ITO,WARD-9(1), KOLKATA, KOLKATA vs. M/S ACYTELENE TREXIM (P) LTD., KOLKATA

6. That, on the facts and in the circumstances of the case, Ld. CIT(A) is not justified in deleting the disallowance of Rs.15,00,000/- on account of payment made for Keyman’s Insurance Policy for the directors.”

Shri S.M.Surna, Ld. Authorized Representative appeared on behalf of assessee and Shri Debasish Banerjee, L’d Departmental Representative appeared on behalf of Revenue.

ITO Wd-9(1) Kol. v. M/s Acytelene Trexim (P) Ltd. Page 3 3. Facts in brief are that assessee in the present case is a Private Limited Company and possesses the valid license of Non Banking Financial Corporation (NBFC for short) from the Reserve Bank of India. The activities of the assessee are regulated by the RBI. The assessee for the year under consideration filed its return of income declaring business income of ₹8,04,561/- which was subsequently processed u/s 143(1) of the Act. Thereafter the case was selected for scrutiny with the prior approval of CCIT- III/ Kolkata. Consequently, notice was issued u/s 143(2)/142(1)/142(2) of the Act.

3.1 Assessee during the year has purchased 1.60 lacs equity shares of GHCL @ ₹ 92/- per share for total consideration of ₹ 1,47,20,000/- in off market on 29.08.2008 through a broker namely M/s Puskar Banijya (MPB for short). The assessee has valued the aforesaid shares at the end of financial year as on 31.03.2009 as closing stock (trading assets) at ₹44.80 lacs. On question by AO, assessee has submitted a copy of the purchased bills of MPB and market quotation of the shares as on 31.03.2009. The AO observed that the value of the shares of GHCL has drastically came down from ₹ 92/- per share to ₹ 27.85 per share as on 31.03.2009. During the course of assessment proceedings, AO observed that the payment for purchase of shares from MPB was made on 17.03.2009 and the shares were transferred to the Demat account of the assessee on 28.03.2009. Accordingly, AO sought clarification from assessee by issuing show cause notice stating that why the share value as on 15.03.2009 should be considered as purchase price of the share. In compliance to the notice, it was submitted by assessee that its books of account are maintained on mercantile basis and shares were originally purchased on 29.08.2008. Therefore, the price prevailing on the date of purchase should be taken for the purchase value. However, AO has disregarded the plea of assessee on account of following reasons:- a) Assessee’s main income is only from source of tendering loan to earn interest for the last three Assessment Years and did not participate ITO Wd-9(1) Kol. v. M/s Acytelene Trexim (P) Ltd. Page 4 in the sale-purchase of share. The assessee during the year under consideration has only done a single transaction which was treated as business transactions. From the above, AO noted that it cannot be treated as business transactions and should be treated as investment of assessee-company; b) The sale-purchase of share is regulated under the Securities Contract (Regulations) Act, 1956 (SCRA for short) and this is not governed by the Sale of Goods Act, 1930. As per the SCRA Act, a person cannot transact in share without the involvement of the broker, however, general exception in Sec. 18(1) of SCRA which states that a transaction without the involvement of broker can be made on the basis of spot delivery which means that the transaction should be closed for the delivery of shares and payment within 24 hrs. In the instant case, the delivery of share was made to the Demat account of assessee after six months and 23 days and payment was made after six months and 19 days. So the same transaction is not following the provision of SCRA and therefore it is illegal in nature. So the illegal loss cannot be adjusted with the legal income of assessee, c) The loss claimed by assessee out of aforesaid transaction is from sham activities and consequently the loss of ₹1,05,36,000/- from such manipulated share business by back dated bill to adjust the business income with a view to avoiding the tax liability.

