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Income Tax Appellate Tribunal, “A” BENCH, MUMBAI
Before: SHRI R.C. SHARMA, AM & SHRI AMARJIT SINGH, JM
आदेश / O R D E R Per R.C. SHARMA, A. M.: These are the Cross Appeals filed by the Assessee as well as the Revenue directed against the Order by the Commissioner of Income Tax (Appeals)- IX, Mumbai (‘CIT(A)’ for short) for the Assessment Years (A.Y.) 2001 – 2002 to 2003-04 in the matter of order passed u/s 143(3) r.w.s 147 of the Income Tax Act.
2. As some of issues are common in all the years under consideration, all these appeals were heard together and are now decided by this consolidated order.
3. In the assessment year 2001-02, revenue is aggrieved for deletion of addition made u/s 68 on account of unproved loans taken by the assessee and also for deleting disallowance of interest thereon.
Rival contentions have been heard and record perused. Facts in brief are that Assessment for the year under consideration i.e. 2001-02 was completed u/s. 143(3) of the Act. Later in course of assessment proceedings for the A.Y.2002-03 the AO disallowed the interest paid to forty parties from whom the assessee had claimed to have received loans, on the ground that these loans were not genuine.
A.Y.2002-03, the AO reopened the case of the assessee u/s.147 for the year under consideration. As per AO the loans were not genuine and hence the amount of such loans was chargeable to tax. Considering the said facts, according to the AO, income in case of the assessee had escaped the assessment for the year under consideration and as such he issued the notice u/s.148 of the Act and completed the assessment u/s.143(3) r.w.s. 147 of the Act where in the AO made additions u/s 68 to the declared income. By the impugned order CIT(A) confirmed the reopening of assessment. However addition made u/s 68 was deleted by CIT(A) after having following observation :
“3.9 I have gone through the contention of the appellant as well as that of the AO. It is not in dispute that the appellant had failed to produce the parties in whose names the appellant had credited amounts in its books or accounts. Also out of those forty parties five parties had denied such transactions and therefore prima-facie this is a case where appellant has failed to prove the transaction between itself and the creditors appearing in books. However on opening the veil it is also not in dispute that entire money had sprang from the Bank in nature of loan and that such loan were though granted to various parties, the cheques were directly issued to the appellant company without even having routed the same from those creditors account. It is also not in dispute that bank had debited such loans in the name of those forty parties, which indicate that those parties were having their bank accounts in those banks or alternatively banker or the appellant company had introduced them as agents on their behalf to put them in the status of undisclosed principle. Whatever may be the case what is important is that undisputedly the appellant had received loan from source which sprang from a definite source whose identity, creditworthiness and genuineness no more remain in doubt. The only dispute is that the credit which were appearing in appellant's books
4 1717&1718/M/07 1288, 4447, 1853&1971/M/07 (A.Y.2001 to 2004) M/s. Kingpin Investment & Finance Pvt. Ltd showed different names as against main source being bank would not be the sole ground for making an addition in the hands of the appellant more so when entire transactions are looked into on the basis of alternative arguments offered by the appellant company and its true nature having been explained and found to be correct. Further the matter should be also looked into on the basis of fact that appellant company had credited amounts in the names of only those forty parties in whose names the bankers had debited the amount as loans given to them and therefore even under the prudent policy the appellant would be expected to credit the amounts in the names of those parties in whose names the bankers had debited such amount and therefore merely because those parties were not traceable would not alter the main source of funds or its nature which has been examined and found correct by the AO. In this regard it is pertinent to read the provisions of section 68 which reads as under, 68. Cash credits. "Where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the sum so credited may be charged to income- tax as the income of the assessee of that previous year. " Plain reading of section suggest that when any sum is found credited in the books of the assessee, the assessee is required to offer explanation regarding nature and source of such credits. Thus what is expected from the assessee is to offer explanation about nature and source of such credits. In the instant case it is not in dispute that nature of credit is nothing but loan and that the source though credited in the names of different creditors it stem from Bank and therefore when the assessee has explained the nature of transaction as also its source the AO is not justified in making such addition. It is also pertinent to note that against the loans given by the bank, though in different names, securities in respect of all those parties or for that matter, for entire amount of loan received by the appellant company was provided by the appellant company or its associates and therefore what emerges out of these facts shows that though the loans were granted in the names of different parties prima facie it was a case of contract between the appellant company and the Banks and therefore when the facts of the case is looked into in its substance over its form there is all the more reason to accept that the appellant had explained the nature and source of such credits. Section 68 gives discretion to the AO to add the credits as income or not and that while using such discretion, AO is expected to act judiciously, and without any bias or arbitrariness. The Hon'ble Supreme court in case of Sreelekha Banerjee V CIT 49 ITR 0112
5 1717&1718/M/07 1288, 4447, 1853&1971/M/07 (A.Y.2001 to 2004) M/s. Kingpin Investment & Finance Pvt. Ltd has observed that if the explanation given by the assessee shows that the receipt was not of an income nature the department can not act unreasonably and reject the explanation hold that it was income. Reference may be also made to decision of Calcutta high court in case of Sriram Jhabarmull (Kalimgpong) Limited V CIT 49 ITR 314'where in it has been held that it is not correct to say that AO is not entitled to reject the explanation without some positive evidence falsifying the assessee’s case. The true view is that while, the AO is not bound to accept as true as any possible explanation which the assessee may put forth, he can not also arbitrarily reject the assessee’s explanation. Further section 68 does not debar the assessee from offering alternative explanation. The M.P. high court in case of ACIT V Ghai Lime Stone Co. 144 ITR 140 has held that on a proper construction, section 68 does not debar the assessee from offering alternative explanation and if either of them is accepted, the cash credit can not be charged as the income of the appellant similar view was also taken by Gauhati High Court in case of Dhansirarn Agarwalla V CIT 217 ITR 4.
