Nekkanti Systems Private Limited Vs ITO (ITAT Hyderabad)
Held that activities of share trading were carried out by the directors in their individual capacity from their unique client codes. Accordingly, loss incurred in same is not allowable in the hands of company
Facts-
After examining the material available on record and the information furnished by the assessee, Assessing Officer completed the assessment u/s 143(3) of the Act accepting the income returned. Subsequently, PCIT passed an order under Section 263 of the Income Tax Act, 1961, revising the assessment order passed by the AO on the ground that the said order was erroneous and prejudicial to the interest of the revenue department.
It was alleged that loss claimed on account of F&O was loss assessable in the assessment of Sri Karthik Velagapudi and Smt. P. Usha Rao and is not allowable loss in the assessment of the company.
Conclusion-
In the present case, it is clear from the facts on record that the activities of share trading were carried out by the directors in their individual capacity from their unique client codes. Therefore, in our view, the losses / income, if any, caused on account of such activities carried out by the directors from their own unique client codes cannot be allowed in the hands of the assessee (company).
FULL TEXT OF THE ORDER OF ITAT HYDERABAD
These are the two connected appeals filed by the assessee and Revenue for A.Y. 2014-15 and 2015-16 against the orders of Principal Commissioner of Income Tax, Hyderabad dt.29.03.2019 u/s 263 of the Act and Commissioner of Income Tax (Appeals) – 4, Hyderabad dt.23.01.2019 u/s 143(3) of the Income Tax Act, respectively.
2. The grounds raised in the appeal filed by the assessee u/s 263 of the Act for A.Y. 2014-15 reads as under :
“1. The order of the learned Principal Commissioner of Income Tax is erroneous both on facts and in law.
2. The learned Principal Commissioner of Income Tax erred in holding that the trading activity in F & O undertaken by Sri Karthik Velagapudi and Smt. P. Usha Rao on behalf of the company Nekkanti Systems Pvt. Ltd., is not assessable in the assessment of the appellant.
3. The learned Principal Commissioner of Income Tax erred in holding that the loss claimed on account of F&O of Rs.1,67,31,578/- loss assessable in the assessment of Sri Karthik Velagapudi and Smt. P. Usha Rao and is not an allowable loss in the assessment of the company.
4. The learned Principal Commissioner of Income Tax erred in holding that the order u/s 143(3) dated 04.11.2016 for the assessment year 2014-15 is erroneous and prejudicial to the interest of revenue on the ground that the loss claimed under F&O of Rs.1,67,31,578/- is not allowable.”
3. The brief facts of the case are that assessee is a company who filed its e-return for A.Y. 2014-15 on 21.09.2014 declaring taxable income of Rs.22,64,140/-. Subsequently, the case was selected for scrutiny and notice u/s 143(2) of the Act was issued and was served on the assessee on 08.09.2015. In response to the notice u/s 143(2) and subsequent statutory notice u/s 142(1) of the Act, director of the company appeared from time to time and furnished the information as called for. After examining the material available on record and the information furnished by the assessee, Assessing Officer completed the assessment u/s 143(3) of the Act accepting the income returned.
3.1. Subsequently, a show cause notice was issued on 03.12.2018 to the assessee as to why the assessment order for A.Y. 14-15 should not be revised as the assessment order was erroneous and prejudicial to the interest of the revenue as per provisions of section 263 of the I.T. Act. In response to which, Ms. P. Usha Rao, Director of the assessee company appeared and furnished written reply on various dates. On verification of all the details furnished, ld.PCIT revised the assessment order u/s 143(3) of the Act on 04.11.2016 for A.Y. 2014-15 as the same is erroneous and prejudicial to the interest of the revenue.
