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TMI Blog2022 (8) TMI 564X X X X Extracts X X X X X X X X Extracts X X X X ..... The same is not permissible in law. No question was asked by the AO to the assessee and there was no basis for allowing the deduction of such trading loss to the assessee company. We cannot approve the same as in the present case, no transactions were carried out by the assessee company during the period from 01.04.2013 to 31.03.2014 resulting into loss - In fact, from the perusal of ledger account of M/s. Zen Securities Limited, in the books of the assessee company, only a loss was shown on account of trading in securities/derivatives. Therefore, in our view, the order passed by the AO is unsustainable and the action on the part of the Ld. PCIT was correct. Two directors namely Ms. P. Usha Rao and Karthik Velagapudi were having two different unique client codes and the amounts were transferred by the assessee company to these two directors. Thus, merely transferring the amounts by the company to the accounts of directors cannot ipso facto lead to the conclusion that they were authorized to transact for and on behalf of the assessee company. Once the transactions can be undertaken by the company on its own capacity, having separate unique client code, then it is possible that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctors, the directors had suffered loss of Rs. 1,67,31,578/- for A.Y. 2014-15 and similarly, as against Rs. 1,72,83,000/- allegedly given by the company to its directors on various occasions, the directors had suffered a loss of Rs. 2,18,87,793/-. Thus, the loss suffered by the assessee, was more than the amount lent by the assessee to its directors. The conduct of the company and its directors does not inspire confidence as it is highly improbable to believe that the assessee will continue to transact through its directors, despite persistent losses. We are of the opinion that the order passed by the Ld. CIT(A) is required to be set aside and the order of the Assessing Officer is required to be restored. Accordingly, the appeal of the Revenue is allowed. - ITA Nos. 637 , 484/Hyd/2019 - - - Dated:- 27-7-2022 - Shri Rama Kanta Panda, Accountant Member And Shri Laliet Kumar, Judicial Member Assessee by : Sri S. Rama Rao Revenue by : Sri Rajendra Kumar CIT DR ORDER Per Laliet Kumar, JM These are the two connected appeals filed by the assessee and Revenue for A.Y. 2014-15 and 2015-16 against the orders of Principal Commissioner of Income Tax, Hyderabad d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment order u/s. 143(3) of the Act on 04.11.2016 for A.Y. 2014-15 as the same is erroneous and prejudicial to the interest of the revenue. 3.2. Feeling aggrieved with the order passed u/s. 263 of the Act, assessee is now in appeal before us. 4. First, we will take up the appeal of the assessee for A.Y. 2014-15 whereby the assessee has sought to challenge the order passed by the Ld. PCIT quashing the assessment made u/s. 143(3) of the Act vide order dt. 04.11.2016 u/s. 263 of the Act 5. The written submissions filed by the Ld. AR in brief are that nowhere in the order, Ld. PCIT mentioned that the Assessing Officer had not conducted necessary enquiry before completing the assessment for the impugned A.Y. 2014-15. Further, Ld. PCIT has not considered the fact that the Assessing Officer allowed the loss from F O in the impugned A.Y. 2014-15 only after conducing necessary enquiries. Ld. CIT(A) allowed the appeal for A.Y. 2015-16 and directed the Assessing Officer to allow the loss from F O and the view taken by the Assessing Officer for A.Y. 2014-15 is supported by the order of Ld. CIT(A) for A.Y. 2015-16 and hence, Ld. PCIT is not correct to conclude that the view taken by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... directly related to the activities of the assessee for carrying out the business activities of the assessee. In the present case, the Ld. PCIT has called upon the assessee to substantiate as to under which provision of law, the loss accrued to directors in their personal capacity can be adjusted against the income of the assessee company. 6.1. Ld. DR further submitted that in the A.Y. 2015-16, the similar issue was examined by the Assessing Officer and the Assessing Officer had called the report from M/s. Zen Money and the said M/s. Zen Money had given a categorical report stating that all the three individuals namely, assessee and the two Directors were maintaining their separate D-mat accounts with the M/s. Zen Money and the loss which has been claimed by the assessee do not represent the loss caused to the assessee on account of the trading activity by it. 6.2. It was also submitted by Ld. DR that the assessee had not informed the Ld. CIT(A) who was hearing the appeal arisen out of the order passed by the Assessing Officer for A.Y. 2015-16, about the pendency of revision proceeding before Ld. PCIT, despite