TaxTMI 
TaxTMI 
2011 (6) TMI 909
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 143(3) of the Act vide his orders dated 16.10.2006 and 28.12.2006 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 Rs. 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 ty....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... iv) The expenditures relating to previous year were accounted for on cash basis and included Rs. 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 below sec. 73 was introduced as a deeming provision, therefore, even if there is no speculation transaction per se, it can be invoked. Secondly, share broker or assessee engaged in only share trading is not excluded from application of this explanation. Thirdly, there are two exception clauses for applications of this section. The first one being, such assessees whose gross total income consists mainly of incomes chargeable to heads other than salary and income from profits and....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s 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 and income from profit and gains from business. The Ld. CIT DR stated that in assessee's case, it is clear from computation of income filed by it that, gross total income consists mainly income of any source other than business and even interest on fixed deposit and dividend are taken as other source of income, the amounts are less than that from business income. The other exception clause is for the assessee's, whose principal business is of money lending. He stated....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ipal 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 Rs. 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 Ltd. 192 ITR 365 (Cal) and also of this Tribunal Mumbai Bench in the case of Samba Trading & Inv. P. Ltd. Vs. ACIT 58 ITD 360 (Mum). The Ld. Counsel for the assessee also relied on the case of coordinate Bench in the case of Wonder Max Vinimay (P) Ltd. Vs. ITO, ITA No. 188 (Kol) of 2009 for Assessment Year 2005-06 dated 24.12.2009. 7. We find from the case records that the assessee suffered loss of Rs. 1,10,83,258/- in the activity of share trading and also earned profit in fu....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 not apply to an investment company or a company whose principal business is of banking or money lending. If the business of a company which does not fall within the excluded categories consisted of purchase and sale of shares of other companies then such a company shall be deemed to be carrying on speculation business for the purpose of section 73 of the Act to the extent to which business consists of purchase and sale of shares but in the present case, the assessee's business consists of purchase and sale of shares for clients or investment for itself and not dealing in purchases and sale of share speculation. We find that Hon'ble Calcutta High Court in the case of Arvind Investment Ltd. (supra) has considered this issue while discussing Explanation to Sec. 73 of the Act as under: "Sub-section (1) of section 73 restricts the scope of section 70 which pe....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 companies carrying on the business of granting loans and advances will be treated on the same footing as speculation business". Therefore, the circular does not leave any room for doubt that the Explanation will apply to the business of purchase and sale of shares of certain companies. Nowhere in the circular has any indication been given that where the only business of a company consists of purchase and sale of shares, the Explanation will not apply." 10. We find that in the present case the assessee is in the business of purchase and sale of shares but the revenue nowhere proved or brought to our notice any instance that it has entered into any speculative transaction. We find that Hon'ble Calcutta High Court in the case of Arvind Investment Ltd. (supra) has clearly made a distinction that Explanation does not apply to an investment ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 Rs. 28,000/- but for that no reasons were given. The CIT(A) allowed the claim of the assessee by stating that the sum of Rs. 28,000/- was paid to Calcutta Stock Exchange towards trading in the course of business and this being preliminary and miscellaneous expenses written off. We find no fault in the order of CIT(A) and the issue of the revenue appeal is dismissed. The ground of Cross Objection of the assessee is supportive of the order of CIT(A) and hence, it is dismissed as infructuous. 13. The first issue in CO No.36/K/2008 is regarding jurisdiction i.e. reopening of assessment u/s. 147 r.w.s. 148 of the Act upheld by CIT(A). For this, the assessee has raised following ground no.1: "1.For that in view of the facts and circumstances of the case the Ld. CIT(A) was wholly wrong and unjustified in upholding the action of the A.O. in initiating the proceeding u/s. 147 of the I. T. Act by issue of notice u/s. 148 and subsequently completing the assessment u/s. 143(3)/147 without considering and appreciating the fact tha....
