2018 (12) TMI 212 - AT - Income Tax

Addition u/s 68 - identity and creditworthiness of creditors - Held that - As the transactions in the commodities were carried out by the assessee off market, thus the same did not inspire any confidence as regards the veracity of such transactions, in our considered view is also an observation arrived at by the A.O on the basis of a half hearted approach and premature observations. In case the A.O had any serious doubts as regards the identity and creditworthiness in respect of the counter party which was identified in the course of the assessment proceedings, then it was open for him to have made further enquiries, which we find has not been done by him. On the basis of our aforesaid observations, we are of the considered view that as the assessee has duly substantiated that it had earned a profit of ₹ 5,73,96,307/- from commodities transactions, therefore, the same in our understanding cannot be held as an unexplained cash credit under Sec.68. The Ground of appeal No. 1 raised by the revenue is dismissed. Loss suffered by the assessee from F O transactions could be set off against the income assessed by the A.O under Sec. 68 - Adjustment as per Sec.115BBE - Held that - Sec.115BBE was brought on the statute by the Finance Act, 2012 with effect from 01.04.2013. On a perusal of the said statutory provision, as was then so available on the statute and was applicable to the case of the assessee for the year under consideration i.e A.Y. 2013-14, no restriction was placed as regards set off of losses against the income referred to in Sec.68, 69, 69A, 69B, 69C and 69D. Rather, the legislature in all its wisdom by amending Sec. 115BBE vide Finance Act, 2016 w.e.f 01.04.2017 had only w.e.f A.Y. 2017-18 placed a restriction on set off of losses, in addition to raising of any claim of expenditure and allowance against such income. The fact that the aforesaid amendment of Sec. 115BBE by the Finance Act, 2016, w.e.f 01.04.2017 is prospective in nature can safely be gathered from a perusal of the CBDT Circular No. 3/2017, dated 20.01.2017. In the backdrop of our aforesaid observations, it can safely be gathered that there was no embargo to claim set off of losses in the year under consideration i.e A.Y. 2013-14. We thus in terms of our aforesaid observations are persuaded to subscribe to the view taken by the CIT(A) that the loss suffered by the assessee from F O transactions could be set off against the income of ₹ 5,73,96,307/- that was allegedly assessed by the A.O under Sec.68. The fact that the restriction as regards the set off of the losses against the income assessed under Sec.68 had been made available on the statute on the basis of an amendment of Sec. 115BBE that was made available on the statute by the Finance Act, 2016 w.e.f 01.04.2017, therefore, the same could not be read into the statute for a period prior to the said amendment. In terms of our aforesaid observations the Ground of appeal no. 3 raised by the revenue is dismissed. We thus in terms of our aforesaid deliberations are in agreement with the view taken by the CIT(A), that the profit shown by the assessee from commodities trading business of ₹ 5,73,96,307/- could not have been treated as an unexplained cash credit under Sec.68 of the Act. Alternatively, we are also persuaded to subscribe to the view taken by the CIT(A) that the loss suffered by the assessee from F O transactions, could validly be adjusted as per Sec.115BBE as was applicable during the year under consideration i.e A.Y.2013-14 against the income of ₹ 5,73,96,307/- that had allegedly been treated by the A.O as unexplained cash credit under Sec.68. We thus not finding any infirmity in the view take by the CIT(A), uphold his order. - Decided against revenue

Summary

Issues Involved:
1. Deletion of addition of ?5,73,96,307/- under Section 68 of the Income Tax Act, 1961.
2. Allowance of set-off of losses against additions made under Section 68.
3. Ignoring judicial precedents by the CIT(A).

Detailed Analysis:

1. Deletion of Addition under Section 68:
The revenue challenged the CIT(A)'s decision to delete the addition of ?5,73,96,307/- made by the AO under Section 68 as unexplained cash credit. The AO had observed discrepancies in the assessee's claimed commodity transaction profits and concluded that these were artificially engineered gains intended to set off losses from F&O transactions. The AO characterized the amount as an unexplained cash credit due to the lack of actual commodity transactions in the Multi Commodity Exchange of India (MCX) and the use of journal entries for settlement.

The CIT(A), however, found that the assessee had provided sufficient evidence, including bills and details of off-market transactions through M/s Kaynet Commodities Pvt. Ltd. The CIT(A) noted that the AO failed to make further inquiries with the counterparty, M/s Sneha Metal Pvt. Ltd., and that the transactions were supported by actual fund movements, including payments through account payee cheques. Consequently, the CIT(A) concluded that the profit from commodities trading could not be treated as unexplained cash credit under Section 68.

The appellate tribunal upheld the CIT(A)'s decision, agreeing that the assessee had substantiated the profit from commodities transactions and that the AO's characterization of the amount as unexplained cash credit was unfounded.

2. Allowance of Set-off of Losses:
The revenue also contested the CIT(A)'s allowance of set-off of losses against the additions made under Section 68. The AO had denied this set-off, citing the judgment of the Gujarat High Court in Fakir Mohammed Haji Hasan vs. CIT, which held that losses could not be set off against income assessed under Section 68.

The CIT(A) observed that Section 115BBE, introduced by the Finance Act, 2012 and applicable from AY 2013-14, did not restrict the set-off of losses against income assessed under Section 68. The restriction was introduced only by the Finance Act, 2016, effective from AY 2017-18. The CIT(A) relied on the CBDT Circular No. 3/2017, which clarified that the amendment was prospective. Therefore, for AY 2013-14, the set-off of losses against income assessed under Section 68 was permissible.

The appellate tribunal agreed with the CIT(A), noting that the absence of any restriction in Section 115BBE for the relevant assessment year allowed the set-off of losses against the income assessed under Section 68.

3. Ignoring Judicial Precedents:
The revenue argued that the CIT(A) ignored the decisions of the Gujarat High Court in Fakir Mohammed Haji Hasan vs. CIT and the Kerala High Court in M/s Kerala Sponge Iron Ltd. vs. CIT. The CIT(A) had concluded that the loss from F&O transactions could be set off against income under Section 68, contrary to these precedents.

The appellate tribunal found that these judicial precedents were rendered before the introduction of Section 115BBE, which provided a specific manner for taxing income assessed under Section 68. Since the restriction on set-off was introduced only from AY 2017-18, the tribunal held that the CIT(A)'s decision was in accordance with the law applicable for AY 2013-14.

Conclusion:
The appellate tribunal upheld the CIT(A)'s order, dismissing the revenue's appeal. The tribunal confirmed that the profit from commodities trading could not be treated as unexplained cash credit under Section 68 and that the set-off of losses against such income was permissible for AY 2013-14. The tribunal also noted that the CIT(A)'s decision did not ignore relevant judicial precedents, given the prospective nature of the amendment to Section 115BBE.