ANAND R BAHL, MUMBAI V. DCIT RG 20(3), MUMBAI

ITA 7706/MUM/2011

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 2479 (ITAT-MUMBAI)
• Duration Of Justice: 4 year(s) 8 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-07-2016
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 25-03-2015
• Assessment Year: 2007-2008
• Appeal Filed On: 15-11-2011
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: B PRUSETH
• Assessee Lawyers: HITEN M VASANT
• Keywords: Business income; Transactions in derivatives; Cost of acquisition
• Section: 145

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH A, MUMBAI BEFORE SHRI SANJAY ARORA, ACCOUNTANT MEMBER AND SHRI PAWAN SINGH, JUDICIAL MEMBER ITA NO.7706/MUM/2011 ASSESSMENT YEAR: 2007-08 SHRI ANAND R. BAHL, SAKET, PLOT NO. 84, MIDC, 15 TH ROAD, ANDHERI (E), MUMBAI-400093. PAN: AEBPB 7854 G VS. DY. CIT, RANGE 20(3), PIRAMAL CHAMBERS, 6 TH FLOOR, LALBAUG, PAREL, MUMBAI-400012 (APPELLANT) (RESPONDENT) ITA NO.7332/MUM/2011 ASSESSMENT YEAR: 2008-09 SHRI ANAND R. BAHL, SAKET, PLOT NO. 84, MIDC, 15 TH ROAD, ANDHERI (E), MUMBAI-400093. PAN: AEBPB 7854 G VS. JT.CIT, RANGE 20(1), PIRAMAL CHAMBERS, 6 TH FLOOR, LALBAUG, PAREL, MUMBAI-400012 (APPELLANT) (RESPONDENT) ITA NO.8112/MUM/2011 ASSESSMENT YEAR: 2008-09 ACIT, RANGE 20(1), VS. SHRI ANAND R. BAHL, (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI HITEN M. VASANT (AR) REVENUE BY : SHRI B. PRUSETH (DR) DATE OF HEARING : 21.04.2016 DATE OF ORDER : 20.07.2016 O R D E R PER BENCH: THESE THREE APPEALS WERE HEARD TOGETHER AND ARE BEIN G DECIDED BY COMMON ORDER. APPEAL ITA NO. 7706/M/2011, IS FILED BY ASSE SSEE AGAINST THE ORDER OF CIT (A)-31 MUMBAI DATED 07.01.2010 FOR AY 2007-08. A PPEAL ITA NO.7332/M/2011FILED BY ASSESSEE, AND CROSS APPEAL I TA NO. 8112/M/2011 FILED BY REVENUE AGAINST THE ORDER OF CIT(A)-31 DATED 26/ 09/2011. AS COMMON GROUNDS RAISED BY ASSESSEE FOR BOTH YEARS HENCE ALL APPEALS WERE CLUBBED AND HEARD TOGETHER. 2 ITA NO.7706/M/2011, 7332 & 8112/M/2011 (A.YS. 2007-08 & 2008-09) ANAND R BEHL 2.1 IN ITA NO. 7706/M/2011 AND 7332/M/2011 (FOR AYS 2007-08 AND 2008- 09), THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: 1.1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) ERRED I N HOLDING THAT THE SHORT TERM CAPITAL GAINS OF RS.2,05,21,550/- (*) DISCLOSED BY YOUR APPELLANT IN HIS RETURN OF INCOME HAS BEEN RIGHTLY ASSESSED BY THE A.O. AS BUSINESS INCOME. 1.2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE AND IN LAW THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) ERRED I N HOLDING THAT TAKING INTO CONSIDERATION THE SUBSTANTIAL OR LARGE VOLUME, CONSISTENT, REGULAR AND REPETITIVE TRANSACTIONS UNDERTAKEN IN T HE SAME SCRIPTS BOTH FOR THE DELIVERY BASED TRANSACTIONS AND NON-DE LIVERY BASED TRANSACTIONS INCLUDING F&O TRANSACTIONS, THESE TRAN SACTIONS ARE IN THE NATURE OF TRADING OR BUSINESS TRANSACTIONS FAIL ING TO APPRECIATE THAT THERE IS NO LEGAL SANCTITY FOR SUCH TREATMENT. 1.3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE AND IN LAW THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) FAILED TO APPRECIATE THAT BY MAKING SUCH A SKEWED INTERPRETATION, THE A.O . HAD ACTED AGAINST THE TRUE SPIRIT OF THE LAW AND HAS TOTALLY DISREGARDED THE PROVISIONS OF SEC. 2(14), 2(42A), I11A & OF THE I.T. ACT (*) RS.4,89,45,103/- (FOR A.Y. 2008-09) 2.2 IN CROSS APPEAL NO. 8112/M/2011 (FOR AY 2008-09 ), THE REVENUE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: 1) THE LD. CIT (A) HAS ERRED IN LAW AND IN FACTS IN DELETING THE DISALLOWANCE OF RS.16,38,96,919/- ON ACCOUNT OF LIAB ILITY TO BROKERS SHOWN IN THE BALANCE SHEET REPRESENTING LOSS FROM F & O TRANSACTIONS IGNORING THE FACTS THAT THE ASSESSEE WAS FOLLOWING CASH SYSTEM OF ACCOUNTING AND THE LOSS INCURRED BUT NOT PAID BY TH E ASSESSEE DURING THE YEAR WAS NOT ALLOWABLE AS DEDUCTION. 2) THE LD. CIT(A) FAILED TO APPRECIATE THAT IN THE P RESENT CASE THE 'LOSS' IS NOTHING BUT UNPAID PURCHASE EXPENDITURE C LAIMED IN THE P/L ACCOUNT WHICH IS NOT ALLOWABLE AS EXPENDITURE UNDER CASH ACCOUNTING SYSTEM. 3) THE LEARNED CIT(A) ERRED IN IGNORING THAT THE AMO UNT DUE TO BROKERS WAS ADDED BY THE AO NOT MERELY BECAUSE IT A PPEARED IN THE BALANCE SHEET OF THE ASSESSEE BUT BECAUSE IT WAS PA RT OF CLAIM A EXPENDITURE IN THE P/L ACCOUNT DURING THE YEAR WHIC H REMAINED UNPAID AND THEREFORE NOT IN ACCORDANCE WITH CASH SY STEM OF ACCOUNTING FOLLOWED BY THE ASSESSEE. 3 ITA NO.7706/M/2011, 7332 & 8112/M/2011 (A.YS. 2007-08 & 2008-09) ANAND R BEHL 4) THE LEARNED CIT(A) WHILE ACCEPTING THE SETTLED P OSITION OF LAW THAT THE TAX IS TO BE LEVIED ON REAL INCOME AND NOT ON A RTIFICIAL OR FICTITIOUS INCOME, ERRED IN NOT CONSIDERING THAT IN THE PRESEN T CASE, THE REAL INCOME IS THAT INCOME WHICH IS DERIVED BY 'CASH' ME THOD OF ACCOUNTING AND THE LOSS DURING THE YEAR WHICH IS NOT YET PAID IS NOT THE 'REAL LOSS' AND THEREFORE CANNOT BE ALLOWED AS SET OFF/ DEDUCTI ON AGAINST THE REAL INCOME'. 