M/S Aravali Engineers (P) Ltd v. The Commissioner Of Income-Tax And Another

Income-tax Appeal No. 429 of 2007 **** IN THE HIGH COURT OF PUNJAB AND HARYANA ATCHANDIGARH Income-tax Appeal No. 429Date of decision: 9.12.2010 of 2007 M/s Aravali Engineers (P) Ltd. ...Appellant Versus The Commissioner of Income-Tax and another ...Respondents CORAM: HON'BLE MR.JUSTICE ADARSH KUMAR GOEL HON'BLE MR.JUSTICE AJAY KUMAR MITTAL 1. Whether Reporters of local papers may be allowed to see the judgment? 2. Whether to be referred to the Reporters or not? 3. Whether the judgment should be reported in the Digest? Present: Ms. Radhika Suri, Advocate for the appellant. Ms. Urvashi Dhugga, Advocate for the respondents. **** ADARSH KUMAR GOEL, J ( Oral). 1.This appeal has been preferred under Section 260-A ofIncome Tax Act, 1961 (hereinafter referred to as “the Act”) by theassessee against order dated 4.5.2007 of the Income Tax AppellateTribunal, Chandigarh Bench, passed in ITA No.366/Chandi/2002 inrespect of assessment year 1997-98. 2.The assessee derives income from business, from houseproperty as also from speculative transactions. It claimed set off ofloss suffered on sale and purchase of shares covered by thedefinition of speculative transactions under Section 43(5) of the Actagainst income from property. It also claimed deductions to the extent of brokerage paid out of income from property. Both the saidclaims were disallowed by the assessing officer with the followingobservations:- Deduction of loss from speculative transactions. “The assessee company has debited an amount ofRs.3,02,050/- on account of loss on shares. It was seenduring the course of scrutiny that the loss had arisen tothe assessee on sale purchase of shares. In theassessee's case only a difference note was sent by thestock broker indicating the loss. It was clearly establishedthat the delivery of shares had not actually taken place inthe assessee's case. The difference note was receivedfrom M/s B.K.Khullar & co. Section 43(5) which specifiesspeculative transactions clearly says that where thetransaction of purchase or sale including shares isultimately settled otherwise than by actual delivery thesame shall be a speculative transaction. Income or lossarising to the assessee from such a transaction has to bea speculative income or speculative loss only. Thespeculative loss of Rs.3,02,050/- is hence not debitable tothe P & L A/c of the regular business of the assessee.Consequently this shall be considered separately as aspeculative loss. Explanation to section 73 also says thatwhere any part of the business of the company consistsin the purchase and sale of shares then the company for the purpose of this section be deemed to be carrying on aspeculation business to the extent to which the businessconsists of purchase and sale of such shares. Thiscompany has a business of trading in Bran. It is not aninvestment company also. Consequently any income orloss arising from dealing in shares shall be treated asspeculative income. On this account also the amount ofRs.3,02,050/- can not be allowed as an expense to thecompany and the loss shall be treated as speculativeloss only.” xxx xxxxxx Deduction on account of Brokerage “With regard to commission payment of Rs.2,50,000/-there is no eligibility under any section for the assesseecompany to claim this expenditure u/s 24. Thedeductions from house property are available only u/s 24and have been clearly specified. The rent received inassessee's case for the full year is the annual lettingvalue. As the commission is not eligible as a deductionu/s 24 it shall not be allowed as an expenditure underhouse property income.” xxx xxxxxx Deduction on account of Brokerage “With regard to commission payment of Rs.2,50,000/-there is no eligibility under any section for the assesseecompany to claim this expenditure u/s 24. Thedeductions from house property are available only u/s 24and have been clearly specified. The rent received inassessee's case for the full year is the annual lettingvalue. As the commission is not eligible as a deductionu/s 24 it shall not be allowed as an expenditure underhouse property income.” 