Active Finstock P.Ltd, Mumbai vs Department Of Income Tax

ी डी. क णाकर राव,ु लेखा सद य SHRI D.KARUNAKARA RAO, ACCOUNTANT MEMBER आयकर अपील सं. / ITA No.1516/MUM/2012 नधा रण वष /Assessment Year 2008-09. Dy.Commissioner of बनाम/ M/s. Active Finstock Pvt. Ltd. Income-tax 4(1), 908, Stock Exchange Tower, Vs. 6 t h Floor, Room No.640, Dalal Street, Fort, Aaykar Bhavan, Mumbai 400 001 Mumbai -20 थायी ले खा सं . /जीआइआर सं . /PAN/GIR No. : AAACA8798G

(अपीलाथ /Appellant) .. ( यथ / Respondent) आयकर अपील सं. / ITA No.1620/MUM/2012 नधा रण वष /Assessment Year 2008-09.

M/s. Active Finstock Pvt. Ltd. बनाम/ Dy.Commissioner of 908, Stock Exchange Tower, Income-tax 4(1), Vs. Dalal Street, Fort, 6 t h Floor, Room No.640, Mumbai 400 001 Aaykar Bhavan, Mumbai -20

थायी ले खा सं . /जीआइआर सं . /PAN/GIR No. : AAACA8798G

(अपीलाथ /Appellant) .. ( यथ / Respondent) C.O.NO.03/MUM/2015 (Arising out of ITA No.1620/MUM/2012, A.Y. 2008-09)

Dy.Commissioner of बनाम/ M/s. Active Finstock Pvt. Ltd. Income-tax 4(1), 908, Stock Exchange Tower, Vs. 6 t h Floor, Room No.640, Dalal Street, Fort, Aaykar Bhavan, Mumbai 400 001 Mumbai -20 थायी ले खा सं . /जीआइआर सं . /PAN/GIR No. : AAACA8798G 2 ITA No.1516&1620/MUM/2012. C.O. NO.03/MUM/2015

Cross Objector .. Appellant in Appeal

Revenue by Shri Asghar Zain Assessee by S/Shri R.C.Jain & Ajay Daga सन ु वाई क" तार$ख / Da te o f Hearing : 19/05/2015 घोषणा क" तार$ख /Date of Pronouncement : 19/05/2015

आदे श / O R D E R

PER I.P.BANSAL, J.M:

ITA No.1516/Mum/2012 and ITA No.1620/Mum/2012 are cross appeals and are directed against order passed by Ld. CIT(A)-8, Mumbai dated 30/12/2011 for assessment year 2008-09. Against the appeal filed by the assessee the Department has also filed Cross Objection No.03/Mum/2015, which is belated by 660 days. Grounds of Cross Appeals and Cross Objection read as under:

1.Grounds of Appeal in ITA No.1516/Mum/2012-Revenue's appeal:

"1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the disallowance amounting to Rs.52,28,925/- on account of Bad debts.

2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the disallowance amounting to Rs.1,33,913/- on account of unpaid STT u/s.43B.

3. On the facts and in the circumstances of the case , the impugned order of the Ld. CIT(A) is contrary to law to be set aside and that of the Assessing Officer be restored."

2. Grounds of Revenue's Cross Objection No.03/Mum/2015:

The appellant has raised additional ground of appeal before ITAT as under:

i) The Ld CIT(A) accordingly ought to have allowed the set off of the brought forward speculation loss against the profit from share trading for the year deemed as speculative within the meaning of Explanation to Sec. 73 of the Act.

During the course of appellate proceedings, the assessee filed a supplementary ground with regard to set off of brought forward speculation loss of Rs 8,09,691/- for AY 2007-08, against the deemed speculation income within the meaning of Explanation to Sec.73 of the Act. The CIT(A) held that the supplementary grounds did not require 3 ITA No.1516&1620/MUM/2012. C.O. NO.03/MUM/2015

investigation of facts and admitted the same. The CIT(A) held that deeming provisions of Explanation to Sec. 73 applies only in respect of losses, assessee can not avail of set off of the brought speculation loss against the delivery based transaction considered as business income of the year. Accordingly the CIT(A) dismissed this ground of the assessee. Against this finding of the Ld. CIT(A), the assessee preferred appeal before the Hon'ble ITAT on the following grounds:

a) The Ld. CIT(A) while admitting additional ground of the appellant erred in holding that Explanation to Sec. 73 of the Act applies only to losses and not to profits.

b) In so doing he did not appreciate that the fiction created by Explanation to Sec.73 of the Act applies to speculative transactions as distinguished from speculative loss.