assessee having received the show cause notice u/s. 263 of the Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the meaning and legal position of Directors may be necessary which is explained here under: a) A Director is an agent of the company for the conduct of the business of the company. Directors of a company have fiduciary relationship with the company as well as the shareholders when he acts as an agent or officers of a company. b) A company is a legal person who is living only in the eyes of law. It is a creation of law which lacks both body and mind. It cannot act, just like a human being. It can act only through. some human agency. Directors are' those. persons through whom company acts and does business. They are collectively known as Board of Directors. c) Cairns L.J. in Ferguson v. Wilson [1867] 2 Ch App 77, 89 said: What is the position of directors of a public company They are merely agents of a company. The company itself cannot act in its own person, for it has no person; it can only act through directors, and the case is, as regards those directors, merely the ordinary case of principal and agent. Wherever an agent is liable, those directors would be liable; where the liability would attach to the principal, and the principal only, the liability is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity of loss claimed by the assessee to the tune of Rs. 1,73,99,050/-. 06-12-2018 The last date of hearing before the Ld. CIT(A) for A.Y. 2015-16. 23.01.2019 The Ld. CIT(A) passed the order allowing the loss of Rs. 2,18,87,993/- 29.03.2019 The Ld. PCIT passed the order setting aside the order of the Assessing Officer passed for A.Y. 2014-15 and directed the Assessing Officer to disallow the excess loss claimed on account of F O for an amount of Rs. 1,67,31,578/-. 9. The interesting facts as per the case of the assessee for A.Y. 2014-15 are that the assessee company had passed a Board Resolution on 01.04.2013 whereby it was resolved that the company for the administrative reason has authorized to both of its Directors namely, Ms. P. Usha Rao and Mr. Karthi Velgapudi to operate, act or otherwise deal in the stocks/derivatives in the stock exchange, for and on behalf of the assessee company. They were also authorized to operate the stocks and derivatives trading accounts of assessee company or can operate through the accounts opened in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions pertain to the claim of deduction by the assessee for the loss suffered by the directors in their individual accounts. Neither the Assessing Officer asked assessee pertaining to the above said questions nor it was replied by the assessee. Hence, the present case is a case of no enquiry by the Assessing Officer. 11. An assessment order to be held liable to revision under section 263 of the Act, if the twin conditions, firstly, order to be an erroneous and secondly, order prejudicial to the interest of the Revenue, should be satisfied simultaneously. The Hon'ble Delhi High Court in the case of GEE VEE Enterprises Private Limited vs. CIT [1975] 99 ITR 375 (Delhi) held that the CIT may consider the order of the Income Tax Officer as erroneous not only because it contains some apparent error of reasoning or of law or of fact on the face of it but also because it is a stereo-typed order which simply accepts what the assessee has stated in his return and fails to make inquiries which are called for in the circumstances of the case. The Hon'ble Delhi High Court referred to the two decisions of the Hon'ble Supreme Court in the case of Rampyari Devi Saraogi Vs. Commission ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... und to result in erroneous and prejudicial orders. Where the relevant enquiry was not undertaken, as in this case, the order is erroneous and prejudicial too and therefore revisable. Investigation should always be faithful and fruitful. Unless all truthful areas of enquiry are pursued the enquiry cannot be said to have been faithfully conducted. 14. The Hon'ble Delhi High Court has again emphasized in the case of ITO vs. DG Housing Projects Ltd. ITA 179/2011 that where there is complete lack of enquiry on the part of the Assessing Officer, the assessment order is erroneous the relevant observation of the Hon'ble High Court are as under: A distinction must be drawn in the cases where the Assessing Officer does not conduct an enquiry; as lack of enquiry by itself renders the order erroneous and prejudicial to the interests of the Revenue and cases where the Assessing Officer conducts an enquiry but the finding recorded is erroneous and which is also prejudicial to the interests of the Revenue. In the latter cases, the Commissioner has to examine the order or the decision taken by the Assessing Officer on the merits and then form an opinion on the merits that the ord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Board to do trading activities for and on behalf