9911796707
TMI Blog2014 (12) TMI 344X X X X Extracts X X X X X X X X Extracts X X X X ..... for the A.Y. 2006-07 for disposal. The Revenue has taken the following grounds in the appeal: 1. (a) Whether on the facts and the circumstances of the case and in law, the Ld. CIT(A) was justified in deleting the addition of Rs. 40,16,93,630/- by treating income as earned by clients of the assessee and not by the assessee? (b) On the facts and the circumstances of the case and in law, the Ld. CIT(A) failed to appreciate that the transactions claimed to have been done on behalf of purported clients was not legally permissible, as the assessee was neither broker or sub-broker of such clients and, therefore erred in deleting the addition of Rs. 40,16,93,630/-. (c) On the facts and the circumstances of the case and in law, the Ld. CIT(A) failed to appreciate that there was no client agreement, KYC details, broker's note with purported clients and, therefore, erred in deleting the addition of Rs. 40,16,93,630/-. 2.(a) On the facts and the circumstances of the case and in law, the Ld. CIT(A) failed to appreciate that transaction resulting in speculation loss of Rs. 1,00,21,000/- done through Madhya Bharat International (I) Ltd., was not legally permissible transaction and, theref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see has earned the income from commodity market through its broker M/s. A.M. Futures. It was found that the assessee distributed the said profit to its different clients. The Assessing Officer examined the books of account of the assessee for the F.Y. 2005-06 and he has noted that the assessee has distributed profits of Rs. 41,92,40,472/- to 170 clients and also incurred losses of Rs. 1,75,46,842/- and earned net profit of Rs. 40,16,93,630/- which was not declared as a profit of the assessee. In short, the said profit was treated as a profit of the assessee's clients as the said profit was passed on to them. 3. During the course of search and seizure action statement of Shri Satishchand Gopilal Mittal, partner of M/s. Sahayog Commodities, was recorded u/s. 132(4) of the Act on 23-11-2007. As noted by the Assessing Officer the partner of the assessee accepted that the assessee is a client of M/s. A.M. Future and not a sub-broker. The partner of the assessee firm also accepted that he was a client of M/s. Sanjay Pulse Processors Pvt. Ltd., Jalgaon (NCDEX), M/s. Shubh Commodities, Jalgaon (NCDEX) and M/s. Shanti Commodities, Jalgaon (NCDEX) and not a sub-broker for any of them. In th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at all clients are genuine and verification is done by the search officials. The Assessing Officer was not convinced with the explanation of the assessee and he assessed the entire income of Rs. 40,16,93,630/- as undisclosed income of the assessee in its hand. The details of income returned, different additions made and finally income assessed by the A.O. are as under : ASSESSEMNT YEAR 2006-07: Income returned as per net profit of audited profit & loss account Rs. 47,91,684/- Add: Net income earned by the clients (Profit Rs. 41,92,40,472 - Loss Rs.l,75,46,842) Rs. 40,16,93,630/- Add: Speculation loss in respect of transaction of Madhya Bharat International Pvt. Ltd. [u/s.41(1)] Rs. 1,00,21,000/- Total income assessed Rs. 41,65,06,314/- 4.1 The reasons noted by the Assessing Officer for holding that the sum of Rs. 40,16,93,630/- represent's undisclosed income of the assessee firm are as under: i). Initially during the course of search action, the assessee (Q. No. 11 of the statement dated 22.11.2007) contended that Sahayog Commodities was doing trading commodities futures on proprietary basis as well as on behalf of clients. In respect of proprietary trades, the assessee gets ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted in the remarks column. At this stage it is recorded that the assessee took 25 minutes and consulted with his employees. The statement was recorded in presence of his Chartered Accountant. After a pause of over 25 minutes, Shri. Satish Mittal expressed his inability to show as to how the orders of a so called clients could be executed by making an entry in the remarks column while operating in the account of M/s. Sahayog Commodities being a client (Q. 12). Then he was once again asked to explain the modalities of placing contracts under the user-id of M/s. Sahayog Commodities. Here Shri. Satish Mittal admitted (Q. 13) that they placed the orders to buy and sell under client-id (S0016) of M/s. Sahayog Commodities and added that the transaction cannot be apportioned to any other client at the time of placing the order. In the light of the above, the contention of the assessee (vide his letter dated 09.11.2009) that the entire transactions of the commodities trade are carried out online with the exchange is devoid of any merits. Once it is established that M/s. Sahayog