THE HIGH COURT OF DELHI AT NEW DELHI
% Judgment delivered on: 30.04.2015
+ ITA 1105/2010
COMMISSIONER OF INCOME TAX ..... Appellant
versus
VISHISHTH CHAY VYAPAR LTD. ..... Respondent
+ ITA 1106/2010
COMMISSIONER OF INCOME TAX ..... Appellant
versus
VISHISHTH CHAY VYAPAR LTD. ..... Respondent
+ ITA 1107/2010
COMMISSIONER OF INCOME TAX ..... Appellant
versus
VISHISHTH CHAY VYAPAR LTD. ..... Respondent
Advocates who appeared in these cases:
For the Appellant : Mr Rohit Madan and Mr Ruchir Bhatia.
For the Respondent : Mr Ajay Vohra, Sr Adv. with Ms Kavita
Jha and Mr Vaibhav Kulkarni.
CORAM:-
HON'BLE MR. JUSTICE S. RAVINDRA BHAT
HON'BLE MR JUSTICE VIBHU BAKHRU
JUDGMENT
VIBHU BAKHRU, J
1. These appeals, preferred by the Revenue under Section 260A of the
Income Tax Act, 1961 (hereinafter the `Act'), impugn a common order
dated 30.06.2009 passed by the Income Tax Appellate Tribunal (hereinafter
ITA Nos. 1105/2010, 1106/2010 & 1107/2010 Page 1 of 31
the `Tribunal') to the extent that the appeals preferred by the Revenue
(being ITA 3763/Del/2007, ITA 3764/Del/2007 and ITA 3732/Del/2007)
against the orders passed by the Commissioner of Income Tax (Appeals)
(hereafter `CIT (A)') in respect of assessment years 1997-1998, 1998-1999
and 1999-2000, have been rejected. The said common order dated
30.06.2009 also disposed of an appeal preferred by the Revenue in respect
of assessment year 1996-97, however the same is not subject matter 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.
ITA Nos. 1105/2010, 1106/2010 & 1107/2010 Page 2 of 31
3.2 The assessee filed a return for the assessment year 1998-99 declaring
an income of `59,070/-. The said income was calculated after claiming a
loss of `5,36,23,950/- on account of sale and purchase of shares of certain
companies. By an assessment order dated 07.03.2001, the AO disallowed
the said loss of `5,36,23,950/- and assessed the income of the asseesse as
`11,06,81,611/- for the assessment year 1998-99. The assessee preferred an
appeal before the CIT(A), which was dismissed by an order dated
13.01.2003. The assessee appealed against this order, being ITA
No.2836/Del/2003, before the Tribunal.
3.3 The assessee filed a return for the assessment year 1999-2000
declaring an income of `70,120/-. The said income was calculated after
claiming a loss of `6,16,86,500/- on account of sale and purchase of shares
of certain companies. By an assessment order dated 27.03.2002, the AO
disallowed the said loss of `6,16,86,500/- and assessed the income of the
asseesse as `17,04,95,139/- for the assessment year 1999-2000. The
assessee preferred an appeal before the CIT(A) which was dismissed by an
order dated 13.01.2003. The assessee appealed against this order (ITA
No.2837/Del/2003) before the Tribunal.
3.4 The Tribunal, by its order dated 19.10.2004, disposed of the said
appeals (being ITA No.2978/Del/2001 for AY 1997-98, ITA
No.2836/Del/2003 for AY 1998-99 and ITA No.2837/Del/2003 for AY
1999-2000) along with appeal (ITA No.2835/Del/2003 for AY 1996-97).
By the said order, the Tribunal deleted most of the additions made by the
AO to the assessed income of the assessee but insofar as the losses claimed
by the assessee, in relation to the shares of companies, the Tribunal
ITA Nos. 1105/2010, 1106/2010 & 1107/2010 Page 3 of 31
remanded the matter to the AO to consider it afresh. The Tribunal held that
the statements of persons relied upon by the AO justified entertaining
suspicion as to the transaction of sale/purchase of shares. However, since
the assessee was not confronted with material collected by AO, the same
had resulted in a material irregularity in respect of the three assessments
(being assessments relating to the assessment years 1997-98 to 1999-2000).
