2005 (9) TMI 511 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of loss claimed by the assessee on the sale of shares of Satyam Computers Ltd.
2. Determination of whether the transaction was genuine or a sham.

Detailed Analysis:

1. Disallowance of Loss on Sale of Shares:

The assessee, engaged in trading and investment in shares, declared a loss of Rs. 6.60 crores on the sale of 41,250 shares of Satyam Computers Ltd. The shares were purchased from Sedum Investments & Finance Ltd. and sold through a broker in Calcutta. The Income-tax Officer (ITO) and the Commissioner of Income-tax (Appeals) [CIT(A)] disallowed the loss, treating the transaction as a sham.

The assessee argued that the shares were purchased in the preceding year and were part of the opening stock. The transactions were delivery-based and conducted in physical mode. The assessee provided evidence such as purchase bills, sale bills, and bank statements to support the genuineness of the transactions. The assessee also cited CBDT Circular No. 704, which recognizes direct transactions between parties.

2. Determination of Whether the Transaction Was Genuine or a Sham:

The ITO and CIT(A) questioned the genuineness of the transactions based on several grounds, including:
- Shares were not purchased through a broker as per SEBI guidelines.
- The transaction was not reported to BSE/NSE.
- The price of the shares was allegedly fixed in advance.
- The shares were purchased at a higher rate than the market rate.
- The assessee did not provide distinctive numbers of the shares or proof of actual delivery.

The assessee contended that the transactions were genuine, supported by confirmations from Sedum Investments & Finance Ltd. and the broker. The shares were traded in physical form, and trading in demat form became mandatory only from July 2001.

The Tribunal examined the evidence and found inconsistencies in the assessee's claims:
- The assessee failed to provide distinctive numbers of the shares.
- Despite repeated inquiries, no proof of physical delivery of shares was provided.
- The payment for the purchase was made in advance without any agreement, which is against normal business practices.
- The sale proceeds were received after a significant delay, which is unusual in share transactions.

The Tribunal concluded that the transaction was not genuine but a sham, intended to defraud the revenue. The assessee's inability to provide crucial evidence, such as distinctive numbers and proof of delivery, supported this conclusion. The Tribunal upheld the findings of the CIT(A) and dismissed the appeal, confirming the disallowance of the claimed loss.

Conclusion:

The Tribunal dismissed the appeal, confirming that the transaction in question was a sham and the disallowance of the loss claimed by the assessee was justified. The decision emphasized the importance of providing concrete evidence to prove the genuineness of transactions in share trading.