2012 (5) TMI 230 - AT - Income Tax

Reopening - the assessee filed return of income declaring total loss of Rs.75,239/- and the assessment under section 143(3) was completed on 31.03.2003 determining the total income at Rs.39,49,962/- which was subject matter of appeal on the issues of depreciation on BSE Membership card, SEBI turnover fees and computer software charges - assessee has not placed on record any evidence that this issue was examined in the original assessment so as to come to a conclusion that the Assessing Officer formed an opinion on the issue - Since proviso to Section 147 does not apply as the reopening was done within 4 years, we are of the opinion that the Assessing Officer has correctly invoked the provisions of section 147 Explanation 2(c) and therefore this ground of the assessee is rejected - Appeal is rejected Regrading treatment of loss claimed by the assessee to the extent of Rs.49,45,786 - Assessing Officer considered the Explanation to Section 73 and held that the assessee company deemed to be carrying on speculation business to the extent to which business consisted of purchase and sale of such shares - It is contended by the learned counsel that the loss from the purchase and sale of the shares is to be separately considered and loss on account of valuation of closing stock of the shares is to be separately considered - Consequent to the rejection of the above, the assessee s contention about expenditure attributable to the speculation activities to the extent of Rs.6.00 lakhs is also be dismissed as the assessee is not contesting the quantification of the expenditure but only on the principle that the business loss so claimed cannot be held to be covered by Explanation to section 73 - Appeals are rejected

Issues Involved:
1. Reopening of assessment under Section 147 of the Income Tax Act.
2. Treatment of loss arising from the revaluation of closing stock as speculation loss.
3. Disallowance of expenditure attributable to speculation activities.
4. Disallowance of interest under Section 40A(2)(b).
5. Treatment of "Vandha loss" as business loss or speculation loss.

Issue-Wise Detailed Analysis:

1. Reopening of Assessment under Section 147:
The assessee contested the reopening of the assessment, arguing that the original assessment had already considered the speculation loss. The CIT (A) upheld the Assessing Officer's action, stating that Section 147 grants wide powers for reopening assessments if there is reason to believe that income has escaped assessment. The Tribunal agreed with the CIT (A), noting that the Assessing Officer had not examined the issue of speculation loss during the original assessment. The reopening was done within four years, and the assessee failed to provide evidence that the issue was previously examined. Consequently, the Tribunal upheld the reopening under Section 147.

2. Treatment of Loss from Revaluation of Closing Stock as Speculation Loss:
The Assessing Officer treated the loss from the revaluation of closing stock as speculation loss under the Explanation to Section 73. The CIT (A) confirmed this treatment. The Tribunal supported this view, citing the ITAT Ahmedabad Bench decision in Krishnalaxmi Multi Trade (P) Ltd vs. ACIT and the Bombay High Court's judgment in Prasad Agents (P) Ltd vs. Income Tax Officer. The Tribunal concluded that the loss from the revaluation of closing stock should be treated as speculation loss, as it is integral to the trading account of the business of purchase and sale of shares. Therefore, the assessee's ground on this issue was rejected.

3. Disallowance of Expenditure Attributable to Speculation Activities:
The Assessing Officer allocated Rs. 10 lakhs as expenditure attributable to speculation activities, which the CIT (A) reduced to Rs. 6 lakhs. The Tribunal upheld the CIT (A)'s decision, stating that the assessee's contention was based on the principle that the business loss claimed could not be covered by the Explanation to Section 73. As the Tribunal rejected the assessee's ground on the treatment of the revaluation loss, it also dismissed the contention regarding the expenditure allocation.

4. Disallowance of Interest under Section 40A(2)(b):
The assessee contested the disallowance of Rs. 4,65,000/- in interest paid to a director, arguing that the issue was previously decided in their favor by the ITAT. The Tribunal agreed, noting that the ITAT had allowed the interest in other years. Therefore, the Tribunal directed the Assessing Officer to allow the interest as claimed by the assessee.

5. Treatment of "Vandha Loss" as Business Loss or Speculation Loss:
The CIT (A) accepted the assessee's claim that the "Vandha loss" was not speculative but related to brokerage business errors. However, the Tribunal found that the issue required further examination by the Assessing Officer to determine whether the loss arose from "Vandha" transactions or the assessee's own trading. The Tribunal directed the Assessing Officer to re-examine the nature of the loss and determine the issue accordingly. Consequently, the Tribunal allowed the revenue's ground for statistical purposes and restored the matter to the Assessing Officer.

Conclusion:
The Tribunal upheld the reopening of the assessment under Section 147, confirmed the treatment of the revaluation loss as speculation loss, and dismissed the assessee's contentions regarding expenditure allocation. The disallowance of interest under Section 40A(2)(b) was overturned in favor of the assessee. The issue of "Vandha loss" was remanded to the Assessing Officer for further examination. The assessee's appeal was partly allowed, and the revenue's appeal was allowed for statistical purposes.

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