Commission on sales is to be allowed in year of sale even if sale was realised in next financial year

IN THE ITAT CHENNAI BENCH ‘C’

Devendra Exports (P.) Ltd.

versus

Assistant Commissioner of Income-tax Company Circle-1(4)

IT APPEAL NO. 450 (MDS.) OF 2011

[ASSESSMENT YEAR 2005-06]

JUNE 22, 2012

ORDER

Vikas Awasthy, Judicial Member

The present appeal has been filed by the assessee impugning the order of the CIT(A)-III, Chennai dated 07.12.2010.

2. The brief facts of the case are that the assessee is a private company engaged in the business of manufacturing and trading of automobile parts. The assessee filed return of income relevant to the assessment year 2005-06 on 30.10.2005. The return of income of the assessee was processed under section 143(1) on 23.05.2006. Subsequently, the case of the assessee was selected for scrutiny and notice under section 143(2) was issued to the assessee on 23.05.2006. The Assessing Officer vide assessment order dated 12.12.2007 made additions on the following counts:-

Aggrieved against the assessment order, the assessee filed an appeal before the CIT(A) assailing the order passed by the Assessing Officer. Now the assessee is in second appeal before the Tribunal challenging the findings of the CIT(A).

3. The assessee has assailed the order of the CIT(A) on the following grounds:-

“1.  The CIT(A) has erred in not following the decision of the jurisdictional Tribunal in the case of Paterson Securities Pvt. Ltd. reported in 7 Taxmann 129 in holding the transactions in derivatives not to be considered as speculation loss and to be allowed as a business loss of the assessee.

 2.  The CIT(A) has erred in not giving the benefit of the clarification u/s. 43(5) of the amended provisions w.e.f. 1.4.2006 holding that the derivative transaction is not a speculative transaction, if the same is done through the stock exchange.

 3.  The CIT(A) has erred in confirming the disallowance of Rs. 2,94,701/- of the accrued commission not relating to the year in appeal, though it is the accounting practice consistently followed by the assessee as well as supported by accounting principles.

 4.  Alternatively, the CIT(A) should have given the clear finding that the amount should be allowed in the subsequent year as an expenditure. Hence the same is against the law and facts of the case.”

4. Mr. R. Vijayaraghavan, counsel appearing on behalf of the assessee submitted that ground nos. 1 and 2 are squarely covered by the order of the Mumbai Bench of the Tribunal in the case of Gajendra Kumar T. Agarwal v. ITO [2011] 45 SOT 156. He submitted that speculation loss from derivatives can be set off against the income earned from derivatives after amendment in the Act with effect from 1.4.2006. As regards grounds no.3 & 4, he submitted that the CIT(A) has wrongly confirmed the disallowance of the accrued commission not relating to the period under reference. In order to support his contentions, he has relied on the judgement of the Hon’ble Supreme Court of India in the case of Bharat Earth Movers v. CIT [2000] 245 ITR 428.

5. On the other hand, Dr. Yogesh Kamat representing the department strongly supported the order of the CIT(A) and submitted that the impugned order is well reasoned and detailed order and no interference in the said order is called for. He further submitted that a loss from trading in derivatives constitutes speculative loss which cannot be set off against short term capital gain. He also submitted that as regards commission to overseas agents is concerned, it is paid against each order or on periodical intervals but only after realization of respective bill amounts. The liability of commission had not crystallized on the amount disallowed by the CIT(A).

6. We have heard the submissions made by the parties and have gone through the case laws cited by the counsel for the assessee. In Gajendra Kumar T. Agarwal’s case (supra), the co-ordinate Bench of the Tribunal has held as under:-

“22. In the light of the views so expressed by Hon’ble jurisdictional High Court, we must proceed on the basis that the losses incurred in the assessment years prior to 2006-07, in dealing in derivatives, must be held to be losses of speculation business. To that extent, the issue is covered against the assessee. However, the question whether such losses of dealing in derivatives, which have been treated as losses of speculation business, can be set of against the profits of the same business activity in the assessment year 2006-07, did not really come up for adjudication before Hon’ble jurisdictional High Court, and Their Lordships did not also have any occasion to examine the scope of statutory provisions regarding carry forward and set off of business losses and the manner in which Hon’ble Courts have interpreted the same. In our humble understanding, therefore, this decision cannot be viewed as an authority for the proposition that losses incurred in dealing in derivatives, prior to the assessment year 2006-07, cannot be set off against the profits of the same business in the assessment year 2006-07 or later assessment years. That aspect of the matter did not come up for consideration before Their Lordships. Similarly, the scope of provisions for set off and carry forward of losses did not come up for consideration before a coordinate bench of this Tribunal in the case of ACIT v. Shreegopal Purohit (33 SOT 1). The coordinate bench apparently proceeded on the assumption that if a loss is characterized as speculation loss, in assessment proceedings for the assessment year in which loss was incurred, and profits from the same business in a subsequent year is characterized as non-speculation business profit, the former cannot be set off against the latter – an assumption, as we have seen earlier in this decision, is contrary to the law laid down by Hon’ble Supreme Courts in Manmohan Das’s case (supra). None of these decisions thus deal with the issue which has come up for our consideration.