Considering the alternative plea that for all practical purpose the amount in question should be treated as bank loan in the appellant's favour ignoring the parties in whose name the amounts are appearing in the bank as well as the appellant's books of accounts as the source and nature of credits are explained, no addition can be made u/s. 68 of the Act, it has been clearly established that the amount of loan sprang from the Bank, and that the appellant's explanation in this regard has not been rejected or found fault with as is evident from the fact that in remand report the AO has not given any findings on such alternative explanation so provided and therefore when the alternative explanation is found to be correct no addition should have been made particularly when it is established that the amount in question was not an income in any form of the appellant.. Thus looking to the fact that the amount in question was received as loan which stem from bank and that against such loans securities were also provided by the appellant, it would be inapt to treat such credit as income of the appellant and thus taking cue from various judgements referred to herein I am in agreement with the appellant that addition u/s 68 should not have been made. It is also pertinent to note that in the original assessment proceedings the appellant's explanation was accepted by the then officer considering the source as explained and therefore also I am inclined to accept the argument of the appellant that the amount in question should not have been added as income. It is also pertinent to note that departmental inquiry was also conducted in this regard where the AO had issued
6 1717&1718/M/07 1288, 4447, 1853&1971/M/07 (A.Y.2001 to 2004) M/s. Kingpin Investment & Finance Pvt. Ltd summons to the Bank to provide the necessary evidence relating to such transactions. In response to which the aforesaid bank has confirmed that they had given loans in the name of forty parties and had also submitted the loan statements, evidencing the fact that amount in question had been received from the said bank only, which could also be verified from bank statement of appellant company when correlated with the loans from those parties viz.a.viz. loans from bank. This clearly shows that appellant's argument that the amount was nothing but bank loan all the more gets support from the evidence independently gathered by the department, which were received directly from the bank in response to summons issued to such banks. Considering these facts I am unable to accede to the AO’s action in making such additions as unexplained cash credit and therefore addition made in this regard is deleted.
Against above order of CIT(A) revenue is in appeal before us.
We have considered rival contentions and carefully gone through orders of authorities below. We had also deliberated on the judicial pronouncements referred by lower authorities in their respective orders as well as cited by ld. AR and DR. during the course of hearing before us. From the record we found that money in the bank of the assessee company had directly come from those bank by debiting accounts of lenders in whose names such credits were shown. AO himself had issued summons directly to the bank for furnishing evidence relating to such transaction. In response to which bank had confirmed that they had given loans in the name of forty parties and had also submitted loan statement evidencing the fact that amount in question had been received from the said bank only which were verifiable from the bank statement of assessee. When correlated with loans from loans were disbursed by the Bank of Punjab Limited in lenders names. In all these cases immediate source of credit in the books of accounts of the assessee was bank loan and hence nature and source of advances were proved beyond doubt and hence once such nature and source of advances are established there is no infirmity in the order of CIT(A) deleting the same. We also found that interest in those cases was also directly paid to the bank by the assessee company. In this regard the assessee has submitted the statement showing loans received and interest paid to those parties as accounted in books of accounts along with the bank statement of assessee as well as of those parties evidencing all those transactions. Since all the cheques from the loan creditors were issued by the bank directly in favour of Assessee Company, irrespective of the fact that such loans were debited in different names by the bank, receipt of such cheques were duly explained by the bank advancing loan. We also found that in respect of these loans from the bank, the assessee had provided security to the bank, therefore considering the facts that such funds stems from the bank remains unaltered, and that an inextricable link is being established beyond doubt between the assessee company and the bank loans so received also proves the nature of such credits and the source thereof. We had also verified the confirmation of bank and the bank statement which clearly proves assessment proceedings issue summons to the bank asking for details of such loans and statements, in response the bank has produced all the evidence like bank statements of all the forty parties, their account opening forms, as also bank has categorically admitted that the banks had advanced loans to those forty parties, and cheques were directly issued in assessee favour, which goes to prove that the assessee had proved nature and source of the credits and therefore there is no question of addition u/s 68 of the Act. Detailed finding recorded by CIT(A) at para 3.9 are as per material on record and has not been controverted by ld. DR by bringing any positive material on record which clearly proves that amount so received was nothing but bank loan. An independent evidence was gathered by department also indicate receipt of loan directly from the banks in response to the summons issued to such banks. The findings of the CIT(A) is as per material on record, therefore do not require any interference on our part. Accordingly we confirm the action of CIT(A) deleting the addition made u/s 68 of I.T. Act.
As we have already confirmed the action of CIT(A) deleting the additions so made, the interest thereon so deleted by CIT(A) do not require any interference at our part.
9 1717&1718/M/07 1288, 4447, 1853&1971/M/07 (A.Y.2001 to 2004) M/s. Kingpin Investment & Finance Pvt. Ltd 8. Revenue is also aggrieved for deleting addition of Rs.1,50,000/- in respect of differential rate of interest on loan given by assessee.
We have considered rival contentions and found from record that assessee had given inter corporate deposit of Rs.75,00,000/- to M/s. Rainbow Denim Ltd (i.e. “Rainbow”) on 3-8-2000 on which interest of Rs.6,13,870/- was received @ 12.5% p.a. Considering the fact that the assessee paid interest @ 18% p.a. on certain bank loans, the AO asked the assessee to show cause as to why proportionate interest should not be disallowed. It was submitted by the assessee that loan of Rs.75,00,000/- was given to Rainbow out of funds borrowed from bank of India, Pune @ 12.25% p.a. However, the AO found that the assessee has paid Rs.75 lakhs to M/s. Rainbow Denim Ltd. On 3.8.2000 assessee has a credit balance of Rs.240604/- after issuing the cheque. The AO made an addition of Rs.1,50,000/- to the income of the assessee.
