THE DY CIT CC-3, V. M/S. KOSHA INVESTMENT LTD.,

ITA 8641/MUM/2004

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 1193 (ITAT-MUMBAI)
• Duration Of Justice: 5 year(s) 6 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-06-2010
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: D
• Next Hearing Date: 24-06-2010
• Assessment Year: 1998-1999
• Appeal Filed On: 01-12-2004
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SOMUGYAN PAL
• Assessee Lawyers: VIJAY KOTHARI
• Keywords: Rule of consistency; Speculation loss; Assessment record; Speculative transactions; Set aside; Capital Gains
• Section: 43(5)

Judgement Text

1 ITA NO.8641/MUM/2004 IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH D MUMBAI BEFORE SHRI R S PADVEKAR, JM & SHRI B RAMAKOTAIAH, AM ITA NO. 8641/MUM/2004 (ASST YEAR 1998-99) THE DY COMMR OF INCOME TAX CEN CIR 3 , MUMBAI VS M/S KOSHA INVESTMENT LTD QEENS MANSION, G/F BEHIND KHADI BHANDAR A K NA.Y.AK MARG FORT, MUMBAI 1 (APPELLANT) (RESPONDENT) PAN AAACK9690Q ASSESSEE BY: SHRI VIJAY KOTHARI REVENUE BY: SHRI SOMUGYAN PAL 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 1998-99 DATED 9.9.2004. 2 GROUND NO. 1 READS AS UNDER: ON THE FACTS AND IN LAW, THE LD CIT(A) HAS ERRED I N DELETING THE ADDITION OF RS.1,59,349/- IN RESPECT OF INTEREST INCOME PERT AINING TO LEASE TRANSACTION WITH M/S TRIVENI MACFIN LTD WITHOUT APP RECIATING, INTER-ALIA THAT THE ASSESSEE HAD FAILED TO LEAD ANY EVIDENCE T O SHOW THAT THE LEASE WAS CANCELLED AND THE MONEY ADVANCED WAS RECE IVED BACK BY THE ASSESSEE. 3 WE HAVE HEARD THE PARTIES. THE LD COUNSEL FOR TH E ASSESSEE SUBMITTED THAT THE LEASED GAS CYLINDERS WERE SOLD IN THE ASSE SSMENT YEAR 1997-98 AS THE TRANSACTION WAS CANCELLED AND THE SAID FACTS HA VE ALREADY BEEN DISCUSSED IN THE RETURN OF INCOME FILED FOR A.Y. 19 97-98 BY OFFERING THE SHORT TERM CAPITAL GAINS OF RS.25,000/- ON THE SALE OF TH E LEASED ASSETS. HE, THEREFORE, SUBMITTED THAT THESE FACTS HAVE BEEN REC ORDED BY THE LD CIT(A) AND FOR VERIFICATION OF THESE FACTS, THE MATTER MA Y BE REMANDED BACK TO THE 2 ITA NO.8641/MUM/2004 FILE OF THE A.O. THE LD DR HAS NO OBJECTION FOR RE MANDING THE MATTER TO THE FILE OF THE A.O. 4 IN VIEW OF THE ABOVE FACTS, WITH THE CONSENT OF B OTH THE PARTIES, WE REMAND THE ISSUE IN RESPECT OF THE ADDITION OF RS. 1,59,349/- TO THE FILE OF THE A.O WITH THE DIRECTION THAT IF THE ASSESSEE HAS ALREADY DECLARED THE SHORT TERM CAPITAL GAIN AS WELL AS THE LONG TERM CAPITAL GAINS THEN THERE IS NO QUESTION OF MAKING THE ADDITION IN THE A.Y 1998-98. THE A.O IS DIRECTED TO VERIFY THIS POSITION ACCORDINGLY ON THE BASIS OF TH E ASSESSMENT RECORDS FOR THE A.Y. 1997-98. ACCORDINGLY, GROUND NO.1 TAKEN BY THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSE. 5 GROUND NO.2 READS AS UNDER: ON THE FACTS AND IN LAW, THE LD CIT(A) HAS ERRED I N GIVING RELIEF OF RS. 67,75,529/- ON ACCOUNT OF DISALLOWANCE OF INTER EST RELATABLE TO FUNDS UTILISED FOR GIVING INTEREST FREE LOAN AND FO R INVESTMENT IN SHARES. 