PANTHER FINCAP & MANAGEMENT SERVICES LTD,MUMBAI vs. ASST CIT CEN CIR 40, MUMBAI

The principal issue arising in this appeal; the Revenue being not in appeal, is the maintainability of the loss arising to the assessee on the diminution in the value of the shares in Global Trust Bank and Padmalaya Tel. The Assessing Officer 2849/Mum/2008 (A.Y.2005-06) Panther Fincap & Management Services Ltd. vs. Asst. CIT (AO), on the ground that the purchase of these shares was included in the stock scam of 2001, regarded the transactions of purchase in their respect and, therefore, the loss arising on their valuation (at nil), as not genuine. He further considered it as speculative in view of the Explanation below section 73, allowing though its’ carry forward. In appeal, the ld. CIT(A) confirmed the loss as not genuine. Further, he held that there was therefore no question of categorisation of the said loss, non genuine in nature, as speculative, considering that to be in fact a contradiction in terms and, two, of it being allowed to be carry forward. Aggrieved, the assessee is in further appeal before us.

Before us, the ld. Authorized Representative (AR), the assessee’s counsel, would submit that the assessee is a company established in 1983 and since inception engaged in the business of purchase and sale of shares. Opening his arguments, he would state that even though the assessee has returned a profit of Rs.243.43 lacs (per its’ P&L Account), the same is principally on account of sale of pledged shares invoked by the mortgagee/s. No purchase or sale of shares has been made by the assessee of its’ own. The assessee has accordingly not breached the interim order dated April 4, 2001 by SEBI, followed by its final order dated December 12, 2003 barring the assessee-company from executing any trade in securities for a period of 14 years. The assessee had in fact appealed against the same, firstly, to the Securities Appellate Tribunal (SAT), and then to the Hon’ble Supreme Court, which finally dismissed the assessee’s appeal vide its order dated 18.5.2007. The Tribunal, he continued, in the case of KNP Securities Pvt. Ltd. vs. Asst. CIT (in and 5009/Mum/2007 dated 29.5.2009), in which the years involved were A.Ys. 2003-04 and 2004-05, held, relying on CIT vs. Vellore Electric Corporation Ltd. [2000] 243 ITR 529 (Mad)), that the assessee could not be, for the reason that SEBI had passed an order barring the assessee to do business activity, said to have discontinued business and, accordingly, the expenditure on the maintenance of its establishment would be deductible, i.e., in computing its business income. The final closure/discontinuance, it opined, could only be said to 2849/Mum/2008 (A.Y.2005-06) Panther Fincap & Management Services Ltd. vs. Asst. CIT be in the year 2007, on the appeal against the said bar being dismissed by the Hon’ble Apex Court. The tribunal, he further continued, in the assessee’s own case for A.Ys. 2001-02, 2002-03 and 2004-05 (in ITA Nos. 7278/Mum/2007, 193/Mum/2008 and 369/Mum/2008, dated 17.4.2013), for which years the facts are identical, allowed the loss on actual sale, holding the same as genuine, i.e., on both delivery and non-delivery based transactions. The said order would, therefore, apply for the current year as well. The ld. Departmental Representative (DR) would rely on the orders by the authorities below.

