DCIT CEN. CIR. 3, MUMBAI V. M/s. KOSHA INVESTMENTS LTD., MUMBAI

ITA 7897/MUM/2004

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 1717 (ITAT-MUMBAI)
• Duration Of Justice: 5 year(s) 7 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-06-2010
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: D
• Next Hearing Date: 23-03-2010
• Assessment Year: 1997-1998
• Appeal Filed On: 04-11-2004
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: ANKUR GARG
• Assessee Lawyers: VIJAY KOTHARI
• Keywords: Opportunity of being heard; Rule of consistency; Speculation loss
• Section: 43(5)

Judgement Text

ITA NO. 7897/MUM/2004 1 IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH D MUMBAI BEFORE SHRI J SUDHAKAR REDDY, AM & SHRI R S PADVEK AR, JM ITA NO. 7897/MUM/2004 (ASST YEAR1997-98 ) THE DY COMMR OF INCOME TAX CENTRAL CIRCLE 3 MUMBAI VS M/S KOSHA INVESTMENTS LTD BASEMENT, COMMERCIAL UNION HOUSE 9 WALLACE STREET, FORT MUMBAI 400 001 (APPELLANT) (RESPONDENT) PAN NA ASSESSEE BY: SHRI VIJAY KOTHARI REVENUE BY: SHRI ANKUR GARG O R D E R PER R S PADVEKAR: IN THIS APPEAL, THE REVENUE HAS CHALLENGED THE IMP UGNED ORDER OF THE LD CIT(A)I, MUMBAI FOR THE ASSESSMENT YEAR 1997-98 DATED 31.8.2004. 2 THE REVENUE HAS TAKEN THE FOLLOWING GROUND: ON THE FACTS AND IN LAW, THE LD CIT(A) HAS ERRED I N ALLOWING HEDGING LOSS OF RS. 1,23,53,697/- TREATED AS SPECULATION LO SS BY THE AO WITHOUT APPRECIATING THAT; I) THE ASSESSEE HAD FAILED TO PRODUCE CONTACT IN RESP ECT OF STOCKS AND SHARES ENTERED INTO BY THEM TO GUARD AGAINST TH E LOSS IN ITS HOLDINGS OF STOCK AND SHARES IN CASE OF PRICE FLUCT UATION; II) IT WAS A SPECULATION LOSS SINCE THE ASSESSEE FAILED TO FURNISH THE DETAILS OF THE STOCK HEDGED AND TO SHOW WHETHER IT WAS MADE AS A DEALER OR INVESTOR, ITA NO. 7897/MUM/2004 2 III) THE MAJOR INCOME OF THE ASSESSEE IS FROM LEASE RENT ALS AND THAT THE SHARE TRANSACTION/HEDGING LOSS IS COVERED BY E XPLANATION TO SEC. 73 OF THE ACT. 3 THE FACTS PERTAINING TO THE ISSUE IN CONTROVERSY, WHICH REVEALED FROM THE RECORDS, ARE THAT THE ASSESSEE HAD CLAIMED LOS S OF RS.1,23,53,697/- AS BUSINESS LOSS U/S 43(5)(B) OF THE ACT CONTENDING TH AT THE SAID LOSS WAS INCURRED IN HEDGING OF SHARES OF M/S SNOWCEM INDIA LTD. THE A.O CALLED FOR THE DETAILS IN RESPECT OF THE SALE OF THE SHARE S OF M/S SNOWCEM INDIA LTD, PROOF OF DELIVERY OF THE SAID SHARES AND PROOF OF H OLDING OF THOSE SHARES. THE A.O ALSO ASKED THE ASSESSEE AS TO WHY THE LOSS CLAIMED AT RS.1,23,18,442/- SHOULD NOT BE DISALLOWED IN THE AB SENCE OF THE NON- AVAILABILITY OF THE DETAILS AND EVIDENCE. 