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Income Tax Appellate Tribunal, “G” BENCH, MUMBAI
Before: SHRI B.R. BASKARAN (AM) & SHRI SANDEEP GOSAIN (JM)
PER BENCH :
These cross appeals are directed against the order passed by Ld CIT(A)-40, Mumbai for assessment year 1991-92.
The facts relating to the assessee are discussed in brief. The assessee is a registered broker in shares and securities and is registered with Bombay
2 Shri Bhupendra C. Dalal ITA Nos. 8176/Mum/2010 & 1023/Mum/2011 Stock Exchange. He was also one of the recognised brokers for dealing in Government Securities. The assessee has also carried on trading activities in securities on his own account. A major securities scam was unearthed in the year 1992, which led to enactment of a special Act known as “Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992. The assessee was also implicated as a person involved in the securities scam. A custodian was appointed to take control of all the assets of persons implicated in the scam. All the persons so implicated were called as “Notified persons”. Hence the assessee became one of the notified persons. Prior to the enactment of the above said Special Act, a Committee named as “Janakiraman Committee” was appointed to probe the scam related matters. A Joint Parliamentary Committee was also formed to investigate into the matters.
The CBI conducted search on the assessee on 22.06.1992 and the income tax department conducted search on the assessee on 16.10.1992. The appeals under consideration have been filed in the second round of proceedings. The assessments were originally completed after the search operations. The assessee challenged the assessment orders by filing appeal before Ld CIT(A) and then the matters were taken before the ITAT by both the parties on the issues decided by Ld CIT(A) against each of them. Before the Tribunal, the assessee contended that the assessing officer had made huge additions on the basis of certain materials, which were not confronted with him. Hence, the Tribunal set aside the orders of tax authorities and restored all the matters to the file of the Assessing officer with the direction to complete the assessments afresh after providing all the materials, which were relied upon by the AO to make additions, to the assessee. Consequently, the present assessment orders were passed by the assessing officer in the second round of proceedings. The assessee again challenged the assessment orders by filing appeals before Ld CIT(A) and both the parties have filed the appeals
3 Shri Bhupendra C. Dalal ITA Nos. 8176/Mum/2010 & 1023/Mum/2011 under consideration challenging the orders passed by Ld CIT(A) on the issues decided against each of them.
The assessee has filed returns of income for AY 1987-88 to 1991-92. However the assessee did not file returns of income for AY 1992-93 and 1993- 94. It was explained that he could not file the return of income for those years, since all the records were seized by the CBI/revenue and further he was constrained to undergo imprisonment and to face enquiries of various investigating agencies.
In the order dated 09-11-2016 passed by us in the hands of the assessee for AY 1987-88 to 1989-90, we have discussed in brief the nature of business activities carried on by the assessee. The discussions are available in paragraph 5 to 13 of the order. The same may be read as part of this order also.
A) DISALLOWANCE OF INTEREST EXPENDITURE:- (Ground 4A in assessee’s appeal and Ground Nos. 1 to 3 in revenue’s appeal) 6. The first issue contested by the both the parties relates to the disallowance of interest expenditure of Rs.1,52,60,990/-. An identical issue has been dealt by us in detail while dealing with the appeal of the assessee relating to AY 1987-88. The observations made by us in that year shall apply to the issue under consideration in this year also. The AO disallowed the interest expenditure on the reasoning that the assessee did not explain the debit entries of interest payments and also do not provide any justification for payment of interest. Accordingly the AO took the view that there is no reason to deviate from the decision taken from the original assessment. Accordingly he made the interest expenditure claim, referred above. The Ld CIT(A) also confirmed this disallowance by following his order passed in the first round of
4 Shri Bhupendra C. Dalal ITA Nos. 8176/Mum/2010 & 1023/Mum/2011 proceedings, wherein the interest receipts of Rs.36,98,990/- were netted off and the balance amount of Rs.1,15,62,000/- was confirmed.
The assessee is aggrieved by the addition partially confirmed by the Ld CIT(A) and the revenue is aggrieved by the decision of Ld CIT(A) in granting partial relief to the assessee.
We heard the parties on this issue. In this year also, the interest receipts accounted under the head “Interest received from PDO” and “Interest on F.Ds and Loans” stand at Rs.1,11,27,196/- in aggregate. As per the method of accounting followed by the assessee, “cum-interest” paid/received are accounted under the head “Interest on securities”, while the interest received on the coupon dates is accounted for under the head “Interest received from PDO Account”. Hence the Ld CIT(A) has netted off the interest receipts against this account and accordingly disallowed the net interest only. We have earlier noticed that the any payment of cum-interest made by the assessee due to utilisation of the money given by the customer would get more than compensated by the reduction in the interest payable to bank. According to the assessee, the transactions relating to Interest on securities are normal business transactions and the disallowance made by the AO consisted of four entries found in the Account as detailed below:-
25.3.1991 16,87,000 31.5.1990 23,00,000 30.11.1990 53,00,000 30.11.1990 22,75,000 ---------------- 1,15,62,000 ========= The assessee has explained that a sum of Rs.16,87,000/- and Rs.23,00,000/- aggregating to Rs.39,87,000/- was part of interest debited by Bank of Karad and the same is reflected in the bank account. In our view, there is no reason
5 Shri Bhupendra C. Dalal ITA Nos. 8176/Mum/2010 & 1023/Mum/2011 to suspect these two items, as they have been paid to a bank. It was submitted that the remaining two items of interest payment aggregating to Rs.75,75,000/- relates to the interest paid by the assessee on purchase of GOI 2008 securities on two occasions from J.P. Gandhi. The purchase value of securities aggregates to Rs.18.50 crores. We have earlier noticed that the “cum-interest” payable on the Government of securities is borne by the assessee till the date of purchase of securities while the assessee could realise “cum-interest” only upto the date of receipt of money from its customers. The interest pertaining to the period between the date of receipt of money from the customer and the date of purchase of securities is borne by the assessee. The above said payment of Rs.75,75,000/- represents such kind of payment and accordingly it was submitted that it was a routine business transactions. We notice that the tax authorities have not rebutted these explanations of the assessee. Under these set of facts, in our view, there is no reason to suspect these expenditure. Accordingly, in our view, there is no reason to disallow the interest expenditure claimed by the assessee. Accordingly we set aside the order passed by Ld CIT(A) on this issue and direct the AO to allow entire expenditure claimed under this head. Since the entire expenditure has been held to be allowed, the netting off of interest receipts is not required and hence the ground urged by the revenue becomes infructuous. Accordingly we dismiss the same.
B) DISALLOWANCE OF LOSS ON SECURITY TRANSACTIONS ENTERED WITH M/s CHAMPAKLAL DEVIDAS:- (Ground 4B in assessee’s appeal) 9. The next issue relates to the disallowance of loss of Rs.84,66,493/- incurred in respect of security transactions entered with M/s Champaklal Devidas. This issue is being contested by the assessee only. The AO noticed that the five transactions entered with the above said party have resulted in an aggregate loss of Rs.1,60,41,493/-. According to AO, all these transactions of purchase and sale of securities have taken place on the same day with the
6 Shri Bhupendra C. Dalal ITA Nos. 8176/Mum/2010 & 1023/Mum/2011 above said concern, whose proprietor was Shri J.P. Gandhi. The AO noticed that Shri J.P. Gandhi was working with the assessee and accordingly he took the view that the above said concern was under the control of the assessee. Since the assessee could not substantiate its contention that the transactions of purchase and sale have taken place at market rates in the course of normal business transactions, the AO disallowed the entire loss of Rs.1,60,41,493/- in the first round of proceedings. Before Ld CIT(A), the assessee submitted that the losses of Rs.54,41,725/- and Rs.22,74,768/- listed out by the AO have already been transferred to “Interest on securities Account” and the disallowances of Rs.53,00,000/- and Rs.22,75,000/- made by the AO, out of interest expenditure, represent the above said loss only. Accordingly it was submitted that the AO has made double disallowance of same item. The Ld CIT(A) agreed with the above said submissions and accordingly deleted the addition of Rs.54,41,725/- and Rs.22,74,768/-. The addition of remaining three items aggregating to Rs.83,25,000/- was confirmed by Ld CIT(A) in the first round of proceedings.
In the second round of proceedings, the AO gave credit of RS.53,00,000/- and Rs.22,75,000/-, since they had already been disallowed under the head “Interest on securities”. The AO confirmed the remaining amounts aggregating to Rs.84,66,493/-. The Ld CIT(A), by following his earlier order, confirmed this addition.
The contentions of the assessee are summarised below:-
(a) The AO has mentioned that J P Gandhi is part and parcel of business of the Appellant. This is factually wrong. J.P. Gandhi is assessed to tax separately. The Same AO has made separate assessment in his hands and made huge additions.
7 Shri Bhupendra C. Dalal ITA Nos. 8176/Mum/2010 & 1023/Mum/2011 (b) The AO has further observed that just because the entries of these transactions have been recorded in the books of J P Gandhi, it does not make the transaction genuine. In such a case, once the department accepts the profit making transactions as genuine, it cannot reject the loss making transactions.
(c) The AO has stated that these transactions are recorded by way of passing journal entries. The profit making transactions have also been entered by way of passing journal entries.
(d) The statement of Shri J P Gandhi was not provided to the assessee. Hence it is not clear as to whether Shri J P Gandhi has accepted the genuineness of transactions or not.
On the contrary, the Ld D.R strongly supported the order passed by the tax authorities by stating that the losses have been booked by passing journal entries and Shri J.P. Gandhi himself was the assessee’s man. Accordingly he submitted that the losses have been artificially generated and hence the tax authorities are justified in disallowing the loss claims.
We heard the parties on this issue and perused the record. It is an admitted fact that the assessing officer has accepted the profit making transactions entered with M/s Champaklal Devidas, the proprietary concern of Shri J.P. Gandhi. We have discussed in the earlier years that the passing of journal entries for transferring profit or loss arising in the transactions is a normal accounting practice. We notice that it was not shown that Shri J.P. Gandhi is a related person, who is covered by the provisions of sec. 40A(2)(b) of the Act. The Ld A.R submitted before us that the assessing officer has recorded a statement from Shri J.P. Gandhi and the same was not provided to the assessee. However, the AO has not shown that Shri J.P. Gandhi has
8 Shri Bhupendra C. Dalal ITA Nos. 8176/Mum/2010 & 1023/Mum/2011 denied the above said transactions. Further it was not shown as to how the corresponding transactions were viewed in the assessment of Shri J.P. Gandhi. The question of disallowance of loss arising from the transactions may arise, when it was shown that the transactions were entered between the related parties, that too at a price, which was different from market rates. In the instant case, it was not shown that the very purchase and sale of transactions were not in accordance with the market rates. We have noticed that the assessing officer has accepted the profit making transactions entered by the assessee with M/s Champaklal Devidas. Hence, we find merit in the contentions of the assessee that the AO is not entitled to reject some transactions alone on pick and choose basis. In view of the above, we are of the view that there is no basis for suspecting the loss making transactions. Accordingly we set aside the order passed by Ld CIT(A) on this issue and direct the AO to delete this addition.
