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Income Tax Appellate Tribunal, “C” BENCH, MUMBAI
Before: SHRI R.C. SHARMA & SHRI PAWAN SINGH
Assessee by Shri Gurumukh Singh Purswani Revenue by : Shri Deepkant Prasad(D.R.) सुनवाई की तायीख /Date of Hearing : 24-08-2015 घोषणा की तायीख /Date of Pronouncement : 21-10-2015 आदेश / O R D E R PER R.C. SHARMA, A.M. :
Out of these seven appeals, three appeals filed by the assessee and four appeals filed by the Revenue against separate orders of ld. CIT(A) in the matter of order passed u/s 143(3) r.w.s. 153A of the Income tax Act, 1961. These appeals have been heard together and are being disposed of by this single consolidated order for the sake of convenience.
Rival contentions have heard and record perused. Facts of the case in brief are that the assessee is dealing in shares. He was applying IPO in the name of different persons. A search was undertaken in his premises. Thereafter, assessment was framed wherein the A.O. did not allow D-Mat charges, new issue expenses while computing profit from investment in shares. By the impugned order, the ld. CIT(A) confirmed both the additions against which the assessee is in further appeal before us.
From the record we found that the A.O. has disallowed De-mat charges which are as under:-
A.Y. Amount 2004-05 Rs.1,26,688/- 2005-06 Rs. 3,06,942/- 2006-07 Rs.6,07,564/- 7 APPLS, PURSHOTTAM BUDHWANI 4 The A.O. has taken a stand that since the expenses incurred by the assessee are for the purpose of earning illegal income, the same are subjected to disallowances. It is stated that the assessee was making multiple applications in contravention of the rules and was manipulating the allotment of shares in IPO and therefore, the expenses pertaining to such illegal activity cannot be allowed as business expenditure. On the other hand, the assessee has relied upon the following decisions:-
“reliance is placed on the decision of Honble Supreme Court in Maddi “Venkatraman and Co. P.L. vs. CIT 229 ITR 534 wherein the Hon’ble Supreme Court ruled that where the entire business of the assessee is illegal and that the income is sought to be taxed by the ITO then the expenditure incurred in the illegal activities will also have to be allowed as deductions. In my case you have mentioned that entire modus operandi of making multiple IPO applications is illegal and at the same time you have taxed the income earned from the said activity, I respectfully submit that expenditure incurred to earn that income from illegal activities shall be allowed as deductions and only net income shall be taxed. I invite your attention towards the decision of Bombay High Court in the case of CIT vs. Anil M. Geni 148 taxman 645 (Bom) wherein in the case of a smuggler detained under COFEPOSA and engaged in business of smuggling foreign currency was allowed to treat the amount of confiscated foreign currency equivalent in value to Indian rupee as business loss.”
By the impugned order, the ld. CIT(A) confirmed the A.O.’s action by holding that expenditure was not allowable in view of Explanation to section 37(1) of the Act.
7 APPLS, PURSHOTTAM BUDHWANI 5
We have considered the rival contentions, gone through the orders of authorities below and found that the D-mat charges were paid by the assessee to various banks. The income arising from application of share in IPO was taxed by the A.O. as business income. However, making payment to the bank for D-mat charges does not amount to any illegal payment nor such payment is in contravention of any law. Accordingly, we do not find any merit in disallowance of D-mat charges in all the three years under consideration.
On similar way, the A.O. also disallowed new issue expenses incurred by the assessee. Following the reasoning given hereinabove, since the new issue expenses were incurred in connection with earning of profit from application of new shares in IPO, expenses incurred wholly and exclusively for earning such income cannot be disallowed. The A.O. is directed to delete the disallowance so made.
In A.Y. 2006-07, the A.O. has also made an addition of Rs. 47,53,110/- in assessee’s income. Facts in brief are that the assessee owed Rs. 47,53,110/- to one M/s Viraj Investments as on 31st March, 2006 which was shown by the assessee as his liability payable to the creditor. During the course of 133(6) proceedings the said M/s Viraj Investments furnished copy of account of the assessee as appearing in their books of account in which they had written off the amount due to the assessee as bad debts. However, on 15th January, 2007 M/s Viraj Investments wrote a letter to the assessee asking the assessee to clear the dues payable by the assessee failing which Court action was threatened by them. The AO has added Rs. 47,53,110/- to the income of the assessee by stating that since M/s Viraj Investments has written off the amount in his books of account it has to be income in the case of the assessee as he obtained the benefits accruing to him. By the impugned order the CIT(A) confirmed the AO’s action against which assessee is in furhter appeal before us.
