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TMI Blog2010 (12) TMI 1233X X X X Extracts X X X X X X X X Extracts X X X X ..... l for the assessee that the shares on which losses have been incurred are not the same scrips as per the report of the JPC and SEBI HELD THAT:- We find before the CIT(A), it was argued that ₹ 58,11,372/- was added in the computation of income in order to arrive at th business income and further addition of ₹ 60,04,791/- was made on the ground that the loss was not genuine. Thus, there is double additions {para 4 of the order of the CIT(A)}. We find this aspect has not been decided by the CIT(A). It is also the case of the AO that the assessee has not explained the differences specifically in those cases where confirmations have not come or where confirmations are incomplete. Under these circumstances, we are of the considered opinion that the matter requires fresh adjudication at the leval of the Or on the basis of the various documents filed before him which appears to have not been properly examined by him. We, therefore, set aside the order of the CIT(A) and restore the matter to the file of the AO with the direction to decide the issue afresh and in accordance with law after giving reasonable opportunity of being heard to the assessee. We hold and direct accordin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g to assessments years 2001-02 and 2002-03 respectively. For the sake of convenience both the appeals were heard together and are being disposed of by this common order. ITA No. 1053/Mum/2008 (AY 2001-02): 2 The assessee in its grounds of appeal no.1 has challenged the order of the CIT(A) upholding the action of the AO in not allowing loss of ₹ 60,04,791/- on share transactions. 2.1 Facts of the case, in brief, are that the assessee company has stated its business activities as mainly share and stock broking, investment and trading in shares and securities. The assessee company is a member of BSE. During the course of assessment proceedings, the Assessing Officer issued notice u/s 142(1) containing a detailed questionnaire. In the said questionnaire apart from asking for various details, the AO specifically asked the assessee to explain the details of transactions of shares in which total loss of 8901 crores has been incurred. He also asked the assessee to give details of purchase of shares and date of declaration of dividend, complete details of speculation loss of ₹ 58,11,300/-. The assessee did not submit the details on the due date. The AO issued anothe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... block assessment proceedings, in view of failure of assessee to provide confirmation letters in part of transactions and also in view of various ID mismatches (identity, volume rate) such transactions both speculative and non-speculative were treated as assessee s own transactions. Similar treatment was given in earlier years also. Many of the transactions of the assessee during the year are was also with such entities. 2.5 The AO noted that despite number of opportunities given by him, the assessee did not furnish full details. According to the Assessing Officer, it is the responsibility of the assessee to explain the differences, specifically in those cases where confirmation has not come or where confirmations are not complete. He noted from the figures disclosed in the P L account under the head profit from operations that the assessee has adjusted loss arising from nondelivery based transactions which are admitted to be speculative in nature. According to the AO, these transactions are neither spot transaction nor are contracted on the Bolt of the Stock Exchange. In certain transactions, the nomenclature of transactions appears to be brought forward which are nondelivery ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ketan Parekh group of share brokers and traders which was found to be involved in security scam. The transactions made with most of the parties are part of the scam. The JPC report which has been exhaustively discussed by the AO had clearly brought out the nefarious activities of the entire group as a whole. The manipulated operation was carried through multi layered transactions, so that it was not possible to link the source of funds to the actual users. The buying and selling pattern of Ketan Parikh group created artificial trading volumes and facilitated price manipulation and such manipulations were carried on through the various sister concerns which led to the crash of stock market. The transaction, both speculative and non speculative carried on by the assessee fall in the same period. Therefore, the findings of the JPC report are clearly applicable to the facts of the case. He noted that the assessee failed to rebut the findings of the Assessing Officer that the transactions carried out by the assessee were manipulative and fraudulent in nature with an intention of distorting the market equilibrium for making personal gains. Further, the