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Income Tax Appellate Tribunal, “D” BENCH: KOLKATA
Before: Shri Partha Sarathi Choudhary, JM & Dr. A. L. Saini, AM]
IN THE INCOME TAX APPELLATE TRIBUNAL “D” BENCH: KOLKATA [Before Shri Partha Sarathi Choudhary, JM & Dr. A. L. Saini, AM] I.T.A No.1858/Kol/2016 Assessment Year: 2011-12 Assistant Commissioner of Income-tax, Vs. M/s. Stewart &Mackertich Wealth Circle-10(2), Kolkata. Management Ltd. (PAN:AADCS7513E) (Appellant) (Respondent)
& I.T.A No.1820/Kol/2016 Assessment Year: 2011-12 M/s. Stewart &Mackertich Wealth Vs. Deputy Commissioner of Income-tax, Management Ltd. Circle-10, Kolkata. (Appellant) (Respondent)
Date of hearing: 08.02.2017 Date of pronouncement: 12.04.2017 For the Revenue :Md. Ghayas Uddin, JCIT, Sr. DR For the Assessee: Shri A. K. Tibrewal, FCA
ORDER Per Dr. A. L. Saini, AM: The captioned cross appeals filed by the Revenue and the Assessee pertaining to Assessment Year 2011-12, aredirected against the order passed by the Ld. CIT(A)-18, Kolkata in Appeal No. 398/CIT(A)-18/14-15/ACIT, Cir.10(1)/Kol dated 26.07.2016, which in turn arises out of assessment order passed by the DCIT, Circle-10, Kolkata u/s.143(3) of the Income-tax Act, 1961 (hereinafter referred to as the “Act”) for AY 2011-12, dated 13.03.2014.Since both the appeals arise out of common order and facts are identical, therefore, we dispose of the same by this consolidated order for the sake convenience.
The brief facts of the case qua the assessee are that the assessee filed its return of income declaring total income at Rs. Nil for AY 2011-12 on 23.09.2011. The assessee’s case was selected for scrutiny u/s. 143(2) of the Act and the AO has completed assessment by making the addition u/s. 37 of the Act for the payment of penalty to the Stock Exchange at Rs.97,617/-(treated by the assessee as business expenses). The assessee failed to segregate the related expenditure for purchase and sale , trading of shares, specifically which is required following the provisions laid down by explanation to section 73 of the I.T.
2 ITA Nos.1858 & 1820/Kol/2016 Stewart &Mackertich Wealth Management Ltd...AY. 2011-12 Act,1961.The Assessee officer disallowed the loss attributable to the own purchase and sale of shares (share trading of the assessee) treating the speculative income of the said loss and held that the said loss is being carried forward and may be availed of for the period permitted by the Act. Therefore, Rs.27,01,695/- is added by the AO holding that it should be kept separately for carry forward in next year. The Ld AO also observed that the assessee has failed to deposit the employees’ contribution to ESI and PF, therefore, the AO disallowed Rs.1,22,350/-. The AO also disallowed the bed debts claimed by the assessee at Rs.8,65,560/-
Aggrieved from the disallowances made by the AO, the assessee filed an appeal before the Ld. CIT(A) who has partly deleted the additions made by the AO. The Ld. CIT(A) has deleted the addition made by the AO on account of bad debts written off of Rs.8,65,560/- holding that deduction of advances given to the employees are concerned, which had become irrecoverable that may not cause much of problem, advances were given to the persons who had been employed by the assessee company and if they had become irrecoverable it would clearly be treated as business loss. Therefore, addition made by the AO at Rs.8,65,560/- on account of bad debts written off were deleted by the Ld. CIT(A).
