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2016 (6) TMI 487

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..... rofit on sale of land. This conclusion in the light of the decision of the Hon’ble Supreme Court in the case of Vodafone (2012 (1) TMI 52 - SUPREME COURT OF INDIA ) cannot be sustained. Consequently, the CIT(A) was fully justified in deleting the addition made by the AO and directing the loss to be allowed to be set off as claimed by the Assessee - Decided against revenue Treatment to loss - genuinity of loss - speculative loss which was allowed to be carried forward for set off against speculative income in future as per law - Held that:- The transactions of purchase and sale of shares carried out by the Assesssee were genuine and real. The loss suffered by the Assessee in such trading was also genuine. The transactions were however speculative in nature in accordance with Sec.43(5) of the Act and the loss in question was speculative in nature requiring special treatment in view of Explanation to sec.73 of the Act. Since the transactions were genuine and proved as real by the assessee, the observation of the assessing officer that the same were Sham is bad in law and is contrary to facts. The assessee has suffered losses of ₹ 37, 95,659 on transactions on shares entered i .....

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..... mmission paid as allowable expense has to be established by the Assessee. The AO will afford opportunity of being heard to the Assessee before deciding the issue. Disallowance of co-ordination charges - Held that:- The law is well settled that any payment of commission should be for services rendered by the recipient of the commission. The Assessee to claim expenditure on account of commission has to prove that services were in fact rendered, by the recipient of the commission from the Assessee. The fact that the payment is made by account payee cheque or the fact that tax had been deducted and source or the fact that the recipient of commission has declared commission in his return of income and paid taxes thereon, the fact that there is an agreement for rendering services are all irrelevant considerations. In the present case, evidence regarding the nature of services rendered by the recipient of commission has not been placed on record by the Assessee. The observations that we have made in paragraph 23 of this order will equally apply to this ground also. The AO will afford opportunity of being heard to the Assessee. The burden will be on the Assessee to prove the nature of s .....

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..... nge has to furnish evidence of payment of security transaction tax for claiming deduction under section 88E of the Income Tax Act, 1961 (Act). The evidence of payment of securities transaction tax which is required to be furnished along with the return of income by the assessee under first proviso to section 88E, on value of transaction entered into by him in a recognised stock exchange, shall be in furnished in Form No. 10DB and shall be verified in the manner indicated therein. As per the content of form 10DB the sale value of the transaction was Rs., 99,25,12,859/- on which STT of ₹ 1,68,727/- was paid. The assessee has set off the loss in trading in derivatives against the profit earned from the sale of land along with Development Right which was sold at a price of ₹ 30Crore. 5. The AO called upon the Assessee to substantiate the loss. In response to the query of the AO, the Assessee filed ledger copy of M/s Shilpa Stock Broker Pvt. Ltd., and From 10DB to substantiate the same. 6. The AO noticed that on 27.11.2006 the assessee sold its land and earned few crores of rupees as Profit on Sale. Immediately on receipt of the money i.e. 29/11/06 and 30/11/2006, the .....

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..... bound to consider the legal effect of the transaction. If the assessee's acts are not bona fide but are ambiguous, sham Of make believe it is open to the taxing authorities to question and doubt the transaction and to find out the true, correct and real meaning and result thereof. The make believe transactions, though seemingly legal, are not free from judicial scrutiny. (b) In the context of determining whether a transaction is sham or illusory or a device or a ruse or a make-believe, the taxing authorities arc entitled to penetrate the veil covering it and ascertain the truth. Taxing authorities are not required to put on blinkers while looking at the documents produced before them. They are entitled to look into the surrounding circumstances to find out the reality of the recitals made on the documents. It is the duty of the court in every case, where ingenuity is expended to avoid facing any welfare legislations, to get behind the smoke- screen and discover the true state of affairs. The court t is not to be satisfied with the form and leave alone the substance of the transactions. (c) The transactions should not be seen in isolation but in consonance with each other. .....