The Ld. CIT(A) accordingly ought to have allowed the set off of the brought forward speculation loss against the profit from share trading for the year deemed as speculative within the meaning of Explanation to Sec. 73 of the Act.

The department has not incorporated the above ground, as the same has already been dismissed by the CIT(A).

The AO in his report has stated that the additional ground should have not been accepted since the assessee does not fulfill any of the conditions laid down in the rule 46A. The AO did not question the gain from share trading amounting to Rs.16,20,98S/- and treated the same as business income as claimed by the assessee. The assessee cannot change the nature of income during the assessment as well as appellate proceedings. No concrete reason was submitted by the assessee for change of nature of income. The Ld. CIT(A) has rightly held that the deeming provisions of Explanation to Sec.73 applies only in respect of losses and hence the assessee cannot set off the brought forward speculation loss against the delivery based share transaction. Hence, a cross objection needs to be filed. In this regard, an approval is obtained by the CIT-4, Mumbai vide letter No.CIT-4/Cross Obj. Appr./2014-15/2160 dated 29.12.2014.

3. Grounds of Appeal in ITA No.1620/Mum/2012-Assessee's appeal:

"1. The Ld. CIT(A) while admitting additional ground of the appellant erred in holding that Explanation to Sec.73 of the Act applies only to losses and not to profits.

2. In so doing he did not appreciate that the fiction created by Explanation to Sec.73 of the Act applies to speculative transactions as distinguished from speculative loss.

3. the Ld. CIT(A) accordingly ought to have allowed the set off of the brought forward speculation loss against the profit from share trading for the year deemed as speculative within the meaning of Explanation to Sec.73 of the Act."

4 ITA No.1516&1620/MUM/2012. C.O. NO.03/MUM/2015

2. As it can be seen from ground of Cross Objection filed the Revenue, these only support the order of Ld. CIT(A) and objecting the grounds of appeal taken by the assessee on the ground that assessee cannot change the nature of income during the assessment as well as assessment proceedings and no concrete reasons have been submitted by the assessee for change of nature of income and Revenue is supporting the decision of Ld. CIT(A) on merits. The deeming provisions of Explanation to section 73 would apply only in respect of losses and hence, assessee cannot set off the brought forward speculation loss against the delivery based share transactions.

3. From the cross objections taken by the Revenue, it is seen that these are only arguments raised by the Revenue to agitate the relief claimed in the grounds of appeal filed by the assessee. The Revenue otherwise can take such arguments while giving reply to the arguments of Ld. AR with regard to the appeal of the assessee. In these circumstances it was required from Ld. AR that whether he has any objection in condonation of delay for filing the cross objection by the Revenue. Ld. AR fairly conceded that assessee does not have any objection if the delay in filing the Cross Objection is condoned. Accordingly, after hearing both the parties we condone the delay and proceed to decide the cross appeals as well as cross objection filed by the Revenue.

REVENUE'S APPEAL:

4. Apropos Ground No.1; the assessee is a stock broker and has debited an amount of Rs.17,68,430/- being bad debt and sundry irrecoverable balances written off. The assessee submitted the details during the course of assessment proceedings vide letter dated 19/11/2010. The total amount was a sum of Rs.52,28,925/-, which was claimed as bad debt and sundry balances. The AO required the assessee to explain the same. It was explained that during the course of earning share brokerage income these amounts have become irrecoverable and therefore, these should be allowed under section 36(1)(vii) of the Income Tax Act, 1961(the Act). The AO did not accept such claim of the assessee and disallowed the impugned amount. Ld. CIT(A) has allowed this claim of the following the decision of Special Bench in the case of Shreyas S. Morarkhia, 40 SOT 432; Hon'ble Delhi High court decision in the case of CIT vs. DB(India) Securities Ltd. 318 CTR 26 (Del) and also the decision in the case of 5 ITA No.1516&1620/MUM/2012. C.O. NO.03/MUM/2015

Bonnaza Portfolio Ltd. 320 ITR 78 (Del) and has held that assessee is entitled to claim such deduction. The Revenue is aggrieved with such decision of Ld. CIT(A).

4.1 At the outset it was submitted by Ld. AR that this issue is now covered by the decision of Hon'ble Bombay High court in the case of Shreyas S. Morarkhia, 342 ITR 285(Bom). In which following question was framed to be answered:

"Whether on the facts and circumstances of the case and in law, the assessee, who is a share broker, is entitled to deduction by way of bad debts under section 36(1)(vii) read with Section 36(2) of the Income Tax Act, 1961 in respect of the amount which could not be recovered from its clients in respect of transactions effected by him on behalf of his clients apart from the commission earned by him."

