Case Law Details
DCIT Vs Welspun Mercantile Limited (ITAT Mumbai)
Conclusion: Excessive disallowance made under Section 14A was restricted as AO had failed to record any dissatisfaction with assessee’s claim regarding the expenditure incurred to earn tax-exempt income, which was a mandatory requirement before invoking Rule 8D for disallowance under Section 14A.
Held: Assessee-company, had filed a nil return, showing income from business and short-term capital gains, both of which were adjusted against brought-forward losses for the assessment year 2014-15. During scrutiny, AO noted that assessee had earned a dividend income of Rs. 2.98 crore, which was claimed as exempt under Section 10(34). Assessee had voluntarily disallowed Rs. 1,10,711 under Section 14A. Still, AO, invoking Rule 8D, computed a much higher disallowance of Rs. 84.78 lakh, citing that assessee had used borrowed funds to make investments in shares. Aassessee carried the matter before CIT(A) and strongly contended that no interest disallowance had to be made as the assessee had made the investment in shares from its interest free funds. CIT(A) found that the interest free funds available with the assessee were Rs.164.29 Crores whereas investment in shares were Rs.170.99 Crores. Therefore, some of the borrowed capital had been invested in shares and accordingly, disallowed Rs. 76,66,092/- on the part of interest under Rule 8D(2)(ii). Further, CIT(A) found that assessee had debited administrative expenditure at Rs.1,56,794/-, therefore, disallowance as per Rule 8D(2)(ii) was restricted to this amount and gave part relief to the assessee. Interestingly, both Revenue and assessee filed cross-appeals before ITAT in which Revenue had contested CIT(A)’s reduction of the disallowance, and assessee had appealed, stating that no disallowance should have been made. ITAT, by going through established precedents, held that AO had not recorded any dissatisfaction with assessee’s voluntary disallowance, nor had he provided any basis for invoking Rule 8D. It was held that AO must first be dissatisfied with assessee’s claim and record reasons for such dissatisfaction before applying Rule 8D. Since AO had failed to do so, ITAT ruled that the disallowance under Section 14A was unjustified and upheld assessee’s voluntary disallowance of Rs. 1,10,711.
ULL TEXT OF THE ORDER OF ITAT MUMBAI
I.T.A. No. 1062/Mum/2019 & I.T.A. No. 269/Mum/2019 are cross-appeals by the revenue and the assessee against the very same order of the ld. CIT(A)-14, Mumbai [hereinafter ‘the ld. CIT(A)’], dated 28/09/2018 pertaining to AY 2014-15.
2. The cross-appeals were heard together and are disposed off by this common order for the sake of convenience and brevity.
3. The grievance of the revenue reads as under-
“1. That on the facts and circumstances of the case and in law, the ld. CIT(A) erred in maintaining the disallowance u/s 14A r.w.r. 8D(2)(iii) to Rs.1,56,794/- as against Rs.84,78,409/- made by the AO as per formula laid down in the Rule 8D(2)(iii).
2. That on the facts and circumstances of the case and in law, the ld. CIT(A) erred in directing the AO to treat the amount of Rs.4,68,87,073/- as income from business and profession and deleting the addition of Rs.6,35,23,711/- made by the AO on account of transactions in the shares of Sulabh Engineers & Services Ltd.
3. That on the facts and circumstances of the case and in law, the ld. CIT(A) erred in deleting the addition of Rs.31,76,185/- on account of disallowance of commission expenses u/s 69C with respect to share transactions of Sulabh Engineers & Services Ltd.”
4 The grievance of the assessee reads as under:-
“The ground or grounds of appeal are without prejudice to one another.
1.a) On the facts and in the circumstances of the case and in law, the Id. AO erred in confirming the addition to the extent of 7 78,22,886/- made by the AO to the income of the Appellant by way of disallowing proportionate interest of * 76,66,092/-under rule 8D(2)(ii) and administrative expenses of r 1,56,794/- under rule 8D(2)(iii) alleged to have been incurred relating to exempt income invoking the provisions of section 14A r.w.r. 8D mechanically.
b) The Id. CIT(A) failed to appreciate that there is no reason and basis in reaching to dis-satisfaction with the correctness of the claim of the Appellant that no expenditure other than STT of 7 1,08,791/- and Demat charges of 7 1,920/- (both were added back to returned income) was incurred in relation to dividend income which does not form part of the total income.
c) In reaching to the conclusion and confirming such addition the ld. CIT(A) omitted to consider relevant factors, considerations, principles and evidences while he was overwhelmed, influenced and prejudiced by irrelevant considerations and factors.
d) In any case the disallowance u/s. 14A r.w.r. 8D as worked out by the ld. CIT(A) is excessive and unreasonable.
