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Income Tax Appellate Tribunal, “A”, BENCH KOLKATA
Before: SHRI S.S.GODARA, JM &DR. A.L.SAINI, AM
आदेश / O R D E R Per Dr. A.L. Saini, AM:
By way of this appeal, the assessee appellant has challenged the correctness of impugned order passed by the learned Principal Commissioner of Income Tax- 14, Kolkata, (For short ‘PCIT’) under section 263 of the Income tax Act, 1961,( hereinafter referred to as the ‘Act’), dated 27.03.2019,for the assessment year 2014-15, on the following grounds:
For that the notice, proceedings and order u/s 263 of the IT Act 1961 was not valid as per law was bad in law and hence the order be quashed and or annulled. 2.For that the Ld Principal Commissioner of Income Tax erred in setting aside the assessment order merely to make further inquiries. Thus the order passed u/s 263 of the IT Act 1961 was bad in law and hence be quashed or set aside.
Sheth Commercial Co. ITA No. 1100/Kol/2019 Assessment Year:2014-15 3.For that the assessment order dated 02/11/2016 was passed after due inquiry and after calling for explanation and therefore the order was not erroneous and prejudicial to the interest of the revenue. Thus the order passed u/s 263 of the IT Act 1961 was bad in law and hence be quashed or set aside. 4.For that the Ld Principal Commissioner of Income Tax erred in holding that the assessment order passed on 02/11/2016 qua the issue of loss on account of commodities of Rs.41,25,364/- was erroneous and prejudicial to the interest of the revenue. The order passed u/s 263 of the IT Act 1961 was bad in law and hence be quashed or set aside. 5.For that in the facts and circumstances of the case the Ld. Pr. CIT was not justified in invoking provisions of section 263 of the Income Tax Act, 1961 and holding that the assessment order passed on 02/11/2016 was erroneous and prejudicial to the interest of revenue. 6.The appellant craves leaves for filing additional evidences before the Hon’ble Tribunal. 7.For that in the facts and circumstances of the case the order u/s 263 of the IT Act 1961 passed was in violation of principals of natural justice hence is bad in law and be quashed and or set aside. 8.The appellant craves leave to press new, additional grounds of appeal or modify, withdraw any of the above grounds at the time of hearing of the appeal.
Brief facts qua the issue are that assessee filed its return of income for the A.Y. 2014-15 on 04.09.2014 declaring total income of Rs. 77,43,630/-. After that, the assessee had filed its revised return of income for the A.Y. 2014-15 declaring total income at Rs. 77,43,630/-. The assessment was made u/s 143(3) of the Act by assessing officer on 02.11.2016 assessing the total income at Rs. 1,03,68,630/-. Later on, Ld Principal Commissioner of Income Tax (PCIT), had exercised his jurisdiction under section 263 of the Act. The ld PCIT, on perusal of the assessment records, noticed that the assessee had claimed loss on account of commodities (Currency Loss) of Rs. 41,25,364/-. On perusal of contract notes of Godavari Exim Pvt. Ltd, it was noted by ld PCIT that the said loss of Rs. 41,25,364/- had been incurred on account of currency derivative. Further, the ld PCIT noticed that the transactions in question involved settlement otherwise than by actual delivery or transfer of any commodity, therefore the loss on account of commodities, currency derivatives of Rs. 41,25,364/- should be speculation loss.
Sheth Commercial Co. ITA No. 1100/Kol/2019 Assessment Year:2014-15 Then after, the ld PCIT, in order to prove his stand, referred the provisions of sec.43(5) of the I.T. Act,1961 which reads as follows: "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) 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 toss 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 2of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) carried out in a recognised stock exchange; [or] (e) an eligible transaction in respect of trading in commodity derivatives carried out in a recognised 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.
