TMI Blog2009 (2) TMI 828X X X X Extracts X X X X X X X X Extracts X X X X ..... emption money to IL FS are arranged. Consequently a notice under s. 148 was issued on 15th Feb., 2005 after recording reasons which got served on assessee on 2nd March, 2005. The notice so issued was complied with vide letter dt. 17th March, 2005. 3. Assessment in pursuance of the above notice got completed vide order dt. 13th March, 2006 passed under s. 144 r/w s. 147 of the Act. AO in the assessment order has observed as under : Regarding dividend income from JM Mutual Funds' Further from the perusal of return, it is seen that the assessee has shown purchase of units of J.M. Mutual Fund amounting to ₹ 2,00,00,000. For the purpose of investment in J.M. Mutual Fund, the assessee has claimed to have taken loan of ₹ 2 crores on 29th Feb., 2001 from Infrastructure Leasing Financial Services Ltd. (IL FS), Mumbai after depositing margin money of ₹ 10 lakhs. The assessee has simultaneously given redemption option in favour of IL FS. After taking the loan of ₹ 2 crores, the same was invested for purchase of units of J.M. Mutual Fund on the same day i.e., 9th Feb., 2001 itself. It is interesting to note that redemption option given by assessee in fav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Fund were ₹ 12.29 per unit on 23rd Feb., 2001 which is evident from the fact that Smt. Aruna Agarwal, 79, Durga Nagar, Firozabad had purchased units of such Mutual Fund on 23rd Feb., 2001 in the similar manner. Thus the price of units were definitely not ₹ 10.58 per unit on 11th Feb., 2001 and all these suggest that price manipulation was definitely being made therewith a view to accommodate the customers. The conduct of IL FS and J.M. Mutual Fund also does not inspire any confidence. This company also acted in haste. Immediately after the sanctioning of the loan by it sister concern viz., IL FS Ltd. on 9th Feb., 2001 on this date itself it allegedly processed the assessee's application, issued/allotted the units and transferred the same in his name. On the next i.e., 10th Feb., 2001 the company gave her the dividend and on the next working day i.e. 11th Feb., 2001 it redeemed the units. The entire conduct looks quite dubious. In view of above discussion, it is clear that the transaction under reference were sham and in-genuine and it was a colourable device of the assessee to bring in its books, its undisclosed income in the shape of exempt income without pay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rustee, Loka Shikshana Trust vs. CIT 1975 CTR (SC) 281: (1975) 101 ITR 234(SC) it was argued that the transaction was undertaken only for reduction of liability of tax and thus it cannot be held as business transaction because according to her the motive of the assessee here was not to earn profit but to earn loss. It was further argued that the transaction being a colourable device to evade taxes and for which reliance was placed to the decision of Banyan Berry (1996) 222 ITR 178(Kar)(sic). 7. Per contra, the counsel of the assessee, Shri Anurag Sinha, advocate referred to the submissions made before CIT(A), rebutting to the submission of the Departmental Representative, submitted that the Hon'ble Special Bench decision in the case of Wallfort Shares Stock Brokers Ltd. (supra) referred and relied by the CIT(A) recently stood approved by the Hon'ble Bombay High Court and stood reported in CIT vs. Walfort Share Stock Brokers (P) Ltd. (2008) 13 DTR (Bom) 163 copy of the judgment as appearing in the said report was also placed on record. Shri Sinha, took us to the relevant paras of the referred judgment, referring to para 26 of the said judgment it was shown that befo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt year in question, the profit of the assessee as per the P L a/c was ₹ 9,70,52,757. By reducing the artificial loss of ₹ 2,09,44,793 and other allowable claims from the said profit, the assessee had offered to tax, the total income of ₹ 6,69,72,260. Thus, on account of the set off of the above artificial loss, the assessee paid tax on ₹ 6,69,72,260 instead of paying tax on ₹ 9,70,52,757. He submitted that where the transaction of purchase and sale of units is a mere pretence to produce artificial loss without actually acquiring or disposing of the units then such a transaction cannot be considered as a business or trade transaction and consequently the artificial loss incurred in such a transaction cannot be allowed as business expenditure. In this connection, he relied upon the principles laid down by the Madras High Court in the case of M.V. Valliappan vs. CIT (1988) 67 CTR (Mad) 289: (1988) 170 ITR 238(Mad). 