High Court Of Delhi
CIT vs. Vishishth Chay Vyapar Ltd.
Section 28(i)
Assessment years 1997-98 to 1999-2000
S. Ravindra Bhat And Vibhu Bakhru, JJ.
IT Appeal Nos. 1105, 1106 & 1107 Of 2010
April 30, 2015
JUDGMENT
1. The judgment of the court was delivered by
2. Vibhu Bakhru J. – These appeals, preferred by the Revenue under section 260A of the Income-tax Act, 1961 (hereinafter “the Act”), impugn a common order dated June 30, 2009, passed by the Income-tax Appellate Tribunal (hereinafter “the Tribunal”) to the extent that the appeals preferred by the Revenue (being I.T.A. No. 3763/Del/2007, I.T.A. No. 3764/Del/2007 and I.T.A. No. 3732/Del/2007) against the orders passed by the Commissioner of Income-tax (Appeals) (hereafter “the CIT(A)”) in respect of the assessment years 1997-1998, 1998-1999 and 1999-2000, have been rejected. The said common order dated June 30, 2009, also disposed of an appeal preferred by the Revenue in respect of the assessment year 1996-97, however the same is not subject matter of these appeals.
3. The principal controversy involved in the present appeals relates to disallowance of loss on account of alleged transactions entered into by the assessee in respect of the shares of certain companies and further the loss claimed on account of diminution in value of those shares.
Briefly stated, the relevant facts leading to the present appeals are as under:
3.1 The assessee filed its return for the assessment year 1997-98 declaring an income of Rs. 1,05,518. The said income was calculated after claiming a loss of Rs. 4,64,82,500 on account of purchase and sale of shares and diminution in the value of shares held by the assessee. By an assessment order dated March 14, 2000, the Assessing Officer (hereafter “the AO”) disallowed the said loss of Rs. 4,64,82,500 and assessed the income of the assessee as Rs. 8,72,20,744 for the assessment year 1997-98. The assessee preferred an appeal before the Commissioner of Income-tax (Appeals) which, was rejected by an order dated March 5, 2001. The assessee carried the said order in appeal, being I.T.A. No. 2978/Delhi/2001, before the Tribunal.
3.2 The assessee filed a return for the assessment year 1998-99 declaring an income of Rs. 59,070. The said income was calculated after claiming a loss of Rs. 5,36,23,950 on account of sale and purchase of shares of certain companies. By an assessment order dated March 7, 2001, the Assessing Officer disallowed the said loss of Rs. 5,36,23,950 and assessed the income of the assessee as Rs. 11,06,81,611 for the assessment year 1998-99. The assessee preferred an appeal before the Commissioner of Income-tax (Appeals), which was dismissed by an order dated January 13, 2003. The assessee appealed against this order, being I.T.A. No. 2836/Del/2003, before the Tribunal.
3.3 The assessee filed a return for the assessment year 1999-2000 declaring an income of Rs. 70,120. The said income was calculated after claiming a loss of Rs. 6,16,86,500 on account of sale and purchase of shares of certain companies. By an assessment order dated March 27, 2002, the Assessing Officer disallowed the said loss of Rs. 6,16,86,500 and assessed the income of the assessee as Rs. 17,04,95,139 for the assessment year 1999-2000. The assessee preferred an appeal before the Commissioner of Income-tax (Appeals) which was dismissed by an order dated January 13, 2003. The assessee appealed against this order (I.T.A. No. 2837/Del/2003) before the Tribunal.
3.4 The Tribunal, by its order dated October 19, 2004, disposed of the said appeals (being I.T.A. No. 2978/Del/2001 for the assessment year 1997-98, I.T.A. No. 2836/Del/2003 for the assessment year 1998-99 and I.T.A. No. 2837/Del/2003 for the assessment year 1999-2000) along with appeal (I.T.A. No. 2835/Del/2003 for the assessment year 1996-97). By the said order, the Tribunal deleted most of the additions made by the Assessing Officer to the assessed income of the assessee but insofar as the losses claimed by the assessee, in relation to the shares of companies, the Tribunal remanded the matter to the Assessing Officer to consider it afresh. The Tribunal held that the statements of persons relied upon by the Assessing Officer justified entertaining suspicion as to the transaction of sale/purchase of shares. However, since the assessee was not confronted with material collected by the Assessing Officer, the same had resulted in a material irregularity in respect of the three assessments (being assessments relating to the assessment years 1997-98 to 1999-2000). The Tribunal also held that the documents relied upon by the assessee—confirmation memos/contract notes, bills, letters confirming registration of shares etc— were required to be considered.
3.5 Pursuant to the order dated October 19, 2004, passed by the Tribunal, the Assessing Officer considered the question with regard to the loss on account of shares claimed by the assessee in various years and disallowed the same. The Assessing Officer found that the assessee had purchased most of the shares of certain companies from one Sh. Nem Chand Jain, who was stated to be a broker with the Gauhati Stock Exchange. Although the value of these transactions was large, no payments for the same were made and the consideration for purchase of the said shares was reflected as outstanding and payable to Sh. Nem Chand Jain. Sh. Nem Chand Jain had neither charged any interest nor instituted any proceedings for recovery of the said amount. The Assessing Officer had found that Sh. Nem Chand Jain was not a person of means and the transactions in question were bogus.