By the impugned order CIT(A) deleted the addition after observing as under:
“I have carefully considered the facts of the case, findings of the AO and arguments of the argued before me that the appellant had given a loan of Rs. 75,00,000/ - to “Rainbow” @ 12.5%p.a. out of funds received from Bank of India, Pune Branch @12.25% p.a. Hence there was no loss of interest nor the funds were given at lower rate of interest than the rate of interest paid on the funds received by the appellant. It is seen that the appellant vide letter dated 19-8-005 submitted relevant cash flow
10 1717&1718/M/07 1288, 4447, 1853&1971/M/07 (A.Y.2001 to 2004) M/s. Kingpin Investment & Finance Pvt. Ltd statement. On perusal of the same I found that the appellant received loan of Rs.1,65,00,000/ - on 3-8-2000 from Bank of India, Pune and the appellant had given loan of Rs.75,00,0001- to "Rainbow" on 3-8-2000 out of the same. Hence, prima-facie in my opinion no part of loan was given at a lower rate of interest. As regard observation of the AO that after issuing cheque to "Rainbow" the appellant had a debit balance of Rs.72,59,396/ - it is brought to my notice by the ld. AR that the transactions of giving loan to “Rainbow" and receiving loan from Bank of India, Pune have been entered on the same day i.e . 3-8-2000. The argument of the ld. AR that as per computer program the payments are recorded first and the receipts are recorded thereafter and therefore apparently in between the day there appeared a debit balance but considering the transactions for the entire day there was no such debit balance appears to be correct. The nexus between loan given to "Rainbow" and loan taken from Bank of India, Pune has been established and considering the fact that the rate of interest on loan taken from Bank of India, Pune was 12.25% p.a. there cannot be any disallowance on the plea of differential rate of interest in respect of loan given to "Rainbow" @12.5%p.a.”
We have considered rival contentions and found from record that the assessee company had given a loan of Rs.75,00,000/- to “Rainbow” @ 12.5% p.a. out of funds received from Bank of India, Pune Branch @ 12.5% p.a. Hence there was no loss of interest nor the funds were given at lower rate of interest than the rate of interest paid on the funds received by the assessee. The assessee had given loan of Rs.75,00,000/- to “Rainbow” on 03-08-2000 out of the advance taken from bank on 03-08-2000. Hence, no part of loan was given at a lower rate of interest.
After recording detailed finding to the effect that nexus between loan given to rainbow and loan taken from Bank of India has been established and that rate of interest on loan taken from the Bank of India was @12.25% p.a., the CIT(A) held
11 1717&1718/M/07 1288, 4447, 1853&1971/M/07 (A.Y.2001 to 2004) M/s. Kingpin Investment & Finance Pvt. Ltd that no disallowance is warranted on account of differential rate of interest in respect of Rainbow @12.5%p.a. The detailed finding recorded by CIT(A) at para 5.4 had not been controverted by ld. DR. Accordingly we do not find any reason to interfere in the findings of CIT(A) deleting the disallowance of Rs.1,50,000/- on account of difference in interest paid and received.
Revenue is also aggrieved by the action of CIT(A) in directing the AO to allow after verification interest expenses of Rs.30,55,968/-.
We have considered rival contentions and found from record that addition of Rs.30,55,968/- was made by the AO by way of disallowing interest on the plea that borrowed funds were not used for the purposes of the business.
By the impugned order CIT(A) restored back the matter to the file of AO with the direction to verify the facts and to delete the addition after verification.
Precise observation of CIT(A) is as under:
“I have carefully considered the facts of the case, findings of the AO, submissions of the appellant. It is brought to my notice by the Id. AR that the cheques of Rs.60,00,000/- for share application in "B4U" was issued on 12-9-2000 resulting in negative balance in the bank account as per books which has been recouped by sale proceeds received on 13-9-2000 to 15-9- 2000. The A0 has not disputed these facts of the case. It is also brought to my notice that the negative balance in the bank was as per books of account
12 1717&1718/M/07 1288, 4447, 1853&1971/M/07 (A.Y.2001 to 2004) M/s. Kingpin Investment & Finance Pvt. Ltd since the cheque issued for share application money had reached to the bank of the appellant on 20-9-2000 for realisation and considering the fact that sufficient money has been deposited in the bank out of sale proceeds on 13-9-2000 to 15-9-2000 before the cheque reached to the bank the money utilised for share application has been funded with sale of stock in trade. As regard source of investment in shares of Rs.37.99 crores, it is submitted by the Id. AR that the said investment was made in the earlier years which is evident from the fact that the value of investment as at 31-3-2001 as well as at 31-3-2000 was same as may be seen from the Balance sheet as at 31-3- 2001. It is submitted by the appellant that it had submitted the cash flow statement alongwith letter dated 19-9-2005 and also produced the cash book before the AO. I have considered these facts of the case and find that AO has not looked into the fact that cheque issued by the appellant company had reached the banker for encashment only after the funds from liquidation of shares had been credited in the bank account and therefore it would be inapt to assume that loan funds were used for the purpose of such investments in making share application in "B4U". The ld. AR also invited my attention on the Balance sheet as at 31-3-2001 from which it is seen that the Appellant was holding interest free funds to the extent of Rs.52,56,63, 1001 - on which no interest was paid. The details of which are as under:- i) Share Capital Rs. 24,77,100/- ii) Securities Premium Rs. 33,30,000/- iii) Share Application Money Rs.23, 73,46,000/- iv) Welspun India Ltd. Advance Rs.28,25, 10,000/- Total Rs.52,56,63, 100/-
In view of the above it is therefore clear that the interest free funds available with the appellant has covered investment in share application and shares.
In view of the above facts of the case in my opinion the basic plea that the share application for Rs.60,00,000/ - in B4U has not been funded by the sale proceeds received by the appellant during the period from 13-9-2000 to 15-9-2000 appears to be prima facie erroneous and therefore I, direct the AO to verify the fact as to whether the amount paid or share application is encashed after the encashment of liquidation of shares and if the same is found to be correct then in that case the addition of Rs.30,55,968/ - made to the income of the appellant be deleted. However in case if the said fact is 13 1717&1718/M/07 1288, 4447, 1853&1971/M/07 (A.Y.2001 to 2004) M/s. Kingpin Investment & Finance Pvt. Ltd not found to be correct then in that case disallowance made would be confirmed. This ground of appeal is partly allowed.”
15. We have considered rival contentions and found that after recording the detailed finding with regard to the interest free fund owned by the assessee to the extent of Rs.52,56,63,100/-, CIT(A) directed the AO to verify as to whether the amount paid for share application is encashed after the encashment of liquidation of shares and if the same is found to be correct then in that case the addition of Rs.30,55,968/- should be deleted. In view of the fact that finding recorded by CIT(A) at para 6.5 has not been controverted, we do not find any infirmity in the direction so given by CIT(A) for deleting addition after proper verification. In the result ground taken by the revenue is dismissed.
In the result, the appeal filed by revenue is dismissed.
