Directors incurring loss while trading in shares cannot be attributed to the company

Directors incurring loss while trading in shares cannot be attributed to the company

The tribunal dismissed the appeal of the assessee, ruling that the AO erred in his assessment order

The Hyderabad Bench of the Income Tax Appellate Tribunal (ITAT) has ruled that trading losses sustained by the directors of the company in their individual accounts, cannot be allowed as a deduction towards the company.

The bench comprising Laliet Kumar (judicial member) and Rama Kanta Panda (accountant member), held that as per the Companies Act, 2013 and the Income Tax Act, 1961, the company and its directors were two distinct juristic entities. Therefore, the act done by the directors in their individual capacity could not be claimed on behalf of the company.

The Board of Directors of the assessee company Nekkanti Systems Private Limited passed a resolution authorizing its directors to deal in stocks or derivatives in the stock exchange, for and on behalf of the company. Thereafter, a sum was paid by the company to its directors. Against the sum, the directors notified the trading losses suffered by them, which were claimed as the loss of the company.

While computing the income of the assessee, the assessing officer (AO) allowed the deduction of the trading loss and passed the assessment order. But the Principal Commissioner of Income Tax (PCIT) passed an order under the IT Act, revising the assessment order on the ground that it was erroneous and prejudicial to the interest of the revenue department.

Aggrieved by PCIT's order, the assessee appealed before ITAT.

The assessee submitted that it was a settled principle of law that where an inquiry was conducted by the AO, an assessment order was passed taking one of the possible views. To substitute its own view, the revisional authority could not invoke the provisions of the Act.

The revenue department contended that the loss was caused to the directors of the company while trading in shares in their respective D-MAT accounts. It averred that the assessee was only entitled to debit the losses that were directly related to the activities of the assessee for carrying out its business activities.

The revenue department added that the AO had erroneously allowed the debit of the trading loss caused to the directors.

ITAT noted that no inquiry was made by the AO pertaining to the claim of the deduction by the assessee for the trading loss suffered by the directors in their individual accounts. It added that for the exercise of revisional jurisdiction under the IT Act, the twin conditions of an order being erroneous and prejudicial to the interest of the revenue department should be satisfied.

The tribunal observed that as per the decision of the Delhi High Court in the ITO versus DG Housing Projects Ltd case, there was a complete lack of inquiry on the part of the AO, hence the assessment order was considered erroneous.

Further, in view of Section 263 of the IT Act, effective from the Assessment Year 2015-2016, it ruled that an assessment order was considered erroneous if the AO failed to carry out the inquiries, as happened in the present case.

Even though the trading losses were caused to the directors of the company in their individual accounts, the AO had allowed the loss to be set off against the income of the company without any inquiry, which was against the law. Hence, the order passed by him was not sustainable.

The bench also observed that the Board passed a resolution giving the directors the power to transact 'for and on behalf of the company'. However, contrary to that power, the directors began trading in shares in their individual capacities. Therefore, under the Companies Act, the act of the directors could not be said to be the act of the company.

The tribunal ruled, "As per the Companies Act and as well as the Income Tax Act, the company and its directors are two distinct juristic entities. Hence, both are separately assessed under the provisions of the Income Tax Act."

It noted that the directors and the company had separate individual trading accounts and separate unique client codes and the directors were trading through their individual trading accounts.

ITAT added that merely because a certain sum was transferred by the company into the accounts of the directors for trading in shares could not ipso facto lead to the conclusion that the directors were transacting for and on behalf of the company.

It maintained that the Board of Directors must invest the funds of the company on behalf of the company. The word 'invests' required to be interpreted in a narrow sense. Its meaning could not be expanded to include 'trading activities of purchase and sale of shares by the directors in their individual capacity.'