5) THE APPELLANT PRAYS THAT THE ORDER OF THE CIT(A) ON THE ABOVE GROUNDS BE SET ASIDE AND THAT OF THE AO BE RESTORED . 3. FIRST WE SHALL TAKE UP THE ASSESSEES APPEALS. TH OUGH THE ASSESSEE HAS RAISED AS MANY AS THREE GROUNDS, THE SAME IN SUBSTA NCE RAISE A SINGLE ISSUE, I.E., AS REGARDS THE HEAD OF INCOME UNDER WHICH THE INCOM E BY WAY OF GAIN ON SALE OF SHARES BY THE ASSESSEE IS TO BE ASSESSED, I.E., AS SHORT TERM CAPITAL GAIN (STCG), AS RETURNED BY THE ASSESSEE, OR AS BUSINESS INCOME , AS ASSESSED AND CONFIRMED. 4. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE FILED RETURN OF INCOME FOR RELEVANT AY DECLARING A LOSS OF RS. 50,54,982/-. TH E RETURN OF INCOME WAS SELECTED FOR SCRUTINY. WHILE FRAMING ASSESSMENT, TH E ASSESSING OFFICER (AO) OBSERVED THAT THE ASSESSEE IS MAINLY ENGAGED IN THE BUSINESS OF SHARE TRADING AND RECEIVED INCOME FROM THE FUTURES AND OPTIONS, WHICH ARE INTIMATELY CONNECTED WITH THE STOCK MARKET OPERATIONS. THE AO REQUIRED D ETAILS WITH REGARD TO THE STCG AND THE BUSINESS ACTIVITIES OF THE ASSESSEE, WH O WAS ALSO ASKED TO SUBMIT THE ANALYSIS OF ENTIRE PORTFOLIO, TAKING INTO CONSI DERATION THE VARIOUS PARAMETERS, VIZ. NUMBER OF SCRIPS, VOLUME, FREQUENCY OF TRANSAC TION AND THEIR SYSTEMATIC AND PERIODICAL NATURE. THE ASSESSEE SUBMITTED HIS REPLY DATED 21.11.2009. IN REPLY, THE ASSESSEE CONTENDED THAT HE IS A PARTNER IN TWO FIRMS, I.E., EAST AND WEST HANDICRAFTS ENTERPRISES AND AARKEY FASHION GARMENTS . THE ASSESSEE IN HIS INDIVIDUAL CAPACITY HAS BEEN INVESTING ACROSS VARIO US ASSETS, INCLUDING IN SHARES, FOR THE PAST MANY YEARS. AT THE END OF EACH FINANCI AL YEAR, THE STOCKS ARE SHOWN IN THE BALANCE-SHEET AT COST UNDER THE HEAD INVEST MENTS. THAT THE ASSESSEE IS BASICALLY AN INVESTOR, EARNING LONG TERM AS WELL AS SHORT-TERM GAINS/LOSSES FROM PURCHASES/SALES OF SHARES AND SUCH INCOME FOR THE LAST SO MANY YEARS HAD BEEN DECLARED UNDER THE HEAD SHORT TERM CAPITAL GAI N (STCG) OR LONG TERM 4 ITA NO.7706/M/2011, 7332 & 8112/M/2011 (A.YS. 2007-08 & 2008-09) ANAND R BEHL CAPITAL GAIN (LTCG) DEPENDING UPON THE PERIOD OF HOL DING. SUCH INCOME HAS BEEN DECLARED BY HIM FOR LAST MANY YEARS UNDER THE HEAD SHORT TERM CAPITAL GAIN AND ACCEPTED BY THE DEPARTMENT. THE CONTENTION OF A SSESSEE WAS NOT ACCEPTED BY THE AO. THE AO CONCLUDED THAT THE STCG RETURNED BY T HE ASSESSEE IS ASSESSABLE UNDER THE HEAD OF INCOME PROFITS AND GAINS OF BUSI NESS OR PROFESSION AS THE ACTIVITIES OF ASSESSEE ARE IN NATURE OF TRADE/BUSIN ESS. BEING AGGRIEVED BY THE ORDER OF AO, THE ASSESSEE FILED APPEAL BEFORE THE C IT(A) BUT WITHOUT ANY SUCCESS. THUS, THE PRESENT APPEAL IS FILED BEFORE US . 5. WE HAVE HEARD AUTHORISED REPRESENTATIVE (AR) OF ASSESSEE AND DEPARTMENTAL REPRESENTATIVE (DR) FOR REVENUE, AND P ERUSED THE MATERIAL AVAILABLE ON RECORD. THE AR ARGUED THAT THE AO HAD WRONGLY TREATED THE STCG AS BUSINESS INCOME. THE ASSESSEE PURCHASES SHARES A S AN INVESTOR AFTER PAYING SECURITIES TRANSACTION TAX (STT), AND SOME OF THESE SH ARES WERE SOLD AFTER A CONSIDERABLE PERIOD OF TIME AND, THEREFORE, QUALIFI ED FOR COMPUTATION UNDER THE HEAD STCG. THE AO HAD WRONGLY OBSERVED THAT PRINCIPA L ACTIVITY OF ASSESSEE IS OF TRADING IN FUTURE & OPTION (F&O). IT WAS ARGUED THAT AO HAS NOT APPRECIATED THE REAL NATURE OF TRANSACTIONS IN RESPECT OF F&O, WHERE-UNDER SHARES ARE NEITHER PURCHASED NOR SOLD. NO DELIVERY IN SHARES IS TAKEN AND THE TRANSACTION RESULTS IN EITHER PROFIT OR LOSS. THE ASSESSEE IS AN INVESTOR A ND IS DOING DELIVERY BASED BUSINESS. THE AO HAS IGNORED THE FACT THAT THE ASSE SSEE HAS BOUGHT AND SOLD SHARES ONLY THROUGH THE RECOGNIZED STOCK EXCHANGE, WHERE THERE IS A COMPLETE TRANSPARENCY. NO SHARES IN ANY UNLISTED COMPANY WER E PURCHASED. THE INTENTION AND MOTIVE OF ASSESSEE IS OF INVESTMENT AND NOT FOR TRADING PURPOSES. THE AR OF ASSESSEE FURTHER RELIED UPON THE CASE OF GOPAL PURO HIT IN ITA NO. 4854/M/2008 DATED 10.02.2009. THE LD. DR FOR REVENUE ARGUED THAT THE ASSESSEE IS ENGAGED IN SHARE TRANSACTIONS ON DAILY BASIS AND OTHER BUSINES S ACTIVITIES ARE NOMINAL. THE ACTIVITY IS SUBSTANTIAL, CONSIDERING THE NUMBER OF TRANSACTIONS, PERIOD OF HOLDING, VOLUME AND NUMBER OF SCRIPS CONSIDERING THE SAME AS WELL AS THE TIME DEVOTED BY ASSESSEE, IT IS CLEAR THAT THE ASSESSEE IS ENGAG ED IN TRADING ACTIVITIES. FURTHER, 5 ITA NO.7706/M/2011, 7332 & 8112/M/2011 (A.YS. 2007-08 & 2008-09) ANAND R BEHL THE PRINCIPLE OF RES-JUDICATA IS NOT APPLICABLE TO ASSESSMENTS UNDER THE INCOME- TAX ACT. HE, FURTHER, RELIED UPON THE CIRCULAR NO.4 OF 2007 DATED 15.06.2007 AND THE DECISION OF DELHI BENCH OF THE TRIBUNAL IN ASST. CIT VS. MANOJ KUMAR SAMDARIA [2012] 54 SOT 331 (DEL). 