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Facts
The assessee claimed a deduction of Rs. 84,70,700/- based on an MOU with M/s Top Line Traders Ltd. for profit sharing from share trading activities. The AO disallowed this claim, stating the MOU was a device to evade tax. The CIT(A) upheld the AO's action.
Held
The Tribunal held that there was no cogent material before the lower authorities to conclude that the MOU was a device to reduce tax liability. The appeal regarding the disallowance of Rs. 84,70,700/- was allowed.
Key Issues
Whether the MOU for profit sharing in share trading was a genuine business arrangement or a device to evade tax liability. Whether additions for income tax and deferred tax liability were correctly made.
Sections Cited
143(2), 40(a)(ii)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, DELHI BENCH: ‘B’: NEW DELHI
Before: SHRI SHAMIM YAHYA & SHRI SUDHIR PAREEK
The instant appeal has been preferred by the assessee against the Order dated 11.12.2017 passed by the Commissioner of Income Tax (Appeals)-43, New Delhi- 110002, [in short (Ld. CIT(A)] for Assessment Year 2013-14.
ITA No.-1282/Del/2018 Trustworthy Gems & Jewellery (P) Ltd. 1.1 The assessee/appellant has raised the following grounds of appeal for adjudication: - “
1. That having regard to the facts and circumstances of the case, Ld. CIT(A) has erred in law and on facts in confirming the action of Ld. AO in making disallowance a sum of Rs.84,70,700/- claimed by assessee company based upon MOU with M/s Top Line Traders Ltd. on the ground that sharing of such profit was a device adopted to evade proper payment of due tax.
2. That in any case and in any view of the matter, action of Ld. CIT(A) in confirming the action of Ld. AO in making disallowance a sum of Rs.84,70,700/-, is bad in law and against the facts and circumstances of the case.
3. That having regard to the facts and circumstances of the case, Ld. CIT(A) has erred in law and on facts in not deleting the addition of Rs.2,95,354/-being income tax u/s 40(a)(ii) and Rs.2,658/- of deferred tax liability.
That the appellant craves the leave to add, modify, amend or delete any of the grounds of appeal at the time of hearing and all the above grounds are without prejudice to each other.”
Brief facts of the case are that the appellant company filed its return of income for the A.Y. 2012-13 on 28.09.2013 declaring NIL income and statutory notice u/s 143(2) was issued on 02.09.2014, as the case was selected for scrutiny assessment under CASS.
2.2. The Learned AO disallowed Rs. 84,70,700/- claimed to be paid to M/s Top Line Traders Ltd., by stating that an alleged MOU dated
ITA No.-1282/Del/2018 Trustworthy Gems & Jewellery (P) Ltd. 05-04-2012 for profit sharing was a device adopted to evade proper payment of due tax, which was upheld by the Learned CIT(A).
Heard rival submissions and carefully perused the material placed on record.
4. Reiterating the grounds of appeal, the Ld. AR submitted that the Ld. CIT(A) erroneously confirmed the disallowance made by the Ld. AO of sum of Rs. 84,70,700/- claimed by the appellant company based upon MOU with M/s Top Line Traders Ltd. on the ground that sharing of such profit was a device adopted to evade proper payment of due tax, and addition of Rs. 2,95,354/- being income tax u/s 40(a)(ii) and Rs. 2,658/- of deferred tax liability.
4.1 So far as ground regarding disallowance of Rs 84,70,700/- is concerned, the Ld. AR submitted that the appellant engaged in the business of purchase and sale of shares and in the relevant year, earned a sum of Rs. 1,12,94,285/- on purchase and sale of shares and entered into an MOU with M/s Top Line Traders Ltd., according to which advises have to be given by M/s Top Line Traders Ltd. from time to time and in consideration of such consultancy, the profits earned on purchase and sale of shares were to be shared between the 3
ITA No.-1282/Del/2018 Trustworthy Gems & Jewellery (P) Ltd. appellant company and M/s Top Line Traders Ltd. and it is admitted that during the year, there was profit of Rs. 1,12,94,285/- on the purchase and sale of shares, appellant company claimed deduction of Rs. 84,70,700/- being 75% share into the said profits of M/s Top Line Traders Ltd. It is further submitted that the said amount was an expenditure incurred as a result of an understanding with M/s Top Line Traders Ltd. and which expenditure was incurred while carrying out the business of purchase of shares, such amount was allowable. It is also submitted that in the balance sheet of A.Y. 2013- 14, it is clearly shown that under the head “Note: 19 Direct Expenses” amount of Rs. 84,70,700/- was share of profit as per Joint Venture Agreement which was transferred to M/s Top Line Traders Ltd.
