Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, JAIPUR BENCH-B ,VC, JAIPUR
Before: SHRI SANDEEP GOSAIN, JM & SHRI RATHOD KAMLESH JAYANTBHAI, AM vk;dj vihy la-@ITA No. 15/JP/2021
The present appeal is filed by the assessee against the order of ld. PCIT Jaipur-1 dated 25.03.2021 for the A.Y. 2016-17 under section 263 of the IT Act, 1961. The grounds raised by the assessee are as under :-
In the facts of the case and in law, the learned PCIT has erred in invoking section 263 to the case of the appellant only by way of change of opinion, without pointing out any error in the order of the AO and also by disregarding/rejecting detailed submissions made to her from time to time.
In the facts of the case and in law, the Show Cause Notice & or order u/s 263 alleging errors and prejudice, itself is erroneous on many counts as follows : a. In the facts of the case and in law, the learned PCIT has erred in invoking the provision of sec. 263 merely because she wants to take a view different from the one taken by the Assessing Officer and thereby changing the opinion of the Assessing Officer by his opinion.
b. In the facts of the case and in law, the learned PCIT has erred in holding that the Assessing Officer failed to treat loss from Futures amounting to Rs. 74,43,978/- as non-speculative and thereby allowing the set-off against other business income. c. In the facts of the case and in law, the learned PCIT has erred in applying explanation to section 73 in respect of losses from Futures by disregarding specific section 43(5)(d) while exercising powers u/s 263. d. In the facts of the case and in law, the learned PCIT has erred in passing the order u/s 263 by disregarding several case laws cited in the reply to show cause notice and thereby passing the order not tenable in law.
2. Brief facts of the case are that the assessee is a trader in land and also derived income from derivative business and also earns income from interest. The case of the assessee was assessed u/s. 143(3) on 26.11.2018 determining income Rs. 4,32,470/-. Thereafter the Ld. PCIT Jaipur-1 noticed that the assessee has set off losses in future amounting to Rs. 74,43,978/- against the revenue from operations amounting to Rs. 1,82,62,775/- which is allowed by the ld. AO in the order passed u/s 143(3). As per the ld. PCIT Jaipur-1, the AO should not have allowed losses in futures u/s. 73(4) because the main business of the assessee is sale of land and therefore losses in futures being speculative loss could not have been allowed. Therefore, show cause notice u/s. 263 dated 09.03.2021 was issued to the assessee. In response to the same the assessee submitted detailed reply on 16.03.2021, citing various facts and case laws. No personal hearing was granted in spite of request made by the assessee. The ld. PCIT Jaipur-1 relied upon explanation to section 73 which reads as follows:-
“Where any part of the business of a company [other than a company whose gross total income consists mainly of income which is chargeable under the heads “Interest on securities”, Income from house property”, “ Capital gains” and Income from other sources”], or a company the principal business of which is the business of [trading in shares or] banking or the granting of loans and advances consists in the purchase and sale of shares of other companies, such company shall, for the purposes of this section, be deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sale of such shares. “
Thereafter the ld. PCIT Jaipur-1 discussed the provision of section 43(5)(d) and held that the same is limited to income from business and does not cover section 73.
Accordingly the ld. PCIT Jaipur-1 observed that the losses incurred by the assessee by trading in futures /derivative is speculative loss by virtue of provisions of explanations to section 73(4) of the Act. Further the ld. PCIT Jaipur-1 relied upon following judgments :- i. DLF Commercial Developers Limited Vs CIT in dated 11.07.2013 ii. Intermetal Trade Ltd. (2006) 285 ITR 536 (MP) iii. CIT vs Lokmat Newspapers P. Ltd. (2010) 322 ITR 43 (Bom) iv. R.P.G. Industries Ltd. vs CIT, (2011) 338 ITR 313(Cal)
The ld. PCIT further observed that the view taken by the AO was not in accordance with the provisions of the section 73. The ld. PCIT also rejected several case laws cited by the assessee and held that the order passed by the AO on 26.11.2018 was erroneous and prejudicial in the interest of the revenue. Accordingly the order of the AO was set aside by the PCIT and directed the AO to pass necessary order after giving opportunity of being heard to the assessee. Thus the revision process u/s. 263 was concluded on 25.3.2021.