2.a)On the facts and in the circumstances of the case and in law, the Id. CIT(A) erred in holding that Long/Short term capital gains of ? 4,68,87,073/- on sale of shares of Sulabh Engineers & Services Ltd., a listed company, be assessed under the head “Profits and gains of business or profession” as against claim of the Appellant that Long term capital gains of ₴ 4,16,73,760/- are exempt u/s.10(38) and Short term-capital gains of * 52,13,313/- would be adjusted against brought forward Short term capital losses and thereby he further erred in directing the AO to treat the capital gains of 7 4,68,87,073/- as income from business and profession.
b) The Id. CIT(A) failed to appreciate that:-
i. the Appellant has earned Long term capital gains of 7 4,16,73,760/-and Short term capital gains of 7 52,13,313/- on sale of shares of Sulabh Engineers & Services Ltd. and the same is supported by independent and admissible evidences;
ii. the shares were held as investment and purchased and sold in the open free market of Bombay Stock Exchange on BOLT;
iii. there were no off market transactions nor any preferential allotment in these shares;
iv. the payments for purchase of shares and receipts for sale of shares are through banking channels;
v. the delivery of shares are taken and given from the Demat account of the Appellant; and
vi. the Id. AO did not provide copy of materials and statements relied upon by him nor allowed any opportunity to the Appellant to cross examine those parties who have been suspected to provided accommodation entries to the Appellant.
c) In reaching to the conclusion and confirming such addition, the ld. CIT(A) omitted to consider relevant factors, considerations, principles and evidences while he was overwhelmed, influenced and prejudiced by irrelevant considerations and factors.
3. On the facts and in the circumstances of the case and in law, the Id. AO erred in not disposing off the Ground No.5 raised by the Appellant disputing the addition of ₴ 1,61,44,501/- to the book profit by way of adding back disallowance made u/s.14A r.w.r. 8D and thereby erred in enhancing the book profit artificially.
4. The Id. CIT(A) erred in not disposing off the Ground No.6 raised by the Appellant disputing levy of interest u/s. 234B of the Income Tax Act, 1961.
5. The ld. CIT(A) erred in not disposing off the Ground No. 7 raised by the Appellant disputing initiation of the penalty proceedings u/s 271(1)(c) of the Income Tax Act, 1961.
The Appellant craves leave to add, alter, amend or delete any or all of the above grounds of appeal.”
5. From the above grievance it can be seen that both the parties are aggrieved on the disallowance u/s 14A and the treatment of gains from sale of shares.
6. Representatives of both the sides were heard at length. Case records carefully perused the and the relevant documentary evidence along with judicial decisions duly considered in light of Rule 18(6) of the ITAT Rules, 1963.
7. The assessee filed NIL return electronically on 22/09/2014, which was selected for scrutiny assessment and accordingly statutory notices were issued and served upon the assessee. The assessee is engaged in the business of investing and trading activity. The assessee has shown income from business at Rs.56,19,076/- and the same is set off against brought forward business loss. The assessee has also shows short term capital gains at Rs.52,13,313/- and the same is also adjusted against the brought forward loss. Thus, the income was computed as NIL.
8. During the course of scrutiny assessment proceedings, the AO noticed that the assessee has earned dividend income of Rs.2,98,11,715/- which was claimed exempt u/s 10(34) of the Act. The AO noticed that the assessee has disallowed Rs.1,920/- u/s 14A of the Act. The assessee has also suo moto disallowed Rs.1,10,711/-. The AO was of the strong belief that the provisions of Section 14A r.w.r. 8D, squarely apply and proceeded to compute the disallowance as under:-
9. The assessee carried the matter before the ld. CIT(A) and strongly contended that no interest disallowance has to be made as the assessee has made the investment in shares from its interest free funds. The ld. CIT(A) found that the interest free funds available with the assessee were Rs.164.29 Crores whereas the investment in shares were Rs.170.99 Crores. Therefore, some of the borrowed capital has been invested in shares and accordingly, disallowed Rs. 76,66,092/- on the part of interest under Rule 8D(2)(ii) of the Act. Further the ld. CIT(A) found that the assessee has debited administrative expenditure at Rs.1,56,794/-, therefore, disallowance as per Rule 8D(2)(ii) was restricted to this amount and gave part relief to the assessee.