[Explanation 1], -For the purposes of [clause (d)], the expressions-
(i) "eligible transaction" means any transaction,-
(A) carried out electronically on screen-based systems through a stock broker or sub-broker or such other intermediary registered under section 12 of the Securities and Exchange Board of India Act, 1992 (15 of 1992) in accordance with the provisions of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) or the Securities and Exchange Board of India Act, 1992 (15 of 1992) or the Depositories Act, 1996 (22 of 1996) and the rules, regulations or bye-laws made or directions issued under those Acts or by banks or mutual funds on a recognised stock exchange; and
(B) which is supported by a time stamped contract note issued by such stock broker or sub-broker or such other intermediary to every client indicating in the contract note the unique client identity number allotted under any Act referred to in sub-clause (A) and permanent account number allotted under this Act;
(ii) "recognised stock exchange" means a recognised stock exchange as referred to in clause (f) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) and which fulfils such conditions as may be prescribed and notified by the Central Government for this purpose;] [Explanation 2.-For the purposes of clause (e), the expressions-
Sheth Commercial Co. ITA No. 1100/Kol/2019 Assessment Year:2014-15 (i) "commodity derivative" shall have the meaning as assigned to it in Chapter VII of the Finance Act, 2013; (ii) "eligible transaction" means any transaction,- (A) carried out electronically on screen-based systems through member or an intermediary, registered under the bye-laws, rules and regulations of the recognised association for trading in commodity derivative in accordance with the provisions of the Forward Contracts (Regulation) Act, 1952 (74 of 1952) and therule5, regulations or bye-laws made or directions issued under that Act on a recognised association; and (B) which is supported by a time stamped contract note issued by such member or intermediary to every client indicating in the contract note, the unique client identity number allotted under the Act, rules, regulations or bye-laws referred to in sub-clause (A), unique trade number and permanent account number allotted under this Act; (iii) "recognised association" means a recognised association as referred to in clause (j) of section 2 of the Forward Contracts (Regulation)Act, 1952 (74 of 1952) and which fulfils such conditions as may be prescribed and is notified by the Central Government for this purpose; ]”
Considering the provisions of section 43(5) of the I.T.Act, 1961, as noted above, the ld PCIT was of the view that the case of the assessee was not covered by any of the exceptions specified in the proviso to sub-section (5) of section 43 of the Act. The loss claimed by the assessee was, therefore, to be treated as speculation loss and was not to be allowed as deduction in computing the business income of the assessee. The A.O. had, however, allowed the same which was against the provisions of the Act leading to underassessment of income. In view of the above, the order passed by the A.O. was found to be erroneous in so far as it is prejudicial to the interest of the revenue within the meaning of section 263 of the I.T. Act, 1961. Accordingly, a show cause notice was issued to the assessee requesting it to explain as to why the assessment order in question should not be subjected to revision.
In response to the show cause notice, the assessee appeared before the PCIT and submitted written submission which is reproduced below:
Sheth Commercial Co. ITA No. 1100/Kol/2019 Assessment Year:2014-15 This is with respect to the notice issued u/s.263 of the IT Act 1961 dated 12/02/2019 proposing to review the assessment order passed u/s.143(3) of the IT Act 1961 dated 01/11/2016 passed by ACIT Circle 40, Kolkata. 1. In your notice the notice issued u/s.263 of the IT Act 1961 dated 12/02/2019 you have stated that the loss on currency i.e. US Dollar incurred for Rs.41,25,364 through broker Godavari Exim Pvt. Ltd. should be treated as speculative loss in view of Section 43(5) of the IT Act 1961. 2. In this regards we draw your attention to the fact that Godavari Exim Pvt. Ltd. was a member of MCX Stock Exchange Ltd. We draw your attention to the notification no. 46/2009 dated 22/05/2009 which recognized MCX Stock Exchange Ltd. as an exchange clause (li) in the Explanation to clause (d) of the proviso to sub-section (5) of section 43 of the Income-tax Act, 1961 (43 of 1961) read with rule 6DDB of the Income- tax Rule. 1962. The said notification reads as follows:
MCX Stock Exchange Ltd., notifies as a recognised Stock Exchange for the purposes of Section 43(5)(ii) of the Income-tax Act, 1961
NOTIFICATION NO. 46/2009 1.. S.O. 1327(E). - In exercise of the powers conferred by clause (ii) in the Explanation to clause (d) of the proviso to sub-section (5) of section 43 of the Income-tax Act. 1961 (43 of 1961), read with rule 6DDB of the Income-tax Rules, 1962, the Central Government hereby notifies MCX Stock Exchange Ltd. as a recognized stock exchange for the purpose of the said clause with effect from the date of publication of this notification in the Official Gazette. 2. MCX Stock Exchange Ltd. shall separately maintain data regarding all transactions registered in the system in which client codes have been allowed to be changed for periodical Inspection by the Director-General of income-tax (Investigation) having Jurisdiction over such exchange and provide copies of the relevant information as and when required. 3. The Central Government may withdraw the recognition granted to MCX Stock Exchange Ltd. if any of the conditions specified in rule 6DDAof the Income-tax Rules, 1962 subject to which the recognition is granted,is violated. 4. This notification shall remain in force until the approval granted by the Securities and Exchange Board of India is withdrawn or expires, or this notification is rescinded by the Central Government as provided in sub-rule (5) of rule 6DDAof the Income-tax RULES, 1962.