Aggrieved by the above said order of the ld. PCIT the assessee filed present appeal before the Hon’ble Bench.
Before us, the ld. Counsel for the assessee submitted in this regard that the assessee is deriving income from currency, derivative and sale of land held as stock in trade and no share trading was done by the assessee and therefore explanation to section 73 does not apply to the fact of the case. This fact is also fortified from the Profit & Loss account where no trading in shares is appearing. Attention of the Hon’ble Bench is invited to page no 8 of the paper book where Note no. 11 forming part of the accounts is as under:
REVENUE FROM OPERATIONS 31st 31st Particulars As at As at March, 2016 March, 2015 Income from Currency 368753.99 0.00 Loss from futures (7443978.58) 0.00 Sale of Stock in trade (Land at 25338000.00 0.00 Mahapura) Total 18262775.41 0.00 It is thus submitted that action of ld. PCIT by relying upon the provisions of section 73(4) is entirely misplaced because section 73(4) speaks about carry forward of losses upto 8 years, whereas the assessee has set off losses in futures against profits on sale of land held as stock in trade.
4.1. Without prejudice to the above, it is further submitted that section 43(5)(d), which is a specific section makes it clear that income from derivatives shall be business income with effect from A.Y. 2006-07. Therefore amended section 43(5)(d) is specific section which overrides general and old section 73 including explanation thereto. Attention of the Hon’ble Bench is also invited to Explanatory Memorandum to the Finance Bill, 2005 (paper book page 50) which reads as under :
“Under the existing provisions [clause (5) of section 43] a transaction for the purchase and sale of any commodity including stocks and shares is deemed to be a "speculative transaction", if it is settled otherwise than by actual delivery. However, certain categories of transactions are excluded from the purview of the said provision. Further the unabsorbed speculation losses are allowed to be carried forward for eight years for set-off against speculation profits in subsequent years. These restrictions were essentially designed as an anti- evasion measure to prevent claims of artificially generated losses in the absence of an appropriate institutional infrastructure. Recent systemic and technological changes introduced by stock markets have resulted in sufficient transparency to prevent generating fictitious losses through artificial transactions or shifting of incidence of loss from one person to another. The screen based computerised trading provides for an excellent audit trail. Therefore, the present distinction between speculative and non- speculative transactions, particularly relating to derivatives is no more required. The proposed amendment, therefore, seeks to provide that an eligible transaction carried out in respect of trading in derivatives in a recognised stock exchange shall not be deemed to be a speculative transaction. The proposed amendment also seeks to notify relevant rules etc. regarding conditions to be fulfilled by recognised exchanges in this regard. Further it is also proposed to amend sub-section (4) of section 73 so as to reduce the period of carry forward of speculation losses from eight assessment years to four assessment years. These amendments will take effect from 1st April, 2006 and will, accordingly, apply in relation to assessment year 2006-07 and subsequent years. [Clauses 14 and 20]“
In view of above amendment, it is submitted that derivative transactions are non speculative from AY 2006-07 and therefore revision made by the ld. PCIT Jaipur is against the statutory provisions of law. The Hon’ble ‘C’ Bench of Ahemdabad ITAT under similar facts in the case of Magic Share Traders Ltd. has held as under :
“9. We have carefully considered the rival submissions and perused the respective orders of the AO and CIT(A) . The substantive question that arises for adjudication is whether loss incur red in eligible transactions i.e. derivative transactions within the meaning of Proviso (d) to Section 43(5) of the Act not involving any purchase or sale of shares per se can be regarded as speculative loss for the purposes of set off in view of Explanation to Section 73 or not. The controversy involved in the present case is thus essentially legal in nature. 