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Income Tax Appellate Tribunal, HYDERABAD ‘A’ BENCH, HYDERABAD.
(Assessment Year : 2016-17) Shri Puli Ashok Reddy, Nellore. PAN ACSPP8800H …..Appellant. Vs. Pr. Commission of Income-tax, Tirupati. …..Respondent. Appellant By : Shri A.V. Raghuram, Adv. Respondent By : Shri Rajendra Kumar, CIT-D.R. Date of Hearing : 21.03.2022. Date of Pronouncement : 24.03.2022. O R D E R Per Shri Bhagirath Mal Biyani, A.M.: This appeal by the assessee is directed against the revision-order dated 12.03.2021 passed by learned Principal Commissioner of Income Tax, Tirupati [“Ld. PCIT” in short] u/s 263 of the Income Tax Act, 1961 [“‘the Act” in short] for Assessment-Year 2016-17.
The registry has informed that that the present appeal was required to be filed by 11.05.2021 but the same was actually filed on 16.12.2021, after a delay of 219 days. The Ld. AR prayed that the delay has occurred due to Covid-19 Pandemic. The Ld. AR further placed reliance on the order of Hon’ble Supreme Court in Suo Motu Writ Petition (C) No. 3 of 2020 read with Misc. Applications, by which suo motu extension of the limitation-period for filing of appeals w.e.f. 15.03.2020 under all laws has been granted and hence there is no delay in fact. We confronted the Ld. DR who agreed to the submission of Ld. AR. In view of this, the appeal is proceeded with for hearing, there being no delay.
3. The assessee filed his Return of Income declaring a total income of Rs. 3,08,290/-. The case was selected for scrutiny and the Ld. AO completed assessment u/s 143(3) of the Act by order dated 21.12.2018 by accepting the total income declared by the assessee.
Subsequently, the Ld. PCIT invoked the provisions of section 263 of the Act by issuing show-cause notice dated 23.02.2021, the relevant extract of which is reproduced below:
“2. In your case, after completion of scrutiny proceedings, on verification of the records, it is found that, ‘As seen from the profit & loss account, net profit of Rs. 4,60,69,635/- includes net gain of Rs. 13,08,856/- on day trading of shares (speculative business) in stock exchange. As per the computation of income statement, the assessee set off the profit of Rs. 4,60,69,635/- against the Brought forward business loss. Since the day trading of shares (settled otherwise than delivery of shares) falls under the speculation business, the gain of Rs. 13,08,856/- on day trading of shares should not be set off against brought forward business loss. It needs to be added back to the income.’ This aspect was not verified by the Assessing Officer while finalizing the assessment proceedings.
Please explain as to why the order dated 21/12/2018 passed by the Assessing Officer should not be treated as erroneous and prejudicial to the interest of revenue in as much as the Assessing Officer did not examine the above aspects.”
In response to the aforesaid notice, the assessee made submissions before the Ld. PCIT. However, the Ld. PCIT was not satisfied and treated the order of assessment as erroneous in so far as it is prejudicial to the interest of revenue. The Ld. PCIT, therefore, set aside the assessment- order with a direction to the Ld. AO to redo the assessment. Being aggrieved by this revision-order of Ld. PCIT, the assessee has presented this appeal and now before us.
By means of various grounds, the assessee has challenged the very assumption of revisional-jurisdiction by the Ld. PCIT and claimed that the revision-order passed by the Ld. PCIT u/s 263 is wrong, illegal and without jurisdiction and deserves to be quashed since the relevant assessment-order passed by the Ld. AO was neither erroneous nor prejudicial to the interest of revenue.
Precisely stated the assessee earned a profit of Rs.13,08,856/- from day trading of shares which is classified as “profit of speculative business” under the provisions of the Act. At the same time, the assesse was also having brought forward business loss from earlier years which was classified as “non-speculative business loss”. To this extent, there is no dispute between the parties either on account of nature or quantum. In the return of income, the assessee claimed set off of brought forward “non- speculative business loss” against the said “profit of speculative business” of Rs. 13,08,856/- and the Ld. AO allowed this claim of assessee during scrutiny proceedings.
On subsequent examination of the records of assessment, the Ld. PCIT observed this point and made a view that the set off of brought forward “non-speculative business loss” has been wrongly allowed by the Ld. AO against “profit of speculative business” and owing to this, the assessment- order has become erroneous in as much as it is prejudicial to the interest of revenue.