3.1 THE ASSESSEE STATED BEFORE THE A.O. THAT THE WA S HOLDING PHYSICALLY MORE THAN12,62,400 LAKH SHARES THROUGH THE YEAR AND DURING THE PERIOD WHEN PURCHASE AND SALE OF TRANSACTION ENTERED INTO ON WHICH THE HEDGING LOSS OF RS. 1,23,18,442/- HAD BEEN INCURRED. THE A SSESSEE PLACED BEFORE THE AO THE COPY OF THE ANNUAL AUDITED ACCOUNT SHOWING T HAT THERE WAS INVESTMENTS OF RS.25,02,000 SHARES OF M/S SNOWCEM I NDIA LTD. THE A.O ASKED THE ASSESSEE TO ESTABLISH THAT THE ENTERED IN TO THE TRANSACTIONS OF PURCHASE AND SALE OF SHARES OF M/S SNOWCEM INDIA LT D IN ORDER TO GUARD AGAINST THE LOSS IN ITS HOLDINGS OF THE SHARES OF M /S SNOWCEM INDIA LTD DUE TO PRICE FLUCTUATIONS. 3.2 THE A.O WAS OF THE VIEW THAT BEING ITS EXCEPTIO N GIVEN UNDER CLAUSE (B) TO SEC 43(5) OF THE ACT TAKES OUT OF THE DEFINITION OF SPECULATIVE TRANSACTION, BURDEN WAS ON THE ASSESSEE TO PROVE THAT IN FACT LO SS WAS INCURRED ON ACCOUNT OF HEDGING TRANSACTIONS. ITA NO. 7897/MUM/2004 3 3.3 THE ASSESSEE FILED THE FOLLOWING DOCUMENTS IN RESPECT OF ITS CLAIM BEFORE THE AO: I) COPY OF THE SAMPLE BILLS AND BROKERS ACCOUNT AS PRO OF OF DELIVERY ON PURCHASE AND SALE OF SHARE S; II) COPY OF PORTFOLIO LEDGER ACCOUNT OF M/S SNOWCE M INDIA LTD; III)COPY OF LEDGER ACCOUNTS OF BROKER THROUGH WHOM THE SHARES HAVE BEEN PURCHASED 3.4 THE MAIN EMPHASIS OF THE ASSESSEE WAS THAT THE ASSESSEE WAS HOLDING PHYSICALLY 12,62,400 LAKH SHARES THROUGHOUT THE YEA R AND ALSO DURING THE PERIOD WHEN PURCHASE AND SALE OF TRANSACTION ENTERE D INTO ON WHICH THE HEDGING LOSS OF RS. 1,23,18,442/- HAD BEEN INCURRED AND ACCORDINGLY, THE ASSESSEE CLAIMED FOR LOSS INCURRED ON THE SHARES OF M/S SNOWCEM INDIA LTD WAS IN THE NATURE OF HEDGING LOSS. 3.5 THE ASSESSEES MAIN CONTENTION WAS THAT IT WAS PHYSICALLY HOLDING A LARGE NUMBER OF SHARES OF M/S SNOWCEM INDIA LTD THR OUGHOUT THE YEAR AND THAT IS SUFFICIENT TO SUPPORT THE CLAIM OF THE ASSE SSEE THAT THE LOSS WAS PERTAINING TO THE HEDGING TRANSACTIONS. 