Appeal details
Counselvise Citation
[2011] 140 COUNSELVISE.COM (IT) 48176 (ITAT-KOLKATA)
Assessee PAN
Bench
Appeal Number
Duration Of Justice
3 year(s) 1 month(s) 18 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
20-06-2011
Appeal Filed By
Department
Bench Allotted
C
Assessment Year
2002-2003
Appeal Filed On
02-05-2008
Judgement Text
, C , IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH: KOL KATA () , , , !' ) [BEFORE HONBLE SRI MAHAVIR SINGH, JM & HONBLE SHR I AKBER BASHA, AM] # # # # / I.T.A NO. 695/KOL/2008 $% &' $% &' $% &' $% &'/ // / ASSESSMENT YEAR: 2002-03 DEPUTY COMMISSIONER OF INCOME-TAX VS. LOKNATH SAR AF SECURITIES LTD. CIRCLE-6, KOLKATA. (PAN-AAACL 4567 A) ()* /APPELLANT ) (+,)*/ RESPONDENT ) & C.O.NO. 36/KOL/2008 # # # # / I.T.A NO. 695/KOL/2008 $% &' $% &' $% &' $% &'/ // / ASSESSMENT YEAR: 2002-03 LOKNATH SARAF SECURITIES LTD. VS. DEPUTY COMMISS IONER OF INCOME-TAX CIRCLE-6, KOLKATA. (CROSS OBJECTOR) (+,)*/ RESPONDENT ) & # # # # / I.T.A NO. 696/KOL/2008 $% &' $% &' $% &' $% &'/ // / ASSESSMENT YEAR: 2004-05 DEPUTY COMMISSIONER OF INCOME-TAX VS. LOKNATH SAR AF SECURITIES LTD. CIRCLE-6, KOLKATA. ()* /APPELLANT ) (+,)*/ RESPONDENT ) & C.O.NO. 37/KOL/2008 # # # # / I.T.A NO. 696/KOL/2008 $% &' $% &' $% &' $% &'/ // / ASSESSMENT YEAR: 2004-05 LOKNATH SARAF SECURITIES LTD. VS. DEPUTY COMMISS IONER OF INCOME-TAX CIRCLE-6, KOLKATA. (CROSS OBJECTOR) (+,)*/ RESPONDENT ) & # # # # / I.T.A NO. 1935/KOL/2008 $% &' $% &' $% &' $% &'/ // / ASSESSMENT YEAR: 2002-03 LOKNATH SARAF SECURITIES LTD. VS. ASSISTANT COMM ISSIONER OF INCOME-TAX, CIRCLE-6, KOLKATA. ()* /APPELLANT ) (+,)*/ RESPONDENT ) FOR THE APPELLANT/DEPARTMENT: SRI D. R. SINDHAL FOR THE ASSESSEE/CROSS OBJECTOR: SHRI R. SALARPURIA 2 ITA 695, 696 & 1935/K/20 0 8 LOKNATH SARAF SECURITIES LTD. A.Y. 02-03 & 04-05 C.O. NOS. 36 & 37/K/2008 ! / ORDER PER MAHAVIR SINGH/ : APPEAL IN ITA NOS.695 & 696/K/2008 BY REVENUE AND C ROSS OBJECTION NOS.36 & 37/K/2008 ARE ARISING OUT OF THE ORDERS OF CIT(A)-V I, KOLKATA IN APPEAL NOS. 95&122/CIT(A)-VI/06-07/C-6 BOTH DATED 25.02.2008 RE SPECTIVELY. ITA NO 1935 / K / 2008 BY ASSESSEE IS ARISING OUT OF THE ORDER OF CIT, KOL-II U/S 263 OF INCOME TAX ACT, 1961(HEREINAFTER REFERRED TO AS THE ACT), KOLKATA VIDE DATED 9.9.2 008 FOR ASSESSMENT YEAR 2002-03. ASSESSMENTS IN WERE FRAMED BY ACIT, CIRCLE-6, KOLKA TA FOR ASSESSMENT YEARS 2002-03 AND 2004-05 U/S.147/143(3) AND 143(3) OF THE ACT VIDE H IS ORDERS DATED 16.10.2006 AND 28.12.2006 RESPECTIVELY. FOR THE SAKE OF BREVITY AN D CLARITY, WE DISPOSE OF ALL THESE APPEALS AND CROSS OBJECTIONS BY THIS CONSOLIDATED ORDER. 2. THE FIRST TWO COMMON ISSUES IN APPEAL OF REVENUE IN ITA NO. 695/K/2008 IS AGAINST THE ORDER OF CIT(A) IN NOT CONFIRMING THE ACTION OF AO REGARDING INVOCATION OF EXPLANATION TO SECTION 73 OF THE ACT FOR HOLDING THE PROFIT OF BUS INESS OF ASSESSEE AS THAT OF SPECULATION PROFIT AND ALSO DEALING IN FUTURES AND OPTIONS AS SPECULAT ION PROFIT. FOR THIS, REVENUE HAS RAISED THE FOLLOWING GROUND NOS. 1 AND 2: 1. THAT THE LD. CIT(A) HAS ERRED IN LAW AS WELL AS ON FACTS BY OBSERVING THE EXPLANATION TO SECTION 73 OF THE I. T. ACT, 1961 IS NOT APPLICA BLE IN THE CASE OF THE ASSESSEE. 2. THAT THE LD. CIT(A) HAS ERRED IN LAW AS WELL AS ON FACTS BY OBSERVING THAT THE INCOME OF RS.13,65,965/- ON ACCOUNT OF DEALING IN FUTURES AND OPTIONS CANNOT BE TREATED AS SPECULATION PROFIT. 3. THE BRIEF FACTS LEADING TO THE ABOVE ISSUE ARE T HAT THE ASSESSEE COMPANY IS IN THE BUSINESS OF SHARE BROKING, FOLLOWING MERCANTILE SYS TEM OF ACCOUNTING AND IT HAS DISCLOSED INCOME FROM SHARE DEALING IN VARIOUS TYPES INCLUDIN G JOBBING, DEALING IN FUTURES AND OPTIONS AND REGULAR TRADING IN SHARES APART FROM INTEREST O N FIXED DEPOSITS AND DIVIDEND INCOME. THE ASSESSEE HAS ALSO DISCLOSED INCOME EARNED FROM BROK ERAGE AS A STOCK BROKER AND ALSO DEALS IN SHARES FOR SELF ALSO. THE ASSESSING OFFICER IN HIS ASSESSMENT ORDER NOTED THAT THE REGULAR ASSESSMENT FOR ASSESSMENT YEAR 2003-04 WAS COMPLETE D ON 13.12.2005 AND ON THE BASIS OF THE SAME, HE MADE FOLLOWING CONCLUSIONS: 1. THE FACTS AS PER RETURNED FIGURES AND AS PER TA X AUDIT REPORT. A. THE TRADING ACCOUNT OF SHARES AS DISCLOSED BY T HE ASSESSEE IN ITS FINAL ACCOUNTS ENCLOSED WITH THE RETURN ARE AS FOLLOWS: 3 ITA 695, 696 & 1935/K/20 0 8 LOKNATH SARAF SECURITIES LTD. A.Y. 02-03 & 04-05 C.O. NOS. 36 & 37/K/2008 SALE OF SHARES RS.136,35,22,792/- ADD: CLOSING STOCK RS. 17,34,63,376/- RS.153,69,86,168/- LESS : OPENING STOCK RS. 52,08,000/- ADD : PURCHASE RS.154,28,61,426/- LOSS IN SHARE TRADING RS. 1,10,83,258/- B. OTHER THAN THE ABOVE, THE ASSESSEE DISCLOSED TH E FOLLOWING AS INCOME FROM OPERATIONS: FUTURE AND OPTIONS DIFFERENCE RS.13,65,965/- BROKERAGE RS. 9,34,921/- DIVIDEND RS. 2,86,000/- INTEREST RECEIVED ON FIXED DEPOSIT RS.26,87,682/ - MISCELLANEOUS INCOME RS. 15,722/- SHORT TERM CAPITAL GAIN RS. 3,231/- C. IN THE EXPENDITURE SIDE, THE ASSESSEE DISCLOSED- I) OPERATIVE, ADMINISTRATIVE AND OTHER EXP. RS.1, 02,36,787/- II) INTEREST TO OTHERS RS. 71,55,208/- III) DEPRECIATION AS PER COMPANY ACCOUNTS RS. 5,84,972/- IV) EXPENDITURE WRITTEN OFF RS. 46,500/ - V) EXPENSES RELATING TO PREVIOUS YEAR RS. 35,0 6,608/- D. THE OPERATIVE, ADMINISTRATIVE AND OTHER EXPENSE S OF RS.1,02,36,787/- INCLUDED LOSS ON A/C. OF SELF DIFFERENCE/JOBBING FOR RS.58,8 6,269/- AND A LOSS ON SALE OF MOTOR CAR FOR RS.11,899/- E. THE TAX AUDITOR IN ITS REPORT STATED AS FOLLOWS: I) OUT OF EXPENDITURE WRITTEN OFF IN THE PROFIT AND LOSS ACCOUNT FOR RS.46,500/- ONLY RS.18,500/- QUALIFIED FOR ADMISSIBLE EXPENSES U/S. 35D. II) THE EXPENSES INCLUDED A SUM OF RS.49,789/- AS P ENALTY CHARGES PAID TO STOCK EXCHANGES FOR DELAY IN DEPOSITING CERTAIN PAPERS/S HORT DELIVERY PROCEEDING. III) LIABILITY PRE-EXISTED, DISALLOWED IN ASSESSMEN T OF ANY PRECEDING ASSESSMENT YEAR AND WAS PAID DURING THE YEAR TO QUALIFY FOR D EDUCTION IN THE CURRENT YEAR AS NIL. IV) THE EXPENDITURES RELATING TO PREVIOUS YEAR WERE ACCOUNTED FOR ON CASH BASIS AND INCLUDED RS.10,792/- AS SERVICE TAX OF EARLIER YEARS. II. OTHER OBSERVATIONS AND FINDINGS . I) IN REPLY TO QUERIES, RAISED BY THE ASSESSING OFF ICER FOR INVOCATION OF EXPLANATION BELOW SEC. 73 IN ASSESSEES CASE FOR A SSTT. YEAR 2003-04, THE A/R IN ITS WRITTEN II) SUBMISSIONS STATED THAT EXPLANATION BELOW SEC. 73 IS APPLICABLE ONLY WHEN SEC. 73 ITSELF APPLIES, AS THE EXPLANATION OF 4 ITA 695, 696 & 1935/K/20 0 8 LOKNATH SARAF SECURITIES LTD. A.Y. 02-03 & 04-05 C.O. NOS. 36 & 37/K/2008 III) ANY SECTION WITHOUT APPLICATIONS OF THAT PARTI CULAR SECTION IS NOT JUSTIFIED. TAKING THAT THE SAME REPLY WILL BE PUT FORWARD IN THE YEAR UNDER CONSIDERATION TOO, IT IS REFUTED AS BELOW. EXPLANATION BELOW SEC. 73 WAS INTRODUCED AS A DEEM ING PROVISION, THEREFORE, EVEN IF THERE IS NO SPECULATION TRANSACTION PER SE, IT CAN BE INVOKED. SECONDLY, SHARE BROKER OR ASSESSEE ENGAGED IN ONLY SHARE TRADING IS NOT EXCLUDED FROM APPLICATION OF THIS EXPLANATION. THIRDLY, THERE ARE TWO EXCEPTION CLAUSES FOR APPLICATIONS OF THIS SECTION. THE FIRST ONE BEING, SUCH ASSESSEES WHOSE GROSS TOTAL INCOME CONSISTS MAINLY OF INCOMES CHARGEABLE TO HEADS OTHER THAN SALARY AN D INCOME FROM PROFITS AND GAINS OF BUSINESS. IN THE ASSESSEES PRESENT CASE, AS PE R COMPUTATION OF INCOME FILED BY ITSELF, DOES NOT SHOW THAT, GROSS TOTAL INCOME CONS ISTS MAINLY OF ANY SOURCE OTHER THAN BUSINESS. EVEN IF WE CONSIDER, INTEREST ON FIXED D EPOSITS AND DIVIDEND INCOME TO BE TAKEN AS OTHER SOURCES OF INCOME, THE AMOUNTS ARE H OPELESSLY LESS THAN THAT FROM BUSINESS. IT MAY BE REMINDED THAT THE JURISDICTION AL HIGH COURT HAS ALREADY LAID DOWN THE PRINCIPLE THAT TO CONSIDER QUANTUM OF INCO ME FOR ANY OF THE SOURCES EVEN NEGATIVE FIGURES ARE TO BE TAKEN FOR COMPARISON OF QUANTUM IRRESPECTIVE OF PROFIT OR LOSS. THE OTHER EXCEPTION CLAUSE IS FOR ASSESSEES WHOSE PRINCIPAL BUSINESS IS OF MONEY LENDING. THE ASSESSEE IN ITS OWN STATEMENTS HAVE ADMITTED TO BE ONE OF THE LEADING STOCK BROKERS OF THE DIFFERENT EXCHANGES IN INDIA AND ITS PRINCIPAL BUSINESS HAD NEVER BEEN MONEY LENDING. THUS, THE LOSS IN SHARE TRADING DEFINITELY ATTRACT S THE DEEMING PROVISION OF EXPLANATION BELOW SEC. 73 AND THE LOSS IS TREATED A S SPECULATION LOSS. 4. THE ASSESSING OFFICER INVOKED EXPLANATION TO SEC TION 73 OF THE ACT AND FINALLY HELD THAT LOSS IS SPECULATION LOSS IS NOT TO BE EXCLUDED FROM THE INCOME OF ASSESSEES BUSINESS INCOME IN VIEW OF EXPLANATION TO SEC. 73 OF THE ACT AND AS PER COMPUTATION OF INCOME FILED BY THE ASSESSEE IT DOES NOT INDICATE THAT THE GROSS TO TAL INCOME CONSISTS MAINLY OF ANY OTHER SOURCES OR OTHER THAN BUSINESS OF SPECULATION. AGG RIEVED AGAINST THIS FINDING, ASSESSEE PREFERRED APPEAL BEFORE CIT(A) AND CIT(A) NOTING TH E FACT THAT IT HAS BUSINESS ACTIVITY OF SHARE TRADING WHICH HAD SUFFERED LOSS OF RS.1,10,83,258/- AND ALSO EARNED PROFIT UNDER FUTURES AND OPTIONS AMOUNTING TO RS.13,65,965/- AND PROFIT IN S HARE TRADING, JOBBING PROFIT, PROFIT ON FUTURES TRADING AND OPTIONS TRADING AND PREMIUM PAI D ON ACCOUNT OF FUTURES AND OPTIONS ARE PART OF ITS SHARE BUSINESS AND ACCORDINGLY, CONSIDE RING EXPLANATION TO SEC. 73 OF THE ACT ALLOWED THE CLAIM OF THE ASSESSEE AS BUSINESS LOSS FROM SHARE BUSINESS ACTIVITY BY GIVING FOLLOWING FINDING: IN THE LIGHT OF ABOVE, THE PROVISIONS OF SEC.73 RE AD WITH EXPLANATION THERETO ARE NOT APPLICABLE TO THE APPELLANT COMPANY. IN VIEW OF TH E ABOVE, A.O IS DIRECTED TO ALLOW THE LOSS IN SHARE BUSINESS AGAINST THE SHARE TRADIN G AND FUTURE OPTION BUSINESS WITH OTHER BUSINESS OF THE COMPANY. THE ENTIRE BUSINESS LOSS BE TREATED AS LOSS FROM SHARE BUSINESS ACTIVITY AND ALLOWED TO BE CARRIED FORWARD FOR SET OFF WITH SHARE BUSINESS OF THE APPELLANT IN SUBSEQUENT YEARS AS PER PROVISIONS OF SEC.70 & 71 OF I. T. ACT. ACCORDINGLY, GROUND NO. 2 IS ALLOWED. 