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2016 (6) TMI 487 - ITAT KOLKATA

2016 (6) TMI 487 - ITAT KOLKATA - TMI - Addition under the head loss on derivatives - Held that:- The right of the parties to enter into transactions according to their free will and choice has always been protected, the only rider being that both the professed intention and the real intention should be the same. Any transaction in which the professed intention and the intention gathered from the documentation are the same must be considered to be genuine. In the present case the AO disallowed t .....

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e in support of the loss but has ignored the loss only on the ground the transactions were colourable and sham device to avoid tax payable on profit 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 - Decide .....

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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 into electronically screen based transaction in a recognized stock exchange, i.e. BSE and NSE. The particulars supporting and evidences were filed dur .....

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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) - Decided against revenue

Disallowance u/s 37 - 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 .....

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ommission, what is their expertise in the field of acting as intermediaries for purchase and sale of properties, whether the recipients have any past or future history of rendering similar services and earning income thereon are all relevant considerations, which ought to have been examined by the CIT(A) before allowing relief to the Assessee. In the given facts and circumstances of the case, we are of the view that it would be just and proper to set aside the order of CIT(A) on this issue and r .....

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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 f .....

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ons in paragraph-23 of this order will apply to this ground of appeal of revenue also. - I.T.A No. 1677/Kol/2011 - Dated:- 1-6-2016 - Sri N. V. Vasudevan, JM And Shri M. Balaganesh, AM For the Appellant : Smt. Ranu Biswas, JCIT, Sr.DR For the Respondent : Shri A.K.Updhay, AR ORDER Per N. V. Vasudevan, JM This is an appeal by the revenue against the order dated 08.09.2011 of CIT(A)- XXXVI, Kolkata, relating to AYr. 2007-08. 2. The grounds of appeal raised by the revenue read as follows :- That on .....

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nation charges ₹ 51,00,000/-. 3. In the grounds of appeal, the revenue has challenged the order of CIT(A) whereby the CIT(A) deleted four additions made by the AO. The revenue has raised one single ground of appeal in which it has questioned the correctness of the decision of the CIT(A) deleted four different additions made by the AO. The revenue was given opportunity to file revised grounds setting out the challenge to each one of the four additions deleted by the CIT(A) independently. Th .....

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n derivatives. The assessee has claimed loss on derivatives of ₹ 31976907/- arising from future option loss on transactions entered on NSE as appeared for from 10DB. In terms of Rule 20AB of the Income Tax Rules, 1962 (Rules), every Assessee who has entered purchased and sold securities in a recognised stock exchange 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 securitie .....

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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 3 .....

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ntered in these 30 days was purchased on the same day & sold on the same day. 3) Each and every transaction resulted in loss. 4) Margin requirement as per SEBI to be paid to Stock Broker was not followed and there rules were violated. 5) Losses were in the odd figures, however the assessee paid the broker in round figures as per ledger copy submitted by the assessee. 6) The Broker Ledger which was from 11/1/2000 to 15/04/2009 and for the entire period of 9 years it is seen that assessee has .....

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ions stopped immediately after the end of Ass. Year 2007-08 because assess thereafter was not in need of any further Loss even prior to or post AY 2007-08. In the circumstances, the AO was of the view that the loss was a make belief affair arranged in manner to manufacture loss and thus the same being a sham transaction which lead to a bogus loss. 8. In coming to the above conclusion the AO referred to the Legal position vis-a-vis powers of income-tax authorities in relation to sham transactions .....

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ona 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. T .....

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e transactions. (c) The transactions should not be seen in isolation but in consonance with each other. The matter may also be considered and decided upon in the light of human probabilities and the surrounding facts and circumstances. (d) The principle 'what is apparent is real' is not sacrosanct and may be overlooked if surrounding circumstances so suggest. (e) It is true that every person is entitled to so arrange his affairs as to avoid taxation but the arrangement must be real or bo .....

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ior purposes. The transaction circumstances of each and every case. (vii) The principle in the matter of tax evasion and tax avoidance as laid down by the (vii) The principle on the matter of tax evasion and tax avoidance as laid down by the Supreme Court in landmark judgment in the case of McDowell & co. Ltd. V. CTO (1985) 154 ITR 148/22 Taxman 11 (SC) can have its application only where colourable or artificial devices are adopted and not to the transactions which are otherwise legitimate .....

