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TMI Blog2012 (8) TMI 43X X X X Extracts X X X X X X X X Extracts X X X X ..... or the purpose of Section 115JB though, it was required to be added back under clause (f) of Explanation 1 of Section 115JB the Order is also set aside to the file of the AO for re-adjudication, as the details and explanations submitted by the assessee during the course of proceedings us. 263 were not adjudicated by the AO - No infirmity into the order passed by CIT as is evident from the records that AO has not applied his mind whether clause (f) of the Explanation 1 of Section 115JB was applicable or not and as also not examined the issue of eligibility of set off of carry forward speculation loss as provided in amended Section 73(4). - ITA No.1262/Ahd/2011 - - - Dated:- 6-7-2012 - A. K. Garodia And Kul Bharat, JJ. Appellant : P. M. Mehta, AR Respondent : Ravindra Kumar, SR-DR ORDER Per Kul Bharat, Judicial Member:- This appeal by the assessee is directed against the order of Ld. Commissioner of Income-tax-I, Ahmedabad dated 28-03-2011 for the assessment year 2006-07. The assessee has raised the following grounds of appeal:- 1.1 In law and in the facts and circumstances of the appellant s case, the impugned order passed under S. 263 of the Income- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e proceedings u/s. 263. 4. Without prejudice to the foregoing grounds No.1 and 2, in law and in the facts and circumstances of the appellant s case, the learned CIT has grossly erred in restoring the issue to the learned Assessing Officer for his re-adjudication, as to whether or not the disallowance of ₹ 64.35 lacs made u/s. 14A while computing the appellant s total income was required to be added while computing the appellant s book profit u/s 115JB. The learned CIT ought to have appreciated the appellant s submissions made vide its elaborate communications dated 27.9.2010 and 09.03-2011 addressed to him in response to his Notice u/s. 263 and refrained from setting aside the issue for being readjudicated upon by the Assessing Officer and, instead, dropped the proceedings u/s.263. 2. The facts in brief are that assessee-company is engaged in the business of trading in shares and securities, trading of cloths and garments had filed its return of income for the year under consideration on 28-11-2006 u/s. 143(1) of the Income Tax Act, 1961 (hereinafter referred to as the Act ). Subsequently the case was selected for scrutiny and assessment u/s. 1453(3) of the Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e us. 4. Ld. Authorized Representative for the assessee submitted that order passed by Ld. CIT is erroneous and without jurisdiction. He submitted that the written submission filed before Ld. CIT was not properly considered and appreciated. He submitted that the entire foundation of invoking the jurisdiction u/s. 263 is misplaced. He submitted that Assessing Officer has duly applied his mind and the order of AO is perfectly. Ld. AR relied upon the written synopsis filed during the course of hearing. 5. On the other hand, Ld. SR-DR submitted that there was no proper application of mind by the Assessing Officer although he computed disallowance u/s. 14A of the Act but did not add back disallowance made in respect of exempted income while computing the profit for the purpose of our thought of clause (f) of Explanation-1 of Section 115JB of the Act. He relied upon the judgment of Hon ble Supreme Court in the case of Reliance Jute Industries Ltd. v. CIT (1979) 120 ITR 921 (SC). In support of his contention that law for the assessment for a particular assessment year would be the law which is in force in first date of that assessment year. Further he placed reliance on the judgme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n or after the 1st day of April, 2001 is less than seven and one half per cent of its book profit, such book profit shall be deemed to be the total income of the assessee and the tax payable by the assessee on such total income shall be the amount of income tax at the rate of seven and one half percent. Moreover, as per the Explanation-1 below Sec. 115JB, for the purposes of this section, book profit means the net profit as shown in the profit and loss account for the relevant previous year prepared under sub-section (2) as increased by the amount of expenditure relatable to any income to which section 10 apply [clause (f) of Explanation 1 to Sec. 115JB] In your case, an amount of ₹ 64.35 lakhs was disallowed u/s.14A r.w.s. rule 8D of the I.T. Act by the Assessing Officer while finalizing the assessment u/s. 143(3) and after allowing set off of brought forward business loss and unabsorbed depreciation of previous years, tax was calculated u/s. 115JB of the I.T. Act. However, it is seen from the working of MAT that the expenditure disallowed (Rs.64.35 lakhs) in respect of exempted income [dividend income u/s. 10(34)] was not added back while computing book profit f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... four therein in place of eight . Accordingly, the amended sub-section (4) reads as under with effect from 21-04-2006: (4) No loss shall be carried forward under this section for more than four assessment years immediately succeeding the assessment year for which the loss was first computed. 5. In our humble submission, only a bare reading of the above provision shows that it makes for the following substantive provisions: (a) that any loss of a speculation business carried on by the assessee in a particular year shall be set off only against the profits and gains of another speculation business carried on by the assessee in that year [vide sub-section (1)] (b) that where for any assessment year, any loss computed in respect of a speculation business carried on by the assessee in that yr has not been wholly set off against profits and gains of another speculation business carried on by the assessee in that year [as provided by ss.