Case Law Details
Brief fact of the case
The assessee filed its return for each assessment year 1997-98, 1998-99 & 1999-2000 separately declaring total income of Rs.105518/-, Rs.59070 & Rs.70120/- respectively after claiming huge loss of Rs.46482500/-, Rs.53623950/- and Rs.61686500/- respectively which was said to have incurred on account of sale and purchase of shares of certain companies and diminution in the value of shares held as stock-in-trade by the assessee. Assessing officer, however, each year disallowed the said loss and assessed the income of the assessee as Rs.87220744/-, Rs.110681611/- and Rs.170495139/- for A.Y. 1997-98, 1998-99 and 1999-2000 respectively. The appeal preferred by the assessee was dismissed by the CIT(A) which was further appealed before the Tribunal. The Tribunal deleted most of the additions made by the AO but in so far as the losses claimed by the assessee, in relation to the shares of the companies, the tribunal remanded the matter to the AO to consider it afresh with a direction to consider the confirmation memos/contract notes, bills, letters confirming registration of shares etc relied upon by the assessee. Pursuant to the direction and order of the tribunal, the AO considered the question with regard to the loss on account of shares claimed by the assessee in various years and disallowed the same. The assessee further filed appeals against the assessment orders framed with respect to the assessment years 1997-98 to 1999-00. The CIT(A) accepted the contract notes and other documents produced by the assessee as evidence of the genuineness of the transactions of sale and purchase of shares as well as reduction in their value at the end of the relevant year and allowed the aforesaid appeals. The Revenue on an appeal before Tribunal urged that the loss claimed by the assessee on account of sale and purchase of shares and diminution in their value could not be set off from business income in view of Section 73 of the Act. The tribunal, after taking into account the material placed on record, was of the view that as the shares were held in stock in trade, the same could be valued at cost or market price, whichever is lower, and a loss on account of diminution in value of the stocks could be set off by the assessee against its other income. The contention of the revenue that loss could not be set off against income by virtue of section 73 was rejected holding that as the said contention had not been urged either before the authorities below or before the Tribunal, in the first round, the Revenue could not be permitted to raise the said contention for the first time in the second round. Hence, Revenue filed the appeal u/s 260A against the order of ITAT.
Question of law
Following substantial question of law arose for consideration in these appeals:-
“Whether the finding of the Income Tax Appellate Tribunal accepting the genuineness of the loss as declared in respect of shares purchased and sold or held as stock-in-trade is perverse?”
Contention of Revenue
AO concluded that the transaction in the present case is not genuine and relied on below facts and findings.
- That the assessee had purchased most shares of certain companies from one Sh Nem Chand Jain, who was stated to be a broker with the Gauhati Stock exchange.
- Transactions for purchase and sale of these shares were ‘off market’ transactions and not through any stock exchange or through any stock broker. Trading in shares of the companies in question, on the Gauhati Stock Exchange, was to be on “spot basis” and there was no settlement of accounts through the Stock Exchange. The certificate produced from the Gauhati Exchange Ltd. also indicates that none of the transactions were through stock exchange but were off market transactions and were merely reported to the stock exchange.
- Shares of the companies which were involved were not actively traded and thus the quotations indicating the value of the shares could not be accepted.
- Although the value of these transactions was large, no payments for the same were made and the consideration for purchase of the said shares was reflected as outstanding and payable to Sh. Nem Chand Jain. The assessee explained that since it was facing a financial crisis, it could not pay the amount due to Shri Nem Chand Jain for the transactions executed during the year. However, it was not explained as to why Shri Nem Chand Jain continued to sell shares to the assessee even in the following year specially when he knew the assessee to be financially constrained.
- Sh. Nem Chand Jain had neither charged any interest nor instituted any proceedings for recovery of the said amount.
- Sh. Nem Chand Jain was not a person of means and his creditworthiness was not established. The report of the Income Tax Authorities from Gauhati indicated that Shri Nem Chand Jain had returned income of Rs.40000/- by way of salary. The assessee did not produce any material to establish the creditworthiness of Shri Nem Chand Jain.
- Statement of Shri Nem Chand Jain recorded under Section 132(4) and Section 131 of the Act stated that he was a Director/Managing Director of M/s Doyang Wood Products Ltd., M/s Kamini Finance & Investment Ltd., M/s Hotahoti Wood Products Ltd. in addition to other companies. He had stated that he was not aware of affairs of those companies but had acted at the instruction of one Mr R. R. Modi. He further stated that he received expenses from Shri R. R. Modi in lieu of services rendered.