6 WE HAVE HEARD THE PARTIES. THE A.O DISCUSSED THIS ISSUE IN PARA 5 OF THE ASSESSMENT ORDER. THE A.O HAS RESERVATION FOR A LLOWING THE ENTIRE EXPENDITURE CLAIMED BY THE ASSESSEE BY DEBITING TO THE P&L ACCOUNT AS THE ASSESSEE HAS SHOWN UNSECURED LOANS OF RS. 40.43 CRO RES IN THE BALANCE SHEET. AS NOTED BY THE A.O, THE ASSESSEE HAS PAID INTEREST ON THE LOANS TO THE EXTENT OF RS. 20.21 CRORES. MOREOVER, THE ASSE SSEE HAD ALSO PAID INTEREST ON THE AMOUNT OF RS 6 CRORES TAKEN FROM M/S SNOWCEM INDIA LTD., BY ISSUING DEBENTURES. AS OBSERVED BY THE A.O, THE T OTAL LOANS GIVEN TO VARIOUS PARTIES INCLUDING THE SISTER CONCERNS WERE TO THE EXTENT OF RS. 30.10 CRORES BUT A VERY MEAGRE INTEREST WAS SHOWN. THE A .O HAS ALSO NOTED THAT THE ASSESSEE HAS GIVEN LOANS OF RS. 33.90 CRORES TO VARIOUS PARTIES WITHOUT CHARGING ANY INTEREST FROM THEM AND OUT OF THE SAID AMOUNT, LOANS TO THE EXTENT OF 8.62 CRORES HAVE BEEN GIVEN TO THE SISTER CONCERNS WHERE NO INTEREST WAS CHARGED. THE A.O REJECTED THE CLAIM O F THE ASSESSEE THAT THE ASSESSEE HAS SUFFICIENT INTEREST FREE FUNDS AND FRO M THE SAID FUNDS, THE ASSESSEE HAS GIVEN INTEREST FREE LOANS. THE A.O HA S ALSO EXAMINED THE 3 ITA NO.8641/MUM/2004 FACTUAL POSITION OF THE ASSESSEE AND CAME TO THE CO NCLUSION THAT INTEREST BEARING LOANS BORROWED BY THE ASSESSEE WERE NOT UTI LIZED FOR THE PURPOSE OF THE BUSINESS OF FINANCING OR FOR THE PURPOSE OF EAR NING ANY TAXABLE INCOME FROM INVESTMENT IN SHARES. HE, ACCORDINGLY, DISALL OWED THE CLAIM OF THE ASSESSEE. THE ASSESSEE CHALLENGED THE ORDER OF THE A.O BEFORE THE CIT(A), WHO DELETED THE ADDITION. 7 THE LD COUNSEL FOR THE ASSESSEE SUBMITTED THAT I N THE A.Y. 1996-97 AND 1997-98 THE TRIBUNAL HAS CONSIDERED THIS ISSUE AND RESTORED THE SAME TO THE FILE OF THE A.O FOR FRESH ADJUDICATION IN TH E LIGHT OF THE DECISION OF THE SUPREME COURT IN THE CASE OF S A BUILDERS LTD (288 ITR 1). HE, THEREFORE, PLEADED THAT IN THIS YEAR ALSO THE ISSUE MAY BE REM ANDED BACK TO THE FILE OF THE A.O. 8 WE HAVE ALSO HEARD THE LD DR. WE HAVE ALSO PERUS ED THE RELEVANT MATERIAL WHILE CONSIDERING THE FACTS. THE COPY OF T HE ORDER OF THE TRIBUNAL IN A.Y. 1996-97 & 1997-98 IN ITA NO.5827/MUM/2002 AND 7814/MUM/2004 IS PLACED AT PAGES 16 TO 34 OF THE PAPER BOOK AND T HE TRIBUNAL HAS DEALT WITH THIS ISSUE IN PARA 24 OF THE SAID ORDER. WE, ACCORDINGLY, FOLLOWING THE DIRECTIONS OF THE TRIBUNAL IN THE A.Y. 1996-97 & 97 -98 SET ASIDE THE ISSUE TO THE FILE OF THE A.O FOR FRESH ADJUDICATION AND AFTE R CONSIDERING THE SAME IN LIGHT OF THE DIRECTIONS OF THE TRIBUNAL. ACCORDING LY, GROUND NO.2 IS ALLOWED FOR STATISTICAL PURPOSES. 