Income Tax Appellate Tribunal - Ahmedabad
Advance Fluid Control Pvt.Ltd.,, ... vs Assessee on 1 February, 2012
IN THE INCOME TAX APPELLATE TRIBUNAL
'C' BENCH - AHMEDABAD
(BEFORE SHRI BHAVNESH SAINI, JM AND SHRI A. MOHAN ALANKAMONY, AM)
ITA No.861/Ahd/2008
A. Y.: 2002-03
Advance Fluid Control Pvt. Ltd., Vs The A. C. I. T., Circle -1(1),
20, Sobhanagar, Vasna Road, Baroda
Baroda,
PA No. AABCA 6596 P
(Appellant) (Respondent)
Appellant by Shri S. N. Sokarkar, AR
Respondent by Shri Vinod Goswami, Sr. DR
Date of hearing: 01-02-2012
Date of pronouncement: 07-02-2012
ORDER
PER BHAVNESH SAINI: This appeal by the assessee is directed against the order of the learned CIT(A)-VI, Baroda dated 04th December, 2007 for AY 2002-03, on the following grounds:
"1. The Ld. Commissioner of Income Tax (Appeals)-VI, Baroda has erred in law and in facts in confirming the action of the Ld. A. O. in disallowing the claim of short term capital loss of Rs.58,29,228/- incurred in relation to investment and sale of shares. The disallowance of appellant's claim being erroneous in law and in facts is prayed to be allowed.
2. The Ld. CIT(A)-VI has further erred in law and in facts in holding that the loss of Rs.58,29,228/- incurred in relation to the sale of shares was to be treated as speculative loss in terms of explanation ITA No.861/Ahd/2008 2 Advance Fluid Control Pvt. Ltd. Vs ACIT, Cir-1 (1), Baroda to sec. 73 and as such the same could not have been set off against the capital gains of Rs.1,04,51,949/-. The action of the Ld. CIT(A) in holding such loss as arising out of speculative business is grossly erroneous in law and in facts and thus the claim of the appellant in set off deserves allowance."
2. In this case, return of income was filed at Rs.40,79,650/-. The assessee company was promoted in the year 1992 with the object of carrying on business of manufacture and inter alia flow meters and also investments in companies carrying out similar activities. In accordance with the said objective, the assessee company had an investment of Rs.29,40,000/- in the assessment year 1993-94 in the equity shares of M/s. Liquid Controls India Pvt. Ltd. an Indian Company jointly promoted with Liquid Controls Corporation of USA wherein the assessee company had stake of 49%. During the course of assessment proceedings it has been observed by the AO that the assessee has shown long term capital gain of Rs.1,04,51,949/- and short term capital loss of Rs.58,29,228/-. On further examination of records it was gathered by the AO that the assessee invested in the shares of Liquid Controls Pvt. Ltd. in 1994 and it sold share of Liquid Controls Pvt. Ltd. on 01-01-2002 which resulted in gain of Rs.1,50,00,000/-. Further short term capital loss of Rs.58,29,228/- arising out of purchase and sale of shares was set off against this gain. During the course of assessment proceedings the assessee was required to give the details of short term capital loss. It was noticed that the assessee had carried out the sale and purchase of shares through two brokers i.e. Thakakr Share Brokers Pvt. Ltd., ITA No.861/Ahd/2008 3 Advance Fluid Control Pvt. Ltd. Vs ACIT, Cir-1 (1), Baroda Baroda and Labh Investment, Mumbai. Notices u/s 133 (6) of the IT Act dated 16-2-2005 and 21-02-2005 were issued to these two brokers requesting them to furnish various transaction details. In response thereto, information received from M/s. Thakkar Share Brokers Pvt. Ltd. was examined by the AO and the following observations by the AO merit attention:
(i) The claim of the assessee that transactions have been done through recognized sock exchange is factually incorrect. The contract note issued by stock broker does not bear the transaction ID No. and time stamp which is mandatorily allotted to every transaction that is carried out through out through on line trading system of recognized stock exchange.
(ii) Further perusal of Sauda Bahi reveal that the other party to the contract is not the broker/ sub-broker of stock exchange but either trading account of broker itself or some individual, meaning thereby that these are cross deals or in-house deals of M/s. Thakkar Share Brokers Pvt. Ltd. which were not even reported to the stock exchange.
(iii) Moreover no delivery to or from the assessee company is effected by way of transfer of shares from demat account of assessee company. Since most of the transactions are from trading account of broker itself no such movement was there and scripts were lying in De-mat account of M/s. TSB throughout the relevant period.ITA No.861/Ahd/2008 4
Advance Fluid Control Pvt. Ltd. Vs ACIT, Cir-1 (1), Baroda
(iv) The debit balance of assessee's account in the broker's books of account had been continually increasing till Rs.1 crore but no margin money/security was furnished to broker which is against the SEBI regulations. Ordinarily delivery of shares and payment of consideration is complete within week of completion of settlement period.
(v) In such circumstances it appears that Sauda of sale and purchase were prepared to create artificial loss by taking accommodation entries from the broker.
