USHITA TRADING & AGENCY LIMITED,KOLKATA vs. CIT-1, KOLKATA, KOLKATA

1. For Ld. Commissioner of Income Tax was not justified in setting aside the order passed u/s 143(4) on ground that Explanation to Section 73 of the Income Tax Act, 1961 is applicable on the Assessee Company. The order passed is illegal against the facts on record and is unjustified.

2. For that Ld. C.I.T. was not justified and acted against the provision of law to observe that explanation to Section 73 of the Income Tax Act, 1961 is applicable on the Assessee Company. Ld. Assessing Officer examined complete details and having satisfied passed the orders. All the details were furnished. The details of the examination were also intimated to Ld. C.I.T. However, for difference of opinion and change of opinion, Ld. C.I.T. held that explanation to Section 73 of the Income Tax Act,1961 is applicable Provisions of Section 263 are not attracted for an assessment which has been made after due verification and enquiry. The order passed u/s 263, therefore, is illegal and incorrect.

3. For that in any view of the case, order passed by Ld. C.I.T. is illegal, arbitrary and fit to be cancelled.”

5.1. We find that the ld CIT had admittedly proceeded to issue the show cause notice by referring to Note No. 8 in Schedule H of the audited financial statements for the preparation

5 Ushita Trading & Agency Ltd.., AY 2008-09 of profit and loss account in respect of share trading transactions. For the sake of convenience, the Note No. 8 of the audited financial statements is reproduced hereunder:- Item Description Unit Qty. Value (Rs.) 31.3.08 31.3.07 31.3.08 31.3.07 Aluminium sheet Opening Stock Kgs. 6917 6917 850.791 850.791 Closing Stock Kgs. 6917 6917 850.791 850.791 Timber Opening Stock Cft 639.40 639.40 358.064 358.064 Closing Stock Cft 639.40 639.40 358.064 358.064 Share Opening Stock 935260 935260 90392500 90392500 Purchase 1266050 ----- 56245000 ---- Sales 1120610 ----- 84150000 ---- Closing Stock 1080700 935260 51700000 90392500 Share Opening Stock ---- ---- ---- ---- Purchases 315100 ---- 386624848.59 ---- Sales ---- ---- ---- ---- Closing Stock 315100 ---- 386621848.59 ----- 5.2. We find that the ld CIT having referred to Note No. 8 supra had not disputed the fact of purchase of sarees made by the assessee and disclosed thereon either in his show cause notice or in his revision order u/s 263 of the Act, though no specific mention was made by the assessee in that regard during the course of revision proceedings before the ld CIT. We find that the total purchases made by the assessee during the year and as confirmed by the ld CIT is Rs. 44,28,66,850/- , the break-up of the same is as below:-

Purchase of shares - Rs. 5,62,45,000 Purchase of sarees - Rs. 38,66,21,850 ------------------------------ Rs. 44,28,66,850 5.3. The ld DR argued that the fact of purchase of sarees to the extent of Rs. 38.66 crores was never disclosed by the assessee either before the ld AO or before the ld. CIT and the same is brought to the notice of this tribunal for the first time. Hence he argued that no view should be taken on the same. He argued that the aspect of principal business of the assessee was never enquired by the ld. AO while raising a query in March 2010 as could be seen from the order sheet entries. He stated that the ld. CIT had given a categorical finding in his order that the granting of loans is not principal business of the assessee. But we find that the ld CIT had proceeded the revision proceedings only by looking at Note No. 8 of the 6 Ushita Trading & Agency Ltd.., AY 2008-09 audited financial statements filed before the ld AO wherein the fact of assessee dealing in shares as well as in sarees were duly mentioned with quantitative particulars thereon. Hence the fact which is staring on us from the face of the balance sheet read together with the notes on accounts thereon cannot be ignored.