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..... is seen that the principles emerged from the decision is that the bona fide business arrangement with incidental fall out by way of tax benefit can be tolerated but tax avoidance or tax evasion by means of colourable device or make believe transaction and dubious means cannot be recognized. In other words, it can be said that where the transactions effected by the assessee are not bona fide or genuine but are sham, make believe, arranged one and are collusive they can be regarded as hollow and colourable device and are not to be accepted as such by the tax authorities. 9. The AO thus concluded the facts as set out above clearly revealed that the transactions with Broker M/s. Shilpa Stock Broker Pvt. Ltd. during the year under consideration are nothing but a make believe affairs and arranged one in collusion with the assessee for tax evasion or tax avoidance. On basis of the principle laid down by the Hon ble Supreme Court in the case of McDowell Co. Ltd. 154 ITR 148 (SC) and certain other judicial pronouncements referred to in the order of the AO that colorable devices to evade taxes can be disregarded by the Revenue, the AO held that the loss in question was not a genuine lo .....

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..... e in a colorable device to evade tax by asking the buyer to direct pay excise duty to the Excise Department. According to the CIT(A) the above observations of the Hon ble Supreme Court were rendered in a totally different context and cannot be applied to the facts of the case of the Assessee. Similarly the CIT(A) pointed out that in the case of CIT Vs. Durga Prasad More 82 ITR 540 (SC) was a case where the Hon ble Supreme Court observed that Courts and Tribunals when testing the reliability fo evidence has to apply the test of human probabilities. The CIT(A) held that the aforesaid observations made in the context of an Assessee s attempt to avoid tax by claiming that property belonged to a trust created by his wife, when the evidence showed that the property belonged to him and not to his wife. The CIT(A) was of the view that this decision was also rendered in a different context and not relevant to the case of the Assessee. The CIT(A) was also of the view that the decision in the case of Sumati Dayal Vs. CIT 214 ITR 801 (SC) was a case where the : The assessee had pleaded that she has earned income by winning from horse races, which was exempt from tax. But the income tax authori .....

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..... ut disallowed loss on derivatives on the basis of doubts and suspiciousness However, the AO failed to substantiate and convert his doubts into a strong and foolproof case to deny the claim of the appellant. The doubt is a thought which needs to work upon and evaluated with strong reasoning based on findings to be a conviction. The AO has not brought in any evidence to establish that the loss booked by the appellant as alleged was received back by the appellant in some or other forms subsequently. In absence of same a mere doubt cannot be taken as fact. In view of the submissions filed by the AR of the appellant with evidences, I am of the opinion that the AO has not made out any case for such disallowance of loss, as his observations are based on mere suspicions and improper interpretation of certain judicial pronouncements. The AO is therefore, directed to allow loss from Future Option transactions. The addition of ₹ 3,19,76,907/- is therefore, deleted. 14. Aggrieved by the order of the CIT(A), the revenue has preferred the present appeal before the Tribunal. We have heard the submissions of the learned DR who reiterated the stand of the AO as reflected in the order o .....

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..... sion in the light of the decision of the Hon ble Supreme Court in the case of Vodafone (supra) cannot be sustained. Consequently, the CIT(A) was fully justified in deleting the addition made by the AO and directing the loss to be allowed to be set off as claimed by the Assessee. We find no grounds to interfere with the order of the CIT(A). Accordingly, this ground of appeal of the revenue is dismissed. 16. The next grievance projected by the Revenue in the grounds of appeal is against the action of the CIT(A) in treating the loss of ₹ 37,95,659/- as genuine loss but speculative loss which was allowed to be carried forward for set off against speculative income in future as per law. The factual details with regard to this ground of appeal of the revenue are that the assessee had claimed a loss of Rs, 37, 95,659/- in share trading. The transactions of purchase and sale were entered into by the Assessee on the same date. No delivery of the shares were taken and these transactions were intra-day transactions which were speculative in nature. In view of above the trading the loss of ₹ 37,95,659/- was required to be treated as speculation loss u/s. 43(5) of the Act and as .....

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..... ssessing officer that the same were Sham is bad in law and is contrary to facts. The assessee has suffered losses of ₹ 37, 95,659 on transactions on shares entered into electronically screen based transaction in a recognized stock exchange, i.e. BSE and NSE. The particulars supporting and evidences were filed during the course of hearing before the assessing officer. The copy of letter dated 7 th May, 2009 submitted to the assessing officer along with the copies of the above stated supporting(s) on the losses on shares, was duly filed by the Assessee before the CIT(A). These documents were neither disputed or disbelieved by the AO. In such circumstances the conclusions of the AO in our view were rightly held to be unsustainable by the CIT(A). The CIT(A) was fully justified in his conclusion that the loss cannot be regarded as sham and had to be regarded as real but treated as speculative loss deserving special treatment in terms of set off in accordance with Explanation to Sec.73 of the Act. We find no grounds to interfere with the order of the CIT(A) on this issue and the relevant ground of appeal of the Revenue is dismissed. 20. The next grievance projected by the reven .....