In the Assessment Year 2001-02 assessee is aggrieved for invoking the explanation to section 73 in respect of share trading loss which was treated by the AO as speculation loss under explanation to section 73.
We have considered rival contentions and found from record that assessee was engaged in purchase and sale of shares. Business profits/loss has been declared accepted assessee’s business as dealing in shares. However AO invoked explanation to section 73 and did not allow set of f loss incurred on purchases and sale of shares. By the impugned order CIT(A) confirmed the action of AO.
We have considered rival contentions and found from record that assessee had suffered loss in share business but the principal business of assessee was purchase and sale of shares. Income in any business is a positive income and loss is negative income which can be set off against positive income of the subsequent year. When the assessee is engaged in purchase and sale of shares whether explanation to section 73 is attracted with reference to the amendment w.e.f.
1.4.15, has been dealt with by the coordinate bench in case of Fiduciary Shares & Stock (P.) Ltd. vs. ACIT 70 taxmann.com 23 (Mumbai-Trib.) wherein Mumbai Tribunal held as under:
• Section 73 stipulates that any loss computed in respect of speculation business shall not be set-off except against profits and gains of speculation business. Section 43(5) clarifies 'speculative transaction' to mean a transaction in which a contract for purchase or sale of any commodity including stock and shares is periodically or ultimately settled otherwise than by actual delivery. Explanation 2 to section 28 stipulates that where speculative transactions carried on by an assessee are of such a nature so as to constitute a business, the speculation business shall be deemed to be distinct and separate from other business. Sections 73, 43(5) and Explanation 2 to section 28 of the Act are on the statute since 01-04-1962. [Para 5.6.1]
Pursuant to the Wanchoo Committee Report of December, 1971, Explanation to section 73 was inserted by the Taxation Laws (Amendment) Act, 1975 with effect from 01-04-1977. Therefore, prior to 01-04- 1977, if any assessee was carrying on any speculative transactions, i.e. a contract ultimately settled otherwise than by actual delivery; which are of such a nature to constitute a business, then such speculative transactions are considered as speculation business. If the assessee incurs a loss in such speculation business, then the loss from such speculation business can be adjusted only against profits of another speculation business as provided under section 73 of the Act.
• In other words, transactions prior to 01-04-1977, which were delivery based, were not treated as speculative transactions and hence the loss arising from such transactions was allowed to be adjusted against the income of the year under consideration. After the insertion of Explanation to section 73 of the Act, companies other than investment companies or finance companies carrying on business of purchase and sale of shares, then the loss from such business would be treated as speculation business loss.
• Therefore, by virtue of the insertion of Explanation to section 73 of the Act, if companies whose principal business is of purchase and sale of shares suffer losses from share trading, then such loss from share trading is to be treated as speculative business loss. The intention behind the insertion of Explanation to section 73 of the Act has been explained by the CBDT, Circular No. 204 dated 24-07-1976 was to curb the methods/devices sometimes resorted to by business house controlling groups of companies to manipulate and reduce the taxable income 'of companies under their control by showing loss on purchase and sale of shares of group companies.
• It appears that the intention of the Legislature, from a perusal of the Wanchoo Committee Report and CBDT Circular o. 204 dated 24-07-1976, was not to treat purchase and sale of shares by companies whose main business is trading in shares as speculative business and therefore the Explanation to section 73 of the Act should be read only to the extent of the purpose for which it was inserted. The subsequent amendment made by Finance (No.2) Act, 2014 in the Explanation to section 73 of the Act appears to be made in order to clarify the real intention behind the insertion thereof, by removing the obvious
• The amendment has removed the anomaly and brought the ambit of the Explanation to section 73 of the Act in line with the intention of the Legislature by placing the companies whose principal business is trading in shares as part of the exception to Explanation to section 73 of the Act, because such companies were not the companies for whom the Explanation was inserted. [Para 5.6.2]
• The insertion f the amendment in the Explanation to section 73 of the Act by the Finance (No.2) Act, 2014, is curative and classificatory in nature. If the amendment is applied prospectively from assessment year 2015-16, a piquant situation would arise that an assessee who has earned profit from purchase and sale of shares in assessment year 2015-16 would be treated as normal business profit and not speculation business profit in view of the exception carried out by the amendment in Explanation to section 73 of the Act. In these circumstances, speculation business loss incurred by trading in shares in earlier years will not be allowed to be set-off against such profit from purchase and sale of shares to such companies in assessment year 2015-16. For this reason also, the amendment inserted to Explanation to section 73 of the Act by Finance (No.2) Act, 2014 is to be applied retrospectively from the date of the insertion to Explanation to section 73 of the Act. [Para 5.6.3]
• Thus, the amendment inserted in Explanation to section 73 by Finance (No.2) Act, 2014 with effect from 01-04-2015 is clarificatory in nature and would therefore operate retrospectively from 01-04-1977 from which date the Explanation to section 73 was placed on the statute since this amendment to section 73 of the Act ' .... or a company the principal business of which is the business of trading in shares ..... ' brings in the assessee whose principal business is trading of shares. Therefore, the loss incurred in share trading business by such companies, i.e. like the assessee will not be treated as speculation business loss but normal business loss, and hence the same loss can be adjusted against other business income or income from any other sources of the year under consideration. In this view of the matter, the Assessing Officer is directed to allow the assessee's claim for setting off the loss from 'share trading business' against 'other business income’ and income from any other sources during the year under consideration.” explanation to section 73 by Finance (No.2) Act,2014 w.e.f. 01.04.2015 is clarificatory in nature and would operate retrospectively from 01.04.1977 from which date the explanation to section 73 was placed on the statute. Accordingly the companies whose principal business is trading of shares, loss incurred by the said company in share trading will not be treated as speculation loss but normal business loss and, hence the same loss can be adjusted against other business income or income from any other sources of the year under consideration.
Respectfully following the proposition of law laid down by the coordinate bench we delete the addition made by AO invoking explanation to section 73. We direct accordingly.
AY 2002-03
In in AY 2002-03, assessee is aggrieved for disallowance of long term capital loss treating the sale of shares as sham transaction.
