IN THE ITAT MUMBAI BENCH ‘F’
Urudavan Investment & Trading (P.) Ltd.
Versus
Additional Commissioner of Income-tax
IT APPEAL NO. 6997/(MUM.) OF 2011
[ASSESSMENT YEAR 2008-09]
DECEMBER 5, 2012
ORDER
D. Karunakara Rao, Accountant Member
These are cross appeals filed against the order of CIT(A)-6, Mumbai dated 30.08.2011 in relation to assessment year 2008-2009. Grounds raised in both the appeals are as under:
2. Grounds raised in Revenue’s appeal – I.T.A. NO. 7442/M/2011:
“1. The order of the CIT(A) is opposed to law and facts of the case.
2. 1(A) “On the facts and circumstances of the case and in law, the Ld CIT(A) erred in treating the short term capital loss as business loss without appreciating fact s and findings brought on record by AO.
1(B) “On the facts and circumstances of the case and in law, the Ld CIT(A) failed to appreciate that the ratio of decision in the case of Gopal Purohit [336 ITR 287 (Bom.)] is squarely applicable to this case as the assessee took delivery of units of mutual funds and sold it at later date after availing the dividend therefrom”.
1(C) “On the facts and circumstances of the case and in law, the Ld CIT(A) filed to appreciate that the purchase and sale of mutual funds was short term capital gain but the assessee treated it as business activity to avail the benefit of loss which otherwise would not have been available as otherwise there was no short term capital gain available for set off.”
1(D) “On the facts and circumstances of the case and in law, the Ld CIT(A) failed to appreciate the colourble planning of the assessee to evade tax on the business income by wrongly setting off the short term capital loss in guise of business loss.”
3. 2(A) “On the facts and circumstances of the case and in law, the Ld CIT(A) failed to appreciate that the assessee has claimed loss on open position F&O contract and did not offer the profit for tax on similar open position of F&O contact on the last day of the previous year.”
2(B) On the facts and circumstances of the case and in law, the Ld CIT(A) failed to appreciate the ratio of decision in the case of Woodward Governors Pvt. Ltd. [179 Taxman 326 (SC)] wherein it was held that the notional loss or gain at the end of the year is to be treated as expenses or gain resp. of the year and therefore, erred in deleting the addition of Rs. 2,50,32,898/- on account of open position of F&O contract as on 31st March, 2008.”
4. For these and other grounds that may be urged at the time of hearing, the decision of CIT(A) may be set aside and that of AO restored.”
3. Grounds raised in Assessee’s appeal: The only effective ground raised by the assessee reads as under:
“On the facts and in the circumstances of the case and in law, the Ld CIT(A) erred in confirming the addition of Rs. 1,56,23,811/- made by the AO under section 14A r.w. Rule-8D of the Income Tax Act, 1961.The appellant prays that the same may please be deleted.”
4. Briefly stated the relevant facts of the case are that the assessee who has claimed to have engaged in the business of trading and investment, filed the return declaring the business loss of Rs. 21,78,14,379/-. The return was scrutinized u/s 143(3) of the Act and the total income was determined at Rs. 24,21,09,160/-. In the return, the assessee claimed business loss on sale of shares to the tune of Rs. 42,01,31,205/-. Considering the fact that the said loss is in the nature of short term capital loss, AO assessed the same as short term capital loss instead of business loss. During the assessment proceedings, AO noted that the assessee invested (a) a sum of Rs 13 cr in Index Select Fund on 10.10.2007; (b) Rs 15 cr in UTI Nifty Index Fund on 24.12.2007; and (c) Rs 50 cr UTI Nifty Index Fund on 24.12.2007 totalling to Rs 78 cr. Subsequently, the assessee earned dividend income out of these units amounting Rs 30,82,83,539/- in the months of Jan and March 2008. Finally the assessee sold all these units on 17th Jan and 28th March, 2008. As a result of the redemption of the units, the assessee incurred the loss of Rs 42,01,31,205/-. While the assessee claims the same as the business loss in view of the treatment of stock in trade in the books over the years as well as their volume of turnover, the AO held the same as ‘short term capital loss’ in view of mere three transactions of purchase and sale together with the colourable device allegedly resorted to by the assessee. Of course there are other related issues involving dividend stripping allegations and we will not discuss them here as these issues are not agitated by either parties before us.
5. Further, the AO picked up the profits and losses declared by the assessee involving the Futures and Options for scrutiny. AO found that the assessee earned and declared profit of Rs. 17,36,09,327/- for the year on transactions relating to Futures & Options (F&O). He also declared the loss on account of ten scrips to the tune of Rs. 3,34,00,286 in the year. However, a sum of Rs 2,50,32,898/- was earned out of the Cent tex and not offered for tax in the year. On finding that the assessee did not recognize profit of Rs. 2,50,32,898/- as income of the year, AO recognized the same as profit of the assessee in the year under consideration. Otherwise, it is a fact that the assessee offered the same in the next financial year i.e AY 2009-2010. In response, AO rejected the written submissions filed by the assessee. Thus, the addition on this account is Rs. 2,50,32,898/- as profits on outstanding possession in Futures.
6. Further also, AO also made disallowance by invoking the provisions of section 14A of the Act. On finding that assessee earned dividend income of Rs. 31,27,95,594/- (short term and long term units) which was claimed as exemption u/s 10(34), AO proposed to invoke provision of section 14A read with Rule-8D of the Act and he relied on the judgment of jurisdictional High Court in the case of Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT [2010] 328 ITR 81. On this account, AO made addition of Rs. 1,56,23,811/-.
Before the CIT(A):
7. Aggrieved with the above additions, the assessee filed appeal before the CIT(A) and the assessee made various submissions which are extracted in para 1.2 of the impugned order. On the issue of AO’s decision in treating the business loss of Rs 43,01,31,205/- as the short capital gains loss, the case of the revenue is that the same cannot be the business loss for the following reasons,- (a) number of transactions are not many – three transactions only; (b) intention was to earn the dividends – evidenced by the fact the assessee earned dividend of Rs. 30.82 cr (rounded off) as per the table below;
