TMI Blog2009 (6) TMI 689X X X X Extracts X X X X X X X X Extracts X X X X ..... 23, held by him as business loss, against profit of Rs. 48,65,115 even though the said profit was held by him as profit from speculation business, inasmuch as there is no embargo in setting of the loss from business against profit from speculation business; 3. That on facts and circumstances of the case and in law, the ld. CIT (Appeals) erred in confirming the disallowance of the expenditure of Rs. 83,30,111 payable to Mahan Enterprise Ltd.; 4. That the ld. CIT (Appeals) erred in not dealing with the ground No. 13 wherein was contended that on the facts and circumstances of the case and in law, the Assessing Officer erred in charging interest under sections 234B and 234C of the Act; 5. That the order passed by the CIT is bad in law and void ab initio . 3. The first grievance of the assessee is that the ld. CIT (Appeals) erred in holding that the profit of Rs. 48,65,115 from the purchase and sale of shares was profit from speculation business. The facts of the case stated in brief are that the assessee at the relevant time was engaged in multifarious activities like purchase and sale of shares, making investments in mutual funds, rendering services of management consulta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness income in view of provisions of Explanation to section 73 of the Act. The assessee vide letter dated 26-12-2003 explained that the main business of the assessee was purchase and sale of shares and, therefore, the assessee had rightly debited/credited the net result of a particular transaction of purchase/sale of shares in the profit and loss account. It was also submitted that the term capital gain / capital loss was used only to identify that the particular account represented purchase/sale of shares. No payments were made or received from the share broker on account of inter se comfort. Accordingly, it was submitted that provisions of section 73 were not applicable because the assessee had earned a positive income from share dealing. However, the Assessing Officer noted that as per clause 6 [wrongly mentioned by Assessing Officer as sub-clause (4)] of the main objects of Memorandum and Article of Association, the assessee was permitted to carry on business as share broker. The assessee was actively engaged in the business of purchase and sale of shares. There was no closing stock of shares on 31-3-2001. He also noted that the assessee had neither made any security d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not allowable. 6. Before us the ld. AR of the assessee submitted that the assessee was engaged in the business of trading in shares and commodities. The assessee-company was not a manufacturing company. It was a service provider company and also engaged in the trading, sale/purchase of shares and mutual fund units and, therefore, the entire transactions of purchase and sales are to be treated on the same footing. The ld. CIT(A) had treated the purchase and sale of units as business activities and part of the activities of dealing in shares as speculative. Therefore, the ld. CIT (Appeals) was not justified in not allowing the set off of business loss from purchase/sale of units of mutual fund against the income earned from trading of shares. 7. On the other hand, the ld. Sr. DR submitted that the assessee is engaged in the business of consultancy. Referring to Memorandum of Association he submitted that the assessee was not authorised to deal in shares. He further submitted that the assessee has not taken the delivery of shares and, therefore, the income earned will be in the nature of speculative transactions. He placed reliance on the decision of Hon ble Supreme Court in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... whether the purchase and sale of units can be treated as business carried on by the assessee? The expression business is not defined under Income-tax Act, 1961. As per the decision of Hon ble Supreme Court in Mazagaon Dock Ltd. v. CIT [1958] 34 ITR 368 , the word business is one of wide import and in fiscal statutes it must be construed in a broad rather than a restricted sense. In below mentioned cases the Hon ble Courts have discussed the circumstances under which a person could said to have carried out business activities : ( i )In Sole Trustee, Loka Shikshana Trust v. CIT [1975] 101 ITR 234 Hon ble Apex Court has held that there must be a course of dealings with continuity. The expression business , though extensively used in taxing statutes, is a word of indefinite import. In taxing statutes it is used in the sense of an occupation or profession which occupies the time, attention and labour of a person, normally with the object of making profit. To regard an activity as business there must be course of dealings either actually contained or contemplated to be contained with a profit motive, and not for sport or pleasure. Whether a person carried on business in a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and not to circulate and part with them in course of business must be distinctly shown. The Court further observed that if the family treated the profits and losses arising from the sales of those shares as capital accretion or capital diminution and not as business profits or business losses arising from sales of stock-in-trade their conduct was relevant material to show that the shares were not stock-in-trade. Seen in the light of observations of Hon ble Calcutta High Court the units were acquired by the assessee as investments and assessee had taken dividend income as further investment in units of the Fund for the purposes of computation of short-term capital loss. The receipt of dividend and its reinvestment in units of the said Fund shows that the assessee held the units as investments and not as stock-in-trade and hence the loss suffered on sale such investments will be assessable as capital loss. Hence the Assessing Officer was justified in accepting the loss from units as short-term capital loss. The purchase and sale of units do not fall in speculative transactions within the meaning of section 43(5) of the Act as the assessee had taken and given the actual delivery of