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2016 (9) TMI 945 - AT - Income TaxCIT invoking revisionary jurisdiction u/s 263 - funds deployed in share business is more than that deployed in loans and advances - why the loss incurred on purchase and sale of shares amounting should not be treated as speculation loss by invoking the Explanation to section 73 - Held that - CIT had taken the total inventories of ₹ 43.95 crores as stock of shares, whereas it admittedly includes closing stock of sarees to the extent of ₹ 38.66 crores, thereby leaving a balance of ₹ 5 crores approx towards the closing stock of shares. From the Note No. 8 of the audited financial statements, the assessee had given the clear break up of closing stock of shares and closing stock of sarees. We also find that the ld CIT in his order itself in page 2 had stated that the closing stock of shares is only ₹ 5,17,00,000/-. Hence the very basis for his decision based on funds deployed in share business is more than that deployed in loans and advances gets defeated. On both the counts of income criterion and funds deployment criterion, it could be safely concluded that the assessee s case squarely falls under the two exceptions provided in Explanation to Section 73 of the Act and hence the order passed by the ld AO in these circumstances cannot be termed as erroneous much less prejudicial to the interests of the revenue warranting revisionary jurisdiction u/s 263 of the Act. Apart from this, we also find that the ld AO had made a specific enquiry with regard to the applicability of Explanation to Section 73 of the Act during the course of original assessment proceedings for which the necessary order sheet entries were placed on record in the paper book. We find from the said order sheet entry on 10.3.2010 and 24.3.2010, a specific query was raised by the ld AO on the applicability of Explanation to section 73 of the Act and the assessee had given due reply to the same and the fact of assessee s reply is also mentioned in the said order sheet entry recorded on 24.3.2010 by the ld AO. The queries raised by the ld AO and the replies filed thereon in this regard are part of the records. Hence in these circumstances, it could be safely concluded that the ld AO on due appreciation of the replies filed in the given set of facts and circumstances after making requisite enquiries thereon, had come to a conscious conclusion that provisions of Explanation to Section 73 of the Act could not be made applicable to the assessee and had taken a possible view in the matter by allowing the claim of share trading loss in the sum of ₹ 1,07,87,500/- in the assessment to be set off against some other income. It is well settled that this possible view cannot be the subject matter of revision u/s 263 of the Act by the ld CIT. - Decided in favour of assessee.
Issues Involved:
1. Justification of invoking revisionary jurisdiction under Section 263 of the Income Tax Act, 1961. 2. Applicability of Explanation to Section 73 of the Income Tax Act, 1961 to the assessee company. Issue-Wise Detailed Analysis: 1. Justification of Invoking Revisionary Jurisdiction under Section 263 of the Income Tax Act, 1961: The core issue in this appeal is whether the Commissioner of Income Tax (CIT) was justified in invoking revisionary jurisdiction under Section 263 of the Act. The assessee filed its return for the Assessment Year (AY) 2008-09, disclosing a total income of Rs. Nil, and the assessment was completed under Section 143(3) of the Act, determining taxable income at ?9,71,753/-. The CIT sought to revise this assessment, issuing a show cause notice to the assessee on why the loss incurred on the purchase and sale of shares amounting to ?1,07,87,500/- should not be treated as speculation loss under the Explanation to Section 73 of the Act. The CIT observed that the principal business of the assessee was not the granting of loans and advances and concluded that the loss from share trading should be construed as speculation loss. This led to the CIT invoking Section 263, deeming the original assessment order erroneous and prejudicial to the revenue's interest. However, the tribunal found that the CIT had not disputed the fact of saree purchases disclosed in the financial statements. The assessee's total purchases included ?5,62,45,000/- for shares and ?38,66,21,850/- for sarees. The CIT's argument that the fact of saree purchases was not disclosed was countered by the tribunal, noting that the audited financial statements clearly mentioned these transactions. The tribunal also noted that the assessee is a non-banking finance company (NBFC) with a certificate of registration from the Reserve Bank of India. The assessee's income composition showed that interest income from lending activities was ?1,23,94,810/-, which was higher than the income from share trading. Thus, the assessee's case fell under the first limb of the Exception provided in the Explanation to Section 73 of the Act. Furthermore, the tribunal highlighted that the CIT's conclusion on the principal business of the assessee was based on an incorrect understanding of the funds deployed in share business versus loans and advances. The audited accounts showed that the assessee had deployed ?5,12,00,000/- towards shares and ?26,21,97,762/- towards loans and advances as of 31.03.2008, indicating that the principal business was indeed granting loans and advances. The tribunal concluded that the order passed by the Assessing Officer (AO) was neither erroneous nor prejudicial to the revenue's interest, and thus, the CIT's invocation of Section 263 was not justified. The tribunal quashed the revision order passed by the CIT under Section 263. 2. Applicability of Explanation to Section 73 of the Income Tax Act, 1961 to the Assessee Company: The CIT's invocation of Section 263 was primarily based on the applicability of the Explanation to Section 73 of the Act, which deals with speculation loss. The assessee argued that the Explanation has two exceptions: (1) if the company's income mainly consists of interest on securities, income from house property, capital gains, and income from other sources, and (2) if the principal business of the company is granting loans and advances. The tribunal found that the assessee's interest income from lending activities was higher than the income from share trading, falling under the first exception. Additionally, the funds deployment criterion showed that the principal business of the assessee was granting loans and advances, meeting the second exception. The tribunal relied on the decision of the Hon'ble Jurisdictional High Court in CIT vs. Middleton Investment & Trading Co Ltd, which supported the assessee's position that the gross total income mainly consisted of income from other sources, thus treating the share trading loss as business loss rather than speculation loss. The tribunal also noted that the AO had made specific inquiries regarding the applicability of Explanation to Section 73 during the original assessment proceedings, and the assessee had provided satisfactory replies. The AO's conclusion that the provisions of Explanation to Section 73 were not applicable was a possible view based on the facts and circumstances, and thus, could not be revised under Section 263. In conclusion, the tribunal held that the CIT's revisionary jurisdiction under Section 263 was wrongly invoked, and the original assessment order was neither erroneous nor prejudicial to the revenue's interest. The appeal of the assessee was allowed, and the revision order passed by the CIT was quashed.
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