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TMI Blog2015 (5) TMI 125X X X X Extracts X X X X X X X X Extracts X X X X ..... cated 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 compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r of these appeals. 2. The principal controversy involved in the present appeals relates to disallowance of loss on account of alleged transactions entered into by the assessee in respect of the shares of certain companies and further the loss claimed on account of diminution in value of those shares. 3. Briefly stated, the relevant facts leading to the present appeals are as under:- 3.1 The assessee filed its return for the assessment year 1997-98 declaring an income of ₹ 1,05,518/-. The said income was calculated after claiming a loss of ₹ 4,64,82,500/- on account of purchase and sale of shares and diminution in the value of shares held by the assessee. By an assessment order dated 14.03.2000, the Assessing Officer (hereafter AO ) disallowed the said loss of ₹ 4,64,82,500/- and assessed the income of the assessee as ₹ 8,72,20,744/- for the assessment year 1997-98. The assessee preferred an appeal before the CIT(A) which, was rejected by an order dated 05.03.2001. The assessee carried the said order in appeal, being ITA No.2978/Del/2001, before the Tribunal. 3.2 The assessee filed a return for the assessment year 1998-99 declaring an income of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... question with regard to the loss on account of shares claimed by the assessee in various years and disallowed the same. The AO found that the assessee had purchased most shares of certain companies from one Sh Nem Chand Jain, who was stated to be a broker with the Gauhati Stock Exchange. Although the value of these transactions was large, no payments for the same were made and the consideration for purchase of the said shares was reflected as outstanding and payable to Sh. Nem Chand Jain. Sh. Nem Chand Jain had neither charged any interest nor instituted any proceedings for recovery of the said amount. The AO had found that Sh. Nem Chand Jain was not a person of means and the transactions in question were bogus. 3.6 The assessee filed appeals (being Appeal No.47/2007-08 for AY 1997-98, Appeal No.48/2007-08 for AY 1998-99 and Appeal No.49/2007- 08 for AY 1999-2000), inter alia, against the assessment orders framed with respect to the assessment years 1997-98 to 1999-00. The CIT(A) accepted the contract notes and other documents produced by the assessee as evidence of the genuineness of the transactions of sale and purchase of shares as well as reduction in their value at the end ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5,36,23,950/- for the assessment year 1998-99; and the loss of ₹ 6,16,86,500/- for the assessment year 1999-2000, on account of sale and purchase of shares of certain companies and on account of diminution in their value were allowable. 5. By an order dated 03.09.2014, this Court had indicated that the following substantial question of law arose for consideration in these appeals:- Whether the finding of the Income Tax Appellate Tribunal accepting the genuineness of the loss as declared in respect of shares purchased and sold or held as stock-in-trade is perverse? 6. The AO had concluded that the transactions of sale and purchase of shares of certain companies, on the basis of which losses were being claimed by the Assessee, were not genuine and, accordingly, the said losses had been disallowed. Before proceedings to examine the decision rendered by the Tribunal, it would be essential to note the reasons which led the AO to conclude that the transactions in shares were not genuine. 7. The nature of transactions in each of the assessment years involved i.e. 1997-98 to 1999-2000 are, essentially, similar. Thus, for the sake of brevity, the transactions relating to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 11. All the aforesaid shares, except shares of M/s Doyang Wood Products. Ltd. amounting to ₹ 1,30,000, were purchased from one Shri Nem Chand Jain. Thus, the assessee claimed that it had purchased shares of a value of ₹ 5,34,19,550/- from Shri Nem Chand Jain. These shares were not sold during the year and were reflected as a part of the closing stock of shares as on 31.03.1997. The shares of Doyang Wood Products were stated to be purchased from one Shama Holdings Private Limited at the rate of ₹ 10 each aggregating ₹ 1,30,000 ( Rupees One Lac thirty thousand). These shares of Doyang Wood Products Ltd were claimed to have been sold during the year at the rate of ₹ 2.50 each aggregating ₹ 32,500/-. The copy of the ledger produced by the assessee indicates that the said shares were purchased on credit but the same were sold in cash. Plainly, the transactions for sale and purchase of these shares, which resulted in loss of ₹ 98,500/-, were 'off market' transactions and not through any stock exchange or through any stock broker. 12. For the previous year ending 31.03.1997, the assessee had claimed a loss of ₹ 4,64,82,500/-. Thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mation as well as the bills produced evidenced the genuineness of the purchase transactions. In addition, the assessee also produced a certificate indicating the value of the quotations of the shares in question from the Gauhati Stock Exchange. This, according to the assessee, evidenced the value of the shares. 