Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, KOLKATA BENCH “C” KOLKATA
Before: Shri Waseem Ahmed & Shri S.S.Viswanethra Ravi
आदेश /O R D E R
PER Waseem Ahmed, Accountant Member:-
This appeal is preferred by the Revenue against the order of Commissioner of Income Tax (Appeals)-VI, Kolkata dated 29.08.2011 and Cross Objection (CO) filed by assessee being CO No.25/Kol/2012. Assessment was framed by DCIT, Circle-6, Kolkata u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) vide his order dated 24.12.2010 for assessment year 2008-09.
ITA No.1614/Kol/2011 & CO.25/Kol/2012 A.Y. 2007-08 DCIT, Cir-6, Kol. v. M/s Nariman Finvest (P) Ltd. Page 2 Shri D.S.Damle, L’d Authorized Representative appeared on behalf of assessee and Shri M.Jungio, Ld. Departmental Representative appeared on behalf of Revenue.
At the outset, it was observed that there is small delay of 13 days in the appeal filed by Revenue and condonation petition has been filed explaining the reasons for delay in filing appeal. Ld. AR did not object for condoning the delay. Hence, we condone the delay and admit the appeal for hearing. First we take up Revenue’s appeal in ITA No.1614/Kol/11 3. The first issue raised by the Revenue is that Ld. CIT(A) erred in deleting the addition made by Assessing Officer for ₹33,60,261/- as speculation loss.
Brief facts are that assessee is a Private Limited Company and engaged in the business activities of share/stock broker. The assessee holds the corporate Membership of National Stock Exchange. Assessee for the year under consideration has filed its returned income on 15.10.2008 declaring total business income of ₹1,49,40,350/-. Thereafter case was selected for scrutiny and notice u/s 143(2) r.w.s. 142(1) was issued to the assessee. The assessee during the year has claimed day trading loss of ₹33,60,261/- on the sale & purchase of the shares. The AO observed that the transaction for the sale & purchase of shares was settled otherwise than by actual delivery of shares. Therefore it is a speculative transaction as per the provisions of section 43(5) of the Act. However the assessee claimed it as non-speculative business transaction on the ground that aforesaid loss is arising out of hedging / arbitrage activities i.e. to take the advantage of price difference between the cash market & F & O market in the same script. The purpose of assessee was to guard the loss which may arise in the ordinary course of business for the sale/ purchase of non-speculative shares. So the transactions giving rise to the aforesaid loss of Rs. 33,60,261.00 are actually speculative but the same cannot be treated as speculative by virtue of provision of Sec.43(5) clause (b) and (c) of the Act. However, AO disregarded the claim of assessee by observing that speculative transactions cannot be explained as the ordinary course of assessee’s business by as stock broker. Accordingly, AO held that the above loss as speculative
ITA No.1614/Kol/2011 & CO.25/Kol/2012 A.Y. 2007-08 DCIT, Cir-6, Kol. v. M/s Nariman Finvest (P) Ltd. Page 3 transactions and is not covered under the exception as discussed in provision of Section 43(5) of the Act.
Aggrieved, assessee preferred an appeal before Ld. CIT(A) whereas assessee submitted that the loss arose on account of transactions entered by assessee to take advantage of price difference between cash and Future & Options market. The transactions between two segments were carried out simultaneously firstly the assessee purchased/sold delivery based shares of a particular script and secondly the same script was purchased/sold in F&O market segments to guard the loss in the ordinary course of business which are known as hedging and arbitrary transaction and are exempted under section 43(5) (c) of the Act. The allegation of AO that two speculative transactions cannot be explained as having been entered into the ordinary course of business is against the practice of arbitrary or jobbing which are in the nature pre-supposes two transactions, one being the primary transactions and second being the supportive transactions to guard the loss of first transaction. Accordingly, Ld CIT(A) deleted the addition made by AO by observing as under:- “11 I have carefully considered the observations of the Assessing Officer in the assessment order and submissions of the appellant. The appellant is a member of stock exchange and dealing in shares and securities. The assessee is doing the business as broker and also transaction in the nature of jobbing and arbitrage. The arbiter or jobbing has two transactions, one being the primary transaction and second being the supportive transaction to guard the losses of first transaction while entering into two transactions broker intends to earn only arbitrage difference between two Segment (Cash vs F & O) and or two Exchanges (BSE, NSE etc). this difference may be an outcome of delivery or without delivery on the same day or over a period of time.”