4.1 The allegation of AO that there was a single transaction for the purchase/sale of share in the last three years and therefore it should be treated as investment is factually incorrect. The assessee has made sale purchase of the share in the AY 2008-09 purchased ₹ 63,96,075/- and sale at ₹ 25,14,958/- and AY 2010-11 purchase ₹3,71,68,025.20 and sales at ₹3,61,38,633.41. After considering the submission of assessee and other relevant records Ld. CIT(A) has deleted the addition made by AO by observing as under:- “I have carefully considered the submission of the appellant including the judgment of the referred case laws and the relevant Provisions of SCRA, 1956, perused the facts of the case, the material placed on record and the finding of the Assessing Officer in the matter. On going through the assessment order, it would appear that the Assessing Officer has made an academic discussion regarding the probability of the appellant having entered into transactions in collusion with Pushkar Banijya Ltd., with a view to manipulate the accounts by claiming loss in share trading and thereby reducing the taxable income and consequent tax liability. From the records, it is, however, seen that the Assessing Officer has made enquiries with the aforesaid company to ascertain the genuineness of the transactions, but no material evidence is brought on record to show that the transactions between the appellant and Pushkar Banijya Ltd., was sham. The cost of purchase of each share at Rs.92/- is evidenced by the demat accounts. In fact, there is no evidence brought on record to show that purchase price has been inflated. The Assessing Officer has not doubted the price of the share of Gujarat Heavy Chemicals Ltd. at Rs.27.85 as on 31.3.2009. it is an inherent part of section 143(3) that where the Assessing Officer is not inclined to accept the return submitted by the assessee and if he wants to modify the assessment, a show cause notice is required to be given to the ITO Wd-9(1) Kol. v. M/s Acytelene Trexim (P) Ltd. Page 6 assessee. Giving of this opportunity will include opportunity to erase procedural defects if any, which is directory in nature – Zenith processing Mills v. CIT [1996] 219 ITR 721 (Guj). In the instant case, no such opportunity appears to have been given to the appellant to put his side of the case effectively.

Now, as a normal rule, the profits should be ascertained by valuing the stock-in-trade at the beginning and at the end of the accounting year – P.M. Mohammad Meerakhan [1969] 73 ITR 735 (SC). It is settled law that the true trading results of a business for an accounting period cannot be ascertained without taking into account the value of the stock-in-trade remaining at the end of the period – A.LA. Firm v. CIT [1999] 189 ITR 285 (SC); CIT v. British Paints India Ltd. [1991] 188 ITR 44 (SC). Here again, though loss due to a fall in price below cost is allowed even if such loss has not been actually realized, no question of charging the appreciated value of closing stock as ‘notional profits’ can arise. It is misconception to think that any profit ‘arises out of the valuation of the closing stock’ and the situs of its arising or accrual is where the valuation is made – Chairup Sampatram v. CIT [1953] 24 ITR 481 (SC). On the facts and in the circumstances of the case, the purchase having established with documentary proof and the market value as at the close of the financial year also having been corroborated with material evidence there is no reason to hold that the transaction is a sham. Therefore, it is held that the addition of Rs.10,53,6000/- made by the Assessing Officer on account of inflation of purchase price in unjustified and unwarranted. The same is hereby deleted and this ground of appeal of the appellant is decided in favour of the appellant.”

Being aggrieved by this order of Ld. CIT(A) Revenue is in appeal before us.

That the transaction is illegal, has been conceded by the appellant in the submission before the Ld. CIT(A). Vide Page 3 of the Appellate Order, the relevant portion of the appellant's submission is quoted as follows: "The AO has raised a number of other norms for foundation of his case for disallowing the loss which will be dealt with presently. But it is felt necessary right at this stage to dislodge his legal contention that the transfer is in violation of the provisions of the Securities contract (Regulation Act 1956). His point is that the purchase not effected through a stock broker is against the provision of the said Act. In that connection he has referred to sections 17(1) and 18(1) ibid. Section 17(1) prohibits any person from dealing in securities except under the authority of a license granted by the SEBI. This prohibits purchase and sale of securities outside the recognized stock exchange. In this case, the transaction has been outside this stock exchange by contract between the parties without the agencies of a member of Stock exchange and so, in violation of the law. Thus the transaction is illegal and the loss fares no better. The loss from an illegal transaction cannot be allowed. But the AD has missed out the fact that section 14(2) carves out an exception where the parties transact in securities by direct treaties without the agencies of a member of the stock exchange for want of knowledge. The said provision reads as under: 2) Nothing in subsection (1) shall be construed to effect the right of any person other than a member of the recognized stock exchange to enforce any such contract or to recover any sum under or in respect of such contract if such person had no knowledge that the transaction was in contravention of any bylaws specified in clause (a) of subsection (3) of section 9. In the present case, neither party was informed of the state of law as is obvious from the acts of the case. It is now accepted that there could be no presumption that everybody knows law vide MP Sugar Mills Ltd. 118 ITR (SC). This view has been taken because the state has now diverse controls and also participation in every walk of life as has to be in a welfare state so much so that it is not possible for everyone to keep abreast of the galore of laws the legislature churns out.”

ITO Wd-9(1) Kol. v. M/s Acytelene Trexim (P) Ltd. Page 9 The argument of the appellant is self-defeating. The illegal purchase transaction is hit by explanation 1 to section 37 (1) which is quoted as follows: "For the removal of doubts it is hereby declared that any expenditure incurred by assessee for any purpose which is an offence or which is prohibited by law shall not deemed to have incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure.”

