VIVEK I GUPTA,MUMBAI vs. ITO 12(2)2, MUMBAI

The sole grievance of the assessee relates to the addition made u/s. 2(22)(e) of the Act made by the AO at Rs. 81,07,672/- which is enhanced by the Ld. CIT(A) to Rs. 1,64,57,672/-.

Briefly stated the facts of the case are that the assessee is a trader in shares and derivatives and commodities. The return for the year was filed on 23.9.2009 declaring total income at Rs. 7,10,106/-. The return was selected for scrutiny assessment and accordingly statutory notices were issued and served upon the assessee.

During the course of the scrutiny assessment proceedings, the Assessing Officer noticed that the assessee is a Director in Gupta Equities Pvt. Ltd in which the assessee is having substantial interest as per the provisions of Sec. 2(22)(e) of the Act. The assessee was asked to produce the ledger account with the said company alongwith the balance sheet of the company. On scrutinizing the ledger account, the AO found that the said company has made payments/advances to the assessee. Invoking the provisions of Sec. 2(22)(e) of the Act, the AO treated a sum of Rs. 81,07,672/- as deemed dividend within the provisions of Sec 2(22)(e) of the Act.

The assessee carried the matter before the Ld. CIT(A) and vehemently contended that the assessee was one of the clients of Gupta Equities Pvt. Ltd which company is trading in derivatives in the stock market. It was brought to the notice of the Ld. CIT(A) that the transactions are purely commercial in nature and therefore outside the ambit of Sec. 2(22)(e) of the Act.

5.1. After considering the facts and the submissions in the light of the copies of the ledger account, the Ld. CIT(A) observed that the advances have no nexus to the trading activity carried out by the assessee. The Ld. CIT(A) went on to compute the deemed dividend as

Aggrieved by this, the assessee is before us.

The Ld. Counsel for the assessee reiterated what has been stated before the lower authorities. It is the say of the Ld. Counsel that the assessee is maintaining two ledger account with the company M/s. Gupta Equities Pvt. Ltd., one account relates to the margin money in relation to the transactions in the derivatives and the second account relates to the mark-to-market profit/loss arising out of the said transaction. The Ld. Counsel for the assessee drew our attention to the respective ledger accounts. The Ld. Counsel explained the nature of transaction by pointing out that the said transactions were done in the ordinary course of business of trading in derivatives, therefore, the transactions are outside the purview of Sec. 2(22)(e) of the Act. Strong reliance was placed on the decision of the Hon’ble High Court of Delhi in the case of CIT Vs Ambassador Travels Pvt. Ltd. 318 ITR 376. Reliance was also placed on the decision of the Hon’ble High Court of Calcutta in the case of Pradipkumar Malhotra Vs CIT 338 ITR 538. The Ld. Counsel concluded by stating that since the transactions are purely commercial in nature, therefore, provisions of Sec. 2(22)(e) of the Act cannot be applied.

Per contra, the Ld. Departmental Representative strongly relied upon the findings of the Ld. CIT(A) but could not bring any decision in favour of the Revenue.

We have given a thoughtful consideration to the orders of the authorities below and with the assistance of the Ld. Counsel we have gone through the related documentary evidences brought on record and referred to. The undisputed facts are that the assessee is having substantial share holding in Gupta Equities Pvt. Ltd. It is also an undisputed fact that the said company is trading in derivatives in the stock market and like many other clients, the assessee was also having margin money account in the said company.

In the result, the appeal filed by the assessee is allowed.