2022 (8) TMI 564 - AT - Income Tax

Tax Tribunal Upholds Order Disallowing Trading Losses for Personal Futures & Options Trading

The Tribunal upheld the Principal Commissioner of Income Tax's order under section 263 for A.Y. 2014-15, stating that the Assessing Officer's failure to ... Revision u/s 263 - loss incurred by the Directors - trading activity in F & O undertaken on behalf of the company is not assessable in the assessment of the appellant - allowability of loss claimed under F & O - HELD THAT:- It is clear that none of the questions pertain to the claim of deduction by the assessee for the loss suffered by the directors in their individual accounts. Neither the Assessing Officer asked assessee pertaining to the above said questions nor it was replied by the assessee. Hence, the present case is a case of no enquiry by the AO. Whether inquiry was conducted by the AO during assessment proceeding on the issue of disallowability of loss caused to the directors in the hands of the assessee or not? - In the present case, despite the fact that the losses were caused to the directors in their accounts, the AO has allowed the said loss to be set off against the income of the assessee company without making any enquiry. The same is not permissible in law. No question was asked by the AO to the assessee and there was no basis for allowing the deduction of such trading loss to the assessee company. We cannot approve the same as in the present case, no transactions were carried out by the assessee company during the period from 01.04.2013 to 31.03.2014 resulting into loss - In fact, from the perusal of ledger account of M/s. Zen Securities Limited, in the books of the assessee company, only a loss was shown on account of trading in securities/derivatives. Therefore, in our view, the order passed by the AO is unsustainable and the action on the part of the Ld. PCIT was correct. Two directors namely Ms. P. Usha Rao and Karthik Velagapudi were having two different unique client codes and the amounts were transferred by the assessee company to these two directors. Thus, merely transferring the amounts by the company to the accounts of directors cannot ipso facto lead to the conclusion that they were authorized to transact for and on behalf of the assessee company. Once the transactions can be undertaken by the company on its own capacity, having separate unique client code, then it is possible that the activity would be carried out through the accounts of the directors. Therefore, in our view, the order passed by Ld. PCIT is in accordance with the law. Applicability of section 179 of the Companies Act, 2013 - From the perusal of the Board resolution, it is amply clear that the Board has given the power to the directors to transact 'for and on behalf of the company'. Contrary to the power given by the resolution, the directors have started doing business of share trading in their individual capacity. The act of the director cannot be said to be the act of company under the provisions of the Companies Act, 2013. There is distinction between the company and its directors under the Act and the act done by the directors in their individual capacity cannot be said to be an act on behalf of the company. As per the Companies Act and as well as the Income Tax Act, the company and its directors are two distinct jurist entity. Hence, both are separately assessed under the provisions of the Income Tax Act. The trading of sale and purchase of shares done by the directors of the company in their individual capacity cannot be said to be in pursuance to the Board's resolution passed by the assessee company. In the board resolution, there is no whisper of making any 'investment' on behalf of the company by these directors as provided u/s. 179(3)(e) of the Companies Act, 2013. In view of the above, we do not find any justification for the Assessing Officer to allow the deduction of the losses suffered by these directors in the hands of the assessee company. CIT-A allowing the loss claimed by the assessee company from trading in Futures & Options pertaining to the director and carried out in the trading account of the director and not through such trading account maintained in the name of the company wherein no trading activity carried out - In the present case, it is clear from the facts on record that the activities of share trading were carried out by the directors in their individual capacity from their unique client codes. Therefore, in our view, the losses/income, if any, caused on account of such activities carried out by the directors from their own unique client codes cannot be allowed in the hands of the assessee. Further, an interesting aspect is also brought on record that as against Rs. 2,06,18,388/- allegedly given by the company to its directors, the directors had suffered loss of Rs. 1,67,31,578/- for A.Y. 2014-15 and similarly, as against Rs. 1,72,83,000/- allegedly given by the company to its directors