7 APPLS, PURSHOTTAM BUDHWANI 6
We have considered the rival contentions and found that during the year the assessee has not written off the amount payable to M/s Viraj Investments and further more M/s Viraj Investments has also wrote letter to the assessee asking repayment of dues payable by the assessee and failing which court action was threatened by them. Under these circumstances, mere on a plea that M/s Viraj Investment written off the amount in its books of account will not empower the A.O. to add the income in assessee’s hands unless it is proved that assessee is not going to pay the amount. In the interest of justice and fair play, we restore this issue to the file of the A.O. to verify the actual payment made by the assessee in the subsequent assessment years and if it is found that the amount was not actually been paid, the A.O. is at liberty to add the same in the income of the assessee. To the extent of interest expenditure, if claimed by assessee during the year under consideration with respect to this amount, same is liable to be added. We direct accordingly.
In the result, appeals of the assessee are allowed in part as indicated above.
Now, we shall decide the appeals filed by the revenue for the assessment years 2004-05 to 2006-07, wherein the revenue is aggrieved by the action of CIT(A) in deleting the addition made on account of transferring 50% of IPO shares to financiers at issue price instead of the listed price.
From the record we found that the addition of Rs.6,67,396/- made on account of transferring 50% of IPO shares to financiers at issue price instead of listed price was deleted by the CIT(A) after observing as under :- “7.3 The facts of the case have been carefully examined and the statements recorded from the financiers as well as the confirmation letters furnished by the financiers, which were available before the A.O.
7 APPLS, PURSHOTTAM BUDHWANI 7 during the assessment proceedings have been perused. It is clear from the confirmation letters as well as the statements recorded from, for instance, Shri Dushyant N Dalal, Shri L.L.Fulwani etc (page no.36 to 47 of the paper book - A.Y.2004-05) that the shares transferred by the appellant to the financiers were at issue price, in accordance with the arrangement entered into between the appellant and the financiers. The statements recorded by the A.O from the financiers corroborated the stand of the appellant that the appellant had transferred the 50% of shares allotted in IPOs to the financiers at issue price and not at the listed price in view of the understanding that in lieu of the finances provided for applying for IPOs, 50% of the allotted shares will be transferred to balance 50%, of the cost of the funds utilised in filing the applications in IPOs financiers at issue price. It is also submitted that the appellant has paid interest only to the extent of 50% of the funds made available by the financiers and the was borne by the financiers themselves since they were entitled to the transfer of 50% of the shares allotted. A.O has not brought any material on record to dispute this important factual position. 7.4 It is clear from the facts of the case and the evidences gathered that the basic incentive for the financiers to provide funds to the appellant to make a large number of applications during IPOs was in the nature of a commitment to transfer of shares by the appellant at IPO issue price itself. The confirmation letters filed also have indicated that the issue price was taken as the basis for the purpose of arriving at capital gains, if any, as and when such transferred shares are sold by transferees / financiers. 7.5 After taking cognizance of the modus operandi recorded by the SEBI in its order in the Matter of IDFC Ltd, the statements recorded and the confirmation letters provided by the financiers it is seen that the stand taken by the appellant that 50% of the IPO shares were transferred by the appellant to the financiers at issue price is found to be corroborated. In the paper book submitted by the appellant, a consent proposal preferred by the appellant before SEBI is taken note of. Gist of the proposal is as under:- "After having considered my aforesaid requests / conditions practical difficulties J herein enclosed (Exhibit I) the statement giving detailed calculation of gain realised by me from aforesaid transactions and offer, without accepting the guilt to get rid of all these complicated., lengthy, cumbersome legal proceedings of all these agencies, the sum of Rs.2, 00, 00, 0001- (Rs. Two crore only) towards the consent term in the matter. However, as you are aware and I have informed you during the course of personal meeting and once again I reiterate that I do not have any money/liquidity and my only asset is shares which have been 7 APPLS, PURSHOTTAM BUDHWANI 8 seized by SEEI and Enforcement Directorate. I, therefore, propose to meet the aforesaid amount mentioned by me (towards consent term) by allowing you to sell the seized shares of IDFC Limited on my behalf in the market and to realise the sale proceeds and adjust the same towards the amount suggested as indicated above." The above proposal clearly establishes that the appellant had accepted his role in market manipulation and had submitted before SEBI to pay a sum of Rs.2 crores to settle the matter amicably. 7.6 In this case, a search and seizure action was also conducted by the department on the appellant. Even consequent to the search and seizure action, no evidence was brought on record to suggest that certain additional incomes were earned by the appellant in contravention of the claim that the shares transferred to the financiers were at the issue price of IPOs. A.O has also not brought any material on record, either with the help of bank accounts or with the help of any market enquiries to directly or indirectly corroborate his stand that the appellant had earned certain undisclosed additional incomes while transferring the shares allotted in the IPOs to the financiers. On the contrary, the statements recorded from the financiers by the A.O during the assessment proceedings have corroborated the version of the appellant. On a careful examination of all the materials on record, it is seen that the methodology adopted by the A.O. to make additions to the returned incomes are nothing but estimations of notional incomes on the basis of difference between the issue price and listed price of the securities transferred to the financiers which are not supported by any evidences. Having regard to the facts and circumstances of the case and since the notional additions made by the A.O. are found to be not supported by any evidences, the additions of Rs.6,67,396/-, Rs.39,23,272/- and Rs.1,72,20,502/- made in the A.Yrs.2004-05, 2005-06 and 2006-07 respectively are hereby deleted.”
