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Income Tax Appellate Tribunal, DELHI BENCH `G’ NEW DELHI
Before: SHRI CHANDRA MOHAN GARG, & SHRI L.P. SAHU
PER CHANDRA MOHAN GARG, JUDICIAL MEMBER
1. This appeal by the revenue has been filed against the order of the CIT(A)- XIII dated 7.5.2012 passed in Appeal No. 214/11-12 for assessment year 2009- 10.
The main grounds raised by the revenue read as under:-
“1. The Learned CIT(A) has erred on the facts and circumstances of the case and in law in allowing the notional loss of Rs. 37,73.273/- on F&O foreign currency transaction..
Assessment Year: 2009-10 2. The Learned CIT(A) has erred on facts and circumstances of the case and in law in allowing the claim of Rs. 2.00.87,987/- without the assessee fulfilling the conditions prescribed under section 54F of the Income tax act, 1961.”
Briefly stated, the facts giving rise to this appeal are that an order u/s 143(3) of the Income Tax Act, 1961 was passed on 16.12.2011 at assessed income of Rs. 3,04,44,615 as against the returned income of Rs.43,59,730/-.
The Assessing Officer made disallowances including impugned two disallowances viz. first disallowance of loss incurred on account of F&O transaction in foreign currency in stock exchange and second disallowance of claim of exemption u/s 54F of the Act by holding that the assessee was owner of more than one property. The aggrieved assessee carried the matter before the first appellate authority and both these grounds were allowed and impugned additions deleted. Now, the aggrieved revenue is before this Tribunal in this second appeal with the ground as reproduced hereinabove.
Ground No. 1
Apropos ground no.1, ld. DR submitted that the ld. CIT(A) has erred on the facts and circumstances of the case and in law in allowing the notional loss of Rs. 37,73.273/- on F&O foreign currency transaction. Ld. DR supporting the action of the Assessing Officer submitted that in view of the specific clarification contained in Board’s Instruction No. 3/2010 dated 23.3.10, the impugned loss claimed by the assessee under the business head was rightly Assessment Year: 2009-10 treated as notional loss and the same was not allowed to be set off from the other heads of income or to carry forward the same to the subsequent years.
Replying to the above, learned counsel of the assessee submitted that the loss suffered by the assessee on the basis of actual transaction in the foreign exchange derivatives is allowable and the observations of the Assessing Officer that the transactions are based on marked to market losses is factually correct.
He further pointed out assessee’s paper book page no. 64 to 66 and submitted that on 31.3.09, the assessee had a credit balance of Rs.25,26,727 against the payment of Rs. 63 lakh made by the assessee during the year, thus, net loss suffered by the assessee during the relevant financial period is allowable.
Further elaborating the alternative plea of the assessee, learned counsel of the assessee submitted that the assessee has suffered gross loss of Rs.2.32 crores and earned a gross profit of Rs.1.94 crore, as such, net loss was Rs.33.73 crore which is not a notional loss but from the facts of the case, it is clear that the loss is an actual loss and the same is allowable to the assessee as per section 43(5) of the Act.
Learned counsel of the assessee also placed reliance on following judgments:-
CIT vs Kapil Nagpal 2015 (9) TMI 613 – Delhi High Court 2. IVF Advisors (P) Ltd. vs ACIT Mumbai (2015) 55 taxmann.om 469 (Mumbai – Trib.)
Assessment Year: 2009-10 3. HB Stockholdings Ltd. vs CIT, Delhi (2013) 33 taxmann.com 154 (Delhi – Trib) 4. DCIT vs Paterson Securities (P) Ltd. (2010) 127 ITD 386 (Chennai) 5. DCIT vs SSKI Investors Services (P) Ltd. (2009) 29 SOT 78 (Mum) (URO) 6. Smt. Maya A. Ajwani vs ITO-7(2)(4), Mumbai (2015) 56 taxmann.com 255 (Mumbai-Trib.)