C) DISALLOWANCE OF LOSS ON SECURITIES:- (Ground 4C in assessee’s appeal) 14. The next issue contested by the assessee relates to the disallowance of loss arising on sale of securities. The assessee has purchased “6.75% GOI- 2007” from M/s Crown Mills Employees Provident Fund for a sum of Rs.63,86,500/- on 11.09.1990 and sold the same to M/s Citi Bank on 09-10- 1990 for a sum of Rs.41,12,906/- and thus incurred a loss of Rs.22,73,594/-. The assessee claimed that these transactions are in the nature of switch transaction and there would be corresponding profit in another part of switch transaction. Further, it was claimed that these transactions have been entered in the normal course of business, since the assessee was dealing in Government Securities. It was also submitted that these transactions have been entered with outsiders and not with related parties. The assessee also submitted that the corresponding switch transactions could not be given, since the records have been seized by CBI.
9 Shri Bhupendra C. Dalal ITA Nos. 8176/Mum/2010 & 1023/Mum/2011
It appears that the AO took the seized records from CBI and provided the assessee an opportunity to take copies thereof. However, the assessee did not avail that opportunity and hence the AO disallowed the claim of loss of Rs.22,73,594/- as non-genuine in the original assessment proceedings. In the set aside proceedings also, the assessee gave identical explanations and further submitted that the AO has not established that the assessee has received any money outside the books. The AO was not convinced with these explanations and accordingly disallowed the loss again in the set aside proceedings also. The Ld CIT(A) also confirmed the same.
We heard the parties on this issue. The undisputed fact available in this issue is that the transactions of purchase and sale of securities have been entered with third parties. In respect of third party transactions, the normal presumption is that they have been entered into under normal business conditions at the prevailing market prices. The case of the assessee is that he, as a dealer of securities, has purchased and sold the securities. Accordingly it has been contended that the loss incurred in these transactions is normal business loss. We find merit in the said submissions. The tax authorities have suspected the transactions only for the reason that it has resulted into a loss. However, the fact remains that these transactions of purchase and sale of securities have taken place with third parties and not with related parties. In case of third party transactions, it is imperative on the part of the tax authorities to bring any material to show that what was recorded in the books of account was not correct, i.e., the AO should bring any material to show that the assessee has suppressed or inflated the rates of sales or purchase of securities. We further notice that the AO did not make any enquiry with either M/s Crown Mills Employees Provident Fund or with M/s Citi Bank. Hence, in our view, the AO was not justified in suspecting these transactions without making enquiries and without bringing any material
10 Shri Bhupendra C. Dalal ITA Nos. 8176/Mum/2010 & 1023/Mum/2011 to show that the transactions have been entered at some other prices. Hence we do not find any justification in disallowing the loss of Rs.22,73,594/- arising in these transactions. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and direct the AO to delete the disallowance referred above.
D) ADDITION ON ACCOUNT OF DIFFERENCE IN CLOSING STOCK:- (Ground 4D in assessee’s appeal):- 17. The next issue urged by the assessee relates to the addition of Rs.6,70,000/- relating to difference in the value of stock. The AO obtained the list and value of securities held by Bank of Karad on behalf of the assessee. According to the AO, the bank furnished the details of stock as on 31.02.1991, which showed that the bank has held 6-3/4% IDBI-92 security having a value of Rs.36,82,700/-. However, in the statement furnished by the assessee, the above said security was shown at Rs.30,12,700/-. Hence the AO added the difference of Rs.6,70,000/- in the original assessment proceedings. In the set aside proceedings, the assessee explained that it has already sold securities having a face value of Rs.3.50 lakhs plus Rs.3.50 lakhs to M/s Hoechst Trust Fund, but the Hoechst Trust fund has not taken delivery of the same from the Bank. Accordingly it was submitted that the difference has occurred due to non-delivery of securities by the bank to M/s Hoechst Trust Fund. Since the assessee did not show as to when the delivery was given, the AO as well as the Ld CIT(A) disallowed the difference value of stock.
We heard the parties on this issue. We notice that the AO has taken the list of securities held by the Bank of Karad on a particular date in the middle of the year. The said date is mentioned as “31.02.1991” in the assessment order. The said date should be wrong since February month does not have 31 days. However, in the heading of Para 3.4, the date is
11 Shri Bhupendra C. Dalal ITA Nos. 8176/Mum/2010 & 1023/Mum/2011 mentioned as 31.01.1991. Accordingly, we are of the view that the date mentioned in the heading of paragraph 3.4, viz., 31-01-1991 should be the correct date. On that date, the 6-3/4% IDBI-92 security held by the Bank of Karad on behalf of the assessee was showing excess balance of stock by Rs.6,70,000/-. According to the assessee, he has sold securities having face value of Rs.7.00 lakhs to Hoechst Trust Fund on 17.01.1991 and the delivery of securities have been given by the bank after 31.01.1991. During set aside proceedings, the assessee expressed his inability to obtain confirmation letters in this regard. It was further stated by the assessee that he had received the sale consideration much earlier and hence the Bank was instructed to give Free delivery, i.e., no payment required to be received at the time of delivery. However, admittedly, the assessee could not furnish the details or evidences substantiating the explanation given by him. At the same time, the AO has also failed to analyse the stock position as at the year end. It is quite normal in the business circles that all the adjustments shall be made as at the year end. Under these trade practice the difference, if any, reflected in the middle of the year would require reconciliation only. Hence, in our view, the tax authorities are also not correct in presuming that the difference noticed in the middle of the year would represent the unexplained investment in the hands of the assessee. Since all the details relating to this issue are not brought on record by both the parties, we are of the view that this issue may be settled by disallowing a portion of alleged excess stock. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and direct the AO to restrict the disallowance to 20% of the difference noticed in the stock. We order accordingly.
E) ADDITION ON ACCOUNT OF NEGATIVE BALANCE OF SECURITIES:- (Ground No.4E in assessee’s appeal) 19. The next issue relates to the addition relating to Negative balance of securities amounting to Rs.18.53 crores. As in earlier years, the assessing
12 Shri Bhupendra C. Dalal ITA Nos. 8176/Mum/2010 & 1023/Mum/2011 officer prepared quantity details of purchase and sale of securities on the basis of entries made in the Securities Ledger. His working revealed that the assessee has sold the shares without having stock of the same. Hence the AO, as in the earlier year, interpreted the negative stock would represent income of the assessee. The assessee explained the modalities of the trade and the accounting practice followed by him, i.e., the entries for purchase and sale of securities are made on cash basis, Conversion of physical shares into SGL, SGL shares into physical shares, splitting up of shares, consolidation of shares etc., and submitted that all these activities might have resulted in a confusion. The assessee also submitted that there may be punching errors in the workings prepared by the assessing officer. According to the assessee, the AO has provided the summary of his workings and the actual workings were not provided to him.
However, the AO took the view that the explanations given by the assessee are not satisfactory in respect of negative balance of various securities given in the assessment order. The AO, in the original proceedings, added the same as income of the assessee.
In the set aside proceedings, the assessee asked the AO to furnish the details of workings made by him to arrive at the alleged negative balance. Without prejudice to the same, the assessee also submitted that the transactions of purchase and sale are carried out for RBI, banks and other reputed institutions. He also submitted that the assessee may be selling the securities without having them in stock, but later he would cover the same by buying it from the market. The assessee also submitted that the ready forward transactions, in which the sale made shall be reversed subsequently, would also give rise to a situation of negative balance on a particular day. The said explanations were not found to be satisfactory by the AO and hence he again made the addition of Rs.18,53,11,553/- in the set aside proceedings
13 Shri Bhupendra C. Dalal ITA Nos. 8176/Mum/2010 & 1023/Mum/2011 also. The Ld CIT(A) also confirmed this addition by following his decision rendered in the original assessment proceedings.
We heard the parties on this issue and perused the record. Identical addition, i.e., negative balance of securities, was made in AY 1987-88. We have dealt with the same in a detailed manner in that year. In the instant year, the assessing officer has listed out 34 scrips, wherein the alleged negative balance was noticed. However, detailed workings have been given in respect of three scrips only. According to the Ld A.R, the assessee has reconciled all the items and the same is placed at pages 10 to 173 of the paper book. The reasons for the alleged negative balance has been summarised as under by the assessee:-
1) Rectification entries passed in the - 7,53,98,100 accounts and not considered by the AO 2) Subsequent purchases not considered - 7,83,26,000 by the AO 3) Sales to Provident fund for which - 10,87,900 delivery was completed later 4) Sales reversed - 16,05,500 5) Delivery effected on the next day - 2,88,94,052 18,53,11,552
Accordingly the Ld A.R contended that the AO has made this addition without examining the explanations of the assessee. On the contrary, the Ld D.R placed strong reliance on the orders passed by the tax authorities.
