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Income Tax Appellate Tribunal, KOLKATA BENCH “B” KOLKATA
Before: Shri Mahavir Singh & Shri Waseem Ahmed
आदेश /O R D E R
PER Waseem Ahmed, Accountant Member:-
This appeal by the assessee is arising out of order of Commissioner of Income Tax (Appeals)-VI, Kolkata in appeal No.138/CIT(A)-VI/Cir.-5/2010- 11/Kol/08-09 dated 05.06.2012. Assessment was framed by DCIT, Circle-5, Kolkata u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) vide his order dated 29.12.2010 for assessment year 2008-09 and assessee raised following grounds:- “1. On the facts and in the circumstances of the case, the learned Commissioner of Income Tax (Appeals) erred in confirming the disallowance of speculation loss of Rs.22696157 arising from purchase
ITA No.1070/Kol/2012 A.Y. 2008-09 Blb Cables & Conductors P. Ltd. v. DCIT, Cir-5, Kol Page 2 and sale of silver and other metals by holding such loss as bogus and inadmissible.
For that on the facts and in the circumstances of the case, the learned Commissioner of Income Tax(Appeals) should have held that the said speculation loss of Rs.22696157/- was incurred in the usual course of business carried on by the appellant for the first time and he should not have been influenced by irrelevant facts including the expelling of the broker M/s Vatika Merchants Pvt. Lt. from the membership of the commodity exchange which was not within the control of the appellant.
For that on the facts and in the circumstances of the case, the learned Commissioner of Income Tax(Appeals) should have held that the speculation loss of Rs.22696157/- was absolutely genuine having been incurred in the usual course of appellant’s business and consequently he should have directed the said loss to be carried forward.
For that on the facts and in the circumstances of the case, the learned Commissioner of Income Tax(Appeals) further erred in holding that the said speculation loss of Rs.22695157/- has to be ignored for the purpose of computing income under section 115JB of Income Tax Act 1961 in complete disregard of the Balance Sheet & Profit & Loss Account prepared in accordance with the provisions of Parts I & III of Schedule VI to the Companies Act, 1956 and the provisions contained in the two provisions to section 115JB(1) of IT Act, 1961.
For that in any event, the learned Commissioner of Income Tax (Appeal) acted illegally in holding that the said speculation loss of Rs.22,696157/- cannot form part of the Profit & Loss Account and that the same can be added back u/s/. 115JB of the Income Tax Act, 1961 which is not permissible at all in terms of section 115JB(1) and the provisos thereto.”
Grounds No. 1 to 3 are common therefore they are clubbed together, the common issues raised by assessee in this appeal are that Ld. CIT(A) erred in confirming the order of Assessing Officer for disallowing the speculation loss of ₹2,26,96,157/- arising from purchase and sale of silver and other metals by holding such loss bogus and inadmissible.
ITA No.1070/Kol/2012 A.Y. 2008-09 Blb Cables & Conductors P. Ltd. v. DCIT, Cir-5, Kol Page 3 2.1 The facts of the case are that assessee is a Private Limited Company and is engaged in the business of granting of loans and dealing in commodities. During the year assessee was engaged in the trading business of commodities in National Multi Commodity Exchange (NMCE for short). Assessee used the services of the broker namely, Vatika Merchant Pvt. Ltd. for the trading in the NMC exchange. The assessee had claimed a loss of Rs.2,26,96,157/- in the business of trading in commodities. The AO during the course of assessment proceedings made enquiry from the NMCE to establish the genuineness of the above loss but found that the above said broker was expelled by the NMCE for having involved in issuing forged and fraudulent contract notes. In reply to the show cause notice, assessee submitted that all these transactions are off market transaction so not passed through the commodity exchange. The assessee also submitted all the purchase and sale contracts notes before AO in support of its claim. However, AO disregarded the claim of assessee by treating the transactions as bogus. Accordingly the AO disallowed the same and added it to the total income of assessee.