We have considered rival contentions and found that from record that the assessee has claimed Long Term Capital Loss of Rs.(-) Rs.3,61,31,594/- on sale of preference shares. In the return of income it has shown the purchase of 245360 Ltd. for Rs.245630000 and Rs.134240000/- respectively. These shares were allotted on 3.1.2000 by both the companies. The assessee has also filed copies of share certificates along with allotment letter issued by both the companies issued on 23.3.2005. The AO found that the company has issued single share certificate of 245630 in case of Welspun mercantile P. Ltd and 134240/- in case of Welsupun Trading P. Ltd. The assessee has sold 215000 shares of Welspun Mercantile P.
Ltd,. to M/s Global Home Tax Ltd. for Rs.21.50 crores and 30630 shares of Welspun Mercantile P. Ltd 134240 shares of Welspun Trading P. Ltd to M/s.
Sheetal Financial Serices P. Ltd. for Rs.164870000/-. These shares were purchased and sold at the same price i.e. Rs.1000 per share and were sold on 1.10.2001 by raising debit note in the name of both the companies. In the course of assessment proceedings the assessee was asked by the AO to file memorandum and articles of association of Welspun Trading P. Ltd and Welspun Mercantile P. Ltd along with share transfer certificate and the source of funds for purchase of these shares. On perusal of the memorandum and articles of Welsupn Mercantile P. Ltd the AO noticed that he company can issue only 238615 preference shares of rs.100 each whereas company has allotted 245630 preference shares of Rs.100 each at a premium of Rs.900/- per share. The Welspun mercantile P. Ltd has violated the the percentage of dividend payable on the preference shares was mentioned. From the balance sheet the AO noticed that the assessee has invested in 12% non- cumulative redeemable shares. Besides this as per AO, both the companies has also violated the payment of stamp duty for issue of shares. Both the companies have affixed Rs. 1 stamp duty which shows that preference shares issued by the company itself is void. On perusal of the transfer deed the AO noticed that the transferee has suppressed the consideration to avoid the payment of stamp duty as applicable. The transferee has shown consideration of Rs. 2.15 crores and Rs. 30,63,000/- in case of Welspun Mercantile P. Ltd and Rs. 1,34,24,000/- in the case of Welspun Trading P. Ltd accordingly they have paid the value of stamp duty for transfer of shares. The assessee has raised debit note of Rs. 21,50,00,000/- to the Global Home tax Ltd. for sale of 2,15,000 shares of Welspun Mercantile P. Ltd whereas transferee has shown a consideration of Rs.2.15 crores. The assessee has raised two debit notes of Rs. 13,42,40,000/- and Rs.3,06,30,000/- for sale of 134240 shares of Welspun Trading P. Ltd and 30360 shares of Welspun Mercantile P. Ltd. whereas transferee has shown Rs.l,3424,0001- and Rs. 30,63,000/-.
20 1717&1718/M/07 1288, 4447, 1853&1971/M/07 (A.Y.2001 to 2004) M/s. Kingpin Investment & Finance Pvt. Ltd 22. In view of the above observation the AO was of the view that the transferee has intentionally suppressed the consideration to avoid the payment of stamp duty as applicable. The AO has also asked the assessee to explain the source of funds used to finance these investments to which the assessee vide its letter dated 28.3.2005 submitted the details of share application money paid with source of funds (page no.13 of the assessment order). The AO also found that in the A.Y. 2001-02 in the case of M/s. Welspun India Ltd. a special audit was done. On perusal of the audit report the AO came to this conclusion that the assessee company has not received full consideration from the transferee company which is also related to the Welspun Group. In view of these observation AO held that it is nothing but sham transaction.
By the impugned order CIT(A) confirmed the action of AO against which assessee is in further appeal before us.
We have considered rival contentions and found from record that the preference shares so allotted to assessee company are non-cumulative and both these companies have not declared any dividend during the previous year on these preference shares and therefore question of showing dividend income did not arise.
21 1717&1718/M/07 1288, 4447, 1853&1971/M/07 (A.Y.2001 to 2004) M/s. Kingpin Investment & Finance Pvt. Ltd As per section 205 of the Companies Act, 1956, no dividend shall be declared or paid by a company for any financial year except out of the profits. Further the company becomes liable to pay dividend on the shares only when it declares dividend and declaration of the dividend is solely in the hands of the company. In the case of these preference shares no dividend was declared by these companies and therefore non receipt of dividend by the assessee company should not be viewed adversely so as to disallow legitimate claim of long term capital loss.
In view of the above we do not find any merit in the objection of the AO that since the assessee company has not shown dividend income as received on preference shares of both these companies, the transaction of long term capital loss is a sham transaction.
AO has also alleged that "sham transaction" in respect of investment in preference shares of M/s. Welspun Trading Pvt. Ltd. and M/s. Welspun Mercantile Pvt. Ltd. on the ground that the Assessee had received funds from M/s. Welspun India Ltd. and M/s Glofame Cotton Yam Ltd, however there is nothing illegal and unlawful in taking funds from others for making investment in shares. The transactions of purchase of preference shares are supported by valid and legitimate
22 1717&1718/M/07 1288, 4447, 1853&1971/M/07 (A.Y.2001 to 2004) M/s. Kingpin Investment & Finance Pvt. Ltd documents and name of the assessee was entered in the Register of members of the said companies. Hence on the facts and in the circumstances, the impugned transactions cannot be treated as sham or bogus as the same are duly supported by sufficient materials and evidences. The fact that assessee purchased preference shares has been established with the allotment letter, share certificate, consideration paid, entries in the books of account and statutory return with the registrar of companies and likewise the sale of preference shares is supported by debit note, transfer form, consideration received, entries in the books of account and statutory return with registrar of companies. Furthermore the purchase of these preference shares were shown in the Balance Sheet as at 31-3- 2001 submitted along with the return of income for the A. Y.2001-02 and the same was accepted by the Department while completing the assessment for the A. Y.2001- 02 un scrutiny. The word "bogus" according to Oxford Dictionary means "sham", "fictitious", "spurious". In this case there was no such thing. In the context of determining whether a transaction is a bogus or illusory transaction or a devise, the AO must bring concrete materials on record in support therewith. It is only if and when there are solid materials to hold taint of collusion or shamness or ungenuineness than the Assessing Officer can disregard the terms of document and decide the matter on the basis of concrete materials. The Id. AO could not bring on except to express guess work and suspicion which have no role to play in assessment proceedings howsoever it may be grave. Considering the relevant facts together it is illogical to presume that the assessee was engaged in sham transaction. Normally the sham transactions are entered into to avoid payment of tax however in the case of assessee the impugned transactions had resulted into no actual profit or loss. The loss arose due to indexed cost of acquisition and has not been claimed as set off against any profit. Hence with this logic the transaction should not be doubted to be sham or bogus.