The assessee has raised an additional ground before the Ld. CIT(A) regarding the disallowance u/s. 14A of the Act read with Rule 8D of the I. T. Rules. The Ld. CIT(A) observed that while filing the return of income, assessee had suo moto made disallowance u/s. 14A of the Act. The Ld. AR for the assessee has submitted before us that the income tax return filed by the assessee wherein we observe that the assessee has shown the exempt income u/s. 14A of the Act at Rs.1,46,902/- and he has disallowed suo moto the expenses which relates to exempt income at Rs.5,38,538/-. The AO accepted the exempt income declared by the assessee in the return of income and also accepted suo moto disallowance made by the assessee u/s. 14A of the Act. But the assessee has raised additional ground before the Ld. CIT(A) stating that the assessee is entitled to claim more relief because of the new judgment of the Hon’ble High Court and Hon’ble Supreme Court, which were delivered by the various courts later on and it seemed to the assessee to claim more benefit and, therefore, he raised the additional ground before the Ld. CIT(A) to allow the more
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benefit u/s. 14A of the Act. But the Ld. CIT(A) has disallowed the assessee’s contention observing that the issue u/s. 14A of the Act did not attain finality and still various decisions are giving interpreting the quantum of disallowance differently. Secondly, the disallowance u/s. 14A of the Act is not a legal and assessee himself has calculated the quantum of basis of law prevailing at that time. In addition to this, the Ld. CIT(A) deleted the addition of Rs.25,66,694/- holding that the business of purchase and sale of shares are not speculative in nature. While deleting the addition made by the AO on account of speculative transaction, the Ld. CIT(A) has observed the following:
“I have carefully considered the facts of the case and the submissions of the assessee. First let us see what is the main business activity of the assessee. Is it earning brokerage income or is it earning income on share trading on its own account. In Form 3CD, Auditors of the company mentioned the following in column 8(a): 8 (a) Nature of business or profession Brokerage income for Security Broking & (if more than one business or on distribution of financial products. The profession is carried on during Company is a trading member of Bombay the previous year, nature of Stock Exchange Ltd., National Stock every business or profession) Exchange of India Ltd., The Calcutta Stock Exchange Ltd., OTC Exchange of India, Depository Participant of Central Depository Services India Ltd. and registered with AMFI (Association of Mutual Funds in India)
In Director's report, under the head 'Activities and Performance/Future Prospects', following is mentioned. "During the year under review, the stock market remained more or less stable. As a consequence, the bottom-line of the Company witnessed a substantial improvement. The Company while consolidating its focus on Institutional and Corporate Stock Broking, had successfully managed QIPs of select corporate. With the world economy witnessing steady recovery, the future outlook of Stock Broking Industry as a whole and your Company in particular, appears to be bright, barring unforeseen circumstances.” Item No. 32 of Form 3CD mentions turnover as under: (i) Brokerage income Rs. 11,87,32,756/- (ii) Trading shares Rs. 1,86,47,504/- Analysis of the above mentioned information throw following facts :- (i) Main business activities of the company is that of earning brokerage, which the Auditors have reported in Audit Report.
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(ii) Focus of the company is on earning brokerage and the bottom lines of the company are dependent on earning brokerage. Director's & Company's attentions are focussed on brokerage income. Share trading activities is not even discussed. (iii) There is loss in share trading activities. But even the turnover of share trading activities are not comparable with that of brokerage income. If we take turnover of share transactions resulting in brokerage income, then it is Rs.46,979,211,826- by assessee's own admission as submitted during assessmentproceedings. Compared to this assessee's turnover on own amount is miniscule. Even if we compare the brokerage income with turnover of share trading on own amount, it is seen that brokerage income is more than 10 (ten) times as compared to share trading turnover. Under the facts and circumstances, as discussed above, it is clear that the main business activity of the appellant is earning brokerage income and not share trading on own accounts. Now let us see the effect of the amendment vide Finance Act(No.2), 2014. As a result of the amendment, apart from the existing exceptions, even those companies would be out of the purview of Explanation to sec. 73 whose main business is that of trading in shares. Without admitting but just presuming that these amendments areto be applied retrospectively, even then it would not benefit appellant, as main business of the assessee is not that of trading in shares. Hence, the ratio of the decision in Fiduciary Shares and Stock Pvt. Ltd. (supra) is notrelevant to the facts of assessee. Now coming to the alternative argument of the appellant that both brokerage income and share trading income should be assessed under the same head, eithernormal business or speculative business, it is seen that this claim is based on some judicial pronouncements which started with the judgment of Hon'ble Calcutta High Court in CIT -Vs- Nirmal Kumar & Co. 26 Taxmann 382. Thejudgment has been followed by Kolkata ITAT in Lohia Securities Ltd. -Vs- DCIT(2016) 66 Taxmann.com 86 wherein it has been held that brokerage income in share dealing and share trading income fall under the same head. Perusal of the judgment in Nirmal Kumar & Co.(supra) shows that thisjudgment was rendered by a division bench of Calcutta High Court on 28.01.1986. Facts of the case are that assessee was dealing in PDOs. This term is not clarified in the order but a little search shows that PDOs stands for instruments issued by 'Public Debt Office' of the Reserve Bank of India (RBI). This department deals in issuing securities. Thus assessee was basically dealing in securities which was a debt instrument and not equity instrument like shares. Assessee was earning a small brokerage on dealing in PDOs(Securities) apart from trading in them. Settlements were made without delivery of the securities. In the earlier years income from both activities, i.e. brokerage on dealing in PDOs and their trading income were assessed under the same head. However, in the current year A.O. treated the loss on trading in PDOs as speculative transactions and the brokerage income earned as normal business activity. However, the Appellate Authority and the Hon'ble Tribunal gave a finding of fact which is summarized in the words of the ITAT as under: "The assessee transacted business in PDOs with third parties in its own account and suffered a loss of Rs. 8,96,300/ -. From these transactions the assessee also earned brokerage of Rs. 12,50,868/-. In the past the income from brokerage and from PDO's transactions had been treated as income under the same head, i.e. 'Business'. As pointed out by the AAC in the assessment year 1970-71, the ITO himself treated a major portion of the brokerage received out of the PDO's transactions as inseparable from the business dealings in PDO's in such transactions." Under the facts and circumstances of the case and the nature of the business activities i.e. dealing in PDOs it was held that earning of brokerage is intrinsically linked to trading in PDOs.