We have considered rival contentions and found from the record that confirmation letters have been filed by the financiers before the AO with regard to the price paid by them. After considering the statement recorded by the AO as well as confirmation filed by the financiers, the CIT(A) recorded a finding to the effect that the shares were transferred by the assessee to the financiers at an issue price in accordance with the arrangement entered into between the assessee and the financiers. As the statement recorded by the AO from the financiers corroborated the stand of the assessee that the assessee had transferred 50% of shares allotted in IPO to the financiers at issue price 7 APPLS, PURSHOTTAM BUDHWANI 9 and not at the listed price, the additions so made by the AO was not warranted. The detailed finding recorded by CIT(A) at para 7.3 to 7.6 has not been controverted by ld. DR by brining any positive material on record. Accordingly, we do not find any reason to interfere in the order of the CIT(A) for deleting the addition made on account of transfer of 50% of IPO shares to the financiers.
Similar finding has been given by CIT(A) in the assessment years 2005- 06 & 2006-07. Following the same reasoning as given hereinabove, we do not find any reason to interfere in the order of the CIT(A) for deleting the disallowance so made in all the years under consideration.
The revenue has also filed an appeal (i.e. against the order of CIT(A) dated 28-9-2011, in the matter of imposition of penalty u/s.271(1)(c) of the Act, for the assessment year 2006-07.
From the record we found that penalty was imposed with respect to the addition made on account of difference between the issue price and the lowest listed price of the securities transferred to the financiers. The addition so made has also been deleted by the CIT(A) vide its order dated 28-9-2011. The appeal filed by the revenue against the quantum deletion on this issue has been dismissed by us, therefore, penalty order to this extent does not survive. Resultantly, this appeal of the revenue is dismissed.
The AO has also levied penalty with regard to addition made in respect of amount due from M/s Viraj Investments amounting to Rs.47,53,110/-. The penalty levied with respect to this addition was deleted by the CIT(A) by observing as under :- “7.0 The facts of the case and the written submissions of the appellant have been carefully examined. It is seen from the written submissions that the appellant has challenged the action of the A.O on the ground 7 APPLS, PURSHOTTAM BUDHWANI 10 that as reflected in the balance sheet of the relevant previous year, M/s. Viraj Investments, continues to be shown as a creditor. It is contended that although the said creditor has written off the amount as a bad debt in its books of accounts, the recovery of the same has been pursued as is evident from the letter of the creditor. It is also submitted during the appeal proceedings that the appellant has not concealed any particulars of income nor furnished any inaccurate particulars of income in the return of income filed. 7.1 For the reasons stated therein, it is held in the quantum appellate order that the amounts written off by the creditor is the income of the appellant in terms of section 41(1) of the Act. However, it is seen that the appellant had not concealed any particulars of income and therefore the same cannot be termed as concealment of income within the meaning of section 271 (1)( c) of the Act. It is also apparent that the issue is a debatable one. Having regard to the facts and circumstances of the case, it is hereby held that penalty u/s.271(l)(c) of the Act is not warranted in respect of this addition. Reliance is placed on the decision of the Hon'ble Supreme Court in the case of CIT v. Reliance Petroproducts Pvt. Ltd [322 ITR 158](2010). Therefore, the penalty levied on this issue is hereby deleted.”
We have considered rival contentions and found that addition was made by the AO merely on the plea that M/s Viraj Investments to whom assessee was to make payment has written off amount in its books of account. However, at the very same time, M/s Viraj Investments has written a letter to the assessee asking for the repayment and threatened to take legal course of action in case of non-repayment. In these circumstances, it cannot be taken that assessee has earned any income u/s.41(1). The CIT(A) has deleted the penalty by observing that assessee has not concealed any particulars of income, therefore, same cannot be termed as concealment of income within the meaning of Section 271(1)(c) of the Act. The CIT(A) also observed that issue is debatable, therefore, do not warrant any penalty. Reliance was placed on the decision of Hon’ble Supreme Court in the case of Reliance Petroproducts Ltd. 322 ITR 158. Accordingly, we do not find any infirmity in the order of CIT(A) for deleting the penalty so imposed. Thus, the appeal of the revenue is dismissed.
7 APPLS, PURSHOTTAM BUDHWANI 11
In the result, appeals of the assessee are allowed in part, whereas appeals of the revenue are dismissed.
Order pronounced in the open court on 21st October, 2015.