The Tribunal also held that the documents relied upon by the assessee -
confirmation memos/contract notes, bills, letters confirming registration of
shares etc. - were required to be considered.
3.5 Pursuant to the order dated 19.10.2004 passed by the Tribunal, the
AO considered the 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)
ITA Nos. 1105/2010, 1106/2010 & 1107/2010 Page 4 of 31
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 of the relevant year and
allowed the aforesaid appeals filed by the assessee by three separate orders
- two orders dated 29.06.2007 in respect of assessment years 1997-98 and
1999-00 and an order dated 22.06.2007 in respect of the assessment order
1998-99.
3.7 The Revenue preferred appeals before the Tribunal assailing the
decision of the CIT(A) to allow the loss claimed by the assessee. The
Revenue urged that the loss claimed by the assessee on account of sale and
purchase of shares and diminution in their value could not be set off from
business income in view of Section 73 of the Act. These appeals preferred
by the Revenue were rejected by the Tribunal by the common order dated
30.06.2009, which is impugned herein. The Tribunal found that the
purchase bills for the shares purchased along with brokers contract note and
copy of the confirmation from the respective companies indicating the
transfer of shares in the name of the assessee evidenced the genuineness of
the losses claimed by the assessee. The Tribunal further noted that the
shares were bought through the Gauhati Stock Exchange and their transfers
in the name of the assessee were confirmed by letters received from the
respective companies. The Tribunal was of the view that as the shares were
held in stock in trade, the same could be valued at cost or market price,
whichever is lower, and a loss on account of diminution in value of the
stocks could be set off by the assessee against its other income. The
Tribunal noted that the companies whose shares were purchased by the
ITA Nos. 1105/2010, 1106/2010 & 1107/2010 Page 5 of 31
assessee were genuine companies and regularly assessed to tax in their
respective wards. Since the Tribunal held that the transaction in purchases
of the shares were genuine, the decisions of the CIT(A) were upheld.
3.8 The Revenue's contention that the losses claimed by the assessee
could not be set off against income by way of interest by virtue of Section
73 of the Act was rejected. The Tribunal held that as the said contention
had not been urged either before the authorities below or before the
Tribunal, in the first round, the Revenue could not be permitted to raise the
said contention for the first time in the second round.
4. In the aforesaid facts, the controversy to be addressed is whether the
Tribunal has erred in holding that the loss of `4,64,82,500/- for the
assessment year 1997-98; the loss of `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
ITA Nos. 1105/2010, 1106/2010 & 1107/2010 Page 6 of 31
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 the previous year 1996-97 relevant to
the assessment year 1997-98 are being referred to for the purpose of
appreciating the AO's findings and reasoning.
8. The following shares were reflected as opening stockin- trade as on
01.04.1996:-
Name of the Company No. of shares Rate(`) Value(`)
Baba Business Services 91300 2.0 1,82,600
Ltd.
Sangrahalaya Timber & 30800 2.0 61,600
Crafts Limited
Premier Auto Finance Ltd 50000 10 500,000
Pulp Products Limited 10000 2 20,000
Mather & Platt India Ltd 38500 13.5 5,19,750
9. Out of the aforesaid shares, the shares of Baba Business Services
Ltd. were sold during the year at the value reflected. Thus, no profit or loss
was claimed with respect to that transaction. No transactions in shares of
Sangrahalaya Timber & Crafts Limited and Premier Auto Finance Limited,
were reported during the year. The shares of Pulp Products Ltd. were
purportedly sold at `3.00 per share and, therefore, a profit of `10,000 was
reported in respect of the said transaction. One thousand shares of Mather
ITA Nos. 1105/2010, 1106/2010 & 1107/2010 Page 7 of 31
& Platt India Limited were purportedly sold at `13.10 each and an
aggregate loss of `400/- was reported with respect to that transaction. As is
apparent from the above, the effect of aforesaid transactions was a net
profit of `9,600/-, which is not significant. The paper book filed before this
court also does not contain any documents relating to the said transactions.
10. During the previous year ended 31.03.1997 the assessee claimed to
have purchased shares of the following companies for a value of
`5,35,49,550/-:-
S. Name of the Coy. Qty Rate(`) Amount(`)
No.
