M/S.ACUMEN CAPITAL MARKET(INDIA) LTD,ERNAKULAM vs. THE ITO, COCHIN

PER GEROGE GEORGE K, JM:

This appeal, at the instance of the assessee, is directed against the CIT’s order dated 27th Nov 2015 passed u/s 263 of the I T Act. The relevant assessment year is

2012-13.

2 The grounds raised read as follows:

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regard. Your appellant vide reply dated 9.2.015 had furnished detailed note on the bank guarantee, along with sanction letter from Federal Bank Ltd. The assessing officer has taken one of the possible view after considering the details furnished by the appellant.

3 Brief stated the facts of the case are as follows:

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The assessee is a company engaged in the business of online share trading. For

the assessment year 2012-13, the return of income was filed on 23.9.2012. The

assessment u/s 143(3) of the Act was completed vide order dated 9.3.2015.

Subsequently, notice dated 16.10.2015 was issued by the Commissioner of Income tax

u/s 263 of the I T Act. The CIT was of the view that the order passed by the Assessing

Officer u/s 143(3) of the Act (order dated 9.3.2015) is erroneous and prejudicial to the

interest of the revenue for the following reasons:

i) Bank Guarantee commission to be considered as interest for disallowance u/s 14A :

ii) Investment written off during the year amounting to Rs.8,94,800 was not considered for arriving at disallowance under Rule 8 D(iii)

iii) Provision for Leave encashment amounting to Rs.83,670 not disallowed following Kerala HC decision in the case of Hindustan Latex Ltd

iv) Loss on trading in shares amounting to Rs.21 ,30,564 is not considered as loss from speculation business as required under explanation to section 73.

3.1 The assessee filed reply vide letter dated 16.11.2015 and the assessee’s

authorized representative appeared before the CIT on various hearing dates and

submitted that the proposed revision is bad in law because there is no error in the

assessment order warranting interference u/s 263 of the Act. The assessee’s

authorized representative had raised specific points with regard to each of the reasons

stated in the notice issued u/s 263 of the Act to contend that there is no error in the

assessment order and the Assessing Officer had taken a conscious decision to allow the

deductions.

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4 The CIT rejected the contentions raised by the assessee and passed order u/s

263 of the Act. The CIT, set aside the assessment order dated 9.3.2015 and directed

the Assessing Officer to pass fresh assessment order, after examining the points of

error mentioned by the CIT in the impugned assessment order. The relevant finding of

the CIT, reads as follows:

“7. …………………….. I have considered the contentions of the assessee. On examination of the records it can be seen that the Assessing Officer has not examined all the above points while allowing the claim of the assessee. On examination of issues will attract provisions of sec u/s 263 of the I T Act.

8 I, therefore, set aside the assessment order dated 9.3.2015 on all the issues discussed above. The Assessing Officer is directed to examine these issues after bringing into record all material facts and pass a speaking order. Needless to say, that the Assessing Officer will give ample opportunity to the assessee before passing an order.”

5 Aggrieved by the order of the CIT, passed u/s 263 of the Act, the assessee is in

appeal before us. The ld counsel for the assessee reiterated the submissions made

before the CIT. It was contended that each reasons pointed out by the CIT invoking

his revisionary jurisdiction, is wrong and there is no error in the assessment order,

warranting interference by CIT u/s 263 of the Act. Therefore, the order passed u/s 263

is to be quashed. For the above proposition, the ld counsel relied on the following

orders of the Tribunal:

i) ITO vs Snow Tex reinvestment Ltd 129 DTR (Trib) 203 ii) Lohia Securities Ltd vs DCIT 157 ITD 265 iii) Fiduciary shares & Stock Pvt Ltd Vs ACIT – ITA no.321/Mum/2013 iv) Sri Sahul Hammed vs ITO 498/Coch/2015

5.1 The ld DR, on the other hand, submitted that the order of the assessment is bad

in law since there is no proper enquiries conducted by the Assessing Officer with regard

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to the points noted by the CIT in his revisionary order passed u/s 263 of the Act.

Therefore, it was submitted by the ld DR that the order passed by the Assessing

Officer is amenable to interference u/s 263 of the Act. For the above proposition, the ld

DR relied on the judgment of the Hon’ble Apex Court in the case of Toyota Motor

Corporation vs CIT reported in 306 ITR 52.

6 We have heard the rival submissions and perused the material on record. As

mentioned earlier, the CIT had listed out four reasons to invoke his revisionary

jurisdictional u/s 263 of the Act. For ready reference, we reproduce the four reasons as

under:

i) Bank Guarantee commission to be considered as interest for disallowance u/s 14A :

ii) Investment written off during the year amounting to Rs.8,94,800 was not considered for arriving at disallowance under Rule 8 D(iii)

iii) Provision for Leave encashment amounting to Rs.83,670 not disallowed following Kerala HC decision in the case of Hindustan Latex Ltd

iv) Loss on trading in shares amounting to Rs.21,30,564 is not considered as loss from speculation business as required under explanation to section 73.