5 ITA 695, 696 & 1935/K/20 0 8 LOKNATH SARAF SECURITIES LTD. A.Y. 02-03 & 04-05 C.O. NOS. 36 & 37/K/2008 AGGRIEVED AGAINST THIS FINDING, REVENUE IS IN APPEA L BEFORE US. 5. WE HAVE HEARD RIVAL SUBMISSIONS AND GONE THROUGH FACTS AND CIRCUMSTANCES OF THE CASE. THE LD. CIT DR SHRI D. R. SINDHAL ARGUED THAT THE O RDER OF ASSESSING OFFICER HAS NOT BEEN CONTROVERTED BY CIT(A) AND HE STATED THAT THE EXPLA NATION TO SEC. 73 OF THE ACT IS A DEEMING PROVISION AND THERE ARE TWO EXCEPTIONS IN EXPLANATI ON, FIRST BEING, WHETHER ASSESSEES GROSS TOTAL INCOME CONSISTS MAINLY OF INCOME CHARGEABLE H EADS OTHER THAN SALARY AND INCOME FROM PROFIT AND GAINS FROM BUSINESS. THE LD. CIT DR STA TED THAT IN ASSESSEES CASE, IT IS CLEAR FROM COMPUTATION OF INCOME FILED BY IT THAT, GROSS TOTAL INCOME CONSISTS MAINLY INCOME OF ANY SOURCE OTHER THAN BUSINESS AND EVEN INTEREST ON FIX ED DEPOSIT AND DIVIDEND ARE TAKEN AS OTHER SOURCE OF INCOME, THE AMOUNTS ARE LESS THAN THAT FR OM BUSINESS INCOME. THE OTHER EXCEPTION CLAUSE IS FOR THE ASSESSEES, WHOSE PRINCIPAL BUSIN ESS IS OF MONEY LENDING. HE STATED THAT THE ASSESSEE ADMITTED BEFORE THE ASSESSING OFFICER THAT IT IS A LEADING STOCK BROKER AND ENGAGED IN DIFFERENT EXCHANGES AND ITS PRINCIPAL BUSINESS WAS NEVER MONEY LENDING. HE NARRATED THE FACTS FROM THE ASSESSEES PAPER BOOK AND HE HAS GONE TO T HE ACCOUNTS OF THE ASSESSEE FOR THE RELEVANT ASSESSMENT YEAR AS WELL AS ONE TO THE PRIOR AND NEX T YEAR. WHILE MAKING COMPARISON, THE LD. CIT-DR DREW OUR ATTENTION TO LOANS AND INVESTMENTS AT PAGE 4 OF ASSESSEES PAPER BOOK AND STATED THAT THERE IS INVESTMENT ON LOANS AND ADVANC ES TO THE EXTENT OF RS.1,81,75,668/- AS AGAINST THE INVESTMENT OF EARLIER YEAR IN LOANS AND ADVANCES AT RS.3,79,06,380/-. THE LD. CIT- DR FURTHER STATED THAT IN CASE THE ASSESSEES SHARE BUSINESS IS SPECULATIVE BUSINESS, THE LOSS CANNOT BE ALLOWED AGAINST NORMAL BUSINESS INCOME IN VIEW OF EXPLANATION TO SEC. 73 OF THE ACT. HE DREW OUR ATTENTION TO EXPLANATION TO SEC. 73 OF THE ACT. HE FURTHER ARGUED THAT THE CIT(A) HAS NOT GIVEN ANY INDEPENDENT FINDING ON THE ISSUE AND NO FACTS ARE DISCUSSED IN THIS CASE EXCEPT THE PROVISIONS OF THE ACT. FINALLY, TH E LD. CIT DR ARGUED THAT SEEING THE NATURE OF SALE OF SHARES AND OPENING STOCK OF SHARES AND PURC HASE AND LOSS SUFFERED IN SHARE TRADING CLEARLY REVEALED THAT ASSESSEE HAD ENTERED INTO SPE CULATIVE TRANSACTION AND NOT IN THE BUSINESS OF SHARE TRANSACTION. HENCE, ACCORDING TO LD. CIT DR, THE EXPLANATION TO SEC. 73 IS CLEARLY APPLICABLE TO THIS CASE. ACCORDINGLY, HE URGED THE BENCH TO CONFIRM THE ORDER OF ASSESSING OFFICER. 6. THE LD. COUNSEL FOR THE ASSESSEE, ON THE OTHER H AND, HAS NARRATED THE FACTS THAT THE ASSESSING OFFICER HIMSELF HAS NOTED THAT THE ASSESS EE HAS DISCLOSED INCOME FROM SHARE DEALING OF VARIOUS TYPES INCLUDING JOBBING, DEALINGS IN FUT URES AND OPTIONS, REGULAR TRADING IN SHARES, 6 ITA 695, 696 & 1935/K/20 0 8 LOKNATH SARAF SECURITIES LTD. A.Y. 02-03 & 04-05 C.O. NOS. 36 & 37/K/2008 EARNED BROKERAGE INCOME AS SHARE BROKER FOR OTHER C LIENTS AND FOR SELF APART FROM INTEREST INCOME ON FIXED DEPOSITS AND DIVIDEND. THE LD. COU NSEL FOR THE ASSESSEE FURTHER STATED FROM THE VERY ACCOUNT AS NARRATED BY THE ASSESSING OFF ICER ON PAGE 2 OF HIS ASSESSMENT ORDER (NOW REPRODUCED ABOVE IN PARA-3 PAGE-3) WHICH CLEAR LY REVEALS THAT THE ASSESSEE IS ENGAGED IN BUSINESS OF SALE AND PURCHASE OF SHARES AND DURING THE COURSE OF NORMAL BUSINESS OF SALE OF SHARES, IT HAS INCURRED LOSS IN SHARE TRADING. HE ARGUED THAT ASSESSEE IS ONE OF THE LEADING STOCK-BROKER WITH DIFFERENT EXCHANGES IN INDIA AND ITS PRINCIPAL BUSINESS WAS NEVER OF MONEY LENDING. THE LD. COUNSEL FOR THE ASSESSEE FURTHER STATED THAT THE ASSESSING OFFICER HIMSELF HAS ASSESSED PROFIT EARNED UNDER FUTURES AND OPTIONS AM OUNTING TO RS.13,65,965/- AS INCOME FROM BUSINESS. HE ARGUED THAT IT IS NOT THE CASE OF THE REVENUE THAT THE ASSESSEE IS A COMPANY CONTROLLED BY A BUSINESS HOUSE AND THE SHARE TRANSA CTIONS IN QUESTION ARE EFFECTED WITH A VIEW TO MANIPULATE OR REDUCE ITS INCOME. IT IS ALSO NOT THE CASE OF THE REVENUE THAT THE ASSESSEE HAS DECLARED THIS LOSS IN SHARE TRADING ACTIVITY IN ORD ER TO REDUCE THE TAX INCIDENCE. THE LD. COUNSEL FOR THE ASSESSEE RELIED ON THE CASE LAW OF HONBLE CALCUTTA HIGH COURT IN THE CASE OF CIT VS. ARVIND INVESTMENTS LTD. 192 ITR 365 (CAL) A ND ALSO OF THIS TRIBUNAL MUMBAI BENCH IN THE CASE OF SAMBA TRADING & INV. P. LTD. VS. ACI T 58 ITD 360 (MUM). THE LD. COUNSEL FOR THE ASSESSEE ALSO RELIED ON THE CASE OF COORDIN ATE BENCH IN THE CASE OF WONDER MAX VINIMAY (P) LTD. VS. ITO, ITA NO. 188 (KOL) OF 2009 FOR ASSESSMENT YEAR 2005-06 DATED 24.12.2009. 7. WE FIND FROM THE CASE RECORDS THAT THE ASSESSEE SUFFERED LOSS OF RS.1,10,83,258/- IN THE ACTIVITY OF SHARE TRADING AND ALSO EARNED PROFIT IN FUTURES AND OPTIONS AMOUNTING TO RS.13,65,965/-. THE ASSESSEE HAS EARNED INCOME IN THE SHAPE OF PROFIT IN SHARE TRADING, JOBBING PROFITS, PROFIT ON FUTURES AND OPTIONS, PRE MIUM PAID ON ACCOUNT OF FUTURES AND OPTIONS, WHICH ARE PART OF ASSESSEES SHARE BUSINESS. THE A SSESSEE IS A SHARE BROKER TRADED IN VARIOUS EXCHANGES ON ITS OWN BEING A REGISTERED STOCK EXCHA NGE BROKER AND FROM THE RECORDS IT HAS GATHERED THAT THE ASSESSEE HAS TRADED IN ASSESSMENT YEAR 2002-03 AND DISCLOSED THE FOLLOWING DETAILS OF SALES AND PURCHASES: 2002-2003 2001-2002 DESCRIPTION SHARES (NOS) QUANTITY VALUE QUANTITY VALUE OPENING STOCK PURCHASES SALES CLOSING STOCK 627253 13090809 13712062 6000 173,563,376 2,496,679,441 2,640,911,814 731,798 42500 7041387 6456634 627253 5,208,000 1,542,861,426 1,363,522,792 173,463,376 7 ITA 695, 696 & 1935/K/20 0 8 LOKNATH SARAF SECURITIES LTD. A.Y. 02-03 & 04-05 C.O. NOS. 36 & 37/K/2008 8. WE FIND FROM THE FACTS THAT THE ASSESSEE IS ENGA GED IN THE BUSINESS OF SALE AND PURCHASE OF SHARES AS A BROKER, WHO IS REGISTERED WITH VARIO US STOCK EXCHANGES. THE ASSESSEE IS ENTERING INTO SHARE TRADING IN THESE EXCHANGES FOR VARIOUS C LIENTS FOR AND FROM THE RECORDS IT CLEARLY REVEALS THAT APART FROM NORMAL SHARE TRADING IT IS ALSO MAKING TRADING FOR ITS OWN PURPOSES AND EARNED PROFITS ON FUTURES AND OPTIONS. WE FIND THA T DIFFERENT TREATMENT TO TRANSACTIONS SEPARATELY DOES CONSTITUTE BUSINESS ACTIVITY AND WH EN THE ASSESSEE IS A SHARE BROKER, TRADING IN EXCHANGES FOR CLIENTS OR FOR ITS OWN PURPOSES HE SA FEGUARDS FUTURES AND OPTIONS TRANSACTIONS AND ENTERED INTO JOBBING TRANSACTIONS, PURCHASE AN D SALE OF SHARES AND THE ENTIRE ACTIVITY IN SHARE BUSINESS, I.E. BY REGISTERED STOCK BROKER, CO NSTITUTE BUSINESS ACTIVITY AND THE SAME CANNOT BE SAID THAT THE ASSESSEE IS ENGAGED IN THE BUSINES S OF SPECULATION THEREBY EARNING SPECULATION PROFIT. WE FIND FROM THE FACTS THAT THERE IS NO TR ANSACTION OF INVESTING THE SURPLUS FUND LYING WITH THE ASSESSEE TEMPORARILY FOR A BRIEF PERIOD, W HICH GIVE A CONCLUSION THAT THE ASSESSEE IS IN SPECULATION PROFIT. THERE IS NO INSTANCE BROUGHT T O OUR NOTICE BY REVENUE THAT THE ASSESSEE HAS ENTERED INTO SPECULATION TRANSACTION OF SHARES, BY VIRTUE OF WHICH THEY HAVE SPECULATED IN TRANSACTIONS WITHOUT MAKING ANY INVESTMENT OR THEY HAVE NOT RECEIVED THE DELIVERIES OR NOT TRADED ON BEHALF OF THE CLIENTS. CARRYING ON A BUS INESS IS SOMETHING DIFFERENT FROM ENTERING INTO SPECULATION TRANSACTION AND IN ORDER TO CONSTI TUTE BUSINESS THERE SHOULD BE AN ORGANIZED ACTIVITY AND NOT THIS SPECULATION TRANSACTION FROM WHICH SPECULATION PROFIT IS EARNED. 9. COMING TO EXPLANATION TO SECTION 73 OF THE ACT, WHICH INTRODUCED A LEGAL FICTION AND IT IS ALSO CLEAR THAT EXPLANATION DOES NOT APPLY TO AN INVESTMENT COMPANY OR A COMPANY WHOSE PRINCIPAL BUSINESS IS OF BANKING OR MONEY LENDING. IF THE BUSINESS OF A COMPANY WHICH DOES NOT FALL WITHIN THE EXCLUDED CATEGORIES CONSISTED OF PURCHASE AND SALE OF SHARES OF OTHER COMPANIES THEN SUCH A COMPANY SHALL BE DEEMED TO BE CARRYING ON SPECULATION BUSINESS FOR THE PURPOSE OF SECTION 73 OF THE ACT TO THE EXTENT TO W HICH BUSINESS CONSISTS OF PURCHASE AND SALE OF SHARES BUT IN THE PRESENT CASE, THE ASSESSEES B USINESS CONSISTS OF PURCHASE AND SALE OF SHARES FOR CLIENTS OR INVESTMENT FOR ITSELF AND NOT DEALIN G IN PURCHASES AND SALE OF SHARE SPECULATION. WE FIND THAT HONBLE CALCUTTA HIGH COURT IN THE CAS E OF ARVIND INVESTMENT LTD. (SUPRA) HAS CONSIDERED THIS ISSUE WHILE DISCUSSING EXPLANATION TO SEC. 73 OF THE ACT AS UNDER: SUB-SECTION (1) OF SECTION 73 RESTRICTS THE SCOPE OF SECTION 70 WHICH PERMITS THE SETTING OFF OF LOSS FROM ONE SOURCE AGAINST THE PROFIT FROM ANOTHER SOURCE FALLING UNDER THE SAME HEAD OF INCOME AND SUB-SECTION (1) O F SECTION 73 CATEGORICALLY DECLARES THAT ANY LOSS ARISING FROM SPECULATION BUSINESS SHA LL NOT BE SET OFF EXCEPT AGAINST PROFITS AND GAINS OF ANOTHER SPECULATION BUSINESS. IN OTHER WORDS, IF THERE IS A SPECULATION LOSS AND ALSO GAIN FROM ANOTHER SOURCE OF NON SPECULATION BUSINESS THEN SUCH SPECULATION LOSS CANNOT BE SET OFF AGAINST THE PROFIT FROM A NON-SPECULATION BUSINESS. 