F. No. 142/25/2008- TPL (V. VizayBabu) Under Secretary (TPL- III,)
We draw your attention to the decision of the Ld ITAT Mumbai in the case of IVF Advisors Private Limited Versus TheAsstt Commissioner of Income Tax, - 20015 (5) TMI 706 -before which a similar issue was there. The Ld ITAT held as follows:
Sheth Commercial Co. ITA No. 1100/Kol/2019 Assessment Year:2014-15 “7. We have carefully perused the orders of the Revenue Authorities and the submissions made by the assessee in the light of the relevant provisions of the IT Act and also Securities Contract Regulation Act, 1956. Section 43(5) of the I.T. Act read as under:
"(5) 32"speculative transaction" means a transaction in which a contract for the purchase or sale of any commodity33, including stocks and shares, is periodically or ultimately settled33 otherwise than by the actual delivery33 or transfer of the commodity or scrips:
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 236 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) carried out in a recognised 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.
[Explanation.--For the purposes of this clause, the expressions--
(i) "eligible transaction" means any transaction,--
(A) carried out electronically on screen-based systems through a stock broker or sub-broker or such other intermediary registered under section 12 of the Securities and Exchange Board of India Act, 1992 (15 of 1992) in accordance with the provisions of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) or the Securities and Exchange Board of India Act, 1992 (15 of 1992) or the Depositories Act, 1996 (22 of 1996) and the rules, regulations or bye-laws made or directions issued under those Acts or by banks or mutual funds on a recognised stock exchange; and (B) which is supported by a time stamped contract note issued by such stock broker or sub-broker or such other intermediary to every client indicating in the contract note the unique client identity number allotted under any Act referred to in sub-clause (A) and permanent account number allotted under this Act; Page | 6
Sheth Commercial Co. ITA No. 1100/Kol/2019 Assessment Year:2014-15 (ii) "recognised stock exchange" means a recognised stock exchange as referred to in clause (f) of section 238 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) and which fulfils such conditions as may be prescribed and notified39 by the Central Government for this purpose;] [Explanation 2 - For the purposes of clause (e), the expressions -
(i) 'commodity derivative" shall have the meaning as assigned to it in Chapter VII of the Finance Act, 2013;
(ii) "eligible transaction" means any transaction,-
(A)carried out electronically on screen-based systems through member or an intermediary, registered under the bye-laws, rules and regulations of the recognized association for trading in commodity derivative in accordance with the provisions of the Forward Contracts (Regulation) Act, 1952 (74 of 1952) and the rules, regulations or bye-laws made or directions issued under that Act on a recognized association; and (B) which is supported by a time stamped contract note issued by such member or intermediary to very client indicating in the contract note, the unique client identity number allotted under the Act, rules, regulations or bye- laws referred to in sub-clause (A), unique trade number and permanent account number allotted under this Act.