6. WE HAVE CONSIDERED THE RIVAL CONTENTION OF THE P ARTIES AND PERUSED THE MATERIAL AVAILABLE ON RECORD. 6.1 SECTION 2(13) OF THE ACT DEFINES THE TERM BUSI NESS INCLUSIVELY, AS FOLLOWS: DEFINITIONS . 2 . IN THIS ACT, UNLESS THE CONTEXT OTHERWISE REQUIRE S.- (1) .............. (13) BUSINESS INCLUDES ANY TRADE, COMMERCE OR MANUFACTURE OR ANY ADVENTURE OR CONCERN IN THE NATURE OF TRADE, COMMERCE OR MANUFACTURE, THE SAME HAS FURTHER BEEN SUBJECT TO ELUCIDATION BY THE HONBLE HIGHER COURTS OF LAW, TIME AND AGAIN, AND IS A TERM WELL U NDERSTOOD AND EXPLAINED IN LAW. TO STATE BRIEFLY, THE WORD BUSINESS IS ONE OF LARGE AND INDEFINITE IMPORT AND CONNOTES SOMETHING WHICH OCCUPIES THE TIME, ATT ENTION AND LABOUR OF A PERSON NORMALLY WITH THE OBJECT OF MAKING PROFIT. TH E WORD IS OF WIDE IMPORT, THE UNDERLYING IDEA BEING OF CONTINUOUS EXERCISE OF AN ACTIVITY. THE DEFINITION IS IN FACT NOT EXHAUSTIVE, AND IS TO BE CONSTRUED IN A BROAD SENSE [REFER, INTER ALIA , VISHWANATH JHUNJHUNWALA V. STATE OF U.P. [2004] 4 SCC 437; CIT V. A. DHARMA REDDY [1969] 73 ITR 751, 755, (SC); VENKATARAMAN AIYAR, J ., SPEAKING FOR THE COURT IN MAZAGAON DOCK LTD. V. CIT(A) [1958] 34 ITR 368, 376 (SC); AND CIT VS. NATIONAL MUTUAL LIFE ASSOCIATION OF AUSTRALASIA L TD. [1993] 1 ITR 350 (BOM). THE WORD MEANS ALMOST ANYTHING WHICH IS AN O CCUPATION OR DUTY REQUIRING ATTENTION AS DISTINGUISHED FROM SPORT OR PLEASURE AND IS USED IN THE SENSE OF AN OCCUPATION CONTINUOUSLY CARRIED ON FOR THE PURPOSE OF PROFIT [ROGERS PYATT SHELLAC & CO. V. SECRETARY OF STATE, AIR 1925 CAL 34 = 1 TC 363]. 6 ITA NO.7706/M/2011, 7332 & 8112/M/2011 (A.YS. 2007-08 & 2008-09) ANAND R BEHL IN CIRCULAR NO.4 OF 2007 DATED 15.06.2007, THE CBDT MADE DISTINCTION BETWEEN SHAREHOLDING AS STOCK-IN-TRADE AND SHARE HO LDING AS INVESTMENT. IN PARA 8, THREE CONDITIONS WERE ENUMERATED, WHICH ARE REPR ODUCED HERE IN BELOW:- (I) WHERE A COMPANY PURCHASE AND SELLS SHARES, IT M UST BE SHOWN THAT THEY WERE HELD AS STOCK-IN-TRADE AND THAT EXIS TENCE OF THE POWER TO PURCHASE AND SELL SHARES IN THE MEMORANDUM OF ASSOCIATION IS NOT DECISIVE OF THE NATURE OF TRANSA CTIONS; (II) THE SUBSTANTIAL NATURE OF TRANSACTIONS, THE MA NNER OF MAINTAINING BOOKS OF ACCOUNTS, THE MAGNITUDE OF PUR CHASE AND SALES AND THE RATIO BETWEEN PURCHASE AND SALES AND THE HOLDING WOULD FURNISH A GOOD GUIDE TO DETERMINE THE NATURE OF TRANSACTIONS; (III) ORDINARILY THE PURCHASE AND SALE OF SHARES WI TH THE MOTIVE OF EARNING A PROFIT, WOULD RESULT IN THE TRA NSACTION BEING IN THE NATURE OF TRADE/ADVENTURE IN THE NATURE OF TRAD E; BUT WHERE THE OBJECT OF THE INVESTMENT IN SHARES OF A COMPANY IS TO DERIVE INCOME BY WAY OF DIVIDEND ETC. THEN THE PROFITS ACC RUING BY CHANGE IN SUCH INVESTMENT (BY SALE OF SHARES) WILL YIELD CAPITAL GAIN AND NOT REVENUE RECEIPT. 6.2 AS SUCH, ANY ORGANIZED, SYSTEMATIC ACTIVITY, WH ICH WOULD IMPLY CONTINUITY AND REGULARITY, AS ALSO EXPENDITURE OF T IME AND EFFORT, WOULD INDICATE BUSINESS. THE SAID PARAMETERS STAND SUGGESTED BY THE HONBLE COURTS, AND WHICH EXPLAINS THEIR INCORPORATION IN THE BOARD CIR CULAR (SUPRA), WHICH IS BASED ON DECISION BY THE HONBLE APEX COURT. IN FACT, FUR THER PARAMETERS, VIZ. VOLUME, FREQUENCY, ETC. TOWARDS THE SAME STAND ADDED, PARTI CULARLY IN THE CONTEXT OF THE TRADE/ACTIVITY UNDER REFERENCE. THESE ARE IN FACT E SSENTIALLY QUANTITATIVE TESTS, THOUGH WELL INDICATE THE INTENT AND MOTIVE WITH WHI CH THE ACTIVITY IS UNDERTAKEN. THE HONBLE APEX COURT PER ITS LARGER BENCH DECISION IN LAKSHMINARAYAN RAM GOPAL AND SON LTD. VS. THE GOVERNMENT OF HYDERABAD [1954] 25 ITR 449 (SC), REFERRED TO BY THE AO IN HIS ORDER, EXPLAINED THAT IT IS THE NATURE AND SCOPE OF THE ACTIVITIES THAT IS RELEVANT, AND DOES NOT NECESSARI LY EXTEND TO, WHICH COULD BY CHANCE OR DESIGN, AS IN THAT CASE, BE LIMITED TO ON LY ONE INDIVIDUAL OR CONCERN (PAGE 458). THE HONBLE COURT WENT ON TO STATE (AT PAGE 459) THAT THE ACTIVITIES WHICH CONSTITUTE CARRYING ON BUSINESS DO NOT NECESS ARILY CONSIST OF ACTIVITY BY WAY OF TRADE, COMMERCE, OR MANUFACTURE OR ACTIVITIE S IN THE EXERCISE OF 7 ITA NO.7706/M/2011, 7332 & 8112/M/2011 (A.YS. 2007-08 & 2008-09) ANAND R BEHL PROFESSION OR VOCATION. THE ISSUE IN THAT CASE WAS A S TO THE NATURE OF THE INCOME ARISING TO THE ASSESSEE UNDER THE AGENCY AGREEMENT WITH A COMPANY. AFTER EXAMINING THE TERMS OF THE AGREEMENT, THE RENDERING SERVICES THERE-UNDER BY THE ASSESSEE, AND WHICH WERE ITSELF OF VARIEGATED CHARA CTER, WERE HELD TO CONSTITUTE BUSINESS AND, ACCORDINGLY, THE INCOME OR GAIN ARISI NG TO THE ASSESSEE FROM THE SAID ACTIVITY AS