Bookmark
PDF
Share
CaseIQ

Aravali Engineers P. Ltd. v. Commissioner Of Income-Tax And Another

Punjab & Haryana High Court

Dec 9, 2010

Judgment

CaseIQ

Smart Summary (Beta)

Factual and Procedural Background

This appeal arises under section 260A of the Income-tax Act, 1961, filed by the assessee against the Income-tax Appellate Tribunal, Chandigarh Bench's order dated May 4, 2007, concerning the assessment year 1997-98. The assessee, engaged in business, house property, and speculative transactions, claimed set off of losses from speculative share transactions against income from house property and deductions for brokerage paid from house property income. The Assessing Officer disallowed these claims, treating the loss on shares as speculative loss and rejecting brokerage deduction under section 24. The Commissioner of Income-tax (Appeals) allowed the brokerage deduction but the Tribunal reversed this, restoring the Assessing Officer’s order. The assessee also raised a limitation plea regarding the notice under section 143(2), which was rejected by the Tribunal. The appeal was admitted by the High Court on three substantial questions of law related to the limitation plea, applicability of section 73, and admissibility of brokerage deduction.

Legal Issues Presented

Whether the Income-tax Appellate Tribunal erred in disallowing the assessee from raising the limitation plea for the first time before it, contrary to Supreme Court precedent.
Whether the provisions of section 73 could be invoked against the assessee when the assessee claimed to be covered by the Explanation to section 73, which excludes certain categories from speculative transaction treatment.
Whether the brokerage paid by the assessee is an admissible deduction under section 24 of the Income-tax Act, despite the rent received being net of brokerage.

Arguments of the Parties

Assessee's Arguments

The assessee contended that the loss on speculative transactions could be set off against income from house property, relying on the Explanation to section 73 excluding certain categories of assessees.
The assessee argued that the brokerage paid should be deductible from income from house property, as the rent received was after deducting brokerage.
The assessee claimed that the limitation plea regarding non-service of notice under section 143(2) should be allowed despite being raised for the first time before the Tribunal.

Revenue's Arguments

The Revenue maintained that the loss on purchase and sale of shares without actual delivery constituted a speculative loss, which cannot be set off against income from house property or other heads, as per section 73.
The Revenue contended that brokerage paid is not an allowable deduction under section 24 since the statute specifies permissible deductions and brokerage is not one of them.
The Revenue argued that the limitation plea was rightly rejected by the Tribunal because it was not raised at the earliest opportunity and involves a question of fact.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
National Thermal Power Co. Ltd. v. Commissioner Of Income Tax, [1998] 229 ITR 383 (SC)	Discretion of appellate authorities to allow questions not raised earlier; limitation on raising questions of fact at appellate stage.	The Court held that discretion to admit new questions must be exercised in the interest of justice and not mechanically; affirmed the Tribunal's rejection of the limitation plea raised for the first time.
Jute Corporation of India Ltd. v. CIT, [1991] 187 ITR 688 (SC)	Supporting authority on limitation and procedural aspects in income-tax proceedings.	Referenced in support of the Tribunal’s approach to limitation plea.
CIT v. Premium Capital Market and Investment Ltd., [2005] 275 ITR 260 (MP)	Question of validity of notice under Income-tax Act may not be allowed to be raised for the first time in appeal.	Supported the Court’s view that the limitation plea was rightly rejected.
Piccadily Holiday Resorts Ltd. v. Deputy CIT, [2005] 278 ITR (AT) 154 (Delhi); [2005] 94 ITD 267	Deduction of brokerage paid on house property income not permissible under section 24.	Followed by the Court to deny deduction of brokerage paid by the assessee.
Commissioner Of Income-Tax, Delhi-I v. H.G Gupta & Sons, [1984] 149 ITR 253 (Delhi)	Interpretation of deductions allowable under section 24 of the Income-tax Act.	Supported the Court’s decision rejecting brokerage deduction.