3.2. Feeling aggrieved with the order passed u/s 263 of the Act, assessee is now in appeal before us.
4. First, we will take up the appeal of the assessee for A.Y. 201415 whereby the assessee has sought to challenge the order passed by the ld.PCIT quashing the assessment made u/s 143(3) of the Act vide order dt.04.11.2016 u/s 263 of the Act
5. The written submissions filed by the ld.AR in brief are that nowhere in the order, ld.PCIT mentioned that the Assessing Officer had not conducted necessary enquiry before completing the assessment for the impugned A.Y. 2014-15. Further, ld.PCIT has not considered the fact that the Assessing Officer allowed the loss from F & O in the impugned A.Y. 2014-15 only after conducing necessary enquiries. Ld.CIT(A) allowed the appeal for A.Y. 2015-16 and directed the Assessing Officer to allow the loss from F & O and the view taken by the Assessing Officer for A.Y. 2014-15 is supported by the order of ld.CIT(A) for A.Y. 2015-16 and hence, ld.PCIT is not correct to conclude that the view taken by the Assessing Officer in A.Y. 2014-15 is not a possible view. Ld.AR further submitted that it is a well settled principle of law that where the enquiry was conducted by the Assessing Officer and thereafter assessment order was passed taking one of the possible views, then provisions of section 263 cannot be invoked by the PCIT to substitute his view and in these circumstances, the exercise of power u/s 263 cannot be sustained. It is a settled principle of law that if the view which was taken by the Assessing Officer is a possible view, it would not be within the jurisdiction of the revisional authority to exercise the power u/s 263.
5.1. The ld.AR further submitted that the assessments in the hands of the Directors of the assessee were also completed accepting the explanations submitted by the Directors that the loss from F&O arisen by the activities carried out on behalf of the assessee company was disclosed and considered in the assessment and hence, there was no loss to Revenue and as such, the assessment order passed for A.Y. 2014-15 is not prejudicial to the interests of revenue. In this connections, he relied on the following decisions :
A) Malabar Industrial Co. Ltd. Vs. CIT – (2000) 243 ITR 83 (SC).
B) CIT Vs. Max India Limited (2007) 295 ITR 282 (SC)
C) Ultratech Cements Ltd. Vs. State of Rajasthan – (2020) 117 com 807 (SC).
D) CIT Vs. Smt. Neena Krishna Menon – (2021) 123 com 205.
E) CIT Vs. GM Mittal Stainless Steel (P) Ltd. – (2003) 263 ITR 255 (SC)
F) CIT Vs. Canara Bank – (2021) 123 com 207
G) Narayan Tatu Rane Vs. ITO – (2016) 70 com 227.
6. On the other hand, ld.DR for the Revenue had submitted that the action on the part of the ld.PCIT was in accordance with the law as the Assessing Officer at the time of framing the original assessment order has not examined the issue raised by the ld.PCIT. He has drawn our attention to the show cause notice issued by ld.PCIT. Based on show cause notice, it was submitted by ld.DR that the Assessing Officer had allowed the debit of Rs.1,73,99,050/- while computing the income of the assessee, whereas the said amount was the trading loss caused to the directors of the company while doing the share trading in their respective D-MAT accounts. It was also submitted that the assessee is only entitled to debit the losses which were directly related to the activities of the assessee for carrying out the business activities of the assessee. In the present case, the ld.PCIT has called upon the assessee to substantiate as to under which provision of law, the loss accrued to directors in their personal capacity can be adjusted against the income of the assessee company.
6.1. Ld.DR further submitted that in the A.Y. 2015-16, the similar issue was examined by the Assessing Officer and the Assessing Officer had called the report from M/s. Zen Money and the said M/s.Zen Money had given a categorical report stating that all the three individuals namely, assessee and the two Directors were maintaining their separate D-mat accounts with the M/s.Zen Money and the loss which has been claimed by the assessee do not represent the loss caused to the assessee on account of the trading activity by it.
6.2. It was also submitted by ld.DR that the assessee had not informed the ld.CIT(A) who was hearing the appeal arisen out of the order passed by the Assessing Officer for A.Y. 2015-16, about the pendency of revision proceeding before ld.PCIT, despite assessee having received the show cause notice u/s 263 of the Act prior to the last date of hearing. It was submitted that the ld.CIT(A) for A.Y. 2015-16 had relied upon the finding of the Assessing Officer for A.Y. 2014-15 whereas the said finding of the Assessing Officer for A.Y. 2014-15 was subject matter of revision before the ld.PCIT.