(iii) "recognized association" means a recognized association as referred to in clause (j) of section 2 of the Forward Contracts (Regulation) Act, 1952 (74 of 1952) and which fulfils such conditions as may be prescribed and is notified by the Central Government for this purpose"
Proviso (d) excludes the transaction from the definition of speculative transaction in respect of trading of derivatives referred to in section 2(ac) of the Securities Contract (Regulation) Act, 1956 carried in recognized stock exchange. Section 2(ac) of the Securities Contract (Regulation) Act, 1956 read as under:
" 2.[ac] "derivative" includes--
(A) a security derived from a debt instrument, share, loan, whether secured or unsecured, risk instrument or contract for differences or any other form of security; (B) a contract which derives its value from the prices, or index of prices, of underlying securities;]"
7.1 Thus, it can be seen that the derivatives also includes securities. The definition of eligible transaction mentioned herein above clearly show that the transaction must have been carried out electronically in accordance with the provisions of Securities Contracts (Regulation) Act and the Rules and Regulations or bye laws made or directions issued under this Act or by banks or mutual funds on a recognized stock exchange and which is supported by time stamped contract note issued by such stock broker or sub-broker or intermediary to every client indicating in the contract note the unique client identity number and permanent account number.
7.2 It would be pertinent to consider the decision of Hon'ble Madras High Court in the case of Rajshree Sugar & Chemicals Ltd. vs. Axis Bank Ltd., AIR 2011 Page | 7
Sheth Commercial Co. ITA No. 1100/Kol/2019 Assessment Year:2014-15 (Mad) 144, wherein the term derivative has been defined to include foreign currency as an underlying security of the derivative. The relevant extract of the case is quoted below:
"What are these derivatives which have gained such a great deal of notoriety? In simple terms, derivatives are financial instruments whose values depend on the value of other underlying financial instruments. The International Accounting Standard (IAS) 39, defines "derivatives" as follows: - "A derivative is a financial instrument: (a) whose value changes in response to the change in a specified interest rate, security price, commodity price, foreign exchange rate, index of prices or rates, a credit rating or credit index, or similar variable (sometimes called the 'underlying'); (b) that requires no initial net investment or little initial net investment relative to other types of contracts that have a similar response to changes in market conditions; and (c) that is settled at a future date." Actually, derivatives are assets, whose values are derived from values of underlying assets. These underlying assets can be commodities, metals, energy resources, and financial assets such as shares, bonds, and foreign currencies."
7.3 Further, the SEBI website in its section 'frequently asked questions' has explained the meaning of derivative as under:
Q 1. What are Derivatives? A. The term "Derivative" indicates that it has no independent value, i.e. its value is entirely "derived" from the value of the underlying asset. The underlying asset can be securities, commodities, bullion, currency, live stock or anything else. In other words, Derivative means a forward, future option or any other hybrid contract of pre determined fixed duration, linked for the purpose of contract fulfillment to the value of a specified real or financial asset or to an index of securities. With Securities Laws (Second Amendment) Act,1999, Derivatives has been included in the definition of Securities. The term Derivative has been defined in Securities Contracts (Regulations) Act, as: A Derivative includes: - a. a security derived from a debt instrument, share, loan, whether secured or unsecured, risk instrument or contract for differences or any other form of security; b. a contract which derives its value from the prices, or index of prices, of underlying securities; It is further provided by SEBI that in Aug.2008 SEBI permitted exchange traded currency derivative.
7.4 Considering the relevant provisions of the relevant Acts, discussed herein above in the light of Hon'ble Madras High Court and the answers given to frequently asked questions by the SEBI and the incorporation of exchange traded currency derivative from August, 2008, there remain no iota of doubt that the transaction of the assessee cannot be treated as speculative transaction. We have also gone through the copies of the contract notes incorporated in the paper book filed before us. A perusal of the contract note shows that the assessee has either entered into call option or put option and on the settlement day the transaction Page | 8
Sheth Commercial Co. ITA No. 1100/Kol/2019 Assessment Year:2014-15 has been settled by delivery, either the assessee has paid US dollar on the settlement day or has taken delivery of US dollar.
7.5 To sum up, the derivatives include foreign currency and call option/ put option, are transactions of derivative markets and cannot be termed as speculative in nature. Considering the totality of the facts and in the light of the judicial discussion herein above, we have no hesitation in setting aside the order of Ld. CIT(A). Appeal filed by the assessee is accordingly allowed.
