Income Tax Appellate Tribunal - Chennai
A. Jahabar Ali, Chennai vs Department Of Income Tax on 20 July, 2009
IN THE INCOME TAX APPELLATE TRIBUNAL
CHENNAI BENCH 'D' : CHENNAI
[BEFORE SHRI HARI OM MARATHA, JUDICIAL MEMBER
AND SHRI ABRAHAM P GEORGE, ACCOUNTANT MEMBER]
I.T.A.No.1585/Mds/2009
Assessment year : 2005-06
The Dy. CIT vs Shri A. Jahabar Ali
Business Circle I 8-A, G.N. Chetty Street
Chennai Mylapore
Chennai - 4
[PAN - AAEPA4832E ]
(Appellant) (Respondent)
Appellant by : Shri K.E.B Rengarajan
Respondent by : Shri D. Anand
ORDER
PER HARI OM MARATHA, JM:
This appeal of the Revenue, for assessment year 2005-06, is directed against the order of the ld. CIT(A)-VI, Chennai, dated 20.7.2009.
2. Briefly stated, the facts of the case are that the assessee filed his return of income for assessment year 2005-06 on 28.10.2005 declaring a total income of ` 80,33,677/- and also showing agricultural income of ` 40,000/-. The assessee, as individual, has shown income from house property at ` 99,318/- in his computation of income :- 2 -: ITA 1585/09 enclosed alongwith the return besides showing income from capital gains being short term on sale of shares at ` 78,68,538/- and income from business at ` 65,821/-. In relation to income from shares, the assessee has shown the transactions as under:
Name : Sri A Jahabar Ali PAN No. AAEPA4382E Son of : Sri Abdul Hameed GIR No.21760-J/A.I(1)C Address No.8-A, G.N. Chetty Street Y.E : 31.3.2005 Chennai 600004 A.Y : 2005-06 Status: INDIVIDUAL VENKATRAMAN & CO DR CR By sale of shares 3,336,658.04 By closing stock 155,805.00 To opening stock 634,236,25 To purchase of shares 2,447,208.65 To profit on sale of shares 411,018.14 3,492,463.04 3,492,463.04 MOTILAL OSWAL SECURITIES LTD DR CR By closing stock 264,765.20 To purchase of shares 251,110.20 To profit on sale of shares 13,655.00 264,765.20 264,765.20 KOTAK AJ701 By sale of shares 647,632.00 By closing stock 165,957.55 To opening stock 282,508.00 To purchase of shares 411,835.00 To profit on sale of shares 119,246.55 813,589.55 813,589.55 :- 3 -: ITA 1585/09 INSIGHT SHARE BROKERS P. LTD DR CR By sale of shares 6,182,572.79 By closing stock 4,270,785.70 By loss on sale of shares 67.21 To purchase of shares 10,453,425.70 10,453,425.70 10,453,425.70 JRG By sales 24,202,018.05 By closing 13,054,642.22 To opening stock 9,411,165.99 To purchase of shares 26,311,360.13 To profit on sale of shares 1,534,134.15 37,256,660.27 37,256,660.27 ARA-87 DR CR By closing stock 377,895.52 To opening stock 100,001.00 To purchases 219,600.00 To profit on sale of shares 58,294.52 377,895.52 377,895.52 BHUBAN STOCK BROKING SERVICE LTD By sales 5,896,930.00 155,805.00 To purchases 204,480.00 To profit on sale of shares 5,692,450.00 5,896,930.00 5,896,930.00 :- 4 -: ITA 1585/09 Profit & Loss account
-Venkatraman & Co 411,018.14
-Kotak AJ 701 119,246.55
-Insight Share Brokers P. Ltd (67.21)
-JRG 1,534,134.15
-Bubna Share Broking 5,692,450.00
-ARA 87 58,294.52
-Motilal Oswal Securities 13,655.00 To net share trading profit 7,828,731.15 7,828,731.15 7,828,731.15 DETAILS OF CLOSING STOCK
-Venkatraman & Co 155,805.00
-Kotak AJ 701 165,957.55
-Insight Share Brokers P. Ltd 4,270,785.70
-JRG 13,054,642.22
- ARA 87 377,895.52
--Motilal Oswal Securities 267,765.20 18,289,851.19
3. During assessment proceedings, the Assessing Officer sought bifurcation of income from share transaction on the basis of actual delivery and otherwise and also to file details of actual sales and purchase of shares. The assessee was also required to produce the books of account, bank statement and contract notes. He wanted to know the transactions in which shares were traded without taking actual delivery. The Assessing Officer also wanted to know the names and addresses of agents/brokers through whom shares were traded and the complete details of opening stock, closing stock alongwith the profit and loss account in shares computed accordingly. The Assessing :- 5 -: ITA 1585/09 Officer show caused the assessee as to why the sale of shares should not be treated as income from business and not as short term capital gains as has been declared by the assessee. The assessee complied with the directions of the Assessing Officer, but he sought more informations to find out the intention of assessee to purchase and sell the shares. He demanded for the production of the books of account and the working of the valuation of shares for the year ending 31.3.2005, and the bills and vouchers for expenses. He wanted to ascertain the application of the provisions of section 94(7) of the Act to the facts of this case. The assessee produced the entire required details vide letter dated 19.11.2007 as under:
"1. Name and Address of the brokers:
a) INSIGHT SHARE BROKERS PVT. LTD
No. 12, Smith Road, Anna Salai
Chennai - 600 002.
b) BUBNA STOCK BROKING SERVICES LTD.
4, Fairlie Place,
6th Floor, Room NO.610
Kolkata - 700 001.
c) MOTlLAL OSWAL SECURITIES LIMITED
K G Business Centre
65, TTK Road,
Chennai - 600 018
:- 6 -: ITA 1585/09
d) J R G SECURITIES L TD
Ankoor Plaza
No.6, 2nd Floor
113, G N Chetty Road, T.Nagar
Chennai - 600017.
e) KOTAK SECURITIES
CRR Business Centre
New No. 36, Old NO.21
Thanikachalam Road ,T.Nagar
Chennai - 600 017.
f) VENKATARAMAN AND CO
P.B.No.2936, NO.53
Dr. Ranga Road
Mylapore
Chennai - 600 004.
"4. Your goodself had also proposed to tax the income from share profit under the head income from business. In this regard I would like to state the following:
a. The income from investment in shares is offered under the head income from capital gains.
b. My client invests in the shares as his investment only and not in the nature of business transactions.
c. The audit report u/s 44AB is provided only to cover the relevant section, wherein it is compulsory for any assessee whose gross receipts gross the statutory limit. Since failure of attaching the audit report who attract the penal provisions.
d. A complete account detail of shares transactions with various brokers is reflected separately only for the sake of arriving at the profit and loss and also to keep track of the investments.
e. Your goodself will find the most of the shares are taken on delivery and subsequently sold, moreover the Securities Transaction Tax is also deducted and hence the income from the profit on sale of shares has been rightly offered to tax under the head capital gains.:- 7 -: ITA 1585/09
f. I would also like to mention that the capital gain on sale of shares in the earlier assessment year was minimal and hence it was offered to tax at maximum marginal rate. Hence your goodself may not be the nomenclature.
g. Your goodself will appreciate the fact there are no other expenses debited on account of profit from sale of profit from sale of shares. Only the expenses relevant and necessary for transfer of shares have been considered.
Annexure to this letter, the assessee's AR has given the details as under:
Name of the Broker Delivery Intra Day F/o(Speculative)
Bubna 5,692,450 - -
Venkat Raman & Co 404,399 6,619 -
Kotak 119,247 - -
Insight 1,374,544 - (1374612)
JRG 1,211,041 321,837 1256
Ara-87-Kotak 57,263 1,032 -
MotilaI 12,387 1,268 -
8,871,331 330,756 (1373356)
7828731
Further a letter dated 7.12.2007 was issued to the assessee vide this office letter dated 07.12.2007, the letter is reproduced as under:
I am forwarding herewith the copies of Form NO.10DB (five in numbers) given in respect of the share transactions done by you through the following stock brokers
a) JRG Securities Ltd
b) Venkataraman & Co.
c) Kotak Securities Ltd
d) Insight Share Brokers P Ltd.
e) Motilal Oswal Securities Ltd., filed along with the Return of Income, for assessment year 2005-06.
You are requested to reconcile the information provided in the Form NO.10DB with that of information appearing in your regular books of account in respect of share transactions. A copy of the ledger accounts as appearing in your books of accounts in respect of share transaction may be filed.
:- 8 -: ITA 1585/09You are requested to appear or through your authorised representative and furnish the details as called for above. You are required to produce books of accounts and bank pass book.
The case is posted for hearing on 12.12.2007 at 3.30 p.m"
Also letters were issued to M/s . Insight Share Brokers and M/s.JRG Securities calling for the details vide this office letter dated 07.12.2007. The contents of the letters are as under:
" The following information are called for u/s.133(6) of the Income-tax Act 1961 in respect of the above assessee.
You are requested to give the ledger account copy of Sri Jahabar Ali PAN AAEPA4832E as appearing in your books of accounts.
2. Details of purchase and sale of share made on behalf of Sri Jahabar Ali - PAN NO.AAEPA4832E and details of opening stock and closing stock of shares held and details of profit derived out of these transactions.
3. Details of payment received from Sri Jahabar Ali - PAN NO. AAEPA4832E and payments made to Sri Jahabar Ali - PAN AAEPA4632E in connection with purchase and sale of shares.
The above details are required for the transaction done on behalf of Sri Jahabar Ali for the period 1.4.2004 to 31.3.2005.
You are requested to send the details called for within 5 days of receipt of this letter. "
Subsequently, the assessee filed letter dated 12.12.2007 filed in this office on 12.12.2001 the details are as under:
Further to our precious representations, your goodself has called for further details, the same are explained below:
1. Reconciliation of turnover as per Form 10DB and the account statement of the records. In this regard I would like to state that the turnover as reflected in form 10DB, represents both purchases and sales. Whereas, the statement as provided by the brokers would include purchase, sale, brokerage, service tax, securities transaction :- 9 -: ITA 1585/09 tax and net of settlement amounts. Hence, the gross total income as appearing in the form 10DB and that of the brokers account would not tally on the face of it.
Securities Transaction tax (STT) is charged on the gross sale and purchases whereas net amounts are only reflected in the broker's statement.
I would like to mention that the brokers are in receipt of your letter asking for their comments and also account copies of my client as appearing in their books. I am pursuing with them to provide the same at the earliest by 17.12.2007.
I have also advised my client to do the necessary reconciliation at his end, in case the brokers take unreasonable time.
2. Note on turnover as reflected in the return of income: Your goodself had called for a clarification for the turnover reflected in the return of income filed before your goodself.
In this regard, as explained earlier, I would like to further state that the turnover as reflected in the return of income is based on cheques issued and cheques received from various brokers.
The cheques issued have been clubbed and reflected under the head purchases and the cheques received have been clubbed and reflected under the head sales. My client maintains the control over the purchases and sales based on cheques issued and the cheques received.
The gain or loss on account of every transaction is controlled through the statement of account, contract notes provided by the brokers.
I sincerely, hope that the explanations provided above would be to the fullest satisfaction to the query raised.
In case of any further clarification required in this regard, the same would be duly furnished".
:- 10 -: ITA 1585/09Subsequently, a letter was issued to Shri Jahabar Ali dated 13.12.2007 which is as under:
"Please refer to your letter dated 12.12.2007 filed in this office on 12.12.2007. The total value of transactions as per Form No.10DB enclosed with your return of income reflects the transactions as under:
Stock Exchange Name of the Value of Total stock broker transation securities entered transaction during the tax financial year collected from the assessee during the financial year National JRG 315,553,852.5 113,187.99 stock securities Ltd exchange National Insight Share 158,677,885.4 63,326.85 Stock Brokers P. Exchange Ltd However, as per the computation of the income from share transactions filed along with your return of income, you have filed the details as under:
Insight Share Brokers P. Ltd
` `
By sale of shares 6,182,572.79
By closing stock 4,270,785.70
By loss on sale of shares 67.21
To purchase of shares 10,453,425.70
10,453,425.70 10,453,425.70
:- 11 -: ITA 1585/09
JRG Securities Ltd.
By sales 24,202,018.05
By closing 13,054,642.22
To opening stock 9,411,165.99
To purchase of shares 26,311,360.13
To profit on sale of shares 1,534,134.15
37,256,660.27 37,256,660.27
You were asked to reconcile the information given as per Form NO. 10DB with that reflected as per your books of accounts.
In reply your authorized representative filed a letter dated 12.12.2007. The relevant content has been reproduced as under:
1. Reconciliation of Turnover as per Form NO.10DB and the account statements of the brokers: In this regard, I would like to state that the turnover as reflected in Form 10DB, represents both purchase and sales. Whereas the statement as provided by brokers would include purchase, sale, brokerage, service tax, securities transaction tax and the net of settlement amounts.
Hence the gross total as appearing in the form 10DB and that of the brokers account would not tally on the face of it.
Securities transaction tax (STT) is charged on gross sales and purchase, whereas net amounts are only reflected in the broker's statement.
I would like to mention that the brokers are in receipt of your letter asking for their comments and also account copies of my client as appearing in their books. I am perusing with them to provide the same at the earliest by 17.12.2007.
I have also advised by my client to do the necessary reconciliation at his end, in case the brokers take unreasonable time.
2. Note on turnover as reflected in the return of income:
Your goodself had called for a clarification on the turnover reflected in the return of income, filed before your goodself.
In this regard, as explained earlier, I would like to further state that the turnover as reflected in the return of income is based on cheques issued and cheques received from various brokers.:- 12 -: ITA 1585/09
The cheques issued have been clubbed and reflected under the head purchases and the cheques received have been clubbed and reflected under the head sales. My client maintains the control over the purchases and sales based on cheques issued and cheques received.
The gain or loss on account of every transaction is controlled through the statement of account, contract notes provided by the brokers.
I sincerely hope that the explanations provided above would be to the fullest satisfaction to the query raised.
In case of any further clarification required in this regard, the same would be duly furnished.
From the above, it is seen that you have not reflected the actual sales and purchases of the shares out of share transactions done by you or on your behalf in the profit and loss account and the return of income filed by you (with regard to the details of shares transactions filed by you) along with the computation of total income filed along with the return of income.
Also as per the copy of the ledger account of A. Jahabar Ali as appearing in the books of accounts of JRG Securities ltd., for the period 01.04.2004 to 31.03.2005 furnished by your authorised representative on 10. 12.2007.
The total amount under the debit column is 110964226.40 And the total amount under the credit column is 110932157.64 Under the column balance is 32068.76(DB) You are required to reconcile these figures with that of the details filed by you in respect of share transactions due through JRG Securities Ltd., filed along with the return of income.
You are required to do similar reconciliation in respect of all the Share Transactions indulged by you for the A Y. 2004-05.
You are required to produce the detailed statements showing all the sale of shares, purchase of shares, opening stock and closing stock broker- wise (as per the sale and purchase of shares done on your behalf or done by you). You are required to produce this information by 17.12.2007 by 4.00 p.m. :- 13 -: ITA 1585/09 You were also asked to furnish the details of valuation of closing (shares held by you or on your behalf as on 31.03.2005). Till date you have not furnished these details. You have also not produced books of accounts for the A Y. 2005-06 or all the contract notes in respect of share transactions indulged by you or on your behalf despite giving number of opportunities. You are required to produce the same on 17.12.2007 before this office.
Also as per authorised representative letter dated 19.11.2007, he has given break up of profit and loss ales as per the tabulation statement as under:-
Name of the Delivery Intra day F/O(speculative) Broker Bubna 5,692,450 - -
Venkat Raman & 404,399 6,619 -
Co
Kotak 119,247 - -
Insight 1,374,544 - (1,374,612)
JRG 1,211,041 321,837 -
Ara - 87- Kotak 57,263 1,032 -
Motilal 12,387 1,268 -
8,871,331 330,756 (1,373,356)
7,828,731
It is clear from the above that the F&O transactions have been categorised as speculative transactions by your authorised representative, the loss thereof cannot be set off against the income from business or from capital gains as per the provisions of the I. T.Act. However, this has not been done so in the details filed along with your return of income while arriving at the computation of income from share transactions. Your authorised representative has not given how the amputation of above tabulation. You are required to produce the contract notes evidencing the above computation.
Also, your Authorised Representative was asked to give the applicability of section 94(7) of the I. TAct in your case and also valuation of the closing stock (shares held by you as on 31.03.2004) till date he has not provided these information.
In the circumstances, you are required to show cause why you should not be directed to get your accounts audited as per provisions of section 142(2A) of I. TAct and submit the report by 26.12.2007. As per your authorised representative letter dated 12.12.2007, the turnover reflected in the return of income is based on cheques issued and cheques received from various brokers and not as actual sale of shares and purchase of shares. Your reply should reach this office on or before 17.12.2007.:- 14 -: ITA 1585/09
You are required to produce aI/ the contract notes before this office in respect of your share transactions on 17.12.2007."
This letter was served on the assessee on 13.12.2007. Meanwhile, certain information in response to letter dated 07.12.2007 was received from Insight Share Brokers vide their letter dated 13.12.2007. This information received from the JRG Securities and Insight Share Brokers was forwarded to Shri A.Jahabar Ali vide this office letter dated 14.12.2007 received by him on 14.12.2007 and he was asked to reconcile the information with that appearing in the regular books of accounts of the assessee. The details are as under:
''In continuation of the letter dated 13. 12.2007, I am enclosing herewith the information received from JRG Securities Ltd., No.6, 2nd Floor, 113 G. N. Chetty Road, TNagar, Chennai - 600017 - a CD containing the following informations:
1. Ledger statement transactions, it includes the cheque received from the client and paid to the client.
2. F & 0 Profit and loss Trade Summary.
3. Cash Trade profit and loss account and closing stock summary and details.
Copies of the Ledger Alc received from Insight Share Brokers Ltd., Vaibhave Complex, Ground Floor, No. 12, Smith Road, Chennai - 600 002.
You are requested to reconcile this information with that appearing in your regular books of accounts and that appearing in Return of Income filed by you, and also _ copy of the Ledger A/c filed by your authorised representative in this regard. You are required to produce the reconciliation by 17. 12.2007 along with details called for by the letter dated 13. 12.2007. "
The assessee's Authorised Representative Shri Siddharth Mehta filed a letter dated 13.12.2007 filed in this office on 14.12.2007. The contents of the letter are as under::- 15 -: ITA 1585/09
''In continuation of my earlier letter dated 12.12.2007, I would like to further state that the turnover as reflected in Form 10DB is covered under the turnover as arrived by my client in the return of Income filed.
The turnover as reflected in Form 10DB is including both sales and purchase of shares.
This is for your kind information and record. Any further clarification required in this regard would be duly furnished."
The assessee's authorised representative, Shri Siddharth Mehta, CA appeared on 17.12.2007. The contents of relevant order sheet notings are as under:
"The assessee's Authorised Representative Shri Siddharth Mehta, CA appeared and submitted his method of accounting for the purposes of share transactions is based on the actual cheques issued to the broker and the actual cheque payments received from the share brokers. The details of valuation of closing stock-method of working will be furnished by 19. 12.2007. As regards the reconciliation of the turnover (valuation of share transactions) as reflected in Form 10DB, the assessee's authorised representative has not given any submissions. With regard to the show cause notice as to why 142(2A) of the Income-tax Act 1961, the assessee's authorised representative Shri Siddharth Mehta replied that he has no objections to invoke the provisions of section 142(2A) of I. T.Act and get his accounts audited as per the said provisions of the I. T.Act. He has not produced any reconciliation or contract notes or other details called for vide this office letters dated 13. 12.2007 and 14.12.2007. The submissions are taken and are being examined. The assessee's authorised representative also did not produce books of accounts called for today."
The assessee's AR Shri Siddharth Mehta on the same day i.e. 17.12.2007 signed the order sheet notings and stated that "no objection for audit u/s.142(2A) of the I. T.Act"
Subsequently, a detailed letter was issued to the Commissioner of Income-tax, Chennai vide this office letter dated 17.12.2007 seeking previous approval for directing the assessee to get his accounts :- 16 -: ITA 1585/09 audited as per the provisions of section 142(2A) of the IT of the Income-tax Act 1961. Some of the contents of this letter at page no.8 are as under:-
"The assessee's authorised representative however did not produce contract notes or actual statement showing the actual sales and purchase of shares indulged by the assessee. Also he did not give any note on valuation of closing stock given. He also did not furnish how the tabulation regarding deliver/lntraday/F/O speculative was worked out and on what basis. The relevant contract notes pertaining to the above working were also not produced. "
Also the assessee did not give how the turnover as per Form 10DB filed along with the return of income is included in the turnover arrived at by the assessee in his return of income filed. The contents of letter dated 17.12.2007 from page no.13 till the end of the letter are stated below:
It is seen that several thousand of share transactions have been indulged on behalf of the assessee. The contract notes may also run into several hundreds. Each of the contract notes requires to be taken out and the following details have to be taken out.
1. Actual sale of share done by the assessee or on behalf of the assessee
2. Actual purchase of share done by the assessee or on behalf of the assessee
3. The share transactions are to be categorized on the basis of actual delivery and otherwise than by actual delivery.
4. Valuation of stock as on 31.3.2005 held by the assessee or on his behalf (reported as cost or market value which ever is less. (as per the report given in Form 3 CD filed along with the Return of Income). For this all the shares held by the assessee as on 31.3.2005 are required to be listed out and the valuation is required to be done.
Since the assessee is also showing an amount of Rs. 7,59,960.56 by way of share dividend the applicability of provisions of sections 94(7) and 94(8) of the Income-tax Act 1961 is to be seen.
:- 17 -: ITA 1585/09Also it is seen that the assessee has indulged in share transaction with several share brokers in the financial year 2004-05 which are as under:-
1. M/s JRG Securities
2. M/s Insight share Brokers P. Ltd.
3. M/s Motilal Oswal Securities Ltd.
4. Kotak AJ 701
5. Kotak ARA 87
6. Bhuban Stock Broking Service Ltd.
It is seen that the assessee has made on account cheque payments of totalling to crores of rupees to the share brokers during the financial year relevant to the assessment year 2005-06 .
The volume of share transactions done by him and on his behalf are in several thousands. The nature of the accounts involving share trading running into several thousands on actual delivery, excluding non-delivery- F & 0 transactions, point out to the complexity of the accounts.
It appears the assessee has not taken into account of the actual sale of shares and actual purchases of shares he has only given the total sale of shares as per the cheque payment received by him and total purchases as per cheque payments made by him to the share brokers.
The valuation of closing stock (shares held by him as on 31.3.2005) also is required to be done as per the shares held by the assessee as on 31.3.2005 is required to be determined.
The assessee's authorised representative appeared on 17.12.2007. The relevant order sheet notings are herein as under:
The assessee's authorised representative Shri Siddharth mehta CA appeared and submitted his method of accounting for the purposes of share transactions is based on the actual cheques issued to the broker and the acual cheque payments received from the share brokers. The details of valuation of closing stock-method working will :- 18 -: ITA 1585/09 be furnished by 19.12.2007. As regards the reconciliation of the turnover (valuation of share transactions) as reflected in Form 100B, the assessee's authorised representative has not given any submissions. With regard to the show cause notice as to why 142(2A) of the Income-tax Act 1961 should not be invoked and the assessee be directed to get his accounts audited as per provisions of sections 142(2A) of the Income-tax Act 1961, the assessee's authorised representative Shri Siddharth Mehta replied that he has no objection to invoke the provision of section 142(2A) of the Income-tax Act 1961 and get his accounts audited as per the said provisions of the Income- tax Act 1961. He has not produced any reconciliation or contract notes or other details called for vide this office letter dated. 13.12.2007 and 14.12.2007. The submissions are taken and being examined. The assessee's authorised representative also did not produce books of accounts called for today.
In the facts and circumstances as discussed above and having regard to the nature and complexity of accounts of the assessee and in the interest of the revenue, I am of the opinion that it is necessary to direct the assessee to get his accounts audited as per provisions of section 142(2A). By an accountant nominated by commissioner in this behalf and the payments made to the accountant as per the provisions of I. T.Act and guidelines thereof In this regard it is requested that the necessary approval as per provisions of section 142(2A) may be given to direct the assessee to get his accounts audited as per provisions of sections 142(2A) of the Income-tax Act 1961 and submit the report by 27.12.2007.
