AMERICAN EXPRESS BANK LTD, MUMBAI v. ITO 19(2)-1, MUMBAI

ITA 6558/MUM/2009 | 1991-1992
Pronouncement Date: 20-08-2010 | Result: Allowed

Appeal Details

RSA Number 655819914 RSA 2009
Assessee PAN AABCA0588K
Bench Mumbai
Appeal Number ITA 6558/MUM/2009
Duration Of Justice 7 month(s) 28 day(s)
Appellant AMERICAN EXPRESS BANK LTD, MUMBAI
Respondent ITO 19(2)-1, MUMBAI
Appeal Type Income Tax Appeal
Pronouncement Date 20-08-2010
Appeal Filed By Department
Order Result Allowed
Bench Allotted A
Tribunal Order Date 20-08-2010
Assessment Year 1991-1992
Appeal Filed On 23-12-2009
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH A MUMBAI BEFORE SHRI S.V. MEHROTRA (AM) AND SMT. ASHA VIJAYARAGHAVAN (JM) ITA NOS.6558 & 6559/MUM/2009 ASSESSMENT YEARS-1990-91 & 1991-92 M/S. AMERICAN EXPRESS BANK LTD. FORT HOUSE 1 ST FLOOR 221 D.N. ROAD MUMBAI-400 001 PAN- AABCA0588K VS. THE DY. DIRECTOR OF INCOME TAX INTERNATIONAL TAXATION 1(1) SCINDIA HOUSE BALLARD PIER MUMBAI-400 038 (APPELLANT) (RESPONDENT) APPELLANT BY: SHRI RAJAN VORA RESPONDENT BY: SHRI S.K. PAHWA O R D E R PER SMT. ASHA VIJAYARAGHAVAN (JM) THESE TWO APPEALS PREFERRED BY THE ASSESSEE ARE DIR ECTED AGAINST THE ORDERS PASSED BY THE LD. CIT(A)-10 FOR THE ASSESSMENT YEARS 2004-05. SINCE THE ISSUES ARE COMMON IN THES E APPEALS THESE WERE HEARD TOGETHER AND ARE BEING DISPOSED OFF THRO UGH THIS CONSOLIDATED ORDER. ITA NO. 6559/MUM/2009 A.Y. 1990-91 2. THE FACTS OF THE CASE ARE THAT THE ASSESSEE IS A BANKING ENTITY INCORPORATED IN THE UNITED STATES OF AMERICA (USA ) CARRYING ON BANKING AND TRAVEL RELATED BUSINESS IN INDIA THROUGH ITS BRANC HES IN INDIA. THE RETURN OF INCOME FOR THE FINANCIAL YEAR ENDED 31 ST MARCH 1990 WAS FILED ON 31 ST DECEMBER 1990 REPORTING TAXABLE INCOME OF RS.497 285 190 AN D CLAIMING A REFUND OF RS.13 571 992/-. AMERICAN EXPRESS BANK LTD. 2 3. DURING THE COURSE OF ASSESSMENT PROCEEDINGS THE LEARNED ASSESSING OFFICER ISSUED QUESTIONNAIRES DATED 05.01.1993 AND 12.03.1993 TO THE ASSESSEE INTERALIA WITH RESPECT TO VARIOUS READY FORWARD TRA NSACTIONS AND REVERSE READY FORWARD TRANSACTIONS IN SECURITIES AND UNITS ENTERE D INTO BY THE ASSESSEE. IN RESPONSE TO THE QUESTIONNAIRES THE ASSESSEE ATTEND ED BEFORE THE LEARNED ASSESSING OFFICER AND FILED SUBMISSIONS FROM TIME T O TIME. SUBSEQUENTLY THE ASSESSING OFFICER PASSED AN ORDER U/S.143(3) OF THE ACT INTERALIA DISALLOWING LOSS AMOUNTING TO RS.120 447 805/- ARISING OUT OF READY FORWARD AND REVERSE READY FORWARD TRANSACTIONS STATING THAT SUCH TRANSACTIONS ARE VIOLATIVE OF GUIDELINES ISSUED BY THE RESERVE BANK OF INDIA (RBI) AND CON SEQUENTLY THE LOSSES INCURRED IN SUCH TRANSACTIONS CANNOT BE ALLOWED AS DEDUCTION IN COMPUTING THE TAXABLE INCOME. THE LEARNED ASSESSING OFFICER HOWEVER TAX ED THE PROFITS ARISING FROM SUCH TRANSACTIONS ALONG WITH OTHER BUSINESS INCOME. 4. AGGRIEVED BY THE ORDER OF THE LEARNED ASSESSING OFFICER THE ASSESSEE PREFERRED AN APPEAL BEFORE THE LD. CIT(A). THE L EARNED CIT(A) ALLOWED THE ASSESSEE TO SET-OFF THE PROFITS DERIVED FROM THE RE ADY FORWARD TRANSACTIONS AGAINST THE LOSSES INCURRED FORM SUCH TRANSACTIONS THEREBY ALLOWING THE ASSESSEE TO SET-OFF RS.110 960 833/- BEING PROFIT DERIVED FR OM READY FORWARD TRANSACTIONS. THE LEARNED CIT(A) THEREFORE PARTIALLY ALLOWED THE CLAIM OF THE ASSESSEE AND CONFIRMED DISALLOWANCE ONLY FOR THE NET LOSS ARISIN G FROM OF THE READY FORWARD TRANSACTION AMOUNTING TO RS.9 486 972/-. 