NARAYA SECURITIES LTD.,DELHI vs. DCIT,CC-1, DELHI

That on the facts and circumstances of the case and in law the Ld. CIT(A) grossly erred in directing the Ld.AO to make the said addition failing to appreciate that the said receipt of shares of M/s. DHFL were purely loan, liable to be returned and, therefore, did not constitute any benefit arising out of a business transaction chargeable to tax u/s. 28(iv) of the Act.

Briefly stated, the assessee company, in the financial year relevant to AY 2019-20, was engaged in the business of stock broking under license from NSE/BSE and primarily derived income from trading in its own account as well as from brokerage on transactions carried out on behalf of its constituents. The assessee filed return of income for AY 2019-20 declaring Loss of Rs. 2,15,43,15,042/- as per the normal provisions of the Act. The Assessee also declared Nil tax liability under s. 115JB also in view of negative book profits. A survey under s. 133A of the Act was conducted on 14.02.2019. The return filed by the assessee was selected for scrutiny by issuing notice under s. 143(2) of the Act.

As per the assessment order, the AO called for explanations towards receipt of 40,00,000 equity shares of Dewan Housing Finance Corporation Limited (“DHFL”) from Galaxy Infraprojects and Developers Pvt.Ltd. (“GIDPL”). The AO however, did not accept the explanation offered by the assessee on such transactions and doubted the identity of GIDPL, the genuineness of the transaction and the creditworthiness/capacity of GIDPL to hold such shares of DHFL (including the shares returned 1,50,000) as unexplained cash credit in the hands of the assessee within the meaning of s. 68 of the Act. Moreover, the AO computed the value of impugned 40 lakh shares of DHFL by applying highest prevailing price per share on the date of respective credits of shares. Consequently, while framing the assessment order dated 27.09.2021 under s. 143(3) of the Act, the AO made an addition of Rs. 2,50,28,50,000/- under s. 68 of the Act.

The assessee challenged the aforesaid additions carried out under s. 68 before the CIT(A). The CIT(A) agreed with the contention of the assessee that addition under s. 68 of the Act could not be made in respect of the impugned transactions in the light of replies and documents filed by the assessee to establish the identity of GIDPL, the genuineness of transactions and creditworthiness of GIDPL. The relevant findings of the CIT(A) are reproduced as under for ready-reference:- 28. In support of its claim that addition cannot be made u/s 68, the appellant furnished its replies and also produced certain documents in support of the grounds of appeal

As stated by the director, in the transaction, the profits would be shared between the appellant and Shri Jalaj Batra whereas the losses would be borne by Shri Batra only. This arrangement establishes that the appellant had entered into an commercial arrangement which was anything but loan transaction. In answer to question no. 42, the appellant stated that loan was not credited in the liability side however, the same was accounted. In response to question no.43 the appellant stated that the losses will be borne by Shri Batra.

The appellant stated that he did not know the address and phone no. of Mr. Batra or Shri Jain, Director of Galaxy. It is not known as to why an unknown person will give shares worth Rs.240 Crores without any agreement if it was really in the nature of loan. Had it been really a transaction of loan, in that case there would have been written agreement and various terms of loan and repayment. If it was transaction of loan then the loans are repayable. In this case, there was no terms/clarity of repayment of the shares. Subsequent event establishes that the appellant has neither returned the shares nor is in a condition to repay the shares. These facts indicate that the transactions were not of loan. Page | 4 ………… 41. The transaction of receipt of share from Galaxy was not that of loan. However, for the sake of argument only, even if it is believed that the transaction was that of loan, even in that case, the amount is Income in the hands of the appellant. The appellant is not liable to pay back the shares to Shri Batra. During the course of statement rendered during the course of survey, the director stated that profits would be shared by the two and losses will be borne by Shri Batra only. If that was the condition/terms of contract between appellant and Shri Batra, it is not known as to why the losses has been claimed in the accounts of the appellant company. In any manner, the liability (if it really exist) is no more payable by the appellant. As there is no liability to pay, therefore, it takes the character of income u/s 41(1) in the hands of the appellant. ………….

