TMI Blog2021 (3) TMI 511X X X X Extracts X X X X X X X X Extracts X X X X ..... re from PFMS before handing over of the physical shares to them at the market price prevailing on the date of sale i.e., ₹ 48.10 per share. Since there is a loss incurred by the assessee in these transactions, the learned Commissioner (Appeals) doubts the whole transaction merely because there is a loss. Otherwise in case the transaction was carried out with any third party, the doubt would not have arisen. In our considered view, merely because the assessee has taken advances from its sister concern to settle purchase consideration, it does not make the transaction a bogus transaction. Speculative transaction or not - As per the definition of speculation transaction which means a transaction in which a contract for the purchase or sale of any commodity including stocks and shares is periodically or ultimately settled otherwise than by actual delivery or transfer of the commodity or scrips. From the above definition, it is clear that the transaction can be considered as speculative only when the transaction is settled otherwise than by actual delivery. In the given case both purchase and sale transactions were carried out with actual delivery of shares on the specific ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n genuine. 3. Brief facts of the case are, the assessee filed its return of income on 11th July 2002, declaring loss of ₹ 36,46,004. The return of income was processed under section 143(1) of the Income Tax Act, 1961 (for short the Act ) and the same was selected for scrutiny and the statutory notices under section 143(2) and 142(1) of the Act were issued and served on the assessee. In response, the learned Authorised Representative of the assessee attended and filed the relevant information as called for by the Assessing Officer. During the assessment proceedings, the Assessing Officer observed that the assessee has declared gross total income (loss) at ₹ 36,46,004. 4. The Assessing Officer sought explanation on the applicability of the Explanation to section 73 of the Act to the loss from shares and securities incurred by the assessee. In response, the assessee filed the following submissions: At the outset, it would be worth the while to refer to the composition of income of our abovenamed clients. Business income Loss in share trading ₹ ₹ (3,07, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dered in computing the gross total income. Reliance is placed on the ratio of the Supreme Court in the following cases CIT v Kantilal Nathuchand Sami 63 ITR 318 (SC) CIT v Jagannath Mahadeo Prasad 71 ITR 296 (SC) In view of the above, Explanation to sec. 73 is not applicable to the facts of the case of our above named clients. 5. After considering the submissions of the assessee, the Assessing Officer rejected the contention of the assessee by observing as under: 2.3: The income side of the P L A/c of the assessee company shows income from shares and securities at ₹ 3,07,40,000. However, this income is negative income. It is by now well settled that the words income or profits and gains should be understood as including losses also so that in one sense profits and gains represent positive income whereas losses represent negative income . In other words, loss is negative profit . Both positive and negative profits are of revenue character. Both must enter into computation, wherever it becomes material, in the same mode of the taxable income of the assessee. Reference in this context, may be made to the decision of the Supreme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Appeals) 5, Mumbai, adjudicated the issues after giving opportunity to the assessee. Before the learned Commissioner (Appeals), the assessee filed similar submissions what was made before the Assessing Officer and in response to the further queries raised by the learned Commissioner (Appeals) the assessee filed further submissions dated 15th March 2004. For the sake of clarity, it is reproduced below: Submissions dated 15.3.2003: (a) In this connection, at the outset, we would like to point out to you that you have not given any reasons for treating the impugned transactions as bogus. In any view of the matter, we submit that the transactions of purchase and sale of shares of Landmark are not bogus as they have been executed by our above named clients in the course of business and all ingredients required for a valid contract are present in the said transaction. There is a purchase (debit note of classic credit ltd.) delivery of shares received (distinctive numbers with delivery letter filed) and payment for the purchase. Similarly, there is a sale (debit note of Panther Industrial Products Ltd.,) delivery of the same shares given and payment receive. We have filed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... u that the shares under reference having been sold by our clients to classic credit Ltd(CCL), our clients have given the delivery of the shares with the transfer deeds, being market delivery and valid for 1 year, and hence, not in possession. CCL in turn pledged the shares with Vidyut Investments Ltd. and the shares, after demat are, as of today, still lying in their demat account. As such the transfer deeds would have been used by the transferee, Vidyut in this case, to get the shares transferred in their name and after transfer being effected the deeds are retained by the company whose shares are under transfer namely, Landmark Leisure. As such our clients would not be in a position to furnish the transfer deed for verification and / or records. Further, in connection with the sale of shares by our above named clients to Panther Fincap Management Services LtcL(PFMS), you have observed that the consideration has been received by our clients in advance. We confirm that the amounts have been received in advance and are in proximity to the date of sale, these are payments in advance by the buyer, that is PFMS; Further, as required by you, please find enclosed the followin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Thus, loss of ₹ 312,90,000/- was incurred by the assessee on purchase and sale of three lack shares of Landmark Leisure(LL) purchased at a cost of ₹ 4,57,20,000/- and sold to sister concern Panther Finvest Management Services(PFMS) at ₹ 1,44,30,000/-. The assessee is a Ketan Parekh Group Company. The background of the transaction is that M/s Classic Credit Ltd(CCL) another Ketan Parikh Group company purchased 14,50,000 shares of Landmark Leisure on 27,01.2000 for ₹ 7,27,90,000/- (at ₹ 50.20 per share) from Pratik Investment, Pune. 6.1 Admittedly, these shares were not transferred in the name of M/s CCL. Subsequently, M/s CCL is stated to have sold three lacs shares to the Assessee company on 26.6.2000 vide debit note no. CCL/2606/200001 dated 26.6.2000 at a cost of ₹ 4,57,20,000/- i.e. ₹ 152.40 per share, This transaction was done outside the stock exchange. No payment was made by the assessee company to M/s CCL for purchases of shares. It was stated that the assessee was having a running account with M/s CCL and the amount of ₹ 4,57,20,000/- towards purchase of shares was credited to .CL's account in assessee's b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d sale of shares were effected and payments were made and received by book entries. Therefore, there were no copies of transfer deeds available with the assessee and no cheque payment was either made for the purchase of shares from Classic Credit Ltd. no payments received for the sale of shares from PFMS Ltd. Accordingly, the learned Commissioner (Appeals) treated the purchase and sale of 3,00,000 shares of Landmark Leisure Ltd. as sham transaction and bogus share transaction and accordingly he came to the conclusion that it should be disallowed and rejected. 