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Income Tax Appellate Tribunal, “B” BENCH: KOLKATA
Before: Shri A. T. Varkey, JM & Dr. A. L. Saini, AM]
ORDER
Per Shri A.T.Varkey, JM
This appeal preferred by the Revenue is against the order of the Ld. CIT(A)-2, Kolkata dated 26.07.2017 for AY 2012-13.
The main ground of appeal
of the revenue is against the action of Ld. CIT(A) in allowing the benefit of set off of unaccounted loss of Rs.91,36,945/- incurred in the undisclosed transaction against the business income of Rs.92,61,341/- derived by the assessee in transactions involving trading of derivatives.
3. Brief facts of the case as noted by the AO are that during the assessment proceedings based on the CIB information and the ITS details it was found that assessee carried out certain transactions in derivative trading through M/s. Geometry Vanijya Pvt. Ltd., an authorized broker of MCX Stock Exchange Ltd. and when the AO asked the assessee to reconcile the data with the transactions recorded in the books, the assessee was able to reconcile the data except that of 255 transactions which the assessee claimed it as not pertaining to the assessee. Thereafter the AO noted that out of 255 number of transactions, the assessee claimed that in 18 number of cases, the trade number was same but amount was different and in some cases there are double entries. The AO issued notice u/s. 133(6) to Shree Harivansh Securities Pvt. Ltd., AY 2012-13 M/s. MCX Stock Exchange Ltd. to furnish details of transaction recorded with the assessee company through the broker M/s. Geometry Vanijya Pvt. Ltd. (hereinafter referred to as “M/s. GVPL”). Pursuant to the notice M/s. GVPL produced transaction record with the Exchange which was booked in the name of the assessee through the broker M/s. GVPL. The AO noted that from the details of the statement he found that 151 number of cases were recorded as transactions in the exchange in the name of the assessee, the details of which has been reproduced by the AO from page 7 to 12 of the assessment order. After reproducing the details as stated above, the AO was of the opinion that the assessee had purchased derivative of quantity 1827 for value Rs. 9,07,14,400/- and sold quantity of 3402 for value Rs.17,00,41,537/-. So, the AO observed that there are more sales than purchase, which cannot be possible. The AO took note of the four types of transactions available in the ITS details, which were found to be unaccounted in the books of the assessee, (1) Purchase of Rs.8,80,86,851/- recorded against which sales of Rs. 7,89,50,506/- resulting in a loss of Rs. 91,36,345/- out of such transactions. (2) Purchase of Rs. 8,16,25,363/- recorded against which no sales recorded. (3) Purchase of Rs. 1,96,39,875/- recorded against which sales of Rs. 2,89,01,716/- recorded resulting m a profit of Rs. 92,61,841/-. (4) Sales of Rs. 4,38,03,828/- recorded against which no purchase found. The Profit/loss generated out of unaccounted transactions was analysed by AO on the basis of taxability of income as under:
1. 1. Loss generated out of unaccounted transactions is not allowed to be set off against business income.
2. The unaccounted purchase could not result in profit since no trace of sale of the derivatives found. Hence, the unrecorded purchase is ignored.
3. Profit generated of Rs. 92,61,841/- is treated as undisclosed income from derivative transaction.
4. From the purchase in respect of which sale is recorded has been found to be Rs.10,77,26,726/- against which sale recorded Rs. 10,78,52,222/-. Hence, the average yield on such transaction is 1.16%. The unrecorded sales found to be Rs.4,38,03,828/-. At the same profit yield ratio, the profit comes to Rs. 51,029/-, which is taken as profit out of unrecorded sales. The profit yield percentage very much commensurate with that prevailing in the market.
Shree Harivansh Securities Pvt. Ltd., AY 2012-13 According to AO, in the non-delivery based derivative future transactions both purchase and sale can be booked separately from which the reverse transaction generates profit or loss. According to AO, the assessee has denied a specific part of the transactions in the books as not related to itself. But the recorded transaction reflected in the exchange definitely pertains to the assessee and the assessee has not taken the same in its books. Thus the income generated out of such transactions is Rs. 93,12,870/- was determined by AO. Aggrieved, the assessee preferred an appeal before the Ld. CIT(A) who was pleased to grant relief to the assessee. Aggrieved, the revenue is before us.