5. AGGRIEVED BY THE ORDER OF THE LD. CIT(A) THE AS SESSEE PREFERRED AN APPEAL BEFORE US. THE ITAT HEARD THE APPEAL AND U PHELD/REVERSED THE ORDER OF THE CIT(A) ON VARIOUS GROUNDS. THE ITAT PASSED TH E ORDER ON 03.01.2007. ON THE GROUND REGARDING DISALLOWANCE OF LOSS OF RS.4 9 86 972/- ON ACCOUNT OF READY FORWARD TRANSACTIONS THE ITAT RESTORED THE MATTER TO THE LEARNED ASSESSING OFFICER FOR THE LIMITED PURPOSE OF VERIFYING. WHET HER- AMERICAN EXPRESS BANK LTD. 3 (I) THE SAID LOSS RELATES TO THE SECOND LEG OF THE READ Y FORWARD TRANSACTION AND (II) SUCH LOSS WAS DEBITED TO THE P & L ACCOUNT OR NOT AND IF THE ANSWER IS IN NEGATIVE THEN WHETHER SUCH LOSS HAS BEEN CLAIMED I N THE COMPUTATION OF INCOME OR NOT. 6. THE ORDER GIVING EFFECT TO THE ITATS ORDER (OGE ) WAS PASSED BY THE LEARNED ASSESSING OFFICER ON 27.12.2007 MAKING THE AFORESAID ADDITION. WHILE PASSING THE OGE THE LEARNED ASSESSING OFFICER ALSO INITIATED PENALTY PROCEEDINGS U/S.274 R.W.S. 271(1)(C) OF THE ACT FOR FURNISHING INACCURATE PARTICULARS OF INCOME IN RESPECT OF THE AFORESAID SECURITIES TRANSACTIONS . 7. AGGRIEVED BY THE ORDER OF THE AO U/AS. 271(1)(C) OF THE I.T. ACT THE ASSESSEE FILED AN APPEAL BEFORE THE LD. CIT(A). BEFORE THE LD. CIT(A) THE LD AR OF THE ASSESSEE SUBMITTED THAT TH E AO HAD NOT GIVEN REASONABLE OPPORTUNITY OF BEING HEARD BEFORE PASSIN G THE ORDER U/S. 271(1)(C) OF THE I.T. ACT AND IT HAD ERRED IN HOLD ING THAT THE ASSESSEE HAD FURNISHED INACCURATE PARTICULARS OF INCOME IN R ESPECT OF SECURITY TRANSACTION WHILE LEVYING PENALTY U/S. 271(1)(C). THE LD. CIT(A) CONFIRMED THE ORDER OF THE ASSESSING OFFICER. 8. AGGRIEVED ASSESSEE PREFERRED AN APPEAL BEFORE US . THE BRIEF FACTS SUBMITTED BEFORE US BY THE LD. COUNSEL FOR TH E ASSESSEE SHRI RAJAN VORA WAS THAT IN THE QUANTUM APPEAL THE ASSE SSEES APPEAL WAS HEARD BY THE ITAT FOR THE PRESENT ASSESSMENT YEAR AND THE ITAT PASSED THE ORDER ON JANUARY 3 RD 2007 ON THE GROUND REGARDING DISALLOWANCE OF LOSS OF RS. 94 86 972/- ON ACCOUNT OF READY FORWARD TRANSACTIONS AND THE ITAT RESTORED THE MATTER TO TH E LD. AO FOR THE LIMITED PURPOSE OF VERIFYING WHETHER THE SAID LOSS RELATES TO THE SECOND LEG OF THE READY FORWARD TRANSACTION AND SUCH LOSS WAS DEBITED TO THE P AMERICAN EXPRESS BANK LTD. 4 & L ACCOUNT OR NOT AND IF THE ANSWER IS IN NEGATIVE THEN WHETHER SUCH LOSS HAS BEEN CLAIMED IN THE COMPUTATION OF INCOME OR NOT. 9. THE ORDER GIVING EFFECT TO THE ITATS ORDER WAS PASSED BY THE LD. AO ON DECEMBER 27 TH 2007 DISALLOWING THE NET LOSS AMOUNTING TO RS. 94 86 972/- FROM READY FORWARD TRANSACTIONS. 10. ALTHOUGH THE ASSESSEE BELIEVED THAT THE NOTIONA L LOSS IN READY FORWARD TRANSACTION IN SECURITY AMOUNTING TO RS. 94 86 972/- ADDED TO THE INCOME OF THE ASSESSEE BY THE ASSESSING OFFICER IS BAD IN LAW AND SHOULD BE DELETED THE ASSESSEE DECIDED NOT TO PUR SUE THE MATTER FURTHER IN APPEAL HAVING ALREADY SPENT 18 YEARS IN LITIGATION FOR THE PRESENT ASSESSMENT YEAR. THEREFORE THE ASSESSEE D ID NOT CONTEND FOR ITS VIEW IN APPEAL AND AGREED TO PAY TAX AND APPLIC ABLE INTEREST. 11. HOWEVER THE LD. AR BROUGHT TO OUR NOTICE THE ORDER FOR THE ASSESSMENT YEAS 1992-93 ON THE SAME ISSUE WHERE AT PAGE 133 OF THE PAPER BOOK IT HAS BEEN HELD AS FOLLOWS: MERELY BECAUSE THE ASSESSEE HAD CLAIMED THE EXPEND ITURE WHICH CLAIM WAS NOT ACCEPTED OR WAS NOT ACCEPTABLE TO THE REVENUE THAT BY ITSELF WOULD NOT IN OUR OPINION ATTRACT PENALTY U /S.271(1)(C) OF THE ACT. IF WE ACCEPT THE CONTENTION THE REVENUE THEN IN CAS E OF EVERY RETURN WHERE THE CLAIM MADE IS NOT ACCEPTED BY THE ASSESSI NG OFFICER FOR ANY REASON THE ASSESSEE WILL INVITE PENALTY. THAT IS CLEARLY NOT THE INTENDMENT OF THE LEGISLATURE. 