1. M/s Hotahoti Wood 96125 15.60 14,99,550
Products Ltd.
2. M/s Purbanchal Pre 1240000 15.60 1,92,29,000
stressed Ltd.
3. M/s Kamini 1635000 20.00 3,27,00,000
Finance & Inv. Ltd.
4. M/s Doyang Wood 13000 10/- 1,30,000
Products Ltd.
TOTAL `5,35,49,550
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
ITA Nos. 1105/2010, 1106/2010 & 1107/2010 Page 8 of 31
`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/-. This loss has two components; the first being, loss
relating to sale and purchase of shares and the second being loss on account
of diminution in value of the stock of shares held by the assessee at the end
of the year. Whilst an amount of `88,900/- was claimed as loss on sale of
shares, the bulk of the loss claimed, that is `4,63,93,600/-, was on account
of reduction in value of the closing stock of shares. Out of the aforesaid
loss only a sum of `56,250/- was on account of reduction in value of the
shares of Mather & Platt India Limited and the remaining amount of
`4,63,28,350/- was shown as loss on account of fall in the value of shares,
as on the closing date i.e. 31.03.1997, purportedly purchased by the
assessee during the course of the year. The break-up of the aforesaid
amount is as under:-
S. Name of the Coy. No. of Rate Value Losses (`)
No. (M/s) Shares (`) (`)
1. M/s Hotahoti Wood 96125 15.60 2.40 1,26,88,50
Products Ltd.
ITA Nos. 1105/2010, 1106/2010 & 1107/2010 Page 9 of 31
2. M/s Purbanchal 124000 15.60 2.50 1,61,20,000
Prestressed Ltd.
3. M/s Kamini Finance & 1635000 20.00 2.30 2,89,39,500
Inv. Ltd.
Total 4,63,28,350
13. As indicated earlier, the abovementioned shares, which are claimed
to have resulted in loss on account of reduction in their value, were claimed
to have been purchased by the assessee from one Shri Nem Chand Jain for
a sum `5,34,19,550/-.
14. The assessee claims the aforesaid transactions to be genuine and in
support of the said claim, the assessee produced:
a) confirmation memo from Shri Nem Chand Jain;
b) purchase bills from Nem Chand Jain;
c) letters of transfer from the companies, whose shares had been
purchased, confirming that the shares had been transferred in the
name of the assessee;
d) a bill indicating sale of 13000 shares of M/s Doyang Wood Products
Ltd. to one Shri Ram Lal Ashoka of Chandni Chowk, Delhi;
e) copy of the ledger accounts; and
f) certificate dated 12.02.2000 from Gauhati Stock Exchange indicating
the prices at which the shares of the companies involved were traded.
15. The assessee further asserted that Shri Nem Chand Jain was a broker
with the Gauhati Stock Exchange and the memos of confirmation 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
ITA Nos. 1105/2010, 1106/2010 & 1107/2010 Page 10 of 31
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 those companies but had acted
at the instruction of one Mr R. R. Modi. He further stated that he received
expenses from Shri R. R. Modi in lieu of services rendered.
18. The AO was informed that Sh. R.R. Modi had made a disclosure that
he had promoted the following companies by introducing share application
money in different names aggregating `170,00,000/-:-
1. M/s Kamala Kal Ltd.
2. M/s Gulmohar Estates Ltd.
3. Dass Apartments Ltd.
ITA Nos. 1105/2010, 1106/2010 & 1107/2010 Page 11 of 31
4. Manipur Pharmaceuticals Ltd.
5. Pulp Products Ltd.
6. M/s Raksha Audio Ltd.
7. Sangrahalaya Timber & Crafts Ltd.
8. M/s Doyang Wood Products Ltd.
9. M/s North Eastern Publishing & Advertising Co. Ltd.
10. Hotahoti Wood Products Ltd.
11. Purbanchal Presstressed Ltd.
12. Kamini Finance & Investment Co. Ltd.
Mr R.R. Modi had further admitted that the companies mentioned at
serial no. 7 to 12 above were not genuine companies.