Commodities is merely a client and that it has a client code through which it is entitled to trade in its own acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ocumentary evidences seized or produced during the course of search to prove the genuineness of the claim of M/s. Sahayog Commodities that it was dealing on behalf of its so called clients? In order to get an answer to this critical question, (Q. No. 14) Shri Satish Mittal was asked to explain at what point of time and on what basis the said orders have been bifurcated amongst the so called clients. Shri. Satish Mittal after deliberating on this issue for over 15 minutes replied that on the basis of receipt of "trade file" through internet from the broker on the next day, they used to apportion the trade on the basis of order register. When he was asked to produce the said order register for examination, he stated that all order registers are destroyed (Q. No. 15). It is also a fact that these so called order registers have neither been found nor seized during the course of the search action. Further, there is no merit whatsoever in the contention of the assessee that these trades are entered in the software of the "trade file" that is received through internet from the broker on the next day. The assessee was asked to show as to how the orders on behalf of the clients can be execu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ponsible/liable for the losses or profits arising out of the transactions entered on behalf of the so called clients, if at all there were any. Under these circumstances it cannot be said that these were the transactions entered into by M/s. Sahayog Commodities on behalf of its so called clients. At the assessment stage, the assessee has come up with an argument for the first time that there was an oral agreement with the so called clients and that it is not necessary that there is any written agreement. This contention of the assessee is again an afterthought as this plea was never taken during the course of statement recorded in the search action. Secondly the key reason for not having a written agreement is that he had no locus standii for executing such an agreement as he was neither a broker nor his franchisee. Needless to say that the assessee failed to produce any ruling in support of his claim that while dealing in commodity markets it is not necessary for the client, broker or his franchisee to sign any written agreement and that an oral agreement is sufficient. Without prejudice to whatever stated above, even if it is presumed that there was any contract, then transaction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rough the member of the commodity exchange and the valid contract note is issued by the member/broker. In the instant case, M/s. Sahayog Commodities has issued broker notes to the so called clients by apportioning the profits/losses at his own sweet will or as per the requirements of the so called clients without any contemporaneous evidence. The broker notes issued by M/s. Sahayog Commodities to the so called clients are patently illegal and pure eyewash to hoodwink the revenue authorities and give a colour of genuineness to structured transactions. The transactions are colourable in nature and squarely covered by the decision of the Hon. Supreme Court in the case of Mac Dowells India Ltd. x) During the dying moments of the assessment proceedings, the assessee produced three of its so called clients as its witnesses. The assessee has conducted the examination in chief of these parties and it is a mere narration of the claims reiterated by the assessee time and again without producing any evidences in support of these claims. These witnesses were cross examined by the undersigned on 28.12.2009 and it was found that none of them had paid any advance tax, they did not have any contr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... harged any commission to their so called clients. In view of the above it is clear that M/s. Sahayog Commodities has not acted as broker for their so called clients. The entire amount of commodity trade belongs to M/s. Sahayog Commodities. xii) We now come to the only issue harped upon by the assessee. The assessee has vehemently argued that the investigation wing had carried out post search enquiries against these so called clients and they have all confirmed these transactions with M/s. Sahayog Commodities and also disclosed them in their regular returns of income. On going through the compilation of the profits/losses distributed by M/s. Sahayog Commodities to these so called clients, it is seen that all these clients have effectively setoff their existing losses against the profits procured from M/s. Sahayog Commodities or they have set off their profits against the losses procured from M/s. Sahayog Commodities. With some minor exceptions, (which might have deliberately been