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Income Tax Appellate Tribunal, BENCH ‘A’ KOLKATA
Before: Hon’ble Shri N.V.Vasudevan, JM & Shri Waseem Ahmed, AM ]
IN THE INCOME TAX APPELLATE TRIBUNAL, BENCH ‘A’ KOLKATA [Before Hon’ble Shri N.V.Vasudevan, JM & Shri Waseem Ahmed, AM ]
ITA No.657/Kol/2012 Assessment Year : 2007-08
Shree Ram Electrocast Pvt. Ltd. -versus- D.C.I.T., Central Circle-XVII, Kolkata Kolkata (PAN:AAICS3476P) (Appellant) (Respondent) ITA No.750/Kol/2012 Assessment Year : 2007-08
D.C.I.T., Central Circle-XVI, -versus- Shree Ram Electrocast Pvt.Ltd. Kolkata Kolkata (PAN:AAICS3476P) (Appellant) (Respondent)
For the Assessee Shri R.P.Agarwal, Sr.Advocate & Shri K.K.Chhaparia, FCA For the Department : Shri Rajat Subhra Biswas, CIT, DR
Date of Hearing : 10.02.2016. Date of Pronouncement : 02.03.2016.
ORDER PER BENCH
ITA No.657/Kol/12 is an appeal by the Assessee while ITA No.750/Kol/12 is an appeal by the Revenue. Both these appeals are directed against the order dated 27.02.2012 of CIT(A)-Central-II, Kolkata, relating to AY 2007-08.
Grounds of appeal raised by the assessee reads as follows : “1. For that in the facts and circumstances of the case, the Ld. A.O. erred in treating the share trading loss of Rs 1,34,38,700/- as deemed speculation loss. The action of the A.O was wholly unreasonable, uncalled for and bad in law. The Ld. CIT (A) was unjustified in confirming the action of AO. 2. For that in the facts and circumstances of the case, the Ld. A.O. erred in making additions of Rs 1,34,38,700/- on amounts which were part of regular accounts in an order passed u/s 153A of Income Tax Act, 1961. The action of the A.O was wholly ITA Nos.657&750/Kol/2012-Shree Ram Electrocast Pvt.Ltd.-A.Y.2007-08
unreasonable, uncalled for and bad in law. The Ld. CIT (A) was unjustified in confirming the action of AO. 3. For the appellant craves leave to add, alter or withdraw all or any grounds of appeal at the time of hearing.”
Grounds of appeal raised by the revenue reads as follows :- 1. For that on the facts and circumstances of the case the Ld. CT(A) has erred in granting the benefit to the assessee to carry forward the speculative loss of Rs.l,34,38,700/-, whereas the assessee has failed to prove his share transaction as genuine, by not furnishing the fundamental evidence in support of his claim. 2. That the Department craves leave to add, modify or alter any of the ground(s) of appeal and/or adduce additional evidence at the time of hearing of the case.
The facts and circumstances under which the above grounds of appeal arise for consideration are that the Assessee is a company. It is engaged in the real estate business, manufacturing of sponge iron, logistics, C&F Agency, distributorship etc. For A.Y.2007-08 assessee filed return of income declaring total income of Rs.10,28,840/-. An intimation u/s 143(1) of the Income Tax Act, 1961 (Act) dated 03.10.2008 was issued.