We notice that the explanations furnished by the assessee for the difference have not been examined at all by the AO. A perusal of the explanations would show that the assessee has reconciled the difference in
14 Shri Bhupendra C. Dalal ITA Nos. 8176/Mum/2010 & 1023/Mum/2011 stock and grouped the same in five categories. Thus, we notice that the assessee has offered explanations in respect of all the items of difference that were pointed out by the AO. We notice that the tax authorities have not examined these explanations and proved the same to be false. In the absence of any contradiction, we are of the view that the explanations offered by the assessee should be accepted. We have also noticed that the assessee also makes short sales and it is submitted that this is also a prevalent commercial practice. Hence, what is required to be seen is that the short sale was ultimately covered up or not. In our view, the claim of short sale could very well be examined by the AO during the course of assessment proceedings, which he has failed to do so. The details of rectification entries passed, reversal of sales, details of late delivery etc. have not also been examined by the AO. The following submissions made by the Assessee supports the case of the assessee:-
“ Further the AO, inspite of specific direction of the CIT(A), in the remand proceedings, had not specifically commented on the reconciliation submitted but had relied on general observation of his predecessor. The Appellant had submitted security wise reconciliation in respect of each of the alleged negative balance identified by the AO. The Appellant had also submitted supporting vouchers and had in each case pointed out that there was no negative balance in any of the security. For eg. Refer page 12 of the Paper Book-II. There was a punching error of wrong accounting code. Instead of Code No.60005 applicable for 6.75% Maharashtra 1991 it was posted in 6.75% State 1992 (Code No.67093) of Rs.50.00 lacs. The AO did not verify this. Kindly refer relevant debit voucher on Pg. 61 of P.B. II. For eg. On Pg 37 of paper book Part-II there is working of negative balacne in Units of UTI. Here instead of considering face value of the security, he has worked out on basis of sale proceeds. Page 42 of the Paper Book Part II on 19-05-1990 the Appellant purchased and sold security of face value of Rs.5.00 crore of 10% GOI 1993 (Code 67097) from M/s Excel & Co. The purchase was wrongly entered into code no. 67079 instead of 67097. This was rectified subsequently by passing journal voucher no.3043 (Refer page 52 of Paper Book Part II). The copy of debit voucher and delivery memo is on Pages 171 to 173 of Paper Book Part II.”
15 Shri Bhupendra C. Dalal ITA Nos. 8176/Mum/2010 & 1023/Mum/2011
Under these set of facts, we are of the view that there is no justification in making addition on account of alleged negative stock. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and direct the AO to delete this addition.
F) DISALLOWANCE OF LOSS IN TRANSACTIONS WITH M/s MOTIRAM VAKIL:- (Ground No.4F in assessee’s appeal) 25. The next issue relates to the disallowance of loss arising from the transactions entered with M/s Motiram Vakil. From the Security ledger (Page No.103), the AO noticed that the assessee has purchased 7% GOI-94 security from A.D. Narottam for a sum of Rs.56,20,120/- and sold the same to M/s Crown Mills EPF for Rs.63,86,500/-. Thus, the assessee made a profit of Rs.7,66,380/-. However, the AO noticed that the assessee has wrote off a sum of Rs.6,64,300/- from the amount due from Shri K Motiram Vakil and claimed the same as deduction. The AO made enquiries with Shri K Motiram Vakil on 23.02.1994 during the course of original assessment proceedings, but he denied the above said transactions in the reply dated 24-03-1994 filed by him. Hence the AO disallowed the loss of Rs.6,64,300/- wrote off by the assessee in the original assessment proceedings.
In the set aside proceedings, the assessee asked for a copy of reply filed by Shri K. Motiram Vakil, but the same was not provided to him. The assessee submitted that the amount written off by him is a normal business transaction, since the assessee could not recover the amount due from Shri K Motiram Vakil. The said explanation was not acceptable to the AO. Since the these transactions have been denied by Shri Motiram Vakil, the assessing officer took the view that the journal entry passed by the assessee is a bogus entry and accordingly took the view that there is no question of allowing the
16 Shri Bhupendra C. Dalal ITA Nos. 8176/Mum/2010 & 1023/Mum/2011 same u/s 36(2) of the Act. Accordingly he made the disallowance in the set aside proceedings also. The Ld CIT(A) also confirmed the same.
We heard the parties on this issue and perused the record. From the assessment order, we notice that Shri K Motiram Vakil has denied the transactions of purchase of transaction relating to 7% GOI-94 security from the assessee. On sale of security to Shri K Motiram Vakil, the assessee would have debited a sum of Rs.63,86,500/-. According to the assessee, he could not recover a sum of Rs.6,64,300/- from the above said party. However, the assessee did not furnish the details of amount received from the above said party and the reason for the writing off of the balance amount. Further Shri Motiram Vakil has altogether denied the transactions. Even though the letter furnished by Shri Motiram Vakil was not furnished to the assessee, yet the fact remains that the explanations of the assessee that it was normal business transaction was not substantiated. Under these set of facts, we are of the view that the Ld CIT(A) was justified in confirming the disallowance of Rs.6,64,300/- made by the AO. Accordingly, we confirm his order passed on this issue.
G) DISALLOWANCE OF LOSS IN TRANSACTION WITH M/s CHAMPAKLAL DEVIDAS (Ground 4G in assessee’s appeal) 28. The next issue contested by the assessee relates to the disallowance of loss arising on transactions entered with M/s Champaklal Devidas, the proprietary concern of Shri J.P. Gandhi. From the ledger account of the above said party, as available in the books of the assessee, the AO noticed that the assessee has purchased and sold shares of following companies and all of them have resulted in loss to the assessee:-
(a) Century Textile - 5,00,000 (b) RIL - 4,59,200 (c) Cheminor Drugs - 5,98,500
17 Shri Bhupendra C. Dalal ITA Nos. 8176/Mum/2010 & 1023/Mum/2011 (d) G.E. Shipping - 17,000 (e) CCGL - 25,000 (f) 15% Killick Ind. Debeture 8,00,000 -------------------- 24,00,200 ========== In the Patawat Register, the AO noticed that the assessee has recorded these transactions as his own transactions, but subsequently the name of M/s Champaklal Devidas has been inserted. The assessee explained that he has acted as broker in these transactions on behalf of M/s Champaklal Devidas, but the concerned employee has wrongly entered the same as assessee’s transactions. On noticing the mistake the name of M/s Champaklal Devidas was inserted. However, the AO noticed that the sale proceeds of shares of Cheminar Drugs amounting to Rs.1,13,08,500/- has been received in the assessee’s name. Hence the AO was not convinced with the explanations of the assessee and accordingly took the view that the assessee has altered the transactions with a view to suppress the profit. Accordingly he disallowed the loss of Rs.24,00,200/- in the original assessment proceedings.
In the set aside proceedings, the assessee reiterated the earlier explanations and also pleaded that these facts could be ascertained by examining the Shri J.P. Gandhi, the proprietor of M/s Champaklal Devidas and also M/s Milan Mahindra, the buyer of shares of M/s Cheminor Drugs. However, the AO made the addition by observing that the assessee did not produce any other evidence to support the claim so made. The Ld CIT(A) has confirmed the same.
We heard the parties on this issue and perused the record. We notice that the tax authorities have made this addition without cross examining the concerned parties, which would have helped them to decide about the
18 Shri Bhupendra C. Dalal ITA Nos. 8176/Mum/2010 & 1023/Mum/2011 veracity of the explanations given by the assessee. Accordingly, we are of the view that this issue requires fresh examination at the end of the AO. Accordingly we set aside the order passed by Ld CIT(A) on this issue and restore the same to the file of the assessing officer with the direction to examine this issue afresh by examining Shri J.P. Gandhi, proprietor of M/s Champaklal Devidas and/or the parties on whose behalf the shares have been purchased and sold.
H) DISALLOWANCE OF LOSS ON SALE OF SHARES:- (Ground 4H in assessee’s appeal) 31. The next issue relates to the disallowance of Rs.15,24,800/- relating to disallowance of loss arising on sale of shares to certain parties. The AO noticed that the share transactions entered with the certain parties have resulted in profit to those parties and loss to the assessee. The details of the parties along with the profit booked in their names are given below:-
Apco Finance 2,52,000 2. Ankit Investment 2,00,000 3. H.P.Finance Consultancy 4,00,000 4. Chemi Tex Corporation 3,71,700 5. Modern metals 2,50,000 6. Nirul Engineering 20,000 7. Place Siddans U Gough Ltd 31,100 ---------------- 15,24,800 ======== The AO noticed that the account of the above said customers of the assessee have disclosed identical amounts of opening debit balance, i.e., identical amounts have been shown as due from these parties since last year. The value of shares purchased on their behalf was lower than the value of sale of those shares and thus the profit was realised on those transactions on their behalf. It is pertinent to note that the profit so realised was exactly equal to the amount of opening debit balance. In this process, the assessee has
19 Shri Bhupendra C. Dalal ITA Nos. 8176/Mum/2010 & 1023/Mum/2011 squared of the opening debit balances. The AO took the view that the assessee has stage managed the purchase and sales and accordingly squared of the debit balances, the effect of which was that the assessee has shown profits in their respective accounts by booking corresponding loss in his accounts. Since the assessee failed to prove the genuineness of these transactions, the AO disallowed the loss of Rs.15,24,800/- in the original assessment proceeding. In the set aside proceedings, the assessee offered following explanations:-
“There were debit balances of seven clients brought forward from earlier years. Due to certain disputes with these parties, the amounts were not recovered. During the year debit balances were written off in Books of accounts by debiting to BCD Share trading account. The copy of result of inquiry made with these parties is not provided to our client. We have to request you to provide the same. The amount so written off is in relation to income assessed in past and hence it is fully allowable under section 36(2) of the Act.”
The AO did not accept the above said explanations and observed that the assessee has entered into bogus transactions and hence the question of writing off bad debts does not arise. Accordingly he disallowed the loss of Rs.15,24,800/- in the set aside proceedings also. The Ld CIT(A) also confirmed the same.
We heard the parties on this issue. Before us, the Ld A.R submitted that the amount so written off was a trading loss. We notice that the assessee has not actually written off the opening balance as bad debts, but only adjusted the opening balance by showing certain transactions of purchase and sale in shares in such a manner, the profit realised on such shares was equivalent to the opening debit balance. In the normal business transactions, such kind of exact tallying of the balances, that too in respect of seven parties, is unlikely. Hence, we are of the view that there is merit in the observations of the AO that these transactions may not be genuine. We
20 Shri Bhupendra C. Dalal ITA Nos. 8176/Mum/2010 & 1023/Mum/2011 notice that the assessee could not controvert the said inference drawn by the AO and instead taken the view that he has written off the opening balances. Since the transactions of purchase and sale of shares have been shown, the question of writing off of bad debts does not really arise. Hence the explanation of the assessee is in contradiction to the transactions recorded in the books of account. Accordingly we confirm the order passed by Ld CIT(A) on this issue.
I) Treating Business loss as Capital loss:- (Ground 4I in assessee’s appeal) 33. The next issue relates to the disallowance of loss of Rs.20,12,500/- by treating the same as Capital loss. The assessee had purchased shares of M/s Rajasthan Glyxol Ltd in the year 1988 from C.Devidas and M/s CIFCO Ltd. The assessee sold 1,25,000 shares on 07.05.1990 to M/s CIFCO and incurred loss of Rs.20,12,500/-. In the original assessment proceedings, the AO disallowed the loss by treading the transactions as non-genuine. However, the Ld CIT(A) held the same as long term capital loss.