structured to bring a facade of reality to the entire gamut of transactions), the entire profits of over Rs. 40,16,93,630/- earned by M/s. Sahayog Commodities have evaporated and revenue has gained a preci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lled clients does not help the case of assessee. xv) As regards contemporaneous records of placement of orders, the assessee stated that these orders were recorded in order registers and then accordingly the profits/losses were apportioned. However, during the search Shri. Satish Mittal stated that these order registers have been destroyed. It is important to note that these order registers are an important piece of contemporaneous evidences which are crucial to link the transactions incurred in the name of M/s. Sahayog Commodities to it so called clients. Without this evidence it is very difficult for the assessee to substantiate its case that the said transactions were entered into by M/s. Sahayog Commodities on behalf of its so called clients. The question that comes to the mind is, would any assessee destroy a critical evidence which would decisively clinch a case in its favour? The answer is, no assessee would ever do it. Hence the conclusion that emerges is that no such evidences were ever there as all these transactions were executed by M/s. Sahayog Commodities on its own behalf. Then vide the letter dated 09.11.2009, the assessee has changed its stand stating that no such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acceptable only if the assessee had transacted on behalf of the so called clients by accepting proper margins or mark to margins and had it been able to show with the help of contemporaneous records that each of these transactions were entered solely on behalf of those clients. M/s. Sahayog Commodities has failed to produce even an iota of evidence to prove that these transactions were entered on behalf of the so called clients. Merely saying that profits were distributed by crossed account payee cheques or losses were genuine as the so called clients paid for them by crossed account payee cheques at the fag end of the year or even beyond that is not acceptable. On similar grounds, producing the copies of the bank accounts (vide letter dated 23.11.2009) does not advance the case of the assessee as the bank entries do not show on real time basis as to when the actual transaction in commodities took place. In absence of the crucial link connecting the transaction entered into by M/s. Sahayog Commodities to the client, the only conclusion that emerges is that all these transactions are the transactions of M/s. Sahayog Commodities. At its best it can be said that M/s. Sahayog Commodit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... u/s. 11(3) of Forward Contract Regulation Act, 1952. The appellant has also agreed that it cannot act as broker or sub-broker for entering into transactions of trading in commodities derivatives in view of the above said provisions of Forward Contract Regulation Act, 1952. The appellant has rightly claimed in this regard that even if the business carried-out by the appellant is not permissible then also only the net income from the said business is to be taxed in the hands of the appellant. The appellant has carried-out the transaction on behalf of the clients and has earned substantial brokerage income which is offered to tax by crediting same to profit and loss account. Therefore this contention raised by the A.O. is rejected. 6.1 The other contention of the A.O. is that the information about the clients was not available with the appellant at the time of search action. However, it is observed that during the course of assessment proceedings the appellant has filed confirmations with addresses, Permanent Account Numbers, copies of returns of income and computations of income of the clients and the Investigation Wing has also verified the clients independently. Further, the deta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and Rs. 1,01,04,401/- is credited to the audited profit and loss account. 6.4 In support of the transactions entered into on behalf of the clients, the appellant has filed affidavits with the A.O. in respect of major clients. Independent verification was made by Investigation Wing by issuing summons/notices to the clients and the clients have confirmed the transactions done by the appellant on their behalf. 