Appeal Details
Counselvise Citation
[2022] 104 COUNSELVISE.COM (IT) 4507 (ITAT-PANAJI)
Assessee PAN
Bench
Appeal Number
CRN Number
Duration Of Justice
3 year(s) 9 month(s) 5 day(s)
Appellant
Respondent
Appeal Type
Income Tax (Search & Seizure) Appeal
Pronouncement Date
04-05-2022
Appeal Filed By
Department
Order Result
Dismissed
Bench Allotted
WT(D)
Assessment Year
2012-2013
Appeal Filed On
29-07-2018
Judgement Text
IN THE INCOME TAX APPELLATE TRIBUNAL PANAJI BENCH, PANAJI BEFORE DR. M. L. MEENA, ACCOUNTANT MEMBER & SHRI ANIKESH BANERJEE, JUDICIAL MEMBER IT (SS) A No. 54 /PAN/2018 (Asst. Year: 2012-13) DCIT, Central Circle, Belagavi, Karnataka (Appellant) Vs. Ms. Sai Kiran Thakur 180, Guruwar Peth, Tilakwadi, Belagavi [PAN: ACXPT9822E] (Respondent) C.O. No. 18/PAN/2018 (Asst. Year: 2012-13) Ms. Sai Kiran Thakur 180, Guruwar Peth Tilakwadi, Belagavi [PAN: ACXPT9822E] (Appellant) Vs. DCIT, Central Circle, Belagavi, Karnataka (Respondent) IT (SS) A No. 58 & 59 /PAN/2018 (Asst. Year: 2014-15 to 2015-16) DCIT, Central Circle, Belagavi, Karnataka (Appellant) Vs. Ms. Sai Kiran Thakur 180, Guruwar Peth Tilakwadi, Belagavi [PAN : ACXPT9822E] (Respondent) I.T. (SS)A. No. 31 & 32/PAN/2018 (Asst. Year: 2013-14 & 2014-15) 2 IT(SS)A No. 54, 58 & 59/PAN/2018 (Asst. Year: 2012-13, 2014-15 & 2015-16) IT(SS)A No. 31 to 32/PAN/2018 (Asst. Year: 2013-14 & 2014-15) CO No. 18/PAN/2018 (Asst. Year: 2012-13) Ms. Sai Kiran Thakur Ms. Sai Kiran Thakur 180, Guruwar Peth Tilakwadi, Belagavi [PAN : ACXPT9822E] (Appellant) Vs. DCIT, Central Circle, Belagavi, Karnataka (Respondent) Appellant by Shri Shrinivas Nayak, C.A. & Shri N.N. Lotlikar, C.A. Respondent by Smt. Ranjan Kumar, CIT, D/R Date of Hearing 31.03.2022 Date of Pronouncement 05.05.2022 ORDER Per Bench: The captioned appeals comprise of three appeals filed by the Revenue, and two appeals and one Cross Objections filed by the assessee against the order of Commissioner of Income Tax (Appeals)-2, Panaji, (hereinafter referred to as “the ld. CIT(A)”) for assessment year 2012-13 to 2015-16. 2. Since, there are common issue involved in these appeals filed by the department and by the assessee for different assessment years, and hence, we have heard the appeal on issue basis and accordingly decided by this consolidated order for the sake of brevity. The facts are taken from IT(SS)A No. 54/PNJ/2018 in respect of Assessment Year 2012-13 as a lead case to adjudicate the common issues of the revenue appeal where the ground No. 1 to 3 reads as under. 3 IT(SS)A No. 54, 58 & 59/PAN/2018 (Asst. Year: 2012-13, 2014-15 & 2015-16) IT(SS)A No. 31 to 32/PAN/2018 (Asst. Year: 2013-14 & 2014-15) CO No. 18/PAN/2018 (Asst. Year: 2012-13) Ms. Sai Kiran Thakur (i) Whether on the facts and circumstances of the case and in law, the CIT(A) was right in relying on its own order in the assesses case for AY 2012-13 by allowing setting off of loss from commodity derivative trading of AY 2012-13 against the income for the AY 2014-15 despite the fact that the decision of the CIT(A) for AY 2012-13 has been challenged before ITAT. (ii) Whether in the facts and circumstances of the case and in law, the CIT(A) was right in holding that dealings in derivatives cannot be held to be speculative in nature based on the explanation to section 73 which is applicable only to the companies and not the assessee who is an individual ? (iii) Whether in the facts and circumstances of the case and in law, the CIT(A) was right in not appreciating the fact that the transaction were carried out through unrecognised exchange by the assessee and hence the resultant losses are speculative in nature for which the reliance is placed on in the Bombay High Court decision in the case of Shri Bharat R Ruia (HUF) reported in 199 Taxman 87 (Bombay). 3. From the grounds of appeals of the revenue in IT(SS)A No. 54, 58 to 59/PAN/2018, the department has challenged the common and sole issue as regards to deletion of addition u/s 73 being carry forward and set-off of Speculative Loss from trading in derivatives, by the CIT (A)-2 Panaji being computed by the AO, as under: Asst Year ITA No. Amount 2012-13 54/PNJ/2018 28,95,13,647 2014-15 58/PNJ/2018 3,91,19,296 2015-16 59/PNJ/2018 6,63,32,145 3.1 That, search u/s 132 of the Income Tax Act’1961, was conducted on the premises of the asessee on 23.09.2014. In compliance, to the notice u/s 153A of the Income Tax Act’1961, the assesee filled return of 4 IT(SS)A No. 54, 58 & 59/PAN/2018 (Asst. Year: 2012-13, 2014-15 & 2015-16) IT(SS)A No. 31 to 32/PAN/2018 (Asst. Year: 2013-14 & 2014-15) CO No. 18/PAN/2018 (Asst. Year: 2012-13) Ms. Sai Kiran Thakur income on 09.06.2016. In response to the subsequent notices/summons, the appellant appeared along with his AR and submitted the details asked for by the assessing officer. Being not satisfied, the assessing officer while completing the assessment order has made additions for set-off / carry forward of the losses, vide passed order u/s 153A r.w.s 143(3) of Income Tax Act 1961, dated 30-12-2016 by observing as under: 4. During the year the assessee has traded in commodity derivatives on the Multi Commodity Exchange of India Ltd. Trading in commodity derivatives is a speculative business. Proviso (e) to Sec.43(5) which deems the eligible transactions in commodities to be non speculative, was inserted by the Finance Act, 2013 w.e.f. 01.04.2014. Sec. 43(5)(e) is reproduced for ready reference: (5) "speculative transaction" means a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips: Provided that for the purposes of this clause (a) ..................... (b) ..................... (c) ..................... (d) ....................... (e) an eligible transaction in respect of trading in commodity derivatives c a r r i e d o u t i n a r e c o g n i s e d a s s o c i a t i o n , w h i c h i s c h a r g e a b l e t o commodities transaction tax under Chapter VII of the Finance Act, 2013 (17 of 2013),]] shall not be deemed to be a speculative transaction". 4.1 M u l t i C o mm o d i t y E x c h an g e o f In d ia L t d . i s n o t r e c o gn i z e d a s s o c i a t i o n p r i o r t o 01.04.2013 and Commodities Transactions Tax was also not chargeable before that date. (Vide Notification No.46/2009 dated 22.05.2009, recognition was given to MCX Stock Exchange Ltd. which is not to be confused with Multi Commodity Exchange of India Ltd. These are two different exchanges). Therefore, the toss on trading in commodity derivatives is be treated as loss from speculative business and As per provisions of sec.73, the claim of adjustment of income from house property and income 5 IT(SS)A No. 54, 58 & 59/PAN/2018 (Asst. Year: 2012-13, 2014-15 & 2015-16) IT(SS)A No. 31 to 32/PAN/2018 (Asst. Year: 2013-14 & 2014-15) CO No. 18/PAN/2018 (Asst. Year: 2012-13) Ms. Sai Kiran Thakur from other sources against the same shall be disallowed. Further such toss has to be carried forward and adjusted against the income from speculative business. The AR was asked to show-cause why the loss from the trading in derivatives in commodity should not be treated as speculative transactions and the set off the same restricted as per section 73 of the Income-tax Act, 1961. 4.2 The AR has argued that dealing in derivatives does not involve purchase and sale of shares and therefore loss on account of derivative trading cannot be speculation toss. This argument of the AR is not acceptable. Speculation transaction has been defined in section 43(5) to include purchase or sale of any commodity otherwise than by actual delivery or transfer of the commodity. It is an accepted fact that the assessee has traded in the derivatives of commodities without taking delivery of the underlying commodities. 4.3 In support of his contention, the AR of assessee has relied on the decision of Mumbai Bench of the ITAT in the case of DCIT V/s SSKI Investors Services P. Ltd (113 TTJ 511) and RB Securities Pvt. Ltd v/s ITO. The two decisions have been overruled by the Special Bench Kolkatta Special Bench decision in Shree Capital Services Ltd. Vs. ACIT (ITA No.1294 [Kol) of 2008 dated 31.07.2009). The Special Bench held that derivative is very much a commodity within the meaning of section 43(5) and that since there is no delivery of this commodity involved; the transaction was essentially speculative in terms of this section. Therefore, this argument of the assessee is not tenable. 4.4 The next contention of the AR is that the derivative transactions are carried out as part of business of the assessee and hence the loss incurred should be treated as non-speculative business loss and the definition of speculative transaction u/s 43(5) does not include derivatives in commodities. In this regard, the High Court of Madras in the case of Rajashree Sugars and Chemicals Ltd, Vs. Axis Bank AIR 2011 Mad 144 has held that derivatives are assets whose values are derived from the values of underlying assets. As the derivatives are based on the commodities and commodity is included in the definition of speculative transaction in section 43(5), the argument of the AR is untenable. 4.5 The next contention of the AR is that the amendment brought w.e.f. lst April 2006, in clause (d) of the proviso to sub-section (5) of section 43, specifically provided that eligible transactions in trading carried out in recognized Stock Exchange shall not be deemed to be speculative transaction. Even though the trading in MCX sx has been notified as recognized exchange for the purpose of section 43(5), subsequently from 22nd May 2009 and MCX is 6 IT(SS)A No. 54, 58 & 59/PAN/2018 (Asst. Year: 2012-13, 2014-15 & 2015-16) IT(SS)A No. 31 to 32/PAN/2018 (Asst. Year: 2013-14 & 2014-15) CO No. 18/PAN/2018 (Asst. Year: 2012-13) Ms. Sai Kiran Thakur recognized from 2013, the recognition of Stock Exchange is merely clarificatory in nature, therefore, the same has to be construed retrospectively from the assessment year 2006-07. Hence, AR contended that recognition by the Central Govt. of the Stock Exchange from a later date will not debar the transaction as non-speculation, especially after 1st April 2006. Therefore, derivative trading through MCX sx Stock Exchange is non-speculation transaction and, therefore, the toss incurred in such transactions is to be treated as normal business loss. 4.6 In this regard, it may be noted that the MCX has been notified as a "recognized association" vide Notification dated 29.11.2013 for the purpose of proviso to clause (e) of section 43(5) The benefit u/s 43(5)(d) sought by the assessee is in respect of transactions on recognized stock exchanges and MCX being only a "recognized association" and not recognized stock exchange benefit would not be available to the assessee. 4.7 MCX, through which the assessee has carried out the transactions, is not a recognized stock exchange as required under the provisions of Section 43(5)(d) of the Act. As it can be seen from the above mentioned Notification dated 29- 11-2013, the MCX, through which the assessee has carried out the transactions, is notified as a "recognized association" for the purposes of clause (e) of proviso to clause 5 of Section 43 of the Act. Clause (e) of proviso to sub- section (5) of Section 43 has recently been inserted by the Finance Act, 2013 w.e.f. 1st April, 2014, which reads as under:- "(e) An eligible transaction in respect of trading in commodity derivatives carried out in a recognized association, shalt not be deemed to be a speculative transaction," 4.8 Therefore, the exemption to the transactions given by the statute is w.e.f. 1-4-2014 and this is inserted by the Finance Act, 2013. Notification dated 29-11-2013 issued by CBDT vide which MCX was notified as a "recognized association" under the provisions of clause (iii) of the Explanation to clause (e) of proviso to clause 5 of Section 43 of the Income Tax Act read with sub-rule 4 of Rule 6DDD of the Income Tax Rules, 1962. For the sake of convenience, the said notification is reproduced below:- "[TO BE PUBLISHED IN THE GAZETTE OF INDIA, EXTRAORDINARY, PART 11, SECTION 3, SUB-SECTION (ii)] GOVERNMENT OF INDIA MINISTRY OF FINANCE DEPARTMENT OF REVENUE CENTRAL BOARD OF DIRECT TAXES NOTIFICATION New Delhi, the 29th November, 2013 INCOME-TAX 5.0.3539 (E). – In exercise of the powers conferred by clause 7 IT(SS)A No. 54, 58 & 59/PAN/2018 (Asst. Year: 2012-13, 2014-15 & 2015-16) IT(SS)A No. 31 to 32/PAN/2018 (Asst. Year: 2013-14 & 2014-15) CO No. 18/PAN/2018 (Asst. Year: 2012-13) Ms. Sai Kiran Thakur (iii) of the Explanation 2 of clause (e) of the proviso to clause (5) of section 43 of the income-tax Act, 1961 (43 of 1961) read with sub- rule (4) of rule 6DDD of the Income-tax Rules, 1962, the Central Government hereby notifies the multi Commodity Exchange of India Limited, Mumbai as a recognized association for the purposes of clause (e) of the proviso to clause (5) of the said section, with effect from the date of publication of this notification in the Official Gazette. 