In view of the above, it is held that the receipt of shares is taxable as business Income u/s 28(iv) of the Act in the hands of the appellant during the year under consideration. ……………… 68. The appellant had initially received 40,00,000 DHFL shares but sold 1,50,000 shares. Finally the appellant was in possession of 38,50,000 shares of DHFL. The benefit arising to the appellant is to be computed on the date of transfer of shares. The closing rate of shares as on the date of transfer is adopted in computing the value of benefit. The total value of shares as on the date of transfer is computed as under:-

The Assessing Officer is directed to treat an amount of Rs. 234,10,10,000/- as business income u/s 28(iv) of the Act.”

Further aggrieved, the Assessee preferred appeal before the Tribunal.

When the matter was called for hearing, the Ld. Counsel made wide ranging oral and written submissions which are summaried hereunder: (i) The assessee, a limited company incorporated on April 1989, was engaged in the business of stock broking under license from NSE/BSE and primarily derived income from trading in shares on its own account, as well as from brokerage on transactions carried out on behalf of its customers during the year under consideration. (ii). During the year under consideration, the assessee, as part of its regular business, had received 40,00,000 equity shares of Dewan Housing Finance Corporation Limited ("DHFL") from Galaxy Infraprojects and Developers Private Limited ("GIDPL") between 02/07/2018 to 16/07/2018. (iii). Out of total 40 lakh shares, 1,50,000 shares were sold at Stock Exchange on 06.08.2018 at the prevailing market price of Rs.620.06 and the corresponding amount aggregating to Rs.9.30 crores (approximately) was refunded to GIDPL. The remaining 38,50,000 shares were ultimately recorded in the books of account at the market value thereof on the date of receipt of loan, with a corresponding credit aggregating to Rs.2,34,24,06,824/-as ‘unsecured loan’ from GIDPL. (iv). The aforesaid shares were, thereafter, pledged for loan or margin to NBFC lenders or Brokers between 18.09.2018 to 19.09.2018. Immediately thereafter, on 21.09.2018, there was a steep and unprecedented fall in the market price of shares of DHFL on Stock Exchange, which was purely market driven. On this date, the share-price of DHFL witnessed fall of 42.58% on a single day from the opening price of Rs.615.15 to low of Rs.274.75. Thereafter, there was a continuous decline in share-price of DHFL which went to a low of Rs.149 by end of the relevant financial year. Page | 8 (v). As a result of steep decline in the share-price of DHFL on 21.09.2018, the lending NBFC and Brokers, in order to recover their loan amount, diluted substantial shares of the assessee as also of its clients pledged with them, including the aforementioned 38,50,000 shares, at the reduced stock price prevailing on that date. The 38,50,000 shares of DHFL pledged with Banks/Brokers were sold for an aggregate consideration of Rs.134.13 crores as per following details, which stood credited in books of the assessee as part of sales of assessee in books of account. Details of shares sold of DHFL during FY 2018-19 Date Particulars No.of Average Total Value shares Rate (amount in Rs.) 21.09.2018 20,00,000 349.35 69,86,93,098 DHFL sold by Goble Capital Market Limited(Broker) 21.09.2018 6,95,000 355.06 24,67,68,320 DHFL sold by Aditya Pirla Capital (NBFC) 21.09.2018 11,55,000 342.75 39,58,72,196 DHFL sold by Bajaj Finance Limited (NBFC) 38,50,000 1,34,13,33,613 (vi). The unprecedented event resulted in substantial loss to the assessee with respect to its own holding of shares as also on account of aforesaid shares of DHFL sold at substantial loss, where after reducing cost of borrowing taken at Rs.234.24 crores, from the forced sale consideration of Rs.134.13 crores, assessee suffered and recorded loss of Rs.100.10 crores on the said shares and an overall loss of Rs.215.43 crores, as per the books of account. Considering that the assessee had suffered losses, its net-worth was eroded and it had become illiquid, the corresponding loan value of 38,50,000 shares aggregating to Rs.234.24 crores remain unpaid and thus continued to remain outstanding under the head 'unsecured loans' payable to GIDPL in the books of account for year ending 31/03/2019. (vii). As a consequence of such huge loss suffered, the assessee filed return of income declaring return of loss of Rs. 215,43,15,042/-. Page | 9 (viii). A survey u/s 133A of the Act was also conducted upon the assessee on 14.02.2019 (which continued till 15.02.2019), whereby statement of Mr. Ramesh Chandra Saraf, director of the assessee, was recorded on oath to understand the facts behind the aforesaid transaction and unprecedented loss suffered by the assessee in that year. During the course of survey proceedings, the AO impounded certain books, loose papers, hard disk and e-mail communication of the assessee company with GIDPL. (ix) Subsequently, the statement of Mr. Ramesh Chandra Saraf was also recorded by the Ld. AO on 21.02.2019 under section 131 of the Act. (x) Pursuant to the survey proceedings, the case of the assessee was selected for scrutiny and during the assessment proceedings, the assessee was, inter-alia, asked to explain the transactions carried out with GIDPL in relation to shares of Dewan Housing Finance Corporation Limited (DHFL), during the year under consideration. (xi) In the assessment order, the ld. AO, without accepting the explanations of the assessee, doubted the identity of GIDPL, the genuineness of the transaction, and the credit-worthiness /capacity of GIDPL to hold such shares, treating the value of 40,00,000 shares of DHFL (i.e. including the returned 1,50,000 shares), as an unexplained cash credit in the hands of the assessee within the meaning of section 68 of the Act. Moreover, the Ld. AO erroneously computed the value of impugned shares by considering the highest per share price (on the date of credit of shares), as the relevant price. Consequently, the Ld. AO made the addition of Rs. 250,28,50,000/- under section 68 of the Act, vide the assessment order passed u/s 143(3) of the Act dated 27.09.2021. (xii) On further appeal by the assessee, the Ld. CIT(A), accepted that an addition under section 68 of the Act could not be made in respect of the impugned transaction, as the assessee had provided replies and produced documents to establish the identity of GIDPL, the genuineness of the transaction, and the creditworthiness of GIDPL.