6.5 The appellant has correctly pointed-out that the presumption u/s. 132(4A) of the Act, supports the contention of the appellant as each transaction entered into on behalf of client was available on record with date and time of execution in computerized data at the time of action u/s.132 of the Act. 6.6 Further no documents, notings or papers were found during search action showing that any of the 170 clients have provided accommodation entries to the appellant firm to reduce its profit. During the course of search action, no notings or evidence showing that the profit paid to clients by account payee cheques was received back by the appellant firm in cash. During the course of search or in post search enquiries or in assessment proceedings, the destination of the alleged ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clients on real time basis on the NCDEX software but on the examination of the seized data it was found that no said details regarding the so called clients fed on the NCDEX software were available in the seized CD. The enquiries were made with the NCDEX and the soft copies of the transactions entered by M/s. Sahayog Commodities through M/s. Shanti Commodities on the NCDEX were called forth. He submits that as per the information gathered from the CD, all the transactions had been carried out by the assessee firm as a client of M/s. Shanti Commodities or M/s. A.M. Futures and there is no entry whatsoever regarding any of the so called clients. He referred to the statement of Shri Satish Mittal recorded during the course of search and submits that there is no consistency in the answers given by the said partner. He argues that there is very crucial evidence against the assessee in respect of the stamp duty payment. The assessee has paid the stamp duty to M/s. A.M. Future for contracts and certainly that support the case of the Department that the contract was only between M/s. A.M. Future and the assessee firm and no one else. He submits that he is not even an agreement between the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clients. He submits that when the assessee has no legal & valid authority to enter into transactions in NCDEX on behalf of its alleged clients as sub-broker or broker then the claim of the assessee is totally false. He argues that it is certain strange that if the assessee's claim is bonafide in respect of carrying out the trading on behalf of its so called clients then why they should destroyed the record. The assessee has not produced any substantive evidence to show that he acted on behalf of the so called clients. The CIT (DR) supported the order of the Assessing Officer and submits that the Ld. CIT(A) was not at all justified drawing the inference in favour of the assessee. 9. Per contra, the Ld. AR for the assessee vehemently argues that in the course of search on 22-11-2007 no incriminating material was found to support the story of the Assessing Officer. He referred to the statement of Shri Satish Mittal, partner of the assessee firm, recorded during the course of search action u/s. 132(4) of the Income-tax Act (Page Nos. 111 to 119 of Compilation) and submits that a specific question being Q. No. 28 was asked to Shri Mittal and in clear terms he told that the profits dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hart showing the profit and loss incurred by the client, PAN of the client, Ward/Circle in which assessed, Date of filing return, Brokerage collected from those clients, Maximum credit balance of the client during the year, Whether the clients have confirmed to the ADIT, Jalgaon, during the course of investigation that they have received the profits in respect of their transactions etc. He vehemently assailed the conclusion drawn by the Assessing Officer by discarding all those circumstantial as well as a direct evidences and for holding that whatever the profit of 170 clients has been accrued or received during the year that is to be taxed in the hands of the assessee. He argues that inference should be based on some corroborative evidence as admitted during the course of search no abnormal cash or assets were found. If the assessee have earned all the 41 crores as a profit in one year but at least something must have been reflected somewhere by way of cash bank account and investments etc. 11. He submits that in respect of the margin money the assessee has explained and made clarification before the Ld. CIT(A) on said charge of the AO. The accounts were running accounts and many ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profits before the date of search action. But in respect of only 11 clients why they have not filed returns of income and why they subsequent filed, it is not concern with the assessee. He submits that another important aspect is to be seen that the entire payments of profits to the clients are made by the cross bank account payee cheques and still it is doubted by the Assessing Officer. He submits that the assesse failed to understand what further evidence is required to satisfy the Assessing Officer when all the substantive & strong evidence in favour of the assessee is available in the form of documentary evidence and as well as the confirmations by the 170 clients. He submits that otherwise also on the principles of diversion of income overriding title income cannot be in the hands of the assessee as it was diverted