EKANSHA ENTERPRISES P.LTD, MUMBAI V. DCIT 3(1), MUMBAI

ITA 809/MUM/2012

• Counselvise Citation: 80919914 RSA 2012
• Duration Of Justice: 1 year(s) 7 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-09-2013
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: E
• Next Hearing Date: 06-08-2013
• Assessment Year: 2007-2008
• Appeal Filed On: 06-02-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: MAHESH O RAJORA; J D MISTRY A T JAI N
• Keywords: Transactions in derivatives; Earning of tax free income
• Section: 143(3); 14A; 37; 10

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH E , MUMBAI BEFORE SHRI P.M. JAGTAP , ACCOUNTANT MEMBER AND SHRI SANJAY GARG , JUDICIAL MEMBER ITA NO. 809/M/12 ASSESSMENT YEAR: 2007 - 08 M/S. EKANSHA ENTERPRISES PVT. LTD. 84 - A, 8 TH FLOOR, MITTAL COURT, 2 24, NARIMAN POINT, MUMBAI - 400 021 PAN: AA BCE4798B VS. THE DY. COMMISSIONER OF INCOME TAX 3 (1), AAYAKAR BHAVAN, MUMBAI - 400020 (APPELLANT) (RESPONDENT) ASSESSEE BY : S/ SHRI J.D. MISTRY, A.T. JAI N & MAHESH O. RAJORA REVENUE BY : SHRI JAVED AKHTAR, D.R. DATE OF HEARING : 06.08.13 DATE OF PRONOUNCEMENT : 25.09.13 O R D E R PER SANJAY GARG, JUDICIAL MEMBER: THE PRESENT APPEAL HAS BEEN FILED BY THE ASSESSEE AGAINST THE ORDER OF THE CIT (A) DATED 17.01.12. 2. VIDE GROUND NO.1 THE ASSESSEE COMPANY HAS CONTESTED THE ACTION OF THE LD. CIT(A) IN CONFIRMING THE DISALLOWANCE OF RENT OF RS. 81, 60,000/ - PAID FOR THE BUSINESS PREMISES OF THE ASSESSEE. 3 . THE ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF INVESTMENT IN SHARES AND SECURITIES. DURING THE FINANCIAL YEAR UNDER CONSIDERATION THE ASSESSEE COMPANY PAID RENT OF RS.81,60,000/ - FOR ITS BUSINESS PREMISES. ON BEING ASKED AS TO THE JUSTIFICATION OF THE SAID EXPENDITURE , THE ASSESSEE COMPA NY SUBMITTED ITA NO. 809/ M /12 M/S. EKANSHA ENTERPRISES PVT. LTD. 2 BEFORE THE AO THAT THE SAID PREMISES WAS USED FOR THE BUSINESS PURPOSE OF THE ASSESSEE. THE RENT WAS PAID FOR FULLY DEVELOPMENT FURNISHED AND INF RASTRUCTURE S UP PORTED STRUCTURES. FURTHER THAT THE AMOUNT OF RENT INCLUDES CHARGES TOWARDS ELECT RICITY, TELEPHONE , FURNITURE AND ALL KIND S OF INFORMATION AND TECHNOLOGY S UP PORTING AND PARKING ETC. IT WAS FURTHER SUBMITTED THAT THE COMPANY WANTED TO EXPAND ITS BUSINESS ACTIVITIES BY WAY OF ALSO ENGAGING IN TRADE AND SOFTWARE DEVELOPMENT ACTIVITY. HE NCE THE PREMISES WAS TAKEN ON RENT FOR THE BUSINESS PURPOSE OF THE ASSESSEE. THE AO HOWEVER WAS NOT SATISFIED WITH THE EXPLANATION GIVEN BY THE ASSESSEE COMPANY . HENCE HE DISALLOWED THE ENTIRE RENT AMOUNT OF RS.81,60,000/ - . IN APPEAL THE LD. CIT(A) CONF IRMED THE SAID DISALLOWANCE . THE ASSESSEE IS THUS IN APPEAL BEFORE US. 4 . WE HAVE HEARD THE LD. REPRESENTATIVES OF THE PARTIES AND HAVE ALSO GONE THROUGH THE RECORDS. 