M/S. SATCO SECURITIES & FINANACIAL SERVICES LTD, MUMBAI v. THE ITO 4(2)(2), MUMBAI

ITA 4067/MUM/2007 | 2001-2002
Pronouncement Date: 09-12-2011 | Result: Partly Allowed

Appeal Details

RSA Number 406719914 RSA 2007
Assessee PAN AAACS6813N
Bench Mumbai
Appeal Number ITA 4067/MUM/2007
Duration Of Justice 4 year(s) 6 month(s) 15 day(s)
Appellant M/S. SATCO SECURITIES & FINANACIAL SERVICES LTD, MUMBAI
Respondent THE ITO 4(2)(2), MUMBAI
Appeal Type Income Tax Appeal
Pronouncement Date 09-12-2011
Appeal Filed By Assessee
Order Result Partly Allowed
Bench Allotted J
Tribunal Order Date 09-12-2011
Date Of Final Hearing 23-11-2011
Next Hearing Date 23-11-2011
Assessment Year 2001-2002
Appeal Filed On 25-05-2007
Judgment Text
ITA NOS 4067 & 4094 OF 2007 SATCO SECURITIES & FIN.SERVICES LTD MUMBAI PAGE 1 OF 13 IN THE INCOME TAX APPELLATE TRIBUNAL 'J' BENCH MUMBAI BEFORE SHRI D.K. AGARWAL JUDICIAL MEMBER AND SHRI B. RAMAKOTAIAH ACCOUNTANT MEMBER ITA NO.4067/MUM/2007 (ASSESSMENT YEAR: 2001-02) SATCO SECURITIES & FINANCIAL SERVICES INCOME TAX OFFICER LTD. 224 291 KESAR BUILDING 4(2)(2) PRINCESS STREET AAYAKAR BHAVAN MUMBAI 400 002 VS MUMBAI 400020 PAN AAACS 6813 N APPELLANT RESPONDENT ITA NO.4094/MUM/2007 (ASSESSMENT YEAR 2001-02) INCOME TAX OFFICER SATCO SECURITIES & FIN. 4(2)(2) SERVICES LTD 224 291 AAYAKAR BHAVAN KESAR BLDG PRINCESS ST. MUMBAI 400020 VS MUMBAI 400002 PAN AAACS 6813 N APPELLANT RESPONDENT ASSESSEE BY: SHRI HARIDAS BHAT REVENUE BY: SHRI PARTHSARATHI NAIK DR DATE OF HEARING: 23/11/11 DATE OF PRONOUNCEMENT: 09/12/11 O R D E R PER B. RAMAKOTAIAH A.M. THESE ARE CROSS APPEALS BY ASSESSEE AND REVENUE AGA INST THE ORDER OF THE CIT-IV MUMBAI DATED 29.03.2007. THE AS SESSEE IN ITS APPEAL HAS RAISED FIVE GROUNDS. GROUND NO.1 PERTAIN S TO THE ISSUE OF REOPENING UNDER SECTION 147 OF THE ACT. GROUND NO.2 PERTAINS TO TREATMENT OF LOSS OF ` 31 72 921/- ARISING OUT OF THE REVALUATION OF CLOSING STOCK AS SPECULATION LOSS AND GROUND NO.3 D ISALLOWANCE OF EXPENDITURE TO THE TUNE OF ` 6.00 LAKHS ATTRIBUTABLE TO THE ITA NOS 4067 & 4094 OF 2007 SATCO SECURITIES & FIN.SERVICES LTD MUMBAI PAGE 2 OF 13 SPECULATION ACTIVITIES AND GROUND NO.4 PERTAIN TO T HE DISALLOWANCE OF INTEREST UNDER SECTION 40A(2)(B) OF ` 4 65 000/-. GROUND NO.5 BEING GENERAL IN NATURE. THE REVENUE IN ITS APPEAL IS CONTESTING THE CIT (A) ORDERS IN GIVING THE BENEFIT OF VANDHA LOS S OF ` 17 72 886/- TREATED AS THE SPECULATION LOSS BY THE ASSESSING OF FICER AS BUSINESS LOSS. IN GROUND NO.2 THE REVENUE IS CONTESTING REDU CTION OF EXPENDITURE ATTRIBUTABLE TO SPECULATION LOSS FROM ` 10.00 LAKHS TO ` 6.00 LAKHS. SINCE THESE ISSUES ARE INTER CONNECTED THEY ARE DECIDED AS UNDER. 2. THE ISSUE OF REOPENING UNDER SECTION 147 : BRIEFLY STATED THE ASSESSEE FILED RETURN OF INCOME DECLARING TOTAL LOSS OF ` 75 239/- AND THE ASSESSMENT UNDER SECTION 143(3) WAS COMPLET ED ON 31.03.2003 DETERMINING THE TOTAL INCOME AT ` 39 49 962/- WHICH WAS SUBJECT MATTER OF APPEAL ON THE ISSUES OF DEPRE CIATION ON BSE MEMBERSHIP CARD SEBI TURNOVER FEES AND COMPUTER SO FTWARE CHARGES. IT WAS NOTICED BY THE ASSESSING OFFICER TH AT THE ASSESSEE HAS NOT CONSIDERED THE LOSS AS SPECULATION LOSS AND INITIATED PROCEEDINGS UNDER SECTION 147 TAKING NECESSARY APP ROVAL FROM THE ADDITIONAL COMMISSIONS OF INCOME TAX RANGE-4 AND N OTICE UNDER SECTION 148 WAS ISSUED ON 