26.1 As regard allegation of the ld. AO that the assessee has not received full consideration from the transferee companies we found that the allegation of the ld. AO is incorrect and contrary to the facts of the case. In fact the assessee had received full consideration on sale of preference shares and the same was recorded in the books of account. In support thereof copy of ledger accounts of preference shares and the counter parties to whom shares were sold were placed on record.
With regard to the allegation of the ld. AO that the assessee is an instrument in the hands of Welspun group of companies a front for their back door operations
24 1717&1718/M/07 1288, 4447, 1853&1971/M/07 (A.Y.2001 to 2004) M/s. Kingpin Investment & Finance Pvt. Ltd in the shares we found that the allegation of the ld. AO are incorrect since nothing has been brought on record in support of such serious allegations. Merely because certain funds were received from M/s. Welspun India Ltd. and M/s. Glofame Cotton Yam Ltd. the purchase of preference shares by the assessee company would not amount to back door operation of Welspun group of companies.
From the record we also found that no concrete materials and evidences were brought on record by the AO to substantiate his findings. Even the AO could not point out any benefits received by Welspun group of companies out of this transaction. It is well settled that mere allegation would not be enough, but in support of the said allegation specific materials must be placed on record. The burden of establishing allegation is very heavy on the person who alleges it. In fact the ld. AO made such serious allegation very easily and light heartedly without placing any material in support of such belief. Such serious allegations demand a credible proof of high order. However nothing has been brought on record by the ld. AO to show that some benefits have been transferred to other companies. We found that assessee company had purchased the preference shares on 3-1-2000 at face value and sold these reference shares at cost on 1-10-2001. It is commonly known that in preference shares normally there is no appreciation in value of the command rice near to its face value. Nevertheless the assessee incurred no actual loss on sale of these shares. However, the loss has resulted due to indexed cost of acquisition in accordance with the provisions of section 48 which were substituted for statutory deduction allowed earlier under the said section. In common parlance, a gain or loss on transfer of any assets would be represented by the difference between its sale price and purchase cost and the same is NIL in this case. However, in view of section 48 the assessee was eligible for benefit of indexation and as such there was long term capital loss as per methodology provided in the statute and merely because as per this methodlogy there was loss, such loss can not be disallowed alleging the same as sham.
In view of the above discussion we do not find any merit in the action of AO for disregarding long term capital loss incurred by the assessee.
As per material placed on record the assessee has discharged onus casted upon him in respect of Long term capital loss shown in the return of income. It was the Department, who asserted the genuine transactions to be sham transaction and therefore the initial burden is on the Department to prove such transactions to be gives an explanation which in the opinion of the ld. AO is not true and which could not reasonably be true, the burden is on him to prove that what he has claimed is true and whatever burden is on the Department stands shifted thereafter. For this purpose reliance is placed on decision in the case of Juggilal Kamlapat V/s. CIT 52 ITR 811, 822 (All). In the case before us nothing could be proved conclusively by the Id. AO so as to treat the legitimate transaction as sham. It is settled law that any loss sought to be disallowed, the burden lies upon the Department to prove that the same is sham or bogus with certain concrete materials and evidence. Merely because there was Long term capital loss in accordance with methodlogy provided in section 48 the same cannot be disallowed in summary manner.
We also found that investment in these preference shares has been properly shown in Balance Sheet as at 31-3-2001 submitted with the Department while filing the return of income for the A. Y.2001-02 and the Department has accepted the same as genuine while completing the scrutiny assessment for the A. Y.2001-
Hence there is no reason and basis in treating such purchases as sham in the subsequent year without proving the same conclusively.
27 1717&1718/M/07 1288, 4447, 1853&1971/M/07 (A.Y.2001 to 2004) M/s. Kingpin Investment & Finance Pvt. Ltd 32. Before parting to the matter it pertinent to bring on record that apart from sale of these preference shares the assessee had also sold certain other shares during the previous year. The Id. AO has accepted Short term capital gains on sale of such shares. If the Short term capital gains are accepted on the basis of similar materials and evidences then Long term capital loss ought to have been accepted with the same logic and reasons.
AY: 2002-03 (ITA No.1853/Mum/07)
Revenue is aggrieved for deleting the disallowance of interest of Rs.94,42,728/-.
In view of the finding given by us in AY 2001-02, we confirm the action of CIT(A) for deleting the addition made on account of disallowance of interest.
In revenue is aggrieved by the action of CIT(A) deleting the addition made on account of ‘conversion of stock in trade’ into ‘investments’ in respect of assessment framed by AO u/s 143(3) r.w.s.147 of the Act for the A.Y. 2002-03. reason the AO has made addition on account of conversion of stock in trade into investments. The CIT(A) has deleted the same after observing as under:
“2.1. In the assessment order, the AO has noted that the assessment was re- opened u/s 148 as he had reason to believe that certain income has escaped assessment in the sense that assessee has not shown closing stock of Rs.8,59,89,584/-. As per the note on accounts (schedule 12) of the Financial Accounts, the company had discontinued trading in shares and taking long term view, the stock in hand as on 31.3.2002 is converted into investment at the closing market rates. Hence, the assessment was re- opened and completed u/s.147 r.w.s. 143(3) of the Act.
2.2. Shri. Mitesh Shah, C.A. and Authorized representative of the assessee company appeared and submitted that the A.O. is not justified in re- opening the assessment as there is no new material which has come to the notice of the A.O. for re-opening the assessment. According to him, there must be a nexus between the material and the belief of the A.O. for re- opening the assessment u/s.147. He relied on the following decisions:- (1) Anant Kumar Saharia Vs. CIT (232 ITR 533, 539) (Gauh).
(2) Hum Boldt Wedag India Ltd. Vs. ACIT (236 ITR 845,847) (Cal).