FROM BUSINESS. THE LAW IN THE MATT ER, AS AFORE-STATED, IS WELL- SETTLED. THE AO IN FACT HAS REFERRED TO A HOST OF D ECISIONS IN THE MATTER, DELINEATING THE SETTLED LAW, AND WHICH WE MAY, THER EFORE, CITE AS UNDER: STATE OF PUNJAB VS. BAJAJ ELECTRICALS LTD. [1968] 70 ITR 730 (SC); RAJPUTANA TEXTILES (AGENCIES) LTD. VS. CIT [1961] 42 ITR 743 (SC); RAJA BAHADUR VISHESHWARA SINGH VS. CIT [1961] 41 ITR 685 (SC); LAKSHMINARAYAN RAM GOPAN AND SON LTD. VS. THE GOVER NMENT OF HYDERABAD 1954] 25 ITR 449 (SC); ALLAHABAD BANK LTD. VS. CIT [1953] 24 ITR 519 (SC); CIT VS. SMT. MINAL RAMESHCHANDRA [1987] 167 ITR 0507 (GUJ); CIT VS .GODAVARI CORPORATION LTD. [1985] 156 ITR 835 (MAD); CIT VS. MOTILAL HIRABHAI SPG. & WVG. CO. LTD. [1978] 113 ITR 173 (GUJ); A.P. DAMODARA SHENOY VS. CIT [1954] 26 ITR 0650 (BOM); W.L. KNOPP VS. CIT [1948] 16 ITR 398 (MAD); PUNJAB CO-OPERATIVE BANK LTD. VS. CIT [1940] 8 ITR 635 (PC) 6.3 WE MAY NEXT EXAMINE THE FACTS OF THE CASE. THE F IRST THING THAT STRIKES US IS THAT THE ASSESSEE IS A TRADER/OPERATOR IN THE F& O MARKET, I.E., DEALS IN SHARES IN THE SAID MARKET ON A REGULAR BASIS, WHICH ACTIVITY IS ADMITTEDLY BUSINESS, AND INCOME THERE-FROM OFFERED TO TAX AS BUSINESS INCOME . THE DIFFERENCE BETWEEN THOSE TRANSACTIONS AND THAT OF PURCHASE AND SALE - WHICH ARE STATED TO BE BY WAY OF INVESTMENT, IS THAT THE LATTER ARE DELIVERY BASE D, WHILE THE FORMER ARE NOT. THAT, HOWEVER, WOULD NOT BE A DISTINGUISHING FEATURE. BOT H REQUIRE UNDERSTANDING OF THE MARKET AS WELL AS MARKET TRENDS, I.E., BOTH GEN ERALLY AS WELL AS QUA THE SPECIFIC SCRIPS. WHETHER DERIVATIVE SEGMENT OR OTHE RWISE, THE ASSESSEE WOULD TRANSACT ONLY IN SHARES WHERE HE PERCEIVES A FAVOUR ABLE MARKET POSITION IN FUTURE, SEIZING THE OPPORTUNITY TO MAKE A GAIN. RATHER, IN THE DERIVATIVE, HE COULD STRIKE A TRADE EVEN ANTICIPATING A DOWN TURN (IN THE PRICE OF THE SCRIP) BY SELLING IT AT THE PREVAILING (HIGHER) RATE, SQUARING THE TRANSACT ION IN FUTURE. THIS COULD BE 8 ITA NO.7706/M/2011, 7332 & 8112/M/2011 (A.YS. 2007-08 & 2008-09) ANAND R BEHL DONE EVEN IN THE REGULAR MARKET, SELLING NOW TO BUY LATER, THE ONLY RIDER BEING THAT IN CASE THE SALE IS NOT ACCOMPANIED BY DELIVER Y, THE SAME IS LIABLE TO BE DEEMED AS A SPECULATIVE TRANSACTION. CONTINUING FUR THER, EITHER WAY, HE CAPITALIZES ON THE SHARE PRICE MOVEMENT, UNDERLININ G OUR OBSERVATION OF HE BEING IN A REGULAR IN THE SHARE MARKET, IN FACT UNDERTAKI NG SUCH ACTIVITY IN THE PAST. UNARGUABLY, HE HAS A KEEN UNDERSTANDING THEREOF, AN D WHICH HE EMPLOYS, ON A CONTINUOUS BASIS, WITH A VIEW TO EARN PROFIT. THE AS SESSEE, ON THE OTHER HAND, CLAIMS THAT THE PURCHASE AND SALE OF SHARES IS PER DELIVERY BASED TRANSACTIONS, AND ONLY BY WAY OF INVESTMENT. INVESTMENT, BY DEFINITIO N, WOULD IMPLY SELECTION OF CERTAIN SCRIPS FOR INVESTMENT, I.E., ON A STUDY AND ANALYSIS OF THE INDUSTRY AND COMPANY PROFILE. THERE IS NOTHING ON RECORD TO SUGGE ST SUCH AN EXERCISE AS HAVING BEEN UNDERTAKEN AT ANY TIME, MUCH LESS FOLLO WED, OR ANY OTHER ADVISORY, AS FURTHER SIGNIFIED BY THE INVESTMENT BEING LIMITE D TO A FEW SCRIPS (ACROSS CERTAIN INDUSTRIES), WITH FEW TRANSACTIONS. THIS PR EDICATES THAT SUCH AN ACTIVITY (INVESTMENT) WOULD BE LIMITED TO FEW SCRIPS IN-AS-M UCH AS ANYONE WOULD CHOSE ONLY THE BEST (OR FROM AMONG THE BEST) IN ANY INDUS TRY, SPREADING IT (INVESTMENT) OVER MORE THAN ONE SCRIP TO DIVERSIFY BOTH, THE COM PANY-SPECIFIC AND INDUSTRY- SPECIFIC RISK. IT IS IN FACT NEITHER FEASIBLE NOR P REFERABLE TO FOLLOW MORE THAN FEW SCRIPS AND/OR INDUSTRIES/SECTORS, BEING A CONTINUOU S RATHER THAN THE ONE TIME EXERCISE. INVESTMENT THEORY ADVOCATES 7 TO 8 SCRIPS . THEN, BY DEFINITION, A SOUND INVESTMENT OPPORTUNITY WOULD ONLY IMPLY AN ASSET WH ICH HAS A POTENTIAL TO YIELD GOOD RETURNS IN FUTURE. ALLOWANCE OF TIME FOR AN IN VESTMENT - WHICH STANDS ACQUIRED AT, AND WOULD ALSO STAND TO BE REALIZED AT , THE PREVALENT MARKET VALUE, TO GROW AND YIELD RETURN IS A PRE-REQUISITE; RATHER, A XIOMATIC. AN UNDERPRICED SHARE (ASSET), IDENTIFIED ON SUCH VALUE ANALYSIS, MAY STA ND TO BE SOLD ON REGAINING ITS CORRECT (PERCEIVED) MARKET VALUE. THIS, THEN, WOULD BE AN EXCEPTION, AND WHERE THE INVESTMENT REALIZED IN A SHORT SPAN OF TIME, CO NSTITUTE STCG, EVEN AS WE FIND NO SUCH ANALYSIS UNDERTAKEN IN THE PRESENT CASE. 6.4 THE ACTIVITY OF OR THE PURCHASE AND SALE BEHAVIO UR IN THE PRESENT CASE STANDS ANALYZED BY BOTH THE REVENUE AUTHORITIES TO FIND IT AS STRONGLY, NAY, UN- 9 ITA NO.7706/M/2011, 7332 & 8112/M/2011 (A.YS. 2007-08 & 2008-09) ANAND R BEHL MISTAKABLY, IN FAVOUR OF A SYSTEMATIC, REGULAR, BUS INESS ACTIVITY. REFERENCE IN THIS CONTEXT MAY BE MADE TO PARAGRAPHS 3.4 (VI) AND 2.3. 