TMI Blog2016 (7) TMI 1547X X X X Extracts X X X X X X X X Extracts X X X X ..... goes to prove that the assessee had proved nature and source of the credits and therefore there is no question of addition u/s 68. Detailed finding recorded by CIT(A) at para 3.9 are as per material on record and has not been controverted by ld. DR by bringing any positive material on record which clearly proves that amount so received was nothing but bank loan. An independent evidence was gathered by department also indicate receipt of loan directly from the banks in response to the summons issued to such banks. The findings of the CIT(A) is as per material on record, therefore do not require any interference on our part. Accordingly we confirm the action of CIT(A) deleting the addition made u/s 68 of I.T. Act. Addition in respect of differential rate of interest on loan given by assessee - HELD THAT:- after recording the detailed finding with regard to the interest free fund owned by the assessee to the extent of ₹ 52,56,63,100/-, CIT(A) directed the AO to verify as to whether the amount paid for share application is encashed after the encashment of liquidation of shares and if the same is found to be correct then in that case the addition of ₹ 30,55,968/- sho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... epted with the same logic and reasons. Long term and Short term capital losses - HELD THAT:- As per documentary evidence placed on record we found that the assessee has discharged onus casted upon him fully and properly in respect of Long/Short term capital losses shown in the return of income. It was the Department, who asserted the transactions not belonged to F.Y. 2002-03 and therefore the initial burden is on the Department to prove such transactions belonged to subsequent year. Once the assessee gives an explanation which in the opinion of the ld. AO is not true and which could not reasonably be true, the burden is on him to prove that what he has claimed is true and whatever burden is on the Department stands shifted thereafter. In view of the above, the opinion formed by the ld. AO that the entire transactions were fabricated to book loss in A.Y. 2003-04 is not supported by any cogent basis and reason or materials is not sustainable. Furthermore the assessee has not claimed any set off of the capital losses and thence there is no reason to form an opinion that the transactions were fabricated to book loss in A.Y. 2003-04 since no benefits have arisen to the assessee out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x. Considering the said facts, according to the AO, income in case of the assessee had escaped the assessment for the year under consideration and as such he issued the notice u/s.148 of the Act and completed the assessment u/s.143(3) r.w.s. 147 of the Act where in the AO made additions u/s 68 to the declared income. By the impugned order CIT(A) confirmed the reopening of assessment. However addition made u/s 68 was deleted by CIT(A) after having following observation : 3.9 I have gone through the contention of the appellant as well as that of the AO. It is not in dispute that the appellant had failed to produce the parties in whose names the appellant had credited amounts in its books or accounts. Also out of those forty parties five parties had denied such transactions and therefore prima-facie this is a case where appellant has failed to prove the transaction between itself and the creditors appearing in books. However on opening the veil it is also not in dispute that entire money had sprang from the Bank in nature of loan and that such loan were though granted to various parties, the cheques were directly issued to the appellant company without even having routed the same ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thing but loan and that the source though credited in the names of different creditors it stem from Bank and therefore when the assessee has explained the nature of transaction as also its source the AO is not justified in making such addition. It is also pertinent to note that against the loans given by the bank, though in different names, securities in respect of all those parties or for that matter, for entire amount of loan received by the appellant company was provided by the appellant company or its associates and therefore what emerges out of these facts shows that though the loans were granted in the names of different parties prima facie it was a case of contract between the appellant company and the Banks and therefore when the facts of the case is looked into in its substance over its form there is all the more reason to accept that the appellant had explained the nature and source of such credits. Section 68 gives discretion to the AO to add the credits as income or not and that while using such discretion, AO is expected to act judiciously, and without any bias or arbitrariness. The Hon'ble Supreme court in case of Sreelekha Banerjee V CIT 49 ITR 0112 has observed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 68 should not have been made. It is also pertinent to note that in the original assessment proceedings the appellant's explanation was accepted by the then officer considering the source as explained and therefore also I am inclined to accept the argument of the appellant that the amount in question should not have been added as income. It is also pertinent to note that departmental inquiry was also conducted in this regard where the AO had issued summons to the Bank to provide the necessary evidence relating to such transactions. In response to which the aforesaid bank has confirmed that they had given loans in the name of forty parties and had also submitted the loan statements, evidencing the fact that amount in question had been received from the said bank only, which could also be verified from bank statement of