In the result, the appeal filed by the assessee is allowed.”
(5) We draw your attention to the decision of the Ld ITAT Mumbai in the case of WEISER TRADING COMPANY PRIVATE LIMITED VERSUS DY. COMMISSIONER OF INCOME TAX - I (3) (2), MUMBAI (No. ITA No. 4657/Mum/2017) before which a similar issue was there. The Ld ITAT held:
I have considered rival contentions and found that the issue under consideration is squarely covered by the decision of the Co-ordinate Bench in case of IVF Advertisers Pvt. Ltd., 39 ITR 541, wherein Tribunal held as under:-
"The assesses was an investment management consultant. For the assessment year 2009-10, it claimed loss-on account of foreign currency futures. The Assessing Officer held that the loss could not be allowed in the light of the provisions of section 43(5) of the Income-tax Act, 1961 read with section 2(ac) of the Securities Contracts (Regulation) Act, 1956. The Commissioner (Appeals) confirmed this. On appeal: Held, allowing the appeal, that derivatives include foreign currency. Call options or put options were transactions of derivative markets and could not be termed speculative in nature. Therefore, the loss claimed by the assessee on account of foreign currency futures was allowable."
The question raised in this appeal reads as under:-
ITA No.4657/Mum/2017 M/s. Weisser Trading Co. Pvt. Ltd., "On the facts and circumstances of the case, and in law, the learned Commissioner of Income-tax (Appeals) ought to have held that clause (d) of the proviso to section 43(5) of the Income-tax Act, 1961 ('the Act')/ was applicable to the transactions in foreign currency futures entered into by the appellant and therefore that the loss from these transactions was not in the nature of speculation loss."
The Tribunal decided the issue as under:-
"considering the relevant provisions of the relevant Acts, discussed here- in-above in the light of the hon'ble Madras High Court and the answers given to frequently asked questions by the Securities and Exchange Board India and the incorporation of exchange traded currency derivative from August, 2008, there remain no iota of doubt that the transaction of the assessee cannot be treated as speculative transaction. We have also gone through the copies of the contract notes incorporated in the paper book filed before us. A perusal of the contract note shows Page | 9
Sheth Commercial Co. ITA No. 1100/Kol/2019 Assessment Year:2014-15 that the assessee has ' either entered into a call option or put option and on the settlement day the transaction has been settled by delivery, either the assessee has paid US dollar on the settlement day or has taken delivery of US dollar. To sum up, the derivatives include foreign currency and call option/put option, are transactions of derivative markets and cannot be termed as speculative in nature. Considering the totality of the facts and in the light of the judicial discussion hereinabove, we have no hesitation in setting aside the order of the learned Commissioner of Income-tax (Appeals). The appeal filed by the assessee is accordingly allowed."
As the facts and circumstances during the year are same, respectfully following the order of the Tribunal, this ground of assessee's appeal is allowed.
We draw your attention to the decision of the Ld ITAT Kolkata in the case of DCIT CIRCLE 11, KOLKATA VERSUS M/S PODDAR PROJECTS LTD, 2018 (5) TMI 1324 - ITAT KOLKATA before which a similar issue was there. The Ld ITAT held:
The second issue that arises are adjudication for the assessment year 2010-11 is whether the Ld. CIT(A) was right in allowing "speculation loss" of Rs. 3,17,26,872/- as trading loss of the assessee. The loss in question was incurred by the assessee on future trading in forex. The Ld. CIT(A) referred to the CBDT instruction no 3/2010 dated 23.03.2010 reported in Taxman (ST) page 160 and 162 and held that the loss is allowable as business loss. We find that this order I.T.A. Nos. 2752 & 2753/Kol/2013 Assessment Years: 2008-09 & 2010-11 M/s. Poddar Projects Ltd.
The First Appellate Authority is in line with the principles of law laid down by Mumbai 'I' Bench of Tribunal in ITA No.4798/Mum/2012 Assessment Year 2009- 10 in the case of IVF Advisors Pvt. Ltd. vs ACIT order dated 13.02.2015, wherein at para 7.5 held as follows:
"To sum up, the derivatives include foreign currency and call option/put option, are transaction of derivative markets and cannot be termed as speculative in nature. Considering the totality of the facts and in the light of the judicial discussion herein above, we have no hesitation in setting aside the order of Ld. CIT(A). Appeal filed by the assessee is accordingly allowed."