Sunil Sachdeva vs ACIT, Gurgaon (2013) 31 taxmann.com 86 (Delhi – Trib.) 7. On careful consideration of above submissions, from careful perusal of the impugned order, we note that the CIT(A) has dealt this issue in para 6.3 at page 8 of the impugned order wherein he has held as under:-
“6.3 I have considered the submission of the appellant and observation of the assessing officer. It is seen that ASSESSING OFFICER has made disallowance of loss of Rs.37,73,273/- incurred on account of F&O transactions in foreign currency in a recognized stock exchange. It has been observed by the Assessing Officer that these transactions represents marked to market losses and in view of the Board’s Instruction No. 03/2010 dated 23rd March, 2010 such losses are not allowable. On the other hand the appellant has contended that this is an actual loss incurred during the year on the transactions done on recognized stock exchange in foreign currency and this is not a notional loss and accordingly the above instruction of Board is not applicable. In support of his contention, the appellant has filed copy of the transactions ledger with M/s PACE Financial Services and PACE Financial Stock Broking. The same is filed at page 197 to 199 of the paper book. The appellant has also filed copy of bank statements running with HSBC Bank where from the payments have been made to the brokers. It has been further contented that in any case this being a loss incurred during the year is an allowable loss. 1 have perused the facts and on going through the same. It is observed that the appellant has entered into these F&O transactions Assessment Year: 2009-10 during the year. In respect of the various transactions entered into by the appellant he has incurred loss of Rs.2,32,10,575/- and earned profit of Rs. 1,94,37,302/-. Thus there is an actual loss of Rs.37,73,273/- during the year in such transactions. Against this the appellant has made a payment of Rs.63 Lac on various dates to the Broker. After adjusting the above losses there is a credit balance with the broker of Rs.25,26,727/-. In view of these facts the observation of the Assessing Officer that the above said loss is a notional loss and represents marked to market is not correct. It is not a notional entry which has been passed on the last day of the financial year and represents the value as per the market value on 31st March. It is a running account whereby profit and loss are being incurred on settlement day and amount being debited and credited on account of loss or the profit as the case may be. Accordingly this being an actual loss net balance of the profit and loss earned/incurred is allowable under the provisions of the Act. The Board circular regarding notional loss is not applicable to such transactions. The Assessing Officer is accordingly directed to allow the loss incurred on F&O foreign currency transactions. This ground of appeal is allowed.”
8. On careful consideration of above rival submissions and operative part of the impugned order on the issue from the assessment order, we observe that the main allegation of the Assessing Officer was that as per specific clarification contained in Board’s instruction (supra), the loss claimed by the assessee under the business head is a notional loss whereas the CIT(A), after considering the facts and circumstances of the case and analyzing the claim of the assessee, observed that the assessee has entered in various F&O transactions and he has incurred loss and has also earned profit and finally he sustained actual loss of Rs.37,73,273 during the relevant financial year from such transaction. Ld. CIT(A) rightly demolished the conclusion of the Assessing Officer that the said loss is a notional loss and represents marked to market is not correct. We are Assessment Year: 2009-10 also in agreement with the conclusion of the CIT(A) that the claim of the assessee is not in pursuance to the notional entry which has been passed on the last date of the financial year and represents the value as per market value as on 31st March. Ld. CIT(A) explicitly held that the entry was passed out of running account whereby profit and loss which have been incurred on settlement day and amount have been debited and credited on account of loss or profit as the case may be. Ld. CIT(A) finally granted relief to the assessee by holding that as per Circular regarding notional loss is not applicable to the transaction which was undertaken by the assessee as F&O transaction. On logical analysis of the order of the first appellate authority on this issue, we reach to a logical conclusion that the Assessing Officer made addition regarding the Board Circular which is not actually applicable to the facts and circumstances of the present case, therefore, the CIT(A) was right in concluding this issue in favour of the assessee. We are unable to see any perversity or any other valid reason to interfere with the order of the ld. CIT(A). Accordingly, ground no. 1 of the revenue fails.
