ACIT Vs Chetan Durgadas Mehra (ITAT Mumbai)- Assessing Officer considered the sale of shares by the assessee to the firm in which he is a Partner as a non genuine transaction. Consequently he re-worked out the P&L account as stated in page 8 of the assessment order and determined the loss from the business at a lesser figure of Rs. 52,56,153/- as against Rs. 1,95,98,779/- incurred by the assessee in the business of purchase and sale of shares and securities. The reasons for Assessing Officer’s action in disallowing the amount is that (a) the shares were not transferred out of the Demat account (b) The assessee has not obtained the real price of Rs. 55/- as per the book value as against Rs. 26/- stated to be the market price (c) That when the assessee decided to sell the shares he was aware that there is a fall in the market price and in his capacity as Managing Director of the company, he sold shares to the partnership firm.
That decision is not prudent decision and (d) the partnership firm is a related entity so the off market transactions cannot be accepted as genuine transactions. The CIT (A) however, after considering the assessee’s submissions disapproved the action of the Assessing Officer and directed the Assessing Officer to allow the loss as claimed. Honurable ITAT too confirmed the Order of CIT (A) after discussing the various case laws in support of their decision.
O R D E R
Per B. Ramakotaiah, A.M.
This is a Revenue appeal against the orders of the CIT (A)-2 Mumbai dated 14/12/2009. The Revenue has raised the only ground which is as under:
“On the facts and in the circumstances of the case and in law, the learned CIT (A) erred in deleting the dis allowance of loss of Rs. 1,43,42,628/- arising from the share transaction when there was no apparent business motive in the said transaction”.
2. Above issue arises as Assessing Officer considered the sale of shares by the assessee to the firm in which he is a Partner as a non genuine transaction. Consequently he re-worked out the P&L account as stated in page 8 of the assessment order and determined the loss from the business at a lesser figure of Rs.52,56,153/- as against Rs.1,95,98,779/- incurred by the assessee in the business of purchase and sale of shares and securities. The reasons for Assessing Officer’s action in disallowing the amount is that (a) the shares were not transferred out of the Demat account (b) The assessee has not obtained the real price of Rs. 55/- as per the book value as against Rs.26/- stated to be the market price (c) That when the assessee decided to sell the shares he was aware that there is a fall in the market price and in his capacity as Managing Director of the company, he sold shares to the partnership firm. That decision is not prudent decision and (d) the partnership firm is a related entity so the off market transactions cannot be accepted as genuine transactions. The CIT (A) however, after considering the assessee’s submissions disapproved the action of the Assessing Officer and directed the Assessing Officer to allow the loss as claimed. His findings in Para 14 to 19 are as under:
“14. I have perused the facts of the case, the arguments of the Assessing Officer and the detailed submissions made before me by learned Counsel of appellant. The first thing that strikes my mind is the fact that appellant is doing business in shares, is dealing in shares and he is not investing in shares. This fact is critical because when an assessee is doing business in shares, his decisions of purchase and sale of shares would be guided by commercial considerations and not by considerations of an investor, of what is the potential in terms of the maximum price that one might get in the times to come and consequently to wait for the moment. To my mind therefore the fact of the book value being Rs.55/- per share is of no consideration for the person who is doing business in shares, who is dealing in shares, for whom the considerations to sell shares can be far and many which an investor may not even be able to think of. The facts of the transactions not having been routed through the stock exchange is again a commercial consideration which only the person doing business in shares can think of. In the process, appellant has not only saved upon the transaction cost that he would have incurred by undertaking transactions through the stock market but, has also made a higher profit in the process since the market depth of the shares under consideration was not adequate to sale of 575000 numbers of shares without drastically affecting the market price. In the off market transaction appellant was then able to sell all the shareholding of 575000 numbers of shares at the prevailing market price of Rs.26/- per share which he would have never got if the shares were sold through the stock exchange. The fact of the depth of the market not being sufficient has also been observed by the Assessing Officer in the order of assessment where he has given data of sale transactions of the shares under consideration on the date of the transactions as well as in the month passed by.
15. The contention of Assessing Officer that appellant, in his action as part of the partnership firm which has purchased the shares, was duty bound to take a prudent decision and could not have taken a decision on behalf of partnership firm which is likely to create a loss to the partnership firm is of no significance for the purpose at hand. This is because Assessing Officer has not at all mentioned how that partnership firm is going to incur a loss in the transaction under consideration. He has not even tried to probe into whether the partnership firm has purchased the shares as an integral part of business transaction, is a dealer in shares, or, for the sake of investment in shares. Evidently in this situation as existing, an investor would be eager to purchase shares under consideration at Rs.26/- per share where the book value of the shares is Rs..52/- per share. These are aspects not having been considered by Assessing Officer, these arguments do not carry any weight for deciding the issue under consideration.
