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2016 (6) TMI 487 - AT - Income TaxAddition under the head loss on derivatives - Held that - The right of the parties to enter into transactions according to their free will and choice has always been protected, the only rider being that both the professed intention and the real intention should be the same. Any transaction in which the professed intention and the intention gathered from the documentation are the same must be considered to be genuine. In the present case the AO disallowed the set off of loss in question not on the basis of any incriminating documents or bringing any adverse evidence on record, but with the observation that the transactions failed to satisfy the test of human probability and the objectives of the transactions was tax evasion. The AO did not doubt the genuineness of the transactions carried out by the Assessee which resulted in the loss. Even in the remand report filed before CIT(A), the AO accepted the veracity of the documents filed by the Assessee in support of the loss but has ignored the loss only on the ground the transactions were colourable and sham device to avoid tax payable on profit on sale of land. This conclusion in the light of the decision of the Hon ble Supreme Court in the case of Vodafone (2012 (1) TMI 52 - SUPREME COURT OF INDIA ) cannot be sustained. Consequently, the CIT(A) was fully justified in deleting the addition made by the AO and directing the loss to be allowed to be set off as claimed by the Assessee - Decided against revenue Treatment to loss - genuinity of loss - speculative loss which was allowed to be carried forward for set off against speculative income in future as per law - Held that - The transactions of purchase and sale of shares carried out by the Assesssee were genuine and real. The loss suffered by the Assessee in such trading was also genuine. The transactions were however speculative in nature in accordance with Sec.43(5) of the Act and the loss in question was speculative in nature requiring special treatment in view of Explanation to sec.73 of the Act. Since the transactions were genuine and proved as real by the assessee, the observation of the assessing officer that the same were Sham is bad in law and is contrary to facts. The assessee has suffered losses of ₹ 37, 95,659 on transactions on shares entered into electronically screen based transaction in a recognized stock exchange, i.e. BSE and NSE. The particulars supporting and evidences were filed during the course of hearing before the assessing officer. The copy of letter dated 7th May, 2009 submitted to the assessing officer along with the copies of the above stated supporting(s) on the losses on shares, was duly filed by the Assessee before the CIT(A). These documents were neither disputed or disbelieved by the AO. In such circumstances the conclusions of the AO in our view were rightly held to be unsustainable by the CIT(A). The CIT(A) was fully justified in his conclusion that the loss cannot be regarded as sham and had to be regarded as real but treated as speculative loss deserving special treatment in terms of set off in accordance with Explanation to Sec.73 of the Act. We find no grounds to interfere with the order of the CIT(A) - Decided against revenue Disallowance u/s 37 - AO held that the assessee has failed to prove rendering of services by the two ladies who are also wife of the partners. Hence in absence of evidences of rendering of services by the said brokers the expenses was not allowed as it failed to satisfy the test of section 37(1) - Held that - In the present case, evidence regarding the nature of services rendered by the recipient of commission has not been placed on record by the Assessee. The fact that the recipient of commission were wife of partners, the fact that the property that was purchased by the Assessee was in Mumbai are circumstances which go against the Assessee. As to how the property was identified by the recipient of commission, what is their expertise in the field of acting as intermediaries for purchase and sale of properties, whether the recipients have any past or future history of rendering similar services and earning income thereon are all relevant considerations, which ought to have been examined by the CIT(A) before allowing relief to the Assessee. In the given facts and circumstances of the case, we are of the view that it would be just and proper to set aside the order of CIT(A) on this issue and remand the issue to the AO for fresh consideration, with liberty to the Assessee to establish the ingredients necessary for claiming commission expense as allowable deduction. We make it clear that the burden to prove the ingredients necessary for claiming commission paid as allowable expense has to be established by the Assessee. The AO will afford opportunity of being heard to the Assessee before deciding the issue. Disallowance of co-ordination charges - Held that - The law is well settled that any payment of commission should be for services rendered by the recipient of the commission. The Assessee to claim expenditure on account of commission has to prove that services were in fact rendered, by the recipient of the commission from the Assessee. The fact that the payment is made by account payee cheque or the fact that tax had been deducted and source or the fact that the recipient of commission has declared commission in his return of income and paid taxes thereon, the fact that there is an agreement for rendering services are all irrelevant considerations. In the present case, evidence regarding the nature of services rendered by the recipient of commission has not been placed on record by the Assessee. The observations that we have made in paragraph 23 of this order will equally apply to this ground also. The AO will afford opportunity of being heard to the Assessee. The burden will be on the Assessee to prove the nature of services rendered and all observations in paragraph-23 of this order will apply to this ground of appeal of revenue also.