Ground No.2
Apropos ground no.2, ld. DR contended that the Learned CIT(A) has erred on facts and circumstances of the case and in law in allowing the claim of Rs. 2.00.87,987/- without the assessee fulfilling the conditions prescribed under section 54F of the Income tax act, 1961 because the assessee made a claim without verifying the pre-conditions prescribed Assessment Year: 2009-10 under the said provisions. Ld. DR took us through relevant part of the assessment order and submitted that after detailed deliberations and consideration of the assessee’s stand and explanation, the Assessing Officer rightly held that exemption u/s 54 of the Act is available only if on the date of transfer of the original asset, the taxpayer does not own more than one residential house property other than the new house. Ld. DR further submitted that since the assessee owned more than one house property on the date of transfer of original asset, therefore, he was not entitled for deduction u/s 54 of the Act. Ld. DR also reiterated the allegations of the Assessing Officer from page 9 to 12 of the assessment order and submitted that the assessee has not able to prove that the source of above investment in capital gain account was the maturity amount of the same funds as necessary evidences thereof have not been furnished and the deduction u/s 54 or 54F will be available to the taxpayer only if the assessee invests either out of sale proceeds of the asset of his other personal funds but not from borrowed funds.
Replying to the above, learned counsel of the assessee supported the order of the first appellate authority and submitted that the Assessing Officer has alleged that the assessee has gifted property no. G-602 to his wife but the rental income is being shown by him and thus, the assessee should be considered as the owner of the property. Learned counsel of the assessee Assessment Year: 2009-10 vehemently contended that the Assessing Officer has also wrongly alleged that the Aravali farm is a residential house and the assessee has not been able to prove the source of investment in the capital gain scheme account. Learned counsel of the assessee submitted that these allegations of the Assessing Officer are factually incorrect and are also legally untenable as the assessee was the owner of only one property i.e. JPH-03, Central Park, Sector 42, Gurgaon having 50% share only which is clear from the copy of the conveyance deed available at assessee’s paper book page 116 to 119. Learned counsel of the assessee further pointed out that the assessee was the owner of property no. G- 602 till 29.1.09 only and when the assessee has gifted said property through the registered deed to his wife, then the assessee did not remain the owner of the said property on the date of sale of the property on which the capital gain has arisen i.e. 2.2.2009. He also shows us Apartment Buyer Agreement at page 142 and 143 and gift deed available at paper book page 146-149 which was submitted before the authorities below. Learned counsel of the assessee submitted that the Assessing Officer did not properly consider the submissions and explanation of the assessee that the rental income for the whole year has been shown by the assessee because the implication of the clubbing provision as
per section 64(1) of the Act and only showing the rental income does not mean that the assessee continues to be the owner of the gifted property. Learned counsel of the assessee placed reliance on the decision of ITAT Mumbai ‘B’ Bench in the case of Smt. Maya A. Ajwani vs ITO-7(2)(4), Mumbai (2015) 56 8 Assessment Year: 2009-10 taxmann.com 255 (Mumbai-Trib.) and submitted that in the similar set of facts and circumstances, it was held that gift of house to husband prior to the date of transfer of original asset other than any residential house cannot be disregarded for the purpose of reckoning assessee’s eligibility for deduction u/s 54 of the Act even if the assessee along with her husband continue to reside in the same house after gift. The ITAT Mumbai also held that section 64(1)(iv) will not operate to nullify gift and would operate only to club income from gifted house in the hands of donor and in this situation, the gift cannot be regarded as sham transaction merely because gift was made by the assessee to his/her spouse.
