Share broker as a third party and mediator:
A security broker is a linking pin between share investor / trader and stock exchange where transactions are carried. Sometimes share broker can also arrange transactions between two parties, even without having a deal on the platform of stock exchange. Suppose client A want to sell 5000 shares of XYL Ltd and client B want to purchase the same , the stock broker can arrange deal directly. Therefore, if the client want that his transactions should be subjected to security transaction tax he must tell the broker that the deal should be through Stock Exchange and STT should be charged to him.
A member of stock exchange, acting as a broker is responsible for documentation between stock exchange about transactions carried and executed by him on behalf o his clients. The client who purchase or sell securities through broker generally does not have any direct responsibility to stock exchange. The client of broker is also not required to report his transactions to the stock exchange.
When assessee as a client of stock broker, and both are not related parties, then the transaction can be regarded as between outsider parties and not related parties. The deals can be considered as at arm's length.
Documentations in security deals:
When transaction is through stock broker documentation is as per standard form of documents prescribed by concerned authorities / regulators/ stock exchange and also as per normal trade practice. Normal documents in case of share and other securities transacted through stock broker are contract notes, and delivery memo. When shares are held in dematerlized form the shares are transferred from broker to client in case of purchase and from client to broker in case of sale. In case of transactions settled otherwise delivery the settlement of account is made for difference receivable or payable.
In case of failure of delivery some other documents may be prepared for penalty imposed by stock exchange and difference payable. A client of stock broker is concerned with the normal documents which the broker provides. When account is voluminous, generally copy of ledger account is also obtained for reconciliation.
Failure of stock broker to submit documents to S/E:
In case a stock broker fails to comply with documentation requirement with stock exchange, his client cannot be held responsible. This is a matter between the stock exchange and its member. For failure of member of S/E in any manner about documentation or reporting a client of broker cannot be penalized.
Discrepancies in documents:
Some time there are found some discrepancies in documentation between stock broker and stock exchange, the client of stock broker should not be pulled-up or made accountable by any concerned party or authority. The client of stock broker, while acting as his client reposes full confidence in the broker. Even when transactions are carried on floor of and exchange, the transactions reported even verbally are honored. In reality and practice transactions are verbally informed and later on written contract notes on printed forms are provided. Now-a-days, the online brokers provide digitally signed contract notes through website or email. Therefore, if there is any discrepancy in documents or reports submitted by stock broker to stock exchange, the client cannot be held responsible and any adverse inference should not be drawn against him.
Reasons for the Assessing Officers drawing adverse inference:
Transactions involving share brokers, stock exchange have different tax treatment in different circumstances therefore Assessing Officers are trying to draw adverse inference against assessee for any fault of share broker. Even if share broker fails to appears before the A.O. of his client, the A.O. may take an adverse inference, in spite of fact that the assessee produces all relevant and normal documents before him. The targets being to raise excessive tax demands, and put assesses to harassment the rule of thumb being followed in case of scrutiny assessment are:
Treat capital gain as business income or income from other sources to impose more tax by denying benefits of Sections 10, 111A and 112.
Teat capital gains as business income to deny assessee benefit of set off of business loss.
Treat business income as capital gains in case of FII's if the FII has not permanent establishment and thus to impose tax by branding business income as capital gains.
Thus assesses are being harassed, ignoring the legal position that after introduction of STT, the assesses have option to arrange their affairs in such a manner so as to reduce tax payments.
A judgment of Calcutta High Court [2009 -TMI - 34738 - CALCUTTA HIGH COURT]:
A judgment from Calcutta High Court on this issue in case of CIT V Bhagawati Prasad Agarwal is reproduced below:
IN THE HIGH COURT AT CALCUTTA
Subhro Kamal Mukherjee and Kalidas Mukherjee JJ.
Commissioner of Income Tax, Kolkata - III
Bhagwati Prasad Agarwal
ITA No. 22 of 2009
Date: 29th April 2009
For the Appellant : Prithu Dudharia, Advocate
This is an appeal under Section 260A of the Income Tax Act, 1961 challenging the order of the Income Tax Appellate Tribunal. The revenue challenged the order passed by the
Commissioner of Income Tax (Appeal), inter alia, deleting the addition of Rs.34,81,165/-, which was treated as income from other sources based on the information received from the Calcutta Stock Exchange. The amount was claimed by the assessee as long term capital gains. It is submitted by Mr. Prithu Dudharia, learned advocate for the revenue that the records from the Calcutta Stock
Exchange shows that the name of the assessee is not appearing in respect of the transactions-in-question. The tribunal found that the chain of transaction entered into by the assessee have been proved, accounted for, documented and supported by evidence. The assessee produced before the Commissioner of Income Tax (Appeal) the contract notes, details of his DEMAT account and, also, produced documents showing that all payments were received by the assessee through bank. We do not, therefore, think that this appeal involves any substantial question of law requiring interference by this court under section 260A of the Income Tax Act, 1961. The appeal is, therefore, summarily dismissed.