8 ITA 695, 696 & 1935/K/20 0 8 LOKNATH SARAF SECURITIES LTD. A.Y. 02-03 & 04-05 C.O. NOS. 36 & 37/K/2008 SUB-SECTION (2) OF SECTION 73 RESTRICTS THE SCOPE OF SECTION 72 WHICH PROVIDES FOR CARRYING FORWARD AND SETTING OFF OF BUSINESS LO SSES. IF ANY LOSS COMPUTED IN RESPECT OF A SPECULATION BUSINESS HAS NOT BEEN WHOLLY SET O FF, SUCH LOSS MAY BE CARRIED FORWARD AND SET OFF AGAINST PROFITS AND GAINS OF ANY SPECUL ATION BUSINESS IN THE FOLLOWING ASSESSMENT YEARS. THE EXPLANATION TO SECTION 73 INTRODUCES A LEGAL F ICTION. THE SECTION APPLIES ONLY TO A COMPANY. IT DOES NOT APPLY TO INDIVIDUALS , FIRMS, HINDU UNDIVIDED FAMILIES OR ASSOCIATIONS OF PERSONS. THE EXPLANATION ALSO DOES NOT APPLY TO AN INVESTMENT COMPANY OR A COMPANY WHOSE PRINCIPAL BUSINESS IS BANKING OR MONEY-LENDING. IF THE BUSINESS OF A COMPANY WHICH DOES NOT FALL W ITHIN THE EXCLUDED CATEGORIES CONSISTS OF PURCHASE AND SALE OF SHARES OF OTHER CO MPANIES, THEN SUCH A COMPANY SHALL BE DEEMED TO BE CARRYING ON SPECULATION BUSINESS FO R THE PURPOSE OF SECTION 73 TO THE EXTENT TO WHICH THE BUSINESS CONSISTS OF THE PURCHA SE AND SALE OF SUCH SHARES. AND FURTHER HONBLE JURISDICTIONAL HIGH COURT HELD THAT THE PHRASE TO THE EXTENT TO WHICH THE BUSINESS CONSISTED OF PURCHASE AND SALE OF SUCH SHARES ALSO DOES NOT INDICATE THAT THE LEGISLATURE HAD SEVERAL OTHER ACTUAL AND EXISTING N ON-SPECULATIVE ACTIVITIES OF BUSINESS IN MIND. IT MERELY INDICATES THAT THE BUSINESS ACTIVIT Y WHICH CONSISTS OF PURCHASE AND SALE OF SHARES WILL BE TREATED AS SPECULATION BUSINESS. IF THE ENTIRE BUSINESS ACTIVITY OF A COMPANY CONSISTS OF PURCHASE AND SALE OF SHARES OF OTHER CO MPANIES, THEN THE ENTIRE BUSINESS WILL BE TREATED AS PECULATION BUSINESS. BUT, IF, APART FRO M PURCHASE AND SALE OF SHARES, THE COMPANY HAS OTHER BUSINESS ACTIVITIES, THEN THOSE OTHER ACT IVITIES WILL NOT TREATED AS SPECULATION BUSINESS. THE CIRCULAR ON WHICH RELIANCE HAS BEEN PLACED ALS O DOES NOT ADVANCE THE CASE OF THE ASSESSEE IN ANY WAY. THE OBJECT AS STATED IN THE CI RCULAR IS TO CURB THE DEVICE TO MANIPULATE AND REDUCE THE TAXABLE INCOME OF A COMPANY UNDER TH E MANAGEMENT OF A CONTROLLING GROUP OF PERSONS. BUT THE CIRCULAR HAS CLEARLY STATED IN PAR AGRAPH 19.1 THAT THE BUSINESS OF PURCHASE AND SALE OF SHARES BY COMPANIES WHICH ARE NOT INVES TMENT OR BANKING COMPANIES OR COMPANIES CARRYING ON THE BUSINESS OF GRANTING LOAN S AND ADVANCES WILL BE TREATED ON THE SAME FOOTING AS SPECULATION BUSINESS. THEREFORE, THE CIRCULAR DOES NOT LEAVE ANY ROOM FO R DOUBT THAT THE EXPLANATION WILL APPLY TO THE BUSINESS OF PURCHASE AND SALE OF SHARE S OF CERTAIN COMPANIES. NOWHERE IN THE CIRCULAR HAS ANY INDICATION BEEN GIVEN THAT WHERE T HE ONLY BUSINESS OF A COMPANY CONSISTS OF PURCHASE AND SALE OF SHARES, THE EXPLANATION WILL N OT APPLY. 10. WE FIND THAT IN THE PRESENT CASE THE ASSESSEE I S IN THE BUSINESS OF PURCHASE AND SALE OF SHARES BUT THE REVENUE NOWHERE PROVED OR BROUGHT TO OUR NOTICE ANY INSTANCE THAT IT HAS ENTERED 9 ITA 695, 696 & 1935/K/20 0 8 LOKNATH SARAF SECURITIES LTD. A.Y. 02-03 & 04-05 C.O. NOS. 36 & 37/K/2008 INTO ANY SPECULATIVE TRANSACTION. WE FIND THAT HON BLE CALCUTTA HIGH COURT IN THE CASE OF ARVIND INVESTMENT LTD. (SUPRA) HAS CLEARLY MADE A D ISTINCTION THAT EXPLANATION DOES NOT APPLY TO AN INVESTMENT COMPANY OR A COMPANY WHOSE PRINCIP AL BUSINESS IS BANKING OR MONEY LENDING AND IF THE BUSINESS OF A COMPANY WHICH DOES NOT FALL WITHIN THE EXCLUDED CATEGORIES CONSISTING OF PURCHASE AND SALE OF SHARES OF OTHER COMPANIES, THEN SUCH A COMPANY SHALL BE DEEMED TO BE CARRYING ON SPECULATION BUSINESS AND T O WHICH EXPLANATION TO SECTION 73 OF THE ACT WILL EXTEND. BUT IN THE PRESENT CASE, THE ASSE SSEE IS CARRYING ON BUYING AND SELLING OF SHARES OF CERTAIN COMPANIES NO SPECULATIVE TRANSACT ION OF PURCHASE AND SALE WERE FOLLOWED BY DELIVERY OF SCRIP AND AS SUCH CANNOT BE TREATED AS SPECULATIVE TRANSACTION AS DEFINED IN SECTION 43(5) OF THE ACT. THE PROVISION OF SECTION 43(5) O F THE ACT DEFINES SPECULATIVE TRANSACTION TO MEAN A TRANSACTION IN WHICH A CONTRACT FOR THE PURC HASE OR SALE OF ANY COMMODITY, INCLUDING ANY STOCK OR SHARES, IS PERIODICALLY OR ULTIMATELY SETTLED OTHERWISE THAN BY THE ACTUAL DELIVERY OR TRANSFER OF THE COMMODITY OR SCRIP. HERE, IN TH E PRESENT CASE, THE ASSESSEE IS ACTUALLY DEALING IN PURCHASE AND SALE OF SHARES FOR CLIENTS AND IT IS ITS NORMAL AND REGULAR BUSINESS. IT CANNOT BE CALLED AS SPECULATIVE BUSINESS EARNING SP ECULATIVE PROFITS. SIMILAR ARE THE REASONS FOR THE ISSUE OF FUTURES AND OPTIONS AS BOTH THE AU THORITIES HAVE RELIED ON THE SAME, TAKING A CONSISTENT VIEW, WE CONFIRM THE ORDER OF CIT(A) ON BOTH THE ISSUES. 11. THE NEXT ISSUE IN ITA NO.695/K/2008 IS AS REGAR DS TO THE ORDER OF CIT(A) DELETING THE DISALLOWANCE OF RS.28,000/- MADE U/S. 35D OF THE AC T BY ADMITTING FRESH EVIDENCE IN VIOLATION OF RULE 46A OF THE I. T. RULES, 1962. FOR THIS, TH E REVENUE HAS RAISED FOLLOWING GROUND NO.3: 3. THAT THE LD. CIT(A) HAS ERRED IN LAW AS WELL AS ON FACTS BY DIRECTING THE ASSESSING OFFICER TO DELETE THE DISALLOWANCE OF RS.28,000/- M ADE U/S. 35D AND ALSO ADMITTING FRESH EVIDENCE IN VIOLATION OF RULE 46A. IN SUPPORT OF ORDER OF CIT(A), ASSESSEE IN ITS CROS S OBJECTION NO.36/K/2008 HAS RAISED THE FOLLOWING GROUND NO.3: 3. FOR THAT IN VIEW OF THE FACTS AND CIRCUMSTANCES OF THE CASE THE LD. CIT(A) WAS WHOLLY CORRECT AND JUSTIFIED IN ALLOWING THE RELIEF ON THE ISSUES WHICH ARE DISPUTED IN THE DEPARTMENTAL APPEAL AND THAT THERE WAS NO VIOLA TION OF RULE 46A OF THE I. T. RULES WHILE DELETING THE DISALLOWANCE OF RS.28,000/- MADE IN ASSESSMENT U/S. 35D OF THE ACT. THE DEPARTMENTS APPEAL BEING DEVOID OF MERIT IS LI ABLE TO BE DISMISSED. 12. WE HAVE HEARD RIVAL CONTENTIONS AND GONE THROUG H FACTS AND CIRCUMSTANCES OF THE CASE. WE FIND THAT THE AO HAS DISALLOWED A SUM OF RS.28,0 00/- BUT FOR THAT NO REASONS WERE GIVEN. THE CIT(A) ALLOWED THE CLAIM OF THE ASSESSEE BY STA TING THAT THE SUM OF RS.28,000/- WAS PAID TO CALCUTTA STOCK EXCHANGE TOWARDS TRADING IN THE C OURSE OF BUSINESS AND THIS BEING 10 ITA 695, 696 & 1935/K/20 0 8 LOKNATH SARAF SECURITIES LTD. A.Y. 02-03 & 04-05 C.O. NOS. 36 & 37/K/2008 PRELIMINARY AND MISCELLANEOUS EXPENSES WRITTEN OFF. WE FIND NO FAULT IN THE ORDER OF CIT(A) AND THE ISSUE OF THE REVENUE APPEAL IS DISMISSED. THE GROUND OF CROSS OBJECTION OF THE ASSESSEE IS SUPPORTIVE OF THE ORDER OF CIT(A) AND H ENCE, IT IS DISMISSED AS INFRUCTUOUS. 13. THE FIRST ISSUE IN CO NO.36/K/2008 IS REGARDIN G JURISDICTION I.E. REOPENING OF ASSESSMENT U/S. 147 R.W.S. 148 OF THE ACT UPHELD BY CIT(A). FOR THIS, THE ASSESSEE HAS RAISED FOLLOWING GROUND NO.1: 1.FOR THAT IN VIEW OF THE FACTS AND CIRCUMSTANCES OF THE CASE THE LD. CIT(A) WAS WHOLLY WRONG AND UNJUSTIFIED IN UPHOLDING THE ACTION OF TH E A.O. IN INITIATING THE PROCEEDING U/S. 147 OF THE I. T. ACT BY ISSUE OF NOTICE U/S. 148 AN D SUBSEQUENTLY COMPLETING THE ASSESSMENT U/S. 143(3)/147 WITHOUT CONSIDERING AND APPRECIATING THE FACT THAT ALL THE MATERIAL FACTS INCLUDING THE TRADING A/C OF SHARES NECESSARY FOR THE ASSESSMENT WERE FULLY AND TRULY DISCLOSED IN THE RETURN AND NO NEW MATERI AL OR EVIDENCE WAS BROUGHT ON RECORD TO JUSTIFY THE REOPENING THE ASSESSMENT ON A SINGLE ISSUE. ACTIONS OF BOTH THE A.O. AND THE LD. CIT(A) WERE WHOLLY ARBITRARY, UNREASONABLE, UNC ALLED FOR AND BAD IN LAW. THE ORDER U/S. 143(3)/147 BEING WHOLLY BAD, ILLEGAL AND VOID AB INITIO BOTH ON FACTS AND IN LAW IS LIABLE TO BE QUASHED/CANCELLED. 14. THE BRIEF FACTS LEADING TO THE ABOVE ISSUE ARE THAT THE ASSESSEE COMPANY FILED ITS RETURN OF INCOME FOR ASSESSMENT YEAR 2002-03 ON 28.10.2002 DISCLOSING INCOME FROM SHARE DEALING OF VARIOUS TYPES INCLUDING JOBBING, DEALING IN FUTU RES AND OPTIONS, REGULAR TRADING IN SHARES, INTEREST ON FIXED DEPOSITS AND DIVIDEND APART FROM BROKERAGE EARNED AS SHARE BROKER. THIS RETURN WAS PROCESSED U/S. 143(1) OF THE ACT ON 26.5 .2003. SUBSEQUENTLY, ASSESSING OFFICER NOTED FROM THE ASSESSMENT RECORD THAT EXPLANATION T O SECTION 73 OF THE ACT IS ATTRACTED AS THE ASSESSEE IS IN THE SPECULATION BUSINESS AND BY VIRT UE OF WHICH HE HAS SUFFERED SPECULATION LOSS. ACCORDINGLY, HE RECORDED THE REASONS BY DATED 27.3. 2006 AS UNDER: 27.03.06 : FROM THE P&L A/C IT HAS BEEN OBSERVED T HAT THE ASSESSEE HAS SOLD SHARES WORTH RS.136,35,22,792. THE NET PROFIT/LOSS ON SHA RE TRADING IS AS BELOW: SALE 136,35,22,792 ADD: CL. STOCK 17,34,63,376 153,69,86,168 LESS PURCHASE & OP. STOCK 154,80,69,426 LOSS 1,10,83,258 THE ABOVE LOSS ON SHARE TRADING HAS BEEN SET OFF WI TH INTEREST INCOME WHICH FALLS UNDER INCOME FROM OTHER SOURCES. EXPLANATION TO SEC. 73 IS ATTRACTED IN ASSESSEES CASE AND THE ABOVE LOSS IS TO BE TREATED AS SPECULATION LOS S. THE ASSESSEE ALSO DOES NOT FALL UNDER THE TWO EXEMPTIONS IN EXPLANATION TO SEC.73 W HICH IS SQUARELY APPLICABLE IN ASSESSEES CASE. I HAVE REASON TO BELIEVE THAT THE AMOUNT OF RS.1,10 ,83,258 SHOULD BE ADDED TO BUSINESS INCOME AND IS TO BE TREATED AS SPECULATION LOSS WH ICH CANNOT BE SET OFF WITH BUSINESS PROFITS. THEREFORE, THE AMOUNT ABOVE HAS ESCAPED A SSESSMENT. 11 ITA 695, 696 & 1935/K/20 0 8 LOKNATH SARAF SECURITIES LTD. A.Y. 02-03 & 04-05 C.O. NOS. 36 & 37/K/2008 ISSUE NOTICE U/S, 148 OF THE I. T. ACT. AND ON THE BASIS OF THESE REASONS HE REOPENED THE A SSESSMENT AND ASSESSEE WAS ALSO MADE AWARE OF THE REASONS VIDE LETTER DATED 23.8.2006. IN RESPONSE TO NOTICE U/S. 148 OF THE ACT, THE ASSESSEE FILED RETURN OF INCOME REPEATING THE SAME INCOME/LOSS ON 19.4.2006. THE ASSESSING OFFICER FRAMED ASSESSMENT U/S. 147 R.W.S 143(3) OF THE ACT AND DISALLOWED THIS LOSS OF RS.1,10,83,258/- INCURRED IN SHARE TRADING. AGGRIE VED, ASSESSEE PREFERRED APPEAL BEFORE CIT(A) AND IN APPEAL, HE CONFIRMED THE ACTION OF TH E ASSESSING OFFICER REOPENING THE ASSESSMENT BY GIVING FOLLOWING FINDING IN PARA 2.3 AND 2.4 OF HIS APPELLATE ORDER: 2.3. I HAVE CONSIDERED THE SUBMISSION MADE BY THE APPELLANT AS WELL AS THE OBSERVATION MADE BY THE A.O. THE APPELLANT IN ITS SUBMISSION HAS RELIED ON A DECISION OF ITAT, MUMBAI IN ITA 672 AND 673/MUMBAI/2004 DATE D 24.08.2007. THE APPELLANT IN ITS SUBMISSION HAS ARGUED THAT THE FACT OF TRADI NG IN SHARES AND RESULTANT LOSS WAS EXPLICITLY DISCLOSED IN THE P&L ACCOUNT AND THE SAM E WAS IN FULL KNOWLEDGE OF THE A.O. AND HENCE THE PROCEEDINGS U/S. 147 SO MADE IS VOID AB INITIO. 