M/s. Pratham Investments, Baroda v. The Dy. CIT, Baroda

ITA 747/AHD/2014 | 2005-2006
Pronouncement Date: 15-01-2019 | Result: Allowed
Expert Summary: The reassessment proceedings could not be initiated by the Assessing officer on the ground that loss arising from changing from one plan of mutual funds to another was of capital nature when he himself had treated profits from sale of such mutual funds as business income.

Appeal Details

RSA Number 74720514 RSA 2014
Assessee PAN AACFJ7207J
Bench Ahmedabad
Appeal Number ITA 747/AHD/2014
Duration Of Justice 4 year(s) 10 month(s) 3 day(s)
Appellant M/s. Pratham Investments, Baroda
Respondent The Dy. CIT, Baroda
Appeal Type Income Tax Appeal
Pronouncement Date 15-01-2019
Appeal Filed By Assessee
Tags No record found
Order Result Allowed
Bench Allotted C
Tribunal Order Date 15-01-2019
Date Of Final Hearing 13-06-2017
Next Hearing Date 13-06-2017
First Hearing Date 13-06-2017
Assessment Year 2005-2006
Appeal Filed On 12-03-2014
Judgment Text
C IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH AHMEDABAD BEFORE SHRI PRADIP KUMAR KEDIA ACCOUNTANT MEMBER & SHRI MAHAVIR PRASAD JUDICIAL MEMEBR ./ I.T.A. NO. 747/AHD/2014 ( ASSESSMENT YEAR : 2005-06) M/S. PRATHAM INVESTMENTS PRATHAM MAKARAND DESAI ROAD NEAR MOTHERS SCHOOL BARODA 390 007 / VS. DEPUTY COMMISSIONER OF INCOME TAX CIRCLE- 2(2) AAYAKAR BHAWAN RACE COURSE CIRCLE VADODARA ./ ./ PAN/GIR NO. : AACFJ7207J ( APPELLANT ) .. ( / RESPONDENT ) / APPELLANT BY : SHRI BHAVIN MARFATIA CA / RESPONDENT BY : SHRI LALIT P. JAIN SR.D.R. DATE OF HEARING 09/01/2019 !'# / DATE OF PRONOUNCEMENT 15/01/2019 / O R D E R PER PRADIP KUMAR KEDIA - AM: THE CAPTIONED APPEAL HAS BEEN FILED AT THE INSTANCE OF THE ASSESSEE AGAINST THE ORDER OF THE COMMISSIONER OF I NCOME TAX (APPEALS)-II BARODA (CIT(A) IN SHORT) DATED 06. 12.2013 ARISING IN THE ASSESSMENT ORDER DATED 25.06.2010 PASSED BY THE ASSESSING OFFICER (AO) UNDER S. 143(3) R.W.S. 147 OF THE INCO ME TAX ACT 1961 (THE ACT) CONCERNING ASSESSMENT YEAR 2005-06. ITA NO. 747/AHD/14 [M/S. PRATHAM INVESTMENTS VS. DCIT] A.Y. 2005-06 - 2 2. AS PER ITS GROUNDS OF APPEAL THE ASSESSEE HAS C HALLENGED THE ACTION OF THE AO IN EXERCISING POWERS UNDER S. 147 OF THE ACT ALLEGING NON-FULFILLMENT OF CONDITIONS STIPULATED T O INVOKE JURISDICTION UNDER S.147 OF THE ACT. THE ASSESSEE HAS ALSO CHALLENGED THE ADDITIONS /DISALLOWANCES ON MERITS. 