CA NeWs Beta*: Judgments

Saturday, November 24, 2012

Judgments

IT : Brought forward unabsorbed depreciation is to be treated as current depreciation and can be set-off against income under head 'capital gains'

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[2012] 27 taxmann.com 203 (Mumbai - Trib.)

IN THE ITAT MUMBAI BENCH 'E'

Suresh Industries (P.) Ltd.

Assistant Commissioner of Income-tax-7(2), Mumbai*

Dinesh Kumar Agarwal, Judicial Member

And N.K. Billaiya, Accountant Member

IT Appeal No. 5374 (Mum.) of 2011

[Assessment year 2007-08]

October 10, 2012

Section 32, read with section 72, of the Income-tax Act, 1961 - Depreciation - Unabsorbed depreciation - Current depreciation v. unabsorbed depreciation - Assessment year 2007-08 - Whether brought forward unabsorbed depreciation is to be treated as current years depreciation because of legal fiction created by provisions of section 32(2) and, therefore, treatment given to current year's depreciation would equally apply to brought forward depreciation and it can be set off against any income - Held, yes - Whether, therefore, brought forward unabsorbed depreciation would be allowed to be set off from long-term capital gains - Held, yes [In favour of assessee]

FACTS

• For the assessment year 2007-08 the assessee claimed set off of current year's depreciation from capital gains.

• The assessee also claimed set off of brought forward unabsorbed depreciation from earlier years against current year's long-term capital gain.

• The claim of the assessee was rejected by the Assessing Officer as he was of the opinion that the set off of current year's business loss against the income under the other heads of income does not include unabsorbed depreciation as it was not a part of business loss.

• The Assessing Officer further observed that section 32(2) restricts the allowable depreciation of the current year only to the extent of profits and gains of business.

• The other reason for rejecting assessee's claim was that the Act treats business loss separately from the depreciation because business loss can be carried forward only for 8 assessment years whereas depreciation can be carried forward for unlimited period.

• While rejecting the claim of set off of depreciation in totality, the Assessing Officer concluded that the assessee had not claimed the amount in return and also no revised return was filed.

• The Assessing Officer completed the assessment after disallowing the claim of the assessee for set off of current year's depreciation as well as brought forward depreciation.

• On appeal, the Commissioner (Appeals) upheld the order of the Assessing Officer.

On second appeal:

HELD

Factual aspect

• A perusal of the statement of income for the year under consideration show that the assessee had shown long-term capital gains at Rs. 1,30,00,000 after claiming exemption under section 54EC. The assessee had also shown net loss from business before depreciation at Rs. 17,48,195. To this, the assessee added current year's depreciation at Rs. 2,32,059 and unabsorbed depreciation brought forward from assessment years 1999-2000 and 2002-03 at Rs. 6,42,208 and claimed set off amounting to Rs. 26,22,462 from the long-term capital gains at Rs. 1,30,00,000. Profit and gains of business or profession are computed in accordance with the provisions contained in sections 30 to 43. Depreciation is allowed as per the provisions of section 32(1). [Para 8]

Applicability of section 32

• A perusal of the aforementioned section shows that section 32(2) has been subjected to the provisions of sections 72(2) and 73(3). [Para 9]

• A comparative study of pre-amendment and post-amendment provisions of section 32(2) suggests that prior to the amendment, the set off was restricted to the profits and gains, if any, of any business or profession whereas post-amendment (i.e., the law applicable for the year under consideration) the set off is available from profits and gains chargeable for the previous year. The claim of the lower authorities that profits or gains so mentioned should be restricted to profits or gains of business or profession cannot be accepted because had that been the intention of the legislature it would not have deleted phrase 'of any business or profession' in the post-amended provisions of section 32(2). The law regarding set off of unabsorbed depreciation up to 1-4-1996 was very liberal and set off was allowable against any income. This was also upheld by the Supreme Court in the case of CIT v. Virmani Indus. (P.) Ltd. [1995] 216 ITR 607/83 Taxman 343. However, the law regarding such set off was changed by the Finance Act No. 2 of 1996 and from assessment years 1997-98 to 2002-03 the unabsorbed depreciation was put at par with business losses under section 72. However, the status quo have been restored from assessment year 2003-04 and, therefore, the ratio laid down by the Supreme Court in the case of Virmani Indus. (P.) Ltd. (supra) once again hold good and so now unabsorbed depreciation can be set off against any income. Thus, the claim of current year's depreciation of Rs. 2,32,059 is directed to be set off against the income under the head 'capital gains'. [Para 10]

• Having considered the provisions of section 32(2), it is also clear that if the current year's depreciation cannot be set off owing to the profits or gains chargeable being less than the allowance, the allowance or the part of the allowance to which effect has not been given shall be added to the amount of allowance for depreciation for the following previous year and deemed to be part of the allowance which means that brought forward depreciation merges with the current year's depreciation because of the legal fiction created by provisions of section 32(2). However, this fiction has been subjected to the provisions of sections 72(2) and 73(3). [Para 11]

Analysis of section 72

• A simple reading of this section suggests that in case of set off of business loss vis-à-vis depreciation, the first preference shall be given to the business loss as per the provisions of section 72(1) for the simple reason that the business loss can be carried forward only up to 8 assessment years whereas the depreciation can be carried over up to unlimited period. As has been discussed hereinabove, the brought forward unabsorbed depreciation is treated as current years' depreciation because of the legal fiction, therefore, the treatment given to the current year's depreciation is equally applicable to brought forward depreciation after the application of Finance Act, 2001. [Para 13]

• As already held that current year's depreciation is to be allowed as set off from the long-term capital gains and brought forward depreciation is to be treated as current year's depreciation as per the legal fiction of section 32(2), the same is also be allowed to be set off from the long-term capital gains. [Para 14]

CASES REFERRED TO

CIT v. Jaipuria China Clay Mines (P.) Ltd. [1966] 59 ITR 555 (SC) (para 5), Rajapalayam Mills Ltd. v. CIT [1978] 45 ITR 777 (SC) (para 5) and CIT v. Virmani Indus. (P.) Ltd. [1995] 216 ITR 607/83 Taxman 343 (SC) (para 5).

Jayesh Dadia for the Appellant. Dr. Manjunath Kankihalti for the Respondent.