5 . IT IS ALMOST AN ADMITTED FACT THAT THE ASSESSEE COMPANY WAS INCORPORATED IN THE YEAR 2005 AND IT HAS BEEN CONTINUOUSLY RUNNING THE BUSINESS OF INVESTMENT IN SHARES AND SECURITIES. THIS FACT IS ALSO EVIDENT FROM THE CERTIFICATE OF INCORPORATION PLACED AT PAGE NO.15 OF PAPER BOOK FILE AS WELL AS COPY OF ASSESSMENT ORDER UNDER SECTION 143(3) OF THE ACT FOR ASSESSMENT YEAR 2006 - 07 PLACED AT PAGE NO.41 OF PAPER BOOK FILE BEFORE US . THERE IS NO CONTENTION OF THE REVENUE THAT THE ASSESSEE COMPANY HAD OWNED ANY OTHER PREMISES FROM WHICH IT WAS RUNNING ITS BUSINESS DURING THE FINANCIAL YEAR UNDER CONSIDERATION. THE CONTENTION OF THE LD. A.R. IS THAT THE RENT AMOUNT WAS PAID FOR A FULLY DEVELOPMENT FURNISHED AND INFRASTRUCTURE SUPPORTED PREMISES WHICH INCLUDE CHARGES FOR ELE CTRICITY, TELEPHONE, FURNITURE, TECHNOLOGY SUPPORT AND PARKING ETC. A LSO. UNDER SUCH CIRCUMSTANCES, THE DISALLOWANCE OF THE ENTIRE EXPENDITURE BY THE AO ON THE GROUND THAT THE ASSESSEE COMPANY INTENDED TO ENGAGE INTO TRADING AND SOFTWARE DEVELOPMENT ACTIVITY ALSO DOES NOT SEEM TO BE ITA NO. 809/ M /12 M/S. EKANSHA ENTERPRISES PVT. LTD. 3 JUSTIFIED. IT WAS FOR THE ASSESSEE COMP ANY TO DECIDE AS TO WHAT TYPE OF PREMISES AND THE FACILITIES AND INFRASTRUCTURE IT WANTED TO OCCUPY TO RUN ITS BUSINESS. IT IS NOT THE CASE OF THE REVENUE THAT THE RENT PAID BY THE ASSESSEE COMPANY WAS EXAGGERATED IN COMPARISON TO THE MARKET LETTING VALUE OF THE PREMISES AT THAT TIME. THE ONLY GROUND THAT THE ASSESSEE WANTED TO ENGAGE IN A NEW BUSINESS BUT IT DID NOT DO SO , IS NOT JUSTIFIED TO MAKE THE DISALLOWANCE OF THE ENTIRE RENT AMOUNT . EVEN THE LD. CIT(A) WHILE CONFIRMING THE DISALLOWANCE HAS NOT C ONSIDERED THIS ASPECT OF THE MATTER. THERE IS NO DENIAL TO THE FACT DURING THE FINANCIAL YEAR IN CONSIDERATION, T HE ASSESSEE COMPANY HA D BEEN ENGAGED IN THE BUSINESS , ASSESSED TO INCOME TAX, AND THE PREMISES IN QUESTION WAS USED FOR THE BUS INESS PURPOSE O F THE ASSESSEE . HOWEVER, SINCE THE ASSESSEE HAS CONTENDED THAT IT INTENDED TO ALSO ENGAGE INTO BUSINESS ACTIVITY OF TRADING AND SOFTWARE DEVELOPMENT, HENCE THE POSSIBILITY CANNOT BE RULED OUT THAT THE BUSINESS PREMISES WAS TAKEN ON RENT TAKING INTO CONSID ERATION THE FUTURE REQUIREMENTS RELATING TO THE SAID BUSINESS ACTIVITY ALSO. CONSIDERING THE OVERALL FACTS AND CIRCUMSTANCES , IN OUR VIEW , A REASONABLE DISALLOWANCE OF RS.10 LAKHS OUT OF THE ENTIRE RENT DISALLOWANCE MADE BY THE AO WILL BE JUSTIFIED. ACCO RDINGLY, THE DISALLOWANCE IS RESTRICTED TO RS.10 LAKHS ON ACCOUNT OF RENT PAID FOR THE BUSINESS PREMISES. 