3.6 THE A.O WAS NOT IMPRESSED WITH THE PLEA OF THE ASSESSEE AS IN THE OPINION OF THE A.O THE ASSESSEE HAS TO SPECIFY THA T ITS TRANSACTIONS WERE ENTERED INTO FOR PROTECTING THE LOSS IF ANY IN CASE OF ANY OTHER SCRIPT DUE TO ADVERSE FLUCTUATION OF SHARES. THE OPERATIVE PART O F THE FINDINGS AND CONCLUSION OF THE A.O IS ON PAGE NO.69 OF THE ASSES SMENT ORDER WHICH ARE AS UNDER: AS DISCUSSED ABOVE, THE EXISTENCE OF CONTRACT TO G UARD AGAINST LOSS IN THE HOLDING OF SHARES THROUGH PRICE FLUCTUATIONS IS A BASIC FEATURE OF A HEDGING TRANSACTION AND THE PHYSICAL HOLDING OF SHA RES IS ONLY A ITA NO. 7897/MUM/2004 4 PRECONDITION OF SUCH TRANSACTION. IN THE INSTANT CA SE NO SUCH CONTRACT HAS BEEN PRODUCED BY THE ASSESSEE. THE ASSESSEE HAS NOT GIVEN THE NAMES AND ADDRESSES OF THE PARTIES WITH WHOM IT ENT ERED INTO TRANSACTION FOR PURCHASE AND SALE OF SHARES THROUGH VARIOUS SHARE BROKERS. THE SHARES BROKERS ARE ONLY MIDDLEMAN. FUR THER, THE ASSESSEE HAS NOT BEEN ABLE TO EXPLAIN AS TO HOW IT AVOIDED T HE LOSS DUE TO ADVERSE PRICE FLUCTUATIONS OF SHARES BY ENTERING IN TO THE TRANSACTION WHICH ADMITTEDLY RESULTED INTO LOSS OF RS.1,23,53, 697/-. IN THIS REGARD IT IS TO BE NOTED THAT CLAUSE (B) OF THE PROVISO TO SEC. 43(5) OF THE I T ACT TAKES OUT OF THE DEFINITION OF SPECULATIVE TRANSACT ION, CONTACT IN RESPECT OF STOCKS AND SHARES ENTERED INTO BY THE DEALER OR INVESTOR THEREIN TO GUARD AGAINST LOSS IN HIS HOLDINGS OF STOCK AND SH ARES THROUGH PRICE FLUCTUATIONS. IN CASES OF CIT VS MOHANLAL RANCHHODD AS, 203 ITR 304 AND CIT VS ASHOKBHAI B SHAH, 218 ITR 331, THE HON. GUJARAT HIGH COURT HAS OBSERVED THAT THE ONLY CONDITION WHICH S HOULD BE SATISFIED BEFORE AN ASSESSEE CAN CLAIM THAT THE CONTRACT ENT ERED INTO BY HIM SHOULD NOT BE CONSIDERED AS A SPECULATIVE TRANSACTI ON IS THAT HE MUST HAVE ENTERED INTO SUCH A CONTRACT TO GUARD AGAINST THE LOSS DUE TO ADVERSE PRICE FLUCTUATIONS OF SHARES IN RESPECT OF WHICH HE MIGHT HAVE ENTERED INTO CONTRACTS OF SALE BY ACTUAL DELIVERY. IN SPITE OF BEING GIVEN REASONABLE AND SUFFICIENT OPPORTUNITY, THE ASSESSEE HAS FAILED TO ESTABLISH THAT IT ENTERED INTO TRANSITIONS OF PURCH ASE AND SALE OF SHARES OF SNOWCEM INDIA LTD IN ORDER TO GUARD AGAINST THE LOSS IN ITS HOLDINGS OF THE SHARES OF SNOWCEM INDIA LTD DUE TO PRIC FLUC TUATIONS. IT WOULD BE RELEVANT TO MENTION HERE THAT IN THE CASE OF CIT VS JOSEPH JOHN 67 ITR 74, THE HONBLE SUPREME COURT HAS HELD THAT THE BUR DEN OF PROOF IS UPON THE ASSESSEE TO SHOW THAT THE TRANSACTIONS ARE MERELY HEDGING TRANSACTIONS AND IN THE