2021 (5) TMI 538 - AT - Income Tax

Speculative transactions - Addition made towards profit in money market operations - addition as profit from trading in money market securities on the basis of contract notes from seven money market transactions - speculative loss from share market transactions eligible to be set off against the profit from trading in money market securities - whether profit from money market transactions is a speculative profit and eligible to be set off against the losses incurred on the share transactions of speculative nature? - HELD THAT - As examined and analysed facts and opine that profit from money market transactions is a speculative profit and eligible to be set off against the losses incurred on the share transactions of speculative nature. CIT(A) has given a finding that transaction of money market are always backed by bank receipts or actual bonds and thus profit or loss arising from money market transactions are non speculative in nature, however, after examining the records before us we find that in this case the physical delivery has not taken place and therefore the transactions of sale and purchase of securities are speculative transactions and so is the profit resulting from those transactions. The speculative transactions are defined under section 43(5) of the Act and are eligible to be set off against the loss of share transactions. Accordingly, we hold that the speculative loss from share market transactions is eligible to be set off against the profit from trading in money market securities. We direct the AO to assess the net income which is the difference between the profit from trading in money market securities of nd losses from share market transactions as both being of speculative nature. Addition made on the basis of notings in the papers/ daily position sheets - addition towards speculative profit on trading in shares and towards speculative profit arising on shares held by the assessee on 24.01.1992 which were presumed to be carried forward and squared up on or before 31.03.1992 - HELD THAT - Despite seized material containing transactions carried out by share brokerage firm M/s. J.H. Mehta, no statement was recorded of any employee or official of M/s. J.H. Mehta at the time of search or during the course of assessment proceedings and therefore the AO has not taken any steps to bring on record any material to corroborate the rough bottings on these sheets and merely proceeded on the basis of surmises and conjuncture. The case of the assessee is also squarely covered by the decision of M/s. Pallavi Holdings Pvt. Ltd. 2005 (8) TMI 589 - ITAT MUMBAI wherein the coordinate bench of the Tribunal had held that income can not be determined by presuming the sale of shares without no evidences have been found to establish that shares were sold by the appellant. The DR could not bring any decision to the contrary. In view of the above facts and circumstances and the ratio laid down in the two decisions of the co-ordinate bench of the Tribunal, we are not in agreement with the conclusion drawn by the Ld. CIT(A) on this issue. Accordingly, we set aside the order of Ld. CIT(A) and direct the AO to delete the addition on the basis of notings in the papers/ daily position sheet. Proportionate share pertaining to the assessee out of disclosure made by Shri Harshad S. Mehta for the entire Harshad Mehta Group - In the first round of litigation, the Ld. CIT(A) confirmed the addition on the ground that books of accounts were not produced before the AO but CIT(A) noted that now the books of accounts have been allowed as additional evidence by the Tribunal - HELD THAT - As the coordinate bench of the Tribunal in the first round of litigation has admitted the books of accounts as an additional evidence and restored the matter back to the file of the Ld. CIT(A) to decide the issues on the basis of books of accounts. We find merit in the contentions and arguments of the Ld. A.R. that the disclosure was made at a stage when the complete books of accounts were not available and it was not possible for the group to determine its correct income from share trading profit, dividend and capital gain etc. and the disclosure was purely on estimation basis. But now since the books of accounts are before the Revenue Authorities and contains all the information qua the income of the assessee by way of profit on share trading, dividend and capital gain etc and the actual income of the assessee has been assessed by the Revenue Authorities based on the bank statements and other accounting records, therefore the income as offered by way of composite disclosure by Shri Harshad Mehta can not be added to the income of the assessee. The case of the assessee also is squarely covered by the decision of the coordinate bench of the Tribunal in the related concern case of M/s. Orion Travels Pvt. Ltd. vs. ACIT 2017 (1) TMI 1643 - ITAT MUMBAI wherein identical issue has been decided in favour of the assessee. We, therefore set aside the finding of the Ld. CIT(A) and direct the AO to delete the addition. Disallowance made towards the various expenses provided by the assessee in respect of services not rendered till the year end - CIT(A) in the second round again dismissed the appeal of the assessee - HELD THAT - As the expenses of audit fees, professional fees, staff welfare have to be allowed on the basis of services availed by the assessee during the year whereas the admissibility of bonus and ex-gratia payment depends on the date of payment by the assessee before the due date of filing the return. Therefore, we are not in agreement with the conclusion drawn by the Ld. CIT(A) that disallowance is not allowable. The expenses incurred by the assessee on account of staff welfare expenses, audit fee, professional fee and preliminary expenses as claimed by the assessee are allowable expenses and AO is directed to allow the same. The remaining expenses in respect of bonus and ex-gratia need verification at the level of the AO and accordingly restored to the file of the AO with the direction verify the date of payment of bonus and exgratia payment and in case they are paid before due date of filing the return, needless to say that same are to be allowed. Short term capital loss on sale of 9% of IRFC bonds by invoking section 94(4) - In the second round CIT(A) affirmed the order of AO by dismissing the ground raised by the assessee by holding that the short term capital loss can not be allowed - HELD THAT - Referring to rimary contentions of assessee is that the provisions of section 94(4) of the Act can not be invoked unless and until the relevant income is brought to tax in the hands of the counter party under section 94(4) of the Act meaning thereby that unless the interest arising and accruing from the security is deemed to be the income of the owner who is Shri Harshad S. Mehta in the present case who transferred the securities to the assessee in terms of section 94(1) of the Act, the loss can not be disallowed in the hands of the assessee the issue is squarely covered by the decision of co-ordinate bench of the Tribunal in the case of related entities M/s. Growmore Leasing Investment Ltd. 2017 (11) TMI 1310 - ITAT MUMBAI direct the AO to allow the set off of loss to the assessee as suffered by it from 9% of IRFC bonds against the profit on sale of shares. Levy of interest under section 234A, 234B 234C - HELD THAT - Interest charged under section 234A, 234B 234C is inevitable and is leviable in any case but same needs to be recomputed by the AO in terms of the decision of the co-ordinate bench of the Tribunal in the case of related entities M/s. Growmore Research and Assets Management Ltd. 2017 (2) TMI 1483 - ITAT MUMBAI - we accordingly, direct the AO to recompute the interest in terms of the above decision after taking into account the amount of tax deductible at source on the assessed income. Ground is allowed for statistical purposes. Rejection of claim of depreciation on various assets acquired and used for the purpose of business of the assessee during the year - HELD THAT - Since the carrying on of business by the assessee and use of these assets for the purpose of business of the assessee are undisputed, therefore the assessee is entitled to claim depreciation on these assets in terms of the explanation 5 to section 32 of the Act. As brought to our notice that this issue has not been examined by the AO, therefore, we are restoring this issue for the limited purpose to the file of the AO to examine and verify the same and allow accordingly. The ground is allowed for statistical purposes.

