Purchase and sale of shares outside the floor of Stock Exchange is not an unlawful activity. Off-market transactions are not illegal. It is always possible for the parties to enter into transactions even without the help of brokers.
When the transactions were off-market transactions, there is no relevance in seeking details of share transactions from Stock Exchanges. Such attempts would be futile. Stock Exchanges cannot give details of transactions entered into between the parties outside their floor. Therefore, the reliance placed by the assessing authority on the communications received from the Stock Exchanges that the particulars of share transactions entered into by the assessee were not available in their records, is out of place. There is no evidential value for such reliance placed by the assessing authority.
Analysis of the ITAT Ahmedabad order in the case of ACIT vs. Vineet Sureshchandra Agarwal
Issue under Consideration
The ld. CIT(A) has erred in law and on facts in deleting the addition made u/s 68 of the Act by the AO on account of credits of Rs.94,49,384/- as LTCG and Rs.19,76,810/- as STCG, even though the share transactions were not recorded in the name of assessee on the floor of stock exchange and transactions were proved bogus.
Brief Facts and Decision of ITAT
In the return of income, the assessee qua the sale of shares of Prranet Indu declared income from Short Term Capital Gain of Rs.32,94,684/- and Long Term Capital Gain of Rs.94,49,383/- on sales of shares of Telent Infoways Limited. In respect thereof, assessee furnished the relevant details and bills issued by M/s. Goldstar Finvest Pvt. Ltd. [GFPL for short] (for purchase) and by M/s. Mahasagar Securities Pvt. Ltd. [MSPL for short] (for sales). The bills reflected that:-
(i) The broker Goldstar Finvest Pvt. Ltd. was was mentioned as “dealer of Inter-connected Stock Exchange of India Limited (ISE)/ Sub-broker of National Stock Exchange India Limited member – ISE Securities and Services Limited, SEBI Reg. no.INB230932431/23-10777.
(ii) While M/s. Mahasagar Securities Pvt. Ltd. was mentioned as “dealer of Inter-connected Stock Exchange of India Limited / Sub-broker of National Stock Exchange India Limited member – ISE Securities and Services Limited, SEBI Reg. no.INB230683331/23-10777.
4.1 Ld. AO sent letters u/s 133(6) in response thereto the NSE furnished a reply dated 22.11.2011 revealing that:
(i) M/s. Goldstar Finvest Pvt Ltd was registered with it as a sub-broker; however, ISE replied that it was a registered trading member but expelled and a sub-broker still registered but expelled.
(ii) M/s. Mahasagar Securities Pvt Ltd was found as a member from database. ISE replied that it was not registered with it.
The ld. Assessing Officer again issued letters u/s 133(6) of the I.T. Act to the NSE, BSE & ISE to verify the share transactions in the assessee name during the year. In reply, ISE stated that “as per our record no trades were executed on our exchange in the name of Vineet S. Agarwal during F. Y. 2004-05.” NSE stated that “based on the PAN provided in your letter, record having matching pattern with data uploaded by trading members to the exchange as on date for the client Vineet S. Agarwal (PAN: AAZPA 8396 C) for the capital market segment are being enclosed as annexure -A. Kindly note that as per the records available with exchange, no trade were found to be executed for the combination of member and client code for the period 01 April 2003 to 31 March 2004 in the capital market segment hence not furnished.”
Ld. AO observed that as per BSE assessee has sold only 30,000 shares of Prraneta Industries while he is claiming that, he has sold 50,000 shares during the concerned F.Y. It was further observed that a search was carried out on a group of concerns viz Mahasagar Securities Pvt Ltd (MSPL), Shri Mukesh Choksi and M/s. Goldstar Finvest Pvt Ltd which were allegedly providing accommodation entries and the assessee was found to be one of the beneficiaries. The assessee was asked to clarify as to why the sale proceedings of the shares should not be treated as unexplained cash credit u/s 68 of the Act. The relevant reply of the assessee dated 05.12.2011 reads as under:-
“4) Coming to the exact transaction, it is respectfully submitted that for the assessment year 2005-06 vide letter dated 20/09/2011,1 have filed the statement of details of purchases as well as details of sales relating to 2,00,000 snares of Talent Infoway Limited I have also submitted copies of purchase memo, contract note relating to purchases. Accordingly, the entire purchases are through Goldstar Fininvest (P) Ltd. I have also furnished the details relating to the sale of 2,00,000 shares to Talent Infoway Limited which has been sold through Mahasagar Securities Pvt. Ltd. vide bills dated 2 0/8/2004, 24/08/2004, 0 1/09/2004, 0 8/0 9/2004 and 09/09/2004. The copies of invoices, contract note, etc. has already been submitted and these copies and contract note includes complete details showing order number, trade number, trade time, quantity, sale rate, brokerage, net rate and amount. The entire amount has been received by Account Payee cheque and from Mahasagar Securities Pvt. Ltd. The transaction has taken place in the normal course of the business and I have nothing to do with the search carried out in the case of Mahasagar Securities Pvt. Ltd. as the reasons mentioned for reopening of the assessment that the group was found to be engaged in fraudulent billing activities. Please note that the said invoice as well as contract note includes the complete details such as quantity, rate, order number, trade number, trade time, sale rate, brokerage, net rate and amount with respect of each sale, etc.
5) Accordingly, the entire purchase as well as sale relating to 2,00,000 shares of Talent Infoway Limited is genuine. The sale transaction has taken place through Mahasagar Securities Pvt. Ltd. the copy of memo, has already been submitted by me, the payment has been received by me through Account Payee cheque from Mahasagar Securities Pvt. Ltd. and why the said transaction is not reported in ISE/BSE/NSE cannot be commented by me. As per the contract note given to me the transaction has taken place in bolt and therefore, I have no reasons of not being reported. Therefore, so far as the gain which has been shown by me is concerned, the same is genuine, correct, supported by documentary evidence and if something is wrong, it may be either due to incorrect inquiry or may be in the hands of Mahasagar Securities Pvt. Ltd.
6) Moreover, the entire 2,00,000 shares of Talent Infoway Limited were held by me in demat account and I am submitting herewith the transaction statement issued by Shah Investor’s Home Ltd. in my name wherein the shares of Talent Infoway Limited has been dematerialized, the receipt is also enclosed along with the demat statement, from the perusal of which, your Honour will find that on 09/08/2 004 the shares have been dematerialized. Accordingly, the shares have been sold after being dematerialized.
7) Therefore, in view of above facts, submissions and evidences already submitted as well as enclosed herewith, the entire gain on sale of shares is genuine, the same has taken place in the normal course of business. There may be something wrong in the hands of Mahasagar Securities Ltd. but so far as 1 am concerned, these shares were held by me, the same has beensold in the open market. The transaction has taken place and therefore, the gain on the same has rightly been shown as capital gain.
8) Under the circumstances, your Honour’s proposed action requires to be dropped.”
4.2 The ld. Assessing Officer, however, disallowed the claim of Long Term Capital Gains qua share transactions and the impugned addition u/s 68 of the Act was made as income from other sources by following observations:-
“After carefully perusal upon the reply of the assessee it is not tenable because the assessee has submitted the copy of bills from M/s. Goldstar Finvest Pvt. Ltd. and from M/s. Mahasagar Securities Pvt. Ltd. :