Court's Reasoning and Analysis

The Court first addressed the limitation plea, observing that although appellate authorities may allow new questions for the first time, such discretion must be exercised judiciously and not mechanically. Since the limitation plea involved a question of fact and was not raised at the earliest opportunity, the Court upheld the Tribunal’s rejection of this plea, consistent with Supreme Court and High Court precedents.

On the issue of speculative loss set-off, the Court analyzed the statutory scheme under sections 28, 43(5), and 73 of the Income-tax Act. It noted that speculative transactions, defined as contracts settled otherwise than by actual delivery, must be treated as a separate speculation business. Losses from such business can only be set off against profits from speculation business. The Explanation to section 73 excludes certain companies mainly earning income from house property, capital gains, interest on securities, etc., from being treated as carrying speculation business to the extent of share dealings. However, the Court found that this Explanation was not applicable to the assessee’s case and that the loss from speculative transactions could not be set off against income from house property or other heads. The Court emphasized the legislative intent to prevent tax avoidance through manipulation of share dealings, referencing the Wanchoo Committee report.

Regarding brokerage deduction, the Court examined section 24, which specifies allowable deductions from income from house property. Since brokerage is not among the specified deductions, and the rent received was the actual rent after deduction of brokerage, the Court held that brokerage payment cannot be allowed as a deduction. The Court relied on the Tribunal’s decision in Piccadily Holiday Resorts Ltd. and the Delhi High Court ruling in Commissioner Of Income-Tax, Delhi-I v. H.G Gupta & Sons to support this conclusion.

Holding and Implications

The appeal is dismissed.

The Court upheld the Tribunal’s decision that:

The limitation plea raised for the first time before the Tribunal was rightly rejected.
The loss on speculative transactions could not be set off against income from house property or other heads, consistent with the statutory scheme under sections 28, 43(5), and 73.
The brokerage paid by the assessee was not an allowable deduction under section 24 of the Income-tax Act.

This decision directly affects the parties by affirming the disallowance of set off of speculative losses against house property income and denial of brokerage deduction. No new precedent beyond the application and interpretation of existing statutory provisions and established case law has been set.

Show all summary ...

Adarsh Kumar Goel, J.:— This appeal has been preferred under section 260A of the Income-tax Act, 1961 (hereinafter referred to as “the Act”), by the assessee against the order dated May 4, 2007 of the Income-tax Appellate Tribunal, Chandigarh Bench, passed in I.T.A No. 366.Chandi/2002 in respect of the assessment year 1997-98.

2. The assessee derives income from business, from house property as also from speculative transactions. It claimed set off of loss suffered on sale and purchase of shares covered by the definition of speculative transactions under section 43(5) of the Act against income from property. It also claimed deductions to the extent of brokerage paid out of income from property. Both the said claims were disallowed by the Assessing Officer with the following observations:

Deduction of loss from speculative transactions

“The assessee-company has debited an amount of Rs. 3,02,050 on account of loss on shares. It was seen during the course of scrutiny that the loss had arisen to the assessee on sale and purchase of shares. In the assessee's case only a difference note was sent by the stock broker indicating the loss. It was clearly established that the delivery of shares had not actually taken place in the assessee's case. The difference note was received from M/s. B.K Khullar and Co. Section 43(5) which specifies speculative transactions clearly says that where the transaction of purchase or sale including shares is ultimately settled otherwise than by actual delivery the same shall be a speculative transaction. Income or loss arising to the assessee from such a transaction has to be a speculative income or speculative loss only. The speculative loss of Rs. 3,02,050 is hence not debitable to the profit and loss account of the regular business of the assessee. Consequently, this shall be considered separately as a speculative loss. The Explanation to section 73 also says that where any part of the business of the company consists in the purchase and sale of shares then the company for the purpose of this section be deemed to be carrying on a speculation business to the extent to which the business consists of purchase and sale of such shares. This company has a business of trading in bran. It is not an investment company also. Consequently, any income or loss arising from dealing in shares shall be treated as speculative income. On this account also the amount of Rs. 3,02,050 cannot be allowed as an expense to the company and the loss shall be treated as speculative loss only.”