Similar is the decision of the Agra Bench of the ITAT in the case of Nand Nandan Agrawal vs DCIT 2018(2) TMI - ITAT Agra and the decision of the Chennai Bench of the ITAT in the case of DCIT vs Paterson Securities (P) Ltd. 127 ITD 386 (Chennai). Hence this grounds taken by the revenue on the deletion of disallowance of loss incurred on future trading of foreign exchange by the Ld. CIT(A) is hereby dismissed.
In the result, the appeals of the Revenue, for both the assessment years, are hereby dismissed.
Sheth Commercial Co. ITA No. 1100/Kol/2019 Assessment Year:2014-15 7. We therefore submit that as per the above notification and the above decision the transaction is not to be treated as a speculative transaction. We therefore submit that there was no error in the order of the Assessing Officer which can be considered to be prejudicial and or erroneous to the interest of revenue. 8.Your assessee therefore submits that the order passed by the Ld AO can therefore not called to be erroneous sand prejudicial to the interest of revenue and therefore you are requested to drop the proceedings u/s. 263 of the IT Act 1961 and oblige.
However, the ld. PCIT rejected the contention of the assessee and held that since one of the prerequisite in the proviso for the transactions not to be deemed as speculative is that the eligible transaction should be carried out electronically on screen-based systems through a stock broker or sub-broker as specified in Explanation 1 below sec.43(5); of the Act.Then, ld PCIT get conducted an enquiry through an income tax inspector to verify the genuineness of M/s Godavari Exim Pvt. Ltd. as a Member of the MCX and the genuineness of the transactions of the assessee through the company.In this connection, the Inspector of Income Tax has reported as follows after conducting enquiry at the address of the company stated in the contract note:-
“As directed, I went to 171, C.R. Avenue, 1st Floor, Kolkata - 700006 to verify the address in the case of Godavari Exim Pvt. Ltd. There is no such address exists in the place mentioned above. C.R. Avenue does , not fall underpin code - 700006. ” The Inspector had also been directed to find out about the existence of Godavar Exim Pvt. Ltd. at 67/28, Strand Road, 12 no. Gali, Kolkata - 700006, i.e., the address of the said company which could be identified from google search. The Inspector has given the following report in respect of the said enquiry. “As directed, I went to 67/28, Strand Road, 12 no. Gali, Kolkata - 700006, to verify the address in the case of Godavari Exim Private Limited. The address is of an old building. There, I could not locate any sign board of the above mentioned company. According to employee of Om Transport Co., Godavari Exim Private Limited & Om Transport Co. are the same and run under the signboard of Om Transport Co. However, none could provide any evidence of the same. Besides, he affirmed that Godavari Exim Private Limited is a transport company. According to the local people, one person also went there few days before to enquire into this matter.”
In view of the above, Ld PCIT held that the company, Godavari Exim Pvt. Ltd was not in existence therefore transaction of the assessee with Godavari Exim Pvt. Page | 11
Sheth Commercial Co. ITA No. 1100/Kol/2019 Assessment Year:2014-15 Ltd. was not genuine. The Ld PCIT also did google search where he found that the company, Godavari Exim Pvt was dealing in trading business activity. Therefore, ld PCIT held that assessment order passed by the AO was erroneous in so far as it is prejudicial to the interest of the Revenue, hence he directed the AO for examining the correctness of the claim of the assessee of ‘loss on commodities’ of Rs.41,25,364/- and the correctness of the claim of the assessee regarding its transactions with Godavari Exim Pvt. Ltd.
Aggrieved by the order of the ld. PCIT, the assessee is in appeal before us.
