DCIT (OSD) II-C RG-7, MUMBAI vs. BHUPENDRA C. DALAL, MUMBAI

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

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

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.

During this year, the assessing officer directed for a Special audit u/s 142(2A) of the Act. Hence this year’s assessment is based on certain observations made by the special auditors. The Special auditors reported that they are not able to express any opinion on the accounts as under:-

As in other years, the original assessment was set aside by the Tribunal and the present assessment order has been passed in the set aside proceedings.

The first issue contested by the assessee relates to the disallowance of exceptional losses incurred in certain security transactions. The special

In the set aside proceedings, the assessee submitted that this addition was made by the AO on the ground that the genuineness of losses was unverifiable. In order to arrive at this decision, the AO had placed reliance on the report given by Special Auditors. The assessee submitted that the auditors have not doubted the genuineness of the transactions, but have only reported exceptional transactions. The assessee further submitted that those exceptional transactions are also normal commercial transactions entered during the normal course of business. Further the profit or loss of the transactions would depend upon the market conditions prevailing at a particular point of time/date. It was further pleaded that the assessee has also made exceptional profits in certain transactions of purchase and sale of securities aggregating to Rs.38,08,318/-.

With regard to the auditor’s observations, the assessee submitted that the auditors have placed on record the cooperation given by the clients and staff. Further they have reported that due to shortage of time, they have not been able to cover all aspects. It was contended that the auditors have not doubted the genuineness of the transactions, but have only expressed the view about the inadequacy of the supporting documents.

The AO was not convinced with the above said explanations of the assessee. He took the view that the assessee is urging very same contentions as was urged before him in the original assessment proceedings. Accordingly the AO took the view that the loss arising from sale of securities are not genuine and accordingly disallowed the same.

In the appellate proceedings, the Ld CIT(A) took cognizance of another disallowance made by the AO, viz., the loss of Rs.7,87,500/- reported by the assessee in respect of security transaction entered with M/s Ganesh Book Binding Works. In the statement taken from the owner of M/s Ganesh Book Binding works, he had denied the transactions and when it was put to the assessee, he could not furnish any convincing reply. Hence the AO disallowed the above said loss of Rs.7,87,500/- and it was confirmed by the Ld CIT(A) in the first round of proceedings. Taking the above said transaction as a sample case, the Ld CIT(A) expressed the view that the claim of loss can be accepted only if a third party confirmation could be submitted by the assessee. With regard to the plea of the assessee that the AO has examined only exceptional transactions where loss has occurred and did not examine profit transactions, the Ld CIT(A) expressed the view that the AO was entitled to examine as to whether the expenses have been inflated.

We heard the parties on this issue and perused the record. The main contention of the Ld A.R was that the special auditors have not doubted the genuineness of the transactions and in their opinion, these losses were exceptional. The parameters followed by the auditors to identify exceptional nature of transactions were:-

The Ld A.R submitted that the assessee had also made profits in such kind of transactions and the said fact has been conveniently ignored by the AO. He submitted that the transaction made with Bank of America in 11.5% 2008 securities resulted in a loss of Rs.5,50,800/- in the month of April (page no.413 of paper book). However, the transaction entered with Bank of America on the very same security subsequently has resulted in a profit of Rs.5,50,000/- (Page no.417 of paper book). The transaction shown at Sr. No.3 at page 416 of paper book in 11.5% 2006 security resulted in a loss of Rs.18.60 lacs. Subsequently, the assessee made a profit of Rs.12.87 lacs in the very same security subsequently (Sr. No.10 at page 418). Accordingly the Ld A.R submitted that the tax authorities have made this addition without applying their mind on this issue and hence the same should be deleted.

On the contrary, the Ld D.R submitted that the assessee is having support of payment and receipt vouchers only as supporting documents. He submitted that payments and receipts alone cannot prove that there was corresponding receipt and issue of securities. In the absence of contract

We notice that the AO has placed reliance fully on the observations made by the auditors for making this disallowance. The Ld CIT(A) has expressed the view that the third party confirmations were not available to prove the losses and hence he has confirmed the addition. It is a fact that the assessee could not produce third party confirmations as well as contract notes to substantiate the claim of exceptional losses in the securities transactions. However, the assessee has also pointed that he has made profits in such type of transactions and the said fact has not been denied by the tax authorities. In fact, they have accepted the profits so declared by him. The assessee has also expressed his handicap in explaining these transactions, viz., seizure of records by CBI as well as Income tax department, resignation of main staff etc. Even though the assessee could not furnish supporting vouchers, the fact remained that the transactions have been carried through banking channels only. The assessee has also given certain examples, wherein he had made profits in dealing with very same securities.

The Ld A.R, during the course of his arguments, effectively made submissions as to how the observations made by the special auditors were not correct. At the relevant point of time, it was stated that the securities were not traded on daily basis on the floor of the stock exchanges. Hence the prices were determined between the purchasers and sellers. The assessee has also explained that one side of broker is representing a bank/financial institution. Since the transactions were carried through banking channels, it was explained that they have been done during the normal course of carrying on the business. In our view, the above said explanations also appear to be reasonable. When the transactions have been entered between a willing seller and willing buyer, the same should not be doubted with unless some

At the same time, there is a major deficiency on the part of the assessee, i.e., he could not furnish relevant contract notes nor he could get confirmation from the other broker or his client in support of the financial transaction. As submitted by Ld D.R, a financial transaction entered through banking channels, may not always prove the transaction of purchase and sales unless the details of securities, buyer, seller etc. are also furnished.