23.03.2006 I.E. WITHIN 4 YEARS FROM THE END OF THE ASSESSMENT YEAR. THE ASSESSEE OBJECTED T O THE REASSESSMENT WHICH WAS REJECTED BY A LETTER NO.ITO4(2)(2)/1242(1)2006-07 DATED 30.06.2006 BY TH E AO. IN THE REASSESSMENT PROCEEDINGS THE SHARE TRADING LOSS WA S CONSIDERED AS SPECULATIVE LOSS AND AN AMOUNT OF ` 10/- LAKHS WAS ALSO APPORTIONED AS EXPENDITURE TOWARDS SPECULATION ACTIVITY. THE AS SESSEE CONTESTED THE REOPENING OF ASSESSMENT BEFORE THE CIT (A) AND THE CIT (A) BY GIVING THE FOLLOWING FINDINGS REJECTED THE CONTENTI ONS: 2.2 I HAVE CONSIDERED THE SUBMISSIONS MADE BY THE APPELLANT BUT I DO NOT AGREE WITH THE SAME. SECTION 147 GIVES WIDE POWERS TO THE ASSESSING OFFICER TO ISSUE NOTICE UNDER SECTION 148 OF THE ACT. THE DEEMING ITA NOS 4067 & 4094 OF 2007 SATCO SECURITIES & FIN.SERVICES LTD MUMBAI PAGE 3 OF 13 PROVISIONS AS PER CLAUSE (B) OF EXPLANATION 2 TO SE CTION 147 SPECIFIES THAT WHERE A RETURN HAS BEEN FILED BU T NO ASSESSMENT HAS BEEN MADE AND IT IS NOTICED BY THE ASSESSING OFFICER THAT THE ASSESSEE HAS UNDERSTATED THE INCOME OR HAS CLAIMED EXCESSIVE LOSS DEDUCTION ALLOWANCE OR RELIEF IN THE RETURN IT SHALL BE DEEM ED TO BE A CASE WHERE INCOME CHARGEABLE TO TAX HAS ESCAPED ASSESSMENT. IN THE INSTANT CASE THE ASSESSING OFFI CER HAD REASON TO BELIEVE THAT CERTAIN CLAIM HAD BEEN ALLOWED IN EXCESS TO THE APPELLANT. THE PROVISIONS OF SECTION 147 AS AMENDED W.E.F. 1.04.1998 ARE CONTEXTUALLY DIFFERENT AND THE CUMULATIVE CONDITION S SPELT OUT IN CLAUSES (A) AND (B) OF SECTION 147 PRI OR TO ITS AMENDMENT ARE NOT PRESENT IN THE AMENDED PROVISION. THE ONLY CONDITION FOR ACTION IS THAT THE ASSESSING OFFICER SHOULD HAVE REASONS TO BELIEVE THAT INCOME HAS ESCA PED ASSESSMENT. HON'BLE DELHI HIGH COURT HAS HELD IN BA WA ABHAI SINGH VS. DY. CIT (2001) 117 TAXMAN 12 THAT SUCH BELIEF CAN BE REACHED IN ANY MANNER AND IT NOT QUALIFIED BY A PRE-CONDITION OF FAITH AND TRUE DISC LOSURE OF MATERIAL FACT BY AN ASSESSEE AS CONTEMPLATED IN THE PRE-AMENDED SECTION 147(A). VIEWED IN THAT ANGLE POWER TO REOPEN ASSESSMENT IS MUCH WIDER UNDER THE AMENDED PROVISION AND CAN BE EXERCISED EVEN AFTER T HE ASSESSEE HAS DISCLOSED FULLY AND TRULY ALL MATERIAL FACTS. AS REGARDS THE APPELLANTS CONTENTION THAT THE ASSE SSEE HAD FULLY DISCLOSED THE FACTS IN THE COMPUTATION OF INCOME EVERY DISCLOSURE IS NOT AND CANNOT BE TREAT ED TO BE TRUE AND FULL DISCLOSURE. HON'BLE SUPREME COURT HAS HELD IN SRI KRISHNA (P) LTD. VS. INCOME TAX OFFICER (1996) 221 ITR 538 THAT A DISCLOSURE MAY BE FALSE ONE OR T RUE ONE. IT MAY OR MAY NOT BE FULL DISCLOSURE. WHAT IS REQUIRED IS A FULL AND TRUE DISCLOSURE OF ALL MATER IAL FACTS NECESSARY FOR MAKING ASSESSMENT FOR THAT YEAR. IN VIEW OF THE ABOVE DISCUSSION I BELIEVE THAT THE ASSESSING OFFICER WAS FULLY JUSTIFIED IN INVOKING T HE PROVISIONS OF SECTION 147 OF THE ACT AS HE HAD SUFF ICIENT REASON TO BELIEVE THAT CERTAIN INCOME HAD ESCAPED ASSESSMENT. ACCORDINGLY THE ACTION OF THE ASSESSING OFFICER IS UPHELD. 