(1)], such loss as has not been so set off (in entire or in part, as the case may be) shall be carried forward to the following assessment year and set off against profits and gains of any speculation business carried on by the assessee in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hile passing the assessment order for the present assessment year. In our humble submission, when the learned Assessing Officer making our assessment for the present assessment year had really no jurisdiction vis- vis the unabsorbed Speculation Loss determined in A.Y. 2000-01, it has necessarily to follow that no error, far less an error prejudicial to the interests of thee Revenue, could be said to have been committed by him if all that he did was to record in the assessment order for the present assessment year that the unabsorbed Speculation Loss brought forward from A./YY. 2000-01 having remained intact in the absence of any Speculation Profit in the present assessment year, the same would be carried forward for being set off against the Speculation Profit, if any, of subsequent assessment years. He may also well not have done anything in this behalf and our position would still have been the same, the right to carry forward that loss for eight years till A.Y 2008- 09 having vested by virtue of that loss having been determined for the first time when our assessment for A.Y. 2000-01 was made. Further, the learned Assessing Officer need not have, and has in fact not, specified t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relation to A.Y. 2006-07 and subsequent years. This is significant because it reaffirms that both the amendments are being made prospectively, especially considering that here can be absolutely no question for suggesting that the other amendment concerning exclusion of derivative transactions from the definition of speculative transaction could have retrospective application. 7.3 Further, the following portion of the circular issued by the CBDT itself leaves no scope for suggesting that the impugned amendment of Section 73(4) was retrospective. Finance Act, 2005 Explanatory Notes on provisions relating to Direct Taxes (other than Banking Cash Transaction Tax and Fringe Benefit Tax) CIRCULAR NO 3/2006 DATED 27-2-2006 ---- --- --- 3.12 Speculation losses allowed to be carried forward for four years Under the existing provisions contained in sub-section (4) of section 73 no loss computed in respect of a speculation business is allowed to be carried forward for more than eight assessment years immediately succeeding the assessment year for which such loss was first computed. Finance Act, 2005 has amended the said sub-section (4) so as to reduce the period of loss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt year. Since, in terms of the well settled legal position referred to above, a substantive provision cannot be given retrospective effect in the absence of an express provision as regards retrospective application or a necessary implication in that regard (far from it, in the present case, as explained before, the Budget papers as well as the CBDT Circular clearly show that the amendment was intended to be effective only prospectively with effect from A.Y. 2006-07), there can be no question for applying the amendment to unabsorbed speculation losses which had already been determined in the assessments of Assessment Years 2005-06 and earlier. Further, since the very process of assessment of unabsorbed losses sin those assessment years created vested rights in the assessee for carry forward thereof for as many as eight as, the well settled legal position referred to above would not permit such vested rights to be taken away or impaired without an express provision or necessary implication in that behalf. It is, therefore, most humbly submitted that the proposal to apply the amendment provisions of sub-section (4) of Section 73 contained in the present Notice is entirely misplaced a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e action. Regarding the entire amendments as meaningless has got to be absolutely out of question. In this connection, reference may be made to the following extracts from the Head Notes of the decision of the Gujarat High Court in CIT v. R.M. Amin (82 ITR 194): It is well-settled that a construction which imputes to the legislature tautology or superfluity in the use of language must, as far as possible, be avoided. The court should always prefer a construction which will give some meaning and effect to the words used by the legislature rather than that which will reduce it to futility. 11. There is yet another way of considering this issue and that is by contemplating what the stand of the Department would be if, instead of reducing the number of assessment years from eight to four as has been done by the Finance Act, 2055, it had increased the number of years from the existing eight to say, twelve. Would the Department then take the stand that all those losses which had been computed before and which were eligible for being carried forward for only eight assessment years succeeding the assessment year in which they were first computed, would be allowed to be carried forw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct, 1922, which provided for a right to set off speculation losses against speculation profits and it further stated that to the extent the speculation loss could not be absorbed, the assessee had a right to carry forward the losses for the future years to be set off against speculation profits .. The assessee before the Supreme Court had speculation losses quantified in its assessments for the assessment years 1960-61 and 1961-62 and claimed that the same should be set off against eh speculation profits for the assessment year 1962-63, from which year the Income Tax Act, 1961 came into force. The claim was resisted by the income-tax authorities, who contended that in view of the coming into operation of the 1961 Act from 01.04.1962 as well as section 75 thereof, even if the assessee can be said to have a vested right to carry forward the speculation loss for previous years under section 24(2) of the 1992 Act, that right came to an end when the new Act came into force. This contention was rejected by the Supreme Court. At page 108 of the reports, it was held as follows:- In our opinion, the right given to the assessee for the assessment year 1961-62 under section 24(2) of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontention that any speculation loss computed for the assessment year 2006-07 and later assessment years alone would be hit by the amendment and such loss can be carried forward only for four subsequent assessment years is correct. The vested right of the assessee has not been taken away. 6. It is also significant, as rightly pointed out on behalf of the assessee, that subsection (4) of section 73 refers only to the loss to be carried forward to the subsequent years. It does not say anything about the set off of the speculation loss brought forward from the earlier