We have heard both the parties and carefully gone through the submission put forth on behalf of the assessee along with the documents furnished and the case laws relied upon, and perused the fact of the case including the findings of the ld PCIT and other materials available on record. Before us, Learned Counsel for the assessee reiterated the submissions made before the ld PCIT during the revision proceedings u/s 263 of the Act. On the other hand, the ld. DR for the Revenue has primarily reiterated the stand taken by the ld PCIT which we have already noted in our earlier para and the same is not being repeated for the sake of brevity. First of all, we have to see whether the requisite jurisdiction necessary to assume revisional jurisdiction is there existing before the Pr. CIT to exercise his power. For that, we have to examine as to whether in the first place the order of the Assessing Officer found fault by the Principal CIT is erroneous as well as prejudicial to the interest of the Revenue. For that, let us take the guidance of judicial precedence laid down by the Hon’ble Apex Court in Malabar Industries Ltd. vs. CIT [2000] 243 ITR 83(SC) wherein their Lordship have held that twin conditions needs to be satisfied before exercising revisional jurisdiction u/s 263 of the Act by the CIT. The twin conditions are that the order of the Assessing Officer must be erroneous and so far as prejudicial to the interest of the Revenue. In the following circumstances, the order of the AO can be held to be erroneous order, that is (i) if the Assessing Officer’s order was passed on incorrect assumption of fact; or (ii) incorrect application of law; or (iii)Assessing Officer’s order is in violation of the principle of natural justice; or (iv) if the order is passed by the Page | 12
Sheth Commercial Co. ITA No. 1100/Kol/2019 Assessment Year:2014-15 Assessing Officer without application of mind; (v) if the AO has not investigated the issue before him; then the order passed by the Assessing Officer can be termed as erroneous order. Coming next to the second limb, which is required to be examined as to whether the actions of the AO can be termed as prejudicial to the interest of Revenue. When this aspect is examined one has to understand what is prejudicial to the interest of the revenue. The Hon’ble Supreme Court in the case of Malabar Industries (supra) held that this phrase i.e. “prejudicial to the interest of the revenue’’ has to be read in conjunction with an erroneous order passed by the Assessing Officer. Their Lordship held that it has to be remembered that every loss of revenue as a consequence of an order of Assessing Officer cannot be treated as prejudicial to the interest of the revenue. When the Assessing Officer adopted one of the courses permissible in law and it has resulted in loss to the revenue, or where two views are possible and the Assessing Officer has taken one view with which the CIT does not agree, it cannot be treated as an erroneous order prejudicial to the interest of the revenue “unless the view taken by the Assessing Officer is unsustainable in law”.
Taking note of the aforesaid dictum of law laid down by the Hon’ble Apex Court, let us examine whether order passed by the assessing officer is erroneous as well as prejudicial to the interest of revenue. We note that ld PCIT was of the view that loss allowed in currency derivative transaction was not covered by the provisions of section 43(5) of the Income Tax Act, 1961 therefore, the assessing officer was not justified in allowing the currency loss of Rs.41,25,364/-. We note that assessee submitted before the ld PCIT that M/s Godavari Exim Pvt Ltd was a member of MCX Stock exchange Ltd, vide notification No. 46/2009 dated 22.05.2009 which is recognized MCX Stock Exchange Ltd as an exchange,for clause (ii) in the explanation to clause (d) of the proviso to sub-section (5) of section 43 of the Income Tax Act, 1961 read with rule 6DDB of the Income Tax Rule, 1962. The assessee submitted the copy of the notification No. 46/2009 dated 22.05.2009 before the ld PCIT. Therefore, the transaction done by the assessee is covered by exception clause (d) of section 43(5) of the Act which is again ( at the cost of repetition ) reproduced below for ready reference: Page | 13
Sheth Commercial Co. ITA No. 1100/Kol/2019 Assessment Year:2014-15 "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) a contract in respect of raw materials or merchandise entered into by a person in the course of his manufacturing or merchanting business to guardagainst 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 toss 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 recognised stock exchange; [or] (e) an eligible transaction in respect of trading in commodity derivatives carried out in a recognised 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.