9 GROUND NO.3 READS AS UNDER: ON THE FACTS AND IN LAW, THE LD CIT(A) HAS ERRED I N ALLOWING HEDGING LOSS OF RS. 1,18,49,593/- TREATED AS SPECULATION LO SS BY THE A.O: I) DESPITE THE FACT THAT THE ASSESSEE HAD FAILED TO PR ODUCE CONTRACT IN RESPECT OF STOCK AND SHARES ENTERED INTO BY THE ASSESSEE TO GUARD AGAINST THE LOSS IN ITS HOLDINGS OF STOCK AND SHARES IN CASE OF PRICE FLUCTUATION AND; 4 ITA NO.8641/MUM/2004 II) WITHOUT APPRECIATING THE FACT THAT IT WAS A SPECULA TION LOSS SINCE THE ASSESSEE FAILED TO FURNISH THE DETAILS OF THE S TOCK HEDGED AND TO ESTABLISH THAT IT WAS MADE AS A DEALER AND; III) WITHOUT APPRECIATING THE MAJOR INCOME OF THE ASSESS EE IS FROM LEASE RENTALS AND THAT THE SHARE TRANSACTION/HEDGIN G LOSS IS COVERED BY EXPLANATION TO SE. 73 OF THE ACT. 10 WE HAVE HEARD THE PARTIES. IDENTICAL ISSUES HAV E BEEN DECIDED BY THE TRIBUNAL WHICH ARISES FROM GROUND NO.3 IN ASSESSEE S OWN CASE FOR THE A.Y. 1997-98 IN ITA NO.7897/MUM/2004 VIDE ORDER DATED 11 .6.2010 AND THE TRIBUNAL HAS RESTORED THE ISSUE TO THE FILE OF THE A.O. THE OPERATIVE PART OF THE TRIBUNAL IN ITA NO.7897/MUM/2004 ARE AS UNDER: 5 WE HAVE GIVEN OUR ANXIOUS CONSIDERATION OF THE R IVAL PARTIES AND ALSO PERUSED THE RELEVANT RECORDS AS WELL AS THE RE ASONS 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 ) TREATING SPECULATION LOSS IN CERTAIN CIRCUMSTANCES AS HEDGING LOSS AND H ENCE, THE ASSESSEE HAS TO ESTABLISH A CONTRACT IN RESPECT OF SHARES EN TERED INTO TO GUARD AGAINST THE LOSS IN HOLDINGS OF THE STOCK OF SHARES DUE TO ADVERSE PRICE SPECULATION. IT IS ARGUED THAT THOUGH THE LOSS IS IN RESPECT OF THE SHARES 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 I S NOT SPECULATION LOSS. THE LD DR TOOK US THROUGH THE ASSESSMENT ORDER AND SUBMITTED THAT THE ASSESSEE MERELY STATED THAT THE ASSESSEE WAS HOLDIN G PHYSICALLY MORE THAN 12,62,400 LAKH SHARES THROUGH THE YEAR HAS NOT IDENTIFIED THE SHARES AGAINST WHICH THE ASSESSEE HAS ENTERED INTO CONTRACT OF THE SHARES OF M/S SNOWCEM INDIA LTD. THE LD DR RELIED ON THE DECISION OF THE HONBLE GUJARAT HIGH COURT IN THE CASE OF PANKA J OIL MILLS V. CIT (115 ITR 824) GUJ (FB) AND SUBMITTED THAT THE HON BLE HIGH COURT HAS EXPLAINED THE DIFFERENCE IN THE HEDGING TRANSACTION AND SPECULATIVE TRANSACTIONS. THE LD DR VEHEMENTLY ASSAILED THE OR DER OF THE LD CIT(A) AND SUBMITTED THAT SO FAR AS THE ASSESSMENT YEAR 1 996-97 IS CONCERNED, THE ISSUE WAS DECIDED ON THE FACTS OF TH AT RESPECTIVE ASSESSMENT YEARS AND IT WAS NOT MERELY BLINDINGLY F OLLOWED THE DECISION OF THE PRECEDING YEAR AS EACH AND EVERY AS SESSMENT YEAR IS AN INDEPENDENT ONE AND THE RELEVANT FACTS ARE TO BE CO NSIDERED. 5 ITA NO.8641/MUM/2004 5.2 PER CONTRA, THE LD COUNSEL OF THE ASSESSEE SUB MITTED 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 WIT H THE SNOWCEM GROUP AND HOLDINGS OF THE SHARES ARE NOT DENIED. I T IS ARGUED THAT THE FACTS IN THE ASSESSMENT YEAR 1996-97 ARE IDENTICAL IN WHICH THE LD CIT(A) HAS ALLOWED THE CLAIM OF THE ASSESSEE AND TH E SAID ORDER HAS NOT BEEN CHALLENGED BY THE REVENUE. HE, THEREFORE, PLEA DED THAT AS PER RULE OF CONSISTENCY, THE REVENUE HAS TO ACCEPT THE PLEA THAT IN A.Y. 1996-97 THERE WAS A HEDGING LOSS AND HENCE, IN THE A.Y. 199 7-98, 