4.9 If the assessee is seeking benefit of clause (e) of proviso to Section 43(5), then such benefit can be extended to assessee only in respect of assessment year 2014-2015 as the provisions of clause (e) of proviso to Section 43(5) are inserted by the Statute w.e.f. 1-4-2014. However, in the present case, the transactions done by the assessee relate to financial year 2011-12 and 2012-13. For these transactions, there was no provision in the statute to give the benefit to the assessee in respect of transactions of commodities, which are ultimately settled otherwise then by actual delivery or transfer of the commodity as per Section 43(5) of the Act. 4.10 The assessee has also contended that the prospective application of the provisions results in hardship to the assessee and the amendments being clarificatory in nature are to be applied retrospectively. in this regard, as per the explanatory notes to the Finance Act, 2013 the amendments made to section 43(5) take effect from 1' April and will accordingly apply in relation to AY 2014-15 and subsequent assessment years. Further, the Supreme Court in P Nageshwar Rao Vs. Govt. of AP [1994] Suppl [22] SSC 693, 694 [SC1 has held that where a Notification expressly mentions the tax imposed under a particular statute would be effective on and from a particular date its operation cannot be pre-paned to an earlier date. In the instant case the Notification of MCX for the purpose of clause (e) of 43(5) has been issued on 29.11.2013 and thus, would be applicable for AY 2014-15 onwards. Therefore, any derivative transactions on the MCX before this date would be treated as speculative transactions. 4.11 Thus the transactions in derivatives of commodities are considered as speculation business and the loss suffered is treated as loss from speculation business. As per provisions of sec.73, the claim of adjustment of income from house property and income from other sources against the same is disallowed. Further such loss is to be carried forward and adjusted against the income from speculative business. In the assessment u/s 153A of the act, the AO came across various losses claimed, carried forward and setoff as listed in para 3 8 IT(SS)A No. 54, 58 & 59/PAN/2018 (Asst. Year: 2012-13, 2014-15 & 2015-16) IT(SS)A No. 31 to 32/PAN/2018 (Asst. Year: 2013-14 & 2014-15) CO No. 18/PAN/2018 (Asst. Year: 2012-13) Ms. Sai Kiran Thakur hereinabove, being loss on trading of the derivatives. Ld. Assessing Officer disallowed the claim and concluded that the losses on trading of derivatives are to be treated as speculative loss u/s 73 explanation 1 for following reasons. 4. In appeal, CIT(A)-2 Panaji, Goa has granted relief to the assessee by observing as under: 5.2. I have gone through the assessment order and the submissions made by the ARs of the appellant. At the outset, one needs to understand as to what exactly derivative means and what is exact meaning of transaction in respect of trading in derivative insofar as Income-Tax Act is concerned. To have clarity in understanding the actual legal meaning of the derivative trading vis- a-vis the speculative transaction, it is necessary to examine the characteristics and the features of the said transactions. A derivative is a financial instrument, the price of which has a strong correlation with an underlying commodity, currency, economic variable or financial instrument. The different types of derivatives are "future contracts, forward, swaps and options". They are traded on derivatives markets or over the counter (OTC). The market traded derivatives are standard but the OTC trades can be customized with regard to maturity, quantity, or pricing structure for a particular client. The disclosure of derivatives in financial statements is required by "Financial Reporting Standard-13". On the other hand, the speculative transaction as per section 43(5) means a transaction in which the contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by actual delivery or transfer of commodity or scrip. A derivative can also be traded on the value of the underlying shares but are not a trade in any actual stock. It does not have a physical existence. Derivatives are not a contract for purchase or sale of any physical commodity as such. So, these are not speculative transactions in the strict sense of terms of section 43(5) of the Act. For the definition of derivatives section 2(ac) of the Securities Contract (Regulation) Act, 1956 can be referred. The derivatives derive its value from the prices or index of prices, of the underlying securities and not the prices of commodities or stocks themselves. 5..3. Definition of "speculative transaction" has been provided in Sub-section (5) of Section 43, which in so far as material for our purposes, is as follows:- '(5) "speculative transaction" means a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips: 9 IT(SS)A No. 54, 58 & 59/PAN/2018 (Asst. Year: 2012-13, 2014-15 & 2015-16) IT(SS)A No. 31 to 32/PAN/2018 (Asst. Year: 2013-14 & 2014-15) CO No. 18/PAN/2018 (Asst. Year: 2012-13) Ms. Sai Kiran Thakur Provided that for the purposes of this clause- (a) a contract in respect of raw materials or merchandise entered into by a person in the course of his manufacturing or merchanting business to guard against loss through future price fluctuations in respect of his contracts for actual delivery of goods manufactured by him or merchandise sold by him; or (b) a contract in respect of stocks and shares entered into by a dealer or investor therein to guard against loss in his holdings of stocks and shares through price fluctuations; or (c) a contract entered into by a member of a forward market or a stock exchange in the course of any transaction in the nature of jobbing or arbitrage to guard against loss which may arise in the ordinary course of his business as such member; [or] (d) an eligible transaction in respect of trading in derivatives referred to in clause [(ac)] of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) carried out in a recognized stock exchange; [or] (e) an eligible transaction in respect of trading in commodity derivatives carried out in a [recognized association, which is chargeable to commodities transaction tax under Chapter VII of the Finance Act, 2013 (17 of 2013)] shall not be deemed to be a speculative transaction;’ 5.4. It would appear that the activities appearing in Clauses (a) to (e) are not to be deemed to be speculative transactions. Keeping the above provision in mind, it is necessary to consider whether section 43(5) of the Act would apply to the facts and circumstances of appellant's case. Section 43(5) deals with. 'speculative transaction' and any income derived from the said speculative transactions shall be assessed as profits from speculation business. Proviso (d) to section 43(5) gives exemption to the eligible transaction in respect of trading in derivatives carried out in a recognized stock exchange. 5.5. Coming to the nature of transactions carried on by the appellant, it is seen that the appellant has traded in commodity derivatives through MCX and has earned profit from the said trading which has been held as profit from speculative business by the AO as the AO held that MCX was not recognized exchange for the transactions in the impugned assessment year. The said transactions carried by the appellant are carried electronically on screen based system and are supported by contract notes issued by the stock broker. The contract notes contain the unique identification number of the appellant and the PAN of the appellant. In terms of explanation to section 73(4) of the Act, the purchase and sale of shares is deemed to be speculative business if the same is settled otherwise than by actual 10 IT(SS)A No. 54, 58 & 59/PAN/2018 (Asst. Year: 2012-13, 2014-15 & 2015-16) IT(SS)A No. 31 to 32/PAN/2018 (Asst. Year: 2013-14 & 2014-15) CO No. 18/PAN/2018 (Asst. Year: 2012-13) Ms. Sai Kiran Thakur delivery. A derivative is a financial instrument whose value depends on the value of other underline financial instruments which requires no initial net investment or little initial net investment that is settled at future date. Explanation to section 73(4) of the Act has been enacted to clarify beyond any doubt that share business of certain type of classes are deemed to be speculative in nature. Since, derivatives are not shares, they are excluded from the ambit of explanation to section 73(4) of the Act. This view is supported by ratio of decision of Hon'ble Calcutta High Court in the case of Asian Financial Services Ltd. Vs CIT reported in 70 Taxmann.com 9 (Cal.) and recent decision of Madras High Court in the case of CIT Vs Sri Vasavi Gold and Bullion Pvt. Ltd. (92 Taxmann.com 290 dated 20.02.2018). The Mumbal 'J' Bench of ITAT in the case of DCIT Vs SSKI Investors Services Pvt. Ltd. (113 TTJ 511) has observed that derivative trading does not involve any purchase and sale of shares and hence, the profit or loss on account of derivatives cannot be treated as speculation loss or profit. It was further observed that the dealings in derivatives being separate kind of transaction, cannot be held to be speculative in nature. 5.6. The decision in the case of OJT Vs Sri Vasavi Gold and Bullion Pvt. Ltd. (92 Taxmann.com 290 dated 20.02.2018) of Hon'ble Madras High Court is specifically on the facts which are identical to the facts of the appellant. In the said case, the question of law before the Hon'ble High Court was as under: "The Tribunal has erred in not appreciating the fact that the assessee had traded the commodity through multi commodity stock exchange, an unrecognized exchange which is different entity from the MCX Stock Exchange which is a recognized exchange." 5.7. In deciding the said question of law, the Hon'ble Madras High Court held that transactions carried out by the assessee are non-speculative transactions and thus, section 43(5) of the Act is not attracted to the facts of the said case and likewise the assessee was trading in derivatives and not in shares, so the loss suffered by the assessee in trading in derivatives is excluded from the ambit of explanation to section 73 of the Act. 5.8. Thus, on the facts and circumstances of the appellant's case, the transactions carried on by the appellant are not speculative transactions as the said transactions are in derivatives. As derivative transactions being separate from trading in shares, provisions of explanation to section 73 of the Act shall not be applicable to such derivative transactions and therefore, the profits earned by the appellant are held to be not from speculative business. Accordingly, the AO is directed to tax the said income from derivatives as normal profits from non-speculative business. Hence, the AO is further directed not to set off this 11 IT(SS)A No. 54, 58 & 59/PAN/2018 (Asst. Year: 2012-13, 2014-15 & 2015-16) IT(SS)A No. 31 to 32/PAN/2018 (Asst. Year: 2013-14 & 2014-15) CO No. 18/PAN/2018 (Asst. Year: 2012-13) Ms. Sai Kiran Thakur profit against the speculative loss incurred by the appellant in the impugned assessment year. The said unabsorbed speculative loss shall be allowed to be carried forward to the subsequent assessment year to be set off only against the speculative income. Ground no.4 is treated to have been allowed. 4.1 At the time of hearing, the Ld. CIT for the Department contended that, the assessee did not trade in derivatives through recognised stock exchange as mandated in section 43(5)(d) and he further relied upon the decision of ‘CIT v/s Bharat R. Ruia (Huf)’, 337 ITR 452. The Ld. DR. referred to para 39 of the Judgement in page 13 as under. “39. In the result, we hold that the exchange traded derivative transactions carried on by the assessee during asst. yr. 2003-04 are speculative transactions covered under s. 43(5) of the Act and the loss incurred in those transactions is liable to be treated as speculative loss and not business loss. We further hold that cl. (d) inserted to the proviso to s. 43(5) w.e.f. 1st April, 2006 is prospective in nature and the Tribunal was in error in holding that cl. (d) to the proviso to s. 43(5) applied retrospectively so as to apply to the transactions carried on by the assessee during asst. yr. 2003-04.” In view of the above, Ld. CIT(A)-2 has erred in deleting additions made u/s 73 of the Act. 4.2 Per contra, the Ld. Counsel of the assessee supported the finding of the Ld. CIT(A) and argued with the support of following submission. 