3. WHEN THE MATTER WAS CALLED FOR HEARING THE LEAR NED AR FOR THE ASSESSEE SUBMITTED THAT HE DOES NOT INTEND TO CHALL ENGE THE ORDER OF THE AUTHORITIES BELOW ON MERITS AND SEEKS TO PRIMAR ILY RESTRICT ITS PLEA ON INVALID EXERCISE OF POWERS BY AO VESTED UND ER S.147 OF THE ACT. 4. ADVERTING TO THE REASONS RECORDED UNDER S.148(2) OF THE ACT THE LEARNED AR SUBMITTED THAT REGULAR ASSESSMENT WA S COMPLETED EARLIER ON 10.12.2007 UNDER S.143(3) OF THE ACT ASS ESSING THE TOTAL INCOME AT RS.11 26 430/-. THEREAFTER THE COMPLETE D ASSESSMENT WAS REOPENED BY ISSUING NOTICE DATED 04.08.2009 UND ER S.148 OF THE ACT I.E. WITHIN FOUR YEARS FROM THE END OF RELEVANT ASSESSMENT YEAR 2005-06. AS PER THE REASONS RECORDED THE AO HAS A LLEGED ESCAPEMENT OF INCOME ON TWO GROUNDS: (I) THE LOSS A RISING FROM SWITCHING OVER FROM ONE PLAN OF MUTUAL FUNDS TO ANO THER IS OF CAPITAL NATURE AND THEREFORE THE ASSESSEE IS NOT E NTITLED TO DEDUCT THE AFORESAID LOSS FROM PROFITS OF BUSINESS ACTIVIT Y & (II) THE LOSS ARISING FROM DERIVATIVE CONTRACTS AMOUNTING TO RS.1 3 08 578/- ARE SPECULATIVE IN NATURE FOR THE RELEVANT AY 2005-06 A ND THEREFORE THE ASSESSEE IS NOT ENTITLED TO ADJUST THE SAME AGAINST THE NON- SPECULATIVE BUSINESS INCOME. 5. AS REGARDS THE FIRST OBJECTION NARRATED ABOVE T HE LEARNED AR FOR THE ASSESSEE POINTED OUT THAT THE ASSESSEE IS A N INVESTOR IN MUTUAL FUNDS. THE GAINS/LOSS ARISING FROM SALE OF MUTUAL FUNDS HAVE ITA NO. 747/AHD/14 [M/S. PRATHAM INVESTMENTS VS. DCIT] A.Y. 2005-06 - 3 ALSO BEEN TREATED BY THE ASSESSEE AS REVENUE INCOME CHARGEABLE TO TAX UNDER THE HEAD BUSINESS INCOME INSTEAD OF CAP ITAL GAINS/LOSS CHARGEABLE UNDER THE HEAD CAPITAL GAINS IN ALL IN STANCES. IN THE PROCESS THE ASSESSEE HAS EARNED INCOME TO THE TUNE OF RS.11 92 648/- AND ALSO INCURRED LOSSES AMOUNTING T O RS.4 43 934/-. THE ASSESSEE HAS DISCLOSED THE PROFIT AS WELL AS TH E LOSS FROM SALE OF MUTUAL FUNDS UNDER THE HEAD BUSINESS INCOME AND T HE RELEVANT FACTS IN THIS REGARD WERE DISCLOSED BEFORE THE AO B Y WAY OF RETURN OF INCOME AS WELL AS IN THE COURSE OF THE SCRUTINY ASSESSMENT. IT WAS CONTENDED THAT THE AO HAS SUBJECTIVELY PICKED U P THE LOSS FROM SALE OF MUTUAL FUNDS FOR DIFFERENTIAL TREATMENT AS CAPITAL LOSS WHEREAS THE INCOME ARISING FROM SALE OF MUTUAL FUND S HAVE BEEN READILY ACCEPTED AS BUSINESS INCOME AS OFFERED BY THE ASSESSEE. THE AO AS PER THE REASONS RECORDED THUS SEEKS TO CH ANGE THE CHARACTER OF INCOME WITHOUT ANY SOUND BASIS AND ON A MERE CHANGE OF OPINION WHICH IS NOT PERMISSIBLE IN LAW. 6. AS REGARDS THE SECOND OBJECTION THE LEARNED AR SUBMITTED THAT THE DERIVATIVE TRANSACTIONS WERE TREATED AS BUSINES S LOSS AND WERE NOT RECORDED AS SPECULATIVE LOSS AS PER SOME DECISI ONS OF THE CO- ORDINATE BENCH PREVAILING AT RELEVANT TIME. A REFE RENCE WAS MADE IN THIS REGARD TO THE DECISION OF THE CO-ORDINATE BENC H IN THE CASE OF R.B.K. SECURITIES (P.) LTD. VS. ITO [2008] 118 TTJ 465 (MUM) NOTWITHSTANDING ITS REVERSAL AT A LATER STAGE BY SP ECIAL BENCH IN SHREE CAPITALS CASE. THE LEARNED AR ACCORDINGLY SU BMITTED THAT THE AO AFTER RAISING SPECIFIC QUESTION IN THIS REGARD A ND AFTER CONSIDERING THE SPECIFIC REPLY OF THE ASSESSEE DATE D 18TH SEPTEMBER 2007 HAS DECIDED THE ISSUE IN FAVOUR OF THE ASSESSE E. THEREFORE THE ISSUE WHEN DECIDED IN THIS BACKGROUND CANNOT BE TOP PLED BY ITA NO. 747/AHD/14 [M/S. PRATHAM INVESTMENTS VS. DCIT] A.Y. 2005-06 - 4 INVOKING PROVISIONS OF SECTION 147 OF THE ACT ON A DIFFERENT OPINION AT A LATER STAGE. 