ITA No. 3076/Mum/10
Assessment year: 2005- 06
O R D E R
Per Pramod Kumar :
1. The short issue that we are required to adjudicate in this appeal is whether or not the learned Commissioner was justified in exercising revision powers under section 263 of the Income Tax Act, 1961, on the facts and in the circumstances of this case. The assessment year involved is 2005-06 and the order so subjected to revision proceedings by the learned Commissioner was passed under section 143(3) of the Act.
2. The issue in appeal lies in a rather narrow compass of material facts. The assessee is engaged in the business of share trading activity. Subsequent to finalization of assessment under section 143(3), the Commissioner sought to subject the assessment revision. In the impugned revisions order, learned Commissioner states that he proceeded to initiate the revision proceedings on the ground that the details of purchase and sale of share transactions in futures were not verified as to whether the profit or loss from the future trading amounts to speculation gains or loss. In the show cause notice, however, learned Commissioner stated that “as per the provisions of Section 73 of the Income Tax Act, any loss computed in respect of a speculation business carried on by the assessee, shall not be set be set off against profits and gains, if any, of speculation business” and, therefore, the assessee is not allowed to adjust speculation loss, on futures trading, against other business profits. In the said show cause it was also observed that “total income of the assessee company is required to be computed by ignoring the speculation loss”. In the written submissions filed by the assessee, in response to the aforesaid show cause notice, it was, inter alia, stated that in the share trading business of the assessee, there is a net profit, even after setting off loss on in transactions which were on account of hedging transactions and thus not hit by the provisions of Explanations to Section 73. While Commissioner did not really reject the submissions so made by the assessee on merits, he exercised his revision powers on the ground that all these issues were not examined by the Assessing Officer in the course of the assessment. He thus set aside the assessment order “with a direction to (the Assessing Officer) to obtain complete details and conduct necessary enquiries and examine the same for the assessment year under consideration” and by observing that “the Assessing Officer shall provide adequate opportunity to the assessee before passing the assessment order”. The assessee is aggrieved by the action of the Commissioner and has challenged the same in appeal before us.
3. We have heard the rival contentions, perused the material on record and duly considered factual matrix of the case as also the applicable legal position.
4. We find that the impugned revision order is indeed not sustainable in law for more reasons than one. A plain reading of the impugned revision order clearly shows that the conclusion drawn in the revision proceedings are different from the reasons for revision proceedings set out in the show cause notice- extracts from which are set out in the revision order itself. It is important to note the shifting stand of the Commissioner so far as reasons for subjecting the assessment order to revision proceedings. At page 1, in fifth sentence of the impugned revision order, learned Commissioner notes that that “ [o]n perusal of assessment record, it was noticed that assessment order was erroneous inasmuch as it was prejudicial to the interest of the revenue as the details of purchase and sale of share transactions in future were not verified as to whether the profit or loss from the futures trading amounts to speculation gain or loss”. The extracts from show cause notice, which have been reproduced in the impugned revision order at page 1 and 2, donot, however, even remotely support that stand. The stand taken in the show cause notice is that, on merits, set off is not permissible inasmuch as show cause notice states that “[a]s per the provisions of Section 73 of the Income Tax Act, any loss computed in respect of speculation business carried on by the assessee shall not be set off except against profits and gains of another speculation business”, and, “therefore you (the assessee) are not allowed to adjust the speculation loss”. The show cause notice, therefore, clearly refers to declining , what the Commissioner perceives as, a set off of speculation loss against business profits. That is a categorical dis entitlement of set off. In the final conclusions in the impugned revision order, however, the Commissioner once again deviates from the stand so taken and concludes as follows:
In view of the foregoing, the assessment order dated 27.12.2007 passed by the Assessing Officer is considered to be erroneous and prejudicial to the interests of the revenue. Since the Assessing Officer has not taken the necessary details to verify whether the profits and loss from future trading amounts to speculation profit or loss, the assessment order is set aside with a direction to obtain complete details and conduct necessary inquiries and examine the same for the assessment year under consideration. The Assessing Officer shall provide adequate opportunity to the assessee before passing the assessment order
5. It is thus clear that there has been shifts in the stand of the Commissioner on whether it was a fit case for revision on the ground that the assessee was not eligible for set off of losses on speculative transactions or whether it was a case for revision on the ground that the Assessing Officer did not make necessary verification about the transactions. The reason given in the show cause notice is former, while the reason for which revision powers are finally exercised in the impugned order are latter. As to whether such an exercise of revisional powers, on the grounds other than the grounds of revision as set out in the show cause notice, could be held to be sustainable in law, we find guidance from the decisions of a coordinate bench in the case of Max pack Investments Ltd Vs ACIT (13 SOT 67) which, inter alia, observes as follows:
………….In CIT v. G.K. Kabra  211 ITR 336 the Andhra Pradesh High Court was dealing with an application seeking reference under section 256(2), inter alia, of the following question :
“Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was correct in holding that the Commissioner of Income-tax lacks initial jurisdiction, particularly when the conclusion made by the Commissioner of Income-tax in the order under section 263 was on the basis of the information furnished in response to the initial notice ?”