We have heard rival submissions and gone through the facts and circumstances of the case. We note that the facts aforesaid are not repeated for the sake of brevity. The action of the AO as we noted is that the AO based on the CIB information, ITS details and the statement from M/s. MCX Stock Exchange found out that the assessee had carried out transactions which resulted in a profit of Rs.92,61,841/- which was unrecorded in the books of the assessee. However, the AO himself acknowledges that the assessee had transactions which resulted in a loss of Rs.91,36,345/- out of the said transactions in derivative. However, the AO has only added the profit of Rs.92,61,841/- without giving set off of the loss which also he has unearthed by his enquiries from which profit of Rs.92,61,841/- was discovered. We note that the assessee is engaged in the business of trading in shares and securities. We note that the assessee also deals in future and options. In the derivative scheme, the profit /loss of future /options is reflected in the P&L Account on net basis. In the course of the assessment, the AO had obtained information pertaining to the future transaction conducted by the assessee which incurred loss in a particular set off transactions of Rs.91,36,345 and a gain of Rs.92,61,841/-. According to AO, neither profit nor the loss from these transactions was reflected in the books of account. In the appeal, the Ld. CIT(A) allowed the claim of the assessee to set off of the loss of Rs.91,36,345/- from the unaccounted profit of Rs.92,11,870/- and accordingly, the undisclosed income was restricted to Rs.1,76,525/-. The Hon’ble Supreme Court in the case of ITO Vs. Ch. Atchaiah 218 ITR 239 (SC) has laid the ratio/principle that “under the present Act, the ITO has no option like the one he had under the 1922 Act. The ITO can and the ITO must tax the right person and the right person alone on the right income in the right year.” In this case, we note that the AO based on the CIB information and ITS details and finding Shree Harivansh Securities Pvt. Ltd., AY 2012-13 discrepancy asked the assessee to reconcile the data and had issued notices u/s. 133(6) to M/s. MCX Stock Exchange and found that 151 number of transactions in the exchange was recorded in the name of the assessee, details have been given from pages 7 to 12 of the assessment order and has found as a fact that the assessee had not recorded the sales which resulted in profit of Rs.92,61,841/- as well as resulted in loss of Rs.91,36,345/- out of such transaction. In such a scenario, the AO being a quasi judicial body had to act in a fair, just and reasonable manner and should have only taxed the right income (even if undisclosed). We note that the profit as well as the loss are from the derivative trading only and therefore, have to be deemed as business income by virtue of sec. 43(5) of the Act. In such a scenario, not allowing the set off of the loss component from the profit from the same transaction though un-recorded, is not just, fair or reasonable order of the AO. Therefore, relying on the ratio laid by the Hon’ble Supreme Court in Ch. Atchaiah (supra) as well as in the case of Maneka Gandhi Vs. Union of India reported in 1978 AIR 597 in which order the law has been laid down that a public authority should discharge his duties in a fair, just and reasonable, manner and the principle of due process of law was recognized by the Hon’ble Supreme Court. So, we uphold the order of the Ld. CIT(A) directing the AO to restrict the addition to Rs.1,76,525/- after giving set off of the loss of Rs.91,36,345/- which does not require any interference from our part and so we confirm the same.
The next ground of appeal
of the revenue is against the action of the Ld. CIT(A) while deciding the disallowance made by the AO u/s. 14A read with Rule 8D of the Income-tax Rules, 1962 (hereinafter referred to as the “Rules”) to consider only the investment which has given rise to the exempt income.