2 OF THE ASSESSMENT AND THE IMPUGNED ORDERS FOR AY 2007-08 AND AY 2008-09 RESPE CTIVELY. THE TRANSACTIONS STAND IN FACT TABULATED BY THE ASSESSE E HIMSELF (REFER PAGES 1 & 9 OF THE ASSESSEES PAPER-BOOK (PB) FOR THE TWO CONSECUT IVE YEARS RESPECTIVELY, WHICH WE REPRODUCE FOR READY REFERENCE, AS UNDER: STATEMENT OF NUMBER OF TRANSACTION FOR THE YEAR END ED 31.3.2007 (AY 200-08) PERIOD OF HOLDING NO. OF TRANSACTION GAINS SALES VALUE LESS THAN ONE MONTH 44 (1547703) 94030893 MORE THAN ONE MONTH AND LESS THAN 3 MONTH 38 (13870705) 115490237 MORE THAN 3 MONTH AND LESS THAN 6 MONTH 34 16802395 73166493 MORE THAN 6 MONTH AND LESS THAN 12 MONTH 46 19137562 78256821 TOTAL 162 20521549 360944443 STATEMENT OF NUMBER OF TRANSACTION FOR THE YEAR END ED 31.3.2008 (AY 2008-09) PERIOD OF HOLDING NO. OF TRANSACTION GAINS SALES VALUE LESS THAN ONE MONTH 55 3986795 25,83,44,804 MORE THAN ONE MONTH AND LESS THAN 3 MONTH 42 (24472619) 11,31,64,170 MORE THAN 3 MONTH AND LESS THAN 6 MONTH 44 2,55,38,143 8,82,71,147 MORE THAN 6 MONTH AND LESS THAN 12 MONTH 50 4,44,28,610 13,28,33,002 TOTAL 191 49,480,930 592,613,123 THE FACTS ARE SELF-SPEAKING. THE ASSESSEE HAS ENGAGED IN THE ACTIVITY THROUGHOUT THE YEAR/S; THE MARKET BEING OPERATIVE F OR ABOUT THE 175-200 DAYS DURING THE YEAR. ADD TO THIS THAT THE ASSESSEE HAS DEALT IN ABOUT 50 SCRIPS, WITH HOLDING PERIOD AS LOW AS 1 DAY -IMPLYING AN IMMEDIA TE SALE, I.E., A HIGH CHURNING OF FUNDS, INCLUDING BORROWED CAPITAL, AND THE PICTU RE IS COMPLETE. THE ASSESSEE IS A REGULAR OPERATOR IN THE MARKET, BUYING AND SELLIN G (SAME) SHARES ON A REGULAR, EVEN REPETITIVE, BASIS, IN BOTH MARKETS/SEGMENTS. R ATHER, EVEN A MUCH LESSER 10 ITA NO.7706/M/2011, 7332 & 8112/M/2011 (A.YS. 2007-08 & 2008-09) ANAND R BEHL NUMBER OF TRANSACTIONS, IN-AS-MUCH AS THE SAME IS P RECEDED BY A CONSTANT VIGIL OF THE MARKET AND MARKET TREND, WOULD SIGNIFY A VOCATI ON AND CONTINUOUS EXERCISE OF ACTIVITY. WHY, WE FIND THAT THE ASSESSEE HAS SQU ARED OFF ABOUT 50% OF THE TRANSACTIONS (60% BY VALUE) WITHIN 90 DAYS OF ENTER ING THE MARKET OR INVESTMENT. THIS IS PARTICULARLY SURPRISING AS MOS T OF SUCH TRADES ARE, IN CONTRADISTINCTION TO TRADES WITH A SHELF-LIFE OF 3 TO 12 MONTHS, AT A LOSS. AN INVESTOR WOULD BE WONT TO BE MORE PATIENT, ALLOWING TIME FOR THE INVESTMENT TO GAIN IN VALUE AND YIELD RETURNS; TIME BEING OF ESSE NCE FOR AN INVESTMENT, ONLY WHEREUPON IT COULD PERFORM. THE MATTER; THE PROPOSI TION OF LAW BEING WELL- SETTLED, TURNS ON FACTS. NEEDLESS TO ADD, THE INDIC A OR THE PARAMETER BASED CONDITIONS STIPULATED BY THE BOARD CIRCULAR (SUPRA) , ARE SATISFIED. 6.5 WE MAY, HOWEVER, MEET THE ASSESSEES ARGUMENT O F HAVING UNDERTAKEN THE IMPUGNED ACTIVITY IN THE PAST YEARS AS WELL, INCOME FROM WHICH STANDS RETURNED AND ACCEPTED AS SHORT TERM CAPITAL GAIN (STCG). THE ADMISSION OR THE FACT OF THE ASSESSEE BEING ENGAGED IN SUCH TRANSACTIONS IN THE PAST AS WELL, STANDS ALSO NOTED BY US IN OUR FOREGOING ANALYSIS; RATHER, SUPPORTS O UR FINDINGS AND INDICTS THAT OF THE ASSESSEE. AS REGARDS THE HEAD OF INCOME UNDER W HICH THE INCOME STANDS DISCLOSED AND ASSESSED; THE ASSESSEES CONTENTION I S, FIRSTLY, COMPLETELY UN- EVIDENCED, EVEN AS IT COULD OF ANY VALUE ONLY IF IT IS AN ASSESSMENT U/S. 143(3), I.E., A REGULAR ASSESSMENT AND, FURTHER, IS ACCOMPA NIED BY A FINDING TO THIS EFFECT. WE HAVE DECIDED THE MATTER ON AN ANALYSIS OF THE AS SESSEES BEHAVIOUR, NOTING AND APPLYING THE SETTLED LAW IN THE MATTER. THERE IS , FURTHER, NO ESTOPPEL AGAINST THE LAW, AND THE PRINCIPLE OF RES JUDICATA IS NOT APPLICABLE TO THE PROCEEDINGS UNDER THE ACT, EVEN AS SOUGHT TO BE EMPHASIZED BY T HE AO, REFERRING TO THE DECISIONS IN THE CASE OF NEW JAHAGIR M. VAKIL MILLS LTD. VS. CIT [1963] 49 ITR 137 (SC); DALHOUSIE INVESTMENT TRADE CO. LTD. VS. CIT [1968] 68 ITR 486 (SC) AND SOLE TRUSTEE, LOK SHIKSHANA TRUST VS. CIT [1975] 101 ITR 234 (SC) TOWARD THE SAME. THE ASSESSEES PLEA OF HAVING ACCOUNTED FO R THE TRANSACTIONS IN ITS BOOKS AS INVESTMENT WOULD ALSO TO BE LITTLE CONSE QUENCE; THE TREATMENT IN ITS BOOKS OF ACCOUNT BY THE ASSESSEE BEING NOT DETERMIN ATIVE OF THE MATTER, AS 11 ITA NO.7706/M/2011, 7332 & 8112/M/2011 (A.YS. 2007-08 & 2008-09) ANAND R BEHL EXPLAINED IN, AMONG OTHERS, TUTICORIN ALKALI CHEMICAL AND FERTILIZERS LTD. VS. CIT [1997] 227 ITR 172 (SC) (AT PAGE 183), REFERRED TO THE ASSESSMENT ORDER. THE ASSESSEE HAS ALSO RETURNED LTCG, WHICH HAS NOT BEE N DISTURBED BY THE REVENUE, SO THAT WHERE AND TO THE EXTENT HIS ACCOUN TS ARE CONFORM WITH HIS UNDISPUTED BEHAVIOUR, THE SAME STANDS FAIRLY ACCEPT ED BY THE REVENUE. WE MAY ADD THAT NO CONTENTIONS WERE RAISED BY THE ASSESSEE WITH REGARD TO SETTLED PROPOSITIONS OF LAW, NOR QUA THE FINDINGS BY THE REVENUE AUTHORITIES, WHICH WE FIND AS SUPPORTED BY THE BOARD CIRCULAR (SUPRA). 