13. Mr. Srivastav further submitted that the concept of business or trade necessarily connotes an activity for earning profit though in the process it may incur loss as well. But where the motive is not to earn profit but only to earn loss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as not suffered any loss in the transaction and by a colourable device or transaction an artificial loss has been created on paper. Colourable transaction means a transaction which is not genuine and which appears to be in existence but not really existing or is only a pretence. In the present case, the colourable device adopted was that the mutual fund gave an advertisement in the newspapers few days before the record date for declaration of dividend, whereby the taxpayers were lured to invest in their units before the record date and get the benefit of 'double advantage'. Although the double advantage was stated to be (one) availing 40 per cent tax-free dividend and (two) 100 per cent safe investment in technology stocks, the real motive was to create an artificial loss. The modus operandi of the transaction was that the mutual fund would purport to sell the units at a high premium to the taxpayer and repurchase the said units immediately after distribution of the dividend at a much lower price. As a result, the loss arising on sale of units was only on paper, because, in reality, the amount of loss was virtually returned to the assessee by way of dividend/incentive incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct that the findings of fact recorded by the Tribunal that the transaction between the assessee and the mutual fund were at arm's length and that the mutual fund has acted in accordance with the applicable law and complied with the regulatory requirements of the SEBI and therefore it is not open for the Revenue to term the transaction being non-genuine. Further, no such inquiry was made in this regard from J.M. Mutual Fund who could have only replied it. It was further submitted that decisions referred by the senior Departmental Representative in her compilation in the cases of (i) Vaneet Jain vs. CIT (supra); (ii) M.V. Valliappan vs. CIT (supra); (iii) CIT vs. Smt. Minal Rameshchandra (supra); (iv) Senairam Doongarmall vs. CIT (supra); (v) Sole Trustee, Loka Shikshana Trust vs. CIT (supra) stood referred on pp. 25 and 26 of the said report and thus, considered by the Hon'ble Bombay High Court while deciding the case of Wallfort Shares Stock Brokers Ltd. (supra). The Authorised Representative thus, submitted that judicial discipline requires that the higher wisdom should prevail. 11. We have given a thoughtful consideration to the rival submissions, precedent referred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TR 178(Kar). However, we are afraid to observe here that no such decision is there on the reported page. The said decision of Banyan Berry vs. CIT (1996) 131 CTR (Guj) 127: (1996) 222 ITR 831(Guj) said decision is in favour of the assessee wherein it was held that the decision in the case of McDowell Co. Ltd. (supra) has not affected the freedom of citizen to plan his business affairs within the framework of law unless they may properly be called a subterfuge. It was further held that McDowell does not lay down that a taxpayer must arrange his affairs so as to attract maximum tax liability and everything resulting in tax reduction or exemption or not attracting tax authorized by the law is to be treated as device of tax avoidance. Similarly the referred decision of M.V. Valliappan (supra) was also decided in favour of the assessee. It is not understood that what proposition of law was sought to be brought on records by the Revenue. 14. We therefore, confirm the order passed by the CIT(A) holding the transaction of sale and purchase of units of J.M. Mutual Fund is a genuine business transaction, the dividend received by the appellant on such units would be exempt under s. 10( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... father case where one transaction claimed to have been made with M/s S.K. Garg Co. were never taken place with it. 17. Per contra, the Authorised Representative of the assessee referred to his submission filed before the CIT(A) as reproduced in his order and relied on the findings recorded by him. 18. The case of the AO as borne out of records is that the AO was in receipt of information, form the Delhi Stock Exchange Ltd. that M/s S.K. Garg Co. had been declared as defaulter by the SEBI w.e.f. 23rd Oct., 1996. However, in the remand proceedings vide remand report dt. 25th April, 2008 (copy available on records) the AO addressing to the objections of the assessee submitted to the CIT(A) that SEBI cancelled the certificate w.e.f. 27th Sept., 2002, which is required to be considered w.e.f. 23rd Oct., 1996 as basis of cancellation of registration has been formed long back. The AO thereafter referring to few other cases wherein those assessee's admitted claim of bogus capital gain and surrendered the same before the Department. The AO thereafter made addition of ₹ 61,93,285 representing sale of shares through M/s S.K. Garg Co. on the basis of various combination ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ckbroker, Delhi. The AO in his reasons recorded as well as in the assessment order has relied upon the information from the stock exchange that the said broker was declared defaulter w.e.f. 23rd Oct., 1996 and debarred from trading by SEBI, order dt. 27th Sept., 2002 with immediate effect. It is the case of the AO that summons issued to the said broker under s. 133(6) was returned unserved . He therefore, concluded that the receipt of amount from the broker were either accommodating entries or were 'speculative transaction', but has made the addition of ₹ 61,93,275 under s. 68. 