16. In the concluding paragraph Assessing Officer has argued that the assessee wanted to hold the shares and at the same time wants to avail of the benefit of fall in market price. There is nothing wrong in this strategy and, the strategy in itself cannot decide the issues of taxation under consideration. It is a fact that appellant is the Managing Director of the company whose shares are under consideration. For whatever reasons appellant decided to sell the share he was holding. The appellant has a buyer in the form of a partnership firm where he also is a partner, he would naturally prefer the shares to be purchased by that partnership firm in order to retain the control by the virtue of the shareholding in the company and, also to retain the expectation of future profits in case of the share prices rising to the level of book value of shares. To my mind this is a very prudent decision made by appellant and no adverse conclusions can be drawn from here.
17. The only remaining argument of Assessing Officer is the technical requirement mentioned by him that a separate and independent Demat account of the partnership firm should have been opened. Assessing Officer has relied upon Para No.42 of SEBI (Depositories and Participants) Regulations requiring separate Demat account to be opened by every participant in the name of each of the beneficial owners and prohibiting mixing up ofsecurities owned by various beneficial owners. In the same flow or arguments, Assessing Officer has put the onus of opening separate Demat account upon the assessee when he observes as under:
“—- —- Section 42 of the SEBI (Depository and Participants) Regulations, 1996 leaves it for the assessee no other option other than to have a separate Demat account separately for the purpose of having the holdings of the partnership firm”.
18. This contention of Assessing Officer is technically not correct. The requirements of SEBI are not for the assessee but for the brokers operating in the stock exchange. It is the broker who has to ensure that separate Demat account is opened for each beneficial owner of the shares. As a trader, or as an investor, the appellant is under no obligation directly or indirectly to follow Section 42 of SEBI guidelines relied upon by Assessing Officer. On the contrary I find that there are prescribed procedures to be followed in situations where there is mixing of shares in a common Demat account. Learned Counsel of appellant has elaborated these requirements in the course of appellate proceedings before me and has explained that all such requirements prescribed by the SEBI and the Companies Law have been followed by appellant. These requirements and how these have been followed has been spelt out in the preceding paragraphs of this order. To my mind there is no technical default on the part of the assessee in contending to hold the shares beneficially owned by the partnership firm in the Demat account in the individual name of appellant. This is particularly in the background facts of the prescribed procedures having been followed by appellant, that of appellate having filed Form No.’I’ prescribed/s 187C(1) and of the Companies Act and, the company Wiseman Ltd having in turn filed Form No.22 B prescribed under section 187C(4) of the Companies Act. These forms are declarations that shares beneficially owned by a third person, in the instant case the partnership firm considered by Assessing Officer are held in the Demat account of an individual, in this case the appellant. To my mind there is absolutely no default on the part of the appellant with regard to the aspect of the issue under consideration. I also find that on this issue, Hon’ble Mumbai Tribunal have in the case of Mishapar Investments Ltd., reported in 8 SOT 532 relied upon by learned counsel of appellant, have after taking into account the fact that the shares continued to remain in assessee’s own name even after the transfer, held that the transaction was genuine. The facts in that case were similar to the facts under consideration here. The arguments placed by learned Counsel of appellant consequently find support from Mumbai ITAT as well. I also find that contract notes in relation to the transaction under consideration have been signed and exist. Further, transfer of money has taken place consequent to the transaction. Both these facts have been ignored by Assessing Officer in coming to the conclusion as he did. To my mind these factors also cannot be ignored for deciding the issue under consideration.
19. To conclude, as I’ve detailed in the paragraphs above, the transaction has taken place at the prevailing market price with prudent commercial considerations of minimizing expenses and maximizing profits, a logical business consideration, with all legal formalities of contract notes and intimations under the companies law having been followed. The corresponding transfer of funds has taken place. There is no occasion of any loss to the partnership firm which has purchased the shares as observed by Assessing Officer in his order of assessment. Consequent to detailed reasons contained in the preceding paragraphs, I am of the view that the transaction under consideration is genuine and nothing adverse like a sham transaction can at all be concluded from the facts under consideration. As a result the dis allowance of loss as done by Assessing Officer is not justified in the facts of the case. Consequently the first ground of appeal of dis allowance of loss is allowed”.
3. The learned Departmental Representative reiterated the arguments of the Assessing Officer to submit that the transactions cannot be accepted as genuine whereas the learned Counsel reiterated the arguments made before the CIT (A) and relied on the findings there in.