X X X X Extracts X X X X
X X X X Extracts X X X X
....led 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 Rs. 1,10,83,258/- incurred in share trading. Aggrieved, assessee preferred appeal before CIT(A) and in appeal, he confirmed the action of the Assessing Officer reopening the assessment by giving following finding in para 2.3 and 2.4 of his appellate order: "2.3. I have considered the submission made by the appellant as well as the observation made by the A.O. The appellant in its submission has relied on a decision of ITAT, Mumbai in ITA 672 and 673/Mumbai/2004 dated 24.08.2007. The appellant in its submission has argued that the fact of trading in shares and resultant loss was explicitly disclosed in the P&L Account and the same was in full knowledge of the A.O. and hence the proceedings u/s. 147 so made is void ab initio. 2.4. I have considered the matter in detail and I have also perused the order of Hon'ble Apex Court in ACIT Vs. Rajesh Javeri Stock Brokers Private Ltd. 291 ITR 500 (SC) and I find that in such decision Hon'ble Court had held that if ingredients of Section 147 are fulfilled, failu....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e 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 there is no difference at all in the loss declared by the assessee in any of these years but tile only result is that the loss shown by the assessee under the head 'Income from business/profession', consequent to the bifurcation of interest, got bifurcated between that head and the head 'Income from other sources'. Applicability of carry forward provisions regarding losses under the various heads would have no bearing on deciding whether an assessee had claimed excessive loss in its return. As long as the loss returned by the assessee remains the same, before on after the bifurcation of the interest, details of all of which, were available from the returns filed by the assessee, reason to believe that there was any income chargeable to tax had escaped assessment, could not be there. Hence at the stage of notice, there was no relevant material on which a reasonable person would have formed a requisite belief that any income chargeable to tax had escaped assessment. In fact,....
X X X X Extracts X X X X
X X X X Extracts X X X X
....pening 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 that AO has not formed any opinion which can be said that there is a change of opinion. The Ld. Counsel for the assessee placed reliance on the case law of this Tribunal in the case of Tarak L. Gandhi (Supra) stating that in the present case also the revenue could not point out that by way of claim of loss will make substantial material difference to the income of the assessee. However, we are of the view that the Hon'ble Apex Court in the case of ACIT Vs. Rajesh Jhaveri Stock Brokers (P) Ltd. (2007) 291 ITR 500 (SC) has clearly held that reason in the phrase "reason to believe" would mean cause or justification for reopening and AO should, in any case, have cause or justification to know or suppose that income has escaped assessment. Accordingly, the return which was originally processed u/s. 143(1) of the Act only first condition regarding reason to believe would be suffice for reopening of the assessment. Therefore, explanation to section 147 clause (c) sub-clause (iv) o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....arious 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 14A of the Act introduced with retrospective effect is attracted by the claim of interest expenditure on borrowed fund utilised for investment in shares. The CIT(A) restricted the disallowance at Rs. 10,000/- u/s. 14A of the Act. The assessee's counsel at the time of hearing before us submitted that the amendments brought to Section 14A of the Act, by the Finance Act, 2006 w.e.f. 1.4.2007, are retrospective in nature and hence, would apply to the present case although the same is for Assessment Year 2002-03. We find that Hon'ble Bombay High Court in the case of Godrej Boycee Mfg. Co. Ltd. vs. DCIT [2010] 328 ITR 81 (Bom.) at pages 138 & 139 vide sub paras (v) to (vii) held that rule 8D is prospective as under: "(v) The provisions of rule 8D of the Income-tax Rules which have been notified with effect from March 24, 2008, shall apply with effect from the assessment year 2008-09; (vi) Even prior to the assessment year 2008-09, when rule 8D was not applicable, the Assessing Officer has to ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....is 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. 