to the concerned client when the transaction was completed. He supported the order of the Ld. CIT(A) on this issue and pleaded for confirming the same. 12. In this case there is no dispute 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 For ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on. In the statement recorded during the course of search u/s. 132(4) of the Act, Shri Satish Mittal, partner of the assessee firm admitted that the assessee firm is not authorized to carry out the transactions with the NCDEX but at the same time we find that he has stated that the transactions carried out on behalf of 170 clients are their transactions and the assessee showed himself as authorized to carry out the transactions with the NCDEX. 14. On perusal of the reasons of the Assessing Officer we find that the Assessing Officer's main concern is no authority to the assessee firm to carry out the transactions with the NCDEX on behalf of the 170 parties which are claimed as the clients of the assessee. It is also seen that the Department carried out the extensive investigation and verification with 170 clients of the assessee and none of the clients denied having carried out the transactions through the assessee firm with NCDEX. Moreover, all the clients have given their confirmation in the clear terms as per the chart placed in the Compilation Page No. 52. It is seen that ADIT (INV) Officer issued the summons with 57 clients and all clients admitted that they have received the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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. In the present case 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. We are given our anxious consideration to entire evidence on record as well as the reasons given by the Ld. CIT(A) for holding that the entire profits cannot be taxed in the hands of the assessee. We are of the opinion that the entire exercise done by the Assessing Officer contrary to the evidence available on record in favour of the assessee. We, therefore, concur with the findings of the Ld. CIT(A) and grounds taken by the Revenue are dismissed. 16. The next issue is the transactions resulting in the speculation loss of Rs. 1,00,21,000/- done through Madhya Bharat International Pvt. Ltd. As per the gr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act as a cessation of the liability. So far as action of the Assessing Officer for invoking the provisions of Sec. 41(1), in the Ground No. 2(a) itself the Revenue has admitted that the Assessing Officer has wrongly made addition u/s. 41(1) in the assessment order. The entire reasons and discussions of the Assessing Officer is revolving around how the said liability was non-genuine, non-existing and hence, it is to be taxed u/s. 41(1) of the Act. There are no other reasons given by the Assessing Officer for making the said addition. The Ld. CIT(A) has deleted the addition by holding that Sec. 41(1) is not applicable. At the same time the Ld. CIT(A) has further observed that in the subsequent year i.e. F.Y. 2006-07 relevant to A.Y. 2007-08 M/s. Madhya Bharat International Pvt. Ltd. has credited the profit to the extent of Rs. 1,05,43,000/- to the account of the assessee on account of transaction carried out by it for the assessee firm. The balance amount of Rs. 5,22,000/- was paid by M/s. Madhya Bharat International Pvt. Ltd. to the assessee by account payee cheques. The Assessing Officer also assessed the said profit of Rs. 1,05,43,000/- in the hands of the assessee in the A.Y. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the assessee is that the loss incurred through M/s. Madhya Bharat International Pvt. Ltd. towards the transactions in the NBOT is to be treated as non-speculation loss. While deciding the Revenues appeal for A.Y. 2006-07 we have already noted that in grounds the Revenue has conceded that the action of the Assessing Officer treating the amount of Rs. 1,00,21,000/- u/s. 41(1) of the Act as a cessation of the liability was not justified. The facts pertaining to the issue are already discussed while deciding the identical issue in the Revenue's appeal. Now the assessee has taken a plea that this particular loss cannot be treated as a speculative loss within the meaning of Sec. 43(5) of the Income-tax Act. Section 43(5) of the Act reads as under: Sec. 43(5) - speculative transaction means a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips: Provided that for the purposes of this clause- (a) a contract in respect of raw materials or merchandise entered into by a person in the course of his manufacturing or merchantin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot be claimed as business loss. Only the eligible transactions as specified under proviso (d) below S. 43(5) are not treated as speculative by the deeming fiction under the Act. The 'eligible transaction' and 'recognized stock exchange' is defined under Explanation (i) and (ii) below the S. 43(5) of the Act. The transactions on commodities market are not covered by the exceptions and hence are held to be speculative in nature. The losses of Rs. 2,09,31,143/- are, therefore, held to be speculative in nature." 