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Income Tax Appellate Tribunal, “B” BENCH : KOLKATA
Before: Hon’ble Shri M.Balaganesh, AM & Hon’ble Shri S.S.Viswanethra Ravi, JM]
IN THE INCOME TAX APPELLATE TRIBUNAL “B” BENCH : KOLKATA [Before Hon’ble Shri M.Balaganesh, AM & Hon’ble Shri S.S.Viswanethra Ravi, JM] I.T.A No. 1927/Kol/2017 Assessment Year : 2007-08 M/s MKJ Developers Ltd. -vs- DCIT, Circle-4, Kolkata [PAN: AABCM 7076 L] (Appellant) (Respondent)
For the Appellant : Shri Ravi Tulsiyan, FCA For the Respondent : Md. Usman, CIT(DR) Date of Hearing : 07.03.2018 Date of Pronouncement : 14.03.2018
ORDER Per M.Balaganesh, AM
This appeal by the Assessee arises out of the order of the Learned Commissioner of Income Tax(Appeals)-17, Kolkata [in short the ld CIT(A)] in Appeal No.185/CIT(A)- 17/Kol/14-15 dated 01.03.2017 against the order passed by the DCIT, Circle-4, Kolkata [ in short the ld AO] under section 143(3) of the Income Tax Act, 1961 (in short “the Act”) dated 28.10.2009 for the Assessment Year 2007-08.
The only issue to be decided in this appeal is as to whether the ld CITA was justified in upholding the disallowance of Rs 2,03,21,461/- being the share trading loss as speculation loss in the facts and circumstances of the case.
2 ITA No.1927/Kol/2017 M/s MKJ Developers Ltd. A.Yr. 2007-08 3. The brief facts of this issue is that the assessee is a company engaged in the business of dealing in shares, granting loans and advances and in real estate. The ld AO observed that the assessee has shown interest income under the head ‘income from business’ and has net off the interest on loan payable with interest on loan received. During the year, the assessee purchased 1000000 quoted equity shares of Himachal Futuristic Communications Ltd (HFCL) at a cost of Rs 4,25,71,461/-. The same was valued at the end of the year at the lower of cost or market value as on 31.3.07. The ld AO observed that the market value as on 31.3.07 in respect of this share was lower than the cost by Rs 2,03,21,461/-. The assessee stated that the said valuation is mandated in Accounting Standard (AS) 2 issued by The Institute of Chartered Accountants of India (ICAI) which is one of the notified accounting standards u/s 145 of the Act. Hence the valuation at market value as on 31.3.2007 resulted in a loss of Rs 2,03,21,461/-. The assessee stated that during the year only this transaction (i.e purchase transaction of 10 lakh equity shares of HFCL) was carried out and the same is lying in closing stock as on 31.3.2007 and no trading actvitiy was carried on during the year. Accordingly it was pleaded that the same cannot be construed as speculation loss. However, the ld AO observed that the assessee had nil income under all heads and therefore the same does not fall under the exception to Explanation to section 73 of the Act and accordingly treated the loss of Rs 2,03,21,461/- as speculation loss and disallowed the claim of set off of the same with business profit.
The assessee stated that during the year, only 1000000 lakh equity shares of HFCL was purchased for Rs 4,25,71,461/- and the market value of the same as on 31.3.2007 was Rs 2,22,50,000/- ( 1000000 shares @ Rs 22.50 per share). The resulting loss of Rs 2,03,21,461/- was claimed in accordance with AS-2 issued by
3 ITA No.1927/Kol/2017 M/s MKJ Developers Ltd. A.Yr. 2007-08 ICAI . The action of the ld AO was upheld by the ld CITA. Aggrieved, the assessee is in appeal before us on the following grounds:-
1.a) That on the facts and in the circumstances of the case, the Ld. CIT(A) erred in holding that primary business of the appellant was engaging in real estate business and dealing in share/securities in spite of the fact that the appellant-company was engaged in the business of granting of inter-corporate loans of trading in securities and real estate business was not the principal business and major source of income in the immediately past and subsequent assessment years were from interest income.
b) That, therefore, the Ld. CIT(A) grossly erred on facts, evidence on record and in law in confirming the disallowance of Rs. 2,03,21,461/- being the share trading loss as speculation loss without properly appreciating that the case of the appellant clearly falls in exceptions provided in Explanation to Sec. 73 of the Act and as such the provisions of sec. 73 of the Act are not applicable to its case.
c) That the ld. Revenue authorities on wrong evaluation of facts and evidence on record erred in disallowing set off of loss of Rs. 2,03,21,461/- from current year’s business profits in spite of the fact that keeping in tune with the accounting policy followed by the appellant since past years and in compliance of AS-2 on Valuation of Inventories, the said loss was claimed due to valuation of shares.
That, as the order of Ld. CIT(A) on the above issues suffered from illegality and is devoid of any merit, the same should be quashed and your appellant be given such relief(s) as prayed for.
That, the appellant craves leave to amend, alter, modify, substitute, add to, abridge and/or rescind any or all of the above grounds.