Aggrieved, assessee preferred an appeal before Ld. CIT(A) where the assessee submitted that the broker has issued contract notes that for the purchase and sales before the AO. Beside the assessee submitted that all the payments were made by cheques on the basis of these contract notes. There was no need to intimate to the stock exchange as these transactions were made off the market. All the transactions were duly confirmed by the broker and were supported with bank statements and ledger copy of the account. The ld. AR also pointed out that the assessee was never confronted to the confirmation submitted by the broker, so the order passed by the AO is without providing the opportunity of being heard.
However the CIT(A) disregarded the plea of the assessee and upheld the order of the AO by observing as under :
ITA No.1070/Kol/2012 A.Y. 2008-09 Blb Cables & Conductors P. Ltd. v. DCIT, Cir-5, Kol Page 4 “9. I have considered the observations of the Assessing Officer in the assessment order and submissions of the appellant. The appellant has incurred loss of Rs.2,26,96,157/- in commodity trading in off market through a broker who has been suspended by the commodity exchange due to issuing the fraudulent contract notes. The contract notes show that the appellant started doing commodity trading from 11.03.2008 to 24.03.2008 and incurred a loss or Rs.2,26,96,157/- mainly in 14 days only. The bank a/c. reveals that difference amount of sale and purchase loss was being paid on day to day basis from 15.03.2008 to 27.03.2008 by cheque in Sr. No. i.e. 35182 to 89. The amounts were being credited tin the account of the appellant regularly from some other sources and being debited to be paid to M/s Vatika Merchants Pvt. Ltd. During the appellate proceedings, the AR was asked to produce the data regarding the price of the silver to show such a huge fluctuation resulting into the loss of Rs.2,26,96,157/- to the appellant. The date of each entry in the commodity exchange is recorded on day to day basis or may be at regular interval of times during the day since such transactions are recorded. However, no such supporting data was produced by the AR during the appellate proceedings.
It is a simple case of procuring contract notes, making entries in a plain simple register showing purchase and sale incurring commodity loss in every purchase and sale thereof, as complied in the annexure “A” attached with this order. Similar transactions have been sown by the appellant in Zinc, Nickel, Sack, Gold, etc. The appellant has entered in to 169 transactions of silver out of which complete details were given for 158 transactions and the appellant incurred loss in all such transactions. There is never gain in any commodity transaction. The appellant has entered in to 42, 34, 5 and 3 transactions of ZINC, NICKLE, SACK and GOLD respectively and the appellant has incurred loss in all transactions except two in gold where it was old on same price. There is never gain in any of the commodity trade transaction to the appellant. The original register of transactions was not produced inspite of specifically asking the appellant to produce the same. It was to be checked whether it was maintained in regular curse of business sand to test the truthfulness & veracity of the transactions. It is not known who prepared it and on whose instructions were entered and on which data base it was prepared and when it was prepared.
The appellant did not furnish even a copy of the Board Resolution or any authorisation by the competent person, given to somebody for entering into commodity trade. The appellant did not furnish the information who did the commodity trade transactions i.e. whether it was a director or employee, what was the experience of the said person(s) in the commodity trading and whether the said Director/employee has entered in these kind of transactions in individual
ITA No.1070/Kol/2012 A.Y. 2008-09 Blb Cables & Conductors P. Ltd. v. DCIT, Cir-5, Kol Page 5 capacity or otherwise ever before entering into these transactions on behalf of pp. He did not inform about the experience of the person and competence who was entering in such huge amount of transaction. The appellant has not produced any documents showing that the fluctuation of silver and other commodities has been so much rapid during the day that every time he bought and sold it at a loss and there was no gain on any day. He has given details of silver buying 158 times and all the transactions resulted into loss. It appears that he is buying silver at a higher price and selling the same at lower price and again buying at a higher price and selling at lower price and so on every day and completes huge number of transaction s on every day. There is no stock to be carried forward on the next day and rather after every purchase same amount is old to square up the account of sale and purchase. In the normal human transaction, it is not possible for a person who is indulging in commodity trading for Fourteen(14) days in an off market condition from a broker who has been suspended subsequently and incurring loss on all transactions and making payment everyday for the loss incurred in commodity trading….
While passing the order the ld. CIT(A) relied on the following judgments of various courts.
