DCIT CIR 4(2), MUMBAI V. PRABHUDAS LILADHAR P. LTD, MUMBAI

ITA 6441/MUM/2009

• Counselvise Citation: 644119914 RSA 2009
• Duration Of Justice: 1 year(s) 4 month(s) 30 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-05-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 03-05-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 14-12-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: VIPUL JOSHI
• Keywords: Business income; Depreciation; Cost of acquisition
• Section: 143(3); 14A; 37(1)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH, MUMBAI BEFORE SHRI, J. SUDHAKAR REDDY, ACCOUNTANT MEMBER A ND SMT. ASHA VIJAYRAGHAVAN, JUDICIAL MEMBER ITA NO. 6437/MUM./2009 (ASSESSMENT YEAR : 2006-07 ) DATE OF HEARING: 3.5.2011 PRABHUDAS LILADHER PVT. LTD. SADHANA HOUSE, 3 RD FLOOR 570, P.B. MARG, BEHIND MAHINDRA TOWERS, WORLI, MUMBAI 400 018 PAN AAACP2733Q .. APPELLANT V/S DY. COMMISSIONER OF INCOME TAX RANGE-4(2), MUMBAI .... RESPONDENT ITA NO. 6441/MUM./2009 (ASSESSMENT YEAR : 2006-07 ) DY. COMMISSIONER OF INCOME TAX RANGE-4(2), MUMBAI .. APPELLANT V/S PRABHUDAS LILADHER PVT. LTD. SADHANA HOUSE, 3 RD FLOOR 570, P.B. MARG, BEHIND MAHINDRA TOWERS, WORLI, MUMBAI 400 018 PAN AAACP2733Q .... RESPONDENT ASSESSEE BY : MR. VIPUL JOSHI REVENUE BY : MR. AJIT KUMAR SINHA PRABHUDAS LILLADHER P. LTD. ITA NO.6437/MUM./2009 ITA NO.6441/MUM./2009 2 O R D E R PER J. SUDHAKAR REDDY, A.M. THESE ARE THE CROSS APPEALS, WHICH ARE DIRECTED AGA INST THE IMPUGNED ORDER DATED 17 TH SEPTEMBER 2009, PASSED BY THE COMMISSIONER (APPEAL S)- VIII, MUMBAI, FOR ASSESSMENT YEAR 2006-07. 2. BRIEF FACTS OF THE CASE ARE THAT, THE ASSESSEE IS A PRIVATE LIMITED COMPANY AND IS A STOCK BROKER. IT HAD FILED ITS RET URN OF INCOME ON 22 ND NOVEMBER 2006, DECLARING TOTAL INCOME OF ` 10,91,02,524. AFTER INITIALLY PROCESSING THE RETURN OF INCOME UNDER SECTION 143(1 ) OF THE INCOME TAX ACT, 1961 (FOR SHORT THE ACT ), THE ASSESSING OFFICER HAS COMPLETED THE ASSESSMENT UNDER SECTION 143(3) OF THE ACT ON 28 TH NOVEMBER 2008, INTER- ALIA, MAKING ADDITIONS ON ACCOUNT OF DISALLOWANCE U NDER SECTION 14A OF THE ACT, STOCK EXCHANGE PENALTY, NOTIONAL LOSS ON FUTUR ES AND OPTIONS, ETC. HE ALSO RECOMPUTED THE REBATE UNDER SECTION 88E OF THE ACT, BY APPORTIONING PART OF THE EXPENDITURE TO SHARE TRANSACTIONS, IN R ESPECT OF WHICH SECURITY TRANSACTIONS TAX WAS PAID. 3. AGGRIEVED, THE ASSESSEE CARRIED THE MATTER BEFORE T HE FIRST APPELLATE AUTHORITY, WHEREIN THE COMMISSIONER (APPEALS) GRANT ED PART RELIEF. 4. ON THE ISSUES WHERE THE FIRST APPELLATE AUTHORITY C ONFIRMED THE ORDER OF THE ASSESSING OFFICER, THE ASSESSEE HAS FILED APPEA L AND WHEREVER THE RELIEF WAS GRANTED TO THE ASSESSEE, THE REVENUE HAS FILED THE APPEAL. 5. WE HAVE HEARD THE LEARNED COUNSEL, MR. VIPUL JOSHI, APPEARING ON BEHALF OF THE ASSESSEE, AS WELL AS THE LEARNED DEPA RTMENTAL REPRESENTATIVE, MR. AJIT KUMAR SINHA. 6. BEFORE US, LEARNED COUNSEL FILED A PAPER BOOK CONSI STING OF 117 PAGES. HE ALSO FILED A CHART GIVING ISSUES IN BRIEF AND TH E ARGUMENTS. 