23. The next common issue in ITA No.696/K/2008 and C.O. Nos. 37/K/2008 is as regards to section 14Aof the Act. For this, the revenue has raised the following ground no.3: "3. That the Ld. CIT(A) has erred in law as well as on facts by restricting the disallowance to Rs. 1,50,000/- u/s. 14A as against Rs. 10,24,315/-." The assessee has also raised in its Cross Objection the following ground no.1: "1. For that in view of the facts and circumstances of the case the Assessing Officer was wholly wrong and unjustified in making adhoc, arbitrary disallowance of operative, administrative and other expenses to the tune of Rs. 10,24,315/- u/s. 14A of the I. T. Act purely on estimate and presumption attributing it to the earning of exempt dividend income of Rs. 71,86,525/- and the Ld. CIT(A) was equally wrong and unjustified in confirming the disallowance to the extent of Rs. 1,50,000/- without considering and appreciating the fact that no expense was actually inc....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 is wholly bad, illegal and void abinitio 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." 25. The brief facts relating to the above issue are that the assessee company filed its return of income originally on 28.10.2002 declaring total loss at Rs. 2,75,11,159/- as business loss and Rs. 1,13,187/- as Short Term Capital Loss. Subsequently, the return was processed u/s. 143(1) of the Act on 26.5.2003. Subsequently, the Assessing Officer after recording reasons initiated proceedings u/s. 147 r.w.s. 148 of the Act and according to him the transactions are speculative transactions and hence, the business loss is speculation loss as hit by explanation to Section 73 of the Act, hence, he computed business loss at Rs. 1,26,96,737/- and further computed speculation loss at Rs. 97,27,293/-. The subject matter was taken to a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....pense was a part of the second assessment order passed u/s. 147 on 16.10.2006. Therefore, the mistake detected which was prejudicial to the interest of revenue was in the order dt. 16.10.2006. Therefore, clearly revision u/s. 263 lies in this case. Secondly, the issue of prior period had not been dealt properly in that order thus, it cannot be held to be an issue already decided by the C1T(A). It may also be clarified further that initially after detection of the mistake an attempt had been taken to rectify it u/s.154 as the prior period expenditure items were available in the tax audit report. To this the assessee challenged that allowability of prior period items being a matter of deliberation and not a matter of arithmetic correction. Thereafter the proceedings had been dropped when the assessee had been clearly informed that the mistake would be rectified by invoking proper remedial action and the proposal was sent fur perusal of the CIT for invocation of his power u/s.263. The assessee had been informed then that it cannot take the plea that the issue had been deliberated upon and thereafter a conscious decision had been taken to allow the prior period items. Therefor....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed on the revision order passed by the CIT and argued that the limitation in this case starts from the reassessment framed u/s. 147/143(3) of the Act. He stated that as such the processing of return u/s. 143(1)(a) of the Act is not assessment and for this he cited the case law of Hon'ble Apex Court in the case of ACIT Vs. Rajesh Jhaveri Stock Brokers P. Ltd. (2007) 291 ITR 500 (SC), he stated that the Hon'ble Apex Court has interpreted the provisions of section 143(1) by holding that w.e.f. 1.6.1999 under the first proviso to the newly substituted section 143(1)of the Act, 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. Ld. CIT-DR stated that Hon'ble Apex Court noted that the acknowledgment is not done by any Assessing Officer, but mostly by ministerial staff and it cannot therefore be said that an "assessment" is done by them. He stated that Hon'ble Court held that the intimation under section 143(1)(a) of the Act was deemed to be a notice of demand under section 156 of the Act for the apparent purpose of making m....
