2015 (3) TMI 563 - AT - Income Tax

Disallowance of loss arising out of valuation of shares - AO has raised the issue that BIFC did not have the adequate number of shares in their stock as on the date sale - CIT(A) deleting the disallowance - Held that - the facts are contrary to the findings of the AO, as would appear from the copy of account enclosed herewith, that the said BFIC had the required number of shares in their stock and in response to the query of the AO, an explanation was filed vide letter dated 30.11.2011 (copy is enclosed in assessee's paper book). Further, the AO also made enquiry u/s. 133(6) from the seller BIFC, who also replied and admitted the factum of the sale of share. Therefore simply because the shares amount transferred to the Demat account of the assessee or that the payments were made in the subsequent year, the transaction cannot be taken to be not genuine. The AO noted that the transaction is bogus and further the purchase was inflated. However, there is no basis for the same but it is only the presumptions of the AO. Moreover, as informed during the course of this appeal hearing before us by Ld. Counsel that after completion of the assessment of the assessee, scrutiny assessment of the seller was taken up and in such scrutiny assessment, the sale of the have been treated to be genuine. This fact was also not examined by the AO from the assessment records of the seller, as the PAN was given. We are of the view that in case the transaction have been treated as genuine in the hands of the seller, the same very transaction cannot be non-genuine in the hands of the purchaser. On identical issue taken up by Hon'ble Gujarat High Court in the case of Prudent Finance (P.) Ltd. 2014 (5) TMI 10 - GUJARAT HIGH COURT we are of the view that the transaction to unrelated parties i.e. off market transaction, there was no evidence in the present case also which suggests that the shares were artificially sold at a lower rate than the prevailing market rate. Even the AO could not bring anything on record, which suggests that the selling rate was lower than the market rate. Respectfully following Hon'ble Gujarat High Court, we confirm the order of CIT(A) and the issue of revenue's appeal is dismissed. - Decided in favour of assessee.

Summary

Issues Involved:
1. Deletion of disallowance of loss arising from the valuation of shares.
2. Validity of shares being part of closing stock despite not being in possession.
3. Legality of transactions under the Securities Contract Regulation Act.
4. Factual correctness of the AO's findings on the closing stock and liabilities.

Issue-wise Detailed Analysis:

1. Deletion of Disallowance of Loss Arising from Valuation of Shares:
The primary issue in the appeal was the deletion of the disallowance made by the Assessing Officer (AO) regarding the loss of Rs. 81,84,000/- claimed by the assessee due to the valuation of shares of Quintegra Solution Ltd. and Pal Credit Capital Ltd. The assessee valued these shares at the market rate as part of the closing stock, which was lower than the purchase rate, leading to a claimed loss. The AO disallowed this loss, treating the transactions as bogus since the shares were not transferred to the Demat account nor any payment was made during the financial year. However, the CIT(A) deleted the disallowance, stating that the transactions were genuine and the shares were part of the closing stock as per the balance sheet.

2. Validity of Shares Being Part of Closing Stock Despite Not Being in Possession:
The AO contended that the shares were not part of the closing stock as they were not in the assessee's possession at the end of the financial year. The CIT(A) countered this by noting that the shares were indeed shown in the closing stock in the balance sheet and the payment for the shares was made through account cheques, which appeared in the bank reconciliation statement. The CIT(A) found that the shares were purchased and the transactions were valid, thus forming part of the closing stock.

3. Legality of Transactions Under the Securities Contract Regulation Act:
The AO argued that the transactions were illegal under the Securities Contract Regulation Act as the shares were not traded through a recognized stock exchange and without the involvement of a broker. The CIT(A) observed that the relevant provisions of the SCRA primarily apply to members of the stock exchange and that the transactions between non-members without knowledge of the Act's provisions are enforceable. The CIT(A) concluded that the transactions were not illegal, as they were carried out with the involvement of a broker who did not inform the assessee of any illegality.

4. Factual Correctness of the AO's Findings on the Closing Stock and Liabilities:
The AO's findings were challenged by the CIT(A), who pointed out factual errors in the AO's assessment. The CIT(A) highlighted that the shares were shown in the closing stock and the payment was made to the seller, as evidenced by the bank reconciliation statement. The CIT(A) also noted that the transactions were accepted as genuine in the hands of the seller, Beejay Investments and Financial Consultants Pvt. Ltd., during their scrutiny assessment, which further validated the genuineness of the transactions in the hands of the assessee.

Conclusion:
The Tribunal, after considering the rival contentions and the facts of the case, upheld the order of the CIT(A). It noted that the transactions were genuine, the shares were part of the closing stock, and the AO's disallowance was based on presumptions without concrete evidence. The Tribunal also referred to the judgment of the Hon'ble Gujarat High Court in the case of CIT v. Prudent Finance (P.) Ltd., which dealt with a similar issue and supported the assessee's case. Consequently, the appeal of the revenue was dismissed.