Deduction on account of brokerage

“With regard to the commission payment of Rs. 2,50,000 there is no eligibility under any section for the assessee-company to claim this expenditure under section 24. The deductions from house property are available only under section 24 and have been clearly specified. The rent received in the assessee's case for the full year is the annual letting value. As the commission is not eligible as a deduction under section 24 it shall not be allowed as an expenditure under house property income.”

3. The Commissioner of Income-tax (Appeals) accepted the plea of the assessee on the question of brokerage but the Tribunal reversed the same and restored the order of the Assessing Officer. The findings recorded by the Tribunal are as under:

“We have given our careful consideration to the rival submissions. The finding of fact recorded by the Revenue authorities that the loss has been incurred by the assessee on the sale and purchase of shares without actual delivery of the scrips has not been challenged before us. Section 43(5) defines speculative transaction as under:

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 merchanting business to guard against loss through future price fluctuations in respect of his contracts for actual delivery of goods manufactured by him or merchandise sold by him; or

(b) a contract in respect of stocks and shares entered into by a dealer or investor therein to guard against loss in his holdings of stocks and shares through price fluctuations; or

(c) a contract entered into by a member of a forward market or a stock exchange in the course of any transaction in the nature of jobbing or arbitrage to guard against loss which may arise in the ordinary course of his business as such member; or

The following clause (d) shall be inserted after clause (c) in the proviso to clause (5) of section 43 by the Finance Act, 2005, with effect from April 1, 2006:

(d) an eligible transaction in respect of trading in derivatives referred to in clause (ac) of section 2 of the Securities Contract (Regulation) Act, 1956 (42 of 1956), carried out in a recognised stock exchange.

shall not be deemed to be a speculative transaction”

On the basis of the findings of facts recorded by the Revenue authorities, not challenged even before us, there is no escape from the finding that the transactions entered into by the assessee in regard to purchase and sale of shares are speculative transactions. Sections 70 to 79 deal with set off and carry forward of losses from various sources of income. Section 73 provides that loss computed in respect of speculative business carried on by the assessee shall not be set off except against profits and gains, if any, of another speculation business. The assessee has pleaded even before us that the transactions of purchase and sale of shares were part of the assessee's business. Since the entire transactions undertaken by the assessee were of speculative nature, the loss suffered by the assessee was a loss in respect of speculative business carried on by the assessee. The Explanation to section 73 provides certain circumstances under which companies partly carrying on the business of purchase and sale of shares of other companies would be treated as carrying on speculation business to the extent of the business consisting of purchase and sale of shares. The said Explanation is not applicable in respect of certain companies whose gross total income consists mainly of income which is chargeable under the heads ‘Interest on securities, Income from house property, Capital gains, Income from other sources’, etc. So, however, in this case, the Explanation to section 73 has not been invoked as the same is not applicable. The transactions undertaken by the assessee fall within the definition of speculative transactions as defined under section 43(5) of the Act. Therefore, the Revenue was justified in treating the loss suffered by the assessee as a loss suffered in speculation business. The contention advanced on behalf of the assessee that the Explanation to section 73 is not applicable need not be considered as the said Explanation has not been invoked by the Revenue authorities. We are, therefore, ignoring the contentions advanced by the learned counsel for the assessee and the countercontentions advanced on behalf of the Revenue in regard to the applicability of the Explanation to section 73 of the Act. The brokerage paid by the assessee in regard to the speculative transactions has also not been allowed as a deduction against other income as the same is undisputedly connected with the business of the assessee in the purchase and sale of shares which is treated as a speculation business…