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Under the circumstances, ITAT held that the 2(two) incomes as above should be assessed under 1(one) head. Hon'ble High Court upheld the view of Tribunal under these peculiar facts of the case. In the light of the above mentioned facts it is worthwhile to mention that Explanation to sec. 73 has never been discussed in the order of Hon'ble High Court and there could not have been the necessity also as A.O. has not held the loss on trading in PDOs to be speculative loss by invoking Explanation to sec. 73. Rather these have been held speculative in terms of sec. 43(5) as these activities were not accompanied with actual delivery of PDOs. Besides, Explanation to sec. 73 is applicable when trading in shares are involved and not in case of trading in securities. Another noteworthy fact in the judgement of the Hon'ble High Court is that it has not overruled any judgement nor it has referred to any other judgement. Now let us see another judgement of the Hon'ble Calcutta High Court in the case of CIT -Vs- K L Jhunjhunwala(1983) 139 ITR 371. In this case assessee was carrying on the business of brokerage and purchase and sale of jute and hessian goods. A.O. found that both the purchase and sale transaction in jute and hessian goods were settled otherwise than by delivery. A.O. treated the trading activity as speculation business and that of earning brokerage as normal business. AAC upheld the order of the A.O. but on appeal tribunal held that the brokerage on purchase and sale of jute and hessian goods should also be treated as a speculation business. On further appeal division bench of Hon'ble High Court held as under: "Upon this fact, the following question of law was referred to this court u/s.256(1) of the I. T. Act, 1961 : "Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that the brokerage on the purchase and sale of the assessee's speculative business of purchase and sale of pucca delivery orders and mate's receipts, was of a speculative nature?" We are inclined to agree with the view of the Tribunal. But the Supreme Court in the case ofCIT-Vs- PangalVittalNayak& Co. Pvt. Ltd. [1969] 74ITR 754 (SC), where the assessee, who was a member of an association for speculation in coconut oil, had also speculated on its own, and the assessee also received orders from its constituents, who were not members of the association, to speculate on their behalf, the procedure for those transactions being, as mentioned in the said judgement, the Supreme Court noticed, that, in each of the transactions, the assessee had received commission from the parties on whose behalf the transactions were done. The assessee had claimed to set off such commission against the speculation losses. It was held by the Supreme Court that the commission received by the assessee could not be set off against the speculationlosses, because there was no element of speculation whatever in the commission income received by the assessee; the commission was independent of any fluctuationin the market and no risk was involved in earning it. The commission had to be treated not as a profit from the speculation business but as profit from the business as brokerage and the assessee was not entitled to have that commission receipt assessed under the head "Speculation business". In view of the said decision of the Supreme Court, the question must be answered in the negative and in the favour ofthe Revenue. " Now coming to the judgement in the case of Nirmal Kumar & Co. (supra) it is seen that the earlier order of the same High Court was not referred as the facts in the case of Nirmal Kumar & Co. were totally different. Judgement in the case of Nirmal Kumar & Co. was based on the peculiar nature of trading in PDOs and the ratio of this judgement cannot be applied to every transaction relating to 'trading' and 'earning of brokerage'. Judicial discipline demands that the judgement of a Court remains operative unless it is overruled by a bigger Benchof the same Court or by a higher Court. In case different view points are taken by 2(two) Courts on the same issue, then view of the higher Court would prevail, i.e. view of Hon'ble Supreme Court would prevail over that of Hon 'ble High Court. In the present case, Hon'ble Supreme Court in the case of CIT -Vs- Pangal Vittal Nayak& Co. Pvt. Ltd., 74 ITR 754 and the Hon'ble Calcutta High Court in the caseof CIT -Vs- K L Jhunjhunwala, 139 ITR 371, had already taken a view on the issue of 'brokerage' and 'trading
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income' then it was not proper to have any other view, unless these judgements were overruled. With due respect, the decision of Hon'ble Kolkata ITAT in the case of Lohia Securities Ltd. -Vs- DCIT 66 Taxmann.com 86, isnot acceptable as the case law referred here is not relevant to the facts of the case. Secondly, on the same issue Hon’ble Supreme Court and Hon’ble Calcutta High Court had already passed orders. In view of the facts and the judicial pronouncements, with due respect, the decision of the Kolkata ITAT in the case of Lohia Securities Ltd. (supra) is not acceptable. Respectfully following the judgements of the Hon 'ble Supreme Court in the case of CIT -Vs- Pangal Vittal Nayak and Co. Pvt. Ltd.