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DCIT, Circle-1(1),Baroda V/s . M/s Advance Fluid Control Pvt. Ltd.,20, Shobhna Nagar, Vasna Road, Baroda
June, 09th 2012
            IN THE INCOME TAX APPELLATE TRIBUNAL
               AHMEDABAD BENCH "D" AHMEDABAD

             Before Shri, A.K.Garodia, Accountant Member and
                      Shri Kul Bharat, Judicial Member

                              IT A No.469/ Ahd/2010
                            Assessment Year:2002-03


       DCIT, Circle-1(1),        V/s .   M/s Advance Fluid Control
       Baroda                            Pvt. Ltd.,
                                         20, Shobhna Nagar, Vasna
                                         Road, Baroda
                                         P AN No. AABCA65 96P


                                  ORDER

PER Kul Bharat, Judicial Member:-

      This appeal of Revenue is directed against the order of Ld.
Commissioner of Income-tax (Appeals)-I, Baroda dated 31-10-2009 for the
assessment year 2002-03. The Revenue has raised the following ground of
appeal:-
      "1. On the facts and in the circumstances of the case and in law, the ld.
      CIT(Appeals) erred in deleting the penalty of Rs.21.00 lacs levied u/s.
      271(1)(c) of the Act on the disallowance of adjustment/set off of short
      term capital loss incurred in sham transaction of purchase and sale of
      shares."
ITA No.469/Ahd/2010     A.Y. 2002-03
DCIT Cir-1(1) BRD v. M/s./ Advance Fluid Control Pvt. Ltd.                             Page 2

2.      The facts in brief are that Assessing Officer noted during the course of
assessment proceedings that assessee had entered into a number of
transactions of purchase and sales of shares as a result of which it had
incurred heavy loss of Rs.58,29,228/-. The assessee in its computation of
income filed along with return of income claimed set off of this loss of
Rs.58,29,228/- against the Long Term Capital Gains (LTCG for short) of
Rs.1,04,51,949/-. It was observed by the AO that assessee had suffered
continuous loss and there was not a single instance of gain in the transactions
entered during the financial year. The only capital gain related to made in
shares in earlier years. It was noted by AO that the transactions were carried
out through brokers. It was also observed that payments for the purchases of
share was not made by the assessee but by the broker. It was concluded by
the AO that Short Term Capital Gains (STCG for short) of Rs.58,29,228/- was
not genuine and this amount was disallowed and added back to the total
income of the assessee. The AO also initiated penalty proceedings u/s.
271(1)(c) of the Income-tax Act, 1961 (hereinafter referred to as `the Act').
The assessee filed an appeal against the assessment order before Ld. CIT(A).
who vide his order dated 04-12-2007 confirmed the addition as made by
Assessing Officer. After receipt of the order of Ld. CIT(A), a letter dated 01-04-
2008 was issued to the assessee calling upon him to submit his written
explanation in respect of levy of penalty u/s. 271(1)(c) of the Act of in respect
of the aforesaid issue. AO after considering the submission of the assessee
and also the case laws as relied by him levied penalty of Rs.21 lakh.





3.      The assessee feeling aggrieved by this order filed appeal before Ld.
CIT(A)      who      after     considering        the        submissions   and   the     judicial
pronouncements as well as provisions of law deleted penalty as levied by
Assessing Officer.


4.      Now the Revenue is in appeal before us against the order of Ld. CIT(A)
whereby the penalty was deducted to be deleted.
ITA No.469/Ahd/2010     A.Y. 2002-03
DCIT Cir-1(1) BRD v. M/s./ Advance Fluid Control Pvt. Ltd.                 Page 3

5.      Ld. SR-DR Shri B.L. Yadav for the Revenue submitted that order of Ld.
CIT(A) is erroneous as the Assessing Officer has rightly came to the
conclusion that assessee had furnished inaccurate particulars of income by
making a share capital loss and claiming of set off against the LTCG received
on the investment made in earlier years. He vehemently argued that order of
AO may be confirmed and order of Ld. CIT(A) be reversed.


6.      On the contrary, Ld. Authorized Representative for the assessee, Shri
Mukund Bakshi supported the order passed by Ld. CIT(A). He placed reliance
on the judgment of Hon'ble Supreme Court in the case of CIT v. Reliance
Petroproduct Pvt. Ltd. (2010) 322 ITR 174 (SC). He further pointed out that in
quantum appeal in ITA No.861/Ahd/2008 order dated 07-02-2012 the Hon'ble
co-ordinate Bench has partly allowed the appeal of assessee.