We have also earlier noticed that the assessee has also declared exceptional profits in certain transactions. Hence we are of the view that the disallowance of entire amount of loss declared by the assessee may not be appropriate under the facts discussed above, i.e., we are of the view that a portion of the loss may be disallowed to take care of deficiencies, if any, in the claim so made. Hence, on a conspectus of the matter, we are of the view that a disallowance of 20% of the exceptional loss claimed on sale of securities may be reasonable. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and direct the AO to restrict the disallowance of 20% of the amount disallowed by him. We order accordingly.

The next addition contested by the assessee relates to the disallowance of Rs.29,23,336/- relating to Difference of Rate (DOR). At the time of purchase and sale of securities, the assessee quotes different rate to seller and purchaser and the difference is being taken as income/expenditure. For example, if Central Bank of India wants to sell a security having a par value of Rs.100/-. The assessee may quote Rs.100.05 to the seller and he may quote Rs.100.10 to the buyer. If both the deals are struck, then the assessee would earn DOR of Re.0.05. This amount is initially credited to the Securities Account and at the year end; the same is transferred to the Profit and Loss

We heard the parties on this issue and perused the record. The main contention of the assessee is that the Special auditors have not set any parameter to determine a transaction as exceptional in nature. According to the assessee, these transactions have been entered in the normal course of business. Since the delivery of securities has been made directly by the seller to the buyer, the same has not come to the hands of the assessee. The transactions are supported by the bank advices for paying DOR. The assessee was issuing delivery instructions to the seller and the same constitute the supporting document. The Ld A.R submitted that the assessee has also made exceptional profits around Rs.50 lakhs in DOR transactions.

On a consideration of rival submissions, we find merit in the submissions made by the assessee. In the instant case, it is not the case of the revenue that the assessee has entered these transactions through another broker. The Special auditors have reported that the DOR loss was exceptional in certain transactions. Neither the special auditor nor the tax authorities has probed those transactions further to ascertain as to whether the loss so incurred could be a case of artificial enhancement of losses. The assessee has also listed out transactions, where he had made exceptional profits. There is merit in the submissions of the assessee that the market rate of a security is dependent upon many factors and hence the same would be fluctuating. The tax authorities have not brought any material on record to show that the prices at which the securities were purchased and sold were not market rates. We have noticed that the assessee was in the habit of entering into the buying and selling the securities by taking risks. In such kind of business transactions, the possibility of making exceptional losses/profits could not be ruled out. Hence we find merit in the submissions that the exceptional losses, per se, would not turn the same to be a bogus or artificially hiked loss. The tax authorities should have probed the matter further by making enquiries from the concerned seller & buyer, about prevailing market rates etc., and then they should have come to a conclusion. It is pertinent to note that the Special auditors have only reported the same as Exceptional cases, but they have not branded the same as bogus. Hence, in our view, this claim has been disallowed by the tax authorities only on surmises and not based upon any credible evidence. Accordingly we do not find any justification in disallowing this claim. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and direct the AO to delete this addition.

The next addition contested by the assessee relates to the disallowance of loss arising with purchase and sale of securities on the same date with the same party. The auditors reported transactions in which purchase and sale of securities were found to have been made with the same party on the same date, but at different rates. Such transactions resulted in loss aggregating to Rs.53,03,007. In the original assessment proceedings, the assessee offered explanations with regard to certain entries, i.e., the assessee had recovered money against loss of Rs.9,20,527/- pointed by the auditors; certain transactions have taken place on different dates etc. The AO accepted the explanation with regard to the loss of Rs.9,20,527/- and did not accept explanations of remaining transactions Accordingly he disallowed the loss of Rs.43,82,480/- (Rs.53,03,007/- less Rs.9,20,527/-) with the reasoning that the transactions remained unverifiable.

The major portion of loss was found to have been incurred in the transactions entered with Shri M.J.Patel, i.e., to the tune of Rs.33,15,000/-. The AO also recorded a statement from him subsequent to the completion of original assessment, wherein he also confirmed the transactions. However he has stated that he was given contract notes and cheques only, meaning thereby he did not receive the securities. The assessee submitted that the securities are usually delivered directly by the selling bank to the buying bank. The assessee also pointed out certain instances, were the transactions were not on the same day, viz.

The Ld A.R placed full reliance on the books of account and security register/vouchers and submitted that the tax authorities have disallowed the claim without properly appreciating the factual matrix. He submitted that the tax authorities have not appreciated the fact that most of the transactions were not carried out on the same date as pointed out by the Auditors. He submitted that, as per the accounting procedure followed, the transactions might have been entered upon different dates but all the transactions are entered in the securities ledger at the end of the month. With regard to the loss incurred in respect of M.J. Patel’s transactions, the Ld A.R submitted that he has confirmed the transactions and hence the tax authorities are not justified in rejecting the same. He submitted that these transactions have been entered into by the assessee in the normal course of business operations.

On the contrary, the Ld D.R submitted that the assessee could not substantiate the claim of loss with proper supporting evidences. He submitted that the security vouchers prepared by the assessee are self serving documents and hence the assessee should have obtained confirmations from ultimate buyers/sellers.