3. IT WAS CONTENDED BEFORE US THAT REOPENING WAS BAD I N LAW AS THE ORIGINAL ASSESSMENT WAS ALREADY COMPLETED AND T HE ASSESSING OFFICER DEEMED TO HAVE CONSIDERED THE SPECULATION L OSS. THE ASSESSEE RELIED ON THE DECISIONS OF THE HONBLE BOM BAY HIGH COURT ITA NOS 4067 & 4094 OF 2007 SATCO SECURITIES & FIN.SERVICES LTD MUMBAI PAGE 4 OF 13 IN THE CASE OF CARTINI INDIA LTD VS. ADD. CIT 314 I TR 275 AND THE DECISION OF IDEA CELLULAR VS. DCIT 301 ITR 407 AND ROSE SERVICES APARTMENT (P) LTD VS. DCIT 56 DTR (DEL) 353 OF THE HONBLE DELHI HIGH COURT. HOWEVER THE LEARNED DEPARTMENTAL REPRE SENTATIVE RELIED ON THE ORDERS OF THE CIT AND FURTHER ON THE PRINCIPLES ESTABLISHED BY THE HON'BLE SUPREME COURT IN THE CAS E OF HONDA SEIL POWER PRODUCTS LTD VS. DCIT IN SPECIAL LEAVE APPEAL NO.19085/2011 DATED 29.7.2011. 4. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND EXAMINI NG THE RECORD WE ARE OF THE OPINION THAT THE ASSESSING OF FICER HAS NEITHER INQUIRED NOR EXAMINED THE ISSUE OF SPECULATION LOSS AT THE TIME OF COMPLETING THE ORIGINAL ASSESSMENT. MOREOVER ASSES SEE HAS NOT PLACED ON RECORD ANY EVIDENCE THAT THIS ISSUE WAS E XAMINED IN THE ORIGINAL ASSESSMENT SO AS TO COME TO A CONCLUSION T HAT THE ASSESSING OFFICER FORMED AN OPINION ON THE ISSUE. I N THE ABSENCE OF ANY EVIDENCE TO THE CONTRARY FINDINGS OF THE CIT ( A) ARE TO BE UPHELD. FURTHER THE HON'BLE SUPREME COURT IN THE CA SE OF HONDA SEIL POWER PRODUCTS (SUPRA) HAS ALSO UPHELD THE REO PENING ON SIMILAR FACTS AND FURTHER HONBLE BOMBAY HIGH COURT IN THE CASE OF INDIAN HUMES PIPE CO. LTD VS. CIT IN WRIT PETITION NO.1017 OF 2011 DATED 8.11.11 CONSIDERED THE SCOPE OF FULL AND TRU E DISCLOSURE OF MATERIAL FACTS TO HOLD THAT IT SHOULD BE SPECIFIC DISCLOSURE OF EACH FACT. AS THE ASSESSEE HAS NOT DEMONSTRATED BEFORE U S THAT THE ISSUE OF SPECULATION LOSS WAS EXAMINED IN THE ORIGINAL AS SESSMENT AND CONSIDERING THAT THE REOPENING WAS DONE WITHIN 4 YE ARS FROM THE END OF THE ASSESSMENT YEAR WE UPHOLD THE ORDER OF THE CIT (A) AND REJECT ASSESSEES CONTENTIONS. CASE LAW RELIED UPON BY THE ASSESSEE DO NOT APPLY TO THE FACTS AS THEY WERE RENDERED IN THE CONTEST OF REOPENING AFTER 4 YEARS FROM THE END OF ASSESSMENT YEAR FOR WHICH IT HAS TO BE DEMONSTRATED THAT THERE IS FAILURE ON THE PART OF THE ASSESSEE TO FULLY DISCLOSE THE MATERIAL FACTS OR T HERE WAS EVIDENCE ITA NOS 4067 & 4094 OF 2007 SATCO SECURITIES & FIN.SERVICES LTD MUMBAI PAGE 5 OF 13 THAT ASSESSING OFFICER FORMED AN OPINION IN THE ASS ESSMENT PROCEEDINGS. SINCE PROVISO TO SECTION 147 DOES NOT APPLY AS THE REOPENING WAS DONE WITHIN 4 YEARS WE ARE OF THE OP INION THAT THE ASSESSING OFFICER HAS CORRECTLY INVOKED THE PROVISI ONS OF SECTION 147 EXPLANATION 2(C) AND THEREFORE THIS GROUND OF THE A SSESSEE IS REJECTED. IT WAS ALSO NOTICED THAT THE ASSESSING OF FICER REJECTED THE OBJECTIONS BY A SEPARATE ORDER DATED 30.6.2006 AND THE ASSESSEE HAS NOT PLACED ON RECORD THE REASONS RECORDED BY TH E ASSESSING OFFICER IN THAT ORDER AND CHALLENGE MADE BY THE ASS ESSEE TO THAT ORDER. GROUND NO. 1 IS REJECTED. 5. GROUND NO.2 & 3 OF THE ASSESSEE APPEAL AND GROUND NO.1 & 2 OF REVENUES APPEAL : THE ISSUE IN THESE FOUR GROUNDS BY THE ASSESSEE AND REVENUE ARE WITH REFERENCE TO T HE TREATMENT OF LOSS CLAIMED BY THE ASSESSEE TO THE EXTENT OF ` 49 45 786/- . THE DETAILS ARE AS UNDER: DECREASE IN STOCK - (-) 31 72 921.20 LOSS OF SALE OF INV - (-) 17 83 971.59 PROFIT ON SALE OF INV. - (+) 58 431.99 LOSS ON F&O SEGMENT - (-) 47 326.00 TOTAL = (-) 49 45 786.80 ============= 6. THE ASSESSING OFFICER CONSIDERED THE EXPLANATION TO SECTION 73 AND HELD THAT THE ASSESSEE COMPANY DEEMED TO BE CARRYING ON SPECULATION BUSINESS TO THE EXTENT TO WHICH BUSINES S CONSISTED OF PURCHASE AND SALE OF SUCH