4.2 Their Lordships, after hearing both the parties and after considering the various decisions have confirmed have confirmed the decision of Special Bench with the following observations:

"14. The value of the shares transacted by the assessee as a stock broker on behalf of its client is as much a part of the debt as is the brokerage which is charged by the assessee on the transaction. The brokerage having been credited to the profit and loss account of the assessee, it is evident that a part of the debt is taken into account in computing the income of the assessee. The fact that the liability to pay the brokerage may arise, as contended by the Revenue, at a point in time anterior to the liability to pay the value of the shares transacted would not make any material difference to the position. Both constitute a part of the debt which arises from the very same transaction involving the sale or, as the case may be, purchase of shares. Since both form a component part of the debt, the requirements of section 36(2)(i) are fulfilled where a part thereof is taken into account in computing the income of the assessee. Before concluding, we again take note of the fact that in paragraph 31 of its impugned decision the Tribunal has left the issue as regards the value of the shares which remain in the hands of the assessee which has to be adjusted against the amount receivable from the client to be determined before the regular Bench of the Tribunal following the view of the Special Bench. The view which has been taken by the Special Bench is, with respect, in accordance with law. We accordingly dispose of the appeal by answering the question of law as formulated in the affirmative and in favour of the assessee. There shall be no order as to costs."

4.3 Ld. DR did not controvert to such submission of Ld. A.R.

4.4 In this view of the situation, as the issue is covered by the aforementioned decision of Hon'ble Jurisdictional High Court, we decline to interfere in the relief granted by Ld. CIT(A) and Ground No.1 of the Revenue is dismissed.

5. Apropos Ground No.2; the same relates to unpaid STT to which section 43B of the Act has been applied. Before Ld. CIT(A) it was contended that this amount was 6 ITA No.1516&1620/MUM/2012. C.O. NO.03/MUM/2015

merely a liability in the capacity of an agent on behalf of Government which was remaining unpaid till the date of filing the return of income. It was pointed out that in the immediate next year the amount was squared up in the following manner:

By payment Rs. 10,780/- By writing back to the P&L account Rs. 1,23,133/- ------------------- Total : Rs. 1,33,913/- ---------------------

5.1 It was further pointed out that aforesaid amount of Rs.1,23,133/- has been offered as income and assessee did not claim another sum of Rs.10,780/- in the next year i.e. A.Y. 2009-10. To support such contention audited accounts and computation of income relevant for A.Y 2009-10 were submitted. After considering all these things Ld. CIT(A) has deleted the addition on the ground that assessee should not suffer double taxation and he has asked the AO to verify it and allow appropriate relief. The observations of Ld. CIT(A) read asunder:

"5.3 I have considered the contention of the AO as well as of the Ld. Ar. I am inclined to agree with the appellant that section 43B has not applicability to the said credit balance. However, the credit balance is part of trading account which is liable to be taxed. It is no doubt true that the appellant has suffered double taxation in respect of the aforesaid amount, one in the year under appeal and the other in the subsequent year. In my considered opinion, it would be fair if the tax is recovered from the appellant in respect of this amount only once and not twice as stated above. I accordingly direct the AO to delete the above addition subject to the verification that appellant has paid tax in the next year on this very amount. In adopting the above procedure, no injustice will be done either to the revenue or to the appellant as it is assessed to maximum marginal rate of tax in both the year and there is taxable income in each of the above year. This ground of appeal is, thus, treated as allowed for statistical purposes."

5.2 In this view of the situation, after hearing both the parties, we decline to interfere in the findings recorded by Ld. CIT(A) as the addition has been deleted only on the ground that the same should not taxed twice and AO has also been asked to make the necessary verification. Therefore, this ground of the Revenue is also dismissed.