3.6 The assessee filed appeals (being Appeal No. 47 of 2007-08 for the assessment year 1997-98, Appeal No. 48 of 2007-08 for the assessment year 1998-99 and Appeal No. 49 of 2007-08 for the assessment year 1999-2000), inter alia, against the assessment orders framed with respect to the assessment years 1997-98 to 1999-2000. The Commissioner of Income-tax (Appeals) accepted the contract notes and other documents produced by the assessee as evidence of the genuineness of the transactions of sale and purchase of shares as well as reduction in their value at the end of the relevant year and allowed the aforesaid appeals filed by the assessee by three separate orders—two orders dated June 29, 2007 in respect of the assessment years 1997-98 and 1999-2000 and an order dated June 22, 2007, in respect of the assessment order 1998-99.
3.7 The Revenue preferred appeals before the Tribunal assailing the decision of the Commissioner of Income-tax (Appeals) to allow the loss claimed by the assessee. The Revenue urged that the loss claimed by the assessee on account of sale and purchase of shares and diminution in their value could not be set-off from business income in view of section 73 of the Act. These appeals preferred by the Revenue were rejected by the Tribunal by the common order dated June 30, 2009, which is impugned herein. The Tribunal found that the purchase bills for the shares purchased along with the brokers contract note and copy of the confirmation from the respective companies indicating the transfer of shares in the name of the assessee evidenced the genuineness of the losses claimed by the assessee. The Tribunal further noted that the shares were bought through the Gauhati Stock Exchange and their transfers in the name of the assessee were confirmed by letters received from the respective companies. The Tribunal was of the view that as the shares were held in stock-in-trade, the same could be valued at cost or market price, whichever is lower, and a loss on account of diminution in value of the stocks could be set-off by the assessee against its other income. The Tribunal noted that the companies whose shares were purchased by the assessee were genuine companies and regularly assessed to tax in their respective wards. Since the Tribunal held that the transaction in purchases of the shares were genuine, the decisions of the Commissioner of Income-tax (Appeals) were upheld.
3.8 The Revenue’s contention that the losses claimed by the assessee could not be set-off against income by way of interest by virtue of section 73 of the Act was rejected. The Tribunal held that as the said contention had not been urged either before the authorities below or before the Tribunal, in the first round, the Revenue could not be permitted to raise the said contention for the first time in the second round.
4. In the aforesaid facts, the controversy to be addressed is whether the Tribunal has erred in holding that the loss of Rs. 4,64,82,500 for the assessment year 1997-98; the loss of Rs. 5,36,23,950 for the assessment year 1998-99; and the loss of Rs. 6,16,86,500 for the assessment year 1999-2000, on account of sale and purchase of shares of certain companies and on account of diminution in their value were allowable.
5. By an order dated September 3, 2014, this court had indicated that the following substantial question of law arose for consideration in these appeals :
“Whether the finding of the Income-tax Appellate Tribunal accepting the genuineness of the loss as declared in respect of shares purchased and sold or held as stock-in-trade is perverse?”
6. The Assessing Officer had concluded that the transactions of sale and purchase of shares of certain companies, on the basis of which losses were being claimed by the assessee, were not genuine and, accordingly, the said losses had been disallowed. Before proceedings to examine the decision rendered by the Tribunal, it would be essential to note the reasons which led the Assessing Officer to conclude that the transactions in shares were not genuine.
7. The nature of transactions in each of the assessment years involved, i.e., 1997-98 to 1999-2000 are, essentially, similar. Thus, for the sake of brevity, the transactions relating to the previous year 1996-97 relevant to the assessment year 1997-98 are being referred to for the purpose of appreciating the Assessing Officer’s findings and reasoning.
8. The following shares were reflected as opening stock-in-trade as on April 1, 1996 :
Name of the company No. of shares Rate (Rs.) Value (Rs.)
Baba Business Services Ltd. 91300 2.0 1,82,600
Sangrahalaya Timber and Crafts Ltd. 30800 2.0 61,600
Premier Auto Finance Ltd. 50000 10.0 5,00,000
Pulp Products Limited 10000 2.0 20,000
Mather and Platt India Ltd. 38500 13.5 5,19,750
Out of the aforesaid shares, the shares of Baba Business Services Ltd. were sold during the year at the value reflected. Thus, no profit or loss was claimed with respect to that transaction. No transactions in shares of Sangrahalaya Timber and Crafts Ltd. and Premier Auto Finance Ltd., were reported during the year. The shares of Pulp Products Ltd. were purportedly sold at Rs. 3 per share and, therefore, a profit of Rs. 10,000 was reported in respect of the said transaction. One thousand shares of Mather and Platt India Ltd. were purportedly sold at Rs. 13.10 each and an aggregate loss of Rs. 400 was reported with respect to that transaction. As is apparent from the above, the effect of the aforesaid transactions was a net profit of Rs. 9,600, which is not significant. The paper book filed before this court also does not contain any documents relating to the said transactions.