7.2 As the A.O. has assessed the speculation income of Rs. 40,16,93,630/- of the clients of the appellant firm in the hands of the appellant, the speculation loss of Rs. 2,09,31,143/- was setoff against the said income. As the addition on account of speculation income of the clients amounting to Rs. 40,16,93,630/- is deleted, the A.O. is directed to disallow the said speculation loss of Rs. 2,09,31,143/- claimed by the appellant as deduction from brokerage income. The A.O. is directed to allow the said speculation loss to be carried forward. The contention of the appellant in this regard that the brokerage income earned in respect of the transactions in commodi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come of the assessee. The details of the return of income and addition made and income assessed by the Assessing Officer for the above assessment can be summarized as under: ASSESSEMNT YEAR 2007-08: Income returned (as considered by A.O.) Rs.3,42,672/- (Net profit as per P & L A/C Rs. 2,43,717 + disallowance u/s. 40(a)(ia) Rs.98,960/- = Rs. 3,42,677/-) Add: Speculation loss claimed as expenditure/ Business loss allowed to be carried forward. Rs.55,62,201/- Total income assessed Rs.59,04,873/- Net speculation loss allowed to be carried forward Net loss earned by the clients (-) Rs. 40,97,718/- (Profit Rs. 71,35,357/- - Loss Rs. 1,12,33,075/-) Add: Speculation loss incurred by the appellant (-) Rs. 55,62,201/- Total (-) Rs. 96,59,919/- 24.1 We have heard the parties. The AO declined to accept the plea of the assessee that the assessee has carried out the transactions as a sub-broker on behalf of his clients in the NCDEX and brought to tax the entire income in the A.Y. 2006-07 in the hands of the assessee. Same way in the A.Y. 2007-08, the AO has also declined to accept that the said loss ( i.e. Rs. 40,97,718 (1,12,33075 - losses - 71,35,357) does not represen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case in the A.Y. 2006- 07. Following our reasons we confirm the order of the Ld. CIT(A) in this year also. We dismiss the Ground Nos. 2, 3 & 4. 27. In Ground No. 5 the assessee has pleaded for allowing the set off of losses of Rs. 55,62,201/- which were incurred in trading in commodity derivatives, against the brokerage income earned by the assessee. The identical contention has been taken in the A.Y. 2006- 07 and this issue is decided against the assessee. As the facts are identical in this year, we hold that as per the provisions of 73(1) of the Act the speculative loss in the commodity derivatives cannot be set off against the regular business income but same can be carry forward and set off against the speculative business profit. Accordingly, Ground No. 5 is also dismissed. In the result, the assessee appeal is dismissed. 28. Now we, take up the appeals of M/s. Sahayog Commodities (Old) being ITA Nos. 857 & 858/PN/2010 for the A.Ys. 2005-06 and 2006-07. This is the old firm of M/s. Sahayog Commodities (New) which details are already discussed in this order. The Revenue has taken the following grounds in the A.Y. 2005-06 are as under: 1. (a) Whether on the facts and the cir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9,615/- Add: Net income earned by the clients (Profit Rs. 88,45,548 - Loss Rs. 28,15,228) Rs. 60,30,320/- Total income assessed Rs. 60,39,935/- 31. The facts which are revealed from the records as under. The assessee firm was engaged in the business of brokerage and NCDEX trading. In respect of A.Y. 2005-06 it was revealed during the course of the search & seizure action that the assessee has entered into the transactions in the commodities trading on behalf of 34 clients and 30 clients in the A.Y. 2006-07 which resulted into to the profits to the extent of Rs. 38,44,218/- and Rs. 60,30,320/- in the A.Ys. 2005-06 and 2006-07 respectively. Otherwise the facts pertaining to the issue are identical as in the case of M/s. Sahayog Commodities (New). The Assessing Officer held that the profit earned by the clients amounting to Rs. 49,53,716/- and Rs. 88,45,548/- in the A.Ys. 2005-06 and 2006-07 respectively and also the losses incurred by the clients amounting to Rs. 11,09,498/- and Rs. 28,15,228/- for the A.Ys. 2005- 06 and 2006-07 respectively, were earned and incurred by the assessee itself. For the coming to the said conclusion the reasons given by the Assessing Officer are summa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are as under: "6. I have carefully considered the assessment orders of the A.O. and the submissions of the appellant. The main contention raised by the A.O. is that the transactions in commodities derivatives