4. We have considered the issue and examined the facts on record and rival contentions. There is no dispute with reference to the fact that the assessee is not an investor but is showing as business income on sale and purchase of shares. It is also not in dispute that in earlier years the assessee has shown these amounts in the balance sheet under the current assets and not a investment and he has opening stock of shares of Weizmann Ltd as on 1.4.2005 in various numbers purchased at a price of Rs.5/- to maximum Rs.70.02. The shares in the Company and group companies of Weizmann Ltd are to the extent of Rs.8.23 crores. One lot of shares of 10,16,700 were acquired at the price of Rs.50/- to cost Rs.5,08,35,000. Out of these shares, shares to the extent of 5,75,000 were sold on 3.3.2006 to M/s Dhanraj Enterprises, a partnership firm in which the assessee is a partner, at a price of Rs.26/- realizing sale value of Rs. 1,49,50,000/-. As seen from the notes of the balance sheet it was clearly mentioned that inventories of shares or securities are valued at a cost which is not in conformity with the accounting standard on valuation of inventories issued by the ICAI. This indicates that even though the assessee is treating the shares as stock in trade, he has not claimed any loss in the valuation in earlier years. In this year, the assessee sold the shares in off market transaction to partnership firm and as pointed out by the CIT (A), the moneys were received through bank on sale of shares. Therefore, on facts the transaction resulted in business loss which the assessee has not set off to any other income during the year but only claimed it to be carried forward to the next year. It is also on record that immediately after entering into contract note dated 3.3.2006, the assessee has filed a declaration and company in turn filed a return with the Registrar of Companies on 23.3.2006 under section 187C of the Companies Act indicating the shares that are held in beneficiary account as per the provisions of Companies Act 1956. This return was accompanied by the declaration under section 187C(1) and 187C(2). Therefore, it cannot be stated that the transaction of sale of shares is not genuine.
5. With reference to the reasons given by the Assessing Officer for considering the transactions as non genuine one, as rightly pointed out by the CIT (A), section 42 of SEBI (Depositories & Participants) Regulations, 1996 does not apply to the individual persons but only to the depository and participants as defined under the SEBI Act. Therefore, the reasoning that the separate Demat account is not maintained cannot be accepted. With reference to the price also the share is a quoted share in the stock exchange and there is no dispute of the fact that the price at which it was sold was as per the market price available on that day. Even the Assessing Officer accepts that the assessee sold at the market price but his contention was that being Managing Director of the Company he should have taken a prudent decision to sell at higher price i.e. at the book value. This argument also cannot be accepted as a prudent business man it is his decision to sell at a particular price and the Assessing Officer cannot substitute the decision unless he establishes that difference in price was received in any other form. It is not the case of the Assessing Officer that the assessee has received more than what is accounted for. Assessee sold the shares to the partnership firm in which he is a partner and received the money. The transactions between these two related parties cannot be doubted just because the purchasing concern is the one in which the assessee has interest. The assessee was not debarred under the law from entering into any transaction with a group concern. The said transactions cannot be doubted unless the contrary was brought on record. As there is no dispute with reference to the sale of shares and as there is evidence that the assessee has fulfilled all prescribed conditions under section 41 and section 187C of the Companies Act, there is no need to suspect the transaction as was done by the Assessing Officer.
6. Similar issue was considered by the Income Tax Appellate Tribunal in the case of Mishapar Investments Ltd 8 SOT 532 Mumbai, which CIT(A) relied, wherein on following facts it was held:
“The assessee held certain shares of a company ‘N’ which were transferred to a firm ‘S’ in which the assessee was a partner. The transfer of shares was duly recorded in the books of account of the assessee as well as of ‘S’. The consideration for transfer was credited by ‘S’ to the assessee’s current account as a partner and the shares were also shown in the balance sheet of ‘S’ as on 31.3.2000 under the head ‘Investments’. The assessee’s balance sheet, the consideration was shown to be due from partnership firm ‘S’. At the time when the shares were transferred in favour of ‘S’ they were pledged with ‘I’ and ‘B’ through pledge agreement. Despite the transfer of those shares by the assessee in favour of ‘S’ those shares remained in the name of the assessee being one of the partner in the firm ‘S’. The shares were sold at the prevailing market rate and the assessee claimed capital loss on transfer of those shares of ‘N’ to the firm. The Assessing Officer disallowed the claim considering that the transaction was sham for the reasons that the said transaction was entered upon between 6the group concern, the physical delivery of shares was not given to ‘S’ as the same were pledged and that the shares were not transferred in the name of ‘S’. The Assessing Officer further held that there was no physical transfer of money from ‘S’ to the assessee and the transaction was entered upon with a view to avoid payment of tax. On appeal, the Commissioner (Appeals) confirmed the impugned order.