2.4. I HAVE CONSIDERED THE MATTER IN DETAIL AND I HAVE ALSO PERUSED THE ORDER OF HONBLE APEX COURT IN ACIT VS. RAJESH JAVERI STOCK BROKERS PRIVATE LTD. 291 ITR 500 (SC) AND I FIND THAT IN SUCH DECISION HONBLE COURT HAD HELD THAT IF INGREDIENTS OF SECTION 147 ARE FULFILLED, FAILURE TO TAKE STEPS U/ S. 143(2) DOES NOT TAKE AWAY THE POWER TO REOPEN THE ASSESSMENT EVEN IN A CASE WHERE INTIM ATION U/S. 143(1) HAS BEEN ISSUED AND AS SUCH A.OS POWER TO PROCEED FOR INCOME ESCAP ING ASSESSMENT EVEN IF THERE IS NO PROCEEDING U/S. 147 IS NOT WASTED. IN VIEW OF THE ABOVE AND ALSO IN VIEW OF THE DECISION OF HONBLE SUPREME COURT (SUPRA) THE ACTION OF THE A.O. IS UPHELD AND ACCORDINGLY, GROUND NO. 1 IS DISMISSED. 15. BEFORE US THE LD. COUNSEL FOR THE ASSESSEE RELI ED ON THE CASE LAW OF MUMBAI ITAT D BENCH IN THE CASE OF TARAK L. GANDHI VS. ITO (2 009) 27 SOT 72 (MUM.) AND STATED THAT THE SIMILAR ISSUE HAS BEEN ADJUDICATED UPON BY MUMB AI TRIBUNAL AND FINALLY HELD AS UNDER: SUBMISSION OF THE LEARNED COUNSEL FOR THE REVENUE I S THAT ASSESSEE HAD CLAIMED EXCESSIVE LOSS EITHER FAILING UNDER CL. (B) ABOVE O R HAD COMPUTED EXCESSIVE LOSS THEREBY FALLING UNDER SUB-CL. (IV) OF CL. (C) ABOVE. NO DOU BT THE DECISION OF DELHI THIRD MEMBER BENCH OF THIS TRIBUNAL IN O.P. CHAWLAS CASE (SUPRA ) WHICH HELD THAT AN ATTEMPT ON THE PART OF THE AO TO PROBE INTO A RETURN WITHOUT ANY F RESH FACT OR CHANGE IN LAW WOULD ONLY BE A REASON TO SUSPECT AND NOT REASON TO BELIEVE, E VEN IN A CASE WHERE ORIGINAL RETURN WAS PROCESSED UNDER S. 143(1)(A) OF THE ACT, WAS RE NDERED, WITHOUT SPECIFICALLY NOTING THE LAW LAID DOWN BY THE HONBLE SUPREME COURT IN R AJESH JHAVERI STOCK BROKERS (P) LTD.S CASE (SUPRA). HONBLE SUPREME COURT HAS HELD THAT REASON IN THE PHRASE REASON TO BELIEVE WOULD MEAN CAUSE OR JUSTIFICATION. AO S HOULD, ANY CASE HAVE CAUSE OR JUSTIFICATION TO KNOW OR SUPPOSE THAT INCOME HAD ES CAPED ASSESSMENT. THOUGH IN AN ASSESSMENT WHICH WAS ORIGINALLY DONE UNDER S. 143(L ) OF THE ACT, ONLY FIRST CONDITION REGARDING REASON TO BELIEVE WOULD BE SUFFICE FOR RE OPENING THE ASSESSMENT, THE ISSUE HERE IS, WHETHER ASSESSEE HAVING DECLARED ITS LOSS UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION, JUST FOR THE PURPOSE OF BI FURCATION OF THE INTEREST EXPENSES, IF THE AO CHOOSES TO ISSUE NOTICES UNDER S. L47 OF THE ACT , WOULD IT BE REASON TO BELIEVE OR SUPPOSE THAT INCOME HAD ESCAPED ASSESSMENT. AS THE ASSESSEE RIGHTLY POINTED OUT, 12 ITA 695, 696 & 1935/K/20 0 8 LOKNATH SARAF SECURITIES LTD. A.Y. 02-03 & 04-05 C.O. NOS. 36 & 37/K/2008 BIFURCATION OF INTEREST EXPENSES WOULD NOT RESULT I N ANY EXCESS CLAIM OR LOSS. IN OUR OPINION, ASSESSEE HAD NOT CLAIMED ANY EXCESSIVE LOS S NOR HAD IT COMPUTED ANY EXCESSIVE LOSS. A.O STATED IN THE REASONS GIVEN IN THE ASSESS MENT ORDER THAT THE BASIS FOR REOPENING ASSESSMENT WAS TO BIFURCATE THE INTEREST EXPENSES A ND SUCH BIFURCATION WOULD MAKE A SUBSTANTIAL MATERIAL DIFFERENCE TO THE LOSS DECLARE D BY THE ASSESSEE IN THESE YEARS. HOWEVER, WE FIND THAT THERE IS NO DIFFERENCE AT ALL IN THE LOSS DECLARED BY THE ASSESSEE IN ANY OF THESE YEARS BUT TILE ONLY RESULT IS THAT THE LOSS SHOWN BY THE ASSESSEE UNDER THE HEAD INCOME FROM BUSINESS/PROFESSION, CONSEQUENT TO THE BIFURCATION OF INTEREST, GOT BIFURCATED BETWEEN THAT HEAD AND THE HEAD INCOME F ROM OTHER SOURCES. APPLICABILITY OF CARRY FORWARD PROVISIONS REGARDING LOSSES UNDER THE VARIOUS HEADS WOULD HAVE NO BEARING ON DECIDING WHETHER AN ASSESSEE HAD CLAIMED EXCESSIVE LOSS IN ITS RETURN. AS LONG AS THE LOSS RETURNED BY THE ASSESSEE REMAINS T HE SAME, BEFORE ON AFTER THE BIFURCATION OF THE INTEREST, DETAILS OF ALL OF WHIC H, WERE AVAILABLE FROM THE RETURNS FILED BY THE ASSESSEE, REASON TO BELIEVE THAT THERE WAS A NY INCOME CHARGEABLE TO TAX HAD ESCAPED ASSESSMENT, COULD NOT BE THERE. HENCE AT TH E STAGE OF NOTICE, THERE WAS NO RELEVANT MATERIAL ON WHICH A REASONABLE PERSON WOUL D HAVE FORMED A REQUISITE BELIEF THAT ANY INCOME CHARGEABLE TO TAX HAD ESCAPED ASSES SMENT. IN FACT, THE AO HAS NOT STATED ANYWHERE THAT HE HAD ANY REASON TO BELIEVE T HAT INCOME CHARGEABLE TO TAX HAD ESCAPED ASSESSMENT. IN THE CASE OF DR. AMINS PATHO LOGY LABORATORY (SUPRA) OF THE JURISDICTIONAL HIGH COURT, THE AO HAD FOUND THAT TH ERE WAS UNPAID EXPENSES WHICH OUGHT TO HAVE BEEN DISALLOWED BUT WERE NOT DISALLOW ED. IN THE CASE OF SMT. GURINDER KAUR (SUPRA) DECIDED BY THE DELHI BENCH OF THIS TR IBUNAL, AND REFERRED BY LEARNED DEPARTMENTAL REPRESENTATIVE, REASON TO BELIEVE WA S A REPORT OF INVESTIGATION WING THAT CERTAIN GIFTS ALLEGED TO HAVE BEEN RECEIVED BY THE ASSESSEE FROM NRI, WERE BOGUS AND ASSESSEE HAD MADE CASH PAYMENTS FOR OBTAINING S UCH GIFTS. THIS DECISION HAS ALSO NO RELEVANCE TO THE FACTS HERE. OF COURSE IT HAS BEEN HELD BY THE HONBLE APEX COURT IN RAJESH JHAVERI STOCK BROKERS (P) LTDS CASE (SUPRA) , THAT WHERE RETURNS WERE ORIGINALLY ACCEPTED UNDER S. 143(1)(A) OF THE ACT, ONLY THE FI RST STIPULATION REGARDING REASON TO BELIEVE ALONE WAS REQUIRED FOR INITIATING THE REASS ESSMENT PROCEEDINGS. HOWEVER, AS MENTIONED ABOVE, WE FIND THAT THERE WAS NO EXISTENC E OF ANY REASON WHICH COULD GIVE RISE TO A BELIEF THAT ANY INCOME CHARGEABLE TO TAX HAD ESCAPED ASSESSMENT. IN THE RESULT, WE ARE OF THE OPINION THAT THE NOTICES UNDER S.148 WERE WITHOUT JURISDICTION FOR ALL THE THREE YEARS AND THEREFORE ASSESSMENTS MADE ON SUCH NOTICES ARE QUASHED. ASSESSEE, THEREFORE, SUCCEEDS IN ITS GROUND NUMBER TWO FOR A1 L THE THREE ASSESSMENT YEARS. 16. ON THE OTHER HAND, THE LD. CIT-DR SUPPORTED THE ORDERS OF THE LOWER AUTHORITIES. 17. WE FIND FROM THE ARGUMENTS OF BOTH THE SIDES AN D FROM THE CASE RECORDS THAT THE ASSESSMENT WAS REOPENED BY ISSUING NOTICE U/S. 147 R.W.S.148 OF THE ACT, AFTER RECORDING OF REASONS AS NOTED ABOVE. THE ORIGINAL RETURN WAS PRO CESSED U/S. 143(1) OF THE ACT ON 26.05.2003, IN WHICH THE ASSESSEE HAS DISCLOSED INC OME FROM SHARE DEALING OF VARIOUS TYPES INCLUDING JOBBING, DEALING IN FUTURES AND OPTIONS, REGULAR TRADING IN SHARES, INTEREST ON FIXED DEPOSITS AND DIVIDEND APART FROM BROKERAGE EARNED A S SHARE BROKER. MAIN CONTENTION OF THE ASSESSEE IS THAT THE AO AS WELL AS CIT(A) HAS CONFI RMED THE REOPENING WITHOUT CONSIDERING THE FACTS THAT ALL MATERIAL FACTS INCLUDING TRADING ACC OUNT OF SHARES NECESSARY FOR ASSESSMENT WAS FULLY AND TRULY DISCLOSED IN THE RETURN OF INCOME A ND NO NEW MATERIAL OR EVIDENCE WAS BROUGHT ON RECORD TO JUSTIFY THE REOPENING OF ASSESSMENT ON THIS SINGLE ISSUE. WE ARE OF THE VIEW THAT 13 ITA 695, 696 & 1935/K/20 0 8 LOKNATH SARAF SECURITIES LTD. A.Y. 02-03 & 04-05 C.O. NOS. 36 & 37/K/2008 THE PROVISO TO SECTION 147 OF THE ACT WILL NOT APPL Y TO THE PRESENT CASE AS NO ASSESSMENT U/S. 143(3) OF THE ACT WAS FRAMED ORIGINALLY. IT MEANS THAT AO HAS NOT FORMED ANY OPINION WHICH CAN BE SAID THAT THERE IS A CHANGE OF OPINION. THE LD. COUNSEL FOR THE ASSESSEE PLACED RELIANCE ON THE CASE LAW OF THIS TRIBUNAL IN THE CASE OF TAR AK L. GANDHI (SUPRA) STATING THAT IN THE PRESENT CASE ALSO THE REVENUE COULD NOT POINT OUT T HAT BY WAY OF CLAIM OF LOSS WILL MAKE SUBSTANTIAL MATERIAL DIFFERENCE TO THE INCOME OF TH E ASSESSEE. HOWEVER, WE ARE OF THE VIEW THAT THE HONBLE APEX COURT IN THE CASE OF ACIT VS. RAJE SH JHAVERI STOCK BROKERS (P) LTD. (2007) 291 ITR 500 (SC) HAS CLEARLY HELD THAT REASON IN TH E PHRASE REASON TO BELIEVE WOULD MEAN CAUSE OR JUSTIFICATION FOR REOPENING AND AO SHOULD, IN ANY CASE, HAVE CAUSE OR JUSTIFICATION TO KNOW OR SUPPOSE THAT INCOME HAS ESCAPED ASSESSMENT. ACCORDINGLY, THE RETURN WHICH WAS ORIGINALLY PROCESSED U/S. 143(1) OF THE ACT ONLY FI RST CONDITION REGARDING REASON TO BELIEVE WOULD BE SUFFICE FOR REOPENING OF THE ASSESSMENT. THEREFORE, EXPLANATION TO SECTION 147 CLAUSE (C) SUB-CLAUSE (IV) OF THE ACT WILL APPLY HE RE AND ACCORDINGLY, WE UPHOLD THE ACTIONS OF THE LOWER AUTHORITIES REOPENING THE ASSESSMENT. TH IS ISSUE OF THE ASSESSEES CROSS OBJECTION IS DISMISSED. 18. THE NEXT ISSUE IN RESPECT OF CROSS OBJECTION NO .36/K/2008 IS REGARDING DISALLOWANCE OF OPERATIVE, ADMINISTRATIVE AND OTHER EXPENSES U/S . 14A OF THE ACT. FOR THIS THE ASSESSEE HAS RAISED THE FOLLOWING GROUND NO.2: 2. FOR THAT IN VIEW OF THE FACTS AND CIRCUMSTANCES OF THE CASE THE ASSESSING OFFICER WAS WHOLLY WRONG AND UNJUSTIFIED IN MAKING ADHOC, ARBIT RARY DISALLOWANCE OF OPERATIVE, ADMINISTRATIVE AND OTHER EXPENSES TO THE TUNE OF RS .28,000/- U/S. 14A OF THE I. T. ACT PURELY ON ESTIMATE AND PRESUMPTION ATTRIBUTING IT T O THE EARNING OF EXEMPT DIVIDEND INCOME OF RS.2,86,000/- AND THE LD. CIT(A) WAS EQUA LLY WRONG AND UNJUSTIFIED IN CONFIRMING THE DISALLOWANCE TO THE EXTENT OF RS.10, 000/- WITHOUT CONSIDERING AND APPRECIATING THE FACT THAT NO EXPENSE WAS INCURRED FOR EARNING THE DIVIDEND AND NO MATERIAL OR EVIDENCE WAS BROUGHT ON RECORD TO ESTAB LISH THE NEXUS BETWEEN SUCH EXPENSE AND THE EARNING OF DIVIDEND INCOME. ACTIONS OF BOTH THE A.O AND THE LD. CIT(A) WERE WHOLLY ARBITRARY, UNREASONABLE, UNCALLE D FOR AND BAD IN LAW. EVEN OTHERWISE THE DISALLOWANCE MADE WAS HIGHLY EXCESSIV E AND WHOLLY UNREASONABLE. 19. BRIEFLY STATED FACTS OF THE CASE ARE THAT THE A SSESSING OFFICER DISALLOWED RS.28,600/- U/S. 14A OF THE ACT BY OBSERVING IN THE ASSESSMENT ORDER THAT THE ASSESSEE EARNED DIVIDEND OF RS.2,86,000/- WHICH IS EXEMPT INCOME AND AS IT DOES NOT HAVE ANY SHARES AS INVESTMENT BUT ALL AS TRADING SHARES, EARNING OF DIVIDEND IS CONSIDERE D AS EMBEDDED IN THE BUSINESS ACTIVITY OF THE ASSESSEE. HE THUS, DISALLOWED U/S. 14A OF THE ACT A SUM OF RS.28,600/- BEING 10% OF THE DIVIDEND EARNED. AGGRIEVED, ASSESSEE PREFERRED APP EAL BEFORE CIT(A) AND IN APPEAL, CIT(A) 14 ITA 695, 696 & 1935/K/20 0 8 LOKNATH SARAF SECURITIES LTD. A.Y. 02-03 & 04-05 C.O. NOS. 36 & 37/K/2008 RESTRICTED THE DISALLOWANCE U/S. 14A OF THE ACT AT RS.10,000/- AS AGAINST RS.28,600/-. BEING FURTHER AGGRIEVED, THE ASSESSEE RAISED THE ABOVE GR OUND THROUGH THIS CROSS OBJECTION. 