undertaken by the appellant for its clients are not permissible u/s.15 and u/s. 11(3) of Forward Contract Regulation Act, 1952. The appellant has also agreed that it cannot act as broker or sub-broker for entering into transactions of trading in commodities derivatives in view of the provisions of aforesaid Sections of Forward Contract Regulation Act, 1952. The appellant has rightly claimed in this regard that even if the business carried-out by the appellant is not permissible then also only the net income from the said business is to be taxed in the hands of the appellant. The appellant has carried-out the transaction on behalf of the clients and has earned substantial brokerage income which is offered to tax by crediting the same to the profit & loss account. Therefore this contention raised by the A.O. is rejected. 6.1 The contention of the A.O. is that the information about the clients was not available with the appellant at the time of search action. However, it is obs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6.4 In support of the transactions entered into on behalf of the clients, the appellant has filed affidavits with the A.O. in respect of major clients. Independent verification was made by Investigation Wing by issuing summons/notices to the clients and the clients have confirmed the transactions done by the appellant on their behalf. 6.5 The appellant has correctly pointed-out that the presumption u/s. 132(4A) of the Act supports the contention of the appellant as each transaction entered into on behalf of client was available on record with date and time of execution in computerized data at the time of action u/s.132 of the Act. 6.6 Further no documents, notings or papers were found during search action showing that any of the clients have provided accommodation entries to the appellant firm to reduce its profit. During the course of search action, no notings or evidence showing that the profit paid to clients by account payee cheques was received back by the appellant firm in cash. During the course of search or in post search enquiries or in assessment proceedings, the destination of the alleged suppressed income of Rs. 99 lacs was not found in the form of unexplained expend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... M/s. A.M. Future and other members of NCDEX. As the facts are identical and all the clients of the assessee, they have admitted & declared their profits in the returns of income. We, therefore, following our reasons in the case of M/s. Sahayog Commodities (New) confirm the order of the Ld. CIT(A) in this case also in both the assessment years and grounds taken by the Revenue are dismissed. In the result, the Revenue's appeals are dismissed. 35. Now, we take up the appeals of M/s. Shanti Commodities being ITA Nos. 786, 787, 855 & 856/PN/2010 which are the cross appeals by the assessee as well as the Revenue. We first taken the appeal filed by the Revenue for the A.Ys. 2006-07 being ITA No. 855/PN/2010. The Revenue has taken the following grounds in the A.Y. 2006-07: 1.(a) On the facts and the circumstances of the case and in law, the Ld. CIT(A) failed to appreciate that transaction resulting in speculation loss of Rs. 3,02,38,100/- done through Madhya Bharat International (I) Ltd., was not legally permissible transaction and, therefore, the AO has rightly disallowed the bogus speculation loss of Rs. 3,02,38,100/-, though the AO has wrongly made addition u/s 41(1) in the assessmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome considered separately (-) Rs. 1,03,07,731/- Total income assessed Rs. 4,94,39,615/- 37. The assessee firm has entered into oil derivatives transactions in NBOT, Indore through M/s. Madhya Bharat International (I) Ltd. which is card holder of NBOT. The assessee incurred the speculation loss of Rs. 3,02,38,100/- in respect of the transactions carried out by the M/s. Madhya Bharat International (I) Ltd. for the assessee. In the reasons given in the assessment orders which are also verbatim as in the case of M/s. Sahayog Commodities, the Assessing Officer treated the said loss as non-genuine on the following reasons: i. Evidence of the transactions entered into by M/s. Madhya Bharat International (I) Ltd. for the appellant is not produced. ii. No margin money was paid in respect of the transactions. iii. The entry of loss was passed by the appellant at the year end. iv. The transactions were entered into by M/s. Madhya Bharat International (I) Ltd. and transferred the same to the appellant firm. v. The loss is not actual loss but mere book entry. vi. As per bylaws of NBOT all the non-member clients are required to be registered with NBOT, before doing that they have to en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... same period. As per the Inspection Report of M/s. Hari Bhakti & Co., the assessee firm has done trading transactions with