on various occasions, the directors had suffered a loss of Rs. 2,18,87,793/-. Thus, the loss suffered by the assessee, was more than the amount lent by the assessee to its directors. The conduct of the company and its directors does not inspire confidence as it is highly improbable to believe that the assessee will continue to transact through its directors, despite persistent losses. We are of the opinion that the order passed by the Ld. CIT(A) is required to be set aside and the order of the Assessing Officer is required to be restored. Accordingly, the appeal of the Revenue is allowed. Issues Involved:1. Validity of the order passed by the Principal Commissioner of Income Tax (PCIT) u/s 263 of the Income Tax Act for A.Y. 2014-15.2. Allowability of trading losses claimed by the assessee company on account of Futures & Options (F&O) trading conducted by its directors in their personal capacity.3. Legality of the Board resolution authorizing directors to conduct trading on behalf of the company.4. Whether the inquiry conducted by the Assessing Officer (AO) during the assessment proceedings was adequate.Detailed Analysis:1. Validity of the Order Passed by the PCIT u/s 263 for A.Y. 2014-15:The assessee challenged the PCIT's order quashing the assessment made u/s 143(3) of the Act, arguing that the PCIT did not demonstrate that the AO failed to conduct necessary inquiries before allowing the F&O losses. The assessee cited various judicial precedents to support the claim that if the AO's view is a possible one, the PCIT cannot substitute his view under section 263.The Tribunal noted that the AO's assessment order did not discuss the allowability of the F&O losses. The Tribunal emphasized that the AO must investigate the facts stated in the return when circumstances provoke an inquiry. The Tribunal cited judicial precedents, including GEE VEE Enterprises Pvt. Ltd. vs. CIT and CIT Central-1 Vs. Maithan International, to underline that lack of inquiry renders the order erroneous and prejudicial to the interests of the Revenue. Therefore, the Tribunal upheld the PCIT's order, stating that the AO's failure to conduct an inquiry made the assessment order erroneous and prejudicial to the Revenue.2. Allowability of Trading Losses Claimed by the Assessee Company:The Tribunal examined whether the trading losses claimed by the assessee company, which were incurred by its directors in their personal trading accounts, could be allowed as a deduction. The Tribunal found that the directors and the company had separate trading accounts with M/s. Zen Money, and the losses incurred in the directors' personal accounts could not be attributed to the company.The Tribunal held that merely transferring amounts from the company to the directors' accounts does not justify treating the directors' trading losses as the company's losses. The Tribunal concluded that the AO's decision to allow such losses without proper inquiry was incorrect, and the PCIT's order to disallow these losses was valid.3. Legality of the Board Resolution Authorizing Directors to Conduct Trading:The assessee argued that the Board of Directors had authorized the directors to conduct trading on behalf of the company through a resolution passed on 01.04.2013. The Tribunal examined the resolution and found that it authorized the directors to transact on behalf of the company but did not explicitly mention trading activities. The Tribunal noted that the directors conducted trading in their personal capacities, which could not be considered as trading on behalf of the company.The Tribunal emphasized that the company and its directors are distinct legal entities, and the acts of the directors in their personal capacities cannot be attributed to the company. Therefore, the Tribunal found no justification for allowing the directors' trading losses as the company's losses.4. Adequacy of Inquiry Conducted by the AO:The Tribunal found that the AO did not conduct any specific inquiry regarding the allowability of the trading losses claimed by the assessee. The Tribunal noted that the AO's assessment order did not discuss the issue, and the AO did not pose any relevant questions to the assessee during the assessment proceedings.The Tribunal cited judicial precedents to underline that the AO must conduct a thorough inquiry when circumstances warrant it. The Tribunal concluded that the AO's failure to conduct an adequate inquiry rendered the assessment order erroneous and prejudicial to the interests of the Revenue.Conclusion:The Tribunal dismissed the assessee's appeal for A.Y. 2014-15, upholding the PCIT's order u/s 263, and allowed the Revenue's appeal for A.Y. 2015-16, setting aside the CIT(A)'s order and restoring the AO's disallowance of the trading losses claimed by the assessee. The Tribunal emphasized that the trading losses incurred by the directors in their personal capacities could not be allowed as deductions in the hands of the assessee company.