20. AFTER HEARING RIVAL CONTENTIONS AND GOING THROU GH FACTS AND CIRCUMSTANCES OF THE CASE, WE FIND THAT THE ASSESSING OFFICER MADE THE DISALLO WANCE OF RS.28,600/- U/S. 14A OF THE ACT AND CIT(A) RESTRICTED THE DISALLOWANCE AT RS.10,00 0/- BY OBSERVING THAT FOR EARNING EXEMPT INCOME THE ORGANIZATION HAS TO INCUR CERTAIN EXPENS ES REGARDING THE VARIOUS STAFF, MANAGEMENT, REMUNERATION, COST OF STATIONERY, BANK CHARGES ETC. THEREFORE, IT CANNOT BE SAID THAT NO EXPENDITURE WAS DIRECTLY INCURRED. WE ALSO FIND THA T THAT SECTION 14A OF THE ACT INTRODUCED WITH RETROSPECTIVE EFFECT IS ATTRACTED BY THE CLAIM OF INTEREST EXPENDITURE ON BORROWED FUND UTILISED FOR INVESTMENT IN SHARES. THE CIT(A) REST RICTED THE DISALLOWANCE AT RS.10,000/- U/S. 14A OF THE ACT. THE ASSESSEES COUNSEL AT THE TIME OF HEARING BEFORE US SUBMITTED THAT THE AMENDMENTS BROUGHT TO SECTION 14A OF THE ACT, BY TH E FINANCE ACT, 2006 W.E.F. 1.4.2007, ARE RETROSPECTIVE IN NATURE AND HENCE, WOULD APPLY TO T HE PRESENT CASE ALTHOUGH THE SAME IS FOR ASSESSMENT YEAR 2002-03. WE FIND THAT HONBLE BOMB AY HIGH COURT IN THE CASE OF GODREJ BOYCEE MFG. CO. LTD. VS. DCIT [2010] 328 ITR 81 (B OM.) AT PAGES 138 & 139 VIDE SUB PARAS (V) TO (VII) HELD THAT RULE 8D IS PROSPECTIVE AS UN DER: (V) THE PROVISIONS OF RULE 8D OF THE INCOME-TAX RU LES WHICH HAVE BEEN NOTIFIED WITH EFFECT FROM MARCH 24, 2008, SHALL APPLY WITH E FFECT FROM THE ASSESSMENT YEAR 2008-09; (VI) EVEN PRIOR TO THE ASSESSMENT YEAR 2008-09, WHE N RULE 8D WAS NOT APPLICABLE, THE ASSESSING OFFICER HAS TO ENFORCE TH E PROVISIONS OF SUB-SECTION (1) OF SECTION 14A. FOR THAT PURPOSE, THE ASSESSING OFF ICER IS DUTY BOUND TO DETERMINE THE EXPENDITURE WHICH HAS BEEN INCURRED I N RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE AC T. THE ASSESSING OFFICER MUST ADOPT A REASONABLE BASIS OR METHOD CONSISTENT WITH ALL THE RELEVANT FACTS AND CIRCUMSTANCES AFTER FURNISHING A REASONABLE OPPORTU NITY TO THE ASSESSEE TO PLACE ALL GERMANE MATERIAL ON THE RECORD; (VII) THE PROCEEDINGS FOR THE ASSESSMENT YEAR 2002 -03 SHALL STAND REMANDED BACK TO THE ASSESSING OFFICER. THE ASSESSING OFFICE R SHALL DETERMINE AS TO WHETHER THE ASSESSEE HAS INCURRED ANY EXPENDITURE ( DIRECT OR INDIRECT) IN RELATION TO DIVIDEND INCOME/INCOME FROM MUTUAL FUND S WHICH DOES NOT FORM PART OF THE TOTAL INCOME AS CONTEMPLATED UNDER SECTION 1 4A. THE ASSESSING OFFICER CAN ADOPT REASONABLE BASIS FOR EFFECTING THE APPORT IONMENT. WHILE MAKING THAT DETERMINATION, THE ASSESSING OFFICER SHALL PROVIDE A REASONABLE OPPORTUNITY TO THE ASSESSEE OF PRODUCING ITS ACCOUNTS AND RELEVANT AND GERMANE MATERIAL HAVING A BEARING ON THE FACTS AND CIRCUMSTANCES OF THE CASE IN VIEW OF FACTS OF THIS CASE AND THE PRINCIPLE LAI D DOWN BY HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ BOYCEE MFG. CO. LTD. (S UPRA), THAT RULE 8D IS APPLICABLE FOR AND FROM ASSESSMENT YEAR 2008-09 AND PRIOR TO THAT THE ASSESSING OFFICER CAN MAKE ESTIMATE IN THE 15 ITA 695, 696 & 1935/K/20 0 8 LOKNATH SARAF SECURITIES LTD. A.Y. 02-03 & 04-05 C.O. NOS. 36 & 37/K/2008 GIVEN FACTS AND CIRCUMSTANCES. HENCE, WE RESTRICT THE DISALLOWANCE TO 1% IN RELATION TO EARNING OF EXEMPT DIVIDEND INCOME AND DIRECT THE AS SESSING OFFICER TO CALCULATE THE EXPENDITURE ON THAT BASIS. THIS GROUND OF ASSESSEE S APPEAL IS PARTLY ALLOWED. 21. THE FIRST ISSUE OF REVENUES APPEAL IN ITA NO. 696/K/2008 IS AGAINST THE ORDER OF CIT(A) IN DELETING THE DISALLOWANCE MADE BY ASSESSI NG OFFICER ON ACCOUNT OF EXPENDITURE OF PREMIUM IN RESPECT OF FUTURE AND OPTIONS. FOR THIS, THE REVENUE HAS RAISED THE FOLLOWING GROUND NOS. 1 AND 2: 1. THAT THE LD. CIT(A) HAS ERRED IN LAW AS WELL AS ON FACTS BY DIRECTING THE ASSESSING OFFICER TO DELETE THE DISALLOWANCE OF EXPENDITURE O N ACCOUNT OF PREMIUM FOR RS.4,45,19,455/- IN RESPECT OF FUTURE AND OPTIONS. 2. THAT THE LD. CIT(A) HAS ERRED IN LAW AS WELL AS ON FACTS BY OBSERVING THAT THE EXPENDITURE ON ACCOUNT OF FUTURE AND OPTIONS IS TO BE TREATED TO BE INCURRED IN COURSE OF SHARE TRADING BUSINESS. 22. AS THIS ISSUE, WE HAVE ALREADY DECIDED IN ITA N O. 695/K/2008, FOR AY 2002-03 VIDE PARA 10 OF THIS ORDER, HENCE TAKING A CONSISTENT VI EW, WE DECIDE THIS ISSUE AGAINST REVENUE AND DISMISS THE GROUND OF APPEAL. 23. THE NEXT COMMON ISSUE IN ITA NO.696/K/2008 AND C.O. NOS. 37/K/2008 IS AS REGARDS TO SECTION 14AOF THE ACT. FOR THIS, THE REVENUE HA S RAISED THE FOLLOWING GROUND NO.3: 3. THAT THE LD. CIT(A) HAS ERRED IN LAW AS WELL AS ON FACTS BY RESTRICTING THE DISALLOWANCE TO \RS.1,50,000/- U/S. 14A AS AGAINST RS.10,24,315/-. THE ASSESSEE HAS ALSO RAISED IN ITS CROSS OBJECTION THE FOLLOWING GROUND NO.1: 1. FOR THAT IN VIEW OF THE FACTS AND CIRCUMSTANCES OF THE CASE THE ASSESSING OFFICER WAS WHOLLY WRONG AND UNJUSTIFIED IN MAKING ADHOC, ARBIT RARY DISALLOWANCE OF OPERATIVE, ADMINISTRATIVE AND OTHER EXPENSES TO THE TUNE OF RS .10,24,315/- U/S. 14A OF THE I. T. ACT PURELY ON ESTIMATE AND PRESUMPTION ATTRIBUTING IT T O THE EARNING OF EXEMPT DIVIDEND INCOME OF RS.71,86,525/- AND THE LD. CIT(A) WAS EQU ALLY WRONG AND UNJUSTIFIED IN CONFIRMING THE DISALLOWANCE TO THE EXTENT OF RS.1,5 0,000/- WITHOUT CONSIDERING AND APPRECIATING THE FACT THAT NO EXPENSE WAS ACTUALLY INCURRED FOR EARNING THE DIVIDEND AND NO MATERIAL OR EVIDENCE WAS BROUGHT ON RECORD T O ESTABLISH THE NEXUS BETWEEN SUCH EXPENSE AND THE EARNING OF DIVIDEND INCOME. ACTIONS OF BOTH THE A.O AND THE LD. CIT(A) WERE WHOLLY ARBITRARY, UNREASONABLE, UNCALLE D FOR AND BAD IN LAW. EVEN OTHERWISE THE DISALLOWANCE MADE WAS HIGHLY EXCESSIV E AND WHOLLY UNREASONABLE. SINCE WE HAVE RESTRICTED THE DISALLOWANCE TO 1% OF THE DIVIDEND INCOME IN RELATION TO EARNING OF EXEMPT DIVIDEND INCOME VIDE PARA 20 OF THIS ORDE R, THE SAME RATIO IS ALSO APPLICABLE IN THESE GROUNDS ALSO. WE ORDER ACCORDINGLY. 16 ITA 695, 696 & 1935/K/20 0 8 LOKNATH SARAF SECURITIES LTD. A.Y. 02-03 & 04-05 C.O. NOS. 36 & 37/K/2008 24. THE FIRST ISSUE IN ITA NO.1935/K/2008 OF THE AS SESSEE IS AGAINST THE ORDER OF CIT, PASSED U/S. 263 OF THE ACT REVISING THE ASSESSMENT, IS BARRED BY LIMITATION. FOR THIS, THE ASSESSEE HAS RAISED THE FOLLOWING GROUND NOS.1 AND 2: 1. FOR THAT IN VIEW OF THE FACTS AND IN CIRCUMSTAN CES THE ORDER U/S. 263 IS WHOLLY BAD, ILLEGAL AND VOID ABINITIO BOTH ON POINTS OF LA W AS WELL AS FACTS AND PROCEEDINGS U/S. 263 IN THIS CASE IN RESPECT OF PRIOR PERIOD EX PENSES IS BARRED BY LIMITATION IN AS MUCH AS ORIGINAL ASSESSMENT IN THIS CASE WAS COMPLE TED ON 26.05.2003 ACCEPTING THE PRIOR PERIOD EXPENSES AND PROCEEDINGS U/S. 147 HAVING BEEN INITIATED SPECIFICALLY FOR APPLICABILITY OF PROVISIONS OF EXP LANATION TO SECTION 73 AND ORDER U/S. 147/143(3) DATED 16.10.2006 HAVING BEEN SPECIF ICALLY MADE IN RESPECT OF PROVISIONS OF EXPLANATION TO SECTION 73, THE PERIOD OF LIMITATION FOR THE PURPOSES OF SECTION 263 COMMENCED FROM 26.05.2003 I.E. THE DATE OF ORIGINAL ASSESSMENT AND NOT FROM 16.10.2006 I.E. THE DATE OF ASSESSMENT U/S. 14 7/143(3) AND HENCE THE PERIOD OF LIMITATION FOR INITIATING PROCEEDINGS U/S. 263 PRIO R PERIOD EXPENSES HAVING EXPIRED ON 31.03.2006, PROCEEDINGS U/S. 263 IN THIS CASE IN RESPECT OF PRIOR PERIOD EXPENSES IS BARRED BY LIMITATION AND HENCE IN VIEW OF THE FA CTS AND IN THE CIRCUMSTANCES SUCH ORDER U/S. 263 IS LIABLE TO BE QUASHED / CANCELLED / SET ASIDE AND IN VIEW OF THE FACTS AND IN THE CIRCUMSTANCES IT MAY KINDLY BE HELD ACCO RDINGLY. 2. FOR THAT IN VIEW OF THE FACTS AND IN THE CIRCUMS TANCES THE ORDER U/S. 263 HAVING BEEN MADE WITHOUT PROPER CONSIDERATION OF THE SUBMI SSIONS MADE BY YOUR PETITIONER IN PARAS 2 TO 8 OF THE WRITTEN SUBMISSION, ORDER U/ S. 263 IS WHOLLY BAD, ILLEGAL AND VOID ABINITIO AND IN VIEW OF THE FACTS AND CIRCUMST ANCES THE CIT IS WHOLLY UNJUSTIFIED IN NOT TAKING INTO CONSIDERATION AND DISCUSSING THE VARIOUS CASE LAWS BROUGHT TO THE NOTICE OF THE CIT IN WRITTEN SUBMISSION AND THE CIT IS WHOLLY UNJUSTIFIED IN IGNORING SUCH DECISIONS AND HENCE ORDER U/S. 263 IS WHOLLY B AD, ILLEGAL AND VOID ABINITIO AND HENCE IN VIEW OF THE FACTS AND IN THE CIRCUMSTANCES SUCH ORDER U/S. 263 IS LIABLE TO BE QUASHED / CANCELLED / SET ASIDE AND IN VIEW OF THE FACTS AND IN THE CIRCUMSTANCES IT MAY KINDLY BE HELD ACCORDINGLY. 