SHARES. BEFORE THE CIT (A ) IT WAS SUBMITTED THAT MOST OF THE PURCHASE AND SALE OF SHA RES AROSE DUE TO MISTAKE IN ENTERING THE SHARE TRADING TRANSACTIONS ON BEHALF OF THE CLIENTS WHICH THE CLIENTS DID NOT ACCEPT DUE TO THE MISTAKE IN ENTRIES AND THEREFORE THOSE TRANSACTIONS GENERALLY CONSIDE RED IN THE MARKET AS VANDHA TRANSACTIONS ARE TAKEN UP BY THE ASSESSEE IN ORDER TO CONTINUE ITS BROKERAGE BUSINESS AND THEREF ORE THE LOSS ITA NOS 4067 & 4094 OF 2007 SATCO SECURITIES & FIN.SERVICES LTD MUMBAI PAGE 6 OF 13 ARISING THEREIN IS VANDHA LOSS WHICH IS NOT SPECU LATIVE LOSS. ACCEPTING THE ASSESSEES SUBMISSIONS THE CIT (A) G AVE RELIEF ON THE LOSS CLAIM ON SALE OF SHARES TO THE EXTENT OF ` 17 83 971/- WHICH THE REVENUE IS CONTESTING IN ITS APPEAL WHEREAS THE CI T (A) CONFIRMED THE LOSS ARISING OUT OF VALUATION OF STOCK AS SPECU LATION LOSS WHICH ASSESSEE IS CONTESTING. IN ADDITION TO THE ABOVE T HE ASSESSING OFFICER ALLOCATED THE EXPENDITURE OF ` 10.00 LAKHS AS ATTRIBUTABLE TO SUCH ACTIVITIES. CONSEQUENT TO THE RELIEF GIVEN BY THE CIT TO THE EXTENT OF VANDHA LOSS HE REDUCED THE ALLOCATION O F EXPENDITURE TO ` 6.00 LAKHS. 7. AFTER CONSIDERING THE ARGUMENTS OF THE RIVAL PARTIE S AND EXAMINING THE FACTS AS PLACED IN THE PAPER BOOK FRO M PAGES NOS. 43 TO 52 WE ARE OF THE OPINION THAT ORDER OF CIT(A) O N THE ISSUE OF TREATING VALUATION LOSS AS SPECULATIVE LOSS DOES NO T REQUIRE ANY MODIFICATION. IT IS NOT IN DISPUTE THAT THE SHARES ARE TREATED AS ASSESSEES OWN SHARES AND THAT TOO TRADING SHARES. THE HON'BLE ITAT AHMEDABAD BENCH IN THE CASE OF KRISHNALAXMI MU LTI TRADE (P) LTD VS. ACIT IN ITA NO.3877/AHD/2004 IN ASSESSMENT YEAR 2000- 01 PLACED ON RECORD BY DR HAS HELD AS UNDER: 6. WE HAVE CAREFULLY CONSIDERED ARGUMENTS OF BOTH THE SIDES AND PERUSED THE MATERIAL PLACED BEFORE US. SE CTION 73 OF THE INCOME TAX ACT DEALS WITH THE LOSS IN SPECULATION BUSINESS. THE SECTION READS AS UNDER: (1) ANY LOSS COMPUTED IN RESPECT OF A SPECULATION BUSINESS CARRIED ON BY THE ASSESSEE SHALL NOT BE S ET OFF EXCEPT AGAINST PROFITS AND GAINS IF ANY OF ANOTHE R SPECULATION BUSINESS. (2) WHERE FOR ANY ASSESSMENT YEAR ANY LOSS COMPUTED IN RESPECT OF A SPECULATION BUSINESS HAS NOT BEEN WHOL LY SET OFF UNDER SUB-SECTION (1) SO MUCH OF THE LOSS AS IS NOT SO SET OFF OR THE WHOLE LOSS WHERE THE ASSESSEE HAD NO INCOME FROM ANY OTHER SPECULATION BUSINESS SHAL L SUBJECT TO THE OTHER PROVISIONS OF THIS CHAPTER BE CARRIED FORWARD TO THE FOLLOWING ASSESSMENT YEAR AND -- ITA NOS 4067 & 4094 OF 2007 SATCO SECURITIES & FIN.SERVICES LTD MUMBAI PAGE 7 OF 13 (I) IT SHALL BE SET OFF AGAINST THE PROFITS AND GAI NS IF ANY OF ANY SPECULATION BUSINESS CARRIED ON BY HIM ASSESSABLE FOR THAT ASSESSMENT YEAR; AND (II) IF THE LOSS CANNOT BE WHOLLY SO SET OFF THE AMOUNT OF LOSS NOT SO SET OFF SHALL BE CARRIED FORWARD TO THE FOLLOWING ASSESSMENT YEAR AND SO ON. (3) IN RESPECT OF ALLOWANCE ON ACCOUNT OF DEPRECIAT ION OR CAPITAL EXPENDITURE ON SCIENTIFIC RESEARCH THE PRO VISIONS OF SUB-SECTION (2) OF SECTION 72 SHALL APPLY IN REL ATION TO SPECULATION BUSINESS AS THEY APPLY IN RELATION TO A NY OTHER BUSINESS. (4) NO LOSS SHALL BE CARRIED FORWARD UNDER THIS SEC TION FOR MORE THAN EIGHT ASSESSMENT YEARS IMMEDIATELY SUCCEEDING THE ASSESSMENT YEAR FOR WHICH THE LOSS W AS FIRST COMPUTED. EXPLANATION : WHERE ANY PART OF THE BUSINESS OF A COMPANY