There was a search and seizure operation carried out in the case of the assessee u/s 132 of the Act on 25.04.2008. Thereafter notice u/s 153A was issued. For A.Y.2007- 08. The Assessee filed return of income in response to notice u/s 153A of the Act on 25.04.2010 declaring total income of Rs.50,02,709/-. Computation of total income filed by the assessee is at page 5 of the assessee’s paper book. The computation of income of the assessee shows that the assessee had declared income under the head profits and gains of business profession and the starting point of computation is the net profit as per profit and loss account. A perusal of profit and loss account of the assessee shows that in arriving at the net profit in the profit and loss account the assessee included loss of Rs.1,34,38,700/- on account of trading in shares. Sec.73 of the Act and Explanation to section 73 of the Act reads as follows :- 73. Losses in speculation business (1) Any loss, computed in respect of a speculation business carried on by the assessee, shall not be set off except against profits and. gains, if any, of another speculation business. ITA Nos.657&750/Kol/2012-Shree Ram Electrocast Pvt.Ltd.-A.Y.2007-08
(2) Where for any assessment year any loss computed in respect of a speculation business has not been wholly set off under sub- section (1), so much of the loss as is not so set off or the whole loss where the assessee had no income from any other speculation business, shall, subject to the other provisions of this Chapter, be carried forward to the following assessment year, and- (i) it shall be set off against the profits and gains, if any, of any speculation business carried on by him assessable for that assessment year; and (ii) if the loss cannot be wholly so set off, the amount of loss not so set off shall be carried forward to the following assessment year and so on. (3) In respect of allowance on account of depreciation or capital expenditure on scientific research, the provisions of sub- section (2) of section 72 shall apply in relation to speculation business as they apply in relation to any other business. (4) No loss shall be carried forward under this section for more than eight assessment years immediately succeeding the assessment year for which the loss was first computed. 1 Explanation.- Where any part of the business of a company ( 2 other than a company whose gross total income consists mainly of income which. is chargeable under the heads" Interest on securities"'," Income from house property"," Capital gains" and" Income from other sources"] or a company the principal business of which is the business of banking or the granting of loans and advances) consists in the purchase and sale of shares of other companies, such company shall, for the purposes of this section, be deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sale of such shares.]”
According to the AO, the assessee was a company and the loss that the assessee had incurred in trading in shares had to be treated as speculation loss in view of Explanation to Sec.73 of the Act which provides that where any part of the business of a company consists in the purchase and sale of shares of other companies, such company shall, for the purpose of Sec.73 be deemed to be carrying on speculation business. Consequently the loss in such purchase and sale of shares will be treated as speculation loss u/s.73(1) and cannot therefore be allowed to be set off against the business income of the Assessee. On this ground according to the AO, the claim of the assessee for setting off loss on purchase and sale of shares could not be permitted.
Without prejudice to the above AO also held that the loss in question was not genuine. The findings of the AO in this regard were as follows :-
ITA Nos.657&750/Kol/2012-Shree Ram Electrocast Pvt.Ltd.-A.Y.2007-08
“Notwithstanding the fact mentioned above, the documents furnished by the assessee as regards its purchase and sale of shares have also been examined from this end. It is seen that assessee had claimed purchase of 16060 number of shares of Bajaj Hindusthan @ Rs.524.05 per share on 05.04.2006 as also purchase of 8178 shares of Arvind Mills Ltd. @ Rs.112.03 per share on 07.04.2006 and purchase of 34420 shares of Arvind Mills Ltd. @Rs.112.00 per share on the same date i.e. 07.04.2006. These three purchases were claimed to have been made from M/ s.Chandimata Management Pvt. Ltd. 27 A, Metcalfe Street, Kolkata-13, from My s.Bahar Paper Pvt. Ltd., 71, Canning Street, Kolkata-1 and M/s. Wellfit Fashions Pvt. Ltd. 2B, Grant Lane, Kolkata-12. From the sale bill of those concerns, it is apparent that such transactions were not conducted through Stock Exchange and those were presumed to be Off- Market purchase. Departmental Inspector was deputed to verify whether those concerns were in existence at all. The report of the Inspector shows no such concerns were there in the given addresses during the relevant period. In order to further verify the genuineness of such transactions bank statements of the assessee for that period was called for. But no such bank statement showing the transactions relating to the purchase of above