Case of Udit Kalra – exemption u.s. 10.38 denied and addition u.s.68 confirmed- a poorly represented case.

[CA DEV KUMAR KOTHARI]

Case of Udit Kalra – exemption u.s. 10.38 denied and addition u.s.68 confirmed- a poorly represented case.

2019 (4) TMI 834 - DELHI HIGH COURT   UDIT KALRA VERSUS ITO WARD-50 (1)

ITA 220/2019 & CM No. 10774/2019  Dated: - 08 March 2019

2019 (4) TMI 543 - ITAT DELHI  UDIT KALRA C/O DEV RAJ SHARMA VERSUS ITO, WARD-50 (1) , NEW DELHI ITA No. 6717/DEL/2017  Dated: - 08 January 2019

2019 (3) TMI 66 - SUPREME COURT  COMMISSIONER OF INCOME TAX-I VERSUS M/S RASHTRADOOT (HUF) CIVIL APPEAL No. 2362 OF 2019 (Arising out of S.L.P.(C) No.20075 of 2017)  Dated: - 27 February 2019

Summary:

In case of Udit Kalra (supra.) honorable High Court has dismissed appeal of assesse holding that substantial question of law does not arise hence concurrent findings of the Assessing Officer , CIT(A) and Tribunal stand confirmed.

On reading of the judgment of High Court, it is clear that the case was not represented properly on all applicable contentions and Ld. Counsel of assesse seems to have restricted his thrust on technical ground and reasoning about principal of natural justice due to not allowing opportunity to cross examine witnesses relied on by revenue. It appears that the judgment of High Court is not in accordance with the judgment of the Supreme Court in case of RastraDoot HUF. 

Analysis of the judgment of honorable High Court:

From judgment of  High Court	Observation/ remarks of author
The main thrust of the assessee’s argument is that he was denied the right to cross-examination of the two individuals whose statements led to the inquiry and ultimate disallowance of the long term capital gain claim in the returns which are the subject matter of the present appeal.	It seems that other important contentions were not pressed effectively and / or have not been considered.
Court considered the submissions of the parties.	All contentions / submissions have not been dealt with.
Aside from the fact that the findings in this case are entirely concurrent – A.O., CIT(A) and the ITAT have all consistently rendered adverse findings.	Even concurrent findings can be wrong and perverse due to bias and conjecture etc. and due to not allowing opportunity to cross examine witnesses relied on by revenue.
what is intriguing is that the company (M/s Kappac Pharma Ltd.) had meagre resources and in fact reported consistent losses.	Price of shares can be volatile. It is dependent on future prospects and sometimes only on expectations. In case of listed  companies, even loss making companies command high premium for many years. Price movements are not in control of shareholders/ investors. Stock Exchanges and SEBI have adequate control mechanism. If the shares were traded at prevailing market price, it cannot be doubted and investors cannot be blamed.  Investor is expected to sell shares when price has increased.
In these circumstances, the astronomical growth of the value of company’s shares naturally excited the suspicions of the Revenue.	The price movement of shares are regulated by S/E and SEBI. It cannot be doubted so as to use against investors who have nothing about price movement. From this it is clear that orders of lower authorities were based on suspicion.
The company was even directed to be delisted from the stock exchange.	Subsequent events should not  have influenced authorities and the Court. If the company was listed and shares were sold at market rate, then there should not be any adverse inference against investor who sold shares. The observations and finding of Tribunal on this issue is irrelevant and therefore finding is perverse.
Having regard to these circumstances and principally on the ground that the findings are entirely of fact, this court is of the opinion that no substantial question of law arises in the present appeal. This appeal is accordingly dismissed.	This is not in accordance with law laid down by the Supreme Court  in case of  RASHTRADOOT (HUF) (supra.) When notices have been issued, both parties have been heard, the High Court must have formulated substantial question of law and answered the same. The dismissal of appeal on ground that no substantial question of law arises is not proper.

Observation of author:

In the judgment we do not find any reference of Grounds of appeal and substantial questions of law incorporated by appellant / assesse in his memo of appeal u/s 260A of the Income-tax Act, 1961. With due respect, author feels that High Courts must also adopt healthy practice of incorporating grounds of appeal and proposed substantial question of law and then substantial questions of law admitted.

In absence of the same, it cannot be found whether, facts found  by the Tribunal were challenged as wrong, and perverse or not. However, in view of issue involved it is likely that findings were challenged as wrong and perverse as these  ought to have been challenged by assesse who had engaged counsels for the purpose. In case there was no challenge on ground of wrongly recorded facts and finding being perverse, it can be said that the appeal was not drafted with due care and caution. 

