M/S. SADANI TRADING COMPANY,KOLKATA vs. INCOME TAX OFFICER, WARD-36(3), KOLKATA, KOLKATA

Grounds No.1 and 2 raised by the Assessee read as follows: “1. a) FOR that the Ld. CIT(A) erred in law as well as on facts in holding that the income of Rs.5,51,362/- from profit in future and option transactions was assessable u/s.68. The Ld. CIT(A) was wrong in relying on the decision of the Apex Court in the case of V.OJ & Am. -V s- Deokinandan Aggarwal which had no relevance whatsoever in the facts of the appellant's case. The said decision related to the powers of the High Court in a case for retirement benefits claimed by a retired High Court Judge. b) Without prejudice to the foregoing ground, the Ld. CIT(A) in rejecting the contention of the appellant that the income of Rs.5,51,362/-, if not assessable under the head 'Business', it had to be assessed under the residuary head of "Other sources" and in case it cannot be assessed under any head then it will not form part of the taxable income of the assessee. 2. FOR that, in any case, the Ld. A.O was wrong and unjustified in not setting off the assessed business loss of Rs.l,65,617/- against the income of Rs.5,51,362/- assessed by him.”

The Assessee is a partnership firm. The Assessee filed return of income for AY 2008-09 declaring total income of Rs.89,200/-. In the profit and loss account the Assessee had shown profit in Futures & Options of Rs.5,51,362/-. The evidence in M/s. Sadani Trading Company – A.Y.2008-09 1 support of the said income showed that the Assessee transacted in commodities through a broker by name Pushpkant Commodities Private Limited, a registered member (No.12790) of Multi commodity Exchange of India Ltd. The Assessee had transacted under client code CSC0026. The AO issued notice u/s.133(6) of the Income Tax Act, 1961 (Act) to Multi Commodity Exchange of India Ltd., and from their replies found that the Assessee was not registered as client either with Pushpakant Commodities (P) Ltd., or any other member of the exchange. The AO confronted the reply so received to the Assessee and called upon the Assessee to show cause as to why the income in question should not be treated as Income from other sources instead of the claim of the Assessee that the income in question was from business. The Assessee explained that the document in the form of contract not and receipt of payment from Pushpakant Commodities (P) Ltd., was sufficient explanation and in any event the sum in question is already offered to tax as income and no addition need to be made. The AO however was of the view that in the light of the reply from Multi commodity Exchange of India Ltd., the claim of the Assessee that the income in question is from business cannot be accepted. The AO held that since the Assessee has failed to prove the nature and source of receipt of Rs.5,51,362 the same cannot be considered as business income as claimed in the P & L A/C. nor under any other head of income as provided under chapter IV of the Act. He held that the sum of Rs.5,51,362 had to be taxed separately and the Assessee will not be entitled to adjust this income with any other loss as the source of income remains un-established.

The computation of total income as done by the AO after the above conclusion is very important. As noticed earlier the Assessee had filed a return of income declaring total income of Rs.89,200. The income in the form of profit in futures and options of Rs.5,51,362 (which is already shown as income in the profit and loss account credit side) was reduced by the AO from the total income returned by the Assessee. The resultant figure was a loss of Rs. 4,62,162/-. The loss was further reduced consequent to disallowance of interest of Rs.60,938 (which addition was sustained by CIT(A) ) which resulted in business loss being determined at Rs.4,01,224 which was allowed to M/s. Sadani Trading Company – A.Y.2008-09 2 be carried forward. The income in the form of profit in futures and options of Rs.5,51,362/- was taxed separately by the AO.

On appeal by the Assessee, the CIT(A) confirmed the order of the AO.

I have considered the submission of the learned counsel for the Assessee and the learned DR. They reiterated the stand of the Assessee before AO/CIT(A) and the stand of the AO and CIT(A) in their orders respectively.

I have given a very careful consideration to the rival submissions. The admitted facts are that the Assessee has shown the profit in transactions of futures and options of Rs.5,51,362/- in his profit and loss account and the resultant income of Rs.89,200/- was declared in the return of income. The aforesaid income of Rs.5,51,362/- was treated as income from business. The AO was not satisfied with the explanation with regard to the source of income as one from business. After doing so, the AO has no other option but to classify the income in question under any of the heads of income given in Sec.14 of the Act. Income which does not fall under any other head of income had to be necessary classified under the head “Income from other sources”, if the AO wants to bring the same to tax. This aspect is clear if one reads the decision of the Hon’ble Supreme Court in the case of Nalinikant Ambalal Mody Vs. CIT 61 ITR 428 (SC) wherein it was held that if income cannot be taxed under any of the heads mentioned in Sec.14 of the Act, then it cannot be taxed at all. The AO in coming to the conclusion that the sum of Rs.5,51,362 had to be taxed separately had not made any reference to any provision of law in the Act under which he is resorting to such a course. Consequently, even assuming the income in question is not treated as income from business, it has to be treated as income from other sources. If so treated, there can be no tax on the said income separately without set off of loss from business u/s.71 of the Act. Thus the levy of tax on the sum of Rs.5,51,362/- cannot be sustained. I am therefore of the view that the addition made by the AO cannot be sustained and the same is directed to be deleted. Ground No.1 and 2 are accordingly allowed. - M/s. Sadani Trading Company – A.Y.2008-09 3