ORDER

N.K. Billaiya, Accountant Member - This appeal by the assessee is directed against the order of Ld. CIT(A)-13, Mumbai dt. 7.4.2011 pertaining to assessment year 2007-08.

2. The assessee has raised two substantive grounds of appeal as under:

"1. The Ld. CIT(A) has erred in law and on the facts of the case in confirming the action of the AO in not allowing current year's depreciation of Rs. 2,32,059/- while determining the Business loss. The action is unjustified and unwarranted and against the provisions of Sec. 32(1) of the I.T. Act.

2. The Ld. CIT(A) has erred in law and on the facts of the case in confirming the action of the AO in not allowing set off of unabsorbed loss of Rs. 6,42,208/- against the current year's Long Term Capital Gain. The action is unjustified and unwarranted."

3. The sum and substance of the above mentioned grievance of the assessee suggests that (a) the Ld. CIT(A) should have allowed current year's depreciation at Rs. 2,32,059/- as set off from the capital gains and (b) the unabsorbed depreciation brought forward from the earlier year's at Rs. 6,42,208/- should have also been allowed as set off against current year's Long Term Capital Gain.

4. The facts giving rise to the grievance of the assessee show that for the year under consideration, during the course of the assessment proceedings, the Assessing Officer observed that the assessee company had incurred loss of Rs. 17,48,195/-. The assessee company also had a Long Term capital gains to the tune of Rs. 1,30,00,000/-. The assessee claimed set off of business loss from Long Term capital gains. This fact is not in dispute. What has been questioned by the AO is the set off claimed by the assessee of Current year's depreciation at Rs. 2,32,059/- at the brought forward depreciation at Rs. 6,432,20/-. The AO sought explanation from the assessee for its claim of set off of current year's and brought forward depreciation. The assessee filed a detailed reply to substantiate its claim. The claim of the assessee was rejected by the AO as the AO was of the opinion that the set off of current year's business loss against the income under the other heads of income does not include unabsorbed depreciation as it is not a part of business loss. The AO further observed that Sec. 32(2) restricts the allowable depreciation of the current year only to the extent of profits and gains of business. The other reason for rejecting assessee's claim was that the Act treats business loss separately from the depreciation because business loss can be carried forward only for 8 assessment years whereas depreciation can be carried forward for unlimited period. While rejecting the claim of set off of depreciation in totality, the AO concluded that the assessee has not claimed the amount in return and also no revised return was filed. The AO completed the assessment after disallowing the claim of the assessee for set off of current year's depreciation as well as brought forward depreciation.

5. The assessee agitated the matter before the Ld. CIT(A) but without any success. The Ld. CIT(A) considered the provisions of I.T. Act 1922 vis-à-vis 1961 Act. The sum and substance for rejecting the assessee's appeal as enumerated by the Ld. CIT(A) in his order suggests that the Ld. CIT(A) was of the opinion that the set off can be claimed only from profits or gains and profits or gains are specifically confined to profits and gains of business only. The Ld. CIT(A) also distinguished the facts of the assessee's case with those of (a) CIT v. Jaipuria China Clay Mines (P.) Ltd. [1966] 59 ITR 555 (SC) (b) Rajapalayam Mills Ltd. v. CIT [1978] 115 ITR 777 (SC) and (c) CIT v. Virmani Indus. (P.) Ltd. [1995] 216 ITR 607/83 Taxman 343 (SC). The Ld. CIT(A) held that the current years' depreciation is not allowed to be set off against the income under the head Long Term capital gains. Further the claim of the assessee for allowing the unabsorbed depreciation of earlier year's was also not allowed for the reason that the assessee has not claimed in its computation of income while filing the return.

6. The assessee is aggrieved by this finding of the Ld. CIT(A) and is before us. The Ld. Counsel for the assessee submitted that the assessee is a private limited company engaged in the business of manufacturing automotive parts such as gear cover, hand chain wheel, round washer etc. The Ld. Counsel further submitted that the assessee company filed a return of income claiming business loss as well as current year's depreciation to be allowed as set off against the Long Term capital gains. The Ld. Counsel further pointed out that the assessee company has also unabsorbed depreciation of Rs. 6,42,208/- of earlier years . The Counsel strongly objected to the observation of the lower authorities that assessee has not shown /claimed unabsorbed depreciation brought forward in its return of income. To substantiate, the Ld. Counsel drew our attention to pages 1 & 2 of the Paper Book which are the statement of income for the year under consideration. The Ld. Counsel continued arguing that the assessee has filed profit and loss account and balance sheet and has claimed current year's depreciation at Rs. 2,32,059/-. It is the contention of the Ld. Counsel for the assessee that though the AO has accepted the figure of business loss but has denied current year's depreciation to be set off against the profit under the head Long Term capital gains. The Ld. Counsel further pointed out that a copy of the depreciation statement was filed along with Tax Audit Report and therefore the depreciation was legally allowable as per the provisions of Sec. 32(1) of the Act as part of the business loss. The Ld. Counsel further drew our attention to the provisions of Sec. 32(2) of the Act which provides that the unabsorbed depreciation is deemed to be merged with current year's depreciation and accordingly the assessee company is entitled to set off of unabsorbed depreciation relating to earlier assessment year's with the income under the head Long Term capital gains. The Ld. Counsel concluded that the assessee's claim of set off of current year's as well as brought forward depreciation is as per the provisions of law and should be allowed to be set off against the income under the head Long Term capital gains.