9.1 In the present appeal, the assessee seeks set off of losses arising from derivative losses as non-speculative business loss. In contrast, the Revenue has labeled the loss arising from derivative transactions as ‘speculative loss’ and has consequently denied set off of such losses from regular income of non-speculative nature etc. by applying Explanation to Sect ion 73 of the Act. 9.2 We first advert to the pivotal contention on behalf of the assessee that Explanation to Section 73 of the Act cannot apply to loss arising from derivative transactions which are categorically excluded from being regarded as speculative business as defined under s.43(5) of the Act read with proviso (d) thereto. Identical issue arose before the Hon’ble Calcutta High Court in the case of Asian Financial Services (supra) relied upon. The Hon’ble Calcutta High Court held that once it is deemed to be a normal business loss on the basis of proviso appended to Section 43(5) of the Act , a question of applying Section 73 of the Act or the Explanation thereto for the purposes of refusing loss to be set off against business income is wholly incorrect .The Hon’ble Calcutta High Court after taking note of the decision of Hon’ble Delhi High Court in DLF Commercial (supra) took a distinct stand that derivatives cannot be treated at par with shares for the purposes of Explanation to Section 73 of the Act because the legislature has t reated it differently. Thus, in view of the aforesaid posit ion enunciated by the Hon’ble High Court in Asian Financial Services (supra) , we find good deal of force in the case of assessee. The claim of the assessee thus requires to be allowed on this ground alone. 9.3 In view of the resounding conclusion drawn in favour of the assessee on the aforesaid legal position, we do not consider it necessary to advert to other alternative content ions raised on behalf of the assessee.
10. In the result, Ground No.1 of the assessee’s appeal is allowed.”
The aforesaid judgment of Hon’ble Ahmedabad Bench is followed in the case of Jeenec Solutions Pvt. Ltd in for AY 2013-14 by SMC Bench of Ahmedabad, wherein it has been held as under :-
We have heard both the sides and perused the material on record. During the year under consideration, the assessee company has entered in the derivative transactions of Nifty and currency (F & O) in which net loss of Rs. 1,71,953/- was incurred. The derivatives i.e. Future and Option transactions were taken place in the recognized stock exchange i.e. National Stock exchanged and MCS in various scripts and currencies. The detailed broker note along with contract notes/invoices were submitted during the course of assessment proceedings. The assessing officer has treated the aforesaid loss as speculation loss and stated that as per section 73(1) of the Act the same cannot be set off against other normal business loss. In this regard, we have gone through the provision of section 43(5) of the Act pertaining to speculation transaction reproduced as under:- (5) 1 " 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 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; shall not be deemed to be a speculative transaction; (d) an eligible transaction in respect of trading in derivatives referred to in clause 71 [(ac)] of section 272 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) carried out in a recognised stock exchange; 73[or]] (e) an eligible transaction in respect of trading in commodity derivatives70 carried out in a recognised association 74[, 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.”
After considering the provision of section 43(5), the Co-ordinate Bench of the ITAT Ahmedabad vide ITA No. (2019) 111 taxman.com 239 (Ahmedabad Trib.) in the case of Magic Share Traders Ltd. vs. ITO has adjudicated the identical issue as under:-
“3.3 The substantive question in controversy is whether loss incurred in eligible transactions viz. 'derivative transactions' within the meaning of Proviso (d) to Section 43(5) of the Act not involving any purchase or sale of shares per se can be regarded as 'speculative loss' for the purposes of set off in view of Explanation to Section 73 or not? 3.4 The Co-ordinate Bench of ITAT in concerning A.Y. 2012-13 order dated 31.10.2018 has adjudicated the issue in favour of the assessee. The relevant operative para is reproduced hereunder:- "9. We have carefully considered the rival submissions and perused the respective orders of the AO and CIT(A). The substantive question that arises for adjudication is whether loss incurred in eligible transactions i.e. derivative transactions within the meaning of Proviso (d) to Section 43(5) of the Act not involving any purchase or sale of shares per se can be regarded as speculative loss for the purposes of set off in view of Explanation to Section 73 or not. The controversy involved in the present case is thus essentially legal in nature. 