12. THE TRIBUNAL IN THE ORDER FOR ASSESSMENT YEAR 1 992-93 HAS ALSO REFERRED TO THE DECISION OF BANK OF AMERICA VS DCIT 124 TTJ 846 WHEREIN SUCH LOSSES WERE HELD TO BE ALLOWABLE AND WAS DECIDED IN FAVOUR OF THE ASSESSEE. THE ASSESSEE RELIED ON PLE THORA OF DECISIONS PARTICULARLY IN THE CASES OF GEM GRANITES VS DCIT 1 20 TTJ 992 (CHD) KANBAY SOFTWARE INDIA (P) LTD. VS DCIT 122 TTJ 721 (PUNE) ACIT VS AMERICAN EXPRESS BANK LTD. 5 VIP INDUSTRIES LTD. 122 TTJ 289(MUM)GLORIOUS REALTY (P) LTD. VS ITO 29 SOT 292 (MUM) AMERSEY DAMODAR VS DCIT 91 TTJ 33 5 (MUM) AND PRAYED THAT PENALTY SHOULD BE DROPPED. 13. THE LD. DEPARTMENTAL REPRESENTATIVE SHRI S.K. P AHWA RELIED ON THE ORDER OF THE AO. 14. WE HEARD BOTH THE PARTIES AND PERUSED THE MATER IAL BEFORE US. WE FIND THAT THE ISSUE WITH RESPECT TO THE QUANTUM FOR THIS YEAR UNDER APPEAL IS IDENTICAL TO THAT OF ASSESSMENT YEAR 1993 -94 WHEREIN IT HAS BEEN HELD AS FOLLOWS: A PERUSAL TO THE RELEVANT PORTION OF THE SAID ORDER OF THE TRIBUNAL SHOWS THAT RELIANCE WAS PLACED ON BEHALF OF THE ASS ESSEE IN SUPPORT OF ITS CASE ON THIS ISSUE ON THE DECISION OF MUMBAI BENCH OF ITAT IN THE CASE OF BANK OF AMERICA VS. DCIT 124 TTJ 846. THE DEPARTME NT ON THE OTHER HAND RELIED ON THE DECISION OF THE TRIBUNAL IN ASS ESSEES OWN CASE FOR A.Y. 90-91 WHEREIN THE CLAIM OF THE ASSESSEE FOR LO SS IN READY FORWARD TRANSACTIONS WAS DISALLOWED. AFTER DISCUSSING BOTH THESE DECISIONS OF THE CO-ORDINATE BENCH THE TRIBUNAL PREFERRED TO FOLLOW THE DECISION RENDERED IN THE CASE OF BANK OF AMERICA FOR THE FOLLOWING RE ASONS GIVEN IN PARA 26 TO 28 OF ITS ORDER:- WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. IN THE CASE OF BANK OF AMERICA (SUPRA) SIMILAR ISSUE ON IDENTICAL FACTS HAS BEEN ELABORATELY DISCUSSED. IT WAS ALSO A CASE WHERE TRANSACTION IN SECURITIES HAD BEE N ENTERED INTO WITH BROKERS ACTING AS PRINCIPAL. THE TRIBUNAL FIRSTLY HELD THAT THE TRANSACTIONS WERE IN VIOLATION OF THE SCR ACT AND THEREFORE LOSSES FROM SUCH TRANSACTIONS ARE LOSES FROM ILLEGAL BUSINESS AND AR E GENERALLY NOT ALLOWABLE. THEREAFTER THE TRIBUNAL DE ALT WITH THE QUESTION AS TO WHETHER THE SAID LOSSES COU LD BE SET OFF AGAINST PROFITS OF BUSINESS. THE TRIBUNAL I N COMING TO THE ABOVE CONCLUSION RELIED ON THE DECISI ON OF THE HONBLE SUPREME COURT IN THE CASE OF DR. T.A.QUERESHI VS. CIT 287 ITR 547 (SC). THE FACTS I N THE AFORESAID CASE WERE THE ASSESSEE A MEDICAL PRACTIT IONER CLAIMED DEDUCTION OF THE VALUE OF HEROIN SEIZED FRO M HIS GROSS INCOME. THE DEPARTMENT DENIED THE DEDUCTION. ON AMERICAN EXPRESS BANK LTD. 6 APPEAL THE APPELLATE TRIBUNAL HELD AS A FACT THAT H EROIN WAS A PART OF HIS STOCK-IN-TRADE AND ALLOWED DEDUCT ION OF THE ESTIMATED VALUE OF THE HEROIN SEIZED FROM THE G ROSS INCOME AS A BUSINESS LOSS. ON APPEAL THE HIGH COURT HELD THAT THE RIGOUR OF THE EXPLANATION TO SECTION 37 OF THE INCOME-TAX ACT 1961 WAS FULLY SATISFIED THAT POSSESSION OF HEROIN WAS AN OFFENCE THAT IT WAS DISGRACEFUL FOR A DOCTOR TO INDULGE IN ACTIVITIES A GAINST HUMANITY AND THAT HENCE THE QUESTION OF CLAIMING DEDUCTION OF THE VALUE OF THE SEIZED ARTICLE DID NO T ARISE. ON APPEAL TO THE SUPREME COURT IT WAS HELD REVERSI NG THE DECISION OF THE HIGH COURT (I) THAT THE EXPLAN ATION TO SECTION 37 HAD NO RELEVANCE AS THIS WAS NOT A CA SE OF BUSINESS EXPENDITURE BUT WAS ONE