The assessee was not debarred under law from entering into any transactions with the group concern. If the assessee dealt with its group concern according to law, the said transaction could not be doubted by the revenue unless a contrary was brought on record. The answer to the question as to whether the physical delivery of shares was must while selling them would depend upon the facts and circumstances of each case. Undisputedly the shares are considered to be goods and its sale is governed by the provisions of the Sale of Goods Act. According to the provisions of section 20 of the Sale of Goods Act, where there is an unconditional contract for sale of a specific goods in a deliverable state, the property in the goods passes to the buyer when the contract is made and it is immaterial whether the time of payment of price or the time o delivery of goods or both is postponed. In the instant case, though physical delivery of goods was not affected, but the corresponding entries with regard to the consideration were passed in the books of the seller as well as of the buyer. With regard to the transfer of name with ‘N’ the shares could not be transferred in the name of the partnership firm. They were to be registered in the name of one of the partners. Since the shares were sold by one of the partners to the partnership firm, they remained in the name of same partner i.e. the seller though company ‘N’ was duly informed regarding that fact. Partnership firm ‘S’ was recognized as a beneficial owner of those shares in the record of ‘N’. With regard to the transfer of money from ‘S’ to the assessee, it was noticed that money was not transferred, but necessary entries were passed in the books of account of the assessee as well as of the partnership firm and in the partnership firm the consideration amount was shown in the name of partner under the head “Partners current account”. Likewise, in the books of the assessee, that amount was shown to be recovered from the partnership firm. According to provisions of section 20 of the Sale of Goods Act, if the goods are identified and parties intend to pass the property to the buyer, the payment can be deferred. But, in the instant case, necessary entries were made in the books of account. Only the physical payment of sale consideration was deferred. Hence, the transaction entered upon by the assessee was not hit by any provision of any relevant law”.
7. In the case of CIT vs. Gillette Diversified Operations (P) Ltd 324 ITR 226 (Delhi), relied on by the learned Counsel, the Hon’ble Delhi High Court held as under:
“Held dismissing the appeal, that as noted by the Commissioner (Appeals) as well as by the Tribunal, the shares in question were held by the assessee-company for more than three years before they were sold. The assessee- company was very much entitled in law to sell the shares held by it at any time, which it considered to be appropriate for such sale. It was for the holder of the shares and not for the Revenue to decide, when to sell the shares held by it. If the sale of shares was not illegal, it could have been made to anyone, including a group company. There was nothing illegal in the assessee-company selling shares held by it, for the purpose of reducing its liabilities. It was also absolutely immaterial that the liabilities of the assessee- company were towards group companies. Similarly, it was also immaterial that the shares sold by the assessee company were of another group company. It was also immaterial as to who the purchaser of the shares was, so long as the shares were not sold at a price which was higher or lower than their fair price and there was no restriction on sale of such shares to a group company. As noted by the Tribunal, neither the assessee- company nor the amalgamated company adjusted the capital loss on account of sale of these shares against any long-term capital gain even till the assessment year 2002-03. No tax benefit was, therefore, obtained by the assessee company for at least two years after the capital loss was booked by it. Hence, it could not be said that the transactions in question were a colourable device, meant to gain some unfair tax advantage. No substantial question of law arose to interfere with the order of the Tribunal.
8. In the case of CIT vs. Pitty Bros (P) Ltd 120 ITR 709, the Hon’ble Bombay High Court held as under:
“Merely because the assessee- company and its vendor firm are sister concerns or are having common directors and partners, it would not necessarily make the purchase an arrangement or a device to palm off the shares of the tobacco company at an inflated price. The Tribunal has in its well-considered order dealt with the various aspects which influenced the ITO and the AAC and has dealt with the same in Para 5 of its appellate order. We are in substantial agreement with the approach of the Tribunal. Having stated this, it would follow that we see no reason to interfere with the conclusion arrived at by the Tribunal from the facts found; and if that be our view, then the question referred to us is required to be answered in the affirmative and in favor of the assessee. The question is accordingly so answered.”
9. Keeping in view the principles laid down by the above judgments and the facts of the case, we are of the opinion that the CIT (A) has come to proper conclusion that the transactions of the assessee in sale of shares cannot be considered as non-genuine so as to deny the loss incurred by assessee. In view of this, the order of the CIT (A) is upheld. The ground is dismissed.
10. In the result, Revenue’s appeal is dismissed.
Order pronounced in the open court on 28th December, 2011.