7. Per contra, Ld. Departmental Representative strongly relied upon the findings of the lower authorities.

8. We have heard the rival submissions and perused the orders of the lower authorities and have carefully considered the relevant provisions of the Act and the Paper Book submitted by the assessee. A perusal of the statement of income for the year under consideration show that the assessee has shown Long Term capital gains at Rs. 1,30,00,000/- after claiming exemption u/s. 54EC of the Act. The assessee has also shown net loss from business before depreciation at Rs. 17,48,195/-. To this, the assessee added current year's depreciation at Rs. 2,32,059/- and unabsorbed depreciation brought forward from assessment years 1999-2000 and 2002-03 at Rs. 6,42,208/- and claimed set off amounting to Rs. 26,22,462/- from the Long Term capital gains at Rs. 1,30,00,000/-. Profit and gains of business or profession are computed in accordance with the provisions contained in Sec. 30 to 43 of the Act. Depreciation is allowed as per the provisions of Sec. 32(1) of the Act. Section 32(2) of the Act contains provisions relating to unabsorbed depreciation which is as under:

"Where, in the assessment of the assessee, full effect cannot be given to any allowance under sub-section (1) in any previous year, owing to there being no profits or gains chargeable for that previous year, or owing to the profits or gains chargeable being less than the allowance, then, subject to the provisions of sub-section (2) of section 72 and sub-section (3) of section 73, the allowance or the part of the allowance to which effect has not been given, as the case may be, shall be added to the amount of the allowance for depreciation for the following previous year and deemed to be part of that allowance, or if there is no such allowance for that previous year, be deemed to be the allowance for that previous year, and so on for the succeeding previous years.]

9. A perusal of the aforementioned section shows that Sec. 32(2) has been subjected to the provisions of Sec. 72(2) and 73(3) of the Act. Before discussing the provisions of Sec. 72(2) let us first analyze the provisions of Sec. 32(2) of the Act prior to this amendment w.e.f. 1.4.2002

"Substituted by the Finance Act, 2001, w.e.f. 1-4-2002. Prior to its substitution, sub-section (2), as amended by the Taxation Laws (Amendment and Miscellaneous Provisions) Act, 1986, w.e.f. 1-4-1988, Direct Tax Laws (Amendment) Act, 1987, w.e.f. 1-4-1989 and Finance Act, 1992, w.e.f. 1-4-1993, substituted by the Finance (No. 2) Act, 1996, w.e.f. 1-4-1997 and further amended by the Finance Act, 2000, w.e.f. 1-4-2001, read as under :

'(2) Where in the assessment of the assessee full effect cannot be given to any allowance under clause (ii) of sub-section (1) in any previous year owing to there being no profits or gains chargeable for that previous year or owing to the profits or gains being less than the allowance, then, the allowance or the part of allowance to which effect has not been given (hereinafter referred to as unabsorbed depreciation allowance), as the case may be,—

(i) shall be set off against the profits and gains, if any, of any business or profession carried on by him and assessable for that assessment year ;

(ii) if the unabsorbed depreciation allowance cannot be wholly set off under clause (i), the amount not so set off shall be set off from the income under any other head, if any, assessable for that assessment year;

(iii) if the unabsorbed depreciation allowance cannot be wholly set off under clause (i) and clause (ii), the amount of allowance not so set off shall be carried forward to the following assessment year and—

(a) it shall be set off against the profits and gains, if any, of any business or profession carried on by him and assessable for that assessment year ;

(b) if the unabsorbed depreciation allowance cannot be wholly so set off, the amount of unabsorbed depreciation allowance not so set off shall be carried forward to the following assessment year not being more than eight assessment years immediately succeeding the assessment year for which the aforesaid allowance was first computed :

Provided that the time limit of eight assessment years specified in sub-clause (b) shall not apply in the case of a company for the assessment year beginning with the assessment year relevant to the previous year in which the said company has become a sick industrial company under sub-section (1) of section 17 of the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986) and ending with the assessment year relevant to the previous year in which the entire net worth of such company becomes equal to or exceeds the accumulated losses."

10. A comparative study of pre-amendment and post amendment provisions of Sec. 32(2) suggests that prior to the amendment, the set off was restricted to the profits and gains, if any, of any business or profession whereas post amendment (i.e. the law applicable for the year under consideration) the set off is available from profits or gains chargeable for the previous year. The claim of the lower authorities that profits or gains so mentioned should be restricted to profits or gains of business or profession cannot be accepted because had that been the intention of the legislature it would not have deleted phrase "of any business or profession in the post amended provisions of Sec. 32(2). The law regarding set off of unabsorbed depreciation upto 1.4.1996 was very liberal and set off was allowable against any income. This was also upheld by the Hon'ble Supreme Court in the case of Virmani Indus. (P.) Ltd. (supra). However, the law regarding such set off was changed by the Finance Act No. 2 of 1996 and from A.Y. 1997-98 to 2002-03 the unabsorbed depreciation was put at par with business losses u/s. 72. However the status quo have been restored from A.Y. 2003-04 and therefore the ratio laid down by the Hon'ble Supreme Court in the case of Virmani Indus. (P.) Ltd. (supra) once again hold good and so now unabsorbed depreciation can be set off against any income. Thus, the claim of current year's depreciation of Rs. 2,32,059/- is directed to be set off against the income under the head "Capital gains". Accordingly, ground No. 1 of the appeal is allowed.

11. Having considered the provisions of Sec. 32(2), it is also clear that if the current year's depreciation cannot be set off owing to the profits or gains chargeable being less than the allowance, the allowance or the part of the allowance to which effect has not been given shall be added to the amount of allowance for depreciation for the following previous year and deemed to be part of the allowance which means that brought forward depreciation merges with the current year's depreciation because of the legal fiction created by provisions of Sec. 32(2) of the Act. However, this fiction has been subjected to the provisions of Sec. 72(2) and 73(3) of the Act.

12. Let us first consider the provisions of Sec. 72(2) of the Act which provides as under:

"Whether any allowance or part thereof is, under sub-section 2 of Sec. 32 or sub section (4) of Sec. 35, to be carried forward, effect shall first be given to the provisions of this section.

13. A simple reading of this section suggests that in case of set off of business loss vis-a-vis depreciation, the first preference shall be given to the business loss as per the provisions of Sec. 72(1) of the Act for the simple reason that the business loss can be carried forward only upto 8 assessment years whereas the depreciation can be carried over upto unlimited period. As has been discussed hereinabove, the brought forward unabsorbed depreciation is treated as current years' depreciation because of the legal fiction, therefore the treatment given to the current year's depreciation is equally applicable to brought forward depreciation after the application of Finance Act, 2001.

14. We have already held that current year's depreciation is to be allowed as set off from the Long Term Capital Gains and brought forward depreciation is to be treated as current year's depreciation as per the legal fiction of section 32(2), the same is also to be allowed to be set off from the Long Term Capital Gains. Accordingly, ground No. 2 of the appeal is also allowed.

