KANJI DEVA PATEL,NAVI MUMBAI vs. ITO WD 23(2)-4,

From the grounds of appeal, it transpires to us that the assessee has raised three issues, viz. (i) challenged the validity of re-assessment; (ii) challenged the addition towards long term capital gain derived from sale of listed equity shares under the head ‘Income from other sources; and (iii) addition towards disallowance of interest paid on borrowed capital u/s 24(b).

During the course of hearing, the Ld.AR for the assessee submitted that he did not want to press ground regarding challenging of validity of reopening of assessment and hence, ground 4 is dismissed, as not pressed.

Thus, the effective grounds remain for our consideration are additions towards long term capital gain derived from sale of listed equity shares under interest paid on borrowed capital u/s 24(b).

The brief facts of the case are that the assessee is an individual filed his return of income for the AY 2003-04 declaring total income of Rs.11,43,553/-, consisting of ‘Income from house property’, ‘Income from capital gain and ‘Income from other sources’. A survey was conducted in assessee’s premises u/s 133A of the Act by the AO to verify the share transaction. During the course of survey, in response to the question putforth by the AO, assessee replied that he had purchased shares of M/s Brijlaxmi Leasing and Finance Ltd through Mr.Thakkar. Consequent to survey, the case has been reopened u/s 147 by issuing notice u/s 148 of the Act. Subsequently, the case has been selected for scrutiny and accordingly notice u/s 143(2) and 142(1) of the Act were issued. During the course of assessment proceedings, the AO observed that the assessee has shown long term capital gain from sale of shares of Rs.19,15,640 . In support of purchase and sale the assessee has furnished contract note issued by M/s. Thakkar Stock Broker Pvt Ltd and M/s Shyam Investment. On perusal of the details it was noticed that the assessee has purchased 10,000 shares of M/s Brijlaxmi Leasing and Finance Ltd for a consideration of Rs.39,025. The said shares have been sold in the financial year 2002 on three occasions for a consideration of Rs.9,54,665. Considering the 2500% of the investment which is within a span of 15 months, the AO has conducted necessary enquiries with regard to the price movement of the scrip in the market and also recorded statements from the brokers from whom the shares were purchased and sold.

The AO, after conducting necessary enquiries, came to the conclusion that long term capital gain declared by the assessee from sale of shares of M/s Brijlaxmi Leasing and Finance Ltd is a sham transaction entered in collusion with certain brokers to convert his unaccounted money under the guise of long term capital gain. The AO came to the conclusion based on the deposition given by Shri Shyam Goyal, Prop of Shree Shyam Investment wherein he stated that the contract note issued by him is not genuine and not reported to stock exchange. He issued contract note as per the request of Mr. Kanji Deva Patel, who came with a cheque for which he charged a commission of Rs.400 to facilitate the transaction. The AO further observed that the price movement of the scrip in the Bombay Stock Exchange at the relevant point of time was between Rs.9.5 to Rs.10. Based on the enquiries conducted during the course of assessment proceedings and considering the fact that the assessee has sold the shares for a consideration of Rs.94.15 per share, the AO opined that the so- called transaction of sale of shares of M/s Brijlaxmi Leasing and Finance Ltd is a brought to tax same under the head ‘Income from other sources’.

During the course of assessment proceedings, the AO noticed that the assessee has claimed interest of Rs.84,000 against ‘Income from house property’. Therefore, the AO requested the assessee to submit co-relation of the loan taken on which interest is paid with the amount paid for purchase of property on which rental income is received. In reply, assessee stated that he has taken Rs.3 lakhs’ loan from Veena Shah and Velji Shah to finance purchase of the property for which he paid interest. The AO, after considering the relevant submissions of the assessee allowed interest payment of Rs.24,000 to Veena Shah and Rs.12,000 to Velji Shah and disallowed balance amount of Rs.48,000 as the assessee has failed to furnish relevant details of loans borrowed and payment of interest.

Aggrieved by the assessment order, assessee preferred appeal before CIT(A) and challenged the reopening of assessment. The assessee also filed elaborate written submission in respect of additions made by the AO towards disallowance of long term capital gain from sale of shares and disallowance of interest on borrowed capital against income from house property. CIT(A), after considering relevant submissions of the assessee and also relying upon certain addition made by the AO. The CIT(A) further observed that the assessment has been reopened with a valid reason and there is no merit in the arguments of the assessee that the assessment is invalid. Insofar as addition made by AO towards disallowance of long term capital gain, the CIT(A) observed that in the instant case, the AO has not only relied upon the statement of the DP / stock broker but also made independent enquiries with BSE to find out the cost of share. At no stag the assessee has stated that the price determined by the AO was actually incorrect. The facts recorded by the AO during the course of assessment proceedings clearly establish that the so-called sale of shares of M/s Brijlaxmi Leasing and Finance Ltd is a sham transaction to convert the undisclosed income of the assessee under the guise of long term capital gain to derive tax benefit. With these observations, the Ld.CIT(A) upheld the additions made by the AO. As regards disallowance of interest, the CIT(A) stated that the assessee has not adduced any evidence to substantiate its claim of interest paid on borrowed capital and hence, upheld addition made by the AO.