19. The AO took note of the above statements received from the Income
Tax Authorities in Gauhati and also examined the books of accounts
produced by the assessee. The AO concluded that the transactions claimed
by the assessee were not genuine. The facts that led him to come to this
conclusion are summarized as under:-
a) The assessee had not paid for the shares that he had purchased and
the consideration was only reflected as book entries. During the
previous year ended 31.03.1997 the assessee had purchased shares
for a sum of `5,35,49,550/- including shares of a value of
`5,34,19,550/- from Shri Nem Chand Jain. And, the said
consideration was shown as credit in the name of the sellers.
ITA Nos. 1105/2010, 1106/2010 & 1107/2010 Page 12 of 31
b) Although Shri Nem Chand Jain had financed almost the entire
purchase of shares, there was no agreement with Shri Nem Chand
Jain for this financing arrangement. He had also not charged any
interest on the amounts outstanding.
c) Shri Nem Chand was not a person of means and his creditworthiness
was not established. The report of the Income Tax Authorities from
Gauhati indicated that Shri Nem Chand Jain had returned income of
`40,000/- by way of salary. The assessee did not produce any
material to establish the creditworthiness of Shri Nem Chand Jain
d) Trading in shares of the companies in question, on the Gauhati Stock
Exchange, were to be on "spot basis" and thus the transactions
claimed by the assessee were contrary to the practice of the 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
ITA Nos. 1105/2010, 1106/2010 & 1107/2010 Page 13 of 31
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 31.3.1998. No
explanation was provided as to why Shri Nem Chand Jain, inspite of
being an unpaid seller would physically deliver the shares sold by
him.
20. In the first round, the Tribunal remanded the matter to the AO ( by an
order dated 19.10.2004) principally on the ground that the assessee had not
been confronted with the material relied upon by the AO and further to
examine the effect of contract notes bills, stock exchange quotations and
confirmation statement filed by the brokers. On remand, the AO again
found against the assessee disbelieving the documents produced by it. The
AO noted that the memos relating to the transaction were serially numbered
or signed by Shri Nem Chand Jain. The assessee further noted that no
evidence from the Gauhati Stock Exchange had been produced. The
quotations indicated by the Gauhati Stock Exchange were also rejected as
the AO found that except some transaction done by assessee, the shares in
question were not quoted and thus, they did not reflect the true value of the
shares in question. It was held that the documents produced by the assessee
ITA Nos. 1105/2010, 1106/2010 & 1107/2010 Page 14 of 31
were only for the purpose of misleading the authorities and could not
establish that the transactions were genuine.
21. The nature of transactions relating to the assessment years 1998-99
and 1999-2000 are not materially different.
22. During the year ended 31.03.1998, 30800 number of shares of
Sangrahalaya Timber and Crafts Limited that were reflected as closing
stock as on 31.03.1997 at a value of `2/- each, were purportedly sold at the
said book value, i.e. at the rate of `2/- per share. The memo of confirmation
dated 23.04.1997, issued by N.C. Jain in respect of the aforesaid transaction
indicates that he had purchased the said shares - as opposed to selling the
shares on behalf of the assessee through the stock exchange - and the
transaction was on principal to principal basis. Thereafter, on 15.05.1997
the assessee is stated to have purchased 27,50,000 shares of Sangrahalaya
Timber and Crafts Limited @ `10/- each. These shares were also purchased
from Mr N.C. Jain and the memo of confirmation also indicates that the
transaction between assessee and Mr N.C. Jain was on principal to principal
basis. The said shares were valued at the rate of `2.25/- each at the end of
the year and on this basis the assessee claimed a loss of `2,13,12,500/-.
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.
ITA Nos. 1105/2010, 1106/2010 & 1107/2010 Page 15 of 31
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 31.03.1998 relevant to assessment year 1998-99 is indicated
below:-
NAME OF SHARE PURCHASE LOSS
THE SCRIPTS
No. of Rate (`) Amount (`) Amount (`)
shares
Sangrahalaya 2750000 10.00 27500000 21312500
Timber and
Crafts Limited
Doyang Wood 640000 10.00 6400000 4800000
Products Ltd.
North Eastern 3500000 10.00 35000000 26250000
Publishing &
Advertising
Company Ltd.