10. We have carefully perused the assessment order. We find that the AO has neither recorded any dissatisfaction, insofar as the suo moto disallowance of Rs.1,10,711/- is concerned nor the AO has recorded any satisfaction for computing the disallowance as per the provisions of Section 14A r.w.r. 8D, having regard to the accounts of the assessee. The Hon’ble Supreme Court in the case of Godrej & Boyce Manufacturing Company Ltd. v. Deputy Commissioner of Income-tax [2017] 394 ITR 449 (SC), on similar facts, held as under:-
“37. We do not see how in the aforesaid fact situation a different view could have been taken for the Assessment Year 2002-2003. Sub-sections (2) and (3) of Section 14A of the Act read with Rule 8D of the Rules merely prescribe a formula for determination of expenditure incurred in relation to income which does not form part of the total income under the Act in a situation where the Assessing Officer is not satisfied with the claim of the assessee. Whether such determination is to be made on application of the formula prescribed under Rule 8D or in the best judgment of the Assessing Officer, what the law postulates is the requirement of a satisfaction in the Assessing Officer that having regard to the accounts of the assessee, as placed before him, it is not possible to generate the requisite satisfaction with regard to the correctness of the claim of the assessee. It is only thereafter that the provisions of Section 14A(2) and (3) read with Rule 8D of the Rules or a best judgment determination, as earlier prevailing, would become applicable.
38. In the present case, we do not find any mention of the reasons which had prevailed upon the Assessing Officer, while dealing with the Assessment Year 2002-2003, to hold that the claims of the Assessee that no expenditure was incurred to earn the dividend income cannot be accepted and why the orders of the Tribunal for the earlier Assessment Years were not acceptable to the Assessing Officer, particularly, in the absence of any new fact or change of circumstances. Neither any basis has been disclosed establishing a reasonable nexus between the expenditure disallowed and the dividend income received. That any part of the borrowings of the assessee had been diverted to earn tax free income despite the availability of surplus or interest free funds available (Rs. 270.51 crores as on 1.4.2001 and Rs. 280.64 crores as on 31.3.2002) remains unproved by any material whatsoever. While it is true that the principle of res judicata would not apply to assessment proceedings under the Act, the need for consistency and certainty and existence of strong and compelling reasons for a departure from a settled position has to be spelt out which conspicuously is absent in the present case. In this regard we may remind ourselves of what has been observed by this Court in Radhasoami Satsang v. CIT [1992] 193 ITR 321/60 Taxman 248 (SC).
“We are aware of the fact that strictly speaking res judicata does not apply to income tax proceedings. Again, each assessment year being a unit, what is decided in one year may not apply in the following year but where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year.”
39. In the above circumstances, we are of the view that the second question formulated must go in favour of the assessee and it must be held that for the Assessment Year in question i.e. 2002-2003, the assessee is entitled to the full benefit of the claim of dividend income without any deductions.”
11. Considering the facts of the case in totality, in light of the judicial decisions discussed hereinabove, we do not find any merit in the impugned disallowance made by the AO and on facts, the suo moto disallowance made by the assessee should suffice. Accordingly, the impugned ground in revenue’s appeal is dismissed and that in the assessee’s is allowed.
12. Coming to the next common grievance, while scrutinising the return of income, the AO noticed that the assessee has shown short term capital gains of Rs. 52,13,313/- which was adjusted against the brought forward loss of AY 2007-08. The AO also found that the assessee has shown long term capital gain of Rs.4,16,73,760/- which was claimed as exempt u/s 10(38) of the Act. The assessee was asked to furnish the details. On going through the details, the AO noticed that the assessee has dealt with the shares of Sulabh Engineers & Services Ltd. (SESL) from which it earned short term capital gains and long term capital gains.
