Addition for income from commodity transactions not justified if supporting details filed

ITO Vs M/s Prism Share Trading Pvt. Ltd. (ITAT Mumbai)

Conclusion: Where assessee had duly substantiated that it had earned a profit from commodities transactions along with complete details supporting the same, AO was not justified in treating the commodity transactions a fictitious arrangement with its associate concerns and adding the income as an unexplained cash credit under Sec.68.

Held: In the present case, assessee had offered the amount of Rs.5,73,96,307/- as income from commodities trading business along with complete details supporting the same. A.O being of the view that assessee had in the garb of the commodity transactions created a fictitious arrangement with its associate concerns, thus characterised the amount of Rs.5,73,96,307/- as an unexplained cash credit under Sec.68. It was held the same could not be termed as an unexplained cash credit as assessee had placed on record the complete details i.e. name and address of the counter party viz. M/s Sneha Metal Pvt. Ltd. with the A.O, but the latter had not deemed it fit to make any enquiry with the said party. As the commodities transactions were carried out by assessee throughout the year, thus the same clearly dislodged the observation of A.O that the profit generated therefrom was prompted with an intent to ‘set off’ the same against the loss suffered by assessee in the F&O transactions. Insofar the adverse inferences that assessee had settled its account with the broker M/s K Pvt. Ltd.(‘sister concern’ of the assessee) only through journal entries, the same was found to be absolutely misconceived. A.O had arrived on observations on the basis of a half hearted approach and premature observations and assessee had duly substantiated that it had earned profit from commodities transactions, therefore, the same could not be held as an unexplained cash credit under Sec.68.

FULL TEXT OF THE ITAT JUDGEMENT

The present appeal filed by the revenue is directed against the order passed by the CIT(A)-21, Mumbai, dated 14.06.2017, which in turn arises from the assessment order passed by the A.O under Sec.143(3) of the Income Tax Act, 1961 (for short ‘Act’), dated 31.03.2016. The revenue assailing the order of the CIT(A) has raised before us the following grounds of appeal:

“1. On the facts and circumstances of the case and in law, the CIT(A) erred in deleting the addition of Rs.5,73,96,307/- made by the AO u/s. 68 of the I.T Act 1961, as unexplained cash credit without appreciating the fact that the Multi Commodity Exchange has denied the transaction of Rs.5,73,96,307/-.

2. On the facts and circumstances of the case and in Law, the CIT(A) erred in allowing the set off of losses against the additions made by the AO towards unexplained cash credit u/s. 68 of the I.T Act by applying the newly amended section 115BBE of the I.T Act.

3. On the facts and circumstances of the case and in law, the CIT(A) erred in ignoring the decision of the Hon’ble Gujarat High Court in the case of Fakir Mohammed Haji Hasan vs. CIT (2001) 247 ITR 290 and the decision in the case of M/s. Kerala Sponge Iron Ltd. vs. CIT (ITA No. 195/2014) by the Kerala High Court.

4. The appellant prays that the order of the CIT(A) on the grounds be set aside and confirm the order of the AO.

5. The appellant craves leave to add, amend or alter all or any of the grounds of appeal.”

2. Briefly stated, the assessee company which is engaged in share trading activities in various stock exchanges including F&O, commodities share trading and currency trading had filed its return of income for A.Y. 2013-14 on 25.09.2013, declaring total income of Rs.6,28,890/-. Subsequently, the case of the assessee was selected for scrutiny assessment under Sec. 143(2).

3. In the course of the assessment proceedings, it was observed by the A.O that the assessee had claimed to have made gain of Rs.5,73,96,307/- in the business of trading in commodities. It was noticed by the A.O that the aforesaid gain claimed by the assessee to have been made from the business of trading in commodities was ‘set off’ against the loss of Rs.5,56,42,339/- from F&O transactions, and a further loss of Rs.1,82,496/- from currency transactions. It was observed by the A.O that the assessee had shown a net profit of Rs.21,25,794/- from its various share trading activities etc., as under:

On verification of the details, it was noticed by the A.O that the assessee had claimed to have carried out commodity transactions in Multi Commodity Exchange of India (for short ‘MCX’). On the basis of the details gathered by the A.O, it was observed by him that during the year under consideration the assessee had made commodity transaction profit of Rs.313/- only, as against the commodity transaction profit of Rs. 5,73,96,307/- so claimed by it. The assessee on being confronted with the aforesaid fact submitted, that only one commodity transaction was entered in MCX and all other transactions were off market transactions which were routed through M/s Kaynet Commodities Pvt. Ltd. In order to fortify the veracity for its aforesaid claim the assessee produced before the A.O ‘bills’ of the off market trading that was carried out during the year under consideration. It was further claimed by the assessee that it had carried out the off market commodity transactions only through one broker i.e M/s Kaynet Commodities Pvt. Ltd. The A.O in order to verify the genuineness of the claim of the assessee issued summons under Sec. 131 to the Director of M/s Kaynet Commodities Pvt. Ltd. and recorded his statement under oath. Shri Mukesh Shah, Director of M/s Kaynet Commodities Pvt. Ltd. in his statement admitted before the A.O that his company had not made any off market transactions with other clients. In the backdrop of the aforesaid facts, the A.O held a conviction that the commodity gains of Rs.5,73,96,307/- claimed by the assessee were in the nature of artificially engineered gains that were created by the assessee with the purpose to ‘set off’ the same against the ‘loss’ incurred in F&O transactions. In order to support his aforesaid conviction, it was observed by the A.O that all the purchase and sale transactions were merely carried out by the assessee on a plain piece of paper. Further, it was noticed by him that there was no movement of actual funds and only a journal entry was passed on 28.12.2012 and 05.01.2013 amounting to Rs.1,00,00,000/- and Rs.1,42,00,000/-, respectively, in the ledger of M/s Kaynet Commodities Pvt. Ltd. On the basis of the aforesaid deliberations, the A.O being of the view that the assessee had in the garb of the aforesaid commodity transactions created a fictitious arrangement with its associate concerns, thus characterised the amount of Rs.5,73,96,307/- as an unexplained cash credit under Sec.68 of the Act.

4. Further, the A.O being of view that as the addition made under Sec.68 could not be taken as income under any specific head of income, therefore, concluded that the aforesaid claim of the assessee for ‘set off’ of the F&O loss against the said deemed income could not be allowed. On the basis of his aforesaid observations the A.O characterized the amount of Rs.5,73,96,307/- as an unexplained cash credit under Sec.68 and declined to allow the ‘set off’ of the loss suffered by the assessee from F&O transactions against the same.

5. Aggrieved, the assessee carried the matter in appeal before the CIT(A). The assessee agitated the order passed by the A.O on two grounds viz. (i) that the income from commodity transactions of Rs.5,73,96,307/- shown by the assessee in its return of income had wrongly been held by the A.O as an unexplained cash credit under Sec. 68 of the Act; and (ii) that the A.O had erred in declining the ‘set off’ of the loss suffered by the assessee against the aforesaid deemed income under Sec.68 of Rs.5,73,96,307/-.The CIT(A) after deliberating at length on the contentions advanced by the assessee was persuaded to subscribe to the same. It was observed by the CIT(A) that the A.O had erred in invoking Sec. 68 and therein characterising the profit shown from commodities trading business of Rs.5,73,96,307/- as an unexplained cash credit under Sec.68 of the Act. Further, it was observed by the CIT(A) that as per Sec. 115BBE that was brought on the statute by the Finance Act, 2012 with effect from 01.04.2013, and was applicable to the year under consideration i.e A.Y. 2013-14 did not contemplate any restriction on ‘set off’ of loss against the income therein assessed. In the backdrop of his aforesaid deliberations, the A.O was of the considered view that the declining on the part of the A.O to allow ‘set off’ of the losses against the income assessed by him under Sec.68 clearly militated against the mandate of law as was then so available on the statute. It was observed by the CIT(A) that the restriction on ‘set off’ of losses against the income referred to in Sections 68, 69, 69A, 69B, 69Cand 69D was made available on the statute by the legislature on the basis of amendment to Sec.115BBE by the Finance Act, 2016 only with effect from 01.04.2017. In order to fortify his aforesaid view the CIT(A) took support of the CBDT circular No. 3/2017, dated 20.01.2017 which explained the amendment on the basis of which Sec. 115BBE was prospectively amended by the Finance Act, 2016 with effect from A.Y. 2017-18. In the backdrop of his aforesaid deliberations the CIT(A) vacated the characterization by the A.O of the profit shown by the assessee from commodities trading business of Rs.5,73,96,307/-, as an unexplained cash credit under Sec.68 of the Act. Apart therefrom, the CIT(A) vacated the observation of the A.O that the ‘set off’ of loss of Rs.5,56,42,339/- suffered by the assessee in F&O transactions was not permissible against the income of Rs.5,73,96,307/- that was assessed by him as an unexplained cash credit under Sec.68 in the hands of the assessee. On the basis of his aforesaid observations the CIT(A) partly allowed the appeal of the assessee.