Total 52362500
25. In addition to the above, the assessee also claimed a loss of
`1,12,500/- on account of diminution in the value of 37,500 shares of
ITA Nos. 1105/2010, 1106/2010 & 1107/2010 Page 16 of 31
Mather & Platt India Ltd. as on 31.03.1998. Thus, the total loss claimed by
the assessee for the year ended 31.03.1998 was `5,36,23,950/- out of which
`11,48,950/- was loss on account of sale of shares and `5,24,75,000 on
account of diminution in value of shares.
26. During the year ended 31.03.1999, relevant to assessment year 1999-
00, the assessee sold the shares held in Sangrahalaya Timber and Crafts
Ltd. and Premier Auto Finance Ltd. at their book value i.e. at the rate `
2.25 each. The shares of North Eastern Publishing and Advertising
Company Ltd. were purportedly sold at a loss of `7,00,000/- and the shares
of Doyang Wood Products Ltd. were purportedly sold and a loss of
`1,92,000/-.
27. The assessee purchased 86,85,000 shares of Hotahoti Wood Products
Ltd. at the rate of `10/- each, the details of which are as under:-
Name of Seller No. of shares Date Value
Purbanchal Prestressed 50,00,000 14.05.1998 5,00,00,000
Ltd.
Sangrahalaya Timber and 36,85,000 13.05.1998 3,68,50,000
Crafts Limited
28. Out of the aforementioned, 82,16,750 shares of Hotahoti Wood
Products Ltd. were purportedly sold for an aggregate amount of
`2,46,50,250/- thus resulting in a loss of `5,75,17,250/-. Out of these
shares 66,29,850 shares were sold to Mr N.C. Jain. The balance shares were
sold to Toko Fin & Associates, P.L. Mittal, Doyang Wood Products Ltd.,
Sangrahalaya Timber and Crafts Ltd., Kamini Finance and Investment
ITA Nos. 1105/2010, 1106/2010 & 1107/2010 Page 17 of 31
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
indicate the volume of shares traded but only indicates quotation of shares
on certain dates. The only inference that can be drawn is that there was no
trading on other dates and this confirms the view that there was hardly any
trading on the shares of the company in question. Since the shares in
question are not actively traded, their quotations at the Stock Exchange
could easily be manipulated by showing transaction in small number of
shares. And, in any case would not be reflective of their value. The stock
ITA Nos. 1105/2010, 1106/2010 & 1107/2010 Page 18 of 31
certificates of Gauhati Stock Exchange for the assessment years 1998-99
and 1999-00 also indicate that the traded prices related to off the floor
transactions which were reported to the exchange. Thus, the transactions
entered into by the assessee and/or the related entities were itself the basis
of the quotations; obviously, no reliance could be placed on these
quotations for justifying the value of the shares in question. Since the
companies in question had been floated by Shri R. R. Modi and share
application money was introduced through other names, it is obvious that
he owned/controlled a good part of the share holding. The shares, which
are alleged to have been purchased by the assessee, were not paid for and
only book entries were passed. Although, it is stated that the shares were
through a broker of the Guwhati Stock Exchange. There is no evidence to
show that the transaction of purchase of shares was done through the
Gauhati Stock Exchange. On the contrary, the certificates issued by the
Gauhati stock exchange put it beyond any pail of doubt that the transactions
in question were "off the floor transaction".
31. The inescapable conclusion is that through a series of transactions -
which were, essentially, book entries - the assessee had devised a loss to set
off against its other income. In our view, the AO's reasoning that the
transactions were not genuine was based on cogent material and after
examining the entire facts.
32. The CIT(A) set aside the assessment orders, without considering the
above facts but by simply relying on the following decisions:-
"CIT Vs Dhawan Investment and Trading Co. Ltd. (1999) 238
ITR 486 (Cal);
ITA Nos. 1105/2010, 1106/2010 & 1107/2010 Page 19 of 31
CIT Vs Currency Investment Co. Ltd. (2000) 244 ITR 494
(Cal);
CIT Vs Carbo Industrial Holdings Ltd. (2000) 244 ITR 422
(Cal);
CIT Vs Kundan Investment Ltd. (2003) 263 ITR 626: &
CIT Vs Janki Textiles & 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
ITA Nos. 1105/2010, 1106/2010 & 1107/2010 Page 20 of 31
Jain was not a man of means. The assessee had produced no evidence
to contradict this.
d) Admittedly, the transactions were done by book entries and no
payment was made for the purchase of shares during the year.