5.4. We find from the paper book that the assessee is a non banking finance company having certificate of registration obtained from Reserve Bank of India with effect from 22.12.2004. We find from the composition of income of the assessee, that the interest income from lending activities was Rs. 1,23,94,810/- which is much more than the income from share trading. Then the assessee’s case would fall under the first limb of the Exception provided in Explanation to Section 73 of the Act. Reliance in this regard is placed on the decision of the Hon’ble Jurisdictional High Court in the case of CIT vs Middleton Investment & Trading Co Ltd in of 1999 dated 15.1.2014, wherein it was held that:- “8.8.1. Alternatively, even if Explanation to section 73 is to be applied, we hold that the assessee’s case falls under the exception provided in the first limb of Explanation to Section 73 of the Act where the gross total income of the assessee comprises of income from other sources which is much more than the speculation loss of Rs. 1,02,12,277/- . Reliance in this regard is placed on the decision of the Hon’ble Jurisdictional High Court in the case of CIT vs Middleton Investment & Trading Co Ltd in ITA No. 196 of 1999 dated 15.1.2014 wherein it was held that:- “The learned Tribunal held as follows: " ... the net loss under the head "profits and gains of business or profession" would be Rs.8,72,972/- whereas, the income shown by the assessee under the head "income from other sources" is to the tune of Rs.10,13,798/-. We are, therefore, of the opinion that the assessee's gross total income consisted mainly of income assessable under the head "income from other sources". It therefore, follows that the loss in share trading has to be treated as business loss. We direct the A.O. accordingly." Aggrieved by the order of the learned Tribunal, the revenue has come up in appeal. At the time of hearing, Mr. Saraf, learned advocate very fairly drew our attention to the judgment in the case of CIT vs. Darshan Securities (P) Ltd. reported in 341 ITR 556 wherein the following view was taken: "The ambit of sub-section (1) of section 73 is only to prohibit the setting off of a loss which has resulted from a speculation business, save and except against the profits and gains of another speculation business. In order to determine whether the exception that is carved out by the Explanation applies, the Legislature has first mandated a computation of the gross total income of the company. The words "consists mainly" are indicative of the fact that the Legislature had in its contemplation that the gross total income consists predominantly of income from the four heads that are referred to therein. Obviously, in computing the gross total income the normal provisions of the Act must be applied and it is only thereafter, that it has to be determined as to whether the gross total income so computed consists mainly of income which is chargeable under the heads referred to in the Explanation.

Consequently, in the present case, the gross total income of the assessee was required to be computed, inter alia, by computing the income under the head of profits and gains of business or profession as well. Both the income from service charges in the amount of Rs.2.25 crores and the loss in share trading of Rs.2.23 crores, would have to be taken into account in computing the income under that head, both being sources under the same head. The assessee had a dividend income of Rs.4.7 lakhs (income from other sources). The Tribunal was justified, in coming to the conclusion that the assessee fell within the purview of the exception carved out in the Explanation to section 73 and that consequently the assessee would not be deemed to be carrying on a speculation business for the purpose of section 73(1)." The judgment cited by Mr. Saraf is directly on the point sought to be agitated by the revenue. There is nothing to show that the view taken by the Bombay High Court is erroneous. We are, as such, of the opinion that the appeal must fail and is hereby dismissed.”

5.5. Moreover, on funds deployment criteria, we find from the audited accounts that the assessee had deployed Rs. 5,12,00,000/- towards shares and Rs. 26,21,97,762/- towards loans and advances as on 31.3.2008. Hence the principal business of assessee could be construed as one engaged in the business of granting of loans and advances. We find that the ld CIT had come to a conclusion that the principal business of the assessee is not granting of loans and advances based on the following chart prepared by him in his order:- “3. The contentions raised by the assessee’s counsel have been considered and examined. From the accounts of the assessee the figures of investment in merchandise (trading stock) and loans & advances as available in the balance sheet are reproduced as under: Particulars As on 31.03.2008 As on 31.03.2007 Inventories Rs.43,95,30,704/- Rs.9,16,01,355/- Loans & advances given Rs.26,16,97,703/- Rs.11,29,505/- But we find that the ld CIT had taken the total inventories of Rs. 43.95 crores as stock of shares, whereas it admittedly includes closing stock of sarees to the extent of Rs. 38.66 crores, thereby leaving a balance of Rs. 5 crores approx towards the closing stock of shares. From the Note No. 8 of the audited financial statements, the assessee had given the clear break up of closing stock of shares and closing stock of sarees. We also find that the ld CIT in his order itself in page 2 had stated that the closing stock of shares is only Rs. 5,17,00,000/-. Hence the very basis for his decision based on funds deployed in share business is more than that deployed in loans and advances gets defeated.