11.1 The appellant on the other hand contended that the material available on record goes to prove that the broker was an existent entity, who at a point of time was duly registered with Delhi Stock Exchange and duly recognized by SEBI. The Delhi Stock Exchange declared him defaulter w.e.f. 23rd Oct., 1996 itself suggests that he was declared defaulter after some period of time. Exact date of such declaration has not been brought on record by the AO. Further he was debarred from trading by SEBI by order dt. 27th Sept., 2002 with effect from that day meaning thereby that he was permitted to m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st have excluded said ₹ 78,675 while computing the total income of the appellant. However, in view of the decision, when separate addition of ₹ 61,93,275 is found to be not maintainable, the appellant would not be eligible for the said deduction of ₹ 78,675 and there would not be any double taxation. 11.4 With regard to the genuineness of the transaction with M/s S.K. Garg Co. it would be relevant to observe that the appellant has treated both the transactions of sale purchase of units and shares as one business activity and also got his accounts audited under s. 44AB. The AO has not rejected the books of the appellant. It is held that the basic principle is the same in the law relating to income-tax as well as in civil law, namely, if there is no challenge to the transaction represented by the entries or to the genuineness of the entries, then it is not open to the Revenue or other side to contend that what is shown by the entries is not the real state of affair, as was held by the Hon'ble Gujarat High Court in the case of CIT vs. Amitbhai Gunvantbhai (1980) 19 CTR (Guj) 105: (1981) 129 ITR 573(Guj) it is seen rather addition has been made under s. 68 in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot have been added under s. 68 of the IT Act, relevant documentary evidence in the shape of contract notes, sale bills stood brought on records evidencing the transaction. Transaction of shares was in respect of blue chip companies and the rates at which purchases and sales have been shown have not been shown to be manipulated. The SEBI debarred the broker from membership from the date which undisputedly falls beyond the period under consideration. Enquiries were undertaken after a considerable period of time and the non-availability of the broker at the relevant point of time when the transaction of the assessee took place has not been shown. Return of notice under s. 133(6) is no evidence unless it is shown that broker never ever existed on the given address. In the assessment order it has not been shown that on what ground the postal authorities returned the envelope to the AO. The AO's view that the sale proceeds represent accommodation entries is not substantiated in view of the fact that when the reassessment proceedings were initiated on the ground then the onus lay on none other then the AO to bring evidence on record to justify his assumption of jurisdiction. In this r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was validly inititated, on the face of candid and unchallenged finding of fact in the appellate order that some of the conclusions drawn by the AO has no bearing and transaction of mutual fund got severally dented by the decision of Special Bench of Tribunal in the case of Wallfort Shares Stock Brokers Ltd. vs. ITO (2005) 96 TTJ (Mumbai)(SB) 673: (2005) 96 ITD 1(Mumbai)(SB) . 2. Because, the reassessment proceedings were initiated on wrong assumption of facts and on fact having no relevance to the case under consideration. There is no direct nexus between the conclusion of fact and primary facts upon which conclusion is said to be based. The reasons recorded have no link between material and formation of belief and were merely for the purpose of investigation. 