SHRI ASHOK KUMAR JATAV,BHOPAL vs. ITO-5(4), BHOPAL

This appeal by assessee is directed against the order dated 29.03.2019 of learned Commissioner of Income-Tax (Appeals)-2 Bhopal in Appeal No. CIT(A)-2/BPL/IT-769/16-17, which in turn arises out of the penalty-order dated 24.03.2017 passed by the learned ITO, Ward-5(4), Bhopal [“Ld. AO”] u/s 271B of the Income-tax Act, 1961 [“the Act”] for the Assessment-Year 2014-15.

The assessee has raised following grounds of appeal:

At the time of hearing, none appeared on behalf of the assessee. But the Ld. DR appearing on behalf of Revenue was ready for hearing and the copies of original assessment-order dated 30.09.2016, penalty-order dated 24.03.2017, first-appellate order dated 29.03.2019 and Form No. 36 are also held on record. On a cursory-examination, it was observed that the appeal involves a small matter and could be decided on the basis of oral submissions of Ld. DR and material held on record. Accordingly, the appeal was proceeded with and heard.

The facts culled out from the material held on record are such that assessee is an employee of MPMKVV Co. Ltd. earning income mainly from salary. For the relevant assessment year 2014-15, the assessee filed return declaring a total income of Rs. 11,24,960/-. The case was selected for scrutiny and statutory notices u/s 143(2) & 142(1) of the Act were issued. During assessment-proceeding, Ld. AO observed that the assessee had done transactions of shares but the same have not been offered for taxation. On the basis of copy of Demat A/c and Statement of Profit & Loss of transactions furnished by assessee, the Ld. AO made an addition of speculative profit of Rs. 57,617/- from non-delivery transactions of shares and completed assessment vide order dated 30.09.2016 u/s 143(3) of the act.

Subsequently, the Ld. AO passed penalty-order dated 24.03.2017 u/s 271B wherein he observed that the assessee had done non-delivery transactions as well as delivery-transactions of shares. Ld. AO further observed that the assessee had earned profit from non-delivery transactions and suffered loss from delivery-transactions. Ld. AO confronted the assessee in the matter, whereupon the assessee filed reply. After considering reply of assessee, Ld. AO treated the delivery-based transactions as in the nature of adventure / business, computed turnover of Rs. 2,13,54,757/- therefrom and imposed a penalty of Rs. 1,06,774/- (0.50% of Rs. 2,13,54,757/-) u/s 271AB of the act on the footing that the assessee had not got the accounts audited u/s 44AB.

Being aggrieved by penalty-order, the assessee carried the matter in appeal to Ld. CIT(A). However, the Ld. CIT(A) dismissed the appeal just by holding “The Ld. AO has duly considered the submission of the appellant and rejected the argument of the appellant. I find no infirmity in the order of the AO. Therefore, penalty of Rs. 1,06,774/- levied u/s 271B of the Act is hereby confirmed”.

Now, the assessee has come in appeal before us assailing the order of Ld. CIT(A).

Heard the Ld. DR, carefully perused the material held on record and also considered the provisions of law.

Before proceeding further, it is worthwhile to examine, compare and contrast the assessment-order and penalty-order carefully. On perusal of assessment-order, we observe that the Ld. AO has made discussions about the non-delivery transactions and assessed profit of Rs. 57,617/- earned therefrom as speculative-income. But, however, the Ld. AO had not uttered any voice qua the delivery-based transactions. Thus, the Ld. AO has kept total silence qua delivery-based transactions in assessment-order despite complete Demat A/c and Statement of Profit & Loss of all transactions (i.e. non-delivery transactions and delivery-transactions) supplied by assessee to him. Then comes penalty-order wherein the Ld. AO has, for the first time, talked about both types of transactions, viz. non-delivery and delivery- based, done by the assessee. The Ld. AO has further gone to narrate that the assessee had suffered loss from delivery-based transactions. Thereafter, the Ld. AO treated the delivery-based transactions as adventure in the nature of business, computed turnover therefrom and imposed penalty u/s 271B. In short, the Ld. AO has not talked a single word about delivery-based transactions in the assessment-order, it is for the imposition of penalty alone that he had taken congnizance of those transactions in penalty-order.

