ITAT HYDERABAD BENCH ‘A’
Ninestar Enterprises (P.) Ltd.
Versus
Assistant Commissioner of Income-tax, Circle-16(1)
IT APPEAL NO. 1054 (HYD.) OF 2011
[ASSESSMENT YEAR 2006-07]
DECEMBER 31, 2012
ORDER
Chandra Poojari, Accountant Member
This appeal by the assessee is directed against the order of the CIT-IV, Hyderabad dated 28.3.2011 for assessment year 2006-07.
2. The assessee raised the following grounds of appeal:
1. The Revision order of learned Commissioner of Income Tax is contrary to law and the facts.
2. The ld. CIT erred in setting aside the assessment order u/s. 143(3) of the Act with a direction to re do the assessment.
3. The appellant contends that Revision order since is based on surmises, suspicion and guess work and for causing enquires which did not render the assessment order erroneous and prejudicial to the interest of revenue.
4. The ld. CIT grossly erred in setting aside the assessment order on presumptions and guess work that the appellant has not furnished the information in the assessment proceedings.
5. The ld. CIT further erred in holding that no questionnaire was issued by assessing officer calling for the details of dates of acquisition of shares.
6. The ld. CIT erred in holding that the assessing officer omitted to examine the dates of acquisition of shares held by the appellant, while the shares were held by the appellant for more than a year, which is evident from the details filed on record.
7. The ld. CIT is not correct in holding that the assessing officer confirmed that No Demat Account had been filed by the assessee company and that the assessment was completed under scrutiny without bringing on record evidence of date of acquisition of shares.
8. The ld. CIT further is not correct in holding that exemption of capital gains was granted to the appellant u/s 10(38) of the act, without the information of date of acquisition of shares.
9. The ld. CIT failed to note that assessing officer allowed exemption based on the evidence of Demat account date of acquisition of shares and particulars of sale transaction of shares under securities transaction tax (STT).
10. The ld. CIT is not correct in holding that no evidence for receipt of dividends to claim exemption u/s. 10(34) of Act was filed by the appellant. Appellant contends that exemption was allowed on verification of evidence.
11. The ld. CIT further erred in dealing on issues in the Revision order which were not raised in the show cause notice dt 04-02-2011. Revision proceedings therefore are bad in law.
12. The ld. CIT erred in holding that the appellant purchased 56,400 shares not disclosed to the Income Tax Department and directing the assessing officer to assesses its value Rs. 1,10,48,210 to tax as undisclosed investment against long term capital gains claimed exempt on sale of above shares.
13. The ld. CIT failed to note that the above shares are Bonus shares received by the appellant at nil cost on the basis of original shares held in the year 2000 which did not constitute income for assessment.
14. The ld. CIT further erred in holding that the interest income of Rs 11,89,745 is “Income from other sources” while the same constitute business income and was being assessed as such.
15. The ld. CIT further erred in holding that expenditure relating to dividends income should not have been allowed u/s. 14A of the Act, while the same was allowed in accordance with law.
16. The ld. CIT grossly erred in holding that the assessing officer made the assessment without application of mind and omitted to examine the material in the assessment proceedings.
17. The ld. CIT erred in directing the assessing officer to recompute capital gains on wrong assumptions of the facts.
18. The ld. CIT erred in holding that the assessment order passed u/s. 143(3) is erroneous and prejudicial to the Interest of the Revenue relying upon the decision of Delhi High Court (99 ITR 375), ignoring catena of judgments of several High Courts and Supreme Court that Revision order based on presumption and guess works, suspicion and surmises bad in law.
19. For these and other grounds argued at the time of hearing, the appellant prays Revision order u/s. 263 of the Act being bad in law requires to be vacated and cancelled.
3. Brief facts of the case are that the assessee had filed return of Income for the asst. year 2006-07 on 25.11.2006 declaring total income of Rs 17,36,424/-. The Dy. Commissioner of Income Tax, Circle-16(1), Hyderabad had completed the assessment u/s 143(3) on 30.09.2008 assessing the total income at Rs. 21,01,889/-.
4. After examining the assessment records for A.Y. 2006-07, the CIT assumed the jurisdiction u/s. 263 of the I.T. Act. 1961, he had issued a notice, setting out the grounds of error and prejudice and calling upon the assessee to show cause as to why the assessment should not be revised or set aside. The grounds of proposed revision were as under.