While declining to refer the above question, the High Court held as under (pages 339-340) :
“The necessary implication in the expression “after giving opportunity of being heard” relates to the point on which the Commissioner considers the order to be erroneous and prejudicial to the interests of the revenue. In other words, it is necessary for the commission to point out the exact error in the order which he proposes to revise so that the assessee would have an adequate opportunity of meeting the error before the final order is made.” [Emphasis supplied]
In the case before the High Court, the show-cause notice referred to two issues to which the assessee had given satisfactory replies. No action was taken under section 263 in respect of these two issues. However, in the said order the CIT mentioned the hire charges as the ground for revising the assessment. This point had not been mentioned as a ground in the show-cause notice. The High Court held that “inasmuch as the Commissioner had not chosen to show these two points as the errors in making the final order and the final order under section 263 refers only to the inference of hire charges being exigible to tax which was not mentioned at all in the show cause, obviously the assessee had no opportunity to meet that point.” [Emphasis supplied]
10. The ratio of the decision, clear from the above observations, is that if a ground of revision is not mentioned in the show-cause notice issued under section 263, that ground cannot be made the basis of the order passed under the section, for the simple reason that the assessee would have had no opportunity to meet the point. …………….
11. The other judgment which supports the case of the assessee is that of the Punjab and Haryana High Court in CIT v. Jagadhri Electric Supply and Industrial Co. Ltd.  140 ITR 490 The nature of the jurisdiction of the CIT under section 263 and the powers of the Tribunal while dealing with an appeal against the order passed under that section were explained in that decision. The CIT had found the order of the Assessing Officer allowing continuation of registration to the assessee-firm to be erroneous on the ground that the actual distribution of the profits was different from the ratio mentioned in the deed of partnership. The Tribunal set aside the order of the CIT but while doing so observed that there was a change in the number of partners from 10 to 11 which fact had not been taken into account by the Assessing Officer when he granted registration for the firm for the assessment year 1966-67 and thus the grant of registration was erroneous. On the basis of this observation it was argued before the High Court on behalf of the Revenue that the Tribunal ought to have sustained the order of the CIT on that ground. Repelling the contention, it was held by the High Court as under (pages 502-3) :
“The jurisdiction vested in the Commissioner under section 263(1) of the Act is of a special nature or, in other words, the Commissioner has the exclusive jurisdiction under the Act to revise the order of the ITO if he considers that any order passed by him was erroneous insofar as it was prejudicial to the interests of the Revenue. Before going so, he is also required to give an opportunity of being heard to the assessee. If after hearing the assessee in pursuance of the notice issued by him under section 263(1) of the Act, he is not satisfied, he may pass the necessary orders. Of course, the order thus passed will contain the grounds for holding the order of the ITO to be erroneous, as contemplated under section 263(1) of the Act. . . . The Tribunal cannot uphold the order of the Commissioner on any other ground which, in its opinion, was available to the Commissioner as well. If the Tribunal is allowed to find out the ground available to the Commissioner to pass an order under section 263(1) of the Act, then it will amount to a sharing of the exclusive jurisdiction vested in the Commissioner, which is not warranted under the Act. It is all the more so, because the Revenue has not been given any right of appeal under the Act against an order of the Commissioner under section 263(1) of the Act. . . . Under section 263 of the Act it is only the Commissioner who has been authorized to proceed in the matter and, therefore, it is his satisfaction according to which he may pass necessary orders thereunder in accordance with law. If the grounds which were available to him at the time of the passing of the order do not find a mention in his order appealed against, then it will be deemed that he rejected those grounds for the purpose of any action under section 2 63(1) of the Act. In this situation, the Tribunal, while hearing an appeal filed by the assessee, cannot substitute the grounds which the Commissioner himself did not think proper to form the basis of his order.”
We respectfully understand this judgment as holding, by necessary implication, that if the CIT has not mentioned the ground on which action is proposed to be taken under section 263 in the show-cause notice, it is deemed that he was not satisfied that it was a fit ground for taking action under the section, with the result that the final order, if based on the ground which he had earlier considered not fit for taking action under the section, will have to be set aside as not based on any ground which may justify his belief that the order passed by the Assessing Officer was erroneous insofar as it is prejudicial to the interests of the Revenue. ………………….
