TMI Blog2014 (9) TMI 161X X X X Extracts X X X X X X X X Extracts X X X X ..... on valuation until these are sold - It is only if the shares are held as stock in trade, that the regular method of valuing closing stock "at cost of market price, which is less" would apply so as to reduce the market price of shares to ₹ 2.64 lac - a transaction of purchase cannot be deferred till the actual possession of shares is received or payment is made - the assessee instructed P.K. Agrawal & Company to purchase shares on her behalf in the year relevant to the assessment year - The shares were purchased in the instant year alone, but the delivery was not given to the assessee till the payment, which event took place in the subsequent year - As the dates of contracts of sale as declared by the parties fall in the instant year and these were actually followed up by actual delivery of shares, these transactions need to be considered in this year alone - since the AO himself held these to be trading transaction though relevant to the next year, the character of such purchase transactions of shares is not disturbed - such shares were held by the assessee as 'Stock in trade' and not as 'Investment'. Nature of transaction - Whether the transaction is Speculative or Non-s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... addition made by the AO on account of disallowance of loss in shares amounting to ₹ 40,01,670? 2. Briefly stated the facts of the case are that the assessee had shown loss from shares to the tune of ₹ 40,01,670/- comprising of two items, viz., trading profit of ₹ 1,27,380/- on the shares of LIC Housing Finance Company and loss amounting to ₹ 41,29,050/- on valuation of shares of Limtex Investment Ltd. (LIL). The facts leading to such loss are that the assessee purchased 12,000 shares of LIL on 07/7/2004 through M/s P.K. Agrawal Company, a Member of Calcutta Stock Exchange @ ₹ 118.05/- per share. A further lot of 17,500 shares of LIL was purchased on 27/7/2004 @ ₹ 170.05 per share, again through M/s P.K. Agarwal Co. Total cost of 29500 shares worked out at ₹ 43.93 lac. The assessee treated such shares as part of her stock in trade. Since these were unsold at the end of the year, the assessee valued the same @ ₹ 8.95 per share as on 31st March, 2005 by following the principle of stock valuation of 'Cost or market price, whichever is less'. That is how the assessee declared the value of her stock in trade of 29500 shares ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be heard by the Division Bench. The learned A.M. decided the issue in favour of the Revenue, by summing up his conclusion on page 25 para 6 of his proposed order, as under: - (i) The decision by the tribunal in the case of Ratan Lal Baid was distinguishable. (ii) Since there was no valid contract between the assessee and Shri P.K. Agrawal, the transaction outside the stock exchange did not satisfy the conditions of 'Spot delivery', thereby violating the relevant provision of the SEBI Act and hence was hit by Explanation to Section 37(1) of the Act. (iii) Profit in LIC Housing share transaction was also bogus. (iv) If the transaction in LIL was to be considered as genuine, then it was a case of capital loss and hence no deduction could be allowed for fall in the market price of such shares at the year-end. (v) If it at all it was to be considered as a trading loss, then it was a speculation loss. That is how the learned A.M. proposed to allow the Revenue's appeal by restoring the action of the Assessing Officer. 4. The learned J.M., on the other hand, concurred with the view taken by the ld. CIT(A). He found the tribunal order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee is not covered at the very outset in such bogus transactions. It is further pertinent to note that during the course of first appellate proceedings, the assessee challenged the action of the Assessing Officer in not confronting the statement of Shri P.K. Agrawal, which was used against her. The learned CIT(A) remanded the matter to the Assessing Officer with a request to furnish a remand report. Two remand reports dated 12/3/2009 and 15/4/2009 were sent by the AO. There is no reference to the statement of Shri P.K. Agrawal in the first remand report dated 12/3/2009, in which the Assessing Officer reiterated his earlier stand as taken in the assessment order. In the second remand report, the Assessing Officer has recorded that Shri P.K. Agrawal has confirmed the genuineness of the transactions with the assessee on affidavit. He also admitted that the transactions of purchase of shares on behalf of the assessee were not through stock exchange and he received payment and gave the delivery of shares. There is no further material on record to dispute the correctness of the assertions made by Sh. P.K. Agrawal in the affidavit. Thus it is seen that on one hand, there is a statement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an illegal transactions with his buyers for the purpose of purchasing shares of LIL for the assessee. In so far as the present case is concerned, what is relevant to decide is whether the transactions between the assessee and P.K. Agrawal are hit by SEBI regulations. As the assessee did not make any off market purchase transactions of the shares of LIL, the limits or the framework with in which such transactions can be entered into, is not applicable. 