3.The CIT(A) accepted the plea of the assessee on thequestion of brokerage but the Tribunal reversed the same andrestored the order of the Assessing Officer. The findings recorded bythe Tribunal are as under:- **** “We have given our careful consideration to the rivalsubmissions. The finding of fact recorded by the revenueauthorities that the loss has been incurred by theassessee on the sale of purchase of shares withoutactual delivery of the scrips has not been challengedbefore us. Section 43(5) defines speculative transactionas under:- “43(5) "speculative transaction" means atransaction in which a contract for the purchase orsale of any commodity, including stocks and shares,is periodically or ultimately settled otherwise than bythe actual delivery or transfer of the commodity orscrips; -Provided that for the purposes of this clause (a) a contract in respect of raw materials ormerchandise entered into by a person in the courseof his manufacturing or merchanting business toguard against loss through future price fluctuationsin respect of his contracts for actual delivery ofgoods manufactured by him or merchandise sold byhim; or (b) a contract in respect of stocks and sharesentered into by a dealer or investor therein to guardagainst loss in his holdings of stocks and sharesthrough price fluctuations; or **** (c) a contract entered into by a member of aforward market or a stock exchange ion the courseof any transaction in the nature of jobbing orarbitrage to guard against loss which may arise inthe ordinary course of his business as suchmember; [or] The following clause (d) shall be inserted after clause (c)in the provisio to clause (5) of section 43 by the FinanceAct, 2005w.e.f. 1.4.2006: (d)an eligible transaction in respect of trading inderivatives referred to in clause (aa) of section 2 of theSecurities Contract(Regulation) Act, 1956 (42 of 1956)carried out in a recognised stock exchange. shall not be deemed to be a speculative transaction.” On the basis of the findings of facts recorded by therevenue authorities, not challenged even before us, thereis no escape from the finding that the transactionsentered into by the assessee in regard to purchase andsale of shares are speculative transactions. Sections 70to 79 deal with set off and carry forward of losses fromvarious sources of income. Section 73 provides that losscomputed in respect of speculative business carried onby the assessee shall not be set off except against profitsand gains, if any, of another speculation business. Theassessee has pleaded even before us that the **** shall not be deemed to be a speculative transaction.” On the basis of the findings of facts recorded by therevenue authorities, not challenged even before us, thereis no escape from the finding that the transactionsentered into by the assessee in regard to purchase andsale of shares are speculative transactions. Sections 70to 79 deal with set off and carry forward of losses fromvarious sources of income. Section 73 provides that losscomputed in respect of speculative business carried onby the assessee shall not be set off except against profitsand gains, if any, of another speculation business. Theassessee has pleaded even before us that the **** transactions of purchase and sale of shares was part ofassessee's business. Since entire transactionsundertaken by the assessee were of speculative nature,the loss suffered by the assessee was a loss in respect ofspeculative business carried on by the assessee.Explanation to Section 73 provides certain circumstancesunder which companies partly carrying on the business ofpurchase and sale of shares of other companies would betreated as carrying on speculation business to the extentof the business consisting of purchase and sale ofshares. The said explanation is not applicable in respectof certain companies whose gross total income consistsmainly of income which is chargeable under the headsinterest on securities, income from house property, capitalgains, income from other sources etc. So, however, inthis case, Explanation to Section 73 has not been invokedas the same is not applicable. The transactionsundertaken by the assessee fall within the definition ofspeculative transactions as defined u/s 43(5) of the Act.Therefore, the revenue was justified in treating the losssuffered by the assessee as a loss suffered in speculationbusiness. The contention advanced on behalf of theassessee that Explanation to Section 73 is not applicableneed not be considered as the said Explanation has notbeen invoked by the revenue authorities. We are, **** therefore, ignoring the contentions advanced by the ld.Counsel for the assessee and the counter contentionsadvanced on behalf of the revenue in regard toapplicability of Explanation to Section 73 of the Act. Thebrokerage paid by the assessee in regard to thespeculative transactions has also not been allowed as adeduction against other income as the same isundisputedly connected with the business of theassessee in the purchase and sale of shares