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Devendra Exports Private Ltd.35/B/2, II Main Road,Ambattur Industrial Estate,Chennai-600 058. Vs. The Assistant Commissioner of Income Tax, Company Circle-1(4),Chennai-34.
June, 25th 2012
                      `C' BENCH, CHENNAI


                         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.
    (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



          The     present appeal has been filed by the assessee

    impugning the order of the CIT(A)-III, Chennai                dated


    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
     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


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
     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."
"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

           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
Dated the 22nd June, 2012.


Copy to:       (1) Appellant     (2) Respondent     (3) CIT
                (4) CIT(A)        (5) D.R.          (6) G.F.
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