(1969) 74 ITR 754(SC) which was followed by Hon 'ble Calcutta High Court in the case of CIT -Vs- K L Jhunjhunwala(1983) 139 ITR 371, it is held that the brokerage earned by the appellant is normal business income and hence loss arising out of shares trading activity being speculative in nature, cannot be adjusted against it. Now coming to the quantum of the expenses attributed by the A.O. to the trading activities, it appears that formula used by A.O. is not correct. Expenses on trading activities would be very less as compared to those on brokerage earning activities. Submission made in this regard by the assessee during assessment proceedings, a copy of which is filed before me, appears to be reasonable which slight modification. Appellant has mentioned that its total turnover in brokerage earning activity is Rs. 46,979,211,826/-. This includes NSE turnover in cash and derivative segment, BSE cash segment and CSE cash segment. Turnover of its trading activity has been taken at Rs. 1,86,47,504/-. Here I would like to mention that turnover in brokerage activities is combined total of both purchase and sale transaction but assessee is considering only sale value of share trading activities. Assessee has also made purchases of Rs. 1,86,87,965/ -. Hence, this should also be considered while arriving at the proportionate expenses of trading activities. Considering this and still applying appellant's own formula, expenses attributable to trading activities would be Rs. 94,370/- and not Rs. 47,134/- as computed by the assessee. In the assessment order A.O. has inadvertently not added the actual loss on those trading (Rs. 40,631/-) to the loss attributable to the trading activity. This apparent mistake is taken note and the speculative loss on account of share trading is held at Rs. 1,35,001/- (Rs. 40,631/- + Rs. 94,370/-).” 4. Not being satisfied with the order of the Ld. CIT(A), the Revenue is in appeal before us. The assessee is also before us in cross appeal, by filing the grounds of appeal for the same AY 2011-12. The grounds of appeal taken by the revenue and the grounds of appeal taken by the assessee are given below:
Grounds of appeal raised by the Revenue (ITA No.1858/Kol/2016):
“1. Whether the Ld. CIT(A) was correct in deleting the disallowance of Rs.8,65,560/- on account of advances written off by the assessee without looking in to the fact that the assessee has taken no step to recover the advances nor has clarified as to when such advances were made? 2. Whether the Ld. CIT(A) was correct in deleting the addition of Rs.25,66,694/- disregarding the fact that the principal business of the Company is neither granting of loans and advance nor it is a banking company and therefore, the business income earned has to be treated as speculation business to the extent of business of purchase of sale of shares thereby attracting the mischief of section 73 of the Act? Whether the Ld. CIT(A) was correct in not appreciating the fact that the AO had to segregate the expenditure attributable to own purchase of sale of
7 ITA Nos.1858 & 1820/Kol/2016 Stewart &Mackertich Wealth Management Ltd...AY. 2011-12 shares and reckoned the figure at Rs.27,01,695/- as disallowable within the meaning of explanation to section 73 of the Act allowing the expenditure as speculation loss carrying it forward to the next year to be set off against speculation profit? 3. Whether the Ld. CIT(A) was correct in deleting the addition of Rs.1,22,350/ - without appreciating that the employees' contribution has to be deposited within the due date by which the assessee was required as employer to credit the employees contribution to the employees' account in the relevant fund under any Act or Rule?” Grounds of appeal raised by the Assessee (ITA No. 1820/Kol/2016):
That, on the facts and in the circumstances of this case, the learned Commissioner of Income Tax (Appeals) erred in concurring with the decision of Ld. Assessing Officer that the provisions of section 73 read with Explanation thereto are applicable to the facts of this case and thereupon further erred in confirming the sum of Rs.1,35,001 to be treated as Speculative Loss. 2. That the Ld. Commissioner of Income Tax (Appeals) erred in treating the aforesaid amount of Rs.1,35,001 as "Speculative Loss" in complete disregard of the Judgment of Jurisdictional Tribunal in the case of "Lohia Securities Ltd. vs. DCIT" ( 2016) 66 taxmann.com 86 by saying that the judgment of Jurisdictional Tribunal is not acceptable to him. 3. That the Judgment of Jurisdictional Tribunal is a binding precedence and therefore the order of the Ld. Commissioner of Income Tax (Appeals) recording conclusions contrary to judgment of the Jurisdictional Tribunal amounts to judicial indiscipline and exercising arbitrary powers. 4. That the Ld. Commissioner of Income Tax (Appeals) erred in refusing to admit the additional ground raised before him which related to disallowance of Rs.5,38,538 made by the Assessing Officer under section 14A of the Act. 5. That the order of the Ld. Commissioner of Income Tax (Appeals) is against law and facts of this case.” 5. Since these two appeals relate to the same assessee, same assessment year and identical issues involved, therefore, these have been clubbed and heard together and a consolidated order is being passed for the sake of convenience and brevity.
