Section 43(5)(d) applicable only on derivatives trading (future & options) and not on share trading

Brief of the case:

In the case of ACE India Medical Systems Vs. ACIT Jaipur Bench of ITAT held that from the bare reading of the section 43 (5) (d) it is prima facie clear that Section 43(5)(d) is for trading in derivatives not trading of shares. The assessee claimed that it has traded shares through broker and through electronics mode, which comes U/s 43(5)(d) of the Act and shall not be deemed to be an speculative transaction. ITAT held that this is wrong interpretation of the section. Besides this other additions were also made by AO which were partly allowed by CIT (A). Both revenue as well as assessee moved in appeal before ITAT.

Facts of the case:

• Assessee filed return declaring total income of Rs. 5,66,890/- comprising of income from retail trading of surgical items.
• A survey U/s 133A was conducted at the business premises of the assessee on 12/10/2007. Various books of account and documents were found during the course of survey were inventorised.
• It was observed that in response to notice u/s 142 (1) assessee mostly sought adjournments on various dates and filed details in part.
• When the assessee was not cooperative with AO then he decided to pass order U/s 144.
• And finally the matter was getting time barred the in the light of decision in Motor General Financial Vs. CIT 254 ITR 449 (Del.) AO completed the assessment.
• AO observed that the assessee has claimed trading expenses at Rs. 3,07,858/- and claimed gross loss of Rs. 4,89,312/- against which sufficient details were not produced before AO.
• AO observed that during the course of survey proceedings, the computerized trial balance and stock register prepared and same was provided itself by the partners of the firm, which were duly signed by one of the partner
• Assessing Officer has not found the assessee’s reply convincing but beyond the truth.
• The assessee had declared total sales at Rs. 13,13,70,013/- which includes trading turnover of medical equipment as well as trading turnover of shares.
• AO decided the assessee’s sale at Rs. 13.25 crores against the sale declared in trading account at Rs. 13,13,70,013/- and recasted the trading account and gross profit was calculated at Rs. 9,48,532/- and the same was added in the income of the assessee.
• The assessee purchased and sold shares of Rs. 8,28,80,996/- and Rs. 7,77,80,690/- the opening stock was nil and closing stock was Rs. 2,75,400/-. The assessee had claimed expenses of Rs. 74,521/- related to share business. The assessee had claimed loss of Rs. 48,24,906/- on sale of shares.
• During appellate proceedings before CIT (A) it was observed that the transactions in shares were squared up without actual delivery and as per the details filed by assessee itself the loss of squared up transactions (without delivery) comes to Rs. 11,41,070/-.
• Assessee was asked by show cause u/s 251 (2) that why Rs. 11,41,070/- should not be treated as speculation loss and disallowed U/s 73.
• During assessment proceedings AO observed that the assessee had shown sundry creditors at Rs. 18,12,459/- in the audit report and was asked to furnish the confirmation, complete name, addresses, PAN, copy of ledger to support its claim but the same were not submitted before him even books of account were also not produced before the Assessing Officer. Therefore, he made addition of Rs. 18,12,459/-.
• AO further observed that during the course of survey proceedings, both the partners of the assessee firm had admitted that they voluntarily surrendered additional income of Rs. 41,93,700/- for taxation but while filing the income tax return, the net income had been declared at Rs. 21,94,196/- and claimed various expenses at Rs. 15,12,001/-.
• Since the assessee had not produced books of account nor any bill or voucher in support of his claim towards expenditure. The genuineness of same could not be established. Hence, AO made addition of Rs. 15,12,001/-.
• AO further observed that the assessee had claimed salary payment of Rs. 6,89,526/- against which only name of the employees were produce. No account details were produced.
• Most of the employees denied the amount of salary as mentioned by assessee during the survey proceedings.
• AO further observed that the assessee had made addition in fixed assets at Rs. 14,83,182/- which he added to the income of assessee.

Contention of the assessee:

• Assessee had computerized books of account and had submitted all the papers, details produced printouts of ledger accounts maintained in computer system to ld Assessing Officer on 27/12/2010 and also before the CIT(A) on 24/1/2012 as evident from the submissions made to them.
• All these details required by the Assessing Officer was submitted in detail on 27/12/2010, which has not been considered by him.
• The AO has estimated the turnover at Rs. 13.25 crores without any basis.
• CIT(A) wrongly held that sale transactions were speculative in nature as these transactions were made through electronic mode and when the purchases made and shares come on screen of the broker, it tantamount to purchase and when it is sold then it is a perfect sale.
• Assessee referred Section 43(5)(d) that an eligible transaction in respect of trading of derivatives referred to in clause (ac) of Section 2(20) of Securities Contracts (Regulation) Act, 1956 carried out in a recognized stock exchange, shall not be deemed to be an speculative transaction.
• In the same section eligible transaction was also defined and according to that, transaction carried out electronically on screen based system through a stock broker or sub-broker or such other intermediary registered U/s 12 of SEBI and which is supported by a time stamped contract note issued by such broker or sub-broker or others.
• The sale and purchase of shares would be treated as trading of shares (business) and not the speculation transaction.
• These transactions were done through broker, who has issued the transaction note after charging the commission. In speculative transaction, no transaction note is issued by the broker but he only gives the difference of profit/loss in case of his speculative share transaction.
• Alternatively, even this is an speculative loss U/s 73, which was not allowed to be set off against the business income U/s 73 of the Act. Therefore, this is a business loss, which is adjustable against the business profit during the year U/s 70 of the Act.
• All the creditors were trade creditors and assessee firm had regular business transaction with them. Merely on the ground of non-furnishing of PAN numbers, the action of AO of treating the sundry creditors as un-genuine was unjustified.
• The nature of the transaction with sundry creditors is of trading activity only which occurs against purchase and sales of any commodity and there is no need for proving creditworthiness of sundry creditors.
• Reliance was placed upon the decision of Hon’ble Allahabad High Court in the case of CIT Vs. Jagdish Prasad Tiwari (2014) 220 Taxman 141 (All) and argued that when the books of account rejected U/s 145(3) of the Act, no addition U/s 68 can be made.
• Assessing Officer had not issued any show cause notice before disallowing expenses of Rs. 15,12,001/-.
• The salary expenses had been added twice while framing assessment order by the Assessing Officer and CIT(A) is also erroneous to this extent by which such addition is sustained.
• The assets were introduced by Shri Lucky Bathla from his proprietorship firm amounting to Rs. 10,90,344/- and to that extent his share capital had been credited in personal capital account, remaining additions were made during the year were computer, fire equipments and car Jen Estilo but no bill vouchers and books of account were produced before the Assessing Officer.

