2014 (9) TMI 161 - AT - Income Tax

Genuineness of transaction - Whether purchase transactions of shares of LIL are genuine Held that - The transaction of purchase was arranged through M/s P.K. Agrawal & Company. Shares in both the cases are of the same company i.e. LIL - Both the assessees considered shares as stock in trade and computed loss by valuing shares at a prevailing market price on the year ending - What difference the margin money of ₹ 1.35 lac would make to the purchase consideration of ₹ 11.05 lac in the case of Ratan Lal Baid, is beyond my comprehension when we consider it in the light of the fact that the assessee also made purchases in identical circumstances - profit of ₹ 1.27 lac earned by the instant assessee on shares of LIC Housing Finance on 03/09/2004 also remained with P.K. Agrawal & Company - there can be no doubt about the genuineness of the purchase transactions of shares of LIL between the assessee and Shri P.K. Agrawal. Whether the shares are Investment or Stock Held that - If the shares are construed as Investment , then obviously there can be no question of computing any loss on valuation until these are sold - It is only if the shares are held as stock in trade, that the regular method of valuing closing stock at cost of market price, which is less would apply so as to reduce the market price of shares to ₹ 2.64 lac - a transaction of purchase cannot be deferred till the actual possession of shares is received or payment is made - the assessee instructed P.K. Agrawal & Company to purchase shares on her behalf in the year relevant to the assessment year - The shares were purchased in the instant year alone, but the delivery was not given to the assessee till the payment, which event took place in the subsequent year - As the dates of contracts of sale as declared by the parties fall in the instant year and these were actually followed up by actual delivery of shares, these transactions need to be considered in this year alone - since the AO himself held these to be trading transaction though relevant to the next year, the character of such purchase transactions of shares is not disturbed - such shares were held by the assessee as Stock in trade and not as Investment . Nature of transaction - Whether the transaction is Speculative or Non-speculative transactions Held that - The mere fact that the delivery was not received up to 31/3/2005, being the year ending relevant to the A.Y. under consideration, would not make a non-speculative transaction to be a speculative one - Since the assessee received delivery of shares, the character of non-speculative transaction cannot be changed by viewing this transaction as on 31/3/2005, till which date no delivery was received - it is not a case that transactions of purchase were settled otherwise than by way of actual delivery - the assessee received the delivery of shares after making due payment by cheques the transactions of purchase cannot be considered as speculative transactions. Loss in shares disallowed - Whether the CIT(A) was justified in deleting the addition made by the AO on account of disallowance of loss in shares Held that - The transactions for purchase of shares of LIL made by the assessee are genuine. Further such shares were purchased as stock in trade in a non-speculative business and the resultant loss arising out of the valuation of such shares at the market rate on the year end, which is obviously less than the cost price, is fully allowable - CIT(A) was justified in deleting the addition made by the AO on account of disallowance of loss in shares Decided against Revenue.

Summary

Issues Involved:
1. Whether the purchase transactions of shares of Limtex Investment Ltd. (LIL) are genuine.
2. If genuine, whether such shares are classified as 'Investment' or 'Stock'.
3. If classified as 'Stock', whether these transactions are speculative or non-speculative.

Detailed Analysis:

I. Whether Purchase Transactions of Shares of LIL are Genuine?

The primary issue was the genuineness of the purchase transactions of LIL shares. The Assessing Officer (AO) and the learned Accountant Member (A.M.) doubted the transactions based on a survey statement from Shri P.K. Agrawal, who admitted to arranging accommodation entries for share trading profits and long-term capital gains. However, the name of the assessee did not appear in the list of beneficiaries of such bogus transactions. During appellate proceedings, Shri P.K. Agrawal confirmed the genuineness of the transactions with the assessee through an affidavit, stating that the transactions were not through the stock exchange but were genuine. The Tribunal found no material to dispute this assertion.

The Departmental Representative (D.R.) argued that the transactions did not comply with SEBI regulations as they were off-market and not spot transactions. However, the Tribunal held that these regulations were not applicable to the transactions between the broker and the assessee. The assessee ordered the shares, made payments, and received delivery, proving the transactions' genuineness.

Further, the D.R. cited SEBI penalizing P.K. Agrawal & Co. for price rigging of LIL shares as evidence of non-genuine transactions. The Tribunal noted that the SEBI order indicated price manipulation but did not imply that transactions with the assessee were bogus. The Tribunal referenced a similar case, Ratan Lal Baid, where the genuineness of LIL share transactions was upheld under identical circumstances.

II. If Genuine, Whether Such Shares are 'Investment' or 'Stock'?

Having established the transactions' genuineness, the next issue was whether the shares were held as 'Investment' or 'Stock'. The assessee categorized the shares as stock in trade, and the AO, although initially doubting the transactions, suggested they could be considered trading transactions for the subsequent year when payment and delivery occurred.

The Tribunal referred to Circular No. 704, which states that the date of the contract of sale, followed by actual delivery, should be treated as the date of transfer. The shares were purchased in the relevant year, and delivery was received later, confirming these were trading transactions. Thus, the shares were held as stock in trade.

III. If Classified as 'Stock', Whether These Transactions are Speculative or Non-Speculative?

The final issue was whether these stock transactions were speculative. The D.R. argued they were speculative since delivery was not received by the year-end. However, Section 43(5) of the Income Tax Act defines speculative transactions as those settled otherwise than by actual delivery. The Tribunal found that the assessee received delivery of shares in December 2005, and the transactions were not settled otherwise than by actual delivery. Therefore, these were non-speculative transactions.

Conclusion:

The Tribunal concluded that the transactions for purchasing LIL shares were genuine. The shares were held as stock in trade in a non-speculative business. The resultant loss from valuing the shares at market rate at the year-end, which was less than the cost price, was fully allowable. The Tribunal agreed with the Judicial Member (J.M.) and upheld the CIT(A)'s decision to delete the addition made by the AO on account of the disallowance of loss in shares amounting to Rs. 40,01,670. The matter was directed to be listed before the Division Bench for passing an order in accordance with the majority view.