In Revenue appeal i.e. ITA No. 1858/Kol/2016, the ground no. 2 and in assessee’s appeal i.e. ITA No. 1820/Kol/2016, the ground no. 1, 2 and 3 are same and on the exact identical issue, therefore, they are being adjudicated together. The main issue involved is “Speculation loss” of Rs.1,35,001/-.
7 The Ld. AR for the assessee has submitted before us that the assessee under consideration is a Member of the National Stock Exchange and having its main business as
8 ITA Nos.1858 & 1820/Kol/2016 Stewart &Mackertich Wealth Management Ltd...AY. 2011-12 stock broking. In addition to the broking business it also deals in shares and derivatives for its own trading business. During the year under consideration the assessee’s income from brokerage is at Rs.11,87,32,756/-. Apart from this, the trading loss shown by the assessee on its own trading activity is at Rs.40,631/-. The assessee is earning income by way of brokerage and by way of doing its own trading in shares i.e. purchase and sale of shares and securities. The AO invoked the provisions of explanation to section 73 of the Act and treated the loss incurred on delivery based share trading as speculation loss and did not allow the assessee to set off the loss. The Ld. AR for the assessee submitted before us that the Explanation to section 73 of the Act is not applicable in the case under consideration as it is not incurred any business loss which it intends to set off or carry forward. All the two segments of the business broking and trading of the assessee should be considered together. The Ld. AR for the assessee further submitted that for the purpose of explanation to section 73 of the Act, it is necessary to arrive at the result of purchase and sale of shares and derivatives taken together for the following reasons:
(i) The assessee’s primary and only business is to deal in shares and securities including derivatives for clients and also for self.
(ii) Both purchase and sale of shares by physical delivery and purchase of sale of shares for future and option derivative does not come under speculation u/s. 43(5) of the Act.
(iii) The transactions of purchase and sale of shares and derivatives are carried out by the broker and payments are settled in a consolidated manner considering the debit/credit in one segment. (iv) The result of both shares and derivatives are inter dependent for the primary reasons that derivatives are used as a tool for protecting the losses in the stock of shares and securities. At this juncture, the Ld. AR for the assessee drew our attention to the provisions of section 43(5) of the Act and explanations to sec. 73 of the Act, which read as under:
“Sec. 43 Definitions of certain terms relevant to income from profits and gains of business or profession.
9 ITA Nos.1858 & 1820/Kol/2016 Stewart &Mackertich Wealth Management Ltd...AY. 2011-12 (5) “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” Section73 :Losses in speculation business. “Explanation.—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.
Therefore, the Ld. AR for the assessee submitted that as delivery based share trading as well as trading are not hit by the provisions of section 43(5) of the Act, both are non- speculative share trading activities. Hence, both are to be considered on the same footing. As per the I. T. Act both are of the same nature and, therefore, income from both the transactions are to be clubbed to work out the share trading Income of the assessee. Explanation to Section 73 of the Act will hit only in case of aggregate of share trading is loss. In the case of the assessee, the aggregate of share trading is profit and hence, there is no question of application of Explanation to Sec. 73 of the Act. So far as allocation of expenditure is concerned, nowhere in the Act, it is provided that expenditure should be allocated with respect to such transactions. In addition to this, the Ld. AR for the assessee has relied on the following judgment:
DCIT Vs. Raima Equiities Pvt. Ltd. (ITA No. 1994/K/2013 “6.4.3. We find that though this amendment is made effective only from Asst Year 2015-16 onwards, the real intention behind introduction of this amendment, in our opinion, is curative in nature. In our considered opinion, the amendment, if not held retrospective, would result in hardship to the assessee in the following manner:-
(a) The assessee engaged in trading of shares would be treated as speculation business uptoAsst Year 2014-15. That assessee might be having losses eligible to be carried forward under the head ‘speculation business’.
(b) The provisions of section 73 of the Act provides that the brought forward speculation loss could be set off only against speculation profits.
10 ITA Nos.1858 & 1820/Kol/2016 Stewart &Mackertich Wealth Management Ltd...AY. 2011-12 (c ) Pursuant to the amendment by Finance Act 2014 supra, the loss derived from the principal business of trading in shares would not be construed as speculative in nature. The logical corollary is profit derived thereon also would be treated only as normal business profits and not speculative profits.
(d) In this situation, the brought forward speculation loss could never be eligible to set off against the profits when there is absolutely no change in the business activities of the assessee (i.e trading in shares as its principal business). That loss would get lapsed for no fault of the assessee thereby creating genuine hardship to the assessee. We feel that the insertion in Explanation to Section 73 of the Act by the Finance Act 2014 should be looked into from this perspective which would create genuine hardship to the assessee if not held to be curative in nature. Hence we hold that the said amendment should be given retrospective effect only. In our considered opinion, the amendment would not serve its object in the instant case unless it is construed retrospective in operation.