The above provision of law is unambiguous and there is no exception on grounds of ignorance etc. as purported to be argued by the appellant. In fact, if the assessee company is engaged on trading of shares on a historical basis, it is unlikely that it would be ignorant of the relevant legal provision of SEBI and its tax implication. It is to be remembered that accounts of the company are subject to financial audit as well as tax audit and the company is supported by legal experts to advice on taxation and financial matters. To conclude, even conceding the genuineness of the transaction, the same is not allowable u/s 37(1) of the Income Tax Act. The appellant also has mentioned about a contract with MPB in respect of the purchase transaction, but no such contract has been presented before the Assessing Officer. From another angle, since the transaction is off market, there has been no contract note. Therefore, the date of payment/delivery should be taken into account for determination of the purchase price of shares of GHCL.

On the other hand, Ld. AR filed paper book which is comprising pages from 1 to 155 and submitted that shares were purchased for a value of ₹1,47,20,000/- on 29.08.2008. These shares were valued at the end of financial year (08-09) at ₹44.56 lakh and therefore there arose a difference of ₹ 1026400.00 and this difference was of loss due to the valuation of share which was denied by AO. From the assessee order, it is clear that the purchase of the share was not denied by AO. Ld. AR drew our attention on page 37 of the paper book where the purchase bill for the aforesaid share was placed along with PAN of MPB. Further Ld. AR submitted that AO has not rejected / doubted the books of account of assessee. He submitted that there ITO Wd-9(1) Kol. v. M/s Acytelene Trexim (P) Ltd. Page 10 was a search conducted in the business premises of assessee and all the books of account including for the year under consideration were duly accepted. It is also important to note that same shares in the subsequent year were sold at profit. Ld AR in support of his contention submitted copy of assessment order which is placed on record and allegation of AO that there is a single business transaction in the last three years is factual incorrect as assessee has dealt into share business in the earlier and subsequent year also including the relevant year under consideration. Lastly, Ld AR relied on the order of Ld. CIT(A).

6.1 From the foregoing discussion, we find that assessee has purchased share of the GHCL on 29.08.2008 but made the payment for the purchase of share in the month of March’09 and also shares were transferred to the demat account of assessee in the month of March’09. The value of share came down drastically on the balance-sheet date as on 31.03.2009 as a result due to decline in the value of shares a loss of ₹1,05,36,000/- was booked in its books of account. We find that AO treated this loss claimed by assessee as illegal loss and it was created with the sole purpose of avoiding the tax liability against the income from the genuine source of the assessee’s business. However, Ld. CIT(A) deleted the addition made by AO. Now the question before us is as to whether the loss arising as a result of valuation of closing stock of share is genuine business loss in the aforesaid facts and circumstances. At the outset, we find that shares were purchased on 29.08.2008 from MPB and on the date of purchase stock of share was very much available in the demat account of MPB as evidenced in the demat account of MPB which is placed on page 45 of the paper book. We also find ITO Wd-9(1) Kol. v. M/s Acytelene Trexim (P) Ltd. Page 11 that a notice was issued to MPB u/s 133(6) of the Act for confirming the aforesaid transactions in its books of account. We find that MPB has duly reflected the transactions with the assessee in its books of account and in support of its claim, the balance-sheet along with other documents and bank a/c are placed on pages 42 to 64 of the paper book. We further find that aforesaid shares were sold subsequently in the financial year 2009-10 and the details of the same is placed on pages 68 to 81 of the paper book. We also find that in the similar facts, co-ordinate Bench decided the same issue in favour of assessee in dated 30-01-2015 in the case of ITO v. Kiran Consortium Trade (P) Ltd. The relevant extract is reproduced below:- “5. We have heard rival contentions and gone through facts and circumstances of the case. We find from the facts that the assessee purchased these shares from Beejay Investments and Financial Consultants P. Ltd (in short BIFC) and consequently, the said party issued the sale bill to assessee, copy of which was filed before the assessing officer and the same is not disputed. The assessing officer has raised the issue that BIFC did not have the adequate number of shares in their stock as on the date sale. However, the facts are contrary to the findings of the assessing officer, as would appear from the copy of account enclosed herewith, that the said BFIC had the required number of shares in their stock and in response to the query of the assessing officer, an explanation was filed vide letter dated 30-11- 2011 (copy is enclosed in assessee's paper book). Further, the assessing officer also made enquiry under section 133(6) from the seller BIFC, who also replied and admitted the factum of the sale of share. Therefore simply because the shares amount transferred to the Demat account of the assessee or that the payments were made in the subsequent year, the transaction cannot be taken to be not genuine. The assessing officer noted that the transaction is bogus and further the purchase was inflated. However, there is no basis for the same but it is only the presumptions of the assessing officer. Moreover, as informed during the course of this appeal hearing before us by learned Counsel that after completion of the assessment of the assessee, scrutiny assessment of the seller was taken up and in such scrutiny assessment, the sale of the have been treated to be genuine. This fact was also not examined by the assessing officer from the assessment records of the seller, as the PAN was given. We are of the view that in case the transaction have been treated as genuine in the hands of the seller, the same very transaction cannot be non-genuine in the hands of the purchaser. Apart from this, learned Counsel also relied on the ITO Wd-9(1) Kol. v. M/s Acytelene Trexim (P) Ltd. Page 12 judgement of Hon'ble Gujarat High Court in the case of CIT v. Prudent Finance (P.) Ltd. (2014) 225 Taxman 0125 (Gu)), wherein exactly identical issue was taken up and the facts discussed by Hon'ble High Court as under: -