OTHER THAN A COMPANY WHOSE GROSS TOTAL INCOME CONSISTS MAINLY OF INCOME WHICH IS CHARGEABL E UNDER THE HEADS 'INTEREST ON SECURITIES' 'INCOME F ROM HOUSE PROPERTY' 'CAPITAL GAINS' AND 'INCOME FROM O THER SOURCES' OR A COMPANY THE PRINCIPAL BUSINESS OF WH ICH IS THE BUSINESS OF BANKING OR THE GRANTING OF LOANS AND ADVANCES) CONSISTS IN THE PURCHASE AND SALE OF SHAR ES OF OTHER COMPANIES SUCH COMPANY SHALL FOR THE PURPOS ES OF THIS SECTION BE DEEMED TO BE CARRYING ON A SPECULATION BUSINESS TO THE EXTENT TO WHICH THE BUS INESS CONSISTS OF THE PURCHASE AND SALE OF SUCH SHARES . AS PER SUB-SECTION 1 OF SECTION 73 ANY LOSS COMPUTE D IN RESPECT OF SPECULATION BUSINESS CARRIED ON BY THE ASSESSEE SHALL NOT BE SET OFF EXCEPT AGAINST THE PR OFIT AND GAIN OF THE SPECULATION BUSINESS. EXPLANATION T O SECTION 73 IS A DEEMING PROVISION WHICH WOULD BE APPLICABLE IF THE FOLLOWING CONDITIONS ARE SATISFIE D; I) THE ASSESSEE IS A COMPANY II) PART OF THE BUSINESS OF THE ASSESSEE IS CONSISTING OF PURCHASE AND SALE OF SHARES OF OTHER COMPANY; IF THE ABOVE TWO CONDITIONS ARE SATISFIED THEN THE ASSESSEE SHALL BE DEEMED TO BE CARRYING ON THE SPECULATION BUSINESS TO THE EXTENT SUCH BUSINESS IS ITA NOS 4067 & 4094 OF 2007 SATCO SECURITIES & FIN.SERVICES LTD MUMBAI PAGE 8 OF 13 CONSISTED OF PURCHASE AND SALE OF SHARES. THERE ARE SOME EXCEPTIONS ALSO UNDER WHICH THIS EXPLANATION WOULD NOT BE APPLICABLE. HOWEVER IT IS NOT THE CLA IM OF THE ASSESSEE THAT ITS CASE FALLS UNDER ANY OF SUCH EXCEPTIONS THEREFORE THOSE EXCEPTIONS DO NOT REQU IRE TO BE DEALT WITH IN THIS APPEAL. NOW ADMITTEDLY THE ASSESSEE IS A COMPANY AND PART OF ITS BUSINESS IS CONSISTING OF PURCHASE AND SALE OF SHARES OF OTHER COMPANY. THE ASSESSEE SUFFERED LOSS IN SUCH BUSINES S THEREFORE THE EXPLANATION TO SECTION 73 WOULD BE APPLICABLE. THE ONLY DISPUTE IS HOW TO COMPUTE THE PROFIT OF SUCH SPECULATION BUSINESS. IT IS CONTENDED BY T HE LEARNED COUNSEL THAT THE LOSS FROM THE PURCHASE AND SALE OF THE SHARES IS TO BE SEPARATELY CONSIDERED AND LO SS ON ACCOUNT OF VALUATION OF CLOSING STOCK OF THE SHARES IS TO BE SEPARATELY CONSIDERED. WE ARE UNABLE TO ACCEPT T HE ABOVE CONTENTIONS OF THE LEARNED COUNSEL. IF THE CONTENTION OF THE LEARNED COUNSEL IS ACCEPTED IT W OULD AMOUNT TO HOLDING THAT THERE ARE TWO SOURCES OF INC OME- ONE IS THE TRADING BUSINESS OF PURCHASE AND SALES O F SHARES AND OTHER VALUATION OF THE CLOSING STOCK. IT IS SETTLED POSITION OF LAW THAT THE VALUATION OF THE C LOSING STOCK IS NOT A SEPARATE SOURCE OF INCOME. THE TRUE PURPOSE OF VALUING AND CREDITING THE CLOSING STOCK IN THE TRADING ACCOUNT IS TO BALANCE SO AS TO CANCEL OUT T HE ENTRIES RELATING TO SAME STOCK FROM BOTH THE SIDES OF THE ACCOUNT. THERE ARE VARIOUS METHODS FOR VALUATION OF CLOSING STOCK. APART FROM COST THE ASSESSEE CAN VA LUE THE CLOSING STOCK AT MARKET VALUE OR COST OR MARKE T VALUE WHICHEVER IS LOWER. BUT MERELY BECAUSE THE ASSESSEE HAD VALUED THE STOCK AT MARKET VALUE WHIC H IS LOWER THAN THE COST IT CANNOT BE SAID THAT THE LOS S ARISEN FROM THE VALUATION OF THE CLOSING STOCK. THE LOSS I S FROM THE TRADING BUSINESS OF PURCHASE AND SALE OF SHARES AND THE VALUATION OF THE CLOSING STOCK AT LESS THAN THE COST IS THE ACCOUNTING FOR THE ANTICIPATED LOSS FROM THE BU SINESS OF PURCHASE AND SALE OF SHARES. THEREFORE THE CONT ENTION OF THE LEARNED COUNSEL THAT THE LOSS FROM