12.1. The AO was in possession of the information that Investigation wing, Kolkata had recorded statements of exit providers in the scrip of SESL wherein they admitted that they were providing bogus accommodation entries. Taking a leaf out of the Investigation report and drawing support from the SEBI Investigation report, the AO formed a belief that the assessee has taken accommodation entries and has shown short term and long term capital gains on sale of shares of SESL and on this belief, added the entire proceeds of Rs. 6,35,23,711/- as unaccounted income. The AO further added Rs.31,76,185/- as the alleged commission paid for purchasing accommodation entries. Both the additions were challenged before the ld. CIT(A).
13. The ld. CIT(A) was convinced that the transactions of sale and purchase of shares have been carried out on Bombay Stock Exchange (BSE) through a registered broker, namely, Samurai Securities Pvt. Ltd.. The transactions were supported by contract notes/bills and the payments have been received and made through banking channels. The shares were sold through Demat accounts and the AO has not brought any material on record to show that any of the operators involved in rigging the prices have named the assessee as one of the beneficiaries of the transactions carried out by them. However, the ld. CIT(A) went to direct the AO to treat the amount of Rs.4,68,87,073/- being capital gains shown by the assessee from the transactions in the shares as income from business and profession and the addition made u/s 68 of the Act was deleted.
14. We have given a thoughtful consideration to the orders of the authorities below.
15. The facts of the case have to be understood in their true perspective. The assessee purchased 3,00,000 shares on 11/03/2013 and further purchased 21,506 shares on 11/03/2013 and 2,00,000 shares on 14/03/2013. The assessee had sold 278454 shares during FY 2013-14 relevant to AY 2014-15. The shares were immediately dematerialized as per the Demat statement of Samurai Securities Pvt. Ltd., exhibited at page 126 of the paper book.
15.1. Thus, it is not the case of the revenue that the assessee purchased shares offline, held physical shares and just before the sale, dematerialized them. It is also not the case of the revenue that the assessee has purchased cheques of accommodation entries by paying cash to the market operators.
15.2. The entire assumption and presumption of the AO revolves around the report of Securities and Exchange Board of India (SEBI). SEBI had conducted investigation in the group of SESL based on the letter received from Pr. Director of Income Tax (Investigation), Kolkata dated 27/04/2015, alleging that certain entities generated bogus long term capital gains through stock exchange mechanism and SESL is one of such scrips mentioned in the aforesaid letter. In view of this, it was alleged as follows:-
“a. With regard to Noticee No. 1 to 8, it was alleged that these Noticees themselves (along with other connected Noticees) indulged in manipulation of the price of the scrip, created false and misleading appearance of trading in the securities market and also carried out an act/practice which operated as a fraud or deceit in the market. Further, they derived benefit out of the price manipulation by selling the shares at such manipulated price.
b. With regard to Noticee No. 9 and 10, it was alleged that they being the new promoters of the company, acquired the company, orchestrated the scheme of manipulation and created a false and misleading appearance of trading in securities market through the connected Noticees.
c. With regard to Noticee No. 9 to 11 and 16, it was alleged that these Noticees (company and its directors) were part of the manipulative scheme which included allotment of shares on preferential basis and were in connivance with the other connected Noticees who carried out the scheme of manipulation of the price of the scrip and created false and misleading appearance of trading in securities market.
d. With regard to Noticee No. 9 to 15, it was alleged they being the promoters, were part of the orchestrated scheme of manipulating the trading in the scrip of Sulabh and derived benefit out of the price manipulation by selling the shares at such manipulated price. Such price manipulation was carried out by the connected Noticees that were also a part of the orchestrated scheme.
e. With regard to Noticee No.17 to 22, it was alleged that these Noticees manipulated the price of the scrip, created false and misleading appearance of trading in the securities market and also carried out an act practice which operated as a fraud or deceit in the market. It was further alleged that these Noticees together repeatedly failed to deliver shares after selling the same on market, entered into transaction in securities without intention of performing it/ without intention of change in ownership of such security.
f. With regard to Noticee No. 23 to 122, it was alleged that these Noticees manipulated the price of the scrip, created false and misleading appearance of trading in the securities market and also carried out an act/ practice which operated as a fraud or deceit in the market.
g. With regard to Noticee No. 123 to 150, it was alleged that these Noticees were a part of the manipulative scheme orchestrated to derive benefit out of the manipulation carried out by the connected Noticees by selling shares of substantial value of Sulabh. It was also alleged that the same also resulted in false and misleading appearance of trading in the securities market and an act/practice which operated as a fraud or deceit in the market.”
