TMI Blog2011 (1) TMI 92X X X X Extracts X X X X X X X X Extracts X X X X ..... llowed - ITA NO. 293/MUM/2009 - - - Dated:- 21-1-2011 - ORDER Per B. Ramakotaiah, A.M. This appeal by the assessee is against the order of the CIT(A)- II, Mumbai dated 29.10.2008. 2. Assessee has raised the following grounds: 1. The Commissioner of Income-tax (Appeals)-II, Mumbai (hereinafter referred to as the CIT(A)) erred in upholding the action of the Assessing Officer in making addition of a sum of Rs.16,06,23,687/-on account of long-term capital gains by treating lending of shares as transfer of shares within the meaning of section 2(47) and thereby charging tax under section 45 of the Act. The appellants contend that the share of Global Trust Bank (GTB) have been lent to a Corporate and not sold as alleged and assumed by the CIT(A) and that the appellants are the rightful owners of the shares lent. The appellants are entitled to receive back the said shares of GTB from the loanee of the shares, and consequently, there is no transfer of shares within the meaning of section 2(47) of the Act. 2. The CIT(A) erred in not adjudicating the following ground of appeal - The Assessing Officer erred in not allowing credit of a sum of Rs.2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , which was in fact examined by the A.O. under section 131 also, the CIT was of the opinion that the transaction resulted in sale of 20 lakhs shares and capital gain thereon was required to be computed for the year. Accordingly he directed the A.O. to compute the capital gain. In addition to the above the CIT also has taken non-reconciliation of over draft taken and also directed the A.O. to examine the above. This order under section 263 dated 19.01.2004 was subject matter of appeal before the ITAT in ITA No. 1651/Mum/2004 wherein on the request of the counsel the directions to the A.O. were modified and the A.O. was directed to examine the matter de novo in accordance with the law by way of speaking order after giving due and fair opportunity of hearing to the assessee. Consequent to the above the A.O. examined the issue and held that the lending of shares is a colourable transaction and assessee has sold the shares to a third party and accordingly the sale value was taken at Rs. 20.76 crores and cost of Rs. 4.70 crores (wrongly shown as 4.07 crores in the order) computing capital gain at 16.06 crores. The matter was carried to the CIT(A), who has confirmed the addition so made. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1.2000 in the market for a consideration of Rs. 15,68,72,806/- at Rs. 104/105 and further 6,00,000 shares on 27.12.2000 at Rs. 84.60 for a consideration of Rs. 5,07,50,881/-. In view of delivery of shares as required by the said company on 24.11.2000, it requested for lending of the shares of Rs. 20,00,000 as that large number of shares were held by the assessee in the investment portfolio having purchased much earlier. Assessee as part of lending of shares after taking a deposit of Rs. 15,00,000/- allowed the shares to be lent and credited the same to the demat account of the broker directly which were also examined by the A.O. and CIT(A). The learned counsel referred to the correspondence in the matter and submitted that M/s. Classic Credit Ltd. has sold the shares first in the market and for delivery of the shares they borrowed the bulk shares from assessee by letter dated 24.11.2000, i.e. after the sale of shares of 21,00,000 in the market and before the delivery it requested assessee for lending of shares for the purpose of delivery. Assessee in good faith allowed the lending and the shares were delivered in the market by CCL and for the purpose of delivery on the request of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to undertake sale of shares, it was the submission that the CIT(A) has wrongly concluded as the sale in the stock exchange was undertaken on 20.11.2000 by the company CCL and since they did not have shares to deliver in exchange, requested the assessee vide letter dated 27.11.2000 for lending of the shares which the assessee has transferred to the broker directly as the delivery has to be undertaken on 28.11.2000 in the Stock Exchange. It was his submission that it was the company CCL which sold the shares and not the assessee. It was the submission that the assessee company is in no way connected with KP group. Assessee company is in the business for the last 30 years and have no connection at all with the KP group or KP group concerns except that they are all dealing with/in the stock market. As an arms length loan transaction, the CCL requested for delivery of shares to the extent of 20,00,000 which were available with the assessee (to the extent of 20.50 lakhs) Since the shares were to be returned in a short period assessee did not undertake any agreement or assurance but unfortunately the KP group was involved in the scam and subsequently after the Joint Parliamentary Committe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as not received. He relied on the principles established by the ITAT in the case of Reliance Communication Infrastructure Ltd. v. CIT 34 SOT 241 with reference to the principles on regulations of SEBI and findings of the above said case to submit that the assessee also has correctly reflected lending transaction in the Balance Sheet and accounts of the assessee and the A.O. did in fact enquired and accepted the transaction in the order under section 143(3) originally. 