16. In order to examine the genuineness of the transactions, the AO made a reference to the Additional Director of Investigation, Income Tax and requested the income tax authority to inquire and report on, inter alia, the financial position of Shri Nem Chand Jain. 17. In response to the aforesaid inquiry, the AO was informed that search and seizure operations were conducted in the case of Shri Nem Chand Jain on 14.10.1996. During the course of the said search and further proceedings, statement of Shri Nem Chand Jain was recorded under Section 132(4) and Section 131 of the Act and the same were forwarded to the AO. Shri Nem Chand Jain had stated that he was a Director/Managing Director of M/s Doyang Wood Products Ltd., M/s Kamini Finance Investment Ltd., M/s Hotahoti Wood Products Ltd. in addition to other companies. He had stated that he was not aware of affairs of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said Stock Exchange; admittedly, there was no settlement of accounts through the Stock Exchange. e) The AO further noted that the shares of the companies which were involved were not actively traded and thus the quotations indicating the value of the shares could not be accepted. No material was produced to controvert the finding that the shares of the companies were not actively traded. f) The assessee and the companies in question were interlinked. Shri R. R. Modi had floated certain number of companies by introducing his undisclosed capital and he was also a Director on the Board of the assessee company. In addition, the assessee also owed money to certain companies, whose shares it held/purchased. These companies also held shares of the assessee company. The fact that the companies in question and the assessee were connected was also not disputed. g) The assessee explained that since it was facing a financial crisis, it could not pay the amount due to Shri Nem Chand Jain for the transactions executed during the year. However, this did not explain as to why Shri Nem Chand Jain continued to sell shares to the assessee even in the following year, i.e., year ended 31.3.199 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 23. The shares of Hotahoti Wood Products Ltd., Purbanchal Prestressed Ltd. and Kamini Finance and Investment Company Ltd. which had been purchased in the earlier year were sold during the year ending 31.03.1998 at ₹ 2/- each and a further losses aggregating ₹ 11,48,950/- were booked by the assessee. 24. During the year ended 31.03.1998, the assessee purportedly purchased the shares of Sangrahalaya Timber and Crafts Limited, Doyang Wood Products Ltd. and North Eastern Publishing Advertising Company Limited. The memos of confirmation relied upon by the assessee reflect that the shares of the abovementioned companies were purchased from Mr N.C. Jain on a principal to principal basis. These transactions were not through stock exchange; the certificate produced by the assessee from the Gauhati Stock Exchange indicates that these transactions were off the floor transactions and were merely informed to the said stock exchange. The assessee valued these shares at a fraction of its purchase price and claimed loss on account of diminution in their value. A statement indicating the losses claimed by the assessee on the reduction of value of shares for the year ended 31 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Company Ltd. The certificate produced from the Gauhati Exchange Ltd. also indicates that none of the transactions were through stock exchange but were off market transactions and were merely reported to the stock exchange. 29. It is apparent from the above that the shares of companies in respect of which losses were booked were floated by Mr R.R. Modi by introducing his undisclosed income. The assessee had not only purchased shares of the companies floated by Mr Modi but had also purchased and sold shares of the said companies. In addition, the said companies also held substantial shares of the assessee. 30. In our view, the facts as outlined by the AO clearly indicate an established link between the companies floated by Shri R. R. Modi and the assessee. This fact has also not been disputed by the assessee in the present proceedings. The AO found that the shares of those companies were not actively traded; there is no material on record, which would indicate otherwise. The certificate of Gauhati Stock Exchange enclosed by the assessee in the paper book filed in ITA 3763/Del/2007 (i.e. in respect of assessment year 1997-98) is dated 12.02.2000. The said certificate does not in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Industries Ltd.(2003) 132 Taxman 231 (Gau). 