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Income Tax Appellate Tribunal, “D” BENCH, AHMEDABAD
Before: SHRI P.M. JAGTAP, VICE- & SHRI SIDDHARTHA NAUTIYAL
आदेश/O R D E R PER P.M. JAGTAP, VICE-PRESIDENT:
This appeal is preferred by the Revenue against the order of the Commissioner of Income Tax (Appeals)-V, Baroda (“CIT(A)” in short) dated 08.01.2014 and the solitary issue relating to the deletion by the learned CIT(A) of the addition of Rs.1,86,25,876/-made by the Assessing Officer under Section 68 of the Income-tax Act, 1961 (“the Act” in short) on account of bogus liability allegedly shown by the assessee is raised therein by way of the following grounds:-
“1. On the facts and in the circumstances of the case and in law, the Ld. CIT (Appeals) erred in deleting the addition of Rs.1,86,25,876/- made u/s 68 of the Act on account of bogus liability shown by the assessee.
2. On the facts and circumstances of the case, the Ld.CIT(A) erred in deleting the addition of Rs. 1,86,25,876/- on account of bogus sundry creditors without appreciating the fact that whole series of transaction of raising creditors in the names of the other parties was a colourable transaction and the basis of raising the creditors in itself was baseless and untrue.
3. On the facts and circumstances of the case, the Ld.CIT(A) erred in allowing the appeal of the assessee without appreciating the fact the borrowed shares cannot be treated as transfer as per provisions of sec. 47(xv) of the Act and therefore the claim of sundry creditor liabilities by the assessee are not allowable.
ITO Vs M/s. Navin Chandra & Co. AY : 2008-09 2
4. On the facts and circumstances of the case, the Ld. CIT(A) erred in holding that the genuineness of lending of shares have not been examined by the A.O. without appreciating the facts that the assessing officer has also doubted the genuineness of lending of shares after verifying the facts of the case.”
The assessee, in the present case, is a partnership firm which is engaged in the business of dealing in shares, derivatives, land, commodity and share-broking. The return of income for the year under consideration was filed by the assessee on 30.09.2008 declaring a loss of Rs.(-) 55,33,149/-. The said return was selected for scrutiny and a notice under Section 143(2) of the Act was issued by the Assessing Officer to the assessee on 19.08.2009. In the balance-sheet filed along with its return of income, sundry creditors of Rs.5,27,79,287/- were shown by the assessee as on 31.03.2008. During the course of assessment proceedings, the assessee was required by the Assessing Officer to furnish the relevant details in respect of the said creditors. On verification of the said details submitted by the assessee as well as further details collected by him independently, the genuineness of the transactions wherein some of the parties were shown as creditors against the shares borrowed from them was found to be doubtful by the Assessing Officer. He, therefore, issued a notice requiring the assessee to show-cause as to why such creditors amounting to Rs.1,86,25,876/- should not be considered as bogus. In reply, following explanation inter alia was offered by the assessee in writing:-
“a. We have received the shares as a loan from various parties and the same have been received by us in our dmat accounts. Thereafter, these shares have been given to our broker namely Khandwala Integrated Financial Pvt. Ltd. for the purpose of giving margin in respect of the business of derivatives carried on by us with the said broker. The complete details of shares received as a loan from various parties together with copy of relevant delivery instruction sips issued by them and copy of our dmat accounts' statements have already been furnished to you along with our letters dated 29.10.2010/11.11.2010. b. It was mutually agreed between us and the parties from whom we have received the shares as loan at the time of taking the shares for the purpose of giving margin that we will return these shares as soon as the shares given for margin is released by the broker namely Khandwala Integrated Financial Pvt. Ltd.