OF BUSINESS LOSS. BUSINESS LOSS WAS ALLOWABLE ON ORDINARY COMMERCIAL PRINCIPLES IN COMPUTING THE PROFITS. ONCE IT WAS FO UND THAT THE HEROIN SEIZED FORMED PART OF THE STOCK-IN- TRADE OF THE ASSESSEE IT FOLLOWED THAT THE SEIZURE AND CONFISCATION OF SUCH STOCK-IN-TRADE HAD TO BE ALLOW ED AS A BUSINESS LOSS. (II) THAT EVEN THOUGH THE ASSESSE E WAS COMMITTING A HIGHLY IMMORAL ACT IN ILLEGALLY MANUFACTURING AND SELLING HEROIN THE CASE HAD TO B E DECIDED ON LEGAL PRINCIPLES AND NOT ON ONES OWN MO RAL VIEWS. LOSS OF STOCK-IN-TRADE HAS TO BE CONSIDERED AS A TRADING LOSS AND THAT SUCH LOSSES ARE TO BE ALLOWED AS DEDUCTION. THE TRIBUNAL FOLLOWING THE AFORESAID DE CISION HELD THAT WHERE THE ASSESSEE EXECUTED THE SECURIT Y TRANSACTION MAY BE IN VIOLATION OF THE PROVISIONS OF S. 15 OF THE SCR ACT AND THE LOSS GENERATED OUT OF THE S AID TRANSACTION WHEN UNDISPUTEDLY BORNE OUT OF THE BOO KS OF THE ASSESSEE IS AN ALLOWABLE LOSS. THEREFORE T HE SAID LOSS IS ELIGIBLE FOR SET OFF AS CLAIMED BY THE ASSE SSEE. HOWEVER THE TRIBUNAL IN ASSESSEES OWN CASE FOR AY 90- 91 IN THE CONTENT OF SET OFF OF LOSS IN READY FORWA RD TRANSACTIONS IN SECURITIES WHICH WERE IN CONTRAVENT ION OF CIRCULAR ISSUED BY RBI HELD THEM TO BE LOSS OCCURR ED WHILE CARRYING OUT TRANSACTIONS WHICH WERE IN INFRACTION OF LAW AND THEREFORE ILLEGAL AND FURTHER HELD THAT LOSS FROM A N ILLEGAL BUSINESS CANNOT BE SET OFF AGAINST PROFITS OF A LAW FUL BUSINESS CARRIED ON BY THE ASSESSEE NOR CAN BE ALLOWED TO BE CARRIED FORWARD. THE TRIBUNAL IN COMING TO THE ABOVE CONCL USIONS FOLLOWED TWO DECISIONS OF THE HONBLE HONBLE SUPRE ME COURT IN THE CASE SC KOTHARI VS. CIT 82 ITR 794 (SC) AND KURJI JINABHAI KOTECHA 107 ITR 101 (SC). IN THE CASE OF S.C.KOTHARI AMERICAN EXPRESS BANK LTD. 7 (SUPRA) THE FACTS WERE THE ASSESSEE A MEMBER OF A RECOGNISED ASSOCIATION ENTERED INTO TRANSACTIONS FOR THE SUPP LY OF GROUNDNUT OIL WITH DIFFERENT PEOPLE WHO WERE NOT ME MBERS OF THE ASSOCIATION. THE TRIBUNAL FOUND (I) THAT THE CO NTRACTS WERE NON-TRANSFERABLE SPECIFIC DELIVERY CONTRACTS WHER E THE INTENTION AB INITIO WAS EITHER TO GIVE OR TO TAKE D ELIVERY; (II) THAT THEY WERE ENTERED INTO EITHER FOR PURCHASE OR FOR S ALE; AND (II) THAT THE SAME QUANTITY WAS EITHER SOLD OR PURCHASED BY THE ASSESSEE ON BEHALF OF THE SAME CONSTITUENTS AT THE MARKET RATES PREVAILING AT THE MATERIAL TIME I.E. THEY W ERE SQUARED UP BY CORRESPONDING SALES OR PURCHASES AS THE CASE MIG HT BE. THE ASSESSEE HAD CONTRAVENED SECTION 15(4) OF THE FORWA RD CONTRACTS (REGULATION) ACT 1952 BECAUSE IT HAD NO T SECURED THE CONSENT OR AUTHORITY OF THE CONSTITUENT AND DIS CLOSED IN THE NOTE MEMORANDUM OR AGREEMENT OF SALE THAT IT HAD B ROUGHT OR SOLD THE GOODS AS THE CASE MIGHT BE ON ITS OWN ACCO UNT. IT INCURRED A LOSS OF RS.3 40 443 IN THESE TRANSACTION S. THE ASSESSEE HAD ALSO EARNED A PROFIT OF RS.2 19 046 FR OM SPECULATIVE TRANSACTIONS. ON THE ABOVE FACTS THE HONBLE SUPREME COURT HELD THAT (I) THAT THE CONTRACTS IN R ESPECT OF WHICH THE LOSS OF RS.3 40 443 WAS INCURRED BY THE A SSESSEE WERE ILLEGAL CONTRACTS; (II) THAT THE ASSESSEE WAS NOT ENTITLED TO A SET-OFF UNDER THE FIRST PROVISO TO SECTION 24(1) OF THE INDIAN INCOME-TAX ACT 1922 OF THE LOSS OF RS. 3 40 443 A GAINST ITS PROFIT IN SPECULATIVE TRANSACTIONS; (III) THAT HOWE VER IF THE BUSINESS IN WHICH THE LOSS WAS SUSTAINED WAS THE SA ME AS THE BUSINESS IN WHICH THE PROFIT WAS DERIVED THEN THE LOSS HAD TO BE TAKEN INTO ACCOUNT WHILE COMPUTING THE PROFITS O F THE BUSINESS UNDER SECTION 10(1). IN THE CASE OF KURJI JINABHAI KOTECHA (SUPRA) THE HONBLE SUPREME COURT HELD THAT (I) THAT LOSS INCURRED BY THE ASSESSEE IN THE PREVIOUS YEAR IN HEDGING TRANSACTIONS OF BANNED ITEMS UNDER SECTION 15(4) OF THE FORWARD CONTRACTS (REGULATION) ACT 1952 COULD NOT BE SET OFF AGAINST THE PROFITS OF THE ASSESSEE'S BUSINESS OF T HE SAME PREVIOUS YEAR UNDER SECTION 24(1) OF THE INDIAN INC OME-TAX ACT 1922.