We have given our careful consideration to the rival submissions. In our considered view, the commission paid by the assessee in respect of the letting out of the house property is not permissible as a deduction under section 24 of the Act. Annual letting value of the property is defined under section 23 of the Act and in case of property let out, if the actual rent received is more than the expected rental value, the actual rent is treated as the annual letting value of the property. Out of the said annual letting value, deductions permissible are specified under section 24 of the Act. In this case, the rental value is not disputed. It is also not disputed that deduction of commission does not fall within the specified deductions under section 24 of the Act. It is also pertinent to mention that section 24(1) provides deduction equal to 30 per cent, of the annual value without the assessee having to establish the incurring of any expenditure. Thus, the expenditure which is incurred by the assessee can be said to be covered under the statutory deduction allowed to the assessee. Since the Legislature in its wisdom has not provided any separate deduction on account of commission/brokerage paid to the property dealers, the Commissioner of Income-tax (Appeals), in our view, was not justified in allowing the deduction to the assessee. We are fortified in our view by the decision of the Delhi Bench of the Income-tax Appellate Tribunal in the case of Piccadily Holiday Resorts Ltd. v. Deputy CIT, [2005] 278 ITR (AT) 154 (Delhi); [2005] 94 ITD 267 For the reasons given earlier by us in this regard and respectfully following the aforementioned decision of the Delhi Bench of the Tribunal, we restore the disallowance of Rs. 2,50,000. The ground of appeal raised by the Revenue is thus allowed.”

4. It may also be mentioned that the assessee raised a plea of the assessment being barred by limitation on the ground that notice under section 143(2) of the Act was not served within the stipulated time. The Tribunal held that the assessee did not raise the plea earlier in spite of opportunity being available and on a question of fact, such a plea could not be allowed to be raised for the first time before the Tribunal. Reference was made to the judgments of the hon'ble Supreme Court in National Thermal Power Co. Ltd. v. Commissioner Of Income Tax, [1998] 229 ITR 383 (SC) and Jute Corporation of India Ltd. v. CIT, [1991] 187 ITR 688 (SC). The appeal was admitted by this court to consider the following substantial questions of law claimed by the assessee:

“(i) Whether, in facts and circumstances of the case, the Income-tax Appellate Tribunal had fallen in error in disallowing the appellant from raising an additional issue, contrary to the ratio of the Supreme Court in National Thermal Power Co. Ltd. v. Commissioner Of Income Tax, [1998] 229 ITR 383 (SC) when all evidence for adjudicating the same was placed before it?

(ii) Whether, in facts and circumstances of the case, the provisions of section 73 could be invoked against the assessee when the assessee was squarely covered by the Explanation to section 73, vide which the sale and purchase of shares by a company would not be speculative in nature in case its income was mainly derived from house property or capital gains or income of the like nature?

(iii) Whether, in facts and circumstances of the case, the hon'ble Income-tax Appellate Tribunal was right in law in holding that the brokerage paid was not an admissible expenditure under section 24 of the Income-tax Act even though the rent actually received by the assessee or the tenant was after deducting the brokerage paid?”

5. We have heard learned counsel for the parties.

6. As regards question (i), we do not find any reason to take a view different from the view taken by the Tribunal. No doubt that an appellate authority can allow a question to be raised for the first time even if such a question was not raised at a lower forum but the discretion to do so has to be exercised in the interest of justice in the facts and circumstances and not mechanically. Normally, a question of fact may not be allowed to be raised for the fist time as it may prejudice the other side. If such question is raised at the earliest opportunity, the other side can lead evidence which it may not be able to do if such a question is raised for the first time before the appellate authority. Of course, there can be no total bar on such question being allowed, if interest of justice so requires. In National Thermal's case, [1998] 229 ITR 383 (SC) it has not been laid down that in every case a question of fact can be mechanically allowed to be raised for the first time. The Madhya Pradesh High Court in CIT v. Premium Capital Market and Investment Ltd., [2005] 275 ITR 260 (MP) held that the question of validity of notice may not be allowed to be raised for the first time in appeal. Subsequent legislative amendment adding section 292BB supports this principle. The question has, thus, to be answered against the assessee.

7. As regards question (ii), learned counsel for the assessee submits that the income of the assessee mainly being under the head of income from property, the assessee was not covered by the Explanation to section 73 and in such a situation the assessee could set off loss in speculative transactions against income from house property. The bar against set off of losses in speculative transactions against income from other heads applies only to assessees covered by the Explanation to section 73.