ITO Vs M/s. Navin Chandra & Co. AY : 2008-09 3 c. As already explained I para (1) above, all the dmat accounts of our partnership firm are required to be held in the name of partners only and all the transactions of shares including transactions of shares received as a loan carried out in the dmat accounts mentioned at para (1) above which are held in the name of partners belong to our partnership firm only, d, The shares received as a loan from various parties which have been given to the aforesaid broker have been sold by them and the sale proceeds of the same is credited to our account. The copy of relevant contract notes have already been furnished to you along with our letter dated 03.12.2010. e. We have credited the sale proceeds of shares received as a loan to the respective parties from whom we have received the same in our books of accounts as these shares do not belong to us or owned by us but the same are owned by them. The credit balance tying in the accounts of these parties shall be adjusted when we will purchase those shares from the market subsequently for the purpose of returning those shares to the respective parties and the difference between the sale proceeds and the purchase cost shall be accounted as profit or loss in our books of accounts in the year of purchase of the relevant shares. f. We have already furnished the confirmatory letters from all the parties along with our letter dated 06.08.2010 confirming the above transactions. g. The Affidavits of the parties from whom we have received the shares as a loan namely Mr. Ramesh K. Shah, Mr. Shaulesh G. Desai, Mrs. Anjana S. Desai, Mrs. Apexa Ankur Shah, Mr. Bhupesh S. Shah, Mr. Pravin S. Talati and Mr. Mehul P. Talati confirming the above transactions are enclosed here with. We could not furnish the Affidavit from the remaining two parties namely Mr. Rahul K. Nayak and Mrs. Jigisha R. Nayak as they are not of country at present.
In view of the above facts, it becomes clear beyond doubt that the sundry creditors worth Rs. 1,86,25,876.21 are genuine and by no stretch of imagination, it can be considered as bogus. Therefore we object to show cause as to why the same should not be considered as bogus in view of the facts and circumstances narrated herein above.”
The Assessing Officer did not find the explanation offered by the assessee as above to be acceptable for the following reasons given in his order:-
“the assessee has taken shares which it claims to the taken as a loan. However, no agreement or understanding has been entered into with the other parties who have advanced these shares to the assessee. Thus neither the value is determined, nor the mode of payment, and not even the date of repayment is fixed. The only factor which is determined is the quantity of shares which the assessee is supposed to return to the parties. Therefore if the shares were still owned by the other parties the assessee should not have transferred them to its D-mat, should not have sold them and if they were sold it should not have been made the part of assessee's books of a/c's. The assessee has sold the shares and have raised creditor in the form of the ITO Vs M/s. Navin Chandra & Co. AY : 2008-09 4 parties who have given these shares to the assessee of the same value at which the shares have been sold. When it is dear that the assessee is supposed to return the shares and not the value of shares. Therefore at best the assessee could have credited its profit & loss a/c by the amount of sale of these shares and debited the cash or bank balance. Moreover, as per the assessee if the assessee does not own these shares it cannot form the part of its income, hence it should not have any bearing on his profit & loss A/c. As per the construction of Sec. 47(xv), the lending of securities cannot be termed as transfer for the purpose of Capital Gain, Therefore it has limited application, the assessee should have utilized these shares only for the purpose of giving it at as margin or mortgaging it. The shares could not be possibly sold and if they are sold it would be the income of the lender rather than the income of the assessee as the transfer has not taken place as per sec. 47(xv).
9. In this case, as per the assessee on the date of sale of shares, the amount is credited and simultaneously with the same amount creditors are raised in the form of these parties who have given shares to the assessee for keeping them as margin with the stock broker. The assessee further says that the same no. of shares are to be purchased at a later date and the purchase amount would be taken into account and the difference between purchase and sale which was already recorded in books would be the profit or loss of the assessee as the case may be.
This situation is totally anachronistic to the principles of business and basic system of accounting. Sale of the same shares or commodities might have taken place in one year but the purchase might take place in another year as it is the case of the assessee, hence for the same no. of shares one year sale is shown the other year purchase is shown. Therefore the resulting profit & loss is totally misleading. It may be true that purchase is of an earlier year and the sale is made subsequently and the difference is treated as income on the basis of date of sale, But in the case of the assessee sale is done prior to the date of purchase which is only possible in the case of ‘speculation' which is also a mark to mark transaction and profit & loss is determined on day to day basis unlike these transaction.