6 . VIDE GROUND NO.2 , THE ASSESSEE COMPANY HAS CONTESTED THE ACTION OF THE LD. CIT(A) IN RESTRICTING THE DISALLOWANCE UNDER SECTION 14A OF THE INCOM E TAX ACT READ WITH RULE 8D OF THE INCOME TAX RULES TO RS.1,73,446/ - ATTRIBUTABLE TO INVESTMENT ACTIVITY GIVING R ISE TO THE EXEMPT INCOME. THE AO DURING THE ASSESSMENT PROCEEDINGS NOTICED THAT THE ASSESSEE HAD CLAIMED EXEMPT DIVIDEND INCOME AMOUNTING TO R S.1,15,55,39,795/ - , HOWEVER NO PART OF EXPENDITURE WAS ATTRIBUTED TOWARDS EARNING ABOVE SAID EXEMPT INCOME. THE ASSESSEE CLAIMED THAT EXCEPT DE - MAT CHARGES OF RS.50,090/ - , NO EXPENDITURE WAS MADE FOR ITA NO. 809/ M /12 M/S. EKANSHA ENTERPRISES PVT. LTD. 4 EARNING OF EXEMPT INCOME. IT WAS FURTHER CONTENDED THA T THERE WAS NO NEXUS TO THE EXPENDITURE INCURRED AND EXEMPTED INCOME , H ENCE NO DISALLOWANCE SHOULD BE MA DE UNDER SECTION 14A OF THE ACT. HOWEVER, THE AO APPLYING THE RULE 8D DISALLOWED A SUM OF RS.31,46,288/ - . IN APPEAL , THE LD. CIT(A) WHILE RELYING UPON AN AUTHORITY OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF M/S GODREJ & BOYCE LTD. . VS. DCIT [(2010) 328 ITR 81 (BOM)] OBSERVED THAT THE RULE 8D WAS NOT APPLICABLE FOR THE ASSESSMENT YEAR UNDER CONSIDERATION AND THE SAME WAS APPLICABLE FROM ASSESSMENT YEAR 2008 - 09 ONWARDS . F OR THE YEAR UNDER CONSIDERATION, A REASONABLE DISALLOWANCE SHOULD HAVE BEEN MADE AS PER THE LAW LAID DOWN BY THE HONBLE BOMBAY HIGH COURT IN THE ABOVE SAID AUTHORITY. THE LD. CIT(A) THUS RESTRICTED THE DISALLOWANCE TO THE EXTENT OF RS.1,73,446/ - . HE, HOWEVER, FURTHER DISALLOWED A SUM OF RS.30,31,633/ - CLAIMED AS MARK TO MARKET LOSS ON F&O TRANSACTIONS BY THE ASSESSEE. 7 . IT MAY BE OBSERVED THAT IN VIEW OF THE LAW LAID DOWN BY THE HONBLE BOMBAY HIGH COURT IN GODREJ & B OYCE LT D. (SUPRA) THE RULE 8D WAS NOT APPLICABLE FOR THE YEAR UNDER CONSIDERATION. EVEN OTHERWISE FOR APPLICATION OF RULE 8D , THE AO WAS REQUIRED TO RECORD HIS DISSATISFACTION TO THE CALCULATION/COMPUTATION MADE BY THE ASSESSEE. THE DISALLOWANCE UNDER THIS HEA D WAS REQUIRED TO BE MADE BY THE AO ON SOME REASONABLE BASIS BY WAY OF A SPEAKING ORDER BUT NO SUCH PROCEDURE WAS FOLLOWED BY THE AO. THE LD. CIT(A) TAKING INTO CONSIDERATION THE OVERALL FACTS AND CIRCUMSTANCES RESTRICTED THE DISALLOWANCE TO THE AMOUNT OF RS.1,73,446/ - WHICH SEEMS TO BE QUITE REASONABLE. WE DO NOT FIND ANY REASON TO INTERFERE IN RELATION TO THE FINDING OF LD. CIT(A) REGARDING CONFIRMATION OF DISALLOWANCE IN THIS RESPECT. HENCE GROUND NO.2 OF THE APPEAL OF THE ASSESSEE IS DISMISSED. ITA NO. 809/ M /12 M/S. EKANSHA ENTERPRISES PVT. LTD. 5 8 . VIDE GROUND NO.3, THE ASSESSEE HAS CONTESTED THE