8. During the year, the appellant has carried out trading in commodity derivatives through Multi Commodity Exchange of India Ltd., whereby the appellant has incurred losses, as the same is business loss, the appellant have been set-off the loss against the other incomes during the year. 12 IT(SS)A No. 54, 58 & 59/PAN/2018 (Asst. Year: 2012-13, 2014-15 & 2015-16) IT(SS)A No. 31 to 32/PAN/2018 (Asst. Year: 2013-14 & 2014-15) CO No. 18/PAN/2018 (Asst. Year: 2012-13) Ms. Sai Kiran Thakur 8.1 The ld AO has treated the commodity trading as speculative losses and have disallowed the set-off of the same with the other income during the year. 8.2 As the appellant has carried out trading in the commodity derivatives and through recognised stock exchange, the same has to be allowed as business and the provision of section 73 of the Income Tax Act’1961 is not applicable to the case. 8.3 We rely upon the identical issue in the matter of COMMISSIONER OF INCOME TAX VS VASAVI GOLD AND BULLION PVT LTD [TS-5518-HC-2018(MADRAS)-O], where it was held that “HC: Explanation to Sec 73 not applicable to derivative transactions; Allows loss set off - Madras HC upholds ITAT order, allows set-off of loss incurred by assessee-company (having main business of jewellery) from trading in derivative transactions through Multi Commodity Stock Exchange (‘MCX’), against other business income; Rejects Revenue’s stand that assessee’s transaction was not an eligible transaction as contemplated in Sec. 43(5)(d); HC refers to ITAT’s findings that the transactions were carried out in a recognised MCX stock exchange, through a stock broker on a screen based system and was supported by contract notes, accordingly holds assessee's transactions as non-speculative applying clause (d) exemption; Also rejects Revenue’s stand that irrespective of the fact that the transaction qualifies as ‘eligible transaction’ in terms of exemption clause (d), the loss cannot be allowed in terms of Explanation to Sec. 73; HC rules that “derivative transactions being separate from trading in shares, provisions of Explanation to Section 73 will not be applicable to such transactions” 8.4 The matter has been thoroughly heard by the Hon. CIT(A), who has rightly deleted the addition made by the AO as per their 13 IT(SS)A No. 54, 58 & 59/PAN/2018 (Asst. Year: 2012-13, 2014-15 & 2015-16) IT(SS)A No. 31 to 32/PAN/2018 (Asst. Year: 2013-14 & 2014-15) CO No. 18/PAN/2018 (Asst. Year: 2012-13) Ms. Sai Kiran Thakur order, with the following noting’s “Thus, on the facts and circumstances of the appellant’s case, the transactions carried on by the appellant are not speculative transactions as the said transactions are in derivatives. As derivative transactions being separate from trading in shares, provisions of explanation to section 73 of the Act shall not be applicable to such derivative transactions and therefore, the loss incurred by the appellant is held to be not from speculative business. Accordingly, the AO is directed to allow the said loss from derivative as normal loss from non-speculative business. Hence, the AO is further directed to allow set off this loss against the income earned by the appellant in the other sources (other than salary) as claimed in the return of income in the impugned assessment year. The unabsorbed business loss shall be allowed to be carried forward to the subsequent assessment year to be set off against the business income. Ground no.3 is treated to have been allowed”. 4.3 Heard rival contentions, perused the material on record and citations referred in support. The Ld. counsel of the assessee argued that, Assessee has traded in derivatives through Reliance Commodities Ltd., which is member of Multi Commodity Exchange of India Ltd. MCX Membership No. 29030; UMC given by FMC: MCX/TCM/CORP/0274, NSDL: DP ID: IN303132, CM-BP Id IN460256, CDSL: DP ID: 13041400. LD Produced contract note of Reliance Commodities Ltd., (In annexure 1). We have heard revenue appeals on the same issue, on identical facts in case of another assessee, Shri Kiran Dhondopant Thakur, of same search group in IT(SS)A no. 42 to 44/PNJ?2018 in respect of the Assessment Year 2011-12 to 2013-14 respectively, wherein we have sustained the decision of the Ld. CIT(A) granting relief to the assessee by observing as under: 14 IT(SS)A No. 54, 58 & 59/PAN/2018 (Asst. Year: 2012-13, 2014-15 & 2015-16) IT(SS)A No. 31 to 32/PAN/2018 (Asst. Year: 2013-14 & 2014-15) CO No. 18/PAN/2018 (Asst. Year: 2012-13) Ms. Sai Kiran Thakur “4.6. We have heard rival contentions, perused the material on record and citations referred in support. The Ld. counsel of the assessee argued that, Assessee has traded in derivatives through Reliance Commodities Ltd., which is member of Multi Commodity Exchange of India Ltd. MCX Membership No. 29030; UMC given by FMC: MCX/TCM/CORP/0274, NSDL: DP ID: IN303132, CM-BP Id IN460256, CDSL: DP ID: 13041400. LD Produced contract note of Reliance Commodities Ltd., (In annexure 1). He contended that, Assessee has traded through recognised Stock exchange and thereby fulfilled criteria specified in clause d of section 43(5). Ld. AR again argued that, explanation to section 73 is only applicable to dealing in shares by limited companies and as the assessee is not a limited company and has dealt in derivatives, the explanation to section 73 is not applicable to the assessee. In rebuttal to the citation of “CIT v/s Bharat R. Ruia (Huf)”, (Supra) referred by Ld. DR, the counsel clarified that, this case law is pertaining to AY 2002-03 and the law is changed after insertion of clause (d) to the proviso to section 43(5) w.e.f. 1 st April 2006. This has also been stated in para 39 of the same judgement as under. “39. In the result, we hold that the exchange traded derivative transactions carried on by the assessee during asst. yr. 2003-04 are speculative transactions covered under s. 43(5) of the Act and the loss incurred in those transactions is liable to be treated as speculative loss and not business loss. We further hold that cl. (d) inserted to the proviso to s. 43(5) w.e.f. 1st April, 2006 is prospective in nature and the Tribunal was in error in holding that cl. (d) to the proviso to s. 43(5) applied retrospectively so as to apply to the transactions carried on by the assessee during asst. yr. 2003-04.” 4.7 Admittedly, the Assesses appeals are for assessment years post amendment as stated by the counsel and therefore, the citation of CIT v/s Bharat R. Ruia (Huf) 337 ITR 452 is not applicable to the assessee’s cases. 4.8 In the case of “CIT v/s Vasavi Gold and Bullion Pvt. Ltd.”, (Supra) the Hon’ble Madras High Court wherein, vide para 18 & 19 of the judgement held as under: 15 IT(SS)A No. 54, 58 & 59/PAN/2018 (Asst. Year: 2012-13, 2014-15 & 2015-16) IT(SS)A No. 31 to 32/PAN/2018 (Asst. Year: 2013-14 & 2014-15) CO No. 18/PAN/2018 (Asst. Year: 2012-13) Ms. Sai Kiran Thakur “18. Section 73 of the I.T. Act deals with "losses in speculation business". Explanation to Section 73 categorically states that in the case of a company, business of purchase and sale of shares is deemed to be speculative business. Here, in the instant case, the assessee had suffered loss in trading of derivatives carried through Multi Commodity Stock Exchange. As derivative transactions being separate from trading in shares, provisions of Explanation to Section 73 will not be applicable to such transactions and hence, the loss incurred by the assessee in derivative transactions through recognised stock exchange has to be set off against other business income as per provisions of the Act. 19. In the light of the above discussions, we are of the view that the transaction carried out by the assessee is a non speculative transaction and thus Section 43(5) is not attracted to the facts of the instant case and likewise the assessee was trading in derivatives and not in shares, so the loss suffered by the assessee in trading in derivatives is excluded from the ambit of Explanation to Section 73.” 4.9 Respectfully, following the latest Judgement of Hon’ble Madras High Court, we hold that Section 43(5) is not attracted to the facts of the instant cases as the assessee was trading in derivatives and not in shares, so the loss suffered by the assessee in trading in derivatives which is excluded from the ambit of Explanation to Section 73 of the Act. 4.10 Accordingly, we find no merits in the department appeals, and therefore, the finding of the CIT(A), deleting addition on the issue of Trading in derivatives is hereby is sustained. 4.11 The fact in the instant appeals, of the appellant assessee, in IT(SS)A No. 54, 58 and 59/PAN/2018 in respect of Assessment Year 2012-13; 2014-15 and 2015-16 respectively are exactly identical to the facts of that appeal in IT(SS)A No. 42/PAN/2018 in respect of Assessment year 2011-12. Therefore, our decision given in IT(SS)A No. 42/PAN/2018, in respect of Assessment Year 2011-12, in the case of Shri Kiran Dhondopant Thakur, on the issue of Loss on trading in derivatives is to be excluded from the ambit of Explanation to Section 73 16 IT(SS)A No. 54, 58 & 59/PAN/2018 (Asst. Year: 2012-13, 2014-15 & 2015-16) IT(SS)A No. 31 to 32/PAN/2018 (Asst. Year: 2013-14 & 2014-15) CO No. 18/PAN/2018 (Asst. Year: 2012-13) Ms. Sai Kiran Thakur of the Act, shall apply in IT(SS)A No. 54, 58 and 59/PAN/2018 in respect of Assessment Year 2012-13; 2014-15 and 2015-16 respectively, in mutatis mutandis. 4.5. Accordingly, we hold that Section 43(5) is not attracted to the facts of the instant cases as the assessee was trading in derivatives and not in shares, so the loss suffered by the assessee in trading in derivatives are excluded from the ambit of Explanation to Section 73 of the Act. Thus, the orders of the CIT(A) are sustained in IT(SS)A No. 54, 58 and 59/PAN/2018. 5. Now, we shall take up the appeals of the assessee in IT(SS)A No. 31/PAN/2018, wherein the issues pertains to Enhancement made by Ld. CIT(A)-2 by disallowing expenses u/s 40A(3) of the Income Tax Act as tabulated here under: Asst. Year ITA NO Amount 2013-14 31/PAN/2018 4,00,00,000/- 5.1 The assessee has taken Ground no. 2 to 5 on the issue, which reads as under. 2) The Assessment Order passed by the ld AO u/s 143(3) r.w.s 153A of the Income Tax Act’1961, and the enhancement made by the ld CIT(A) is without jurisdiction, misconceived and without following the principles of natural justice. 3)The ld CIT(A) has erred in enhancing the assessment made by the AO by Rs.4,00,00,000/- by applying provision of section 40(A)(3) of the Income Tax Act’1961, whereas the provisions of section 40(A)(3) of the Income Tax Act’1961 are not applicable to the case.. 17 IT(SS)A No. 54, 58 & 59/PAN/2018 (Asst. Year: 2012-13, 2014-15 & 2015-16) IT(SS)A No. 31 to 32/PAN/2018 (Asst. Year: 2013-14 & 2014-15) CO No. 18/PAN/2018 (Asst. Year: 2012-13) Ms. Sai Kiran Thakur 4)The ld CIT(A) has tried their means to tax Rs.4,00,00,000/- which is oppose to the facts and bad in law. 5)The ld CIT(A) has erred in ignoring the binding judicial decision in the matter. 5.2 Brief facts of the case as per record are that, while deciding appeal of the assessee for A. Y. 2013-14, Ld. CIT(A)-2 has issued enhancement notice and upon conducting enquiry and perusal of reply of the assessee and remand report of the AO, Ld. CIT(A)-2 has enhanced the assessment by disallowing the expenses u/s 40A(3) being cash payment made by LMCS for purchase of property on behalf of the assessee being more than Rs. 20,000/- as specified in the section. While making the enhancement, Ld. CIT(A)-2 has observed as under: 8.. During the course of appellate proceedings in the case of Lokmanya Multipurpose Co-operative Society Ltd. (LMC), for assessment year 2012-13 and 2013-14, it was found that LMC had made on-money payments in cash towards purchase of immovable properties which were shown as current assets and in some cases as fixed assets as well in the Balance Sheet. Prior to the search, the LMC was showing only the payments made by cheques/DDs for purchase of immovable properties as the cost of the properties purchased in the Balance Sheet. And the payments made in cash as part consideration for the said immovable properties were shown in the CC account of Lokmanya Constructions, a dummy loan account. 