7. WE FIRST TAKE UP ASSESSEES APPEAL IN ITA NO.6437/M UM./2009. PRABHUDAS LILLADHER P. LTD. ITA NO.6437/MUM./2009 ITA NO.6441/MUM./2009 3 8. GROUND NO.1, IS ON THE ISSUE OF DISALLOWANCE OF DEP RECIATION CLAIMED ON BOMBAY STOCK EXCHANGE MEMBERSHIP CARD. 9. THE ASSESSING OFFICERS VIEW IS THAT, SINCE THE DEM UTULIZATION OF STOCK EXCHANGE CARD TAKES PLACE THIS YEAR, THE BENEFIT UN DER SECTION 55(2)(AV) ACCRUES THIS YEAR. IT IS THE CASE THAT AS AND WHEN THE ASSESSEE TRANSFERS THE STOCK EXCHANGE MEMBERSHIP CARD, IT WILL RECEIVE EXC ESS BENEFIT IN TERMS OF THE ORIGINAL COST OF ACQUISITION UNDER SECTION 55(2 )(AV) AND THAT THIS WILL TENTAMOUNTS TO RECOVERY OF DEPRECIATION ALLOWANCE A LLOWED TILL DATE. HIS VIEW IS THAT, SECTION 41(1)(A) APPLIES. ALTERNATIVELY, H E HELD THAT THE BENEFIT IS TAXABLE UNDER SECTION 28(1)(IV) OF THE ACT. THE ADD ITION HAS BEEN MADE BY THE ASSESSING OFFICER ON PROTECTIVE BASIS. THE SAME HAS BEEN CONFIRMED BY THE COMMISSIONER (APPEALS). 10. BEFORE US, THE LEARNED COUNSEL CONTENDS THAT NO TRA NSFER HAS TAKEN PLACE DURING THE YEAR, NO DEPRECIATION WAS CLAIMED IN THE YEAR UNDER CONSIDERATION AND NO DEPRECIATION WAS CLAIMED ON OL D BSE MEMBERSHIP CARD. HE ALSO CLAIMS THAT THE ISSUE IS COVERED BY THE DEC ISION OF MUMBAI BENCH OF THE TRIBUNAL IN HDFC SECURITIES LTD. V/S ACIT, ITA NO.5858 & 5937/MUM./ 2009, VIDE ORDER DATED 27 TH OCTOBER 2010. HE ALSO DISTINGUISHS THE JUDGMENT OF HON'BLE JURISDICTIONAL HIGH COURT RELIED UPON BY THE ASSESSING OFFICER IN CIT V/S SURAT COTTON SPINNING & WEAVING MILLS PVT. LTD., 202 ITR 932 (BOM.), ON THE GROUND THAT THE JUDGMENT RELATES TO DEEMING PROVISIONS ON REDEMPTION OF THE PREFERENCE SHARES. 11. LEARNED DEPARTMENTAL REPRESENTATIVE, ON THE OTHER H AND, SUBMITS THAT THIS IS JUST PROTECTIVE ADDITION AND THERE IS NO IN TENTION TO COLLECT THE TAX AND THE ISSUE MAY BE KEPT ALIVE SO THAT IN THE YEAR OF TRANSFER, THIS ASPECT IS NOT LOST SIGHT OF. 12. ON THE CONSIDERATION OF BOTH THE ARGUMENTS, WE ARE OF THE CONSIDERED OPINION THAT THE ASSESSEE SHOULD SUCCEED IN THIS MA TTER FOR THE REASON THAT THERE IS NO TRANSFER OF ANY ASSET DURING THE YEAR A ND, HENCE, THE QUESTION OF APPLICATION OF SECTION 55(2)(AV) DOES NOT ARISE. TH E TRIBUNAL IN HDFC PRABHUDAS LILLADHER P. LTD. ITA NO.6437/MUM./2009 ITA NO.6441/MUM./2009 4 SECURITIES LTD. (SUPRA), HAS, AT PARA-10/PAGE-7, CL EARLY HELD THAT THE APPLICABILITY OF SECTION 55(2)(AV) MAY BE CONSIDERE D AT THE TIME OF SALE. IT IS ALSO HELD THAT THE PROVISIONS OF SECTION 55(2)(AV), CANNOT BE APPLIED IN THE YEAR OF ALLOTMENT OF SHARES IN LIEU OF THE STOCK EX CHANGE CARD. IN THIS DECISION, IT IS ALSO HELD THAT THIS IS NEITHER BENE FIT OF PERQUISITE ASSESSABLE AS BUSINESS INCOME UNDER SECTION 28(IV) OF THE ACT. RE SPECTFULLY FOLLOWING THIS DECISION AND ALSO FOR THE REASON THAT THERE CANNOT BE A PROTECTIVE ASSESSMENT, WITHOUT THERE BEING A SUBSTANTIVE ASSES SMENT, WE DELETE THIS ADDITION AND ALLOW THE GROUND RAISED BY THE ASSESSE E. 13. THE NEXT GROUND IS ON THE ISSUE OF DISALLOWANCE OF SEBI FEES. THIS ISSUE RELATES TO FEES AND INTEREST PAYABLE TO SEBI FOR TH E EARLIER YEARS. THERE WAS A DISPUTE AND IT WAS ULTIMATELY SETTLED IN JUNE 200 6. 