7. THE LEARNED AR ACCORDINGLY SUBMITTED IN CONCLUSI ON THAT THE ACTION OF THE AO UNDER S.147 OF THE ACT SUFFERS FRO M LACK OF JURISDICTION AND THEREFORE THE ENTIRE RE-ASSESSMEN T PROCEEDINGS CONSEQUENCES OF SUCH UNTENABLE ACTION UNDER S.147 O F THE ACT IS BAD IN LAW AND THUS A NULLITY. THE LEARNED AR ALSO POI NTED OUT THAT BOTH LOANS ON SALE OF MUTUAL FUND AS WELL AS DERIVATIVE LOSS WAS DULY EXAMINED IN THE REGULAR ASSESSMENT PROCEEDINGS AND THEREFORE RE- ASSESSMENT PROCEEDINGS ON THE SAME IS NOT PERMISSI BLE IN LAW WITHOUT BRINGING ANY FRESH MATERIAL ON RECORD. 8. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIO NS. THE ASSESSEE HAS CHALLENGED THE PREMISE OF ACTION TAKEN BY THE AO. THE AO IN ESSENCE HAS ALLEGED THAT NOTICE ISSUED UNDE R S.148 OF THE ACT IS WITHOUT JURISDICTION AND THUS RE-ASSESSMENT PROC EEDINGS ARE VITIATED IN LAW. AS THE ISSUE HINGES AROUND THE VA LIDITY OF ACTION UNDER S.147 OF THE ACT IT WILL BE APT TO REPRODUCE THE REASONS RECORDED UNDER S.148(2) OF THE ACT FOR INVOKING JUR ISDICTION UNDER S.147 OF THE ACT: IN THIS CASE THE ASSESSEE FILED RETURN OF INCOME ON 31.08.2005 DECLARING TOTAL INCOME AT RS.9 32 692/-. ASSESSMENT U/S. 143(3) OF THE I.T.ACT WAS COMPLETED ON 10.12.2007 ASSESSING THE T OTAL INCOME AT RS.11 26 430/-. AS PER SECTION 29 OF THE I.T.ACT 1 961 THE INCOME UNDER SECTION 28 OF THE I.T.ACT SHALL BE COMPUTED BY ALLO WING DEDUCTION OF EXPENSES AS PROVIDED IN SECTION 30 TO SECTION 43D O F THE ACT. EXPENDITURE OF A CAPITAL NATURE IS NOT ADMISSIBLE AS DEDUCTION. FURTHER UNDER SECTION 73 OF THE ACT SPECULATION LOSS CAN BE SET OFF IN T HE SAME YEAR ONLY AGAINST THE SPECULATION PROFITS. 2. THE ASSESSEE FIRM IS ENGAGED IN THE BUSINESS OF DEALING AND INVESTING IN SHARES AND STOCKS OF VARIOUS COMPANIES TRADING IN DERIVATIVES FUTURES AND OPTIONS INVESTING AND DEA LING IN MUTUAL FUNDS ETC. THE PROFIT AND LOSS ACCOUNT HAS BEEN CHARGED W ITH LOSS ON FUTURE CONTRACTS AND INVESTMENTS OF RS.8 64 644/- AND LOSS ON INVESTMENTS OF RS.4 43 934/-. FROM THE LEDGER ACCOUNT OF LOSS ON I NVESTMENT IT IS ITA NO. 747/AHD/14 [M/S. PRATHAM INVESTMENTS VS. DCIT] A.Y. 2005-06 - 5 OBSERVED THAT THE SAID EXPENDITURE IS INCURRED FOR SWITCHING OVER FROM ONE PLAN OF MUTUAL FUNDS TO ANOTHER IN RESPECT OF INVES TMENTS IN MUTUAL FUNDS. SINCE THE LOSS INCURRED IN INVESTMENTS DID N OT RELATE TO ASSESSEES BUSINESS AND WAS IN FACT CAPITAL