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Considering the findings of Investigation, the allegations made out in the SCN and the submissions made by the Noticees, I find that following issues require consideration in the present case:
Issue 1:
Whether the Noticees were directly or indirectly connected to Sulabh or the promotors/directors of Sulabh?
b. Whether the trades carried out by connected noticees in Patch 1A, 1B and 2 of the IP have resulted in violation of Regulation 3(a) (b)(c)(d), 4(1), 4(2)(a), (b), (e) and 4(g) of the SEBI (PFUTP) Regulations, 2003, as applicable?
c. Whether the company, its promoters, directors orchestrated scheme to manipulate the price of scrip of Sulabh?
Issue 2: Does the violation, if any, attract penalty under Section 15HA of the SEBI Act, 1992?
Issue 3: If so, what would be the monetary penalty that can be imposed taking into consideration the factors mentioned in Section 15J of SEBI Act, 1992?
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The above Noticees, in order to determine their role in the present manipulative scheme, can be divided into the following groups:
a. Group A of Noticees who are connected to the company through its promoter directors (PDs) and being a preferential allottee, namely, Noticee Nos. 1, 2, 4 to 16, 31, 32, 83, 123 to 127, 129, 131 to 139, 142 to 148.
b. Group B of Noticees who are connected to Subodh Agarwal and hence connected to the company, namely, Noticee Nos. 3, 17 to 29, 34, 37 to 40, 41, 42, 43, 46, 47, 53, 55, 56, 65, 71, 78, 88, 97, 105, 107, 108, 109, 113, 116, 122. 128, 130, 140, 141, 149, 150
c. Group C of Noticees who are connected with Anil Khemka and hence connected to the company through Subodh Agarwal i.e. Noticee nos.45, 48 to 35 51, 57, 67, 76, 86, 92, 94, 103, 110, 111.
d. Group D of Noticees who are connected with other Noticees mentioned herein but were not connected with either Company or PDs or Subodh Agarwal or Anil Khemka, namely noticees no. 52, 59, 64, 68, 69, 70, 72, 79, 81, 84, 87, 90. 93. 95, 96, 100, 101, 118.
e. Group E of Noticees who had no connection with either Company or PDs or Subodh Agarwal or Anil Khemka, namely, notices no. 30, 33, 35, 36, 44, 58, 61, 75, 77, 80, 85, 89, 91, 92, 98, 99, 102, 104, 106, 112, 114, 115, 117, 120, 121
28. For the purpose of present proceedings, the role of Noticees in Group A, B and C shall be considered and adjudicated as they are directly or indirectly linked to the company, its promotors and directors and shall be collectively referred as ‘Connected Noticees’. The Noticees in Group B and C are indirectly connected with the company through either Mr. Subodh Agarwal or Mr. Anil Khemka. Noticees related to Mr. Subodh Agarwal are either those where Mr. Subodh Agarwal is holding the position of director or where the Noticee has common director with Subodh Agarwal’s connected entity or the Noticee had an off market transfer with Mr. Subodh Agarwal’s connected entity. Considering that Mr. Subodh Agarwal is directly known to the PDs of the company, hence Noticees connected through him also needs to be considered as Connected Noticees.
29. With regard to connection shown through Anil Khemka, note that, as per Investigation Report (IR), Mr. Anil Khemka had made statement before the DDIT, Kolkata that he is managing and controlling certain companies and also stated that the main function of such companies was to provide the accommodation entries in the guise of Long Term Capital Gains (apart from Share Capital and Unsecured Loans). Several entities connected to Mr. Anil Khemka, entities named by Mr. Anil Khemka or entities connected to the entities named by him have traded in the scrip of Sulabh. Considering that Mr. Anil Khemka is connected to Mr. Subodh Agarwal, as seen above, it becomes imperative to consider that the said Noticees were connected through Mr. Anil Khemka as Connected Noticees.
30. Noticees in Group D and E are neither directly nor indirectly connected with the company, PD, Mr. Subodh Agarwal or Mr. Anil Khemka, albeit they are connected to other Noticees who traded in the scrip. Since the impugned manipulative scheme was hatched by the company along with PDs and few other Noticees, it is important that the Noticee should be directly or indirectly connected with the company or any PD to establish any substantial connection. In view of the above, a benefit of doubt is given to Noticees of the aforesaid Group and hence they shall not be considered Connected Noticee.