THE PURCH ASE AND SALE OF SHARES AND LOSS FROM THE VALUATION OF T HE CLOSING STOCK IS TO BE TREATED SEPARATELY CANNOT BE ACCEPTED. THERE IS ONLY ONE TRADING ACCOUNT IN RESP ECT OF THE BUSINESS OF PURCHASE AND SALE OF SHARES. IN SUC H TRADING ACCOUNT PROFIT/LOSS IS TO BE WORKED OUT OF COURSE AFTER TAKING THE VALUE OF THE STOCK AS PER THE METH OD OF ACCOUNTING FOR VALUATION OF THE CLOSING STOCK BEING REGULARLY FOLLOWED BY THE ASSESSEE. AFTER SUCH VALU ATION OF CLOSING STOCK WHATEVER PROFIT OR LOSS ARISES I T WOULD ITA NOS 4067 & 4094 OF 2007 SATCO SECURITIES & FIN.SERVICES LTD MUMBAI PAGE 9 OF 13 BE PROFIT/LOSS FROM THE BUSINESS OF PURCHASE AND SA LES OF THE SHARES. THERE CANNOT BE ANY ARTIFICIAL DIVISION OF SUCH LOSS BETWEEN THE LOSS FROM TRADING IN SHARES A ND LOS FROM VALUATION OF CLOSING STOCK. WHILE TAKING T HIS VIEW WE DERIVE SUPPORT FROM THE DECISION OF THE HO N'BLE APEX COURT IN THE CASE OF CHAIRRUP SAMPATRAM VS. CI T 24 ITR 481 (SC) WHEREIN THEIR LORDSHIPS HELD: IT IS A MISCONCEPTION TO THINK THAT ANY PROFIT ARI SES OUT OF THE VALUATION OF THE CLOSING STOCK AND THE SITU S OF ITS ARISING OR ACCRUAL IS WHERE THE VALUATION IS MADE. VALUATION OF UNSOLD STOCK AT THE CLOSE OF AN ACCOUN TING PERIOD IS A NECESSARY PART OF THE PROCESS OF DETERM INING THE TRADING RESULTS OF THAT PERIOD AND CAN IN NO SE NSE BE REGARDED AS THE SOURCE OF SUCH PROFITS. NOR CAN T HE PLACE WHERE SUCH VALUATION IS MADE BE REGARDED AS T HE SITUS OF THEIR ACCRUAL. THE SOURCE OF THE PROFITS A ND GAINS OF A BUSINESS IS INDUBITABLY THE BUSINESS AND THE P LACE OF THEIR ACCRUAL IS WHERE THE BUSINESS IS CARRIED ON. AS SUCH PROFITS CAN BE CORRECTLY ASCERTAINED ACCORDING TO T HE METHOD ADOPTED BY AN AS ONLY AFTER BRINGING INTO TH E TRADING ACCOUNT HIS CLOSING STOCK WHEREVER IT MAY E XIST THE WHOLE OF THE PROFITS MUST BE TAKEN TO ACCRUE OR ARISE AT THE PLACE OF CARRYING ON THE BUSINESS. 7. THE LEARNED COUNSEL FOR THE ASSESSEE HAD RELIED UPON TWO DECISIONS OF THE ITAT MUMBAI BENCHES IN THE CAS E OF PIONEER EQUITY TRADE PVT. LTD (SUPRA) AND MODELLA WOOLLENS LTD (SUPRA). HOWEVER WE FIND THAT FACTS I N BOTH THE ABOVE CASES WERE DIFFERENT IN AS MUCH AS THERE WAS NO PURCHASE AND SALE OF SHARES DURING THE RELEVANT YEAR. SINCE THERE WAS NO PURCHASE AND SALES OF SHARES DUR ING THE YEAR UNDER APPEAL BEFORE THE ITAT THE ITAT HAS TAKEN THE VIEW THAT EXPLANATION TO SECTION 73 WAS N OT APPLICABLE. THE ITAT DELHI BENCHES IN THE CASE OF INCOME TAX OFFICER VS. BIG APPLE CLOTHING PVT LTD. (2010) 5 ITR (TRIB) 44(DELHI) HAS TAKEN THE VIEW THAT THE EXPLANATION TO SECTION 73 WOULD BE APPLICABLE EVEN WHEN THE LOSS IS ARISING BECAUSE OF THE VALUATION O F SHARES. IN THE CASE UNDER APPEAL BEFORE US ADMITTE DLY THERE ARE LARGE NUMBER OF TRANSACTIONS OF PURCHASE AND SALE OF SHARES DURING THE YEAR UNDER CONSIDERATION. THEREFORE THERE IS NO DISPUTE THAT EXPLANATION TO SECTION 73 IS APPLICABLE. ONLY QUESTION IN THIS APPEAL BEFO RE US IS WITH REGARD TO DETERMINATION OF LOSS FROM THE BU SINESS OF PURCHASE AND SALE OF SHARES. THUS THE FACTS IN THE CASE UNDER APPEAL BEFORE US ARE ALTOGETHER DIFFEREN T THAN THE FACTS IN THE CASES RELIED UPON BY THE LEARNED C OUNSEL ITA NOS 4067 & 4094 OF 2007 SATCO SECURITIES & FIN.SERVICES LTD MUMBAI PAGE 10 OF 13 OF THE LEARNED DR. ONLY DISPUTE IN THIS APPEAL BEFO RE US IS WITH REGARD TO DETERMINATION OF LOSS FROM SHARE TRADING BUSINESS. FOR THE DETAILED DISCUSSION IN PA RA NO.6 ABOVE WE HOLD THAT WHILE DETERMINING LOSS FRO M SHARE TRADING BUSINESS LOSS FROM VALUATION OF CLOS ING STOCK CANNOT BE EXCLUDED. VALUATION OF CLOSING STOC K IS INTEGRAL PART OF PREPARATION OF TRADING ACCOUNT. IN VIEW OF THE ABOVE WE REJECT THE GROUND NO.2 OF THE ASSESSE ES APPEAL. 