9. During the previous year ended March 31, 1997, the assessee claimed to have purchased shares of the following companies for a value of Rs. 5,35,49,550 :
S. No. Name of the company Qty. Rate (Rs.) Amount (Rs.)
1. M/s. Hotahoti Wood Products Ltd. 96125 15.60 14,99,550
2. M/s. Purbanchal Pre stressed Ltd. 1240000 15.60 1,92,29,000
3. M/s. Kamini Finance and Inv. Ltd. 1635000 20.00 3,27,00,000
4. M/s. Doyang Wood Products Ltd. 13000 10.00 1,30,000
Total 5,35,49,550
All the aforesaid shares, except shares of M/s. Doyang Wood Products Ltd. amounting to Rs. 1,30,000, were purchased from one Shri Nem Chand Jain. Thus, the assessee claimed that it had purchased shares of a value of Rs. 5,34,19,550 from Shri Nem Chand Jain. These shares were not sold during the year and were reflected as a part of the closing stock of shares as on March 31, 1997. The shares of Doyang Wood Products were stated to be purchased from one Shama Holdings P. Ltd. at the rate of Rs. 10 each aggregating Rs. 1,30,000 (rupees one lakh thirty thousand). These shares of Doyang Wood Products Ltd were claimed to have been sold during the year at the rate of Rs. 2.50 each aggregating Rs. 32,500. The copy of the ledger produced by the assessee indicates that the said shares were purchased on credit but the same were sold in cash. Plainly, the transactions for sale and purchase of these shares, which resulted in a loss of Rs. 98,500, were “off market” transactions and not through any stock exchange or through any stock broker.
For the previous year ending March 31, 1997, the assessee had claimed a loss of Rs. 4,64,82,500. This loss has two components; the first being loss relating to sale and purchase of shares and the second being loss on account of diminution in the value of the stock of shares held by the assessee at the end of the year. Whilst an amount of Rs. 88,900 was claimed as loss on sale of shares, the bulk of the loss claimed, that is Rs. 4,63,93,600, was on account of reduction in value of the closing stock of shares. Out of the aforesaid loss only a sum of Rs. 56,250 was on account of reduction in value of the shares of Mather and Platt India Ltd. and the remaining amount of Rs. 4,63,28,350 was shown as loss on account of fall in the value of shares, as on the closing date, i.e., March 31, 1997, purportedly purchased by the assessee during the course of the year. The break-up of the aforesaid amount is as under :
Sl. No. Name of the company (M/s.) No. of shares Rate (Rs.) Value (Rs.) Losses (Rs.)
1. M/s. Hotahoti Wood Products Ltd. 96125 15.60 2.40 12,68,850
2. M/s. Purbanchal Prestressed Ltd. 124000 15.60 2.50 1,61,20,000
3. M/s. Kamini Finance and Inv. Ltd. 1635000 20.00 2.30 2,89,39,500
Total 4,63,28,350
10. As indicated earlier, the abovementioned shares, which are claimed to have resulted in loss on account of reduction in their value, were claimed to have been purchased by the assessee from one Shri Nem Chand Jain for a sum Rs. 5,34,19,550.
11. The assessee claims the aforesaid transactions to be genuine and in support of the said claim, the assessee produced :
(a) confirmation memo from Shri Nem Chand Jain;
(b) purchase bills from Nem Chand Jain;
(c) letters of transfer from the companies, whose shares had been purchased, confirming that the shares had been transferred in the name of the assessee;
(d) a bill indicating sale of 13000 shares of M/s. Doyang Wood Products Ltd. to one Shri Ram Lal Ashoka of Chandni Chowk, Delhi;
(e) copy of the ledger accounts; and
(f) certificate dated February 12, 2000, from Gauhati Stock Exchange indicating the prices at which the shares of the companies involved were traded.
11.1 The assessee further asserted that Shri Nem Chand Jain was a broker with the Gauhati Stock Exchange and the memos of confirmation as well as the bills produced evidenced the genuineness of the purchase transactions. In addition, the assessee also produced a certificate indicating the value of the quotations of the shares in question from the Gauhati Stock Exchange. This, according to the assessee, evidenced the value of the shares.
12. In order to examine the genuineness of the transactions, the Assessing Officer made a reference to the Additional Director of Investigation, Income-tax and requested the income-tax authority to inquire and report on, inter alia, the financial position of Shri Nem Chand Jain.
13. In response to the aforesaid inquiry, the Assessing Officer was informed that search and seizure operations were conducted in the case of Shri Nem Chand Jain on October 14, 1996. During the course of the said search and further proceedings, statement of Shri Nem Chand Jain was recorded under section 132(4) and section 131 of the Act and the same were forwarded to the Assessing Officer. Shri Nem Chand Jain had stated that he was a director/managing director of M/s. Doyang Wood Products Ltd., M/s. Kamini Finance and Investment Ltd., M/s. Hotahoti Wood Products Ltd. in addition to other companies. He had stated that he was not aware of affairs of those companies but had acted at the instruction of one Mr. R.R. Modi.
