IN THE INCOME TAX APPELLATE TRIBUNAL
`C' BENCH, CHENNAI
BEFORE SHRI N.S.SAINI, ACCOUNTANT MEMBER AND
SHRI VIKAS AWASTHY, JUDICIAL MEMBER
ITA No.450/Mds/2011
(Assessment Year: 2005-06)
Devendra Exports Private Ltd. The Assistant Commissioner of
35/B/2, II Main Road, Income Tax, Company Circle-1(4),
Ambattur Industrial Estate, Vs. Chennai-34.
Chennai-600 058.
PAN:AAACD1193N
(Appellant) (Respondent)
Appellant by : Mr. R.Vijayaraghavan, Advocate
Respondent by : Dr. Yogesh Kamat, JCIT
Date of Hearing : 28th May, 2012
Date of Pronouncement : 22nd June, 2012
ORDER
PER 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
2 ITA No.450/Mds/2011
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:-
i) Short term capital loss in respect `66,52,030
of speculation business
(Derivative Trading)
ii) Commission to foreign agents `2,94,071
iii) Disallowance u/s.14A on dividend `7,832
income
iv) Interest on delay of payment of `4,039
dividend tax
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
3 ITA No.450/Mds/2011
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 ` 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 Vs. ITO.,
reported as 2011-TIOL-337-ITAT-MUM. 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
4 ITA No.450/Mds/2011
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 Vs.CIT reported
as 245 ITR 428(SC).
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
5 ITA No.450/Mds/2011
the assessee. In Gajendra Kumar T.Agarwal's case, 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
6 ITA No.450/Mds/2011
losses did not come up for consideration
before a coordinate bench of this Tribunal in
the case of ACIT Vs 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."
xxxxxx
"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
7 ITA No.450/Mds/2011
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 vs
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
8 ITA No.450/Mds/2011
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
9 ITA No.450/Mds/2011
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 ` 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.
10 ITA No.450/Mds/2011
9. In the instant case, the liability to pay commission
`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.
Order pronounced in the open court on Friday, the 22nd day of
June, 2012 at Chennai.
Sd/- Sd/-
( N.S. Saini ) ( Vikas Awasthy )
Accountant Member Judicial Member
Chennai,
Dated the 22nd June, 2012.
somu
Copy to: (1) Appellant (2) Respondent (3) CIT
(4) CIT(A) (5) D.R. (6) G.F.
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