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2016 (11) TMI 69 - ITAT AHMEDABAD

2016 (11) TMI 69 - ITAT AHMEDABAD - TMI - Addition of speculation loss - nature of income - Held that:- There is not dispute about the fact that the assessee had already proved that its main income has already been treated to be under the head “income from other sources”. The Assessing Officer’s findings in assessment order as affirmed in the CIT(A)’s opinion deny application of above explanation in assessee’s case mainly on the ground that its statement of income is entirely under the head “ bu .....

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ramod Kumar, Accountant Member And Shri S. S. Godara, Judicial Member By Assessee : Shri Vijay Ranjan, A.R. By Revenue : Shri Vilas V. Shinde, Sr.D.R. ORDER Per S. S. Godara, Judicial Member This is a batch of four appeals. First assessment year 2001-02 involves three cases comprising of two quantum cross appeals ITA Nos.943 & 1256/Ahd/2005 filed by assessee and the Revenue against CIT(A)-XIV, Ahmedabad s order dated 02.02.2005 passed in case no. CIT(A)/XIV/ACIT C.8/56/2004-05. The latter pa .....

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d appeal involves proceedings u/s.271(1)(c) of the Act. We proceed assessment year-wise for the sake of convenience and brevity. Assessment Year 2001-02 2. This assessment year comprises of three appeals as clarified hereinabove in opening paragraph. Assessee s appeal ITA No.943/Ahd/2005 raises three substantive grounds inter alia pleading that the CIT(A) has erred in confirming Assessing Officer s action making Section 14A interest disallowance of ₹ 1,27,74,382/-, treating its loss of  .....

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3. We now advert to Revenue s former appeal ITA No.1256/Ahd/2005 challenging correctness of the lower appellate order deleting Section 14A apportioned interest disallowance of ₹ 26,62,673/- out of the total disallowance figure of ₹ 1,54,37,055/-. Its latter appeal ITA No.2735/Ahd/2006 seeks to revive Section 271(1)(c) penalty of ₹ 27lacs imposed by the Assessing Officer vide order dated 07.03.2006 as pertaining to the above three quantum issues summarized in assessee s appeal .....

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he above disallowance qua assessee s interest expenses stated to have been incurred for earning exempt income by parking its funds in share activities. We find that the CIT(A) follows his order in assessee s own case for assessment year 1999-2000 as follows: I have carefully considered the assessment order and the above submissions. I have also perused the appellate order dt: 31-01-2003 for A.Y. 1999-2000 passed by the C.I.T (A) IX; Mumbai in appellants own case. I find that the assessee has bee .....

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The CIT(A) Mumbai in his order, supra has held that in respect of interest not connected with dividend income, sec. 14A would not be applicable and has accordingly confirmed the disallowance u/s. 14 A with reference to shares on which dividend is received. As the facts mentioned in A.Y. 1999-2000 are similar, the appellant was requested to furnish necessary details for the same, which were duly furnished. On a perusal of the same, I find the following facts:- Cost A List of shares which are pur .....

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idend is received. Morgan Stanley Units (sold) 423,430 Gujarat Narmada Valley Fertilizers Ltd. 11,442 Nirma ltd. 9.576,900 Shree Rama Multitech Ltd. 125,760,881 The Royal Co. op. Bank Ltd. (sold) 15,000 DSQ Software Ltd. Total 815,000 Total 136,602,653 Total (A+B) on which dividend not received 25,302,180 Total (A+B+C) 1,61,904,833 Amount of interest for the year 17,038,044 Working of interest on which no dividend is received. 17038044 x 25302180/161904833 2,662,673 According to this working, it .....

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. 2962 & 2963/Ahd/2003 decided on 11.09.2015 holding that Section 14A disallowance is not exigible since the assessee had made investments yielding the impugned exempt income in group companies for acquiring controlling interest. Ld. coordinate bench places reliance on case law CIT vs. Srishti Securities Pvt. Ltd. (2010) 321 ITR 498 (Bombay) as well as this tribunal s decision in M/s. Questar Investments Ltd. vs. ACIT in ITA No.6332/Mum/2004 and M/s. Interglobe Enterprises Pvt. Ltd. vs. DCIT .....