mentioned shares were filed by the assessee at the course of assessment. Thus, from the fact of the case it is apparent that the said purchases were not made in the month of April 2006. The action was an afterthought and loss was booked by that process. Incidentally, it maybe mentioned that the A/R was requested to furnish statement as to when those shares purchased from off-market were taken into Demat account since, no sale can be made through stock exchange without converting such physical form of shares into demat form. In this respect also, the assessee preferred to remain mum and no documents whatsoever was furnished showing de materialization of shares. The ledger copy of Sri Ram Electrocast Pvt. Ltd. in respect of purchases and sales of such shares and the narration given thereon also indicates the differences of the manner of purchase and sale. In the ledger account, no detailed narration is given as to the payment made for claimed purchase of- shares from M/s. Chandimata Management Pvt. Ltd., My s. Bahar Paper Pvt. Ltd. and My s. Wellfit Fashions Pvt. Ltd. The copies of sale bill produced along with the ledger copies given in respect of such claimed purchase of shares also evoked questions about the genuineness of such transactions. The copy of sale bill given by M/s. Chandimata Management Pvt. Ltd., My s. Bahar Paper Pvt. Ltd. and My s. Wellfit Fashions Pvt. Ltd. as well as ledger copies of purchases and sales signifying the nature of difference in entries are enclosed as part of the order with Annexure - 1 to 7. The analysis given above clearly reveals that assessee is not eligible for getting such benefit of set-off of loss with the rental income on two grounds - (i) provision as enumerated in Explanation to Section 73 of the L T. Act and (ii) the ingenuinity of transactions which resulted the arranged loss. Accordingly, a sum of Rs.l,34,38,700/- is disallowed as business loss, as claimed by the assessee and no benefit of set-off in this respect is allowed.”
On appeal by the assessee CIT(A) held that the loss in question was genuine loss. He however held that in view of Explanation to section 73 of the Act, the loss in question will not be set off against the business and had to be carried forward for ITA Nos.657&750/Kol/2012-Shree Ram Electrocast Pvt.Ltd.-A.Y.2007-08
being set off only against the income which is of the nature of speculation. The findings of CIT(A) with regard to loss in question being genuine were as follows :- “However, as far as the view of the A.O. regarding ingenuineness of said loss is concerned, I am- of the opinion that the loss cannot be treated as ingenuine because all the three parties from whom shares were purchased by the appellant company are assessed to tax and filing their return of income. The A.O. did not allow an opportunity to the appellant company to rebut the findings in enquiry conducted by him that the three companies from whom shares were purchased were not available on the given addresses. The fact remains that these companies are assessed to tax and their PAN were mentioned on the bills which were produced before the A.O. Further, the sale of shares was done through Stock Exchange through a Registered Share Broker. The copies of sale contract notes also submitted before the A.O. Under the circumstances, I am of the opinion that the transactions of purchase and sale of shares cannot be held to be ingenuine.” 8. With regard to the claim of the assessee that the loss in question should be treated as speculation loss, the CIT(A) relied on the decision of the Hon’ble Calcutta High Court in the case of RPG Industries Ltd. Vs CIT 338 ITR 313(Cal). In the aforesaid decision the Hon’ble Calcutta High Court held that when there was actual delivery of shares the loss in question on account of dealing in shares in the case of an assessee which is a company had to be treated as speculation loss. One of the contention raised by the assessee before CIT(A) was that the intention of the legislature in inserting Explanation to section 73 of the Act was unambiguous and the same was to ensure that the device sometimes resorted to by business houses controlling groups of companies to manipulate and reduce the taxable income of companies under their control by incurring loss on sale of shares within the group companies. It was the stand of the assessee that unless the revenue proves that the loss in trading in shares was created by the assessee as a device to avoid tax by selling shares of companies controlling group of companies, explanation to section 73 of the Act cannot be invoked. In this regard the assessee placed reliance on the decision of ITAT Delhi Bench in the case of Aman Portfolio Pvt., Ltd. Vs DCIT 92 ITD 324. CIT(A) however was of the view that the said decision has not been approved by the Hon’ble Calcutta high Court in the case of RPG Industries Ltd. (supra). For the above reason CIT(A) held that the share trading loss was a speculation loss and cannot be set
ITA Nos.657&750/Kol/2012-Shree Ram Electrocast Pvt.Ltd.-A.Y.2007-08
off against the business income of the assessee. Accordingly the loss in question was added to the total income of the assessee.