Contention of the revenue:

• Assessee was non-cooperative for two years from the date of first notice issued by the AO till the assessment barred by limitation.
• Even the assessee’s submission presumed to be correct that he has furnished details before the AO on 27/12/2010, it shows that the assessee’s intention not to be investigated or scrutinized the case in proper sense of scrutiny.
• CIT(A) had verified all the particulars of transactions of shares and held that these transactions are speculative in nature.
• The CIT(A) was also not right in confirming the trade creditors not having PAN to the tune of Rs. 3,19,611/-. It is not necessary that every trader is required to have PAN before making any business transaction if net income is below the basic exemption limit.
• Assessee only had given details of sundry creditors, no confirmation with full address was filed by the assessee.

Held by CIT (A):

• During the course of hearing before the Assessing Officer, the assessee did not produce books of account or other documents inventorised during the survey. The assessee failed to comply to the requirement of notice U/s 143(2) and 142 of the Act and therefore, as per provisions of Section 144(1)(b)(c), the Assessing Officer rightly passed order U/s 144 of the Act.
• CIT (A) enhanced the addition at Rs. 1,92,538/- in trading account and gross profit by observing that on verification of books of account, it was noticed by him that the turnover of assessee included sale of shares and stock option.
• CIT(A) held that provisions of Section 43(5)(d) of the Act are applicable only on derivatives trading (future & options) and not on trading of shares.
• The assessee had incurred loss of Rs. 11,41,070/- from trading of shares without any delivery, therefore the same was found by him as speculation loss and accordingly, disallowed U/s 73 of the Act.
• After reducing loss of share trading, the assessee’s profit from medical business came to Rs. 43,35,594/- on a turnover of Rs. 4,96,19,004/- giving G.P. rate of 8.74% which is reasonable in the line of wholesale medical business.
• No separate addition was considered necessary by CIT (A). In the result, the addition of Rs. 11,41,070/-on account of speculation loss was resulted in enhancement of income by Rs. 1,92,538/-.
• Out of sundry creditors Rs. 18,12,459/- who have PAN can be verified from their records by AO and who donot have PAN then assessee is responsible for their verification. Hence, part relief of Rs. 14,92,848/- was granted to the assessee.
• CIT (A) confirmed the addition of Rs. 15,12,001/- as he observed that not crucial evidence was produce by AO in this regard.
• During survey assessee surrendered misc. income of Rs. 41,93,700/- related to unaccounted cash. The payment of bogus salary would result in generation of cash and as the amount of cash surrendered was more than the salary disallowed. The assessee has been given benefit of telescopic. Accordingly the Assessing Officer was directed to delete the addition of Rs. 3,44,763/-.
• The assets were duly shown in the books of account and balance sheet which can either at item of credit side or debit side making addition under the head income as well as assets would result in double addition, therefore, addition is liable to be deleted.

Held by ITAT:

• The assessee’s attitude was totally non-cooperative with the department as evident from the number of dates for hearing given by the AO.
• The assessee had never produced the books of account before the Assessing Officer as claimed by him, which has been confirmed by the CIT(A).
• The assessee’s claimed that he had submitted books of account on 27/12/2010 does not serve any purpose as the case was going to barred by limitation on 30/12/2010.
• As per Section 43(5) “Speculative transaction” means a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips.
• Prima facie it is clear that Section 43(5)(d) is for trading in derivatives not trading of shares.
• The assessee has not produced any evidence regarding delivery of shares and transactions note, detail of scrap traded during the year under consideration. Therefore, we do not find any reason to intervene in the order of the CIT(A).
• AO did not make any inquiry from sundry creditors for verification of these transactions about essentiality for having PAN number.
• The AO is discharging the function of quasi judicial authority which should have justified himself for making proper inquiry in the matter of creditors and about their genuineness.
• Assessee was asked to file various details regarding sundry creditors. Assessee did not file all the details. CIT (A) as well as assessee were wrong on this fact and hence addition of Rs. 18,12,459/- is confirmed.
• AO made addition regarding expenses of Rs. 15, 12,001/- in absence of details and hence this issue is restored back to the file of AO.
• The assessee had surrendered cash found during the course of survey at Rs. 20,49,000/- in total surrender of Rs. 41,93,700/-, therefore, ITAT uphold the order of the CIT(A).
• The assessee never had furnished any evidence for purchase of assets before the lower authorities. Books of account were also not produced before the Assessing Officer. The CIT(A) decided the issue on the basis of books of account without referring to the purchase bills. Hence, it was restored to the file of AO.