According to him, this amounts to change of opinion and hence re-opening of the assessment is invalid. He further relied on the following decisions:-
(1) VXL India Ltd. Vs. ACIT (215 ITR 295,297) (Guj). (2) Birla VXL Ltd. Vs. ACIT (217 ITR 1,3-4) (Guj). (3) Saradbhai M. Lakhani Vs. ITO (231 ITR 779) (Guj).
2.3. I have duly considered the submission of the A.R. I find that under the amended provisions of section 147, the A.O. has powers to re-open the assessment if he has reason to believe that certain income has escaped assessment. In this case, the AO had reasonable belief that certain income- has escaped assessment, therefore he invoked the provisions of section 147 and re-opened the assessment. The re-opening of the assessment is valid and appeal on this ground is dismissed.
In grounds of appeal No.2, 3(a), 3(b) and 3(c) the assessee is aggrieved by addition of Rs.8,59,89,584/- on account of so called wrong claim of deduction in conversion of stock in trade into investment.
3 .1. In the assessment order, the A.O. has noted that the assessee has converted stock in trade to investment amounting to Rs.8,59,89,584/-.
According to the AO, this claim is wrong. Hence, he made an addition of Rs.8,59,89,584/- to the total income of appellant.
3.2. The A.R. submitted that the AO is not justified in making addition of Rs.8,59,89,584/-. He further submitted as under :-
(a) On perusal of Schedule-S and schedule-3 forming part of audited statement of accounts it may be seen that the closing stock valued at market price worth Rs.8,59,89,304/- has been transferred from trading account to investment for the reason that these shares hithertobefore held as stock in trade has been converted into investment resulting in no. deduction from the income of the Appellant. However, the ld. AO probably observing that that cost of shares sold is shown after deducting from the opening stock of shares the market value of closing stock converted into investment formed an erroneous opinion that the Appellant had claimed deduction of investment from the profit. The opinion formed by the Id.AO is untrue, misconceived and contrary to the facts of the case. It is submitted that it is merely transfer entry from one debit account to another debit account of the balance sheet items and no part of these shares were sold during the previous year. In .other words the closing stock of shares has been shown as investment in shares where both are assets of the Appellant. The profit or loss would arise in subsequent year on sale of these shares. Hence, the addition is made by the Id. AO without any basis and reason and as such the same is III founded and liable to be annulled. An assessment based on mere conjecture, surmise or suspicion or irrelevant and inadmissible material is invalid and unsustainable in law.
(b) It is submitted that in working out profit from the business of trading in shares one has to reduce the cost of shares sold from the sale value of the shares and the Appellant has followed the same procedure as may be seen from the Profit and Loss account and profit/loss shown In the Profit and 30 1717&1718/M/07 1288, 4447, 1853&1971/M/07 (A.Y.2001 to 2004) M/s. Kingpin Investment & Finance Pvt. Ltd loss account was true and fair without claiming any deduction from investment as erroneously thought by the Id. AO. (c) It may be seen that the Id. A.O. has rejected the explanation of your Appellant simply saying "I am not convinced ………" without giving any reason. It is now settled law that where an authority makes an order in exercise of a quasi-judicial function, it must record its reasons in support of the order it makes. Every quasi-judicial order must be supported by reasons. Simply to say "I am not convinced" does not make the order a speaking order. It is nothing but miscarriage of justice ignoring the vital facts of the case. It is now settled law that where the authority makes an order in exercise of quasi-judicial function, it must record its reason in support of the order it makes. The quasi-judicial authority must pass a speaking' order. The requirement of a speaking order cannot be dispensed with on the mere ground that the authority has been vested with the discretionary power in deciding a matter. (Mool Chand Mahesh Chand Vs. CIT 115 ITR 1, 8- All) The non-speaking order without giving reasons is invalid and is liable to be quashed. (Hindustan Sanitary Wares & Industries Ltd. Vs. CIT 118 ITR 21, 28 - Cal). We also rely on the decision of CIT Vs. Sunder Lal 96 ITR 310, 314 (All).
(d) In fact the Id. AO misunderstood the entries of conversion of stock of shares into investment in shares and also failed to bring on record any evidence in support thereof except to rely on suspicion and guess work. It is an established proposition of law that in making an assessment u/s.143(3), the. Id. AO is not entitled to make a pure guess and make an assessment without reference to any evidence or any material at all. There must be something more than bare suspicion to support the assessment u/s.143(3) (Dhakeshwari Cotton Mills Vs. CIT 261 ITR 775, 782-SC), In other words, Ll1e assessment of any particular year must not be based on mere suspicion or bare guess work but on legitimate materials from which reasonable Inference of Income having been earned during the accounting year could be drawn and that the Initial burden of finding such material, however slight, is on the Income-tax authorities and not on the assessee, (Banshidhar Omkarmal vs. CIT 23 ITR 253, 361). There is no presumption of bad faith against an assessee unless there be sufficient material on record to establish and sustain such bad faith. In the case of your Appellant there is nothing on record which could bernade the basis for making such a huge addition. It certainly a leap in the dark, which is not permitted in making assessment.
31 1717&1718/M/07 1288, 4447, 1853&1971/M/07 (A.Y.2001 to 2004) M/s. Kingpin Investment & Finance Pvt. Ltd Your appellant therefore hereby prays your Honour to delete the addition made to its income to meet the ends of justice. 3.3. I have duly consider d the submission of the A.R. and I find that there is nothing wrong in converting stock in trade to investment and there is no revenue loss if the assessee company has shown stock-in- trade as investment in the balance sheet of the assessee company. Since, there is no revenue loss, no addition can be made. The A.O. is directed to delete this addition. Appeal on these grounds are allowed.”
We have considered rival contentions, in view of the detailed finding given by CIT(A) there is no reason to interfere in the order of CIT(A) in so far as without giving any reason the AO has made addition on account of conversion of shares held as stock in trade into investments account as at the end of the year.