11. Therefore the whole transaction is incongruent with prudential principles of business and is based on the whims and fancies of the assessee. The assessee does not commit the amount, and date of returning these shares. The purpose of taking these shares are to give them to the share broker as margin but are subsequently sold. The effect of the shares taken as loan for the relevant A.Y.., as well as last A.Y. is not given in the books neither as stock nor investment. Hence, they were kept out of the books till they were sold. Even if they were sold and were brought to the books it can have effect on sale and asset side of balance sheet, there should not be any chance on the liability side of balance sheet. If there is an introduction towards liability side of balance sheet, there should be a corresponding entry towards debit side. Moreover as the value of transaction with the other parties was not decided, it cannot be determined at the sweet will of the assessee. The only liability which was crystallized was to return the same quantity of shares. Therefore if value was not ascertained at the same of acceptance, it cannot be determined subsequently without the consequence of the other parties. Moreover, the assessee has shown the amount of sale in its books without recording the value of shares as stock-in-trade
ITO Vs M/s. Navin Chandra & Co. AY : 2008-09 5 in its books for F.Y.2006-07 as well as for F.Y.2007-08. Finally, the assessee intends to show the profit & loss of these shares on the date of purchase. Hence without showing the shares as stock-in-trade, the assessee has sold the shares and in future would purchase the shares as well. It is pertinent to point out that the whole transaction is a gimmick through which loss or profit is created as per the requirement of the assessee. The assessee is actively involved in purchase and sale of shares through its own portfolio. The purchase of these shares are postponed till the assessee does not have profit in its own portfolio. The year in which the assessee will be having profit these shares will be purchased at a price which will be higher than the price at which they have been sold. The resulting loss will be treated by the assessee as the loss from its business and the profit will be set-off against this loss. In the current year, the assessee a ready had loss in its portfolio; hence it didn't feel the necessity of purchasing these shares. The assessee in the relevant A.Y. needed cash and bank balance hence the shares were sold and cash or bank was debited. Moreover, the other aspect i.e. when the shares are returned to the other parties who as per the assessee is still the owner of the shares and have not transferred the shares as per section 45(xv) would treat as their long term capital asset because the holding period would be determined from the date of purchase in their hands and subsequently when these shares are sold by them, their capital gains will be exempt as per section 10(38) of the Act. Therefore, it is a win-win situation for, both the parties to this understanding this kind of activity in connivance with the other parties is carried on by the assessee for many year.”
For the reasons given above, the Assessing Officer held that the whole transactions of raising creditors against the shares claimed to be taken on loan constituted a colourable devise and by relying inter alia on the decisions of Hon’ble Supreme Court in the case of Mc Dowell Vs. Commercial Tax Officer and Union of India Vs. Azadi Bachao Andolan, he treated sundry creditors of Rs.1,86,25,876/- as a bogus liability and made addition to that extent to the total income of the assessee under Section 68 of the Act in the assessment completed under Section 143(3) of the Act vide an order dated 30.12.2010.