8.1. Subsequently, it was found that the advances for on-money paid in cash were shown as refunded in the books of LMC in A.Y. 2013-14. The details of payments and refunds received were examined with the bank statements. On verification, it was found that the immovable properties for which LMC had given the advance of on-money in cash were actually purchased by the appellant and her father Mr. Kiran Thakur. Accordingly, the P & L account for the year ended 31.03.2013 of the appellant filed along with return filed u/s. 153A was examined. In the said P & L account, the appellant has not accounted the transaction of payment of purchase consideration in cash to Mr. Pramod Barde and his family. As stated earlier, the payment was 18 IT(SS)A No. 54, 58 & 59/PAN/2018 (Asst. Year: 2012-13, 2014-15 & 2015-16) IT(SS)A No. 31 to 32/PAN/2018 (Asst. Year: 2013-14 & 2014-15) CO No. 18/PAN/2018 (Asst. Year: 2012-13) Ms. Sai Kiran Thakur initially made by LMC in cash to Mr. Pramod Barde and family, which was subsequently transferred to the account of the appellant and her father by means of a journal entry. The appellant has accounted the said transaction of payment of Rs. 40000000/- in cash to Mr. Pramod Barde and family in AY 2015-16. However, the LMC has passed the journal entry in their books of transferring the amount of Rs. 4,00,00,0001-- from CC account of Lokmanya Constructions to the CC account of the appellant during the Financial year 2012-13 relevant to the impugned assessment year. Further, the property in question purchased from Mr. Pramod Barde and family was held to be sold to LMC through MOU in the assessment year 2014-15 and hence, the purchase consideration paid in cash cannot be accounted in A.Y. 2015-16 as done by the appellant. The appellant has debited the purchase consideration paid by cheque to Mr. Pramod Barde and his family in the impugned A.Y. But the appellant has not debited the purchase consideration paid in cash for the same property in the impugned assessment year in which the journal entry was also passed by LMC and the appellant's CC account with LMC was debited. Hence, the P & L account and Balance Sheet filed by the appellant along with the return of income u/s. 153A for the impugned assessment year is held to be defective. Accordingly, the books of accounts of the appellant for the impugned assessment year are rejected as they do not show true and fair view of the state of affairs of the appellant. In the P & L account for A.Y. 2015-16, the Appellant has shown purchase of property at Nirawade, Sawantwadi from Mr.Pramod Barde family for a total consideration of Rs.10,51,00,000/-. Out of the said amount, Rs.6,51,00,000/- was accounted in A.Y. 2013-14 itself. But Rs.4,00 00,000/- paid in cash initially by LMC which was subsequently transferred to the loan account of the appellant in the books of LMC was not recorded in the books of the appellant for A.Y. 2013,14. Instead, it was recorded in the books of A.Y. 2015-16 after the date of search. Now, the fact remains that the purchase consideration amounting to Rs.4,00,00,000/- was paid by the appellant other than by account payee cheque or draft. As the appellant had incurred the expenditure on purchase of immovable property in cash (for making on-money payments), the provisions of section 40A(3) of the Act were found to be attracted. As the AO had not made any disallowance for the expenditure incurred in cash u/s. 40A(3) of the Act, an enhancement notice as per the provisions of section 251(2) of the Act dated 25.04.2018 was issued to the appellant and the same was duly served. In the enhancement notice issued, the appellant was asked to file her objection for the proposed enhancement being disallowance of expenditure claimed (purchase consideration) which is paid in cash as per the provisions of section 40A(3) of the Act. The ARs of the appellant vide letter dated 20.04.2018 made the following submissions: 19 IT(SS)A No. 54, 58 & 59/PAN/2018 (Asst. Year: 2012-13, 2014-15 & 2015-16) IT(SS)A No. 31 to 32/PAN/2018 (Asst. Year: 2013-14 & 2014-15) CO No. 18/PAN/2018 (Asst. Year: 2012-13) Ms. Sai Kiran Thakur "(a) We wish to inform you that the provisions of section 40A(3) are not attracted where the borrower and the payee are identified and there is no material on record to doubt the genuineness of the payment. The advance payment made in excess of the prescribed limit u/s. 40A(3) of the Act prior to the execution of the Sale Deed are not covered under the provisions of the said section. Further, we invite your kind reference to Rule 6DD of the I. T. Rules, 1962. In the present case on the examination the few sellers of the property have admitted the receipt of money. We have submitted the names and addresses of few sellers who insisted on payment in cash and the said sellers have paid the capital gain tax on the aggregate amount (i.e. including the on- money). Therefore it is submitted that the appellant's case falls under exceptional circumstances.' 8.2. I have gone through the objections raised by the ARs of the appellant for the proposed enhancement in the form of disallowance u/s. 40A(3) of the Act. The first objection of the AR of the appellant is that because the payment is genuine, the same does not come within the purview of section 40A(3) of the Act. The other objection is that the cash payment has been made before the execution of the sale deed and the same is also not covered by the provisions of section 40A(3) of the Act. Section 40A(3) of the Act speaks about the expenditure incurred and in respect of which the payment or aggregate of payments made to a person in a day, otherwise than by an account payee cheque or a draft exceeds Rs.20,000/-, no deduction shall be allowed in respect of such expenditure. So to say, the section is specific and without any ambiguity. The said section does not make any exception for the genuine payments and payments made before the execution of sale deed/issue of invoice etc. What the section speaks is that expenditure exceeding Rs.20,000/- if paid by a mode other than account payee cheque/draft, such expenditure is not allowable as deduction. Therefore, both the objections raised by the ARs of the appellant about the applicability of the provisions of section 40A(3) to the facts of appellant's case are accordingly rejected. 8.3. The other objection of the AR of the appellant is that the payments made by the appellant for purchase of immovable properties in cash are exempt as per the provisions of Rule 6DD of I.T. Rules, 1962 as the sellers of the properties were examined and who admitted receipt of the additional consideration in cash. Rule 6DD of I.T. Rules, 1962 provides for certain exceptions for disallowance u/s. 40A(3) of the Act, As per the said Rule, if the payments are made to certain entities specified in the said Rule in a mode other than account payee cheque/draft exceeding Rs.20,000/-, such payments cannot be disallowed u/s. 40A(3) of the Act. The list includes RBI, Banks, Co-operative Primary Agricultural Credit Societies, LIC, Credit/Debit Cards, Payments made to purchase 20 IT(SS)A No. 54, 58 & 59/PAN/2018 (Asst. Year: 2012-13, 2014-15 & 2015-16) IT(SS)A No. 31 to 32/PAN/2018 (Asst. Year: 2013-14 & 2014-15) CO No. 18/PAN/2018 (Asst. Year: 2012-13) Ms. Sai Kiran Thakur Agricultural/Forest produce, produce of Animal Husbandry/Dairy/Poultry/ Fishing/Horticulture, Cottage Industry, Salary payments, payments by money changers etc. However, the payments made for purchase of immovable properties which are current assets by mode other than account payee cheque/draft is not covered by the exceptions given in Rule 6DD of I.T. Rules, 1962. Thus, the said objection that the payments made in cash by the appellant are covered by exceptions given in Rule ODD of I.T. Rules 1962 is also rejected. 8.4. Coming to the facts of the appellant's case, LMC made part payment of purchase consideration for purchase of Malgaon properties in cash by withdrawing the said cash from CC/SB accounts with HO Branch of LMC. During the course of search in the premises of LMC, the modus operandi of part payment of purchase consideration in cash was found and the same was accepted by LMC during search as well as during assessment proceedings. The appellant is the founder Chairman of LMC and controls the functioning of LMC. 8..5. During appellate proceedings in the case of LMC, revised/recast Trading , P & L account was filed by the ARs of LMC. From the said Trading, P & L account, it was found that LMC had incurred expenditure on purchase of immovable properties at Malgaon in cash. Initially, this property was to be purchased by LMC but subsequently, it was purchased by the appellant. Hence, the cash payment being on-money made by LMC was transferred to the account of the appellant by passing a journal entry in the books of LMC. The total cash payments made for purchase of the immovable properties at Malgaon as shown in the Trading account of LMC is Rs.50,60,000/-. 8.6 From the above analysis. it is proved that the appellant paid on-money in cash of Rs.4,00,00.000/- as seen from SB account of LMC from where the withdrawals of cash were made for making the said on-money payments. During appellate proceedings of LMC, the details of a transaction consisting of Rs.400,00,000/- were sought with dates and the ARs were asked to produce the statements of SB account and CC account of LMC. From the CC account produced, it is found that the cash paid as advance to Mr. Pramod Barde and family of Rs.400,00,000/- was received back and credited on 05.04.2012 in the books of LMC. However, this is a book entry in the books of LMC as the advance given in cash for purchase of Nirawade property did not materialize and accordingly, the appellant's account was debited and LMC's CC account was credited. This is done as the details found during the course of search showed that the payments were made for purchase of properties at Nirawade, which could not be purchased by the LMC but ultimately were purchased by the appellant, founder Chairman of LMC. Thus, these advances made were transferred from the loan account of the LMC to the loan account of the appellant in the books of LMC. 21 IT(SS)A No. 54, 58 & 59/PAN/2018 (Asst. Year: 2012-13, 2014-15 & 2015-16) IT(SS)A No. 31 to 32/PAN/2018 (Asst. Year: 2013-14 & 2014-15) CO No. 18/PAN/2018 (Asst. Year: 2012-13) Ms. Sai Kiran Thakur 8.7. These cash payments made of Rs.4,00,00,000/- for purchase of Nirawade property attract provisions of section 40A(3) of the Act. Therefore, the on- money paid which is admitted by the appellant in the capacity as founder Chairman of LMC, which is on-money paid on purchase of immovable properties at Nirawade amounting to Rs.4,00,00,000/-, which is actually debited in the books of accounts of the appellant is disallowed u/s. 40A(3) for incurring the expenditure otherwise than by account payee cheque drawn on bank or account payee bank draft exceeding Rs.20,000/- and income of the appellant is enhanced by an amount of Rs.4,00,00,000/-. 8.8. The Courts have held that provisions of section 40A(3) of the Act are applicable to block assessment proceedings U/s. 153 BC/BD. The assessments u/s. 153A/C are search assessment and identical to the assessments u/s. 158BC/BD. The provision of section 40A(3) of Act would apply only where expenditure in question has been incurred and claimed in the computation of income. The Supreme Court, in the case of Attar Singh Gurmukh Singh v. /TO [1991] 191 ITR 667159 Taxman 11, reiterates this position as well. In the instant case, as the appellant h as cl a ime d t he p aymen t o f on-m oney as e xpen d it ur e in c ash in th e recast/revised statements and as the said expenditure has been claimed in the computation of income, the disallowance made under the said section and resultant enhancement made is supported by judicial pronouncements. The income of the appellant stands enhanced by Rs.4,00,00,000/-. 5.2 The Ld. Counsel for the assessee has objected to the enhancement made by the Ld. CIT(A), challenging his jurisdiction in exceeding power given under section 251 of the IT Act with support of a paper book which reads as under: 7. The ld CIT(A) has erred in enhancing the income of the appellant by Rs.400,00,000/-, which is bad in law. 7.1 The hon. CIT(A) has applied provision of section 251 to enhance the income of the appellant. We note the relevant provision as below: Powers of the Commissioner (Appeals). 