DISALLOWANCE MADE BY THE LD. CIT(A) I.E. THE FIRST APPELLATE AUTHORITY OF RS.30,31,633/ - ON ACCOUNT OF MARK TO MARKET LOSS ON F&O TRANSACTION. IT MAY BE OBSERVED THAT NO SUCH DISALLOWANCE WAS MADE BY THE AO IN THE ASSESSMENT PROCEEDINGS. HOWEVER, DURING THE FIRST APPEAL THE LD. CIT(A) OBSERVED THAT THE MARK TO MARKET LOSS DID NOT PERTAIN TO EARNING OF EXEMPT INCOME AND FURTHER THAT THERE WAS NO RECEIPT ON SALE OF SHARE DERIVATIVES. 9 . IT MAY BE OBSE RVED THAT THE SIMILAR ISSUE CAME INTO CONSIDERATION BEFORE THE CO - ORDINATE BENCH OF THIS TRIBUNAL IN ITA NO.1502/M/12 IN THE CASE OF DCIT VS. KOTAK MAHINDRA INVESTMENT LTD. W HILE DEALING WITH THE SAID ISSUE , THE CO - ORDINATE BENCH OF THIS TRIBUNAL OBSERV ED THAT THE STOCK FUTURE IS ONE OF THE TYPES OF FORWARD CONTRACT, WHICH IS TRADED ON EXCHANGES. THIS CAN BE TRADED IN BSE AS WELL AS IN NSE. IN SUCH TYPE OF CONTRACTS , THE STOCK IS NOT ACTUALLY PURCHASED RATHER THE PROFIT OR LOSS IS CALCULATED ON THE BOOK VALUE IN COMPARISON TO THE ACTUAL MARKET RATE OF THE STOCKS ON THE DATE WHICH HAS BEEN AGREED BY THE PARTIES FOR THE PERFORMANCE OF THE CONTRACT. CERTAIN STOCKS ARE BOOKED TO BE PURCHASED AT A PREDETERMINED PARTICULAR RATE ON FUTURE DATE AND WHEN SUCH FUTU RE DATE OF PERFORMANCE OF CONTRACT BECOMES DUE, THEN THE PREDETERMINED PRICE IS COMPARED WITH THE ACTUAL MARKET RATE OF THE BOOKED STOCK AND THE DIFFERENCE, IF ANY, IS PAID BY THE PARTIES WITHOUT ACTUALLY PURCHASING OR SELLING THE STOCKS IN QUESTION. THE D AILY MARKET RATE OF THE SAID STOCK IN QUESTION IS TAKEN AND THE DIFFERENCE BETWEEN THE MARKET RATE AND THE PREDETERMINED RATE IS DAILY CALCULATED AND THE DIFFERENCE MARGIN, IF ANY, IS RECEIVED/PAID TO THE BROKER AND FINALLY , ON THE STIPULATED DATE , THE CON TRACTS ARE SQUARED OFF RESULTING INTO ACTUAL LOSS OR PROFIT. THE CONTRACTS IN SUCH TYPE OF CASES CAN BE SQUARED OFF BEFORE THE ARRIVAL OF ACTUAL PERFORMANCE DATE OF CONTRACT, AS THE PROFIT AND LOSS ARE CALCULATED ON DAILY BASIS AND THE MARGINS ARE ITA NO. 809/ M /12 M/S. EKANSHA ENTERPRISES PVT. LTD. 6 SETTLED ACCORDINGLY. SUCH TYPE OF CONTRACTS ARE NOT PURELY CONTINGENT IN NATURE RATHER LOSS OR PROFIT IS SOMEWHAT ASCERTAINABLE IN VIEW OF CONSTANT WATCH ON DAILY MARKET VALUE AND EVEN THE QUANTUM OF PROFIT OR LOSS THOUGH NOT ACTUALLY ASCERTAINABLE, CAN BE ANTICIP ATED IN VIEW OF THE TRENDS OF THE MARKET. THE DIFFERENCE BETWEEN THE PREDETERMINED PRICE AND MARKET PRICE IS SETTLED DAILY ON MARK - TO - MARKET BASIS. IN SUCH TYPE OF CONTRACTS, IT IS NOT THE STOCK VALUE WHICH IS SUBJECT MATTER OF THE CONTRACT RATHER THE CO NTRACT ITSELF IS THE STOCK IN TRADE WHICH IS PURCHASED BY PAYING/DEPOSITING THE INITIAL