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2014 (12) TMI 344 - AT - Income TaxAddition deleted by CIT(A) - Whether the CIT(A) failed to appreciate that there was no client agreement, KYC details, broker s note with purported clients Held that - Even if it is claimed by the assessee he acted as a broker or sub-broker on behalf of the 170 parties or clients but he has no valid license or authorisation as per the Forward Contract (Regulation) Act, 1952 - the assessee has contract with M/s. A.M. Futures and Others and the assessee was using those entities for carrying out its transactions with the NCDEX (National Commodities & Derivatives Exchange) - The assessee also used M/s. Sanjay Pulse Processors Pvt. Ltd., Jalgaon, M/s. Shubh Commodities, Jalgaon and M/s. Shanti Commodities, Jalgaon it could not be understood as to how the 170 clients confirmed that the assessee firm represented as a broker for them and carried out the trading derivatives and transactions in the NCDEX. Many of the clients who have filed their returns of income and even those to whom the assessee transferred all profits or losses by putting into their accounts are assessed by the AO by accepting income declared by the assessee s clients - when the entire evidence is in favour of the assessee that cannot be brushed aside and tax liability of the assessee cannot be determined on the basis of suspicion and surmises - if the assessee has violated the provisions that specific statute, the action can be taken against the assessee under that enactment but merely because without authority or without license the assessee carried out the trading derivatives and other transaction with the NCDEX may be wrongly representing himself as a broker or misusing the ID but that still not changed the nature of the transaction carried out by the assessee on behalf of its clients- the entire evidence support the case of the assessee save one aspect that the assessee has not followed the provisions of Forward Contract (Regulation) Act, 1952 - the entire exercise done by the AO contrary to the evidence available on record in favour of the assessee thus, the order of the CIT(A) is upheld Decided against revenue. Legality of transactions resulting in speculation loss done through Madhya Bharat International (I) Ltd. Held that - CIT(A) has rightly deleted the addition by holding that Sec. 41(1) is not applicable - in the subsequent year i.e. FY 2006-07 relevant to AY 2007-08 M/s. Madhya Bharat International Pvt. Ltd. has credited the profit to the account of the assessee on account of transaction carried out by it for the assessee firm - The balance amount of ₹ 5,22,000/- was paid by M/s. Madhya Bharat International Pvt. Ltd. to the assessee by account payee cheques - the speculation loss is to be allowed to the assessee - CIT(A) has rightly held that the transaction was genuine between the assessee and M/s. Madhya Bharat International Pvt. Ltd. - The benefit of the said speculation loss is to be given to the assessee Decided against revenue. Loss from trading in commodity derivatives Loss incurred through M/s. Madhya Bharat International Pvt. Ltd. towards the transactions in the NBOT to be treated as non-speculation loss or not Held that - Nothing was on record to show that the transactions were settled by the assessee on actual delivery thus, loss incurred in the oil trading through M/s. Madhya Bharat International Pvt. Ltd. in the NBOT is a speculative loss within the meaning of Sec. 43(5) The speculation loss cannot be set off against the regular business set off as per the provisions of Sec. 73(1) - Decided against assessee. Levy of penalty Held that - The forward market commission (FMC) lays down limit of the quantity to be traded by each party and if transaction of any party exceeds the limit than amount at certain percentage of the value of commodity traded is charged - The said charges are treated as a penalty to regularise the transaction relying upon Prakash Cotton Mills P. Ltd. Vs. CIT 1993 (4) TMI 3 - SUPREME Court - the penalty levied which is in the nature of civil liability and similar to the nature of compounding fees - It is not for something charged for serious violation of provisions of law but these are the routine procedural violations - CIT(A) has rightly deleted the addition the order of the CIT(A) is upheld Decided against revenue.
Issues Involved:
1. Deletion of addition of Rs. 40,16,93,630/- by treating income as earned by clients and not by the assessee. 2. Deletion of addition of Rs. 1,00,21,000/- as bogus speculation loss. 3. Treatment of commodity derivative trading loss as speculative business loss. 4. Deletion of addition of Rs. 40,97,718/- as speculation loss. 5. Deletion of addition of Rs. 3,02,38,100/- as bogus speculation loss. 6. Deletion of addition of Rs. 9,44,552/- as penalty. 7. Deletion of addition of Rs. 38,44,218/- and Rs. 60,30,320/- by treating income as earned by clients and not by the assessee. 8. Set off of loss of Rs. 1,09,48,979/- against brokerage income. Issue-Wise Detailed Analysis: 1. Deletion of Addition of Rs. 40,16,93,630/- by Treating Income as Earned by Clients and Not by the Assessee: The Assessing Officer (AO) treated the income of Rs. 40,16,93,630/- as undisclosed income of the assessee, arguing that the assessee was not authorized to trade on behalf of clients as per the Forward Contract (Regulation) Act, 1952. The AO noted various discrepancies such as lack of client agreements and KYC details. However, the CIT(A) deleted the addition, stating that the assessee had provided confirmations from clients, and the transactions were genuine. The ITAT upheld the CIT(A)'s decision, noting that the income was already assessed in the hands of the clients, and taxing it again in the hands of the assessee would result in double taxation. 2. Deletion of Addition of Rs. 1,00,21,000/- as Bogus Speculation Loss: The AO disallowed the loss, claiming it was not genuine and was merely a book entry. The CIT(A) deleted the addition, noting that the loss was genuine and the amount was credited in the subsequent year by Madhya Bharat International Pvt. Ltd. The ITAT upheld the CIT(A)'s decision, confirming the genuineness of the transaction. 3. Treatment of Commodity Derivative Trading Loss as Speculative Business Loss: The AO treated the loss of Rs. 2,09,31,143/- as speculative loss under Section 43(5) of the Income Tax Act. The CIT(A) upheld this treatment, stating that the transactions were settled without actual delivery. The ITAT agreed with this finding, confirming that the loss was speculative and could not be set off against regular business income. 4. Deletion of Addition of Rs. 40,97,718/- as Speculation Loss: The AO treated the loss as the assessee's own loss, not that of the clients. The CIT(A) deleted the addition, stating that the loss belonged to the clients and was already assessed in their hands. The ITAT upheld the CIT(A)'s decision, confirming that the loss should not be taxed in the hands of the assessee. 5. Deletion of Addition of Rs. 3,02,38,100/- as Bogus Speculation Loss: The AO disallowed the loss, claiming it was not genuine and was merely a book entry. The CIT(A) deleted the addition, noting that the loss was genuine and the amount was credited in the subsequent year by Madhya Bharat International Pvt. Ltd. The ITAT upheld the CIT(A)'s decision, confirming the genuineness of the transaction. 6. Deletion of Addition of Rs. 9,44,552/- as Penalty: The AO disallowed the penalty expenses under Section 37(1) of the Income Tax Act, treating them as penal in nature. The CIT(A) deleted the addition, stating that the penalties were civil liabilities and not for any serious violation of law. The ITAT upheld the CIT(A)'s decision, confirming that the penalties were routine procedural violations and not disallowable. 7. Deletion of Addition of Rs. 38,44,218/- and Rs. 60,30,320/- by Treating Income as Earned by Clients and Not by the Assessee: The AO treated the income as the assessee's own income, not that of the clients. The CIT(A) deleted the addition, stating that the income belonged to the clients and was already assessed in their hands. The ITAT upheld the CIT(A)'s decision, confirming that the income should not be taxed in the hands of the assessee. 8. Set Off of Loss of Rs. 1,09,48,979/- Against Brokerage Income: The AO treated the loss as speculative and did not allow it to be set off against brokerage income. The CIT(A) upheld this treatment, stating that the loss was speculative under Section 43(5) of the Income Tax Act. The ITAT agreed with this finding, confirming that the loss was speculative and could not be set off against regular business income. Conclusion: The ITAT upheld the CIT(A)'s decisions in all the issues, confirming the deletion of additions made by the AO and the treatment of losses as speculative. The appeals by the Revenue were dismissed, and the assessee's appeals were also dismissed except for the partial allowance of depreciation on capital expenditure.
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