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basis of evidence and the surrounding circumstances of the case, appears to be non-genuine or bogus or a make believe or sham, with a view to avoid the tax liability or if it appears that the series of transactions effected by the assessee to achieve the desired result is sham or collusive or non-genuine, the tax authorities can ignore the transaction. Such power of tax authorities are legally recognized. From the decision of Hon'ble Supreme court in McDowell & Co. Ltd.'s case it is .....

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ourable 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 certai .....

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any incriminating documents or bringing any adverse evidence on record, but with the observation that the transactions failed to satisfy the test of human probability and the objectives of the transactions was tax evasion. It was argued that the AO did not doubt the genuineness of the transactions carried out by the Assessee which resulted in the loss. The Assessee pointed out that even in the remand report filed before CIT(A), the AO accepted the veracity of the documents filed by the Assessee .....

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ed by the Hon ble Supreme Court in the case of Mcdowell & Co. Ltd. (supra) was a case in which the issue was whether the liability to pay excise duty was that of the assessee. Even if the liability to pay excise duty was of the Assessee, whether the amount of excise duty, directly paid by the buyer, was includible in the turnover of the assessee for payment of sales tax? Referring to several earlier precedents wherein the concept of excise duty had been elaborated, the Constitution Bench hel .....

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r had directly paid it to the Excise Department. The Supreme Court held that the Assessee cannot indulge 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 ca .....

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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 authorities proved that it was her unaccounted monies, mainly on the grounds that the Assessee had poor knowledge of racing, improbability that one person will win jackpot in three seasons continuously. T .....

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s prevailed over the evidence of certificates from race courses. The CIT(A) held that in the case of the Assessee, apart from mere suspicion, there was no case made out by the assessing officer. 12. The CIT(A) also held that the decision by the Hon ble Calcutta High Court in the case of CIT vs. L.N. Dalmia 207 ITR 89 (Cal), was a case where the Hon ble Calcutta High court held that where the shares of a company were sold to another company by a individual, and when the purchasing company is floa .....

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alcutta High Court in the case of CIT Vs. Shekhawati Rajputana Trading Co (P) Ltd. 236 ITR 950 (Cal), were not applicable to the case of the Assessee, as the transactions in those cases were collusive in nature and not a real transaction with unrelated parties, as in the case of the Assessee. Similarly, the CIT(A) held that the decision of ITAT Mumbai in the case of Bombay Oil Industries Ltd. Vs. Dy. CIT [2002] 82 ITD 626 (Mum) was also a case of tax avoidance with collusion of a related party. .....

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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 cert .....

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e order of the CIT(A). 15. We have given a very careful consideration to the rival submissions. The law as laid down by the Hon ble Supreme Court in the case of Mc.Dowell & Co. (supra) has been explained in a later judgment in the case of Vodafone 341 ITR 1 (SC) and the ratio laid down therein is that all tax planning is not illegal/illegitimate/impermissible. It is only when colourable or dubious devices are employed or transactions are sham or when arrangements are a mere subterfuge, as pa .....

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s tax evasion then the arrangement need not be given effect to. In cases where transactions or arrangement are evidenced by written agreement/arrangement it is not possible to rewrite the agreement/arrangement. The right of the parties to enter into transactions according to their free will and choice has always been protected, the only rider being that both the professed intention and the real intention should be the same. Any transaction in which the professed intention and the intention gathe .....

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Even in the remand report filed before CIT(A), the AO accepted the veracity of the documents filed by the Assessee in support of the loss but has ignored the loss only on the ground the transactions were colourable and sham device to avoid tax payable on profit on sale of land. This conclusion 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 direc .....

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etails 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 per provision .....

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ons in the context of loss in derivatives which was discussed in the earlier paragraphs of this order and in view of the reasons recorded under the head loss on derivatives, the loss of ₹ 3795659 on share trading was also treated as bogus by the AO. 17. Before CIT(A), the Assessee conceded that the loss in question was speculative in nature but challenged the finding of the AO that loss in question was arising out of sham transactions and the loss itself was to be disregarded. The CIT(A) a .....

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ure .. In view of such, loss from share transactions at ₹ 37,95,659/- is taken as speculative loss. 18. Aggrieved by the order of the CIT(A), the Assessee has raised the aforesaid ground of appeal before the Tribunal. The learned DR relied on the order of the AO and the learned counsel for the Assessee relied on the order of the CIT(a). 19. We have considered the rival submissions. The transactions of purchase and sale of shares carried out by the Assesssee were genuine and real. The loss .....