Aggrieved by the order of CIT(A) treating the loss in question as a genuine loss the revenue has preferred the present appeal before the Tribunal. Aggrieved by the order of CIT(A) holding that the loss in question cannot be set off against the business income, the assessee has preferred the present appeal before the Tribunal.
It can be seen from ground no.2 raised by the assessee that the assessee has raised the issue with regard to the jurisdiction of the AO to make the addition in respect of loss in trading in shares treating the speculation loss in the present proceedings u/s 153A of the Act. Such a ground was raised by the assesse before CIT(A) but since no arguments were advanced on the said ground of appeal, the CIT(A) dismissed the said ground.
The learned counsel for the assessee first addressed the arguments on ground no.2. His submission was that in the course of search no incriminating documents whatsoever was found with regard to the share trading loss. It was his submission that once the return of income of the assessee for A.Y.2007-08 is accepted u/s 143(1) of the Act in a subsequent assessment u/s 153A of the Act, only issue which arise for consideration consequent to material found in the course of search can be subject matter of assessment. It was his submission that since no material with regard to share trading loss was found in the course of search, an inquiry by the AO in proceedings u/s 153A of the Act with regard to the question whether the loss in trading of shares had to be regarded as speculative loss or as normal business loss, could not be made by the AO and his action has to be held as without jurisdiction. In this regard the learned counsel for the assessee placed reliance on the decision of Hon’ble Delhi High Court in the case of CIT vs Kabul Chawla 380 ITR 573 (Delhi) wherein the following proposition was laid down with regard to jurisdiction of AO in assessment to be made u/s.153A of the Act.: ITA Nos.657&750/Kol/2012-Shree Ram Electrocast Pvt.Ltd.-A.Y.2007-08
“The legal position that emerges on a perusal of section 153A and section ·32 of the Income-tax Act, 1961, is as under: (i) Once a search takes place under section 132 of the Act, notice under section 153A(1) will have to be mandatorily issued to the person in respect of whom search was conducted requiring him to file returns for six assessment years immediately preceding previous year relevant to the assessment year in which the search takes place. (ii) Assessments and reassessments pending on the date of the search shall abate. The total income for such assessment years will have to be computed by the Assessing Officers as a fresh exercise.
(iii) The Assessing Officer exercise normal assessment powers in respect of the six years previous to relevant assessment year in which the search takes place. The Assessing officer has the power to assess and reassess the "total income" of the six years in separate assessment orders for each of the six years. In other words, there will be only one assessment order in respect of each of the six assessment years in which both the disclosed and the undisclosed income would be brought to tax.
(iv) Although section 153A does not say that additions should be strictly on the basis of evidence found in the course of the search, or other post-search material or information available with the Assessing Officer which can related to the evidence found, it does not mean that the assessment can be arbitrary or made without any relevance or nexus with the seized material. Obviously, an assessment has to be made under this section only on the basis of the seized material.
(v) In the absence of any incriminating material, the completed assessment can be reiterated and the abated assessment or reassessment can be made. The word "assess" in section 153A is relatable to abated proceedings (i.e., those pending on the date of search) and the word "reassess” to completed assessment proceedings.
(vi) In so far as pending assessments are concerned, the jurisdiction to make the original assessment assessment under section 153A merges into one. Only one aseessment shall be made separately for each assessment year on the basis of the findings of the search and any other material existing or brought on the record of the Assessing Officer. (vii) Completed assessments can be interfered with by the Assessing Officer while making the assessment under section 153A only on the basis of some incriminating material unearthed during the course of search or requisition of documents or undisclosed income or property discovered in the course of search which were not produced or not already disclosed or made known in the course of original assessment. ITA Nos.657&750/Kol/2012-Shree Ram Electrocast Pvt.Ltd.-A.Y.2007-08
Conclusion 38. The present appeals concern AYs, 2002-03, 2005-06 and 2006-07.On the date of the search the said assessments already stood completed. Since no incriminating material was unearthed during the search, no additions could have been made to the income already assessed.”