1) The Hon'ble Supreme Court in the case of Juggilal Kamlapat v. CIT [1969] 73 ITR 702 has held that the income-tax authorities are entitled to pierce the veil of corporate entity and look at the reality of the transaction and that in exceptional cases the Court can lift the veil of corporate entity and to pay regard to the economic realities behind the legal façade. Similarly, the Assessing Officer has power to disregard the corporate entity if it is used for tax evasion or to circumvent tax obligation or to perpetuate fraud.
2) The Hon'ble Delhi High Court in PNB Finance Ltd. v. Shri Shital Prasad Jain [1983] 54 Comp. Cas. 66 has held that the doctrine of piercing the corporate veil wherever necessary might be invoked by the Curt in the interest of justice to prevent the corporate entity from being used as an instrument of fraud and the fundamental principle of corporate personality itself might be disregarded having regard to the exigencies of the situation and for the ends of justice. If the economic realities of a transaction between the appellant and others are arranged and the exigency of the circumstances surrounding it reveal that the transaction has been entered only to defraud the revenue causing injustice to it, the authorities should look behind the real purpose of the transaction and deal with the consequence of the transaction in a mane with which it should have been dealt with otherwise.
ITA No.1070/Kol/2012 A.Y. 2008-09 Blb Cables & Conductors P. Ltd. v. DCIT, Cir-5, Kol Page 6 3) Mere payment by account payee cheque is not sacrosanct nor can it make a non-genuine transaction genuine has been held by Hon'ble High Court of Calcutta in the case of CIT v Precision Finance (P)) Limited reported in 208 ITR 540 (Cal); [1995] 82 TAXMAN 31 (Cal).
4) An inference about the genuineness of apparent Commodity Trade Loss transactions has to be drawn on the basis of the circumstances available on the record and having regard to the conduct of the appellant in making payment as well as other material on the record, an inference could reasonably be drawn that the Commodity Trade Loss transactions are non-genuine. It is held that after considering the surrounding circumstances and applying the test of human probabilities it is rightly concluded that the appellant’s Commodity Trade Loss transactions is not genuine. It cannot be said that the explanation offered by the appellant in respect of the said payment has been rejected unreasonably. Further, relying on the judgment of the Hon'ble “A” Bench of the jurisdictional ITAT, Kolkata in ITA No. 1871/Kol/2008 dated 21-07-2011 in the case of ITO ward 7(3), Kolkata vs. M/s. Ellenbarrie Exim Ltd. for Assessment Year 2005-06 it is held that the action of the AO in the facts and circumstances of the case that all transactions pertaining to the so-called Commodity Trade Loss transactions is bogus and colourable device to evade the taxes is to be confirmed.”
Being aggrieved by this order of Ld. CIT(A) assessee came in second appeal before us.
Shri S.M.Surana, Ld. Authorized Representative appearing on behalf of assessee and Shri David Z. Chowngtho, Ld. Departmental Representative appearing on behalf of Revenue.
We have heard both the side and perused the materials available on record. The ld. AR submitted two papers books. First book is running in pages no. 1 to 88 and 2nd paper book is running in pages 1 to 34. Before us the ld. AR submitted that the order of the AO is silent about the date from which the broker was expelled. There is no law that the off market transactions should be informed to stock exchange. All the transactions are duly recorded in the accounts of both the parties and supported with the account payee cheques. The ld. AR has also submitted the IT return, ledger copy, letter to AO and PAN
ITA No.1070/Kol/2012 A.Y. 2008-09 Blb Cables & Conductors P. Ltd. v. DCIT, Cir-5, Kol Page 7 of the broker in support of his claim which is placed at pages 72 to 75 of the paper book. The ld. AR produced the purchase & sale contracts notes which are placed on pages 28 to 69 of the paper book. The purchase and sales registers were also submitted in the form of the paper book which is placed at pages 76 to 87. The Board resolution passed by the company for the transactions in commodity was placed at page 88 of the paper book. On the other hand the ld. DR relied in the order of the lower authorities.