14. BEFORE US, BOTH THE PARTIES AGREED THAT THIS LIABIL ITY CRYSTALLIZED IN ASSESSMENT YEAR 2007-08. IN VIEW OF THIS MUTUAL AGR EEMENT, WE HOLD THAT THE LIABILITY ON THIS ACCOUNT CRYSTALLIZED ONLY IN ASSESSMENT YEAR 2007-08 AND THE SAME SHOULD BE ALLOWED IN THAT YEAR ONLY. THIS GROUND IS, THUS, DISMISSED. 15. THE NEXT GROUND IS ON THE ISSUE OF DISALLOWANCE UND ER SECTION 14A OF THE ACT. 16. AS MUTUALLY AGREED BETWEEN THE PARTIES, WE SET ASID E THE ISSUE TO THE FILE OF ASSESSING OFFICER FOR DENOVO ADJUDICATION I N LINE WITH THE JUDGMENT OF HON'BLE JURISDICTIONAL HIGH COURT IN GODREJ & BOYCE MFG. CO. LTD. V/S DCIT & ANR. (2010) 328 ITR 081 (BOM.). 17. THE NEXT GROUND IS ON THE ISSUE OF MANNER OF COMPUT ING REBATE UNDER SECTION 88E OF THE ACT. 18. THE ASSESSING OFFICER, AT PARA-9/PAGE-10 OF HIS ORD ER, EXTRACTED THE SECTION AND HELD THAT THE AMOUNT WHICH IS ELIGIBLE FOR REBATE UNDER SECTION 88E, IS THE INCOME RELATABLE TO THE TRANSACTIONS DU LY PAID SECURITIES TRANSACTION TAX (HEREIN AFTER FOR SHORT STT ) AFTER REDUCING THE EXPENDITURE. PRABHUDAS LILLADHER P. LTD. ITA NO.6437/MUM./2009 ITA NO.6441/MUM./2009 5 THE COMPUTATION OF EXPENDITURE, AS DONE IN THE PREV IOUS YEAR, WAS ADOPTED BY THE ASSESSING OFFICER AND HE ALSO MENTIONED THAT IN THE PREVIOUS YEAR, THE ASSESSEE HAS NOT DISPUTED ALLOCATION OF INDIRECT EX PENDITURE ON PROPORTIONATE BASIS TO THE TRANSACTIONS ON WHICH THE STT HAS BEEN PAID. 19. ON APPEAL, THE FIRST APPELLATE AUTHORITY UPHELD THI S CALCULATION. 20. BEFORE US, THE LEARNED COUNSEL SUBMITS THAT STT IS LEVIED ON GROSS VALUE AND THAT THE TERM INCOME UNDER THE INCOME TAX ACT, 1961, DOES NOT ALWAYS MEAN THAT EXPENDITURE IS DEDUCTIBLE. HE ARGU ES THAT WHEREVER THE STATUTE WANTED THAT INCOME SHOULD BE A NET FIGURE, THE MODE OF COMPUTATION HAS BEEN PROVIDED AND AS IN SECTION 88E, THE MODE O F COMPUTATION HAS NOT BEEN PROVIDED, NO EXPENDITURE CAN BE DEDUCTED, WHIL E DETERMINING THE INCOME RELATABLE TO TRANSACTIONS ON WHICH STT IS PA ID. HE SUBMITS THAT THE ASSESSEE HAS REDUCED PURCHASES FROM SALES AND ARRIV ED AT AN INCOME AND WHEREAS THE ASSESSING OFFICER FURTHER REDUCED PROPO RTIONATE EXPENDITURE. HE RELIED ON THE JUDGMENT OF HON'BLE SUPREME COURT IN DISTRIBUTORS (BARODA) PVT. LTD. V/S UNION OF INDIA & ORS., (1985) 155 ITR 120 (SC), SPECIFICALLY AT PAGE-125 AND SUBMITS THAT, IN THAT JUDGMENT, THE RA TIO LAID DOWN BY THE HON'BLE JURISDICTIONAL HIGH COURT IN CIT V/S INDUST RIAL INVESTMENT TRUST CO. LTD. (1968) 67 ITR 436 (BOM.) HAS NOT BEEN OVERTURN ED. ON A QUERY FROM THE BENCH THAT WHY ONLY EXPENDITURE ON PURCHASE SHO ULD ONLY BE DEDUCTED AND NOT OTHER EXPENDITURE, LEARNED COUNSEL SUBMITS THAT A FAIR INTERPRETATION OF THE PROVISIONS WOULD NOT WARRANT DEDUCTION OF PR OPORTIONATE EXPENDITURE. HE FURTHER SUBMITS THAT IN THE EARLIER ASSESSMENT Y EAR, THE ASSESSEE DID NOT DISPUTE THE COMPUTATION, FOR THE REASON THAT THE QU ANTUM WAS SMALL. ALTERNATIVELY, HE SUBMITS THAT ONLY DIRECT EXPENDIT URE SHOULD BE DEDUCTED AND NOT ALL EXPENDITURE. 