6.6 IN VIEW OF THE FOREGOING DISCUSSION, WE FIND NO INFIRMITY IN THE IMPUGNED ORDER, WHICH ACCORDINGLY GETS UPHELD, AND THE ASSES SEE FAILS. 7. THE REVENUE HAS RAISED ONLY ONE SUBSTANTIAL GROUN D PER ITS APPEAL, I.E., THAT THE LD. CIT (A) HAS ERRED IN LAW AND IN FACTS I N DELETING THE DISALLOWANCE OF RS. 16,38,96,919/- ON ACCOUNT OF LIABILITY TO BROKE RS SHOWN IN THE BALANCE SHEET REPRESENTING LOSS FROM F & O TRANSACTIONS. 8. BRIEF FACTS LEADING TO THIS ADDITION ARE THAT DU RING THE ASSESSMENT PROCEEDINGS, THE AO OBSERVED THAT THE ASSESSEE IS M AINTAINING ACCOUNTS ON CASH BASIS, AS MENTIONED IN THE TAX AUDIT REPORT ITSELF. HE FURTHER OBSERVED THAT IN THE BALANCE-SHEET THE ASSESSEE HAD SHOWN A SUM OF R S. 16,38,96,919/- AS PAYABLE TO THE BROKERS (LIABILITY SIDE) AND ANOTHER SUM OF RS. 2,663/- AS RECEIVABLE FROM THE BROKERS (ON ASSET SIDE). THE ASSESSEE WAS ASKED TO EXPLAIN AS TO HOW THESE ENTRIES FIND PLACE IN THE BALANCE-SHEET, CONSIDERIN G THE FACT THAT HE MAINTAINS HIS BOOKS OF ACCOUNT ON CASH BASIS. THE ASSESSEE SUBMITT ED THAT THOUGH HE MAINTAINS ACCOUNTS ON CASH BASIS, HE IS DEALING IN SHARES AND HAS TO ACCOUNT FOR EACH AND EVERY TRANSACTION OF PURCHASE AND SALE OF SHARES, R ESULTING IN AMOUNTS PAYABLE TO OR, AS THE CASE MAY BE, RECEIVABLE FROM, THE BROKER S, WHICH APPEAR IN THE BALANCE- SHEET AS OUTSTANDING BALANCES. THE EXPLANATION OF TH E ASSESSEE WAS NOT ACCEPTED BY THE AO. THE AUDITORS REPORT CLEARLY STATES THAT THE METHOD OF ACCOUNTING FOLLOWED IS CASH BASIS. SINCE CERTIFICATION BY THE PROFESSIONALS RECOGNISED U/S. 12 ITA NO.7706/M/2011, 7332 & 8112/M/2011 (A.YS. 2007-08 & 2008-09) ANAND R BEHL 288 OF THE ACT ARE INTENDED TO ENSURE THE CORRECTNE SS IN ALL RESPECTS, THE STATEMENT MADE BY THE ASSESSEES CA IS TO BE CONSID ERED AS TRUE AND CORRECT. THE AO STATED THAT AS PER SECTION 145 OF THE ACT, THE A SSESSEE CAN SELECT CASH OR MERCANTILE SYSTEM OF ACCOUNTING. UNDER THE CASH SYS TEM OF ACCOUNTING, REVENUE AND EXPENDITURE ARE RECORDED ONLY WHEN RECEIVED O R PAID. EXPENDITURE IS DEDUCTIBLE FROM THE TAXABLE INCOME ONLY IF IT IS PA ID DURING THE PREVIOUS YEAR, IRRESPECTIVE OF THE FACT WHETHER IT RELATES TO THE PREVIOUS YEAR OR NOT. INCOME UNDER THE CASH SYSTEM OF ACCOUNTING IS THEREFORE TH E EXCESS OF RECEIPT OVER DISBURSEMENT DURING THE PREVIOUS YEAR. IN CASH ACCO UNTING SYSTEM, THE ASSESSEE CANNOT ACCOUNT FOR THE TRANSACTION OF SALES FOR WHI CH THE PAYMENT IS NOT RECEIVED OR THE PURCHASES FOR WHICH THE PAYMENTS ARE NOT MAD E . THE CONTENTION OF ASSESSEE WAS THEREFORE NOT ACCEPTED BY THE AO, WHO ACCORDINGLY MADE DISALLOWANCE FOR RS.16,38,96,919/- SHOWN AS THE AMO UNT PAYABLE TO THE BROKERS AND, FURTHER, AN AMOUNT OF RS.2,663/-, WHICH WAS SH OWN AS DUE FROM BROKERS, WAS REDUCED, MAKING A NET DISALLOWANCE FOR RS.16,38 ,94,266/-. AGGRIEVED BY THE ADJUSTMENT, THE ASSESSEE FILED AN APPEAL BEFORE THE CIT(A), WHEREIN THE ENTIRE DISALLOWANCE WAS DELETED VIDE THE IMPUGNED ORDER AG AINST WHICH THE REVENUE IS IN APPEAL. 9. WE HAVE HEARD THE LD. DR FOR THE REVENUE AND LD. AR FOR THE ASSESSEE, AND PERUSED THE MATERIAL ON RECORD. THE LD. DR FOR THE REVENUE SUPPORTED THE ORDER OF THE AO AND PRAYED THAT ORDER OF THE AO MAY BE RESTORED AND THAT OF THE LD. CIT(A) REVERSED. ON THE OTHER HAND, THE LD. AR FOR THE ASSESSEE ARGUED THAT THE ASSESSEE PURCHASES AND SELLS SHARES (PER THE FU TURES AND OPTIONS TRANSACTIONS) THROUGH THE BROKERS, AND ON ANY GIVEN DAY THERE WIL L BE AMOUNTS DUE TO THE BROKERS AND, LIKEWISE, ALSO AMOUNTS DUE FROM THEM. THOUGH THE METHOD OF ACCOUNTING FOLLOWED IS CASH BASIS, THAT DOES NOT BA R THE ASSESSEE FROM ACCOUNTING THE AMOUNT DUE TO A BROKER OR THE AMOUNT DUE FROM T HE BROKERS. IT WAS FURTHER ARGUED THAT THE AO HAD MISCONCEIVED HIS CASE IN CON SIDERING THE AMOUNT DISALLOWED AS THE INCOME OF THE ASSESSEE. THE AMOUNT DUE TO THE BROKERS IS 13 ITA NO.7706/M/2011, 7332 & 8112/M/2011 (A.YS. 2007-08 & 2008-09) ANAND R BEHL ALWAYS CALCULATED AFTER CONCLUSION OF THE TRANSACTI ONS THEREWITH AND, FURTHER, TILL THE END OF THE RELEVANT FINANCIAL YEAR. ALL THE ENT RIES GIVING RISE TO SUCH CREDITS HAVE ALREADY BEEN ACCOUNTED. IN THE SUBSEQUENT YEAR , THE AMOUNT HAS BEEN PAID TO THE BROKER/S AGAINST THE LIABILITY. 