of the company. On being asked by the Bench as to whether these two directors and the company are having separate individual trading accounts with M/s. Zen Money or not, it was answered by the Ld. AR fairly that they are maintaining separate accounts. Even otherwise the said fact is appearing at Para 3 of the Ld. PCIT's order where the three unique client codes were given to three individuals and the unique client code of the assessee was 070N013N wherein only a loss for the sum of Rs. 6,67,472/- was caused to the assessee company. In our view, the two directors namely Ms. P. Usha Rao and Karthik Velagapudi were having two different unique client codes and the amounts were transferred by the assessee company to these two directors. Thus, merely transferring the amounts by the company to the accounts of directors cannot ipso facto lead to the conclusion that they were authorized to transact for and on behalf of the assessee company. Once the transactions can be undertaken by the company on its own capacity, having separate unique client code, then it is possible that the activity would be carried out through the accounts of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nies Act, 2013. There is distinction between the company and its directors under the Act and the act done by the directors in their individual capacity cannot be said to be an act on behalf of the company. As per the Companies Act and as well as the Income Tax Act, the company and its directors are two distinct jurist entity. Hence, both are separately assessed under the provisions of the Income Tax Act. 23. The trading of sale and purchase of shares done by the directors of the company in their individual capacity cannot be said to be in pursuance to the Board's resolution passed by the assessee company. In the board resolution, there is no whisper of making any investment on behalf of the company by these directors as provided u/s. 179(3)(e) of the Companies Act, 2013. In view of the above, we do not find any justification for the Assessing Officer to allow the deduction of the losses suffered by these directors in the hands of the assessee company. 24. In the result, the appeal of assessee in ITA No. 637/Hyd/2019 for A.Y. 2014-15 is dismissed. 25. Now we will come to the appeal of Revenue in ITA 484/Hyd/2019 for A.Y. 2015-16. 26. The only effective ground raise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed loss of Rs. 2,18,87,793/- on account of F O trading undertaken by the directors of the company in their individual capacity. The Assessing Officer had issued summons u/s. 133(6) of the Act to M/s. Zen Money and in response thereto, it was intimated by the company M/s. Zen Money that no transactions were done by the company during the F.Y. 2014-15 relevant to A.Y. 2015-16. It was also pointed out that different unique client codes were granted to the assessee company and to its two directors. The Assessing Officer after affording opportunities to the assessee, had disallowed the deduction claimed by the assessee for an amount of Rs. 2,18,87,793/- as the said amount does not pertain to the company and the company has not carried out any transactions with M/s. Zen Money. 29. Feeling aggrieved with the order of Assessing Officer, assessee preferred appeal before Ld. CIT(A) who allowed the appeal of the assessee vide Para 4.2 by observing as under: 4.2. I have carefully considered the assessment order, grounds of appeal and AR's submissions in this regard. The only issue involved in this appeal is with regard to purchase and sale of shares, stocks, scripts, commodities, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... considered to be the loss of the company. Similarly, the profit earned by the directors cannot be added in the hands of the company. The law is fairly settled that income is to be assessed in the right hands and the income cannot be assessed in another person's hand either by transferring the profit or loss. 31. Ld. AR for the assessee had submitted that the directors were duly authorized by the company to operate the accounts on behalf of the company. It was also the contention of the Ld. AR that if the company has caused the profit to carry out the activities of the trading and if any loss had been caused on account of trading activities carried out by the assessee then the same is required to be adjusted against the income of the assessee. It was submitted that as per the resolution passed by the company, the activities were carried out and there is no breach or violation of the activities carried out by the assessee. It was also submitted that in the financial year relevant to assessment year, the directors earned profit on account of transactions carried out by them besides the loss caused to the assessee on account of the trading activities. It was also contended by th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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