Against the order passed by the Assessing Officer under Section 143(3) of the Act, an appeal was preferred by the assessee before the learned CIT(A) and while challenging the addition of Rs.1,86,25,876/- made by the Assessing Officer under Section 68 of the Act by treating the sundry creditors as bogus liability, the submissions made before the Assessing Officer during the course of assessment proceedings were reiterated on behalf of the assessee before the learned CIT(A). It was further submitted on behalf of the assessee before the learned CIT(A) that ITO Vs M/s. Navin Chandra & Co. AY : 2008-09 6 some of the allegations made by the Assessing Officer in the assessment order were factually incorrect and findings of the inquiries conducted by the Assessing Officer directly were never confronted to the assessee-firm. Keeping in view these submissions made on behalf of the assessee-firm, a remand report was called for by the learned CIT(A) from the Assessing Officer and after considering the same as well as the material available on record and the submissions made on behalf of the assessee, the learned CIT(A) deleted the addition of Rs.1,86,25,876/- made by the Assessing Officer under Section 68 of the Act for the following reasons given in paragraph No. 4.2 of his impugned order:-
4.2 I have given my careful consideration to the facts of the case as well as the observation of the AO and the arguments put forth by the AR of the appellant. The appellant has given evidence in support of its claim that the shares were taken on loan. The shares were lying in the Demat accounts of the parties lending them and they have been transferred from there to the account of the appellant through verifiable authorised channels. Since the appellant is supposed to return the shares only, no entry could have been made in the books of accounts which record financial transactions only. When the shares taken on loan and given as security were sold by respective parties, the amount realised on sale of shares was recorded in the books of account as amount of loan received from these parties. I do not find anything wrong in the method adopted by the appellant or the accounting entries passed by the appellant. The AO could have examined whether this is a case of genuine lending of shares out the same has not been apparently examined. Whether the transaction amounts to transfer in the hands of the parties lending the shares is another matter and which should be looked into by the AO. So far as loan transactions of shares are concerned, since the appellant has submitted evidence about the genuineness lending of shares, the source of such shares, capacity of the parties to lend such shares and nothing adverse has been found by the AO in respect of these transactions, the addition of Rs.18625876.21 made by the AO is hereby deleted.
Aggrieved by the order of the learned CIT(A), the Revenue has preferred this appeal before the Tribunal.
The learned Departmental Representative, at the outset, invited our attention to the relevant portion of the assessment order to point out the specific findings and observations recorded by the Assessing Officer to doubt the genuineness of the concerned creditors representing liability shown by the ITO Vs M/s. Navin Chandra & Co. AY : 2008-09 7 assessee against shares claimed to be taken on loan from them. He contended that entries for the shares taken on loan from the concerned creditors, however, did not appear in the demat account of the assessee nor the same were reflected in the books of accounts regularly maintained by the assessee. He contended that such transactions are prohibited under SEBI Rules and the fact that there were no entries made by the assessee in the books of accounts for the said transactions clearly shows that these were not genuine transactions. He submitted that there was no agreement between the assessee and the concerned sundry creditors who had given shares on loan to the assessee and even no fix period was stipulated for returning the said shares by the assessee to the concerned creditors. He contended that even the valuation of the shares was not properly reflected and in the absence of any fixed value assigned to the shares, the liability of the assessee was not ascertainable with any certainty. He contended that all these adverse findings and observations specifically recorded by the Assessing Officer while arriving at a conclusion that the liability on account of sundry creditors representing shares claimed to be taken on loan constituted bogus liability were completely overlooked by the learned CIT(A) and, therefore, the deletion by the learned CIT(A) of the addition made by the Assessing Officer by treating the said liability as bogus is not justified.
The learned Counsel for the assessee, on the other hand, invited our attention to the submissions made on behalf of the assessee before the learned CIT(A) in support of its case as reproduced by the learned CIT(A) in his impugned order to point out that all the objections raised by the assessee while treating the concerned liability representing on account of sundry creditors representing shares taken on loan from them were clarified and met by the assessee and after getting himself satisfied with the same, the learned CIT(A) found that the said liability was not a bogus liability as alleged by the Assessing Officer. He submitted that the accounting treatment given by the assessee to the relevant transactions was explained by the assessee to the learned CIT(A) on the basis of relevant details and documents placed on record and the same was properly
ITO Vs M/s. Navin Chandra & Co. AY : 2008-09 8 understood and appreciated by the learned CIT(A). He submitted that when the shares were taken as loan, there was no entry made in the books of accounts of the assessee as the same was not necessary and only when the shares were sold and the sale proceeds were received/utilized by the assessee, proper entries giving effect to the said transactions were made in the books of accounts of the assessee. He contended that the entire modus operandi involved in these transactions was explained by the assessee before the learned CIT(A) on the basis of the relevant details and documents and even the affidavit of all the concerned creditors confirming the said transactions were filed by the assessee. He submitted that such transactions are not at all prohibited by SEBI Rules as sought to be contended by the learned DR and this is a common practice followed in the trade. He contended that it was thus not a case of any bogus liability and the assessee having established on evidence the identity and capacity of the concerned creditors as well as the genuineness of the relevant transactions, the addition made by the Assessing Officer under Section 68 of the Act by treating the same as unexplained cash credit was rightly deleted by the learned CIT(A). He, therefore, strongly relied on the impugned order of the learned CIT(A) on the issue under consideration and urged that the same deserves to be upheld.