25. THE BRIEF FACTS RELATING TO THE ABOVE ISSUE ARE THAT THE ASSESSEE COMPANY FILED ITS RETURN OF INCOME ORIGINALLY ON 28.10.2002 DECLARING TOTAL LOSS AT RS.2,75,11,159/- AS BUSINESS LOSS AND RS.1,13,187/- AS SHORT TERM CAPITAL LOSS. SUBS EQUENTLY, THE RETURN WAS PROCESSED U/S. 143(1) OF THE ACT ON 26.5.2003. SUBSEQUENTLY, THE ASSESSING OFFICER AFTER RECORDING REASONS INITIATED PROCEEDINGS U/S. 147 R.W.S. 148 OF THE AC T AND ACCORDING TO HIM THE TRANSACTIONS ARE SPECULATIVE TRANSACTIONS AND HENCE, THE BUSINESS LO SS IS SPECULATION LOSS AS HIT BY EXPLANATION TO SECTION 73 OF THE ACT, HENCE, HE COMPUTED BUSINE SS LOSS AT RS.1,26,96,737/- AND FURTHER COMPUTED SPECULATION LOSS AT RS.97,27,293/-. THE S UBJECT MATTER WAS TAKEN TO APPEAL TO THE CIT(A) AND FURTHER TO TRIBUNAL, WHICH IS NOW ADJUDI CATED VIDE ITA NO. 695/K/2008 AND CO NO.36/K/2008. FURTHER, CIT, KOL-2 ON EXAMINATION O F RECORDS NOTED THAT FOLLOWING PRIOR PERIOD EXPENSES SHOULD HAVE BEEN DISALLOWED AND ADD ED BACK TO THE RETURNED INCOME, WHICH WAS NOT DONE AT THE TIME OF FRAMING OF REASSESSMENT U/S. 147 R.W.S. 143(3) OF THE ACT: 17 ITA 695, 696 & 1935/K/20 0 8 LOKNATH SARAF SECURITIES LTD. A.Y. 02-03 & 04-05 C.O. NOS. 36 & 37/K/2008 SEBI TURNOVER FEES RS.29,90,963/- SEBI SAT CHARGES RS. 3,01,515/- SERVICE TAX RS. 10,791/- TRANSACTION CHARGES RS. 1,76,173/- ALBM RS. 22,162/- OTHERS RS. 5,003/- RS.35,06,607/- CIT, KOL-2 ISSUED SHOW CAUSE NOTICE TO THAT EFFECT, VIDE SHOW CAUSE NOTICE NO.CIT/KOL- II/U/S.263/C-50/2007-08/809 DATED 12.5.2008. BEFOR E CIT, THE ASSESSEE CONTENDED THAT THE PROCEEDINGS INITIATED U/S. 263 OF THE ACT ON THE BA SIS OF REASSESSMENT ORDER U/S. 147 R.W.S. 143(3) OF THE ACT DATED 16.10.2006 IGNORING THAT TH E ORIGINAL ASSESSMENT WAS FRAMED ON 26.5.2003 AND HENCE, THE PRESENT PROCEEDING U/S. 26 3 OF THE ACT IS BARRED BY LIMITATION. BEFORE CIT IT WAS SPECIFICALLY CONTENDED THAT THE R EASSESSMENT PROCEEDINGS U/S. 147/143(3) OF THE ACT WAS COMPLETED AFTER RECORDING OF SPECIFIC R EASONS AND REASSESSMENT WAS FRAMED IN RESPECT TO APPLICATION OF EXPLANATION TO SECTION 73 OF THE ACT FOR TREATING CERTAIN BUSINESS LOSS AS SPECULATION LOSS AS IS APPARENT FROM THE REASONS RECORDED FOR INITIATING PROCEEDINGS U/S. 147 R.W.S 148 OF THE ACT. IN VIEW OF THESE FACTS, THE LD. COUNSEL BEFORE CIT CONTENDED THAT THE SHOW CAUSE NOTICE IS IN RESPECT OF SPECIFIC ITEMS O THER THAN ITEMS FOR WHICH PROCEEDINGS U/S. 147 OF THE ACT HAS BEEN INITIATED AND HENCE, INITIA TION OF ACTION U/S. 263 OF THE ACT IS CLEARLY BARRED BY LIMITATION, AS LIMITATION IN THE PRESENT PROCEEDINGS I.E. 263 OF THE ACT WILL START FROM THE DATE OF ORIGINAL ASSESSMENT I.E. 26.5.2003 AND NOT FROM THE DATE OF REASSESSMENT ORDER DATED 16.10.2006. BEFORE CIT THE CASE LAW OF HONB LE APEX COURT IN THE CASE OF CIT VS. ALAGENDRAN FINANCE LTD. (2007) 293 ITR 1 (SC). TH E CIT CALLED FOR THE REPORT FROM THE ASSESSING OFFICER AND THE ASSESSING OFFICER IN HIS REPORT DATED 7.8.2008 STATED AS UNDER: AT PARA 2 OF THE SAID LETTER THE ASSESSEE SOUGHT T O REASON THAT THE INITIATED PROCEEDING HAS GOT BARRED BY LIMITATION OF TIME. AGAIN AT PAR A 4 OF THE LETTER THE ASSESSEE ITSELF ADMITS THAT THE ISSUE OF PRIOR PERIOD EXPENSE WAS A PART OF THE SECOND ASSESSMENT ORDER PASSED U/S. 147 ON 16.10.2006. THEREFORE, THE MIST AKE DETECTED WHICH WAS PREJUDICIAL TO THE INTEREST OF REVENUE WAS IN THE ORDER DT. 16.10. 2006. THEREFORE, CLEARLY REVISION U/S. 263 LIES IN THIS CASE. SECONDLY, THE ISSUE OF PRIOR PERIOD HAD NOT BEEN DE ALT PROPERLY IN THAT ORDER THUS, IT CANNOT BE HELD TO BE AN ISSUE ALREADY DECIDED BY TH E C1T(A). IT MAY ALSO BE CLARIFIED FURTHER THAT INITIALLY AFT ER DETECTION OF THE MISTAKE AN ATTEMPT HAD BEEN TAKEN TO RECTIFY IT U/S.154 AS THE PRIOR PERIO D EXPENDITURE ITEMS WERE AVAILABLE IN THE TAX AUDIT REPORT. TO THIS THE ASSESSEE CHALLENG ED THAT ALLOWABILITY OF PRIOR PERIOD ITEMS BEING A MATTER OF DELIBERATION AND NOT A MATT ER OF ARITHMETIC CORRECTION. THEREAFTER THE PROCEEDINGS HAD BEEN DROPPED WHEN TH E ASSESSEE HAD BEEN CLEARLY INFORMED THAT THE MISTAKE WOULD BE RECTIFIED BY INV OKING PROPER REMEDIAL ACTION AND THE 18 ITA 695, 696 & 1935/K/20 0 8 LOKNATH SARAF SECURITIES LTD. A.Y. 02-03 & 04-05 C.O. NOS. 36 & 37/K/2008 PROPOSAL WAS SENT FUR PERUSAL OF THE CIT FOR INVOCA TION OF HIS POWER U/S.263. THE ASSESSEE HAD BEEN INFORMED THEN THAT IT CANNOT TAKE THE PLEA THAT THE ISSUE HAD BEEN DELIBERATED UPON AND THEREAFTER A CONSCIOUS DECISIO N HAD BEEN TAKEN TO ALLOW THE PRIOR PERIOD ITEMS. THEREFORE, IN MY VIEW THE PROCEEDINGS INITIATED U/ S.263 ABSOLUTELY VALID. COMING TO THE FACTS TO THE CASE, THE ASSESSEE HAS N OT EXTENDED ANY COMMENT ON THE ISSUE OF ALLOWABILITY OF ANY ONE OF THE SIX ITEMS. IT IS SUBMITTED THAT SEBI TURNOVER FEES, VSAT EXPENSES, SERVICE TAX, TRANSACTION CHARGES PAYABLE TO STOCK EXCHANGE, ALBM OR FEES PAYABLE TO STOCK EXCHANGE ARE ALL QUANTIFIABLE ITEM WITHIN THE FINANCIAL YEAR, AS ALL ARE FEES/CHARGES CHARGEABLE BY VARIOUS AUTHORITIES. EXC EPT FOR SERVICE TAX OF RS. 10,791/- NONE OF THE OTHER EXPENDITURES ARE COVERED U/S. 43B , SO THEY ARE NOT ALLOWABLE IN THE YEAR OF PAYMENT. THE CHARGING OF PRIOR PERIOD ITEMS IS NOT ALLOWABLE AS PER SEC. 145(1) OF THE I. T. ACT. THE CIT FINALLY SET ASIDE THE ISSUE AND DIRECTED TH E ASSESSING OFFICER TO REASSESS BY MAKING ADDITIONS OF THE ABOVE STATED PRIOR PERIOD EXPENSES TOTALING TO RS.35,06,607/-. AGGRIEVED, NOW ASSESSEE IS IN APPEAL BEFORE US. 26. AS REGARDS THE LIMITATION, THE LD. COUNSEL FOR THE ASSESSEE SHRI R. SALARPURIA ARGUED THAT THE RETURN WAS PROCESSED U/S. 143(1) OF THE AC T IN THE PRESENT CASE ON 26.5.2003 AND RESULTANT REFUND WAS ISSUED ON 30.5.2003 AMOUNTING TO RS.6,57,051/-. HE ARGUED THAT FROM THE ORIGINAL ASSESSMENT I.E. 26.5.2003, THE LIMITATION ENDS ON 31.5.2005 AND CIT HAS TAKEN THE LIMITATION FROM THE REASSESSMENT PROCEEDINGS FRAMED U/S. 147 R.W.S. 143(3) OF THE ACT ON 16.10.2006. THE LD. COUNSEL FOR THE ASSESSEE STATE D THAT THE REASSESSMENT PROCEEDINGS WERE INITIATED FOR SPECIFIC REASONS RECORDED AND REASSES SMENT WAS FRAMED U/S. 147 R.W.S.143(3) OF THE ACT FOR SUCH SPECIFIC PURPOSE FOR ALLEGED ESCA PEMENT OF INCOME BY APPLICATION OF EXPLANATION TO SECTION 73 OF THE ACT FOR TREATING B USINESS LOSSES AS SPECULATION LOSSES AS IS APPARENT FROM THE REASONS RECORDED AS WELL AS THE R EASSESSMENT FRAMED U/S. 147 R.W.S 143(3) OF THE ACT. HE ARGUED THAT THE PRESENT SHOW CAUSE NOTI CE IS IN RESPECT OF ITEMS OTHER THAN ITEMS FOR WHICH PROCEEDINGS U/S. 147 OF THE ACT WAS INITI ATED AND HENCE, THE PROPOSED INITIATION OF SECTION 263 OF THE ACT IS CLEARLY BARRED BY LIMITAT ION WHICH WILL START FROM THE DATE OF ORIGINAL ASSESSMENT FRAMED U/S. 143(1) OF THE ACT DATED 26.5 .2003. IN VIEW OF THIS, THE LD. COUNSEL STATED THAT THIS IS A COVERED CASE BY THE DECISION OF HONBLE APEX COURT IN THE CASE OF ALAGENDRAN FINANCE LTD. (SUPRA). 27. ON THE OTHER HAND, LD. CIT-DR SHRI D. R. SINDHA L RELIED ON THE REVISION ORDER PASSED BY THE CIT AND ARGUED THAT THE LIMITATION IN THIS C ASE STARTS FROM THE REASSESSMENT FRAMED U/S. 147/143(3) OF THE ACT. HE STATED THAT AS SUCH THE PROCESSING OF RETURN U/S. 143(1)(A) OF THE ACT 19 ITA 695, 696 & 1935/K/20 0 8 LOKNATH SARAF SECURITIES LTD. A.Y. 02-03 & 04-05 C.O. NOS. 36 & 37/K/2008 IS NOT ASSESSMENT AND FOR THIS HE CITED THE CASE LA W OF HONBLE APEX COURT IN THE CASE OF ACIT VS. RAJESH JHAVERI STOCK BROKERS P. LTD. (2007 ) 291 ITR 500 (SC), HE STATED THAT THE HONBLE APEX COURT HAS INTERPRETED THE PROVISIONS O F SECTION 143(1) BY HOLDING THAT W.E.F. 1.6.1999 UNDER THE FIRST PROVISO TO THE NEWLY SUBST ITUTED SECTION 143(1)OF THE ACT, EXCEPT AS PROVIDED IN THE PROVISION ITSELF, THE ACKNOWLEDGMEN T OF THE RETURN SHALL BE DEEMED TO BE AN INTIMATION UNDER SECTION 143(1) WHERE (A) EITHER NO SUM IS PAYABLE BY THE ASSESSEE, OR (B) NO REFUND IS DUE TO HIM. LD. CIT-DR STATED THAT HONBL E APEX COURT NOTED THAT THE ACKNOWLEDGMENT IS NOT DONE BY ANY ASSESSING OFFICER , BUT MOSTLY BY MINISTERIAL STAFF AND IT CANNOT THEREFORE BE SAID THAT AN ASSESSMENT IS DO NE BY THEM. HE STATED THAT HONBLE COURT HELD THAT THE INTIMATION UNDER SECTION 143(1)(A) OF THE ACT WAS DEEMED TO BE A NOTICE OF DEMAND UNDER SECTION 156 OF THE ACT FOR THE APPAREN T PURPOSE OF MAKING MACHINERY PROVISIONS RELATING TO RECOVERY OF TAX APPLICABLE AND BY SUCH APPLICATION ONLY RECOVERY INDICATED TO BE PAYABLE IN THE INTIMATION BECAME PERMISSIBLE. FINA LLY HONBLE COURT HELD THAT NOTHING MORE CAN BE INFERRED FROM THE DEEMING PROVISIONS. THEREF ORE, THERE BEING NO ASSESSMENT UNDER SECTION 143(1) (A) OF THE ACT, THE QUESTION OF CHAN GE OF OPINION DOES NOT ARISE. ACCORDINGLY, THE LD. CIT-DR STATED THAT WHILE MAKING AN ASSESSME NT AN AO IS FREE TO MAKE ANY ADDITION AFTER GRANT OF OPPORTUNITY TO THE ASSESSEE BUT WHIL E MAKING ADJUSTMENT UNDER THE FIRST PROVISO TO SECTION 143(1)(A) OF THE ACT NO ADDITION IS PERM ISSIBLE AND AO HAS TO PROCESS THE RETURN AS IT IS AND ACCORDINGLY, INTIMATION U/S. 143(1)(A) OF TH E ACT CANNOT BE TREATED AS AN ORDER OF ASSESSMENT. ACCORDINGLY, THE LD. CIT-DR STATED THA T ONCE THE INTIMATION U/S. 143(1)(A) OF THE ACT IS NO ASSESSMENT, LIMITATION FOR INVOKING THE P ROVISION OF SECTION 263 OF THE ACT STARTS FROM THE DATE OF ASSESSMENT OR REASSESSMENT AND REA SSESSMENT IN THE PRESENT CASE WAS FRAMED VIDE ORDER DATED 16.10.2006 AND REVISION PROCEEDING S BY THE CIT, KOL-2 WAS COMPLETED VIDE ORDER DATED 9.9.2008, WELL WITHIN THE LIMITATION PR OVIDED UNDER THE ACT. HENCE, HE URGED THE BENCH TO DISMISS THE GROUND OF LIMITATION RAISED BY THE ASSESSEE. 