251. (1) In disposing of an appeal, the Commissioner (Appeals) shall have the following powers— 22 IT(SS)A No. 54, 58 & 59/PAN/2018 (Asst. Year: 2012-13, 2014-15 & 2015-16) IT(SS)A No. 31 to 32/PAN/2018 (Asst. Year: 2013-14 & 2014-15) CO No. 18/PAN/2018 (Asst. Year: 2012-13) Ms. Sai Kiran Thakur (a) in an appeal against an order of assessment, he may confirm, reduce, enhance or annul the assessment; (aa) in an appeal against the order of assessment in respect of which the proceeding before the Settlement Commission abates under section 245HA, he may, after taking into consideration all the material and other information produced by the assessee before, or the results of the inquiry held or evidence recorded by, the Settlement Commission, in the course of the proceeding before it and such other material as may be brought on his record, confirm, reduce, enhance or annul the assessment; (b) in an appeal against an order imposing a penalty, he may confirm or cancel such order or vary it so as either to enhance or to reduce the penalty; (c) in any other case, he may pass such orders in the appeal as he thinks fit. (2) The Commissioner (Appeals) shall not enhance an assessment or a penalty or reduce the amount of refund unless the appellant has had a reasonable opportunity of showing cause against such enhancement or reduction. Explanation.—In disposing of an appeal, the Commissioner (Appeals) may consider and decide any matter arising out of the proceedings in which the order appealed against was passed, notwithstanding that such matter was not raised before the Commissioner (Appeals) by the appellant. 7.2 As noted above, the Hon. CIT(A) has powers to step into the shoes of AO, but the action of CIT(A) cannot amount to replacement of the proceedings already carried out by the AO. 7.3 In the appellant case, the AO neither asked nor viewed the “on money” payments made by the appellant as expenses. As such the Hon. CIT(A) has to look at the issue on the same lines and use his power vested u/s 251 of the IT Act. 7.4 Further, section 40A(3) of the IT Act, treats the expenses / deduction claimed as actual and disallows the same incase the payment is made in cash above the specific limit. 23 IT(SS)A No. 54, 58 & 59/PAN/2018 (Asst. Year: 2012-13, 2014-15 & 2015-16) IT(SS)A No. 31 to 32/PAN/2018 (Asst. Year: 2013-14 & 2014-15) CO No. 18/PAN/2018 (Asst. Year: 2012-13) Ms. Sai Kiran Thakur 7.5 As such the Hon. CIT(A) has exceeded his power u/s 251 of the IT Act’ to enhance the income of the appellant, which is bad in law. 7.6 We rely upon the judicial decision in the case of Hari Mohan Sharma v. Assistant Commissioner of Income-tax, Circle-63(1), New Delhi [2019] 110 taxmann.com 119 (Delhi - Trib.) were it was noted that “Section 251, read with sections 68 and 147, of the Income-tax Act, 1961 - Commissioner (Appeals) - Powers of (Power of enhancement) - Whether enhancement under section 251(1)(a) is prohibited on issues which have not at all been considered by Assessing Officer during assessment proceedings and Commissioner (Appeals) is not competent to enhance assessment taking an income which was not considered expressly or by necessary implication by Assessing Officer - Held, yes - Assessee, an individual, disclosed capital gain on sale of property and also claimed exemption/deduction under section 54F as sale consideration was invested for purchase of another property - Assessing Officer noted that two residential properties were sold by assessee and, accordingly, deduction under section 54F was denied - Commissioner (Appeals) noted that property was never sold, as neither registry was made nor physical possession was given and source of money given by purchaser to assessee also could not be explained and, hence, he treated sales consideration as unexplained and made addition under section 68 - Whether since no inquiry was made by Assessing Officer on issue of capital gain shown by assessee and he had not at all considered issue of sales consideration received by assessee on sale of house as an issue of dispute before him, Commissioner (Appeals) could not have made enhancement holding that funds received by assessee was unaccounted income of assessee and chargeable to tax under section 68 - Held, yes [Paras 20 & 21] [In favour of assessee]” 7.7 In the case of COMMISSIONER OF INCOME TAX VS UNION TYRES [TS-5470- HC-1999(Delhi)-O], (1999) 157 CTR 286 (Delhi), (1999) 240 ITR 556 (Delhi), (1999) 107 TAXMAN 0447 (Delhi). The Hon. High Court held that. “12. Applying the above well settled principles of law to the facts of the instant case, we are of the view that the Tribunal was justified in holding that in 24 IT(SS)A No. 54, 58 & 59/PAN/2018 (Asst. Year: 2012-13, 2014-15 & 2015-16) IT(SS)A No. 31 to 32/PAN/2018 (Asst. Year: 2013-14 & 2014-15) CO No. 18/PAN/2018 (Asst. Year: 2012-13) Ms. Sai Kiran Thakur calling for a remand report on the aforenoted four points the AAC had exceeded his jurisdiction. While computing the total business income of the assessee, the AO had estimated the sales at an enhanced figure and had applied a higher rate of gross profit. Thus, the only matter dealt with by the AO in the assessment order was the estimation of profits and gain of the business of the assessee. None of the aforenoted four points had any bearing on the question of estimation of either the sales or the gross profit rate. From the observations, extracted above, it is evident that the AAC had his doubts about the capacity of the assessee to raise finances for the purpose of goods and show a huge turnover in the very first year of his business. In other words, the enquiry orders by the AAC was to satisfy himself about the source of investment by the assessee. It is automatic that failure to prove the sources of investment will result in addition in the hands of the assessee under a different provision of law and will not have much relevance in the estimation of sales and gross profit rate adopted by the AO. In our opinion, any addition on account of unexplained investment would constitute a new source of income which was not the subject-matter of assessment before the AO and, therefore, it was not open to the first Appellate Authority to direct the AO to conduct enquiry on the said four points. For the foregoing reasons, we answer the question in the affirmative i.e., in favour of the assessee and against the Revenue. No order as to costs.” 8. The ld CIT(A) has erred in enhancing the assessment made by the AO by applying provision of section 40(A)(3) of the Income Tax Act’1961, whereby Rs.4,00,00,000/- was paid by Lokmanya Multipurpose CO-operative Society Ltd., on behalf of the appellant for purchase of immovable property. 9. We note the provision of section 40A(3) of the Income Tax Act’1961 as below: “ 40A(3) Expenses or payments not deductible in certain circumstances. (3) Where the assessee incurs any expenditure in respect of which a payment or aggregate of payments made to a person in a day, otherwise 25 IT(SS)A No. 54, 58 & 59/PAN/2018 (Asst. Year: 2012-13, 2014-15 & 2015-16) IT(SS)A No. 31 to 32/PAN/2018 (Asst. Year: 2013-14 & 2014-15) CO No. 18/PAN/2018 (Asst. Year: 2012-13) Ms. Sai Kiran Thakur than by an account payee cheque drawn on a bank or account payee bank draft, or use of electronic clearing system through a bank account [or through such other electronic mode as may be prescribed], exceeds twenty thousand rupees, no deduction shall be allowed in respect of such expenditure.” 9.1 As noted above the provision 40A(3) of the IT Act is applicable for the expenses deductible, whereas in the appellant case, the appellant has not claimed any expenses but has incurred the amount as “on money” paid towards purchase of immovable properties, which are part of the current assets / investments of the appellant. 9.2 The ld CIT(A) has willfully mentioned in their order that the appellant has incurred expenditure of Rs.4,00,00,000/-, whereas it is worth to note that the appellant has invested in the property and have never claimed the same as expenses in their financials. Copy of the financials are enclosed. Annex-1 9.3 We rely upon the case of Westland Developers Pvt. Ltd., vs ACIT (I.T.A .No.- 1752/Del/2013) where it was held that “We have heard the rival submissions and perused the material available on record. The case law relied upon by the parties has been taken into consideration. On a consideration of the same we are of the view that since in the facts of the present case the material issue is that the said expenditure was never claimed as assessee's business expenditure the occasion to make a disallowance of the same does not arise. On this fact there is no dispute as admittedly the expenditure was not claimed as an expense by the assessee and consequently has not been routed through its P&L A/c. In the circumstances, the occasion to make an addition of the same by way of a disallowance in these peculiar facts and circumstances of the case does not arise.” 10. From the above it is evident that the assessment order has been passed without application of mind and without considering the facts and the same is deserves to be set aside. 26 IT(SS)A No. 54, 58 & 59/PAN/2018 (Asst. Year: 2012-13, 2014-15 & 2015-16) IT(SS)A No. 31 to 32/PAN/2018 (Asst. Year: 2013-14 & 2014-15) CO No. 18/PAN/2018 (Asst. Year: 2012-13) Ms. Sai Kiran Thakur 5.4 At the time of hearing ld. AR raised the legality of enhancement by Ld. CIT(A)-2 with respect to powers of commissioner (Appeals) u/s 251(1) of the Act, by relying upon the decision of Hari Mohan Sharma v/s ACIT Circle-63(1) New Delhi 110 Taxman 119 (Delhi –Trib) and CIT v/s Union Tyres 240 ITR 556 (Delhi High Court) where in the judicial decisions prohibits CIT(A)-2 from making enhancement under fresh sections which were not considered by the AO in his assessment order. Ld. AR further pointed that in original assessment order, AO has only made additions u/s 56(2)(vii), disallowance of interest u/s 36(1)(iii) and disallowance of carry forward and setoff of loss u/s 73 being speculative loss. Nowhere in the impugned assessment order there is any mention of additions contemplated u/s 40A(3). And hence Ld. AR argued that, section 251(1) empowers the Ld. CIT(A)-2 to get into the shoes of the AO but certainly does not empower him to replace the AO and start fresh assessment proceedings. As such, Ld. CIT(A)-2 has exceeded the powers given to him under section 251(1) and as such the enhancement needs to be set aside. Arguing on merits of the case, Ld. AR presented the profit and loss account of the assessee in page 31 of the paper book wherein he demonstrated that the alleged cash payment of Rs. 50,60,000/- has not been claimed as expenses and section 40A(3) and section only talks about assessee incurs any expenditure in respect of which payment or aggregate payments made to a person in a day otherwise than by an account payee cheque. In the instant case, no such expenses are debited to the profit and loss account. With respect to alleged payments made by LMCS, the payments are made for purchase of fixed assets as on-money and all assets are accounted in the books of LMCS under Fixed Assets schedule of balance sheet. As 27 IT(SS)A No. 54, 58 & 59/PAN/2018 (Asst. Year: 2012-13, 2014-15 & 2015-16) IT(SS)A No. 31 to 32/PAN/2018 (Asst. Year: 2013-14 & 2014-15) CO No. 18/PAN/2018 (Asst. Year: 2012-13) Ms. Sai Kiran Thakur such, section 40(3) is not applicable to the assessee. With respect to LMCS recasting of Trading, Profit and Loss account during the appeal proceedings before Ld. CIT(A)-2, at the instruction of Ld. CIT(A)-2, Ld. AR pointed out that, even Revenue has objected such powers in ground 3 of IT(SS)A NO. 47/PAN/2018 of LMCS and as such, the appeal before CIT(A)-2 needs to be adjudicated on the basis of documents available before AO at the time of assessment proceedings. Hence Ld. CIT(A)-2 has erred in getting accounts recasted at time of appeal proceedings and making enhancement on the basis of recasted statement of accounts. 5.5 Per Contra, the Ld. DR argued that, though there is no specific mention of section 40A(3) in the assessment order, the chart given in page para 6.5 of the assessment order mentions about the cash payments made by the assessee and hence, Ld. CIT(A)-2 has not erred in making enhancement as per section 251(1). Ld. DR further argued that, all on-money payments are done at the directions of the assessee who is fonder charman and managing director of the LMCS and he has admitted the same in the statement recorded u/s 132(4). 