TMI Blog2011 (6) TMI 909X X X X Extracts X X X X X X X X Extracts X X X X ..... 006 respectively. For the sake of brevity and clarity, we dispose of all these appeals and cross objections by this consolidated order. 2. The first two common issues in appeal of revenue in ITA No. 695/K/2008 is against the order of CIT(A) in not confirming the action of AO regarding invocation of Explanation to section 73 of the Act for holding the profit of business of assessee as that of speculation profit and also dealing in futures and options as speculation profit. For this, revenue has raised the following ground nos. 1 and 2: 1. That the Ld. CIT(A) has erred in law as well as on facts by observing the Explanation to Section 73 of the I. T. Act, 1961 is not applicable in the case of the assessee. 2. That the Ld. CIT(A) has erred in law as well as on facts by observing that the income of ₹ 13,65,965/- on account of dealing in futures and options cannot be treated as speculation profit. 3. The brief facts leading to the above issue are that the assessee company is in the business of share broking, following mercantile system of accounting and it has disclosed income from share dealing in various types including jobbing, dealing in futures and options and r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d as follows: i) Out of expenditure written off in the profit and loss account for ₹ 46,500/- only ₹ 18,500/- qualified for admissible expenses u/s. 35D. ii) The expenses included a sum of ₹ 49,789/- as penalty charges paid to stock exchanges for delay in depositing certain papers/short delivery proceeding. iii) Liability pre-existed, disallowed in assessment of any preceding assessment year and was paid during the year to qualify for deduction in the current year as NIL. iv) The expenditures relating to previous year were accounted for on cash basis and included ₹ 10,792/- as service tax of earlier years. II. Other observations and findings. i) In reply to queries, raised by the Assessing Officer for invocation of explanation below sec. 73 in assessee s case for asstt. year 2003-04, the A/R in its written ii) submissions stated that explanation below sec. 73 is applicable only when sec. 73 itself applies, as the explanation of iii) any section without applications of that particular section is not justified. Taking that the same reply will be put forward in the year under consideration too, it is refuted as below. Explanation be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nation to sec. 73 of the Act allowed the claim of the assessee as business loss from share business activity by giving following finding: In the light of above, the provisions of Sec.73 read with explanation thereto are not applicable to the appellant company. In view of the above, A.O is directed to allow the loss in share business against the share trading and future option business with other business of the company. The entire business loss be treated as loss from share business activity and allowed to be carried forward for set off with share business of the appellant in subsequent years as per provisions of Sec.70 71 of I. T. Act. Accordingly, ground no. 2 is allowed. Aggrieved against this finding, revenue is in appeal before us. 5. We have heard rival submissions and gone through facts and circumstances of the case. The Ld. CIT DR Shri D. R. Sindhal argued that the order of Assessing Officer has not been controverted by CIT(A) and he stated that the Explanation to Sec. 73 of the Act is a deeming provision and there are two exceptions in Explanation, first being, whether assessee s gross total income consists mainly of income chargeable heads other than salary a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Ld. Counsel for the assessee further stated from the very account as narrated by the Assessing Officer on page 2 of his assessment order (now reproduced above in para-3 page-3) which clearly reveals that the assessee is engaged in business of sale and purchase of shares and during the course of normal business of sale of shares, it has incurred loss in share trading. He argued that assessee is one of the leading stock-broker with different exchanges in India and its principal business was never of money lending. The Ld. Counsel for the assessee further stated that the Assessing Officer himself has assessed profit earned under futures and options amounting to ₹ 13,65,965/- as income from business. He argued that it is not the case of the revenue that the assessee is a company controlled by a business house and the share transactions in question are effected with a view to manipulate or reduce its income. It is also not the case of the revenue that the assessee has declared this loss in share trading activity in order to reduce the tax incidence. The Ld. Counsel for the assessee relied on the case law of Hon ble Calcutta High Court in the case of CIT Vs. Arvind Investments Lt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds futures and options transactions and entered into jobbing transactions, purchase and sale of shares and the entire activity in share business, i.e. by registered stock broker, constitute business activity and the