On going through the details filed by Labh Investment, it was noticed by the AO that the relevant portion of Sauda Bahi as well as demat account statement had not been furnished by the party. It was stated by the AO that from the details furnished, it was not known as to whether deals are in-house or reported to exchange. It was also found quite unusual by the AO that an assessee of Baroda was carrying out its share transaction through a sub-broker at Mumbai. The assessee by way of show cause letter was required to explain as to why loss of Rs.58,29,228/- as claimed by it should not be disallowed as the assessee company had resorted to colourable device to avoid tax incidence. The assessee in response filed an elaborat4e reply emphasizing that the short term capital loss was genuine by contending the following:
(i) The transactions were done through a member of the stock exchange and assessee was not required to follow ITA No.861/Ahd/2008 5 Advance Fluid Control Pvt. Ltd. Vs ACIT, Cir-1 (1), Baroda the procedures which were applicable to members of exchange.
(ii) That these transactions were not prohibited by the stock exchange authorities and that all the transactions for purchase and sales were routed through the demat account of the broker. The receipts of shares in the demat account of the broker who acted as an agent of the customer is sufficient evidence of receipt of shares on behalf of the assessee and therefore the transfer to the assessee's demat account was irrelevant.
(iii) It was submitted that the debit balance increase was on the basis of judgment taken by the broker based on reputation and creditworthiness of the assessee. The broker is secured by the fact that all the shares purchased by the assessee were lying in his account and to that extent the payment from the assessee was assured.
(iv) The assessee has placed reliance in the case of CWT Vs Arvind Norotham 173 ITR 479 (SC), Banyan and Berry Vs CIT, 222 ITR 831 (Guj) and Azadi Bachao Andolan, 263 ITR 706 (SC).
The AO did not accept the contention of the assessee and opined that the facts and circumstances of the case clearly suggest that transaction of sale/purchase of shares by the assessee company were not carried out in ordinary course of business and that when the assessee company realized that there was a huge capital gain during the year then it purchased such losses from the market. The AO in the assessment stressed on the following points:
ITA No.861/Ahd/2008 6Advance Fluid Control Pvt. Ltd. Vs ACIT, Cir-1 (1), Baroda
(i) The sub-brokers were having certain scripts in their stock-
in-trade through out the year in which there were movements of price. The scripts were continually lying in the de-mat account of share brokers and no movement on account of purchase or sale was there during the year.
(ii) Since the transactions were not carried out at the time appearing in contract, neither the payments were timely made/received nor was the delivery of shares was effected by way of transfer entry of to or fro from de-mat account.
(iii) The assessee had carried out so many transactions, but strangely, none of the transactions was carried out through on line trading system of recognized stock exchange.
(iv) If the assessee had directed that the transaction had to be carried out through on-line trading and company wanted the delivery of shares then the sub-broker would definitely had done so.
(v) In vies of the above facts, the modus-operandi of above transactions of the assessee company suggest that these were not genuine transactions carried out in ordinary course of business.
The AO has also examined the legal position in this regard. The assessee had contended before the AO that these transaction could not be termed as colourable device and cited few decision which according to him have overruled the ratio laid down by the Hon'ble ITA No.861/Ahd/2008 7 Advance Fluid Control Pvt. Ltd. Vs ACIT, Cir-1 (1), Baroda Apex Court in the case of McDowell (154 ITR). The AO on the other hand had pointed out that the taxing statute must be applied to the scheme and not to the constituent transactions comprised in the scheme. In other words, an artificial tax avoidance scheme does not alter the incidence of tax. The essence of business must be there. The AO referred to following extract from McDowell case.
"In the context of determining whether a transaction is a sham or illusory transaction or a device or a ruse, the income tax authorities are entitled to penetrate the veil covering it and ascertain the truth. The taxing authorities are not required to put blinkers while looking at the documents produced before them. They are entitled to look into the surrounding circumstances to find out the reality of the recitals made in the documents. In every case, where ingenuity is extended to avoid taxing and welfare legislation, it is duty to get behind the smoke screen and discover the true state of affairs. Here, as anyone can understand the essence of scheme was to include a transaction designed to produce a loss to be offset against a gain. Without this loss assessee would have to pay a higher amount of tax."
In view of the above facts and legal position the AO treated the loss as colourable device to avoid tax incidence and hence short term capital loss of Rs.58,29,228/- as claimed by the assessee was treated as non-genuine and was disallowed.