(II) THAT LOSS INCURRED BY THE ASSESSEE I N ONE YEAR IN SPECULATIVE TRANSACTIONS (OTHER THAN HEDGING TRANSA CTIONS) OF BANNED ITEMS UNDER THE FORWARD CONTRACTS (REGULATIO N) ACT 1952 COULD NOT BE CARRIED FORWARD FOR SET-OFF AGAI NST PROFITS IN THE FOLLOWING YEAR. THE HONBLE SUPREME COURT OBSE RVED AS FOLLOWS: TO ALLOW A LOSS INCURRED BY THE ASSESSEE IN ILLEGA L SPECULATIVE TRANSACTIONS IS TO PERMIT A BENEFIT OF ADJUSTMENT O F LOSS FROM AN ILLEGAL BUSINESS TO SPILL OVER AND CONTINUE IN T HE FOLLOWING AMERICAN EXPRESS BANK LTD. 8 YEAR EVEN IN A LAWFUL SPECULATIVE BUSINESS. A SPECU LATIVE BUSINESS WHICH IS CARRIED ON IN THE FOLLOWING YEAR MUST BE A BUSINESS OF LAWFUL SPECULATION PERTAINING TO LAWFUL AND ENFORCEABLE CONTRACTS. THE ASSESSEE CARRYING ON A L AWFUL SPECULATIVE BUSINESS IN THE FOLLOWING YEAR CANNOT D ERIVE BENEFIT BY CARRYING FORWARD AND SETTING OFF A LOSS FROM AN ILLEGAL SPECULATIVE BUSINESS OF THE EARLIER YEAR. LAW WILL ASSUME AN ILLEGAL BUSINESS TO DIE OUT OF EXISTENCE WITH ALL I TS LOSSES TO THE ASSESSEE IN THE YEAR OF LOSS ITSELF. THE ASSESSEE C AN DERIVE NO BENEFIT ON ACCOUNT OF THE UNLAWFUL BUSINESS IN THE FOLLOWING YEAR. THE MATTER WILL BE DIFFERENT IF A LAWFUL SPEC ULATIVE BUSINESS AFTER INCURRING LOSS IS DISCONTINUED AND L OSS THERE FROM IS CARRIED FORWARD FOR SET-OFF AGAINST ANY OTHER LA WFUL SPECULATIVE BUSINESS IN THE FOLLOWING YEAR. THE HONBLE SUPREME COURT IN THE CASE OF DR. T.A.QUERESHI (SUPRA) HAS HOWEVER OBSERVED THAT THE EXPLANATION TO SECTION 37 WOULD MAKE NO DIFFERENCE TO LOSSES WHICH ARE REQUIRED TO BE ALLOWED IRRESPECT IVE OF THE FACT THAT IT WAS CONSEQUENCE OF CONTRAVENTION OF LAW. IT OBSERVED THAT THE ASSESSEE WAS NO DOUBT COMMITTING A HIGHLY IMMORAL ACT IN STOCKING HEROIN. BUT THEN MORAL CONSIDERATIONS ARE NOT RELEVANT IN COMPUTATION OF BUSINESS INCOME. IT WAS POINTED OUT THAT LAW IS DIFFERENT FROM MORALITY AS POINTED OUT BY JURISTS LIKE BENTHAM AND AUSTIN. THE SUPREME COURT ALSO REFERRED TO THE PRECEDENT IN CIT V. S. N. A. S. A. ANNAMALAI CHETTIAR [1972] 86 ITR 607 WHERE IT WAS POINTED OUT THAT BUSINESS INCOME IS TO BE COMPUTED ON ORDINARY PRINCIPLES OF COMMERCIAL ACCOUNTING. SECTI ON 37 DID NOT APPLY WHERE BUSINESS LOSS IS CONCERNED. ON LY WHERE BUSINESS EXPENDITURE IS CLAIMED SECTION 37 W OULD BE RELEVANT. THIS DECISION OF THE SUPREME COURT IN QUERESHIS CASE (SUPRA) HIGHLIGHTS THE DISTINCTION BETWEEN A BUSINESS LOSS AND BUSINESS EXPENDITURE AN D EXPLN. TO SEC.37(1) WOULD BE RELEVANT ONLY WHEN CLAIMING DEDUCTION OF EXPENDITURE WHILE COMPUTING INCOME. THE EARLIER TREND OF ALLOWING EXPENDITURE WHICH ARE ILLEGAL WHILE COMPUTING INCOME FROM ILLEGAL BUS INESS AND NOT ALLOWING ILLEGAL EXPENDITURE WHILE COMPUTIN G INCOME OF LAWFUL BUSINESS DID PUT A PERSON IN ILLEG AL BUSINESS TO AN ADVANTAGE. THE DECISION OF THE HON BLE SUPREME COURT IN THE CASE OF DR. T.A.QUERESHI(SUPRA ) AMERICAN EXPRESS BANK LTD. 9 HOWEVER HAS NEUTRALIZED THIS POSITION. THE DECISION OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR AY 90-91 HA D BEEN