"Respondent of Tax Appeal No. 1003/2013 and other connected appeals is one Prudent Finance Pvt. Ltd. a company registered under the Companies Act. One Nitin B. Parikh and other members of his family referred to as Nttin B. Parikh group of assessee who had control over others, was subjected to search action under section 132 of the Act. It was found that large number of shares were traded between the Company and the said group of persons at off-market transactions. Such off market transactions were entered by the company with other unrelated assesses also. The assessing officer carried a belief that such transactions were not genuine, in the sense that the same would have taken place with anterior dates in the opinion of the assessing officer, this was done to contrive loss in the hands of some of the assessee who in turn transferring the profits in the hands of other assessees. This was done to ensure that the assessees who had sizable profits from sale of shares could claim such losses as set off. The assessing officer questioned the assessee company in detail. The assessing officer in the order of assessment formed a belief that full details were not made available with respect to such transactions. The sales were not at market price. The amounts were not paid, but only account entries were made. The shares were also not transferred in the name of the purchasers. On such basis, the assessing officer concluded that the transactions were not genuine and applying the ratio of the judgment of the Supreme Court in the case of McDowell Co. Ltd v. Commercial Tax. Officer (1985) 154 ITR 148/22 Taxman 11, held that such loss cannot be allowed. The assessing officer observed that whenever sales were made to other entities, they were not followed by cheque receipts. Similarly when purchases were made from other entities, they were also not followed by cheque payments. He concluded that the assessee carried off market transactions by simple purchase bills or sales bills ignoring market rates. This was done to avoid tax."

And finally held as under:

"8. Additionally, we also note that necessary entries were made in the account books of both sides, i.e. purchaser and seller and delivery receipts were also passed demonstrating contemporaneous sale and purchase of the shares. It is not even the ease of the Revenue that such ITO Wd-9(1) Kol. v. M/s Acytelene Trexim (P) Ltd. Page 13 off market transactions were not permissible. When we find that off market transactions were permitted in law, that there was no evidence to suggest that artificially they were sold at rates lower than the prevailing market rates and we further find that the assessing officer could not bring on record any material to show that the transactions were shown to be deliberately back-dated, the findings of the Commissioner (Appeals) as well as that of the Tribunal, in our opinion, call for no interference."

In view of the above facts and identical issue taken up by Hon'ble Gujarat High Court in the case of Prudent Finance (P.) Ltd., supra, we are of the view that the transaction to unrelated parties i.e. off market transaction, there was no evidence in the present case also which suggests that the shares were artificially sold at a lower rate than the prevailing market rte. Even the assessing office could not bring anything on record, which suggests that the selling rate was lower than the market rate. Respectfully following Hon'ble Gujarat High Court, we confirm the order of Commissioner (Appeals) and the issue of revenue’s appeal is dismissed.”

Further we also relying on the judgment of Hon'ble Gujarat High Court in the case of CIT v. Prudent Finance (P) Ltd. (2014) taxman 125 where the head note as under:- “-Business loss – Allowability Genuineness of loss on off market transactions – Assessee-company found to be treated in off market share transactions with its related group of persons as well as with unrelated groups of persons. AO disallowed losses on impugned transactions on the ground that transactions were not genuine as assessee carried off market transactions by simple purchase bills or sales bills ignoring market rtes. This was done to avoid tax. Moreover neither any amount was paid nor any shares were transferred in the name of purchasers, only account entries were made. Held: Necessary entries were made in the account books of both sides, i.e. purchaser and seller and delivery receipts were also passed demonstrating contemporaneous sale and purchase of the shares. It was not even the case of the Revenue that such off market transactions were not permissible. When off market transactions were permitted in law, and there was no evidence to suggest that artificially they were sold at rates lower than the prevailing market rates and AO could not bring on record any material to show that the transactions were not genuine, the findings of CIT(A) as well as Tribunal that impugned transactions were genuine, called for no interference.”