We have heard the rival submissions. It is not in dispute that the assessee during the year bought 10 lakh shares of HFCL for Rs 4.21 crores and the same was lying in closing stock as on 31.3.07 and accordingly valued the same at market value as the same was below the cost price. This valuation resulted in a loss of Rs 2.03 crores
4 ITA No.1927/Kol/2017 M/s MKJ Developers Ltd. A.Yr. 2007-08 which was claimed by the assessee as a regular business loss which was treated by the ld AO as speculation loss by applying the provisions of Explanation to Section 73 of the Act. We find that the break up of income of the assessee company from various activities are as under for various years :-
It is not in dispute that the assessee is also engaged in the business of granting of loans and advances and interest income derived thereon is also offered to tax under the head ‘income from business’. But based on the funds deployed by the assessee towards investment segment, shares trading segment and lending segment, we find that the principal business of the assessee cannot be held as granting of loans and advances. Even from the income criterion for the year under appeal, the principal business of the assessee is not that of granting of loans and advances. We find that on the income criterion, for the Asst Year 2007-08 i.e the year under appeal before us, the assessee’s interest income is less than other income. The ld AR placed heavy reliance on the decision of the Special Bench of this Tribunal in the case of DCIT vs Venkateswar Investment and Finance Ltd reported in 93 ITD 177 (Kol SB) which had held as under:- “What constitutes the ‘principal business’ has not been defined anywhere in the Act. Therefore, what constitutes principal business will depend on the facts and circumstances of each case. The memorandum and articles of association of the company, past history of the company, current deployment of the capital of the company, break up of the income earned during the
5 ITA No.1927/Kol/2017 M/s MKJ Developers Ltd. A.Yr. 2007-08 relevant year will all help in determining the principal business of the company”.
But we find that the assessee had derived huge interest income only in Asst Year 2005-06 which is much more than other income. However, in Asst Year 2006-07 , the same had drastically come down from Rs 1,00,95,535/- to Rs 5,14,409/- and assessee during the very same year, had reported capital gains of Rs 4,14,18,793/- , income from other sources of Rs 6,85,197/- ; profit from real estate of Rs 3,63,56,986/- and loss on trading of shares of Rs 1,70,744/-. Hence the principal business carried on by the assessee during the Asst Year 2006-07 was investment and real estate transaction. Hence it is proved beyond doubt that it had not carried on the principal business of granting of loans and advances. Hence even going by the immediate past history of the assessee company as pointed out by the Special Bench of this Tribunal in Venkateswar Investment supra, it could be safely concluded that the principal business is not that of granting of loans and advances. Hence both on funds deployment as well as on the income criterion, the assessee’s principal business could not be construed as that of granting of loans and advances. We also find from the Segment Reporting disclosed in accordance with Accounting Standard 17 issued by ICAI, the assessee had categorized its segments into real estate and securities only. A segment becomes a reportable segment as per AS 17 of ICAI if the total income contributed by such segment is beyond the prescribed percentage when compared to other segments i.e based on income criterion. Similarly if the capital employed in a particular segment is found to be more than other segments, then also it becomes a reportable segment. In the instant case, the assessee company itself had not considered the lending segment as reportable segment as per AS 17 issued by ICAI as it had not fulfilled the necessary parameters therein. This fact has been rightly taken note of by the ld CITA while deciding the issue of principal business of the assessee.
6 ITA No.1927/Kol/2017 M/s MKJ Developers Ltd. A.Yr. 2007-08 5.1. The ld AR argued that Explanation to section 73 of the Act has been amended with effect from 1.4.2015 to include the expression ‘principal business of dealing in shares’ also as one of the exception to fall outside the ambit of Explanation to Section 73 of the Act. The ld AR pleaded heavily that the said amendment is to be construed as retrospective in operation , in support of which, he placed reliance on the following decisions :- a) Co-ordinate Bench decision of Mumbai Tribunal in the case of Fiduciary Shares & Stock P Ltd vs ACIT reported in 159 ITD 554 ; b) Co-ordinate Bench of Mumbai Tribunal in the case of Kingpin Investment & Finance Pvt Ltd & Anr vs DCIT reported in 47 CCH 482 ; and c) Co-ordinate Bench of this Tribunal in the case of Jalan Cement Works Ltd vs CIT in ITA No. 1112 / Kol/2013.
But we find that the Hon’ble Jurisdictional High Court in the case of PCIT vs M/s Snowtex Investment Ltd in GA No. 1695 of 2016 ITAT No. 199 of 2016 dated 22.11.2016 had held that the amendment carving out an exception in the explanation to section 73 of the Act for the companies, which have dealings in shares as their principal business, was made effective only on 1st April 2015. The amendment made with effect from 1st April 2015 is not curative in nature , hence does not have a retrospective effect. Hence respectfully following the decision of Hon’ble Jurisdictional High Court in the case referred to supra, we are not inclined to accept the arguments of the ld AR and the decisions relied upon by him. Accordingly the alternative argument advanced by the ld AR is dismissed.
5.2. In view of the aforesaid findings in the facts and circumstances of the case, we find that the ld CITA had rightly upheld the action of the ld AO in treating the loss
7 ITA No.1927/Kol/2017 M/s MKJ Developers Ltd. A.Yr. 2007-08 arising on valuation of shares held as stock in trade as a speculation loss in the sum of Rs 2,03,21,461/- . Accordingly, the grounds raised by the assessee are dismissed.
In the result, the appeal of the assessee is dismissed.
Order pronounced in the Court on 14.03.2018
Sd/- Sd/- [S.S. Viswanethra Ravi] [ M.Balaganesh ] Judicial Member Accountant Member
Dated : 14.03.2018
SB, Sr. PS Copy of the order forwarded to: 1. M/s MKJ Developers Ltd., Unit-1, 4th Floor, Sagar Estate, 2, Clive Ghat Street, Kolkata-700001 2. DCIT, Circle-4, Kolkata, Aayakar Bhawan, P-7, Chowringhee Square, Kolkata- 700069. 3..C.I.T.- 4. C.I.T.- Kolkata. 5. CIT(DR), Kolkata Benches, Kolkata.