2017 (3) TMI 1166 - AT - Income Tax

Disallowance of entire amount of loss - Held that - Disallowance of entire amount of loss declared by the assessee may not be appropriate under the facts discussed above, i.e., we are of the view that a portion of the loss may be disallowed to take care of deficiencies, if any, in the claim so made. Hence, on a conspectus of the matter, we are of the view that a disallowance of 20% of the exceptional loss claimed on sale of securities may be reasonable. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and direct the AO to restrict the disallowance of 20% of the amount disallowed by him. Disallowance relating to Difference of Rate (DOR) - Held that - We have noticed that the assessee was in the habit of entering into the buying and selling the securities by taking risks. In such kind of business transactions, the possibility of making exceptional losses/profits could not be ruled out. Hence we find merit in the submissions that the exceptional losses, per se, would not turn the same to be a bogus or artificially hiked loss. The tax authorities should have probed the matter further by making enquiries from the concerned seller & buyer, about prevailing market rates etc., and then they should have come to a conclusion. It is pertinent to note that the Special auditors have only reported the same as Exceptional cases, but they have not branded the same as bogus. Hence, in our view, this claim has been disallowed by the tax authorities only on surmises and not based upon any credible evidence. Accordingly we do not find any justification in disallowing this claim. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and direct the AO to delete this addition. Disallowance of loss arising with purchase and sale of securities - Held that - In the first round of proceedings, the assessee had also claimed that the transactions noted in Sl.No.11 have also been entered on different dates, but the said claim was not made in the second round proceedings. Hence we restore the issue relating to transactions noted in Sr. No. 11 to the file of the AO with the direction to delete the addition, if the transactions have been entered on two different dates. With regard to the loss of ₹ 33,15,000/- in relation to the transactions entered with M.J. Patel, we are of the view that a partial disallowance out of the above said loss would settle this dispute, since there are deficiencies on both sides. Accordingly, we direct the AO to restrict the disallowance of the above said item to 20% of ₹ 33,15,000/- to take care of deficiencies, if any, and in our view the same would meet the ends of justice. Disallowance of net loss incurred in ready forward transactions - Held that - The assessee has offered general explanations with regard to these transactions. In that case, the tax authorities could have examined the net loss vis- -vis normal interest expenditure. These kind of examination has not been carried out by the tax authorities in order to find out as to whether the loss vis- -vis is excessive or unreasonable. We further notice that the assessing officer has not conducted any enquiry with the concerned parties.We also notice that the rate of interest given in the last column ranges from 8.03% to 14.95%. In our view, the same appears to be reasonable rates also. Hence, we are of the view that there is no reason to reject the explanation of the assessee that the same actually represents funding transactions. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and direct the AO to delete this addition. Disallowance of loss arising from security transaction entered with Maruti Udyog Ltd. - Held that - the interest calculated at 12% p.a. on the above said transaction may be accepted and the same would meet the ends of justice also. Accordingly, the interest computed at 12% p.a. for a period of 13 days on the amount of ₹ 15.30 crores works out to ₹ 6,63,300/-. Accordingly, we are of the above that the above said amount of ₹ 6,63,300/- may be allowed in the place of ₹ 16,95,247/- claimed by the assessee. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and direct the AO to allow the amount of ₹ 6,63,300/- against the claim of ₹ 16,95,427/- made by the assessee. We also notice that the above said loss claimed by the assessee also forms part of disallowance of ₹ 1,08,41,926/- relating to Ready forward transactions. Hence the disallowance of ₹ 16,95,427/- results in double disallowance. Since we have deleted the above said disallowance of ₹ 1,08,41,926/-, there was a need to adjudicate the disallowance of ₹ 16,95,427/- separately. Addition of Negative balance of securities - Held that - We notice that the assessee has offered explanations in respect of the items that were pointed out by the AO. In respect of remaining items, no details were furnished to the assessee, since the workings were not given by the AO and hence there was no occasion for the assessee to furnish any explanation. We have noticed earlier that the tax authorities have not examined these explanations and proved the same to be false. In the absence of any contradiction, we are of the view that the explanations offered by the assessee should be accepted. We have also noticed that the assessee also makes short sales and it is submitted that this is also a prevalent commercial practice. Hence, what is required to be seen is that the short sale was ultimately covered up or not. In our view, the claim of short sale could very well be examined by the AO during the course of assessment proceedings, which he has failed to do so. Disallowance of loss arising in the security transactions entered with Oswal Agro Ltd. - Held that - Out of the aggregate amount of about ₹ 90 crores, the assessee submits that he has received about ₹ 72 crores by way of securities, wherein there is no question of diversion. In respect of remaining funds also, the same has been received through the bank account of the assessee and, in the absence of specific finding about diversion, it would get mixed up with the business funds and accordingly it should be presumed that the same has been used for the purposes of business of the assessee. In that view of the matter, the excess payment of ₹ 12,56,943/- would partake the character of interest only, which the assessee is entitled to claim. The assessee has also pointed out that he has made a profit of ₹ 12,56,943/- in respect of securities transactions entered with M/s Oswal Agro. In view of the above, we set aside the order passed by Ld