Being aggrieved by this order of Ld. CIT(A) Revenue is in appeal before us.
Before us both the parties relied on the orders of Authorities Below as favourable to them. Ld. AR filed Index which is running pages from 1 to 88 and drew our attention at pages 29 to 66 where the transactions in F & O was taken to guard the loss of the share business held by the assessee.
ITA No.1614/Kol/2011 & CO.25/Kol/2012 A.Y. 2007-08 DCIT, Cir-6, Kol. v. M/s Nariman Finvest (P) Ltd. Page 4 7. We have heard rival contentions and perused the materials available on record. From the foregoing discussion we find that the AO has treated the transaction of sale & purchase of shares in F&O market which was undertaken to safe guard the loss in his holdings of stocks and shares against price fluctuations as speculation. However we find that the existing transaction is falling within the exceptions provided in clause (c) to section 43(5) of the Act. As per the provisions of the section 43(5) of the Act the transaction is falling within the definition of speculation transaction but the same has been provided in the exception list as per clause (c) to section 43(5) of the Act. At this juncture we find relevant to reproduce the provisions of section 43(5) of the Act which reads as under : (5) “speculative transaction” means a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically ors 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; [or] (d) An eligible transaction in respect of trading in derivatives referred to in clause [(ac)] of section 2 of the Securities Contracts (Regulation0 Act, 1956 (42 of 1956) carried out in a recognised stock exchange;][or] (e) An eligible transaction in respect of trading in commodity derivatives carried out in a recognized association,] [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. From the plain reading of the provisions we find that the transaction undertaken for the sale & purchase of the shares in F&O market to safeguard the loss on account of price fluctuations of the share held by the assessee within the same script cannot be regarded as speculation transactions.
ITA No.1614/Kol/2011 & CO.25/Kol/2012 A.Y. 2007-08 DCIT, Cir-6, Kol. v. M/s Nariman Finvest (P) Ltd. Page 5 7.1 We find that in similar facts of the case, issue has been decided in favour of assessee by the Hon’ble Bench of Kolkata in the case Lohia Securities Ltd. v. Deputy Commissioner of Income-tax, Circle-6, Kolkata 66 taxmann.com 86 the relevant head note reads as under : “Section 73, read with section 43(5), of the Income-tax Act, 1961 - Losses - In speculation business (Delivery and non-delivery transactions) - Whether trading of shares which is done by taking delivery does not come under purview of section 43(5); similarly, as per sub-clause (d) of section 43(5), derivative transaction in shares is also not speculation transaction as defined in section 43(5); and therefore, both profit/loss from all share delivery transactions and derivative transactions have same meaning as far as section 43(5) is concerned - Held, yes - Whether loss from share dealing should be allowed to be set off from profits from F & O in share transactions - Held, yes - Whether thus, before application of Explanation to section 73, aggregation of business profit or loss from these transactions is to be worked out irrespective of fact whether it is from share delivery transaction or derivative transactions - Held, yes [Paras 2.7.8 & 2.7.11][In favour of assessee]”
The ld. AR before us submitted that all the transactions in F&O were undertaken to safeguard the losses which may arise to the shares/ securities held by the assessee due to price fluctuations. The ld. AR in support of his claim has submitted the details of the transactions which are placed in paper book on pages 29 to 66. In view of above we find no reasons to interfere in the order of ld. CIT(A). Hence this ground of appeal of Revenue is dismissed.
The second issue raised by Revenue is that the ld. CIT(A) erred in treating the transaction out of the purview of Explanation to Section 73 of the Act.
