF THE REVENUE A UTHORITIES THAT THERE WAS CONCEALMENT OF INCOME OR THUS WAS A CASE OF I NACCURATE PARTICULARS OF INCOME AND IN ANY CASE, THE ISSUE IS PURELY LEGAL. WE ARE ALSO CONVINCED THAT THE ISSUE IS SQUARELY COVERED BY TH E DECISION OF CIT VS RELIANCE PETROPRODUCTS PVT. LTD., (SC), REPORTED IN 322 I TR 158, WHEREIN IT WAS HELD THAT EVEN IN CASES OF CLAIMS MADE, WH ICH ARE OTHERWISE NOT ALLOWABLE, PENALTY WAS NOT EXIGIBLE. 18. WE, THEREFORE, SET ASIDE THE ORDER OF THE CIT(A) ON THIS ISSUE AND CANCEL THE PENALTY LEVIED BY THE AO. 19. THE AR THEN REVERTED TO GROUND NO. 2, WHEREIN IT WAS POINTED OU T THAT THE AO HAD NOT RECORDED HIS SATISFACTION SO FAR AS THE TWO ADDITIONS WERE CONCERNED. THE AR TOOK US THROUGH THE A SSESSMENT ORDER AND POINTED OUT THAT BARRING THESE TWO DISALLOWANC E, ALL OTHER DISALLOWANCES HAVE BEEN MADE WITH REMARKS OF SATISFACTION T O INITIATE PENALTY PROCEEDINGS. THE AR PLACED RELIANCE ON THE DECISIO NS OF CIT VS RAJAN & CO., REPORTED IN 291 ITR 340 (DEL) AND MS. MADHUSH REE GUPTA VS UOI, REPORTED IN 317 ITR 107 AT 148 (DEL), WHER EIN THE BASIC RATIO IS FINAL CONCLUSION SHOULD BE DISCERNIBLE CLEARLY FROM THE ORDER PASSED DURING SUCH PROCEEDINGS. 20. ON THIS ISSUE, WE ACCEPT THE DECISION OF THE CIT(A) THAT THE AO HAS MENTIONED ABOUT THE INITIATION OF PENALTY, BEFORE THE CLO SE OF ASSESSMENT ORDER, THEREFORE, WE WILL HOLD THAT IT WOULD IMPLY THAT THE SATISFACTION IS FOR ALL THE DISALLOWANCES AND IN ANY CASE, IF AT ALL, THERE WAS AN OVER SIGHT, IT IS CURABLE AS PER THE PROVISIONS OF SECTION 292B OF THE ACT. ACCORDINGLY, GROUND NO. 2 IS REJECTED. PADMAKSHI FINANCIAL SERVICES PVT. LTD. NOW KNOWN AS PADMAKSHI FINANCIAL SERVICES LTD. ITA 6054/MUM/2011 7 21. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS DAY OF 21/11/2012. SD/- (D. KARUNAKARA RAO) ACCOUTANT MEMBER SD/- (VIVEK VARMA) JUDICIAL MEMBER MUMBAI, DATE: 21/11/2012 COPY TO:- 1) THE APPELLANT. 2) THE RESPONDENT. 3) THE CIT (A)- 11 , MUMBAI. 4) THE CIT CITY-4, MUMBAI, 5) THE D.R. C BENCH, MUMBAI. 6) COPY TO GUARD FILE. BY ORDER / / TRUE COPY / / ASSTT. REGISTRAR I.T.A.T., MUMBAI *CHAVAN