same cannot be said that the assessee is engaged in the business of speculation thereby earning speculation profit. We find from the facts that there is no transaction of investing the surplus fund lying with the assessee temporarily for a brief period, which give a conclusion that the assessee is in speculation profit. There is no instance brought to our notice by revenue that the assessee has entered into speculation transaction of shares, by virtue of which they have speculated in transactions without making any investment or they have not received the deliveries or not traded on behalf of the clients. Carrying on a business is something different from entering into speculation transaction and in order to constitute business there should be an organized activity and not this speculation transaction from which speculation profit is earned. 9. Coming to Explanation to Section 73 of the Act, which introduced a legal fiction and it is also clear that explanation does ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. and further Hon ble jurisdictional High Court held that The phrase to the extent to which the business consisted of purchase and sale of such shares also does not indicate that the Legislature had several other actual and existing non-speculative activities of business in mind. It merely indicates that the business activity which consists of purchase and sale of shares will be treated as speculation business. If the entire business activity of a company consists of purchase and sale of shares of other companies, then the entire business will be treated as peculation business. But, if, apart from purchase and sale of shares, the company has other business activities, then those other activities will not treated as speculation business. The circular on which reliance has been placed also does not advance the case of the assessee in any way. The object as stated in the circular is to curb the device to manipulate and reduce the taxable income of a company under the management of a controlling group of persons. But the circular has clearly stated in paragraph 19.1 that the business of purchase and sale of shares by companies which are not investment or banking companies or co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le 46A of the I. T. Rules, 1962. For this, the revenue has raised following ground no.3: 3. That the Ld. CIT(A) has erred in law as well as on facts by directing the Assessing Officer to delete the disallowance of ₹ 28,000/- made u/s. 35D and also admitting fresh evidence in violation of Rule 46A. In support of order of CIT(A), assessee in its Cross Objection No.36/K/2008 has raised the following ground no.3: 3. For that in view of the facts and circumstances of the case the Ld. CIT(A) was wholly correct and justified in allowing the relief on the issues which are disputed in the Departmental appeal and that there was no violation of Rule 46A of the I. T. Rules while deleting the disallowance of ₹ 28,000/- made in assessment u/s. 35D of the Act. The Department s appeal being devoid of merit is liable to be dismissed. 12. We have heard rival contentions and gone through facts and circumstances of the case. We find that the AO has disallowed a sum of ₹ 28,000/- but for that no reasons were given. The CIT(A) allowed the claim of the assessee by stating that the sum of ₹ 28,000/- was paid to Calcutta Stock Exchange towards trading in the cours ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Less Purchase Op. stock 154,80,69,426 Loss 1,10,83,258 The above loss on share trading has been set off with Interest Income which falls under Income from Other Sources. Explanation to Sec. 73 is attracted in assessee s case and the above loss is to be treated as speculation loss. The assessee also does not fall under the two exemptions in explanation to Sec.73 which is squarely applicable in assessee s case. I have reason to believe that the amount of ₹ 1,10,83,258 should be added to business income and is to be treated as speculation loss which cannot be set off with business profits. Therefore, the amount above has escaped assessment. Issue notice u/s, 148 of the I. T. Act. and on the basis of these reasons he reopened the assessment and assessee was also made aware of the reasons vide letter dated 23.8.2006. In response to notice u/s. 148 of the Act, the assessee filed return of income repeating the same income/loss on 19.4.2006. The Assessing Officer framed assessment u/s. 147 r.w.s 143(3) of the Act and disallowed this loss of ₹ 1,10,83,258/- incurred in share ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Supreme Court has held that reason in the phrase reason to believe would mean cause or justification. AO should, any case have cause or justification to know or suppose that income had escaped assessment. Though in an assessment which was originally done under s. 143(l) of the Act, only first condition regarding reason to believe would be suffice for reopening the assessment, the issue here is, whether assessee having declared its loss under the head Profits and gains of business or profession , just for the purpose of bifurcation of the interest expenses, if the AO chooses to issue notices under s. l47 of the Act, would it be reason to believe or suppose that income had escaped assessment. As the assessee rightly pointed out, bifurcation of interest expenses would not result in any excess claim or loss. In our opinion, assessee had not claimed any excessive loss nor had it computed any excessive loss. A.O stated in the reasons given in the assessment order that the basis for reopening assessment was to bifurcate the interest expenses and such bifurcation would make a substantial material difference to the loss declared by the assessee in these years. However, we find that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mber two for a1l the three assessment years. 