The Ld. AR instantly drew our attention to the provisions of section 72 and 73 of the Act. For the ready reference, we reproduce below the relevant portion of section 72 and 73:
Section 72: “72. (1) Where for any assessment year, the net result of the computation under the head “Profits and gains of business or profession” is a loss to the assessee, not being a loss sustained in a speculation business, and such loss cannot be or is not wholly set off against income under any head of income in accordance with the provisions of section 71, so much of the loss as has not been so set off or, where he has no income under any other head, the whole loss shall, subject to the other provisions of this Chapter, be carried forward to the following assessment year, and – (i) it shall be set off against the profits and gains, if any, of any business or profession carried on by him and assessable for that assessment year; (ii) if the loss cannot be wholly so set off, the amount of loss not so set off shall be carried forward to the following assessment year and so on:” Section 73: “73. (1) Any loss, computed in respect of a speculation business carried on by the assessee, shall not be set off except against profits and gains, if any, of another speculation business.” Analysing section 72, the Ld. AR submitted that this section permits set off of business losses other than the loss of speculative business i.e. the “non-speculative business loss” against the profit of “any” business. He submitted that the word, “any” appearing in clause (i) of section 72(1) is not restricted to “profit of non-speculative business” alone. It could be the “profit of non-speculative business” or even the “profit of speculative business”. Therefore, the brought forward “non-speculative business loss” can be set off against the “profit of non-speculative business” or even against “profit of speculative business”. To support this interpretation, the Ld. AO also relied upon following decisions:
(a) CIT Vs. Ramshree Steels (P) Ltd (2018) 400 ITR 61 (All High Court): Loss - Set off – Set off of brought forward and current business loss against profits of speculation business – Is allowable – Tribunal while allowing set off of non-speculative loss against profits of speculative business having relied on the decision of Supreme Court and Bombay High Court, calls for no interference – CIT Vs. Jagannath Mahadeo Prasad (1969) 71 ITR 296 (SC) and A.R. Mahadevia Vs. CIT (1967) 65 ITR 308 (Bom) relied on. In this case, the ITAT allowed set off of brought forward and current business loss against the profits of speculation business. Against ITAT’s order, the revenue filed appeal to the Hon’ble High Court. The Hon’ble High Court agreed with the decision of ITAT and dismissed departmental appeal. (b) ITAT, Mumbai in & 3576/Mum/2016, order dated 06.04.2018: “14. A reading of the above sections 71, 72 and 73, Circular and case laws makes it clear that there is no blanket bar as such in adjustment of carry forward non speculation business loss against current year speculation profit. These provisions provide that loss in speculation business cannot be set against any income under the head “Business or profession” nor against income under any other head, but it can be set off only against profits, if any, of another speculation business. Section 73 effects complete segregation of speculation losses, which stand distinct and separate and can be mixed for set off purpose, only with speculation profits. The said circular of the Board (which has been held by the Hon'ble High Court to be still holding the field) provide that if speculation losses for earlier years are carried forward and if in the year of account a speculation profit is earned by the assessee, then such speculation profits for the current accounting year should be adjusted against carried forward of speculation losses of the earlier year, before allowing any other losses to be adjusted against those profits. Hence, it is clear that there is no bar in adjustment of unabsorbed business losses from speculation profit of the current year, provided the speculation losses for the year and earlier has been first adjusted from speculation profit. In the present case, no case has been made out by the Revenue that the current or earlier speculation losses have not been adjusted from the speculation profit. Hence, in view of the Hon’ble jurisdictional High Court and CBDT Circular mentioned hereinabove, we set aside the order of the authorities below and decide the issue in favour of the assessee.” Reverting to the facts of present appeal, the Ld. AR submitted that the assessee has claimed set off of brought forward “non-speculative business loss” against the “profit of speculative business”, which is a valid claim of the assessee, permitted by section 72. Stepping further to section 73, the Ld. AR submitted that the section 73 merely prescribes that the “loss of a speculative business” cannot be set off against “any profit or gain, except the profit of another speculative business”. That means the “loss of speculative business” cannot be set off against “profit of non-speculative business”. According to the Ld. AR, section 73 is ex facie not applicable to the assessee as the assessee does not have “loss of speculative business”. The Ld. AR submitted, for the sake of completeness, that the assessee has brought forward “loss of non-speculative business” which has been claimed as set off against “profit of speculative business” and this set off is not at all prohibited by section 73.