Summary

Issues Involved:
1. Legality of invoking Section 144 and making best judgment assessment.
2. Applicability of presumptions under Sections 292C and 132(4A) for routine assessments.
3. Use of third-party information without inspection or cross-examination.
4. Addition of ?81,15,850/- for profits from money market operations.
5. Addition of ?1,92,05,630/- and ?97,29,79,373/- for speculative profit on trading in shares.
6. Addition of ?33,60,000/- based on aggregate disclosure by the Harshad Mehta Group.
7. Disallowance of ?1,67,014/- out of total expenditure claimed.
8. Disallowance of short-term capital loss on sale of 9% IRFC bonds amounting to ?48,93,466/-.
9. Levy of interest under Sections 234A, 234B, and 234C.

Detailed Analysis:

1. Legality of Invoking Section 144 and Making Best Judgment Assessment:
The Tribunal did not find it necessary to adjudicate on this issue as it was deemed general in nature.

2. Applicability of Presumptions Under Sections 292C and 132(4A) for Routine Assessments:
Similarly, this issue was considered general and did not require specific adjudication.

3. Use of Third-Party Information Without Inspection or Cross-Examination:
This issue was also deemed general and did not necessitate adjudication.

4. Addition of ?81,15,850/- for Profits from Money Market Operations:
The Tribunal admitted additional grounds related to the security trading loss and depreciation. It found that the profit from money market transactions was speculative and should be set off against the loss from share transactions of speculative nature. The Tribunal directed the AO to assess the net income of ?4,39,395/-, which is the difference between the profit from money market transactions and the losses from share transactions.

5. Addition of ?1,92,05,630/- and ?97,29,79,373/- for Speculative Profit on Trading in Shares:
The Tribunal found that the loose sheets seized during the search were rough notings and not reliable evidence of actual transactions. It noted the absence of corroborative evidence and the failure of the AO to substantiate the notings on these sheets. The Tribunal set aside the additions made by the AO and directed the deletion of the amounts of ?1,92,05,630/- and ?97,29,79,373/-.

6. Addition of ?33,60,000/- Based on Aggregate Disclosure by the Harshad Mehta Group:
The Tribunal observed that the disclosure of ?100 crores was made in the absence of complete books of accounts and was purely on an estimation basis. Since the actual income was now assessed based on books of accounts, the Tribunal held that the estimated disclosure could not be separately added. The Tribunal directed the AO to delete the addition of ?33,60,000/-.

7. Disallowance of ?1,67,014/- Out of Total Expenditure Claimed:
The Tribunal found that expenses such as audit fees, professional fees, and staff welfare were allowable based on services availed during the year. It directed the AO to verify the payment dates for bonus and ex-gratia payments and allow them if paid before the due date of filing the return. The Tribunal allowed the ground partly for statistical purposes.

8. Disallowance of Short-Term Capital Loss on Sale of 9% IRFC Bonds Amounting to ?48,93,466/-:
The Tribunal held that the provisions of Section 94(4) could not be invoked unless the relevant income was brought to tax in the hands of the counterparty. Since no disallowance was made in the case of Harshad S. Mehta, the Tribunal directed the AO to allow the set-off of the loss of ?48,93,466/-.

9. Levy of Interest Under Sections 234A, 234B, and 234C:
The Tribunal directed the AO to recompute the interest under Sections 234A, 234B, and 234C after considering the amount of tax deductible at source on the assessed income, following the decision in the case of related entities.

Additional Grounds:
The Tribunal admitted the additional grounds challenging the rejection of audited books of accounts and the claim of depreciation of ?4,72,678/-. It directed the AO to examine and verify the claim of depreciation and allow it accordingly.

Conclusion:
The appeal was allowed for statistical purposes, with directions for the AO to reassess certain issues based on the Tribunal's findings and the provided evidence.