9.1 In the present appeal, the assessee seeks set off of losses arising from derivative losses as non-speculative business loss. In contrast, the Revenue has labeled the loss arising from derivative transactions as 'speculative loss' and has consequently denied set off of such losses from regular income of non-speculative nature etc. by applying Explanation to Section 73 of the Act. 9.2 We first advert to the pivotal contention on behalf of the assessee that Explanation to Section 73 of the Act cannot apply to loss arising from derivative transactions which are categorically excluded from being regarded as speculative business as defined under s.43(5) of the Act read with proviso (d) thereto. Identical issue arose before the Hon'ble Calcutta High Court in the case of Asian Financial Services (supra) relied upon. The Hon'ble Calcutta High Court held that once it is deemed to be a normal business loss on the basis of proviso appended to Section 43(5) of the Act, a question of applying Section 73 of the Act or the Explanation thereto for the purposes of refusing loss to be set off against business income is wholly incorrect. The Hon'ble Calcutta High Court after taking note of the decision of Hon'ble Delhi High Court in DLF Commercial (supra) took a distinct stand that derivatives cannot be treated at par with shares for 9 Wealthy Sky Development Pvt. Ltd. the purposes of Explanation to Section 73 of the Act because the legislature has treated it differently. Thus, in view of the aforesaid position enunciated by the Hon'ble High Court in Asian Financial Services (supra), we find good deal of force in the case of assessee. The claim of the assessee thus requires to be allowed on this ground alone. 9.3 In view of the resounding conclusion drawn in favour of the assessee on the aforesaid legal position, we do not consider it necessary to advert to other alternative contentions raised on behalf of the assessee.
In the result, Ground No. 1 of the assessee's appeal is allowed." In the light of the above facts and findings of the Co-ordinate Bench, we consider that the ld. CIT(A) is not justified in treating the business loss incurred in Future & Option of Derivatives of Rs. 1,71,953/- as speculation loss. Therefore, following the decision of the Co-ordinate Bench as cited above, the appeal of the assessee is allowed.”
With regard to the reliance placed by ld. PCIT Jaipur – 1 in the case of DLF Commercial Developers Ltd. (35 Taxman.com 280 Delhi) is not tenable in law because the same is already distinguished following cases:
- Asian Financial Services Ltd. 70 taxmann.com 9 (Calcutta) - Upkar Retail (P.) Ltd. 171 ITD 626 (Ahmedabad) - Magic Share Traders Ltd. 174 ITD 230 (Ahmedabad) - Sadhana Stocks & Securities (P.) Ltd. 168 ITD 499 (Kol) - Sucon India Ltd. 184 TTJ 713 (Del) - Vibha Goel 16 ITR(T) 418 (Chand) - Madanlal Ltd 51 SOT 188 (Kol) - Hiren Jaswantrai Shah 141 TTJ 851 (Ahd) - D & H Sechron Electrodes Pvt.Ltd. vs JCIT Range-1, Indore - Sri Vasavi Gold & Bullion (P.) Ltd.[ 92 taxmann.com 290 (Madras)] - Smt. Seema Jain 6 ITR(T) 488 (Del) - G.K. Anand Bros. Buildwell (P.) Ltd. 34 SOT 439 (Delhi) - Ivory Consultants (P.) Ltd. 96 taxmann.com 539 - Lohia Securities Ltd. [157 ITD 265 Kolkata - Trib.] Further, Hon’ble Supreme Court in the case of Vegetable Products Ltd. (88 ITR 192 SC) has categorically held that where there are two different views possible, one favourable to the assessee must be followed. In the case of Ivory Consultants Pvt. Ltd. (96 Taxman.com 539), under similar facts, the Calcutta High Court held as under:
“Section 43(5), read with sections 73 and 263, of the Income-tax Act, 1961 - Speculative transactions (Derivatives) - Assessment year 2011-12 - In course of assessment, Assessing Officer made sufficient inquiries on derivative loss claimed as a business loss by assessee - After said inquiries Assessing Officer completed assessment holding that loss from derivative's was a genuine loss and had to be allowed as a normal business loss - However, Commissioner (Appeals) passed an order under section 263 setting aside assessment order on ground that no proper inquiry was made - Tribunal, however, found on facts that inquiry was conducted in a proper manner and thus, Tribunal confirmed order passed by Assessing Officer - Whether on facts, impugned order passed by Tribunal was to be confirmed - Held, yes [Para 5] [In favour of assessee]“.