7. The ld.AR for the assessee in rebuttal had submitted that the show cause notice for hearing of 263 was received by the assessee after the conclusion of the proceedings for A.Y. 2015-16 and the ld.CIT(A) had passed the order for A.Y. 2015-16 on 23.01.2019. The assessee immediately after receipt of the order dt.23.01.2019 from the ld.CIT(A) had forwarded the order to ld.PCIT. However, ld.PCIT has not considered the said order which was forwarded by the assessee to the ld.PCIT. The ld.AR for the assessee had also filed the written submissions on 25.07.2022, the relevant portion of the written submissions are as under :
“22. It is humbly submitted that it is connected with the powers of the Board of Directors of a company and the delegation of powers to the Directors. According to the provisions of Sec.179 of the Companies Act, the Board of Directors of the company shall be entitled to exercise such powers as the company desires them to do. The provisions of clause (e) of sub section (3) of Sec.179 of the Companies Act empowers the Board of Directors of the company to invest the funds of the company if a resolution is passed to the effect. First proviso to sub section (3) of Sec.179 of the Companies Act mentions that the Board may by a resolution delegate such powers to any committee of directors, the managing director, the manager or any other principal officer of the company. In the case of the company, in consequence to Sec.179 of the Companies Act, a resolution was passed by the company on 1.4.2013 and also an agreement was entered into between the company and the Directors of the company (pages No 15, 16 8617). The Directors of the company acted on behalf of the company in accordance with the directions given by the Board of Directors and as authorised by Sec.179 of the Companies Act. Therefore, delegation of powers in company on the business of the company through its directors is legally permissible.
23. Firstly, it is submitted that the Board of Directors can Authorise the Directors to carry on business of the company in their name.
In this respect, the meaning and legal position of Directors may be necessary which is explained here under:
a) A Director is an agent of the company for the conduct of the business of the company. Directors of a company have fiduciary relationship with the company as well as the shareholders when he acts as an agent or officers of a company.
b) A company is a legal person who is living only in the eyes of law. It is a creation of law which lacks both body and mind. It cannot act, just like a human being. It can act only through. some human agency. Directors are’ those. persons through whom company acts and does business. They are collectively known as Board of Directors.
c) Cairns L.J. in Ferguson v. Wilson [1867] 2 Ch App 77, 89 said :
“What is the position of directors of a public company They are merely agents of a company. The company itself cannot act in its own person, for it has no person; it can only act through directors, and the case is, as regards those directors, merely the ordinary case of principal and agent. Wherever an agent is liable, those directors would be liable; where the liability would attach to the principal, and the principal only, the liability is the liability of the company.”
d) The Hon’ble Supreme Court in [1958] 34 ITR 10 (SC) Badridas Daga Vs. CIT held that
“When once it was established that ‘C’ was in charge of the business, that he had authority to operate on the bank accounts, and that he withdrew the moneys in the purported exercise of that authority, his action was referable to his character as agent, and any loss resulting from misappropriation of funds by him would be a loss incidental to the carrying on of the business.”
e) In the case of the assessee, the Directors, on due authorisation by the company, carried on the business of the company i.e., trading in shares, as agents of the company and on behalf of the company and therefore, the profit and/or loss thereon should be treated as the outcome of the business of the company and allowed in the assessment of the company. It cannot be considered as profit and/or loss of the Directors in their assessments. From the above, it is clear that the Board of Directors are permitted to pass a Resolution authorising the directors to act on behalf of the company which is permissible under the Companies Act and the assessee company did exactly what was permitted by the Companies Act.”
In view of the above, it was submitted that the order passed by the ld.PCIT was wrong and contrary to the order passed by the ld.CIT(A) for A.Y. 2015-16.
8. We have heard the rival submissions and perused the material on record. Before we deal with the issue, it is essential to bring certain important dates which are relevant for the determination of present set of appeals.