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n case itself fails. 6. We now come to assessee s second substantive ground assailing correctness of both the lower authorities order treating a sum of ₹ 1,20,741/- as speculative loss. The CIT(A) s findings under challenge discuss relevant facts as well as Assessing Officer s observations as under: 6. The next ground of appeal relates to addition ₹ 1,20,741/- on account of disallowance of speculation loss on sale of shares by invoking section 73 of the Act. The Assessing Officer has .....

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against the profit of ₹ 14,80,248/- on sale of shares and worked out the loss of Rs, 1,20,741/- which has been considered as trading loss from share trading activity and is disallowed as speculation loss u/s.73. He has stated that the assessee has itself show the entire income as business income, and. therefore, it is not She company whose total income is chargeable under the head Interest on securities", income from house property, capital gains and income front other sources. With .....

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purchase and sale of shares. (ii) It is further submitted that explanation enacts a deeming provision in respect of companies other than those being investment and finance companies. Hence such explanation has to be considered strictly, the explanation refers to the business which "consists of the purchase and sale of such shares". The words "consists of do restrict the scope only to the purchase and sale of share. This is because this words are not defined in the Income Tax Act .....

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ference to (lie said explanation and stated that the Board has also explained that the said explanation covers the loss from shares trading only. The appellant also referred to the words "extent to which the business" and stated that it restricted to purchase and sale only. The appellant also referred to the- speculation transaction defined in section 43(5)and staled that it includes only transactions of purchase and sale of shares and thus, it is submitted that interest attributable t .....

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re used for share acquisition, the proportionate interest referable to share purchase and sale is justifiably added in computation of speculation loss. This ground of appeal is accordingly dismissed. 7. Shri Ranjan submits at the outset that the above extracted interest sum sought to be disallowed already forms part of Section 14A interest disallowance figure of ₹ 1,54,37,055/-. We don t find any force since the CIT(A) in his order extracted hereinabove already adjusts the remaining intere .....

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d from schedule 10 & 11 of the balance sheet in page 32 of the paper book. His submission accordingly is that Section 73 explanation inserted in the Act w.e.f. 01.04.1997 itself exclude from operation of the main provision those companies whose gross total income consists mainly of income which is chargeable as income from other sources . It is thus contented that both the Assessing Officer as well as the CIT(A) have erred in applying the above explanation to Section 73 of the Act in its cas .....

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me is entirely under the head business income . We reiterate that these two authorities have themselves treated the said receipts under the head income from other sources . There is thus no substantive reason for not treating the assessee as an entity covered by Section 73 explanation hereinabove in these peculiar facts and circumstances. We accordingly delete the impugned disallowance/addition of speculation loss of ₹ 1,20,741/-. The assessee succeeds in its second substantive ground. Its .....

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om M/s. Vimpson Agencies as its business income. Both the lower authorities treat the same to be income from other sources after holding that the correspondence transaction are between group entities with an intent to reduce tax liability. The very factum of the impugned payments being received is not an issue. We hold in these peculiar facts that this is neither a case of concealment nor furnishing of inaccurate particulars of income inviting Section 271(1)(c) penal action. We thus confirm CIT( .....

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ion loss and further upholding assessment findings denying maintenance expenses of ₹ 2,31,560/- in view of standard deduction already allowed u/s.24 of the Act. Learned counsel submits not to press for the third substantive ground keeping in mind smallness of the maintenance amount involved. The same is thus dismissed as not pressed. We now proceed to adjudicate the remaining substantive two issues. 12. Both parties are ad - idem in the course of hearing qua first substantive ground of Sec .....

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stantive ground stands accepted. 13. We now come to second substantive ground raising the issue of speculation loss hereinabove. There is no dispute that the assessee is a company engaged in construction and investment business activities. It raised tow loss claimed of ₹ 16,71,900/- and ₹ 94,42,003/- on sale of 17000 shares of M/s. Nirma Ltd. sold @ ₹ 465/- and due to reduction in the value of stop of shares; respectively. The Assessing Officer quoted Section 73 explanation for .....