6.1 Now, let us examine whether the above four reasons stated by the CIT is a

good ground to hold that the assessment order passed u/ 143(3) of the Act dated

9.3.2015 is an order erroneous and prejudicial to the interest of the revenue.

6.2 Bank Guarantee commission to be considered as interest for

disallowance u/s 14A:

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Section 2(28A) of the I T Act defines “interest” which reads as follows:

“interest’ means interest in any manner n respect of any moneys borrowed or debt incurred (including a deposit, claim or other similar right or obligation) and includes any service fee or other charge in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilized.”

6.3 A bank guarantee is a promise from a bank that the liabilities of a debtor will be

met in the event that the debtor fails to fulfill the contractual obligations. It is not a

borrowing or a debt incurred. It is only a facility extended by the bank for which

charges are recovered. Hence, the bank guarantee commission cannot be considered as

interest on borrowing. The board notification no. 56/2012 dated 31.12.2012 had

clearly held that bank guarantee commission paid to a bank need not suffer

deduction of tax at source under Chapter XV of the I T Act. Moreover, the Assessing

Officer, in the course of assessment proceedings has called for details of bank

guarantee commission paid. The assessee in its reply dated 9.2.2015 had submitted

the details called for by the Assessing Officer and on examination of the same no

disallowance was made. It also to be noted that the Assessing Officer, in the

assessment had made disallowance by invoking provision u/s 14A of the Act. Therefore,

according to us, the Assessing Officer has taken a conscious decision not disallow bank

guarantee commission paid by the assessee by invoking section 14A of the Act. For the

aforesaid reasons, we are of the view that the bank guarantee commission paid by the

assessee is not in the nature of interest expenditure warranting disallowance u/s 14A

r.w.r 8D(2)(ii).

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6.4 Investment written off during the year amounting to Rs. 8,94,800/-

was not considered for arriving at disallowance u/r 8D(iii)

Rules 8D(iii) of the I T Rules read as under:

“An amount equal to one half per cent of the average of the value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day f the previous year.”

The rule requires the value of investment, the income from which is exempt from tax

alone to be considered for the disallowance. The sum of Rs. 8,94,800/- written off

during the year is in respect of joint venture in Dubai in Peninsular Middle East DMCC.

The Income from this investment is not exempt from tax and hence the same need not

be considered for disallowance u/s 14A r.w.r 8D. Therefore, it cannot be said that there

is error in the assessment order.

6.5 Provision for leave encashment amounting to Rs.83,670/-

The assessee in the statement of total income had mentioned in the footnote

that no disallowance was made towards leave encashment, following the decision of the

jurisdictional Kerala High Court in the case of Hindustan Latex Ltd. The Assessing

Officer has accepted the same while completing the assessment. There is no error in

the assessment since the Assessing Officer has followed the judgment of the

jurisdictional High Court.

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6.6 Loss on trading in shares amounting to Rs. 21,30,564 is not considered

as loss from speculation business as required under explanation to section 73

The brief fact in relation to the above issue are as follows:

The assessee is engaged in the business of trading in shares on self account,

derivatives transactions and share broking activity. The Assessing Officer treated the

aforesaid loss arising from purchase and sale of share on self account, done on delivery

basis, as normal business loss to be set off against other business income i.e brokerage.

The IT Act 1961 has been amended by Finance Act 2005 w.e.f 1.4.2005 and by clause

Proviso of sub. Sec 5 of section 43 it has been provided that trading in derivative

carried out in the recognized stock exchange should not be considered as speculative

business. The assessee, in the assessment proceedings, vide its reply dated 9.2.2015

has answered in detail the loss in trading, scrip wise profit and loss etc., (details are

furnished from pages 38 to 47 of the paper book filed by the assessee). The AO during

the course of assessment proceedings had examined the evidence furnished and had

concluded the assessment. On examination of record, it is clear that loss on trading in

shares amounting to Rs. 21,30,564/- cannot be from speculative business and there is

no error in the Assessment order to the above extent.

6.7 Section 263 is attracted only if order of assessing officer is erroneous in so far as

it is prejudicial to the interest of the revenue. Thus, if one of the twin conditions

namely; (i) the assessment order is erroneous and (ii) prejudicial to the interest of

revenue, is not satisfied, the CIT does not have power to exercise his revisionary

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powers u/s 263 of the Act. In the instant case, as mentioned earlier, on examination of

facts, we find there is no error in the assessment order for the CIT to invoke his powers

u/s 263 of the Act, hence, we quash the same. It is ordered accordingly.

4 In the result, the appeal filed by the assessee is allowed.

Order pronounced in the open Court on this 24th day of March 2017.

Sd/- Sd/-

(ABRAHAM P GEORGE) (GEORGE GEORGE K) Accountant Member Judicial Member

Cochin: Dated 24th March 2017 Raj*

Copy to: 1. Appellant – 2. Respondent – 3. CIT(A) 4. CIT, 5. DR 6. Guard File By order

Assistant Registrar ITAT, COCHIN