assessee has failed to produce an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Stock Exchange and the transactions are appearing in the DP account. Therefore, the very basis of the Assessing Officer treating the transactions as non-genuine is erroneous and faulty. Referring to page 1 of the paper book, he submitted that loss from shares and securities was disclosed at ` 58,11,372/- whereas the Assessing Officer has wrongly taken the figure at ` 60,04,791/-. Referring to page 39 of the paper book, he submitted that the assessee vide letter dated 4.2.2004 has given the scrip wise details of speculation loss of` 58,11,300/-as per Annexure 1. Referring to the said annexure, he drew the attention of the Bench to the item wise opening stock of quantity rate and value, purchase of quaintly, rate and value, sale/purchase during the year containing the details of quaintly, rate and value and the closing stock of quantity, rate and value. Referring to the said annexure, he submitted that contract note bill and De-mat account were also furnished before the Assessing Officer. He submitted that scrip wise details of profit and loss with supporting details were furnished. Therefore, transaction simply cannot be treated as non-genuine. He submitted that the observations of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome. He submitted that the CIT(A) has given clear cut findings for not allowing the loss claimed by the assessee. He, accordingly submitted that the order of the CIT(A) should be upheld. 5.3 The ld counsel for the assessee in his rejoinder submitted that the assessee is a member of BSE and trading is being done through its own terminal and the assessee cannot trade through the terminal of other members of the Stock Exchange since there is prohibition. He submitted that the assessee has application account with the Stock Exchange and the entire transactions are to be routed through the Exchange and the entire money has come out from the same account. He submitted that the assessee paid stamp duty on the contract. Referring to the order of the SEBI as relied on by the Assessing Officer/CIT(A), he submitted that there is no mention that scrips of those companies appears in the case of the assessee. H submitted that the scrips discussed by SEBI are different from those scrips traded by the assessee. He accordingly submitted that the order of the CIT(A) should be set aside and the loss claimed by the assessee be allowed. 6. We have considered the rival submissions made by both ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tract note, bill and demat account have been furnished before the Assessing Officer, we find the same were not properly verified by the Assessing Officer or by the CIT(A). It is also the case of the Assessing Officer that the assessee has not explained the differences specifically in those cases where confirmations have not come or where confirmations are incomplete. Under these circumstances, we are of the considered opinion that the matter requires fresh adjudication at the leval of the Assessing Officer on the basis of the various documents filed before him which appears to have not been properly examined by him. We, therefore, set aside the order of the CIT(A) and restore the matter to the file of the Assessing Officer with the direction to decide the issue afresh and in accordance with law after giving reasonable opportunity of being heard to the assessee. We hold and direct accordingly. This ground of the assessee is accordingly allowed for statistical purpose. 7 In grounds of appeal no.2, the assessee has challenged the order of the CIT(A) in not allowing depreciation of ₹ 18,28,125/- on membership rights of the Stock Exchange. 8 At the time of hearing, it was a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccount of bad debts from the franchises of the company at Indore and Valsad. Since the assessee could not prove to his satisfaction the fulfilment of the provisions of sec. 36(2), the Assessing Officer disallowed an amount of ` 149,62,136/-. 11.2 Before the CIT(A) it was submitted that the Assessing Officer never asked for any such details. The assessee furnished copies of the ledger account of the respective parties along with the bills of transactions undertaken on behalf of the parties in stock exchange. It was requested to consider such details and evidences as additional evidence/supporting documents, which could not be filed due to lack of sufficient opportunity allowed by the Assessing Officer. However, the CIT(A) noted that the Assessing Officer had called for relevant details pertaining to bad debts as per detailed questionnaire dated 9.12.2003 by seeking details of bad debt written off and basis for claiming the deduction. The assessment order was passed on 30.3.2004. Therefore, it is not correct on the part of the assessee to state that the Assessing Officer did not ask for necessary details or did not accord sufficient opportunity. Since the assessee failed to give ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ness loss on the ground that no business activity has been carried out during the year. 14.1 Facts of the case, in brief, are that the assessee has filed its return of income on 31.10.2002 declaring the loss of `. 