ABSENCE OF ANY EVIDENCE PRO DUCED ON THE PART OF THE ASSESSEE, THE TRANSACTION WHERE NO DELIVERY OF GOODS TOOK PLACE MUST BE HELD TO BE A SPECULATIVE TRANSACTION. ITA NO. 7897/MUM/2004 5 ACCORDINGLY, THE AO TREATED THE LOSS OF RS. 1,23,53 ,697/- AS SPECULATION LOSS AND DISALLOWED THE SAME WHILE COMPUTING THE PROFIT/ LOSS UNDER THE HEAD PROFIT AND GAIN OF BUSINESS. THE ASSESSEE CHALLENG ED THE SAID ISSUE BEFORE THE LD CITA) AND FOUND FAVOUR. 4 THE LD CIT(A), FOLLOWING THE DECISION OF HIS PRED ECESSOR IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 1996-97 WITHOUT GO ING INTO THE DETAILS, ALLOWED THE CLAIM OF THE ASSESSEE AND DIRECTED THE AO TO TREAT THE SAID LOSS AS HEDGING LOSS U/S 43(5)(B) OF THE ACT. NOW, THE REVENUE IS IN APPEAL HERE BEFORE US. 5 WE HAVE GIVEN OUR ANXIOUS CONSIDERATION OF THE RI VAL PARTIES AND ALSO PERUSED THE RELEVANT RECORDS AS WELL AS THE REASONS GIVEN BY THE A.O. WE HAVE ALSO GONE THROUGH THE PAPER BOOK FILED BY THE ASSESSEE AS WELL AS THE CASE LAWS CITED AT THE BAR. 5.1 THE LD DR TOOK US THROUGH THE ASSESSMENT ORDER AND SUBMITTED THAT EXCEPTION PROVIDED IN SECTION (B) TO SEC. 43(5) TRE ATING SPECULATION LOSS IN CERTAIN CIRCUMSTANCES AS HEDGING LOSS AND HENCE, TH E ASSESSEE HAS TO ESTABLISH A CONTRACT IN RESPECT OF SHARES ENTERED I NTO TO GUARD AGAINST THE LOSS IN HOLDINGS OF THE STOCK OF SHARES DUE TO ADVE RSE PRICE SPECULATION. IT IS ARGUED THAT THOUGH THE LOSS IS IN RESPECT OF THE SH ARES OF M/S SNOWCEM INDIA LTD IS CLAIMED AS HEDGING LOSS U/S 43(5(B) OF THE ACT. THE ASSESSEE HAS FAILED TO ESTABLISH THAT IT IS NOT SPECULATION LOSS . THE LD DR TOOK US THROUGH THE ASSESSMENT ORDER AND SUBMITTED THAT THE ASSESSE E MERELY STATED THAT THE ASSESSEE WAS HOLDING PHYSICALLY MORE THAN 12,62 ,400 LAKH SHARES THROUGH THE YEAR HAS NOT IDENTIFIED THE SHARES AGAI NST WHICH THE ASSESSEE HAS ENTERED INTO CONTRACT OF THE SHARES OF M/S SNOW CEM INDIA LTD. THE LD DR RELIED ON THE DECISION OF THE HONBLE GUJARAT HI GH COURT IN THE CASE OF PANKAJ OIL MILLS V. CIT (115 ITR 824) GUJ (FB) AN D SUBMITTED THAT THE HONBLE HIGH COURT HAS EXPLAINED THE DIFFERENCE IN THE HEDGING TRANSACTION AND SPECULATIVE TRANSACTIONS. THE LD DR VEHEMENTL Y ASSAILED THE ORDER OF ITA NO. 7897/MUM/2004 6 THE LD CIT(A) AND SUBMITTED THAT SO FAR AS THE ASSE SSMENT YEAR 1996-97 IS CONCERNED, THE ISSUE WAS DECIDED ON THE FACTS OF TH AT RESPECTIVE ASSESSMENT YEARS AND IT WAS NOT MERELY BLINDINGLY FOLLOWED THE DECISION OF THE PRECEDING YEAR AS EACH AND EVERY ASSESSMENT YEAR IS AN INDEPE NDENT ONE AND THE RELEVANT FACTS ARE TO BE CONSIDERED. 