2015 (5) TMI 125 - HC - Income Tax

Disallowance of loss on account of alleged share transactions - shares of certain companies purchased and further the loss claimed on account of diminution in value of those shares - whether ITAT accepting the genuineness of the loss as declared in respect of shares purchased and sold or held as stock-in-trade is perverse? - Held that - The Tribunal proceeded on an erroneous footing that all shares have been bought through the recognised stock exchange through the main broker of the exchange . There was no evidence to indicate that all shares were bought through the stock exchange. The assessee also did not claim this; the assessee had claimed before the AO that all shares were bought from the broker of Gauhati Stock Exchange None of the material produced by the assessee could be relied upon to indicate the market value of the shares. The certificates issued by the Gauhati Stock exchange for the previous years 1997-98 and 1998-99 certified the traded prices of the shares.. as intimated by a member as off the floor transactions . This, clearly, indicated that (a) the transactions were not conducted through the stock exchange but merely reported as off market transactions; and (b) the transaction was reported by a singular member - thus, the transaction did not involve any other broker. Further the dates and quotations certified, clearly pertained to the transactions involving the assessee and or related companies as parties. The dates of the memos of confirmation and the date of transaction reported to the stock exchange are the same in almost all instances. Thus, these certificates, which only certify the prices at which transactions in question were reported cannot prove that the transactions were executed at market value. Since these transactions in question were not done in open market, but between related concerns and no other transactions in those shares were reported, any price at which the assessee transacted would, obviously, be reflected as a quotation by the Gauhati Stock Exchange. The AO had found that the assessee and the companies whose shares purchased were related. It was pointed out that those companies were promoted by Mr Modi who had disclosed that he had used his undisclosed funds to promote those companies. The assessee had argued that the fact that undisclosed funds were used in promoting companies did not mean that the companies did not carry on its business or were not genuine. However, it was apparent that Mr Modi was the prime mover of the companies in question. The assessee had booked losses in respect of shares of certain companies. The close link between the said companies and the assessee was clearly established. In our view, the link established between the assessee and these companies was important in considering the question whether the transactions of shares were genuine or not.the Tribunal grossly erred in completely ignoring the aspect of inter linked entities and overlooking the perspective outlined by the AO. Insofar as the loss in relation to shares of Mather & Platt India Ltd. is concerned, there is no allegation that the assessee is related in any manner to the said company. In this view, the losses as claimed by the assessee in respect of Mather & Platt India Ltd. cannot be rejected. The losses claimed by the assessee, except the losses relating to the shares of Mather and Platt India Ltd. i.e. ₹ 56,650/- in the assessment year 1997-98, ₹ 1,12,500 in the assessment year 1998-99; and ₹ 67,500/- in the assessment year 1999-00, are liable to be disallowed. - Decided in favour of the Revenue.

Issues Involved:
1. Disallowance of loss on account of alleged transactions in shares.
2. Genuineness of transactions in shares.
3. Applicability of Section 73 of the Income Tax Act, 1961.
4. Interlinking of the assessee with companies involved in the transactions.
5. The Tribunal's acceptance of the assessee's claimed losses.
6. The CIT(A)'s and Tribunal's failure to consider relevant facts.

Issue-wise Detailed Analysis:

1. Disallowance of Loss on Account of Alleged Transactions in Shares:
The principal controversy involves disallowance of losses claimed by the assessee due to transactions in shares. The Assessing Officer (AO) disallowed these losses for assessment years 1997-98, 1998-99, and 1999-2000, concluding that the transactions were not genuine. The losses were claimed on account of both sale/purchase of shares and diminution in their value.

2. Genuineness of Transactions in Shares:
The AO found that the transactions were not genuine based on several factors:
- The shares were purchased on credit without any payment being made.
- The seller, Shri Nem Chand Jain, did not charge interest or take legal action for the unpaid amount.
- The companies involved were not actively traded, and their stock prices could be manipulated.
- The companies and the assessee were interlinked, with common directors and cross-holdings.
- The transactions were "off-market" and not through any recognized stock exchange.
- The AO concluded that these transactions were sham, devised to create artificial losses to offset other income.

3. Applicability of Section 73 of the Income Tax Act, 1961:
The Revenue argued that the losses could not be set off against business income under Section 73. However, the Tribunal rejected this contention, noting that the issue was not raised in earlier proceedings.

4. Interlinking of the Assessee with Companies Involved in the Transactions:
The AO highlighted the close relationship between the assessee and the companies whose shares were traded. These companies were promoted by Mr. R.R. Modi, who was also a director of the assessee company. The companies held shares of the assessee, and the transactions were essentially book entries among related entities.

5. The Tribunal's Acceptance of the Assessee's Claimed Losses:
The Tribunal upheld the CIT(A)'s decision, accepting the genuineness of the transactions based on documentary evidence like purchase bills, broker's contract notes, and letters confirming share transfers. However, the High Court found this acceptance to be erroneous and perverse, as the Tribunal ignored the substantial evidence indicating the transactions were sham.

6. The CIT(A)'s and Tribunal's Failure to Consider Relevant Facts:
The High Court noted that the CIT(A) and the Tribunal failed to address key aspects:
- The interlinking of the assessee with the companies involved.
- The non-payment for the shares and the lack of financial capacity of the seller.
- The manipulation of share prices and the nature of the transactions being off-market.
- The Tribunal's erroneous assumption that all shares were traded through a recognized stock exchange.

Conclusion:
The High Court concluded that the transactions were not genuine and were designed to create artificial losses. The Tribunal's and CIT(A)'s findings were deemed perverse and erroneous. The appeals were allowed, disallowing the losses claimed by the assessee, except for the losses related to Mather & Platt India Ltd., which were not linked to the sham transactions.

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