5.6 We have heard rival contentions, perused the material on record and citations referred in support on the issue of enhancement of income by the CIT Appeal. Before us, the ld. AR challenged the legality of enhancement by Ld. CIT Appeal with respect to powers of commissioner (Appeals) u/s 251(1) of the Act, by relying upon the decision of ‘Hari Mohan Sharma v/s ACIT’, Circle-63(1) New Delhi 110 Taxman 119 (Delhi –Trib) and CIT v/s Union Tyres 240 ITR 556 (Delhi High Court) wherein the judicial decisions prohibit CIT Appeal from making 28 IT(SS)A No. 54, 58 & 59/PAN/2018 (Asst. Year: 2012-13, 2014-15 & 2015-16) IT(SS)A No. 31 to 32/PAN/2018 (Asst. Year: 2013-14 & 2014-15) CO No. 18/PAN/2018 (Asst. Year: 2012-13) Ms. Sai Kiran Thakur enhancement under fresh sections which were not considered by the AO in his assessment order. 5.7 The fact in the instant appeal, of the appellant assessee, in IT(SS)A No. 31/PAN/2018 in respect of Assessment Year 2013-14 are exactly identical to the facts of that appeal we decided in IT(SS)A No. 29/PAN/2018 in respect of Assessment year 2013-14 in case of Shri Kiran Dhondopant Thakur. Therefore, our decision given in IT(SS)A No. 29/PAN/2018 in respect of Assessment year 2013-14 in case of Shri Kiran Dhondopant Thakur, on the same issue of enhancement u/s 40A(3), a issue which is not arising out of the assessment proceedings, shall apply in IT(SS)A No. 31/PAN/2018 in respect of Assessment Year 2013-14, in mutatis mutandis. 5.8 Accordingly, we hold that the Ld. CIT appeal has erred in law getting accounts recasted in appeal proceedings and making enhancement u/s 40A(3), a issue which is not arising out of the assessment proceedings. Therefore, the enhancement made by the Ld. CIT Appeal is deleted. 6. Next issue is regarding addition on account of profit on sale of properties, made by Ld. AO and sustained by Ld. (CIT(A)-2 in as tabulated here under: Asst. Year IT(SS)A No. Amount 2014-15 32/PNJ/2018 48,65,00,000/- 6.1 The assesee has taken the following grounds 1 to 8, as detailed here under: 29 IT(SS)A No. 54, 58 & 59/PAN/2018 (Asst. Year: 2012-13, 2014-15 & 2015-16) IT(SS)A No. 31 to 32/PAN/2018 (Asst. Year: 2013-14 & 2014-15) CO No. 18/PAN/2018 (Asst. Year: 2012-13) Ms. Sai Kiran Thakur 1) The order passed by the ld CIT(A) is bad in law and is void-ab-initio. 2) The Assessment Order passed by the ld AO u/s 143(3) r.w.s 153A of the Income Tax Act’1961 and partly sustained by ld CIT(A) is without jurisdiction, misconceived and without following the principles of natural justice. 3) Ld CIT(A) has erred in sustain the addition made by the ld AO of Rs.48,65,00,000/-, without considering the facts and the submission made by the appellant. 4) The ld CIT(A) has erred in upholding the presumption of ld AO that the assesee has willfully cancelled the MOU as not to show the profits, but has failed to understand that after the sale of the same property in FY 2015-16, the assesee has duly offered the profit to tax in subsequent years. 5) The ld CIT(A) has erred in upholding the presumption of the ld AO that the LMC has shown the properties as assets in their books, whereas the AO and CIT(A) has totally ignored the fact that executing of the MOU does not relinquishes the right and tittle of the assessee. 6) The ld CIT(A) has ignored that the. The MOU has been subsequently cancelled and the amount received has been refunded back by the assesee. 7) The ld CIT(A) has erred in not appreciating the fact that the said properties has been subsequently sold and the profit has been offered to tax. 8) The ld CIT(A) has erred in ignoring the binding judicial decision in the matter. 6.2 Facts as per record are that during the search proceedings, it was found that the assessee has executed MOU on 23.01.2014 for transfer of the property at Nirawade village of Sawantwadi for a consideration of Rs.57.63 crores to M/s. Lokmanya Multipurpose Cooperative Society Ltd., and have received total amount against the same. However, the assesee has not shown any sale of property in the final accounts filed with the return of income for AY 2014-15. The Assessing Officer made the addition of profit on sale of land of Rs.48.65 crores for the following reasons that 100% advance was received by the assesee; that LMC and assesee are related parties as the father of the assesee is chairman and 30 IT(SS)A No. 54, 58 & 59/PAN/2018 (Asst. Year: 2012-13, 2014-15 & 2015-16) IT(SS)A No. 31 to 32/PAN/2018 (Asst. Year: 2013-14 & 2014-15) CO No. 18/PAN/2018 (Asst. Year: 2012-13) Ms. Sai Kiran Thakur founder of LMC; that Property appeared in fixed assets in the annual report of LMC for the year ending 31.03.2014; that Sri. Abhijit Dixit CEO, LMC in his statement confirmed the transaction; that TDS of Rs.57,63,000/- deducted by LMC and claimed by the assesee in the returns; that Said property subsequently sold to the son of the director of LMC and that Loan of Rs.100 crores given by LMC to the son of the director. 6.3 While deciding the appeal, CIT(A)-2 Panaji, Goa has partly sustained the addition with following observations that- 6,2. I have gone through the assessment order and the submissions made by the AR of the appellant. The appellant does not dispute the signing of MOU to sell property in question to LMC during, the financial year 2013-14 for a total consideration of Rs.57.63 crore. The only objection of the appellant is that she has not executed the sale deed in respect of the said property during F.Y. 2013- 14 and hence, the profits from the sale of the said property are not taxable in the impugned assessment year. The appellant also submitted that though the entire sale consideration was received, the possession of the property was not handed over to LMC. 6,3. The AO has brought several aspects on record to show that the property in question was transferred to LMC but the profits from the sale of the said property was not disclosed in the return filed for the impugned assessment year, The AO has made a mention of the fact that the property in question was shown as asset by LMC in the Balance Sheet as on 31.03.2014 as per the details given in para 4.6 of the assessment order. The LMC is a Co-operative organisation subjected to audit as per Co-operative Societies Act and also as per the provisions of section 44AB of the Act. If the property is not actually bought by LMC, it is not possible that the same is being shown as fixed asset in the Balance Sheet of LMC. Further, LMC has totally paid the sale consideration as agreed in MOU to the appellant and hence, executing of sale deed was merely a formality which was pending.. Though, handing over of possession was not formally done, the fact that LMC showed the assets in its Balance Sheet go to show that the transaction of sale was actually complete in all respects but the profits on the transaction were not shown in the return filed by the appellant. This finding is even supported by the statement dated 6.11.2014 u/s. 132(4) of the- Act of Mr. AbhiJit Dixit, CEO of LMC in reply to Q.No.5. Even LMC had deducted tax at 31 IT(SS)A No. 54, 58 & 59/PAN/2018 (Asst. Year: 2012-13, 2014-15 & 2015-16) IT(SS)A No. 31 to 32/PAN/2018 (Asst. Year: 2013-14 & 2014-15) CO No. 18/PAN/2018 (Asst. Year: 2012-13) Ms. Sai Kiran Thakur source tits. 1941A of the Act towards the sale consideration paid to the appellant for the property in question. 6.4. The AO has already brought on record the fact that the appellant's father is the founder chairman of LMC and search u/s, 132 of the Act carried in the premises of LMC showed that several transactions of immovable properties were carried on by the appellants father with LIVIC, several loans were sanctioned by LMC to the appellant's father and other relatives of the appellant. Even the AO has examined the claimed buyer of the property Mr. Nitin Dhond, and proved that he was related to the appellant and her family.. The transaction with the new buyer, Mr. Nitin Dhond who is related to the appellant and cancellation of MOU with LMC were held by the AO as afterthought done after the search. This was done by the appellant in connivance with LMC to prove that the profits were not required to be offered for taxation in the impugned assessment year, as the transactions in question had not reached the finality. Even, the AO has also brought on record that the claimed buyer of the property viz. Mr. Nitin Dhond had megre income of Rs. 21.01 lakhs for XV. 2014-15 and Rs.192 lakh for A.Y. 2016- 17 and was a person of megre means and purchased/agreed to purchase property only at the instance of the appellant and her father and even got huge loans from LMC disproportionate to his repaying capacity only at the instance of the appellants father. Therefore, I agree with the finding of the. AO that the sale/agreement to sell with Mr. Nitin Dhond was a sham transaction entered with an intention to postpone the liability to tax. As the said Gerson would not be able to repay the loans taken from LMC, the properties would be ultimately taken over by LMC showing the loans as non-performing assets. 6.5. All these facts go to show that the property in question would be with LMC and cancellation of MOU and sale/agreement to sell to Mr. Nitin Dhond was done with a sole intention of not offering the profits on sale of properties in the impugned assessment year. 6.6. During appellate proceedings, the ARs of the appellant alternatively submitted (in case the profits from sale of property is taxed in the impugned assessment year) that while determining the profits from sale of the property, the interest paid by the appellant on loans borrowed from LMC was not allowed as deduction. In my opinion, as the appellant was holding the property as business asset, and any interest paid on amounts borrowed for purchase of property needs to be allowed as deduction to determine the correct profit from sale of the said property. The AO is directed to allow the interest on funds borrowed for purchase of the property in question after due verification. 6.7. The ARs further submitted that the appellant has paid interest on amounts received from LMC as part of the MOU after the said MOU was subsequently cancelled. 32 IT(SS)A No. 54, 58 & 59/PAN/2018 (Asst. Year: 2012-13, 2014-15 & 2015-16) IT(SS)A No. 31 to 32/PAN/2018 (Asst. Year: 2013-14 & 2014-15) CO No. 18/PAN/2018 (Asst. Year: 2012-13) Ms. Sai Kiran Thakur The interest paid to LMC on cancellation of MOU may also be allowed as deduction in determining the profits from sale of the property. I am not inclined to accept this plea of the ARs as I have held that cancellation of MOU was an afterthought and thus, a sham transaction. Hence, any interest paid on such cancellation of MOU cannot be allowed to the appellant. Alternatively, it was submitted that after cancellation of the MOU, the property was sold/agreed to be sold for higher consideration. In case, the higher consideration is brought to tax in any subsequent assessment year, atleast the said interest paid on cancellation of MOUs be allowed against such enhanced consideration. 6.8. As it has been held that the cancellation of the MOU was a sham transaction, the interest paid consequent to cancellation of the IVIOU is not allowable as deduction in the impugned assessment year, However, if enhanced sale consideration on the said property is taxed in any subsequent year, the interest paid by the appellant to LMC shall be allowed by the AO in that assessment year as the enhanced computation is receivable to the appellant because of cancellation of the MOU. 6.9. Overall, the profit from sale of property brought to tax by the AO is upheld in principle. The AO is directed to allow the interest paid on funds borrowed for purchase of the said property against the profits determined. As a regards, interest paid by the appellant consequent to cancellation of MOU can be allowed only in the year in which enhanced consideration on the said property is brought to tax by the AO in any of the subsequent assessment years. Ground no.4 is treated to have been partly allowed. 