6.4.4. We draw support from the decision of the Hon’ble Apex Court in the case of CIT vs Alom Extrusions Ltd reported in 319 ITR 306 (SC) wherein their Lordships were considering the amendment made by Finance Act 2003 by omitting the second proviso to section 43B of the Act w.e.f. 01.04.2004 and bringing about uniformity in the first proviso by equating tax, duty, cess and fees with contribution to welfare funds (viz provident fund etc) . The Hon’ble Apex Court held that the aforesaid amendment in section 43B of the Act by Finance Act 2003 is curative in nature and would therefore apply retrospectively w.e.f. 01.04.1988.
6.4.5. In the case of Allied Motors Pvt Ltd vs CIT reported in 224 ITR 677 (SC), the question before the Hon’ble Apex Court was whether sales tax collected by the assessee and paid after the end of the relevant previous year but within the time allowed under the relevant sales tax law should be disallowed u/s 43B of the Act. The ITO disallowed the deduction of sales tax collected by the assessee for the last quarter of the accounting year as the same was paid in the subsequent year. The aforesaid difficulty was cured by the insertion of the first proviso w.e.f. 01.04.1988. The Hon’ble Apex Court held that when a proviso is inserted to remedy unintended consequences and to make the provision workable, the proviso which supplies an obvious omission in the section and which is read to be read into the section to give it a reasonable interpretation, it could be read as retrospective in operation to give effect to the section as a whole. The Hon’ble Apex Court held that the first proviso to section 43B of the Act was curative in nature and hence retrospective in operation, i.e. w.e.f. 01.04.1984 from when the section was brought on the statute.
6.4.6. The Hon’ble Apex Court in the case of CIT vs J.H.Gotla reported in (1985) 156 ITR 323 (SC) at page 339 and 340 had observed as under:- “In the case of K P Varghese vs ITO (1981) 131 ITR 597 , this court emphasized that a statutory provision must be so construed, if possible, that absurdity and mischief may be avoided. Where the plain literal interpretation of a statutory provision produces a manifestly unjust result which could never have been intended by the legislature, the court might modify the
11 ITA Nos.1858 & 1820/Kol/2016 Stewart &Mackertich Wealth Management Ltd...AY. 2011-12 language used by the legislature so as to achieve the intention of the legislature and produce a rational construction. The task of interpretation of a statutory provision is an attempt to discover the intention of the legislature from the language used. It is necessary to remember that language is at best an imperfect instrument for the expression of human intention. It is well to remember the warning administered by Judge Learned Hand that one should not make a fortress out of the dictionary but remember that statutes always have some purpose or object to accomplish and sympathetic and imaginative discovery is the surest guide to their meaning. We have noted the object of s.16(3) of the Act which has to be read in conjunction with s.24(2) in this case for the present purpose. If the purpose of a particular provision is easily discernible from the whole of the scheme of the Act which in this case, is to counteract the effect of transfer of assets so far as computation of income of the assessee is concerned, then bearing that purpose in mind, we should find out the intention from the language used by the legislature and if strict literal construction leads to an absurd result, i.e., result not intended to be subserved by the object of the legislation found in the manner indicated before, then another construction is possible apart from strict literal construction then that construction should be preferred to the strict literal construction. Though equity and taxation are often strangers , attempts should be made that these do not remain always so and if a construction results in equity rather than in injustice, then such construction should be preferred to the literal construction. Furthermore, in the instant case, we are dealing with an artificial liability created for counteracting the effect only of attempts by the assessee to reduce tax liability by transfer. It has also been noted how for various purposes the business from which profit is included or loss is set off is treated in various situations as the assessee’s income. The scheme of the Act as worked out has been noted before.”
6.5. Respectfully following the judicial precedents relied upon hereinabove, Wanchoo Committee report of December 1971 and our findings given in Para 6.4.3 above , we hold that the amendment brought in by the Finance Act 2014 should be construed as curative in nature and hence to be given retrospective applicability. It is not in dispute that the principal business of the assessee in the instant case is trading in shares. If the amendment supra is given retrospective effect, then the same would automatically fall under the exception provided in the Explanation to Section 73 of the Act and accordingly the loss incurred on delivery based share transactions should not be construed as speculation loss. Hence the grounds raised by the revenue in this regard are dismissed.