6. We note that the assessee has filed an application under Rule 27 of the ITAT Rules in respect to this ground of appeal preferred by the revenue. According to the assessee, the AO while taking note that the assessee was in receipt of exempt dividend income of Rs.22,23,801/-, however has not accepted the assessee’s contention that the assessee has only incurred expenditure on STT of Rs.2,24,983/- and towards investment, other charges (investments) of Rs.14,749/- and offered Rs.2,39,732/- towards disallowance. The AO applying Rule 8D(2)(i) and 8D(2)(iii) made disallowance of Rs.9,30,504/- and Rs.27,366/- respectively. Since the assessee offered Rs.2,39,732/- balance of Rs.7,17,848/- was Shree Harivansh Securities Pvt. Ltd., AY 2012-13 disallowed as expenditure u/s. 14A of the Act. On appeal, though assessee challenged the addition made u/s. 14A read with Rule 8D(2)(i), the Ld. CIT(A) has not adjudicated the same and only adjudicated in respect to application of Rule 8D(2)(iii) and relying on the judgment of this Tribunal in REI Agro Ltd. Vs. DCIT (144 ITD 141) has directed the AO to take into consideration 0.5% of the investment in scrips which had yielded dividend income. This action of the Ld. CIT(A) has been challenged by the Revenue. However, the assessee has also filed the Rule 27 application has contended that the AO’s action in respect of application under Rule 8D(2)(iii) is fully supported by the assessee. However, brought to our notice that the Ld. CIT(A) while adjudicating the action of AO while disallowing under section 14A read with Rule 8D(2)(i) has not been adjudicated this ground and need us to adjudicate the same. We find that the Ld. CIT(A) has rightly adjudicated the application of sec. 14A read with Rule 8D(2)(iii) and has directed the AO to consider only 0.5% of the investment which has yielded exempt income by relying on the Tribunal’s order in REI Agro Ltd., supra which is confirmed. Coming to the assessee’s application that while applying the disallowance u/s. 14A read with Rule 8D(2)(i), we note that the Ld. CIT(A) has not adjudicated the issue. We note disallowance computed by the AO under Rule 8D(2)(i) comprised of the following: a) STT paid on investments - Rs.9,09,922/- b) Other Charges - Rs.14,709/- c) Demat Charges - Rs.5,873/- 7. It was brought to our notice that item no. (b) was already allowed by the assessee in the return of income, which we find to be correct. We note that the item no. (c) i. e. demat charges was suo moto offered by the assessee vide submission dated 10.02.2015 before the AO. As regards the disallowance of STT of Rs.9,09,022/-, it was brought to our notice that the said STT comprised of sum of Rs.2,24,983/- paid on purchase & sale of investments and the remaining STT of Rs.6,84,939/- (9,09,022 – 2,24,983) was paid in relation to trades conducted in futures & derivatives on the stock exchange. Before the AO the assessee in its submission dated 10.02.2015 had explained that out of the total STT, sum of Rs.2,24,983/- was directly attributable to the investments and that the said amount had already been disallowed and added back to the total income. As regards the STT of Rs.6,84,939/- paid on Shree Harivansh Securities Pvt. Ltd., AY 2012-13 derivatives, it brought to our notice that the aforesaid amount was erroneously disallowed by the AO presuming it to be as direct expenditure under Rule 8D(2)(i). We note that the AO seems to have not understood that STT was directly & intrinsically related to the activity of trading in derivatives, which yielded only taxable income, and which was also assessed to tax at normal rates. In the circumstances these charges had no correlation either with investments or for that matter with earning of dividend. In the circumstances the STT of Rs. 6,84,939/- being not relatable to investments was wrongly disallowed by the AO under Section 14A read with Rule 8D(2)(i). Therefore the AO is directed to delete the impugned disallowance to the extent of Rs.6,84,939/-.
In the result, appeal of revenue is dismissed and assessee’s Rule 27 application is allowed as discussed above. Order is pronounced in the open court on 27th March, 2019. Sd/- Sd/- (Dr. A. L. Saini) (A. T. Varkey) Accountant Member Judicial Member Dated: 27th March, 2019 Jd.(Sr.P.S.)
Copy of the order forwarded to:
1 Appellant – DCIT, Central circle-2(2), Kolkata 2 Respondent – M/s. Shree Harivansh Securities Pvt. Ltd., 22, Brabourne Road, Kolkata- 700 001. 3 CIT(A)-2, Kolkata (sent through e-mail)