appellant company when correlated with the loans from those parties viz.a.viz. loans from bank. This clearly shows that appellant's argument that the amount was nothing but bank loan all the more gets support from the evidence independently gathered by the department, which were received directly from the bank in response to summons issued to such banks. Consid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e link is being established beyond doubt between the assessee company and the bank loans so received also proves the nature of such credits and the source thereof. We had also verified the confirmation of bank and the bank statement which clearly proves that these loans were directly received from the bank. Even the AO during the assessment proceedings issue summons to the bank asking for details of such loans and statements, in response the bank has produced all the evidence like bank statements of all the forty parties, their account opening forms, as also bank has categorically admitted that the banks had advanced loans to those forty parties, and cheques were directly issued in assessee favour, which goes to prove that the assessee had proved nature and source of the credits and therefore there is no question of addition u/s 68 of the Act. Detailed finding recorded by CIT(A) at para 3.9 are as per material on record and has not been controverted by ld. DR by bringing any positive material on record which clearly proves that amount so received was nothing but bank loan. An independent evidence was gathered by department also indicate receipt of loan directly from the banks in re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bow the appellant had a debit balance of ₹ 72,59,396/ - it is brought to my notice by the ld. AR that the transactions of giving loan to Rainbow and receiving loan from Bank of India, Pune have been entered on the same day i.e . 3-8-2000. The argument of the ld. AR that as per computer program the payments are recorded first and the receipts are recorded thereafter and therefore apparently in between the day there appeared a debit balance but considering the transactions for the entire day there was no such debit balance appears to be correct. The nexus between loan given to Rainbow and loan taken from Bank of India, Pune has been established and considering the fact that the rate of interest on loan taken from Bank of India, Pune was 12.25% p.a. there cannot be any disallowance on the plea of differential rate of interest in respect of loan given to Rainbow @12.5%p.a. 11. We have considered rival contentions and found from record that the assessee company had given a loan of ₹ 75,00,000/- to Rainbow @ 12.5% p.a. out of funds received from Bank of India, Pune Branch @ 12.5% p.a. Hence there was no loss of interest nor the funds were given at lower rate of i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... estment in shares of ₹ 37.99 crores, it is submitted by the Id. AR that the said investment was made in the earlier years which is evident from the fact that the value of investment as at 31-3-2001 as well as at 31-3-2000 was same as may be seen from the Balance sheet as at 31-3- 2001. It is submitted by the appellant that it had submitted the cash flow statement alongwith letter dated 19-9-2005 and also produced the cash book before the AO. I have considered these facts of the case and find that AO has not looked into the fact that cheque issued by the appellant company had reached the banker for encashment only after the funds from liquidation of shares had been credited in the bank account and therefore it would be inapt to assume that loan funds were used for the purpose of such investments in making share application in B4U . The ld. AR also invited my attention on the Balance sheet as at 31-3-2001 from which it is seen that the Appellant was holding interest free funds to the extent of ₹ 52,56,63, 1001 - on which no interest was paid. The details of which are as under:- i) Share Capital ₹ 24,77,100/- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transaction. Even during the course of assessment AO has accepted assessee s business as dealing in shares. However AO invoked explanation to section 73 and did not allow set of f loss incurred on purchases and sale of shares. By the impugned order CIT(A) confirmed the action of AO. 18. We have considered rival contentions and found from record that assessee had suffered loss in share business but the principal business of assessee was purchase and sale of shares. Income in any business is a positive income and loss is negative income which can be set off against positive income of the subsequent year. When the assessee is engaged in purchase and sale of shares whether explanation to section 73 is attracted with reference to the amendment w.e.f. 1.4.15, has been dealt with by the coordinate bench in case of Fiduciary Shares Stock (P.) Ltd. vs. ACIT 70 taxmann.com 23 (Mumbai-Trib.) wherein Mumbai Tribunal held as under: Section 73 stipulates that any loss computed in respect of speculation business shall not be set-off except against profits and gains of speculation business. Section 43(5) clarifies 'speculative transaction' to mean a transaction in which a contrac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gislature, from a perusal of the Wanchoo Committee Report and CBDT Circular o. 204 dated 24-07-1976, was not to treat purchase and sale of shares by companies whose main business is trading in shares as speculative business and therefore the Explanation to section 73 of the Act should be read only to the extent of the purpose for which it was inserted. The subsequent amendment made by Finance (No.2) Act, 2014 in the Explanation to section 73 of the Act appears to be made in order to clarify the real intention behind the insertion thereof, by removing the obvious hardship caused to