The major portion of loss has been incurred in the transactions entered with M.J. Patel. The statement from Shri M.J. Patel has been taken after the completion of the original assessment proceedings, i.e., at the time of original assessment, the statement of Shri M.J. Patel was not available before the AO. In the statement, Shri M.J. Patel has confirmed all the transactions, but he submitted that he has received only contract notes and cheques and not any other documents. The relevant extract from the statement given by Shri M.J. Patel is given below:-

Accordingly, we are of the view that the transactions claimed to have been made on different dates have to be accepted, since the said claim has not been disproved by the tax authorities. Accordingly, out of the addition of Rs.43,82,480/-, the losses pertaining to transactions noted down in Sr. no.5, 12 and 13 are directed to be deleted. In the first round of proceedings, the assessee had also claimed that the transactions noted in Sl.No.11 have also been entered on different dates, but the said claim was not made in the second round proceedings. Hence we restore the issue relating to transactions noted in Sr. No. 11 to the file of the AO with the direction to delete the addition, if the transactions have been entered on two different

The next item of addition relates to the disallowance of net loss of Rs.1.08 crores incurred in ready forward transactions. The Special auditors have prepared a list of transactions wherein the purchase and sale of transactions were entered with the very same party. The assessee had purchased the securities on a higher rate and sold the same to the very same party at a lower rate on a subsequent date resulting in loss to the assessee. Sometimes, the assessee had purchased securities at a lower rate and sold them to the very same party at a higher rate making profits also. During the year under consideration, the assessee incurred loss of Rs.1,57,34,386/- and made profit of Rs.48,92,460/-. Thus, the net result of these transactions was loss of Rs.1,08,41,926/-. Since the assessee did not furnish any explanations during the original assessment proceedings, the AO disallowed the same.

In the second round, the assessee submitted that these transactions are in the nature of loan transactions, i.e., the assessee shall receive loan on pledging the security, but on papers it would be shown as purchase of securities. At the time of sale, the securities would be sold at a price, which would cover the interest factor. But the AO was not satisfied with the said explanation and he took the view that the assessee has manipulated transactions in such a way that he would incur loss. Accordingly he again

We heard the parties on this issue. We notice that the main contention of the assessee is that these transactions of purchase and sale were aimed in getting/giving loans. The difference in purchase and sale rate actually represented interest element. We notice both the tax authorities have failed to examine this claim with the relevant transactions before rejecting this explanation of the assessee.

The assessee has furnished the details of these transactions at page 483 of the paper book. The said statement is the Annexure 4 referred to in the original assessment order and the same has been prepared by the Special auditors. However, the Annexure 4 appears to be incomplete one. A perusal of the same shows that the assessee has transacted with Bank of America, Excel Co., Oswal Agro, State Bank of Hyderabad, BMC Bank etc. According to the assessee, these transactions are one leg of transactions and other leg of transactions were not considered by the tax authorities. According to the assessee, he could not also explain about the other side of transactions in the absence of securities registers, which have been seized by the revenue. A perusal of the statement would show that the assessee has given details of purchase and sale, party’s name, the loss or profit in the purchase and sale, interest received and interest paid, the net result (profit/loss in trading plus net interest). The very fact that the Special auditor has noted down the interest receipts and payments show that the claim of the assessee that these transactions are, in effect, funding transactions appears to be a correct claim.

According to the assessee, these kind of funding transactions are quite common in the securities trading circles. We notice that the assessee has 20 Shri Bhupendra C. Dalal & 1670/Mum/2011 transacted with reputed banks and companies. Hence the loss claimed by the assessee is in the nature of “interest expenditure” only. We also notice that the assessing officer has considered these transactions as stage managed one, since the assessee did not give any specific explanation with any specific transaction. However we notice that the assessee has offered general explanations with regard to these transactions. In that case, the tax authorities could have examined the net loss vis-à-vis normal interest expenditure. These kind of examination has not been carried out by the tax authorities in order to find out as to whether the loss vis-à-vis is excessive or unreasonable. We further notice that the assessing officer has not conducted any enquiry with the concerned parties.

We also notice that the rate of interest given in the last column ranges from 8.03% to 14.95%. In our view, the same appears to be reasonable rates also. Hence, we are of the view that there is no reason to reject the explanation of the assessee that the same actually represents funding transactions. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and direct the AO to delete this addition.

The next addition relates to the disallowance of loss arising from security transaction entered with Maruti Udyog Ltd. The assessee had credited the account of Maruti Udyog Ltd with Rs.15.30 crores on 27.6.1989 and debited with the amount of Rs.15.47 crores on 10.7.1989. Thus, he declared a loss of Rs.16,95,247/- from these transactions. When the AO made enquiries, M/s Maruti Udyog Ltd reported that it did not carry on any transaction with the assessee. The AO further ascertained that the above said amount of Rs.15.30 crores has been received from Andhra Bank from a Current account belonging to Hiten Dalal. The amount of Rs.15.47 crores have been paid from the bank account of the assessee with the instruction to remit the same to the account of M/s Maruti Udyog Ltd.