From the above judgments, we find that the transactions of sale-purchase was duly recorded in the books of account of the respective parties, the allegation ITO Wd-9(1) Kol. v. M/s Acytelene Trexim (P) Ltd. Page 14 by the Assessing Officer that the off market transactions cannot be accepted under SCRA is factual incorrect relating in the aforesaid appellate order. We also find that the exception has been provided in the SCRA Act under section 14(2) of the SCRA Act as discussed above. Accordingly we uphold the order of Ld. CIT(A) and ground raised by Revenue is dismissed.

Q. No. 8 How do you consider any loan creditors fit for granting loan, i.e criteria?

Ans. Market reputation, profit and loss account and balance sheet.

Q. No.4 Do anyone introduce loan creditors to you?

Ans. Sometimes friends or other way loan creditors know that the company tenders loan.

Q. No. Would you note the feasibility report in any register?

Ans. No, no any staff records the feasibility records. I only memorized reports of the company. I don’t memorize the nos. of the company to whom he loans were given for Financial Year 2008-09.

Q. No. 13 How many staff are in your company at present?

ITO Wd-9(1) Kol. v. M/s Acytelene Trexim (P) Ltd. Page 15 Ans. I do not know.

Q. No. 14 What are the sources of loan tendered by your company? Ans. I am not sure about it. Q. No. 15 Do your company do other business other than tendering loans? Ans. No. Q. No. 16 Are there any fixed assets of the company? Ans. I don’t know about that.”

From the statement of said director, AO observed that the director of assessee-company is just acting as signatory only and has no role in the day- to-day affairs of the business of assessee-company. Therefore, the expense incurred for ₹15 lakhs on account of KIP are not having any business connection and AO disallowed the same and added to the total income of assessee.

In the instance case, the key persons who are covered by the Policy of Rs.7,500,000/- each are both directors of the company and there is no denying the fact that the director as employees worked for the company. According to the appellant company, the persons played key role in managing the affairs and in turn adding to the profitability of the company. According to the appellant company, the persons played key role in managing the affairs and in turn adding to the profitability of the company. Therefore, the mere fact that the lady director could not answer some of the questions posted by the Assessing Officer, did not by itself make her obsolete or non-productive for the appellant company. In any case, the Assessing Officer cannot sit on the chair of the businessman and dictate terms as to how the business would have been run. It was incumbent on his part to ensure that the claim is within the four corners of the provisions of the Act and the scheme.

In the case of CIT vs. Rajan Nanda [2012] 205 Taxman 138/18 Taxmann.com 98 (Delhi), it is held that “where the assessee company had taken ‘Keyman’ insurance policies on life of its chairman and director but in subsequent year said policies were assigned to chairman and director receiving surrender value from them, and, for the remaining period of all those policies, the insurance premiums were paid by the assignee, the deduction claimed towards premium so paid (less surrender value received back) could not be disallowed by the Assessing Officer on the ground that it was a colourable device adopted by the assessee-company to claim business expenditure and that the expenditure was not wholly and exclusively for the business of the assessee-company.”

One of the broad principles for allowance of deduction under sec. 37(1) of the Act as laid down by the Hon'ble Supreme Court in CIT v. Chandulal Keshavlal & Co. [1960] 38 ITR 601 (SC) is that ‘if the payment or expenditure is incurred for the purpose of the trade of the assessee it does not matter that the payment may ensure to the benefit of a third party. Another test is whether the transaction is properly entered into as part of the assessee’s legitimate commercial undertaking in order to facilitate the carrying on its business; and it is immaterial that a third party also benefits there.”

In the light of the above observation and discussion and on the facts and in the circumstances of the case and emerging legal position, I am of the considered view that the appellant company is entitled for ITO Wd-9(1) Kol. v. M/s Acytelene Trexim (P) Ltd. Page 17 deduction in respect of the payment of the premiums made for Keyman Insurance cover for its directors-employees at Rs.7,50,000/- each aggregating to rs.15,00,000/-.Thus, the addition of Rs.15,00,000/- made by the AO by way of the disallowances is hereby deleted and this ground of appeal is allowed.”

Being aggrieved by this order of Ld. CIT(A) Revenue is in appeal before us.

On the other hand, Ld. AR drew our attention on page 152 of paper book and demonstrated that the directors are actively engaged in the business affairs of the business. The KIP premium have also been paid in earlier year which was allowed as deduction and he very much relied on the order of Ld. CIT(A).