8. THIS VIEW IS ALSO SUPPORTED BY THE HON'BLE BOMBAY H IGH COURT IN THE CASE OF PRASAD AGENTS (P) LTD VS. INCO ME TAX OFFICER IN ITA NO.196 OF 2009 DATED 20.3.2009 ON THE ISSUE (I) WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW THE TRIBUNAL WAS JUSTIFIED IN TREATING ` 6 00 877/- AS SPECULATION LOSS BY DINT OF THE EXPLANATION TO S ECTION 73 OF THE ACT ? (II) (II) WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW THE TRIBUNAL WAS CORRECT IN TREATI NG THE LOSS OF ` 6 00 877/- ORIGINATING FROM AND TRACEABLE SIMPLY AND BARELY TO THE VALUATION OF STOCK OF SHAR ES AS COVERED BY THE KEN OF THE EXPLANATION TO SECTION 73 OF THE ACT ? THE HON'BLE BOMBAY HIGH COURT HELD VIDE PARA 9 AS UNDER: 9. IN OUR OPINION THERE CAN BE NO DIFFERENCE BETWE EN THE LOSSES SUFFERED IN THE COURSE OF TRADING BY DELIVER Y AND LOSSES IN TERMS OF THE BOOK VALUE. AS LONG AS THE ASSESSEE IS CARRYING ON BUSINESS OF TRADING BY WAY OF PURCHASE AND SALE OF SHARES EVEN IF IN RESPECT OF A NY FINANCIAL YEAR THERE ARE NO TRANSACTION AND YET TH E COMPANY HAS STOCK IN TRADE OF SHARES THE BOOK VALU E WILL HAVE TO BE CONSIDERED FOR THE PURPOSE OF CONSI DERING THE PROFIT AND LOSS IN CASE OF SPECULATIVE BUSINESS . THERE CAN BE NO DOUBT THAT THE EXPLANATION TO SECTION 73 CANNOT BE READ TO MEAN ONLY WHEN THERE IS A PURCHAS E AND SALE OF SHARES IN THE COURSE OF THE FINANCIAL Y EAR. THE EXPLANATION WILL COVER BOTH SHARES WHICH ARE ST OCK IN TRADE AND SHARES WHICH ARE TRADED IN THE COURSE OF THE FINANCIAL YEAR FOR THE PURPOSE OF CONSIDERING T HE LOSS ITA NOS 4067 & 4094 OF 2007 SATCO SECURITIES & FIN.SERVICES LTD MUMBAI PAGE 11 OF 13 AND PROFIT FOR THAT YEAR. THE TRIBUNAL IN OUR OPIN ION HAS CORRECTLY ANSWERED THE ISSUE BY HOLDING THAT THE LO SS OF PROFIT ON ACCOUNT OF VALUATION AMOUNTS TO REVENUE L OSSES OR REVENUE RECEIPT. THE SECOND QUESTION THEREFORE ALSO WILL HAVE TO BE ANSWERED AGAINST THE ASSESSEE AND I N FAVOUR OF THE REVENUE. 9. IN VIEW OF THE JURISDICTIONAL HIGH COURT JUDGMENT WE UPHOLD THE ORDER OF THE CIT (A) WHICH IS IN CONFORMITY WIT H THE ABOVE JUDGMENT OF THE HON'BLE HIGH COURT. THEREFORE THE GROUND NO.2 RAISED BY THE ASSESSEE REGARDING THE LOSS OF ` 31 72 921/- IS REJECTED. CONSEQUENT TO THE REJECTION OF THE ABOVE THE ASSESSEES CONTENTION ABOUT EXPENDITURE ATTRIBUTABLE TO THE SP ECULATION ACTIVITIES TO THE EXTENT OF ` 6.00 LAKHS IS ALSO BE DISMISSED AS THE ASSESSEE IS NOT CONTESTING THE QUANTIFICATION OF TH E EXPENDITURE BUT ONLY ON THE PRINCIPLE THAT THE BUSINESS LOSS SO CLA IMED CANNOT BE HELD TO BE COVERED BY EXPLANATION TO SECTION73. THE REFORE ASSESSEES GROUNDS NO.2 & 3 ARE ACCORDINGLY REJECTE D. 10. COMING TO THE ISSUE OF VANDHA LOSS CONTESTED BY REV ENUE THE SAME REQUIRED TO BE EXAMINED BY THE ASSESSING OFFIC ER. AS SEEN FROM THE BALANCE SHEET PLACED ON RECORD THE ASSESS EE HAS SHOWN STOCK IN TRADE TO THE EXTENT OF ` 21 89 579/- UNDER THE HEAD CURRENT ASSETS AS AGAINST ` 32 61 097/- OF EARLIER YEAR. THERE IS NOTHING ON RECORD TO EXAMINE WHETHER THIS