Ground No.3 raised by the Assessee reads as follows: “3. FOR that the Ld. CIT(A) erred in upholding the addition of Rs.60,938/- made for deemed interest income of the appellant. The appellant had sufficient own funds. The Ld. CIT(A) failed to appreciate that no expenditure on interest was incurred by the appellant for advancing interest free loan. The Ld. CIT(A) should also have appreciated that the appellant had a net income from interest of Rs.3,05,OOI/- during the year Interest received Rs.7,19,115/- less Interest paid Rs.4,14,114/-) and thus there was no scope for making any addition on account of deemed income from interest.”

During the course of appellate proceedings, the A.R. of the appellant has submitted that the A.O. has made this addition on the ground that the Assessee had normally taken interest bearing loans @ 8% per annum and had also given interest bearing loans by charging interest @ 8% per annum. The A.O. has given details of the loans on which interest was not charged and similarly loans received on which interest was not paid at Pages-5, 6, & 7 of the assessment order which is set out here under. Loans given on which no interest was Charged Name Interest not charged as per AO's calculation Ajay Pugalia 26,202.73 Niraj Sadani 11,771.79 Shobha Sadani 10,580.95 Siddhi Vinayak 3,520.54 Sundarlal Makhanlal 3,008.70 Lalit Kumar Sad ani -2,791.38 Ganapati Commercial Services 2,114.60 TOTAL Rs.69,407/- Loans taken on which no interest was paid Name Interest not paid as per AO's calculation Sampurn Commodities Pvt Ltd 382.83 Sanjeev Saraf 7,364.29 Shobha Sadani 209.47 Niraj Sadani 545.35 Laxmi Kothari 46.69 TOTAL Rs.8,469/- The A.O. thereafter concluded that the Assessee did not pay interest to the extent of Rs.8,469/- on loans taken and did not charge interest to the extent of Rs.69,407/- on loans given and therefore interest income to the extent of Rs.60,938/- (Rs.69,407/- minus Rs.8,469/-) remains undisclosed which he added as undisclosed income of the Assessee. - M/s. Sadani Trading Company – A.Y.2008-09 4 9.1 The Assessee submitted before CIT(A) appellant respectfully submits that the very method adopted by the A.O. for determining the amount and the basis of the addition was illogical and misconceived. At the out-set it was submitted that simply because interest is not charged on some loans income from interest cannot be presumed from such loans and treated as undisclosed income, it is entirely volition of the Assessee as to whom interest free loan is to be given and to whom it is not to be given. It was pointed out that the A.O. has totally ignored the following particular facts of thr case.

The CIT(A) however did not accept the submission of the Assessee and he held as follows: “5.2. I have perused the assessment order and considered the submission of the appellant. The fact of the case is that the A.O. noted that the appellant received loan on which interest was paid and at the same time he has given some loans on which no interest was charged. The A.O. perused all the accounts of loan creditors/debtors and calculated the interest applying rate at 8% in all the cases and concluded that claim of interest of Rs.60,938/- was not to be allowed as to .that extent interest was not charged on the loan given. After careful consideration of the facts and circumstances of the case, I find no infirmity in the order of the A.O., therefore, ground raised is dismissed.” - M/s. Sadani Trading Company – A.Y.2008-09 5

Aggrieved by the order of the CIT(A) the Assessee is in appeal before the Tribunal. I have heard the rival submissions. The entire basis of addition made by the AO was erroneous. It is not the case of the AO that borrowed funds on which interest was paid were not used for the purpose of business and therefore the interest expenditure cannot be allowed u/s.36(1)(iii) of the Act. Therefore the non-payment of interest on loans borrowed has no relevance whatsoever. As far as interest received by the Assessee is concerned, so long as borrowed funds on which interest is paid and claimed as deduction is not given as interest free loans, the AO cannot compel that the Assessee should earn interest on any lending by it. There is no provision in the Act by which notional income on such lending can be brought to tax. The decision of the Hon’ble Madras High Court in the case of CIT Vs. J Chelladurai (2012) 17 Taxmann.com 73 (Mad) clearly supports the stand of the Assessee in this regard. I am therefore of the view that the addition sustained by the CIT(A) is without any basis and the same is directed to be deleted. Gr.No.3 raised by the Assessee is accordingly allowed.

In the result, the appeal by the Assessee is allowed. Order pronounced in the Court on 03.02.2016.