4.1 From the aforesaid discussion we find that the assessee has incurred losses from the off market commodity transactions and the AO held such loss as bogus and inadmissible in the eyes of the law. The same loss was also confirmed by the ld. CIT(A). However we find that all the transactions through the broker were duly recorded in the books of the assessee. The broker has also declared in its books of accounts and offered for taxation. In our view to hold a transaction as bogus, there has to be some concrete evidence where the transactions cannot be proved with the supportive evidence. Here in the case the transactions of the commodity exchanged have not only been explained but also substantiated from the confirmation of the party. Both the parties are confirming the transactions which have been duly supported with the books of accounts and bank transactions. The ld. AR has also submitted the board resolution for the trading of commodity transaction. The broker was expelled from the commodity exchange cannot be the criteria to hold the transaction as bogus. In view of above, we reverse the order of the lower authorities and allow the common grounds of assessee’s appeal.
Next common grounds 4 and 5 are clubbed together. The issue raised by assessee in this appeal is that Ld. CIT(A) erred in confirming the order of AO by ignoring the speculation loss at ₹ 2,26,96,157/- while computing the income u/s 115JB of the Act.
ITA No.1070/Kol/2012 A.Y. 2008-09 Blb Cables & Conductors P. Ltd. v. DCIT, Cir-5, Kol Page 8 In the present case, AO has computed the tax liability under the provisions of Sec. 115JB of the Act after disallowing the above stated loss of ₹2,26,96,157/- . 6. Aggrieved, assessee preferred an appeal before Ld. CIT(A) who confirmed the action of AO by observing as under:- “21. I have considered the observations of the Assessing Officer in the assessment order and submissions of the appellant. The Assessing Officer has disbelieved the transactions regarding speculation loss from commodity trading transactions. The Assessing Officer has concluded that the loss is bogus and inadmissible. When the transactions itself are doubtful, these cannot find place in the books of a/cs. For computing the loss incurred by the appellant. The commodity trading transactions are found to be bogus. The appellant has created these entries in a fraudulent manner jut to reduce the profit and to carry forward loss, if any in future adjustments. Therefore, once the genuineness of the transaction is doubtful, these cannot form a part of the P&L a/c. and it can be added back u/s. 115JB of the Income Tax Act, 1961. The Assessing Officer has calculated the profits both under the normal provisions of the Income Tax Act, 1961 and as well as u/s 115JB and to find where it was more as per the Income Tax Act, 1961.
The STT is not expenditure but tax to be allowed as deduction from the tax as per the provisions of section 88E. Therefore, the Assessing Officer has rightly added the amount of Rs.36,538/- paid as STT since it is not an expenditure deductible in the Profit and Loss Account. Therefore, it is held that the addition of Rs.36538/- as STT and speculation loss of Rs.226,96,157/- incurred in commodity transactions have been rightly added while determining the profit as per section 115JB of the Income Tax Act, 1961. These grounds of appeal are accordingly held to be dismissed.”
Being aggrieved by this order of Ld. CIT(A) assessee preferred second appeal before us.
We have heard rival parties of both sides and perused the materials available on record. Before us the ld. AR submitted that the AO has no jurisdiction to disregard the net profit shown in the profit & loss account of the assessee to the extent provided in the explanation to sub section (2) of
ITA No.1070/Kol/2012 A.Y. 2008-09 Blb Cables & Conductors P. Ltd. v. DCIT, Cir-5, Kol Page 9 section 115JB of the Act. On the other hand the ld. DR relied in the order of the lower authorities.
7.1 We find from the aforesaid discussion that the AO has disallowed the above stated loss while computing the tax liability under the provisions of MAT under section 115 JB of the Act. We find from the orders various court that the AO is duty bound to accept the profit as shown in the profit & loss account of the assessee. We are putting our reliance in decisions of Hon’ble Apex Court, Hon’ble Delhi High Court and ITAT Delhi Bench which are given as under :
“Apollo Tyres Ltd. v. CIT 255 ITR 273 (SC), the relevant extract is reproduced below :
Therefore, we are of the opinion, the AO while computing the income under s. 115J has only the power of examining whether the books of account are certified by the authorities under the Companies Act as having been properly maintained in accordance with the Companies Act. The AO thereafter has the limited power of making increases and reductions as provided for in the Explanation to the said section. To put it differently, the AO does not have the jurisdiction to go behind the net profit shown in the P&L a/c except to the extent provided in the Explanation to s. 115J”
Malayala Manorama Co. Ltd. v. CIT 300 ITR 251 (SC) the relevant extract is reproduced below : 28. We have heard the learned counsel for the parties at length and carefully perused the written submissions filed by them. In our considered opinion, the controversy involved in this case is no longer res integra. A three Judge Bench of this Court in Apollo Tyres (supra) has clearly interpreted s. 115J of the 1961 Act. There is no scope for any further discussion.