CIT(A) on this issue and direct the AO to delete this disallowance. Disallowance of loss arising in the security transaction entered with Ganesh Book Binding Works - Held that - Admittedly, the assessee could not prove the genuineness of the transactions entered with Ganesh Book Binding Works. Since the assessee has asked for cross examination of the witness after expiry of 14 years, it may not be feasible for the assessing officer to provide the same after expiry of such a long period. However, the fact remains that the assessee could not substantiate the transactions entered with Ganesh Book binding works. On the contrary, the AO has proved that the said transactions are not genuine. Hence we are of the view that the Ld CIT(A) was justified in confirming this addition. Claim of loss in trading in shares, which was debited to the Brokerage Account - Held that - When the AO is accepting the profit making transactions, there is no reason to isolate the loss making transactions and disallow the same. With regard to the loss of ₹ 1,13,231/- pointed out by the auditors are concerned, we have noticed in AY 1988-89 that the Patawat sheets contain transactions entered throughout the month and hence it was not correct to presume that the purchase and sale has taken place on the last day of month. Further the contention of the assessee is that these transactions have been routed through bank account. Hence there is no reason to make such kind of presumption and hence the disallowance of ₹ 1,13,231/- is not justified. Accordingly, we set aside the order passed by Ld CIT(A) on the above said issues and direct the AO to delete the disallowances. Disallowance on ground that the same has resulted in reduction of brokerage - Held that - We notice that the auditors have only given the list of reduction in brokerage account. The assessee has explained that the same represents loss incurred in the share trading. We notice that the AO has rejected the explanation without even examining the same. The contention of the assessee is that both profit and loss arising in share trading were also accounted in brokerage account only. Since there is no material to contradict explanations given by the assessee, we are of the view that there is no justification in rejecting the same. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and direct the AO to delete this disallowance. Disallowance of loss booked in BCD Share trading Account - Held that - We have noticed earlier while disposing the appeals of the assessee for earlier years that the Patawat Sheets is only summary of transactions entered during the month and the same were prepared at the end of the month. Hence, even though the transactions appear to have been entered on the last day of month, the fact remains that they would have been entered on different days in that month. Further, it was not shown by AO that these transactions are not regular business transactions, i.e., it was extra ordinary one. Accordingly we are of the view that there is no justification in making addition of remaining amount of loss Addition of difference in closing stock - Held that - The fact that the second stock statement is not dated has been accepted by the AO. He has given importance to the same only for the reason that some of the shares mentioned therein tallied with the original stock statement. However, no step was taken by the AO to ascertain as to whether the extra shares noted in the second list were, in fact, purchased by the assessee. The AO could have ascertained the same from the Securities register available with him. Since the second statement was not dated, the AO has presumed the same to be of 31.3.1990 without any basis. Accordingly the impugned addition has also been made on surmises and conjectures. Accordingly, we find no merit in this addition Disallowance of loss on sale of shares to CIFCO Ltd. - Held that - The possibility of stage managing the loss by the transactions entered with the sister concern cannot be ruled out. Though the assessee claims that these transactions have been entered in the normal course of business, yet the fact that the assessee was incurring loss on every occasion is not understandable. The assessment of profits in the hands of sister concern, in our view, will not take away the responsibility of the assessee to prove the genuineness of these transactions. In the absence of anything to prove their genuineness, we are of the view that the Ld CIT(A) was justified in confirming the addition made by the AO by disallowing the loss incurred on security transactions entered with CIFCO Ltd. Unexplained Cash deposit - Held that - It is not clear as to whether the assessee has spent away all the withdrawals. In respect of deposit of ₹ 50,000/- made on 11.07.1989, there was no prior withdrawals and hence the same should be considered as unexplained deposit. With regard to the withdrawals aggregating to ₹ 5,00,000/- made between 15.11.1989 to 14.12.1989, we are of the view that the assessee may be given credit of 50% of the same, since the claims of both the parties are not supported by the any evidence. Accordingly, we are of the view that the assessee may be given further relief of ₹ 2,50,000/-. Accordingly, we modify the order passed by Ld CIT(A) and direct the AO to confirm the addition on this issue to the extent of ₹ 2,50,000/-. Disallowance of loss incurred in the security transaction entered with Milan Mahindra - Held that - The transactions entered with unrelated parties and also through banking channels may not be doubted with, unless due enquiries were carried out to ascertain the non-genuineness of transactions. Undoubtedly, no such enquiry or investigation was carried out by the AO either in the original assessment proceedings or in the set aside proceedings. Accordingly we do not find any merit in this addition also. Disallowance of loss incurred in share transactions - Held that - In any case, the transactions have been entered through banking channels and both these parties are not related parties. We further notice that the explanations of the assessee that the same were funding transactions have been rejected by the tax authorities without examining the corresponding parties or the gamut of whole transactions. Hence, we are of the view that there is no reason to suspect these transactions, merely on the reasoning that the assessee has incurred loss in these transactions. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and direct the AO to delete this addition.