3. The order of the AO was challenged before the learned CIT(A) and it was submitted before the learned CIT(A) that during the year under consideration the assessee sold the shares of M/s. Liquid Controls India Pvt. Ltd. for a consideration of Rs.205.85 lacs. On receipt of such consideration and with the availability of funds, the ITA No.861/Ahd/2008 8 Advance Fluid Control Pvt. Ltd. Vs ACIT, Cir-1 (1), Baroda company started making investments in the shares of other companies as also investment in Government Bonds. Some of the investments made were for long term while the others were for short term. In relation to short term investments the assessee company incurred loss of Rs.58,29,228/-. During the course of assessment proceedings, the assessee furnished the details of the shares purchased and sold duly evidenced by the copy of bills, contract notes issued by the brokers M/s. Thakkar Share Brokers Pvt. Ltd. and also M/s. Labh Investments of Mumbai, entries in the books of accounts, the payments made for purchase and also the details of the persons from whom such shares were purchased. The AO also obtained information from the brokers by issuing notice u/s 133(6) of the IT Act calling for various information from whom such shares were purchased. The AO also obtained information from the brokers by issue of notices u/s 133(6) calling for various information. The assessee further submitted that the conclusion of the AO has based purely on conjectures, surmises and on misconceived appraisal of the facts and the regulations relating to the conduct of transactions / business. The AO has disputed the transactions as the sale and purchase of the shares as the same were not recorded on the on-line Trading System of the Stock Exchange and did not contain transaction ID Number and time Stamp. The assessee submitted that such mandatory of ID Number as well as time Stamp is necessary only where the transaction is done on-line and not in respect of transactions which are done off-line or off-market, as is generally termed in the stock market parlance. The modus of off-market trading is that the purchases made by various constituents of broker member ITA No.861/Ahd/2008 9 Advance Fluid Control Pvt. Ltd. Vs ACIT, Cir-1 (1), Baroda are executed in the account of the broker himself and consequently the receipt of deliveries of shares on behalf of the constituent clients in the demat account of the broker. Out of such balance available in the account of the broker if a constituent is willing to sell to another customer / constituent, the transaction is effected without effecting any deliveries to the new purchaser as the delivery of such stocks already available in the account of the broker. The broker, however, makes necessary entries in his books to record the availability of balance of stock in the demat account as now belonging to the new purchaser instead of the previous purchaser. In the financial records of the broker the necessary debits and credits are made in the accounts of respective purchaser as well as seller to reconcile with the balance available in the demat account. The broker in his records maintains all such particulars which were furnished to the AO. Similarly, it also records the particulars of persons to whom the sale is made. The corresponding bills / contracts for purchase as well as sales are issued by the broker to the named persons and the effect of the increase or decrease h the holding of equity shares by individuals is reconciled with the stock the available in the demat account of the broker. The identity of all the persons whose names are appearing in the Sauda Bahi is not in doubt and the broker normally does these transactions for the benefit of the constituents where the intention of the respective constituents / clients is to hold the shares for temporary periods as the transfer of the shares to the demat account of individual constituents attracts the charges / cost. The assessee further added that the conduct of off-market transaction is absolutely legal and permitted by law and there is no regulation requiring the ITA No.861/Ahd/2008 10 Advance Fluid Control Pvt. Ltd. Vs ACIT, Cir-1 (1), Baroda transfer of shares in to the Demat account of the individual buyer / seller as presumed by the AO. The assessee in support of its contention drew attention to the extracts of the regulation of transaction between clients and brokers as released by the Bombay Stock Exchange as well as the Vadodara Stock Exchange in accordance with the guidelines of SEBI in relation to the permitted transactions out of client's account by the broker. The relevant regulation of Bombay Stock Exchange and Vadodara Stock Exchange were also given. It was thus argued that the relevant Stock Exchanges operating under the guidelines of SEBI permit the retention of the stocks in the account of the broker and that the broker has lien in respect of such stocks for the recovery of his dues implying thus that the broker can refuse to transfer the shares to the account of client if the due amounts are not received. The assessee further argued that as per provisions of section 10(38) of the IT Act exempts the income arising from long term capital gains in equity shares where securities transaction tax is paid. Under Securities Transactions Tax Act, the charges on purchase or sale of equity shares are to be paid where the transaction of such purchase or sale is entered into a recognized stock exchange and the contract for purchase is settled by actual delivery or otherwise. This is provided in sec. 98 of Chapter XVI of Finance (No. 2) Act, 2004, It is thus argued that where the transactions are not entered into a stock exchange and no securities transaction tax is paid, long term capital gains tax is leviable or in other words, the provision recognizes the conduct of off- market transactions. Further reliance was placed on following decisions;
ITA No.861/Ahd/2008 11Advance Fluid Control Pvt. Ltd. Vs ACIT, Cir-1 (1), Baroda
1. Mukesh R. Marolia Vs. Addl. CIT - 6 SOT 247(Mumbai-
ITAT)