RENDERED PRIOR TO THE DECISION OF THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF DR. T.A.QUERESHI (SUPRA). WE ARE OF THE VIEW THAT THE TRIBUNAL WHILE DECIDING THE CASE OF BANK OF AMERICA (SUPRA) HAS FOLLOWED THE LATER DECISION OF THE HON BLE SUPREME COURT SAID DECISION AND THEREFORE THE SAME HAS TO BE FOLLOWED. RESPECTFULLY FOLLOWING THE DECISION OF THE TRIBUNAL IN THE CASE OF BANK OF AMERICA (SUPRA) WE DIRECT THE ASSESSING OFFICER TO ALLOW THE LOSS AS DEDUCTION BY ADJUSTMENT OR SET OFF AGAINST OTHER BUSINESS INCOME. THE RELEVANT GROUND NO. 4 IS ALLOW ED. AS THE ISSUE INVOLVED IN THE YEAR UNDER CONSIDERATI ON AS WELL AS ALL THE MATERIAL FACTS RELEVANT THERETO ARE SIMILAR TO THAT OF A.Y. 1992-93 WE RESPECTFULLY FOLLOW THE ORDER OF THE TRIBUNAL FOR A .Y. 1992-93 AND DIRECT THE A.O. TO ALLOW THE CLAIM OF THE ASSESSEE FOR LOS S ON READY FORWARD TRANSACTIONS. GROUND NO. 7OF THE ASSESSEES APPEAL IS ACCORDINGLY ALLOWED. 15. IN OUR OPINION HAD THE ASSESSEE GONE ON APPEAL FOR THIS YEAR IN THE SECOND ROUND I.E. AGAINST THE ORDER GIVING EFFE CT TO THE ORDER OF THE ITAT PASSED ON JANUARY 3 RD 2007 THE ISSUE WOULD HAVE BEEN COVERED IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 1992-93 AND 1993-94 AND THE QUANTUM APPEAL WOULD HAVE BEEN ALLOWED IN FAVOU R OF THE ASSESSEE. CONSEQUENTLY THE PENALTY APPEAL WOULD H AVE BEEN DISMISSED AS HAVING NO LEGS TO STAND. MERELY BEC AUSE THE ASSESSEE HAD NOT PREFERRED AN APPEAL AGAINST THE ORDER OF TH E ITAT PASSED ON JAN 3 RD 2007 THE ASSESSEE CANNOT BE PENALIZED WITH PENAL TY AS HELD IN THE CASES OF CIT VS KHIMJI BHANJEE & CO. 32 CTR 296 (MUM) AND CIT VS DHARAMCHAND L. SHAH 204 ITR 462. RELYING ON THE RATIO OF THE DECISIONS WE ARE OF THE OPINION THAT THE ASSESSEE H AS NOT FILED AN APPEAL AGAINST ADDITIONS MADE MERELY BECAUSE IT CAN NOT BE HELD THAT HE HAS CONCEALED THE INCOME. THEREFORE NO PENALTY C AN BE LEVIED ON AMERICAN EXPRESS BANK LTD. 10 THAT GROUND ABOVE. FURTHER THE SUPREME COURT IN TH E CASE OF RELIANCE PETROPRODUCTS PVT. LTD. HELD AS FOLLOWS: MERELY BECAUSE THE ASSESSEE HAD CLAIMED THE EXPEND ITURE WHICH CLAIM WAS NOT ACCEPTED OR WAS NOT ACCEPTABLE TO THE REVENUE THAT BY ITSELF WOULD NOT IN OUR OPINION ATTRACT PENALTY U/S.271(1)(C) OF THE ACT. IF WE ACCEPT THE CONTEN TION THE REVENUE THEN IN CASE OF EVERY RETURN WHERE THE CLAIM MADE I S NOT ACCEPTED BY THE ASSESSING OFFICER FOR ANY REASON THE ASSESS EE WILL INVITE PENALTY. THAT IS CLEARLY NOT THE INTENDMENT OF THE LEGISLATURE. THEREFORE RESPECTFULLY FOLLOWING THE RATIO OF THE APEX COURT WE DELETE THE PENALTY FOR THE ASSESSMENT YEAR 1990-91. ITA NO. 6558/MUM/2009 A.Y. 1991-92 16. THE FACTS OF THE CASE ARE THAT THE RETURN OF IN COME FOR THE FINANCIAL YEAR ENDED 31.03.1991 WAS FILED ON 31.12.1991 REPORTING TAXABLE INCOME OF RS.658 048 378/-. A SPECIAL AUDIT U/S.142(2A) OF TH E ACT WAS ORDERED BY THE LEARNED ASSESSING OFFICER FOR THE SUBJECT ASSESSMEN T YEAR. THE SPECIAL AUDITORS WERE GIVEN A MANDATE TO ENQUIRE INTO VARIOUS ASPECT S OF THE SECURITIES TRANSACTIONS ENTERED INTO BY THE ASSESSEE. ONE OF THE ASPECT WAS TO IDENTIFY THE TRANSACTIONS WHERE A BROKER MAY HAVE BEEN GIVEN A C LEAN LOAN IN THE GUISE OF SECURITIES TRANSACTIONS SINCE AS PER RESERVE BANK OF INDIAS (RBI) GUIDELINES BANKS WERE NOT PERMITTED TO PROVIDE FINANCE TO THE BROKERS.THE SPECIAL AUDITORS IN THEIR REPORT DATED 25.02.1994 LISTED FOLLOWING THREE TRANSACTIONS WHICH HAVE RESULTED IN POSSIBLE UNSECURED LOANS TO THE BROKERS . THE PARTY WISE FIGURES OF INTEREST AMOUNT ARE AS UNDER: NAME OF THE BROKER AMOUNT OF NOTIONAL INTEREST (RS.) ASIT MEHTA 35 99 621 AMERICAN EXPRESS BANK LTD. 11 17. ACCORDINGLY AFTER GIVING SHOW CAUSE NOTICE AND CONSIDERING THE `SUBMISSIONS OF THE ASSESSEE NOTIONAL INTEREST ON THE TRANSACTIONS WITH THESE THREE PERSONS WAS TREATED AS INCOME OF THE ASSESSEE . THE LEARNED ASSESSING OFFICER RELYING ON THE SPECIAL AUDIT REPORT PASSE D AN ASSESSMENT ORDER U/S.143(3) OF THE ACT ON 30.03.1994 MAKING AN ADDIT ION OF RS.33 465 162/- IN THE ASSESSMENT ORDER. SUBSEQUENTLY THE ASSESSEE FI LED A LETTER DATED 16.03.1994 WITH THE STATUTORY AUDITORS EXPLAINING THE AFORESAI D TRANSACTIONS WITH NECESSARY DOCUMENTARY EVIDENCES. IN RESPONSE TO THIS LETTER THE STATUTORY AUDITORS CONSIDERED REVISING THE REPORT AND ISSUED A LETTER DATED 19.10.1994 STATING THAT THE AFORESAID TRANSACTIONS DO NOT AMOUNT TO FINANCI NG THE BROKERS. 18. IN FIRST APPEAL THE CIT(A) HELD THAT THE TRANS ACTION WITH HITEN DALAL ONLY AS LOAN AND THE TRANSACTIONS WITH THE OTHER TWO PAR TIES WERE NOT TREATED AS LOAN.THE ASSESSEE FILED AN APPLICATION FOR RECTIFIC ATION WITH CIT(A). 19. AGGRIEVED BY THE ORDER OF THE CIT(A) THE ASSES SEE AND THE LEARNED ASSESSING OFFICER PREFERRED APPEALS BEFORE THE ITAT . THE ITAT HEARD BOTH THE APPEALS AND UPHELD/REVERSED THE ORDER OF THE CIT(A) ON VARIOUS GROUNDS. THE ITAT ORDER WAS PASSED ON 28.02.2007. ON THE GROUND REGARDING NOTIONAL INTEREST AMOUNTING TO RS.33 465 162/- ON LOANS TO B ROKERS THE ITAT RESTORED THE MATTER TO THE LEARNED ASSESSING OFFICER FOR FRESH A DJUDICATION OF THE ISSUE AND DIVERTED AS UNDER: IN OUR OPINION THE INTEREST OF JUSTICE WOULD BE M ET IF THE ISSUE IS ADJUDICATED AFRESH BY THE ASSESSING OFFICER AFTER C ONSIDERING ALL THE MATERIAL WHICH MAY BE PRODUCED BY THE ASSESSEE BEFO RE THE ASSESSING OFFICER. ACCORDINGLY WE SET ASIDE THE ORDER OF T HE CIT(A) ON THIS KOTAK MAHINDRA FINANCE LTD. 16 58 730 HITEN DALAL 2 85 06 811 TOTAL 3 34 65 162 AMERICAN EXPRESS BANK LTD. 12 ISSUE AND RESTORE THE MATTER TO THE FILE OF THE ASS ESSING OFFICER FOR FRESH ADJUDICATION AFTER CONSIDERING ENTIRE MATERIA L. 20. HOWEVER THE LEARNED ASSESSING OFFICER NOT CON VINCED WITH THE SUBMISSIONS FILED BY THE ASSESSEE TREATED THE SECU RITIES TRANSACTIONS WITH BROKERS AS UNSECURED LOANS AND MADE AN ADDITION OF RS.33 465 162/- AS NOTIONAL INTEREST ON SUCH LOANS.THE LEARNED ASSESSING OFFICE R PASSED AN ORDER GIVING EFFECT TO ITATS ORDER (OGE) ON 27.12.2007 MAKING THE AFORESAID ADDITION. 21. AGGRIEVED BY THE ORDER OF THE AO U/AS. 271(1)(C ) OF THE I.T. ACT THE ASSESSEE FILED AN APPEAL BEFORE THE LD. CIT(A). BEFORE THE LD. CIT(A) THE LD AR OF THE ASSESSEE SUBMITTED THAT TH E AO HAD NOT GIVEN REASONABLE OPPORTUNITY OF BEING HEARD BEFORE PASSIN G THE ORDER U/S. 271(1)(C) OF THE I.T. ACT AND IT HAD ERRED IN HOLD ING THAT THE ASSESSEE HAD FURNISHED INACCURATE PARTICULARS OF INCOME IN R ESPECT OF SECURITY TRANSACTION WHILE LEVYING PENALTY U/S. 271(1)(C). THE LD. CIT(A) CONFIRMED THE ORDER OF THE ASSESSING OFFICER. 