34. In our view, the aforesaid aspects were important and clearly
indicated that the transactions entered by purchase and sale of shares were,
in fact, sham transactions and could not be relied upon. The CIT (A) failed
to apply its mind to the aforesaid aspects and therefore, in our view, the
orders passed by the CIT(A) were clearly unsustainable.
35. Given the facts of this case, the decisions referred to by CIT(A) are
also, plainly, not applicable. In case of Janki Textiles and Industries Ltd.
(supra), there was no allegation that payments for the shares in question
had not been made and the transaction consisted of only book entries. On
the contrary, the Court found that all payments had been made and received
through account payee cheques and/or drafts. In that case, the Court
specifically noted that no evidence was placed by the Revenue to indicate
that the disputed share transactions were entered into between parties that
were related or had common interest. In the present case, the AO had
clearly brought on record that the transactions were of companies that were
linked with the assessee company. The companies in question were
promoted by one Mr R.R Modi who was also a Director of the assessee
company. The shares of assessee company were also held by some of the
companies whose shares had been purchased by the assessee. The AO had
further found that Mr N.C. Jain was not a person of means and his declared
ITA Nos. 1105/2010, 1106/2010 & 1107/2010 Page 21 of 31
income was only `40,000/- by way of salaries. The assessee sought to
dispute this by producing a balance sheet of Mr N.C. Jain. However, that
also indicated that he owed a large sum of money - `7.5 crores to his
creditors. There was no finding as to the net worth of Mr. N.C. Jain. In
addition to the above, no payment had been made for the purchase of shares
during the relevant period. Mr N.C. Jain was stated to be a broker. No
explanation was provided as to why a broker would extend credit without
any interest. The explanation given by the assessee was that the assessee
was undergoing financial crises and, therefore, although it owed the money
to N.C. Jain, it could not discharge its debts at the material time. Even if
this is accepted, there is no plausible explanation why despite not being
paid for the 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
ITA Nos. 1105/2010, 1106/2010 & 1107/2010 Page 22 of 31
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 assessee had furnished the names and addresses of brokers
and also shown payments made to them by account payee cheques. The
companies whose shares were subject matter of transaction were blue chip
companies and extensively traded on the stock exchange. The Revenue had
rejected the transactions only on the ground that the assessee could not
produce certain brokers. The Court held that even if the share brokers did
not appear the claim of the assessee could not be denied as neither the
existence of the broker nor the payments made to them were in dispute.
The Court held that the assessee could not be punished for fault of the
broker.
38. In Dhawan Investment and Trading Co. Ltd. (supra), the AO had
disallowed a loss on account of purchase and sale of shares on the ground
that the record was inadequate in respect of the share dealings. The said
conclusion was rejected by the Tribunal as it found that the transactions
were genuine and made through registered brokers. There was no allegation
that the consideration for the sale and purchase was not paid through
banking channels or that the transactions in question concerned related
companies.
39. In Kundan Investment Co. Ltd. (supra), the Court found that the sale
and purchase transactions, which were questioned by the Revenue, were in
ITA Nos. 1105/2010, 1106/2010 & 1107/2010 Page 23 of 31
respect of shares of reputed companies which were quoted on the stock
exchange. The transactions were supported by contract notes and bills and
the payments made through cheques. The Calcutta High Court did not find
the decision of the Tribunal to be perverse in the given facts.
40. It is apparent from the above that the aforesaid decisions have no
application in the facts of this case. The factual controversy involved in
these appeals is materially different from the issues involved in the cases
referred by the CIT(A).
