TMI Blog2018 (3) TMI 474X X X X Extracts X X X X X X X X Extracts X X X X ..... allowed. - Decided in favour of assessee. - I.T.A No. 1156/Kol/2017 - - - Dated:- 9-3-2018 - Hon ble Shri Aby. T. Varkey, JM And Shri M.Balaganesh, AM For the Appellant : Shri Ravi Tulsiyan, FCA For the Respondent : Shri Md. Usman, CIT(DR) ORDER Per M.Balaganesh, AM 1. This appeal by the assessee arises out of the order of the Learned Principal Commissioner of Income Tax-3, Kolkata [in short the ld. CIT] in Memo no. Pr. CIT- 3/Hqrs.-3/Kol/U/s263/Wd-8(3)/113/2016-17/16346-16349 dated 08.03.2016 passed u/s 263 of the Act against the order passed by the DCIT, Circle-8(2), Kolkata [in short the ld. AO] under section 143(3) of the Income Tax Act, 1961 [in short the Act ] dated 31.03.2015 for the Assessment year 2012-13. 2. The only issue to be decided in this appeal is as to whether the ld CIT was justified in invoking revisionary jurisdiction u/s 263 of the Act in the facts and circumstances of the case. 3. The brief facts of this issue is that the assessee is a Non-Banking Finance Company (NBFC) engaged in investment of shares and other trading business. The return of income for the Asst Year 2012-13 was filed by the assessee company on 27.9.2012 decla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome. In view of the above, the ld CIT alleged that since the ld AO had passed the assessment order u/s 143(3) of the Act without making enquiries or verification, the assessment order so passed by the ld AO u/s 143(3) of the Act is prima facie erroneous and prejudicial to the interests of the revenue. 4. In response to the show cause notices issued, the assessee filed written submissions explaining the details why the assessment order cannot be held to be erroneous and prejudicial to the interests of the revenue. However, the ld Pr CIT proceeded to pass the order u/s 263 of the Act on 8.3.2017 by observing that the impugned assessment order has not considered the provisions of section 68 of the Act and the decision of Hon ble Jurisdictional High Court supra in relation to the issue of receipt of share application money and further observing that the ld AO had failed to make any enquiry in respect of issue of debiting the differential value of closing stock of shares in the profit and loss account of the assessee thereby making the impugned order erroneous and prejudicial to the interests of the revenue. Aggrieved, the assessee is in appeal before us on the following grounds:- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .03.2015 and hence cannot be doubted. 6. That, the Ld. Pr. CIT while admitting that the A.O. made certain enquiries in regard to receipt of share application money further erred in alleging that no enquiry was made by him to rule out the possibility of the transaction being collusive and sham in spite of the fact that depositions u/s.131 (1) from the directors of the shareholder companies were recorded/considered at par with supporting authentic evidence, thus negating any avenues of not conducting any enquiry or conducting inadequate enquiries. 7. That, the Ld. Pr. CIT has wrongly alleged that the A.O. has not even examined the bank accounts of the share subscribers when as per record, bank statements of the share subscribers and the assessee reflecting debit and credit entries respectively had been verified by the A.O., who ultimately made addition of ₹ 2.79 crores u/s. 68 of the Act on that account. 8. That, the Ld. Pr. CIT on misinterpretation has alleged that book value of closing stock was shown at ₹ 1,22,37,191/-, whereas as per PIL Account the same was shown at ₹ 1,15,07,191/- under the head 'Changes in Inventories of finished goods, WIP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT on the above issues suffers from illegality and is devoid of any merit, the same should be quashed and your appellant be given such relief(s) as prayed for. 15. That the appellant craves leave to amend, alter, modify, substitute, add to, abridge and/ or rescind any or all of the above grounds. 5. We have heard the rival submissions and perused the materials available on record including the paper book of the assessee comprising of pages 1 to 231. With regard to the issue of receipt of share application money, we find that during the relevant assessment year, the assessee had allotted 1457400 equity shares of face value of ₹ 10 each at a premium of ₹ 15 per share to 4 parties viz. Baba Basuki Distributors Pvt Ltd, Regards Fin-Cap Pvt Ltd , Kamayani Commotrade Pvt Ltd and Amber Vinimay Pvt Ltd and accordingly raised share capital of ₹ 1,45,74,000/ - and share premium of ₹ 2,18,61,000/-. Out of the total allotment made, the assessee company had received share application money of ₹ 1,36,65,000/- only during the relevant financial year from 3 parties viz Baba Basuki Distributors Pvt Ltd, Regards Fin-Cap Pvt Ltd and Kamayani Commotrade Pvt Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore the revision proceedings u/s 263 of the Act. It was further pleaded that assessee being a NBFC had genuine and substantial business activities during the relevant assessment year of giving loans and earning interest income therefrom, making investment in shares, including that of listed companies and earning dividend therefrom and profit on sale of investments. The details of income earned by the assessee company are as under:- Interest income 3,16,490.00 Dividend received 1,21,74,923.63 Profit on sale of investments 51,80,564.77 