16. On the other hand, the Ld. CIT-DR supported the orders of the lower authorities. 17. We find from the arguments of both the sides and from the case records that the assessment was reopened by issuing notice u/s. 147 r.w.s.148 of the Act, after recording of reasons as noted above. The original return was processed u/s. 143(1) of the Act on 26.05.2003, in which the assessee has disclosed income from share dealing of various types including jobbing, dealing in futures and options, regular trading in shares, interest on fixed deposits and dividend apart from brokerage earned as share broker. Main contention of the assessee is that the AO as well as CIT(A) has confirmed the reopening without considering the facts that all material facts including trading account of shares necessary for assessment was fully and truly disclosed in the return of income and no new material or evidence was brought on record to justify the reopening of assessment on this single issue. We are of the view that the proviso to section 147 of the Act will not apply to the present case as no assessment u/s. 143(3) of the Act was framed originally. It means tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... u/s. 14A of the Act by observing in the assessment order that the assessee earned dividend of ₹ 2,86,000/- which is exempt income and as it does not have any shares as investment but all as trading shares, earning of dividend is considered as embedded in the business activity of the assessee. He thus, disallowed u/s. 14A of the Act a sum of ₹ 28,600/- being 10% of the dividend earned. Aggrieved, assessee preferred appeal before CIT(A) and in appeal, CIT(A) restricted the disallowance u/s. 14A of the Act at ₹ 10,000/- as against ₹ 28,600/-. Being further aggrieved, the assessee raised the above ground through this Cross Objection. 20. After hearing rival contentions and going through facts and circumstances of the case, we find that the Assessing Officer made the disallowance of ₹ 28,600/- u/s. 14A of the Act and CIT(A) restricted the disallowance at ₹ 10,000/- by observing that for earning exempt income the organization has to incur certain expenses regarding the various staff, management, remuneration, cost of stationery, bank charges etc. therefore, it cannot be said that no expenditure was directly incurred. We also find that that section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... make estimate in the given facts and circumstances. Hence, we restrict the disallowance to 1% in relation to earning of exempt dividend income and direct the Assessing Officer to calculate the expenditure on that basis. This ground of assessee s appeal is partly allowed. 21. The first issue of Revenue s appeal in ITA No. 696/K/2008 is against the order of CIT(A) in deleting the disallowance made by Assessing Officer on account of expenditure of premium in respect of future and options. For this, the revenue has raised the following ground nos. 1 and 2: 1. That the Ld. CIT(A) has erred in law as well as on facts by directing the Assessing Officer to delete the disallowance of expenditure on account of premium for ₹ 4,45,19,455/- in respect of future and options. 2. That the Ld. CIT(A) has erred in law as well as on facts by observing that the expenditure on account of future and options is to be treated to be incurred in course of share trading business. 22. As this issue, we have already decided in ITA No. 695/K/2008, for AY 2002-03 vide para 10 of this order, hence taking a consistent view, we decide this issue against revenue and dismiss the ground of appeal. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns of Explanation to Section 73, the period of limitation for the purposes of section 263 commenced from 26.05.2003 i.e. the date of original assessment and not from 16.10.2006 i.e. the date of assessment u/s. 147/143(3) and hence the period of limitation for initiating proceedings u/s. 263 prior period expenses having expired on 31.03.2006, proceedings u/s. 263 in this case in respect of prior period expenses is barred by limitation and hence in view of the facts and in the circumstances such order u/s. 263 is liable to be quashed / cancelled / set aside and in view of the facts and in the circumstances it may kindly be held accordingly. 