15. In the result, the appeal filed by the assessee is allowed

IT : Where assessee carried out derivative trading of shares in National Stock Exchange and Bombay Stock Exchange, income derived from such transactions for period up to 24-1-2006 was in nature of speculative income

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[2012] 27 taxmann.com 197 (Ahmedabad - Trib.)

IN THE ITAT AHMEDABAD BENCH 'B'

Assistant Commissioner of Income-tax, Circle 6, Surat

Vimal Vadilal Shah (HUF)*

A.K. GARODIA, ACCOUNTANT MEMBER

AND KUL BHARAT, JUDICIAL MEMBER

IT APPEAL NO. 2427 (AHD.) OF 2009

C.O. NO. 201 (AHD.) OF 2009

[ASSESSMENT YEAR 2006-07]

AUGUST 31, 2012

Section 43(5) of the Income-tax Act, 1961 - Speculative transactions - Derivative trading of shares - Assessment year 2006-07 - Assessee carried out derivative trading of shares in National Stock Exchange and Bombay Stock Exchange - He earned income from such transactions - He also suffered loss from commodity trading - Whether as per Notification No. 02/2006 [SO 89E], dated 25-1-2006, which is not applicable with retrospective effect from 1-4-2005 and decision of Ahmedabad Bench of Tribunal rendered in case of Tejas K Shah v. ITO [IT Appeal No. 2255 (Ahd.) of 2010, dated 17-9-2010], income of assessee for period up to 24-1-2006 was in nature of speculative income and same could be adjusted against speculative loss suffered by assessee - Held, yes [Para 8] [In favour of assessee]

Circulars & Notifications : Circular No. 3/2006, dated 27-2-2006, Notification No. 2/2006 [S.O. No. 89(E)], dated 25-1-2006, Notification No. 46/2009, dated 22-5-2009 and Notification No. 12/2011, dated 25-2-2011

FACTS

Facts

• During the year, the assessee carried out derivative trading of shares in National Stock Exchange [NSE] and Bombay Stock Exchange [BSE]. He earned income from derivative trading of shares. He also suffered loss from commodity trading. He claimed set off of aforesaid loss against income earned from derivative trading of shares.

• He submitted that the recognized stock exchange was notified by the Central Government with effect from 25-1-2006 vide notification No. 2/2006 [SO 89E], dated 25-1-2006 and so the business profit or loss arising on 25-1-2006 or thereafter in derivatives could only be considered as non-speculative profit or loss.

• The Assessing Officer rejected the assessee's contention to treat the aforesaid income for the period upto 24-1-2006 as speculative income. He further considered the commodity trading loss as speculative loss and did not allow set off of same against the income earned from derivative trading of shares.

• On appeal, the Commissioner (Appeals) treated the profit earned for the period up to 24-1-2006 from derivative trading of shares as speculative income and, accordingly, allowed set off of speculative loss (commodity trading loss) against profit from derivative trading of shares.

Revenue's arguments

• The Ahmedabad Bench of the Tribunal in the case of Asstt. CIT v. Hiren Jaswantrai Shah [2011] 46 SOT 276/12 taxmann.com 55 held that the notification dated 25-1-2006 would be effective from 1-4-2005 and, therefore, the income of the assessee from derivative trading of shares was not speculative income.

• There was one more decision of the Ahmedabad Bench of the Tribunal in the case of Tejas K. Shah v. ITO [IT Appeal No. 2255 (Ahd.) of 2010, dated 17-9-2010]; wherein it was held that the transaction up to the date of notification dated 25-1-2006 was to be treated as speculative transaction.

• In view of these two contradictory judgments of the Tribunal, the matter should be referred to Special Bench of the Tribunal.

Issue involved

• Whether Commissioner (Appeals) was justified in allowing set off of commodity trading loss against profits from derivative trading of shares.

HELD

• From the reading of provision of clause (d) of sub-section (5) of section 43, it is clear that derivative transaction carried out in a recognized stock exchange is not to be considered as speculative transaction. Hence, this is very important to find out as to whether the derivative transaction in question was carried out in a recognized stock exchange or not.

• As per the notification No. 89E, dated 25-1-2006, two stock exchanges were notified as recognized stock exchange, i.e., National Stock Exchange (NSE) and Bombay Stock Exchange (BSE). Subsequently MCX Stock Exchange was also recognized by notification No. 46/2009, dated 22-5-2009 and United Stock Exchange of India Ltd. is also recognized vide notification No.12/2011, dated 25-2-2011.

• Now the question is as to whether the transaction carried out in NSE and BSE up to 24-1-2006 can be said to be the transaction carried out in a recognized stock exchange and similarly whether a transaction carried out in MCX stock exchange up to 21-5-2009 and in United Stock Exchange of India Ltd. up to 24-2-2011 can be said to be the transaction carried out in a recognized stock exchange. Here the question is not this that whether this notification is clarificatory and, therefore, retrospective because the notification itself states that the stock exchange has been recognized with effect from the date of publication of the notification in the official gazette and such date of publication regarding notification for BSE and NSE is 25-1-2006.

• The Tribunal decision rendered in the case of Hiren Jaswantrai Shah (supra) is dated 17-6-2011; whereas the Tribunal decision rendered in the case of Tejas K. Shah (supra) is dated 17-9-2010. In the Tribunal decision rendered in the case of Hiren Jaswantrai Shah (supra), the other Tribunal decision rendered in the case of Tejas K. Shah (supra) was not cited and not considered although the members constituting both these Benches were the same. This is now a settled position of law that the earlier Tribunal decision is binding on the Tribunal and if such decision is not considered in a later Tribunal judgment, then such later judgment cannot have the precedence value because of the reason that later decision is without considering the earlier decision having contradictory decision. [Para 8]

Notification No. 2/2006 [S.O. No. 89(E)], dated 25-1-2006 is not applicable with retrospective effect from 1-4-2005

• Under these facts, the later Tribunal decision rendered in the case of Hiren Jaswantrai Shah (supra) is not a binding precedence and, therefore, the earlier Tribunal decision rendered in the case of Tejas K. Shah (supra) is binding precedence. Otherwise also, in view of the fact that two stock exchanges are subsequently notified, it cannot be said that all these notifications are retrospective and are applicable with effect from 1-4-2005. Under this factual position, the instant Bench is bound to follow the earlier Tribunal decision rendered in the case of Tejas K. Shah (supra) and there is no requirement to refer the matter to the President for constitution of a Special Bench.