21. LEARNED DEPARTMENTAL REPRESENTATIVE OPPOSED THE CON TENTION BY SUBMITTING THAT A PLAIN READING GIVES EXEMPTION TO THE ASSESSEE ON INCOME ARISING OUT OF SECURITIES TRANSACTIONS, ON WHICH ST T HAS BEEN LEVIED. HE SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW. PRABHUDAS LILLADHER P. LTD. ITA NO.6437/MUM./2009 ITA NO.6441/MUM./2009 6 22. ON CAREFUL CONSIDERATION OF THE FACTS AND CIRCUMSTA NCES OF THE CASE, WE HOLD AS FOLLOWS:- SECTION 88E OF THE ACT, READS AS FOLLOWS:- [REBATE IN RESPECT OF SECURITIES TRANSACTION TAX. 88E. (1) WHERE THE TOTAL INCOME OF AN ASSESSEE IN A PREVIOUS YEAR INCLUDES ANY INCOME, CHARGEABLE UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION, ARISING FROM TAXABLE SECURITIES TRANSA CTIONS, HE SHALL BE ENTITLED TO A DEDUCTION, FROM THE AMOUNT OF INCOME-TAX ON SU CH INCOME ARISING FROM SUCH TRANSACTIONS, COMPUTED IN THE MANNER PROVIDED IN SUB-SECTION (2), OF AN AMOUNT EQUAL TO THE SECURITIES TRANSACTION TAX PAID BY HIM IN RESPECT OF THE TAXABLE SECURITIES TRANSACTIONS ENTERED INTO IN THE COURSE OF HIS BUSINESS DURING THAT PREVIOUS YEAR: PROVIDED THAT NO DEDUCTION UNDER THIS SUB-SECTION S HALL BE ALLOWED UNLESS THE ASSESSEE FURNISHES ALONG WITH THE RETURN OF INCOME, EVIDENCE OF PAYMENT OF SECURITIES TRANSACTION TAX IN THE PRESCRIBED FORM: PROVIDED FURTHER THAT THE AMOUNT OF DEDUCTION UNDER THIS SUB-SECTION SHALL NOT EXCEED THE AMOUNT OF INCOME-TAX ON SUCH INCOME COMP UTED IN THE MANNER PROVIDED IN SUB-SECTION (2). (2) FOR THE PURPOSES OF SUB-SECTION (1), THE AMOUNT OF INCOME-TAX ON THE INCOME ARISING FROM THE TAXABLE SECURITIES TRANSACT IONS, REFERRED TO IN THAT SUB-SECTION, SHALL BE EQUAL TO THE AMOUNT CALCULATE D BY APPLYING THE AVERAGE RATE OF INCOME-TAX ON SUCH INCOME. EXPLANATION.FOR THE PURPOSES OF THIS SECTION, THE EXPRESSIONS, TAXABLE SECURITIES TRANSACTION AND SECURITIES TRANSACTION TAX SHALL HAVE THE SAME MEANINGS RESPECTIVELY ASSIGNED TO THEM UNDER CHAPTE R VII OF THE FINANCE (NO. 2) ACT, 2004.] A PLAIN READING OF THIS SECTION SHOWS THAT INCOME ARISING FROM TRANSACTIONS ON WHICH STT IS PAID, HAS TO BE DETERM INED AND THEREAFTER, AVERAGE RATE OF INCOME TAX SHOULD BE APPLIED ON SUC H INCOME AND THIS AMOUNT WOULD BE GIVEN AS REBATE FROM THE INCOME TAX PAYABLE. NOW, THE SHORT POINT FOR CONSIDERATION IS WHETHER THE EXPEND ITURE INCURRED BY THE ASSESSEE CAN BE ALLOCATED PROPORTIONATELY TO THE TR ANSACTIONS IN RESPECT OF WHICH STT IS PAID AND INCOME DETERMINED THEREAFTER OR NOT. IN OUR OPINION, WHEN THE LEGISLATURE USES THE WORDS INCOME ARISING FROM TRANSACTIONS IN RESPECT OF WHICH STT IS PAID ALL EXPENDITURE RELATABLE TO EARNING OF SUCH INCOME SHOULD BE DEDUCTED FROM THE GROSS SALE RECEI PTS. THE ASSESSEES PRABHUDAS LILLADHER P. LTD. ITA NO.6437/MUM./2009 ITA NO.6441/MUM./2009 7 ARGUMENT IS FALLACIOUS FOR THE REASON THAT IT WANTS TO DEDUCT PURCHASE PRICE, BUT ARGUES THAT OTHER EXPENDITURE IS NOT DEDUCTIBLE . THE JUDGMENT OF HON'BLE SUPREME COURT IN DISTRIBUTORS (BARODA) PVT. LTD. (S UPRA) WAS DEALING WITH THE ISSUE WHETHER GROSS DIVIDEND IS ELIGIBLE FOR EX EMPTION OR NET DIVIDEND IS ELIGIBLE FOR EXEMPTION. THE CASE HAS NO APPLICATION FOR THE REASON THAT, HERE, IT IS NOT THE CASE OF THE ASSESSEE THAT GROSS RECEI PT FROM SALE OF SHARES ON WHICH STT IS PAID IS INCOME. IT IS THE CASE OF THE ASSESSEE THAT WHILE DETERMINING THE INCOME FROM SUCH TRANSACTIONS, WHAT IS DEDUCTIBLE IS ONLY PURCHASE PRICE AND NOT OTHER