4.2 The Ld. AR vehemently argued that the assessee furnished the copy of confirmation of M/s Top Line Traders Ltd., wherein it has been confirmed by the said party that it has received Rs. 84,70,000/- from appellant company being share of profit @ 75% from trading of listed shares booked, which is placed at page no. 38-39 of Paper Book, and also furnished copy of Joint Venture Agreement dated 05.04.2012 between appellant company and M/s Top Line Traders
ITA No.-1282/Del/2018 Trustworthy Gems & Jewellery (P) Ltd. Ltd., wherein it has been decided that M/s Top Line Traders Ltd. will take all the decisions related to sale and purchase of shares and appellant company will implement the decisions. The profit ratio will be 25:75 between appellant company and said party and losses will be share in ratio of nil: 100% respectively, confirmation of M/s top Line Traders Ltd., is placed at page no. 51 of the Paper Book, in which Authorized Signatory for Top Line Traders Ltd., confirmed that they had received Rs. 84,70,700/- from M/s Trustworthy Gems & Jewellery Pvt. Ltd. (assessee), as profit share during the F.Y. 2012- 13, and also confirmed that copy of agreement for this purpose has already been submitted. The Ld. AR also furnished the copies of ITR, computation of income and balance sheet of M/s Top Line Traders Ltd. for A.Y. 2013-14 which would show that amount of Rs. 84,70,700/- has been received and shown as ‘Profit sharing income on share Trading’ under the head ‘Other Income’.
4.3. The Ld. AR submitted in reference to abovementioned factual matrix, as appellant was into the business of purchasing and selling of shares, it doesn’t mean that an expert cannot be associated for undertaking the said activity, and by stating so that the assessee
ITA No.-1282/Del/2018 Trustworthy Gems & Jewellery (P) Ltd. was already into the business of buying and selling of shares, and there was no business necessity for entering into MOU with M/s Top Line Traders Pvt. Ltd., the Ld. AO tried to interfere into the business decision of the assessee and submitted that the share selling and buying activity is full of risks, so assessee company sought to avail the expert association of the said company and entered into an MOU based upon which 75% of the profits earned were to be shares with the said company. It is also submitted that the Ld. AO held that the MOU was only a device adopted to reduce its tax liability on the basis of the facts that there were losses at the end of M/s Top Line Traders Ltd. but because there were losses with M/s Top Line Traders Ltd. does not establish that it was an arrangement or a device to reduce tax liability and the Ld. AO has used surmises and conjectures, as there was no evidence with the Ld. AO to reach such conclusion.
On the basis of foregoing factual matrix, we find material substance in the submissions on behalf of the assessee that there was no any cogent material before both lower authorities to reach the conclusion that MOU in question was only a device adopted to reduce its tax liability, whereas other sufficient material was available on ITA No.-1282/Del/2018 Trustworthy Gems & Jewellery (P) Ltd. record to strengthen the plea of the assessee. In totality of facts this ground of appeal deserves to be allowed by deleting the addition in question.
6. So far ground regarding the disallowance of Rs. 2,95,354/- towards income tax under section 40(a)(ii) and ₹2,658/- towards deferred tax liability is concerned, the Learned CIT(A) observed that these additions has been made on account of income tax paid and deferred tax liability and the assessee has himself added back the same in the return filed and the Learned AO was required to correct the computation to this extent as the amounts have not been claimed in the P&L account for the purpose of computing taxable income. Hence, this ground is dismissed as infructuous.
Consequently, the appeal of the assessee is partly allowed as indicated above.
Order pronounced in the Open Court on 16.07.2025