2022 (7) TMI 533 - AT - Income Tax

Addition u/s 68 - bogus liability allegedly shown by the assessee - HELD THAT - Although the assessee-firm did not make any entry in its books of accounts on receipt of the shares on loan as the same was not required, the proper accounting entries on sale of shares were duly passed in the books of accounts of the assessee showing the value of sale proceeds as the liability of the assessee-firm to the concerned creditors. Although the assessee, as submitted before the authorities below as well as before us, was required to repay the said liability in the form of shares and not the value, we find that assigning the value of sale proceeds of the shares actually realized to the concerned creditors was fair and proper in the facts and circumstances of the case including especially the fact that the difference on the date of purchase of shares for returning back to the concerned creditors was liable to be declared by the assessee as profit or loss as the case may be as agreed even by the assessee. The shares owned by the concerned creditors were given on loan by them to the assessee to discharge its liability of margin payment through demat account and on sale of the same by the main broker M/s. Khandwala Integrated Financial Services Pvt. Ltd., the liability was duly recognized by the assessee towards the concerned creditors in its books of accounts at the value of sale proceeds actually realized. All these transactions were duly supported by the documentary evidence produced by the assessee; and, the AO in our opinion, was not justified to doubt the genuineness of the said transactions on the basis of some frivolous objections which have been duly clarified and met by the assessee. It appears to us that the nature of transactions as well as the modus operandi involved in the same was not properly understood by the AO while doubting the genuineness of the same while CIT(A) not only understood the same properly but also appreciated the exact nature of transactions to hold that the said transactions were genuine which were entered into by the assessee in the normal course of its business as a dealer in shares. Moreover, the identity and capacity of the concerned creditors as well as genuineness of the relevant transactions involving shares taken by the assessee on loan was duly established by the assessee on evidence and the learned CIT(A), in our opinion, was fully justified in deleting the addition made by the Assessing Officer by treating the said transactions as unexplained cash credit under Section 68 - Decided against revenue.

Summary

Issues Involved:
1. Deletion of addition under Section 68 of the Income-tax Act, 1961 on account of bogus liability.
2. Genuineness of sundry creditors.
3. Treatment of borrowed shares under Section 47(xv) of the Act.
4. Examination of the genuineness of lending of shares.

Issue-wise Detailed Analysis:

1. Deletion of Addition under Section 68 of the Income-tax Act, 1961 on Account of Bogus Liability:
The Revenue appealed against the order of the Commissioner of Income Tax (Appeals) [CIT(A)] deleting the addition of Rs. 1,86,25,876/- made by the Assessing Officer (AO) under Section 68 of the Income-tax Act, 1961. The AO had treated sundry creditors as bogus liabilities, alleging that the transactions were colorable and baseless. The assessee, a partnership firm dealing in shares and derivatives, had shown sundry creditors of Rs. 5,27,79,287/- in its balance sheet. The AO, doubting the genuineness of these transactions, issued a notice to the assessee, who provided explanations and supporting documents, including affidavits from the parties involved.

2. Genuineness of Sundry Creditors:
The AO found the explanation unacceptable, citing the absence of agreements, undetermined values, and unspecified repayment dates. The AO argued that the shares should not have been transferred to the assessee's demat account or sold, and the transactions were incongruent with business principles. The AO concluded that the transactions were a gimmick to create artificial losses or profits, relying on Supreme Court decisions in Mc Dowell Vs. Commercial Tax Officer and Union of India Vs. Azadi Bachao Andolan.

3. Treatment of Borrowed Shares under Section 47(xv) of the Act:
The AO contended that the borrowed shares could not be treated as a transfer under Section 47(xv) of the Act, and thus, the claim of sundry creditor liabilities was not allowable. The AO emphasized that the shares should have been used only for margin purposes and not sold, as the transfer was not recognized under Section 47(xv).

4. Examination of the Genuineness of Lending of Shares:
The CIT(A), after considering the remand report and submissions, found that the assessee had provided evidence supporting the genuineness of the lending of shares, including demat account statements and affidavits from the creditors. The CIT(A) noted that the AO had not examined whether the transactions were genuine lending of shares. The CIT(A) concluded that the transactions were genuine and deleted the addition made by the AO.

Tribunal's Analysis and Conclusion:
The Tribunal observed that the assessee had borrowed shares to meet margin requirements and had provided a list of creditors with their PAN and addresses. The shares were transferred through demat accounts, and proper accounting entries were made upon the sale of shares. The Tribunal found that the AO had not properly understood the nature and modus operandi of the transactions and had raised frivolous objections. The Tribunal upheld the CIT(A)'s order, concluding that the transactions were genuine and entered into in the normal course of business. The identity and capacity of the creditors, as well as the genuineness of the transactions, were established on evidence. The Tribunal dismissed the Revenue's appeal, finding no infirmity in the CIT(A)'s decision.

Judgment:
The appeal of the Revenue was dismissed, and the order of the CIT(A) deleting the addition of Rs. 1,86,25,876/- was upheld. The Tribunal pronounced the order in the open court on 15th June 2022 at Ahmedabad.