ITO,WARD-3(2), KOLKATA, KOLKATA vs. M/S. STEEL EMPORIUM LTD, KOLKATA

This appeal by the Revenue is against the order of Commissioner of Income Tax (Appeals)-I, Kolkata dated 23.04.2012. Assessment was framed by ITO Ward-3(2), Kolkata u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) vide his order dated 27.12.2011 for assessment year 2009-10 and Revenue has raised following grounds:- “1. On the facts and in the circumstances of the case the Ld. CIT(A) was erred deleing the addition of short term capital gain of Rs.14,34,741.17 (without STT payment) out of purchase and sale of units of mutual fund and taxed at normal rate and erred in deleting the disallowance of set off of speculation loss out of sale and purchase of shares with short term capital gain out of sale and purchase of units of mutual fund in violation of sec. 73.

The first issue raised by the Revenue in this appeal is that ld. CIT(A) erred in deleting the addition made by the AO on account of short term capital gain of Rs. 14,34,741.00 and treating the speculation loss as per explanation to section 73 of the Act as loss from capital gain.

Aggrieved assessee preferred an appeal before Ld. CIT(A) who deleted the addition made by the AO by observing as under :

We have heard rival submissions of both the parties and perused the materials available on record. Ld. DR vehemently relied on the order of AO whereas Ld. AR relied on the order of Ld. CIT(A). Ld. AR submitted paper ITO Wd.3(2) Kol. vs. M/s Steel Emporium Ltd. Page 4 book which is running pages 1 to 230. Before us the ld. AR submitted that the AO has first treated the capital gain/ loss from shares as speculative transactions and thereafter computed the test of applicability of explanation to section 73 of the Act wrongly. The AO first should have determined the income under various heads of income without deciding the nature of share transactions and then should have applied the test of applicability of explanation to section 73 of the Act. On the other hand the ld. DR vehemently supported the order of the AO. From the aforesaid discussion we find that the AO has treated the losses declared by the assessee are in the nature of speculative loss in term of explanation to section 73 of the Act. Therefore the gain arising from the mutual fund will not be allowed to be set off against the speculation loss. However we find that the AO has wrongly held the losses from capital gain as speculation by misinterpreting the provisions of explanation to section 73 of the Act. The first conditions used the words ‘mainly’ relevant to the income from the specified four heads of income which has to be understood in true legal terms. The dictionary meaning of the word ‘mainly’ is chiefly, principally, much etc. This is very clear that the aggregate income from the specified four heads should be the main portion of the gross total income of the company. The plain meaning of the word ‘mainly’ is more than half. It means any element which has the presence of more than half in the total shall be termed as main element. So, if the aggregate income of the four specified heads is more than 50% of the gross total income of a company, it can be said that the company has the main income from the four specified heads. So, if the aggregate income of the four specified heads is 51% and above of the gross total income of a company, it should be said the company has the income mainly from the four specified heads. From the figures put narrated by the Ld AO as reproduced above, it is evident that the gross total income o the company consisted mainly of income which is chargeable under the heads “Capital Gains” and “Income from other sources”. Such a Company is exempted from Explanation to Section 73.

The second issue raised by the Revenue in this appeal is that ld. CIT(A) erred in deleting the disallowance of Rs. 4,08,937/- made u/s 14A of the Act.

Aggrieved, assessee preferred an appeal before ld. CIT(A) who deleted the addition made by the AO by observing as under : “I have carefully gone through the assessment order and the submissions of the Appellant. It is true that the App had, himself computed the amount disallowable u/s. 14A. The AO has not disputed the computation of the Appellant. Merely stating that he is not satisfied with the correctness of the claim without recording the reasons of his disallowance-satisfaction, goes beyond the four corners of the provisions of section 14A. Had it been so, there would not have been any requirement of satisfaction of the AO. In fact, instead of asking the Appellant to explain the claim and raising queries regarding the same to satisfy himself, the AO has first applied Rule 8D in his letter dated 09- ITO Wd.3(2) Kol. vs. M/s Steel Emporium Ltd. Page 6 12-2011 and thereafter asked the Appellant to explain his computation of disallowance. The addition made by the AO is arbitrary and against the spirit of section 14A. Therefore, I direct the AO to delete the addition of Rs.4,08,937 is disallowed u/s. 14A(2) read with Rule 8D which was over of the above expenses of Rs.58,611/- disallowed by the assessee in Schedule – 13 of Profit and Loss A/c.”

