1990 (5) TMI 63 - AT - Income Tax

Summary

Issues Involved:
1. Whether the losses claimed by the appellant-company in the trading of shares are genuine or bogus.

Issue-wise Detailed Analysis:

1. Examination of ITO's Observations:
The ITO disallowed the losses claimed by the appellant-company, asserting that the transactions were bogus. The ITO noted that the appellant-company conducted transactions through three brokers, including M/s. Rajendra & Co., a proprietary concern of one of the directors of the appellant-company. The ITO observed that shares were purchased and sold through intermediaries to lend credibility to the transactions. However, the Tribunal found that the ITO did not dispute the existence of the transactions but questioned their credibility without substantial evidence.

2. Short Selling and Speculative Transactions:
The ITO argued that the appellant-company sold shares before taking delivery, labeling it speculative. The Tribunal clarified that short selling is a legitimate practice and that hand delivery share transactions cannot be settled by paying differences, contradicting the ITO's assertion. The Tribunal also noted that the ITO's definition of 'speculative transaction' under Section 43(5) of the IT Act, 1961, was misapplied.

3. Allegations of Peak and Lowest Prices:
The ITO claimed that the appellant-company purchased shares at peak prices and sold at the lowest prices. The Tribunal refuted this by explaining that brokers cannot predict peak or lowest prices during trading hours, as prices fluctuate throughout the trading session.

4. Delivery and Payment Discrepancies:
The ITO alleged that delivery against purchases was not taken timely and that no carry-over charges were accounted for. The Tribunal found these allegations to be based on conjectures without supporting evidence. The ITO's claim of simultaneous delivery and payment was also deemed self-contradictory by the Tribunal.

5. CIT(Appeals) Allegations:
The CIT(Appeals) supported the ITO's disallowance, alleging that transactions were arranged to claim losses. However, the Tribunal found no material evidence to support these allegations. For instance, in the case of J.K. Synthetics and Tata Tea Ltd., the Tribunal noted that actual deliveries and payments were made through account payee cheques, dismissing the CIT(Appeals)'s claims of bogus transactions.

6. Specific Transactions:
The Tribunal examined various transactions in detail:
- J.K. Synthetics: No evidence of commission payment to brokers.
- Tata Tea Ltd.: Actual delivery and payments made, dismissing claims of peak and lowest price manipulation.
- Escorts Ltd.: No evidence of commission payment; allegations deemed imaginative.
- Texmaco: Delivery and payments made on the same date, similar to Tata Tea Ltd. transactions.
- Hindustan Motors Ltd.: No material evidence of sham transactions despite shares passing through related parties.
- Hindustan Aluminium Ltd.: CIT(Appeals) accepted the loss as genuine due to lack of contrary evidence.

7. Bye-laws of Calcutta Stock Exchange:
The Tribunal examined the relevant bye-laws and found that the transactions did not contravene the regulations. The contracts did not stipulate periods for payment or delivery beyond 14 days, thus not void under Bye-law 331.

8. Tribunal's Conclusion:
The Tribunal concluded that the ITO and CIT(Appeals) failed to provide substantial evidence to prove the transactions were bogus. The Tribunal upheld the appellant-company's claim that the losses were genuine and allowable as deductions from income. The appeals were allowed in favor of the appellant-company.