2. ITO Vs. Kusumlata - 105 TTJ 265 (Jodhpur ITAT) It was further pleaded that all the transactions are evidenced and confirmed by contracts, bills and also transaction summary showing the particulars of the seller or buyer of the stock in respect of the stock lying in the demat account of the broker and that the payments / receipts for such purchases were made by account payee cheques from time to time and hence simply because the transactions were not routed through the stock exchange and that deliveries were not taken in the account of the respective parties such transactions cannot be considered as bogus. As regards the delivery of stocks in the account of broker's demat account is concerned it was stated that the same is also a recognized method of obtaining and giving deliveries as the relationship between the client and the broker is that of a principal and agent. The assessee referred and relied on the decision of the Calcutta Tribunal in the case Smt. Jayshree Roychowdhury Vs ACIT, 93 TTJ 714. As regards the objection of the AO that the broker has allowed debit balance or credit to the assessee to an extent of Rs.1.00 crore without any margin which is against SEBI regulations, assessee submitted that all attempts were made to find out the regulations prohibiting such allowance of credit by the brokers to the clients but no such restriction could be found and therefore the finding and observation of the AO in this regard is without any basis. The assessee submitted that since the entire stocks were lying in the demat account of the broker, he had ITA No.861/Ahd/2008 12 Advance Fluid Control Pvt. Ltd. Vs ACIT, Cir-1 (1), Baroda sufficient security and the debit balance of Rs.1.00 crore was only for a short period of a week where after the assessee had made the payments. As regards the transactions with M/s. Labh Investments it was submitted that promoters of the company were natives of Mumbai and have associations with various people in the city and, therefore, the conduct of transactions with broker in Mumbai with modern communication system was not a hurdle on account of geographical distance. The assessee also refuted the allegation of the AO that the transactions are a colourable device entered with an intention to reduce its tax liability. It is stressed that if one considers the concessional tax rate in respect of long term capital gains, then any set off of loss is only diluting the benefit of concessional tax. Considering the fact that the assessee hereafter also continued to make investments in the shares of other companies as well as bonds goes to establish that the activity of investment was a regular activity of the assessee company. The submission of the assessee was referred to AO for his comments. Vide remand report dated 8.10.2007 it was essentially stated that if someone chooses to carry out off market transactions, he had something to hide and that if the transactions are not routed through the stock exchange. Attention was also drawn to section 98 of Chapter XVI of Finance Act, 2004 which discourages the off market transactions. In response to the remand report it was submitted by the assessee that the broker had entered necessary entries in his books of accounts to record the availability of stock and that all the necessary debits and credits in the account of respective purchases were made and details were furnished to the AO. It was emphasizes that the identity of all the ITA No.861/Ahd/2008 13 Advance Fluid Control Pvt. Ltd. Vs ACIT, Cir-1 (1), Baroda persons in Sauda Bahi was not doubted and that the off market transactions are absolutely legal and there was no regulation requiring transfer of shares in de-met account by individual buyers / sellers. It was also added that payments for purchases and sales were received by account payee cheques from time to time. It was thus pleaded that the loss of Rs.58,29,228/- be allowed.
4. The learned CIT(A) considering the explanation of the assessee in the light of the findings of the AO confirmed the order of the AO and dismissed the appeal of the assessee on this issue. His findings in Para 5.5 to Para 5.5.7 of the appellate order are reproduced as under:
5.5. I have carefully considered the rival submissions, the remand report and the assessment records. The factual matrix of the case reveal that the assessee company was incorporated in 1992-93 with following main objects of business as contained in Memorandum of Association of the company.
i) To carry on business of manufacturers, traders, buyers, sellers, dealers, consignors, consignees, exporters, importers, agents and distributors, wholesalers and retailers of all types of flow meters like positive displacement type, turbine, magnetic, ultrasonic, mass, vortex, shedding, ventury, all types of flow and measurement control devices, all types of rotameters, temperature volume compensator, numerical counter, ticket printer, present counter, air eliminator, strainer, present valve, vapor eliminator, back check valve, differential valve, differential valve, fittings, flanges, micro switches, swivel, numerical counter, gear plate, register stack adapter, extensions, hot oil/steam jacket, mechanical flow rate indicator, external drive module, ITA No.861/Ahd/2008 14 Advance Fluid Control Pvt. Ltd. Vs ACIT, Cir-1 (1), Baroda pulser, pilot operated control valves, Microprocessor based supervisory control, Remote control counter and supervisory control box odometer pulser, computer interface, memory cards, Batch counter, Flow computer, Actuators, Chokes,, filtration systems, data acquisition and logging systems totalizers hydraulic and pneumatic controls for liquids, gases, steam air and flowing materials.
ii) To carry on the business as manufacturers, traders, exporters, importers, dealers, manufacturer's representatives, agents of all types of Mechanical, electrical and electronic devices, components, spares, Equipments, apparatuses machines, instruments, accessories land parts thereof for measurement and control of liquids, gases, steam any other flowing material.
5.5.1. It is also noticed that the appellant company promoted and invested in M/s. Liquid Control India Ltd. engaged in the business of manufacturing of Liquid Flow Control Equipments and invested Rs.40 lakhs as capital in F.Y. 1994-95. Investments were also made for factory shed which was rented out to M/s, Liquid Control India Limited. During 1.4.1997 to 31.3.2001, the appellant had rental income, interest income and dividend income.
5.5.2. It is claimed before Assessing Officer and in appellate proceedings that the company is engaged in the investment and financing business. However the contentions of the appellant do not appear to be correct as except for said investment in M/s. Liquid Control India Ltd. there was no other investing or financing activities undertaken. The Assessing Officer in the assessment order has mentioned that the assessee is engaged in the business of trading of shares. However, it is seen that till 31.3.2001 not a single share was purchased or sold by the appellant company. The trading activity was only initiated during the current financial year. It is also intriguing to note that out of numerous share purchase and sale transactions shown during the year not ITA No.861/Ahd/2008 15 Advance Fluid Control Pvt. Ltd. Vs ACIT, Cir-1 (1), Baroda a single transaction has been resulted in profit to the appellant. In case the appellant had commercial interest behind trading in shares the prudence would demand that there would at least be some transactions resulting in profit. The share transactions were restricted to two brokers namely Thakkar Share Brokers Pvt. Ltd., Baroda and Labh Investments, Mumbai. The details of scrip-wise summary revealed following interest trends.
i) The trading in shares commenced from July, 2001. All the transactions between the appellant and Thakkar Share Brokers Pvt. Ltd. have been between appellant and the stock broker meaning thereby these were off market transactions involving the brokers own stock in trade of the shares.
ii) The transactions between appellant and Thakkar Share Brokers were in respect of following scripts.