8. At this stage the Bench has asked for the details of the sale by CCL and the corporate benefits (dividend) received by the assessee company for which clarifications were filed in writing as under: - 1. Photo copy of the ledger account of Triumph International Finance India Limited (TIFIL) in the books of account of Classic Credit Limited (CCL) (since in liquidation) for the year ended 31st March 2001 which includes the two bills of Triumph International Finance India Limited for sale of 21 lakhs shares of Global Trust Bank. This shows that Classic Credit Limited has considered the sale of 20 lacs shares of Global Trust Bank in their accounts which have been borrowed form our clients. 2. Corporate Benefits ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. for sale of 6,00,000 shares of Rs. 84.60 per share for a consideration of Rs. 5,07,50,881/-. As can be seen from the above two bills the total shares sold were 21,00,000 whereas the assessee has lent only 20,00,000 shares. While computing the capital gain the A.O. took the total value of 21 lakh shares but gave credit for 20,00,000 shares only that too at the cost price even though the assessee was eligible for indexation of shares as per the provisions of the Act. This indicates that the A.O. has mechanically treated the sale by the broker in the case of Classic Credit Ltd. as the total sale consideration of the assessee, even though the assessee does not own 1,00,000 shares at all which was also brought to tax. This shows that the transactions of Classic Credit Ltd. which was recorded in that company s books of account had been comply treated as transaction of the assessee without establishing that the said transaction was that of the assessee. 10. All these transactions were undertaken much before the securities scam has come out and the assessee was caught unaware vis-a-vis the Classic Credit Ltd. whose transactions were prohibited subsequently. Eventhough at the time of l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the learned counsel that they are yet to receive more than 385 lakhs of consideration and received only Rs. 3.05 crores out of Rs. 4.40 crores investment. They also offered the capital gains on the sale price in AY 2003-04 without receiving full consideration. 12. The sequence of events do indicate that it was only a lending transaction and not sale of shares as alleged by revenue. In fact the A.O. has issued summons under section 131 on 10.01.2003 to the Principal Officer, CCL as part of the enquiry in the original assessment proceedings. The said CCL, vide letter dated 10.01.2003, has replied that they have obtained a loan of 20,00,000 shares of Global Trust Bank from the assessee on 28.11.2001 which have been directly transferred to the demat account of their broker, Triumph International Finance (I) Ltd. and the same have been subsequently been sold through them. They also enclosed bills evidencing sale of shares aggregating to 21,00,000. It was also confirmed that the aforesaid loan of shares has been utilised to give delivery of the said sale of shares. The Triumph International Finance (I) Ltd. also confirmed that they have received 20,00,000 shares of Global Trust Bank f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... counsel the scheme prescribes certain methodology to avoid risk in the market whereas the assessee has undertaken the risk by lending directly. However, this does not bar transactions between the two independent companies per se. The Board also, vide circular No. 751, has clarified on the basis of the scheme that the lending of shares does not involve transfer of assets. Vide paras 3 and 4 of the circular No. 751 the following has been clarified: - 3. The following taxation issue may arise in respect of transactions under the scheme of securities lending: Whether the lending of shares under the securities lending scheme will amount to transfer under section 2(47) of the Income-tax Act in the hands of the lender? 4. As far as the stock market is concerned, shares are fungible assets. Fungible has been defined in the Shorter Oxford English Dictionary on Historical Principles as said of a thing which is the subject of an obligation when another thing of the same or another class may be delivered in lieu of it . One share of a company is good replacement for another share of the same company. The market does not lay any emphasis on the distinctive numbers. It is only for ..... X X X X Extracts X X X X X X X X Extracts X X X X
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