Not in accordance with judgment of the Supreme Court:

In case of Rastradoot HUF (supra) the honorable Supreme Court, while considering provisions of S. 260A held on the following aspects:

1. High Court did not dismiss the appeal in limine but dismissed it after hearing both the parties.
2. In such a situation, the High Court should have framed the question(s) and answered them by assigning the reasons accordingly one way or the other by exercising powers under sub-sections (4) and (5) of Section 260A of the Act.
    

In case of Udit Kalra also we find that notice was issued, both parties have been represented and heard. The High Court did not dismiss appeal in limine but dismissed appeal after hearing both parties. High Court did not refer to grounds of appeal and proposed substantial question of law in the appeal memo submitted by appellant / assesse. High Court did not formulated substantial questions of law but held that no substantial question of law arises hence appeal is dismissed.

With due respect author feels that this is not as per law contained in s. 260A and as interpreted by honorable Supreme Court.

On merits of the case:

It seems that, as per honourable High Court, main contention pressed   on behalf of assesse was about lack of opportunity of cross examination of witnesses relied on by revenue. In other words no other contention was pressed by the counsel of assesse, before the High Court.

Per author:

However, another important contentions raised by counsel for assesse is found in the following paragraph of judgment: quote:

        “Mr. Rajesh Mahna, learned counsel appearing for the assessee relied upon the orders of the co-ordinate Bench of the tribunal, in respect of the same company i.e. M/s Kappac Pharma Ltd., and pointed out that the tax authority’s approach in this case was entirely erroneous and inconsistent.”

Unquote:

With due respect, it seems that contentions of not following binding precedence in form of judgment of co-ordinate Bench of Tribunal, orders being  erroneous and inconsistent remained  not properly pressed by counsels and remained unconsidered by honorable High Court.

Surveillance measures by Stock Exchanges:

Various stock exchanges adopt stricter surveillance about trading in securities, volatility in prices by various means like categorization of securities, different margins, different modes of trades and their settlement, control over price movement, suspensions of trading for few hours or few days for various reasons etc.  This list is not exhaustive. In the case of Udit Kalra, it is clear that even honorable High Court was adversely influenced by price increase of shares of Kappac Pharma Ltd.

Regarding check and balances on price movement:

We find the following information on website of BSE:

https://www.bseindia.com/investors/periodic_price_bands.aspx?expandable=5

Periodic Price Bands

(Applicable to Securities exclusively traded at BSE)

Exchange had introduced periodic price bands for the securities that are exclusively traded at the Exchange. The applicable periodicity and corresponding price bands were specified in its notice nos. 20150806-24 dated August 06, 2015, 20150930-36 dated September 30, 2015, 20151203-12 dated December 03, 2015 and 20160129-22 dated January 29, 2016, 20170310-21 dated March 10, 2017 and 20170609-39 dated June 09, 2017 are as under.

Daily Price Band as Applicable Periodic Price Bands Weekly* Monthly* Quarterly Yearly 20% +/-60% +/-100% +/-200 % +/-400 % 10% +/-30% +/-60% +/-100 % +/-200 % 5% +/-20% +/-30% +/-60 % +/-100 % 2% +/-10% +/-20% +/-30 % +/-50 %

Note - for lower price bands (downward limits), please refer point no. 1 below

In addition to the above, for monthly, quarterly and yearly price bands, a factor of 200 % of higher of “ S & P BSE Midcap Index " and “ Sectoral Index ” movement (subject to minimum 2% movement) shall be applied to the applicable periodic limits to take into account the overall movement in the market. This factor shall be added in the direction of index movement (rounded off to the nearest number) and threshold of the opposite direction will remain unchanged.

A brief primer on periodic price band mechanism and related rules is given as under.

1. A price band value on the lower side cannot be specified in negative. Hence, in such cases, applicable tick size of a security shall be taken as the minimum possible value as the lower limit of a price band, irrespective of the value calculated as per downward % slab. Example - For a security having tick size as 1 paisa, the lowest value possible for individual price bands shall be 1 paisa and securities having tick size as 5 paise shall have lowest possible value as 5 paise.

2. From the calculated individual lower and upper price limits for all periods (daily / quarterly / yearly), the Final Upper DPR (Daily Price Range) and Final Lower DPR shall be arrived based on the following rule

Final Upper DPR shall be the "Minimum of all individual Upper Price limits"

Final Lower DPR shall be the "Maximum of all individual Lower Price limits"

3. The reference price for setting up periodic price bands shall be as follows:

Price Band Reference Price Remarks Daily Previous closing price Whenever there is no trading on the relevant day, previous close price as available shall be considered as a reference price. Weekly* Close price of last trading day of the preceding week Monthly* Close price of last trading day of the calendar month Quarterly Close price of last trading day of the preceding quarter Yearly Close price of last trading day of the preceding year i.e. September 30th.

4. In case of downward revision in daily price bands i.e. from 20% to 10 % or 10% to 5 % or 5 % to 2 % as the case may be, the corresponding daily limits shall be revised based on the revised daily price band.