In this backdrop, the assessee with reference to Ground Nos. 1 to 3, submits that the entity GIDPL approached the assessee to open a Demat account. A complete Client Registration Kit was signed by Mr. Nitish Surana, the director of GIDPL on 29.06.2018. The documents signed on behalf of GIDPL were uphold to the online portals of National Stock Exchange (‘NSE’), Bombay Stock Exchange (‘BSE’) and Central Depository Service [India] Limited (‘CDSL’) for opening of Demat and trading account. Hence it cannot be said that there was any afterthoughts in the transactions. Upon opening the Demat account, GIDPL transferred stock of DHFL shares to the assessee as loan of shares. Significantly, when the assessee received the shares from GIDPL as a loan, it was a mandatory requirement to transfer such shares via Delivery Instruction Slips (‘DIS’). The DIS clearly indicated that shares were transferred by GIDPL to the assessee as a ‘loan’. The respective DISs were submitted to CDSL, NSE & BSE via online portals. The DISs explicitly stated the receipts of shares of DHFL from GIDPL as and by way of loan. The DISs placed on the online portals at the time of transfer of shares to the assessee would thus clearly establish the intent of the transferor (GIDPL) and transferee (the assessee) that the impugned transfer of shares was by way of loan to the assessee. The copy of DISs were also produced and submitted by the assessee before the Income Tax Department vide letter dated 19.02.2019 immediately after survey which was conducted on 14.02.2019. The Ld. Counsel next submits that there is no family or blood relationship of the assessee or any of its directors with GIDPL or its directors. Thus, in the absence of any relationship, the shares received from GIDPL worth around Rs.240 crores on commercial considerations, can only plausibly be a returnable loan. Also, minutes of meeting dated 14.03.2020 between the director or assessee co. and that of lender co. clearly discerns that the shares were given to the assessee by GIDPL by way of loan. A copy of minutes, placed in the paper book, was also provided to lower authorities. The e-mail conversations would also simultaneously suggest that due to certain disputes regarding shares, the GIDPL demanded the return of all unsold shares. Such e-mail exchange with GIDPL also form part of the records seized by the authorities during survey proceedings. Thus coupled with the minutes of GIDPL, e-mail conversations and DISs would clearly underscore the intent of loan transaction. Besides, the Auditor’s report on the financial statement of the assessee company also reinforces such facts. 9.1 The assessee further submits that information were collected by the AO under s. 133(6) of the Act from the lender, GIDPL in respect of such transactions. In response, GIDPL in its reply dated 22.09.2021 filed a ‘Note on business relationship with M/s Narayan Securities Ltd.’ wherein it acknowledged and confirmed in unambiguous terms that it had provided a loan of 50,00,000 shares of DHFL to the assessee and 10000 shares were returned at the instance of the lender and 1,50,000 shares were sold and proceeds thereof were paid to the lender. The balance 38,50,000 No. shares have not however been returned till date. Such statement of the lender yet again lends support to the contentions of the assessee towards such receipt of shares being in the nature of loan transactions and also received with an obligation to return the same to the lender. 9.2 The director of the assessee, in the statement recorded in the survey proceedings under s. 133A of the Act, explained the contours or implied terms and conditions of the aforesaid transactions deposed the same to be in the nature of loan. The survey statement clearly brings out the oral understanding that shares were received by way of loan on returnable basis. The AO has also not disputed the nature of transactions to be loan but rather doubted creditworthiness of the lender i.e. GIDPL and consequently invoked deeming provision of s. 68 of the Act to treat loan as unexplained credits chargeable to tax as income of the assessee. Since the assessee has established genuineness of receipt transactions and creditworthiness of lender GIDPL towards acquiring and holding of shares of DHFL before transfer, the CIT(A) reversed the additions made under the deeming provision of s. 68 of the Act. The assessee thus contends that having accepted the creditworthiness and genuineness of receipt of shares, there was no justification for the CIT(A) to modify the tenor and colour of DHFL transactions and seeking to tax under the other provisions of the Act [s. 28(iv) of the Act] merely to sustain the additions made by the AO. 9.3 The assessee thereafter adverted to the observations of the revenue that at the time of survey, the accounting entries towards receipt of shares were not made giving rise to adverse inference. In reply, the assessee submits that owing to huge losses suffered and accounting year had not closed, the books were tentative and inchoate as the assessee was stuck in the midst of settling huge financial problems cropped up such as enquiry from Stock Exchange Board of India (‘SEBI’) and other customers owing to unprecedented loss from sharp fall in share price of borrowed shares. The accounts could not be kept updated in such short intervening period. However, the inward of shares in the Demat account duly emanates from record. Mere non-reconciliation of Demat holding vis-a- vis holding in the books is inconsequential and inconclusive to treat the transactions to be not a loan in an arbitrary manner. It is an admitted position that sale part of the shares were duly recorded. 9.4 Heavy emphasis has been placed by the CIT(A) on the position that in the absence of any formal lending agreement, the transactions undertaken cannot be characterised as ‘loan’ per se. The CIT(A) thus has arrived at a strange inference that owing to huge losses suffered by the assessee, the right to realise and recover the shares transferred by GIDPL stood waived resulting in ‘benefit’ as contemplated in s. 28(iv) r.w.s 41(1) of the Act. The assessee also disputed the applicability of s. 28(iv) and 41(1) of the Act invoked by the CIT(A) having regard to the peculiar facts of the case. The assessee contends that such provisions have no applicability in such simple transaction of loan where there is no evidence of remission of any liability. The incapacity of the assessee to return the loan due to losses cannot be equated with benefit bestowed upon or obtained by the assessee by way of remission or cessation of liability under s. 41(1) or any benefit arising from business as contemplated under s. 28(iv) of the Act. The Ld. Counsel has referred to certain judicial pronouncements to contend inapplicability of such provisions. 9.5 Without prejudice and in the alternative, the Ld. Counsel also voiced his strong objections to not allowing set off of huge business losses incurred and claimed in the ROI against income deemed with the aid of s. 28(iv) of the Act by the CIT(A) which runs contrary to scheme of the Act. Once, such inter set off is allowed, the assessee income would be substantially erased. 9.6 We shall deal with various facets of contentions raised in the succeeding paragraphs.