On careful consideration of above submissions of both the sides, from the operative part of the impugned order of the first appellate authority, we note that the first appellate authority had dealt with this issue in para 10.2 at page 19 of the impugned order and the relevant observations of the ld. CIT(A) appear on page 12 which read as under:-
“On going through the provisions of section 54F it is noticed that the benefit is not available to an assessee where the assessee owns more than one residential house on the date of transfer of the original asset on which the capital gain has arisen. In this case the capital gain has arisen on 2nd February, 2009. The allegation of the Assessing Officer that the appellant was owning following three residential houses on 2nd February, 2009:- 1. JPH-03, Central Park, Sector 42, Gurgaon, 50% share 2. G-602, Central Park, Sector 42, Gurgaon 3. Aravali Farm, 50% share There is no dispute so far as JPH-03, Central Park-, Sector 9 Assessment Year: 2009-10 42, Gurgaon is concerned as the assessee also admits that he was 50% owner of this flat. As regards the flat no. G-602, the contention of the appellant is that he has gifted this property to his wife on 29th January, 2009 and as such he ceased to be the owner on 29th January, 2009. This fact is also noted by the Assessing Officer. However, the Assessing Officer is of the view that assessee having gifted the property to his wife, still continues to be the beneficial owner and showing rental income in his hand. In this regard I notice that as per the gift deed, the appellant has conveyed all rights and privileges whatsoever of the said property forever and has not kept any right with him. It has been further stated in the gift deed that the donee will be the exclusive and absolute owner and that the donee shall enjoy the property with absolute rights including the exclusive unrestricted right to sell or transfer the said property. The physical vacant possession has also been handed over to the Donee. The gift deed is a registered deed registered before the Sub-Registrar, Gurgaon on 29 January, 2009. In view of these facts I hold that the observation of the Assessing Officer in the assessment order that the appellant continues to be the beneficial owner is not correct. The second contention of the Assessing Officer that the appellant is showing the rental income in his hand and thus appellant is taking a contradictory stand. Firstly by merely showing rental income in his hands, the appellant can’t become owner of the property. Secondly one needs to find out the reasons for showing such rental income in his hands. There is no dispute to the fact that appellant was owner of this flat till 29th January, 2009 and accordingly rental income upto that date in any case is to be assessed in his hands. Further appellant having gifted this flat to his wife on 29th January, 2009 thereafter the appellant despite not being owner of the flat, still the rental income from such income is to be clubbed in his hand in view of the provisions of Section 64(1 )(iv) of the Act. Thus there is no contradiction as alleged by the A.O. The explanation of the appellant in this regard is found to be correct that it is not his rental income. It is because of the clubbing of income provision that income earned is being included in his hands under Section 64(1 )(iv). This does not mean that the appellant is the owner of the property. The contention of the Assessing Officer that the appellant is taking contradictory stands is not correct. The fact remains that as on the date when the original asset on 10 Assessment Year: 2009-10 which the capital gain has arisen i.e. 2nd February, 2009 appellant was not the owner of the said flat. The next allegation of the Assessing Officer is that the appellant is owner of a farm house for which he has referred to definition of ‘Farm House’ that is a type of building or house which serves the residential purposes in a rural or agricultural land. There can’t be any dispute about the Farm House, if there is a house on the farm land. But the issue is whether there is a house on the agriculture (farm) land. There does not seem to be any basis for the Assessing Officer to conclude that there is a house on the farm. The Assessing Officer has picked up the figure of investment from the statement of affairs and without examining the fact whether it is an agricultural land or a house constructed on agricultural land has assumed that there is a house on such agriculture land. This observation of the Assessing Officer that appellant is having a house on the farm land is without any basis. As explained by the appellant, the appellant has only agricultural land with no construction whatsoever on the said land. The Assessing Officer has simply picked up the assets stated in the statement of affairs ignoring the fact that the appellant has paid a sum of Rs.5,50,000/- for 50% right in the agricultural land being plot no.C-66 in Aravali Retreat. There being no material to allege that there is construction and there is a house, the same cannot be considered to be a residential house for the purpose of Section 54F of the Act. It being an agricultural land, it cannot be considered a residential house for the purpose of Section 54F of the Act. In view of the above stated facts, it is established that appellant was having only one residential property and hence the appellant fulfils the condition so as to not to own more than one house on the date on which the capital gain arose for claiming the benefit of Section 54F of the Act. The Assessing Officer has further denied the benefit under Section 54F on the ground that the appellant was required to deposit the net consideration before the due date of furnishing return of income i.e. 31st July, 