various assessees whose main business is trading in shares. The amendment has removed the anomaly and brought the ambit of the Explanation to section 73 of the Act in line with the intention of the Legislature by placing the companies whose principal business is trading in shares as part of the exception to Explanation to section 73 of the Act, because such companies were not the companies for whom the Explanation was inserted. [Para 5.6.2] The insertion f the amendment in the Explanation to section 73 of the Act by the Finance (No.2) Act, 2014, is curative and classificatory in nature. If the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hence the same loss can be adjusted against other business income or income from any other sources of the year under consideration. Respectfully following the proposition of law laid down by the coordinate bench we delete the addition made by AO invoking explanation to section 73. We direct accordingly. AY 2002-03 20. In ITA No. 1717/Mum/07 in AY 2002-03, assessee is aggrieved for disallowance of long term capital loss treating the sale of shares as sham transaction. 21. We have considered rival contentions and found that from record that the assessee has claimed Long Term Capital Loss of Rs.(-) ₹ 3,61,31,594/- on sale of preference shares. In the return of income it has shown the purchase of 245360 shares of Welspun Mercantile P. Ltd. and 134240 shares of Welsupun trading P. Ltd. for ₹ 245630000 and ₹ 134240000/- respectively. These shares were allotted on 3.1.2000 by both the companies. The assessee has also filed copies of share certificates along with allotment letter issued by both the companies issued on 23.3.2005. The AO found that the company has issued single share certificate of 245630 in case of Welspun mercantile P. Ltd and 134240/- in cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shown Rs.l,3424,0001- and ₹ 30,63,000/-. In view of the above observation the AO was of the view that the transferee has intentionally suppressed the consideration to avoid the payment of stamp duty as applicable. The AO has also asked the assessee to explain the source of funds used to finance these investments to which the assessee vide its letter dated 28.3.2005 submitted the details of share application money paid with source of funds (page no.13 of the assessment order). The AO also found that in the A.Y. 2001-02 in the case of M/s. Welspun India Ltd. a special audit was done. On perusal of the audit report the AO came to this conclusion that the assessee company has not received full consideration from the transferee company which is also related to the Welspun Group. In view of these observation AO held that it is nothing but sham transaction. 23. By the impugned order CIT(A) confirmed the action of AO against which assessee is in further appeal before us. 24. We have considered rival contentions and found from record that the preference shares so allotted to assessee company are non-cumulative and both these companies have not declared any dividend during the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Dictionary means sham , fictitious , spurious . In this case there was no such thing. In the context of determining whether a transaction is a bogus or illusory transaction or a devise, the AO must bring concrete materials on record in support therewith. It is only if and when there are solid materials to hold taint of collusion or shamness or ungenuineness than the Assessing Officer can disregard the terms of document and decide the matter on the basis of concrete materials. The Id. AO could not bring on record any material to show the impugned transactions to be sham transaction except to express guess work and suspicion which have no role to play in assessment proceedings howsoever it may be grave. Considering the relevant facts together it is illogical to presume that the assessee was engaged in sham transaction. Normally the sham transactions are entered into to avoid payment of tax however in the case of assessee the impugned transactions had resulted into no actual profit or loss. The loss arose due to indexed cost of acquisition and has not been claimed as set off against any profit. Hence with this logic the transaction should not be doubted to be sham or bogus. 26. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubstituted for statutory deduction allowed earlier under the said section. In common parlance, a gain or loss on transfer of any assets would be represented by the difference between its sale price and purchase cost and the same is NIL in this case. However, in view of section 48 the assessee was eligible for benefit of indexation and as such there was long term capital loss as per methodology provided in the statute and merely because as per this methodlogy there was loss, such loss can not be disallowed alleging the same as sham. 29. In view of the above discussion we do not find any merit in the action of AO for disregarding long term capital loss incurred by the assessee. 