10. Further, he analysed the claim of loss as speculation loss by the Assessing Officer and affirmed by the learned Commissioner (Appeals) II, Mumbai, as an alternative issue. Accordingly, he analyzed the issue and came to the following conclusion: Prima facie it would appear that none of the two limbs of explanation to sub section 73(4) of the IT Act, 1961 which exclude the applicability of the explanation to companies, do not apply to the facts of the case4 and hence prima facie, provisions of explanation to sub section 73(4) of the IT Act 1961 are applicable to the assessee s case. Even though it has been held t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ook). Further he submitted that the shares of Landmark Leisure have been sold on 28th December, 2000 to Panther Fincap Management Services Ltd, he brought to our notice Assessee-company's debit note no PIPIJ28 12/2000-01 dated 28.12.2000 (page no 34 of the paper book). 11.3 He submitted that the payment has been effected by Panther Fincap Management Services Ltd to the Assessee-company on 4th December, 2000 (₹ 75 lacs) and 21 December, 2000 (₹ 100 lacs). He brought to our notice page nos 35 and 36 of the paper book and submitted there was no broker involved to effect both the aforesaid transactions and the seller-company (Classic Credit) and the buyer-company (Panther Fincap) are associates of the Assessee-company. 11.4 He further submitted that the transactions of purchase and sale of shares of Landmark Leisure are not bogus as they have been executed by the Assessee in the course of carrying on business and all ingredients required for a valid contract are present in the said transaction. There is a purchase contract (debit note of Classic Credit Ltd), delivery of shares received of the shares purchased (distinctive numbers with delivery letter fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nterest on securities , Income from house properly , Capital gains and Income from other sources , or a company the principal business of which is the business of banking or the granting of loans and advances) consists in the purchase and sale of shares of other companies, such company shall, for the purposes of this section, be deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sale of such shares . 13.1 Further be brought to our notice page no 21 of the paper book to highlight the loss incurred by the assessee and he brought to our notice the composition of the current assets at page no 6 of the paper book, which is reproduced below: Particulars 31st March 2000 31st March 2001 Investments ₹ 8,48,000 ₹ 2,72,56,000 Stock in trade (shares) ₹ 3,46,538 Total: ₹ 11,94,538 ₹ 2,72,56,000 Loans and advances S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... res of Landmark Leisure Ltd. from Classic Credit Ltd. on 26th June 2000 at the cost of ₹ 4,57,20,000 by taking physical delivery of shares. However, this amount was settled by PFMS which is a sister concern of the assessee, which is evident from the ledger copy of CCL (refer order of CIT(A)). On 28th December 2000, the assessee has sold the same shares to PFMS. The assessee has handed over the delivery of shares to PFMS. The assessee has accepted delivery of shares from CCL after settlement of fund by PFMS. The assessee has filed a copy of the letter in support of the receipt of physical delivery and similarly the assessee has handed over the physical copies of shares to PFMS at the time of sale, the proof is also placed on record at Page 34 to 37 of the paper book. 17. With this background, we noticed that the learned Commissioner (Appeals) observed in his order that the assessee has purchased shares from its sister concern CCL and the same was settled by PFMS on behalf of the assessee. Further he observed that CCL has raised a debit note to the assessee. For reaching his conclusion, he analyzed the ledger copy of the assessee in the books of CCL in which it is narrate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 16 09/11/2000 ON A/C. 2500000 7500000.00 000003 1408 13/11/2000 ON A/C CMO NC.062071 100000000.00 925000000.00 CCL/03/01 30/03/2000 BILL AMOUNT 63800000 28700000.00 PIPL/3103 31/03/2001 SAME A/C 28700000 T O T A L S : 162683250.00 165883230.00 18. After careful consideration of the above ledger, we observe that on 26th June 2000, PFMS has made a payment to CCL of ₹ 4,57,20,000 (the narration clearly indicates that PD TO CCL FOR PFMS ) which means PFMS paid the above amount on behalf of assessee and further following that payment, bill amount for transfer of shares were recorded. Subsequently, on 27th October 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a loss incurred by the assessee in these transactions, the learned Commissioner (Appeals) doubts the whole transaction merely because there is a loss. Otherwise in case the transaction was carried out with any third party, the doubt would not have arisen. In our considered view, merely because the assessee has taken advances from its sister concern to settle purchase consideration, it does not make the transaction a bogus transaction. 19. Coming to the next argument whether these transactions will fall under speculative transaction or not. We notice from the record that the assessee has taken delivery of shares on the date of purchase and similarly the assessee has made the physical delivery of shares to PFMS. Therefore, as per the definition of speculation transaction which means a transaction in which a contract for the purchase or sale of any commodity including stocks and shares is periodically or ultimately settled otherwise than by actual delivery or transfer of the commodity or scrips. From the above definition, it is clear that the transaction can be considered as speculative only when the transaction is settled otherwise than by actual delivery. In the given case bo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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