6.4 The Counsel for the appellant has objected to the finding of the Ld. CIT(A). To buttress, its contentions, the Ld. AR filed the following written submission (paper-book): 8. The appellant had purchased the agricultural property at Nirawade, Sawantwadi, Maharashtra on 07.09.2012. Copy of the purchase deed is enclosed. Annex-1 9. During the year, the appellant has entered into memorandum of understanding (MOU) with Lokmanya Multi Purpose Co-operative Society Ltd., (in short LMC) for sale of agricultural at Nirawade, Sawantwadi, Maharashtra, for consideration of Rs.57.63 crores. The copy of the MOU dated 23.01.2014 is enclosed. Annex - 2 33 IT(SS)A No. 54, 58 & 59/PAN/2018 (Asst. Year: 2012-13, 2014-15 & 2015-16) IT(SS)A No. 31 to 32/PAN/2018 (Asst. Year: 2013-14 & 2014-15) CO No. 18/PAN/2018 (Asst. Year: 2012-13) Ms. Sai Kiran Thakur 10. As per the terms of the MOU, the appellant received 100% advance against the sale of the agricultural property in financial year 2013-14. Which has been duly acknowledged by the appellant. 11. As per the terms of the MOU, the handing over of the possession and execution of the sale deed was to be completed on or before 30.09.2014, which is in financial year 2014-15. 12. On due diligence of the proposed purchaser M/s. Lokmanya Multi Purpose Co-operative Society Ltd, realised that as per the section 63 of The Bombay Tenancy and Agricultural Lands Act’1948, the appellant was not able to get the same classified as non-agriculture, as such they cancelled the MOU, vide deed of cancellation of MOU dated 20.04.2015. Copy of the cancellation of MOU is enclosed. Annex-3 13. On cancellation, the appellant refunded the total amount of Rs.57.63 crores along with interest to the purchaser and the same has also been acknowledged by LMC. 14. Subsequently, the referred agricultural land was sold by the appellant to Shri. Nitin Pandurang Dhond vide sale deed dated 26.05.2015. copy of the sale deed is enclosed. Annex-4 15. On completing the sale of the property in financial year 2015-16, the appellant has duly offered the same for tax and have paid the necessary taxes on the same. Copy of the ITR of AY 2016-17 is enclosed. Annex-5 16. Knowing the above facts, the AO has wilfully twisted the transaction and have made the addition of Rs.48,65,00,000/- and the same have been sustained by Hon. CIT(A), which is bad in law and discussed as below: 16.1 Ld AO has recorded the statement of Sri. Abhijit Dixit, CEO, LMC and also noted that the referred agricultural land is shown in the books of the LMC as per LMC annual report for year ending 31.03.2014. a) It is worth to note that 100% payment was made by the LMC to the appellant and it was up to the LMC as to how to show the same in their books of accounts. 34 IT(SS)A No. 54, 58 & 59/PAN/2018 (Asst. Year: 2012-13, 2014-15 & 2015-16) IT(SS)A No. 31 to 32/PAN/2018 (Asst. Year: 2013-14 & 2014-15) CO No. 18/PAN/2018 (Asst. Year: 2012-13) Ms. Sai Kiran Thakur b) Disclosure of the amount paid by LMC in their books as asset does not have any relevance to conclude that the transfer of the property has taken place or not. c) Further, to consider a sale / transaction to be completed, the transaction has to complete the following tests. i. Whether substantial consideration has been paid towards the sale. ii. Whether sale deed has been executed. iii. Whether possession has been handed over. d) In the present case the answers to two of the above tests are negative for the following reasons. i. Whether substantial consideration has been paid towards the sale? Ans. Yes, 100% consideration was received as confirmed by both the parties. ii. Whether sale deed has been executed.? Ans. No. the sale deed was executed after cancelling the mou in third parities name on 26/05/2015, copy enclosed as above. iii. Whether possession has been handed over.? Ans. No. though the mou was entered on 23/01/2014, the possession of the property was with the appellant. Further, it is also worth to note that as per section 63 of The Bombay Tenancy and Agricultural Lands Act’1948, the LMC was not permitted to purchase agriculture land. We enclose the copy of the relevant extract of the Act. Annex-6 e) Further, we would also like to note the section 2(47)(v) of the Income tax Act’1961, which is noted below: "transfer", in relation to a capital asset, includes,— any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of 35 IT(SS)A No. 54, 58 & 59/PAN/2018 (Asst. Year: 2012-13, 2014-15 & 2015-16) IT(SS)A No. 31 to 32/PAN/2018 (Asst. Year: 2013-14 & 2014-15) CO No. 18/PAN/2018 (Asst. Year: 2012-13) Ms. Sai Kiran Thakur a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882 (4 of 1882)” f) After considering the above facts, it should be noted that section 2(47)(v) is not applicable to the case, as the possession of the property remained with the appellant till AY 2015-16 and subsequently it was sold in AY 2016-17. 16.2 Further, the ld AO has made the following noting’s at para 4.9 to para 4.14 at page no. 5 & 6 of his order, which is reproduced and discussed as below: “4.9 From the records it is seen that LMC has deducted TDS of Rs.57,63,000/- on the above mentioned transaction and paid the same into Government Account. The assessee Ms. Sai Thakur has also claimed credit for the above amount of tax deducted at source. 4.10 The strategy of cancelling the contract and entering into MoU with other party is only a devise thought after the search to evade payment of taxes on the profit arising on the sale of the lands. It may be mentioned here that the assessee had suffered huge losses in the business of trading in derivatives of commodities during the A.Y.2012-1.i and was carrying forward this toss as business loss. The assessee was under the impression that the profit from the sale of lands can be set off against the loss in the business of Commodity derivatives. The search team then, explained to Sri Kiran Thakur the father of the assessee that prior to 01.04.2013, trading in commodities was deemed to be speculative and not business. 4.11 When the assessee learnt that the income earned in the land transactions cannot be set off against the loss suffered in the speculative business, the assessee devised this strategy to postpone the sale to later year to defer his tax liability. The enquiries with the new buyer revealed that he is son of the Director in LMC and he was financed beyond his repaying capacity by LMC and not capable of buying properties worth crores of rupees. 36 IT(SS)A No. 54, 58 & 59/PAN/2018 (Asst. Year: 2012-13, 2014-15 & 2015-16) IT(SS)A No. 31 to 32/PAN/2018 (Asst. Year: 2013-14 & 2014-15) CO No. 18/PAN/2018 (Asst. Year: 2012-13) Ms. Sai Kiran Thakur 4.12 It is also pertinent to note that the assessee has sold the property at Nirawade village of Sawantwadi to Sri. Nitin Dhond, who is the son of Sri Pandurang N. Dhond - Director in Lokmanya Multi-purpose Co-op. Society which is controlled by Sri Kiran D. Thakur. As per the return filed by Sri Nitin Dhond, the income declared for AY 2014-15 is Rs.21,01,730/ - and for AY 2016-17 is Rs.3,92,950/-. Sri Nitin Dhond has been sanctioned a CC limit of Rs.100 crores from the Lokmanya Multi-purpose Co-op. Society for the purchase of the property from Ms. Sai Thakur. The loan is sanctioned on the strength of the property to be bought and the society sanctioning the loan is also controlled by Sri Kiran D. Thakur. Further this loan is sanctioned in violation to the bylaws of the society. As per bylaw 49, for Loans and Advances, for - Housing/ Mortgage loan, the limit is up to 90% of the valuation of the building or property mortgaged. 4.13 Therefore, the transfer of the above property to Sri. Nitin Dhond during F.Y. 2015-16 is sham transaction entered into as an afterthought post the search to minimise the tax liability of the assessee. The assessee has put. a veil of postponement of sale to evade payment of taxes when all the terms of MoU were completed during AY 2014-15 itself. 4.14 An MoU has been entered into and the entire sale consideration has been received and has been fully utilized by Ms. Sai Thakur. Since a contract has been entered into, entire sale consideration has been paid and possession has been handed over, the transfer of property is complete and the profit of Rs.48.65 Crores is liable to be taxed as business income in the AY 2014-15.” 16.2.1 As per section 194IA of the Income Tax Act’1961, TDS has to be deducted on advance paid for purchase of immovable property. TDS deduction has no bearing whether or not the transfer of the property has taken place. Hence, TDS deduction does not amount to sale of the property. 16.2.2 Ld AO has come out with his own theory / story that the appellant was to set-off of the losses and when the appellant came to know that the losses cannot be set-off, they cancelled the agreement. 37 IT(SS)A No. 54, 58 & 59/PAN/2018 (Asst. Year: 2012-13, 2014-15 & 2015-16) IT(SS)A No. 31 to 32/PAN/2018 (Asst. Year: 2013-14 & 2014-15) CO No. 18/PAN/2018 (Asst. Year: 2012-13) Ms. Sai Kiran Thakur The theory is best known only to AO. Also worth to note that the commodity derivatives has already been allowed as business income in the appellant cases. No other theory has been brought on record. Further, no opportunity of cross examination of these persons has been provided. 16.2.3 The Ld AO has tried to link the actual sale of the property made by the appellant in AY 2016-17, with the business of LMC and their director, but the AO totally forgot that the LMC is in the business of landing and in the course of its business has given the loan to Sri. Nitin Dhond, who is the son of the director of the LMC. Giving of the loan by LMC to Sri. Nitin Dhond and he purchasing the property from the appellant has no linking as to why it has to be taxed in AY 2014-15. As such the AO has totally misplaced the facts and have tried to jumble up the facts to his own advantage. 16.2.4 As noted by us above, executing the MOU will not result in concluding that the transfer of the property has taken place. Hence the AO has tried to prove that the sale has happed in AY 2014-15, whereas the actual sale of the property has been concluded in AY 2016-17 and the necessary taxes on the same has also been paid. 16.3 We rely upon the following decided cases in the matter. Decision of the Hon. ITAT, Panaji Bench in the case of ACIT, Central Circle Vs. Shri Prakash V. Kittur (ITA No. 186/PNJ/2015), where it was held that “11. Thus, a reading of the above order shows that in order to tax the income in the assessment year, three conditions have to be cumulatively satisfied:- 11 ITA No. 186/PNJ/2015 C.O.No. 20/PNJ/2015 1) Sale deed should be registered; 2) The assessee should have acquired a legal right to receive the consideration 38 IT(SS)A No. 54, 58 & 59/PAN/2018 (Asst. Year: 2012-13, 2014-15 & 2015-16) IT(SS)A No. 31 to 32/PAN/2018 (Asst. Year: 2013-14 & 2014-15) CO No. 18/PAN/2018 (Asst. Year: 2012-13) Ms. Sai Kiran Thakur stated in the registered sale deed; and 3) The possession of the property must be handed-over to the buyer. In the instant case, it is not in dispute that the sale deed was registered on 04/04/2008 which is the previous year relevant to the assessment year 2009-10. Thus, one of the conditions for treating the income from sale of land as income accrued to the assessee during the year under appeal is not satisfied. Therefore, we find that the Commissioner of Income Tax (Appeals) was justified in holding the sale consideration from the property was not taxable in the assessment year 2008-09. Hence, we dismiss the above grounds of appeal of the Revenue.” 16.3.1 From the above it is evident that the assessment order has been passed without application of mind and without considering the facts, which has been sustained by the Hon. CIT(A), the same is deserves to be set aside. 6.5 The Ld. AR of the assessee further argued that, only by taking 100% advance against the sale of land does not conclude the transfer of the land. He also pointed out that the possession of the land was with the assesee and also highlighted that the possession of the property was not handed over by the assesee. It was also pointed out that the referred property was subsequently sold by the assessee to third party in AY 2016-17 and duly accounted for. 6.6 The Ld. DR, on the other side, has relied upon the order of the Ld. CIT(A). 