22. AGGRIEVED ASSESSEE PREFERRED AN APPEAL BEFORE U S. THE LD. COUNSEL FOR THE ASSESSEE SHRI RAJAN VORA BROUGHT TO OUR NOTICE AT PAGE 54 OF THE PAPER BOOK WHEREIN THE AUDITORS HAVE REVI EWED THEIR ORIGINAL AUDITED REPORT AND PAGES 104 AND 105 TO SUBSTANTIAT E HIS SUBMISSIONS. THE LD. COUNSEL FOR THE ASSESSEE FURTHER SUBMITTED THAT PENALTY CANNOT BE LEVIED ON NOTIONAL INCOME BROUGHT TO TAX BY THE AO. HE SUBMITTED THAT THE LD. AO MADE AN ADDITION OF INTEREST AT THE RATE OF 16% PER ANNUM ON TRANSACTIONS WITH BROKERS CONSIDERED TO BE IN NATURE OF UNSECURED LOANS WHICH IS NOTIONAL/FICTIONAL IN NAT URE AS THE ASSESSEE NEVER EARNED THE INCOME. HE FURTHER SUBMITTED THAT IT IS WELL SETTLED LEGAL POSITION THAT THE INCOME FOR TAX PURPOSES MEA NS REAL INCOME AND NOT FICTIONAL INCOME. A RECEIPT CAN BE INCOME ONLY WHEN IT CONNOTES A AMERICAN EXPRESS BANK LTD. 13 REAL INCOME OR TANGIBLE INCOME COMING IN AND NOT ME RELY SOMETHING NOTIONAL OR FICTIONAL OR HYPOTHETICAL. THIS POSITI ON HAS BEEN ACCEPTED IN THE FOLLOWING DECISIONS: CHOWGULE & CO. (195 ITR 810)(BOM) KERALA STATE DRUGS & PHARMACEUTICALS LTD. (192 ITR 1(KER) STATE BANK OF TRAVANCORE (158 ITR 102 (KER) 23. THE LD. DEPARTMENTAL REPRESENTATIVE SUPPORTED T HE ORDER OF THE AO. 24. WE HEARD BOTH THE PARTIES AND PERUSED THE MATER IAL ON RECORDS. WE FIND THAT THE AO HAS BROUGHT TO TAX NOTIONAL/FIC TIONAL INCOME DESPITE THE FACT THAT THE ASSESSEE HAS OFFERED TO T AX THE GAINS ON SECURITIES TRANSACTIONS WITH BROKERS. BY OFFERING THE CAPITAL GAINS TO TAX THE ASSESSEES ORIGINAL INTENT WAS TO ACTUALLY EFFECT THE PURCHASE/SALE OF SECURITIES TO BROKERS AS CONTENDED BY THE ASSESSEE. HOWEVER THE AO PROCEEDED TO MAKE AN ADDITION OF NO TIONAL INTEREST TO THE INCOME OF THE ASSESSEE BY CONSIDERING THE SALE TRANSACTIONS AS UNSECURED LOANS TO THE BROKERS RELYING ON THE REPOR T OF THE SPECIAL AUDITORS. IT IS TO BE NOTED THAT THE SPECIAL AUDITO RS VIDE THEIR LETTER DT. 19.10.1994 HAVE REVISED THEIR ORIGINAL REPORT AND H AVE STATED THAT TRANSACTIONS WERE NOT IN THE NATURE OF UNSECURED LO ANS TO BROKERS. 25. IN OUR OPINION THE ADDITION IS MAINLY DUE TO TH E DIFFERENCE IN OPINION BETWEEN THE ASSESSEE AND THE AO. AS THE AO HAD NOT CONSIDERED THE CONTENTION OF THE ASSESSEE THAT THE ORIGINAL INTENT WAS TO ACTUALLY EFFECT THE PURCHASE/SALE OF SECURITY FR OM/TO BROKERS. THIS WOULD NOT AMOUNT TO FURNISHING ALL THE INACCURATE P ARTICULARS OF INCOME BY THE ASSESSEE. RELYING ON THE RATIO OF DECISION IN THE CASES OF CIT VS SHIVLAL DESAI & SONS 114 ITR 377 AND CIT VS DEVIDAY AL ALUMINIUM AMERICAN EXPRESS BANK LTD. 14 INDUSTRIES PVT. LTD. 171 ITR 683 AND BURMASHELL IND IA LTD 163 ITR 496 WHERE THE COURTS HAVE OBSERVED THAT MERE REJECTION OF THE CLAIM MADE BY THE ASSESSEE CANNOT BE THE CAUSE FOR LEVY OF PEN ALTY U/S. 271(1)(C). WE DELETE THE PENALTY AND ALLOW THE ASSESSEES APPE AL FOR ASSESSMENT YEAR 1991-92. 26. IN THE RESULT THE APPEALS FILED BY THE ASSESSE E ARE ALLOWED. ORDER PRONOUNCED ON THIS 20 TH DAY OF AUGUST 2010 SD/- SD/- (S.V. MEHROTRA ) (ASHA VIJAYARAGHAVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI DATED 20 TH AUGUST 2010 RJ COPY TO : 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT-CONCERNED 4. THE CIT(A)-CONCERNED 5. THE DR A BENCH TRUE COPY BY ORDER ASSTT. REGISTRAR I.T.A.T MUMBAI AMERICAN EXPRESS BANK LTD. 15 DATE INITIALS 1 DRAFT DICTATED ON: 6.8.2010 SR. PS 2. DRAFT PLACED BEFORE AUTHOR: 10 .8. 2010 ______ SR. PS/PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER: _________ ______ JM/AM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER: _________ ______ JM/AM 5. APPROVED DRAFT COMES TO THE SR. PS/PS: _________ ______ SR. PS/PS 6. KEPT FOR PRONOUNCEMENT ON: _________ ______ SR. PS/PS 7. FILE SENT TO THE BENCH CLERK: _________ ______ SR. PS/PS 8. DATE ON WHICH FILE GOES TO THE HEAD CLERK: _________ ______ 9. DATE OF DISPATCH OF ORDER: _________ ______