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ed for purchase of the shares in question. It thus took into account assessee s interest paid qua unsecured loans of ₹ 1,20,18,610/- to compute proportional interest outgo to arrive at a figure of ₹ 7,66,152/- as pertaining to the above sum of ₹ 95,76,900/-. The Assessing Officer would add this amount to above stated figure of ₹ 16,71,900/- thereby arriving at a gross sum of ₹ 24,38,052/-. 14. This case file indicates that the Assessing Officer then proceeded to inv .....

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from sale purchase of shares found part of the total income. He then adverted to assessee s computation claiming the impugned loss. The Assessing Officer invoked deeming fiction that the assessee was carrying out speculation business requiring it to prepare a separate P&L account. 15. The assessee appears to have filed its reply on 21.02.2005 inter alia pleading that Section 73 spoke of purchase and sale of shares only to object to disallowance of ₹ 7,66,152/- (supra), it claim to hav .....

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oss in view of Section 73 explanation. All this resulted in disallowance of gross loss sum of ₹ 1,18,80,055/-. 17. The CIT(A) deals with the issue in the following manner: 4.1 Grounds No. 4, 5 & 6 are regarding treatment of a sum of ₹ 24,38,052/- as speculation loss by treating it as attributable to the sale of 17000 shares of Nirma Ltd. The A.O. has found that the assessee had shown loss of ₹ 16,17,900/p on sale of 17000 shares of Nirma Ltd. He further calculated the inter .....

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ated as speculation loss, but should be treated as business loss. The AO. Was also not justified in calculating the interest cost amounting to ₹ 7,66,152/- and treating it as part of loss. After carefully considering the facts of the case and the submissions of the appellant. I find that the appellant's income from house property is ₹ 1,20,065/-. The rest of the income is from shares amounting to ₹ 19,31,140/- and interest received of ₹ 1,22,100/- Thus, explanation to .....

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levant that in earlier asst. year , the CIT(A) has also held that explanation to sec. 73 is applicable to the appellant's case and similar grounds were rejected in earlier years, vide his order dt. 21-10-2004 for AY. 2001-02. 5. The ground No. 7 is regarding treating the sum of ₹ 94,42,003/- as speculation loss attributable to the reduction in market value of shares held by the assessee as stock in trade. The assessee claimed loss of ₹ 94,42,003/- due to reduction in market value .....

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s case. Once it is done, the loss arising out of shares held as stock in trade, whether due to sale or due to change in value of closing stock becomes speculation loss and the A.O. was justified in treating it as speculation loss. This ground is, therefore, rejected. During the appellate proceedings, the appellant made an alternative, submission that once it is taken as speculator loss, the income form share dealing amounting to ₹ 19,31,140/- should be set off against this loss as the prof .....

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consequential loss as speculation loss so far as former claim is concerned. The assessee then submits qua latter claim that the impugned sum of loss amounting to ₹ 94,42,003/- has arisen on account of reduction in value of shares without any transaction involved at all. 19. Learned Departmental Representative strongly relied upon CIT(A) s finding extracted hereinabove on the impugned issue of speculation loss. 20. We have heard rival contentions. The assessee s case admittedly is that neit .....

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isions are general in nature. The said bench applies legal maxim generalia specialibus non derogant in view of hon ble apex court s decision in Union of India vs. India Fisheries (P.) Ltd. (1965) 57 ITR 331 (SC). We deem it appropriate at this stage to reproduce the said findings on this issue reading as under: 12. We now come to assessee s plea that as to what will constitute speculation loss for the purpose of section 72 of the Act, will be governed by the provisions of section 43(5) of the Ac .....

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business , for purposes other than section 73 of the Act, is to be governed by the definition contained in section 43(5), as read with section 28 (Explanation 2), of the Act. However, this proposition also proceeds on a fallacy i.e., that the definition under section 43(5) and definition under Explanation to section 73 are competing and mutually exclusive. In our considered view, however, definition of speculation loss, as given under Explanation to section 73, is supplementing and has applicati .....