33. The CIT(A) failed to consider any of the reasons provided by the AO for holding the transactions to be not genuine; CIT(A) did not address any of the following aspects. a) That the assessee company and the companies whose shares were bought by the company were interlinked. The companies in question owned shares of the assessee company. Mr R. R. Modi who was a Director of the assessee company was also closely connected with the companies in question. These companies owned shares of the assessee and also had entered into transactions with the assessee. b) Even though the companies in question may have been listed on the Gauhati Stock Exchange, their shares were not actively traded and the transactions were amongst inter related parties. Thus, the quotations reflected on the Gauhati Stock Exchange could not be relied upon to reflect their value. c) There was no evidence produced to show that Shri Nem Chand Jain who is stated to have funded the purchase of shares by the assessee, had any means to do so. The AO had found that Shri Nem Chand Jain was not a man of means. The assessee had produced no evidence to contradict this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e shares sold, Mr N.C. Jain would continue to sell and deliver further shares to the assessee, specially when he knew the assessee to be financially constrained. Shri NC Jain is stated to have sold shares for ₹ 6,89,00,000/- in the year ended 31.03.1998 thus swelling his outstanding credit to ₹ 12,22,57,950/- as on 31.03.1998 after adjusting ₹ 60,600/- on account of shares purportedly purchased by Sh. N. C. Jain. 36. In our view, the CIT(A) completely ignored the aforesaid facts and merely cited the judgments where contract notes had been accepted as evidence of genuine transaction. Undoubtedly, contract notes, confirmation memos, bills, books of accounts are evidence of genuine transactions. However, where the fundamental transaction is shown to be a sham transaction, the same cannot necessarily be accepted as genuine merely because a broker s confirmation and invoices have been produced. In our view, the CIT(A) erred in the applying the decision in Janki Textiles (supra) in the facts of this case. 37. In Cargo Industrial Holdings Ltd. (supra), the Court upheld the decision of the Tribunal in accepting the transactions in shares to be genuine as the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee contended that the transaction for purchase of shares were carried out by the assessee company through main broker of Gauhati Stock Exchange . Thus, it was not the assessee s claim that all shares were purchased through the Gauhati Stock Exchange. This aspect is material as, admittedly, the transactions in question could not have been made through Gauhati Stock Exchange. In case of transactions through a stock exchange the selling broker is required to submit the share scrips with the clearing system of the stock exchange. The purchasing brokers are required to pay the consideration on the pay in date . The consideration for the shares transacted through the stock exchange is paid to the selling broker on the pay out date . Thus, in cases of transaction through a stock exchange a purchasing broker is required to deposit the consideration with the clearing system of the stock exchange. However, in the present case bulk of the shares in question were claimed to have been sold/purchased by Mr N.C. Jain. The memos of confirmations by Mr N.C. Jain in respect of shares purportedly purchased by the assessee indicate that Mr N.C. Jain had sold the shares to the assessee. Simi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 45. The AO had found that Mr N.C. Jain was not a person of means. His returns disclosed income of ₹ 40,000 by way of salaries. The Tribunal rejected the AO s finding that N.C. Jain was not a person of means by holding that the issue of Mr N.C. Jain creditworthiness was covered by the Tribunal s order dated 19.10.2004. A perusal of the said order indicates that the Tribunal had noted the following submission on behalf of the assessee:- Shri Vohra also drew our attention to the audited balance sheet of Shri N.C. Jain (Pages 64 to 67 of the Paper Book) t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed Ltd. (v) Kamini Finance Investment Co. Ltd. (vi) M/s Doyang Wood Products Ltd. (vii) M/s North Eastern Publishing Advertising Co. Ltd. Out of the above companies, all except Mather Platt India Ltd. were companies promoted by Mr R.R. Modi by introduction of his undisclosed funds as share application money in various names. (b) The fact that the share application money was introduced in different names by Mr R.R. Modi indicates that although there may have been a number of shareholders, the de facto control of the companies as well as its shares vested with Mr R.R. Modi. (c) Sh. R.R. Modi was also a Director of the assessee company. (d) The aforesaid companies also held substantial shares of the assessee. (e) The assessee had not only dealt with shares of the aforementioned companies but also had purchased certain shares from some of the companies. (f) Although the shares of these companies were listed, there is no evidence that the shares were traded through the stock exchange or there was any other genuine transaction not involving these companies, the assessee and the named brokers. (g) The AO had found that except the assessee s own transac ..... X X X X Extracts X X X X X X X X Extracts X X X X
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