6. The revenue being aggrieved with the order of the CIT(A) has carried the matter in appeal before us. The ld. Departmental Representative (for short ‘D.R’) relied on the order of the A.O. It was submitted by the ld. D.R that as the assessee had entered into commodity transaction activities to avail the artificially engineered gain created by the aforesaid transactions with a purpose to ‘set off’ the loss incurred in F&O transactions, therefore, the A.O rightly appreciating the facts of the case had held the alleged gain of Rs.5,73,96,307/- as an unexplained cash credit under Sec.68 of the Act. Further, it was submitted by the ld. D.R that the A.O rightly taking support of the judgment of the Hon’ble High Court of Gujarat in the case of Fakir Mohmed Haji Hasan Vs. CIT (2001) 247 ITR 290 (Guj) had rightly concluded that the loss from F&O transactions of the assessee could not be ‘set off’ against the addition made in the hands of the assessee under Sec.68 of the Act.

7. Per contra, the ld. Authorized Representative (for short ‘A.R’) for the assessee submitted, that the A.O had on flimsy grounds dislodged the profit shown by the assessee from commodities trading business of Rs.5,73,96,307/-, and had wrongly characterised the same as an unexplained cash credit under Sec.68 of the Act. It was submitted by the ld. A.R that the assessee had earned the commodities profit by carrying out offline transactions. Alternatively, it was submitted by the ld. A.R that the A.O had erred in not allowing ‘set off’ of the loss suffered by the assessee from F&O transactions against the income that was allegedly brought to tax under Sec.68 of the Act. In support of his aforesaid contention the ld. A.R relied on the order of the ITAT, Jaipur in the case of ACIT, Central Circle -2, Jaipur Vs. M/s Sanjai Bairathi Gems Ltd. (ITA No. 157/JP/2017; dated 08.08.2017). It was submitted by the ld. A.R that Sec. 115BBE as was amended vide the Finance Bill, 2016 had only prospectively with effect from A.Y. 2017-18 put a restriction on the ‘set off’ of losses against the income that was brought to tax under Sec.68, or Sec. 69, Sec.69A, Sec. 69B, Sec.69C or Sec.69D. It was submitted by the ld. A.R that in the absence of any such restriction in Sec. 115BBE as was available on the statute for the year under consideration i.e. A.Y. 2013-14, as regards ‘set off’ of losses against the income assessed under Sec.68, the A.O was in error in declining to allow the ‘set off’ of loss suffered by the assessee from F&O transactions against the income that was allegedly assessed by the A.O under Sec. 68 of the Act.

8. We have heard the authorized representatives for both the parties, perused the orders of the lower authorities and the material available on record. We find that the revenue by preferring the present appeal has sought our indulgence on two issues viz. (i) that as to whether the CIT(A) is right in law and facts of the case in concluding that the profits from the commodities transaction claimed by the assessee could not be assessed as an unexplained cash credit under Sec.68 of the Act; and (ii) that as to whether the CIT(A) has rightly concluded that the loss suffered by the assessee from F&O transactions could validly be ‘set off’ against the income assessed in the hands of the assessee under Sec. 68 of the Act.

9. We shall first advert to the observations of the CIT(A) that the profit from commodities trading business of Rs.5,73,96,307/- could not have been held as an unexplained cash credit under Sec.68 of the Act. Insofar the application of Sec.68 is concerned, the same comes into play where the assessee fails to explain the ‘nature’ and ‘source’ of any sum found credited in his ‘books’, or explanation offered by him is not, in the opinion of the A.O satisfactory. In the present case as the assessee had offered the amount of Rs.5,73,96,307/- as income from commodities trading business along with complete details supporting the same, therefore, in our considered view the same cannot be termed as an unexplained cash credit. Rather, the assessee had placed on record the complete details i.e. name and address of the counter party viz. M/s Sneha Metal Pvt. Ltd. with the A.O, but the latter had not deemed it fit to make any enquiry with the said party.

We have deliberated at length on the adverse inferences drawn by the A.O as regards the genuineness and veracity of the commodities transactions carried out by the assessee, and are unable to persuade ourselves to subscribe to the same. We find that as the commodities transactions were carried out by the assessee throughout the year, thus the same clearly dislodges the observation of the A.O that the profit generated therefrom was prompted with an intent to ‘set off’ the same against the loss suffered by the assessee in the F&O transactions. Insofar the adverse inferences that had been drawn by the A.O as regards the genuineness and veracity of the commodities transactions on the ground that the assessee had settled its account with the broker M/s Kaynet Commodities Pvt. Ltd.(‘sister concern’ of the assessee) only through journal entries, the same is found to be absolutely misconceived. We find from a perusal of the records that though an amount of Rs.2,42,00,000/- was adjusted through journal entries, however, the payment of Rs.3,21,50,000/- was received through account payee cheques, which thus clearly established the movement of actual funds in respect of the aforesaid transactions. Apart therefrom, the observations of the A.O that as the transactions in the commodities were carried out by the assessee off market, thus the same did not inspire any confidence as regards the veracity of such transactions, in our considered view is also an observation arrived at by the A.O on the basis of a half hearted approach and premature observations. In case the A.O had any serious doubts as regards the identity and creditworthiness in respect of the counter party which was identified in the course of the assessment proceedings, then it was open for him to have made further enquiries, which we find has not been done by him. On the basis of our aforesaid observations, we are of the considered view that as the assessee has duly substantiated that it had earned a profit of Rs.5,73,96,307/- from commodities transactions, therefore, the same in our understanding cannot be held as an unexplained cash credit under Sec.68. The Ground of appeal No. 1 raised by the revenue is dismissed.

