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2016 (9) TMI 592 - ITAT KOLKATA

2016 (9) TMI 592 - ITAT KOLKATA - TMI - Addition on account of inflation of purchase price of 1.60 lakh equity shares - Held that:- The transactions of sale-purchase was duly recorded in the books of account of the respective parties, the allegation by the Assessing Officer that the off market transactions cannot be accepted under SCRA is factual incorrect relating in the aforesaid appellate order. We also find that the exception has been provided in the SCRA Act under section 14(2) of the SCRA .....

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f all the affairs of business of assessee. In view of above, we find no reason to interfere in the order of Ld. CIT(A) in deleting the addition - Decided against revenue - ITA No.1429/Kol /2012 - Dated:- 3-8-2016 - Shri N.V.Vasudevan, Judicial Member and Shri Waseem Ahmed, Accountant Member For The Appellant : Shri Debasish Banerjee, JCIT-SR-DR For The Respondent : Shri S.M.Surana, Advocate ORDER PER Waseem Ahmed, Accountant Member:- This appeal by the Revenue is arising out of order of Commissi .....

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price of 160000 equity shares of Gujrat Heavy Chemicals Ltd. 2. That Ld. CIT(A) has erred in not discussing the issue raised in ground No.1 by the assessee s appeal before him which runs as under: That on the facts and circumstances of the case the learned A.O erred in coming to the conclusion that the purchase of shares was not on the contract date being 29.08.2008. 3. That Ld. CIT(A) has erred in not discussing the material facts brought on record by the A.O and discussed in his assessment or .....

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perverse. 5. That Ld. CIT(A) has erred in acting on irrelevant facts not material to the issue in the operative part of his order before coming to his conclusion; and as such his order is bad in law and perverse. 6. That, on the facts and in the circumstances of the case, Ld. CIT(A) is not justified in deleting the disallowance of ₹ 15,00,000/- on account of payment made for Keyman s Insurance Policy for the directors. Shri S.M.Surna, Ld. Authorized Representative appeared on behalf of ass .....

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assessee in the present case is a Private Limited Company and possesses the valid license of Non Banking Financial Corporation (NBFC for short) from the Reserve Bank of India. The activities of the assessee are regulated by the RBI. The assessee for the year under consideration filed its return of income declaring business income of ₹8,04,561/- which was subsequently processed u/s 143(1) of the Act. Thereafter the case was selected for scrutiny with the prior approval of CCITIII/ Kolkata. .....

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y of the purchased bills of MPB and market quotation of the shares as on 31.03.2009. The AO observed that the value of the shares of GHCL has drastically came down from ₹ 92/- per share to ₹ 27.85 per share as on 31.03.2009. During the course of assessment proceedings, AO observed that the payment for purchase of shares from MPB was made on 17.03.2009 and the shares were transferred to the Demat account of the assessee on 28.03.2009. Accordingly, AO sought clarification from assessee .....

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n income is only from source of tendering loan to earn interest for the last three Assessment Years and did not participate in the sale-purchase of share. The assessee during the year under consideration has only done a single transaction which was treated as business transactions. From the above, AO noted that it cannot be treated as business transactions and should be treated as investment of assessee-company; b) The sale-purchase of share is regulated under the Securities Contract (Regulation .....

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Demat account of assessee after six months and 23 days and payment was made after six months and 19 days. So the same transaction is not following the provision of SCRA and therefore it is illegal in nature. So the illegal loss cannot be adjusted with the legal income of assessee, c) The loss claimed by assessee out of aforesaid transaction is from sham activities and consequently the loss of ₹1,05,36,000/- from such manipulated share business by back dated bill to adjust the business inc .....

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to appreciate that the assessee was bound to purchase the share at agreed price on date 29.08.2008 and he had no option except to make the payment of the share at agreed price. Regarding the allegation of AO for following provision of SCRA the assessee submitted that an exception has been provided u/s 14(2) of SCRA Act which says that nothing shall affect the right of any person other than a member of a recognized stock exchange to enforce such contract or to recover any sum under or in respect .....