The assessee submitted that he had carried the transaction with M/s Jayantilal Khandwala (Broker of Maruti Udyog Ltd) and also with M/s Hiten Dalal. Originally the security was purchased from Hiten Dalal and sold to Maruti Udyog Ltd through Jayantilal Khandwala. It was a funding transaction and the deal was for 60 days. However, Hiten Dalal foreclosed it within in 30 days and paid the money to the assessee. After 60 days, the assessee returned the money to Jayantilal Khandwala, i.e., by direct remittance to Maruti Udyog Ltd. In the accounts of the assessee, the ledger account was opened in the name of Maruti Udyog Ltd instead of Jayantilal Khandwala. The above said explanation was not acceptable to the AO and hence he disallowed the loss of Rs.16,95,247/- in the original assessment proceedings.

In the set aside proceedings, the assessee submitted the letter of confirmation as well as ledger account copy obtained from M/s Jayantilal Khandwala and submitted that the transactions were entered with the above said party only, who was the broker of Maruti Udyog Ltd. Accordingly it was submitted that Ledger account was wrongly opened in the name of Maruti Udyog Ltd. The AO did not accept the said explanations and hence he disallowed the loss of Rs.16,95,247/-. The Ld CIT(A) also confirmed the same.

We heard the parties and perused the record. We have gone through the Ledger account copy in the name of the assessee as available in the books of M/s Jayantilal Khandwala, which is placed at page 505 of paper book. A perusal of the same shows that the assessee has received a sum of Rs.15,03,68,128/- on 19.5.1989 and repaid a sum of Rs.15,23,55,557/- on 10.7.1989. The difference between the two works out to Rs.19,87,429/-. The ledger account further shows that these transactions were in connection with purchase and sale of 13.50 crores 7.25% IDBI Loan and 1.35 crores

The assessee has claimed that he has purchased the securities from Hiten Dalal and sold the same to Jayantilal Khandwala. However the ledger account copy of Hiten Dalal is not available on record. However the bank account copy of the assessee placed at page 503 shows the receipt of Rs.15.30 crores on 27.6.89 and the Bank account copy placed at page 502 shows payment of Rs.15.47 crores on 10.7.1989. Thus there is a difference of Rs.16,95,247/- between the two.

The foregoing discussions show that there is confusion in the assessee’s explanation also. The amount originally received from Maruti Udyog was Rs.15.03 crores on 19.5.1989 and according to the assessee it was received by Hiten Dalal. Thereafter, Hiten Dalal repaid a sum of Rs.15.30 crores to the assessee on 27.6.1989 and the same was credited in the account of Maruti Udyog Ltd. Thereafter, the assessee returned a sum of Rs.15.47 crores on 10.07.1989 claimed to be transferred directly to Maruti Udyog Ltd. The confusion arises on account of entries made by Jayantilal Khandwala, since he has shown receipt of Rs.15.23 crores only on 10.7.1989.

When the assessee is returning a sum of Rs.15.47 crores, why M/s Jayantilal Khandwala should credit the account of the assessee with Rs.15.23 crores. This confusion stands un-clarified till date.

Be that as it may, the assessing officer’s enquiry made with Bank of Karad shows (clause (d) in page 48 of the assessment order) that the amount

Even though the ledger account copy of the assessee as available in the books of M/s Jayantilal Khandwala creates further confusion, yet the fact that the sum of Rs.15.47 crores has been instructed to be paid to the account of Maruti Udyog Ltd, in a way, supports the claim of the assessee. Further the ledger account in the books of M/s Jayantilal Khandwala shows that it was acting as broker of M/s Maruti Udyog Ltd and the same further proves that the assessee did not have direct dealing with M/s Maruti Udyog Ltd. Hence the explanation of the assessee that the ledger account was wrongly opened in the name of Maruti Udyog Ltd needs to be accepted under these set of facts.

However, since there is confusion about the amount that was received and paid, we are of the view that the explanations of the assessee are insufficient. However, the fact remains that the assessee has received a sum of Rs.15.30 crores on 27.6.1989 and repaid a sum of Rs.15.47 crores on 10.07.1989, i.e., the assessee has used the funds for 13 days. According to the assessee, the above said purchase and sale were in the nature of funding transactions only. Hence, in our view, the interest calculated at 12% p.a. on the above said transaction may be accepted and the same would meet the 24 Shri Bhupendra C. Dalal & 1670/Mum/2011 ends of justice also. Accordingly, the interest computed at 12% p.a. for a period of 13 days on the amount of Rs.15.30 crores works out to Rs.6,63,300/-. Accordingly, we are of the above that the above said amount of Rs.6,63,300/- may be allowed in the place of Rs.16,95,247/- claimed by the assessee. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and direct the AO to allow the amount of Rs.6,63,300/- against the claim of Rs.16,95,427/- made by the assessee. We also notice that the above said loss claimed by the assessee also forms part of disallowance of Rs.1,08,41,926/- relating to Ready forward transactions. Hence the disallowance of Rs.16,95,427/- results in double disallowance. Since we have deleted the above said disallowance of Rs.1,08,41,926/-, there was a need to adjudicate the disallowance of Rs.16,95,427/- separately.