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 A RISING FROM THE ORDER OF THE LD CIT(A) AND HENCE, THE GROUND RAISED BY TH E 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 SNOWCEM INDIA LTD. HENCE, THE PLEA OF THE ASSESSEE IS THAT THE A SSESSEE WAS PHYSICALLY HOLDING MORE THAN 12,62,400 LACS OF SHAR ES THROUGHOUT THE YEAR AND ALSO DURING THE PERIOD OF PURCHASE AND SAL E OF THE TRANSACTIONS ENTERED 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 DEF INITION OF THE SPECULATIVE TRANSACTIONS, EVEN IF OTHERWISE THE SAID CONTRACT M AY PARTAKE THE CHARACTER OF THE SPECULATIVE TRANSACTION. IF THE C ONTRACT IS 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 DIFFER ENCE BETWEEN THE HEDGING TRANSACTIONS AND SPECULATIVE TRANSACTIONS. IT IS TRUE 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 TRANSACTI ON HAS BEEN DISCUSSED BY THEIR LORDSHIP. AS CLAUSE (A) TO SEC . 43(5) ALSO DEALS WITH A SITUATION WHERE THE CONTRACT IN RESPECT OF RAW MA TERIAL OF MERCHANDISE IS ENTERED INTO GUARDING AGAINST THE LOSS THROUGH T HE FUTURE PRICE FLUCTUATION IN RESPECT OF ACTUAL DELIVERY OF THE GO ODS MANUFACTURED. 6 ITA NO.8641/MUM/2004 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 FLUCTUATION. THE ONLY ADVERSE STATEMENTS MADE THAT THE ASSESSEE WAS HOLDI NG MORE THAN THE SHARES OF M/S SNOWCEM INDIA LTD; THE BURDEN IS ON T HE ASSESSEE TO PROVE TO IDENTIFY THE TRANSACTION WHICH CAN BE TREA TED AS CONTRACT FOR HEDGING. IN OUR OPINION, THIS ISSUE NEEDS FRESH ADJ UDICATION AS THE LD COUNSEL EXPRESSED THAT IN CASE WE DO NOT AGREE WITH THE CONCLUSION ARRIVED AT BY THE LD CIT(A) THAT THE ASSESSEE MAY B E GIVEN OPPORTUNITY TO VERIFY THE TRANSACTION BY SETTING ASIDE THE ISS UE TO THE FILE OF THE A.O. WE CONSIDER IT REASONABLE TO ACCEPT THE PLEA OF THE LD COUNSEL OF THE ASSESSEE AND ACCORDINGLY, SET ASIDE THE ISSUE TO TH E FILE OF THE A.O FOR FRESH ADJUDICATION. THE ASSESSEE IS DIRECTED TO ID ENTIFY HEDGING TRANSACTIONS TO SUBSTANTIATE ITS CLAIM U/S CLAUSE ( B) TO SEC. 43(5) OF THE ACT. THE A.O IS ALSO DIRECTED TO GIVE REASONABLE OP PORTUNITY OF BEING HEARD TO THE ASSESSEE. 11 THE LD COUNSEL SUBMITTED THAT IN THIS YEAR ALSO, ON THE SAME DIRECTIONS, THIS ISSUE MAY BE RESTORED TO THE FILE OF THE A.O. WE, ACCORDINGLY RESTORE THIS ISSUE ARISING FROM GROUND NO.3 WHETHE R IT IS HEDGING LOSS OR SPECULATION LOSS TO THE FILE OF THE A.O WITH THE DI RECTION TO DECIDE THE ISSUE AFRESH IN LIGHT OF THE DIRECTIONS OF THE TRIBUNAL FOR A.Y. 1997-98 ON THIS ISSUE. ACCORDINGLY, GROUND NO.3 IS ALLOWED FOR STA TISTICAL PURPOSE. 12 IN THE RESULT, THE APPEAL FILED BY THE REVENUE I S ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED ON THE 29 TH , DAY OF JUNE 2010. SD/- SD/- (B RAMAKOTAIAH ) ACCOUNTANT MEMBER (R S PADVEKAR ) JUDICIAL MEMBER PLACE: MUMBAI : DATED: 29 TH , JUNE 2010 RAJ* 7 ITA NO.8641/MUM/2004 COPY FORWARDED TO: 1 APPELLANT 2 RESPONDENT 3 CIT 4 CIT(A) 5 DR /TRUE COPY/ BY ORDER DY /AR, ITAT, MUMBAI