6. In any case, even on merits, the stand of the assessee cannot be faulted, and is, as learned representatives fairly agree, covered in favour of the assessee by Hon’ble jurisdictional High Court’s judgment in the case of CIT Vs Lokmat Newspapers Pvt Ltd (322 ITR 43) wherein it is held that irrespective of whether or not the profits on sale of shares arose from delivery based trading or non delivery based trading, as long as assessee is hit by Explanation to Section 73, the entire profits will be deemed to be speculation profits and, accordingly, losses from non delivery based activity will also be eligible for set off against profits from delivery based transactions as well. Their Lordships have noted “The submission of the revenue is that a loss which arises on account of a transaction of the sale and purchase of shares would constitute a loss from a speculation business for the purposes of the Explanation. But, that the profit which arises from a transaction involving the actual delivery of shares would not constitute a profit for the purposes of sub-sections (1) and (2) of section 73 in respect of which a set off can be granted”, which precisely was the stand of the Commissioner at the time of initiation of revision proceedings in challenge before us as well. However, this stand of the revenue has been rejected unequivocally by Their Lordships by observing as follows :
To accept the submission of the revenue would be to introduce a restriction into the scope and ambit of the deeming fiction which is created by the Explanation to section 73, which is not contemplated by Parliament. Once a deeming fiction is created by law, it must be given full and free effect, of course, in relation to the ambit within which it is intended to operate. The deeming fiction created by the Explanation to section 73 defines when an assessee is to be deemed to be carrying on a speculation business for the purposes of the section. The deeming fiction is, therefore, one which arises specifically in the context of the provisions of section 73 and is confined to that purpose alone. The Explanation stipulates that where an assessee is a company whose business consists in any part of the purchase and sale of shares of other Companies, it shall be deemed to be carrying on a speculation business to the extent to which the business consists of purchase and sale of such shares. Whether or not it is a profit or loss that has resulted from carrying on such business, is a consideration which is alien to the meaning of what constitutes a speculation business by the Explanation to section 73. Once an assessee is deemed to be carrying on a speculation business for the purpose of section 73, any loss computed in respect of that speculation business, can be set off only against the profits and gains of an other speculation business. Similarly, for the purposes of sub¬section (2), the loss in respect of a speculation business which has not been set off either in whole or in part, can be carried forward and can be set off against profits and gains “of any speculation business”. The expression “any speculation business” means a speculation business of the assessee in respect of which profits and gains for the assessment year in question have arisen and there is no justification to restrict the content of that speculation business where profits have arisen by excluding a business involving actual delivery of shares. No such restriction is found in the Explanation. To impose one is a legislative function. In other words, once the assessee is carrying on a speculation business and the profits and gains have arisen from that business during the course of the assessment year, the assessee is entitled to set off the losses carried forward from a speculation business arising out of a previous assessment year.
7. In this view of the matter, it is wholly immaterial whether or not the losses from non delivery based transactions, i.e. in trading in futures, are speculation losses or not. The profits of the assessee, being from share trading transactions which, as learned departmental representative fairly agrees and is the undisputed position, are hit by the provisions of Explanation to Section 73 and these profits can thus only be treated as speculation profits and, as speculation losses of trading in futures can thus be offset against speculation profits, there is no error in the speculation losses, even if that be so, being set off against profits of speculation business. As Hon’ble jurisdictional High Court has categorically observed, revenue authorities can not be allowed to take a stand that while losses of the speculation business, under Explanation to Section 73, are required to be treated as speculation losses ineligible for being set off against normal profits, the profits of speculation business cannot be adjusted against any other speculation losses.
8. The line of demarcation thus implied canvassed by the revenue against non delivery based speculation losses and losses in the speculation business under deeming fiction of Explanation to Section 73 is devoid of legally sustainable merits. There is no infirmity in the losses in non delivery based transactions being set off against profits of speculation business under the deeming fiction of Explanation to Section 73 of the Act. In this view of the matter, the course of suggestion suggested by the learned Commissioner is unsustainable in law.
9. We may also mention that the assessee has also taken a stand before the Commissioner that the futures transactions are in the nature of hedging transactions, and thus outside the ambit of speculative transactions under section 43(5) of the Act. However, given the above findings that the profits from trading in shares were in the nature of speculation profits, in our considered view, it is not really necessary to deal with this aspect of the matter.
10. For the reasons set out above, we quash the impugned revision order as devoid of jurisdiction and as unsustainable on merits.
11. In the result, the appeal is allowed. Pronounced in the open court today on 31st day of March, 2011.