In the set aside proceedings, the assessing officer accepted the order passed by Ld CIT(A) in the first round and accordingly treated the loss as long term capital loss. In the second round also, the ld CIT(A) upheld the order of the AO in treating this loss as long term capital loss.
We heard the parties on this issue. Even though the assessee has contested this issue, we notice that the assessee has treated the purchase of shares of M/s Rajasthan glycol Ltd as an item of “Investment”. Hence we are of the view that the tax authorities have rightly treated the loss as long term capital loss. Accordingly we uphold the order passed by Ld CIT(A) on this issue.
21 Shri Bhupendra C. Dalal ITA Nos. 8176/Mum/2010 & 1023/Mum/2011 J) ADDITION RELATING TO TRANSACTIONS ENTERED WITH BANK OF AMERICA:- (Ground 4J in assessee’s appeal) 36. The next issue relates to the addition of Rs.7.50 crores relating to the transaction with Bank of America/ AD Narottam. The assessee had carried on security transactions with Shri A.D. Narottam (ADN) during the year under consideration. Hence the AO obtained ledger account of the assessee as appearing in the books of Shri ADN. On comparison of the same with the books of accounts of the assessee, the AO noticed that there were many un- reconciled entries.
The AO noticed that the assessee has sold 10% GOI 93 security having a face value of Rs.7.50 crores to Bank of America on 19-05-1990. The assessee delivered the security by issuing SGL from his security account maintained with Bank of Karad and received funds. As per the details furnished by Bank of America, this transaction was reversed on 19-06-1990 by receiving payment of Rs.7.50 crores. The concerned SGL was credited to the account of the assessee maintained with Bank of Karad. Thus, the AO noticed that both the purchase and sale of 10% GOI 93 security was shown by Bank of America in the accounts of the assessee. However, the assessee had shown only sale of security. It was seen that Shri ADN has made payment to Bank of America by selling the above said security to CITI Bank (Rs.5.00 crores) and South Indian Bank (Rs.2.50 crores). Subsequently above said transactions with both the above said banks was seen reversed.
The AO took the view that the assessee has siphoned off Rs.7.50 crores, since the repayment of Rs.7.50 crores never came back to the account of assessee. The AO has summarised the sequence of transactions as under:-
22 Shri Bhupendra C. Dalal ITA Nos. 8176/Mum/2010 & 1023/Mum/2011 (a) On 19-05-1990, B.C. Devidas enters into a RF deal with BOA for 30 days for sale and purchase of 10% GOI-93. He receives 7.50 crores in his account by issuing SGL.
(b) On 19-06-1990, sale of 5 cr 10% GOI-93 to South Indian Bank is made from accounts of A.D.Narottam. In this way 7.50 crore rupees are brought into account of A.D. Narottam.
(c) This 7.50 crores was repaid back to Bank of America. Bank of America shows reversal of the RF deal done earlier with B.C. Devidas and returns SGL. When SGL is returned by BOA, credit for the same is made in the security account of BCD maintained by the BOK, even though he has not made corresponding payment of Rs.7.50 crores either to BOA or to anybody else for that matter. (The fact of credit of the SGL in his security a/c with BOK also nailed the lie about his not being aware of the complete set of fraudulent transactions).
(d) On 20/6/90, B.C. Devidas allegedly sells 25 cr 11.5% GOI-2009 to LIC MF and receives 25 Cr.
(e) On 20/6/90, B.C. Devidas allegedly purchases this 11.5% GOI 2009 from A.D. Narottam and amount of Rs.25 cr is paid in the account of A.D. Narottam.
(f) Out of this 25 cr received by A.D.Narottam on 10-6-1990, CITI Bank is paid 5 cr and South Indian Bank is paid 2.5 crore. Thus deal with CITI Bank and South Indian Bank made on 19-6-1990 are reversed on 20-6-90 and these banks receive bank their dues.
(g) Transactions with LIC MF on 20-6-90 were reversed on 23.7.90. A.D. Narottam repays 25 cr to LIC MF. For making this payment
23 Shri Bhupendra C. Dalal ITA Nos. 8176/Mum/2010 & 1023/Mum/2011 ADN received 25 crores from LICMF itself by showing further sale of 11.5% 2006 security of 25 cr. Face value.
On the basis of these transactions, the AO came to the conclusion that the assessee has siphoned off a sum of Rs.7.50 crores on 19.5.1990 itself, since the assessee has never paid back the above said sum of Rs.7.50 crores. Hence the AO treated the sum of Rs.7.50 crores as income of the assessee in the original assessment proceedings.
In the set aside proceedings also, the assessee submitted that the bank of Karad has wrongly credited his SGL account instead of crediting the same in the account of AND. It was further submitted that the assessee is not liable to pay any amount to anybody on account of these transactions. However, these explanations were not convincing to the AO and hence he added the above said sum of Rs.7.50 crores to the total income of the assessee. The Ld CIT(A) also confirmed the same.
We heard the parties on this issue and perused the record. We are not able to understand as to how the transactions narrated by the AO would lead to the conclusion that the assessee has siphoned off Rs.7.50 crores. The fact that the assessee has sold the securities to Bank of America and received a sum of Rs.7.50 crores is not disputed, meaning thereby, the assessee has duly accounted for the sale of securities and receipt of money there from. Thereafter, the Bank of America has sold the very same security to ADN and he has paid the money to Bank of America by receiving funds from CITI Bank (Rs.5.00 crores) and South Indian Bank (Rs.2.50 cores). Hence, so far as Bank of America is concerned, these transactions of purchase and sale of security is complete. So far as the assessee is concerned, he has only sold the security to Bank of America.
24 Shri Bhupendra C. Dalal ITA Nos. 8176/Mum/2010 & 1023/Mum/2011 41. It is stated that the SGL was returned by Bank of America upon resale of the above said security to ADN and the said SGL was credited to the account of the assessee herein by Bank of Karad. The explanation of the assessee was that the Bank of Karad has erroneously credited the account of the assessee with SGL instead of crediting the account of ADN. We notice that the assessing officer did not seek any explanation either from Bank of Karad or from ADN in this regard. The assessee has further explained that he has given delivery of Rs.7.50 crores security to ADN and it is stated that the copies of SGL account evidencing the above said delivery was given in page 311 of the Paper book. Even though the assessee has not stated as to whether he has received any payment against such delivery, yet we notice that the AO has not brought any material on record to disprove this claim of the assessee. The subsequent transactions narrated by the assessing officer himself shows that the transactions of sale entered with CITI Bank and South Indian Bank by ADN was subsequently reversed by the ADN only. Hence, in our view, there is merit in the contentions of the assessee that his role came to an end upon selling of security to Bank of America and further transactions were entered by ADN.
From the foregoing discussions, we notice that all the transactions have been routed through the bank. The assessee has also stated that neither the Bank of America nor the ADN has raised any claim over the assessee, meaning thereby, there may be merit in the explanations of the assessee. In any case, the receipt of Rs.7.50 crores on sale of security has been duly accounted for by the assessee. The doubt, if any, that should arise is whether the assessee has repurchased the above said security from Bank of America or not, since the SGL returned by the Bank of America has been credited to the account of the assessee by Bank of Karad. If it is considered that the assessee has repurchased the security, then the assessee would be liable to pay a sum Rs.7.50 crores and hence the question of siphoning off of fund, in
25 Shri Bhupendra C. Dalal ITA Nos. 8176/Mum/2010 & 1023/Mum/2011 our view, does not arise. At the most, it may be necessary to examine whether the assessee has paid any money outside the books, which is in the normal circumstances unlikely, particularly when the transactions are routed through the bank. We notice that the AO has not made any such enquiries after having noted that this transaction was Ready Forward transaction. Hence, we are of the view that there is no basis in the conclusion reached by the tax authorities that the assessee has siphoned off the funds. Accordingly, we set aside the order passed by the Ld CIT(A) on this issue and direct the AO to delete this addition.
K) ADDITION ON ACCOUNT OF CASH CREDIT:- (Ground 4K in assessee’s appeal) 43. The next issue relates to the addition of Rs.4.73 crores relating to Cash credits. During the year under consideration, seven cheques aggregating to Rs.14.60 crores were found deposited in the bank account of the assessee. The assessee explained the same to be sale proceeds of securities sold to M/s Excel & Co. When enquired, M/s Excel & Co. denied the transactions. When these facts were brought to the notice of the assessee, he explained that these cheques have been issued from Allahabad bank account belonging to M/s Dhanraj Mills. But the assessee maintained that these amounts were received against sale of securities. The AO noticed that the “credit advice” given by Bank of Karad did not mention anything about the nature of receipt, i.e. it did not mention about the security transactions. Accordingly, the AO took the view that the above said sum of Rs.14.60 crores stand unexplained by the assessee.
The AO further observed that the above said amount of Rs.14.60 crores forms part of the sum of Rs.173 crores fraudulently raised from LIC Mutual Fund by Dhanraj Mills. Further the AO has stated that the assessee has used the above said sum of Rs.14.60 crores to repay a sum of Rs.9.36 crores to
26 Shri Bhupendra C. Dalal ITA Nos. 8176/Mum/2010 & 1023/Mum/2011 LICMF in respect of some other transactions. The AO had earlier assessed the sum of Rs.9.36 crores in the hands of the assessee while considering the security transactions entered with LIC Mutual Fund. Hence the AO assessed the balance amount of Rs.4.74 crores as unexplained receipt in the original assessment proceedings. However, the Ld CIT(A) deleted this addition in the first round on the reasoning that the above said receipts were towards sale of securities, which has already been credited to the Profit and Loss account.