1. Soft Solution
2. Silver Lines
3. Shyam Teli
4. PSI Data
5. Himachal Futuristic
6. Global Tele ITA No.861/Ahd/2008 16 Advance Fluid Control Pvt. Ltd. Vs ACIT, Cir-1 (1), Baroda
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 Purchase No. of Sale date shares date shares sold purchased Soft Solution 7939 @ 13.9.01 5027 17.9.01 130.93 @ 100.24 Soft Solution 3711 25.9.01 3521 26.9.01 @102.52 @91.74 3102 8.10.01 @90,73 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 scrip appears to be so decided that it would result only in loss to the appellant.
iv) It is interesting to note that in respect of shares of PSI Data the appellant purchased 9979 shares on 12.12.2001 @ 152.88 and sold the same on 28.12.2001 and 31.12.2001 at rates of Rs113.19 and Rs.125.30 respectively. Further on 20.2.2002 the appellant sold 4055 shares of PSI Data @ 110.80 without having any stock in hand of such shares. In other words the appellant engaged in short selling till 8.3.2002 when equivalent numbers of shares of PSI Data were shown to have been purchased from the broker.
v) The appellant had invested in M/s. Liquid Control India Pvt. Ltd. whose shares are also unlisted. Since Liquid Control India Pvt. Ltd. was promoted by appellant ITA No.861/Ahd/2008 17 Advance Fluid Control Pvt. Ltd. Vs ACIT, Cir-1 (1), Baroda company its business scenario and profitability are very much in the knowledge of the appellant. The appellant was aware of the proposed foreign buyout of the strafes of Liquid Control India Pvt. Ltd. The appellant also aware of the valuation of such shares of Liquid Control India Pvt. Ltd. and the possible gain accruing to it in case the appellant's equity is transferred to the foreign buyer. In other words appellant had full knowledge about its tax liability and under such a scenario it seems likely that it opted for two brokers with whom from July, 2001 to March, 2002 it entered into off market purchase and sale transactions. The purpose of entering into off market transactions also appear to be well thought out as the manipulations in terms of purchase and sale date and time in such transactions could be with express knowledge and awareness of the brokers involved and could be rather easier. It is not incidental that the purchase and sale of shares were resorted to only during the relevant assessment year. The entire scheme was well planned and thought out to offset the possible gain from sale of equity of Liquid Control India Pvt. Ltd. to foreign buyer. There was not a single trade in shares during the period 1995-96 to 2000-01. There was no opening stock for shares. Further the entire purchase and sale transactions during the year were squared up with two brokers in the instant assessment year. If the appellant was indeed serious in the business of trading in shares the intention would have been to make profit and hold on to certain shares or at least to carry out transactions in a manner to generate some profit in at least some scripts. The coincidence and continuous error of judgment in such share transactions appear to be too far fetched to be true. On the other hand, factors such as huge amount of intending capital gains, entering into off market transactions with two brokers, all transactions resulting into loss, long credit period allowed by brokers, etc. are pointers towards non genuineness of these transactions. These transactions were purposely entered into in order to secure loss. Thus the Assessing Officer was completely justified in holding that these transactions ITA No.861/Ahd/2008 18 Advance Fluid Control Pvt. Ltd. Vs ACIT, Cir-1 (1), Baroda were nothing but colourable device to avoid payment of tax.
5.5.3. Hon'ble Apex Court in the case of McDowell supported the Assessing Officer's view to go beyond what is written on paper in order to find the real arrangement. The observation of Justice Ranganathan in McDowell case is still good law as Apex Court in Ajadi Bachavo Andolan did not overrule these observations. Only Justice Chinnapa Reddy's remarks were overruled.
