S.10(38) Exemption cannot be denied for delay in dematerialisation

In the ITAT Pune Bench ‘B’

Income-tax Officer

V/s.

Ajay Shantilal Lalwani

IT Appeal No. 163 (Pune) of 2010

[Assessment Year 2006-07]

NOVEMBER 18, 2011

ORDER

I.C. Sudhir, Judicial Member

The Revenue has questioned first appellate order on the following grounds :

“1.  On the facts and circumstances of the case, the CIT(A) erred in treating the income by the assessee from undisclosed sources as capital gains.

 2.  On the facts and in the circumstances of the case the CIT(A) erred by accepting the cost of purchase/acquisition of the shares as stated by assessee, contradicting his own findings in the appellate order that the purchase contract notes are not genuine and that the shares were not purchased by the assessee in financial year 2003-04.

 3.  On the facts and in the circumstance of the case, the CIT(A) ignored the fact that once the documents/evidences produced by the assessee have been proved to be fabricated, the only logical conclusion that can be drawn is that the whole transaction is a sham transaction and assessee has tried to introduce his undisclosed income in the guise of long-term capital gain.

 4.  On the facts and in the circumstances of the case, the CIT(A) erred by applying the decision of Hon’ble High Court of Punjab & Haryana delivered in the case of CIT v. Anupam Kapoor [2007] 212 CTR (P&H) 491:[2008] 299 ITR 179 (P&H) when the facts of the cases are distinguishable.”

2. The assessee, on the other hand, has impugned the first appellate order on the following grounds :

“(1)  The learned CIT(A) erred in holding that the appellant had failed to prove that the delivery of the shares was taken in financial year 2003-04 and therefore, the gain arising on sale of shares was to be taxed as short-term capital gain by assuming the date on which the shares were transferred to the D-mat account as the date of purchase of shares.

(2)  The learned CIT(A) failed to appreciate that the appellant had purchased the shares of Oasis Cine Communication Ltd. on 4th April, 2003 and had also purchased the shares of Shiv Om Investment & Consultancy Ltd. on 24th Nov., 2003 and accordingly, the gain arising on sale of shares was a long-term capital gain exempt under s. 10(38).

(3)  The learned CIT(A) erred in holding that the assessee could not satisfactorily explain the genuineness of the contract notes issued by the brokers and therefore, the assessee had failed to prove that the shares were purchased by him in financial year 2003-04.

(4)  The learned CIT(A) ought to have appreciated that :

(a)  The assessee had purchased the shares of Oasis Cine Communication Ltd. and Shiv Om Investment & Consultancy Ltd. in financial year 2003-04.

(b)  The name of the assessee was endorsed on the share certificate of the said companies in financial year 2003-04 only and thus, the assessee’s ownership of these shares was established in financial year 2003-04.

(c)  When the assessee had established that the shares were transferred in his name in financial year 2003-04 only, there was no justification for holding that the assessee became the owner of the shares when they were credited to his D-mat account.

(d)  The sharebrokers through whom the shares were purchased had also accepted receipt of the amount from the assessee and also the fact that the transaction of purchase of shares was a genuine transaction.

(e)  The shares were purchased by the assessee through off-market trade and therefore, there was no such transaction on the Kolkata Stock Exchange.

(f)  The assessee had filed the return for asst. yr. 2004-05 on 31st Oct., 2004 and had duly shown the purchase of shares of above-referred companies in the balance sheet filed along with the return.”

3. We have heard and considered the arguments advanced by the parties. In view of the orders of the authorities below, material available on record and the decisions relied upon.

4. The relevant facts are that the AO denied exemption under s. 10(38) of the Act in respect of long-term capital gain mainly on the basis that there was a substantial delay in transferring the shares into D-mat account from the date of purchase, transactions stated to have been mentioned on the contract notes were not routed through the Calcutta Stock Exchange, the assessee was unable to give any satisfactory explanation about the genuineness of the contract notes issued by the sharebroker and acquisition or delivery of shares, and sufficient proof regarding the possession of shares as on the date of purchase was not there. The details of these transactions are being reproduced hereunder :

The learned CIT(A) has accepted the finding of the AO that there is no sufficient and valid evidence available with the assessee to prove that the shares were actually acquired followed by delivery in the relevant financial year. The learned CIT(A) has, however, allowed short-term capital gains treating the dates of the acquisition of the shares as on the date of transfer of shares to the appellant’s D-mat account on the undisputed sales of those shares. The parties are thus in cross-appeals. The assessee has basically questioned the first appellate order treating the date of acquisition of the shares as the date of transfer on those shares in the assessee’ D-mat account instead of the declared date of acquisition of those shares by the assessee. The Revenue, on the other hand, has questioned first appellate order accepting the cost of purchase/acquisition of the shares as stated by assessee.