2009. He has further stated that the amount of capital gain realized by the appellant was first deposited in the mutual fund and then appellant has not been able to prove the source of the investment in respect of the investment made in the capital Assessment Year: 2009-10 gain scheme. Further he has held that the amount to be deposited in Capital Gain Scheme be the same amount as realized from the sale of original assets. In this regard the Assessing Officer has cited the judgment of the Bombay Bench in the case of Milan Sharat Ruparel vs. ACIT 121 TTJ 770 (Mum) whereby it was held that investment of capital gain account scheme should not come from the borrowed funds. On going through the facts I notice that the above contention of the Assessing Officer is not correct. Further there is no requirement under the law that the appellant should deposit the money received on sale of original capital asset in the Capital Gain Scheme. The only requirement is that the money should be deposited in the capital gain account scheme before the due date of filing return. Admittedly in this case there is no dispute that the money has been deposited before the due date of filing the return. However the contention of the Assessing Officer that the capital gain realized has been first utilized for deposit with the mutual fund cannot be a ground for disallowing the exemption. There is no restriction on utilization of capital gain realized from sale of original asset till its deposit in the Capital Gain Scheme. The appellant is free to deal with the same as it may like. The allegation of the Assessing Officer that the appellant has not been able to prove the source of investment is also not correct. During the course of assessment proceedings the appellant has filed the relevant details of the capital gain and its utilization along with bank account. The money has been deposited in the mutual fund and on redemption of the mutual fund it has been deposited in the capital gain account scheme. Accordingly the allegation of the Assessing Officer in this regard is also not correct. The appellant on sale of original assets first deposited the proceeds in his bank account. From there he deposited the money temporarily with mutual funds and before the due date of deposit in Capital Gain Scheme, encashed the mutual funds and deposited the amount in Capital Gain Scheme. Thus the appellant has complied with all the conditions of Section 54F to be eligible to claim the exemption. The Assessing Officer is accordingly directed to allow the exemption u/s 54F of the IT Act at Rs. 2,00,87,987/-.”
Assessment Year: 2009-10 12. In view of above, at the very outset, let us note some admitted and undisputed facts viz. the assessee gifted property no. G-602 to his wife on 29.1.2009 through a registered gift deed. The assessee sold property on 2.2.2009 on which the impugned capital gain has arisen. The rental income gifted property was taxed in the hands of the assessee during the relevant financial year and it is also not in dispute that money accrued from capital gain has been deposited in the capital gain of amount before the due date of filing the return.
We consider the allegations of the Assessing Officer as well as conclusion of the CIT(A). In our understanding when the assessee has parted his legal right through gift deed dated 29.1.2009 and the property no. G-602 was gifted to his wife, then it cannot be presumed that the assessee continued to be owner of the said property even after execution of registered gift deed in favour of his spouse. So far as the taxable income from the said property is concerned, the assessee’s stand gets support from the order of the ITAT Mumbai Bench in the case of Smt.
Maya wherein it was held that section 64(1)(iv) will not operate to nullify gift and would operate only to club income in the hands of donor assessee.
Assessment Year: 2009-10 14. At this juncture, it is also relevant to note that the assessee is the owner of only one property i.e. JPH-03, Central Park, Sector 4, having 50% of share as per conveyance deed available at assessee’s paper book pages 96 to 119 after sale of property on 2.2.2009 out of which impugned capital gain accrued to the assessee. In these facts and circumstances, the CIT(A) was right in concluding that during the course of assessment proceedings, the assessee filed the relevant details of capital gain and its utilization along with copies of the bank account statement and from these details, it is amply clear that the money of capital gain has been deposited in mutual fund and on redemption of the mutual fund, it has been deposited in the capital gain account scheme. It was also noticed that the assessee on sale of original assets has deposited the proceeds in his bank account. From there, he deposited the money temporarily with mutual funds and before the due date of deposit in Capital Gain Scheme, encashed the mutual funds and deposited the amount in Capital Gain Scheme as required by the relevant provisions of the Act. On vigilant and careful consideration of contention of the Assessing Officer as well as conclusion of the CIT(A) as noted above, we are of the view that the Assessing Officer rejected the claim of the assessee u/s 54 of the Act without any justified reason and on incorrect premise which was rightly allowed by the CIT(A) after properly appreciating and considering the facts and circumstances of the case in the light of explanation of the 14 Assessment Year: 2009-10 assessee. We are unable to see any infirmity or any other valid reason to interfere with the order of the ld. CIT(A) and uphold the same.
Accordingly, ground no. 2 of the revenue is also dismissed.
In the result, the appeal of the revenue is dismissed.
Order pronounced in the open court on 24.11.2015.