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..... iled by the assessee, it is observed that the above commission income were shown as Income from other source and they did not have any major income apart from above. Hence they have rendered service only the assessee, in which their husband are partner, and not to any other person during the said Ass.Year. Hence this expense appears to be intentionally manufactured in order to reduce the profit generated from sale of land. (reliance is placed on the judgments reported as CIT V Calcutta Agency Limited {19ITR 191 (SC)}, Gopinath Vir Bhan V CIT {6 ITR 242}, Vijay Kumar Mills Ltd. V CIT {50 ITR 332}, Vishnu Cotton Mills Ltd. V CIT {117 ITR 754}, Madurai Knitting Co. V CIT {30 ITR 764} and Hatz Trust, Simla V CIT {21 ITR 149}. The AO held that the assessee has failed to prove rendering of services by the two ladies who are also wife of the partners. Hence in absence of evidences of rendering of services by the said brokers the expenses of ₹ 66 lakhs was not allowed as it failed to satisfy the test of section 37(1). 21. On appeal by the Assessee, the CIT(A) deleted the addition made by the AO observing as follows: 6.4. I have carefully considered the submission of the A .....

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..... s of commission -and the vendor, the deduction claimed by the appellant is admissible. Even if the husband of t.ie recipients joined the appellant firm on later date, it did not deter such admissibility, unless evidences are brought on record showing such expenditure was either bogus or excessive. The AO has not made any case to qualify such expenditure was bogus or excessive. Hence, the addition of ₹ 66,00,000 is deleted. 22. We have heard the rival submissions. The learned DR reiterated stand of the AO as contained in the order of assessment. The learned AR relied on the order of the CIT(A). We have considered the rival submissions. The law is well settled that any payment of commission should be for services rendered by the recipient of the commission. The Assessee to claim expenditure on account of commission has to prove that services were in fact rendered, by the recipient of the commission from the Assessee. The fact that the payment is made by account payee cheque or the fact that tax had been deducted and source or the fact that the recipient of commission has declared commission in his return of income and paid taxes thereon, are all irrelevant considerations. .....

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..... person rendering the service for the purchase of the property which was purchased by the Assessee much before than the service rendered by the said party . 3) The only evidence the assessee filed to justify the claim of expenditure was the copy of the Bill, TDS certificate. No evidence what so ever was brought on record to establish the rendering of service by the said party, Inspector reported that there was no such concern ever existed in the said premises. In absence of vital evidence regarding rendering of services, the expenditure claimed cannot be allowed, and thus the expenditure is disallowed. 4) Without prejudice to above it is also found that the Assessee has violated provisions of section 40(a)(ia) in respect this payment as because the Assessee debited it: Books of A/c on 05/0112007 and was liable to deduct TDS @ 2% and cess as applicable. However assessee deducted only 0.10% based on certificate u/s 197 of the IT dated 09/0112007 which was after the date of debit it) the books of Accounts. It is settled law that certificate u/s 197 does not have retro respective effect and govern debit of expenditure made on or after the issue of certificate. In this case the ce .....

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..... s also not disallowable u/s. 40(a)(ia) as there was no violation of section 194C of the Act. The AR tiled the documentary proof and a sworn affidavit of the said Onkar Management Pvt. Ltd. about its existence. The certificate u/s. 197 was issued by the ITO, TDS, Kolkata 011 0910112007 for deduction of 0.10% tax at source, which clearly mentioned the name .of the appellant and the period of validity was financial year 2006-07. The AR asserted that the payment to the Onkar be verified from the bank statement of the assessee. The AO has not disputed to this claim of the AR in his remand report. In view of such, I am of the opinion that the payment of ₹ 51,00,000/- is neither disallowable u/s. 37(1) nor u/s. 40(a)(ia) of the Act. The allowability of such expenditure depends on the circumstances and the events of the business; on this the order of the AO is silent. The AO has not brought in any evidence to establish that the alleged payment to Onkar management Pvt. Ltd. was received back by the appellant in some or other forms subsequently. In absence of same a mere doubt cannot be taken as fact. In view of the submissions filed by the AR of the appellant with evidences, I am of t .....

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