Summary

Issues Involved:

1. Disallowance of exceptional losses in security transactions.
2. Disallowance relating to Difference of Rate (DOR) transactions.
3. Disallowance of loss from same-day security transactions with the same party.
4. Disallowance of net loss in ready forward transactions.
5. Disallowance of loss in transactions with Maruti Udyog Ltd.
6. Disallowance of excessive interest payments.
7. Addition due to negative balance of securities.
8. Disallowance of loss in transactions with Oswal Agro Ltd.
9. Disallowance of loss in transactions with Ganesh Book Binding Works.
10. Disallowance of loss in share trading transactions.
11. Disallowance of brokerage reduction.
12. Disallowance of loss in BCD Share trading account.
13. Addition due to difference in closing stock.
14. Disallowance of loss in transactions with CIFCO Ltd.
15. Addition of unexplained cash deposit.
16. Disallowance of loss in transactions with Milan Mahindra.
17. Disallowance of loss in share transactions with Random House and Navdha Investments.
18. Relief granted by CIT(A) on unexplained cash deposits.
19. Relief granted by CIT(A) on transactions with J.P. Gandhi.

Detailed Analysis:

1. Disallowance of Exceptional Losses in Security Transactions:
The special auditors listed substantial losses in certain transactions, questioning their authenticity due to inadequate supporting vouchers. The AO disallowed ?1,20,36,929/- in exceptional losses, which the assessee claimed were normal business transactions. The Tribunal concluded that while the assessee failed to provide third-party confirmations and relevant contract notes, the transactions were conducted through banking channels. A partial disallowance of 20% of the exceptional loss was deemed reasonable to account for deficiencies.

2. Disallowance Relating to Difference of Rate (DOR) Transactions:
The AO disallowed ?29,23,336/- in DOR losses, considering them exceptional without proper explanation. The Tribunal found merit in the assessee's argument that the market rate fluctuations justified the losses. The tax authorities failed to provide evidence of artificial loss enhancement. The Tribunal directed the AO to delete this addition.

3. Disallowance of Loss from Same-Day Security Transactions with the Same Party:
The AO disallowed ?43,82,480/- in losses from same-day transactions, particularly with Shri M.J. Patel. The Tribunal found that while there were deficiencies in the assessee's records, the transactions were through banking channels. A partial disallowance of 20% of the loss with Shri M.J. Patel was deemed appropriate. Transactions not on the same day were directed to be accepted.