MARGINS ON PERCENTAGE BASIS TO THE BROKER TAKING INTO CONSIDERATION MAXIMUM ANTICIPATED RISE OR FALL IN THE PRICE OF THE STOCK IN FUTURE. AS OBSERVED ABOVE, THE DIFFERE NCE OF MARGIN IN CALCULATED AND SETTLED ON DAILY BASIS IN VIEW OF THE MARKET RATES AND TRENDS. THE HONBLE SUPREME COURT IN THE CASE OF CIT V. WOODWARD GOVERNOR INDIA (P.) LTD . (2009) 179 TAXMAN 326, WHILE DEALING WITH THE QUESTION AS TO WHETHER THE ADDI TIONAL LIABILITY ARISING ON ACCOUNT OF FLUCTUATION IN THE RATE OF EXCHANGE CAN BE ALLOWED TO BE ADJUSTED PENDING ACTUAL PAYMENT OF THE VARIED, HAS OBSERVED THAT EXPENDITURE AS USED IN SECTION 37 IN INCOME TAX ACT MAY IN THE CIRCUMSTANCES OF A PARTICULAR CASE COVER AN AMOUNT WHICH IS A LOSS EVEN THOUGH SAID AMOUNT HAS NOT BEEN GIVEN FROM THE POCKET OF THE ASSESSEE. IT HAS BEEN FURTHER OBSERVED THAT THE ORDINARY PRINCIPLE OF COMMERCIAL ACCOUNTING REQUIRES THAT IN THE PROFIT & LOSS ACCOUNT THE VALUE OF STO CK IN TRADE AT THE BEGINNING AND AT THE END OF THE YEAR SHOULD BE ENTERED AT COST OR MARKET PRICE, WHICHEVER IS LOWER. WHILE ANTICIPATED LOSS IS TAKEN INTO ACCOUNT, ANTICIPATED PROFIT IN THE SHAPE OF APPRECIATED VALUE OF THE CLOSING STOCK IS NOT BROUGHT I NTO ACCOUNT, AS NO PRUDENT TRADER WOULD CARE TO SHOW INCREASE PROFITS BEFORE ACTUAL REALIZATION. PROFITS FOR INCOME - TAX PURPOSES ARE TO BE COMPUTED IN ACCORDANCE WITH ORDINARY PRINCIPLES OF COMMERCIAL ACCOUNTING, UNLESS, SUCH PRINCIPLES STAND SUPERSEDED OR MODIFIED BY LEGISLATIVE ENACTMENTS. UNREALIZED PROFITS IN THE SHAPE OF APPRECIATED VALUE OF GOODS REMAINING UNSOLD AT THE END OF THE ITA NO. 809/ M /12 M/S. EKANSHA ENTERPRISES PVT. LTD. 7 ACCOUNTING YEAR AND CARRIED OVER TO THE FOLLOWING YEARS ACCOUNT IN A CONTINUING BUSINESS ARE NOT BROUGHT TO THE CHARGE AS A MATTER OF PRACTICE, THOUGH, AS STATED ABOVE, LOSS DUE TO FALL IN THE PRICE BELOW COST IS ALLOWED EVEN THOUGH SUCH LOSS HAS NOT BEEN REALIZED ACTUALLY. 1 0 . SO RESPECTFULLY FOLLOWING THE LAW LAID DOWN BY THE HONBLE SUPREME COURT AND IN VIEW OF THE FIND INGS OF THE CO - ORDINATE BENCH OF THE TRIBUNAL ON THE SIMILAR ISSUE, THE DISALLOWANCE MADE BY THE LD. CIT(A) IN RESPECT OF MARK TO MARKET LOSSES ON DERIVATIVES IS HEREBY ORDERED TO BE DELETED. THIS GROUND IS ACCORDINGLY DECIDED IN FAVOUR OF THE ASSESSEE. 1 1 . IN THE RESULT THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 25.09. 2013. SD/ - SD/ - ( P.M. JAGTAP ) ( SANJAY GARG ) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATED: 25.09. 2013. * KISHORE COPY TO: THE APPELLANT THE RESPONDENT THE CIT, CONCERNED, MUMBAI THE CIT ( A) CONCERNED, MUMBAI THE DR C BENCH //TRUE COPY// [ BY ORDER DY/ASSTT. REGISTRAR, ITAT, MUMBAI.