X X X X Extracts X X X X
X X X X Extracts X X X X
....(1)(a) was substituted by the Finance Act, 1997, which was operative till June 1, 1999. The requirement was that an intimation was to be sent to the assessee whether or not any adjustment had been made under the first proviso to section 143(1) and notwithstanding that no tax or interest was found due from the assessee concerned. Between April 1, 1998, and May 31, 1999, sending of an intimation under section 143(1)(a) was mandatory. Thus, the legislative intent is very clear from the use of the word "intimation" as substituted for "assessment" that two different concepts emerged. While making an assessment, the Assessing Officer is free to make any addition after grant of opportunity to the assessee. By making adjustments under the first proviso to section 143(1)(a), no addition which is impermissible by the information given in the return could be made by the Assessing Officer. The reason is that under section 143(1)(a) no opportunity is granted to the assessee and the Assessing Officer proceeds on his opinion on the basis of the return filed by the assessee. The very fact that no opportunity of being heard is given under section 143(1)(a) indicates that the Assessing Officer has t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ng Officer, but mostly by ministerial staff. Can it be said that any "assessment" is done by them? The reply is an emphatic "no". The intimation under section 143(1)(a) was deemed to be a notice of demand under section 156, for the apparent purpose of making machinery provisions relating to recovery of tax applicable. By such application only recovery indicated to be payable in the intimation became permissible. And nothing more can be inferred from the deeming provision. Therefore, there being no assessment under section 143(1)(a), the question of change of opinion, as contended, does not arise." We find from the above judgment of Hon'ble Apex Court in the case of Rajesh Jhaveri Stock Brokers P. Ltd. (Supra) that the issue was regarding reopening and particularly change of opinion where no assessment was framed. With due respect to the above decision of the Hon'ble Apex Court, we are of the view that the intimation u/s. 143(1)(a) of the Act is no assessment but subsequently Hon'ble Apex Court in the case of Alagendran Finance Ltd. (Supra) considering the provisions of section 263 explanation (c),(2) has considered the period of limitation commences from the date of original ass....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nterests of the Revenue. But the original assessment was made on November 18, 1985, and the reassessment under section 147 of the Act was made on January 8, 1987 and the Commissioner of Incometax revised the original assessment order under section 263 on March 8, 1988, directing the Income-tax Officer to charge interest under section 215 of the Act. The assessee contended that as the original assessment order had merged with the reassessment order, the Commissioner of Income-tax could not revise the original assessment order under section 263of the Act. Hon'ble High Court held that the Commissioner of Income-tax could revise the original assessment order under section 263of the Act. 29. Even order u/s. 143(1)(a) is amenable to revision u/s. 263 of the Act and this view has been held by Hon'ble Madras High Court in the case of CIT Vs Smt. R. G. Umaranee (2003) 262 ITR 507 (Mad), wherein it is held that the order of Tribunal holding that the Commissioner has no jurisdiction to revise u/s. 263 an order u/s. 143(1)(a)of the Act, is not correct and is legally not sustainable. Similar view is held by Hon'ble Bombay High Court in the case of CIT Vs. Anderson Marine & Sons Pvt. Ltd. (20....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... in the case before it in that the earlier assessment order had been effaced by the subsequent order and closed the case with the observation "in these circumstances, we do not consider it necessary to go into the question that is raised and the same is left open". The decision of the Supreme Court in the case of Alagendran Finance Ltd. (Supra) has not noticed the decision in K. L. Srihari's case (supra), which, at any rate, can be considered only as one rendered in the facts of the case as it actually left the issue open. There are a number of other decisions of the High Courts taking one or the other view, the Supreme Court choosing the decision of the Madras High Court in CWT Vs. A. K. Thanga Pillai [2001] 252 ITR 260 for its approval in sorting out the controversy. The view of the Madras High Court, it was observed, was in consensus with the decision of the Supreme Court in Sun Engineering Works P. Ltd.'s case (Supra) treating the reassessment as a supplementary assessment. It follows that the time limit for revision has to be reckoned with reference to the first assessment in respect of any decisions prejudicial to the Revenue, so that the extended time limit was not availa....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed i stating in his order that no Explanation was offered for allowability of such expenditure and in any case without prejudice and even otherwise the entire sum of Rs. 35,06,607/- being Tax, Duty Cess or Fees was fully allowable during the year on the basis of actual payment and hence also order u/s. 263 is wholly bad, illegal and void abinitio. 5. Without prejudice to Grounds No. 1, 2, 3 & 4 above and even otherwise, Rs. 35,06,607/- considered by the CIT in his order u/s. 263 for the purposes of section 263 included Service Tax of Rs. 10,792/- which had already been disallowed by the AO in the assessment and hence proceedings u/s. 263 having been initiated for the same is wholly bad and moreover the said sum of Rs. 10,792/- being the expenses for prior year having been allowed by the CIT(A) by his Appellate order dated 25.02.2008, the order of the AO on the issue of prior period expenses had fully merged with the order of the CIT(A) and hence also provisions of section 263 did not validly lie in this case and in view of the facts and circumstances order u/s. 263 is wholly bad, illegal and void abinitio and hence in view of the facts and in the circumstances such order u....