41. In our view, the Tribunal also erred in upholding the orders of
CIT(A) and failed to consider the controversy in issue. 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". In the submissions filed before the
AO, the 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
ITA Nos. 1105/2010, 1106/2010 & 1107/2010 Page 24 of 31
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. Similarly the memos of confirmation regarding
the shares purportedly purchased by the assessee reflected that the shares
had been sold by Nem Chand Jain to the assessee. These memos of
confirmations were not contract notes evidencing purchase or sale of shares
by Mr N.C. Jain through the stock exchange for and on behalf of the
assessee. In case, Mr N.C. Jain had purchased the shares through the stock
exchange for the assessee, in the normal course, he would have issued a
contract note indicating the shares bought for the assessee. The assessee
had also produced bills from Mr N.C. Jain evidencing sale of shares to the
assessee. These documents produced by the assessee clearly indicated that
the transactions for purchase of shares were not being claimed as
transactions done through the stock exchange. The AO had, therefore,
found and in our view rightly so, that the transactions were not through the
stock exchange.
42. The AO had also found that the shares of companies in question were
listed on spot basis i.e. the transactions on the stock exchange in respect of
shares in question were required to be settled on the day of the trade itself.
ITA Nos. 1105/2010, 1106/2010 & 1107/2010 Page 25 of 31
However, in the present case, the assessee had admittedly not made
payment for the said shares and this was contrary to the prevalent practice.
43. Thus, the finding of the Tribunal, to the effect that all shares were
transacted through Gauhati stock exchange, is not supported by any
material and is perverse. The Tribunal held that "All documentary
evidences itself prove that assessee had bought/sold these shares at the
prevailing market price and based on the same, the genuineness of the
transactions could not be doubted". This finding is also patently erroneous.
44. 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
ITA Nos. 1105/2010, 1106/2010 & 1107/2010 Page 26 of 31
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) to
show that Mr. Jain was man of means having a closing stock of
shares worth Rs.1.70 crores and a liability of Rs.7.50 crores to
its creditors."
However the Tribunal did not return any finding on the question of
Mr N.C. Jain's creditworthiness. In our view, the Tribunal grossly erred in
holding that this issue was covered by its earlier decision of 19.10.2004.
46. The Tribunal has held that the amount payable to Mr N.C. Jain had
been discharged by the assessee in the year 2005-06 and, therefore, found
that the transactions in question were genuine. It is relevant to note that Mr
N.C. Jain had expired in the year 1999 and the material placed on record
indicated that he was not a person of means and had been acting at the
instance of Mr R.R. Modi. Mr R.R. Modi had created several entities
which were involved or connected with the transactions in question. In the
circumstances, the payment of money to Mr N.C. Jain was required to be
investigated further to ascertain as to the ultimate recipient of those funds.
ITA Nos. 1105/2010, 1106/2010 & 1107/2010 Page 27 of 31
No such exercise has been done in this case. Thus, in our view, the fact
that certain payments were shown to have been made to Mr N.C. Jain in
2005-06, would not be sufficient to conclude that the transactions in
question were genuine.
47. 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. It is relevant to take
note of the following:-
(a) That the assessee had booked losses in respect of shares of the
following companies:-
(i) Sangrahalaya Timber & Crafts Ltd.
(ii) Matther & Platt India Ltd.
(iii) Hotahoti Wood Products Ltd.
(iv) Purbanchal Presstressed Ltd.
ITA Nos. 1105/2010, 1106/2010 & 1107/2010 Page 28 of 31
(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.
ITA Nos. 1105/2010, 1106/2010 & 1107/2010 Page 29 of 31
(g) The AO had found that "except the assessee's own transaction
the value of shares were never quoted at the Guwahati Stock Exchange
on any other date".
48. In view of the above, the AO had further concluded that "the
purchases of shares and valuation was done through series of steps
involving inter-related companies, which accommodated one another and
made fictitious dealing through convenient book entries in their respective
books of accounts"
49. In our view, the Tribunal grossly erred in completely ignoring the
aspect of inter linked entities and overlooking the perspective outlined by
the AO.
50. 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.
51. We find that the Tribunal erred in ignoring certain relevant facts and
its finding that transactions for purchase and sale of shares are genuine, is
perverse. Accordingly, the question of law as indicated in paragraph 5
above, is answered in the affirmative and in favour of the Revenue.
ITA Nos. 1105/2010, 1106/2010 & 1107/2010 Page 30 of 31
52. The appeals are allowed. No order as to costs.
VIBHU BAKHRU, J
S. RAVINDRA BHAT, J
APRIL 30, 2015
MK/RK
ITA Nos. 1105/2010, 1106/2010 & 1107/2010 Page 31 of 31
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