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t ₹ 25,14,958/- and AY 2010-11 purchase ₹3,71,68,025.20 and sales at ₹3,61,38,633.41. After considering the submission of assessee and other relevant records Ld. CIT(A) has deleted the addition made by AO by observing as under:- I have carefully considered the submission of the appellant including the judgment of the referred case laws and the relevant Provisions of SCRA, 1956, perused the facts of the case, the material placed on record and the finding of the Assessing Officer .....

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to ascertain the genuineness of the transactions, but no material evidence is brought on record to show that the transactions between the appellant and Pushkar Banijya Ltd., was sham. The cost of purchase of each share at ₹ 92/- is evidenced by the demat accounts. In fact, there is no evidence brought on record to show that purchase price has been inflated. The Assessing Officer has not doubted the price of the share of Gujarat Heavy Chemicals Ltd. at ₹ 27.85 as on 31.3.2009. it is .....

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t his side of the case effectively. Now, as a normal rule, the profits should be ascertained by valuing the stock-in-trade at the beginning and at the end of the accounting year - P.M. Mohammad Meerakhan [1969] 73 ITR 735 (SC). It is settled law that the true trading results of a business for an accounting period cannot be ascertained without taking into account the value of the stock-in-trade remaining at the end of the period - A.LA. Firm v. CIT [1999] 189 ITR 285 (SC); CIT v. British Paints I .....

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of the case, the purchase having established with documentary proof and the market value as at the close of the financial year also having been corroborated with material evidence there is no reason to hold that the transaction is a sham. Therefore, it is held that the addition of ₹ 10,53,6000/- made by the Assessing Officer on account of inflation of purchase price in unjustified and unwarranted. The same is hereby deleted and this ground of appeal of the appellant is decided in favour o .....

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ice whichever is lower. As the market quotation was lower on 1.03.2009 the value of the same was shown at the rate of ₹ 27.85 per share whereas the purchase was at ₹ 92/- per share. The appellant was carrying on the business of purchase and sale of shares in earlier year also and claimed the same as business loss. The appellant company is a NBFC under the Reserve Bank of India directions and purchase and sale of shares have been the trading activity of the company. The Assessing Offi .....

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No. 4 of the Assessment Order which has recorded as under: "The Government of India introduced special Act, namely Securities contract (Regulations) Act 1956 (SCRA) for the purpose to regulate the shore trading. On introduction of the Securities Contract (Regulations) Act 1956 (SCRA), the shore trading is governed by this Act, not by the contract sole of goods Act, 1930. The Securities contract (Regulations) Act 1956 (SCRA) prohibits person to transact in shores without involvement of broke .....

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o apply, except under the authority of a license granted by the Securities and Exchange Board of India in this behalf. However, exception in this rule of prohibition is provided in section 18(1) of SCRA which states that section 17 shall not apply to spot delivery contracts. The term "Spot delivery" is defined under clause (i) of section 2 of SCRA which is reproduced as under: "Spot delivery contract" means a contract which provides for- (a) Actual delivery of securities and .....

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h by a depository; Therefore, combined reading of section 17, definition of "Spot delivery" and section 18 of SCRA show that two persons can transact without involvement of share broker, who is member of recognized stock exchange, only when the delivery of share is given and payment were also made at most, within 24 hours of transaction. In the instant case, the assessee-company did not purchase through any share broker, actual delivery of shares did credit/take place after 6 month 23 .....

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gal income. In this regard, reliance may be placed on Apex Court's decision in Maddi Venkataraman and Company Pvt. Ltd. vs. CIT (1998) 229 ITR 534(SC) wherein it was held that infraction of law is not a normal incidence of business. That the transaction is illegal, has been conceded by the appellant in the submission before the Ld. CIT(A). Vide Page 3 of the Appellate Order, the relevant portion of the appellant's submission is quoted as follows: "The AO has raised a number of other .....

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in securities except under the authority of a license granted by the SEBI. This prohibits purchase and sale of securities outside the recognized stock exchange. In this case, the transaction has been outside this stock exchange by contract between the parties without the agencies of a member of Stock exchange and so, in violation of the law. Thus the transaction is illegal and the loss fares no better. The loss from an illegal transaction cannot be allowed. But the AD has missed out the fact th .....