We make no order as to costs.
Let urgent certified copy of this order be supplied to the parties, if applied for, upon compliance with all requisite formalities.
(Subhro Kamal Mukherjee, J.)
(Kalidas Mukherjee, J.)
The assessee entered into various transactions through member of stock exchange. The transactions were supported by all usual documents executed/ or provided by stock broker in normal course and as per relevant provisions and trade practices. The assessee has produced all such documents and the payments were made and received by a/c payee cheques. The Tribunal found that:
a. the chain of transaction entered into by the assessee have been proved,
b. the transaction have been accounted for,
c. transactions have been documented and supported by evidence.
d. the assessee produced before the Commissioner of Income Tax (Appeal) the contract notes, details of his DEMAT account and, also, produced documents showing that all payments were received by the assessee through bank. Thus, acquisition, holding and transfer of shares as capital assets is proved. Therefore the head 'capital gains' is applicable.
CIT(A) allowed claim of assessee that assessee had earned capital gains and disagreed with the A.O. that the income was not capital gains but 'income from other sources'. The reason given by the A.O. that the name of assessee is not appearing in stock exchange list is not proper and cannot change the conclusion that assessee held capital assets which were transferred resulting into capital gains.
e. In view of facts as found by CIT(A) and examined by the Tribunal, the Tribunal confirmed the order of the CIT(A) and dismissed appeal of revenue.
Before High Court:
The revenue preferred an appeal under Section 260A of the Income Tax Act, 1961 challenging the order of the Income Tax Appellate Tribunal. The revenue challenged the order passed by the Tribunal confirming the order passed by the Commissioner of Income Tax (Appeal), inter alia, deleting the addition of Rs.34,81,165/-, which was treated as income from other sources based on the information received from the Calcutta Stock Exchange. The amount was claimed by the assessee as long term capital gains.
Mr. Prithu Dudharia, learned advocate for the revenue submitted that the records from the Calcutta Stock Exchange shows that the name of the assessee is not appearing in respect of the transactions-in-question.
The honorable High Court held that this appeal does not involves any substantial question of law requiring interference by the High Court under section 260A of the Income Tax Act, 1961.
Therefore, the appeal was, summarily dismissed by the high Court.
Although the high Court has dismissed the appeal summarily, however, the High Court has considered the facts concurrently found by CIT(A) and Tribunal and then came to conclusion that there is no substantial question of law involved in the appeal. When two appellate authorities and the Tribunal as final fact finding authority has found that the income was on transfer of capital assets there is really no question of law involved. Therefore, let us hope that the revenue will not challenge this order before the high Court.
This is a fit case to grant costs in favor of assessee because the assessee was put to harassment at different stages namely first when the A.O. made addition of capital gains as income from other sources and raised demands and pressed for recovery. The assessee had to appeal before the CIT(A) and incur costs, and during pendency of appeal tackle threats of recovery from the A.O. Even when the CIT(A) allowed the appeal the A.O. filed appeal before Tribunal and then when Tribunal decided the mater in favor of assessee the revenue preferred appeal before the High Court. All these stages of litigation initiated and pursued by the revenue caused harassment and costs to the assessee. The assessee won the case at three stages. The Tribunal and the High Courts could have allowed costs in favor of assessee. However, no such costs were allowed. Allowing costs in such cases can put a check on un-necessary litigation by revenue.
Preparation of case when some discrepancies or failure in reporting is noticed
The revenue is trying to deny benefit of lower tax in case of short-term capital gains and exemption in case of long-term capital gains where transactions are through share broker and STT has been paid. On ground of some discrepancies or absence of reporting of transactions to the stock exchange the revenue is trying to take adverse inference against assessee. In such cases the assessee should prove transaction by proper documentation, delivery - "in and out" of securities in its D.P. Statement, payment through banking channels etc.
Similarly in case of transactions in future and options also normal documents and other supporting documents are required to prove transactions. In some cases of future and options also some discrepancies were noticed.
In case of settlement or future and option transactions:
In case of transactions in future and options, there will be no IN and out of securities in DP. However, normal feature of transactions are to pay margins as required in particular scrip, to hold or square off positions and make payment or receive payment. Therefore, in case of future and options contract notes with time noting, payment of margin money by banking channels, payments or receipts of loss or income through banking channels are normal transactions. Besides the parties may decide to take periodical report about out standing positions, copy of ledger etc.
The assessee should prove his transactions with relevant documents, bank statements. DP statements (in case of delivery based transactions) etc. The assessee must establish facts about independence of share broker, acquisition of securities or interest therein, holding of securities and interest therein, transfer of securities and / or interest therein, payments through banking channels. All documents should be as per general norms and no superficial document is required. The facts must be established without unduly being technical on the basis of any judgments. Judgments will help only after facts are established.
For example the above judgment of Calcutta high Court is on facts as found by the Tribunal. Therefore, in case of dispute, the facts are very important. The factual findings at the assessment stage is also very important.