EXPENDITURE. IN OTHER WORDS, THE ISSUE IN DISPUTE IS AS TO HOW THE NET INCOME HAS TO BE ARRIV ED AT. THE OTHER DECISION RELIED BY THE LEARNED COUNSEL ALSO DO NOT COME TO H IS RESCUE AS, IN OUR OPINION, JUST LIKE COST OF PURCHASE WHICH IS EXPEND ITURE RELATABLE TO EARNING OF INCOME OTHER EXPENDITURE ARE ALSO TO BE DEDUCTED AND INCOME EARNED ON TRANSACTIONS ON WHICH STT IS PAID. IN OUR VIEW, NOT ONLY DIRECT EXPENDITURE BUT ALSO PROPORTIONATE INDIRECT EXPENDITURE SHOULD BE DEDUCTED TO ARRIVE AT INCOME. INCOME TAX IS ALWAYS PAYABLE ON INCOME AFTER ALLOW ING OF DEDUCTIONS. DETERMINATION OF INCOME FOR THE PURPOSE OF REBATE U NDER SECTION 88E, CANNOT BE DIFFERENT FROM DETERMINATION OF INCOME FOR THE P URPOSE OF LEVY OF INCOME TAX. HENCE, FOR ALL THESE REASONS, WE REJECT THE CO NTENTIONS OF THE ASSESSEE AND DISMISS THIS GROUND. 23. IN THE RESULT, ASSESSEES APPEAL IS ALLOWED IN PART . 24. NOW, WE TAKE UP REVENUES APPEAL IN ITA NO.6441/MUM ./2009. 25. THE FIRST GROUND IS ON THE ISSUE OF DISALLOWANCE OF PENALTY PAID TO STOCK EXCHANGES IN VIEW OF EXPLANATION-1 TO SECTION 37(1) OF THE ACT. COMMISSIONER (APPEALS) HAS ALSO HELD THAT STOCK EXC HANGES ARE NOT GOVERNMENT OR SEMI GOVERNMENT BODIES AND VIOLATION OF REGULATIONS OF STOCK EXCHANGES IS NOT IN FRACTION OF LAW AND, HENC E, NO DISALLOWANCE CAN BE MADE UNDER SECTION 37(1). PRABHUDAS LILLADHER P. LTD. ITA NO.6437/MUM./2009 ITA NO.6441/MUM./2009 8 26. IN OUR CONSIDERED OPINION, THIS DECISION HAS TO BE UPHELD AS IT IS IN LINE WITH VARIOUS ORDERS OF THE CO-ORDINATE BENCHES OF T HIS TRIBUNAL SOME OF WHICH ARE LISTED BELOW:- KAIRA CAN COMPANY LTD V/S DCIT, (2010) 2 ITR (TRIB. ) 20 (MUM.). THE PENALTY FOR NON-COMPLIANCE OF SEBI REGULATION S CHEME, 2002, AWAS ALLOWED AS EXPENDITURE. IT WAS HELD THAT COMPL IANCE OF LAW IS INCIDENT OF EVERY BUSINESS CARRIED ON BY A PERSON. THEREFORE, ANY PAYMENT MADE FOR THE PURPOSE OF COMPLIANCE OR NON-C OMPLIANCE OF THE PROVISIONS OF LAW WOULD TANTAMOUNT TO PAYMENT INCID ENTAL TO THE CARRYING ON THE BUSINESS. GOLDCREST CAPITAL MARKET LTD. V/S ITO, (2010) 2 ITR (TRIB.) 355 (MUM.). MEMBERS OF NSE ARE BOUND TO ABIDE BY THE RULES, REG ULATIONS AND BY- LAWS OF THE NSE. HOWEVER, SUCH RULES, REGULATIONS A ND BYE-LAWS CAN BE CONSIDERED AS REGULATIONS FOR CONTROLLING THE INTER NAL INTER SE, OBLIGATIONS AND RIGHTS OF THE MEMBERS OF THE NSE WH ICH EVERY MEMBER OF NSE WOULD BE OBLIGED TO ALLOW. A VIOLATION THERE OF CANNOT BE TREATED AS VIOLATION OF A STATUTORY LAW OR RULE. ITO V/S VRM SHARE BROKING (P) LTD., (2009) 28 SOT 4 69 (MUM.). THE AMOUNT PAID IS A PENALTY AS AND SAME IS LEVIED FOR VIOLATION OF THE MARGINS IMPOSED BY THE SEBI ON THE SHARE BROKERS. A S SEEN FROM THE NOTIFICATIONS ISSUED BY THE SEBI SUCH MARGINS ARE I MPOSED IN ORDER TO REDUCE THE RISK COMPONENTS AND, THEREFORE, THESE AR E BASICALLY RISK MANAGEMENT ORIENTED PENALTIES, WHICH ARE ROUTINE IN NATURE. THESE VIOLATIONS ARE OFFER BY PAYMENT OF PENALTY AS IN TH E INSTANT CASE. HAVING REGARD TO THE PURPOSE OF THE PROVISIONS OF S. 37(1) WHICH IS AIMED AT PROVIDING DETERRENCE FOR INFRACTION OF ACTS OF THE COUNTRY, THE VIOLATION AS IN THE INSTANT CASE, ARE NOT FOUND TO ATTRACT TH