5.6. On both the counts of income criterion and funds deployment criterion, it could be safely concluded that the assessee’s case squarely falls under the two exceptions provided in Explanation to Section 73 of the Act and hence the order passed by the ld AO in these

8 Ushita Trading & Agency Ltd.., AY 2008-09 circumstances cannot be termed as erroneous much less prejudicial to the interests of the revenue warranting revisionary jurisdiction u/s 263 of the Act.

5.7. Apart from this, we also find that the ld AO had made a specific enquiry with regard to the applicability of Explanation to Section 73 of the Act during the course of original assessment proceedings for which the necessary order sheet entries were placed on record in the paper book. We find from the said order sheet entry on 10.3.2010 and 24.3.2010, a specific query was raised by the ld AO on the applicability of Explanation to section 73 of the Act and the assessee had given due reply to the same and the fact of assessee’s reply is also mentioned in the said order sheet entry recorded on 24.3.2010 by the ld AO. The queries raised by the ld AO and the replies filed thereon in this regard are part of the records. Hence in these circumstances, it could be safely concluded that the ld AO on due appreciation of the replies filed in the given set of facts and circumstances after making requisite enquiries thereon, had come to a conscious conclusion that provisions of Explanation to Section 73 of the Act could not be made applicable to the assessee and had taken a possible view in the matter by allowing the claim of share trading loss in the sum of Rs. 1,07,87,500/- in the assessment to be set off against some other income. It is well settled that this possible view cannot be the subject matter of revision u/s 263 of the Act by the ld CIT. Reliance in this regard is placed on the decision of the Hon’ble Supreme Court in the case of Malabar Industrial Co. Ltd vs CIT reported in 243 ITR 83 (SC) and Hon’ble Bombay High Court in the case of CIT vs Gabriel India reported in 203 ITR 108 (Bom). Moreover, we also hold that the view taken by the ld AO in the facts and circumstances is the only possible view and hence there is no scope for any other view. This fact is further strengthened by the subsequent action of the ld AO in accepting to the stand of the assessee on the same issue in the scrutiny assessment proceedings completed u/s 143(3) of the Act dated 29.10.2012 for the Asst Year 2010-11 , wherein the ld AO had recorded in his order as under:- “During the course of scrutiny proceeding, it was found that the assesssee had received an interest income of Rs. 1.74 crores during the financial year which was adjusted with the share trading loss. The assessee was asked to show cause as to why the setting off interest income with share trading loss will not be disallowed in the light of Explanation to Section 73. The assessee in its reply stated that the assessee company is a NBFC company and its principal business is granting of loans and advances and not share trading and the company has utilized most of its funds i.e Rs. 18.26 crores to loans and advances to earn an interest income of Rs. 1.74 crores. Moreover , the interest income is higher than loss in share trading . Therefore the losses arising out of share transaction should not be treated as speculation loss but should be treated as normal business loss as the principal income of the assessee during

9 Ushita Trading & Agency Ltd.., AY 2008-09 the aforesaid assessment year consist mainly of advancing loans and advances and earning interest income. The explanation of the assessee seems reasonable. Hence, the share trading loss is being treated as business loss.”

5.8. In view of the aforesaid facts and circumstances and findings given thereon and respectfully following the judicial precedents relied upon hereinabove, we hold that the ld CIT had wrongly invoked revisionary jurisdiction u/s 263 of the Act as the order passed by the ld AO is neither erroneous nor prejudicial to the interest of the revenue which is the condition precedent for invoking revisionary jurisdiction u/s 263 of the Act. Hence we hereby quash the revision order passed u/s 263 of the Act by the ld CIT and allow the grounds of the assessee in this regard.

Order pronounced in the open court on 11.08.2016