Pawankumar Laddha much before its existence as a partnership firm and has set off its losses against NCDEX profit at the end of the year. The Assessing Officer, therefore, proceeded to disallow the loss claimed by the assessee of Rs. 14.32 Lacs. The assessee explained to the Assessing Officer that the partners of the assessee firm have orally decided to start the business from 01-04-2005 and hence, entered into trade transaction of NBOT through M/s. Pawankumar Laddha of Indore. Consequently the firm has made the payment of Rs. 14.32 Lacs to Pawankumar Laddha by account payee cheques. The Assessing Officer was not convinced with the explanation of the assessee. In his opinion, as observed by him, the assessee company came into existence in February, 2006 whereas trading transactions through M/s. Pawankumar Laddha were between 12-08-2005 to 23-12-2005. The Assessing Officer rejected the contention of the assessee and treated the loss incurred by the assessee of Rs. 14.32 Lacs as nongenuine in nature and brought to tax the same u/s. 41(1) of the Act. When the matt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .Y. 2007-08. The Revenue has taken the only ground in the appeal is as under: 1. On the facts and the circumstances of the case and in law, the Ld. CIT(A) failed to appreciate that penalty levied was penal in nature of infraction of law and, therefore, the Ld. CIT(A) erred in deleting the addition of Rs. 9,44,552/-. 43. The facts pertaining to the issue are as under. The Assessing Officer has observed that during the course of search, instances of violations of various legislation were found. On the verification of record it was noticed by the Assessing Officer that the assessee has been charged the penalties of Rs. 4,06,079/- and Rs. 5,38,473/- on 21- 03-2007. On the basis of narrations in the accounts of the assessee, the Assessing Officer came to the conclusion that those penalties have been charged for open interest position violations laid down by the forward market commission. The Assessing Officer, accordingly, disallowed the said expenditure under the explanation below u/s. 37(1) of the Act and made the addition to the extent of Rs. 9,44,552/-. The Ld. CIT(A) deleted the addition made by the Assessing Officer by disallowing the expenses towards the penalties paid by the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the assessee firm has come into existence in February, 2006 whereas the loss was incurred in the trading through M/s. Pawankumar Laddha between 12-08-2005 to 23-12- 2005. The Assessing Officer disallowed the entire loss and treated the same as income of the assessee firm u/s. 41(1) of the Act. So far as the action of the Assessing Officer treating the said loss as an income of the assessee u/s. 41(1), Ld. CIT(A) reversed the finding of the Assessing Officer and held that the Assessing Officer was not justified to bring to tax the same of Rs. 14,32,20/- u/s. 41(1) of the Act. The revenue has not challenged said finding of Ld. CIT(A) and hence, it has reached the finality. So far as the second approach of the Assessing Officer that the said loss was incurred prior to the constitution of the assessee firm and hence, the said loss cannot be allowed to be set off against the income of the assessee firm, the CIT(A) has observed that the partnership deed of the firm is dated 31-10-2005 and the assessee firm commenced business on 01-11-2005. The bills of M/s. Pawankumar Laddha showed that in respect of two transactions the loss amounting to Rs. 4,44,300/- and Rs. 1,77,100/- was incurr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee submits that the learned CIT(A) ought to have allowed set off of loss of Rs. 1,09,48,979/- being incurred in trading in commodity derivatives against the brokerage income earned by the assessee." 48. As observed by the Assessing Officer the assessee debited an amount of Rs. 1,11,10,895/- on account of losses in NCDEX commodities trading and credited an amount of Rs. 1,57,981/- as profit from NCDEX commodity trading and accordingly, claimed the net loss of Rs. 1,09,52,914/-. The Assessing Officer held that the said losses incurred in the commodities trading are clearly speculative in nature as defined u/s. 43(5) of the Income-tax Act. The Assessing Officer, therefore, declined to allow the set off of the said loss against the regular business profit. The assessee carried the issue before the Ld. CIT(A). The Ld. CIT(A) declined to interfere with the finding of the Assessing Officer on this issue. He has observed that the Assessing Officer has correctly assessed speculation profit earned in loss incurred by the assessee from trading in commodities derivatives as speculation income in the A.Y. 2006-07 and speculation loss in A.Y. 2007-08 in view of the provisions of Sec. 43(5 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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