which istreated as a speculation business.” xxxxxxxxx “We have given our careful consideration to the rivalsubmissions. In our considered view, the commissionpaid by the assessee in respect of the letting out of thehouse property is not permissible as a deduction u/s 24 ofthe Act. Annual letting value of the property is defined u/s23 of the Act and in case of property let out, if the actualrent received is more than the expected rental value, theactual rent is treated as the ALV of the property. Out ofthe said ALV, deductions permissible are specified u/s 24of the Act. In this case, the rental value is not disputed.It is also not disputed that deduction of commission doesnot fall within the specified deductions u/s 24 of the Act.It is also pertinent to mention that section 24(1) providesdeduction equal to 30% of the annual value without **** **** assessee having to establish the incurring of anyexpenditure. Thus, the expenditure which is incurred bythe assessee can be said to be covered under thestatutory deduction allowed to the assessee. Since theLegislature in tis wisdom has not provided any separatededuction on account of commission/brokerage paid tothe property dealers, the CIT(A), in our view, was notjustified in allowing the deduction to the assesseee. Weare fortified in our view by the decision of Delhi Bench ofther ITAT in the case of Piccadily Holidays Resorts Ltd.DCIT (2005) 278 ITR(AT) 154 (Delhi) [(2005) 94 ITD 267].For the reasons given earlier by us in this regard andrespectfully following the aforementioned decision of theDelhi Bench of the Tribunal, we restore the disallowanceof Rs.2,50,000/-. The ground of appeal raised by therevenue is thus allowed.” 4.It may also be mentioned that the assessee raised plea ofthe assessment being barred by limitation on the ground that noticeunder Section 143(2) of the Act was not served within the stipulatedtime. The Tribunal held that the assessee did not raise the pleaearlier inspite of opportunity being available and on a question offact, such a plea could not be allowed to be raised for the first timebefore the Tribunal. Reference was made to the judgments of theHon'ble Supreme Court in National Thermal Power Co. Ltd. Vs.CIT 229 ITR 383 (SC)and Jute Corporation of India Ltd. Vs. CIT **** 187 ITR 688 (SC). 5.The appeal was admitted by this Court to consider the following substantial questions of law claimed by the assessee:- i)Whether in facts and circumstances of the case theITAT had fallen in error in disallowing the appellantfrom raising an additional issue, contrary to ratio ofSupreme Court in National Thermal Vs. CIT whenall evidence for adjudicating the same was placedbefore it.ITAT had fallen in error in disallowing the appellantfrom raising an additional issue, contrary to ratio ofSupreme Court in National Thermal Vs. CIT whenall evidence for adjudicating the same was placedbefore it. ii) Whether in facts and circumstances of the case theprovisions of Section 73 could be invoked againstthe assessee when the assessee was squarelycovered by explanation of Section 73 vide which thesale and purchase of shares by a company wouldnot be speculative in nature in case its income wasmainly derived from house property or capital gainsor income of like nature?provisions of Section 73 could be invoked againstthe assessee when the assessee was squarelycovered by explanation of Section 73 vide which thesale and purchase of shares by a company wouldnot be speculative in nature in case its income wasmainly derived from house property or capital gainsor income of like nature? 6. Iii) Whether in facts and circumstances of the case theHon'ble ITAT was right in law in holding that thebrokerage paid was not an admissible expenditureunder Section 24 of the Income Tax Act eventhough the rent actually received by the assessee orthe tenant was after deducting the brokerage paid?Hon'ble ITAT was right in law in holding that thebrokerage paid was not an admissible expenditureunder Section 24 of the Income Tax Act eventhough the rent actually received by the assessee orthe tenant was after deducting the brokerage paid?We have heard learned counsel for the parties. 7. As regards question (i), we do not find any reason to take **** 6. Iii) Whether in facts and circumstances of the case theHon'ble ITAT was right in law in holding that thebrokerage paid was not an admissible expenditureunder Section 24 of the Income Tax Act eventhough the rent actually received by the assessee orthe tenant was after deducting the brokerage paid?Hon'ble ITAT was right in law in holding that thebrokerage paid was not an admissible expenditureunder Section 24 of the Income Tax Act eventhough the rent actually received by the assessee orthe tenant was after deducting the brokerage paid?We have heard learned counsel for the parties. 