We have heard the parties, and perused the material on record. The tribunal for the earlier years did not consider, perhaps, was not even aware of, the restraint orders by the SEBI barring the assessee from trade and, thus, undertake its’ business. In fact, the main order by the tribunal is for A.Y. 2001-02 (in to which year the interim order by SEBI (dated 4.4.2001) – the first order in the matter, did not apply, with its orders for the subsequent two years (i.e., for A.Ys. 2002-03 and 2004-05) only following the order for A.Y. 2001-02. How could then the facts be claimed as identical; the assessee for the current year claiming no purchases and sales, with that sold being in fact the shares under pledge, by the mortgagees, in exercise of their lien and toward discharge of their debt, even as the sales (and the profit or loss thereon) would only be to the account of the assessee-company. There is though, we may add, no question of regarding the transactions of sale of shares and, consequently, the income arising there-from, as not genuine. Apart from the tribunal holding it as so in the assessee’s case for the preceding years, which shall equally apply for the current year, the Revenue has itself assessed the said income as business income, implying considering it as genuine. How, then, one may ask, could it regard the transactions qua the balance shares not sold, perhaps for the reason of being not under pledge, as not genuine? Coming to the orders by the SEBI, the question that arises is: Could the said (SEBI) orders be said to be relevant in the facts and circumstances of the case? We 2849/Mum/2008 (A.Y.2005-06) Panther Fincap & Management Services Ltd. vs. Asst. CIT say so as the Act only seeks to bring to tax the real income. Whether the same (income) is legal or not so is, in fact, of little relevance. If the assessee has undertaken business, despite the legal bar – which is operative for the current year in-as-much as no stay against the same has been sought, much less granted, the same would only qualify it as an illegal trade, with attendant consequences, including but not limited to penal consequences under the SEBI Act or perhaps even under the Securities Contract (Regulation) Act. The contention of the assessee that it being in appeal against the SEBI order before the higher forums, so that there was a possibility of it being successful and, accordingly, being allowed to trade, is to no consequence. This is as an order allowing its’ appeal, where so, would only operate prospectively and not entitle it to do business retrospectively. A favourable order, operate as it would retrospectively, could at best grant the business, if any, undertaken in the interim, a legal status, which has been considered by us as of little moment. We may though clarify that our observation with regard to the assessee undertaking business, i.e., despite the legal embargo thereon, is subject to it being possible for it do so, as where it holds valid licence/s to operate in the relevant markets, viz. BSE, NSE, etc., as was the case in KNP Securities (P.) Ltd. (supra)(refer para 5.1 of the order). This is also relevant as an incapacity to trade would also adversely impact its ability to pass a legal title to the transferee of the shares sold. The decisions in Vellore Electric Corporation Ltd. (supra) and KNP Securities Pvt. Ltd. (supra) are rendered in the context of allowance of the maintenance expenses required to be incurred to keep alive the business establishment, i.e., in the hope of being successful in appeal. The loss under reference, however, arises on account of the valuation of the unsold shares at nil, i.e., on account of diminution in their value, stating them to have no market value. The moot question, as per the ld. AR, that would arise for determination is if the shares would lose the character of stock-in-trade - which is to be valued at cost or market value, whichever is less - on account of the legal bar on their sale? In our view, the said legal bar would have no impact on the character 2849/Mum/2008 (A.Y.2005-06) Panther Fincap & Management Services Ltd. vs. Asst. CIT of a stock/share held by the assessee as being either a trading or a capital asset. The legal bar is not permanent, but for 14 years. An assessee may intend to continue business after the said hiatus (i.e., treating the time gap as so), while another may not. In either case, it will dispose the shares - when and to the extent it does, at the prevailing market rate, even as a treatment and character of the gain/loss so arising would be different, i.e., either as capital gain/loss or as business gain/loss. That is, it is the intent with which the shares are held that is material and relevant. Our opining of intent as being the material and relevant consideration in determining if the assessee is in business or not, is also – in ratio, in harmony with that by the tribunal in KNP Securities Pvt. Ltd. (supra), whereby it holds that in-as-much as the assessee was hopeful of carrying on business, as demonstrated by it being in appeal, right up to the highest Court of law, incurring maintenance expenditure, it should be considered as having not discontinued business. So, however, the question that would arise is if the assessee could, or did