- Sh. R.R. Modi had made a disclosure that he had promoted many companies by introducing share application money in different names and out of those some companies were not genuine companies.
- The assessee and the companies in question were interlinked. Shri R. R. Modi had floated certain number of companies by introducing his undisclosed capital and he was also a Director on the Board of the assessee company. In addition, the assessee also owed money to certain companies, whose shares it held/purchased. These companies also held shares of the assessee company.
Contention of Assessee
The assessee asserted that Shri Nem Chand Jain was a broker with the Gauhati Stock Exchange and the memos of confirmation as well as the bills produced evidenced the genuineness of the purchase transactions. In addition, the assessee also produced a certificate indicating the value of the quotations of the shares in question from the Gauhati Stock Exchange. This, according to the assessee, evidenced the value of the shares.
Held By Court
It was held by Hon’ble High Court that the facts as outlined by the AO clearly indicate an established link between the companies floated by Shri R. R. Modi and the assessee. This fact has also not been disputed by the assessee in the present proceedings. The AO found that the shares of those companies were not actively traded; there is no material on record, which would indicate otherwise. Since the shares in question are not actively traded, their quotations at the Stock Exchange could easily be manipulated by showing transaction in small number of shares. And, in any case would not be reflective of their value. The stock certificates of Gauhati Stock Exchange for the assessment years 1998-99 and 1999-00 also indicate that the traded prices related to off the floor transactions which were reported to the exchange. Thus, the transactions entered into by the assessee and/or the related entities were itself the basis of the quotations; obviously, no reliance could be placed on these quotations for justifying the value of the shares in question. Although it was stated that the shares were purchase and sold through a broker of the Guwhati Stock Exchange, there is no evidence to show that the transaction of purchase of shares was done through the Gauhati Stock Exchange. The CIT(A) failed to consider any of the reasons provided by the AO for holding the transactions to be not genuine and did not address any of the aspects as above. In view of the aforesaid aspects which were important and clearly indicated that the transactions entered by purchase and sale of shares were, in fact, sham transactions and could not be relied upon. The CIT(A) completely ignored the aforesaid facts and merely cited the judgments where contract notes had been accepted as evidence of genuine transaction. Undoubtedly, contract notes, confirmation memos, bills, books of accounts are evidence of genuine transactions. However, where the fundamental transaction is shown to be a sham transaction, the same cannot necessarily be accepted as genuine merely because a broker’s confirmation and invoices have been produced. Given the facts of this case, the decisions referred to by CIT(A) are also, plainly, not applicable since in all those decisions there was no allegation that payments for the shares in question had not been made and the transaction consisted of only book entries. On the contrary, the Court found that all payments had been made and received through account payee cheques and/or drafts.
The Tribunal also erred in upholding the orders of CIT(A) and failed to consider the controversy in issue. The Tribunal proceeded on an erroneous footing that all shares have been “bought through the recognised stock exchange through the main broker of the exchange”. There was no evidence to indicate that all shares were bought through the stock exchange. The assessee also did not claim this; the assessee had claimed before the AO that all shares were “bought from the broker of Gauhati Stock Exchange”. In the submissions filed before the AO, the assessee contended that “the transactions for purchase of shares were carried out by the assessee company through main broker of Gauhati Stock Exchange”. Memos of confirmations were not contract notes evidencing purchase or sale of shares by Mr N.C. Jain through the stock exchange for and on behalf of the assessee. The Tribunal has held that the amount payable to Mr N.C. Jain had been discharged by the assessee in the year 2005-06 and, therefore, found that the transactions in question were genuine. It is relevant to note that Mr N.C. Jain had expired in the year 1999. In the circumstances, the payment of money to Mr N.C. Jain was required to be investigated further to ascertain as to the ultimate recipient of those funds. No such exercise has been done in this case. Thus, in our view the fact that certain payments were shown to have been made to Mr N.C. Jain in 2005-06, would not be sufficient to conclude that the transactions in question were genuine. We find that the Tribunal erred in ignoring certain relevant facts and its finding that transactions for purchase and sale of shares are genuine, is perverse. Accordingly, the question of law as indicated above is answered in the affirmative and in favour of the Revenue. The appeals are allowed.