Consequently, the appeals are allowed and the impugned order of the High Court is accordingly set aside. In the facts and circumstances of the case, we direct the parties to bear their own costs.
ITA No.1070/Kol/2012 A.Y. 2008-09 Blb Cables & Conductors P. Ltd. v. DCIT, Cir-5, Kol Page 10 CIT v. C.J. International Hotels Ltd. 325 ITR 313 (Del), the relevant extract is reproduced below : While the AO would be well within his jurisdiction to compute depreciation under s. 32 on the rats provided in Appendix I to IT Rules, 1962, for computing total income under other provisions of the Act, he cannot disturb the book profit, which has been certified to be drawn in the P&L a/c as per the Companies Act. Therefore, we are of the view that the order passed by the AO was not erroneous, which is one of the preconditions for invoking jurisdiction under s. 263 of the Act. Since it was no erroneous, it could not have been termed to be prejudicial to the interest of the Revenue. In this view of the matter, we set aside the order of the learned CIT. In the result, ground No.2 is allowed.
We agree with the views expressed by the Tribunal. Consequently, no substantial question of law arises for our consideration. The appeal is dismissed.
DCIT – Circle-10(1) v. Dune Leasing & Finance Ltd. 126 ITD 255 (Del), wherein the Tribunal held paragraph No. 3.2 & 5 (last 3 lines)
3.2 We have considered the facts of the case and rival submissions. Having considered the decision of Hon’ble Supreme Court in the case of Apollo Tyres Ltd. (supra), we are of the view that the AO cannot reopen the accounts of a company, which have been audited and certified by the statutory auditor, passed by the members of the company in general body meeting, filed before the ROC, and to which he has not taken any objection under that Act. The impugned amount was not entered in the books as liability and the auditor had made certain remarks only in regard to the impugned amount. No objection has been taken by the registrar to the accounts field before him. Therefore, the book profit has to be taken as per the aforesaid P&L a/c. No adjustment is permissible in the book profit in respect of aforesaid amount under any of the cls. (i) to (vii) of the Explanation to s. 115JB. IN view thereof, it is held that the learned CIT(A) erred in directing the AO to reduce this amount from the book profit. Thus, this ground is allowed.
Following our finding on that ground of the Revenue, it is held that the interest income of Rs.1,19,07,474 could not have been added to the book profit under s. 115JB. Thus, this ground is allowed.
ITA No.1070/Kol/2012 A.Y. 2008-09 Blb Cables & Conductors P. Ltd. v. DCIT, Cir-5, Kol Page 11 In terms of the various judicial pronouncements as well as order of Tribunal, as discussed above, we are inclined to reverse the orders of authorities below. Besides in the case in hand, we have allowed the speculation loss as genuine loss. Hence this ground of the assessee is allowed.
In the result, assessee’s appeal is allowed. Order pronounced in the open court 03/01/2016 Sd/- Sd/- (Mahavir Singh) (Waseem Ahmed) (Judicial Member) (Accountant Member) Kolkata, *Dkp �दनांकः- 03/02/2016 कोलकाता । आदेश क� ��त�ल�प अ�े�षत / Copy of Order Forwarded to:- 1. अपीलाथ�/Appellant-Blb Cables & Conductors Pvt. Ltd., 56, Netaji Subhas Road, 2nd Floor, Kolkata-01 2. ��यथ�/Respondent-DCIT, Cir-5, Ayakar Bhawan, 8th Fl, P-7, Chowringhee Sq., Kol-69 3. संबं�धत आयकर आयु�त / Concerned CIT Kolkata 4. आयकर आयु�त- अपील / CIT (A) Kolkata 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 ।