10.1 WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND P ERUSED THE ORDERS OF THE AUTHORITIES BELOW. THE REVENUES CASE IS THAT THE A SSESSEE ADMITTEDLY FOLLOWS CASH SYSTEM OF ACCOUNTING, WHICH IT HAS TO, CHOOSIN G FROM EITHER CASH OR MERCANTILE METHOD OF ACCOUNTING (SEC. 145). THAT BEI NG THE CASE, LIABILITY ON ACCOUNT OF BUY AND SELL TRANSACTIONS IN SHARES (WHI CH IN THE PRESENT CASE IS UNDER THE DERIVATIVE SEGMENT), COULD BE ALLOWED ONLY ON P AYMENT BASIS, WHILE THE REVENUE WOULD ALSO STAND TO BE CONSIDERED ON RECEIP T BASIS. IT IS NOT OPEN FOR THE ASSESSEE TO FOLLOW THE CASH, OR FOR THAT MATTER ANY , METHOD, SELECTIVELY, EXTENDING IT ONLY TO EXPENSES, AS EXPLAINED BY THE ASSESSEE ( BEFORE THE AO), WHOSE ACCOUNTS DID NOT REFLECT ANY LIABILITY ON ACCOUNT O F EXPENSES (AS AT THE YEAR-END). WE DO NOT FIND ANY INFIRMITY IN THE AOS UNDERSTAND ING IN THIS REGARD AND, CONSEQUENTLY, HIS FINDINGS IN PRINCIPLE. THE ACCEPT ANCE BY THE LD. CIT(A) OF THE ASSESSEES CASE IS ON THE BASIS THAT THE ASSESSEE H AD BEEN ACCOUNTING FOR ITS TRANSACTIONS IN FUTURES AND OPTIONS (F & O) IN THE SAME MANNER CONSISTENTLY FROM THE PAST. THAT APART, THE MATCHING PRINCIPLE WOULD D ICTATE ALLOWANCE OF LIABILITY INASMUCH AS, HOW COULD IT BE THAT THE SALES ARE INC LUDED (IN COMPUTING INCOME) WHILE THE CORRESPONDING PURCHASES ARE NOT, SO THAT IT WOULD IN EFFECT REQUIRE DEDUCTION FOR THE CORRESPONDING SALES. TAX IS TO BE LEVIED ON REAL INCOME, AND NOT ON SOME ARTIFICIAL OR FICTITIOUS INCOME. 10.2 WE PROCEED ON THE FOOTING THAT THE IMPUGNED OU TSTANDING REPRESENTS A LIABILITY ON ACCOUNT OF, AS STATED, CONCLUDED CONTR ACTS, AND THAT NO PART OF IT IS IN RESPECT OF MARGIN REQUIREMENT. OUR FIRST OBSERVATIO N IN THE MATTER IS THAT THE ALLOWANCE OF LIABILITY DUE TO THE BROKERS, VIZ. KOT AK SECURITIES AND SHAREKHAN (AT RS. 1638.97 LACS) DOES NOT REPRESENT PURCHASE, AND NEITHER DOES THE AMOUNT DUE FROM THE BROKERS (RS. 2663/-) REPRESENT SALES. BOTH ARE BALANCES REFLECTED IN THE 14 ITA NO.7706/M/2011, 7332 & 8112/M/2011 (A.YS. 2007-08 & 2008-09) ANAND R BEHL ACCOUNTS OF THE BROKERS ON THE SETTLEMENT OF THE CO NTRACTS, I.E., AFTER ADJUSTMENT FOR PAYMENTS TO OR RECEIPTS THEREFROM. EACH CONTRACT RESULTS IN EITHER AN AMOUNT PAYABLE TO OR RECEIVABLE FROM A BROKER, REPRESENTIN G THE LOSS OR GAIN, AS THE CASE MAY BE, ARISING IN THE TRANSACTION. THIS GAIN OR LOS S IS ITSELF THE DIFFERENCE, I.E., POSITIVE OR NEGATIVE, BETWEEN THE VALUE OF THE TRAN SACTION, BOOKED ON THE BASIS OF THE ANTICIPATED MOVEMENT IN THE SHARE PRICE OVER TH E INTERIM PERIOD, AND THE ACTUAL PRICE OBTAINING AT THE END OF THE CONTRACT P ERIOD. THE INVOCATION OF THE MATCHING PRINCIPLE BY THE LD. CIT(A) IS THEREFORE I NCORRECT. 10.3 HE, THEN, SPEAKS OF THE REAL INCOME THEORY. TRU E, BUT THEN THE SAME HAS TO BE SUBJECT TO THE EXPRESS PROVISIONS OF THE ACT. IT IS NOT THAT THE AO HAS CONSIDERED SOME INCOME WHICH IS CONCEIVABLY NOT SO, OR DOES NOT ANSWER THE NOTION OF THE INCOME (WHICH INCLUDES LOSS), A T ERM OF WIDE AMPLITUDE. THE ADJUSTMENT MADE (IN ASSESSMENT) IS FOR THE LOSSE S AND GAINS WHICH WOULD NOT, UNDER THE METHOD OF ACCOUNTING ADMITTEDLY FOLL OWED, ARISE FOR BEING CONSIDERED AS SO. SECTION 5 OF THE ACT, WHICH DEFIN ES THE SCOPE OF TOTAL INCOME UNDER THE ACT, MAKES IT SUBJECT TO THE OTHER PROVIS IONS OF THE ACT, INCLUDING SECTION 145, WHICH PROVIDES THAT THE BUSINESS INCOM E IS TO BE COMPUTED FOLLOWING EITHER CASH OR MERCANTILE METHOD OF ACCOUNTING. EACH YEAR IS A SEPARATE AND INDEPENDENT UNIT OF ASSESSMENT, WHICH (ASSESSMENT) HAS THEREFORE TO BE MADE ON THE BASIS OF THE INCOME ASSESSABLE AND E XPENDITURE ADMISSIBLE FOR THAT YEAR, AND NOT BY MAKING ALLOWANCE FOR EXPENDIT URE THAT IS NOT LIABLE TO BE REGARDED AS SUCH, I.E., AS EXPENDITURE, FOR THE YEA R UNDER REFERENCE ON THE BASIS OF METHOD OF ACCOUNTING BEING FOLLOWED. THE LIABILITY, WHICH REPRESENTS A LOSS, AND AGAINST WHICH THERE IS NO CORRESPONDING SALE/RECEIP T, WOULD STAND TO BE ALLOWED ONLY IN THE YEAR OF PAYMENT. THE LAW IN THE MATTER I S WELL SETTLED, AND CASE LAW, LEGION. WE MAY, FOR READY REFERENCE, ADVERT TO THE DECISIONS IN CIT VS. BRITISH PAINTS INDIA LTD. [1991] 188 ITR 44 (SC) AND SOUTHERN TECHNOLOGIES LTD. V. JT. CIT [2010] 320 ITR 577 (AT PAGES 608-610). THE SAID ARG UMENT BY THE LD. CIT(A) MADE QUA REAL INCOME IS AGAIN MISCONCEIVED. 15 ITA NO.7706/M/2011, 7332 & 8112/M/2011 (A.YS. 2007-08 & 2008-09) ANAND R BEHL 10.4 THE QUESTION, HOWEVER, THAT ARISES IS IF THE AS SESSEE IS, AS CLAIMED AND ACCEPTED, FOLLOWING CASH SYSTEM OF ACCOUNTING, HOW IS IT THAT THE IMPUGNED SUMS APPEAR AS PAYABLE AND/OR RECEIVABLE IN ITS FINAL AC COUNTS ? THE VERY FACT THAT THE ASSESSEE IS SO ACCOUNTING, CLAIMED TO BE CONSISTENT LY FROM THE PAST, IT CANNOT BE SAID TO BE FOLLOWING CASH SYSTEM OF ACCOUNTING, WHI CH DOES NOT ADMIT ACCRUAL AS A BASIS FOR RECOGNISING EITHER INCOME OR EXPENDITUR E. A LOSS UNDER THE DERIVATIVE CONTRACT, AFTER ALL, IS ONLY THE EXCESS (SHORT-FALL ) OF THE PURCHASE COST OVER THE SALE (PURCHASE) VALUE, WITH AN OPPOSITE SITUATION RESULTING IN A GAIN. THAT THE PURCHASE AND SALE RATES ARE BOOKED IN ADVANCE, AND LOSS/GAIN ARISES ON THE MOVEMENT IN THE PRICE AS ACTUALLY OBTAINS OVER THE PERIOD UNDER CONTRACT, IS ANOTHER