• Therefore, the order of the Commissioner (Appeals) deserved to be upheld. [Para 8]

CASE REVIEW

Tejas K. Shah v. ITO [IT Appeal No. 2255 (Ahd.) of 2010, dated 17-9-2010] (para 8) followed.

Asstt. CIT v. Hiren Jaswantrai Shah [2011] 46 SOT 276/12 taxmann.com 55 (Ahd.) (para 8) dissented from.

CASES REFERRED TO

Asstt. CIT v. Hiren Jaswantrai Shah [2011] 46 SOT 276/12 taxmann.com 55 (Ahd.) (para 5), Tejas K. Shah v. ITO [IT Appeal No. 2255 (Ahd.) of 2010, dated 17-9-2010] (para 5), CIT v. Bharat R. Ruia (HUF) [2011] 337 ITR 452/199 Taxman 87/10 taxmann.com 265 (Bom.) (para 6) and Shree Capital Services Ltd. v. Asstt. CIT [2009] 121 ITD 498 (Kol.) (para 8).

Rajnish Vohra for the Appellant. Rasesh Shah for the Respondent.

ORDER

A.K. Garodia, Accountant Member - This is revenue's appeal and the cross objection is filed by the assessee which are directed against the order of Ld. CIT(A) IV, Surat dated 12.05.2009 for the assessment year 2006-07.

2. First, we take up the revenue's appeal. The grounds raised by the revenue are as under:

"(1) On the facts and in the circumstances of the case and in law, the Ld. CIT(A) IV, Surat has erred in allowing set off of speculative loss on account of commodities trading of Rs. 91,13,122/- against the business income of Rs. 1,23,60,835/-.

(2) On the facts and in the circumstances of the case and in law, the Ld. CIT(A) IV, Surat ought to have upheld the order of the A.O.

(3) It is, therefore, prayed that the order of the Ld. CIT(A) IV, Surat may be set aside and that of the A.O. restored."

3. Brief facts till the assessment stage are noted by Ld. CIT(A) on pages 1, 2 & 3 of his order, which are reproduced below:

"The brief facts of the case are that for the year under consideration assessee earned profit of Rs. 1,41,80,518/- on account of derivative trading of shares. So far as the commodity trading is concerned, assessee incurred loss of Rs. 91,13,122/- in derivatives. The assessee has set off the loss of Rs. 91,13,122/- on commodity trading with business income form trading of derivatives in shares during the current year. In the course of assessment proceedings, assessee was asked to show cause notice vide letter dated 25.11.2008 as to why the commodity trading loss should not be treated as speculation loss and same should not be added to total income of the assessee as same is not allowable as set-off against other heads of income.

In response to above notice, assessee replied vide letter dated 27.11.2008 which is reproduced at Para no.8 of the assessment order. The main argument of assessee was that recognised stock exchange was defined in clause 2 of the Explanation to Sec 43(5) as stock exchange as referred in Securities Contract (Regulations) Act, 1956 and which fulfils such conditions as may be prescribed and notified by central government for this purpose. The recognised stock exchange was notified by central government with effect on 25.01.06. So according to assessee, the business profit or loss arising on or afterwards on 25.01.06 in derivatives could only be considered as non-speculative profit or loss. Assessee gave bifurcation of profit in respect of the transactions of the derivatives being Rs. 1,23,60,835/- derived between 01.04.05 to 24.01.06 and Rs. 18,19,7837-between 25.01.06 to 31.03.06. However, the assessing officer was not satisfied with the reply of assessee. He stated that trading in derivatives is the new adventure in the nature of trade in which concept of actual delivery has become irrelevant. He placed reliance on the Advance Ruling in the case of Morgan Stanley & Co. International Ltd. - 272 ITR 416 holding that income from trading in derivative trading in case of global FII such as Morgan Stanley should be considered only as business income. He reproduced relevant portion of sec 43(5) notifying the amendment made in the section by Finance Act, 2005 at Para no. 10.9 of the assessment order & the Circular no. 3/2006 dated 27.02.06 in Finance Act, 2005 at Para no.3.10 of the assessment order. He placed reliance on the notes on clauses wherein it is mentioned that amendment will take effect from April 1, 2006 and will accordingly apply in relation to A.Y. 2006-07 & subsequent years. He stated that said circular was only for notifying the two biggest stock exchanges in India for derivative trading. He stated that said notification is effective from 01.04.06 and considered the amendment made as retrospective being clarificatory in nature. He stated that where an amendment is made from T' April, it is usually understood that it is applicable from the assessment year starting from 1st April. He placed reliance on the decision in case of CIT v. Hongkong Ocean Shipping - 238 ITR 955 (Mad.). He made various other contentions & disapproved the assessee's contention to treat F&0 income before 25.01.06 as speculative income and considered the loss in commodity trading as speculative loss and did not allow the set-off & accordingly, addition of Rs. 91,13,122/- was made to the total income of the assessee on account of loss on commodity transactions."

4. Being aggrieved, the assessee carried the matter in appeal before Ld. CIT(A) who has decided this issue in favour of the assessee and now, the revenue is in appeal before us.

5. It was submitted by the Ld. D.R. that the tribunal decision rendered in the case of Asstt. CIT v. Hiren Jaswantrai Shah [2011] 46 SOT 276/12 taxmann.com 55 (Ahd.) supports the case of the revenue. He submitted a copy of this Tribunal decision and pointed out that in that case, it was held by the tribunal that Rule 6DDB is only procedural in nature and, therefore, it is retrospective and hence, the notification dated 25.01.2006 would be effective form 01.04.2005 and it would be applicable to the entire assessment year 2006-07. He submitted that as per this tribunal decision, the income of the assessee from derivative transaction is not speculation income and hence, it cannot be adjusted against speculation loss arising on account of commodity trading of Rs. 91,13,122/-. He further submitted that there is one more Tribunal decision in the case of Tejas K Shah v. ITO [I.T. Appeal No. 2255/Ahd/2010 dated 17.09.2010] wherein, it was held that the transaction up to the date of notification is to be treated as speculative transaction. He submitted that in view of these two contradictory judgements of the tribunal, the matter may be referred to Special bench of the Tribunal.