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treated as ,speculation profits. In addition to this provision, in the cases of companies profits from a business, which fulfils the conditions specified under Explanation to section 73, are also required to be taken as profits from speculation business. In our considered view, therefore, there is no conflict in these two provisions, namely provisions of section 43(5) and of Explanation td section 73. As far as scope of Explanation to section 73 is concerned, it may be relevant to quote from th .....

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carried forward to the following assessment year and set-off against the speculation profits, if any, in that year, and so on. The Amending Act has added an Explanation to section 73 to provide that the business of purchase and sale or shares by companies which are not investment or banking companies or companies carrying on business of granting loans or advances will be treated on the same footing as a speculation business. Thus, in the case of aforesaid companies, the losses from share dealin .....

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oviso to the general provision and the general provision, insofar as it is inconsistent with the special provisions, must be deemed not to apply". Therefore, provisions of section 73 are required to be read as proviso to section 72 and, to the extent carry forward of speculation losses is concerned, section 72 will not have application in the matter. In this view of the matter, we reject the contention that, for the purpose of section 72 of the Act, the question as to what will constitute s .....

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ndeed not be relevant for the purpose of section 72. In fact, entire arguments proceed on the foundation that application of section 72 will have precedence over application of section 73 and once that basic foundation is found to be unsustainable in law, we see no substance in ingenious, but fallacious, arguments of the assessee. 14. We may also mention that Honble jurisdictional High Court, in the case of CIT v. Jayashree Charity Trust (1986) 159 ITR 280 (Cal) has inter alia observed that &quo .....

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that is possible, be avoided, on the principle expressed in the maxim, "ut res magis valeat quam pereat". Vide Courtis v. Stovin and in particular, the following observations of Fry, L.J., at page 519 : The only alternative construction offered to us would lead to this result, that the plain intention of the legislature had entirely failed by reason of a slight inexactitude in the language of the section. If we were to adopt this construction, we should be constructing the Act in order .....

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ntentions of the learned counsel, Explanation to section 73 has to be treated as otiose because, if this provision cannot be put into service for determining what is speculation loss for the purpose of carry forward and set off of losses, this provision cannot be put into service for any other purpose at all. This construction will, therefore, tantamount to obliterating the provision from the statute and will, accordingly, be clearly contrary to the principle of ut res magis valeat quam pereat a .....

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dealings was only on account of fall in value of shares held as closing stock and, therefore, the loss so suffered cannot be said to be loss on account of purchase and sale of shares within meanings of section 73. However, we find that there is nothing on record to substantiate the factual elements embedded in this proposition and this plea, being taken for the first time at this stage, seems to be a new twist to the assessee s case. On the contrary, there is a categorical and uncontroverted fin .....

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see s sale of the securities amounted to ₹ 7,46,51,708. It is thus clear that the assessee s contention is contrary to the admitted facts on record. Learned counsel for the assessee has also not brought on record any material to substantiate the factual elements embedded in the proposition canvassed by him. 17. We are also of the considered view that even if the loss is only on account of fall in value of stock, it is still in the nature of loss incurred from that business. A careful perus .....

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ally governed by the normal accounting principles and business practices. Unlike the definition under Section 43(5) which defines 'speculative transactions' per se, the deeming provisions of Explanation to Section 73 lay down the circumstances in which, and the extent to which, a business is to be deemed as 'speculation business'. The thrust of the provisions under Explanation to Section 73 is on the nature of 'business', rather than nature of 'transaction'. It is .....

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Lordships of Hon'ble Supreme Court inter alia observed that, "...valuation of unsold stock at the end of an accounting period is a necessary part of the process of determining the trading results of that period, and can in no sense be regarded as source of such profits (or losses)". In this view of the matter, the loss on valuation of closing stock of shares, in the present case, cannot be treated any different than a normal trading loss; such a loss is, as is the settled legal po .....

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to say that we are in considered agreement with the observations of the learned assessing officer to the effect that the wordings of the statute are plain and simple and. as held by Hon ble Supreme Court in the case of Vegetable Products Ltd. (supra). If the language is plain, the fact that the consequence of giving effect to it may lead to some absurd results is not a factor to be taken into account in interpreting a provision. It is for the legislature to step in and remove the absurdity.&quo .....

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