The Ld.CIT DR for the Revenue on the other hand, strongly relied upon the first appellate order. The CIT DR submitted that firstly, there is no formal loan agreement for such staggering value of shares handed over by an unknown party to the assessee and thus the onus is squarely on the assessee to establish character of such receipts; secondly, the statement recorded of the director of the assessee co. at the time of s. 133A and thereafter under s. 131 of the Act, gives rise to an impression that the assessee was only obliged to share profits arising from transactions in DHFL and in view of the heavy losses, the assessee is not required to return money or be under obligation qua GIDPL. The shares have been received with an understanding to make profits with an intent to share and divide profits. The act of pledging the shares as margin with financiers etc. shows the capacity of assessee to be an owner of such shares which gave it such right. Thus such transactions were not in the nature of loan as rightly held by the CIT(A) but a pure business arrangement which did not work out. However, the loss incurred by the assessee has given rise to a situation where the liability arising on account of receipt of shares is reduced to nullity and therefore, there is a remission of loan liability under s. 41(1) of the Act and benefit arising to the assessee under s. 28(iv) from such business Page | 15 arrangement. The Ld. CIT-DR also contended that since no loan could be stated to have been received by the assessee from GIDPL in the absence of any formal documentation and in view of the objectives of receipts to be a business arrangement for sharing profits with one Mr. Jalaj Batra who was working on behalf of the promoters of DHFL ( and loss to be borne by Mr. Jalaj Batra only), the assessee has obtained ‘benefit’ in the course of carrying on of business by receiving shares without any element of quid pro quo having regard to losses incurred and therefore provision of s. 28(iv) of the Act were attracted to tax the benefit arising to the assessee. The assessee had treated such shares as stock in trade of revenue character. The CIT(A) has thus correctly taken the aid of s. 28(iv) r.w.s. 41(1) of the Act for the purpose of modifying the action of the AO and thereafter making additions under s. 28(iv) of the Act rather than s. 68 of the Act. The CIT DR thus submitted that no interference with the order of the CIT(A) is called for.