5.5.4. In the case of CIT vs. Abishek Industries - 2B6 ITR 1(P&H) it is held that;
"17. We think that the time has come for us to depart from the Westminster principle as emphatically as the British Courts have done and to dissociate ourselves from the observations of Shah, J. and similar observations made elsewhere. The evil consequences of tax avoidance are manifold. First there is substantial loss of much needed public revenue, particularly in a welfare State like ours. Next there is the serious disturbance caused to the economy of the country by the piling up of mountains of black money, directly causing inflation. Then there is 'the large hidden loss' to the community (as pointed out by Master Wheatcroft in 18 Modern Law Review 209) by some of the best brains in the country being involved in the perpetual war waged between the tax-avoider and his expert team of advisers, lawyers and accountants on one side and the tax-gatherer and his perhaps not so skillful advisers on the other side. Then again there is the 'sense of injustice and inequality which tax avoidance arouses in the breasts of those who are unwilling or unable to profit by it. Last but not the least is the ethics (to be precise, the lack of it) of transferring the burden of tax liability to the shoulders of the guileless, good citizens from those of the 'artful dodgers'. It may, indeed, be difficult for lesser mortals to attain the state of mind of Mr. Justice Holmes, who said, 'Taxes are what we pay for civilized society. I like to pay taxes. With them I buy civilization.' But, surely, ITA No.861/Ahd/2008 19 Advance Fluid Control Pvt. Ltd. Vs ACIT, Cir-1 (1), Baroda it is high time for the judiciary in India too to part its ways from the principle of Westminster and the alluring logic of tax avoidance. We now live in a welfare State whose financial needs, if backed by the law, have to be respected and met. We must recognise that there is behind taxation laws as much moral sanction as behind any other welfare legislation and it is a pretence to say that avoidance of taxation is not unethical and that it stands on no less a moral plane than honest payment of taxation. In our view, the proper way to construe a taxing statute, considering a device to avoid tax, is not to ask whether the provisions should be construed literally or liberally, nor whether the transaction is not unreal and not prohibited by the statute, but whether the transaction is a device to avoid tax, and whether the transaction is such that the judicial process may accord its approval to it. A hint of this approach is to be found in the judgment of Desai, J. in Wood Polymer Ltd., In re and Bengal Hotels P. Limited, In re [1977] 47 Comp Cas 597 (Guj) where the learned judge refused to accord sanction to the amalgamation of companies as it would lead to avoidance of tax.
18. It is neither fair nor desirable to expect the Legislature to intervene and take care of every device and scheme to avoid taxation. It is up to the court to take stock to determine the nature of the new and sophisticated legal devices to avoid tax and consider whether the situation created by the devices could be related to the existing legislation with the aid of 'emerging' techniques of interpretation as was done in Ramsay [1982] AC 300 (HL), Burma Oil [1982] STC 30 (HL) and Dawson [1984] 1 All ER 530 (HL), to expose the devices for what they really are and to refuse to give judicial benediction."
5.5.5. It would also be pertinent to note that the appellant engaged into sale of shares of PSI Data without having a stock of such shares. Further in all the transactions with share brokers no delivery was taken or ITA No.861/Ahd/2008 20 Advance Fluid Control Pvt. Ltd. Vs ACIT, Cir-1 (1), Baroda even intended. There are numerous instances where the appellant had entered into purchase and sale of some scripts on the same day. Al these factors reveal that there was never any intention to take actual delivery of such shares and in terms of section 43(5) these are nothing but speculative transactions. It has been admitted that there has not been a single instance of actual delivery of shares to the appellant from the broker. Explanation to section 73 reads as under;
"'Explanation.-Where any part of the business of a company other than a company Whose gross total income consists mainly of income which is chargeable under the heads "Interest on securities", "Income from house property", "Capital gains" and "Income from other sources", or a company the principal business of which is the business of banking or the granting of loans and advances) consists in the purchase and sale of shares of other companies, such company shall, for the purposes of this section, be deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sale of such shares,"
5.5.6 In the instant case the appellant has indulged in trading of shares and undisputedly the appellant is not in the business of banking or granting of loans and advances, Therefore, even in terms of explanation to section 73 the purchase and sale of shares of other companies would be deemed to be a speculative business and therefore such loss cannot be allowed to be set off against the capital gains. Support is also drawn from the following judgments.
a) ITO vs. Sincere Management Services P. Ltd. - 9 SOT 21 (Del)
b) SCIT vs. Frontline Capital Services Ltd. - 96 TTJ 201 (Delhi)
c) JCIT vs. Haldia Investment Co. Ltd. - 85 ITD 212 (Cal) ITA No.861/Ahd/2008 21 Advance Fluid Control Pvt. Ltd. Vs ACIT, Cir-1 (1), Baroda
d) Khajana Holding Pvt. Ltd. vs. ACIT - 17 SOT 367 (Mum) 5.5.7. In light of the foregoing the Assessing Officer was justified in rejecting the claim of loss of Rs.58,29,228/- and in not allowing the set off of such losses against the capital gain of Rs.1,04,51,949/-."