AY: 2003-04:
In the Assessment Year 2003-04 assessee is aggrieved for disallowance of long term capital loss of Rs.1,44,82,907/-, treating short term capital loss of Rs.7,44,17,697/- the same as not pertaining to AY 2003-04. By the impugned order of CIT(A) confirmed the action of AO against which assessee is in further appeal before us. We have considered rival contentions and found that assessee has claimed short term and long term capital loss of Rs.87285686/ -. The AO found that all the investments are sold by passing a journal entry through debit note on 31.3.2003. demat account the AO found that the shares are transferred on 3.4.2003 and 11.4.2003. The assessee has explained that the genuineness of the sale transaction is proved by debit note received from parties, demat account and ledger accounts of the parties. All parties are assessed to tax and majority of sale is made on 31.3.2003 and the amount is reflected in the books by passing journal entries.
Merely because the delivery is given in the first and second week of April 2003 does not make transaction of sale invalid.
However, AO did not convince with assessee’s contentions and disallowed both long term and short term capital loss. Action of the AO was confirmed by CIT(A) against which assessee is in further appeal before us.
We have considered rival contentions and found from record that allegation of the AO that the shares were sold directly to M/s. Shital Financial Services Ltd. (i. e. "Shital") and not through any broker is not fully correct. We found that part of the shares were sold to the persons other than 'Shital" and further part of the shares were sold through stock brokers also. A statement showing details of shares sold through stock brokers a directly as spot transaction along with the name of the 6,25,000 shares of Welspun India Ltd. were sold to "Shital" and the rest of shares were sold to Welspun Finance Ltd., Global Hometex Ltd., Cresent Trading Pvt. Ltd., Gayanshankar Investments Trading Co. Pvt. Ltd. and further through certain stock brokers also namely, Sicrop Finlease Ltd. and Keynote Capital Ltd. Further the contention of the Id. AO that the listed shares has to be sold through broker of Stock Exchange only is not correct. However there is no restriction of whatsoever for selling listed shares through stock brokers only. There is nothing illegal and unlawful in selling the shares to buyers directly which is called "spot transaction" in shares and securities market. In this case both the purchaser and seller have agreed to the transactions which is permitted under the law and as such no objection can be raised by the Department on this account. However the transactions were entered into at prevailing market rate and the Id. AO has not raised any doubt on this aspect. In the course of assessment proceedings the assessee had submitted quotation of the stock prices in support thereof. In view of these facts of the case the conclusion of the Id. AO is base on unsubstantiated information. the hands and the shares were transferred through Journal entries, in most of the transactions, consideration was received by cheque before the end of the previous year as is clear from the copy of account of the buyer parties and statement showing details of shares sold. Further there is no requirement under any law relating to sale of goods or even of immovable property that the purchase consideration has necessarily got to be paid immediately in cash. On the other hand, if the vendor is treated as a creditor of the purchaser and corresponding debit and credit entries are made in their respective book that would sufficiently serve the purpose of payment of consideration money for the same. According to section 43(2), “paid" includes amounts incurred according to the method upon the basis of which profits or gains are computed. Admittedly, the assessee follows mercantile system of accounting and hence, crediting the account of the assessee in the books of the counter party and debiting the account of the counter party in the books of the assessee suffices the purpose of actual payments towards sale of the shares.
With regard to the claim of the ld. AO that eh current account with “Shital” was a loan account, the observations of the ld. AO are based on his own assumption and not supported by any basis and reason. We found that assessee had against sale of shares and this account cannot be termed as loan account. As regard physical delivery of the shares given in first and second week of April, 2003 we found that some of the transactions of sales were completed on 31-3-2003 and therefore the delivery will naturally follow after the date of transactions only.
Admittedly the debit notes were made on 31-3-2003 and therefore the same should be considered as date of sale. Merely because the physical delivery of the shares were given in the first and second week of April, 2003 the transactions cannot be treated as not pertaining to F. Y.2002-03 more particularly when the parties to the transactions confirmed the fact that transactions were carried on 31-3-2003 and same is supported by proper accounting entries in the books of the Appellant as well as counter parties. Accordingly we set aside the orders of the lower authorities on this ground.
As per documentary evidence placed on record we found that the assessee has discharged onus casted upon him fully and properly in respect of Long/Short term capital losses shown in the return of income. It was the Department, who asserted the transactions not belonged to F.Y. 2002-03 and therefore the initial burden is on the Department to prove such transactions belonged to subsequent
36 1717&1718/M/07 1288, 4447, 1853&1971/M/07 (A.Y.2001 to 2004) M/s. Kingpin Investment & Finance Pvt. Ltd year. Once the assessee gives an explanation which in the opinion of the ld. AO is not true and which could not reasonably be true, the burden is on him to prove that what he has claimed is true and whatever burden is on the Department stands shifted thereafter. In view of the above, the opinion formed by the ld. AO that the entire transactions were fabricated to book loss in A.Y. 2003-04 is not supported by any cogent basis and reason or materials is not sustainable. Furthermore the assessee has not claimed any set off of the capital losses and thence there is no reason to form an opinion that the transactions were fabricated to book loss in A.Y. 2003-04 since no benefits have arisen to the assessee out of these transactions. In fact transactions of sales were made during the previous year in the ordinary course of business and the same are supported by valid and legitimate materials and as such there is no reason and basis in taking a different view without establishing the same. The guess work and suspicion, howsoever it may be strong, have no role to play in assessment proceedings.
In view of the above we can conclude that assessee had furnished sufficient materials before the AO and as such prima facie onus was discharged to prove the genuineness of the acquisition and sale of shares. term and Short term capital losses is allowed in its favour.
A.Y. 2003-04
In the AY 2003-04 revenue is aggrieved for disallowance of interest. In view of our finding given in the A.Y. 2001-02, we confirm the action of CIT(A) for deleting the disallowance of interest. Revenue is also aggrieved for deleting commission income. From the record we found that the AO has made an addition of Rs.12,883/- on account of commission income on the basis of TDS certificates of M/s Poddar Pigment Ltd. which shows commission of Rs.9,78,540/- as against commission of Rs.9,65,657/- shown in the books of account of the assessee. It was contended by ld. AR that due to reversal of commission by M/s Poddar Pigment Ltd. assessee has not shown its commission income. In the interest of justice we restore this matter back to the file of AO for verification of account of Poddar Pigment to find out whether there is any reversal of entry of commission due to return of material by the buyer. After verification AO is to decide the same afresh as per law.
In the result, these appeals of assessee and revenue are allowed in part, in terms indicated herein above.