We have dispassionately considered the rival submissions and carefully perused the assessment order and the first appellate order. It is the case of the assessee that shares were received from GIDPL on loan basis and the assessee carried the obligation to return the shares or its equivalent value to the lender and hence no ‘benefit’ has accrued to assessee in terms of s. 28(iv) of the Act. 11.1. As noted in the preceding paragraphs, the assessee received 40 lakh shares of DHFL from GIDPL between 02.07.2018 to 16.07.2018 and sold around 1,50,000 shares on 06.08.2018 and remaining 38,50,000 shares were pledged by the assessee to avail loans from financiers for its utilisation as margin money for trading purpose between 18.09.2018 to 19.09.2018. The assessee treated such shares so received as trading stock of revenue nature. However due to unprecedented fall in the value of DHFL shares on 21.09.2018, the margin requirement got triggered and DHFL shares pledged as margin were sold by the lending NBFCs and brokers to protect their money and to recovery their dues. The shares were sold by these intermediaries at a sale consideration of Rs.134.13 crores resulting in loss of around Rs. 100.10 crores to the assessee owing to such steep fall in the value of DHFL scrip. The assessee treated such receipt of shares from GIDPL to be a loan transaction in its books. The AO accepted such stand of the assessee on the nature of receipt being loan but however invoked the deeming provisions of s. 68 of the Act on the ground that creditworthiness of lender GIDPL is not satisfactory. The CIT(A) in first appeal however reversed the aforesaid additions made by the AO under s.68 but however simultaneously invoked the provision of s. 28(iv) to treat the receipt of value of 38,50,000 shares of DHFL as value of benefit arising from business. This was done on the premise that the assessee received shares at NIL consideration with embedded object to share business profits if any, which may arise to the assessee in future as attributable to such shares transferred. The CIT(A) observed that the assessee has not traded in the shares in the name of lender but in its own name and thus was the real owner indulging in trade. The CIT(A) held that transfer of DHFL transactions were business transactions and not in the nature of loan transactions as incorrectly claimed by the assessee and wrongly assessed by the AO and benefit has arisen to the assessee on transfer of shares in terms of s. 28(iv) of the Act having regard to absence of any obligation to repay any amount. 11.2. The DISs based on which the shares have been transferred by the lender to the assessee clearly reflects that shares are being transferred as loan. The director of the assessee in statement under s.133A has also asserted shares to have been received by way of loan. The minutes of the board meeting of the lender company also underscores the understanding of transferring such large amount of shares. Otherwise also, it is nearly impossible to visualize that an unconnected company shall transfer such high value of shares without safeguarding its minimum interest of taking the shares back or equivalent value thereof. Such assumptions are unknown to business world. The CIT(A) has invoked the provision of s. 28(iv) of the Act and treated such amount to be ‘benefit’ to the assessee from a commercial arrangement. We are totally at loss to understand such action of the CIT(A). How the transfer of shares to an unconnected company per se will result in any benefit to the recipient. The profit arising thereon may probably result in some benefit out of the profits but however visualizing the transfer of shares itself as benefit is beyond understanding. Likewise inferring remission of liability to return the shares received owing losses incurred is also beyond the pale of our understanding. The remission of liability cannot be assumed. We are unable to understand as to how a lender will exonerate a borrower from such liability merely because losses have been incurred by the assessee resulting in some financial incapacity to pay back the loan/liability. 11.3. To recount the facts noted in the preceding paragraphs, the assessee, on its part, has sufficiently established that the receipt of shares were loan transactions. For such claim, the assessee has referred to entries in the books reflecting its intent; declarations made in delivery instruction slips at the time of transfer of shares by the lender to the assessee which was also uploaded online on the platform of Exchanges and clearing houses etc.; the statement of director of the assessee at the time of incisive questioning under s. 133A and s. 131 of the Act; the unequivocal stand taken by the lender GIDPL in the minutes of meeting of director of two cos.; the reply of the lender to AO against notice issued to them under s. 133(6) of the Act; e-mail conversations; absence of any relations to spur transfer actuated by personal considerations etc. The AO in fact, duly accepted the factum of such receipt in the nature of loan notwithstanding his action to resort to s. 68 due to alleged non satisfactory explanations on creditworthiness and capability of lender to make such large scale lending. 11.4. While the CIT(A) has rightly deleted the additions made by the AO under the umbrella of s. 68 of the Act in view of the clinching evidences towards creditworthiness of the lender and genuineness of the transactions etc. the CIT(A) has resorted to s. 28(iv) to tax the unreturned shares holding such receipt of shares to be a ‘benefit’ accruing to assessee as contemplated under s. 28(iv) of the Act.