In the set aside proceedings, the assessee submitted that these receipts represent sale proceeds of securities. Since M/s Excel & Co. denied the transactions, the AO took the view that these receipts remain unexplained. He has further observed that mere exchange of cheques does not absolve the assessee of his burden to prove the genuineness of transactions. The AO further observed as under:-
“. The funds of Rs.14.60 crores had actully come from the Allahabad Bank account of Dhanraj Mills Pvt Ltd. However, in the ledger of the assessee there is no transaction with Dhanraj Mills. . M/s Excel and Co. has denied the payments or transactions with the assessee. . The credit notes from Bank of Karad also do not indicate Security transactions. . The assessee has not furnished the details of purchase of security transaction as claimed by him. Thus it is clear that the receipts were transfer of funds from Dhanraj Mills Pvt Ltd which the assessee has passed as security transaction. This sum of Rs.14.60 crores has been partly utilised by the assessee to pay his dues to LIC Mutual Fund itself in respect of some other transactions (Rs.9.36 crores). This amount has been considered earlier in the para relating to security transaction of assessee with LIC Mutual Fund. The remaining amount Rs.14,60,33,377 (-) Rs.9,86,65,896/- = Rs.4,73,67,481/- is added to the income of the assessee being unexplained receipts.”
27 Shri Bhupendra C. Dalal ITA Nos. 8176/Mum/2010 & 1023/Mum/2011 In the second round of appellate proceedings, the Ld CIT(A) upheld the addition by observing that the Ld CIT(A) has not properly appreciated the factual aspects in the first round.
The Ld A.R submitted that the assessee has furnished full details of securities sold in these transactions before the Ld CIT(A) during the course of first round of proceedings. The Ld CIT(A) remanded the matter to the AO seeking his comments and upon considering the report of the AO, he has deleted the addition in the first round of proceedings. He further submitted that the assessing officer has not shown that the assessee sold the securities without having them in stock. He further submitted that the LIC Mutual fund has not raised any claim over the assessee for recovery of amount.
On the contrary, the Ld D.R submitted that the assessee has recorded the transaction as sale of securities to M/s Excel & Co. However, M/s Excel & Co. has denied the transactions. Further it was found that these amounts aggregating to Rs.14.60 crores have been received from M/s Dhanraj Mills, who in turn had received funds from LIC Mutual Fund through fraudulent transactions. Further the assessee has used these funds to repay a sum of Rs.9.87 crores to LIC Mutual Fund. Accordingly the AO has taken the view that net amount of Rs.4.73 crores remain unexplained.
We heard the parties on this issue and perused the record. The fact that impugned amount of Rs.14.60 crores was received from the account of M/s Dhanraj Mills is not in dispute as of now. In the books of accounts of the assessee, the same was shown as received from M/s Excel & Co., which fact was denied by M/s Excel & Co. The explanation of the assessee was that the above said amount of Rs.14.60 crores was received in connection of sale of securities and in his books of account, the client name was mentioned as M/s Excel & Co., where as the amount has been received from M/s Dhanraj Mills.
28 Shri Bhupendra C. Dalal ITA Nos. 8176/Mum/2010 & 1023/Mum/2011 Since the above said amount represents sale proceeds of securities, it was contended that the name of the payee is not much relevant, since the entire sale proceeds has been declared in the Profit and Loss account. It is pertinent to note that the Ld CIT(A) has accepted this fact in the first round of proceedings, after getting remand report from the assessing officer. When the assessee has declared the sale proceeds of securities in his Profit and Loss account, then making addition of same amount again on some other reasoning would result in double taxation. The following observations made by the Ld CIT(A), in the first round of proceedings, are relevant here:-
“81. The next question that is to be considered is whether the securities, which are shown in the books of accounts as having been sold to Excel & Co., were present in the stock of assessee for sale. In this connection, as already mentioned, assessee had filed copies of ledger account of securities involved in alleged transactions with Excel & Co. There is a separate ledger for each alleged transactions with Excel & Co. there is separate ledger for each security. Name of persons from whom securities have been purchased and to whom securities have been sold are mentioned in the individual ledger for each security. It is not the case of the AO that the assessee could not have sold the securities, which are listed on page 94 of the assessment order, due to lack of such stock. It is found that the AO had desired the assessee to identify the security. Once the assessee has maintained individul ledger account for various kind of securities, the assessee cannot pinpoint as to from which party the security allegedly sold were purchased from. I am not in agreement with the Learned AO that the assessee should have pointed out the name of the persons from whom the securities have been sold. These facts are mentioned in the ledger itself along with voucher number, date, face value etc. 82. I have already narrated the facts that are mentioned in the assessment order, facts of which have been covered by the AO on investigation. The addition has been made u/s 68 of the I.T Act. The AO had after investigation came to the conclusion that the appellant has wrongly attributed the source of funds to Excel & Co., but at the same time he has found that the source is actually traceable to DMPL. It is a case where the assessee has mentioned an incorrect source while basic fact does not get obliterated that the AO has himself traced out the source of DMPL. That the money has flowed from DMPL, has not been disputed by the AO. In fact he has proved that by investigation
29 Shri Bhupendra C. Dalal ITA Nos. 8176/Mum/2010 & 1023/Mum/2011 he has proved the evidence that the sum of Rs.14.60 crores flowed from DMPL and found place in the bank acccount of the assessee in BOK. Thus, it has been proved that the money in the sum of Rs.14.60 crores has a source extraneous to the assessee. There is nothing on record even remotely to suggest that the assessee has ploughed back his own secreted funds in the cloak of sale proceeds as cash credits. Further, application of section 68 comes in the picture only when the identity of the creditor, credit worthiness is in doubt. It is not the case of the AO that the DMPL had no capacity to give Rs.14.60 crores on the days when cheques were issued. DMPL is assessed to I.T. Hence, in my considered opinion, the source having been established and source being known and established source the basis of addition u/s 68 does not exist. Conversely, if for a moment and for the sake of arguments it comes to be held that the appellant has failed to explain the nature and source of funds, the question that crops up is what treatment has to be given to the funds of Rs.14.60 crores. The appellant’s contention is that the entire amount to the last rupee has duly been routed through Profit and Loss account and the entire receipt is nothing but sale proceeds of securities. The credits in various ledger accounts are verifiable with reference to books of accounts of assessee. The receipts of money fully matches with amounts credited in Security sale accounts. If the sum of Rs.14.60 crores is again added u/s 68 of I.T Act, it will result in double addition leading to absurd results. By sale of securities, closing stock of securities has been accordingly reduced. The sale proceeds having been credited to profit and loss account and source of the funds being adequately established, there is no question of addition u/s 68 of the I T Act. Further, it has to be stated that the AO has separately made an addition for oversold position of securities. This takes into account any shortfall, if at all in availability of securities. I delete the addition of Rs.4.60 crores”.
In our view, the majority of observations made by the Ld CIT(A) in the first round of proceedings, which are extracted above, brings out correct proposition of law. The Ld CIT(A) has shown that the ingredients for making an addition u/s 68 of the Act have not been fulfilled. Further he has given a finding that the assessee has included the above said amount of Rs.14.60 crores in the sale proceeds of securities and hence making of separate addition again as cash credits would lead to double addition. The security wise ledger account shows that there was corresponding purchase of securities and the closing stock has also been reduced by the sale quantity.
30 Shri Bhupendra C. Dalal ITA Nos. 8176/Mum/2010 & 1023/Mum/2011
In the second round of proceedings, the Ld CIT(A) has observed that that his predecessor’s observation that the amount of Rs.14.50 crores is entirely subsumed in the transaction of Rs.173 crores with LIC Mutual Fund on the basis of wrong appreciation of facts and accordingly took the view that the difference between the receipt of Rs.14.60 crores and the payment of Rs.9.86 crores remain unexplained. However, the Ld CIT(A) has failed to appreciate that his predecessor has deleted the addition on various reasoning and at the end he has observed, as an alternative, that the addition of oversold position would cover this addition also. The main reasons given by the Ld CIT(A), in the first round of proceedings, were that (a) the conditions for making addition u/s 68 have not been fulfilled and (b) the assessee has disclosed the above said amount as sale proceeds and hence making of addition u/s 68 of the Act would result in double addition. We notice that the Ld CIT(A) did not consider/address this factual/legal position in the second round of proceedings.
In view of the foregoing discussions, we are of the view that the decision taken by Ld CIT(A) in the first round of proceedings sounds reasonable and justifiable. Accordingly, we set aside the order passed by Ld CIT(A) on this issue in the current proceedings and direct the AO to delete this addition.
L) ADDITION ON ACCOUNT OF CASH DEPOSITS:- (Ground 4L in assessee’s appeal) 51. The next issue contested by the assessee relates to the addition of cash deposits of Rs.13.00 lakhs made in the bank account of the assessee. The assessee has made a deposit of Rs13.00 lakhs on 27.03.1991 in O/D account No.348 maintained in Bank of Karad. The assessee explained the sources as the withdrawals earlier made by him in the months of November, 1990 to
31 Shri Bhupendra C. Dalal ITA Nos. 8176/Mum/2010 & 1023/Mum/2011 March 1991. In view of the time gap, the AO did not accept the said explanations and accordingly added the above said sum of Rs.13.00 lakhs as income of the assessee in the original proceedings. In the set aside proceedings, the assessee submitted that the deposit was made out of book balance and further the book does not show any negative cash balance. The AO did not accept the same and accordingly assessed the sum of Rs.13.00 lakhs as income of the assessee in the set aside proceedings also. The Ld CIT(A) confirmed the same.
We heard the parties on this issue and perused the record. The Ld A.R submitted that the impugned deposit has been made out of cash balance available in the books of account, particularly petty cash ledger account. He submitted that the assessee was having sufficient cash balance in the books. On the contrary, the Ld D.R submitted that the assessee has failed to convincingly explain the sources of making deposits.
We notice that the assessee has given different explanation during the course of the present assessment proceedings, i.e., according to the assessee the petty cash ledger account had sufficient cash balance and the deposit was made out of cash balance available on hand. We notice that the tax authorities have not examined the petty cash ledger account available with the assessee. According to Ld A.R, the copy of petty cash ledger is available in pages 209 to 211 of the paper book. Since this aspect requires verification, we set aside the order passed by Ld CIT(A) on this issue and restore the same to the file of the AO with the direction to examine the petty cash ledger account and if he is satisfied that sufficient cash balance was available on hand, then delete this addition.