5.2 PER CONTRA , THE LD COUNSEL OF THE ASSESSEE SUBMITTED THAT THE QUANTIFIED LOSS IS NOT IN DISPUTE. HE REFERRED PAG E 35 OF THE PAPER BOOK WHICH IS THE SCHEDULE OF THE BALANCE SHEET AS ON 31 .3.1997 AND SUBMITTED THAT THE SHARES OF M/S SNOWCEM INDIA LTD WERE ALSO AS INVESTMENT. IT IS ARGUED THAT HEDGING WAS ONLY WITH THE SNOWCEM GROUP AND HOLDINGS OF THE SHARES ARE NOT DENIED. IT IS ARGUED THAT THE FACTS IN THE ASSESSMENT YEAR 1996-97 ARE IDENTICAL IN WHICH THE LD CIT(A) HAS AL LOWED THE CLAIM OF THE ASSESSEE AND THE SAID ORDER HAS NOT BEEN CHALLENGED BY THE REVENUE. HE, THEREFORE, PLEADED THAT AS PER RULE OF CONSISTENCY, THE REVENUE HAS TO ACCEPT THE PLEA THAT IN AY 1996-97 THERE WAS A HEDGING LOS S AND HENCE, IN THE AY 1997-98, THE REVENUE SHOULD NOT HAVE THE GRIEVANCE AGAINST THE ORDER OF THE LD CIT(A). 5.3 HE FURTHER ARGUED THAT THE ISSUE OF APPLICABILI TY OF EXPLANATION TO SEC. 73 WAS NOT IN THE ASSESSMENT ORDER NOR IT IS ARISIN G FROM THE ORDER OF THE LD CIT(A) AND HENCE, THE GROUND RAISED BY THE REVENUE IS TOTALLY INFRUCTUOUS. 6 AS PER THE FACTS AND MATERIAL BEFORE US, NOWHERE IT IS DISPUTED BY THE A.O THAT THE ASSESSEE WAS HOLDING SHARES OF M/S SNO WCEM INDIA LTD. HENCE, THE PLEA OF THE ASSESSEE IS THAT THE ASSESSEE WAS P HYSICALLY HOLDING MORE THAN 12,62,400 LACS OF SHARES THROUGHOUT THE YEAR A ND ALSO DURING THE PERIOD OF PURCHASE AND SALE OF THE TRANSACTIONS ENT ERED INTO ON WHICH HEADING LOSS OF RS. 1,23,18,442/- HAS BEEN CLAIMED TO HAVE BEEN INCURRED. IT IS SELL SETTLED PRINCIPLE THAT CLAUSE (B) TO SEC . 43(5) IS AN EXCEPTION TO THE DEFINITION OF THE SPECULATIVE TRANSACTIONS, EVEN IF OTHERWISE THE SAID CONTRACT MAY PARTAKE THE CHARACTER OF THE SPECULATIVE TRANSA CTION. IF THE CONTRACT IS ITA NO. 7897/MUM/2004 7 IN RESPECT TO THE STOCK AND SHARES IS ENTERED INTO GUARD AGAINST THE LOSS IN HOLDING STOCK OF SHARES DUE TO PRICE FLUCTUATIONS. WHEN THE EXCEPTION IS PROVIDED, IN OUR OPINION, THE BURDEN IS ON THE ASSE SSEE TO PROVE THAT THE ASSESSEE COVERED IN THE CASE OF EXEMPTION. 