(i) The assessee had claimed exemption u/s. 10(38) of the I.T Act in respect of Long Term Capital Gains of Rs. 2,41,99,132 on transfer of equity shares of companies and units of equity oriented mutual funds. The Assessing Officer had omitted to examine the dates of acquisition of these shares and units. No questionnaire was issued by Assessing Officer calling for the details of dates of acquisition. There is no order-sheet entry or other correspondence available on record indicating that the dates of acquisition of shares and units were examined or considered.
(ii) Demat accounts for the years in which shares and units were acquired and also for the financial year 2005-06 were neither called for nor furnished by the assessee. The Assessing Officer has confirmed that no such Demat accounts had been filed by the assessee, that he had completed the scrutiny assessment without bringing on record any evidence regarding dates of acquisition of equity shares etc. The ITO (Hqrs) has examined each of the pages in assessment folder but no Demat account for the material period was found. In other words, the assessment was completed granting exemption without examining material evidence on material points desiderated for granting such exemption. Dates of acquisition are necessary information for deciding whether a particular share/equity sale transaction is long term or short term.
(iii) No evidence for receipt of dividends such as dividend warrants for claim of exemption u/s 10(34) was called for by Assessing Officer or filed by the assessee.
(iv) Interest income of Rs 11,89,745/- should have been brought to tax under the head Income from other sources. But the Assessing Officer, against this income, allowed deduction of expenditure relating to incomes which were claimed and granted as exempt, thereby ignoring the provision of section 14A of the I.T. Act, 1961.
(v) The Assessing Officer had omitted to examine these material points and allowed the assessee’s claims without application of mind.
5. In response to notices, the assessee’s AR appeared from time to time and made written submissions before the CIT. After going through the relevant records as well as the submissions made by the assessee, the CIT observed as follows:
(i) The first issue is regarding the assessee’s claim of exemption u/s 10(38) of the Income Tax Act, 1961 in respect of Long Term Capital Gains of Rs. 2,41,99,132/- on transfer of equity shares/units of equity oriented mutual funds. In the course of the proceeding before the CIT, the assessee submitted the relevant details and copies of some of the relevant documents. Examining such details and documents, the CIT noted that the assessee’s claim of Long Term Capital gains i.e., Rs. 2.41 Crores included (erroneously) Short Term Capital gains in respect of sale of bonus shares of IPCA Laboratories Limited. During the assessment year under consideration, the assessee happened to sell 800 bonus shares of IPCA Laboratories Limited on 26.08.2005. The 800 bonus shares were sold in two lots i.e., 20 bonus shares were sold as a part of the lot of 820 shares on 26.08.2005. The rest of the bonus shares i.e., 780 were sold on the same day i.e., 26.08.2005 for the consideration of Rs. 3,48,872/- (the cost acquisition being nil). The sale consideration in respect of 20 bonus shares works out to Rs 8,945.43 (cost of acquisition being nil). Hence, the total sale consideration in respect of 800 bonus shares works out to Rs. 3,57,817/- [Rs. 3,48,872 + 8,945]. The record date mentioned in this letter is 31.01.2005. The date of credit of bonus shares to the Demat A/c of the assessee has been stated as 01.03.05. The date of sale of the bonus shares is admittedly 26.08.05. Hence, the duration of holding of bonus shares is evidently less than one year i.e., the minimum period necessary for characterizing the transaction as ‘Long Term Capital Gain’. Hence, the amount of Rs. 3,57,817/- is evidently ‘Short Term Capital Gains’. But the assessee has erroneously included it in the Long Term Capital gains exemption of claim of Rs. 2.41 crores. The authorized representative has conceded this point vide order-sheet noting dated 07.03.2011. Hence, the Assessing Officer is directed to bring the said amount of Rs. 3,57,817/- to tax.