14. He further stated that he received expenses from Shri R.R. Modi in lieu of services rendered.
15. The Assessing Officer was informed that Sh. R.R. Modi had made a disclosure that he had promoted the following companies by introducing share application money in different names aggregating Rs. 1,70,00,000 :
1. M/s. Kamala Kal Ltd.
2. M/s. Gulmohar Estates Ltd.
3. Dass Apartments Ltd.
4. Manipur Pharmaceuticals Ltd.
5. Pulp Products Ltd.
6. M/s. Raksha Audio Ltd.
7. Sangrahalaya Timber and Crafts Ltd.
8. M/s. Doyang Wood Products Ltd.
9. M/s. North Eastern Publishing and Advertising Co. Ltd.
10. Hotahoti Wood Products Ltd.
11. Purbanchal Prestressed Ltd.
12. Kamini Finance and Investment Co. Ltd.
16. Mr. R.R. Modi had further admitted that the companies mentioned at serial Nos. 7 to 12 above were not genuine companies.
17. The Assessing Officer took note of the above statements received from the income-tax authorities in Gauhati and also examined the books of account produced by the assessee. The Assessing Officer concluded that the transactions claimed by the assessee were not genuine. The facts that led him to come to this conclusion are summarised as under :
(a) The assessee had not paid for the shares that he had purchased and the consideration was only reflected as book entries. During the previous year ended March 31, 1997, the assessee had purchased shares for a sum of Rs. 5,35,49,550 including shares of a value of Rs. 5,34,19,550 from Shri Nem Chand Jain. And the said consideration was shown as credit in the name of the sellers.
(b) Although Shri Nem Chand Jain had financed almost the entire purchase of shares, there was no agreement with Shri Nem Chand Jain for this financing arrangement. He had also not charged any interest on the amounts outstanding.
(c) Shri Nem Chand was not a person of means and his creditworthiness was not established. The report of the income-tax authorities from Gauhati indicated that Shri Nem Chand Jain had returned income of Rs. 40,000 by way of salary. The assessee did not produce any material to establish the creditworthiness of Shri Nem Chand Jain.
(d) Trading in shares of the companies in question, on the Gauhati Stock Exchange, were to be on “spot basis” and, thus, the transactions claimed by the assessee were contrary to the practice of the said stock exchange; admittedly, there was no settlement of accounts through the stock exchange.
(e) The Assessing Officer further noted that the shares of the companies which were involved were not actively traded and thus the quotations indicating the value of the shares could not be accepted. No material was produced to controvert the finding that the shares of the companies were not actively traded.
(f) The assessee and the companies in question were interlinked. Shri R.R. Modi had floated certain number of companies by introducing his undisclosed capital and he was also a director on the board of the assessee-company. In addition, the assessee also owed money to certain companies, whose shares it held/purchased. These companies also held shares of the assessee-company. The fact that the companies in question and the assessee were connected was also not disputed.
(g) The assessee explained that since it was facing a financial crisis, it could not pay the amount due to Shri Nem Chand Jain for the transactions executed during the year. However, this did not explain as to why Shri Nem Chand Jain continued to sell shares to the assessee even in the following year, i.e., year ended March 31, 1998. No explanation was provided as to why Shri Nem Chand Jain, in spite of being an unpaid seller would physically deliver the shares sold by him.
18. In the first round, the Tribunal remanded the matter to the Assessing Officer (by an order dated October 19, 2004) principally on the ground that the assessee had not been confronted with the material relied upon by the Assessing Officer and further to examine the effect of contract notes bills, stock exchange quotations and confirmation statement filed by the brokers. On remand, the Assessing Officer again found against the assessee dis-believing the documents produced by it. The Assessing Officer noted that the memos relating to the transaction were serially numbered or signed by Shri Nem Chand Jain. The assessee further noted that no evidence from the Gauhati Stock Exchange had been produced. The quotations indicated by the Gauhati Stock Exchange were also rejected as the Assessing Officer found that except some transaction done by the assessee, the shares in question were not quoted and, thus, they did not reflect the true value of the shares in question. It was held that the documents produced by the assessee were only for the purpose of misleading the authorities and could not establish that the transactions were genuine.
19. The nature of transactions relating to the assessment years 1998-99 and 1999-2000 are not materially different.
20. During the year ended March 31, 1998, 30800 number of shares of Sangrahalaya Timber and Crafts Ltd. that were reflected as closing stock as on March 31, 1997, at a value of Rs. 2 each, were purportedly sold at the said book value, i.e., at the rate of Rs. 2 per share. The memo of confirmation dated April 23, 1997, issued by N.C. Jain in respect of the aforesaid transaction indicates that he had purchased the said shares—as opposed to selling the shares on behalf of the assessee through the stock exchange—and the transaction was on principal-to-principal basis. Thereafter, on May 15, 1997, the assessee is stated to have purchased 27,50,000 shares of Sangrahalaya Timber and Crafts Ltd. at Rs. 10 each. These shares were also purchased from Mr. N.C. Jain and the memo of confirmation also indicates that the transaction between the assessee and Mr. N.C. Jain was on principal-to-principal basis. The said shares were valued at the rate of Rs. 2.25 each at the end of the year and on this basis the assessee claimed a loss of Rs. 2,13,12,500.
