Disallowance stating hedging transactions in non-cleared securities as illegal is unsustainable

Atul C. Vyas Vs ACIT (ITAT Mumbai)

ITAT Mumbai held that disallowance alleging that the hedging transactions in ‘non-cleared securities’ are illegal are unsustainable in law

Facts- During the course of survey, certain share certificates registered in the name of the assessee were found. The value of those shares was ₹ 86,300/-. Hence the assessee was asked to explain the sources for making the above said investments. It was submitted that these share certificates do not belong to the assessee and they actually belonged to the customers of the Share broker. It was explained that, as per practice followed by the broker’s office, the physical share certificates purchased by the jobbers would be registered in the name of employees till the record date. In effect, it was explained that the assessee is holding the share certificates on behalf of the jobbers/sub-brokers (customers of employers). AO did not accept above said explanations of the assessee. Accordingly, he took the view that shares belong to the assessee only and accordingly assessed the amount of Rs.86,300/- as income of the assessee. The learned CIT(A) also confirmed the same.

Futher, the assessee had purchased 16,200 shares of MLIL during September, 1991 and October 1991 on delivery basis. Subsequently, the assessee sold 5100 shares on 14.02.1992. Assessee has sold 2900 shares by way of hedging transactions. The hedging contract was closed by purchasing 1700 shares. The assessee claimed that the closing of hedging transaction by purchasing shares had resulted in a loss and the same was claimed in next AY and in the next year also loss was claimed in the same manner. But the AO did not accept the claim of hedging transactions.

Conclusion- We notice that the assessee has explained the trade practice and has also furnished materials to prove the trade practice, as per which, the impugned shares do not belong to him and he was holding them on behalf of others. Hence we are of the view that the above said explanations, in the facts and circumstances of the case, may be accepted. Further, when an asset is not belonging to the assessee, the question of assessing the same u/s 69 of the Act does not arise. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and direct the AO to delete the addition of Rs.86,300/- relating to unexplained investment in shares.

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