The next item of addition relates to the disallowance of interest paid in respect of certain security transactions, treating the same as payment of excess interest. The special auditors have listed some instances, where the assessee appears to have paid interest at high rates. Since the assessee did not offer proper explanations, the AO disallowed the claim of Rs.1,48,92,400/- as excessive interest payment in the original assessment proceedings. In the set aside proceedings, the AO repeated the same addition. The Ld CIT(A) gave a relief of Rs.38,46,750/- (relating double entry of same item) and accordingly restricted the addition to Rs.1,10,45,650/-.

We have heard the parties on this issue. This addition has been made by the AO mainly on the reasoning that the rate of interest works out to a higher figure and the assessee has not shown as to how he received corresponding interest from securities. The AO has relied upon the special auditor’s report in this regard. A perusal of Annexure 6 attached to the original assessment order would show that the Special Auditor has listed out the payments, where he did not receive proper explanation, i.e., the special

The payment of interest at excessive rate is relevant under the Income tax Act only if it is paid to related parties specified in sec. 40A(2)(b) of the Act. In the instant case, it is not the case of the tax authorities that these interest have been paid to any related party. In the instant case, it is the submission of the assessee that the impugned interest has been paid in the normal course as per trade practice to the third parties.

The issue relating to interest paid on securities 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. In the set aside proceedings, we notice that the assessee has reconciled certain interest payments and interest receipts as under:-

While considering an identical issue in AY 1987-88, we have arrived at a conclusion that this disallowance has been made only on surmises and conjectures. In our view, the tax authorities have made this addition in this year also only on surmises and conjectures, even without examining the explanations furnished by the assessee. All these payments have been made to third parties, i.e., unrelated parties and according to the assessee these transactions are commercial transactions entered in the normal course of business. Hence we do not find any justification in making this addition. Accordingly, we set aside the order passed by Ld CIT(A) and direct the AO to delete this addition.

The next issue relates to the addition of Negative balance of securities. As in earlier years, the assessing 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 interpretated that the negative stock represents 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 pointed out that there were punching errors in the statement prepared by the AO. However, the AO took the view that the explanations given by the assessee are not satisfactory in respect of negative balance of various securities listed in page 57 to 60 of 27 Shri Bhupendra C. Dalal & 1670/Mum/2011 the assessment order, which aggregated to Rs.75,69,07,150/-, 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 sells securities without having stock, but later cover the same by buying 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. The said explanations were not satisfactory to the AO and hence he again made the addition of Rs.75,69,07,150/- in the set aside proceedings 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 additions towards negative balance of securities were 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 35 scrips, wherein the alleged negative balance was noticed. However, detailed workings have been given in respect of three scrips only. In respect of the three scrips, the assessee has offered following explanations:-

From the paper book furnished by the assessee, we notice that the assessee has offered explanations with regard to the 35 items listed out by the AO in the original assessment proceedings. The explanations are available at pages 552 to 705 of the paper book. As submitted by the ld A.R, these explanations have not been examined at all by the AO. A perusal of the explanations would show that the assessee has given the details of transactions in respect of each of the security and also attached the relevant security vouchers. The details show that the sale is covered by the subsequent purchases. The assessee has also pointed out mistakes

Thus, we notice that the assessee has offered explanations in respect of the items that were pointed out by the AO. In respect of remaining items, no details were furnished to the assessee, since the workings were not given by the AO and hence there was no occasion for the assessee to furnish any explanation. We have noticed earlier 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. 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.

In the set aside proceedings, the assessee explained that all the transactions were routed through the banks and the funds given by Oswal Agro was used by the assessee for his business purposes only. The AO considered the same as vague reply and accordingly disallowed the above said interest claim in the set aside proceedings also. The Ld CIT(A) also confirmed the addition.

We heard the parties on this issue and perused the record. The main contention of the assessee is that out of funds of 90 crores received, about Rs.72 crores were received in the form of securities, in which the question of diversion of funds does not arise. He further submitted that the assessee has received remaining amounts through banking channels and it was used for the purposes of business only. The Ld A.R further submitted that the assessing officer has not pointed out as to how the funds were diverted by the assessee. Accordingly he submitted that the Ld CIT(A) was not justified in confirming this disallowance.

Having heard rival contentions, we are of the view that there is merit in the contentions of the assessee. Out of the aggregate amount of about Rs.90 crores, the assessee submits that he has received about Rs.72 crores by way of securities, wherein there is no question of diversion. In respect of remaining funds also, the same has been received through the bank account of the assessee and, in the absence of specific finding about diversion, it would get mixed up with the business funds and accordingly it should be presumed that the same has been used for the purposes of business of the assessee. In that view of the matter, the excess payment of Rs.12,56,943/- would partake the character of interest only, which the assessee is entitled to claim. The assessee has also pointed out that he has made a profit of Rs.12,56,943/- in respect of securities transactions entered with M/s Oswal Agro. In view of the above, we set aside the order passed by Ld CIT(A) on this issue and direct the AO to delete this disallowance.

The next item of addition relates to the disallowance of loss arising in the security transaction entered with Ganesh Book Binding Works. The assessee had shown security transactions with the above said company and incurred a loss of Rs.7,85,500/-. The AO conducted Survey operations u/s 133A of the Act on Ganesh Book Binding Works and the proprietor of the above said concern denied the transactions. When the statement given by the above said party was confronted with the assessee, he gave only evasive replies and sought time to examine the books of account. Hence the AO disallowed the loss of Rs.7,85,500/- in the original assessment proceedings.