7,27,08,940/-. The Assessing Officer while passing the order u/s 143(3) made various additions/disallowance and determined the total loss at ` 70,493,585/-. The assessee challenged the order of the Assessing Officer before the CIT(A). During the appellate proceedings the CIT(A) noted that the Assessing Officer had determined the business loss at ` 7.04 crores and allowed the same to be carried forward; although no specific mention of such fact has been made in the order. He noted that the assessee is debarred from carrying on share trading activity by SEBI as it along with other group concerns led by Shri Ketan Parekh was involved in Securities Scam which was unearthed in the year 2000. From April 2001, the whole group including the assessee could not carry out such trading. He noted that as per the past records, this was the only business activity of the assessee. However, the assessee was also earning certain residual income in the form of interest on FDR etc. He no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urces. 15 Aggrieved with such order of the CIT(A), the assessee is in appeal here before us. 16. The ld counsel for the assessee submitted that the assessee company is a Member of BSE and was debarred from undertaking any fresh business as a stock broker or merchant banker till further orders by SEBI vide its order dated 4.4.2001. He submitted that SEBI vide order dated 21.6.2001 passed another order holding that on receipt of the enquiry officer s recommendations, further decision as to whether prohibition to carry out fresh broking activity on the entities should be continued for a further period or it should be withdrawn, will be taken. He submitted that SEBI passed an order dated 8.3.2004 cancelling the certificate of registration granted to the company. The company then preferred an appeal to the Securities Appellate Tribunal (SAT) in April, 2004 against the order dated 8.3.2004 passed by SEBI and the appeal of the assessee was dismissed vide order dated 11.5.2007. He submitted that the company has not been delisted as member of the Stock Exchange. He submitted that the company has not discontinued its business operations but has been forced not to undertake any business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stock broker till further order as on account of indications of the prima facie involvement of Mr Ketan Parekh in manipulating certain scrips of various companies. It has been noticed that M/s V N Parekh Securities Ltd and M/s KNP Securities Ltd are also the entities controlled by and connected with Mr Ketan Parekh or Mr Kartik Parekh. Therefore, in view of the powers conferred under the provisions of sub section (3) of sec. 4 r.w.s 11 and 11B of the SEBI Act, 1902, the assessee was barred from undertaking any fresh business as stock brokers till further orders as stated above. Thereafter, SEBI passed another order on 21st June 2001 stating that in view of the order of SEBI dated 4.4.2001 and 10.4.2001 debarring them from undertaking any fresh business as a stock broker and merchant bankers till further orders should be continued. This action of the SEBI has been challenged by the assessee before the appropriate authorities. Copy of the petition filed before the Securities Appellate Tribunal is placed at page 94 of the paper book. In view of these facts and circumstances, the assessee was not allowed to do its business activity in share on the stock exchange floor. 5.1 Not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Hon ble Madras High Court has held that: it could not be said that there was a permanent closure, as the validity of the Act was yet to be finally settled by the Supreme Court. In the event of the Act being struck down, the assessee could resume business. The fact that it had continued to maintain an establishment was indication of its intention to resume business, if an opportunity for it arose by reason of the Supreme Court holding in its favour. The expenses incurred by it while awaiting the decision of the Supreme Court could not altogether be regarded as unconnected with the business that it had been carrying on by supply of electricity and that business was interrupted only by reason of the Act. The possible resumption of the business was dependent on the outcome of the appeals pending before the Supreme Court. The amounts claimed were also not very substantial. The Tribunal had taken a broad view of the matter and had held in favour of the assessee. There was no ground to differ 6.1 The facts before the Hon ble High Court were that the assessee was a private electric company. Its undertaking vested with the State Government by reason of the enactment of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re