[Explanation 1], -For the purposes of [clause (d)], the expressions-
(i) "eligible transaction" means any transaction,-
(A) carried out electronically on screen-based systems through a stock broker or sub-broker or such other intermediary registered under section 12 of the Securities and Exchange Board of India Act, 1992 (15 of 1992) in accordance with the provisions of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) or the Securities and Exchange Board of India Act, 1992 (15 of 1992) or the Depositories Act, 1996 (22 of 1996) and the rules, regulations or bye-laws made or directions issued under those Acts or by banks or mutual funds on a recognised stock exchange; and
(B) which is supported by a time stamped contract note issued by such stock broker or sub-broker or such other intermediary to every client indicating in the contract note the unique client identity number allotted under any Act referred to in sub-clause (A) and permanent account number allotted under this Act;
(ii) "recognised stock exchange" means a recognised stock exchange as referred to in clause (f) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) and which fulfils such conditions as may be prescribed and notified by the Central Government for this purpose;]
Therefore, it is quite clear that MCX Stock exchange Ltd is a recognized stock exchange and M/s Godavari Exim Pvt Ltd was a member of MCX Stock exchange Ltd; therefore assessee`s currency derivative transactions are covered by exception Page | 14
Sheth Commercial Co. ITA No. 1100/Kol/2019 Assessment Year:2014-15 clause (d) of section 43(5) of the Act, hence loss incurred by the assessee to the tune of Rs.41,25,364/- in respect of currency derivative is not speculation loss, therefore order passed by the AO u/s 143(3) dated 02.11.2016 is not erroneous.
We note the ld PCIT, on perusal of contract notes, deputed an Inspector to verify the transactions with the broker i.e. M/s Godavari Exim Pvt Ltd. The Inspector found the office and stated that an employee of Om Transport Co. stated that Godavari Exim Pvt Ltd and Om Transport were running under the sign board on Om Transport Co. The said employee of Om Transport Co. affirmed that Godavari Exim Pvt Ltd is a Transport Company. The ld Counsel submitted that after passing the order u/s 263 of the Act, he had made enquiries with the stock exchange and found out that said M/sGodavari Exim Pvt Ltd had surrendered its membership of MCX Stock Exchange and after surrendering the same, it was engaged in Transport business. We note that transactions were duly backed by contract notes, transactions were entered into by account payee cheque. The assessee proved that MCA Stock Exchange Ltd was notified for the purpose of section 43(5) of the Act, vide Notification No. 46/2009 dated 22.05.2009 issued by the CBDT and the currency derivative transaction was done by assessee through broker i.eM/s Godavari Exim Pvt Ltd; who was member of MCA Stock Exchange Ltd. The assessee`s transaction falls under clause (d) of sub-section 5 of section 43 of the Act and therefore currency derivative loss Rs. 41,25,364/- is not a speculation loss. Based on the factual position, as narrated above, the assessment order,u/s 143(3) of the Act dated 02.11.2016 which is subjected to impugned revision proceedings, thus could not be held to be erroneous and prejudicial to the interest of the revenue. Accordingly, we quash the impugned revision proceedings, and set aside learned Commissioner's order in challenge before us.
Before parting, it is noted that the order is being pronounced after 90 days of hearing. However, taking note of the extraordinary situation in the light of the Covid-19 pandemic and lockdown, the period of lockdown days need to be excluded. For coming to such a conclusion, we rely upon the decision of the Co- ordinate Bench of the Mumbai Tribunal in the case of DCIT vs. JCB Limited in Page | 15
Sheth Commercial Co. ITA No. 1100/Kol/2019 Assessment Year:2014-15 ITA No. 6264/Mum/2018 and ITA No. 6103/Mum/2018 for A.Y. 2013-14 order dated 14.05.2020.
In the result, the appeal of the assessee is allowed.
Order pronounced in the Court on 12.06.2020
Sd/- Sd/- (S.S.GODARA) (A.L.SAINI) �या�यकसद�य / JUDICIAL MEMBER लेखासद�य / ACCOUNTANT MEMBER कोलकाता /Kolkata; �दनांक/ Date: 12/06/2020 (SB, Sr.PS) Copy of the order forwarded to: 1. Sheth Commercial Co. 2. Pr. CIT-14, Kolkata 3. C.I.T(A)- 4. C.I.T.- Kolkata. 5. CIT(DR), KolkataBenches, Kolkata. 6. Guard File.