7.4. The learned D.R. then argued that the Contract notices issued by the broker allegedly under Regulation-55 of the Calcutta Stock Exchange could be used only when acting on behalf of the customers on the floor of the stock exchange. If these transactions were off-market, then such Contract notes could not have been issued. I fail to appreciate as to how this aspect of the matter goes against the assessee, who genuinely ordered for the purchase of shares and got delivery on making the payment, although belatedly. The assessee was concerned only with the purchase of shares and not how these were procured by the broker. If the broker failed to comply with the norms, it was his fault for which he ought to have been visited with the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pulated rates on the dates of purchase. That is when, the assessee paid the entire consideration by cheques in the months of November and December, 2005. Coinciding with the payment made by the assessee, the broker gave delivery of the shares to the assessee in December, 2005. There is no dispute on the fact, as has been rightly admitted by the authorities as well, that the assessee opened the Demat account in October, 2005 and delivery of such shares was taken in her Demat account from the Demat account of Sh. P.K. Agrawal in December, 2005. The fact that the actual delivery of shares was taken by Sh. P.K. Agrawal who dematerialized such shares and kept with him till the resolution of the dispute with the assessee, amply proves at least one thing that the shares were genuinely purchased by him and which were given to the assessee on the receipt of payment. The further fact that the assessee received delivery of such shares in her Demat account and admittedly continued to remain in the possession of such shares for so many years after taking delivery, abundantly proves that it was not a paper transaction inasmuch as the movement of shares from the broker to the assessee is not in d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntially. This fact rather proves the case of the assessee that she purchased the shares of LIL at high prices, leading to dispute with P.K. Agrawal Co. If the charge by the SEBI had been that P.K. Agrawal Company and others were engaged in arranging paper transactions for purchase and sale of shares in connivance with LIL, then it would have amounted to a bogus transaction in the hands of the assessee as well. In my considered opinion, the SEBI penalizing P.K. Agrawal Company for price rigging rather supports the stand of the assessee that her transactions of purchase of shares of LIL were genuine. 7.8. It is noticed that the Tribunal in the case of Ratan Lal Baid dealt with similar facts as are obtaining in the present case. The assessee in that case purchased 6500 shares of LIL @ ₹ 170 per share on 27/7/2004 through P.K. Agrawal Company. Neither the delivery of such shares was obtained nor any payment was made till the year ending. At the end of the year, that assessee valued such shares at ₹ 58,175/- @ ₹ 8.95 per share and claimed loss of ₹ 10,47,150/- on account of valuation of such shares. The Assessing Officer made the addition for ₹ 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned CIT(A), apart from relying on the Tribunal's order in the case of Ratan Lal Baid, has also relied on another order passed by the Tribunal in the case of Riverside Farm Pvt. Ltd. in which case also the genuineness of the transactions of shares has been upheld under similar circumstances. 7.9. In view of the foregoing discussion, I am of the considered opinion that there can be no doubt about the genuineness of the purchase transactions of shares of LIL between the assessee and Shri P.K. Agrawal. II. IF THESE ARE GENUINE, THEN SUCH SHARES ARE 'INVESTMENT' OR 'STOCK'? 8.1. Having held that the transactions of purchase of shares of LIL by the assessee were genuine, now it remains to be decided as to whether such shares were held as stock in trade or investment. If the shares are construed as 'Investment', then obviously there can be no question of computing any loss on valuation until these are sold. It is only if the shares are held as stock in trade, that the regular method of valuing closing stock at cost of market price, which is less would apply so as to reduce the market price of such shares to ₹ 2.64 lac. 8.2. In so far as the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shares, then such transactions be considered as speculative because the assessee did not receive delivery of such shares as at the end of the year. I do not find any force in the submission of the learned D.R. for the reason that section 43(5) of the Act defines speculative transaction to mean: a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips . A bare perusal of the definition of speculative transaction, transpires that the transaction for the purchase or sale of shares etc. should be 'periodically' or 'ultimately' settled otherwise than by actual delivery. The learned D.R. submitted that the transactions of purchase should be considered as speculative transactions because no physical delivery was received by the assessee till the end of the year. 9.2. I find this contention to be bereft of any force because the assessee admittedly received the delivery of such shares in December, 2005. The mere fact that the delivery was not received up to 31/3/2005, being the year ending relevant to the A.Y. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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