(ii) Another equity transaction of the assessee which was taken up for in-depth enquiry and examination pertains to Visual Soft Technologies Limited. Along with the return filed for the asst. year 2006-07, the assessee had enclosed Annual Report for the period 2005-06 which, inter alia, contained schedule relating to investments. Under the head “Long Term – Non-Trade”, the assessee had given particulars of number of shares/bonds/units as at 31.03.2005 and as at 31.03.2006. In this schedule the total number of equity shares of Visual Soft Technologies Limited has been stated as 73,107 as at 31.03.2005 and 13,107 as at 31.03,2006 i.e., at the end of the relevant previous year under consideration. It can be seen from this document that against the equity of Visual Soft Technologies Limited, there is absolutely no indication nor mention of any bonus shares whereas there are clear mentions of bonus shares in respect of Tata Infotec Limited, Tata Iron & Steel company, Unichem Laboratories Limited, Wockhardt Limited and all on the same page along with Visual Soft Technologies Limited. Thus, during the asst year under consideration, the assessee claimed to have sold 60,000 shares of Visual Soft Technologies Limited for a total consideration of Rs. 1,17,53.414/-. The assessee claimed the entire 60,000 shares of Visual Soft Technologies Limited as bonus shares and hence claimed that the cost of acquisition was ‘Nil’. It claimed exemption of entire capital gains of Rs. 1.17 crores u/s 10(38) of the Income Tax Act. In the course of proceeding before CIT, the assessee was called upon to produce evidence in support of its claim i.e., 60,000 shares were bonus shares. The assessee submitted the bonus shares allotment letter dated 20.09.2000 issued by Visual Soft Technologies Limited. In this letter, the record date has been stated as 25.08.2000. On the said record date, the number of shares held by the assessee has been stated as 8,209. As per the decision of the Board of Directors, two bonus shares for everyone share held in the company was the entitlement of a shareholder. Hence, the said letter evidences that the total number of bonus shares credited to the account of the assessee were stated as 16,418 (8,209 × 2). In other words, on record date i.e., 25.08.2000, the assessee had 8,209 shares as per the records of the said company i.e., Visual Soft Technologies Limited. Hence, it was allotted 16,418 bonus shares by the letter dated 20.09.2000. As the assessee’s claim was 72,818 bonus shares it was called upon to produce evidence of bonus shares allotment letter in respect of rest of the bonus shares i.e., 56.400. Despite several opportunities given to the assessee by the CIT, the assessee could not produce evidence of bonus allotment letter from Visual Soft Technologies Limited in respect of alleged 56,400 bonus shares i.e., in addition to allotment letter. The authorized representative submitted that the relevant evidence has been lost. In this context, the past assessment records, going back to the asst. year 2001-02, were called for and examined with regard to the Visual Soft Technologies Limited equity. There is no dispute that the year of allotment of bonus shares of Visual Soft Technologies Limited was financial year 2000-01 relevant to the asst. year 2001-02. As on 01.04.2000 the assessee was in possession of 50,100 shares of Visual Soft Technologies Limited, valued by the assessee at Rs. 70,27,453/-. Admittedly, there were absolutely no bonus shares in these 50,100 shares as on 01.04.2000. Along with the return filed by the assessee for the A.Y. 2001-02 on 31.10.2001, the assessee had enclosed ‘Annexure-II’ containing particulars of Long Term Capital gains which, inter alia, recorded sales of shares of Visual Soft Technologies Limited. As per this document, the total long term capital gains have been shown at Rs. 9,66,37,083/- which includes sale of 10,866 shares of Visual Soft Technologies Limited in the period from 1st April 2000 to 24.08.2000. There were no sales of shares by the assessee of Visual Soft Technologies Limited after 24.08.2000, in the Financial Year 2000-01 i.e., as per the assessment record of the assessee. But, in the course of the scrutiny assessment proceedings relating to the A.Y. 2001-02, the assessee, once again, submitted particulars of long term capital gains showing the long term capital gains as the same figure i.e., Rs. 9,66,37,083/- (one rupee difference). But, in the second set the total number of shares of Visual Soft Technologies Limited sold during the same period i.e., 01.04.2000 to 24.08.2000 has been claimed at the higher figure i.e., 11,791 as against the earlier claim of 10,866 shares. The total number of Visual Soft Technologies Limited shares in the possession of the assessee as at 31.03.2001 has been shown as 1,11,127 valued by the assessee at Rs. 66,09,317/-and out of the said 1,11,127 the assessee had claimed 72,818 as bonus shares. If one calculates back as per the assessee’s claim of 72,818 bonus shares, one will get the following results:
a. In order to get 72,818 bonus shares, the assessee must have had 36,409 shares on the record date i.e., 25.08.2000. Undisputedly, the assessee was having 50100 shares on 01.04.2000 and in the period from 01.04.2000 to 24.08.2000, the assessee had admittedly sold 11,791 shares. Thus, going by the assessee’s version, as on record date i.e., 25.08.2000, the assessee would be in possession of 38,309 shares of Visual Soft Technologies Limited (50,100 – 11,791). In that case the assessee should get twice that number of bonus shares i.e., 38,309 x 2 = 76,618. Hence, as on 31.03.2001 the assessee should be having closing stock of Rs. 1,14,927 (76,618 + 38,309) i.e., as against the assessee’s figure of Rs. 1,11,127. If one takes the sale of Visual Soft Technologies Limited shares in the period from 01.04.2000 to 24.08.2000 at 10,866 the closing stock would still be higher.