In the set aside proceedings, the assessee merely reiterated that he has given the difference amount of Rs.7,85,500/- to the above said party. He

We heard the parties on this issue. Admittedly, the assessee could not prove the genuineness of the transactions entered with Ganesh Book Binding Works. Since the assessee has asked for cross examination of the witness after expiry of 14 years, it may not be feasible for the assessing officer to provide the same after expiry of such a long period. However, the fact remains that the assessee could not substantiate the transactions entered with Ganesh Book binding works. On the contrary, the AO has proved that the said transactions are not genuine. Hence we are of the view that the Ld CIT(A) was justified in confirming this addition.

The next issue relates to the claim of loss in trading in shares, which was debited to the Brokerage Account. The auditors had reported certain transactions entered by the assessee with his clients, which resulted in a loss of Rs.3,75,000/- in the account of B.C. Dalal share trading account. The auditors also reported that the assessee has accounted debit and credit entries with the same party on 31.3.1990, which showed a loss of Rs.1,13,231/-. The AO disallowed the above said two claims in the original as well as in set aside proceedings. The Ld CIT(A) also confirmed the same.

We heard the parties and perused the record. The contention of the assessee is that the share transactions were entered in the normal course of business and certain shares have resulted in loss. It was submitted that the 33 Shri Bhupendra C. Dalal & 1670/Mum/2011 assessee has made net profit of Rs.11,99,386/- from share transactions and hence it was not correct to isolate the loss transactions alone and disallow the same. We find merit in the said contentions of the assessee. The auditors have merely highlighted the loss transactions and they have not reported the same to be bogus. When the AO is accepting the profit making transactions, there is no reason to isolate the loss making transactions and disallow the same. With regard to the loss of Rs.1,13,231/- pointed out by the auditors are concerned, we have noticed in AY 1988-89 that the Patawat sheets contain transactions entered throughout the month and hence it was not correct to presume that the purchase and sale has taken place on the last day of month. Further the contention of the assessee is that these transactions have been routed through bank account. Hence there is no reason to make such kind of presumption and hence the disallowance of Rs.1,13,231/- is not justified. Accordingly, we set aside the order passed by Ld CIT(A) on the above said issues and direct the AO to delete the disallowances.

The next item of addition relates to the disallowance of Rs.1,64,285/- on the ground that the same has resulted in reduction of brokerage. The assessee submitted that the above said brokerage have resulted on account of share trading activity carried on by the assesssee, the profit or loss of which was also recorded in the Brokerage Account. The same was not accepted and since the auditors have given list of negative brokerage, the AO disallowed the same in the original as well as in the set aside proceedings. The Ld CIT(A) also confirmed the same.

We heard the parties on this issue and perused the record. We notice that the auditors have only given the list of reduction in brokerage account. The assessee has explained that the same represents loss incurred in the share trading. We notice that the AO has rejected the explanation without even examining the same. The contention of the assessee is that both profit

The next addition relates to the disallowance of loss booked in BCD Share trading Account. The AO collected ledger account copies from some of the brokers with whom the assessee had made share trading. Comparison of the same with the books of account revealed that the opening and closing balances did not tally. The assessee submitted that he has maintained books of account on Cash basis, while other brokers might have maintained under mercantile system as per Settlement basis. Further, the AO noticed that the assessee has booked losses in eight transactions aggregating to Rs.42,42,350/-. The assessee submitted that a sum of Rs.34,54,000/- out of the above transactions are in the nature of reimbursement of dividend income to the following parties:-

We heard the parties on this issue. We notice that there is a totalling mistake in the aggregate amount computed by the AO. The total of the eight transactions work out to Rs.41,42,350/-, where as the AO has casted the same as Rs.42,42,350/-. Accordingly, the assessee gets relief of Rs.1.00 lakh on this account.

In respect of Rs.34,54,000/- referred above, the assessee has claimed that he has passed journal entries in order to transfer dividend amount to their respective accounts, since the shares were sold on cum-dividend basis. Normally when the dividend is declared, the market price of the shares gets adjusted to include dividend also. Hence the concept of “cum-dividend”, though theoretically exists, but in practice it is not followed. Hence the explanation of the assessee in this regard is hard to believe. But, if the agreement between the parties was like that, then it was the responsibility of the assessee to show that the dividend amount was actually reimbursed to the buyer of shares. This can be proved by showing the payment details. In the instant case, the assessee has not done the same. It may be difficult for the assessee to get confirmation at this stage, due to passage of long time. Alternatively, the payment details should be available in the ledger account of the respective parties. Accordingly, we are of the view that the claim of reimbursement of dividend income may be accepted, if the assessee is able to match the dividend credit in his books and the payments actually made to the respective parties. Since this fact requires verification, we restore this issue to the file of the AO with the direction to examine this issue in the light of discussions made supra. The order of Ld CIT(A) stands modified accordingly.

The Ld D.R, on the contrary, placed reliance on the orders of tax authorities. Having heard rival submissions, we are of the view that there is merit in the submissions made by the assessee. We have noticed earlier while disposing the appeals of the assessee for earlier years that the Patawat Sheets is only summary of transactions entered during the month and the same were prepared at the end of the month. Hence, even though the transactions appear to have been entered on the last day of month, the fact remains that they would have been entered on different days in that month. Further, it was not shown by AO that these transactions are not regular business transactions, i.e., it was extra ordinary one. Accordingly we are of the view that there is no justification in making addition of remaining amount of loss. Accordingly we set aside the order passed by the Ld CIT(A) in respect of remaining items and direct the AO to delete the same.