His further submission was that even proceedings completed u/s 143(1) of the Act should be treated as equivalent to assessment already completed and in this regard reliance placed reliance on two decision of the Hon’ble Delhi High Court wherein it was laid down that even where the intimation u/s 143(1) of the Act is issued, proceedings for re-assessment u/s 147 of the Act can be initiated only where there was “reason to believe that income chargeable to tax of the assessee has escaped assessment”. The two decisions referred to in this regard were CIT vs Orient Craft Ltd. 354 ITR 536 (Delhi) and Mohan Gupta (HUF) vs CIT 366 ITR 115 (Delhi).
On the aspect that the loss in question should not be treated as speculation loss the learned counsel for the assessee apart from relying on the submissions made before CIT(A), further placed reliance on the decision of Hyderabad ITAT in the case of Godavari Capital Limited vs DCIT (2004) 273 ITR 10 (Hyd) (AT) wherein the ruling similar to the one of the Delhi Bench in the case of Aman Porfolio Private Limited vs DCIT 92 ITD 324(Delhi)(supra) was laid down. The learned DR relied on the orders of the revenue authorities on this aspect.
We have given a careful consideration to the rival submissions. In the present case the return for AY 2007-08 was filed by the Assessee on 24.10.2007. The due date u/s.139(1) of the Act for AY 2007-08 was 31.10.2007. An intimation u/s.143(1) of the Act was issued by the AO on …10.2008. The time limit for issue of a notice u/s.143(2) on the above return filed by the Assesssee was 6 months from the end of the financial year in the which the return was filed. That time would expire on 30.9.2009. Admittedly no such notice was issued. However, it must be noticed that
ITA Nos.657&750/Kol/2012-Shree Ram Electrocast Pvt.Ltd.-A.Y.2007-08
on 24.4.2008 a search was conducted u/s.132 of the Act in the business premises of the Assessee and therefore no action whatsoever could be taken by the AO on the return of income filed by the Assessee. Therefore it cannot be said that the intimation u/s.143(1) of the Act should be equated to an assessment u/s.143(3) of the Act. While issuing an intimation u/s.143(1) of the Act, the AO has not power to go into any issues arising out of the return of income filed by an Assessee. The intimation u/s.143(1) of the Act cannot therefore said to be a completed assessment which can be disturbed only on the basis of evidence found in the course of search. It is no doubt true that no incriminating material whatsoever found in the course of search with regard to the loss on trading in shares claimed to have been incurred by the Assessee. But in the light of the circumstances set out above, it cannot be said that the intimation u/s.143(1) of the Act is a completed assessment. The intimation u/s.143(1) of the Act should therefore be equated to a pending assessment proceeding which stood abated under the proviso to Sec.158BA of the Act. In respect of such abated proceedings, the total income for such AYs will have to be computed by the AOs as a fresh exercise. The AO will exercise normal assessment powers in respect of AY 2008-09 and the AO has the power to assess and reassess the 'total income' of the aforementioned AY in which both the disclosed and the undisclosed income would be brought to tax.
The decisions of the Hon’ble Delhi High Court in the case of Orient Craft Ltd. (supra) and Mohan Gupta (HUF) (supra) are decisions rendered in the context of initiation of reassessment proceedings u/s.147 of the Act when an intimation u/s.143(1) of the Act is issued and reassessment proceedings are sought to be initiated. The Hon’ble Delhi High Court held that even in such cases “reasons to believe that income chargeable to tax escaped assessment” should exist to assume jurisdiction u/s.147 of the Act. The ratio laid down in the said judgments cannot be extended to equate an assessment u/s.143(1) of the Act to a completed assessment u/s.143(3) of the Act, in the facts and circumstances of the case set out in the earlier paragraph of the order where within the period of time for issue of notice u/s.143(2) of the Act for an assessment year for which a return was filed, a search is initiated in the case of the ITA Nos.657&750/Kol/2012-Shree Ram Electrocast Pvt.Ltd.-A.Y.2007-08
Assessee and the said assessment year is one of the 6 AYs referred to Sec.153A of the Act. For the reasons given above, we reject Gr.No.2 raised by the Assessee in its appeal.