it indeed, carry on business during the year? This is as, as it appears, it, in compliance with the restraint order, did not do so during the period under reference. Section 28(i) postulates determination of business income only where business is (actually) carried out during the relevant year. As such, quite apart from the assessee’s intention to continue business, i.e., on the expiry of the bar period, and which decision may itself undergo change in time, the question of valuing shares - which would continue to be therefore the assessee’s stock-in-trade, in determining the business income, would arise only where the assessee actually undertakes business – the legal status or the manner of the business notwithstanding. This is as it is only in that case that 28(i) would come into play, necessitating computation of income, including loss, assessable under Chapter IV-D of the Act, having regard to sections 145 and 145A thereof. Where, therefore, no business is actually undertaken, there is no question of loss on valuation of shares, or of it being taken into account in determining business income assessable u/s.28. An assessee intending to continue business (after the bar period) may therefore continue to regard the shares as stock- 2849/Mum/2008 (A.Y.2005-06) Panther Fincap & Management Services Ltd. vs. Asst. CIT in-trade and value the same as per the accounting principles, i.e., at cost or market value, whichever is less. There would, however, be no computation of business income (or income from the said business) under the Act, rendering the said valuation of no consequence. We are, when we say so, alive to the fact that the holding of the shares could itself be a positive, as against a passive, act, i.e., a result of a conscious decision to hold on to the shares having regard to the prevailing market and future prospects thereof, and not dispose the same, in which case the ‘hold’ decision itself becomes a business decision, indicative of the assessee being in business. The facts of the case, and in their entirety, would need to be examined. Coming to the facts of the case, there is firstly an embargo on the purchase and the sale of shares, which the assessee has admittedly and, in any case, impliedly observed. There is nothing on record to show that the assessee could, even if intended to, operate in the relevant markets, i.e., held valid and current licenses/permits by the relevant/market organisations, viz. BSE, NSE, etc., which can only be presumed to be aware of the SEBI order; rather, would stand to be served on them as well. Also would arise the question if the assessee could, in view of the restraint, pass a legally valid title to the transferee of shares. Further, no doubt the assessee has returned and been assessed for business income u/s. 28(i). The assessee has however clarified that the same is only in respect of trades executed by the pledgee/s. The sale executed by a pledgee, who is only realizing its’ dues by selling the shares held as security, cannot be, by any stretch of imagination, considered as a sale in the course of its’ business by the assessee- debtor. The creditor, it needs to be appreciated, is only realizing his security, and its’ character, i.e., either as a trading or capital asset, in the hands of the assessee, is irrelevant as far as he is concerned. In other words, the assessment of business income, arising thus, in the assessee’s hands cannot be regarded as either a conduct of business by it, or even an expression or manifestation of its’ intent to do business. Examining its’ conduct, we find the assessee has been continuously, i.e., since f.y. 2000-01 (the previous year relevant to A.Y. 2001-02), ‘selling’ shares, so 2849/Mum/2008 (A.Y.2005-06) Panther Fincap & Management Services Ltd. vs. Asst. CIT that it is left with only two shares, valuation of which is under question, and which, as it appears, is for the reason that the same are not under pledge and, in any case, have no value. The assessee is thus clearly in liquidation mode, realizing its’ assets, including investments (refer: assessment order, para 5), with a view to discharge its’ liabilities and, understandably, contain losses. Couple this with the fact that it has huge losses, as apparent from the order by the tribunal (supra) in its’ case (which speaks of cumulative losses at Rs. 1826 crores, at para 9.1), so that it (company) cannot sustain itself in business – which it is even otherwise barred for a long period of 14 years, without recapitalization, and it is unmistakably clear that it, embroiled as it is in complete financial mess and legal wrangles, if not also probes, is no longer in business; rather, is exiting it. The ‘hold’ decision, if it could be so called, is, under the circumstances, only a concomitant of the relevant shares carrying no value (if under pledge) and/or being unable to sell (where not under pledge). The assessee being precluded from transacting any business, there is in fact no business in the eyes of law. Concomitantly, the shares under question cannot be regarded as stock-in-trade. In fact, even where regarded as so, the assessee having not undertaken any business during the year, the question of determining its’ business income, valuing the stock-in-trade, also does not