We have considered the rival submissions and also perused the relevant material available on record. It is observed that the assessee in the present case is a partnership firm which is in the business of dealing in shares and acts as a share broker. It had entered into certain transactions of derivatives through its main broker and had to pay margin to its broker in respect of the said transactions. In order to discharge the said liability, the assessee borrowed shares from certain persons and the list of such persons along with their address and PAN as filed before the authorities below is placed on record before us. The shares borrowed by the assessee were duly reflected in the demat account of the concerned creditors and the same were duly transferred to the demat account of the partners of the assessee-firm since the assessee as a firm was not allowed to maintain a demat account in its name. The documentary evidence in the form of the copies of ITO Vs M/s. Navin Chandra & Co. AY : 2008-09 9 relevant demat accounts of the concerned creditors as well as the partners of the assessee-firm as filed before the authorities below is placed on record before us to establish that the shares held by the said creditors were duly transferred to the demat account of the partners of the assessee-firm. In order to fulfill the margin requirement, the main broker M/s. Khandwala Integrated Financial Services Pvt. Ltd. sold the shares in the margin account and entries of such shares were also reflected in the relevant demat accounts. Although the assessee-firm did not make any entry in its books of accounts on receipt of the shares on loan as the same was not required, the proper accounting entries on sale of shares were duly passed in the books of accounts of the assessee showing the value of sale proceeds as the liability of the assessee-firm to the concerned creditors. Although the assessee, as submitted before the authorities below as well as before us, was required to repay the said liability in the form of shares and not the value, we find that assigning the value of sale proceeds of the shares actually realized to the concerned creditors was fair and proper in the facts and circumstances of the case including especially the fact that the difference on the date of purchase of shares for returning back to the concerned creditors was liable to be declared by the assessee as profit or loss as the case may be as agreed even by the assessee.
10. It is thus clear that the shares owned by the concerned creditors were given on loan by them to the assessee to discharge its liability of margin payment through demat account and on sale of the same by the main broker M/s. Khandwala Integrated Financial Services Pvt. Ltd., the liability was duly recognized by the assessee towards the concerned creditors in its books of accounts at the value of sale proceeds actually realized. All these transactions were duly supported by the documentary evidence produced by the assessee; and, the Assessing Officer, in our opinion, was not justified to doubt the genuineness of the said transactions on the basis of some frivolous objections which have been duly clarified and met by the assessee. It appears to us that the nature of transactions as well as the modus operandi involved in the same was not properly understood by the Assessing Officer while doubting the genuineness of the same while the learned CIT(A) not only understood the same properly but also ITO Vs M/s. Navin Chandra & Co. AY : 2008-09 10 appreciated the exact nature of transactions to hold that the said transactions were genuine which were entered into by the assessee in the normal course of its business as a dealer in shares. Moreover, the identity and capacity of the concerned creditors as well as genuineness of the relevant transactions involving shares taken by the assessee on loan was duly established by the assessee on evidence and the learned CIT(A), in our opinion, was fully justified in deleting the addition made by the Assessing Officer by treating the said transactions as unexplained cash credit under Section 68 of the Act. As such, considering all the facts and circumstances of the case, we do not find any infirmity in the order of the learned CIT(A) giving relief to the assessee on this issue and upholding the same, we dismiss the appeal filed by the Revenue.
In the result, appeal of the Revenue is dismissed.
Order pronounced in the open Court on 15th June, 2022 at Ahmedabad.