7.      We haves heard the rival submissions, perused the materials available
on record and case laws cited by the parties. We find that Ld. CIT(A) has
discussed this issue in detail and dealt with in para-7.1 to 7.4 of his order,
same are reproduced hereinbelow for the sake of clarity:-
        "7.1 It is a well settled proposition that penalty proceedings and
        assessment proceedings are distinct. Judicial opinion is unanimous that
        where all the facts relating to the addition have been disclosed by the
        assessee, it would not be a fit case for penalty. Mere difference of
        opinion regarding the meaning and scope of a provision of law may
        result in yield of additional quantum of tax on assessment, but may not
        justify or warrant the imposition of penalty.

        7.2 Recently the decision of the Supreme Court in the case of
        Dharmendra Textiles Processors (supra) has generated some
        controversy. The assessing authorities have interpreted the decision to
        mean that there is now no place for mens rea in penalty proceedings,
        and that every addition or disallowance would have the consequence of
        mandatory imposition of penalty. However, in Rajasthan Spinning and
        Weaving Mills, 23 DTR 158, the Supreme Court has revisited its
        decision in the case of Dharmendra Textiles Processors and clarified
        that it merely reiterates the earlier existing position, i.e., penalty can be
        levied only in a case where there has been either concealment of
        income or furnishing of inaccurate particulars of income. Whether there
ITA No.469/Ahd/2010     A.Y. 2002-03
DCIT Cir-1(1) BRD v. M/s./ Advance Fluid Control Pvt. Ltd.                 Page 4




        has been concealment or furnishing of inaccurate particulars would be
        decided only after any of the three following conditions are satisfied:-

                (i)     Where no explanation is offered,
                (ii)    Where the explanation offered is found to be false, or
                (iii)   Where the explanation is unsubstantiated.

        7.3 In the instant case, it appears that the penalty has been levied
        considering the loss suffered by the assessee to be a sham transaction.
        This conclusion seems to have been arrived at based on the fact that
        the assessee suffered continuous losses in its transactions, and the fact
        that the transactions were not carried on online but the services of a
        broker were utilized. The payments were initially made by the broker
        and subsequently reimbursed by the assessee. The disallowance had
        been confirmed on the ground that the transactions amounted to a
        speculative loss and also that the activity of trading in shares were not
        permitted by the Articles of Association. However, I find, on going
        through the Articles of Association that, in the ancillary Objects, at Sr.
        No.22, the activity of trading in shares has been duly permitted.
        Moreover, even though the disallowance may or may not be justified by
        having recourse to the provisions contained in the Explanation below
        section 73, such disallowance would be the result of a long drawn-out
        process of reasoning. This is a highly debatable issue on which more
        than one view is possible. The levy of penalty based on the
        disallowance which is highly contentious would not be justifiable.
        Moreover, I find that the basic assumption that the transactions were
        carried out by the broker and not by the assessee is not borne out by
        facts, since periodic settlements of the outstanding amounts were made
        and all the dues have been reimbursed by the as subsequently.

        7.4 Penalty proceedings are distinct and separate from assessment
        proceedings. Where the assessee has not concealed any fact material
        to the computation of its income and has offered a satisfactory
        explanation with regard to the facts doubted by the AO, and such
        explanation has not been found to be false or unsubstantiated, the onus
        cast upon the assessee would stand discharged. Accordingly, I am of
        the opinion, on the above facts, that the penalty in respect of
        Rs.21,00,000/-was not justified and is accordingly cancelled."

It is contended by Ld. Authorized Representative that in quantum proceedings
so far as the transaction conducted by Thakkar Share Brokers Pvt. Ltd is
concerned. It has been held to be genuine and the Hon'ble ITAT has set aside
the orders of authorities below as regards to the transactions conducted by
ITA No.469/Ahd/2010     A.Y. 2002-03
DCIT Cir-1(1) BRD v. M/s./ Advance Fluid Control Pvt. Ltd.                       Page 5