M) REJECTION OF CLAIM OF SET OFF OF SPECULATION LOSS AGAINST SPECULATION INCOME:- (Ground 4M in assessee’s appeal)
32 Shri Bhupendra C. Dalal ITA Nos. 8176/Mum/2010 & 1023/Mum/2011 54. The next issue urged by the assessee relates to the addition of Rs.50,14,729/- relating to loss on Share trading Account. The assessee has carried out purchase and sale of shares on his own account. The trading transactions were maintained in a separate account titled as “BCD Share Account”. This account showed certain transactions which resulted in loss. The AO has listed out the same in page 108-109 of the assessment order, which aggregate to Rs.45,44,258/-. The AO called for explanations with regard to the losses. The assessee explained that the loss represent badla charges and also explained modus operandi carried out by him in respect of share transaction carried in a share named “Garware Nylon”. Accordingly he submitted that the loss incurred actually represents badla charges. The AO noticed that the assessee has not identified all badla transactions and accordingly took the view that the loss of Rs.50,14,729/- was of speculative in nature and the same cannot be set off against the business profits. Accordingly the AO also added the same to the total income of the assessee.
The Ld CIT(A) took the view that the loss of Rs.50,14,729/- should be considered as speculation loss and accordingly directed the AO to allow carry forward of the same.
We heard the parties on this issue and perused the record. The Ld A.R submitted that the assessee has not incurred such huge loss as pointed out by the AO. He submitted that this fact could have been verified from the books of account. He further submitted that if the badla transactions are treated as speculative in nature, then the badla income shown by the assessee should have been directed to be set off against the loss identified by the AO. On the contrary, the Ld D.R submitted that the assessee has failed to furnish necessary details relating to this issue.
33 Shri Bhupendra C. Dalal ITA Nos. 8176/Mum/2010 & 1023/Mum/2011 57. We have noticed that the assessing officer has identified certain loss and the amount quantified by the AO is being disputed by the assessee. Accordingly, we are of the view that the assessee should be provided with an opportunity to quantify the correct amount of loss from the books of account. Further, the assessee has also pleaded that the loss should be allowed to be set off against the profit earned from the similar types of transactions. We find merit in the said submission also. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and restore the same to the file of AO with the direction to examine this issue afresh by affording the relevant documents for inspection/taking copies. The assessee is also directed to quantify actual loss from the books of account, which shall be examined by the AO. Further, we also direct the AO to allow set off of loss against income of identical nature and the balance, if any, may be carried forward. We order accordingly.
N) ADDITION RELATING TO TRANSACTIONS ENTERED WITH LIC MUTUAL FUND:- (Additional ground in assessee’s appeal and Ground Nos. 9 to 15 in revenue’s appeal) 58. The AO had made an addition of Rs.52.75 crores and the Ld CIT(A) confirmed the addition to the extent of Rs.17.69 crores. Initially the assessee did not raise any ground relating to this issue, since the AO had given full relief of Rs.52.75 crores in the order passed to give effect to the order of Ld CIT(A). Later, the AO realised his mistake and accordingly passed a rectification order confirming the addition to the extent of Rs.17.69 crores and hence the assessee has raised this additional ground. We notice that the revenue has challenged the relief granted by the Ld CIT(A). In view of the above, we admit the additional ground urged by the assessee contesting the addition to the extent of Rs.17.69 crores confirmed by Ld CIT(A). The revenue is also contesting the relief granted by Ld CIT(A).
34 Shri Bhupendra C. Dalal ITA Nos. 8176/Mum/2010 & 1023/Mum/2011 59. During the year under consideration, the assessee has entered Ready Forward transactions with LIC Mutual fund, i.e., the assessee sold the securities to LIC Mutual Fund on the following dates:-
Date Security details Amount 17.05.1990 11.5% GOI 2006 17,69,64,610.89 02.06.1990 10% GOI 1993 6,23,39,160.00 04.06.1990 6.75% State 98,31,000.00 04.06.1990 11.5% GOI 2008 2,51,79,949.22 20.06.1990 11.5% GOI 2009 25,31,46,107.88 ------------------------ 52,75,60,827.99 =========== According to LIC Mutual Fund, the above said transactions were reversed on the following dates:-
14.08.1990 18,39,46,228.42 02.07.1990 6,32,08,920.00 05.07.1990 99,56,244.00 05.07.1990 2,55,00,732.60 23.07.1990 25,59,54,878.22 ----------------------- 53,85,67,003.24 =========== The AO noticed that the assessee had paid a sum of Rs.9,86,65,896.60 only and the balance amount was paid by the following parties:-
Dhanraj Mills 18,39,46,228.42 A.D.Narottam 25,59,54,878.22
The AO noticed that a person named J.P. Gandhi, who was alleged to be a close associate of the assessee herein has obtained a sum of Rs.173 crores
35 Shri Bhupendra C. Dalal ITA Nos. 8176/Mum/2010 & 1023/Mum/2011 from LIC Mutual Fund by issuing Banker’s Cheques in favour of Allahabad Bank. The cheque for 173 crores was stated to be deposited in the account of Dhanraj Mills, which in turn was advanced to various parties including the assessee herein. The AO noticed that the assessee has received a sum of Rs.14.60 crores from M/s Dhanraj Mills. The AO further noticed that the above said sum of Rs.18.39 crores paid by M/s Dhanraj Mills to LIC Mutual fund was paid out of the amount of Rs.173 crores received by it. By observing these transactions, the AO came to the conclusion that the funds received from LIC Mutual fund has been siphoned off by the assessee in collusion with M/s Dhanraj Mills and other parties.
Then the AO analysed the transactions entered by the assessee with LIC Mutual Fund. The AO noticed that the Bank of India received a Bank Receipt (BR) from Bank of Karad on 17.5.1990. On the strength of the said BR, the Bank of India issued its own BR for 17.50 crores 11.5% GOI 2006 to LIC Mutual fund, which in turn paid money to Bank of India which was credited to the assessee’s account.
The AO noticed from the “Securities Ledger of the assessee” maintained by Bank of India that the Bank of India received back the BR from LIC Mutual fund on 05-07-1990, which was given by it earlier, i.e., there was credit and debit of BRs on 05.07.1990 in the Security Ledger of assessee maintained by Bank of India. On the same date, the Bank of India returned back the BR received from Bank of Karad.
When the AO made enquiries with the assessee and came to the conclusion that the assessee was not able to identify the party from whom the above said security was purchased. The transfer and receipt of BR did not find place in the Securities ledger of the assessee. Hence the AO came to the conclusion that the assessee has purchased the securities from his
36 Shri Bhupendra C. Dalal ITA Nos. 8176/Mum/2010 & 1023/Mum/2011 undisclosed sources on 17.5.1990 and took it back on 05-07-1990. The AO also looked at the transactions in a different angle, i.e., the assessee has issued BR without the backing of a security and raised funds. When the assessee took back the BR, the repayment of loan was done by somebody else.
In the same manner, the AO analysed other transactions also and came to the conclusion that the repayment was not made by the assessee and further the assessee could not identify the parties from whom the securities were purchased by him. The assessee explained that the BRs are in the nature of bearer BRs and hence it can be circulated in the market. He further submitted that there is no case for making addition of Rs.52.75 crores. The AO was not convinced with the explanations and accordingly assessed the above said amount of Rs.52.75 crores in the first round of proceedings.
In the second round, the assessee heavily relied upon the submissions made before Ld CIT(A) in the first round of proceedings. The assessee further submitted that the LIC Mutual Fund has not lodged any claim with the assessee. He further submitted that the Ld CIT(A) has deleted the addition of Rs.9,74,50,100/- & Rs.25,31,16,107/-. However, the AO observed that the assessee has not identified the parties from whom securities were purchased and further the repayment of amount has not been made from the bank account of the assessee. Accordingly he again assessed the entire amount of Rs.52.75 crores as income of the assessee. The Ld CIT(A) simply followed his predecessor’s order passed in the first round of proceedings and accordingly confirmed the addition to the extent of Rs.17.69 crores and deleted the balance amount of addition.
We heard the parties on this issue and perused the record. We notice that both the tax authorities have followed the order passed in the first round
37 Shri Bhupendra C. Dalal ITA Nos. 8176/Mum/2010 & 1023/Mum/2011 of proceedings. On a perusal of the order passed by Ld CIT(A), we notice that the Ld CIT(A) has made following observations/given findings:-
(a) On 17.5.1990, Bank of India received B R No.2697 of Bank of Karad of Rs.17.50 crores 11.5% GOI-2006. The credit for this BR was given in the account of the assessee by Bank of India. On the strength of this BR, Bank of India issued its own BR No.557 to LIC Mutual Fund. LICMF released funds of Rs.17.69 crores, which were deposited in A/c No.10459 of assessee in Bank of India.
(b) The Assessing officer made independent enquiries and found that the pay order of Rs.17.69 crores drawn by Bank of India was deposited into the A/c of one M/s Dhanraj Mills P Ltd in Bank of Karad. The assessee expressed ignorance about the credit of funds in the account of M/s Dhanraj Mills P Ltd.
After analysing the facts relating to transfer of BR and funds, the Ld CIT(A) came to the following conclusion:-
“As discussed earlier, it was found by the Assessing Officer that the pay order of Rs.17.69 crores was deposited in the a/c of M/s Dhanraj Mills (P) Ltd in Bank of Karad. The voucher of Bank of Karad in this regard is available on the record. On perusal of the same, I find that the said voucher gives graphic details like date of transaction, face value and particulars of the security, rate at which the transaction took place and also the number of two BR issued (BR No.2697). All these details match perfectly with the details of the securities claimed to have been sold to the LIC MF by the assessee. Even the number of BR mentioned in the said voucher is the same as that mentioned by the Assessing Officer in his assessment order. The AO at no place in his assessment order has doubted the veracity of this voucher. In fact on the basis of very voucher he found that the money was deposited in
38 Shri Bhupendra C. Dalal ITA Nos. 8176/Mum/2010 & 1023/Mum/2011 the a/c of M/s Dhanraj Mills P Ltd. Therefore I have reason to belive that the Assessing officer has admitted it as a genuine document.
Even if the assessee has not admitted to the source of his purchase of the said securities, the fact remains that the Assessing officer has made complete enquiries in this regard. He has traced the movement of fund of Rs.17.69 crores from LIC MF to the a/c of M/s Dhanraj Mills P Ltd. The supporting voucher of Bank of Karad to this effect also clearly states that the said money was deposited into the a/c of M/s Dhanraj Mills P Ltd and BR No.2697 was issued by Bank of Karad. It is also undisputed fact that based on this very BR, Bank of India issued its BR to LIC MF.
Under the given facts and circumstances, I find no reason to agree with the conclusion of the Assessing officer that the purchase of the said security in the form of BR No.2697 (of BOK) was from undisclosed sources.”