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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 7th 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 disbeli .....

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evenue is dismissed. 20. The next grievance projected by the revenue in its grounds of appeal is against the order of the CIT(A) allowing the claim of the Assessee of deduction of ₹ 66 lacs while computing total income. The Assessee as we have already seen is a partnership firm engaged in the business of trading in properties and shares. The assessee had paid of ₹ 33,00,000/- to Mrs. Rupali K, Shah and ₹ 33,00,000/- Priya K. Shah as commission for purchase of Property in Mumbai .....

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he date when services were claimed to have been rendered was not hit by the provisions of Sec.40A(2)(b) of the Act. According to the AO, except filing of copy of bill & TDS Certificates, the assessee had not discharged his onus to prove the services rendered for which commission was paid. He held that merely making payments or deduction of tax is not evidence enough to prove that the expense is deductible u/s. 37(1) of the Income Tax Act. He held that the law was well settled that the onus t .....

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w partners had brought in capital on 21.05.2006 and the payment were made from the capital contributed by these partners. Hence the money was taken back by the partners through their respective wife. 4) There was no agreement or documents except and save Bill and TDS Certificates to justify the nature and claim of such huge expenditure of ₹ 66,00,000/- 5). On the perusal of the computation and Profit & Loss of these commission agents filed by the assessee, it is observed that the above .....

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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 th .....

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he property brokers are identified individual and assessed to tax. From the copy of the LT. records filed it is seen that both recipients have disclosed such commission in their respective returns and paid tax. There is no dispute on these issues. During the remand report, the AO obtained the confirmation from the vendor of the property namely Vadilal Dolatam & sons, Mumbai. The vendor confirmed that both M/S Priya K Shah and Mrs Rupali K.Shah acted as broker on behalf of the purchaser, (the .....

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penditure is based on the nature of transactions, need thereof and the circumstances in which it is incurred for the purpose of business as think proper by the businessman. The income tax authorities cannot take over the mettle of businessman to judge his prudence, his decision makings and requirement of paying any outgo. No businessman would incur any cost till it is necessary for his business The AR further submitted that the appellant was offered a piece of land and property by these brokers. .....

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rmations filed by the recipients 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 submissi .....

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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. 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 fact that the recipient of commission were wife of partners, the fact that the property that was purchased by the Assess .....

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stances of the case, we are of the view that it would be just and proper to set aside the order of CIT(A) on this issue and remand the issue to the AO for fresh consideration, with liberty to the Assessee to establish the ingredients necessary for claiming commission expense as allowable deduction. We make it clear that the burden to prove the ingredients necessary for claiming commission paid as allowable expense has to be established by the Assessee. The AO will afford opportunity of being hea .....

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mited, a Company having its Registered office at Kolkata (no documentary evidence were filled to prove its establishment in Mumbai) has been paid this sum for Co-ordinating the sale of property. The AO noticed the following facts in respect of the said payment and disallowed the claim of the Assessee for deduction:- 1) As per assessee's ledger the payment was for sale of property as apparent from Debit made on 05/01/2007 in the assessee's book. 2) The bill issued by Onkar Management Priv .....

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pector 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 d .....

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ebit note made on 05/0112007 Then this payment also is liable to be disallowed U/s 40 a (ia) which- has not been done because for the purpose of business. 5) In view of the same and without prejudice to the above that deduction cannot be allowed u/s 40a(ia) of the IT Act 1961. However as the expenses has been already disallowed as it failed to satisfy the test of section 37(1) in case it any proceedings the AO held that the expenses is otherwise allowable then the said expenses shall be disallow .....

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nt (p) Ltd was given. Then, another letter was issued to the said company to confirm the documents. In reply, the said company confirmed the payment of coordination charges. A letter dated 17,08.2010 was also send with inspector to the Sri P. K. Duta, Notary for confirmation of agreement. Inspector in his report confirm the entry in the register. However, I am also with the opinion of AO that these charges claimed by me appellant are bogus. This matter is thoroughly discussed by the AO in its as .....

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inclined to accept AR's version that the payment of co-ordination charges to Onkar Management pvt.. Ltd. is an allowable deduction u/s. 37(1) of the Act. The said payment is 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, .....

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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 the opinion that the AO has not made out any case for disallowance of co-ordination charges, as his observations are based o .....

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