years. There is a distinction between a loss brought forward from the earlier years and a loss to be carried forward to the subsequent years. The sub-section deals only with the speculation loss to be carried forward to the subsequent years and in the very nature of things it cannot apply to speculation loss quantified in any assessment year before the assessment year 2006-07. The Income Tax Rules which prescribed the return form for individuals having proprietary business (ITR 4) also makes a distinction between the loss brought forward and loss to be carried forward. --- --- ---- --- 8. In the result, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture in relation to income which does not form part of the total income under this Act. (3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act. Provided that nothing contained in this section shall empower the Assessing Officer either to reassess under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under section 154, for any assessment year beginning on or before the 1st day of April, 2001. 14.3 We would like to emphasize here itself that sub-sections (2) and (3) were inserted in the above provision by the Finance Act, 2006 with effect from 1.4.2007. Rule 8D in pursuance of sub-section (2) of Section 14A was framed much later (w.e.f. 24-03-2008). 15.1 We would also like to record here that as rightly stated in your Notice, the disallowance of ₹ 64.35 lacs had been made by the learned Assessing Officer after applying Rule 8D. Significantly, as will been seen from the following relevant portion of the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s.64.35 lacs Total Rs.64.35 lacs Hence, disallowance u/s. 14A of the I.T. Act is of ₹ 64.35 lacs. 15.2 We may emphasise here itself that as is clear from the above extract, the disallowance of ₹ 64.35 lacs has been arrived at @ 0.5% of average investments. It has, therefore, to follow, it being only axiomatic, that it does not represent any particular item or items of expenditure actually debited to our Profit Loss Account. 16.1 Having emphsized earlier that the provisions of sub-sections (2) and (3) of Section 14A were inserted by the Finance Act, 2006 with effect from 1.4.2007 and that Rule 8D was framed in pursuance of the said sub-section (2) even later, we now beg to point out that it has been categorically held by the Bombay High Court in Godrej Boyce v. DCIT that those provisions do not have any retrospective effect. 16.2 In our humble submission, once it is seen that the provisions of sub-sections (2) and (3) of Section 14A are only prospective and applicable to assessment years 2007-08 and thereafter, the present a 2006-07 being anterior thereto, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2001. Therefore, if the Legislature had desired that for computing book profit u/s.115JB, the expenditure that an Assessing Officer may disallow under Section 14A must be added to the profit as per the Profit Loss Account, it would have made an appropriate provision in Explanation 1 below sub-section (2) of Section 115JB. Since that has not been done, and instead, the Legislature has chosen to persist with the same item (f) as also with the requirement that all the items envisaged to be added to the profit as per the Profit and Loss Account would be such as had been debited to that Profit and Loss account, it is obvious that Legislature has not intended that the profit as per Profit and Loss Account be increased also by the expenditure that may be disallowed u/s. 14A. 20.1 Whilst on the above, it would be significant to consider that sub-section (4) of Section 115JB provides as under (Emphasis supplied): (4) Every company to which this section applies, shall furnish a report in the prescribed form from an accountant as defined in the Explanation below subsection (2) of s3ctin 288, certifying that the book profit has been computed in accordance with the provisions of this s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y forward. However, in the assessee s case, the brought forward loss of A.Y. 2000-01 has already expired in A.Y. 2004-05. Likewise, the AO has also not verified the scope for making disallowance of expenditure of ₹ 64.35 lakhs while computing book profit u/s. 115JB of the Act. From the above facts, it is apparent that during the assessment proceedings the Assessing Officer has neither sought assessee s explanation on these issues nor has he called for any details to verify the veracity of assessee s claim. The Assessing Officer has allowed the claim of assessee without proper inquiry and verification. It is settled legal issue that if the Assessing Officer has completed any assessment without making proper inquiry/verifications, then such order will always be erroneous and prejudicial to the interest of Revenue. Section 263 of the Income-tax Act empowers the Commissioner of Income-tax to call for and examine the record of any proceeding under the Income-tax Act and if he considers that any order passed by the Income-tax Officer is erroneous and prejudicial to the interests of Revenue, he may, after complying with the principles of natural justice, pass such orders thereon as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtunities to the assessee of being heard. 7. From the record it is transpired that the basis issuing notice u/s. 263(1) of the Act was that the Assessing Officer allowed wrong carry forward of speculation loss, from the work of MAT it was noticed that the expenditure disallowed interest of the exempted income was not added back while computing book profit for the purpose of Section 115JB of the Act though, it was required to be added back under clause (f) of Explanation 1 of Section 115JB. The Assessing Officer had finalized the assessment without making due inquiry and examining the issue of eligibility of set off of carry forward speculation loss as provided in amended Section 73 (4) of the Act. The contention of the assessee is that at the time of assessment for the year under consideration i.e. A.Y. 2000-01 the speculation loss was determined of ₹ 69,62,778/-. Since then no loss was observed till A.Y. 2005-06. The entire amount had remained unabsorbed. The amendment u/s. 73(4) was made with effect from 01-04-2006. Therefore, the amended provision was not applicable on the facts of the present case. The contention of the assessee is that it is very well settled that no ..... X X X X Extracts X X X X X X X X Extracts X X X X
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