31. With regards to the Noticees who were the Preferential Allottees and are also part of one of the five groups mentioned above, they can be directly considered as connected noticees as held by the Hon’ble SAT in Som Prakash Goenka vs. SEBI (Appeal No. 323 of 2020, Date of Decision 29.04.2022). SAT held:
“There is no doubt that private placement of shares is rarely given to unknown entities and consequently it can be safely presumed that preferential allottees are known to the Company. One could easily club the preferential allottees in the premeditated scheme to benefit them from the price manipulation which was
launched by the promoter directors.”
Hon’ble SAT in Som Prakash (supra) further held that unless these preferential allottees have increased the price of the scrip or contributed to Positive LTP, they cannot be made part and parcel of the fraudulent scheme just because they reaped in huge profits by selling the shares. Hence, it is pertinent to examine the impact of their trade in the instant case.
32. Noticees who received shares of the company through Preferential Allotments are as under: (March 2011 and March 2012):
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33. Pursuant to detailed analysis, it is established that the aforementioned Noticees are connected (‘connected notices’) to each other through a web of off market transfers, common address, email ID and preferential allotment among themselves.
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81. In view of the aforesaid observations, I found that the connected Noticee Nos. 1 to 8, 17 to 29, 31, 32, 34, 37 to 43, 45 to 51, 53, 55 to 57, 65, 67, 71, 76, 78, 83, 86, 88, 94, 97, 103, 105, 107-111, 113, 116 and 122 have traded in Patch 1A, Patch 1B and Patch 2, and contributed to the positive LTP. Hence, they manipulated the price of the scrip, created false and misleading appearance of trading in the securities market and also carried out an act/ practice which operated as a fraud or deceit in the market, violating the Regulation 3(a), (b), (c), (d),4(1),4(2)(a), (b) and (e) of SEBI (PFUTP) Regulation, 2003.”
16. The entire allegation and the investigations/enquiries and the SEBI report revolve around the manipulations/rigging done by the promoters/directors of SESL.
17. Neither the broker of the assessee nor the name of the assessee appear in the investigation. As mentioned elsewhere, the assessee has neither purchased the shares offline nor has kept the physical shares with it. All these shares were purchased online through BOLT, dematerialized and sold through banking channels, therefore, the allegations of the AO are merely assumption and presumption and conjectures drawn by the AO on such assumptions which do not have any evidentiary value.
18. The Hon’ble High Court of Bombay in the case of Principal Commissioner of Income Tax vs. Ziauddin A. Siddique in Income Tax Appeal No. 2012 of 2017, judgment dated 04/03/2022, was seized with the following question of law and held as under:-
“Whether on the facts and in the circumstances of the case and in law, the Hon’ble Tribunal was justified in deleting the addition of Rs.1,03,33,925/- made by AO u/s 68 of the I.T. Act, 1961, ignoring the fact that the shares were bought/acquired from off market sources and thereafter the same was demated and registered in stock exchange and increase in share price of Ramkrishna Fincap Ltd. is not supported by the financials and, therefore, the amount of LTCG of Rs.1,03,33,925/- claimed by the assessee is nothing but unaccounted income which was rightly added u/s 68 of the I. T. Act, 1961?”
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2. We have considered the impugned order with the assistance of the learned Counsels and we have no reason to interfere. There is a finding of fact by the Tribunal that the transaction of purchase and sale of the shares of the alleged penny stock of shares of Ramkrishna Fincap Ltd. (“RFL”) is done through stock exchange and through the registered Stock Brokers. The payments have been made through banking channels and even Security Transaction Tax (“STT”) has also been paid. The Assessing Officer also has not criticized the documentation involving the sale and purchase of shares. The Tribunal has also come to a finding that there is no allegation against assessee that it has participated in any price rigging in the market on the shares of RFL.
3. Therefore we find nothing perverse in the order of the Tribunal.
4. Walve placed reliance on a judgment of the Apex Court in Principal Commissioner of Income-tax (Central)-1 vs. NRA Iron & Steel (P.) Ltd.1 but that does not help the revenue in as much as the facts in that case were entirely different.
5. In our view, the Tribunal has not committed any perversity or applied incorrect principles to the given facts and when the facts and circumstances are properly analysed and correct test is applied to decide the issue at hand, then, we do not think that question as pressed raises any substantial question of law.