The shares of Hotahoti Wood Products Ltd., Purbanchal Prestressed Ltd. and Kamini Finance and Investment Co. Ltd. which had been purchased in the earlier year were sold during the year ending March 31, 1998, at Rs. 2 each and a further losses aggregating Rs. 11,48,950 were booked by the assessee.
21. During the year ended March 31, 1998, the assessee purportedly purchased the shares of Sangrahalaya Timber and Crafts Ltd., Doyang Wood Products Ltd. and North Eastern Publishing and Advertising Co. Ltd. The memos of confirmation relied upon by the assessee reflect that the shares of the abovementioned companies were purchased from Mr. N.C. Jain on a principal-to-principal basis. These transactions were not through stock exchange; the certificate produced by the assessee from the Gauhati Stock Exchange indicates that these transactions were “off the floor transactions” and were merely informed to the said stock exchange. The assessee valued these shares at a fraction of its purchase price and claimed loss on account of diminution in their value. A statement indicating the losses claimed by the assessee on the reduction of value of shares for the year ended March 31, 1998, relevant to the assessment year 1998-99 is indicated below :
Name of the scripts Share Purchase Loss
No. of shares Rate (Rs.) Amount (Rs.) Amount (Rs.)
Sangrahalaya Timber and Crafts Limited 2750000 10.00 27500000 21312500
Doyang Wood Products Ltd. 640000 10.00 6400000 4800000
North Eastern Publishing & Advertising Company Ltd. 3500000 10.00 35000000 26250000
Total 52362500
22. In addition to the above, the assessee also claimed a loss of Rs. 1,12,500 on account of diminution in the value of 37,500 shares of Mather and Platt India Ltd. as on March 31, 1998. Thus, the total loss claimed by the assessee for the year ended March 31, 1998, was Rs. 5,36,23,950 out of which Rs. 11,48,950 was loss on account of sale of shares and Rs. 5,24,75,000 on account of diminution in value of shares.
23. During the year ended March 31, 1999, relevant to the assessment year 1999-2000, the assessee sold the shares held in Sangrahalaya Timber and Crafts Ltd. and Premier Auto Finance Ltd. at their book value, i.e., at the rate Rs. 2.25 each. The shares of North Eastern Publishing and Advertising Co. Ltd. were purportedly sold at a loss of Rs. 7,00,000 and the shares of Doyang Wood Products Ltd. were purportedly sold and a loss of Rs. 1,92,000.
The assessee purchased 86,85,000 shares of Hotahoti Wood Products Ltd. at the rate of Rs. 10 each, the details of which are as under :
Name of seller No. of shares Date Value
Purbanchal Prestressed Ltd. 50,00,000 14-5-1998 5,00,00,000
Sangrahalaya Timber and Crafts Ltd. 36,85,000 13-5-1998 3,68,50,000
24. Out of the aforementioned, 82,16,750 shares of Hotahoti Wood Products Ltd. were purportedly sold for an aggregate amount of Rs. 2,46,50,250 thus resulting in a loss of Rs. 5,75,17,250. Out of these shares 66,29,850 shares were sold to Mr. N.C. Jain. The balance shares were sold to Toko Fin and Associates, P. L. Mittal, Doyang Wood Products Ltd., Sangrahalaya Timber and Crafts Ltd., Kamini Finance and Investment Co. Ltd. The certificate produced from the Gauhati Exchange Ltd. also indicates that none of the transactions were through stock exchange but were off market transactions and were merely reported to the stock exchange.
25. It is apparent from the above that the shares of companies in respect of which losses were booked were floated by Mr. R.R. Modi by introducing his undisclosed income. The assessee had not only purchased shares of the companies floated by Mr. Modi but had also purchased and sold shares of the said companies. In addition, the said companies also held substantial shares of the assessee.
26. In our view, the facts as outlined by the Assessing Officer clearly indicate an established link between the companies floated by Shri R.R. Modi and the assessee. This fact has also not been disputed by the assessee in the present proceedings. The Assessing Officer found that the shares of those companies were not actively traded; there is no material on record, which would indicate otherwise. The certificate of the Gauhati Stock Exchange enclosed by the assessee in the paper book filed in I.T.A. No. 3763/Del/2007 (i.e., in respect of the assessment year 1997-98) is dated February 12, 2000. The said certificate does not indicate the volume of shares traded but only indicates quotation of shares on certain dates. The only inference that can be drawn is that there was no trading on other dates and this confirms the view that there was hardly any trading on the shares of the company in question. Since the shares in question are not actively traded, their quotations at the stock exchange could easily be manipulated by showing transaction in small number of shares. And, in any case would not be reflective of their value. The stock certificates of the Gauhati Stock Exchange for the assessment years 1998-99 and 1999-2000 also indicate that the traded prices related to off the floor transactions which were reported to the exchange. Thus, the transactions entered into by the assessee and/or the related entities were itself the basis of the quotations; obviously, no reliance could be placed on these quotations for justifying the value of the shares in question. Since the companies in question had been floated by Shri R.R. Modi and share application money was introduced through other names, it is obvious that he owned/controlled a good part of the shareholding. The shares, which are alleged to have been purchased by the assessee, were not paid for and only book entries were passed. Although it is stated that the shares were through a broker of the Gauhati Stock Exchange. There is no evidence to show that the transaction of purchase of shares was done through the Gauhati Stock Exchange. On the contrary, the certificates issued by the Gauhati Stock Exchange put it beyond any pail of doubt that the transactions in question were “off the floor transaction”.