5. In support of the grounds of the appeals preferred by the Revenue, the learned Departmental Representative has basically placed reliance on the assessment order. He submitted that the learned CIT(A), on one hand, has upheld the findings of the AO that purchase contract notes of the shares are not genuine and that the shares were not purchased by the assessee in financial year 2003-04, but on the other hand, he has accepted the cost of purchase/acquisition of the shares as stated by the assessee. The learned Departmental Representative submitted that the documents/evidence produced by the assessee have been found to be fabricated, the only logical conclusion that can be drawn that the whole transaction is a sham transaction. He submitted that the assessee has tried to introduce his undisclosed income in the guise of long-term capital gain.

6. The learned Authorised Representative, on the contrary, tried to justify the first appellate order to the extent questioned by the Revenue. He submitted that there is no dispute that the shares were sold, the only dispute before the AO was regarding the date of purchase of those shares as the AO was having doubt on the date of purchase of those shares as declared by the assessee. In support of declared date of acquisition of shares, the assessee had filed sufficient evidence. The assessee had purchased equity shares of (i) Oasis Cine Communication Ltd, and (ii) Shiv Om Investment & Consultancy Ltd. listed on a recognized stock exchange viz. The Calcutta Stock Exchange and the sale transaction was covered by security transaction tax. These purchases are duly disclosed in the relevant year’s balance sheet. The assessee had also disclosed investment in purchase of shares in the return furnished for the preceding asst. yr. 2004-05. Thus, merely because there is some general tendency of some few traders engaged in rigging up the market, the same should not deprive the assessee from profit arising from genuine sales which has actually resulted in long-term capital gain which is exempt under s. 10(38) of the Act. The learned Authorised Representative also tried to meet out the objections raised in this regard by the authorities below which we will discuss in our finding in succeeding paras. He drew our attention to page Nos. 16 to 50 of the paper book i.e. copies of remand report of the AO, reply of the assessee to the remand report, return of income along with balance sheet for the asst. yrs. 2004-05 and 2005-06, physical share certificates of Oasis Cine Communication Ltd. and Shiv Om Investment & Consultancy Ltd., D-mat account statement, D-mat request application forms in respect of Oasis Cine Communication Ltd. and Shiv Om Investment & Consultancy Ltd., D-mat account client master report received from Stock Holding Corporation of India Ltd., contract notes issued by the broker and S.B. Bhutra & Co.; confirmation given by Shiv Om Investment & Consultancy Ltd., confirmation given by broker, statement recorded of the assessee, and reply of the Kolkata Stock Exchange Association Ltd. The learned Authorised Representative also placed reliance on the following decisions :

(i)  Nisraj Real Estate & Export (P.) Ltd. v. Asstt. CIT [2009] 31 DTR 456 (JP).

(ii)  CIT v. Smt. Jamnadevi Agrawal [2012] 20 taxmann.com 529 (Bom.)

(iii)  Asstt. CIT v. Kamal Kumar S. Agrawal (Indl.) [2012] 20 taxmann.com 338 (Nag.)

(iv)  Acchyalal Shaw v. ITO [2009] 30 SOT 44 (Kol.) (URO)

(v)  CIT v. Anupam Kapoor [2008] 299 ITR 179/166 Taxman 178 (Punj. & Har.).

The learned Authorised Representative also tried to distinguish the decision of Pune Bench of the Tribunal in the case of Smt. Surekha Bhagvati Prasad Mundada v. ITO., IT Appeal No. 1332/Pn/2008 and others at. 16th June, 2010. He submitted that in that case facts are distinguishable as there, no physical share certificate was available, transfer was denied by stock exchange and before the Tribunal, assessee changed its stand with the explanation that shares were purchased from off-market and not from the stock exchange. There was no confirmation by the company and delivery of shares was made directly in the D-mat account.