5.2. From the balance sheet of the assessee enclosed in the paper book, we find that the assessee had made substantial investments in shares of listed and unlisted companies during the year under consideration. The total value of investments as at the beginning of the year were ₹ 20,07,47,007.19, out of which investment of an amount of ₹ 16,68,79,617/- was made in the shares of a listed company namely Simplex Infrastructure Ltd, which is stated to be one of the largest infrastructure companies ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the ITR acknowledgements, audited financial statements, confirmation for having made investment in shares of assessee company at premium, source for such investments, bank statements proving the immediate source of credit, copy of share certificates containing distinctive numbers of shares, date of allotment etc. c) The directors of the share applicant companies also appeared in person and gave a statement in response to section 131 summons before the ld AO and confirmed the aforesaid transactions. d) Assessee had also filed a reply letter before the ld AO stating all these facts vide letter filed on 13.3.2015 enclosed in pages 32 33 of the paper book filed before us. Hence from the aforesaid action of the assessee company and the response of the share applicant companies, it could be safely concluded that the three necessary ingredients for section 68 of the Act have been duly complied with by the assessee company and there is absolutely no case for making any addition u/s 68 of the Act in the assessment or warranting any fresh enquiry pursuant to revision proceedings u/s 263 of the Act. We are not inclined to accept the finding of the ld CIT in his section 263 orde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the ld AO had conducted enquiry into the taxability of share capital receipts u/s 68 of the Act from all possible purviews and has even added an amount more than the amount received by the assessee during the year and thereby causing prejudice only to the assessee and not to the revenue. Hence the reliance placed by the ld DR on the decision of Hon ble Calcutta High Court supra does not advance the case of the revenue before us. In the instant case, the ld AO on thorough examination of the relevant records had come to a conclusion that the receipts towards share capital deserves to be added u/s 68 of the Act in the sum of ₹ 2.79 crores in the year under appeal , thereby taking one of the view in the matter. At the cost of repetition, in any case, only a sum of ₹ 1.3665 crores could be added u/s 68 of the Act towards share capital and share application money as that was the money received during the year under consideration, where as the ld AO had already added ₹ 2.79 crores in the assessment, thereby causing prejudice only to the assessee and not to the revenue. We find lot of force in the arguments of the ld AR and on the following decisions relied upon by him :- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and are notional in nature and cannot be deductible as business losses under the Act. In this regard, the ld CIT placed reliance on the CBDT s Instruction No. 3/2010 which relates to tax implications of forward foreign exchange contracts. Further in the order dated 8.3.2017 passed u/s 263 of the Act, the ld CIT discussed in detail what is mark to market loss and held that sicne all such MTM losses on account of revaluation of forex derivative are only notional, they are not deductible as business losses under the Act. In this connection, the ld PCIT further relied on Instruction No. 17/2008 dated 26.11.2008 of CBDT relating to non-allowability of contingent and unascertained losses applicable for banks. In view of the above, the ld PCIT alleged tha the ld AO had failed to make enquiries which are called for in the circumstances of the case thereby making the impugned assessment order passed by him erroneous and prejudicial to the interests of the revenue. 6.2. In this regard, the ld AR submitted that first of all that closing stock entirely consists of shares and no part of it was derivatives where the question of MTM loss would arise. As such, the assessee in accordance with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... forex derivatives, which is absolutely baseless and factually incorrect. This proves the complete non-application of mind on the part of the ld CIT while invoking revisionary jurisdiction u/s 263 of the Act for this issue. We find lot of force in the arguments of the ld AR and on the following decisions relied upon by him :- a) Hon ble Delhi High Court in the case of CIT vs Ashish Rajpal reported in 320 ITR 674 (Del) b) Hon ble Delhi High Court in the case of CIT vs Sunbeam Auto Ltd reported in 332 ITR 167 (Del) c) Hon ble Gujarat High Court in the case of CIT vs R.K.Construction Co. reported in 313 ITR 65 (Guj) d) Hon ble Delhi High Court in the case of DIT vs Jyoti Foundation reported in 357 ITR 388 (Del) e) Hon ble Delhi High Court in the case of ITO vs DG Housing Projects Ltd reported in 343 ITR 329 (Del) 6.3. In view of the aforesaid findings and respectfully following the various judicial precedents relied upon hereinabove, we hold that the order passed by the ld AO by allowing the changes in inventories of finished goods, WIP and stock in trade as deduction and the same cannot be treated as MTM loss or notional loss and hence cannot be termed as ..... 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