At the outset, it was observed that this issue raised by Revenue is not emanating from the order of the lower authorities. Therefore the same is dismissed as infructuous. 10. In the result, Revenue’s appeal is dismissed. Coming to assessee’s CO No. 25/Kol/2012. 11. Issues raised by assessee are reproduced below:-
ITA No.1614/Kol/2011 & CO.25/Kol/2012 A.Y. 2007-08 DCIT, Cir-6, Kol. v. M/s Nariman Finvest (P) Ltd. Page 6 “1. In the facts and the circumstances of the case and in law the Learned Assessing Officer erred in raising ground of appeal u/s 73, although the same was never the case under assessment, in respect of disallowance of arbitrage loss of Rs.3360261/- wrongly made by the Assessing Officer u/s 43[5] and now deleted by the Commissioner of Income Tax [A] 2. In the facts and the circumstances of the case and in law the Learned Assessing Officer erred in disallowing Rs.112385/- [being Rs.341711 – 218326] u/s 14A read with rule 8D even though no expenses were incurred to earn dividend & income from arbitrage is not exempt. 3. In the fats and the circumstances of the case and in law the Learned Assessing Officer erred in disallowing Rs.347750/- out of club membership fees by wrongly treating it as personal/capital expenses. 4. In the facts and the circumstances of the case and in law the Learned Assessing Officer erred in disallowing Rs.198500/- out of catering charges u/s. 40a[ia] even though TDS is not applicable to payment made to hotel. The appellant also prays that the cross objection of the cross, objector may be allowed to be amended/altered or added on any of the cross objection raised, as may be necessary.”
First issue raised by assessee in its CO is that AO erred in raising the ground of appeal under the explanation to Sec. 73 although the same was never the case of assessment proceedings under consideration.
This ground of assessee has already been decided in favour of assessee vide para no.8 & 9 of this order. Accordingly, the issue raised by the assessee in its CO is allowed.
Next issue in assessee’s CO is that AO erred in disallowing ₹1,12,385/- u/s 14. 14A r.w.s 8D of the IT Rules.
The assessee during the year has earned dividend income of ₹5,68,583/- but did 15. not disallow any expenses in relation to aforesaid exempted income. Accordingly, AO disallowed the administrative expense of ₹1,12,385/- under Rule 8D(iii).
ITA No.1614/Kol/2011 & CO.25/Kol/2012 A.Y. 2007-08 DCIT, Cir-6, Kol. v. M/s Nariman Finvest (P) Ltd. Page 7 16. Aggrieved, assessee preferred an appeal before Ld. CIT(A) whereas assessee submitted that AO disallowed the expense without recording his “satisfaction” which is mandatory requirement of the Sec. 14A of the Act. The assessee also submitted that the shares were held in the Demat form and dividend directly credited through ECS to the bank account of assessee. The shares were held by the assessee as stock in trade therefore the rule 8D does not apply. As such no expenditure was incurred in connection with the earning of dividend income. However the Ld. CIT(A) has confirmed the order of the AO by disallowing the expense of ₹1,12,385/- under Rule 8D(iii).
Being aggrieved by this order of Ld. CIT(A), the assessee filed CO before us.
The ld. AR reiterated the submission made to the ld. CIT(A) before us. On the other hand the ld. DR vehemently supported the order of the lower authorities.
We have heard the rival contentions of both the parties and perused the materials available. At the outset we find that the in the identical facts and circumstances the Co-ordinate Bench has decided the issue in favour of Revenue in the case of DCIT vs. M/s Teenlok Advisory Services Pvt. Ltd. in ITA No.1351/Kol/2013 for AY 2009-10 dated 08.06.2016, the relevant extract is reproduced below:- “17. Having held that section 14A is applicable in the present case where the exempt dividend income is earned by the assessee form shares held as stock-in- trade, the next question that arises for out consideration is how to compute the disallowance to be made under section 14A on account of expenses incurred I relation to such exempt income by applying Rule 8D. in this regard, the ld. counsel for the assessee has relied on the decision of the Coordinate Bench of this Tribunal in the case of Gulshan Investment Co. Limited (supra) to contend that even if section 14A read with Rule 8D is held to be applicable in the case of the assessee, the disallowance on account of expenditure incurred in relation to the earning of exempt dividend income on shares held as stock- in-trade can only be in respect of expenditure directly relatable to earning of exempt income by applying the Rule 8D(2)(i) and not in respect of indirect expenses as per Rule 8D(2)(i) and 8D(2)(ii), which are not applicable. It is observed that a similar contention was raise don behalf of the assessee before the Tribunal even in the case of D.H. Securities Pvt. Limited (Supra) by