30. As per material placed on record the assessee has discharged onus casted upon him in respect of Long term capital loss shown in the return of income. It was the Department, who asserted the genuine transactions to be sham transaction and therefore the initial burden is on the Department to prove such transactions to be sham and loss sustained therein is sought to be disallowed. Once the assessee gives an explanation which in the opinion of the ld. AO is not true and which could not reasonably be true ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment order, the AO has noted that the assessment was reopened u/s 148 as he had reason to believe that certain income has escaped assessment in the sense that assessee has not shown closing stock of ₹ 8,59,89,584/-. As per the note on accounts (schedule 12) of the Financial Accounts, the company had discontinued trading in shares and taking long term view, the stock in hand as on 31.3.2002 is converted into investment at the closing market rates. Hence, the assessment was reopened and completed u/s.147 r.w.s. 143(3) of the Act. 2.2. Shri. Mitesh Shah, C.A. and Authorized representative of the assessee company appeared and submitted that the A.O. is not justified in reopening the assessment as there is no new material which has come to the notice of the A.O. for re-opening the assessment. According to him, there must be a nexus between the material and the belief of the A.O. for reopening the assessment u/s.147. He relied on the following decisions:- (1) Anant Kumar Saharia Vs. CIT (232 ITR 533, 539) (Gauh). (2) Hum Boldt Wedag India Ltd. Vs. ACIT (236 ITR 845,847) (Cal). According to him, this amounts to change of opinion and hence re-opening of the assessment is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th are assets of the Appellant. The profit or loss would arise in subsequent year on sale of these shares. Hence, the addition is made by the Id. AO without any basis and reason and as such the same is III founded and liable to be annulled. An assessment based on mere conjecture, surmise or suspicion or irrelevant and inadmissible material is invalid and unsustainable in law. (b) It is submitted that in working out profit from the business of trading in shares one has to reduce the cost of shares sold from the sale value of the shares and the Appellant has followed the same procedure as may be seen from the Profit and Loss account and profit/loss shown In the Profit and loss account was true and fair without claiming any deduction from investment as erroneously thought by the Id. AO. (c) It may be seen that the Id. A.O. has rejected the explanation of your Appellant simply saying I am not convinced without giving any reason. It is now settled law that where an authority makes an order in exercise of a quasi-judicial function, it must record its reasons in support of the order it makes. Every quasi-judicial order must be supported by reasons. Simply to say I am not conv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t and there is no revenue loss if the assessee company has shown stock-in- trade as investment in the balance sheet of the assessee company. Since, there is no revenue loss, no addition can be made. The A.O. is directed to delete this addition. Appeal on these grounds are allowed. 37. We have considered rival contentions, in view of the detailed finding given by CIT(A) there is no reason to interfere in the order of CIT(A) in so far as without giving any reason the AO has made addition on account of conversion of shares held as stock in trade into investments account as at the end of the year. AY: 2003-04: 38. In the Assessment Year 2003-04 assessee is aggrieved for disallowance of long term capital loss of ₹ 1,44,82,907/-, treating short term capital loss of ₹ 7,44,17,697/- the same as not pertaining to AY 2003-04. By the impugned order of CIT(A) confirmed the action of AO against which assessee is in further appeal before us. We have considered rival contentions and found that assessee has claimed short term and long term capital loss of ₹ 87285686/ -. The AO found that all the investments are sold by passing a journal entry through debit note on 31 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pect. In the course of assessment proceedings the assessee had submitted quotation of the stock prices in support thereof. In view of these facts of the case the conclusion of the Id. AO is base on unsubstantiated information. 42. With regard to the allegation of the AO that no consideration has changed the hands and the shares were transferred through Journal entries, in most of the transactions, consideration was received by cheque before the end of the previous year as is clear from the copy of account of the buyer parties and statement showing details of shares sold. Further there is no requirement under any law relating to sale of goods or even of immovable property that the purchase consideration has necessarily got to be paid immediately in cash. On the other hand, if the vendor is treated as a creditor of the purchaser and corresponding debit and credit entries are made in their respective book that would sufficiently serve the purpose of payment of consideration money for the same. According to section 43(2), paid includes amounts incurred according to the method upon the basis of which profits or gains are computed. Admittedly, the assessee follows mercantile system ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pital losses and thence there is no reason to form an opinion that the transactions were fabricated to book loss in A.Y. 2003-04 since no benefits have arisen to the assessee out of these transactions. In fact transactions of sales were made during the previous year in the ordinary course of business and the same are supported by valid and legitimate materials and as such there is no reason and basis in taking a different view without establishing the same. The guess work and suspicion, howsoever it may be strong, have no role to play in assessment proceedings. 45. In view of the above we can conclude that assessee had furnished sufficient materials before the AO and as such prima facie onus was discharged to prove the genuineness of the acquisition and sale of shares. 46. Accordingly ground taken by the assessee with regard to its claim of Long term and Short term capital losses is allowed in its favour. A.Y. 2003-04 47. In the AY 2003-04 revenue is aggrieved for disallowance of interest. In view of our finding given in the A.Y. 2001-02, we confirm the action of CIT(A) for deleting the disallowance of interest. Revenue is also aggrieved for deleting commission incom ..... 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