E PROVISIONS OF THE SAID PROVISO. THEREFORE, THIS IS NOT FIT CASE OF INVOKIN G SAID PROVISO. MASTER CAPITAL SERVICES LTD. V/S DCIT, (2007) 108 T TJ (CHD.) 389. THE ASSESSEE INCURRED THE EXPENSES IN THE SHAPE OF FINES DURING NORMAL COURSE OF BUSINESS AND THERE WAS NO INFRACTION OF A NY STATUTORY LAW. IN SUCH TYPE OF BUSINESS IT IS BEYOND THE CONTROL OF S HARE BROKER TO KNOW IN ADVANCE THAT THE TRADING VOLUME WILL INCREASE BEYON D THE FIXED EXPOSURE LIMIT BECAUSE TRADING DEPENDS UPON THE MAR KET TREND AND ON CERTAIN DATES, THERE CAN BE EXTRA- ORDINARY INCREAS E IN TRADING VOLUME. ON THAT INCREASED TRADING VOLUME, THE CONCERNED MEM BER ALSO EARNS INCOME IN THE SHAPE OF COMMISSION, ETC. WHICH IS TA XABLE SO, THE FINE PAID WHICH WAS CO- RELATED WITH THE INCREASE IN TRA DING VOLUME WHICH CROSSED THE FIXED EXPOSURE LIMIT, CANNOT BE CONSIDE RED AS INFRACTION OF PRABHUDAS LILLADHER P. LTD. ITA NO.6437/MUM./2009 ITA NO.6441/MUM./2009 9 LAW ALTHOUGH IRREGULARITIES ARE THERE, AND FOR THOS E IRREGULARITIES, THE ASSESSEE SUFFERED AND PAID THE FINE BUT THIS PAYMEN T CANNOT BE TERMED AS PENAL IN NATURE. SIMILARLY, LATE SUBMISSION OF M ARGIN CERTIFICATE DUE TO COMPUTER SOFTWARE PROBLEM, CANNOT BE CONSIDERED AS INFRACTION OF LAW AND IF ANY FINE IS PAID FOR SUCH LATE SUBMISSIO N, DUE TO UNAVOIDABLE CIRCUMSTANCES IN THE REGULAR COURSE OF BUSINESS THA T CANNOT ALSO BE TERMED AS PENAL IN NATURE. SIMILARLY, FINE PAID FOR DELAY IN MAKING THE DELIVERIES OF SHARES DUE TO DEFICIENCIES IN THE DOC UMENTS LIKE NON- MATCHING OF SIGNATURES, ETC. CANNOT BE CONSIDERED P ENAL IN NATURE; IRREGULARITIES OF THIS TYPE CANNOT BE RULED OUT IN SUCH TYPE OF BUSINESS AND ANY FINE PAID FOR THOSE IRREGULARITIES CANNOT B E CONSIDERED AS INFRACTION OF ANY LAW. SO, THE PAYMENTS MADE BY THE ASSESSEE IN THE REGULAR COURSE OF BUSINESS, CANNOT BE TERMED AS PEN AL IN NATURE, PARTICULARLY WHEN THE ASSESSEE DID NOT COMMIT THOSE IRREGULARITIES INTENTIONALLY AND REGULARLY. THEREFORE, CONSIDERING THE TOTALITY OF THE FACTS OF THE PRESENT CASE, IN THE INSTANT CASE, ALT HOUGH SOME VIOLATIONS OF THE CONDITIONS PRESCRIBED BY THE NSE WERE THERE BUT THOSE VIOLATIONS OCCURRED IN THE REGULAR COURSE OF BUSINESS AND CANN OT BE CONSIDERED AS INFRACTION OF ANY STATUTORY LAW. SO, THE EXPENSES I NCURRED BY THE ASSESSEE IN REGULAR COURSE OF BUSINESS WERE ALLOWAB LE. 27. LEARNED DEPARTMENTAL REPRESENTATIVE, ON THE OTHER H AND, RELIED ON THE DECISION OF DELHI BENCH OF THE TRIBUNAL IN ACIT V/S SUBHASH CHANDRA SHOREWALA, (2004) 91 TTJ 57 (DEL.), AND PRAYED THAT THE ISSUE BE SET ASIDE TO THE FILE OF ASSESSING OFFICER FOR VERIFYING AS T O WHETHER THE PENALTY WAS LEVIED FOR FAILURE TO ADHERE TO REGULATE THE PROCED URE OR FOR BREACH OF LAW. HIS CASE IS THAT THE NATURE OF EACH PENALTY SHOULD BE V ERIFIED AND DECISION TAKEN. THE ASSESSEE DRAWS THE ATTENTION TO PAGE-38(A) OF T HE PAPER BOOK AND POINTS OUT THAT ALL THE PAYMENTS ARE MADE TO NSE OR BSE AN D THEY ARE NOT PAID TO ANY GOVERNMENT FOR VIOLATION OF LAW. WE ARE CONVINC ED WITH THE SUBMISSIONS MADE BY THE ASSESSEE COUNSEL. THUS, RESPECTFULLY F OLLOWING THE DECISIONS OF THE CO-ORDINATE BENCH IN KARIA CAN CO. LTD. (SUPRA) , GOLDCREST CAPITAL MARKET LTD. (SUPRA) AND VRM SHARE BROKING (P) LTD. (SUPRA) AND MASTER CAPITAL SERVICES LTD. (SUPRA), WE UPHOLD THE FINDINGS OF TH E FIRST APPELLATE AUTHORITY AND DISMISS THE GROUND RAISED BY THE REVENUE. 