ITA No.1614/Kol/2011 & CO.25/Kol/2012 A.Y. 2007-08 DCIT, Cir-6, Kol. v. M/s Nariman Finvest (P) Ltd. Page 8 placing reliance on the decision in the case of Gulshan Investment Co. Limited (Supra). The ld. Accountant member, with whom the ld. Third Member finally concurred, however, did not accept the same by relying on the decision of Special Bench of the Tribunal in the case of Daga Capital Management Pvt. Limited (Supra), wherein a similar contention was rejected by the Tribunal by observing that the reference in Rule 8D is to the “value of investment” and not to the “assets held as investment”. It was held that a person may make investment in shares and the shares so purchased may be held either as stock- in-trade or investment. The word “investment” in Rule 8D refers to the making of purchase of shares and not holding it as investment. The applicability of Rule 8D to compute the disallowance to be made under section 14A on account of expenditure in relation to the exempt dividend income earned by the assessee from shares held as stock-in-trade thus was upheld by the Tribunal in its Third Member decision rendered din the case of DH Securities Pvt. Limited and respectfully following the same, we reject the contention of the ld. counsel for the assessee that the disallowance in the case of the assessee can be restricted only to direct expenses incurred in relation to the earning of exempt dividend income by applying Rule 8D(2)(i).”
We are accordingly putting our reliance in the above case and conclude that the provisions of section 14A read with rule 8D of the Act are squarely applicable even for the shares/securities held as stock in trade. In the instant case the shares were held as stock in trade but no disallowance of any expenditure was made. We also find that no submission or any calculation was made before the AO at the time of assessment showing that no expenditure was incurred in connection with the dividend income. In the absence of any information the AO has no option except to resort to the provisions of rule 8D of Income Tax Rules 1962. Accordingly the plea of the assessee with regard to the satisfaction is not tenable. Hence this ground of Assessee’s CO is dismissed.
The next issue raised by the assessee in CO is that ld. CIT(A) erred in confirming the order of the AO by sustaining the disallowance for a sum of Rs. 3,47,750.00 on account of the payment of club membership fees.
At the outset, we find that this issue is already covered in favour of assessee by the judgment of Hon’ble Punjab and Haryana in the case of Commissioner of
ITA No.1614/Kol/2011 & CO.25/Kol/2012 A.Y. 2007-08 DCIT, Cir-6, Kol. v. M/s Nariman Finvest (P) Ltd. Page 9 Income-tax, Patiala v. Groz Beckert Asia Ltd. [2013] 31 taxmann.com 155 (Punjab & Haryana). The relevant extract is reproduced as under : “Section 37 provides that any expenditure (not being expenditure of the nature described in sections 30 to 36) and not being in the nature of capital expenditure or personal expenses of the assessee, laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head 'profits and gains of business or profession'. The expression 'capital expenditure' has been interpreted by various judgments. In Assam Bengal Cement Co. Ltd.v. CIT [1955] 27 ITR 34 the Supreme Court deduced that, an outlay is deemed to be capital when it is made for the initiation of a business, for extension of a business, or for a substantial replacement of equipment and; expenditure may be treated as properly attributable to capital when it is made not only once and for all, but with a view to bringing into existence as asset or an advantage for the enduring benefit of a trade. The expression 'enduring benefit' or 'of a permanent character' were introduced to make it clear that the asset or the right acquired must have enough durability to justify its being treated as a capital asset. [Para 7] In the present case, the nature of expenditure incurred by the assessee cannot be said to be a capital expenditure. The second test culled down in Assam Bengal Cement Co. Ltd.'s case was that expenditure should bring into existence an asset or an advantage for the enduring benefit of a trade. In the present case, the corporate membership of Rs. 6 lakhs was for a limited period of 5 years. The corporate membership was obtained for running the business with a view to produce profit. Such membership does not bring into existence an asset or an advantage for the enduring benefit of the business. It is an expenditure incurred for the period of membership and is not long lasting. By subscribing to the membership of a club, no capital asset is created or comes into existence. By such membership, a privilege to use facilities of a club alone, are conferred on the assessee and that too for a limited period. Such expenses are for running the business with a view to produce the benefits to the assessee. Consequently, it cannot be treated as capital asset. [Para 16]”
Respectfully following the judgment of Hon’ble Punjab and Haryana in the case of Groz Beckert Asia Ltd (supra) we allow assessee’s ground of CO.