MATTER. WHAT WOULD THEREFORE HAVE TO BE SEE N IS IF THE ASSESSEE IS ACTUALLY FOLLOWING SUCH A METHOD ON A REGULAR, CONS ISTENT BASIS, OR IS IT THAT IT HAS, IN VIEW OF THE HUGE LOSS ARISING TO IT FOR THE CURRENT YEAR, ACCOUNTED FOR THE SAME. IT IS NOT THE AMOUNT, IF ANY, OUTSTANDING AS AT THE YEAR-END, BUT THE METHOD OF ACCOUNTING ADOPTED IN ACCOUNTING FOR THE CONTRAC T/S, PARTICULARLY ON ITS CONCLUSION, THAT WOULD HAVE TO BE SEEN. THOUGH THE LD. CIT(A) HAS ISSUED A FINDING OF THE ASSESSEE HAVING FOLLOWED THE SAME ME THOD OF ACCOUNTING AS IN THE PAST, THE SAME IS NEITHER HERE NOR THERE. THERE IS, FIRSTLY, NOTHING TO INDICATE HIS HAVING EXAMINED THE ASSESSEES ACCOUNT BOOKS FOR TH E PRECEDING YEARS, WHICH RATHER OUGHT TO HAVE BEEN PRECEDED BY SUCH AN OPPOR TUNITY BEING GIVEN TO THE AO. TWO, THE ASSESSEES METHOD FOR THE CURRENT YEAR IS, AS EXPLAINED, HYBRID, SO THAT IT IN ANY CASE IS NOT ACCEPTABLE. 10.5 THE ASSESSEES ACCOUNTS FOR THE PRECEDING YEARS WOULD THEREFORE HAVE TO BE EXAMINED. IF THE ASSESSEE IS CONSISTENT IN ACCOU NTING IN THE MANNER HE CLAIMS TO BE, HE IS DEFINITELY NOT FOLLOWING CASH METHOD OF ACCOUNTING, AS HE BELIEVES ARE CONSIDERS HIMSELF TO BE, OR IS CERTIFIED BY HIS AUDITOR AS FOLLOWING. IT IS THE CORRECT LEGAL POSITION THAT IS RELEVANT, AND NOT TH E VIEW THAT THE PARTIES MAY TAKE OF THEIR RIGHTS IN THE MATTER [REFER: CIT V. C. PARAKH & CO. (INDIA) LTD . [1956] 29 ITR 661 (SC); KEDARNATH JUTE MFG. CO. LTD. V. CIT [1971] 82 ITR 363 (SC)]. BY 16 ITA NO.7706/M/2011, 7332 & 8112/M/2011 (A.YS. 2007-08 & 2008-09) ANAND R BEHL NOT CLAIMING CERTAIN EXPENSES, ADMISSIBLE IN NATURE , ON THE GROUND THAT THE SAME ARE UNPAID, HE IS AT BEST FOLLOWING HYBRID SYSTEM O F ACCOUNTING, SINCE PROSCRIBED BY LAW (BY FINANCE ACT, 1995 W.E.F. 1/4/1997). WHER E SO, THE OPTION OF CHOOSING BETWEEN THE CASH OR MERCANTILE METHOD OF ACCOUNTING BEING WITH THE ASSESSEE, HE IS ENTITLED TO MAKE THE CHOICE FOR THE CURRENT YEAR (ASSUMING IT TO HAVE BEEN NOT SO IN THE PAST). EITHER, THEREFORE, THE ASSESSEE WOU LD STAND TO BE ALLOWED THE SAME, DISALLOWING THE EXPENSES (PERTAINING TO OTHER YEARS), CLAIM FOR WHICH, ON PAYMENT BASIS, MAY HAVE BEEN CLAIMED AND ALLOWED TO IT OR, VICE VERSA , IT ALLOWED THE EXPENSES ON CASH BASIS, WHILE THE IMPUG NED (NET) DISALLOWANCE GETS UPHELD. ON THE OTHER HAND, IF THE AO FINDS NO CONSI STENCY IN THE METHOD OF ACCOUNTING FOLLOWED BY THE ASSESSEE OR IT IS ONLY F OR THE FIRST TIME, IN DIGRESSION WITH THE PAST, THAT THE ASSESSEE HAS ACCOUNTED FOR IN THE MANNER IT HAS, IT IS CLEARLY A CASE OF THE ASSESSEE FOLLOWING CASH SYSTE M OF ACCOUNTING, BUT CLAIMING THE LOSS IN DEPARTURE WITH ITS CONSISTENT METHOD OF ACCOUNTING FOR BOTH INCOME AND EXPENDITURE ON RECEIPT/PAYMENT BASIS. THE IMPUGN ED DISALLOWANCE MADE, AT NET OF PAYABLE AND RECEIVABLE, STANDS IN SUCH A CAS E CORRECTLY MADE. THERE IS A THIRD POSSIBILITY IS WELL. THAT IS, THE TRADES HAVE BEEN ENTERED INTO BY THE ASSESSEE FOR THE FIRST TIME. THOUGH IMPROBABLE IN LIGHT OF TH E CONTENTIONS RAISED, WHERE SO, THE AO SHALL HAVE TO APPLY THE SAME METHOD OF ACCOU NTING AS HE FINDS THE ASSESSEE TO BE CONSISTENTLY FOLLOWING; THERE BEING NO CLAIM OF A CHANGE IN THE METHOD OF ACCOUNTING FROM THE CURRENT YEAR, OR WHIC H HE DECIDES FOR BEING ADOPTED THEREFOR, AND DECIDE ACCORDINGLY. 10.6 BEFORE PARTING WITH OUR ORDER, WE MAY ADD THAT THE AO, WHILE MAKING THE ADJUSTMENT, IF ANY, ENSURE THAT THE LIABILITY WHICH IS THE SUBJECT MATTER OF ADJUSTMENT IS QUA CONCLUDED CONTRACTS ONLY, AND NO PART OF IT IS IN RESPECT OF OPEN CONTRACTS, WHICH IS THUS NOT IN THE NATURE OF AN AC CRUED LIABILITY IN RESPECT OF A LOSS. FURTHER, AS THERE CAN ADMITTEDLY BE NO DOUBLE JEOPARDY OR PREJUDICE CAUSED, HE SHALL, INVOKING SECTION 154, EITHER SUO MOTU OR ON AN APPLICATION MOVED BY THE ASSESSEE, EFFECT CORRESPONDING ADJUSTMENT IN TH E SUBSEQUENT YEARS AS WELL. 17 ITA NO.7706/M/2011, 7332 & 8112/M/2011 (A.YS. 2007-08 & 2008-09) ANAND R BEHL FOR EXAMPLE, WHERE A LIABILITY GETS DISALLOWED FOR THE CURRENT YEAR, I.E., ON ACCOUNT OF IT BEING UNPAID (SO THAT IT CANNOT BE RE GARDED AS A LOSS ARISING FOR THE YEAR), WHILE BEING NOT CLAIMED AND, THUS, NOT ALLOW ED FOR THE FOLLOWING YEAR, WHEREAT IT STANDS PAID. 11. IN THE RESULT, THE APPEALS BY THE ASSESSEE ARE DISMISSED AND THAT BY THE REVENUE IS ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 20 DAY O F JULY, 2016 SD/- SD/- (SANJAY ARORA) (PAWAN SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI; DATED 20/07/2016 S.K.PS, ROSHANI, SR. PS / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT 3. ( ) / THE CIT(A) 4. / CIT - CONCERNED 5. , , / DR, ITAT, MUMBAI 6. !' / GUARD FILE / BY ORDER, / (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI