2020 (6) TMI 467 - AT - Income Tax

Revision u/s 263 - speculative loss in view of Section 43(5) - Treatment to currency derivative transactions - HELD THAT - MCX Stock exchange Ltd is a recognized stock exchange and M/s Godavari Exim Pvt Ltd was a member of MCX Stock exchange Ltd; therefore assessee s currency derivative transactions are covered by exception clause (d) of section 43(5) of the Act, hence loss incurred by the assessee to the tune in respect of currency derivative is not speculation loss, therefore order passed by the AO u/s 143(3) dated 02.11.2016 is not erroneous. PCIT, on perusal of contract notes, deputed an Inspector to verify the transactions with the broker i.e. M/s Godavari Exim Pvt Ltd. The Inspector found the office and stated that an employee of Om Transport Co. stated that Godavari Exim Pvt Ltd and Om Transport were running under the sign board on Om Transport Co. The said employee of Om Transport Co. affirmed that Godavari Exim Pvt Ltd is a Transport Company. As submitted that after passing the order u/s 263 he had made enquiries with the stock exchange and found out that said M/sGodavari Exim Pvt Ltd had surrendered its membership of MCX Stock Exchange and after surrendering the same, it was engaged in Transport business. We note that transactions were duly backed by contract notes, transactions were entered into by account payee cheque. The assessee proved that MCA Stock Exchange Ltd was notified for the purpose of section 43(5) of the Act, vide Notification No. 46/2009 dated 22.05.2009 issued by the CBDT and the currency derivative transaction was done by assessee through broker i.e M/s Godavari Exim Pvt Ltd; who was member of MCA Stock Exchange Ltd. The assessee s transaction falls under clause (d) of sub-section 5 of section 43 of the Act and therefore currency derivative loss is not a speculation loss. Based on the factual position, as narrated above, the assessment order,u/s 143(3) of the Act dated 02.11.2016 which is subjected to impugned revision proceedings, thus could not be held to be erroneous and prejudicial to the interest of the revenue. Accordingly, we quash the impugned revision proceedings, and set aside learned Commissioner's order in challenge before us.- Appeal of the assessee is allowed.

Summary

Issues Involved:
1. Validity of the notice, proceedings, and order under section 263 of the IT Act, 1961.
2. Whether the Principal Commissioner of Income Tax (PCIT) erred in setting aside the assessment order for further inquiries.
3. Whether the original assessment order was erroneous and prejudicial to the interest of the revenue.
4. Classification of the loss on account of commodities as speculative loss.
5. Justification for invoking provisions of section 263 of the IT Act, 1961.
6. Violation of principles of natural justice.

Detailed Analysis:

1. Validity of the Notice, Proceedings, and Order under Section 263:
The assessee challenged the validity of the notice, proceedings, and order under section 263 of the Income Tax Act, 1961, arguing that they were not valid as per law and should be quashed. The Tribunal examined whether the PCIT had the requisite jurisdiction to assume revisional jurisdiction under section 263. The Tribunal referred to the judicial precedent set by the Supreme Court in Malabar Industries Ltd. vs. CIT, which mandates that the order must be both erroneous and prejudicial to the interest of the revenue for section 263 to be invoked.

2. Error in Setting Aside the Assessment Order for Further Inquiries:
The assessee contended that the PCIT erred in setting aside the assessment order merely to make further inquiries. The Tribunal noted that the original assessment was made after due inquiry and explanation, and therefore, the PCIT's action of setting aside the order for further inquiries was not justified.

3. Original Assessment Order's Validity:
The assessee argued that the original assessment order dated 02.11.2016 was passed after due inquiry and was not erroneous or prejudicial to the interest of the revenue. The Tribunal found that the original assessment was made after considering all relevant facts and explanations provided by the assessee. The Tribunal held that the assessment order was not erroneous and prejudicial to the interest of the revenue.

4. Classification of Loss on Account of Commodities:
The PCIT classified the loss on account of commodities (currency derivatives) amounting to ?41,25,364/- as speculative loss under section 43(5) of the IT Act, 1961. The assessee argued that the loss was incurred through transactions on the MCX Stock Exchange Ltd, which is a recognized stock exchange, and therefore, the transactions were covered by the exceptions specified in the proviso to section 43(5). The Tribunal agreed with the assessee, citing multiple judicial precedents, including the ITAT Mumbai's decision in IVF Advisors Private Limited vs. ACIT, which held that currency derivatives are not speculative transactions.

5. Justification for Invoking Section 263:
The PCIT invoked section 263, arguing that the assessment order was erroneous and prejudicial to the interest of the revenue. The Tribunal examined whether the conditions for invoking section 263 were met. The Tribunal found that the transactions were duly backed by contract notes and carried out through a recognized stock exchange. The Tribunal concluded that the assessment order was neither erroneous nor prejudicial to the interest of the revenue, and therefore, the invocation of section 263 was not justified.

6. Violation of Principles of Natural Justice:
The assessee contended that the order under section 263 was in violation of the principles of natural justice. The Tribunal noted that the assessee was given an opportunity to present its case and provide explanations. Therefore, there was no violation of the principles of natural justice.

Conclusion:
The Tribunal concluded that the assessment order dated 02.11.2016 was not erroneous and prejudicial to the interest of the revenue. The transactions in question were covered by the exceptions specified in section 43(5) of the IT Act, 1961, and the loss incurred was not speculative. The Tribunal quashed the revision proceedings under section 263 and set aside the PCIT's order. The appeal of the assessee was allowed.