ASSESSEE'S APPEAL:

6. During the course of assessment proceedings the assessee filed following note before the AO:

"Note on explanation to Section 73 of IT Act, 1961 and its treatment in computation of Total Income:

7 ITA No.1516&1620/MUM/2012. C.O. NO.03/MUM/2015

You have required to show cause as to why the explanation to section 73 should not be invoked for share transactions, please that that there is a gain of Rs.1620985/- from share trading as reflected in Schedule "L" of the audited accounts. On careful examination of provisions of explanation to section 73, computation of total income filed and Schedule 'L', it is seen that the share trading income of Rs.1620985/- is declared as business income only as against speculation income. The said income should have been disclosed under the head speculation income. Your kind attention is invited to return of income wherein brought forward speculation loss of Rs.809691 has been disclosed for A.Y 2007-08 which has been carried forward. In view of the fact that now the income from share trading of Rs.1620985/- is to be assessed as speculative income the assessee is therefore eligible to set off brought forward speculation loss of Rs.809691/- as above against the above speculation income which may please be set off while finalizing the assessment. It is submitted that explanation to section 73 envisages transactions to be speculative and not result. The error in treating the share trading income as business income instead of speculation income is regretted and we have to request you to kindly treat the share trading income of Rs.1620985/- as speculation income and allow set off of brought forward speculation loss of Rs.809691/-."

6.1 Thus, assessee sought set off of brought forward speculation loss of Rs.8,09,691/- as similar income in the year under consideration of a sum of Rs.16,20,985/- was wrongly shown by the assessee as business income against real nature of the income being speculative income arising out of sale and purchase of shares by application of Explanation to section 73 of the Act. The AO did not consider such submission of the assessee and assessed the income without giving set off of brought forward speculation losses. Aggrieved by such treatment given by the AO, the assessee raised additional ground before Ld. CIT(A) to claim the same. For proper understanding of the situation, the relevant portion of order of Ld. CIT(A),wherein the said issue has been decided, is reproduced below:

"6 During the course of appellate proceedings, the Ld. AR of the appellant filed a supplementary ground of appeal with regard to set off of brought forward speculation loss of Rs.8,09,691 for AY 2007- 08 against the deemed speculation income within the meaning of explanation to section 73 of the Act.

6.1 The Ld. AR of the appellant has filed supplementary grounds of appeal with regard to setting off of the brought forward speculation loss of Rs.8,09,69l for AY 2007-08 against the deemed speculation income of the year under appeal. I do not find any discussion by the AO in the assessment order on this issue. The Ld. AR has however, brought to my notice that such a claim was made during the course of assessment proceedings in response to the show cause by the AO requiring the appellant to explain as to why explanation to section 73 be not applied in respect of dealing in purchase and sale of shares.

6.2 I have considered the submissions of the appellant and find that omission of this ground in the original memo of appeal was not willful and the same raises a legal ground which does not require investigation of facts. I accordingly admit the same. However, on 8 ITA No.1516&1620/MUM/2012. C.O. NO.03/MUM/2015

merits I am not inclined to agree with the appellant in as much as the deeming provisions of explanation to section 73 applies only in respect of losses and therefore, appellant cannot avail the set off of the brought forward speculation loss against the delivery based share transaction considered as business income of the year under appeal. This ground of appeal is, thus, dismissed.

6.2 After narrating the facts, it was submitted by Ld.AR that this issue is covered in favour of the assessee by the decision of Hon'ble Bombay High Court in the case of CIT vs. Lokmat Newspapers Pvt. Ltd., 322 ITR 43(Bom), wherein their Lordships have held that profit from purchase and sale of shares by actual delivery are not required to be excluded from deeming fiction and company is entitled to set off of profits from such transactions against speculation loss brought forward from earlier years. Thus, it was claimed that Ld. CIT(A) has committed an error in holding that brought forward speculation loss cannot be set off against current years income earned by the assessee from sale and purchase of shares which represented actual delivery.

7. On the other hand, Ld. DR relied upon order passed by Ld. CIT(A).

8. We have heard both the parties and their contentions have carefully been considered. The issue is covered by the aforementioned decision of Hon'ble Bombay High Court. The relevant observations of their Lordships read as under:

9. The contention of the Revenue in the present case, in essence is that the definition of the expression "speculative transaction" in section 43(5) must be read into the provisions of section 73, because a business cannot be a speculation business unless there is a speculative transaction and a speculative transaction is defined by the former as one, not involving an actual delivery of shares. Hence, it was submitted that a transaction which involves an actual delivery of shares would not constitute a speculative transaction and the assessee who is engaged in a business involving the actual delivery of shares, cannot be regarded as being engaged in speculation business.