7. As regards question (i), we do not find any reason to take **** a view different from the view taken by the Tribunal. No doubt thatan Appellate Authority can allow a question to be raised for the firsttime even if such a question was not raised at a lower forum but thediscretion to do so has to be exercised in the interest of justice in thefacts and circumstances and not mechanically. Normally a questionof fact may not be allowed to be raised for the fist time as it mayprejudice the other side. If such question is raised at the earliestopportunity, the other side can lead evidence which it may not beable to do if such a question is raised for the first time before theAppellate Authority. Ofcourse, there can be no total bar on suchquestion being allowed, if interest of justice so requires. In NationalThermal's case (supra) it has not been laid down that in every casea question of fact can be mechanically allowed to be raised for thefirst time. The Madhya Pradesh High Court in Commissioner ofIncome-Tax Vs. Premium Capital Market and Investment Ltd.(2005) 260 ITR 275 held that question of validity of notice may not beallowed to be raised for the first time in appeal. Subsequentlegislative amendment adding Section 292BB supports thisprinciple. The question has, thus, to be answered against theassessee. 8.As regards question (ii), learned counsel for the assesseesubmits that the income of the assessee mainly being under thehead of income from property, the assessee was not covered byexplanation to Section 73 and in such a situation the assessee couldset off loss in speculative transactions against income from house **** property. The bar against set off of losses in speculativetransactions against income from other services applied only toassesses covered by Explanation to Section 73. 9.This submission cannot be accepted. Under the schemeof the Act computation of income under different heads has beenprovided for. Business loss cannot be set off against income fromother heads unless specifically provided. The business loss can beset off only against the business income as it is net income which isto be taxed. If business is partly of speculative transactions lossfrom such transaction cannot be set off against income from otherbusiness. The scope of Section 73 read with Section 28 Explanation2 is to deal with the situation where loss in speculative transaction issought to be set off against other business income. Section 73provides that such loss can be set off only against income fromspeculative business. The object of Explanation is to explain thisscheme in the main provision to situations where part of business isfrom speculative transactions. To that extent the assessee will bedeemed to be carrying on speculative business. Exclusion ofcategories of specified assesses i.e. where income is under theheads of interests on security, house property, capital gains andother sources or where main business is of banking or granting ofloans and advances etc. is to exclude the said assesses fromconsideration from the scope of provisions to limit the scope ofadjustment of loss of speculative business against business income,from other business. In respect of excluded categories, there being **** **** no income from other business, such categories have beenexcluded. Explanation 2 to Section 28 provides that speculativetransaction shall be deemed to be distinct and separate from otherbusiness. 10.It will be appropriate to set out relevant provisions forready reference:- “28. Profits and gains of business or profession.- The following income shall be chargeable to income-taxunder the head "Profits and gains of business of---profession", xxxxxxxxxx Explanation 2.-----Where speculative transactions carriedon by an assessee are of such a nature as to constitute a business, the business (hereinafter referred to as"speculation business") shall be deemed to be distinctand separate from any other business.” xxxxxxxxx “43. Definitions of certain terms relevant to income fromprofits and gains of business or profession.