FAIRGROWTH ENTERPRISES(P)LTD,KOLKATA vs. I.T.O. WD - 5(4),KOLKATA, KOLKATA

The assessee has raised the following grounds in :-

The brief facts of the case in is that the assessee had incurred a loss of Rs. 62,61,870/- in commodity transactions which was set off against income arising from purchase and sale of shares. The assessee claimed that it is engaged in the speculation business of purchase and sale of shares and also dealing in commodities business. Hence loss incurred on commodity transactions is eligible for set off against profit from sale of shares. The Learned AO observed that the assessee has got interest income from lending activities also which is more than the income from share trading activities and accordingly held that the assessee falls under the exception clause provided in Explanation to Section 73 of the Act. Then he proceeded to disallow the claim of loss on commodity transactions in the assessment. On first appeal, the Learned CIT(A) confirmed the disallowance made by the Learned AO but by stating that the entire loss on commodity transactions claimed by the assessee is fictitious in nature. Aggrieved, the assessee is in appeal before us by raising the aforesaid grounds.

The Learned AR argued that the Learned AO agreed to the fact that the loss on commodity transactions is normal business loss ought to have allowed to be set off against income from share trading and other income and ought not to have made a separate disallowance. He further stated that the Learned AO had erroneously stated that the assessee’s case falls under the exception to Explanation to Section 73 of the Act as interest income from lending activity is more than income from share trading. According to him, the Learned AO ought to have considered the interest payment also and then decide whether there is resultant profit thereon and the profit , if any, figure so arrived needs to be compared with income from share trading. If that is done, there is only a net loss after reducing interest paid on loans which would automatically lead to a situation that income from share trading more than the interest income (net) and 3 M/s. Fairgrowth Enterprises P.Ltd ITA No.1876/Kol/2012-C-AM M/s. Hari Finance & Trade P.Ltd hence it would naturally follow that assessee would fall under Explanation to section 73 and hence the share trading activity would be speculation income. Once this is done, then the loss on commodity transactions (silver) is eligible for set off against speculation income. He further argued that the Learned CIT(A) had treated the entire loss on commodity transactions as bogus based on irrelevant considerations. He further argued that the reliance placed on the decision of Kolkata Tribunal, by the Learned CIT(A) in the case of ITO vs M/s Ellenbarrie Exim Ltd in ITA No. 1871/Kol/2008 dated 21.7.2011 in support of his conclusion that the loss on commodity transaction is bogus and colourable device to evade the taxes, is totally misplaced as the facts in that case are totally different from the facts of the instant case. In response to this, the Learned DR vehemently supported the orders of the lower authorities.

We have heard the rival submissions and perused the materials available on record including the certified copy of the paper book filed by the assessee containing the details of loss in commodity business transaction at page 36 of the paper book and contract notes and invoices given by the broker for dealing in silver (commodity trading) at pages 37 to 44 of the paper book among others. From the pages 36 to 44 of the paper book, we find that the assessee was involved in purchase and sale of silver in its commodity trading activities during the assessment year under appeal. It is not in dispute that the assessee had carried out this commodity trading activity through a recognized and registered commodity broker viz Kshitiz Commotrade Pvt Ltd, 205, Rabindra Sarani, 4th Floor, Room No. 139, Kolkata – 700007 having FMC Code : MCX/TCM/CORP/1266 duly mentioning its PAN and Service Tax Registration Number in the contract notes. It is not in dispute that M/s Kshitiz Commotrade Pvt Ltd is a member of Multi Commodity Exchange of India Ltd and the purchase and sale of silver have been carried out on mark to market basis by duly suffering service tax at applicable rates which are clearly reflected in the contract notes and in the invoices given by the said commodity broker. We find that there is no basis for the Learned 4 M/s. Fairgrowth Enterprises P.Ltd ITA No.1876/Kol/2012-C-AM M/s. Hari Finance & Trade P.Ltd CIT(A) to treat the loss on commodity transactions to be fictitious loss. The aforesaid documents were duly filed before the Learned AO and hence there is no need to reach a contrary conclusion about the genuineness of the transaction. We hold that the Learned CITA had merely gone by surmise and suspicion by making baseless allegations in his order to reach to a pre-determined conclusion. The Learned CIT(A) agrees that assessee had filed contract notes. Because he uses the same while making one allegation against the assessee. The Learned CIT(A) nowhere concludes that the loss on commodity transactions is non-genuine. He only states in pg 20 para 15 of his order that the genuineness of the loss from commodity trading could not be examined and verified by him. The Learned CIT(A) in order to justify his suspicion ought to have made adequate enquiries with Kshitiz Commotrade Pvt Ltd by using his unfettered powers provided in the statute. Absolutely no enquiry was carried out by the Learned CITA with regard to these transactions with the broker by either referring this issue to the AO of the broker or by directly summoning the broker to understand the impugned transactions and the beneficiaries in the said transactions. We also find that the case law of this tribunal relied upon by the Learned CIT(A) in the case of ITO vs M/s Ellenbarrie Exim Ltd in dated 21.7.2011 in support of his conclusion that the loss on commodity transaction is bogus and colourable device to evade the taxes, is totally misplaced. In the said case, the issue involved was with regard to allowability of commission expenditure to certain parties which are supported by commission agreement. This tribunal in the facts and circumstances of the case had held that merely because payment is made pursuant to an agreement would not make the payment of commission as a genuine business expenditure. But the facts in the instant case are totally different and distinguishable from the facts of the case relied upon by the Learned CIT(A). We hold that without carrying out requisite enquiries as provided in the Act , merely treating the loss claimed to be a fictitious loss based on surmise and suspicion and by making general baseless allegations without bringing any evidence on record, the action of the Learned CIT(A) is unjustified. ITA No. 1875/Kol/2012-C-AM 5 M/s. Fairgrowth Enterprises P.Ltd ITA No.1876/Kol/2012-C-AM M/s. Hari Finance & Trade P.Ltd 7.1. Hence the only point to be addressed in this issue is as to whether the activity of trading in commodity transactions by the assessee could be construed as speculation activity in the facts and circumstances of the case in the context of section 73 of the Act read with its Explanation thereon. We find that the Learned AO had treated the assessee’s activity of share trading to be normal business as according to him the principal business of assessee is granting of loans and advances. He had reached this conclusion on the ground that interest income on loans of Rs. 35,21,584/- is more than the income from share trading of Rs. 13,62,106/-. Accordingly he held that the assessee’s case falls under the exception to Explanation to Section 73 of the Act. Having concluded so, he ought to have treated the loss on commodity transactions as a normal business loss and allowed to be set off against the speculative income as admittedly in the instant case the profit from trading in shares has been accepted as arising from speculative business. Hence there was no need to make any addition towards loss on commodity transactions.

In the result, the appeals of the respective assessee are allowed. THIS ORDER IS PRONOUNCED IN OPEN COURT ON 09 -03- 2016