STOCK IN TRADE SHO WN IS PERTAINING TO VANDHA TRANSACTIONS SO CLAIMED OR ASSESSEE OWN T RADING TRANSACTIONS. IT IS ALSO NOTICED THAT THE ASSESSEE ALSO HAD JOBBING PROFIT OF ` 11 39 213/-. VIDE PARA 3.1 CIT (A) ALSO NOTED THAT THE ASSESSEE SUBMITTED THAT CONSIDERING THE COMBINED NA TURE OF BUSINESS EXPENSES TOWARDS BROKERAGE BUSINESS AS WEL L AS TRADING IN SHARES ON ITS OWN ACCOUNT THE EXPENDITURE TO BE SE GREGATED. THIS INDICATES THAT THERE IS TRADING IN SHARES ON ITS OW N ACCOUNT WHICH ASPECT HAS NOT BEEN CONSIDERED BY THE CIT(A). IN VI EW OF THIS WE ARE OF THE OPINION THAT THE GROUNDS RAISED BY THE REVEN UE REGARDING VANDHA LOSS TO BE TREATED AS SPECULATION LOSS IS TO BE EXAMINED ITA NOS 4067 & 4094 OF 2007 SATCO SECURITIES & FIN.SERVICES LTD MUMBAI PAGE 12 OF 13 WHETHER THE LOSS AROSE IN VANDHA TRANSACTIONS OR I N ASSESSEES OWN TRADING TRANSACTIONS. IT IS NOTICED THAT THE CIT HA S CONSIDERED THE TOTAL LOSS OF `49 45 786/- MINUS DECREASE IN STOCK VALUE TO THE EXTENT OF `31 72 921/- AS BUSINESS LOSS. AS SEEN FR OM THE TABLE EXTRACTED ABOVE THERE IS A PROFIT ON SALE OF INVES TMENT TO THE EXTENT OF `58 431/- WHICH SHOULD BE CONSIDERED ALONG WITH THE LOSS ON SALE OF INVESTMENT AND LOSS IN F & O TRANSACTIONS WHERE THERE IS NO DELIVERY. THEREFORE THE ASSESSING OFFICER IS ALSO DIRECTED TO EXAMINE THE NATURE OF LOSS CORRECTLY AND DETERMINE THE ISSU E ACCORDINGLY. TO THAT EXTENT THE ORDER OF THE CIT (A) IS SET ASID E AND THE MATTER RESTORED TO THE FILE OF THE ASSESSING OFFICER TO EX AMINE THE FACTS. 11. WITH REFERENCE TO THE REVENUES GROUND NO.2 ABOUT T HE DELETION OF ` 4.00 LAKHS BY THE CIT (A) SINCE THE ISSUE OF VANDH A/ SPECULATION LOSS CONTESTED IN GROUND NO.1 OF THE RE VENUE IS RESTORED TO THE FILE OF THE ASSESSING OFFICER FOR F RESH EXAMINATION ON FACTS THE ISSUE OF EXPENDITURE ATTRIBUTABLE TO SUC H ACTIVITY IS ALSO RESTORED TO THE FILE TO DECIDE ACCORDINGLY. WITH TH ESE DIRECTIONS THE GROUND NUMBERS 2 & 3 OF THE ASSESSEE ARE REJECTED A ND REVENUES GROUND NO.1 AND 2 ARE ALLOWED FOR STATISTICAL PURPO SES. 12. GROUND NO.4 IN ASSESSEES APPEAL IS WITH REFERENCE TO DISALLOWANCE OF ` 4 65 000/- UNDER SECTION 40A IN LIEU OF INTEREST PAID TO SHRI AMANLAL MELWANI ONE OF THE DIRECTORS FOLLOWING THE ORDER OF THE CIT (A) FOR ASSESSMENT YEAR 2002-03. A T THE OUTSET IT WAS SUBMITTED THAT THIS ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY THE ORDERS OF THE ITAT IN OTHER YEARS AND ACCORDING LY THE ADDITION SHOULD BE DELETED. AS SEEN FROM THE ORDER PLACED FO R ASSESSMENT YEAR 2040-05 IN ITA NO.4289/MUM/2007 DATED 12.11.2 009 THERE IS A FINDING THAT THE ISSUE WAS DECIDED IN FAVOUR O F THE ASSESSEE BY THE ITAT AND RESPECTFULLY FOLLOWING THE ABOVE THE ASSESSEES GROUND IS ALLOWED. THE ASSESSING OFFICER IS DIRECTED TO AL LOW THE INTEREST AS CLAIMED. ITA NOS 4067 & 4094 OF 2007 SATCO SECURITIES & FIN.SERVICES LTD MUMBAI PAGE 13 OF 13 13. IN THE RESULT ASSESSEES APPEAL IS PARTLY ALLOWED AND APPEAL OF THE REVENUE IS ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 9 TH DECEMBER 2011. SD/- SD/- (D.K.AGARWAL) (B. RAMAKOTAIAH) JUDICIAL MEMBER ACCOUNTANT MEMBER VNODAN/SPS MUMBAI DATED 9 TH DECEMBER 2011. COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CONCERNED CIT(A) 4. THE CONCERNED CIT 5. THE DR J BENCH ITAT MUMBAI BY ORDER ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES MUMBAI