With these submissions, the Ld. AR argued that the assessee has validly claimed the set off of brought forward “non-speculative business loss” against “profit of speculative business” and the Ld. AO has validly permitted this set off as per the scheme of section 72 read with section 73. According to the Ld. AR, therefore, the order passed by Ld. AO is neither having any error nor prejudicial to the interest of revenue. Therefore, the Ld. PCIT has wrongly invoked the provisions of section 263. In conclusion, the Ld. AR prayed to quash the revision-order passed by Ld. PCIT.
Per contra, the Ld. DR carried our attention to Explanation 2 to section 28 of the Act which reads as under: “Explanation 2.— Where speculative transactions carried on by an assessee are of such a nature as to constitute a business, the business (hereinafter referred to as “speculative business”) shall be deemed to be distinct and separate from any other business.” Analysing this Explanation 2 to Section 28, the Ld. DR vehemently argued that the Parliament has consciously and purposely mandated that the “speculative business” shall be deemed to be a distinct and separate business from “any other business”, which means the “speculative business” and “any other business i.e. non-speculative business” constitute two separate strata of businesses for all purposes under the Act. According to the Ld. DR, this automatically follows that neither the “loss of speculative business” could be set off against the “profit of non-speculative business” nor the “loss of non-speculative business” could be set off against the “profit of speculative business”. Being so, the Ld. DR argued, the set off of “non-speculative business loss” against “profit of speculative business” claimed by the assessee is against the prescription of section 28 and by allowing the same, the Ld. AO has committed an error prejudicial to the interest of revenue. Hence the Ld. PCIT was justified in making revision u/s 263. The Ld. DR therefore prayed to uphold the revision-order passed by Ld. PCIT.
We have considered the rival submissions, perused the material available on record as also the legal precedents cited before us. As can be seen from the above submissions 28, 72 and 73. At the outset, we would like to note that Income-tax Act, 1961 has divided into several Chapters, which prescribe a definite scheme for a specific purpose. To illustrate, Chapter IV of the Act prescribes computation of income under various heads and Chapter VI prescribes aggregation of income and set off of losses. We observe that the section 28 pressed by the Ld. DR falls within Chapter IV but the section 72 and 73 emphasized by the Ld. AR fall within Chapter VI. We observe that there is no conflict amongst the mandate of section 28 on one hand and of section 72 and 73 on other hand. Section 28 merely prescribes that the “speculative business” shall be treated as a separate and distinct business from “non-speculative business”. This simply means the computation of taxable income of “speculative business” and “non-speculative business” cannot be combined together, the figures have to be separately arrived at for each segment. Having arrived at such separate figures of two segments, if there arises necessity of set off in case of negative figure (i.e. loss) from 72 and 73. We believe that it may not be correct to say that by segregating two segments as per mandate of section 28, there is an automatic consequence that loss of one segment cannot be set off against profit of another segment. If that be so, what would be the necessity of section 72 and 73? Therefore, we have to look upon the provisions of section 72 and 73, which fall under the Chapter VI, to understand what is allowed and what is prohibited in the matter of set off. The Ld. AR has already put forward the analysis of section 72 and 73 supported by the legal precedents. We do not want to reproduce the same for the sake of brevity but the Ld. AR is right in submitting the interpretation that the “loss of speculative business” cannot be set off against the “profit of non-speculative business” but the loss of “non-speculative business” is allowed to be set off against “profit of speculative business”.
In view of the discussion in foregoing paragraphs, we observe that the assessee was justified in claiming set off of Ld. AO has allowed the same, which is very much in accordance with the provisions of the Act. Therefore the order passed by the Ld. AO is neither suffering from any error nor prejudicial to the interest of revenue. Being so the Ld. PCIT has wrongly invoked the provisions of section 263 which are not applicable to the present case. Therefore we are persuaded to quash the revision-order passed by the Ld. PCIT u/s 263 of the Act. With this, the grievance of the assessee emerging in all grounds is properly addressed.
In the result, the appeal of the assessee is allowed.
Order pronounced in the open court on 24th Mar., 2022.