7. The learned Departmental Representative submitted that the claimed share transactions are bogus as there is no evidence of purchase by the assessee and referred contents of page Nos. 4 to 13 of the assessment order. The learned Departmental Representative also referred page No. 50 of the paper book i.e. information furnished by the Kolkata Stock Exchange Association Ltd. to the AO on 23rd Nov., 2003 and 2nd April, 2003 that M/s S.B. Bhutra & Co. had not executed any transaction in the scrips of Shiv Om Investment & Consultancy Ltd. and Oasis Cine Communication Ltd. either in physical or D-mat form in the online trading system of exchange.

8. Considering the above submissions, we find that some material facts are undisputed that : (i) shares purchased were transferred into D-mat account maintained by the assessee with HDFC Bank and the shares were sold on the dates mentioned in the Table reproduced hereinabove. The only dispute is regarding the date and mode of acquisition of those shares in question. The assessee was not able to prove to the satisfaction of the authorities below that the said shares were actually purchased on various dates during the financial year 2004-05. The assessee has tried to meet out objections raised by the AO in this regard. The AO noted that the shares were credited in D-mat account on 12th April, 2005, after lapse of more than 20 to 24 months from the date of purchase contract note i.e. 4th April, 2003 and 25th Nov., 2005. The submission of the assessee in this regard remained that the assessee had purchased the shares outside stock exchange directly from the broker in physical form. The assessee was having no D-mat account when the shares were purchased. D-mat account was opened on 30th Nov., 2004 in the financial year 2004-05. The date of purchase of shares is 25th Nov., 2003 and not 25th Nov., 2005. The said date falls in the asst. yr. 2006-07. It was explained that shares were kept in the physical form till the shares were held by the assessee. When the assessee had decided to sell the shares, he had sent the shares to D.P. (Stock Holding Corporation of India Ltd.) for dematerialization. Assessee had submitted a copy of D-mat account statement received from the D.P. in his first submission dt. 19th June, 2008. The D-mat account statements revealed that the shares D-mat request was received by the D.P. from the assessee , and after some days, D-mat was confirmed by the D.P. It proves that the shares were in the possession of the assessee before dematerialization, explained the assessee. The fact that investment in purchase of shares disclosed in the preceding year’s return is very well accepted by the Department. The assessee all along displayed the characteristics of an investor and there was nothing on record to suggest that the assessee had ever indulged in any manipulation in the market. It was submitted that while comparing the date of purchase of shares in physical form of the assessee in the given data with the date of credit in D-mat account, the AO erred in totally ignoring the fact that at the time of purchase of aforesaid companies’ shares, assessee was not having D-mat account and hence shares were purchased in physical form which were transferred into D-mat account opened subsequently. It was submitted that during the assessment proceedings, copies of share certificates held by the assessee in physical form were also provided to the AO, which contained complete relevant details such as address of latest office of the company, signature of the authorized signatory along with two directors’ signatures, value of shares with paid-up amount of shares purchased in each company, date of issue of certificate, serial number, registered folio, number of shares with their distinctive numbers, date of transfer of shares in the name of assessee (reflected on the backside of the certificate) and also copies of contract note along with bills issued by sharebroker S.B. Bhutra & Co.

9. It was further submitted that date of alleged non-execution of 70 scrips of 23rd Nov., 2008 relied upon by the AO in the assessment order, falls in asst. yr. 2009-10. Similarly, the AO had not been vigilant to mention correct name of the company in the assessment order. The name of the company is Shiv Om Investments & Consultancy Ltd. and not Shiv Communications as mentioned in the assessment order. The AO has thus proceeded on the basis of not only misleading but incorrect facts.

10. Regarding denial of stock exchange that S.B. Bhutra & Co., had not executed any trade on 2nd April, 2003 in Oasis Cine Communication Ltd. and also on 23rd Nov., 2008 (correct date is 25th Nov., 2003) in Shiv Om Communications in online trading systems of the exchange, the submission of the assessee remained that the words used “online trading system of the exchange” are very important as the assessee has also stated the same clearly to the AO in his statement that the transaction is not done by him in the online system of the exchange, but the shares were purchased outside the market through the broker. It was submitted that the AO had asked the company to confirm the share transactions. In case of Shiv Om Investments & Consultancy Ltd., the company vide its letter dt. 29th Nov., 2008 addressed to the company had confirmed in black and white that the said shares have been transferred on the given date. It was submitted that it is for the assessee to hold the shares in physical form or dematerialized form. The assessee could not be penalized either for not opening D-mat account when he had purchased shares in the physical form. It was further submitted by the assessee that during the inspection of records allowed by AO (after completion of assessment and for the purpose of preparation of first appeal), it was noticed that the broker S.B. Bhutra & Co. in their letter dt. 10th Nov., 2008 had informed the AO that they had transactions with Shri Ajay Lalwani during financial year 2003-04 as per ledger account furnished with the said letter. From the copy of the ledger account extract received from the said broker, it would be seen that the names of both the companies and relevant details i.e. quantities of shares and the amount of purchases are duly reflected. It was submitted that the assessee is assessed to tax since asst. yr. 1991-92 having substantial income out of which, he had purchased shares; the contract note and bill issued by the broker is full and complete supporting evidence for purchase of shares.