10. The submission which has been urged on behalf of the Revenue, cannot be accepted, having regard to the plain meaning of the Explanation to section 73. The submission of the Revenue is that a loss which arises on account of a transaction of the sale and purchase of shares would constitute a loss from a speculation business for the purposes of the Explanation. But, that the profit which arises from a transaction involving the actual delivery of shares would not constitute a profit for the purposes of sub-sections (1) and (2) of section 73 in respect of which a set off can be granted. To accept the 9 ITA No.1516&1620/MUM/2012. C.O. NO.03/MUM/2015

submission of the Revenue would be to introduce a restriction into the scope and ambit of the deeming fiction which is created by the Explanation to section 73, which is not contemplated by Parliament. Once a deeming fiction is created by law, it must be given full and free effect, of course, in relation to the ambit within which it is intended to operate. The deeming fiction created by the Explanation to section 73 defines when an assessee is to be deemed to be carrying on a speculation business for the purposes of the section. The deeming fiction is, therefore, one which arises specifically in the context of the provisions of section 73 and is confined to that purpose alone. The Explanation stipulates that where an assessee is a company whose business consists in any part of the purchase and sale of shares of other companies, it shall be deemed to be carrying on a speculation business to the extent to which the business consists of purchase and sale of such shares. Whether or not it is a profit or loss that has resulted from carrying on such business, is a consideration which is alien to the meaning of what constitutes a speculation business by the Explanation to section 73. Once an assessee is deemed to be carrying on a speculation business for the purpose of section 73, any loss computed in respect of that speculation business, can be set off only against the profits and gains of another speculation business.

Similarly, for the purposes of sub-section (2), the loss in respect of a speculation business which has not been set off either in whole or in part, can be carried forward and can be set off against profits and gains "of any speculation business". The expression "any speculation business" means a speculation business of the assessee in respect of which profits and gains for the assessment year in question have arisen and there is no justification to restrict the content of that speculation business where profits have arisen by excluding a business involving actual delivery of shares. No such restriction is found in the Explanation. To impose one is a legislative function. In other words, once the assessee is carrying on a speculation business and the profits and gains have arisen from that business during the course of the assessment year, the assessee is entitled to set off of the losses carried forward from a speculation business arising out of a previous assessment year.

11. In these circumstances, the view which has been formed by the Tribunal is consistent with the provisions of section 73. The questions of law shall stand answered accordingly.

The appeal shall stand dismissed. There shall be no order as to costs.

8.1 Accordingly, we hold that assessee should be given benefit of set off of brought forward speculation loss against income earned by the assessee in the current year from sale and purchase of shares even though the sale and purchase of shares is by way of actual delivery. The cross appeal filed by the assessee is allowed.

9. In the Cross Objection filed by the Revenue, we find that assessee has made submissions before the AO regarding set off of unabsorbed speculation loss in the current year. The AO did not adjudicate the same. Such claim was raised by the assessee by way of additional ground which has been admitted by Ld. CIT(A). According to well established law Appellate Authority is entitled to 10 ITA No.1516&1620/MUM/2012. C.O. NO.03/MUM/2015

entertain a claim which was not raised before AO and if assessee is legally entitled for the same it should be allowed. In the present case, the claim was raised before AO, which was not admitted, however, Ld. CIT(A) did not commit any error in admitting the additional ground. The same has to be decided according to provisions of law and according to provisions of law the issue has been decided in favour of assessee in the appeal filed by the assessee. Therefore, the cross objection filed by the Revenue has to be dismissed and accordingly dismissed.

10. To sum up, the appeal and cross objection filed by the Revenue are dismissed and the appeal filed by the assessee is allowed.

Order pronounced in the open court on 19/05/2015 आदे श क" घोषणा खल ु े यायालय म* +दनांकः 19/05/2015 को क" गई ।

Sd/- Sd/- (डी. क णाकर रावु / D.KARUNAKARA RAO) (आय.पी. बंसल / I.P. BANSAL) लेखा सद य / ACCOUNTANT MEMBER या यक सद य / JUDICIAL MEMBER मुंबई Mumbai; +दनांक Dated 19/05/2015 आदे श क त ल प अ!े षत/Copy of the Order forwarded to : 1. अपीलाथ / The Appellant 2. यथ / The Respondent. 3. आयकर आय/ ु त(अपील) / The CIT(A)- 4. आयकर आयु/त / CIT 5. 0वभागीय त न2ध, आयकर अपील$य अ2धकरण, मुंबई / DR, ITAT, Mumbai 6. गाड फाईल / Guard file.

आदे शानुसार/ BY ORDER, स या0पत त //True Copy//

उप/सहायक पंजीकार (Dy./Asstt. Registrar) आयकर अपील य अ धकरण, मुंबई / ITAT, Mumbai व. न.स./Vm, Sr. PS