On the other hand, the Ld. DR for the revenue has submitted before us that assessee under consideration falls in Explanation to Sec. 73 of the Act. Since the assessee incurred loss on sale and purchase of shares and claimed set off of said loss against brokerage earned from its business as a broker, therefore, the loss which was incurred by the assessee on sale and purchase of shares which had no connectivity with purchase and sale of shares as a broker, therefore, the trading loss incurred by the assessee would be treated as a speculation loss as per provisions of explanation to section 73 of the Act. Apart from this, the Ld. AR for the revenue has relied on the stand taken by the AO, which we have already noted in our
12 ITA Nos.1858 & 1820/Kol/2016 Stewart &Mackertich Wealth Management Ltd...AY. 2011-12 earlier para and is not being repeated for the sake of brevity. In addition to this, the Ld. DR for the revenue has relied on the following judgments:
(i) Anjalee Exim (P) Ltd. Vs. DCIT (2013) 35 taxmann.com 374 (Guj), wherein it has been held as under:
“Section 37(1), read with section 73 of the Income-tax Act, 1961 - Business expenditure - Allowability of [Bifurcation of expenses] - Assessment year 2007-08 - Assessee-company was engaged in business of trading of shares, gold bullion and commodities - It filed return of income declaring total income and speculation loss - It claimed deduction of administrative and other expenses - Assessing Officer having noticed that said expenses were relatable to both speculative and non-speculative activities bifurcated same in ratio of 2:3 between speculative and non-speculative income - Whether since on administrative and other expenses reflected in books by assessee no segregation had been made and they were relatable to both speculative and non-speculative activities, bifurcation of sue expenses was not only necessary but inevitable - Held, yes.” (ii) CIT Vs. Eureka Stock & Share Broking Services Ltd., (2016) 74 taxmann.com 114 (Cal) wherein it has been held as under :
“Section 73, read with sections 147, of the Income-tax Act, 1961 - Losses - In speculation business (Explanation of section 73) - Assessment year 2001-02 - Assessee incurred loss on sale and purchase of shares and claimed set off of said loss against brokerage earned from its business as a sharebroker - Whether, sinceimpugned loss was incurred by assessee on sale and purchase of shares, which had no connection with business as a share broker, said loss would be treatedasspeculation loss as per provisions of Explanation to section 73 - Held, yes.” 10. Having heard rival submissions and perused the material available on record, we are of the view that there is merit in the submissions the assessee, as the proposition canvassed by the Ld. AR for the assessee are supported by various judgment cited by him supra and the facts narrated by him above. As the Ld. AR for the assessee has pointed out that apparently there is no loss on share trading activities since trading of shares as well as brokerage income are of the same nature so far as the income tax Act is concerned and the assessee’s case is not hit by the Explanation to section 73 of the Act. So delivery based share trading as well as brokerage are not hit by the provisions of section 43(5) of the Act, both are non-speculative nature i.e. both are share trading activities, hence both are to be considered on the same footing. We find that the primary and only business of assessee is to deal with shares and securities including derivatives and work as a broker on behalf of the clients and earned brokerage thereon. We find that all these activities cumulatively related
13 ITA Nos.1858 & 1820/Kol/2016 Stewart &Mackertich Wealth Management Ltd...AY. 2011-12 to purchase and sale of shares. Therefore, we find that both purchase and sale of shares (trading activity and the brokerage activity) do not fall under speculation transactions as per section 43(5) of the Act. Therefore, considering the factual position, we dismiss the ground no.,2 raised by the revenue and allow the ground nos. 1, 2 and 3 raised by the assessee in its cross appeal (ITA No.1820/k/16).
11.In the result, the ground no.,2 raised by the revenue is dismissed and ground nos. 1, 2 and 3 raised by the assessee are allowed.
Ground No. 1 of revenue’s appeal in ITA No. 1858/Kol/2016; it relates to addition deleted by the Ld. CIT(A) of Rs.8,65,560/- on account of advance written off as bad debts.
Ld. DR for the Revenue has submitted before us that the assessee has written off Rs.8,65,560/- as bad debts by writing off the advances given to the staff. The assessee has not taken any step to recover these advances. The assessee debtor not clarified the reasons why he was writing off the advances without taking any steps to recover these advances from the persons to whom the advances were given.
On the other hand, the Ld. AR for the assessee has submitted that the assessee has its prerogative right to write off the advances and bad debts if it seems to him that these are irrecoverable. The Ld. AR for the assessee has also relied on the judgment of Triveni Engineering & Industries Ltd. 343 ITR 245. In this case, the Hon’ble Delhi High Court relying on the judgment of Hon’ble Bombay High court in the case of CIT Vs. Maina Ore Transport Pvt. Ltd. 218 CTR 653 has held as under:
“In so far as deduction of advances given to the employees are concerned, which had become irrecoverable that may not cause it of a problem. Advances were given to the persons who had been employed by the assessee company and if they became irrecoverable, it would clearly be treated as business loss. Law on this aspect stands crystallized by the judgment of the Hon’ble Bombay High Court in the case of CIT Vs. Maina Ore Transport Pvt. Ltd. 324 ITR 100.” 15. Having heard rival submissions and perused the material available on record, we are of the view that there is merit in the submissions of the Ld. AR of the assessee as the proposition canvassed by the Ld. AR for the assessee are supported by various judgments
14 ITA Nos.1858 & 1820/Kol/2016 Stewart &Mackertich Wealth Management Ltd...AY. 2011-12 cited by him supra and the facts narrated by him above. As the Ld. AR for the assessee has pointed out that if it seems to the assessee that any debtor or the advance given by the assessee becomes irrecoverable, he may write it off as a bad debt. Therefore, considering the factual position, we do not find any infirmity in the order passed by the Ld. CIT(A). Therefore, we confirm the same.