un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (5) is plain and clear. A speculative transaction as contemplated by section 43(5) should fulfil four essential conditions namely ( i ) the contract should be for purchase or sale; ( ii ) the purchase or sale should be of any commodity; including stocks and shares; ( iii ) periodical or ultimate settlement of the contract; and ( iv ) settlement to be otherwise than by the actual delivery or transfer. The section covers only those transactions or contracts which are periodically or ultimately settled otherwise than by the actual delivery or transfer. The assessee s case does not fall under any of the exceptions contained in the proviso to section 43(5) of the Act. It has been held by Hon ble Delhi High Court in the case of M.R. Dhawan v. CIT [1979] 119 ITR 412 that speculation in common parlance connotes an intention to speculate, gamble, take a chance or risk. The Act however provides a very simple and objective test for determining whether a transaction is a speculative transaction or not. Under this definition, all that has to be found out is whether the contract was periodically or ultimately settled by actual delivery, transfer or otherwise. If the goods or commodities in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income which is chargeable under the heads Interest on securities , Income from house property , Capital gains and Income from other sources , or a company the principal business of which is the business of banking or the granting of loans and advances, consists of the purchase and sale of shares of other companies, such company shall, for the purposes of section 73, be deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sale of such shares. The provisions of Explanation to section 73 do not distinguish between the transaction of trading in shares on actual delivery or without delivery basis. Admittedly the assessee does not fall under any of the exceptions provided in the Explanation and hence, the purchase and sale of shares traded during the year under consideration is also in nature of speculation business within the meaning of proviso to section 73 of Income-tax Act, 1961. 9.5 Another contention of Sh. Ved Jain, the AR of the assessee is that both the transactions i.e., trading in shares and units of mutual funds have to be treated on same footings. We are unable to accept this proposition of the ld. A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eld that the legal fiction created by section 32(3) of the UTI Act cannot be carried any further. We have examined the provisions of the UTI Act and we are of the opinion that even though the said section creates a fiction to make the UTI as a deemed company and distribution of income received by the unit holder as a deemed dividend, by virtue of these deemed provisions, it cannot be said that it also makes the unit of the UTI a deemed share. In our opinion, a deeming provision of this nature, as found in section 32(3), should be applied for the purpose for which the said deeming provision is specifically enacted, which in the present case is confined only to deeming the UTI as a company and deeming the income from the units as a dividend. If as a matter of fact, the Legislature had contemplated making the unit as also a deemed share, then it would have stated so. In the absence of any such specific deeming in regard to the units as shares, it would be erroneous to extend the provisions of section 32(3) of the UTI Act to the units of UTI for the purpose of holding that the unit is a share. For these reasons, we are in agreement with the finding of the High Court on this point also. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der offer dated 22-12-1999 agreed to pay service charges to the assessee at the rate of 4 per cent of the amounts of claims settled with SECL. Schedule B to the offer letter also provided incentive charges for early settlement of the claims. 11.1 The assessee in order to achieve the contractual obligations entered into a joint venture agreement with M/s. Mahan Enterprises Ltd. for the purpose of rendering services to M/s. Gujarat Electricity Board. Under the terms of agreement the assessee was to pay M/s. Mahan Enterprises Ltd. subject to payment of expenses a sum equivalent to 2.8 per cent of the claim of amount settled between GEB and SECL to Mahan as Mahan s share in revenues from GEB s said assignment excluding expenses, if any, incurred by Mahan on the said GEB assignment. For the share in revenues M/s. Mahan Enterprises was required to provide finance to the assessee. During the year under consideration the assessee received service charges amounting to Rs. 2,12,01,307 from GEB. The assessee claimed expenses of Rs. 2,95,31,418 thereby making a loss of Rs. 83,30,111. The expenses of Rs. 2,95,31,418 included the amount of Rs. 1,48,40,915 payable to M/s. Mahan Enterprises Lt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 6 of the agreement. The Assessing Officer disallowed the loss of Rs. 83,30,111. 11.2 The Assessing Officer conducted inquiries from Mahan enterprises Ltd. It was found that assessee had not made payments of Rs. 1,48,40,915 to Mahan Enterprises Ltd. Mahan Enterprises Ltd. had not disclosed the amount of Rs. 1,48,40,915 in its return of income for assessment year 2001-02. It was admitted by Mahan Enterprises that the amount of Rs. 1,48,40,915 was due from the assessee and had received payment of Rs. 1.07 crores out of funds arranged for the projects. Since payment of Rs. 1,48,40,915 was not paid to Mahan Enterprises Ltd. the amount payable was accepted on protective basis. 