not allowed by the AO by observing that these expenses were not for the purpose of business and were not incurred during the year under consideration. Matter reached up to the stage of the Hon ble Supreme Court who has allowed the expenditure incurred by the company as business expenditure by holding as under: that the object of the petition was t secure a declaration that the order dated Feb 20th 1946, in so far as it sought to put restrictions upon the right of the company to carry on its business in the manner in which it was accustomed to do was unauthorised, and to prevent enforcement of that order. Thereby, the company was seeking to obtain an order from the court enabling the business to be carried on without interference. The amounts expended by the company n that behalf were expenditure laid out wholly and exclusively for the purpose of its business and were deductible u/s 10(2)(xv). It was further held that; the question of admissibility u/s 10(2)(xv) had to be decided not on what was found or observed by the High Court in appeal from the order in the proceedings u/s 45 of the Specific Relief Act or by the Privy Council but upon the findings of fact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Disputes Act 1947 on account of retrenchment which were held as not related to the business carried on by the assessee. 11.1 We have also taken into consideration various other case laws relied upon by the ld DR and found that they are distinguishable on facts. 12 In the present case, no such facts are involved as all the expenses incurred were in connection with the business activity only and for keeping the business alive, to maintain its business establishment and to meet that the obligation of interest on loan etc taken for its business activity; therefore, we hold that various expenses incurred by the assessee are allowable as deduction. However, admissibility of the expenditure was not examined by the AO for the reason that he has disallowed the expenditure on the ground that they are not allowable as the assessee has not done any business activity. Therefore, for the purpose of examining the admissibility/genuineness of these expenses, the mater is sent to the file of the AO. The assessee has contended that depreciation and interest have been allowed by the Tribunal as allowable while passing order for AY 2000-01. The AO will take into consider the order of the T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and pertains to value of shares purchased by client is not covered by section 36(2). Therefore, in case the client does not pay in future, this debit cannot partake the nature of bad debt allowable u/s 36(1)((vii) as this amount of debt has not been included in the computation of income as required u/s 36(2). Since the debt not collectible from the client, does not fall under the ambit of sec. 36(2), it remains outside the purview of sec. 36(1)(vii). On this basis, the Assessing Officer disallowed the claim of bad debts made by the assessee. 21.1 In appeal, the CIT(A) upheld the action of the Assessing Officer on the ground that the assessee has not carried out any business activity during the year. Aggrieved with such order of the CIT(A), the assessee is in appeal here before us. 22 The ld counsel for the assessee, at the outset, submitted that the issue of bad debts in the case of share broker is covered by the decision of the Special Bench in the case of DCIT vs Shri Shreyas S Morakhia reported in (2010) TIOL 390 (Mum)(SB). 22.1 The ld DR, on the other hand submitted that since the CIT(A) had held that the assessee has not carried our any business activity during the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment Year 2000-01. Referring to para 10 of the order of the Tribunal, he submitted that the Assessing Officer in the said decision disallowed an amount of ` 4,75,335/- on account of penalty paid by the assessee for violation of the provisions of NSE and in appeal, the CIT(A), deleted the addition. On further appeal by the revenue, the Tribunal in the said decision upheld the action of the CIT(A) and dismissed the ground raised by the revenue. 25.1 Referring to the order of the Tribunal in the case of KNP Securities P Ltd vide ITA Nos. 5008 5009/Mum/2007 order dated 29.5.2009 for AYs 20-34 and 2004-05, he submitted that the Tribunal under identical facts and circumstances has held that the assessee is carrying out business activity. In view of the above two decisions, he submitted that the issue stands covered in favour of the assessee. 25.2 The ld DR, on the other hand supported the order of the CIT(A). 26 After hearing both the sides, we find the Assessing Officer disallowed the amount of `3,750/- paid to BSE for violation of its Rules and Regulations on the ground that the same is in the nature of penalty and is not an allowable deduction. In appeal, the CIT(A) upheld ..... X X X X Extracts X X X X X X X X Extracts X X X X
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