As far as Gr.No.1 raised by the Assessee in its appeal is concerned, we find that the ratio laid down by the Hon’ble Calcutta High Court in the case of RPG Industries Ltd. (supra) clearly supports the conclusion of the CIT(A). The Hon’ble Calcutta High Court in the aforesaid decision has laid down that by Explanation to s. 73, a legal fiction has been created whereby loss suffered by a company in share transactions is to be treated as a speculative loss within the meaning of s. 73, notwithstanding the fact that there was actual delivery of scrips of shares and the transaction is not within the purview of the definition of speculative transaction in s. 43(5). It was laid down that by virtue of Explanation to s. 73, even the transactions which are not speculative transactions within the meaning of s. 43(5) are deemed to be speculative transactions. The Hon’ble Court has explained that if the contention of the assessee that the provision of s. 43(5) of the Act defining speculative transaction should prevail even if the case comes within the purview of the Explanation to s. 73 is accepted, effect cannot be given to the Explanation at all and it would be rendered meaningless and that it was the intention of the legislature that if the assessee is a company indicated in the Explanation to s. 73, there shall be a different definition of speculation business than the one applicable to other types of assessees. The Hon’ble Court further held that there is nothing illegal for the legislature to enact two different definitions of speculation business for two different categories of assessees. The Hon’ble Court has explained that although ordinarily the object of an Explanation is not to enlarge the scope of the original section that it is supposed to explain, if on a true reading of an Explanation it appears that it has widened the scope of the main section, effect should be given to the legislative intent and that only one interpretation of the Explanation to s. 73 is possible and that goes against the assessee and therefore there is no question of adopting a view which is favourable to the assessee. In view of the aforesaid decision of the Hon’ble Calcutta High Court, we are of the view that the decisions referred to ITA Nos.657&750/Kol/2012-Shree Ram Electrocast Pvt.Ltd.-A.Y.2007-08
by the learned counsel for the Assessee was rightly not accepted by the CIT(A). The decision in the case of Aman Portfolio Pvt.Ltd. (supra) was also considered and the ratio laid down therein was not accepted by the Hon’ble Calcutta High Court. We do not find any grounds to interfere with the order of the CIT(A) and Gr.No.1 raised by the Assessee is also dismissed.
As far as the appeal of the revenue is concerned, we are of the view that the CIT(A) rightly held that the loss in question had to be regarded as genuine loss. The identity of the companies from where purchase of shares was made by the Assessee stood established as the said company were assessed to income tax and their IT acknowledgement for the relevant AY was also filed. Bank statement evidencing payments through banking channels were filed . The demat statement evidencing actual transfer of shares was also filed. The sale and purchase contract notes were produced. The brokers were registered brokers with the Stock Exchange. In these circumstances, the loss in trading of shares had to be regarded as genuine. We do not find any grounds to interfere with the findings of the CIT(A) on this issue. Consequently the appeal by the revenue is dismissed.
In the result, the appeal by the Assessee and the Revenue are dismissed.
Order pronounced in the Court on 02.03.2016.
Sd/- Sd/- [Waseem Ahmed ] [ N.V.Vasudevan ] Accountant Member Judicial Member Dated : 02.03.2016. [RG PS]
ITA Nos.657&750/Kol/2012-Shree Ram Electrocast Pvt.Ltd.-A.Y.2007-08
Copy of the order forwarded to: 1.Shree Ram Electrocast Private Limited, Chhaparia & Associates, ‘Shantiniketan Building’, 8, Camac Street, 5th Floor, Suite-2, Kolkata-700017. 2.D.C.I.T., Central Circle-XVI, Kolkata 3. CIT(A)-Central-II, Kolkata 4. CIT-Central-II, Kolkata. 5. CIT(DR), Kolkata Benches, Kolkata. True Copy By order,
Asst. Registrar, ITAT, Kolkata Benches Kolkata Benches
ITA Nos.657&750/Kol/2012-Shree Ram Electrocast Pvt.Ltd.-A.Y.2007-08