The next issue relates to the addition of difference in closing stock of Rs.2.64 crores. During the course of search floppies containing data were seized and the print outs were generated from them. A list of closing stock as on 31.3.1990 was generated, which disclosed shares of 130 companies valued at Rs.1,04,48,151/-. The floppies also contained another list of stock on which no date was mentioned. The said list contained shares of 153 companies valued of Rs.3,69,47,542/-. Though the second statement was undated, most of the items of shares tallied with the first statement. Hence, the AO confronted the same with the assessee. He replied that the same was 37 Shri Bhupendra C. Dalal & 1670/Mum/2011 rough sheet prepared before carrying out necessary corrections, i.e., it may include shares that were purchased on behalf of its clients etc. It was submitted that the second list is the final copy which has been accepted by the auditors u/s 44AB of the Act as well as by the Special auditors. But the explanations of the assessee were not convincing to the AO and hence he added the difference of Rs.2.64 crores to the total income of the assessee. The Ld CIT(A) also confirmed the same.

We have heard the parties on this issue and perused the record. The fact that the second stock statement is “not dated” has been accepted by the AO. He has given importance to the same only for the reason that some of the shares mentioned therein tallied with the original stock statement. However, no step was taken by the AO to ascertain as to whether the extra shares noted in the second list were, in fact, purchased by the assessee. The AO could have ascertained the same from the Securities register available with him. Since the second statement was not dated, the AO has presumed the same to be of 31.3.1990 without any basis. Accordingly the impugned addition has also been made on surmises and conjectures. Accordingly, we find no merit in this addition. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and direct the AO to delete this addition.

The next item of addition relates to the disallowance of loss on sale of shares to CIFCO Ltd. The AO noticed that the assessee has purchased shares of HCL Ltd from CIFCO Limited and also sold them at a price lower than the purchase price to CIFCO. These kind of purchase and sale of shares have been undertaken on three occasions. The aggregate amount of loss incurred in these transactions was Rs.1,61,950/-. Since CIFCO Ltd was a sister concern and since the assessee did not maintain adequate records to support these transactions, the AO disallowed the claim in the original as well as in the set aside assessment. The Ld CIT(A) also confirmed the same.

We heard the parties on this issue. The Ld A.R submitted that the profit of Rs.1,61,950/- earned by the sister concern CIFCO Ltd has been accepted in its hands. He further submitted that the assessee could not produce evidences, since the records were in disarray due to raids by CBI and Income tax department. He submitted that these transactions were entered into in the normal course of business and hence the disallowance of loss should be deleted.

On the contrary, the Ld D.R submitted that the assessee has always incurred loss in the transactions entered with his sister concern and hence the burden to prove genuineness of the same lies upon the assessee, which he has failed to discharge.

We notice that the assessee has incurred loss in all the three occasions of purchase of shares of HCL Ltd from CIFCO Ltd and sale of same shares again to CIFCO. The repeated transactions of purchase and sale of very same shares at a lower price, in fact, creates doubt in the minds of anyone. Hence, the possibility of stage managing the loss by the transactions entered with the sister concern cannot be ruled out. Though the assessee claims that these transactions have been entered in the normal course of business, yet the fact that the assessee was incurring loss on every occasion is not understandable. The assessment of profits in the hands of sister concern, in our view, will not take away the responsibility of the assessee to prove the genuineness of these transactions. In the absence of anything to prove their genuineness, we are of the view that the Ld CIT(A) was justified in confirming the addition of Rs.1,61,950/- made by the AO by disallowing the loss incurred on security transactions entered with CIFCO Ltd.

We have heard the parties on this issue and perused the record. We notice the assessee has made withdrawals in the month of November & December, 1989 and made the deposits in February & March, 1990. Thus there is a gap of about three months between the date of withdrawals and deposits. Hence the tax authorities have refused to accept the withdrawals as the source of deposits. However, it is not clear as to whether the assessee has spent away all the withdrawals. In respect of deposit of Rs.50,000/- made on 11.07.1989, there was no prior withdrawals and hence the same should be considered as unexplained deposit. With regard to the withdrawals aggregating to Rs.5,00,000/- made between 15.11.1989 to 14.12.1989, we are of the view that the assessee may be given credit of 50% of the same, since the claims of both the parties are not supported by the any evidence. Accordingly, we are of the view that the assessee may be given further relief of Rs.2,50,000/-. Accordingly, we modify the order passed by Ld CIT(A) and direct the AO to confirm the addition on this issue to the extent of Rs.2,50,000/-.

The next addition relates to the disallowance of loss incurred in the security transaction entered with Milan Mahindra amounting to Rs.4,73,472/-. The AO made this addition in the set aside proceedings without discussing the same. Since this addition was set aside by the ITAT in the original assessment proceedings, the Ld CIT(A) (and also the AO in his remand report) took the view that the assessee should have taken the responsibility to explain the transactions entered with M/s Milan Mahindra. The Ld CIT(A) also expressed the view that the failure on the part of the AO to discuss about this 41 Shri Bhupendra C. Dalal & 1670/Mum/2011 addition will not make the addition void. Since the assessee failed to adduce any argument or evidence, the Ld CIT(A) confirmed this addition.

