2013 (10) TMI 541 - AT - Income Tax

Off market transactions - huge loss - genuineness - colourable device to avoid tax - Held that - he requirement of filling up the DIS for transfer cannot be an issue to decide the genuineness of the transactions carried out by the appellant. - Not a single instance has been given by the AO highlighting that any purchase or sale was effected by the assessee in respect of these off market transactions which is not at market rate - Even if, for the sake of argument, it is accepted that no such evidence was provided by the assessee regarding market rate on the date of transaction then also, market rate of a particular share on a particular date is easily verifiable independently from the website of Bombay Stock Exchange(BSE). The assessee has furnished the print-out of stock prices from such site of BSE before us in respect of various transactions and from the same, it is seen that the transactions carried out by the assessee in respect of these off market transactions is very much at market rate - Almost in all the cases, the sale price adopted by the assessee is near to the high price of the concerned script on this date - When the sale price adopted by the assessee is close to the high price of the concerned share on the relevant date, it cannot be said that the transactions effected by the assessee is not at market rate, particularly, when the AO has not given even a single instance where the assessee has effected the transaction of purchase at a price higher than the high price of the concerned share on the relevant date or effected the sale of a share at a price below the low price of the concerned share on the relevant date Decided against the Revenue. Further, AO that in similar transactions, the assessee has earned profit also and even if the AO is making disallowance of the loss in off market transactions , then he should disregard the profit also in similar transactions and hence, only net loss can at best be disallowed. But the AO has taxed the profit earned by the assessee in such transactions and disallowed the losses only. This goes to show that the AO has also accepted off market transactions as genuine and valid where the assessee has earned profit, but in similar transactions, where the assessee has incurred losses, the AO had disallowed such loss by holding that such transactions are only paper transactions or bogus transactions. This is not permissible. Disallowance u/s 14A of the Income Tax Act Held that - Relying upon the judgment of Hon ble Karnataka High Court rendered in the case of CCI Ltd. 2012 (4) TMI 282 - KARNATAKA HIGH COURT , wherein it was held that if the assessee is a dealer of shares and securities then it cannot be said that such purchases of shares and holding of shares were for the purpose of earning of dividend income and hence, expenditure incurred in acquiring cannot be u/s. 14A of the Income-tax Act, 1961 In the instant case assesses is a dealer in shares and securities and this fact is noted by Assessing Officer also in his assessment order and inspite of this contention raised by Ld. AR of the assessee before us, nothing has been brought on record by Ld. CIT-DR of the Revenue to show otherwise Therefore following the judgment of Hon ble Karnataka High Court rendered in the case of CCI Ltd, no disallowance u/s. 14A of the Act on account of interest expenditure on proportionate basis be sustained Decided against the Revenue.

Issues Involved:
1. Legitimacy and genuineness of "off-market transactions" conducted by the assessee.
2. Applicability of Section 19(1) of the Securities Contracts (Regulation) Act, 1956.
3. Disallowance of losses incurred in "off-market transactions."
4. Disallowance of interest expenses under Section 14A of the Income Tax Act.

Detailed Analysis:

1. Legitimacy and Genuineness of "Off-Market Transactions":
The core issue was whether the "off-market transactions" conducted by the assessee were genuine and legitimate. The Assessing Officer (AO) contended that these transactions were merely paper transactions aimed at transferring profits to other entities to avoid tax. However, the CIT(A) found that the transactions were legitimate and genuine, conducted on a principal-to-principal basis, and at market rates. The CIT(A) noted that the parties involved were genuine, funds were available, and transactions were confirmed by the respective parties. The Tribunal upheld the CIT(A)'s decision, stating that the AO's objections were without merit and that the transactions were indeed genuine.

2. Applicability of Section 19(1) of the Securities Contracts (Regulation) Act, 1956:
The AO argued that the "off-market transactions" violated Section 19(1) of the Securities Contracts (Regulation) Act, 1956. However, the CIT(A) clarified that Section 19(1) applies to persons organizing or assisting in organizing a stock exchange, not to transactions conducted on a principal-to-principal basis. The Tribunal agreed with the CIT(A), stating that the assessee was neither a member of any unrecognized stock exchange nor was it organizing any activity for the purpose of assisting in, entering into, or performing any contract in securities. Therefore, Section 19(1) was not applicable.

3. Disallowance of Losses Incurred in "Off-Market Transactions":
The AO disallowed the losses incurred by the assessee in "off-market transactions," alleging that these transactions were not conducted at market rates and were aimed at evading tax. The CIT(A) found that the transactions were conducted at market rates, and the prices were verifiable from the Bombay Stock Exchange website. The Tribunal examined the evidence and found that the transactions were indeed conducted at market rates. The Tribunal also noted that the AO had accepted the profits from similar transactions but disallowed the losses, which was inconsistent. Therefore, the Tribunal upheld the CIT(A)'s decision to delete the disallowance of losses.

4. Disallowance of Interest Expenses Under Section 14A:
The AO disallowed interest expenses under Section 14A, arguing that the assessee failed to prove that the shares and mutual funds were purchased out of its own funds and not from borrowed capital. The CIT(A) deleted the disallowance, relying on judicial precedents that supported the assessee's contention. The Tribunal upheld the CIT(A)'s decision, citing the Karnataka High Court's judgment in the case of CCI Ltd., which held that if the assessee is a dealer in shares, the disallowance under Section 14A is not applicable. The Tribunal found that the assessee was indeed a dealer in shares and, therefore, the disallowance under Section 14A was not sustainable.

Conclusion:
The Tribunal dismissed all the appeals filed by the Revenue, upholding the CIT(A)'s decisions on all issues. The Tribunal found that the "off-market transactions" were genuine and conducted at market rates, Section 19(1) of the Securities Contracts (Regulation) Act, 1956 was not applicable, and the disallowance of interest expenses under Section 14A was not justified.

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