10. We shall now advert to the observation of the CIT(A) that the loss suffered by the assessee from F&O transactions could be ‘set off’ against the income of Rs.5,73,96,307/- assessed by the A.O under Sec. 68 of the Act. We find that Sec.115BBE was brought on the statute by the Finance Act, 2012 with effect from 01.04.2013. On a perusal of the said statutory provision, as was then so available on the statute and was applicable to the case of the assessee for the year under consideration i.e A.Y. 2013-14, no restriction was placed as regards ‘set off’ of losses against the income referred to in Sec.68, 69, 69A, 69B, 69C and 69D. Rather, the legislature in all its wisdom by amending Sec. 115BBE vide Finance Act, 2016 w.e.f 01.04.2017 had only w.e.f A.Y. 2017-18 placed a restriction on ‘set off’ of losses, in addition to raising of any claim of expenditure and allowance against such income. The fact that the aforesaid amendment of Sec. 115BBE by the Finance Act, 2016, w.e.f 01.04.2017 is prospective in nature can safely be gathered from a perusal of the CBDT Circular No. 3/2017, dated 20.01.2017. In the backdrop of our aforesaid observations, it can safely be gathered that there was no embargo to claim ‘set off’ of losses in the year under consideration i.e A.Y. 2013-14. We thus in terms of our aforesaid observations are persuaded to subscribe to the view taken by the CIT(A) that the loss suffered by the assessee from F&O transactions could be ‘set off’ against the income of Rs.5,73,96,307/- that was allegedly assessed by the A.O under Sec.68 of the Act. The Ground of appeal No. 2 raised by the revenue is dismissed.

11. Insofar the claim of the revenue that the CIT(A) had erred in ignoring the decision of the Hon’ble High Court of Gujarat in the case of Fakir Mohmed Haji Hasan Vs. CIT (2001) 247 ITR 290 (Guj) and the decision of the Hon’ble High Court of Kerala in the case of M/s Kerala Sponge Iron Ltd Vs. CIT (ITA No. 195/2014) while concluding that the loss of F&O transactions could be ‘set off’ against the income under Sec. 68 of the Act, we are unable to persuade ourselves to accept the same. We are of the considered view that as Sec.115BBE as was applicable for the year under consideration i.e A.Y. 2013-14 did not provide for any restriction on ‘set off’ of losses against the income assessed under Sec.68, therefore, the view taken by the CIT(A) cannot be faulted with. In this regard it would be relevant and pertinent to point out that as the aforementioned judicial pronouncements relied upon by the revenue were rendered at a point of time when there was no such specific section viz. Sec. 115BBE contemplating a separate manner for taxing an income assessed under Sec. 68 of the Act, therefore, no support can be drawn from the same in the case of the assessee before us. Lastly, the fact that the restriction as regards the ‘set off’ of the losses against the income assessed under Sec.68 had been made available on the statute on the basis of an amendment of Sec. 115BBE that was made available on the statute by the Finance Act, 2016 w.e.f 01.04.2017, therefore, the same could not be read into the statute for a period prior to the said amendment. In terms of our aforesaid observations the Ground of appeal no. 3 raised by the revenue is dismissed.

12. We thus in terms of our aforesaid deliberations are in agreement with the view taken by the CIT(A), that the profit shown by the assessee from commodities trading business of Rs.5,73,96,307/-could not have been treated as an unexplained cash credit under Sec.68 of the Act. Alternatively, we are also persuaded to subscribe to the view taken by the CIT(A) that the loss suffered by the assessee from F&O transactions, could validly be adjusted as per Sec. 115BBE as was applicable during the year under consideration i.e A.Y.2013-14 against the income of Rs.5,73,96,307/- that had allegedly been treated by the A.O as unexplained cash credit under Sec.68. We thus not finding any infirmity in the view take by the CIT(A), uphold his order.

13. The appeal of the revenue is dismissed.

Order pronounced in the open court on 30.11.2018