3. Because, on the facts and in the circumstances of the case there was no valid reason to believe to initiate assessment proceedings by issue of notice dt. 15th Feb., 2005 under s. 148 and therefore, consequent assessment is illegal, without jurisdiction and bad in law. 22. Opening his arguments learned Authorised Representative of the assessee referred to his filed synopsis which reads as under : Reasons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting to ₹ 61,93,285 is mere accommodation entry and income to that extent has escaped assessment in asst. yr. 2001-02. Failing to take note of the fact on record that assessee himself has shown this income as duly noted by the AO on p. 7 of his assessment order. In view of above, even a prima facie Further notice under s. 148. The Department has not challenged these findings of fact recorded by the learned CIT(A) through which he has candidly held that the second limb of the reasons recorded which pertains to transaction of mutual fund cannot be a valid reason for issuance of notice under s. 148. The learned CIT(A) has validated the former i.e. the first limb of the reasons recorded which pertains to S.K. Garg Co. sufficient for issuance of notice under s. 148. 23. The learned Authorised Representative took us through the synopsis filed in order to show that each part of the reasons as recorded by the AO are not at all relevant and thus do not afford a valid basis for issuing notice under s. 148 of the Act. Copy of the assessment order in the case of Smt. Vimla Garg for asst. yr. 2001-02 was placed before us and from which it is seen that the assessee therein has s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... challenge as held in S. Narayanappa vs. CIT (1967) 63 ITR 219(SC), Kantamani Venkata Narayana Sons vs. Addl. ITO (1967) 63 ITR 638(SC), Madhya Pradesh Industries Ltd. vs. ITO (1970) 77 ITR 268(SC), Sowdagar Ahmed Khan vs. ITO (1968) 70 ITR 79 (SC), ITO vs. Lakhmani Mewal Das (supra) and ITO vs. Nawab Mir Barkat Ali Khan Bahadur 1974 CTR (SC) 273: [1974] 97 ITR 239 (SC). 26. The formation of the required opinion and belief by the AO is a condition precedent. Without such formation, he will not have jurisdiction to initiate proceedings under s. 147. The fulfilment of this condition is not a mere formality but it is mandatory. The failure to fulfil that condition would vitiate the entire proceedings as held by the apex Court in the case of Johri Lal (HUF) vs. CIT 1973 CTR (SC) 283: (1973) 88 ITR 439(SC) and Sheo Nath Singh vs. AAC 1973 CTR (SC) 484: (1971) 82 ITR 147(SC). The reasons for the formation of the belief must have rational connection with or relevant bearing on the formation of belief. Rational connection postulates that there must be a direct nexus or live link between the material coming to the notice of the AO and the formation of his belief that there has been esc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the returns were accepted without scrutiny and consequent passing of regular assessment orders under s. 143(3)/144 of the Act. In such cases of accepted returns and in cases of scrutiny assessments, the status of external source of information for reopening of assessment under s. 147 are not affected in any manner by Rajesh Jhaveri Stock Brokers (P) Ltd.'s case nor does it have any effect on the relevancy of reasons and their nexus for the formation of the belief the income chargeable to tax has escaped assessment. This will also be evident from the following observations of the Supreme Court on p. 512 of the report Vol. 291 : In other words if the AO for whatever reason has reasons to believe that income has escaped assessment it confers jurisdiction to reopen this assessment. It is, however, to be noted that both the conditions must be fulfilled if the case falls within the ambit of the proviso to s. 147. The case at hand is covered by the main provision and not the proviso. So long as the ingredients of s. 147 are fulfilled, the AO is free to initiate proceeding under s. 147 and failure to take steps under s. 143(3) will not render the AO powerless to initiate reasse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has merely referred those guidelines in the reasons recorded and in the reasons recorded there is no reference much less allegation that these guidelines of the SEBI were not being followed by the broker. That portion pertaining to Smt. Vimla Garg, already stood shown to be based on incorrect assumption of fact, this leaves only that portion of the reasons recorded which refers to receipt of letter through the Addl. CIT, Range-4, intimating that S.K. Garg has been declared as defaulter of the stock exchange w.e.f. 23rd Oct., 1996 and, therefore, debarred from making share transaction as broker. Despite challenge Revenue has not preferred to place letter for the consideration of any of the appellate authority. Be that as it may, only on the strength of that letter contents of which have not been disclosed, notice under s. 148 cannot be justified. Had the AO done some mental exercise on his part after receipt of letter he could have seen the facts on record that the income of ₹ 61,93,285 stood duly disclosed by the assessee thus, requiring no notice under s. 148 reasons recorded being combination of various facts proved to be incorrect and few allegations which are not borne ou ..... 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