11.3 The Assessing Officer further, noted that assessee had incurred expenditure Rs. 64,73,413.92 in assessment year 2000-01 and Rs. 70, 57,790 in assessment year 2001-02 on the project. The assessee debited 20 per cent of such expenses to profit and loss account as deferred revenue expenditure amounting to Rs. 27,06,241. It was explained that even though the expenditure was incurred in the current financial year, the revenue for the same was anticipated in subsequent years also. The Assessing Officer, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessing Officer in the assessment order was to be considered to be appropriate. This fact stood confirmed from examination of M/s. Mahan Enterprises Ltd. that the said sum of Rs. 1,48,40,915 claimed by the assessee as payable had not been shown by the other party as part of his receipts. Accordingly, the ld. CIT (Appeals) upheld the disallowance of Rs. 83,30,111 in principal subject to the direction to the Assessing Officer that arithmetical mistakes should be cured after due verification. As regards the contention of the assessee that the Assessing Officer has held that expenses of Rs. 1,48,40,915 payable to Mahan Enterprises Ltd. were acceptable on protective basis, the ld. CIT (Appeals) observed that allowability of certain expenses was being judged on merits of the case and, therefore, making of such a statement did not really serve any purpose and the same was considered out of place. Similarly for allowance of expenditure of Rs. 70,57,970 on protective basis has not been approved by CIT(A). The ld. CIT (Appeals) accordingly confirmed the stand taken by the Assessing Officer. 13. Before us, the ld. AR of the assessee submitted that the liability to pay the share of joint v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... conditions for work order regarding GEB s claim on SECL pertaining to supply of coal during the period 1993-99 and the assessee based on records/data/information made available by GEB, shall : ( a )determine/verify the extent to which there was a slippage in quality of coal supplied by South Eastern Coalfields Ltd. (SECL) to GEB during the said periods and on basis thereof shall compute the claim amount/verify the computation of claim done by GEB for the said periods; ( b )study the sampling procedures/techniques adopted by GEB/CCO/PA during the period under reference and correlate the same with the norms prescribed by ISS and the procedures followed during the joint sampling period; ( c )study the contractual position as it existed between GEB and SECL during the said two periods under reference; ( d )advise/suggest the strategies/mechanism which GEB should pursue to ensure settlement of its claims with SECL; ( e )prepare various documents/negotiation papers/presentation formats/data tabulation charts to enable negotiations with SECL; ( f )obtain expert advice on behalf of GEB and take services in this matter from eminent and appropriate professionals so as to streng ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and conditions enumerated in Schedule A B, it is clear, that work order was to be completed within the period of three months i.e., by 21-3-2000 but the assessee as admitted in written submissions made before Assessing Officer vide reply dated 12-12-2003 and also before CIT(A) submitted that it was not able to achieve any results for GEB until 20-2-2000. The assessee in reply dated 12-12-2003 also informed the Assessing Officer that the services rendered by the assessee enabled GEB to arrive at a settlement in September 2000. As a consequence of this, lower slab of service charges were made applicable to the assessee and thereafter, the service charges receivable by the assessee were reduced from 8 per cent to 4 per cent of the amount of the claims settled between GEB and SECL in respect of the period 1993-95; and were reduced from 8 per cent to 3 per cent in case of period 1995-99. Based on reduced slabs of services charges, GEB disbursed the service charges amounting to Rs. 2,12,01,307 between 9-2-2001 to 27-2-2001. 15. Though the terms and conditions of the work order were communicated to assessee vide letter dated 22-12-1999 for its acceptance but the assessee enter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ner - II shall be paid his share in Joint Venture Revenue up to a maximum extent of 2.80 per cent of the amount of claims settled between GEB SECL; ( iv )After paying/disbursing the amounts mentioned in para 6( i ) to ( iii ) above out of the amounts received from GEB, if any further amounts are still in surplus, then the same shall be retained and had by JV Partner-I as its share in the Joint Venture Revenue. The opening sentence of clause 5 contains words That the parties herein having assumed the gross service charges receivable from GEB at about 8 per cent indicate the assumption of the gross service charges receivable from GEB at 8 per cent of the amount of claims settled between GEB SECL. Therefore, sharing of the revenue of joint venture in ratio of 2.8 : 5.2 was based on assumption of revenue to be received. When service charges have been reduced from 8 per cent to 4 per cent in September 2000, the share of Mahan Enterprises Ltd. will be reduced in the same ratio. Thus, the existence of assumption of revenue at 8 per cent in the opening sentence of clause 5 clearly indicates that sharing of revenue between the parties was not absolute or final. It was depend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m GEB at Rs. 2,12,01,307 against which the assessee has treated an amount of Rs. 1,48,40,915 payable to Mahan Enterprises Ltd. as per provisions of clause 5 of the agreement. If for a moment the contention of assessee is accepted as correct it will render the other clauses of Joint Venture Agreement as redundant. Thus, the amount of Rs. 1,48,40,915 determined payable to Mahan Enterprises Ltd. by the assessee is not in accordance of provisions of the Joint Venture Agreement. Neither the Assessing Officer nor the ld. CIT (Appeals) have examined the terms and conditions of the Joint Venture Agreement vis-a-vis providing of finances by the JV Partner -II for the purpose joint venture. They have also failed to examine as to what was the ratio of sharing of Revenue, between them when service charges have been reduced to 4 per cent for the claims settled with SECL pertaining to period 1993-95 and 3 per cent for the period 1995-99 since we have held that sharing of revenue is not absolute when the sharing of revenue have been arrived at on assumption that they will receive 8 per cent as service charges on claims settled between GEB and SECL. We, therefore, set aside this issue to the f ..... X X X X Extracts X X X X X X X X Extracts X X X X
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