11. In case of Oasis Cine Communications Ltd., it was submitted that shares were purchased on 4th April, 2003, but got transferred in the name of assessee on 23rd April, 2004. The delay was due to some procedure undergone as the share certificates were received after transfer in the name of assessee bearing issue date of 16th March, 2004. It was submitted that the shares purchased are recorded in the books of account and shown in the balance sheet as on 31st March, 2004. The copy of the balance sheet was submitted along with the return of income for the asst. yr. 2004-05. Also, the assessee had received the contract notes and broker’s bill in the said year only without any delay. The D.P.’s data also shows that the assessee had sent the shares in physical form by submitting the original share certificate to the D.P for dematerialization.

12. From above discussion, we find that the assessee had addressed the doubts raised on the declared dates of purchases of above shares. The learned Departmental Representative has not been able to rebut the above explanation of the assessee before us. Admittedly, in the present case before us, the assessee had purchased the shares outside stock exchange directly from the broker in physical form though D-mat account was opened on belated date with this explanation that at the time of purchase of shares, he was not having D-mat account and on opening of D-mat account, the shares were transferred to the same. Before the AO copies of the share certificates held by assessee in physical form were provided which contained complete relevant details such as address of registered office of the company, signatures of the authorized signatory along with two directors’ signatures, value of shares with paid-up amount of shares purchased in each company, date of issue of certificate, certificate number, registered folio, number of shares with their distinctive numbers, date of transfer of shares in the name of assessee and also copies of contract notes along with bills issued by sharebroker. S.B. Bhutra & Co. The assessee also furnished returns of income along with balance sheet for the asst. yrs. 2004-05 and 2005-06 during which period, assessee claimed to have purchased those shares in question, copy of contract notes issued by the broker and confirmations given by Shiv Om Investments & Consultancy Ltd. and by broker. We are thus of the view that merely because there was substantial delay in transferring the shares into D-mat account from the date of purchase and the transactions not routed through Calcutta Stock Exchange, the AO was not justified in doubting the declared date of purchase of the shares ignoring the above evidences. In the case of Smt. Jamnadevi Agrawal (supra), copy supplied, the property broker had stated the share transactions as sham and bogus. However, the purchase and sale prices of the shares declared by the assessee were in conformity with the market sales prevailing on the respective dates, the related company had confirmed to have handed over the shares purchased by the assessee, sale of the shares to the respective buyers was also supported by the documents, the Hon’ble High Court has been pleased to uphold the finding of the Tribunal that transactions were genuine. Likewise in the case of Kamal Kumar S. Agrawal (Indl) (supra) that Nagpur Bench of the Tribunal has also held that the fact that there was difference in the information as per contract notes and that received from the stock exchange is not material as admittedly some off-market transactions were not reported to the stock exchange, therefore such transactions cannot be treated as sham merely on account of some discrepancies and the sale proceeds of shares cannot be taxed under s. 68 of the Act. Similarly, the Kolkata Bench in Acchyalal Shaw (supra) has held that in off-market transactions in shares, any enquiry from the stock exchange will not yield result in favour of Revenue, Revenue has to see whether the sale has been effected or not as per the acceptance and admission of the respective stockbroker. Under these circumstances, we set aside the first appellate order to this extent that shares in question were not purchased on the declared dates and direct the AO to allow the claimed exemption under s. 10(38) of the Act on the long-term capital gain shown by the assessee on those shares. The grounds of the appeals preferred by the assessee against the denial of the deemed exemption under s. 10(38) of the Act on long-term capital gain on sale of the above shares are thus allowed.

13. Likewise in view of our discussion, we do not find infirmity in the first appellate order whereby the learned CIT(A) has rightly accepted the cost of purchase/acquisition of shares as stated by the assessee. The same is upheld. The grounds of the appeals preferred by the Revenue are thus rejected. Consequently, appeals preferred by the Revenue are dismissed and those preferred by the assessee are allowed.

NF