5. The learned Counsel for the assessee reiterated the submissions made before the authorities below and submitted that apart from confirming the order of the AO on merit, the learned CIT(A) also referred to terms of section 43(5) of the IT Act and explanation to section 73 of the IT Act for the purpose of rejecting the claim of the assessee considering it to be speculative transaction. He has submitted that capital gains/loss arising from the sale of shares held as investment cannot be hit by explanation to section 73 of the IT Act and referred to explanation therein to section 28 of the IT Act which provides that "whether speculative business carried on by the assessee are of a nature as to constitute a business, the business (hereinafter referred to as speculative business), shall be deemed to be distinct and separate from any other business." He has therefore, submitted that the terms of speculative loss could be considered for computing business income only and the same principle is not applicable for capital loss/capital gain. In support of his contention, he has relied upon the order of ITAT Ahmedabad Bench in the case of Krishnalaxmi Multi Trade (P) Ltd. Vs ACIT, 130 ITD 584 in which it was held that "losses in speculation business - capital gains arising from sale of shares held as investment cannot be hit by explanation to section 73 of the Act." He has also relied upon the ITA No.861/Ahd/2008 22 Advance Fluid Control Pvt. Ltd. Vs ACIT, Cir-1 (1), Baroda decision of ITAT in the case of Smt. Jayashree Roychowdhury Vs ACIT, 92 ITD 400 in which it w as held that "whether where shares were sold by the assessee and shares deposited in broker's D- mat account, it could be said that transactions of sale and purchase of shares were not settled otherwise than by actual delivery or transfer of shares and, thus, provisions of section 43(5) were not applicable. Held - yes." He has also relied upon the decision of the Hon'ble Rajasthan High Court in the case of CIT Vs Aditya Mills Ltd., 209 ITR 933 wherein it was held that "The word "actual delivery" was not restricted to delivery to the assessee, it could be to his agent also." He has also relied upon the decision of the Hon'ble Andhra Pradesh High Court in the case of CIT Vs Laxminarayana Trading Co., 219 ITR 90 in which it was held that "contract for purchase of goods - goods dispatched by assessee and railway receipt issued in name of assessee. Sale of goods by assessee while goods in transit - not a speculative transaction. Loss incurred in transaction was a business loss." He has also relied upon the order of ITAT Kolkata Bench in the case of Acchyalal Shaw Vs ITO, 30 SOT 44 in which it was held as under:
"In all off-market transactions any enquiry from the stock exchange would not yield result in favour of the revenue. The revenue has to see whether the sale has been effected or not as per the documents and as per the acceptance and admission of the respective stock brokers. As it had been assertively argued by the assessee in the instant case that both the stock brokers had not denied the transactions and the capital gain had been shown, the Assessing Officer simply by casting doubt on alleged purchase of ITA No.861/Ahd/2008 23 Advance Fluid Control Pvt. Ltd. Vs ACIT, Cir-1 (1), Baroda house property could not treat the same as cash credit and could not take the same in his cash credit. Suspicion cannot replace the real evidential document. Simply by arguing it to be a case of manipulation the revenue was not supposed to succeed in its contention without proper evidence. Holding the aforesaid view of the matter on the factual matrix the assessee's second appeal was to be allowed."
The learned Counsel for the assessee referring to the above decisions also referred to the decision of the ITAT Mumbai Bench referred to in this order in the case of Mukesh R. Marolia Vs Addl CIT, 6 SOT 247 in which it was held that off-market transactions are not illegal." The learned Counsel for the assessee submitted that both the brokers confirmed the transactions to the AO on inquiries held by the AO directly from them. The brokers confirmed the transactions with the assessee; therefore, off-market transactions are not invalid or illegal and that delivery to the agent or by the agent is delivery with the assessee. No inquiry was made from the broker or concern parties. Transactions conducted by the brokers have not been disputed. Since, the brokers were holding the shares in their demat accounts so payment was not relevant as it was secured by holding the shares by them. Later on, payments were also cleared to the brokers. The learned Counsel for the assessee however, submitted that in case of broker M/s. Labh Investment, Mumbai No demat account or Sauda Bahi was filed before the AO. No contra account was furnished. Therefore, in his alternate contention it was submitted that in case of M/s. Labh Investment, the matter may be remanded to the AO for reconsideration of the issue afresh.
ITA No.861/Ahd/2008 24Advance Fluid Control Pvt. Ltd. Vs ACIT, Cir-1 (1), Baroda
6. On the other hand, the learned DR replied upon the orders of the authorities below and submitted that no actual payments have been made and only lump sum payments have been made. No contemporious evidences were filed to prove the case of the assessee. The assessee was not dealing in shares in the past; therefore, the authorities below rightly disallowed the claim of the assessee. The learned DR submitted that in the case of Labh Investment the details called for by the AO were not furnished and even no Sauda Bahi as well as demat account was furnished. Therefore, addition should be confirmed in that case. The learned DR relied upon the order of ITAT Mumbai Bench in the case of ITO Vs Deepchan G. Shah, 128 ITD 488 in which the matter was remanded to the file of the AO because necessary details could not be traced regarding corresponding purchases of shares from the demat account maintained by the broker. The learned DR, therefore, in his alternate contention submitted that the entire matter may be remanded to the AO for verification as is directed in the case of Deepchan G. Shah (supra).