6. As against this, Ld. A.R. supported the order of Ld. CIT(A). He placed reliance on the judgment of Hon'ble Bombay High Court rendered in the case of CIT v. Bharat R. Ruia (HUF) [2011] 337 ITR 452/199 Taxman 87/10 taxmann.com 265 and it was submitted that this judgment of Hon'ble Bombay High court covers the issue in favour of the assessee and hence, no reference to Special bench of the Tribunal is required. He further submitted that notification dated 25.01.2006 is not fully considered by the tribunal in the case of Hiren J Shah (supra) and the tribunal has failed to consider this aspect of notification that NSE and BSE were approved by this notification No.02/06 dated 25.01.2006 w.e.f. the date of publication of this notification in the official gazette. He further submitted that in these two stock exchange notifications, date is 25.01.2006 only and hence, till 24.01.2006 it was not approved stock exchange and therefore, derivative transaction till this date is speculative transaction only. He further submitted that if this is held that whenever the recognition is granted to a stock exchange, the same shall apply form 01.04.2005 then, it will lead to unintended results because NCX stock exchange Ltd. has been notified as per notification No. 46/9 dated 22.05.2009 and he submitted a copy of this notification. He further submitted that more stock exchanges may be notified in future also and, therefore, this view cannot be taken that whenever the stock exchange is notified, the same should be considered as approved notified stock exchange for the purpose of Section 43(5) w.e.f. 01.04.2005.

7. We have considered the rival submissions, perused the material on record and have gone through the orders of authorities below and the judgements cited by both the sides. We find that the relevant amendment being insertion of clause (d) in sub-section (5) of Section 43 of the Act is w.e.f. 01.04.2006. The same is reproduced below for the sake of ready reference:-

"43(5)(d): an eligible transaction in respect of trading in derivatives referred to in clause (ac) of Section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) carried out in a recognized stock exchange shall not be deemed to be a speculative transaction."

8. From the above provision of clause (d) of sub-section (5) of Section 43, we find that derivative transaction carried out in a recognized stock exchange is not to be considered as speculative transaction. Hence, this is very important to find out as to whether the derivative transaction in question was carried out in a recognized stock exchange or not. As per the notification No. 89 dated 25.01.2006, two stock exchanges were notified as recognized stock exchange i.e. National Stock Exchange (NSE) and Bombay Stock Exchange (BSE). Subsequently, MCX Stock Exchange was also recognized by notification No.46/9 w.e.f. 22.05.2009 and Untied Stock Exchange of India Ltd. is also recognized vide notification No. 12/11 dated 25.02.2011. Now, the question is as to whether the transaction carried out in NSE and BSE up to 24.01.2006 can be said to be the transaction carried out in a recognized stock exchange and similarly whether a transaction carried out in MCX stock exchange up to 21.05.2009 and in United stock exchange of India Ltd. Up to 24.02.2011 can be said to be derivative transaction carried out in a recognized stock exchange. Here, the question is not this that whether this notification is clarificatory and, therefore, retrospective because the notification itself states that the stock exchange has been recognized w.e.f. the date of publication of the notification in the official gazette and such date of publication regarding notification for BSE and NSE is 25.01.2006. We find that the tribunal decision rendered in the case of Hiren Jaswantrai Shah (supra) is dated 17.06.2011 whereas, the tribunal decision rendered in the case of Shri Tejas K. Shah (supra) is dated 17.09.2010. In the case of the tribunal decision rendered in the case of Hiren Jaswantrai Shah (supra), the other tribunal decision rendered in the case of Tejas K. Shah (supra) was not cited and not considered although the members constituting both these benches were the same. This is now a settled position of law that the earlier tribunal decision is binding on the tribunal and if such decision is not considered in a later tribunal judgment, then such later judgement cannot have the precedence value because of the reason that later decision is without considering the earlier decision having contradictory decision. Under these facts, in our considered opinion, the later Tribunal decision rendered in the case of Hiren Jaswantrai Shah (supra) is not a binding precedence and, therefore, in our considered opinion, the earlier tribunal decision rendered in the case of Tejas K. Shah (supra) is binding precedence. We also find that in that tribunal decision, the Tribunal has considered and followed the decision of Special bench of the Tribunal rendered in the case of Shree Capital Services Ltd. v. Asstt. CIT [2009] 121 ITD 498 (Kol.). Otherwise also, in view of this fact that two stock exchange are subsequently notified as on 22.05.2009 i.e. MCX Stock Exchange and on 25.02.2011 i.e. United Stock Exchange of India Ltd. It cannot be said that all these notifications are retrospective and are applicable w.e.f. 01.04.2005. Under this factual position, we are of the considered opinion that we are bound to follow the earlier Tribunal decision rendered in the case of Tejas K. Shah (supra) and there is no requirement to refer the matter to Hon'ble President, ITAT for constitution of a Special bench because the contradictory decision in the case of Hiren Jaswantrai Shah (supra) is not of any precedence value because of this reason that it is without considering the earlier Tribunal decision rendered in the case of Tejas K. Shah (supra). We therefore, decide this issue in favour of the assessee by respectfully following the Tribunal decision rendered in the case of Tejas K. Shah (supra).

9. In the result, appeal of the revenue is dismissed.

10. Now, we take up the C.O. filed by the assessee. The grounds raised in the C.O. are as under:

"1. On the facts and in circumstances of the case as well as law on the subject, the learned assessing officer has erred in treating business loss of Rs. 91,13,122/- on account of commodity derivative transactions as speculative loss instead of non speculative loss and thereby not allowing set off against business profit from shares in derivative trading. The learned CIT(A) did not deal with the ground as he already allowed assessee's ground by treating income of Rs. 1,23,60,735/- from F&O transactions as speculative income and thereby allowing set off against business loss from commodity trading.

2. On the facts and in circumstances of the case as well as law on the subject, the learned assessing officer has erred in not assessee the rebate claim of Rs. 7,59,584/- u/s. 88E on account of STT paid during the year against the demand raised. The learned CIT(A) did not deal with the ground as he already allowed assessee's ground by treating income of Rs. 1,23,60,735/- from F&O transactions as speculative income and thereby allowing set off against business loss from commodity trading.