4. Disallowance of Net Loss in Ready Forward Transactions:
The AO disallowed ?1,08,41,926/- in net losses from ready forward transactions, suspecting manipulation. The Tribunal accepted the assessee's explanation that these were funding transactions with interest elements. The AO was directed to delete this addition.

5. Disallowance of Loss in Transactions with Maruti Udyog Ltd:
The AO disallowed ?16,95,247/- in losses from transactions with Maruti Udyog Ltd, which denied such transactions. The Tribunal found confusion in the records but accepted the transactions as funding transactions. The AO was directed to allow ?6,63,300/- as interest expenditure.

6. Disallowance of Excessive Interest Payments:
The AO disallowed ?1,10,45,650/- as excessive interest payments without proper examination. The Tribunal found the transactions were with unrelated parties and commercial in nature. The AO was directed to delete this addition.

7. Addition Due to Negative Balance of Securities:
The AO added ?75,69,07,150/- for negative stock balances, which the assessee explained were due to short sales and accounting errors. The Tribunal found the explanations reasonable and directed the AO to delete this addition.

8. Disallowance of Loss in Transactions with Oswal Agro Ltd:
The AO disallowed ?12,56,943/- in losses, questioning the usage of funds. The Tribunal accepted the assessee's explanation that the funds were used for business purposes and directed the AO to delete this disallowance.

9. Disallowance of Loss in Transactions with Ganesh Book Binding Works:
The AO disallowed ?7,85,500/- in losses as the transactions were denied by the counterparty. The Tribunal upheld the disallowance due to the assessee's failure to substantiate the transactions.

10. Disallowance of Loss in Share Trading Transactions:
The AO disallowed ?3,75,000/- and ?1,13,231/- in share trading losses. The Tribunal found the transactions were in the normal course of business and directed the AO to delete these disallowances.

11. Disallowance of Brokerage Reduction:
The AO disallowed ?1,64,285/- in brokerage reduction. The Tribunal accepted the assessee's explanation that it represented share trading losses and directed the AO to delete this disallowance.

12. Disallowance of Loss in BCD Share Trading Account:
The AO disallowed ?42,42,350/- in losses due to discrepancies in balances. The Tribunal found merit in the assessee's explanation and directed the AO to verify and allow the claim.

13. Addition Due to Difference in Closing Stock:
The AO added ?2.64 crores due to discrepancies in stock lists. The Tribunal found the addition was based on surmises and directed the AO to delete it.

14. Disallowance of Loss in Transactions with CIFCO Ltd:
The AO disallowed ?1,61,950/- in losses from transactions with a sister concern. The Tribunal upheld the disallowance due to the repetitive loss-making nature of the transactions.

15. Addition of Unexplained Cash Deposit:
The AO added ?7,50,000/- for unexplained cash deposits. The Tribunal gave partial relief, reducing the addition to ?2,50,000/-.

16. Disallowance of Loss in Transactions with Milan Mahindra:
The AO disallowed ?4,73,472/- in losses without discussion. The Tribunal found no basis for the disallowance and directed the AO to delete it.

17. Disallowance of Loss in Share Transactions with Random House and Navdha Investments:
The AO disallowed ?4,19,200/- and ?3,86,450/- in losses. The Tribunal accepted the transactions as funding transactions and directed the AO to delete the disallowances.

18. Relief Granted by CIT(A) on Unexplained Cash Deposits:
The Tribunal upheld the CIT(A)'s decision to grant relief of ?2,50,000/- due to the proximity of withdrawal and deposit dates.

19. Relief Granted by CIT(A) on Transactions with J.P. Gandhi:
The Tribunal upheld the CIT(A)'s decision to delete the addition of ?88,98,250/- as the profit was already included in the assessee's books.

Conclusion:
The Tribunal provided significant relief to the assessee by partially or fully deleting several disallowances and additions made by the AO, while upholding some disallowances where the assessee failed to provide adequate evidence. The revenue's appeal was dismissed.