It is thus submitted that the case of DLF Commercial Developers Ltd. as relied upon by the ld. PCIT Jaipur is distinguish in the case of Ivory Consultants Pvt. Ltd. (supra) and not only that but revision made in that case u/s. 263 in the case of Ivory Consultants Pvt. Ltd. was quashed by Calcutta High Court on the same issue of allowance of losses in derivative u/s. 43(5) and non applicability of section 73 to such cases. It is also relevant to state that all the three case laws relied upon by the PCIT Jaipur -1 are old and prior to the amendment to section 43(5)(d) and therefore are not applicable to the fact of the case.
4.2. It is further submitted that the expression “erroneous” has been defined in Black’s Law Dictionary (paper book page 46 para j). According to the definition “erroneous” means involving error, deviating from the law. It is therefore clear that an order cannot be termed as erroneous unless it is not in accordance with law. The Section 263 does not visualize a case of substitution of the judgment of the Commissioner of Income Tax for that of the Assessing Officer unless proved to be erroneous. The error envisaged by Section 263 is not one, which depends on possibility or guesswork, but it should actually an error. The scope of interference u/s 263 is not to set aside merely unfavourable orders and bring to tax more money to treasury. The reversionary power u/s 263 cannot in any manner be equated to or regarded as approaching in any way in Appellate jurisdiction as was held in the case of V K. Rice Co. [163 ITR 129 (Mad)].” Further powers u/s. 263 require both the conditions should co-exist i.e order should erroneous as well as should be prejudicial to the interest of revenue. In this regard reliance is placed on the decision of Hon’ble Bombay High court in the case of Gabriel India Ltd. reported in 203 ITR 128. In this regard further reliance is placed on the following:
- Malabar Ind. Co. Ltd. 243 ITR 83 (2000)(SC) - Venkata Krishna Rice Co. 163 ITR 129 (97)(Mad.)
During the course of assessment proceedings details of losses in future and set off against profit on sale of land were duly submitted vide letter dated 10.10.2018 (page no. 24 to 26 of the paper book). Merely because there is no discussion about the losses in derivatives in the assessment order does not mean that the AO is not made application of mind. The ld. AO has taken one possible view and change of the opinion by PCIT Jaipur is not permissible as has been held in the case of Green world Corporation 314 ITR 81 (2009) (SC).
In view of the facts and circumstances, it is humbly prayed that the revision order of ld. PCIT, Jaipur deserves to be quashed and the assessment order as passed by the ld. AO may please be upheld.
On the other hand the ld. D/R supported the order of the Pr. CIT and 5. submitted that in Explanation to section 73 of the Act, the words “ the principal business of which is the business of banking” have been substituted for the words “the principal business of which is the business of trading in shares or banking” by the Finance (No. 2) Act, 2014, w.e.f. 01.04.2015.
Thus, w.e.f. 01.04.2015, vide above amendment to Explanation to section 73 of the Act, if the principal business of a company is trading in shares, then the transactions in shares by a company would no longer be covered by the deeming fiction of Explanation to section 73 of the Act. Therefore, the ld. PCIT has rightly applied the provisions of section 73 by overriding the general provisions of section 43(5) of the Act.
6. We have heard both the parties and perused the material available on record.
The argument of the ld. D/R regarding the amendment of section 73 does not apply in respect of transactions undertaken in derivatives on recognized Stock Exchange and these transactions are out of ambit of this amendment. Therefore, there is no force in the argument of ld. D/R on this point. Similar issue has been adjudicated by the Ahmedabad Bench of the Tribunal in dated 12.03.2020 in the case of M/s. Jeenec Solution Pvt. Ltd. vs. ITO wherein one of us was co-author, and following the earlier decision in ITA No. 770/Ahd/2016 dated 31.10.2018
13 Wealthy Sky Development Pvt. Ltd. decided the matter in favour of the assessee. Therefore, following the decisions discussed hereinabove and considering the totality of facts and circumstances of the case, the appeal of assessee is allowed.
In the result, the appeal of the assessee is allowed.
Order pronounced in the open Court on 27/06/2022.