We thus find strong traction in the plea raised on behalf of the assessee. The action of the CIT(A) is devoid of any rationale as rightly pleaded on behalf of the assessee.

Ground Nos. 1 to 3 raised by the assessee are thus allowed.

Ground No.4 concerns challenge to adjustments in book profits as a consequence of additions under s. 28(iv) of the Act for the purposes of determination of tax liability under s. 115JB of the Act.

In its return of income, the assessee has declared loss of Rs.2,15,46,84,509/- for the purposes of s. 115JB of the Act. The CIT(A) while directing the additions under s.28(iv) of the Act of an amount of Rs.2,34,10,10,000/- as receipt of business income also simultaneously directed the AO to enhance the book profit/reduce the book losses by the aforesaid amount for the purposes of determination of s.115JB of the Act. 15.1. The assessee contends that it is fairly well-settled that provision of s. 115JB of the Act are sacrosanct and self-content and additions to profits deduced as per Profit & Loss Account can only be made if an item of adjustment is prescribed in various sub-clauses of Explaantion-1 of s.115JB of the Act. The assessee relies upon the judgement rendered by the Hon’ble Apex Court in Apollo Tyres Ltd. vs CIT 255 ITR 273 (SC) to submit that Revenue Page | 21 authorities are not empowers to disturb the book profits towards such adjustments. 15.2. In the facts of the present case firstly, the books of accounts have not been rejected nor any adverse remark qua the accounting entry or maintenance of books of accounts has been made by the AO. The issue is squarely covered in favour of the assessee by the judgement rendered in the case of Apollo Tyres Ltd. (supra); secondly and without prejudice, the additions directed to be made by the CIT(A) under s. 28(iv) of the Act has been deleted and reversed for the purposes of determination of taxable income under normal provisions of the Act in the preceding paragraphs. Thus, as a sequel to such view expressed, the adjustments made to the book losses declared by the assessee is not permissible. 15.3. Hence, on both counts, the adjustments made to the book profit for the purposes of determination of MAT liability with reference to s. 115JB of the Act is unsustainable in law.

Ground No.4 raised by the assessee is thus allowed.