3. In case appeal filed by the Revenue is allowed, the above grounds raised before CIT(A) may please be decided."

11. Regarding ground No. 1 of the C.O., we find that no adjudication is called for because we have already upheld the order of Ld. CIT(A) on this issue.

12. Regarding ground No. 2 of the C.O. also, we find that no separate adjudication is called for because we have already approved the order of Ld. CIT(A) on the main aspect regarding treating of income of Rs. 1,23,60,375/- from F&O transaction as speculative income and thereby allowed set off against business loss for commodity trading. On this aspect, it is held by Ld. CIT(A) that this ground of assessee has become infructuous as set off of loss is already allowed and, therefore, there is no case of any increase in tax liability. On this aspect also, we do not find any reason to interfere in the order of Ld. CIT(A). This ground is also rejected.

13. In the result, appeal of the revenue and the C.O. of the assessee are dismissed.

■■■

[2012] 27 taxmann.com 197 (Ahmedabad - Trib.)

IN THE ITAT AHMEDABAD BENCH 'B'

Assistant Commissioner of Income-tax, Circle 6, Surat

Vimal Vadilal Shah (HUF)*

A.K. GARODIA, ACCOUNTANT MEMBER

AND KUL BHARAT, JUDICIAL MEMBER

IT APPEAL NO. 2427 (AHD.) OF 2009

C.O. NO. 201 (AHD.) OF 2009

[ASSESSMENT YEAR 2006-07]

AUGUST 31, 2012

FACTS

Facts

Revenue's arguments

• In view of these two contradictory judgments of the Tribunal, the matter should be referred to Special Bench of the Tribunal.

Issue involved

• Whether Commissioner (Appeals) was justified in allowing set off of commodity trading loss against profits from derivative trading of shares.

HELD

Notification No. 2/2006 [S.O. No. 89(E)], dated 25-1-2006 is not applicable with retrospective effect from 1-4-2005

• Therefore, the order of the Commissioner (Appeals) deserved to be upheld. [Para 8]

CASE REVIEW

Tejas K. Shah v. ITO [IT Appeal No. 2255 (Ahd.) of 2010, dated 17-9-2010] (para 8) followed.

Asstt. CIT v. Hiren Jaswantrai Shah [2011] 46 SOT 276/12 taxmann.com 55 (Ahd.) (para 8) dissented from.

CASES REFERRED TO

Rajnish Vohra for the Appellant. Rasesh Shah for the Respondent.

ORDER

2. First, we take up the revenue's appeal. The grounds raised by the revenue are as under:

(2) On the facts and in the circumstances of the case and in law, the Ld. CIT(A) IV, Surat ought to have upheld the order of the A.O.

(3) It is, therefore, prayed that the order of the Ld. CIT(A) IV, Surat may be set aside and that of the A.O. restored."

3. Brief facts till the assessment stage are noted by Ld. CIT(A) on pages 1, 2 & 3 of his order, which are reproduced below:

4. Being aggrieved, the assessee carried the matter in appeal before Ld. CIT(A) who has decided this issue in favour of the assessee and now, the revenue is in appeal before us.

9. In the result, appeal of the revenue is dismissed.

10. Now, we take up the C.O. filed by the assessee. The grounds raised in the C.O. are as under:

3. In case appeal filed by the Revenue is allowed, the above grounds raised before CIT(A) may please be decided."

11. Regarding ground No. 1 of the C.O., we find that no adjudication is called for because we have already upheld the order of Ld. CIT(A) on this issue.