IN NATURE ITS D EDUCTION WAS NOT ALLOWABLE. SIMILARLY FROM THE LEDGER ACCOUNT PERTA INING TO LOSS ON FUTURE CONTRACTS AND INVESTMENT IT IS OBSERVED THAT THE S AID EXPENDITURE HAVE BEEN INCURRED ON PAYMENTS TO THREE COMPANIES AND TH E PAYMENTS INCLUDE COMPONENT OF SERVICE-TAX AND TRANSACTION TAX INDIC ATING THAT THESE PAYMENTS WERE INCURRED ON TRANSACTIONS OF SPECULATI VE NATURE. AS PER THE PROVISIONS OF SECTION 73 OF THE ACT SPECULATION LO SS CANNOT BE SET OFF AGAINST ANY OTHER INCOME EXCEPT FROM SPECULATION IN COME. IN VIEW OF THE ABOVE FACTS AND PROVISIONS OF THE ACT THE LOSS OF RS. 13 08 578/- CHARGED TO THE PROFIT AND LOSS ACCOUNT WAS REQUIRED TO BE D ISALLOWED AND ADDED TO THE TOTAL INCOME. THIS RESULTED INTO UNDER ASSESSME NT OF RS. 13 08 578/- WITH SHORT LEVY OF TAX AT RS.6 36 859/-. I HAVE THEREFORE REASON TO BELIEVE THAT INCOME CH ARGEABLE TO TAX HAS ESCAPED ASSESSMENT FOR THE ASSESSMENT YEAR 2005 -06. ISSUED NOTICE U/S.148 OF THE I.T.ACT 1961 FOR THE ASSTT. YEAR 20 05-06. 9. TWO ALLEGATIONS ARE BORNE OUT FROM THE REASONS R ECORDED TOWARDS ALLEGED ESCAPEMENT OF INCOME; FIRSTLY THE AO HAS ALLEGED THAT LOSS ARISING FROM SWITCH OVER / SALE OF MUTUAL FUNDS OUGHT TO BE REGARDED AS CAPITAL LOSS INSTEAD OF BUSINESS LOS S AND THEREFORE IS NOT ENTITLED TO BE SET OFF AGAINST THE BUSINESS INC OME OF THE ASSESSEE. THE ACTION OF THE AO IN FORMATION OF SUC H BELIEF AFTER THE COMPLETION OF THE ASSESSMENT APPEARS ENTIRELY UNTEN ABLE IN THE FACTS AND THE CONTEXT OF THE CASE. AS POINTED OUT ON BEH ALF OF THE ASSESSEE WE NOTICE THAT THE ASSESSEE HAS BOTH EARN ED INCOME AS WELL LOSS ON SALE OF MUTUAL FUNDS. THE LOSS TRANSACTION FROM SALE OF MUTUAL FUNDS THUS CANNOT BE GIVEN A DIFFERENTIAL TR EATMENT AND SINGLED OUT FROM OTHER TRANSACTIONS SIMILARLY PLACE D. THE AO HAS NOT ASSIGNED AND REASONS FOR DO SO. IT IS CLEARLY AN UNJUST ACT IN THE CIRCUMSTANCES. THE BELIEF FOR ESCAPEMENT OF INCOME IS THUS A PRETENSE AND IS NOT SUSTAINABLE IN LAW. 10. WE NOW ADVERT TO THE SECOND GROUND FOR ALLEGED ESCAPEMENT OF INCOME I.E. THE FUTURE CONTRACTS OF DERIVATIVE NATU RE IN STOCK MARKET ARE ALLEGED TO BE OF SPECULATIVE NATURE. THE ALLEGA TION HAS BEEN ITA NO. 747/AHD/14 [M/S. PRATHAM INVESTMENTS VS. DCIT] A.Y. 2005-06 - 6 MADE AFTER THE COMPLETION OF THE ASSESSMENT BASED O N APPRECIATION OF MATERIAL ALREADY AVAILABLE ON RECORD. IT IS THE CASE OF THE ASSESSEE THAT ALL THE RELEVANT FACTS WERE PLACED ON RECORD WHILE CLAIMING THE LOSS ARISING FROM DERIVATIVE TRANSACTI ONS TO BE BUSINESS LOSS. THE AO AFTER TAKING NOTE OF THE RELEVANT FAC T HAS ADMITTED SUCH LOSS AS BUSINESS LOSS AND GRANTED SET OFF OF S UCH LOSS AGAINST BUSINESS INCOME. IT IS THE CASE OF THE ASSESSEE TH AT THE ADMISSION OF CLAIM OF ASSESSEE BY AO AT THE TIME OF