The inescapable conclusion is that through a series of transactions—which were, essentially, book entries—the assessee had devised a loss to set-off against its other income. In our view, the Assessing Officer’s reasoning that the transactions were not genuine was based on cogent material and after examining the entire facts.
27. The Commissioner of Income-tax (Appeals) set aside the assessment orders, without considering the above facts but by simply relying on the following decisions :
CIT v. Dhawan Investment & Trading Co. Ltd. [1999] 238 ITR 486 (Cal.);
CIT v. Currency Investment Co. Ltd. [2000] 241 ITR 494/[2001] 117 Taxman 522 (Cal.) ;
CIT v. Carbo Industrial Holdings Ltd. [2000] 244 ITR 422/[2001] 116 Taxman 159 (Cal.);
CIT v. Kundan Investment Ltd. [2003] 263 ITR 626/130 Taxman 689 (Cal.);
CIT v. Janki Textiles & Industries Ltd. [2003] 264 ITR 579/132 Taxman 231 (Gauhati).
28. The Commissioner of Income-tax (Appeals) failed to consider any of the reasons provided by the Assessing Officer for holding the transactions to be not genuine; the Commissioner of Income-tax (Appeals) did not address any of the following aspects.
(a) That the assessee-company and the companies whose shares were bought by the company were interlinked. The companies in question owned shares of the assessee-company. Mr. R.R. Modi who was a director of the assessee-company was also closely connected with the companies in question. These companies owned shares of the assessee and also had entered into transactions with the assessee.
(b) Even though the companies in question may have been listed on the Gauhati Stock Exchange, their shares were not actively traded and the transactions were amongst inter-related parties. Thus, the quotations reflected on the Gauhati Stock Exchange could not be relied upon to reflect their value.
(c) There was no evidence produced to show that Shri Nem Chand Jain who is stated to have funded the purchase of shares by the assessee, had any means to do so. The Assessing Officer had found that Shri Nem Chand Jain was not a man of means. The assessee had produced no evidence to contradict this.
(d) Admittedly, the transactions were done by book entries and no payment was made for the purchase of shares during the year.
29. In our view, the aforesaid aspects were important and clearly indicated that the transactions entered by purchase and sale of shares were, in fact, sham transactions and could not be relied upon. The Commissioner of Income-tax (Appeals) failed to apply its mind to the aforesaid aspects and, therefore, in our view, the orders passed by the Commissioner of Income- tax (Appeals) were clearly unsustainable.
30. Given the facts of this case, the decisions referred to by the Commissioner of Income-tax (Appeals) are also, plainly, not applicable. In the case of Janki Textiles and Industries Ltd. (supra), there was no allegation that payments for the shares in question had not been made and the transaction consisted of only book entries. On the contrary, the court found that all payments had been made and received through account payee cheques and/or drafts. In that case, the court specifically noted that no evidence was placed by the Revenue to indicate that the disputed share transactions were entered into between parties that were related or had common interest. In the present case, the Assessing Officer had clearly brought on record that the transactions were of companies that were linked with the assessee-company. The companies in question were promoted by one Mr. R.R Modi who was also a director of the assessee-company. The shares of the assessee-company were also held by some of the companies whose shares had been purchased by the assessee. The Assessing Officer had further found that Mr. N.C. Jain was not a person of means and his declared income was only Rs. 40,000 by way of salaries. The assessee sought to dispute this by producing a balance-sheet of Mr. N.C. Jain. However, that also indicated that he owed a large sum of money Rs. 7.5 crores to his creditors. There was no finding as to the net worth of Mr. N.C. Jain. In addition to the above, no payment had been made for the purchase of shares during the relevant period. Mr. N.C. Jain was stated to be a broker. No explanation was provided as to why a broker would extend credit without any interest. The explanation given by the assessee was that the assessee was undergoing financial crises and, therefore, although it owed the money to N.C. Jain, it could not discharge its debts at the material time. Even if this is accepted, there is no plausible explanation why despite not being paid for the shares sold, Mr. N.C. Jain would continue to sell and deliver further shares to the assessee, specially when he knew the assessee to be financially constrained. Shri N.C. Jain is stated to have sold shares for Rs. 6,89,00,000 in the year ended March 31, 1998, thus swelling his outstanding credit to Rs. 12,22,57,950 as on March 31, 1998, after adjusting Rs. 60,600 on account of shares purportedly purchased by Sh. N.C. Jain.
31. In our view, the Commissioner of Income-tax (Appeals) completely ignored the aforesaid facts and merely cited the judgments where contract notes had been accepted as evidence of genuine transaction. Undoubtedly, contract notes, confirmation memos, bills, books of account are evidence of genuine transactions. However, where the fundamental transaction is shown to be a sham transaction, the same cannot necessarily be accepted as genuine merely because a broker’s confirmation and invoices have been produced. In our view, the Commissioner of Income-tax (Appeals) erred in applying the decision in Janki Textiles & Industries Ltd. (supra) in the facts of this case.