6. The appeal is devoid of merits and it is dismissed with no order as to costs.”
19. In the case of CIT vs. Mukesh Ratilal Matolia [ITA No. 456 of 2007], the Hon’ble Bombay High Court was seized with the following question of law and consequently held as under:-
“1 Whether the ITAT was justified in deleting the amount of Rs.1,41,08,484/ received by the Assessee on sale of the shares as unexplained investment under section 69 of the Income Tax Act, 1961 is the question raised in this Appeal.”
“2 The Assessment Year involved herein is A.Y. 20012002.
3 The Assessee was carrying on business of manufacturing handkerchiefs as the proprietor of Rumal Manufacturing Company. In the Assessment Year in question the Assessee claimed that he had sold the shares of four companies, namely, M/s Alang Industrial Gases Ltd., Mobile Telecommunication Ltd., M/s Rashel Agrotech Ltd. and M/s. Sentil Agrotech Ltd, which were purchased during the year 19992000 and 20002001. The entire sale consideration amounting to Rs.1,41,08,484/ was utilised for the purchase of a flat at Colaba, Mumbai and accordingly benefit of section 54E of the Income Tax Act, 1961 was claimed.
4. The Assessing Officer has held that neither the purchase nor sale of shares were genuine and that the amount of Rs.1,41,08,484/ stated to have been received by the Assessee on sale of shares was undisclosed income and accordingly made addition under section 69 of the Income Tax Act, 1961. The Appeal filed by the Assessee was dismissed by CIT (A).
5. On further Appeal, the ITAT by the impugned order allowed the claim of the Assessee by recording that the purchase of shares during the year 19992000 and 20002001 were duly recorded in the books maintained by the Assessee. The ITAT has recorded a finding that the source of funds for acquisition of the shares was the agricultural income which was duly offered and assessed to tax in those Assessment Years. The Assessee has produced certificates from the aforesaid four companies to the effect that the shares were in fact transferred to the name of the Assessee. In these circumstances, the decision of the ITAT in holding that the Assessee had purchased shares out of the funds duly disclosed by the Assessee cannot be faulted.
6 Similarly, the sale of the said shares for Rs.1,41,08,484/ through two Brokers namely, M/s Richmond Securities Pvt. Ltd. and M/s. Scorpio Management Consultants Pvt. Ltd. cannot be disputed, because the fact that the Assessee has received the said amount is not in dispute. It is neither the case of the Revenue that the shares in question are still lying with the Assessee nor it is the case of the Revenue that the amounts received by the Assessee on sale of the shares is more than what is declared by the Assessee. Though there is some discrepancy in the statement of the Director of M/s. Richmand Securities Pvt. Ltd. regarding the sale transaction, the Tribunal relying on the statement of the employee of M/s. Richmand Securities Pvt. Ltd. held that the sale transaction was genuine.
7 In these circumstances, the decision of the ITAT in holding that the purchase and sale of shares are genuine and therefore, the Assessing Officer was not justified in holding that the amount of Rs. 1,41,08,484/- represented unexplained investment under Section 69 of the Income Tax Act, 1961 cannot be faulted.
8 In the result, we see no merit in this Appeal and the same is dismissed with no order as to costs.”
20. Considering the facts of the case in totality, in light of the judicial decisions discussed hereinabove, we do not find any merit in the impugned addition made by the AO. The same are directed to be deleted.
21. Since the assesse has held the shares as investment, therefore, the gain from sale of shares has to be treated as short term capital gain/long term capital gains. Therefore, to that extent, the findings of the ld. CIT(A) are not accepted and the gains shall be treated as such. Accordingly, the impugned grievance in revenue’s appeal is dismissed and that in assessee’s appeal is allowed.
22. Since we have accepted the genuineness of the transactions, the deletion of the alleged commission for purchase of accommodation entries by the ld. CIT(A) cannot be faulted with.
23. The only other issue in the assessee’s appeal is the addition u/s 14A of the Act taken to the book profit by enhancing the book profit artificially. Since we have directed the AO to delete the entire disallowance made u/s 14A of the Act, this ground becomes redundant.
24. In the result, appeal of the assessee is allowed and that of the revenue is dismissed.
Order pronounced in the Court on 9th January, 2025 at Mumbai.
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