28. FIRST OF ALL, WE HAVE GONE THROUGH THE DECISION OF HONBLE APEX COURT IN THE CASE OF RAJESH JHAVERI STOCK BROKERS P. LTD. (SUPRA), WHERE IN HONBLE APEX COURT HAS DISCUSSED THE ISSUE AS REGARDS TO FORMATION OF OPINION IN CASE OF REASSESSMENT VIS--VIS INTIMATION U/S. 143(1)(A) OF THE ACT. HONBLE APEX COURT HELD AS U NDER: ONE THING FURTHER TO BE NOTICED IS THAT INTIMATION UNDER SECTION 143(1)(A) IS GIVEN WITHOUT PREJUDICE TO THE PROVISIONS OF SECTION 143( 2). THOUGH TECHNICALLY THE INTIMATION ISSUED WAS DEEMED TO BE A DEMAND NOTICE ISSUED UNDER SECTION 156, THAT DID NOT PER SE PRECLUDE THE RIGHT OF THE ASSESSING OFFICER TO PROCEED UNDER SECTION 143(2). THAT RIGHT IS PRESERVED AND IS NOT TAKEN AW AY. BETWEEN THE PERIOD FROM APRIL 20 ITA 695, 696 & 1935/K/20 0 8 LOKNATH SARAF SECURITIES LTD. A.Y. 02-03 & 04-05 C.O. NOS. 36 & 37/K/2008 1, 1989, AND MARCH 31, 1998, THE SECOND PROVISO TO SECTION 143(1)(A), REQUIRED THAT WHERE ADJUSTMENTS WERE MADE UNDER THE FIRST PROVISO TO SECTION 143(1)(A), AN INTIMATION HAD TO BE SENT TO THE ASSESSEE NOTWITHST ANDING THAT NO TAX OR REFUND WAS DUE FROM HIM AFTER MAKING SUCH ADJUSTMENTS. WITH EF FECT FROM APRIL 1, 1998, THE SECOND PROVISO TO SECTION 143(1)(A) WAS SUBSTITUTED BY THE FINANCE ACT, 1997, WHICH WAS OPERATIVE TILL JUNE 1, 1999. THE REQUIREMENT WA S THAT AN INTIMATION WAS TO BE SENT TO THE ASSESSEE WHETHER OR NOT ANY ADJUSTMENT HAD B EEN MADE UNDER THE FIRST PROVISO TO SECTION 143(1) AND NOTWITHSTANDING THAT NO TAX O R INTEREST WAS FOUND DUE FROM THE ASSESSEE CONCERNED. BETWEEN APRIL 1, 1998, AND MAY 31, 1999, SENDING OF AN INTIMATION UNDER SECTION 143(1)(A) WAS MANDATORY. T HUS, THE LEGISLATIVE INTENT IS VERY CLEAR FROM THE USE OF THE WORD INTIMATION AS SUBS TITUTED FOR ASSESSMENT THAT TWO DIFFERENT CONCEPTS EMERGED. WHILE MAKING AN ASSESSM ENT, THE ASSESSING OFFICER IS FREE TO MAKE ANY ADDITION AFTER GRANT OF OPPORTUNITY TO THE ASSESSEE. BY MAKING ADJUSTMENTS UNDER THE FIRST PROVISO TO SECTION 143( 1)(A), NO ADDITION WHICH IS IMPERMISSIBLE BY THE INFORMATION GIVEN IN THE RETUR N COULD BE MADE BY THE ASSESSING OFFICER. THE REASON IS THAT UNDER SECTION 143(1)(A) NO OPPORTUNITY IS GRANTED TO THE ASSESSEE AND THE ASSESSING OFFICER PROCEEDS ON HIS OPINION ON THE BASIS OF THE RETURN FILED BY THE ASSESSEE. THE VERY FACT THAT NO OPPORT UNITY OF BEING HEARD IS GIVEN UNDER SECTION 143(1)(A) INDICATES THAT THE ASSESSING OFF ICER HAS TO PROCEED ACCEPTING THE RETURN AND MAKING THE PERMISSIBLE ADJUSTMENTS ONLY . AS A RESULT OF INSERTION OF THE EXPLANATION TO SECTION 143 BY THE FINANCE (NO. 2) ACT OF 1991 WITH EFFECT FROM OCTOBER 1, 1991, AND SUBSEQUENTLY WITH EFFECT FROM JUNE 1, 1994, BY THE FINANCE ACT, 1994, AND ULTIMATELY OMITTED WITH EFFECT FROM JUNE 1, 1999, BY THE EXPLANATION AS INTRODUCED BY THE FINANCE (NO. 2) ACT OF 1991 AN IN TIMATION SENT TO THE ASSESSEE UNDER SECTION 143(1)(A) WAS DEEMED TO BE AN ORDER F OR THE PURPOSES OF SECTION 246 BETWEEN JUNE 1, 1994 AND MAY 31, 1999, AND UNDER S ECTION 264 BETWEEN OCTOBER 1, 1991, AND MAY 31, 1999. IT IS TO BE NOTED THAT THE EXPRESSIONS INTIMATION AND ASSESSMENT ORDER HAVE BEEN USED AT DIFFERENT PLAC ES. THE CONTEXTUAL DIFFERENCE BETWEEN THE TWO EXPRESSIONS HAS TO BE UNDERSTOOD IN THE CONTEXT THE EXPRESSIONS ARE USED. ASSESSMENT IS USED AS MEANING SOMETIMES THE COMPUTATION OF INCOME, SOMETIMES THE DETERMINATION OF THE AMOUNT OF TAX P AYABLE AND SOMETIMES THE WHOLE PROCEDURE LAID DOWN IN THE ACT FOR IMPOSING L IABILITY UPON THE TAX PAYER. IN THE SCHEME OF THINGS, AS NOTED ABOVE, THE INTIMATIO N UNDER SECTION 143(1)(A) CANNOT BE TREATED TO BE AN ORDER OF ASSESSMENT. THE DISTINCTI ON IS ALSO WELL BROUGHT OUT BY THE STATUTORY PROVISIONS AS THEY STOOD AT DIFFERENT POI NTS OF TIME. UNDER SECTION 143(1)(A) AS IT STOOD PRIOR TO APRIL 1, 1989, THE ASSESSING OFFICER HAD TO PASS AN ASSESSMENT ORDER IF HE DECIDED TO ACCEPT THE RETURN, BUT UNDER THE AMENDED PROVISION, THE REQUIREMENT OF PASSING OF AN ASSESSMENT ORDER HAS B EEN DISPENSED WITH AND INSTEAD AN INTIMATION IS REQUIRED TO BE SENT. VARIOUS CIRC ULARS SENT BY THE CENTRAL BOARD OF DIRECT TAXES SPELL OUT THE INTENT OF THE LEGISLATU RE, I.E., TO MINIMIZE THE DEPARTMENTAL WORK TO SCRUTINIZE EACH AND EVERY RETURN AND TO CO NCENTRATE ON SELECTIVE SCRUTINY OF RETURNS. THESE ASPECTS WERE HIGHLIGHTED BY ONE OF U S (D. K. JAIN J.) IN APOGEE INTERNATIONAL LIMITED V. UNION OF INDIA [1996] 220 ITR 248 (DELHI). IT MAY BE NOTED ABOVE THAT UNDER THE FIRST PROVISO TO THE NEWLY SUB STITUTED SECTION 143(1), WITH EFFECT FROM JUNE 1, 1999, EXCEPT AS PROVIDED IN THE PROVIS ION ITSELF, THE ACKNOWLEDGMENT OF THE RETURN SHALL BE DEEMED TO BE AN INTIMATION UNDE R SECTION 143(1) WHERE (A) EITHER NO SUM IS PAYABLE BY THE ASSESSEE, OR (B) NO REFUND IS DUE TO HIM. IT IS SIGNIFICANT THAT THE ACKNOWLEDGMENT IS NOT DONE BY ANY ASSESSING OFF ICER, BUT MOSTLY BY MINISTERIAL STAFF. CAN IT BE SAID THAT ANY ASSESSMENT IS DONE BY THEM? THE REPLY IS AN EMPHATIC NO. THE INTIMATION UNDER SECTION 143(1)(A) WAS DE EMED TO BE A NOTICE OF DEMAND UNDER SECTION 156, FOR THE APPARENT PURPOSE OF MAK ING MACHINERY PROVISIONS RELATING TO RECOVERY OF TAX APPLICABLE. BY SUCH APPLICATION ONLY RECOVERY INDICATED TO BE PAYABLE IN THE INTIMATION BECAME PERMISSIBLE. AND N OTHING MORE CAN BE INFERRED FROM 21 ITA 695, 696 & 1935/K/20 0 8 LOKNATH SARAF SECURITIES LTD. A.Y. 02-03 & 04-05 C.O. NOS. 36 & 37/K/2008 THE DEEMING PROVISION. THEREFORE, THERE BEING NO AS SESSMENT UNDER SECTION 143(1)(A), THE QUESTION OF CHANGE OF OPINION, AS CONTENDED, DO ES NOT ARISE. WE FIND FROM THE ABOVE JUDGMENT OF HONBLE APEX CO URT IN THE CASE OF RAJESH JHAVERI STOCK BROKERS P. LTD. (SUPRA) THAT THE ISSUE WAS RE GARDING REOPENING AND PARTICULARLY CHANGE OF OPINION WHERE NO ASSESSMENT WAS FRAMED. WITH DU E RESPECT TO THE ABOVE DECISION OF THE HONBLE APEX COURT, WE ARE OF THE VIEW THAT THE INT IMATION U/S. 143(1)(A) OF THE ACT IS NO ASSESSMENT BUT SUBSEQUENTLY HONBLE APEX COURT IN T HE CASE OF ALAGENDRAN FINANCE LTD. (SUPRA) CONSIDERING THE PROVISIONS OF SECTION 263 E XPLANATION (C),(2) HAS CONSIDERED THE PERIOD OF LIMITATION COMMENCES FROM THE DATE OF ORIGINAL A SSESSMENT AND NOT FROM THE REASSESSMENT, SINCE THE LETTER HAD NOT HAD ANYTHING TO DO WITH TH E ISSUES UNDER REASSESSMENT. THE HONBLE APEX COURT HELD THAT A BARE PERUSAL OF THE ORDER PA SSED BY COMMISSIONER OF INCOME-TAX WOULD CLEARLY DEMONSTRATE THAT ONLY THAT PART OF THE ORDE R OF ASSESSMENT WHICH RELATED TO LEASE EQUALISATION FUND WAS FOUND TO BE PREJUDICIAL TO TH E INTERESTS OF THE REVENUE. THE PROCEEDINGS FOR REASSESSMENT HAVE NOTHING TO DO WITH THE SAID H EAD OF INCOME AND THE DOCTRINE OF MERGER, THEREFORE, WOULD NOT APPLY IN A CASE OF THIS NATURE . BEFORE HONBLE APEX COURT ASSESSMENTS FOR THE ASSESSMENT YEARS 1994-95, 1995-96 AND 1996- 97, WHICH WERE COMPLETED IN 1997-98 WERE THERE AND IN THE ORDERS OF ASSESSMENT ASSESSEE S CLAIM RELATING TO LEASE EQUALISATION FUND WAS ACCEPTED AND THEREAFTER REASSESSMENTS WERE FRAM ED WITH RESPECT TO THREE OTHER ITEMS BUT NOT THE ITEMS RELATING TO LEASE EQUALISATION FUND. HONBLE APEX COURT HELD THAT THE PROCEEDINGS FOR REASSESSMENTS HAVE NOTHING TO DO WI TH THE ISSUE OF LEASE EQUALISATION FUND. HONBLE CALCUTTA HIGH COURT IN THE CASE OF CIT VS. KANUBHAI ENGINEERS (P) LTD. (2000) 241 ITR 665 (CAL) HAS DEALT WITH THE SIMILAR ISSUE AND SAME PRINCIPLE WAS REITERATED BY HOLDING THAT IN PROCEEDINGS UNDER SECTION 147 OF THE ACT, T HE INCOME-TAX OFFICER MAY BRING TO CHARGE ITEMS OF INCOME WHICH HAD ESCAPED ASSESSMENT OTHER THAN OR IN ADDITION TO THAT ITEM OR ITEMS WHICH HAVE LED TO THE ISSUANCE OF THE NOTICE UNDER SECTION 148OF THE ACT. WHERE REASSESSMENT IS MADE UNDER SECTION 147 OF THE ACT IN RESPECT OF INCOME WHICH HAS ESCAPED ASSESSMENT, THE INCOME-TAX OFFICER'S JURISDICTION IS CONFINED TO ON LY SUCH INCOME WHICH HAS ESCAPED ASSESSMENT OR HAS BEEN UNDER ASSESSED AND DOES NOT EXTEND TO REVISING, RE-OPENING OR RECONSIDERING THE WHOLE ASSESSMENT OR PERMITTING TH E ASSESSEE TO RE-AGITATE QUESTIONS WHICH HAD BEEN DECIDED IN THE ORIGINAL ASSESSMENT PROCEED INGS. IT IS ONLY THE UNDERASSESSMENT WHICH IS SET ASIDE AND NOT THE ENTIRE ASSESSMENT WHEN REA SSESSMENT PROCEEDINGS ARE INITIATED. WHEN THE ASSESSMENT IS REOPENED, THE ORIGINAL ASSESSMENT UNDER SECTION 143(3) OF THE ACT REMAINS AND IT COULD NOT BE SAID THAT THE ORIGINAL ASSESSME NT IS NON-EST ON ACCOUNT OF THE REOPENING OF 22 ITA 695, 696 & 1935/K/20 0 8 LOKNATH SARAF SECURITIES LTD. A.Y. 02-03 & 04-05 C.O. NOS. 36 & 37/K/2008 THE ASSESSMENT. WHEN THE ORIGINAL ASSESSMENT REMAIN S THE COMMISSIONER OF INCOME-TAX HAD EVERY RIGHT TO REVISE THE ORDER IF IT WAS ERRONEOUS AND PREJUDICIAL TO THE INTERESTS OF THE REVENUE. BUT THE ORIGINAL ASSESSMENT WAS MADE ON NO VEMBER 18, 1985, AND THE REASSESSMENT UNDER SECTION 147 OF THE ACT WAS MADE ON JANUARY 8, 1987 AND THE COMMISSIONER OF INCOME- TAX REVISED THE ORIGINAL ASSESSMENT ORDER UNDER SEC TION 263 ON MARCH 8, 1988, DIRECTING THE INCOME-TAX OFFICER TO CHARGE INTEREST UNDER SECTION 215 OF THE ACT. THE ASSESSEE CONTENDED THAT AS THE ORIGINAL ASSESSMENT ORDER HAD MERGED WI TH THE REASSESSMENT ORDER, THE COMMISSIONER OF INCOME-TAX COULD NOT REVISE THE ORI GINAL ASSESSMENT ORDER UNDER SECTION 263OF THE ACT. HONBLE HIGH COURT HELD THAT THE COM MISSIONER OF INCOME-TAX COULD REVISE THE ORIGINAL ASSESSMENT ORDER UNDER SECTION 263OF THE A CT. 29. EVEN ORDER U/S. 143(1)(A) IS AMENABLE TO REVISI ON U/S. 263 OF THE ACT AND THIS VIEW HAS BEEN HELD BY HONBLE MADRAS HIGH COURT IN THE CASE OF CIT VS SMT. R. G. UMARANEE (2003) 262 ITR 507 (MAD), WHEREIN IT IS HELD THAT THE ORDE R OF TRIBUNAL HOLDING THAT THE COMMISSIONER HAS NO JURISDICTION TO REVISE U/S. 263 AN ORDER U/S. 143(1)(A)OF THE ACT, IS NOT CORRECT AND IS LEGALLY NOT SUSTAINABLE. SIMILAR VI EW IS HELD BY HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. ANDERSON MARINE & SONS PVT. LTD . (2004) 266 ITR 694 (BOM). IN VIEW OF THE ABOVE FACTUAL MATRIX OF THE CASE AND LEGAL POSI TION AS NOTED ABOVE, WE ARE OF THE VIEW THAT WHERE AN ASSESSMENT HAS BEEN MADE AND THE SAME HAD BECOME THE SUBJECT MATTER OF THE REASSESSMENT, THE QUESTION THAT AROSE WAS WHETHER R EVISION IS POSSIBLE IN RESPECT OF A MATTER IN THE ORIGINAL ASSESSMENT, BUT NOT IN THE REASSESSMEN T WITH THE TIME LIMIT RECKONED WITH REFERENCE TO THE REASSESSMENT ORDER. IN RESPECT OF A SIMILAR MATTER OF RECTIFICATION, THE SUPREME COURT IN HIND WIRE INDUSTRIES LTD. V. CIT ( 1995) 212 ITR 639 HELD THAT THE ORIGINAL MISTAKE CONTINUES IN ALL ORDERS, THOUGH NOT A SPECI FIC SUBJECT MATTER IN THE LAST ORDER, SO THAT THE DATE OF THE LAST ORDER CAN BE TAKEN FOR PURPOSE S OF THE TIME LIMIT, FOLLOWING A SALES TAX DECISION IN INTERNATIONAL COTTON CORPORATION (P) LT D. V. CTO [1975] 35 STC I (SC). THE DOCTRINE OF MERGER WAS ALSO SOUGHT TO BE RELIED UPO N EVEN