7. We have considered the rival submissions and material on record. We take the transactions carried out by the broker M/s. Thakkar Share Brokers. In this case, admittedly detailed statement of demat account and Sauda Bahi was filed by the broker directly before the AO. Copy of the bill, copy of the contract note of the broker and entries in the books of accounts of the broker were also furnished before the AO. PB-1 is the confirmation letter of M/s. Thakkar Share Broker Pvt. Ltd. directly submitted before the AO in response to query ITA No.861/Ahd/2008 25 Advance Fluid Control Pvt. Ltd. Vs ACIT, Cir-1 (1), Baroda raised by the AO in which the broker confirmed the entire transactions conducted on behalf of the assessee. In the same confirmation, the broker furnished copy of the ledger account; copy of bills (contract note) and copy of demat account statement and script- wise summary for the said series. Further, details were attached with the same confirmation. These evidences on record would prove that the broker conducted the transactions of sale and purchases of shares on behalf of the assessee. The transactions conducted by the broker on behalf of the assessee would be deemed to be conducted as conducted by the agent for the principal. Since the broker confirmed the transactions conducted on behalf of the assessee and produced all relevant evidences and material on record, therefore, there should not have been any doubt in the transactions conducted on behalf of the assessee. It is held in catena of authorities that off-market transactions are not illegal. The identities of all the persons whose names are appearing in the Sauda Bahi are also not in dispute. The entire stocks were lying in the demat account of the broker who had sufficient securities and according to the assessee the payments have been cleared later on. The transactions have not been doubted and no further inquiries have been made from M/s. Thakkar Share Brokers Pvt. Ltd. or the concerned party with whom the broker has conducted the transactions. Therefore, there was no basis left for the AO to disbelieve the transactions conducted on behalf of the assessee. The decision of the Calcutta Bench in the case of Acchyalal Shaw (supra) is directly applicable to the case of the assessee in which several other decisions of Mumbai Bench in the case of Mukesh R. Moralia (supra) and ACIT Vs Claridges ITA No.861/Ahd/2008 26 Advance Fluid Control Pvt. Ltd. Vs ACIT, Cir-1 (1), Baroda Investments & Finances and Board Circulars have been considered. We may also note that the learned CIT(A) rejected the claim of the assessee by holding it to be speculative transactions which is meant for business purposes only and would not be relevant in respect of the transactions involving capital gains or losses. The decisions cited by the learned Counsel for the assessee would support the findings above. The learned CIT(A) also referred to the decision in the case of Abhishek Industries (supra) delivered by the Hon'ble Punjab & Haryana High Court which is connected with disallowance of interest and has been later on overruled by the Hon'ble Supreme Court in the case of Munjal Sales Corporation 298 ITR 298 as is argued by the learned Counsel for the assessee. Therefore, the findings of the learned CIT(A) in denying the claim of the assessee on further reasons would not be valid and justified. Considering the above discussions, we are of the view that sufficient evidences and material are available on record to prove that the assessee genuinely entered into share transactions through M/s. Thakkar Share Brokers Pvt. Ltd. and, therefore, the authorities below have acted upon grossly on inadequate materials and their conclusions are merely based on suspicion, conjecture and surmises. The transactions conducted by M/s. Thakkar Share Brokers Pvt. Ltd. are genuine transactions and set off of losses incurred in dealing in shares to that extent should have been allowed by the authorities below. We accordingly, set aside the orders of the authorities below as regards transactions conducted be M/s. Thakkar Share Brokers Pvt. Ltd. on behalf of the assessee and direct the AO to allow the claim of the assessee for set ITA No.861/Ahd/2008 27 Advance Fluid Control Pvt. Ltd. Vs ACIT, Cir-1 (1), Baroda off of short term capital losses against the gains. The appeal of the assessee to that extent is allowed.
7.2 However, as regards the transactions conducted through M/s. Labh Investments, Mumbai, the broker, it is admitted fact that the assessee has not furnished any demat account statement and even no Sauda Bahi account has been furnished before the AO for his consideration. In the absence of basic documents on record it is difficult to examine and investigate the transactions carried out through this broker. The learned Counsel for the assessee referred to PB- 30, 31 and 32 which is ledger account in the books of M/s. Labh Investments and alleged details of the assessee are stated to be mentioned. However, it is a fact that no confirmation from the broker, no demat account and no copy of Sauda Bahi account, bills or contract note have been furnished in this case as were furnished in the case of other broker, M/s. Thakkar Share Brokers Pvt. Ltd. Therefore, in the absence of relevant and cogent evidence on record the claim of the assessee had been rightly rejected by the authorities below. Copy of the ledger account filed by M/s. Labh Investment would not reveal the true nature of the transactions conducted through them. The alternative contention of the learned Counsel for the assessee for remanding the matter to the file of the AO also cannot be accepted. It is an old case pertaining to assessment year 2002-03. What the assessee could not do during last several years, it cannot be expected to do now in the remand proceedings before the AO. Even, there was no basis whatsoever provided for remanding the matter to the file of the AO because even before the ITA No.861/Ahd/2008 28 Advance Fluid Control Pvt. Ltd. Vs ACIT, Cir-1 (1), Baroda Tribunal the basic documents mentioned above have not been furnished. Therefore, we do not find it proper even to remand the matter to the file of the AO. Considering the facts and circumstances noted above and in the absence of any reliable and cogent evidence on record, we are not inclined to interfere with the orders of the authorities below in respect of transactions conducted by M/s. Labh Investments of Mumbai. To that extent the orders of the authorities below are maintained and part of this ground of appeal of the assessee is dismissed.
8. No other point is argued or pressed.
9. In the result, the appeal of the assessee is partly allowed on both the above grounds as indicated above.
Order pronounced in the open Court 07/02/2012.
(A. MOHAN ALANKAMONY) (BHAVNESH SAINI)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Deka/--
Lakshmikant Deka/
Copy of the order forwarded to:
1. The Appellant
2. The Respondent
3. The CIT concerned
4. The CIT(A) concerned
5. The DR, ITAT, Ahmedabad
6. Guard File
BY ORDER
Dy. Registrar, ITAT, Ahmedabad