32. In Cargo Industrial Holdings Ltd. (supra), the court upheld the decision of the Tribunal in accepting the transactions in shares to be genuine as the assessee had furnished the names and addresses of brokers and also shown payments made to them by account payee cheques. The companies whose shares were subject matter of transaction were blue chip companies and extensively traded on the stock exchange. The Revenue had rejected the transactions only on the ground that the assessee could not produce certain brokers. The court held that even if the share brokers did not appear the claim of the assessee could not be denied as neither the existence of the broker nor were the payments made to them in dispute. The court held that the assessee could not be punished for fault of the broker.
33. In Dhawan Investment & Trading Co. Ltd. (supra), the Assessing Officer had disallowed a loss on account of purchase and sale of shares on the ground that the record was inadequate in respect of the share dealings. The said conclusion was rejected by the Tribunal as it found that the transactions were genuine and made through registered brokers. There was no allegation that the consideration for the sale and purchase was not paid through banking channels or that the transactions in question concerned related companies.
34. In Kundan Investment Co. Ltd. (supra), the court found that the sale and purchase transactions, which were questioned by the Revenue, were in respect of shares of reputed companies which were quoted on the stock exchange. The transactions were supported by contract notes and bills and the payments made through cheques. The Calcutta High Court did not find the decision of the Tribunal to be perverse in the given facts.
35. It is apparent from the above that the aforesaid decisions have no application in the facts of this case. The factual controversy involved in these appeals is materially different from the issues involved in the cases referred to by the Commissioner of Income-tax (Appeals).
36. In our view, the Tribunal also erred in upholding the orders of the Commissioner of Income-tax (Appeals) and failed to consider the controversy in issue. The Tribunal proceeded on an erroneous footing that all shares have been “bought through the recognised stock exchange through the main broker of the exchange”. There was no evidence to indicate that all shares were bought through the stock exchange. The assessee also did not claim this; the assessee had claimed before the Assessing Officer that all shares were “bought from the broker of the Gauhati Stock Exchange”. In the submissions filed before the Assessing Officer, the assessee contended that “the transaction for purchase of shares were carried out by the assessee-company through main broker of the Gauhati Stock Exchange”. Thus, it was not the assessee’s claim that all shares were purchased through the Gauhati Stock Exchange. This aspect is material as, admittedly, the transactions in question could not have been made through Gauhati Stock Exchange. In case of transactions through a stock exchange the selling broker is required to submit the share scrips with the clearing system of the stock exchange. The purchasing brokers are required to pay the consideration on the “pay in date”. The consideration for the shares transacted through the stock exchange is paid to the selling broker on the “pay out date”. Thus, in cases of transaction through a stock exchange a purchasing broker is required to deposit the consideration with the clearing system of the stock exchange. However, in the present case, bulk of the shares in question were claimed to have been sold/purchased by Mr. N.C. Jain. The memos of confirmations by Mr. N.C. Jain in respect of shares purportedly purchased by the assessee indicate that Mr. N.C. Jain had sold the shares to the assessee. Similarly the memos of confirmation regarding the shares purportedly purchased by the assessee reflected that the shares had been sold by Nem Chand Jain to the assessee. These memos of confirmations were not contract notes evidencing purchase or sale of shares by Mr. N.C. Jain through the stock exchange for and on behalf of the assessee. In case, Mr. N.C. Jain had purchased the shares through the stock exchange for the assessee, in the normal course, he would have issued a contract note indicating the shares bought for the assessee. The assessee had also produced bills from Mr. N.C. Jain evidencing sale of shares to the assessee. These documents produced by the assessee clearly indicated that the transactions for purchase of shares were not being claimed as transactions done through the stock exchange. The Assessing Officer had, therefore, found and, in our view, rightly so, that the transactions were not through the stock exchange.
37. The Assessing Officer had also found that the shares of companies in question were listed on spot basis, i.e., the transactions on the stock exchange in respect of shares in question were required to be settled on the day of the trade itself. However, in the present case, the assessee had admittedly not made payment for the said shares and this was contrary to the prevalent practice.
38. Thus, the finding of the Tribunal, to the effect that all shares were transacted through the Gauhati Stock Exchange, is not supported by any material and is perverse. The Tribunal held that “All documentary evidences itself prove that the assessee had bought/sold these shares at the prevailing market price and based on the same, the genuineness of the transactions could not be doubted”. This finding is also patently erroneous.
39. None of the material produced by the assessee could be relied upon to indicate the market value of the shares. The certificates issued by the Gauhati Stock Exchange for the previous years 1997-98 and 1998-99 certified the “traded prices of the shares . . . . as intimated by a member as off the floor transactions”. This, clearly, indicated that: (a) the transactions were not conducted through the stock exchange but merely reported as off market transactions; and (b) the transaction was reported by a singular member—thus, the transaction did not involve any other broker. Further, the dates and quotations certified, clearly pertained to the transactions involving the assessee and/or related companies as parties. The dates of the memos of confirmation and the date of transaction reported to the stock exchange are the same in almost all instances. Thus, these certificates, which only certify the prices at which transactions in question were reported cannot prove that the transactions were executed at market value. Since these transactions in question were not done in the open market but between related concerns and no other transactions in those shares were reported, any price at which the assessee transacted would, obviously, be reflected as a quotation by the Gauhati Stock Exchange.