FOR REVISIONAL POWERS AS WAS SANCTIFIED FOR RECTIFICATION POWERS AND IT IS IN TH IS CONTEXT THAT THE STATUS OF THE REASSESSMENT VIS-A-VIS THE ORIGINAL ASSESSMENT BECAME THE SUBJEC T MATTER OF ADJUDICATION IN ALAGENDRAN FINANCE LTD. (SUPRA) THE ISSUE WHETHER REASSESSMENT REPLACES THE ORIGINAL ASSESSMENT IN ITS ENTIRETY OR IT IS ONLY A SUPPLEMENTARY ASSESSMENT W ITH THE ORIGINAL ASSESSMENT REMAINING INTACT CAME TO BE INCIDENTALLY CONSIDERED AS A MATTER RELE VANT FOR RESOLVING THE ISSUE. THIS ISSUE WAS INCONCLUSIVE, SINCE THERE WAS SOME CONFLICT AS BETW EEN THE DECISIONS OF THE SUPREME COURT. IN V. JAGANMOHAN RAO V. CIT AND CEPT [1970] 75 ITR 373 , THE SUPREME COURT TOOK THE VIEW 23 ITA 695, 696 & 1935/K/20 0 8 LOKNATH SARAF SECURITIES LTD. A.Y. 02-03 & 04-05 C.O. NOS. 36 & 37/K/2008 THAT THE ENTIRE ASSESSMENT WAS WITHIN THE PURVIEW O F THE ASSESSING OFFICER DURING REASSESSMENT. IN A LATER DECISION IN CIT V. SUN ENG INEERING WORKS P. LTD. [1992] 198 ITR 297 (SC), IT WAS DECIDED THAT THE ASSESSING OFFICERS J URISDICTION WAS CONFINED TO THE INCOME THAT HAS ESCAPED ASSESSMENT AND THAT IT CANNOT JUSTIFY R EVISION, REOPENING OR RECONSIDERATION OF THE ENTIRE ASSESSMENT. RECONCILIATION WAS SOUGHT BETWEE N THESE TWO VIEWS BEFORE A BENCH OF THREE JUDGES OF THE SUPREME COURT IN ITO V. K. L. SRIHARI (HUF) [2001] 250 ITR 193 ON A REFERENCE BY THE BENCH, WHICH INITIALLY HEARD THE CASE. BUT I N THE CASE BEFORE HOBLE SUPREME COURT IN THE FACTS OF THE CASE AFTER PERUSAL OF BOTH THE ASS ESSMENT AND REASSESSMENT ORDERS WAS SATISFIED AND FOUND THAT THE HIGH COURT WAS RIGHT ON THE DISP UTE INVOLVED IN THE CASE BEFORE IT IN THAT THE EARLIER ASSESSMENT ORDER HAD BEEN EFFACED BY THE SU BSEQUENT ORDER AND CLOSED THE CASE WITH THE OBSERVATION IN THESE CIRCUMSTANCES, WE DO NOT CONS IDER IT NECESSARY TO GO INTO THE QUESTION THAT IS RAISED AND THE SAME IS LEFT OPEN. THE DECI SION OF THE SUPREME COURT IN THE CASE OF ALAGENDRAN FINANCE LTD. (SUPRA) HAS NOT NOTICED THE DECISION IN K. L. SRIHARIS CASE (SUPRA), WHICH, AT ANY RATE, CAN BE CONSIDERED ONLY AS ONE R ENDERED IN THE FACTS OF THE CASE AS IT ACTUALLY LEFT THE ISSUE OPEN. THERE ARE A NUMBER OF OTHER DE CISIONS OF THE HIGH COURTS TAKING ONE OR THE OTHER VIEW, THE SUPREME COURT CHOOSING THE DECISION OF THE MADRAS HIGH COURT IN CWT VS. A. K. THANGA PILLAI [2001] 252 ITR 260 FOR ITS APPR OVAL IN SORTING OUT THE CONTROVERSY. THE VIEW OF THE MADRAS HIGH COURT, IT WAS OBSERVED , WAS IN CONSENSUS WITH THE DECISION OF THE SUPREME COURT IN SUN ENGINEERING WO RKS P. LTD.S CASE (SUPRA) TREATING THE REASSESSMENT AS A SUPPLEMENTARY ASSESSMENT. IT FOL LOWS THAT THE TIME LIMIT FOR REVISION HAS TO BE RECKONED WITH REFERENCE TO THE FIRST ASSESSMENT IN RESPECT OF ANY DECISIONS PREJUDICIAL TO THE REVENUE, SO THAT THE EXTENDED TIME LIMIT WAS NOT AV AILABLE FOR REVISION UNDER SECTION 263 AS DECIDED IN ALAGENDRAN FINANCE LTD. S CASE (SUPRA). THOUGH THE DECISION OF THE SUPREME COURT IN THIS CASE WAS RENDERED BY THE BENCH OF TWO JUDGES, IT DID REFER FOR ITS CONCLUSION TO ITS OWN DECISION IN CIT V. SHRI ARBUDA MILLS LTD. [1998 ] 231 ITR 50 (SC) AND POINTED OUT TO THE RETROSPECTIVE AMENDMENT MADE TO SECTION 264 WITH EF FECT FROM JUNE 1, 1998, INSERTING AN EXPLANATION BY EXTENDING THE JURISDICTION TO ALL MA TTERS, WHICH HAVE NOT BEEN CONSIDERED EVEN IN AN ASSESSMENT SUBJECT TO APPEAL PLACING A RESTRA INT ON THE THEORY OF MERGER. SUCH A PROVISION FOUND IN SECTION 264 IS NOT AVAILABLE UNDER SECTION 263. EVEN FOR THIS REASON, IT WAS FOUND THAT THE MERGER THEORY COULD HAVE NO APPLICATION FOR REV ISIONAL POWERS UNDER SECTION 263. THE RULING IN SUN ENGINEERING WORKS P. LTD.S CASE (SUP RA) WAS, THEREFORE, PREFERRED. ACCORDINGLY, THE LAW AS TO THE POWERS OF REASSESSMENT APART FROM POWERS OF REVISION IS NOW TO BE TREATED AS SETTLED IN ALAGENDRAN FINANCE LTD.S CASE (SUPRA), THOUGH IT IS CONFINED TO REVISIONAL POWERS 24 ITA 695, 696 & 1935/K/20 0 8 LOKNATH SARAF SECURITIES LTD. A.Y. 02-03 & 04-05 C.O. NOS. 36 & 37/K/2008 UNDER SECTION 263. HENCE, IN OUR VIEW, THE REVISIO N ORDER PASSED BY CIT, KOL-2 IS BARRED BY LIMITATION AND WE QUASH THE SAME. 30. THE NEXT ISSUE IN THIS APPEAL OF THE ASSESSEE I S AGAINST THE ORDER OF CIT PASSED U/S. 263 OF THE ACT THAT THE ASSESSING OFFICER HAS TAKEN ONE POSSIBLE VIEW AND EVEN ON MERITS THE SERVICE TAX, SEBI SAT CHARGES, SEBI TURNOVER FEES, TRANSACTION CHARGES, ALBM AND OTHERS. FOR THIS THE ASSESSEE HAS RAISED FOLLOWING GROUND N OS. 3 TO 6: 3. WITHOUT PREJUDICE TO GROUNDS NO. 1 & 2 ABOVE AN D EVEN OTHERWISE, PRIOR PERIOD EXPENSES HAVING BEEN ALLOWED BY THE AO IN THE ORIGI NAL ASSESSMENT AS WELL AS ORDER U/S. 147/143(3) AFTER HAVING MADE A SPECIFIC QUERY IN THIS REGARD IN ORDER U/S. 147/143(3) AND AFTER HAVING OBTAINED ALL THIS DETAI LS IN THIS REGARD AND AFTER FULLY SATISFYING HIMSELF REGARDING ALLOWABILITY OF THE RE VENUE EXPENDITURE DURING THE YEAR AND THE AO HAVING TAKEN ONE OF THE POSSIBLE VIEWS, PROVISIONS OF SECTION 263 DID NOT VALIDLY LIE IN THIS CASE AND IN VIEW OF THE FACTS A ND IN THE CIRCUMSTANCES IT MAY KINDLY BE HELD ACCORDINGLY. 4. WITHOUT PREJUDICE TO WHAT HAS BEEN STATED IN GRO UNDS NO. 1, 2 & 3 ABOVE AND EVE OTHERWISE, THE MATTER REGARDING ALLOWABILITY OF SUC H EXPENDITURE HAVING BEEN FULL EXPLAINED IN PARA 11 OF THE WRITTEN SUBMISSION, THE CIT IS WHOLLY UNJUSTIFIED I STATING IN HIS ORDER THAT NO EXPLANATION WAS OFFERED FOR ALLOW ABILITY OF SUCH EXPENDITURE AND IN ANY CASE WITHOUT PREJUDICE AND EVEN OTHERWISE THE E NTIRE SUM OF RS. 35,06,607/- BEING TAX, DUTY CESS OR FEES WAS FULLY ALLOWABLE DURING T HE YEAR ON THE BASIS OF ACTUAL PAYMENT AND HENCE ALSO ORDER U/S. 263 IS WHOLLY BAD , ILLEGAL AND VOID ABINITIO. 5. WITHOUT PREJUDICE TO GROUNDS NO. 1, 2, 3 & 4 ABO VE AND EVEN OTHERWISE, RS.35,06,607/- CONSIDERED BY THE CIT IN HIS ORDER U /S. 263 FOR THE PURPOSES OF SECTION 263 INCLUDED SERVICE TAX OF RS. 10,792/- WHICH HAD ALREADY BEEN DISALLOWED BY THE AO IN THE ASSESSMENT AND HENCE PROCEEDINGS U/S. 263 HA VING BEEN INITIATED FOR THE SAME IS WHOLLY BAD AND MOREOVER THE SAID SUM OF RS. 10,792/ - BEING THE EXPENSES FOR PRIOR YEAR HAVING BEEN ALLOWED BY THE CIT(A) BY HIS APPELLATE ORDER DATED 25.02.2008, THE ORDER OF THE AO ON THE ISSUE OF PRIOR PERIOD EXPENSES HAD FULLY MERGED WITH THE ORDER OF THE CIT(A) AND HENCE ALSO PROVISIONS OF SECTION 263 DID NOT VALIDLY LIE IN THIS CASE AND IN VIEW OF THE FACTS AND CIRCUMSTANCES ORDER U/S. 263 IS WHOLLY BAD, ILLEGAL AND VOID ABINITIO AND HENCE IN VIEW OF THE FACTS AND IN THE CIRCUMSTANCES SUCH ORDER U/S. 263 IS LIABLE TO BE QUASHED / CANCELLED / SET ASIDE AND IN VIEW OF THE FACTS AND IN THE CIRCUMSTANCES IT MAY KINDLY BE HELD ACCORDINGLY. 6. WITHOUT PREJUDICE TO WHAT HAS BEEN STATED IN GRO UNDS NO. 1, 2, 3, 4 & 5 ABOVE AND EVEN OTHERWISE, THE ENTIRE EXPENDITURE OF RS. 35,06 ,607/- BEING TAX DUTY CESS OR FEES BEING FULLY ALLOWABLE U/S. 43B OF THE INCOME-TAX AC T IT MAY KINDLY BE HELD ACCORDINGLY AND THE ORDER OF THE CIT IN THIS REGARD MAY KINDLY BE AMENDED AND/OR THE AO MAY KINDLY BE DIRECTED TO ALLOW THE SAME. 31. AFTER HEARING RIVAL CONTENTIONS ON MERITS, WE F IND THAT THE EXPENDITURES SOUGHT TO BE DISALLOWED I.E. SEBI TURNOVER FEE, SEBI SAT CHARGES , SERVICE TAX, TRANSACTION CHARGES, ALBM AND OTHERS ARE IN THE NATURE OF ITEMS FALLING UNDER SECTION 43B OF THE ACT EXCEPT OTHERS (WHICH IS VERY NOMINAL AT RS.5003/-). WE FIND THAT EVEN INITIALLY THE AO TRIED TO PUT THESE ITEMS FOR DISALLOWANCES U/S. 154 OF THE ACT BY TREA TING THE SAME AS MISTAKE APPARENT FROM 25 ITA 695, 696 & 1935/K/20 0 8 LOKNATH SARAF SECURITIES LTD. A.Y. 02-03 & 04-05 C.O. NOS. 36 & 37/K/2008 RECORD AS THE PRIOR PERIOD EXPENDITURE ITEMS WERE A VAILABLE IN THE TAX AUDIT REPORT. THE ASSESSEE CHALLENGED THE ALLOWABILITY OF PRIOR PERIO D ITEMS BEING A MATTER OF DELIBERATION, THEREFORE, THE AO DROPPED THE RECTIFICATION PROCEED INGS INITIATED U/S. 154 OF THE ACT AND THE PROPOSAL WAS SENT TO THE CIT FOR INVOCATION OF HIS POWERS U/S. 263 OF THE ACT. WE FIND THAT THESE FEES ARE PAYABLE TO STOCK EXCHANGE AND ALL AR E QUANTIFIABLE ITEMS WITHIN THE FINANCIAL YEAR, AS ALL ARE FEE CHARGES PAYABLE TO VARIOUS AUT HORITIES AND PAID WITHIN THE DUE DATE OF FILING OF RETURN AND ACCORDINGLY FALLING U/S. 43B OF THE A CT. WE FIND THAT THE ISSUE NOW IS CRYSTALLY CLEAR THAT THESE EXPENDITURES FALLING U/S. 43B OF THE ACT ARE ALLOWABLE, HENCE WHILE PROCESSING THE RETURN U/S. 143(1)(A) OF THE ACT DATED 26.5.200 3 WAS AS PER LAW AND PROCESSING WAS NEITHER ERRONEOUS NOR PREJUDICIAL TO THE INTEREST OF REVENU E SO AS TO PROVOKE THE REVENUE TO INITIATE ACTION U/S. 263 OF THE ACT FOR REVISION OF THE SAME . ACCORDINGLY, ON MERITS ALSO WE HOLD THAT THE DISALLOWANCES MADE BY CIT(A) IS WITHOUT LEGAL F ORCE. ACCORDINGLY, WE QUASH THE SAME. THE APPEAL OF THE ASSESSEE IS ALLOWED. 6. IN THE RESULT, ITA NO.695/K/2008, REVENUES APPE AL IS DISMISSED, CO. NO.36/K/2008, ASSESSEES CO IS PARTLY ALLOWED, ITA NO.696/K/2008 REVENUES APPEAL IS PARTLY ALLOWED, CO NO.37/K/2008 ASSESSEES CO IS PARTLY ALLOWED AND IT A NO.1935/K/2008 ASSESSEES APPEAL IS ALLOWED. 7. ORDER PRONOUNCED IN OPEN COURT ON 20.6.2011. SD/- SD/- , !' , (AKBER BASHA) (MAHAVIR SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER ( -' -' -' -') )) ) DATED 20TH JUNE, 2011 PRONOUNCED BY SD/- (CDR) SD/- (M.SINGH) ./ $01 2 JD.(SR.P.S.) AM JM ! 3 +4 5!4&6- COPY OF THE ORDER FORWARDED TO: 1 . )* / APPELLANT DCIT/ACIT, CIRCLE-6, KOLKATA. 2 +,)* / RESPONDENT LOKNATH SARAF SECURITIES LTD., 6, LY ONS RANGE, KOLKATA-700 001. 3 . $ ( )/ THE CIT(A), KOLKATA 4. 5. $ / CIT KOLKATA 4<= +$ / DR, KOLKATA BENCHES, KOLKATA ,4 +/ TRUE COPY, ! $>/ BY ORDER, 1 /ASSTT. REGISTRAR .