The first issue that came up for our consideration is disallowance of long term capital gain from sale of listed equity shares and brought to tax under the had ‘Income from other sources’. The AO disallowed long term capital gain on the ground that the assessee has used sham transaction to convert his undisclosed income under the guise of long term capital gain to derive tax benefit. According to the AO, the brokers from whom the shares were purchased and the broker through whom shares were sold are denied of having done any share transaction with the assessee. The AO further was of the opinion that the assessee has obtained contract note from the broker by paying his own money which is evident from the fact that the broker, who issued the contract note has disowned the contract note and accepted that he had issued the contract note on a commission of Rs.400 to facilitate the transaction. The assessee claims that his share transaction of M/s Brijlaxmi Leasing and Finance Ltd is a genuine transaction done through demat account. The assessee further contended that he had purchased impugned shares in the financial year 2001 @Rs.3.90 per share and the same has been sold in the financial year 2002 @Rs.94.95 per share. The assessee has furnished his demat account and also statement of BSE price index of shares generated from the website of BSE which indicate that during the period June, 2002 to December, 2002, the price movement of the shares was around Rs.91.5 to 109.25 per share. The assessee further contended that this fact has been recorded by the ITAT, in the case of M/s Parvesh Construction P Ltd for the assessment Leasing and Finance Ltd has been traded between Rs.82.90 to Rs.110.50 per share. Therefore, the AO was incorrect in holding that the transaction of share of M/s Brijlaxmi Leasing and Finance Ltd is a sham transaction.

We have heard both the parties and perused the material available on record. The AO disallowed claim of long term capital gain on sale of shares of M/s Brijlaxmi Leasing and Finance Ltd on the ground that the brokers have denied the transaction of sale of shares and also the price of stock in the BSE at the relevant point of time was between Rs.9.5 to Rs.10 per share. The AO relied upon the statement of broker, who facilitated transaction to come to the conclusion that it is a sham transaction used for conversion of undisclosed income under the guise of long term capital gain to derive tax benefit. The assessee claims that he had done purchase and sale of shares of M/s Brijlaxmi Leasing and Finance Ltd through demat account and the price at which the shares have been sold is in conformity with the price movement of share price in the BSE at the relevant point of time. The assessee has filed copy of demat account and also statement generated from the website of BSE to prove the price movement of stock at the relevant point of time. We find that the assessee has demated shares of M/s Brijlaxmi Leasing and Finance Ltd and the purchase and sale of shares of the said group is recorded in the demat account BSE during the relevant point of time is in conformity with the price at which the assessee has sold his shares. We further observe that the ITAT, Mumbai Bench “C” in the case of M/s Parvesh Leasing & Finance Ltd (supra) has dealt with a similar issue on sale of shares of M/s Brijlaxmi Leasing and Finance Ltd wherein the Tribunal recorded a clear finding that the price movement of the share in the BSE during the period April, 2002 to March, 2003 is between Rs.82.90 to Rs.110.50 per share. All these evidences lead us to a conclusion that the share transfer of M/s Parvesh Construction P Ltd is not a sham transaction, but a normal transfer of shares of through recognized stock exchange and through demat account. Therefore, we are of the considered view that the AO was incorrect in holding that the assessee has used sham transaction to convert his undisclosed income under the guise of long term capital gain. However, the issue needs to be re-examined by the AO to ascertain the correct fact with regard to the statement of the assessee to justify the price movement of shares as it is clearly in conflict with the finding of fact recorded by the AO during the course of assessment proceedings.

The next issue that came up for our consideration is disallowance of assessee has claimed interest payment of Rs.84,000 against the income from house property. The assessee claims that he had borrowed loan on which interest has been paid. The AO has allowed interest payment of Rs.36,000 against loan borrowed from two individuals amounting to Rs.3 lakhs and disallowed balance amount of Rs.48,000 on the ground that the assessee has failed to file necessary evidence. The fact remains unchanged. The assessee has failed to file any evidence to controvert the findings of fact recorded by the AO. Therefore, we are of the view that the AO was right in disallowing interest and hence, we uphold the addition made by the AO and dismissed ground raised by the assessee.

In the result, appeal of the assessee is partly allowed, for statistical purpose. Order pronounced in the open court on 20th September, 2017.