- xxxxxxxxx (5) "speculative transaction" means a transaction inwhich a contract for the purchase or sale of anycommodity, including stocks and shares, is periodically orultimately settled otherwise than by the actual delivery ortransfer of the commodity or scrips; -Provided that for the purposes of this clause (a) a contract in respect of raw materials or merchandiseentered into by a person in the course of hismanufacturing or merchanting business to guard againstloss through future price fluctuations in respect of hiscontracts for actual delivery of goods manufactured byhim or merchandise sold by him; or (b) a contract in respect of stocks and shares enteredinto by a dealer or investor therein to guard against lossin his holdings of stocks and shares through pricefluctuations; or (c) a contract entered into by a member of a forwardmarket or a stock exchange ion the course of anytransaction in the nature of jobbing or arbitrage to guardagainst loss which may arise in the ordinary course of hisbusiness as such member[or] (d)an eligible transaction in respect of trading inderivatives referred to in clause (aa) of section 2 of theSecurities Contract(Regulation) Act, 1956 (42 of 1956)carried out in a recognised stock exchange. xxxxxxxxx “73. Losses in speculation business: (1) Any loss, computed in respect of a speculationbusiness carried on by the assessee, shall not be set offexcept against profits and gains, if any, of another **** speculation business. Explanation :- Where any part of the business of acompany (other than a company whose gross totalincome consists mainly of income which is chargeableunder the heads “Interest on securities”, “Income fromhouse property”, “Capital Gains” and “Income from othersources”, or a company the principal business of which isthe business of banking or the granting of loans andadvances) consists in the purchase and sale of shares ofother companies, such company shall, for the purposes ofthis section, be deemed to be carrying on a speculationbusiness to the extent to which the business consists ofthe purchase and sale of such shares.” 11. Thus, contention raised on behalf of the assesses that categories of assesses excluded under the Explanation can beallowed to set off loss in speculative transactions against incomefrom any other source cannot be accepted. As already discussed,even business loss in speculative transactions cannot be set offagainst other business income or income from other sources, exceptas may be expressly provided. If that is so, loss from speculativetransactions could not stand on higher footing than the business lossso as to qualify for set off against other income. **** 12. The object of addition of Explanation was to check taxavoidance device resorted to for manipulation by share dealings andthereby avoid tax on business income in the light ofrecommendations of Wanchoo Committee report (December, 1971page 78) which is as under:- **** 12. The object of addition of Explanation was to check taxavoidance device resorted to for manipulation by share dealings andthereby avoid tax on business income in the light ofrecommendations of Wanchoo Committee report (December, 1971page 78) which is as under:- “A tax avoidance device often resorted to by businesshouses controlling groups of companies is manipulationof results from dealings in shares of the companiescontrolled by them. In our opinion, such manipulation inshare dealings for the purpose of tax avoidancde can bechecked effectively if the results of dealings in shares bysuch companies are treated for tax purposes in a manneranalogous to speculation. No doubt, companies whosemain business activities centre around investment inshares will have to be left out. Accordingly, werecommend that the results of dealings in shares bycompanies, other than investment, banking and financecompanies, should be treated in a manner analogous tospeculation business.” 13.In view of above, the question has to be answeredagainst the assessee. 14.As regards question (iii), learned counsel for theassessee submits that rent to the extent of brokerage paid havingnever been received by the assessee, the assessee was not liable toinclude the said rent in the income. This submission cannot be **** accepted. Rent admittedly was payable to the assessee andbrokerage was an independent transaction envisaging payment tothe broker. Where ever deductions out of income from property arepermissible, the same have been specified in Section 24. De-horsthe said provision, deduction from income is not permissible. Thisview has also been taken by Delhi High Court inCommissioner ofIncome-Tax, Delhi-I Vs. H.G. Gupta & sons [1984] 149 ITR 253.We are in agreement with the view taken in said judgment.Question No.(iii) is thus answered against the assessee.15.Accordingly, the appeal is dismissed. (Adarsh Kumar Goel) Judge December 09,2010Pka (Ajay Kumar Mittal) Judge