However, there is some obscurity in the above said observations of the tax authorities. (a) It is stated that the Bank of India received BR from Bank of Karad. However it was not investigated or found as to from whose account the BR was issued by Bank of Karad to disprove the claim of the assessee that he purchased the security.
(b) It was initially stated that proceeds of Rs.17.69 crores given by LIC MF was credited to bank account No.10459 of the assessee. In the later part, it is stated that the above said amount of Rs.17.69 crores was deposited in the account of M/s Dhanraj Mills P Ltd maintained with Bank of Karad through a Bank draft issued by Bank of India. It is not clear as to whether the above said funds of Rs.17.69 crores was transferred to the account of M/s Dhanraj Mills P Ltd by debiting the account of the assessee.
39 Shri Bhupendra C. Dalal ITA Nos. 8176/Mum/2010 & 1023/Mum/2011 (c) Thus, it is seen that the security has come from Bank of Karad and the payment has also gone to Bank of Karad. Under these set of facts, the role of the assessee was not made clear.
As per the details of repurchase of this security, the LIC MF received back a sum of 18.39 crores on 14.8.1990 by reversing the above said transactions. There is also no dispute with regard to the fact that the above said amount of Rs.18.39 crores was given by M/s Dhanraj Mills P Ltd. We notice that the tax authorities have not examined the details of the repayment vis-à-vis the transactions of sales, wherein the sale proceeds have ultimately reached the account of M/s Dhanraj Mills P Ltd. Thus, we notice that the sale proceeds of Rs.17.69 crores received on sale of “Rs.17.50 crores 11.5% GOI 2006” was received by M/s Dhanraj Mills and the repayment of the proceeds on repurchase of the above security was also made by M/s Dhanraj Mills.
It may be relevant to state that the AO had made an alternative observation that the amount of Rs.17.69 crores raised by the assessee by issuing BR, which had no backing of the concerned security. The Ld CIT(A) has rejected the said presumption of the AO in the first round of proceedings with the following observations:-
“69. I have gone through the records and find that there is no material on record to suggest that the BR issued by Bank of Karad (BR No.2697) had no backing of the concerned security. Moreover the issue whether this particular BR was backed by security or not is not relevant because the purchase of the sold security has already been traced to the a/c of M/s Dhanraj Mills P Ltd. Accordingly the alternative conclusion of the assessing officer is also unacceptable.”
Thus, we notice that the Ld CIT(A) has rejected both the grounds made out by the AO in the first round of proceedings, viz., (a) the purchase of security was not proved and (b) the BR did was not backed by the security, to make the addition of Rs.17.69 crores.
40 Shri Bhupendra C. Dalal ITA Nos. 8176/Mum/2010 & 1023/Mum/2011
However, the Ld CIT(A) has proceeded to take cognizance of entries made by the Bank of India in the Security Account of the assessee on 05-07- 90. It may be remembered that there was debit and credit entries in the Securities Account of the assessee on 05-07-1990. In the absence of complete details given by LICMF and Bank of Karad, the Ld CIT(A) took the view that the entries made by Bank of India were reliable. When these entries were confronted with the assessee, he replied as under:-
“We are not aware how the BR No.0057 has been noted by Bank of India to have received BR in our a/c on 5.7.90 and returned to BOK on 5.7.90. There is no transaction recorded in our books nor has payment been made or received.” The assessee also contended that the said transactions recorded on 5.7.90 have no financial implications, since there was no movement of funds on the particular date. However, the Ld CIT(A) took the view that the transactions of 5.7.90 have definite financial implications even though there was no movement of fund. Accordingly he upheld the addition of Rs.17.69 crores as unexplained investment.
As noticed earlier, the AO has followed the decision taken by him in the first round of proceedings, particularly the view that the purchase of securities was not proved by the AO. We noticed earlier that the Ld CIT(A) has rejected the said view of the assessing officer in the first round of proceedings. In the second round, the Ld CIT(A) has followed his predecessor’s order, meaning thereby, the view taken by his predecessor has been followed. Accordingly, the view of the AO that the purchase of security was not proved or alternatively the BR was not backed by the security stood rejected by Ld CIT(A) in the second round also. Accordingly the addition of Rs.17.69 crores came to be sustained by the Ld CIT(A) only on the reasoning that the same was unexplained investment made on 5.7.90. As noticed earlier, the Ld
41 Shri Bhupendra C. Dalal ITA Nos. 8176/Mum/2010 & 1023/Mum/2011 CIT(A) came to the conclusion on the basis of entries found in the “Securities Account of the assessee” maintained with Bank of India.
With regard to the view expressed by the AO that the purchase of security was not proved, we notice that the Ld CIT(A) has analysed the facts and has expressed the view that such a conclusion is not possible in the facts available in this case. The observations made by Ld CIT(A) was extracted by us earlier, in which, the Ld CIT(A) has examined the details of BR and descriptions made therein. In our view, the Ld CIT(A) has taken a judicious view in this matter and hence we are inclined to accept the same. The alternative presumption of the AO that the BRs are not supported by securities, was also rejected by the Ld CIT(A) and his observations are also extracted above. We notice that the alternative view taken by the AO was only a presumption and hence we are inclined to agree with the view of Ld CIT(A) on this matter also.
Hence the question that arises before us is whether an addition could be made on the basis of entries found in the “Securities Account” maintained by Bank of India on 5.7.90. It may be recalled that the assessee has expressed ignorance about the entries passed by Bank of India. In any case, the assessee has submitted that those entries do not have any financial implication and hence the question of making addition does not arise. The ld CIT(A) has rejected the said submissions on the reasoning that the entries made by Bank of India is most reliable in the facts and circumstances of the case. Accordingly he took cognizance of the entries made in the books of Bank of India and accordingly treated the sum of Rs.17.69 crores as unexplained investment.
The view taken by the Ld CIT(A) may be right in respect of the Credit entry, i.e., the receipt of security. It is also on record that the very same
42 Shri Bhupendra C. Dalal ITA Nos. 8176/Mum/2010 & 1023/Mum/2011 security was debited to the account of the assessee, meaning thereby, it was transferred on the very same day, i.e., on 05-07-1990. Further, the corresponding financial transactions have not been traced by the tax authorities, i.e., whether the assessee made payment for the receipt of security and whether the assessee received the money on its transfer. Further, the Ld CIT(A) has not taken any steps to clarify his presumption by making enquiries with Bank of India and LIC Mutual Fund. An addition, in our view, would be warranted only if the same involves financial implication. Thus, we notice that the Ld CIT(A) has taken this view only on interpretation of certain entries found in the books of Bank of India, which was not substantiated. Hence, we are unable to agree with the view taken by the Ld CIT(A) on this issue. Accordingly we set aside the order passed by him on this issue and direct the AO to delete the addition of Rs.17.69 crores, referred above.
The next addition relate to following three items of transactions carried on by the assessee with LIC MF.
02.06.1990 10% GOI 1993 6,23,39,160.00 04.06.1990 6.75% State 98,31,000.00 04.06.1990 11.5% GOI 2008 2,51,79,949.22
The AO has made this addition only for the reason that the assessee has obtained funds M/s Dhanraj Mills, who in turn had taken loan of Rs.173 crores from LIC MF. Accordingly the AO took the view that the assessee has used the funds received from LIC MF to purchase securities back from LICMF. Accordingly the AO took the view that the assessee has siphoned off the funds taken from LICMF in the first instance.
43 Shri Bhupendra C. Dalal ITA Nos. 8176/Mum/2010 & 1023/Mum/2011 73. The Ld CIT(A) has deleted this addition by relying on the following observations made by his predecessor in the first round of proceeding:-
“74. The matter was again discussed finally with the AO and the Learned A.R. Receipt of money from DMPL is not in dispute. How DMPL procured the sum of Rs.173 crore from LICMF is not relevant to determine whether assessee has extinguished his liability to LICMF. LICMF is not claiming that any amount is due in respect of the security transactions listed in paragraph 60. The AO has himself stated that entire money has been paid to LICMF. The source of money out of which payment has been made to LICMF while purchasing security is proved. Under such a situation no addition could be made either u/s 68 or 69 of the I T Act. I do not find any other provision which could bring the sum of Rs.9,74,50,109/- being aggregate of sale consideration of securities listed at items (ii), (iii) and (iv) in paragraph 60. The addition is therefore deleted.”
We heard the parties on this issue. We notice that the AO has not doubted the sale of above stated three securities to LICMF. His concern was that the assessee has borrowed funds from M/s Dhanraj Mills, who in turn, has borrowed funds from LICMF. According to AO, the assessee has obtained funds from LICMF indirectly and used the very same funds to purchase back the securities from LICMF. Accordingly the AO has come to the conclusion that the assessee has siphoned off the funds in collusion with M/s Dhanraj Mills.
We notice that all the transactions have been carried out through banking channels. The sources of money transactions are traceable/established. There is no dispute that the concerned securities have also exchanged hands. Under these set of facts, we are of the view that there is no basis available with the AO to come to such a conclusion that the funds have been siphoned off. We notice that the AO has considered these transactions in isolation without examining the books of account to ascertain the resulting transactions. Further, the Ld CIT(A) has, in our view, rightly
44 Shri Bhupendra C. Dalal ITA Nos. 8176/Mum/2010 & 1023/Mum/2011 observed that there is no provision under the Act to assess the sum of Rs.9.74 crores as income of the assessee, in facts and circumstances narrated above. Accordingly we uphold his order on this issue.
The last item relates to the addition made in respect of following transaction:-
20.06.1990 11.5% GOI 2009 25,31,46,107.88
The AO noticed that the assessee sold the above said securities on 20-06-90 to LIC MF and received money. He noticed that the assessee has shown to have purchased shares from A.D. Narottam (ADN). According to AO, neither the assessee nor the ADN had held shares on that date, since the examination of ADN revealed that he did not have BR, SGL etc., on that date. The AO noticed that on 23.07.1990, i.e., the date of reversal of transaction, a sum of Rs.25.00 crores was received in the account of ADN for alleged sale of 11.5% GOI-2006 security. According to the AO, the assessee used the above said funds of ADN to repurchase the security sold on 22.6.1990, i.e., the assessee received funds from ADN and used the same to purchase the security. Since the payment was made to LICMF from the account of ADN, the AO concluded that the assessee has siphoned off the funds and subsequently extinguished his liability to LICMF without making any payment from his account.