Issues Involved:
1. Deletion of addition of ?3,19,76,907/- under the head loss on derivatives. 2. Treatment of loss of ?37,95,659/- as speculative loss. 3. Deduction of ?66,00,000/- paid as commission. 4. Deduction of ?51,00,000/- paid as coordination charges. Analysis of the Judgment: 1. Deletion of Addition of ?3,19,76,907/- Under the Head Loss on Derivatives: The Assessee, a partnership firm dealing in property and shares, claimed a loss of ?3,19,76,907/- from trading in derivatives. The AO deemed these transactions as sham and make-believe, citing peculiar features such as all transactions resulting in loss, margin requirements not being followed, and transactions occurring only within a specific period. The AO referenced judicial principles to support the view that the transactions were not genuine. However, the CIT(A) disagreed, finding no evidence of fraud or bad faith. The CIT(A) noted that the AO's conclusions were based on suspicion and not on concrete evidence. The Tribunal upheld the CIT(A)’s order, emphasizing that the AO did not provide incriminating documents or adverse evidence and merely relied on human probability tests. The Tribunal concluded that the CIT(A) was justified in deleting the addition, as the transactions were genuine and the loss was legitimately claimed. 2. Treatment of Loss of ?37,95,659/- as Speculative Loss: The Assessee claimed a loss of ?37,95,659/- from share trading, which the AO treated as speculative since the transactions were intra-day and no delivery of shares was taken. The AO also considered these transactions sham, similar to the derivatives loss. The Assessee conceded that the loss was speculative but contested the sham nature of the transactions. The CIT(A) agreed that the transactions were speculative but genuine and allowed the loss to be carried forward for set off against future speculative income. The Tribunal upheld the CIT(A)’s decision, noting that the transactions were real and supported by evidence, thus dismissing the Revenue’s appeal on this issue. 3. Deduction of ?66,00,000/- Paid as Commission: The Assessee paid ?66,00,000/- as commission for property purchase, which the AO disallowed, questioning the necessity and genuineness of the expenditure. The AO noted that the recipients were wives of the partners and there was no substantial evidence of services rendered. The CIT(A) deleted the addition, accepting the Assessee’s argument that the commission was necessary for the property transaction and noting that the recipients were identified individuals who declared the income and paid taxes. However, the Tribunal found that the CIT(A) did not adequately examine the nature of services rendered and remanded the issue to the AO for fresh consideration, emphasizing the need for the Assessee to prove the services rendered. 4. Deduction of ?51,00,000/- Paid as Coordination Charges: The Assessee claimed ?51,00,000/- as coordination charges paid to Onkar Management Pvt. Ltd. The AO disallowed the claim, citing lack of evidence of services rendered and issues with TDS compliance. The CIT(A) allowed the deduction, accepting the Assessee’s submission and additional evidence provided. The Tribunal, however, found that the CIT(A) did not sufficiently verify the nature of services rendered and remanded the issue to the AO for fresh consideration, similar to the commission payment issue, requiring the Assessee to prove the services rendered. Conclusion: The Tribunal upheld the CIT(A)’s deletion of the addition related to the derivatives loss and the speculative loss treatment. However, it remanded the issues of commission and coordination charges back to the AO for further verification, emphasizing the Assessee’s burden to prove the genuineness of the services rendered. The appeal was partly allowed for statistical purposes.
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