Thakkar Share Brokers Pvt. Ltd. on behalf of the assessee and the Assessing
Officer is directed to allow the claim of the assessee for set off of STCG
against the gains. It is submitted by Ld. AR that most of the transactions have
been conducted through Thakkar Share Brokers Pvt. Ltd. We also find that
this fact has been noted by Hon'ble ITAT at page-15 of its order in quantum
appeal of assessee's own case in ITA No.861/Ahd/2008 (supra), same is
reproduced hereinbelow:-
        "ii) The transactions between appellant and Thakkar Share Brokers
        were in respect of following scripts.
        1.     Soft Solution                  4. PSI Data
        2.     Silver Iines                   5. Himachal Futuristic
        3.     Shyam Teli                     6. Global Tele

        iii) Out of total purchase of Rs.3.194 crores. Rs.2.69 crores relate to the
        aforesaid shares. Uniformly, all the purchase and sale transactions led
        to loss. The purchase and sale of shares show a typical pattern eg.

     Name of share      No. of shares Purchase date          No. of shares Sale date
                        purchased                            sold
     Soft Solution       7939      @   13.9.01                5027 @ 100.24 17.9.01
                        130.93
     Soft Solution      3711       @   25.9.01               3521 @ 91.74    26.9.01
                        102.52
                                                             3102 @ 90.73    8.10.01

        The same pattern is in respect of other scripts between the appellant
        and Thakkar Share Brokers Pvt. Ltd. is also seen. There was regularity
        and continuity in purchase of such shares but the time and type of script
        appears to be so decided that it would result only in loss to the
        appellant."

Admittedly, all the transactions were duly disclosed by the assessee had
carried out substantial transactions with Thakkar Share Brokers Pvt. Ltd. as
noted by Hon'ble ITAT in appellate quantum proceedings and addition made
on account of transaction through Thakkar Share Brokers Pvt. Ltd. has been
deleted by Hon'ble co-ordinate Bench in ITA No.861/Ahd/2008 (supra).
Further, we find merit in the contention of Ld. AR that the judgment of Hon'ble
Supreme Court in the case of Reliance Petroproduct Pvt. Ltd. (supra) is
applicable on the facts and circumstances of the present case.                     As the
ITA No.469/Ahd/2010     A.Y. 2002-03
DCIT Cir-1(1) BRD v. M/s./ Advance Fluid Control Pvt. Ltd.                           Page 6

assessee had made claim of short term loss, and merely claim of the
assessee has been rejected by the Assessing Officer would not be sufficient
to levy of the penalty. The penalty provisions u/s. 271(1)(c) of the Act can not
be invoked solely on the ground that a claim made in terms of income is
rejected by the AO. The Assessment proceedings and penalty proceedings
are distinct and independent. It is undisputed fact that the trams carried out
through Thakkar Share Broker Pvt. Ltd. has been decided as genuine
transactions by the Hon'blke co-ordinate Bench and setting off of short term
loss out of such transaction is also allowed. In view of this matter, respectfully
following the decision of Hon'ble Supreme Court in the case of Reliance
Petroproduct Pvt. Ltd. (supra), we do not find any infirmity into the order
passed by Ld. CIT(A). This ground of Revenue's appeal is dismissed.


8.      In the result, appeal filed by Revenue is dismissed.
  Order pronounced in Open Court on the date mentioned
 hereinabove at caption page.

         Sd/-                                                           Sd/-
    (A.K.Garodia)                                                   (Kul Bharat)
  (Accountant Member)                                            (Judicial Member)
Ahmedabad,

*Dkp
-          07/06/2012           
     / Copy of Order Forwarded to:-
1.  / Appellant
2.  / Respondent
3.    / Concerned CIT
4.  -  / CIT (A)
5.  ,   ,  / DR, ITAT, Ahmedabad
6. [  / Guard file.
                                                                               By order/  ,
                                                             /True Copy/
                                                                              / 
                                                                             ,
                                                                                      
ITA No.469/Ahd/2010     A.Y. 2002-03
DCIT Cir-1(1) BRD v. M/s./ Advance Fluid Control Pvt. Ltd.             Page 7

           Strengthen preparation & delivery of orders in the ITAT
1) date of taking dictation                                    04/06
2) direct dictation by Member straight on                      No.
computer/laptop/dragon dictate
3) date of typing & draft order place before Member            05/06
4) date of correction                                          05/06
5) date of further correction
6) date of initial sign by Members                             06/06
7) order uploaded on                                           07/06
8) original dictation pad-part has been enclosed in the file Yes
9) final order and 2nd copy send to Bench Clerk on             07/06
 
 
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