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travention of any bylaws specified in clause (a) of subsection (3) of section 9. In the present case, neither party was informed of the state of law as is obvious from the acts of the case. It is now accepted that there could be no presumption that everybody knows law vide MP Sugar Mills Ltd. 118 ITR (SC). This view has been taken because the state has now diverse controls and also participation in every walk of life as has to be in a welfare state so much so that it is not possible for everyone .....

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in respect of such expenditure. The above provision of law is unambiguous and there is no exception on grounds of ignorance etc. as purported to be argued by the appellant. In fact, if the assessee company is engaged on trading of shares on a historical basis, it is unlikely that it would be ignorant of the relevant legal provision of SEBI and its tax implication. It is to be remembered that accounts of the company are subject to financial audit as well as tax audit and the company is supported .....

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into account for determination of the purchase price of shares of GHCL. On the other hand, Ld. AR filed paper book which is comprising pages from 1 to 155 and submitted that shares were purchased for a value of ₹1,47,20,000/- on 29.08.2008. These shares were valued at the end of financial year (08-09) at ₹44.56 lakh and therefore there arose a difference of ₹ 1026400.00 and this difference was of loss due to the valuation of share which was denied by AO. From the assessee orde .....

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ote that same shares in the subsequent year were sold at profit. Ld AR in support of his contention submitted copy of assessment order which is placed on record and allegation of AO that there is a single business transaction in the last three years is factual incorrect as assessee has dealt into share business in the earlier and subsequent year also including the relevant year under consideration. Lastly, Ld AR relied on the order of Ld. CIT(A). 6. We have heard rival parties and perused the ma .....

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ically on the balance-sheet date as on 31.03.2009 as a result due to decline in the value of shares a loss of ₹1,05,36,000/- was booked in its books of account. We find that AO treated this loss claimed by assessee as illegal loss and it was created with the sole purpose of avoiding the tax liability against the income from the genuine source of the assessee s business. However, Ld. CIT(A) deleted the addition made by AO. Now the question before us is as to whether the loss arising as a re .....

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We find that MPB has duly reflected the transactions with the assessee in its books of account and in support of its claim, the balance-sheet along with other documents and bank a/c are placed on pages 42 to 64 of the paper book. We further find that aforesaid shares were sold subsequently in the financial year 2009-10 and the details of the same is placed on pages 68 to 81 of the paper book. We also find that in the similar facts, co-ordinate Bench decided the same issue in favour of assessee i .....

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not disputed. The assessing officer has raised the issue that BIFC did not have the adequate number of shares in their stock as on the date sale. However, the facts are contrary to the findings of the assessing officer, as would appear from the copy of account enclosed herewith, that the said BFIC had the required number of shares in their stock and in response to the query of the assessing officer, an explanation was filed vide letter dated 30-11- 2011 (copy is enclosed in assessee's paper .....

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it is only the presumptions of the assessing officer. Moreover, as informed during the course of this appeal hearing before us by learned Counsel that after completion of the assessment of the assessee, scrutiny assessment of the seller was taken up and in such scrutiny assessment, the sale of the have been treated to be genuine. This fact was also not examined by the assessing officer from the assessment records of the seller, as the PAN was given. We are of the view that in case the transacti .....

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Prudent Finance Pvt. Ltd. a company registered under the Companies Act. One Nitin B. Parikh and other members of his family referred to as Nttin B. Parikh group of assessee who had control over others, was subjected to search action under section 132 of the Act. It was found that large number of shares were traded between the Company and the said group of persons at off-market transactions. Such off market transactions were entered by the company with other unrelated assesses also. The assessing .....

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il. The assessing officer in the order of assessment formed a belief that full details were not made available with respect to such transactions. The sales were not at market price. The amounts were not paid, but only account entries were made. The shares were also not transferred in the name of the purchasers. On such basis, the assessing officer concluded that the transactions were not genuine and applying the ratio of the judgment of the Supreme Court in the case of McDowell Co. Ltd v. Commer .....

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er: "8. Additionally, we also note that necessary entries were made in the account books of both sides, i.e. purchaser and seller and delivery receipts were also passed demonstrating contemporaneous sale and purchase of the shares. It is not even the ease of the Revenue that such off market transactions were not permissible. When we find that off market transactions were permitted in law, that there was no evidence to suggest that artificially they were sold at rates lower than the prevaili .....