28. NEXT GROUND IS ON THE ISSUE OF DELETION OF NOTIONAL LOSS ON FUTURES AND OPTIONS. 29. THE ASSESSEE HAD ENTERED INTO SUCH CERTAIN FUTURES AND OPTIONS TRANSACTIONS. AS ON 31 ST MARCH OF THE IMPUGNED FINANCIAL YEAR, THE NOTIONAL PRABHUDAS LILLADHER P. LTD. ITA NO.6437/MUM./2009 ITA NO.6441/MUM./2009 10 LOSS WAS QUANTIFIED AND CLAIMED AS EXPENDITURE. THE ASSESSING OFFICER DISALLOWED THE SAME ON THE GROUND THAT (A) FIGURE S ARE NOT ACCOUNTED IN THE BOOKS AT THE INCEPTION AND, HENCE, CANNOT FORM PART OF STOCK IN TRADE; (B) IN CASE, THEY ARE CONSIDERED AS CLOSING STOCK, THE VALUATION WILL BE NEGATIVE AND BY ITS VERY NATURE, STOCK IN TRADE CAN NOT BE NEGATIVED; AND (C) IN FUTURE PROFIT OR LOSS CANNOT ACCRUE UNTIL AND UN LESS THE CONTRACT IS SETTLED. THE COMMISSIONER (APPEALS) RELIED ON THE JUDGMENT O F THE HON'BLE SUPREME COURT IN CIT V/S WOODWARD GOVERNOR INDIA PVT. LTD. (2009) 312 ITR 254 (SC), AND ALLOWED THE CLAIM. 30. BEFORE US, LEARNED COUNSEL SUBMITS THAT THE ISSUE I S COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF A CO-ORDINATE BE NCH OF THE TRIBUNAL IN EDELWEISS CAPITAL LTD. V/S ITO, ITA NO.5324/MUM./20 07, ORDER DATED 10 TH NOVEMBER 2010. LEARNED DEPARTMENTAL REPRESENTATIVE, ON THE OTHER HAND, THOUGH NOT LEAVING HIS GROUND, ULTIMATELY AGREE THA T THE ISSUE HAS BEEN CONSIDERED AND HELD IN FAVOUR OF THE ASSESSEE BY TH E DECISION OF A CO- ORDINATE BENCH OF THE TRIBUNAL IN EDELWEISS CAPITAL LTD. (SUPRA). 31. RIVAL CONTENTIONS HEARD. ON CAREFUL CONSIDERATION O F THE FACTS AND CIRCUMSTANCES OF THE CASE AND THE CASE LAWS CITED B EFORE US, WE FIND THAT THE ISSUE BEFORE US IS COVERED IN FAVOUR OF THE ASSESSE E BY THE DECISION OF A CO- ORDINATE BENCH OF THE TRIBUNAL IN EDELWEISS CAPITAL LTD. (SUPRA), WHEREIN THE BENCH OBSERVED AS FOLLOWS:- .. THERE IS NO DISPUTE THAT THE ASSESSEE HOLDS DE RIVATIVES AS ITS STOCKI-IN-TRADE AND THERE IS ALSO NO DISPUTE THAT T HE PRINCIPLE COST OR MARKET PRICE, WHICHEVER IS LOWER IN VALUING THE DE RIVATIVES. WHEN THE DERIVATIVES ARE HELD AS STOCK-IN-TRADE THEN WHATEVE R RULES APPLY TO THE VALUATION OF STOCK-IN-TRADE WILL HAVE TO BE NECESSA RILY APPLY TO THEIR VALUATION ALSO. IT IS A WELL SETTLED POSITION IN LA W THAT WHILE ANTICIPATED LOSS IS TAKEN INTO ACCOUNT IN VALUING THE CLOSING S TOCK, ANTICIPATED PROFIT IN THE SHAPE OF APPRECIATED VALUE OF THE CLO SING STOCK IS NOT BROUGHT INTO THE ACCOUNT, AS NO PRUDENT TRADER WOUL D CARE TO SHOW INCREASED PROFIT BEFORE ITS REALIZATION. THIS IS TH E THEORY UNDERLYING THE RULE THAT THE CLOSING STOCK IS TO BE VALUED AT COST OR MARKET PRICE WHICHEVER IS THE LOWER, AND IT IS NOW GENERALLY ACC EPTED AS AND ESTABLISHED RULE OF COMMERCIAL PRACTICE AND ACCOUNT ANCY. THIS IS WHAT THE SUPREME COURT HELD IN THE CASE OF CHAINRUP SAMP ATRAM V/S COMMISSIONER OF INCOME TAX, WEST BENGAL, (1953) 24 ITR 481 (SC), PRABHUDAS LILLADHER P. LTD. ITA NO.6437/MUM./2009 ITA NO.6441/MUM./2009 11 SPEAKING THROUGH HONBLE