40. The Assessing Officer had found that Mr. N.C. Jain was not a person of means. His returns disclosed income of Rs. 40,000 by way of salaries. The Tribunal rejected the Assessing Officer’s finding that N.C. Jain was not a person of means by holding that the issue of Mr. N.C. Jain’s creditworthiness was covered by the Tribunal’s order dated October 19, 2004. A perusal of the said order indicates that the Tribunal had noted the following submission on behalf of the assessee :
“Shri Vohra also drew our attention to the audited balance-sheet of Shri N.C. Jain (pages 64 to 67 of the paper book) to show that Mr. Jain was man of means having a closing stock of shares worth Rs. 1.70 crores and a liability of Rs. 7.50 crores to its creditors.”
41. However, the Tribunal did not return any finding on the question of Mr. N.C. Jain’s creditworthiness. In our view, the Tribunal grossly erred in holding that this issue was covered by its earlier decision of October 19, 2004.
42. The Tribunal has held that the amount payable to Mr. N.C. Jain had been discharged by the assessee in the year 2005-06 and, therefore, found that the transactions in question were genuine. It is relevant to note that Mr. N.C. Jain had expired in the year 1999 and the material placed on record indicated that he was not a person of means and had been acting at the instance of Mr. R.R. Modi. Mr. R.R. Modi had created several entities which were involved or connected with the transactions in question. In the circumstances, the payment of money to Mr. N.C. Jain was required to be investigated further to ascertain as to the ultimate recipient of those funds. No such exercise has been done in this case. Thus, in our view, the fact that certain payments were shown to have been made to Mr. N.C. Jain in 2005-06, would not be sufficient to conclude that the transactions in question were genuine.
43. The Assessing Officer had found that the assessee and the companies whose shares purchased were related. It was pointed out that those companies were promoted by Mr. Modi who had disclosed that he had used his undisclosed funds to promote those companies. The assessee had argued that the fact that undisclosed funds were used in promoting companies did not mean that the companies did not carry on its business or were not genuine. However, it was apparent that Mr. Modi was the prime mover of the companies in question. The assessee had booked losses in respect of shares of certain companies. The close link between the said companies and the assessee was clearly established. In our view, the link established between the assessee and these companies was important in considering the question whether the transactions of shares were genuine or not. It is relevant to take note of the following :
(a) That the assessee had booked losses in respect of shares of the following companies :
(i) Sangrahalaya Timber and Crafts Ltd.
(ii) Mather and Platt India Ltd.
(iii) Hotahoti Wood Products Ltd.
(iv) Purbanchal Prestressed Ltd.
(v) Kamini Finance and Investment Co. Ltd.
(vi) M/s. Doyang Wood Products Ltd.
(vii) M/s. North Eastern Publishing and Advertising Co. Ltd.
Out of the above companies, all except Mather and Platt India Ltd. were companies promoted by Mr. R.R. Modi by introduction of his undisclosed funds as share application money in various names.
(b) The fact that the share application money was introduced in different names by Mr. R.R. Modi indicates that although there may have been a number of shareholders, the de facto control of the companies as well as its shares vested with Mr. R.R. Modi.
(c) Sh. R.R. Modi was also a director of the assessee-company.
(d) The aforesaid companies also held substantial shares of the assessee.
(e) The assessee had not only dealt with shares of the aforementioned companies but also had purchased certain shares from some of the companies.
(f) Although the shares of these companies were listed, there is no evidence that the shares were traded through the stock exchange or there was any other genuine transaction not involving these companies, the assessee and the named brokers.
(g) The Assessing Officer had found that “except the assessee’s own transaction the value of shares were never quoted at the Guwahati Stock Exchange on any other date”.
In view of the above, the Assessing Officer had further concluded that
“the purchases of shares and valuation was done through series of steps involving inter-related companies, which accommodated one another and made fictitious dealing through convenient book entries in their respective books of account”.
44. In our view, the Tribunal grossly erred in completely ignoring the aspect of inter-linked entities and overlooking the perspective outlined by the Assessing Officer.
45. Insofar as the loss in relation to shares of Mather and Platt India Ltd. is concerned, there is no allegation that the assessee is related in any manner to the said company. In this view, the losses as claimed by the assessee in respect of Mather and Platt India Ltd. cannot be rejected. The losses claimed by the assessee, except the losses relating to the shares of Mather and Platt India Ltd., i.e., Rs. 56,650 in the assessment year 1997-98, Rs. 1,12,500 in the assessment year 1998-99; and Rs. 67,500 in the assessment year 1999-2000, are liable to be disallowed.
46. We find that the Tribunal erred in ignoring certain relevant facts and its finding that the transactions for purchase and sale of shares are genuine, is perverse. Accordingly, the question of law as indicated in paragraph 5 above, is answered in the affirmative and in favour of the Revenue.
47. The appeals are allowed. No order as to costs.
[Citation : 376 ITR 576]