On perusal of penalty-order, we further observe that the assessee had submitted a detailed reply to the show-cause notice issued by Ld. AO, contents of which are reproduced by Ld. AO on Page No. 2 and 3 of the order. Confining our discussion to the delivery-based transactions only because the penalty has been imposed on the basis of those transactions, in the said reply the assessee made two-fold submissions, one that the impugned delivery-based transactions were in the nature of “short term capital gain” and other that, even if they are treated as speculative, then the turnover would be Rs. 2,97,124/- only on the basis of “Guidance-Note on Tax Audit u/s 44AB of the Income-tax Act, 1961” issued by the ICAI for computation of turnover in case of speculative-transactions. The assessee further submitted that his total turnover would be below the threshold prescribed u/s 44AB for audit requirement, he was not liable for audit and consequently the penalty u/s 271B was not attracted. The Ld. AO considered the submissions of assessee but observed that the assessee had done delivery-based transactions of shares at a large scale (aggregate amount being Rs. 2,13,54,757/-) and did not hold shares for even 3 to 4 months. Hence the delivery-based transactions were in the nature of an adventure / business. Further, since the transactions were delivery-based, they cannot be said to be speculative-transactions. Thus, rejecting both submissions of assessee, the Ld. AO computed turnover of delivery-based transactions at Rs. 2,13,54,757/- and concluded that audit u/s 44AB was necessary.

On a careful consideration of above facts, we observe that the assessee is a full-time salaried employee of MPMKVV Co. Ltd. earning a high amount of salary. Therefore, the assessee is not engaged as such, in any kind of business activity. Regarding the scale of activity, the turnover of Rs. 2,13,54,757/- in the transactions of shares per se is not an indication that the activity was in the nature of adventure / business. With the advancement of technology, ease of transactions, minute by minute fluctuations of stock-prices and the way persons have started dealings in stocks, the volume of Rs. 2,13,54,757/- cannot be said to be a large-scale activity so as to infer an adventure / business. Further, the observation of Ld. AO that the holding-period is not even 3 to 4 months, is also not a sound-observation for the reason that there are persons who hold shares even for a few days and have to sell to avoid losses / book profits whatever they have earned. Even the law-makers have prescribed cut-off period of 12 months for long-term, which indicates that any period less than 12 months can be sufficient for treating as short-term. We also observe that the issue whether the delivery-based transactions could be in the nature of capital gain or adventure / business, has always been a matter of dispute and litigation and there cannot be a short-cut or standard formula to decide exact nature, particularly by means of a short-finding in the penalty-order even while maintaining total silence in the assessment-order. In any case, considering the fact that there can be two views on the nature of transactions, we observe that the assessee would be entitled to the benefit of section 273B which reads as under:

We also look at the action of Ld. AO from one more legal angle. Ld. AO has concluded in the penalty-order that the (i) transactions were in the nature of adventure / business, and (ii) the transactions were delivery-based hence cannot be treated as speculative. If these conclusions of Ld. AO hold good, then obviously it would lead us to a logical conclusion that the Ld. AO has accepted the loss suffered from those transactions as “non-speculative business loss”. If it is so, then the Ld. AO was duty bound to allow set-off of the “non-speculative business loss” against the speculative-profit of Rs. 57,617/- added in the assessment-order, but the Ld. AO has not allowed the same by keeping silence. Then what could be the reason of not allowing set- off? Although it is not mentioned in the assessment-order, because the assessment-order has absolute silence, it is implicit that the Ld. AO has treated the loss as “short-term capital loss” which is not allowed to be set-off against any other income under the provisions of the act. This demonstrates a clear contradiction in the approach of Ld. AO in the sense, the Ld. AO has treated the impugned transactions as having character of short-capital loss in the assessment-order but treated the same as adventure / business for the purpose of imposition of penalty in the penalty-order only to impose penalty. This contradictory approach of Ld. AO is, in our view, not sustainable.

Before parting we would also like to make one more mention which too goes in favour of assessee. Under the scheme of Income-tax Act, 1961, the audit u/s 44AB was introduced for making a proper assessment of the transactions done by tax-payers so that correct taxable income can be assessed. As observed earlier, the Ld. AO has maintained total silence about the delivery-based transactions and not assessed the income (loss) from those transactions in the assessment-order at all. This action of Ld.AO itself demonstrates that the Ld. AO did not have necessity of audit of the impugned delivery-based transactions. Needless to conclude that the Ld. AO has emphasized the requirement of audit of delivery-based transactions only for imposition of penalty in the penalty-order, but not for assessment of assessee. It is a settled-law that penalty is a not a source of revenue for the Govt. Therefore imposing penalty for default of audit without having any necessity of audit for assessment of income of assessee, cannot be appreciated.

In view of foregoing discussion, we do not find any strength in the penalty-order passed by Ld. AO. Therefore, we delete the penalty and allow grounds of appeal raised by the assessee.

In the result, the appeal of assessee is allowed.