23. In view of the above discussions, though subject to certain conditions – which are not relevant for the present purposes, the assessee was indeed entitled to set off the loss incurred, in the assessment years prior to the assessment year 2006-07, in the business of dealing in derivatives, against the profits earned in the assessment year 2006-07 and later assessment years.”

“27. As a result of the amendment in Section 43(5) with effect from 1st April 2006, losses incurred in derivative trading are held to be eligible for being set off against normal business profits, as derivate trading itself is treated as a non-speculative business, and losses of any non-speculative businesses can be adjusted profits of any non-speculative business. Ironically, however, this apparently well- intended measure of relief to the assessee has resulted in an absurd situation in which past losses of derivatives trading cannot be set off against profits of derivatives trading itself. What was meant to be a source of relief has turned into a cause of misery. That is clearly an absurdity. As to what should be done in such a situation, we find guidance from the observations made by Hon’ble Supreme Court, in the case CIT v. Hindustan Bulk Carriers Ltd. (259 ITR 449), as follows:

A construction which reduces the statute to a futility has to be avoided. A statute or any enacting provision therein must be so construed as to make it effective and operative on the principle expressed in maxim ut res magis valeat quam pereat i.e., a liberal construction should be put upon written instruments, so as to uphold them, if possible, and carry into effect the intention of the parties. [See Broom’s Legal Maxims (10th Edition), page 361, Craies on Statutes (7th Edition) page 95 and Maxwell on Statutes (11th Edition) page 221.]

A statute is designed to be workable and the interpretation thereof by a Court should be to secure that object unless crucial omission or clear direction makes that end unattainable – Whitney v. Commissioner of Inland Revenue [1926] AC 37 p. 52 referred to in CIT v. S. Teja Singh AIR 1959 SC 352, Gursahai Saigal v. CIT AIR 1963 SC 1062.

The Courts will have to reject that construction which will defeat the plain intention of the Legislature even though there may be some inexactitude in the language used – Salmon v. Duncombe [1886] 11 AC 627 p. 634 (PC), Curtis v. Stovin [1889] 22 CBD 513 referred to in S. Teja Singh’s case (supra).

If the choice is between two interpretations, the narrower of which would fail to achieve the manifest purpose of the legislation we should avoid.

Whenever it is possible to do so, it must be done to construe the provisions which appear to conflict so that they harmonise. It should not be lightly assumed that Parliament had given with one hand what it took away with the other.”

7. In the light of the findings of the co-ordinate Bench of the Tribunal, we are of the opinion that the assessee is also entitled to the relief and the loss suffered by the assessee during derivative trading should be allowed as short term capital loss and the same can be set off against the short term capital gain during the year.

8. As regards disallowance of Rs. 2,94,701/- on account of commission paid to foreign agents is concerned, the case of the assessee is squarely covered by the judgement of Hon’ble Supreme Court of India in the case of Bharat Earth Movers (supra). The Hon’ble Supreme Court in case of Bharat Earth Movers has held as under:-

“The law is settled: if a business liability has definitely arisen in the accounting year, the deduction should be allowed although the liability may have to be quantified and discharged at a future date. What should be certain is the incurring of the liability. It should also be capable of being estimated with reasonable certainty though the actual quantification may not be possible. If these requirements are satisfied the liability is not a contingent one. The liability is in praesenti though it will be discharged at a future date. It does not make any difference if the future date on which the liability shall have to be discharged is not certain.

9. In the instant case, the liability to pay commission Rs. 2,94,701/- has arisen by virtue of sales in the financial year 2004-05 relevant to the assessment year 2005-06. The realization of sale amount in the next financial year will not make much difference as the liability to pay commission had crystallized in the financial year 2004-05 itself after sale. We, therefore, reverse the decision of the CIT(A) on this issue and allow the ground raised by the assessee.

10. In view of the above, we set aside the impugned order dated 7.12.2010 passed by the CIT(A) and allow the appeal of the assessee.