The Ld A.R submitted that the assessing officer did not discuss about this addition and hence the assessee could not have visualized the same and met the contentions of the AO.

We heard Ld D.R and perused the record. Since there is no discussion about this addition either in the assessment order or in the order of Ld CIT(A), there is merit in the contentions of the assessee that he could not have visualised the mind of the AO and offer explanations. However, a perusal of the paragraph 9.7 of the original assessment order shows that the AO disallowed the claim on the reasoning that the assessee has always incurred losses in a series of purchase and sale of Reliance Chem debentures with M/s Milan Mahindra. We have earlier taken a view that the transactions entered with unrelated parties and also through banking channels may not be doubted with, unless due enquiries were carried out to ascertain the non- genuineness of transactions. Undoubtedly, no such enquiry or investigation was carried out by the AO either in the original assessment proceedings or in the set aside proceedings. Accordingly we do not find any merit in this addition also. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and direct the AO to delete this addition.

The next item of addition relates to the disallowance of loss incurred in share transactions amounting to Rs.4,19,200/- and Rs.3,86,450/-. The following parties had purchased shares of M/s Baroda Rayon Ltd from the assessee:-

In the set aside proceedings, the assessee explained the same to be in the nature of funding transactions and the loss incurred actually represents interest payments. He further submitted that the assessee has carried out all these transactions through banking channels and there are cases, where he has made profits also in the funding transactions. The assessee further submitted that these transactions have been entered in the normal course of carrying the business and accordingly contended that there is no reason to disallow the claim. The AO was not convinced with these explanations and accordingly disallowed the loss. The Ld CIT(A) also confirmed the same.

We heard the parties and perused the record. Both the concerns referred above are not related parties. All the transactions have been entered through banking channels. The very fact that the assessee did not deliver the shares shows that the same may be a funding transaction as claimed by the assessee. In the case of funding transaction, the receiver of the funds has to give interest to the lender. According to the assessee, the loss on securities is actually in the nature of interest paid to the above said lenders. According to the assessee, the above said method of funding is quite prevalent in the share trading circles. The said claim has not been proved to be wrong. Further the AO has not brought on record the details of quantum of funds raised and the rate at which the interest actually works out to. The assessee has also not 43 Shri Bhupendra C. Dalal & 1670/Mum/2011 furnished those details. In any case, the transactions have been entered through banking channels and both these parties are not related parties. We further notice that the explanations of the assessee that the same were funding transactions have been rejected by the tax authorities without examining the corresponding parties or the gamut of whole transactions. Hence, we are of the view that there is no reason to suspect these transactions, merely on the reasoning that the assessee has incurred loss in these transactions. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and direct the AO to delete this addition.

We shall now take up the appeal filed by the revenue. The first issue contested by the revenue relates to the relief of Rs.2,50,000/- granted by the Ld CIT(A) in respect of addition relating to unexplained cash deposits. We have discussed the facts of this issue in the preceding paragraphs and have noticed that the deposit of Rs.2,50,000/- made on 6.11.1989 was explained to be from the withdrawal of equal amount made on 04.11.1989. In view of the proximity of the both dates, referred above, we are of the view that the Ld CIT(A) was justified in granting relief to the extent of Rs.2,50,000/-.

The next issue relates to the relief of Rs.88,98,250/- granted by Ld CIT(A) in respect of addition relating to the transactions entered with J.P.Gandhi. The assessee had made profit of Rs.88,98,250/- in respect of transactions of trading in shares with M/s Champaklal Devidas, the proprietary concern of Shri J.P.Gandhi. However, the assessee had declared overall profit of Rs.11,99,386/- only in respect of trading in share transactions. Hence the AO took the view that the assessee might not have declared the above said profit and accordingly made the addition in the first round of proceedings. Before the Ld CIT(A), in the first round of proceedings, the assessee submitted that the transactions entered with Shri J.P.Gandhi has already been included in his books of account and no separate addition is 44 Shri Bhupendra C. Dalal & 1670/Mum/2011 called for. The Ld CIT(A) noticed that the AO did not intend to make any addition, even though he has discussed about these transactions and those discussions were intended to substantiate the disallowances of losses only. The Ld CIT(A) also observed that the above said position was also accepted by the AO during the course of hearing of the appeal. Accordingly the Ld CIT(A) deleted the above said addition in the first round of proceedings.

In the set aside proceedings, the AO again made the addition and the Ld CIT(A) deleted the same by following his order passed in the first round. The revenue is aggrieved by this decision.

We heard the parties on this issue and perused the record. The AO has noted down this issue from the books of accounts of the assessee and hence there is merit in the claim of the assessee that the profit computed by the AO has already been included in the profits from share trading. Further, the assessing officer himself has confirmed before the Ld CIT(A) in the first round of proceedings that he did not intend to make separate addition of the profits, cited above. Under these set of facts, the Ld CIT(A) has deleted this addition and hence, we do not find any reason to interfere with his order passed on this issue.

In the result, the appeal of the assessee is partly allowed and the appeal of department is dismissed.