THE ORIGINAL ASSESSMENT WAS NOT WITHOUT ANY BASIS. THE DECISION OF THE CO-ORDI NATE BENCH OF TRIBUNAL IN R.B.K. SECURITIES (SUPRA) SUPPORTS THE ACTION OF THE AO IN HOLDING THE DERIVATIVE LOSS TO BE A BUSINESS LOS S. THE AO WHILE RECORDING REASONS UNDER S.148(2) OF THE ACT HAS NOT POINTED OUT THE CIRCUMSTANCES FOR THE CHANGE IN THE STAND ORIGINALL Y TAKEN AT THE TIME OF ORIGINAL ASSESSMENT. NEEDLESS TO SAY THE AO IS NOT ENTITLED TO EXERCISE POWER UNDER S.147 OF THE ACT TO REOPEN THE COMPLETED ASSESSMENT IN A CURSORY MANNER. THE OBJECTIVITY IN THE FOUNDATION FOR FORMATION OF BELIEF TOWARDS ESCAPEMENT OF INCOM E MUST EXIST. THE AO IS EXPECTED TO SPELL THE PROCESS BY WHICH HE ENTERTAINED THE BELIEF FOR ALLEGED ESCAPEMENT OF INCOME. IN THE PR ESENT CASE THE REASONS RECORDED ARE OSTENSIBLY ABSTRACT WITHOUT RE FERENCE TO ANY MATERIAL. THE ASSESSEE IN THE INSTANT CASE HAVING DISCLOSED THE RELEVANT FACTS AT THE TIME OF THE ORIGINAL ASSESSME NT HAS THUS DISCHARGED ITS PRIMARY ONUS. CONSEQUENTLY THE ONU S WAS SHIFTED ON THE AO TO DRAW INFERENCE THEREON. HAVING REGARD TO THE FACTS AVAILABLE ON RECORD THE PLAUSIBLE INFERENCE WOULD BE THAT THE AO HAS APPLIED HIS MIND TO THE FACTS AND CONCLUDED THA T THE LOSS IN DERIVATIVE TRANSACTIONS TO BE ORDINARY BUSINESS LOS S. THE AO COULD HAVE DISPLACED THE ORIGINAL ACTION ONLY UPON SHOWIN G THE FALLACY THEREIN. AS NOTED EARLIER THE AO HAS NOT RECORDED ANYTHING TO SUGGEST AS TO WHAT CHANGE IN CIRCUMSTANCES PROMPTED HIM TO INVOKE ITA NO. 747/AHD/14 [M/S. PRATHAM INVESTMENTS VS. DCIT] A.Y. 2005-06 - 7 SECTION 147 OF THE ACT SUBSEQUENT TO COMPLETION OF ASSESSMENT. NEEDLESS TO SAY THE WIDE POWER TO REOPEN IS CIRCUM SCRIBED AND DOES NOT GIVE PERMISSION TO THE AO TO REOPEN THE COMPLET ED ASSESSMENT ON A MERE CHANGE OF OPINION ON THE SAME FACTS. WE THUS SEE NO SEMBLANCE IN THE ACTION OF THE AO UNDER S.147 OF TH E ACT. A BARE GLANCE OF THE REASONS RECORDED GIVES AN IMPRESSION THAT THE REOPENING HAS BEEN CARRIED OUT ON SHALLOW REASONING S WHICH IS NOT SUSTAINABLE IN LAW. THE ACTION UNDER S.147 OF THE ACT IS THUS VOID AB INITIO AND CONSEQUENT RE-ASSESSMENT ORDER FRAMED THEREUND ER IS BAD IN LAW AS A COROLLARY THERETO. IN THE RESULT THE RE-ASSESSMENT NOTICE AND CONSEQUENT RE-ASSESSMENT ORDER UNDER S.1 43(3) R.W.S. 147 OF THE ACT IS QUASHED AND SET ASIDE. 11. IN THE RESULT THE APPEAL OF THE ASSESSEE IS AL LOWED. SD/- SD/- (MAHAVIR PRASAD) (PRADIP KUMA R KEDIA) JUDICIAL MEMBER ACCOUNTANT MEMBER AHMEDABAD: DATED 15/01/2019 TRUE COPY S. K. SINHA !'#' / COPY OF ORDER FORWARDED TO:- &. / REVENUE 2. / ASSESSEE (. )*+ / CONCERNED CIT 4. - / CIT (A) /. 012 33*+4 *+#4 56) / DR ITAT AHMEDABAD 7. 289 : / GUARD FILE. BY ORDER / 4 /5 *+#4 56) THIS ORDER PRONOUNCED IN OPEN COURT ON 15/01/2 019