arise. It could be argued that the shares under reference may have been regarded as stock-in-trade for the immediately preceding year. There is firstly no finding by the tribunal to this effect. Two, we have already noted that the tribunal (for that year) was not aware of the legal bar inflicted on the assessee. We have, in fact, in arriving at our decision qua the assessee being in exit mode and no longer in business, taken into account the conspectus of the case, including its’ conduct over the earlier periods as well. The loss would consequently only be a loss in the value of a capital asset, i.e., a capital loss by definition. In-as-much as such loss, under the provisions of the Act, arises only on the transfer of the asset, to which the stated valuation principle (of cost or market value, whichever is less) does not apply, the same would not stand to be computed under the Act, much less carry forward. The 2849/Mum/2008 (A.Y.2005-06) Panther Fincap & Management Services Ltd. vs. Asst. CIT question of any part of the impugned loss being speculative in nature, i.e., u/s. 73 of the Act would also, consequently, not arise. The assessment of the gain on sale of pledged shares, rightly assessable as ‘income from other sources’, as ‘business income’ by the Revenue, would not be fatal to our findings. The assessee’s argument (before us) that the Revenue had not considered the legal bar on it to transact business (by SEBI), which (bar) is an admitted fact, would be to no moment. Is it so for the reason that the assessee has failed to disclose the said fact thereto? Where so, it commits itself to perjury, concealing a crucial fact material to the computation of its’ income from the Revenue, with implications for penalty and prosecution proceedings under the Act. Further, how does it then rely on the decision in KNP Securities Pvt. Ltd. (supra)? This perhaps also explains the assessment of the profit on the sale of shares by the Revenue as ‘business income’. On the other hand, it could be that the Revenue has not regarded this fact as relevant. The same is, in fact, extremely unlikely in-as-much as there is even no reference to the said fact - which rather supports the Revenue’s case as the said bar only follows and indicts the assessee-company of being involved in the securities scam - in the assessment and the penalty order. Even assuming that it regards it as not relevant, the question is: Does it bar the tribunal from considering it as so? Surely, not. We have, on a factual and legal examination of the issue, found the assessee as having not undertaken any business during the year; rather, cannot be said to be in business. The said fact (of legal embargo) in fact explains the assessee’s conduct. The argument would thus be of no assistance to the assessee. Before parting with our order, we may add that our decision may not appear to agree with that by the tribunal in KNP Securities Pvt. Ltd. (supra), with which we have rather clarified as being - in ratio – in harmony. The said decision is, as explained, distinguishable on facts. In that case the appellant-company was holding valid licence/s to transact business, and there was a positive act of incurring expenditure toward maintaining its’ establishment, which could be under the circumstance of it being in appeal against the bar considered as incurred in the 2849/Mum/2008 (A.Y.2005-06) Panther Fincap & Management Services Ltd. vs. Asst. CIT course of its business and, thus, deductible. There is, in contradistinction, absence of any such positive action and no undertaking of business in the present case. The assessee has further not shown to be able to, despite the bar, undertake business. We have rather found it as overwhelmed and inundated by debt and losses, eroding its capital and the capacity to operate, so that it, under liquidation, could no longer be regarded as in business.

The only other issue in appeal is in respect of the charge of interest u/s. 234B of the Act (vide Gd. 2). The charge is mandatory (refer: CIT vs. Anjum M. H. Ghaswala and Others [2001] 252 ITR 1 (SC)), and which perhaps also explains the non pressing of this Ground by the ld. counsel during hearing. We decide accordingly, even as the assessee would get consequential relief, i.e., in respect of the addition (qua dividend at Rs.12.14 lacs) deleted by the ld. CIT(A) and against which the Revenue is not in appeal.

We decide accordingly, dismissing the assessee’s appeal.

The penalty in the instant case has been levied u/s. 271(1)(c) of the Act in the sum of Rs.15,75,000/- on the following adjustments to the returned income, i.e., at minimum (100%) of the tax sought to be evaded, which works to Rs.15,74,576/-: a) Loss on share trading Rs.20,48,450/- b) Claim for capital loss Rs.23,40,000/- Total Rs.43,88,450/- Even as the assessee before us contests the entire levy, no arguments were made with regard to the adjustment on account of capital loss, as was the case before the first appellate authority, the addition in respect of which, since confirmed by it, stands accepted by the assessee in-as-much as no appeal has been preferred by it qua the same before any appellate authority. The penalty levied thereon; the facts as well as the legal position being admitted, is accordingly confirmed.