39 IT(SS)A No. 54, 58 & 59/PAN/2018 (Asst. Year: 2012-13, 2014-15 & 2015-16) IT(SS)A No. 31 to 32/PAN/2018 (Asst. Year: 2013-14 & 2014-15) CO No. 18/PAN/2018 (Asst. Year: 2012-13) Ms. Sai Kiran Thakur 6.7 We have gone through the rival submissions, perused the material on record and case law cited before us. Admittedly, it is not disputed that a MOU was signed to sell the alleged property in question to LMC during, the financial year 2013-14 for a total consideration of Rs.57.63 crore. The Ld. AR’s only objection is that the appellant has not executed the sale deed in respect of the said property during F.Y. 2013- 14 and hence, the profits from the sale of the said property are not taxable in the impugned assessment year. The Ld. counsel also argued that although, the entire sale consideration was received by the appellant, but the possession of the property was not transferred to LMC. 6.8. It is noted that the appellant had purchased the agricultural property at Nirawade, Sawantwadi, Maharashtra on 07.09.2012 (purchase deed copy is enclosed. Annex-1); that during the year, the appellant has entered into memorandum of understanding (MOU) dated 23.01.2014 with Lokmanya Multi Purpose Co-operative Society Ltd., (in short LMC) for sale of agricultural at Nirawade, Sawantwadi, Maharashtra, for consideration of Rs.57.63 crores (copy of the MOU is enclosed. Annex – 2); and that She acknowledged receipt of 100% advance against the sale of the agricultural property in financial year 2013-14 in terms of MOU. However, as per the terms of the MOU, the handing over of the possession and execution of the sale deed was to be completed on or before 30.09.2014, which is in financial year 2014- 15. 6.9 The LD. AR argued that the proposed purchaser M/s. Lokmanya Multi Purpose Co-operative Society Ltd, realised that as per the section 63 of The Bombay Tenancy and Agricultural Lands Act’1948, the 40 IT(SS)A No. 54, 58 & 59/PAN/2018 (Asst. Year: 2012-13, 2014-15 & 2015-16) IT(SS)A No. 31 to 32/PAN/2018 (Asst. Year: 2013-14 & 2014-15) CO No. 18/PAN/2018 (Asst. Year: 2012-13) Ms. Sai Kiran Thakur appellant was not able to get the same classified as non-agriculture, as such they cancelled the MOU, vide deed of cancellation of MOU dated 20.04.2015 (Copy of the cancellation of MOU is enclosed. Annex-3); that accordingly, on cancellation, the appellant refunded the total amount of Rs.57.63 crores along with interest to the purchaser and the same has also been acknowledged by LMC; that subsequently, the referred agricultural land was sold by the appellant to Shri. Nitin Pandurang Dhond vide sale deed dated 26.05.2015 (copy of the sale deed is enclosed. Annex-4) and that on completing the sale of the property in financial year 2015-16, the appellant has duly offered the same for tax and have paid the necessary taxes on the same (Copy of the ITR of AY 2016-17 is enclosed. Annex-5). 6.10 The Ld. CIT (A) held that cancellation of MOU was an afterthought and thus, a sham transaction. He has mentioned that the cancellation of the MOU was a sham transaction, the interest paid consequent to cancellation of the IVIOU is not allowable as deduction in the impugned assessment year, However, if enhanced sale consideration on the said property is taxed in any subsequent year, the interest paid by the appellant to LMC shall be allowed by the AO in that assessment year as the enhanced computation is receivable to the appellant because of cancellation of the MOU. Thus, on the one hand, the CIT(A) is admitting the fact of cancellation of MOU and on the other hand, he is upholding the finding of the AO in principle as regards to the profit from sale of property brought to tax by the AO, is a contradictory finding of facts without support of cogent documentary evidence to that effect. In our view, such finding of the Ld. CIT(A) without appreciating the facts of the 41 IT(SS)A No. 54, 58 & 59/PAN/2018 (Asst. Year: 2012-13, 2014-15 & 2015-16) IT(SS)A No. 31 to 32/PAN/2018 (Asst. Year: 2013-14 & 2014-15) CO No. 18/PAN/2018 (Asst. Year: 2012-13) Ms. Sai Kiran Thakur matter based on material evidence available on record before him is not justified. is upheld in principle. 6.11 The Ld. Counsel argued that without appreciating the facts, the AO has wilfully twisted the transaction and have made the addition of Rs.48,65,00,000/- and that has been sustained by Hon. CIT(A), is bad in law. He contended that the AO has recorded the statement of Sri. Abhijit Dixit, CEO, LMC and also noted that the referred agricultural land is shown in the books of the LMC as per LMC annual report for year ending 31.03.2014 on 100% payment was being made by the LMC to the appellant and it was up to the LMC as to how to show the same in their books of accounts. The counsel argued that the disclosure of the amount paid by LMC in their books as asset or advance does not have any relevance to conclude that the transfer of the property has taken place or not. 6.12 In order to understand the “Transfer” in relation to capital asset we refer to section 2(47)(v) of the Income tax Act’1961, which reads as under: "transfer", in relation to a capital asset, includes,— any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882 (4 of 1882)” 6.13 To our understanding for the considering a sale / transaction to be completed, the transaction has to qualify the test that whether substantial consideration has been paid towards the sale; that whether sale deed has been executed and that whether possession has been 42 IT(SS)A No. 54, 58 & 59/PAN/2018 (Asst. Year: 2012-13, 2014-15 & 2015-16) IT(SS)A No. 31 to 32/PAN/2018 (Asst. Year: 2013-14 & 2014-15) CO No. 18/PAN/2018 (Asst. Year: 2012-13) Ms. Sai Kiran Thakur handed over. In the present case the answers to two of these tests are negative for the reasons that there was no the sale deed executed was executed with LMC and that subsequently, after cancelling the MOU with LMC, the sale deed was executed in the name of third parties on 26/05/2015, (copy placed on record) and that no possession was handed over to LMC, as the possession of the property was with the appellant. It is pertinent to mention the fact that the worth fact that as per section 63 of The Bombay Tenancy and Agricultural Lands Act’1948, the LMC was not permitted to purchase agriculture land. (Copy of the relevant extract of the Act. Annex. 6). Under the facts and circumstances, we are of the considered view that section 2(47)(v) is not applicable to the instant case, as the possession of the property remained with the appellant till AY 2015-16 which was subsequently was sold in the Assessment Year 2016-17. 6.14 The AO’s observation and subsequent confirmation by the CIT(A) that LMC has deducted TDS of Rs.57,63,000/- on the above mentioned transaction and paid the same into Government Account and that The assessee Ms. Sai Thakur has also claimed credit for the above amount of tax deducted at source; that on explaining by then search team to Sri Kiran Thakur the father of the assessee that prior to 01.04.2013, trading in commodities was deemed to be speculative and not business; that the income earned in the land transactions cannot be set off against the loss suffered in the speculative business, the assessee devised this strategy to postpone the sale to later year to defer his tax liability and so the assessee has sold the property at Nirawade village of Sawantwadi to Sri. Nitin Dhond, who is the son of Sri Pandurang N. Dhond - Director in Lokmanya Multi-purpose Co-op. Society which is controlled by Sri Kiran 43 IT(SS)A No. 54, 58 & 59/PAN/2018 (Asst. Year: 2012-13, 2014-15 & 2015-16) IT(SS)A No. 31 to 32/PAN/2018 (Asst. Year: 2013-14 & 2014-15) CO No. 18/PAN/2018 (Asst. Year: 2012-13) Ms. Sai Kiran Thakur D. Thakur who has been sanctioned a CC limit of Rs.100 crores from the Lokmanya Multi-purpose Co-op. Society for the purchase of the property from Ms. Sai Thakur is not relevant. What is relevant is valid sale transaction within the meaning of section 2(47) read with section 53A of the Transfer of property Act. 6.15 Under the provisions of section 194IA of the Income Tax Act’1961, The payee is mandatory required to deduct TDS on advance paid for purchase of immovable property. As such TDS deduction has no bearing whether the transfer of the property has taken place. Therefore, the TDS deduction does not amount to sale of the property. It is further noted that the AO has attempt to link the actual sale of the property made by the appellant in Assessment Year 2016-17, with the business connection of LMC and their director, however the AO has ignored the fact that the LMC has been in the business of credit loan and in the course of its business has given the loan to Sri. Nitin Dhond, who is the son of the director of the LMC; that giving of the loan by LMC to Sri. Nitin Dhond and thereby purchasing the property by him from the appellant in the assessment Year 2016-17 has no link as to why it has to be taxed in AY 2014-15. Thus, the AO and CIT(A) has totally misplaced the facts. The authorities below has merely based on execution of MOU concluded that the transfer of the property has taken place and self-satisfied them that the sale has happed in AY 2014-15, without establishing the completion of sale transaction by bringing cogent material evidence on record in the form of registered sale deed, transfer of possession of the property which is against the facts on record as the actual sale of the property has been executed in Assessment Year 2016-17, for that the necessary taxes has also been paid. In our view, the Ld. Authorities below failed to 44 IT(SS)A No. 54, 58 & 59/PAN/2018 (Asst. Year: 2012-13, 2014-15 & 2015-16) IT(SS)A No. 31 to 32/PAN/2018 (Asst. Year: 2013-14 & 2014-15) CO No. 18/PAN/2018 (Asst. Year: 2012-13) Ms. Sai Kiran Thakur appreciate the correct facts of the case and wrongly interpreted the facts to their advantage and such finding are unwarranted and unjustified which can’t be approved. 6.16 The coordinate Bench in the case of “ACIT, Central Circle Vs. Shri Prakash V. Kittur” (Supra) held that- “11. Thus, a reading of the above order shows that in order to tax the income in the assessment year, three conditions have to be cumulatively satisfied:- 11 ITA No. 186/PNJ/2015 C.O.No. 20/PNJ/2015 1) Sale deed should be registered; 2) The assessee should have acquired a legal right to receive the consideration stated in the registered sale deed; and 3) The possession of the property must be handed-over to the buyer. In the instant case, it is not in dispute that the sale deed was registered on 04/04/2008 which is the previous year relevant to the assessment year 2009-10. Thus, one of the conditions for treating the income from sale of land as income accrued to the assessee during the year under appeal is not satisfied. Therefore, we find that the Commissioner of Income Tax (Appeals) was justified in holding the sale consideration from the property was not taxable in the assessment year 2008-09. Hence, we dismiss the above grounds of appeal of the Revenue.” 7. In the above view, Respectfully, following Coordinate Bench, we hold that the subject property was taxable in the assessment year 2016- 17 and therefore, the CIT Appeal was not justified in holding the sale consideration from the property as taxable in the assessment year 2014- 15. Hence, we allow the above grounds of appeal of the assessee. 45 IT(SS)A No. 54, 58 & 59/PAN/2018 (Asst. Year: 2012-13, 2014-15 & 2015-16) IT(SS)A No. 31 to 32/PAN/2018 (Asst. Year: 2013-14 & 2014-15) CO No. 18/PAN/2018 (Asst. Year: 2012-13) Ms. Sai Kiran Thakur 8. At the time of the hearing, the Ld. AR of the assessee submitted that he is not pressing ground no. 1 to 4 of the appeal under cross objection no. CO18/PAN/2018 and hence the assess’s CO is dismissed as not pressed. 9. In the backdrop of the aforesaid discussion, the appeals of the revenue and the assesse are disposed of in the terms indicated as above. Order pronounced in the open court on 05.05.2022 Sd/- Sd/- (Anikesh Banerjee) (Dr. M. L. Meena) Judicial Member Accountant Member Date: 05.05.2022 Sr.P.S. Copy of the order forwarded to: (1)The Appellant:- (2) The Respondent :- (3) The CIT:- (4) The CIT (Appeals):- (5) The DR, I.T.A.T.:- True Copy By Order
Other Referred Cases
-
Laws Referred To
-
Consultation on Entity Formation
₹0
1:1 Consultation on Startup Compliance
₹1
1:1 Consultation with family dentist -Your Smile Deserves the Best Care!
₹250
Memorandum Amendment Resolution
₹0
Income Tax Act 2025
₹0
Residency Rules: Income Tax Act, 1961 vs Income Tax Bill, 2025 — A Subtle Yet Significant Shift!
Team Counselvise - February 18, 2026
When Global Talent Meets GST: The Huawei Secondment Ruling explained
Team Counselvise - March 09, 2026
Finance Bill, 2026: Key GST Reforms that will Reshape Compliance and Cash Flows
Team Counselvise - February 03, 2026