The last issue raised by the assessee in its CO is that Ld. CIT(A) erred in confirming the order of AO by sustaining the disallowance of ₹1,98,500/- u/s 40(a)(ia) of the Act on account of catering charges.
ITA No.1614/Kol/2011 & CO.25/Kol/2012 A.Y. 2007-08 DCIT, Cir-6, Kol. v. M/s Nariman Finvest (P) Ltd. Page 10 22. The assessee, during the year, has incurred catering charges without deducting TDS u/s 194C of the Act. Therefore, the AO disallowed the same and added back to the total income of assessee.
Aggrieved, assessee preferred an appeal before Ld. CIT(A) who has confirmed the action of AO by observing as under:- “17. Explanation II to sub-section 2 of Section 194C clearly provides that work shall include catering. The assessee has given copies of the bills of M/s deluxe Caterers for Rs.1,98,500/- where it is mentioned that Hi-tea has been given to 100 @ 100/- per person and dinner @ Rs.325/-for 580 persons vide bill No. 2555-2556 respectively dated 9th March, 2008. The orders have been placed in advance by the assessee and it is not a case where the customer goes in the restaurant and gets its food packed for self consumption. The caterer when supplies food under a contract/supply order at particular place for large number of people by having an advance order, falls under category of carrying out work in pursuance of a contract. The person paying any sum to the said caterer is responsible for deduction of TDS u/s. 194C. the assessee has violated the provisions of Section 194C read with section 40(a)(ia). Therefore, the appellant is not allowed to claim the said expenditure in the profit and Loss account. The said addition / disallowance by the Assessing Officer is up-held. This ground of appeal is dismissed.”
Being aggrieved by this order of Ld CIT(A) assessee came in CO before us.
Before us Ld. AR submitted that the catering charges have been incurred for the purchase of food from the M/s Deluxe Caterers and as such there was no contract for supplying of such food. Ld. AR in support of its claim has submitted the tax invoice from M/s Deluxe Caterers along with confirmation which are placed on pages 67 to 70 of the paper book. On the other hand, Ld. DR relied on the order of authorities below.
We have heard rival submissions and perused the materials available on record. At the outset, we find that assessee has organized the conferences and has purchased food items from M/s Deluxe Caters for the persons who attended the conference. From the facts of the case, we find that the instant transaction is solely purchase of food items and therefore, same is out of purview of TDS provision. The provisions of
ITA No.1614/Kol/2011 & CO.25/Kol/2012 A.Y. 2007-08 DCIT, Cir-6, Kol. v. M/s Nariman Finvest (P) Ltd. Page 11 TDS u/s. 194C of the Act are applicable for a works on contract and they do not apply on the sale-purchase of products. Therefore, in our considered view, the transaction for purchase of food items is out of purview of TDS provision. Hence, this ground of assessee’s CO is allowed. Accordingly, AO is directed.
In the result, Revenue’s appeal stands dismissed and that of assessee’s CO is partly allowed. Order pronounced in open court on 10/08/2016 Sd/- Sd/- (S.S.Viswanethra Ravi) (Waseem Ahmed) Judicial Member Accountant Member *Dkp �दनांकः- 10/08/2016 कोलकाता / Kolkata आदेश क� ��त�ल�प अ�े�षत / Copy of Order Forwarded to:- 1. आवेदक/Assessee-M/s Nariman Finvest (P) Ltd.,33/1 N.S. Road, Kolkata-01 2. राज�व/Revenue-DCIT, Circle-6,P-7, Chowringhee Square, Kolkata-41 3. संबं�धत आयकर आयु�त / Concerned CIT 4. आयकर आयु�त- अपील / CIT (A) 5. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण कोलकाता / DR, ITAT, Kolkata 6. गाड� फाइल / Guard file.
By order/आदेश से, /True Copy/ उप/सहायक पंजीकार आयकर अपील�य अ�धकरण, कोलकाता