2. For that in view of the facts and in the circumstances the Order u/s. 263 having been made without proper consideration of the submissions made by your petitioner in paras 2 to 8 of the written submission, order u/s. 263 is wholly bad, illegal and void abinitio and in view of the facts and circumstances the CIT is wholly unjustified in not taking into consideration and discussing the various case laws brought to the notice of the CIT in written submission and the CIT is wholly unjustified in ignoring such decisions and hence order u/s. 263 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act was completed after recording of specific reasons and reassessment was framed in respect to application of explanation to section 73 of the Act for treating certain business loss as speculation loss as is apparent from the reasons recorded for initiating proceedings u/s. 147 r.w.s 148 of the Act. In view of these facts, the Ld. Counsel before CIT contended that the show cause notice is in respect of specific items other than items for which proceedings u/s. 147 of the Act has been initiated and hence, initiation of action u/s. 263 of the Act is clearly barred by limitation, as limitation in the present proceedings i.e. 263 of the Act will start from the date of original assessment i.e. 26.5.2003 and not from the date of reassessment order dated 16.10.2006. Before CIT the case law of Hon ble Apex Court in the case of CIT Vs. Alagendran Finance Ltd. (2007) 293 ITR 1 (SC). The CIT called for the report from the Assessing Officer and the Assessing Officer in his report dated 7.8.2008 stated as under: At para 2 of the said letter the assessee sought to reason that the initiated proceeding has got barred by limitation of time. Again at para 4 of the letter the assessee itself adm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nting to ₹ 6,57,051/-. He argued that from the original assessment i.e. 26.5.2003, the limitation ends on 31.5.2005 and CIT has taken the limitation from the reassessment proceedings framed u/s. 147 r.w.s. 143(3) of the Act on 16.10.2006. The Ld. Counsel for the assessee stated that the reassessment proceedings were initiated for specific reasons recorded and reassessment was framed u/s. 147 r.w.s.143(3) of the Act for such specific purpose for alleged escapement of income by application of explanation to section 73 of the Act for treating business losses as speculation losses as is apparent from the reasons recorded as well as the reassessment framed u/s. 147 r.w.s 143(3) of the Act. He argued that the present show cause notice is in respect of items other than items for which proceedings u/s. 147 of the Act was initiated and hence, the proposed initiation of section 263 of the Act is clearly barred by limitation which will start from the date of original assessment framed u/s. 143(1) of the Act dated 26.5.2003. In view of this, the Ld. Counsel stated that this is a covered case by the decision of Hon ble Apex Court in the case of Alagendran Finance Ltd. (Supra). 27. On t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll within the limitation provided under the Act. Hence, he urged the bench to dismiss the ground of limitation raised by the assessee. 28. First of all, we have gone through the decision of Hon ble Apex Court in the case of Rajesh Jhaveri Stock Brokers P. Ltd. (Supra), wherein Hon ble Apex Court has discussed the issue as regards to formation of opinion in case of reassessment vis- -vis intimation u/s. 143(1)(a) of the Act. Hon ble Apex Court held as under: One thing further to be noticed is that intimation under section 143(1)(a) is given without prejudice to the provisions of section 143(2). Though technically the intimation issued was deemed to be a demand notice issued under section 156, that did not per se preclude the right of the Assessing Officer to proceed under section 143(2). That right is preserved and is not taken away. Between the period from April 1, 1989, and March 31, 1998, the second proviso to section 143(1)(a), required that where adjustments were made under the first proviso to section 143(1)(a), an intimation had to be sent to the assessee notwithstanding that no tax or refund was due from him after making such adjustments. With effect from April 1, 199 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e treated to be an order of assessment. The distinction is also well brought out by the statutory provisions as they stood at different points of time. Under section 143(1)(a) as it stood prior to April 1, 1989, the Assessing Officer had to pass an assessment order if he decided to accept the return, but under the amended provision, the requirement of passing of an assessment order has been dispensed with and instead an intimation is required to be sent. Various circulars sent by the Central Board of Direct Taxes spell out the intent of the Legislature, i.e., to minimize the Departmental work to scrutinize each and every return and to concentrate on selective scrutiny of returns. These aspects were highlighted by one of us (D. K. Jain J.) in Apogee International Limited v. Union of India [1996] 220 ITR 248 (Delhi). It may be noted above that under the first proviso to the newly substituted section 143(1), with effect from June 1, 1999, except as provided in the provision itself, the acknowledgment of the return shall be deemed to be an intimation under section 