8. This submission cannot be accepted. Under the scheme of the Act, computation of income under different heads has been provided for. Business loss cannot be set off against income from other heads unless specifically provided. The business loss can be set off only against the business income as it is net income which is to be taxed. If business is partly of speculative transactions loss from such transaction, cannot be set off against income from other business. The scope of section 73 read with section 28 Explanation 2 is to deal with the situation where loss in speculative transaction is sought to be set off against other business income. Section 73 provides that such loss can be set off only against income from speculative business. The object of the Explanation is to explain this scheme in the main provision to situations where part of business is from speculative transactions. To that extent the assessee will be deemed to be carrying on speculative business. Exclusion of categories of specified assessees, i.e, where income is under the heads of interests on security, house property, capital gains and other sources or where the main business is of banking or granting of loans and advances, etc., is to exclude the said assessees from consideration from the scope of the provisions to limit the scope of adjustment of loss of speculative business against business income, from other business. In respect of excluded categories, there being no income from other business, such categories have been excluded. Explanation 2 to section 28 provides that speculative transaction shall be deemed to be distinct and separate from other business.

9. It will be appropriate to set out the relevant provisions for ready reference:

“28. Profits and gains of business or profession.— The following income shall be chargeable to income-tax under the head ‘Profits and gains of business of profession’, —…

Explanation 2. —Where speculative transactions carried on by an assessee are of such a nature as to constitute a business, the business (hereinafter referred to as ‘speculation business’) shall be deemed to be distinct and separate from any other business.”

“43. Definitions of certain terms relevant to income from profits and gains of business or profession—…

(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—

(b) a contract in respect of stocks and shares entered into by a dealer or investor therein to guard against loss in his holdings of stocks and shares through price fluctuations; or

“73. Losses in speculation business.— (1) Any loss, computed in respect of a speculation business carried on by the assessee, shall not be set off except against profits and gains, if any, of another speculation business…

Explanation.— Where any part of the business of a company (other than a company whose gross total income consists mainly of income which is chargeable under the heads ‘Interest on securities’, ‘Income from house property, ‘Capital gains’ and ‘Income from other sources’, or a company the principal business of which is the business of banking or the granting of loans and advances) consists in the purchase and sale of shares of other companies, such company shall, for the purposes of this section, be deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sale of such shares.”

10. Thus, the contention raised on behalf of the assessees that categories of assessees excluded under the Explanation can be allowed to set off loss in speculative transactions against income from any other source cannot be accepted. As already discussed, even business loss in speculative transactions cannot be set off against other business income or income from other sources, except as may be expressly provided. If that is so, loss from speculative transactions could not stand on a higher footing tlian the business loss so as to qualify for set off against other income.

11. The object of addition of Explanation was to check tax avoidance device resorted to for manipulation by share dealings and thereby avoid tax on business income in the light of recommendations of the Wanchoo Committee report (December, 1971 page 78) which is as under:

“A tax avoidance device often resorted to by business houses controlling groups of companies is manipulation of results from dealings in shares of the companies controlled by them. In our opinion, such manipulation in share dealings for the purpose of tax avoidance can be checked effectively if the results of dealings in shares by such companies are treated for tax purposes in a manner analogous to speculation. No doubt, companies whose main business activities centre around investment in shares will have to be left out. Accordingly, we recommend that the results of dealings in shares by companies, other than investment, banking and finance companies, should be treated in a manner analogous to speculation business.”

12. In view of the above, the question has to be answered against the assessee. As regards question (iii), learned counsel for the assessee submits that rent to the extent of brokerage paid having never been received by the assessee, the assessee was not liable to include the said rent in the income. This submission cannot be accepted. Rent admittedly was payable to the assessee and brokerage was an independent transaction envisaging payment to the broker. Wherever deductions out of income from property are permissible, the same have been specified in section 24. De hors the said provision, deduction from income is not permissible. This view has also been taken by Delhi High Court in Commissioner Of Income-Tax, Delhi-I v. H.G Gupta & Sons. and Sons, [1984] 149 ITR 253 (Delhi). We are in agreement with the view taken in said judgment. Question No. (iii) is thus answered against the assessee.

13. Accordingly, the appeal is dismissed.