The Ld CIT(A) has dealt with this issue in the following manner in the first round of proceeding and the same was followed by him in the second round also:-
“77. I have considered submissions made in respect of addition of Rs.25,31,16,107/-. I have considered relevant portion of assessment order. From page 87 of the order it is clear that purchase of above security from ADN is recorded in the books of account of assessee. Sale of the same to LICMF is also recorded on 20.6.1990. The AO has
45 Shri Bhupendra C. Dalal ITA Nos. 8176/Mum/2010 & 1023/Mum/2011 noted that on that date neither the assessee nor ADN had these securities. AO has also noted that on the reversal date ADN had received Rs.25 crores in its bank account on sale of 11.5% GOI-2006 security. It is to be mentioned that security sold to LICMF on 20.6.90 was 11.5% GOI-2009 and not 11.5% GOI-2006. The AO has noted on page 92 that SGL for 11.5% GOI-2009 was issued by assessee from Bank of India on 20-06-90. It is on strength of above facts that addition of Rs.25 crores (in round figure) was made. It was submitted that securities was purchased by the assessee on 20-06-90 from ADN and sold to LICMF. It was also mentioned by the Learned A.R that the assessee after selling these securities to LICMF was not conscious of what happened to these securities after that date. I find that the assessing officer has not shown as to what was the exact mode of delivery of 11.5% GOI-2009 to LICMF on 20-06-90. The assessee has made payment for purchasing the same to ADN (sic. from). From assessment order it does not appear that LICMF has claimed that SGL was issued by the assessee. LICMF, it appears, does not say that monies had been handed over to the assessee on 20.6.90 without receipt of 11.5% GOI-2009 of face value of 25 crores. The premises on which additions have been made are not only factually and legally unsound but are also not clear. The assessing officer has not established that the assessee had a SGL account in Bank of India. This fact had been made clear by the assessee to the AO in its letter dated 8.3.94. The fact that ADN received money on 23.7.90 to the tune of Rs.25 crores by sale of some other security, namely 11.5% GOI-2006 is of no relevant for making the impugned addition. Purchase of 11.5% GOI-2009 is reflected in the books of the assessee on 20.6.90. Payment for the same has been made to ADN. The addition of Rs.25 crores (in round figure) appears to have been made by the AO for possessing unaccounted assets. The charge of possessing unaccounted asset does not stand. The addition is deleted.”
We notice that all the transactions have been carried through banking channels. The sources of money transactions are traceable/established. Though the AO expressed doubts about the existence of securities, in our view, the same may not be relevant for income tax purposes. So long as the money transactions are identified and the sources thereof are not doubted, the question of treating the same either as “money siphoned off” or as “unaccounted investments” does not arise. In this case also, the AO has considered these transactions in isolation without examining the books of
46 Shri Bhupendra C. Dalal ITA Nos. 8176/Mum/2010 & 1023/Mum/2011 account to ascertain the resulting transactions. Further, the Ld CIT(A) has pointed out that the AO has confused himself by linking the transactions relating to 11.5% GOI-2006. In view of the above, we are of the view that there is no reason to interfere with the decision taken by Ld CIT(A) on this issue.
OTHER ISSUES URGED IN DEPARTMENT’S APPEAL:-
O) ADDITION RELATING TO SHARE DEALINGS IN RIL SHARES WITH CIFCO:- (Ground Nos. 4 to 6 in revenue’s appeal) 78. The AO noticed that the assessee has sold 5500 shares of RIL @ Rs.118/- per share to CIFCO Ltd on 28.7.1990. Subsequently, the assessee has purchased back the shares on 09.10.1990 @ Rs.245/- per share. These transactions resulted in a loss of Rs.6,98,500/-. Even though the assessee contended that these transactions have been entered at the prevailing market rates, the AO took the view that the assessee has failed to prove the genuineness of these transactions and accordingly disallowed the loss in the first round of proceedings.
The Ld CIT(A) deleted this disallowance in the first round. However, the AO again made the addition in the second round of proceedings. The Ld CIT(A) again deleted this addition in the second round. Aggrieved the revenue is agitating the decision rendered by Ld CIT(A) on this issue.
We heard the parties and perused the record. We notice that the assessee has furnished the Stock exchange quotation available on 27.7.1990(Rs.119/-) and on 09-10-1990 (Rs.232/-). Thus, the Ld CIT(A) noticed that the impugned transactions have been carried out at market rate. Accordingly the Ld CIT(A) held as under:-
47 Shri Bhupendra C. Dalal ITA Nos. 8176/Mum/2010 & 1023/Mum/2011 “15.3 I am in agreement with my ld.. Predecessor’s argument that since there are large number of transactions in RIL shares by appellant during the previous year, it is not legally tenable to pick out one or two transactions, work out loss and disallow the same. For these reasons, respectfully following my Ld. Predecessor’s decision in this regard, the disallowance is directed to be deleted.”
We agree with the view expressed by the Ld CIT(A). Since it is shown that the transactions have taken place at market rate, in our view, there is no reason to suspect the transactions. In this case, the assessee has sold the shares on 27.7.1990 to CIFCO, meaning thereby the assessee had purchased the same on an earlier occasion from some other person. Subsequently the assessee has purchased the shares back from CIFCO, meaning thereby, the assessee would have sold the shares to someone else. Accordingly, we are of the view that the Ld CIT(A) has rightly observed that the AO has cherry picked two transactions, which should not have been done. Accordingly we uphold the order passed by Ld CIT(A) on this issue.
P) ADDITION RELATING TO BONUS, RIGHTS & DIVIDENDS (Ground Nos. 7 & 8 in revenue’s appeal) 81. During the year the assessee has transferred the rights relating to bonus shares, Rights and dividends to his clients. The AO valued the transfer of such rights at Rs.20,79,336/- and assessed the same. Even though the Ld CIT(A) deleted the above said addition in the first round, the AO again made the addition in the set aside proceedings. However, the Ld CIT(A) again deleted the addition in the second round and hence the revenue is aggrieved.
The Ld CIT(A) noticed that the assessee has explained before the AO, vide letter dated 28.3.1994, that the shares of Tata Chemicals and Sesa Goa were purchased on cum rights basis and were sold on cum-rights basis only to various parties. Accordingly it was submitted that the various parties only have received the benefits of bonus, rights and dividends. The assessee also
48 Shri Bhupendra C. Dalal ITA Nos. 8176/Mum/2010 & 1023/Mum/2011 furnished the names and addressed of the persons to whom the shares were sold. Accordingly, the Ld CIT(A) decided this issue as under in the first round of proceedings:-
“48. I have considered submissions made. The AO has evidently not made any inquiry with those parties and has proceeded to work out the benefit accruing to the assessee by way of bonus, rights etc. The addition is not based on any cogent material. The AO has proceeded on the premise that the benefits accrued to the assessee only. The addition is deleted.” In the second round, the Ld CIT(A) has followed the above said decision.
We heard the parties on this issue and perused the record. We notice that the assessee has furnished the details of purchase of shares on cum- rights/bonus/dividend basis and also the details of persons to whom those shares were sold. We notice that the AO did not prefer to examine the said submissions by making enquiries with the concerned persons. Hence, we are of the view that the Ld CIT(A) was justified in holding that the AO has made the addition without bringing any cogent material, meaning thereby, the AO has made the addition on presumptions. Accordingly, we are of the view that the Ld CIT(A) was justified in deleting this addition.
Q) ADDITION RELATING TO SECURITIES RECEIVED FREE (Ground Nos. 16 to 19 in revenue’s appeal) 84. The AO noticed from the Securities transactions collected from various banks that the assessee has delivered certain securities at free of cost and also received the securities at free of cost. With regard to the securities delivered at free of cost, the assessee explained that he would have received funds from his clients much earlier and hence the banks were instructed to give delivery at free of cost. With regard to the securities received by the assessee at free of cost from A D Narottam, the AO noticed that the assessee
49 Shri Bhupendra C. Dalal ITA Nos. 8176/Mum/2010 & 1023/Mum/2011 has not made the payments to ADN. Hence the AO assessed the value of securities delivered at free of cost (Rs.11.03 crores) and received at free of cost (Rs.6.14 crores), both aggregating to Rs.17.17 crores as income of the assessee both in original and set aside proceedings.
Even though the Ld CIT(A) confirmed this addition in first round of proceedings, he deleted the same in the second round on being satisfied with the explanations furnished by the assessee. The revenue is aggrieved by his decision.
We heard the parties on this issue and perused the record. We notice that the assessee has furnished detailed explanation correlating the receipts/payments with delivery/receipt of securities. These details were forwarded to the AO by Ld CIT(A) seeking his comments. After that the Ld CIT(A) deleted this addition with the following observations:-
“24.4 This explanation is filed alongwith other supportings. It was also forwarded to the Ld AO for his comments. He has not been able to find any specific fault with this explanation. In other words, the appellant has discharged his primary onus of explaining the sources of funds deployed towards acquisition of so called free securities. Having discharged such onus, it was for the AO to prove that any part of such security is from sources unexplained. No specific comment has been made in the remand report against the explanation offered. There is also merit in the general explanation of the appellant that in the commercial world nothing can be given or received free.
24.5 Under the circumstances, it is held that the addition made by the AO is on the misconceived notion of appellant receiving certain securities free or releasing other securities free. Free security is nothing but a nomenclature provided to security overdraft account with a receiving order instructing the bank to receive securities free after a few days. Accordingly, the Ld AO is directed to delete the addition of Rs.17,17,74,600/- on this ground. This ground of appeal, is therefore, allowed.”
50 Shri Bhupendra C. Dalal ITA Nos. 8176/Mum/2010 & 1023/Mum/2011 We notice that the assessee has furnished proper explanations with regard to receipt/delivery of securities at free of cost, i.e., the money transaction did not take place at the time when the securities were received/delivered, but it has taken place on an earlier occasion. We notice that the AO could not rebut the explanations furnished by the assessee in this regard. Accordingly, we confirm the order passed by Ld CIT(A) on this issue.
In the result, the appeal of the assessee is partly allowed and the appeal of the revenue is dismissed.
Order pronounced in the open court on 9th December, 2016.
Sd/- Sd/- (SANDEEP GOSAIN) (B.R.BASKARAN) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai; Dated : 9th December, 2016 *SSL* Copy of the Order forwarded to : 1. The Appellant 2. The Respondent 3. The CIT(A) 4. CIT 5. DR, ITAT, Mumbai 6. Guard File. BY ORDER, //True Copy//
(Dy./Asstt. Registrar) ITAT, Mumbai