5. In case of downward revision in daily price bands, if Upper DPR limit is lower than its close price or lower DPR limit is higher than the close price, then the close price shall be considered as the corresponding Upper DPR limit or Lower DPR limit respectively.

6. In cases of upward revision in daily price band all individual lower and upper price bands for all periods (daily / quarterly / yearly) shall be revised based on the new revised daily price band. Quarterly/Yearly shall be revised based on the highest band during the period.

7. For securities where corporate action is effected, upper & lower periodic price bands shall be revised by applying the Adjustment Factor to the relevant reference rates.

8. For securities trading below Re.1/-, there may be a situation wherein the computed higher and lower side price limits may be same resulting in no price movement in the security. In order to avoid such situation, the upper limit shall be adjusted one tick size to provide the movement in the respective securities.

9. *Securities categorized in Groups P, Z, ZP, SS and ST shall attract weekly and monthly price bands in addition to their daily, quarterly and yearly limits under the PPB framework.
The daily periodic price bands applicable is given below (price bands applicable for T+1 day shall be made available on T day EOD).

Unquote:

In view of several surveillance measures including price band- controls and relaxations in different situations, the authorities and Courts observation and doubting the transactions on ground of substantial increase in price of shares is not proper. Undoubtedly shares were sold at prevailing market rate, therefore, doubting genuineness of gains was not proper. The finding of Tribunal is not as per ground reality, trade practices and documents.

Other aspects not considered:

It appears that before the High Court, various related contentions about double taxations, payment received via stock exchange and stock broker by realization of  cheque received, held and presented in due course and adoption of favorable view etc. were not pressed.

About order of Tribunal:

It appears that lower authorities and Tribunal were prejudiced due to:

1. off market purchase
2. purchases  in physical form

cost of acquisition was paid in cash and not  through the normal banking channel , hence not verifiable and purchase not proved from the authentic supporting details such as bank account/ documents.

3. The  assessee got  share of  M/s Kappac Pharma Ltd.  converted into electronic mode.
4. Assessee is not a regular investor in shares.
5.  Entire transactions are against human probability.
6. Findings of the Investigation Wing, inquiries conducted in the case of assessee, brokers, operators and the entry providers and the nature of transaction entered into by the assessee .
7. The LTCG claimed exempt u/s. 10(38) by the assessee cannot be allowed and addition u/s 68 was confirmed by considering case of tax avoidance and applying  McDowell and Company Limited [1985 (4) TMI 64 - SUPREME COURT]
8. the case laws cited by the Ld. counsel for the assessee are on distinguished facts, hence, not applicable .

 On reading of the order of tribunal it appears that the purchase was doubted because cost of acquisition was paid in cash and not through banking channel.

It is surprising that even Tribunal has taken a view just like lower authorities who even doubt transactions through banking channels.

Honorable Tribunal has ignored the records of assesse like entry in books of account, balance sheets, contract notes for purchases, dematerialization of shares  which is prove that shares were held by the assesse.

Transfer of shares from demat account. 

Thus fact  was that when shares were sold they were held in electronic form in DP in demat form and were transferred from  DP in Demat form and payment was received from stock exchange by the broker and broker paid to the assesse. Shares were sold at prevailing market rate.

Therefore, it was fully probable that assesse sold shares when price of shares had increased.

Tribunal has not followed other judgments of co-ordinate benches and judgments of High Courts relied on by assesse without distinguishing them and by simply saying that facts in those cases are different.

With due respect author find that the tribunal has considered irrelevant aspects also. The Tribunal was concerned to examine nature and source of deposit made on the occasion of sale of shares. Undoubtedly shares were held and transferred from DP, sale took place at prevailing market rate, sale took place at trading platform of BSE. In this case even ‘cost of acquisition’ was also not an important factor because shares held were long-term and were sold at Stock Exchange and were subjected to levy of security transaction tax, therefore entire gain was exempt, the amount of cost of acquisition in such case is not an important factor.

Therefore, credit found in books of account of assesse was fully explained.

How shares were acquired was not at all relevant while examining applicability of section 68 vis a vis credit entry found in books of account of appellant/ assesse. Credit found was on realization of cheque received on sale of shares, which was received, held and deposited as a holder in due course and was honored by drawee bank as payment in due course. Tribunal has not considered these aspects in tune with the provisions of Negotiable Instrument Act, practice and procedures followed by banks and stock exchange and share brokers.  In such circumstances, credit entry is fully explained and therefore, finding of the Tribunal was wrong and perverse.

 As discussed above, the procedure followed and order passed by the High Court is not in accordance with law laid down by the Supreme Court, therefore, the judgment deserves to be recalled, to frame substantial questions of law and then answer the same.

On part of assesse it is a case in which he can make appropriate application for recall and adjudication afresh, of the appeal by the High Court. And as a precautionary measure, appeal can also be filed before the Supreme Court.