6. The CIT observed that thus, going by the assessee’s version, there is clear evidence of unacceptable discrepancy. This discrepancy becomes serious when viewed in conjunction with the bonus shares allotment letter of Visual Soft Technologies Limited which had allotted only 16,418 bonus shares. The serious discrepancies were communicated to the assessee vide his letter dated 18.03.2011. The assessee AR miserably failed to furnish any rational, convincing and acceptable explanation. The contentions canvassed by the assessee are only two – viz.,
(i) that the figure of bonus shares in the assessees Demat Account maintained with Karvy are 16.418 + 56.400. A letter was addressed to Karvy Stock Broking limited Hyderabad calling for relevant information u/s 133(6) of the I.T Act i.e.: relating to Visual Soft Technologies Limited in the case of the assessee. The reply received from Karvy reiterated the assessee’s version without throwing illuminating light on the evident discrepancy. In the course of the proceeding before the CIT, the Sr. Manager Sri V Seetharam was summoned u/s 131 of the IT Act. He appeared and narrated the version of the assessee orally. A question was put to Sri V Seetharam as to how the entire alleged bonus shares i.e., 72,818 could be credited in the Karvy Demat A/c when the balance in the said Demat A/c with Karvy as on 14.08.2000 is only 8,209 shares of Visual Soft Technologies Limited. Sri V Seetharam admitted that since the balance of shares of Visual Soft Technologies Limited in the Demat A/c of the assessee as on 14.08 2000 was only 8,209, in normal circumstances, the appropriate credit of bonus shares would have been only 16.418. However, he orally submitted speculative point that the assessee might be having certain Visual Soft Technologies Limited shares in physical form not known to the company i.e., Visual Soft Technologies Limited. This does not at all inspire belief. The CIT had also visited Karvy premises in Hyderabad in order to see firsthand relevant computer screen shots and collected relevant computer screen shots relating to 16,418 bonus shares. In this, the final remark written is verified relating to the alleged 56,400. In this, there is no such comment as ‘verified’ and the transaction is recorded as ‘closed and settled’. At the time of the CIT visit there was an officer-in-charge, apart from Sri V Seetharam. When asked as to the basis on which the entry regarding the alleged bonus shares of 56.400 has been made in the assessee’s Demat A/c., they could not give any reply other than to insist that the basis must have been given by the company Visual Soft Technologies Limited. A letter was duly addressed to Visual Soft Technologies Limited, Hyderabad (Merged since October. 2006 with Megasoft limited), calling for relevant information u/s 133(6) of the I.T. Act. The authorities of Visual Soft Technologies Limited failed to give any reply. Strangely, the CIT letter to them was sent by them in turn to M/s. Karvy Stock Broking Limited, Hyderabad for furnishing the necessary reply. Thus, despite strenuous efforts made by the CIT to gather the relevant evidence from objective source, no reliable evidence could be found and the assessee and the authorized representative also miserably failed to produce acceptable evidence in support of the alleged bonus shares i.e., 56.400. In the absence of reliable evidence and in view of the bonus shares allotment letter of Visual Soft Technologies limited dated 20th September, 2000 which had allotted only 16,418/- bonus shares, it has to be taken that the assessee had only got bonus shares of 16,418. As against this, the assessee claimed alleged bonus shares of 56,400/-. The only possible rational information in the given facts and circumstances would be that the assessee must have purchased the shares and not disclosed the same to the Department. It is the matter on record that the assessee’s premises had been covered under search operation in 1998-1999