16.In the result, the appeal filed by the Revenue in ground no. 1 of ITA No. 1858/Kol/2016 is dismissed.
Ground No. 3 raised by the Revenue in ITA No. 1858/Kol/2016 relates to addition deleted by the Ld. CIT(A) of Rs.1,22,350/- on account of employees contribution. The solitary grievance of the Revenue in this ground is that employees` contribution has not been deposited within the due date.
The Ld. AR for the assessee has submitted that the payments were made before the due date of filing the return of income. The audit report of the assessee shows that all these payments have been made before the due date of filing the return of income, hence, there should not be any addition on this account.
On the other hand, the Ld. DR for the revenue has primarily reiterated the stand taken by the AO, which we have already noted in our earlier para and is not being repeated for the sake of brevity.
Having heard rival submissions and perused the material available on record, we are of the view that there is merit in the submissions of the Ld. AR of the assessee, as the proposition canvassed by the Ld. AR for the assessee are supported by facts narrated by him. As the Ld. AR for the assessee has pointed out that all the payments were made before the due date of filing of return of income, therefore, assessee’s claim should not be disallowed. In addition to this, it is important to quote here the judgment of the Hon’ble Calcutta High Court in the case of CIT Vs. Vijay Shree Ltd. (2014) 43 Taxman.com 396 wherein it has been held that if payments are made before the due date of the filing of return of income then these are allowable expenditure. Therefore, considering the factual position,
15 ITA Nos.1858 & 1820/Kol/2016 Stewart &Mackertich Wealth Management Ltd...AY. 2011-12 we do not find any infirmity in the order of the Ld. CIT(A). Hence, we confirm the order of CIT(A).
21.In the result, the appeal filed by the Revenue in ITA No. 1858/K/2016 in ground no. 3, is dismissed.
Ground No. 4 which relates to assessee’s appeal in ITA No. 1820/Kol/2016 relates to disallowance of Rs.5,38,538/- u/s. 14A of the Act.
The Ld. AR for the assessee has submitted before us that the assessee has claimed in its return of income Rs.1,46,902/- as an exempt income and Rs.5,38,538/- as an expenditure relates to exempt income. The Ld. AR for the assessee has admitted that the assessee has suo moto disallowed the expenditure pertaining to exempt income at Rs.5,38,538/-. The Ld. AR for the assessee also admitted that the assessee under consideration could not raise the issue of disallowance of section 14A of the Act before the AO and the AO disallowed the claim u/s. 14A of the Act at the same amount which has been suo moto disallowed by the assessee at Rs.5,38,538/-. The Ld. AR for the assessee has submitted that for the first time the assessee has raised an additional ground of appeal before the Ld. CIT(A). The Ld. CIT(A) observed that the assessee did not question at the time of assessment proceedings and suo moto made the disallowance u/s. 14A of the Act. The Ld. CIT(A) also observed that the assessee is now claiming relief as per some judicial pronouncements. The Ld. CIT(A) refused to give relief to the assessee stating that the issue involved u/s. 14A of the Act has not attained finality and still various decisions are coming interpreting the point of disallowance differently. This way, the Ld. CIT(A) has disallowed the claim of the assessee.
On the other hand, the Ld. DR for the Revenue has primarily reiterated the stand taken by the AO and the Ld. CIT(A), which we have already noted in our earlier para and is not being repeated again for the sake of brevity.
Having heard rival submissions and perused the material available on record, we are of the view that this issue requires a fresh examination at the end of the AO. Whether the assessee has wrongly stated suo moto disallowance at Rs.5,38,538/- or not, is to be
16 ITA Nos.1858 & 1820/Kol/2016 Stewart &Mackertich Wealth Management Ltd...AY. 2011-12 examined afresh and, therefore, we are of the view to remit the said issue to the file of the AO to examine this issue afresh after considering the documents and explanations/evidence submitted by the assessee. Therefore, we allow this ground for statistical purposes.
In the result, the assessee`s ground No. 4 in ITA No.1820, is allowed for statistical purposes.
Order pronounced in the open court on 12.04.2017
Sd/- Sd/- (ParthaSarathiChoudhary) (Dr. A. L. Saini) Judicial Member Accountant Member 12th April 2017 Dated : Jd. Sr. P.S
Copy of the order forwarded to: 1. Appellant – ACIT, Circle-10(2), Kolkata. 2. Respondent – Stewart &Mackertich Wealth Management Ltd., Vaibhav-5F, 4 Lee Road, Kolkata-700 020. 3. CIT(A), Kolkata 4. CIT, Kolkata 5. DR, Kolkata Benches, Kolkata /True Copy, By order,
Asstt. Registrar.