JUSTICE PATANJALI SASTRI, THE THEN CHIEF JUSTICE OF INDIA (PAGE 485-486 OF THE REPORT). AT P AGE-486, THE SUPREME COURT FURTHER OBSERVED THAT LOSS DUE TO A FALL IN PRICE BELOW COST IS ALLOWED EVEN IF SUCH LOSS HAS NOT BEEN ACTU ALLY REALIZED. QUOTING FROM THE CASE OF WHIMSTER & CO. V/S COMMISS IONERS OF INLAND REVENUE (1926) 12 TAX CASES 813, THE SUPREME COURT OBSERVED THAT THE PROFITS THAT ARE CHARGEABLE TO TAX ARE THOSE RE ALIZED IN THE YEAR AND THAT AN EXCEPTION IS RECOGNIZED WHERE A TRADER PURCHASED AND STILL HOLDS GOODS WHICH ARE FALLEN IN VALUE IN WHICH CASE THOUGH NO LOSS HAS BEEN REALIZED NOR IT HAS OCCURRED, NEVERTHELESS AT THE CLOSE OF THE YEAR HE IS PERMITTED TO TREAT THESE GOODS AS OF THEIR MA RKET VALUE. THIS DECISION OF THE SUPREME COURT GOVERNS THE FACTS OF THE PRESENT CASE. IT IS TO THE ASSESSEES STRENGTH THAT THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA IN ITS GUIDELINES HAVE ALSO AP PROVED OF THE RULE OF PRUDENCE WHICH REALLY MEANS THAT WHILE ANTICIPATED LOSSES CAN BE TAKEN NOTE OF WHILE VALUING THE CLOSING STOCK, ANTI CIPATED PROFITS CANNOT BE RECOGNIZED. THE ANTICIPATED LOSS, IN THE LIGHT O F THE JUDGMENT OF THE SUPREME COURT CITED ABOVE, CANNOT BE TREATED AS A C ONTINGENT LIABILITY. THE LEARNED DR POINTED OUT THAT THE ASSESSEE HAS VA LUED EACH SCRIP OF THE DERIVATIVES AS AT THE END OF THE YEAR. WE DO NO T SEE HOW THIS CAN MAKE ANY DIFFERENCE TO THE LEGAL PRINCIPLE. IF THE DERIVATIVES HAVE BEEN TREATED AS STOCK-IN-TRADE, THEN THERE IS NOTHING UN USUAL IN THE ASSESSEE VALUING EACH DERIVATIVE BY APPLYING THE RU LE COST OR MARKET WHICHEVER IS LOWER. WE, THEREFORE, DIRECT THE ASSESSING OFFICER TO ALLO W THE PROVISION AS REFLECTING IN SUBSTANCE THE LOSS ARISING ON ACCOUNT OF VALUATION OF THE CLOSING STOCK. THE GROUND IS ALLOWED. RESPECTFULLY FOLLOWING THE AFORESAID DECISION OF T HE TRIBUNAL AND ALSO THE PRINCIPLES LAID DOWN BY THE HON'BLE SUPREME COU RT IN WOODWARD GOVERNOR INDIA PVT. LTD. (SUPRA), WE UPHOLD THE ORD ER OF THE COMMISSIONER (APPEALS) AND DISMISS THE GROUND OF APPEAL RAISED B Y THE REVENUE. 32. IN THE RESULT, REVENUES APPEAL IS DISMISSED. 33. TO SUM UP, ASSESSEES APPEAL IS ALLOWED IN PART AND REVENUES APPEAL IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 13.5.2011 SD/- ASHA VIJAYRAGHAVAN JUDICIAL MEMBER SD/- J. SUDHAKAR REDDY ACCOUNTANT MEMBER MUMBAI, DATED: 13.5.2011 PRABHUDAS LILLADHER P. LTD. ITA NO.6437/MUM./2009 ITA NO.6441/MUM./2009 12 COPY TO : (1) THE ASSESSEE (2) THE RESPONDENT (3) THE CIT(A), MUMBAI, CONCERNED (4) THE CIT, MUMBAI CITY CONCERNED (5) THE DR, C BENCH, ITAT, MUMBAI TRUE COPY BY ORDER PRADEEP J. CHOWDHURY ASSISTANT REGISTRAR SR. PRIVATE SECRETARY ITAT, MUMBAI BENCHES, MUMBAI DATE INITIAL 1. DRAFT DICTATED ON 6.5.2011 SR.PS 2. DRAFT PLACED BEFORE AUTHOR 9.5.2011 SR.PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER 9.5.2011 JM/AM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER 9.5.2011 JM/AM 5. APPROVED DRAFT COMES TO THE SR.PS/PS 9.5.2011 SR.PS/PS 6. DATE OF PRONOUNCEMENT 13.5.2011 SR.PS 7. FILE SENT TO THE BENCH CLERK 13.5.2011 SR.PS 8. DATE ON WHICH FILE GOES TO THE HEAD CLERK 9. DATE OF DISPATCH OF ORDER