13. In the result, appeal of the revenue and the C.O. of the assessee are dismissed.

IN THE INCOME-TAX APPELLATE TRIBUNAL
‘C’ BENCH, CHENNAI.
Before Dr. O.K. Narayanan, Vice-President &
Shri S.S. Godara, Judicial Member
I.T.A. No.943/Mds/2012
Assessment Year : 2007-08
The Assistant Commissioner of
Income Tax, Business Circle IV,
Room No. 507, Annexe Building, 5th
Floor, 121, Nungambakkam High
Road, Chennai 34.
Vs.
Shri C. Ramabrahmam,
16, 2nd Canal Cross Road, Gandhi
Nagar, Adyar, Chennai 600 020.
[PAN:AACPR0103K]
(Appellant)
(Respondent)
Appellant by : Shri Guru Bashyam, IRS, JCIT
Respondent by : Shri Ananda Kumar, C.A.
Date of Hearing : 29.10.2012
Date of pronouncement : 31.10.2012
ORDER
PER S.S. Godara, Judicial Member
This Revenue’s appeal is directed against the order of the
Commissioner of Income Tax (Appeals) VIII Chennai dated 24.01.2012 in
ITA No. 53/09-10(A)-VIII for the assessment year 2007-08 in proceedings
under section 143(3) of the Income Tax Act 1961 [in short the “Act”].
2. Brief facts of the case are that the assessee (individual), filed his
‘return’ declaring income of `.6,40,440/-. In scrutiny proceedings, the
Assessing Officer noticed that the assessee had purchased a house
property at T. Nagar, Chennai on 20.01.2003 for `.32.64 lakhs. In addition to
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2 I.T.A. No.943/M/12
the said consideration, he paid `.4.00 lakhs towards registration cost and
also had added further amount of `. 39,926/- as cost of improvement. In this
manner, the assessee paid net cost of `.37,03,926/-. In the enclosures with
the return, the assessee had added an amount of `.4,82,042/- as interest on
housing loan taken in 2003 for purchasing the property. Finally, the
assessee sold the said property on 20.04.2006 for `.26.00 lakhs.
After taking cognizance of the above facts, the Assessing Officer was
of the opinion that since interest in question on housing loan, had already
been claimed as deduction under section 24(b) in assessment years 2004-
05 to 2006-07, the same could not be taken into consideration for
computation under section 48 of the “Act” as the legislative provision did not
provide such method of including amount of deduction under section 24(b) of
the “Act”. Therefore, the Assessing Officer added back the above said
interest amount to the income of the assessee from short term capital gains
vide assessment order dated 24.11.2009.
4. Further, the assessee had declared income under “other sources” of
`.26,127/- alleged to have been derived from tax free dividend of `.4,720/-
with interest of `.26,127/-. With regard to the above income, he debited an
amount of `.9,94,542/- as interest on loan and brokerage amount and the
consequential loss was set off against income from other heads.
5. The Assessing Officer did not accept the assessee’s contention by
holding that since there was no consistency and regular activity of granting
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3 I.T.A. No.943/M/12
loans by the assessee, the same could not be called as a business activity
even if some interest had accrued to the assessee. The Assessing Officer
also noticed that the assessee had not advanced loan to any other party
except the above said. In this manner, on legal principle as well as on facts,
the Assessing Officer, added an amount of `.9,94,542/- in assessee’s total
income. In this manner, the assessee’s total income was assessed as
`.21,17,020/-.
6. The assessee preferred appeal against the assessment order,
wherein, both the additions made by the Assessing Officer (supra) have
been deleted by the CIT(A). Regarding addition of interest amount of
`.4,82,042/-, the CIT(A) has held that the assessee was entitled to include
the interest amount for computation under section 48 despite the fact that
the same had been claimed under section 24(b) while computing income
from house property.
Regarding other addition of `.9,94,542/- (supra), the CIT(A) has held
that the payments made by the concerned creditor to the assessee stood
duly proved from the record, which had not been considered by the
assessing authority.
It is, in this background, the Revenue has challenged the CIT(A)’s
order.
7. The DR, representing the Revenue, reiterated the finding of the
assessing authority as well as grounds of appeal and prayed for restoring
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4 I.T.A. No.943/M/12
the additions made by the Assessing Officer. It is the submission of the
Revenue that once the assessee had availed section 24(b) of the “Act”, he
cannot include the same very amount for the purpose of computing capital
gains under section 48. In the same manner, regarding other addition under
the head “income from other sources” (supra), the contention of the
Revenue is that the Assessing Officer had rightly made the addition since
the assessee’s activity of granting loan to a single person could not be called
as business. By referring to the findings of the CIT(A), the DR had submitted
for verification of creditors facts only the record has been dealt with by the
CIT(A) and not qua the legal aspect of the assessee’s claim, which was
negatived by the Assessing Officer by holding that the assessee’s activity
could not be called as a ‘business’.
On the other hand, the AR representing assessee has sought to place
reliance on CIT(A)’s order as well as findings contained therein. In the light
thereof, he prayed for upholding the same and dismissal of the Revenue’s
appeal.
8. We have considered submissions of both parties at length and also
perused the relevant findings of the Assessing Officer as well as CIT(A).
Regarding the issue of capital gains, it transpires that there is hardly any
dispute that the assessee had availed the loan for purchasing the property in
question. Since the assessee had shown the income under the head ‘house
property’, he preferred to raise the claim of deduction under section 24(b) of
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5 I.T.A. No.943/M/12
the “Act”, which reads as under:
“(b) where the property has been acquired, constructed, repaired,
renewed or reconstructed with borrowed capital, the amount of any
interest payable on such capital:”
There is no quarrel that since the assessee’s claim of deduction was under
the statutory provisions; therefore, he succeeded in getting the same.
However, after the property was sold, he also chose to include the interest
amount while computing capital gains under section 48 of the “Act”, which
reads as under:
“48. The income chargeable under the head “Capital gains” shall be
computed, by deducting from the full value of the consideration43
received or accruing as a result of the transfer of the capital asset the
following amounts, namely :—
(i) expenditure incurred wholly and exclusively in connection with
such transfer;
(ii) the cost of acquisition of the asset and the cost of any
improvement thereto:”
After perusing the above said provisions, we are of the opinion that
deduction under section 24(b) and computation of capital gains under
section 48 of the “Act” are altogether covered by different heads of income
i.e., income from ‘house property’ and ‘capital gains’. Further, a perusal of
both the provisions makes it unambiguous that none of them excludes
operative of the other. In other words, a deduction under section 24(b) is
claimed when concerned assessee declares income from ‘house property’,
whereas, the cost of the same asset is taken into consideration when it is
sold and capital gains are computed under section 48. We do not have even
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6 I.T.A. No.943/M/12
a slightest doubt that the interest in question is indeed an expenditure in
acquiring the asset. Since both provisions are altogether different, the
assessee in the instant case is certainly entitled to include the interest
amount at the time of computing capital gains under section 48 of the “Act”.
Therefore, the CIT(A) has rightly accepted the assessee’s contention and
deleted the addition made by the Assessing officer. Hence, qua this ground,
we uphold the order of the CIT(A).
9. Coming to the other issue involved i.e. addition regarding income from
the head “other sources”. We find that the Assessing Officer had turned
down assessee’s plea by holding that the assessee’s alleged loan
transaction to the concerned debtor namely Shri S.A. Krishnakanth could not
be called a ‘business activity’ even if it had culminated in some interest
which accrued to the assessee. Not only this, the assessing authority also
rejected assessee’s explanation tendered on facts as well. However, the
CIT(A) has found merits in assessee’s argument and held that the material
on record duly proved the transactions since the details of loan creditors,
who had lent money to the assessee stood proved as well as there was
evidence that the assessee had also paid interest to them in return. Further,
it is also evident that the CIT(A) has nowhere dealt with the legal aspect of
the issue i.e., whether the assessee who, called himself to be a salaried
employee could raise a plea his loan transaction could be called as a
‘business activity’ or not even after the same had led to accrual of interest as
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7 I.T.A. No.943/M/12
held by the assessing authority. This vital aspect, in our opinion has escaped
the consideration of the CIT(A). Faced with this situation, we deem it
appropriate that the CIT(A) shall redecide this legal aspect in accordance
with law after affording adequate opportunity of hearing to the assessee.
Accordingly, we uphold the CIT(A)’s order in deleting the addition of
`.4,82,042/- (supra). Regarding other issue involved i.e. addition of
`.9,94,542/-, we restore it back to the file of the CIT(A).
10. In the light of the above discussion, the Revenue’s appeal is partly
accepted for statistical purpose.
Order pronounced on Wednesday, the 31st of October, 2012 at
Chennai.
Sd/- Sd/-
(Dr. O.K. NARAYANAN)
VICE-PRESIDENT
(S.S. GODARA)
JUDICIAL MEMBER
Chennai, Dated, the 31.10.2012
Vm/-
To: The assessee//A.O./CIT(A)/CIT/D.R.
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