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e. off market transaction, there was no evidence in the present case also which suggests that the shares were artificially sold at a lower rate than the prevailing market rte. Even the assessing office could not bring anything on record, which suggests that the selling rate was lower than the market rate. Respectfully following Hon'ble Gujarat High Court, we confirm the order of Commissioner (Appeals) and the issue of revenue s appeal is dismissed. Further we also relying on the judgment of .....

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e purchase bills or sales bills ignoring market rtes. This was done to avoid tax. Moreover neither any amount was paid nor any shares were transferred in the name of purchasers, only account entries were made. Held: Necessary entries were made in the account books of both sides, i.e. purchaser and seller and delivery receipts were also passed demonstrating contemporaneous sale and purchase of the shares. It was not even the case of the Revenue that such off market transactions were not permissib .....

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e respective parties, the allegation by the Assessing Officer that the off market transactions cannot be accepted under SCRA is factual incorrect relating in the aforesaid appellate order. We also find that the exception has been provided in the SCRA Act under section 14(2) of the SCRA Act as discussed above. Accordingly we uphold the order of Ld. CIT(A) and ground raised by Revenue is dismissed. 7. Next issue is against the order of Ld. CIT(A) in deleting the addition made by AO for ₹ 15 .....

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u/s 131 of the Act which is reproduced below:- Q. No. 2 Please tell me what kind of work on behalf of the company do you do? Ans. The study of the company to whom loan should be given or not. Q. No. 8 How do you consider any loan creditors fit for granting loan, i.e criteria? Ans. Market reputation, profit and loss account and balance sheet. Q. No.4 Do anyone introduce loan creditors to you? Ans. Sometimes friends or other way loan creditors know that the company tenders loan. Q. No. Would you n .....

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re there any fixed assets of the company? Ans. I don t know about that. From the statement of said director, AO observed that the director of assessee-company is just acting as signatory only and has no role in the dayto- day affairs of the business of assessee-company. Therefore, the expense incurred for ₹15 lakhs on account of KIP are not having any business connection and AO disallowed the same and added to the total income of assessee. 9. Aggrieved, assessee preferred an appeal before .....

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emium on claim or maturity of policy including the sum allocated by way of bonus on such policy is not exempt under Section 10(10D) of the Act which exempts from, tax any sum received under a life insurance policy other than, among other things, a keyman insurance policy. It may also be noted here that the company also has an option to assign/endorse the insurance policy in favour of the key employee (keyman) who has been insured under the keyman insurance policy. If such an assignment happens w .....

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he hands of the keyman. The tax incidence is the same as above. In the instance case, the key persons who are covered by the Policy of ₹ 7,500,000/- each are both directors of the company and there is no denying the fact that the director as employees worked for the company. According to the appellant company, the persons played key role in managing the affairs and in turn adding to the profitability of the company. According to the appellant company, the persons played key role in managin .....

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rovisions of the Act and the scheme. In the case of CIT vs. Rajan Nanda [2012] 205 Taxman 138/18 Taxmann.com 98 (Delhi), it is held that where the assessee company had taken Keyman insurance policies on life of its chairman and director but in subsequent year said policies were assigned to chairman and director receiving surrender value from them, and, for the remaining period of all those policies, the insurance premiums were paid by the assignee, the deduction claimed towards premium so paid ( .....

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yment or expenditure is incurred for the purpose of the trade of the assessee it does not matter that the payment may ensure to the benefit of a third party. Another test is whether the transaction is properly entered into as part of the assessee s legitimate commercial undertaking in order to facilitate the carrying on its business; and it is immaterial that a third party also benefits there. In the light of the above observation and discussion and on the facts and in the circumstances of the c .....

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efore us Ld. DR submitted that as per the provision of the Act, premium under KIP is paid for those persons who are playing an active role for the growth and survival of the assessee s business. But in the instant case, the director of assessee-company, is playing no role in the day-to-day affairs business of assessee-company and are merely acting as signatory. Therefore they are not entitled for the KIP. He vehemently relied on the order of AO. On the other hand, Ld. AR drew our attention on pa .....

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