We have heard rival submissions of both the parties and perused the materials available on record. Before us the ld. AR has submitted that the assessee had identified the expenses amounting to Rs.58611 as attributable to the exempted income and added back the same to the taxable income. The Ld. AO, did not specify the reasons for his dissatisfaction of the expenses identified by the assessee as attributable to the exempted income. He has never raised any objection to the claim of the assessee either during the assessment proceedings or in the assessment order. He never raised any query about specific information and explanation required with respect to the claim. Here was no scope for explanation since the Ld. AO has never disputed the expenses as determined by the assessee. As such, Rule 8B was not attracted at all. The Ld AO had had predetermined to disallow the claim, even before seeking the explanation from the assessee, when he stated in his aforesaid letter dated 09-12-2011 that he proposed to disallow amount of expenditure as per Sec. 14A read with Rule 8D. It is obligatory on the part of the Ld. AO to first examine the claim of the assessee by raising queries and soliciting explanation and documents in support of the explanation. In the present case, the AO has predetermined to disallow the claim of the assessee even before raising any query or soliciting the explanation from the assessee. The Ld. AO has not brought any material on record as to the reasons for his rejecting the claim of the assessee. In fact, the Ld. AO has never bothered to examine the claim of the assessee. Ld. AO does not have suo-moto right to resort to Rule 8D. It is imperative on the part of the Ld. AO to resort to application of Rule 8D only if he is not satisfied with the correctness of the quantum of disallowance admitted by the assessee.

The third issue raised by the Revenue in this appeal is that ld. CIT(A) erred in deleting the addition made by the AO for Rs.1.83 crores u/s. 68 of the Act.

Aggrieved assessee preferred an appeal to ld. CIT(A) who deleted the addition made by the AO by observing as under:- “16. I have carefully gone through the assessment order and the submissions of the Appellant. I am in agreement with the submissions, which is based on documentary evidences. The addition made by AO in respect of shares application money subscribed by 9 out of 25 applicants is unwarranted. Just on flimsy ground of notice u/s. 133(6), having been served at any particular address, which happened to be the old address of those Company share applicants, he cannot make ITO Wd.3(2) Kol. vs. M/s Steel Emporium Ltd. Page 9 the addition when a host of other evidences are supporting the identity of the applicants, genuineness of the transaction and creditworthiness of the applicants. In fact, the AO has, all along, resorted to guesswork and surmises. He has used the words, ‘it appears’ several times in the assessment order. Therefore, I direct the AO to delete the addition.”

We have heard both the rival parties and perused the materials available on record. The ld. DR vehemently supported the order of the AO. Before us the ld. AR submitted that the assessee raised share application money during the year from 25 applicants. The AO was furnished with the copy of Form 2 of Allotment of Shares to the Applicants as filed with the Registrar of Companies, West Bengal. On the date of receipt of Share applications from the Applicants, they furnished their addresses, which were recorded in the Register of Members. The AO observed that as per ROC records the addresses of the nine companies were different from the address as per Form filed with him. The AO issued notices u/s.133(6) to all the companies at the addresses furnished in Form 2 as filed with him, which were duly served at the given addresses. The AO argued that the letters should not have been served at the given address by the assessee. He served a show a cause notice dated 09.12.2011 asking for the explanation from the assessee as to how the notices u/s. 133(6) could be served to these nine companies who had different address as per ROC records. The AO was explained vide letter dated 20.12.2011 of the assessee that those companies had changed their addresses since filing of Form 2 with the Registrar. Further, it was none of the business of the assessee to question the addresses of the applicants as long as they affirm the address. The applicants were duly incorporated bodies under the Companies Act, 1956 since long. They have been regularly filing their returns of income under the Income Tax Act and are being assessed by the Revenue since long. Some of them are even registered as Non-Banking Financial Companies with Reserve bank of India. They have been filing returns regularly with Registrar of Companies and RBI since long. The letters ITO Wd.3(2) Kol. vs. M/s Steel Emporium Ltd. Page 10 might have been received at their old addresses because in case of change in the address, people instruct the incumbents at old addresses not to refuse the receipt of letters and receive the same. Just because, a letter was received at the old address instead of present address, it cannot be said that the identity of the applicant has not been verified. All of these companies had duly replied to notice u/s. 133(6) and confirmed the transaction with all the evidences. The AO has not raised any objection on any of the information furnished before him. The AO has not asked the respective Company applicants also to explain the alleged discrepancy in the address. The AO has not brought any material on account of record to disbelief the evidences furnished with him and treat the transaction as not genuine. The assessee submitted the following material at the time of assessment. a) Copy of share applications from the share applicants (copies enclosed) b) Copy of Form 2 filed with Registrar of Companies, West Bengal (copy enclosed) c) Copy of Form 18 about the Registered Office of the applicants for change of address subsequent to the date of allotment, i.e. 31.03.2009 (copies enclosed) d) Members register e) Share application & Allotment Register f) Copy of board resolution. g) Replies from Share applicants to the notice u/s. 133(6) issued to them by the AO seeking information and documents about the sources and to examine their identity, genuineness of the transaction and their creditworthiness. (copy enclosed). h) Copy of audited accounts. i) Copy of bank statements. j) Copy of Income tax acknowledgment of return filed for AY 2009-10. k) Copy of PAN Card. l) Details of sources of funds. m) Copy of covering letter for delivery of shares. n) Copy of master data as per ministry of Company Affairs records. o) Copy of Annual return. p) Copy of Memorandum and articles of Association.