(ii) It is the claim of the assessee that it has sold 60,000 bonus shares during the asst. year under consideration. Out of these 60.000 alleged bonus shares, 56,400 happen to be the alleged bonus shares for which the assessee has no evidence and the only rational inference possible is that these 56,400 shares must have been purchased by the assessee with undisclosed investment. That would leave 3600 genuine bonus shares. At the rate of sale consideration admitted by the assessee, the sale value of 3600 bonus shares would be Rs 7,05,204. The Assessing Officer is directed to treat this amount as genuine claim on Long Term Capital gains and to allow the same as claimed after verifying the STT payment in the original document. The total sale consideration admitted by the assessee is Rs 1,17,53,414/-. After deducting Rs 7,05,204/-. The balance sale consideration will be Rs. 1,10,48,210. This would apparently relate to the alleged bonus shares of 56,400 which are unproved. The market value of Visual Soft Technologies Limited shares peaked in the period May, June, July and August going up to Rs 5,850.04 Ps per share. Hence, in terms of rational probability the assessee would incline to make hay by selling its shareholding i e. 50,100 shares relating to Visual Soft Technologies Limited. But, out of 50,100 shares held as on 01.04.2000 the assessee apparently sold only 11,791 shares, keeping back as many as 38,309 shares. This would be inconceivable. However as on 31 03.2001, the share value had steeply declined to Rs. 223.30 Ps per share. Taking the least possible cost of acquisition during the year 2000-01 i.e., Rs 223.30 Ps the cost of acquisition of 56.400 shares works out to Rs. 1.25,94.120/- This is the least possible cost of acquisition and as the admitted sale consideration is Rs. 1.17 Crores, there ought to have been long term capital loss. But the assessee has disclosed income of Rs. 1,1 0,48,210 relating to these so-called bonus shares i.e., 56,400. Hence, this amount has to be treated as income from ‘Other Sources’. The Assessing Officer is directed to bring this amount of Rs. 1,10,48,210 to tax as ‘income from other sources’, not as income from long term capital gains/loss
7. Regarding the second issue i.e., regarding the exemption claim of the assessee u/s., 10(34) in respect of the dividends, the CIT noted that the original assessment had been completed without examining or enquiring into the evidence relating to the dividend warrants. The Assessing Officer is directed to examine this matter with reference to original dividend warrants and to allow the exemption claim only, if the assessee discharges the burden of establishing its entitlement to the exemption claimed by producing proper evidence.
8. Regarding the third issue i.e., regarding interest income of Rs. 11,89,745/- the CIT observed that there is no dispute that this income falls under the head income from Other Sources’. This ought to have been assessed as income from other sources i.e., the entire amount of Rs. 11,89,745/-. But the Assessing Officer had allowed certain deduction from this income i.e., deduction of expenditure relating to exempt income. Sec 14A of the IT Act does not allow such deduction. Hence, the CIT directed the Assessing Officer to bring to tax the entire amount of Rs. 11,89,745/-as income from ‘Other Sources’
9. The CIT observed that while completing the original assessment, the Assessing Officer had not at all enquired into the issues stated in the show-cause notice. He had mechanically completed the assessment on the erroneous assumption of the correctness of the assessee’s claims of exemptions and deduction. He had not called for the relevant evidence regarding dates of acquisition of shares, nor the relevant Demat A/c. Etc. These serious omissions on his part have rendered the assessment not only erroneous but also prejudicial to the interest of revenue in the light of the decision of the Hon’ble Delhi High Court in the case of Gee Vee Enterprises v. Addl. CIT [1975] 99 ITR 375 as well as in the light of the decision of Hon’ble Supreme Court in the case of Malabar Industrial Co. Ltd. v. CIT [2000] 109 Taxman 66. It is pertinent to extract the relevant portion of the land mark Judgment of Hon’ble Apex Court as under
“An incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous In the same category fall orders passed without applying the principles of natural justice or without application of mind.
