THE COMMISSIONER OF INCOME TAX, TRICHUR vs. M/S.KERALA SPONGE IRON LTD.

ITA/195/2014HC KeralaKLHC01026761201419 August 2015Author: HONOURABLE MR. JUSTICE SHAJI P.CHALY,HONOURABLE MR.JUSTICE ANTONY DOMINIC9 pages
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What were the facts?

The Revenue is in appeal against an order of the Income Tax Appellate Tribunal (ITAT) for the assessment year 2010-2011. The assessee, M/s. Kerala Sponge Iron Ltd., reported a commodity trading profit of Rs. 5,13,55,093/-. The Assessing Officer (AO) found that the counterparty, M/s. Vatika Merchants Private Limited, was expelled by the commodity exchange for issuing fraudulent contracts, and the assessee was not a recognized client. The AO treated the profit as a sham and bogus transaction, adding it as unexplained cash credit under Section 68 of the Income Tax Act. The Commissioner of Income Tax (Appeals) confirmed this. The ITAT, however, allowed the assessee to set off business losses and unabsorbed depreciation against this income.

What did the High Court hold?

The High Court held that the ITAT erred in allowing the set off of business losses and unabsorbed depreciation against the income assessed under Section 68. The Court reasoned that income treated as unexplained cash credit under Section 68 cannot be classified under any of the heads of income specified in Section 14 of the Act. Consequently, the question of allowing deductions or set offs under provisions corresponding to those heads, such as Section 70, does not arise. The Court distinguished the case of Daulatram Rawat Mull v. CIT relied upon by the ITAT, noting that the disputed income in that case was assessed as concealed profits of the business, which is different from unexplained cash credit. The Court found the Gujarat High Court's decision in Fakir Mohmed Haji Hassam v. CIT to be applicable. Therefore, the High Court set aside the ITAT's order to the extent it directed the AO to allow the set off of losses and unabsorbed depreciation against the Section 68 addition.

What were the issues?

1. Whether, on the facts and circumstances of the case, income determined under Section 68, which does not fall under any head of income under Section 14, is eligible for set off under Section 70 of the Income Tax Act. Assessee's Contention (as interpreted from the ITAT's reasoning): The assessee contended that the profit from commodity trading, though treated as unexplained cash credit, was essentially from business activity. Therefore, it should be eligible for set off against current year business losses and brought forward losses/unabsorbed depreciation. The assessee relied on the Calcutta High Court judgment in Daulatram Rawat Mull v. CIT (64 ITR 593). Revenue's Contention: The Revenue argued that income assessed under Section 68, being unexplained cash credit and not classifiable under any head of income under Section 14, cannot be set off against business losses under Section 70. The Revenue relied on the Gujarat High Court judgment in Fakir Mohmed Haji Hassam v. CIT (2001) 247 ITR 290.

Which sections of the Income-tax Act were involved?

Section 68,Section 14,Section 70

AI-generated summary — verify with the full judgment below

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT: THE HONOURABLE MR.JUSTICE ANTONY DOMINIC & THE HONOURABLE MR. JUSTICE SHAJI P.CHALY WEDNE AY, THE 19TH DAY OF AUGUST 2015/28TH SRAVANA, 1937 ------------------------- AGAINST THE ORDER IN ITA 654/2013 of I.T.A.TRIBUNAL, COCHIN BENCH DATED 11-04-2014 APPELLANT/RESPONDENT/REVENUE : ---------------------------------------------------- THE COMMISSIONER OF INCOME TAX TRICHUR. BY ADV. SRI.P.K.R.MENON, SC FOR INCOME TAX ADV.SRI.JOSE JOSEPH, SC FOR INCOME TAX RESPONDENT/APPELLANT/ASSESSEE : ---------------------------------------------------- M/S.KERALA SPONGE IRON LTD. XV/D NO.810, MANTHURUTHY, KANJIKODE WEST P.O. PALAKKAD, KERALA-678 623. R1 BY ADV. SRI.JOBY JACOB PULICKEKUDY R1 BY ADV. SRI.ANIL GEORGE THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 19-08-2015, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING:

APPENDIX PETITIONER'S ANNEXURES: ANNEXURE A:OF THE ASSESSMENT ORDER DATED 28/3/2013. ANNEXURE B:OF THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS) DATED 19-7-2013. ANNEXURE C:OF THE ORDER OF THE INCOME TAX APPE

The order continues below.

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