7 IN THE CASE OF PANKAJ OIL MILLS V. CIT (SUPRA), T HE HONBLE GUJARAT HIGH COURT HAS EXPLAINED AND ILLUSTRATED THE DIFFERENCE BETWEEN THE HEDGING TRANSACTIONS AND SPECULATIVE TRANSACTIONS. IT IS TR UE THAT THE SAID DECISION IS RENDERED IN THE CONTEXT OF CLAUSE (A) TO SEC. 43(5) OF THE ACT. BUT THE BASIC FEATURE OF THE HEDGING TRANSACTION HAS BEEN DISCUSS ED BY THEIR LORDSHIP. AS CLAUSE (A) TO SEC. 43(5) ALSO DEALS WITH A SITUATIO N WHERE THE CONTRACT IN RESPECT OF RAW MATERIAL OF MERCHANDISE IS ENTERED I NTO GUARDING AGAINST THE LOSS THROUGH THE FUTURE PRICE FLUCTUATION IN RESPEC T OF ACTUAL DELIVERY OF THE GOODS MANUFACTURED. 8 IN OUR OPINION, THE IN THE PRESENT CASE THE ASSES SEE HAS FAILED TO IDENTIFY WHICH TRANSACTIONS WERE ENTERED INTO FOR G UARDING THE LOSS AGAINST OTHER TRANSACTIONS IN CASE OF ADVERSE PRICE FLUCTUA TION. THE ONLY ADVERSE STATEMENTS MADE THAT THE ASSESSEE WAS HOLDING MORE THAN THE SHARES OF M/S SNOWCEM INDIA LTD; THE BURDEN IS ON THE ASSESSE E TO PROVE TO IDENTIFY THE TRANSACTION WHICH CAN BE TREATED AS CONTRACT FO R HEDGING. IN OUR OPINION, THIS ISSUE NEEDS FRESH ADJUDICATION AS THE LD COUNS EL EXPRESSED THAT IN CASE WE DO NOT AGREE WITH THE CONCLUSION ARRIVED AT BY T HE LD CIT(A) THAT THE ASSESSEE MAY BE GIVEN OPPORTUNITY TO VERIFY THE T RANSACTION BY SETTING ASIDE THE ISSUE TO THE FILE OF THE AO. WE CONSIDER IT REASONABLE TO ACCEPT THE PLEA OF THE LD COUNSEL OF THE ASSESSEE AND ACCORDI NGLY, SET ASIDE THE ISSUE TO THE FILE OF THE A.O FOR FRESH ADJUDICATION. THE AS SESSEE IS DIRECTED TO IDENTIFY HEDGING TRANSACTIONS TO SUBSTANTIATE ITS CLAIM U/S CLAUSE (B) TO SEC. 43(5) OF THE ACT. THE AO IS ALSO DIRECTED TO GIVE REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. 9 REVENUE HAS ALSO TAKEN ONE MORE GROUND WHICH RELA TES TO APPLICABILITY OF SEC. 73. ITA NO. 7897/MUM/2004 8 10 AS RIGHTLY ARGUED BY THE LD COUNSEL OF THE ASSES SEE, THIS ISSUE WAS NOT BEFORE THE AO NOR IT WAS BEFORE THE LD CIT(A). IT IS A NEW PLEA OF THE REVENUE. IN OUR OPINION, THE NEW PLEA RAISED BY THE REVENUE CANNOT BE ENTERED; WE, ACCORDINGLY, DISMISS THE RELEVANT GROUND. 11 IN THE RESULT, THE APPEAL FILED BY THE REVENUE I S ALLOWED FOR STATISTICAL PURPOSE. ORDER PRONOUNCED ON THE 11 TH DAY OF JUNE 2010. SD/- SD/- ( J SUDHAKAR REDDY ) ACCOUNTANT MEMBER (R S PADVEKAR ) JUDICIAL MEMBER PLACE: MUMBAI : DATED: 11 TH JUNE 2010 RAJ* COPY FORWARDED TO: 1 APPELLANT 2 RESPONDENT 3 CIT 4 CIT(A) 5 DR /TRUE COPY/ BY ORDER DY /AR, ITAT, MUMBAI