2021 (3) TMI 511 - AT - Income Tax

Disallowance of loss - non genuine transactions in shares - HELD THAT - Since the delivery of shares were taken place in the name of the assessee on the date of transfer and there was no involvement of any agent in order to complete the transaction, the physical delivery of shares were carried out and the proof of which is properly submitted in the paper book. It is normal in case of closely held companies like this to borrow funds from the sister concern in order to complete the transaction or internal settlements. It is important to note that all the settlement of shares were carried out only through banking channel. We do not understand the findings of Commissioner (Appeals) that it is only book entries, how they can create book entries when the settlements were carried out by bank transfers. There is no improper way of settlement and it is one of the legal ways of completing the contract. With regard to sale of shares to PFMS, the assessee has submitted clearly proper payment challan to support that the assessee has actually received ₹ 1.75 crore from PFMS before handing over of the physical shares to them at the market price prevailing on the date of sale i.e., ₹ 48.10 per share. Since there is a loss incurred by the assessee in these transactions, the learned Commissioner (Appeals) doubts the whole transaction merely because there is a loss. Otherwise in case the transaction was carried out with any third party, the doubt would not have arisen. In our considered view, merely because the assessee has taken advances from its sister concern to settle purchase consideration, it does not make the transaction a bogus transaction. Speculative transaction or not - As per the definition of speculation transaction which means a transaction in which a contract for the purchase or sale of any commodity including stocks and shares is periodically or ultimately settled otherwise than by actual delivery or transfer of the commodity or scrips. From the above definition, it is clear that the transaction can be considered as speculative only when the transaction is settled otherwise than by actual delivery. In the given case both purchase and sale transactions were carried out with actual delivery of shares on the specific dates and at the specific rate prevailing on the date of transfer. Therefore, this transaction can never be classified as speculation transaction. Whether the business of the assessee falls under the category specified in Explanation 2 to section 73? - Companies which falls under exclusion which are the company mainly consist of income which is chargeable under the head interest on securities, income from house property, capital gain and income from other sources are companies the principal business of which is the business of banking or granting of loans and advances. It is brought to our notice by the learned Authorized Representative that the majority of the business of the assessee is lending of loans and advances, it is evident from the Balance sheet. In the year 31st March 2000 the loans and advances stood at ₹ 3,70,42,439, whereas at the similar period as on 31st March 2001, the loans and advances stood at ₹ 7,74,20,916. Therefore, 75% of the total assets consist of loans and advances. Therefore, it clearly falls under category of the principal business of granting of loans and advances under exclusion category in the Expalanation-2 to Section 73. Therefore, Explanation 2 to section 73 of the Act will attract to the facts of the present case. Accordingly, the grounds raised by the assessee are allowed.

Issues Involved:
1. Disallowance of loss arising from transactions in shares of Landmark Leisure Ltd. as non-genuine.
2. Classification of the transactions as speculative under section 43(5) of the Income Tax Act, 1961.
3. Applicability of Explanation to section 73 for not allowing set-off of the loss.
4. Justification of penalty imposed under section 271(1)(c) of the Income Tax Act, 1961.

Detailed Analysis:

1. Disallowance of Loss Arising from Transactions in Shares of Landmark Leisure Ltd. as Non-Genuine

The assessee filed its return declaring a loss, which included a significant loss from transactions in shares of Landmark Leisure Ltd. The Assessing Officer (AO) and the Commissioner (Appeals) (CIT(A)) treated these transactions as non-genuine and sham. The CIT(A) observed that the transactions were carried out within the Ketan Parekh Group and involved book entries without actual movement of funds or delivery of shares. The Tribunal, however, found that the assessee had indeed taken and given physical delivery of shares, and the transactions were settled through banking channels. The Tribunal concluded that the transactions were genuine, carried out at prevailing market rates, and not merely book entries.

2. Classification of the Transactions as Speculative Under Section 43(5) of the Income Tax Act, 1961

The AO classified the loss as speculation loss under section 43(5) of the Act, which was affirmed by the CIT(A). However, the Tribunal noted that the transactions involved actual delivery of shares, which does not fall under the definition of speculative transactions as per section 43(5). Therefore, the Tribunal held that the transactions could not be classified as speculative.

3. Applicability of Explanation to Section 73 for Not Allowing Set-Off of the Loss

The AO invoked Explanation to section 73 to disallow the set-off of the loss against other business income, treating it as speculation loss. The assessee contended that its principal business was granting loans and advances, which falls under the exclusion category in the Explanation to section 73. The Tribunal observed that a significant portion of the assessee’s assets comprised loans and advances, thus qualifying for the exclusion. Consequently, the Tribunal ruled that Explanation to section 73 was not applicable, and the set-off of the loss should be allowed.

4. Justification of Penalty Imposed Under Section 271(1)(c) of the Income Tax Act, 1961

The penalty under section 271(1)(c) was imposed based on the quantum addition made by the AO and confirmed by the CIT(A). Since the Tribunal deleted the quantum addition, it held that the penalty became infructuous. Therefore, the Tribunal quashed the penalty order.

Conclusion

The Tribunal allowed the appeals filed by the assessee, holding that the transactions in shares of Landmark Leisure Ltd. were genuine and not speculative, and thus, the loss incurred was allowable. Additionally, the Tribunal quashed the penalty imposed under section 271(1)(c) as the quantum addition was deleted.

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