143(1) where (a) either no sum is payable by the assessee, or (b) no refund is due to him. It is significant that the ackno ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e similar issue and same principle was reiterated by holding that in proceedings under section 147 of the Act, the Income-tax Officer may bring to charge items of income which had escaped assessment other than or in addition to that item or items which have led to the issuance of the notice under section 148of the Act. Where reassessment is made under section 147 of the Act in respect of income which has escaped assessment, the Income-tax Officer's jurisdiction is confined to only such income which has escaped assessment or has been under assessed and does not extend to revising, re-opening or reconsidering the whole assessment or permitting the assessee to re-agitate questions which had been decided in the original assessment proceedings. It is only the underassessment which is set aside and not the entire assessment when reassessment proceedings are initiated. When the assessment is reopened, the original assessment under section 143(3) of the Act remains and it could not be said that the original assessment is non-est on account of the reopening of the assessment. When the original assessment remains the Commissioner of Income-tax had every right to revise the order if it wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... whether reassessment replaces the original assessment in its entirety or it is only a supplementary assessment with the original assessment remaining intact came to be incidentally considered as a matter relevant for resolving the issue. This issue was inconclusive, since there was some conflict as between the decisions of the Supreme Court. In V. Jaganmohan Rao v. CIT and CEPT [1970] 75 ITR 373, the Supreme Court took the view that the entire assessment was within the purview of the Assessing Officer during reassessment. In a later decision in CIT v. Sun Engineering Works P. Ltd. [1992] 198 ITR 297 (SC), it was decided that the Assessing Officer s jurisdiction was confined to the income that has escaped assessment and that it cannot justify revision, reopening or reconsideration of the entire assessment. Reconciliation was sought between these two views before a Bench of three judges of the Supreme Court in ITO v. K. L. Srihari (HUF) [2001] 250 ITR 193 on a reference by the Bench, which initially heard the case. But in the case before Ho ble Supreme Court in the facts of the case after perusal of both the assessment and reassessment orders was satisfied and found that the High Cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion and we quash the same. 30. The next issue in this appeal of the assessee is against the order of CIT passed u/s. 263 of the Act that the Assessing Officer has taken one possible view and even on merits the service tax, SEBI SAT Charges, SEBI Turnover Fees, Transaction charges, ALBM and others. For this the assessee has raised following ground nos. 3 to 6: 3. Without prejudice to Grounds No. 1 2 above and even otherwise, prior period expenses having been allowed by the AO in the original assessment as well as order u/s. 147/143(3) after having made a specific query in this regard in order u/s. 147/143(3) and after having obtained all this details in this regard and after fully satisfying himself regarding allowability of the revenue expenditure during the year and the AO having taken one of the possible views, provisions of section 263 did not validly lie in this case and in view of the facts and in the circumstances it may kindly be held accordingly. 4. Without prejudice to what has been stated in Grounds No. 1, 2 3 above and eve otherwise, the matter regarding allowability of such expenditure having been full explained in Para 11 of the written submission, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therefore, the AO dropped the rectification proceedings initiated u/s. 154 of the Act and the proposal was sent to the CIT for invocation of his powers u/s. 263 of the Act. We find that these fees are payable to stock exchange and all are quantifiable items within the financial year, as all are fee charges payable to various authorities and paid within the due date of filing of return and accordingly falling u/s. 43B of the Act. We find that the issue now is crystally clear that these expenditures falling u/s. 43B of the Act are allowable, hence while processing the return u/s. 143(1)(a) of the Act dated 26.5.2003 was as per law and processing was neither erroneous nor prejudicial to the interest of revenue so as to provoke the revenue to initiate action u/s. 263 of the Act for revision of the same. Accordingly, on merits also we hold that the disallowances made by CIT(A) is without legal force. Accordingly, we quash the same. The appeal of the assessee is allowed. 6. In the result, ITA No.695/K/2008, revenue s appeal is dismissed, CO. No.36/K/2008, assessee s CO is partly allowed, ITA No.696/K/2008 revenue s appeal is partly allowed, CO No.37/K/2008 assessee s CO is partly allo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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