2022 (8) TMI 629 - HC - Income Tax

Revision u/s 263 - assessee had claimed losses on account of commodities - Transaction in question involved settlement otherwise than the actual delivery or transfer of any commodity - Tribunal allowed assessee appeal - HELD THAT - Fundamental error has been committed by the PCIT by proceeding based upon certain alleged facts which were never brought on record at the time of issuance of the show cause notice. When the matter was carried on appeal to the tribunal the tribunal examined the documents and found that the transaction done by the assessee was an eligible transaction in respect of trading in derivatives and that M/s. Godavari Exim Pvt. Ltd. was registered with MCX Stock Exchange which was a notified stock exchange. Since PCIT had travelled beyond what was the allegation in the show cause notice the tribunal had to clarify the factual position. Therefore a query has been raised to the learned Advocate who appeared for the assessee before the tribunal and it was submitted that after passing order u/s 263 Ld. Advocate had made enquiries in the stock exchange and found that the said M/s. Godavari Exim Pvt. Ltd. had surrendered its membership of MCX Stock Exchange and after surrendering the same it was engaged in transport business. Assessee has produced before us a copy of the circular dated 8th September 2016 which is a public notification of resignation of membership and the name of the said M/s. Godavari Exim Pvt. Ltd. finds place where they have sought to surrender their membership. Last of the transaction done by the said company was on 30th March 2016. After issuing the notification and giving sufficient time for any objection to be received and in the absence of any objection by circular dated 11th January 2017 the resignation/surrender of membership in the currency derivatives of M/s. Godavari Exim Pvt. Ltd. was accepted and SEBI has also cancelled the certificate of registration for the member and they have ceased to be a member of MCX Stock Exchange. These documents which were noted by the tribunal would also ensure in favour of the respondent/assessee.

Summary

Issues:
1. Interpretation of Section 263 of the Income Tax Act regarding the correctness of the assessment order.
2. Assessment of losses claimed on dealing commodities as business expenses.
3. Examination of the procedure followed by the Principal Commissioner of Income Tax before invoking Section 263.

Analysis:
1. The appeal was filed by the revenue challenging the order of the Income Tax Appellate Tribunal (ITAT) for the assessment year 2014-15. The substantial questions of law raised included whether the ITAT erred in not appreciating the lack of inquiries by the Assessing Officer on certain issues. The High Court considered if the Principal Commissioner of Income Tax was justified in invoking Section 263 and deeming the assessment order under Section 143(3) as erroneous and prejudicial to revenue's interest.

2. The Principal Commissioner alleged that the assessee's claimed losses on commodities were speculative and not to be allowed. The assessee argued that the transaction was not speculative based on notifications and tribunal decisions. The High Court noted that the PCIT's conclusions were based on new information not part of the original show cause notice. The tribunal found the transaction legitimate, especially after the company involved surrendered its membership in the stock exchange, leading to the dismissal of the appeal.

3. The High Court scrutinized the PCIT's procedure before passing the order under Section 263. It was observed that the PCIT relied on information not raised in the show cause notice, indicating a fundamental error in the assessment process. The tribunal's examination of subsequent events, such as the company's resignation from the stock exchange, further supported the assessee's position. Ultimately, the High Court found no substantial questions of law for consideration, leading to the dismissal of the appeal and closure of the connected application for stay.

This detailed analysis of the judgment highlights the issues raised, the arguments presented, and the court's reasoning in arriving at its decision.