All the details received from the share brokers M/s JRG Securities and M/s Insight share brokers along with the CD sent. The copy of the ledger account, client ledger submitted by the assessee's authorised representative is enclosed. The Miscellaneous Records are forwarded herewith for your kind perusal and necessary approval."
The above said letter is placed on record.
The Commissioner of Income-tax, Chennai-IV, Chennai vide letter in C.No.1338/2007-08/IV dated 17.12.2007 accorded approval to direct the assessee to get the accounts audited as per the provisions of section 142(2A) of the Income-tax Act 1961. The contents of the letter are as under:
:- 19 -: ITA 1585/09"Approval is hereby accorded to get the accounts Audited as per Provisions of Sec. 142(2A) of the Income-tax Act1961, in the above case."
Further, vide letter in C.No.1338/2007-08/IV dated 18.12.2007 has stated as under:
"Shri G.Suresh, Partner of M/s.Ramesh and Ramachandran, Chartered Accountants, No. 39, Viswanathapuram Main Road, Kodambakkam, Chennai - 600 024 is hereby nominated and appointed as Auditor to Audit the accounts, as per the provisions of Sec. 142(2A) of the Income-tax Act 1961, in the above case."
Subsequently, a letter dated 19.12.2007 was issued to Shri A.Jahabar Ali, No.8A, G.N.Chetty Street. Copies of this letter were submitted to the CIT, Chennai-IV, Chennai, G.Suresh, FCA and Shri.Siddharth Mehta. The copies of this letter were served on the assessee Shri Jahabar Ali, Shri G.Suresh and Shri Siddharth Mehta on 19.12.2007. The contents of the letter are as under:
"With regard to the assessment proceedings for A.Y 2005-06, you are directed to get the accounts audited by Shri G. Suresh, FCA, M/s. Ramesh and Ramachandran, CAs, No. 39, Vishwanathapuram Main Road, Kodambakkam, Chennai - 600 024, who is nominated by the Commissioner of Income-tax, Chennai-Iv, Chennai in this regard and to furnish a report of such audit in the prescribed Form (see Rule 14A of IT Rules and Form 6B) duly signed and verified by Shri G,. Suresh and setting forth such particulars as may be prescribed and other particulars required as under:
1. Actual sales of shares and purchase of shares which are done by the assessee or on behalf of the assessee by way of actual delivery with valuation thereof
2. Actual sale and purchase of shares which are done by the assessee or on behalf of the assessee by way otherwise than actual delivery.
3. Valuation of stock of shares held by the assessee or on behalf of the assessee as on 31.03.2005 - Details of valuation to be furnished.
4. Details and valuation of opening stock of shares held by the assessee or on his behalf as on 1.4.2004.
5. Total amount of payments made by the assessee Shri Jahabar Ali towards purchase of shares and total amounts received by Shri Jahabar Ali for sale of shares.
6. Applicability of provisions of Section 94(7) and 94(8) and 14A of I. :- 20 -: ITA 1585/09 T.Act in the assessee's case for A. Y. 2005-06.
7. Finding on the "valuation of transactions entered into during the financial year' as reflected in Form 10DB filed along with the Return of Income. Whether the value reported is taken into while arriving at total income of the assessee for A. Y. 2005-06.
The report under subsection (2A) of 142) of I. T.Act shall be furnished within a period of nine days of receipt of this proceeding by the assessee.
The proceeding is issued with the previous approval of Commissioner of Income-tax, Chennai-Iv, Chennai."
Further, Shri G.Suresh, partner M/s. Ramesh and Ramachandran, CAs, appeared and filed a letter dated 19.12.2007 before this office which is as under:
"19th December 2007 Commissioner of Income-tax Range-IV, Uttamar Gandhi Salai Sub: Acceptance of Audit u/s. 142(2A) of the Income-tax Act 1961.
While thanking you for the offer to handle the above cited assignment, we wish to express our willingness to take up the said audit. Thanking you Yours faithfully For Ramesh and Ramachandran Chartered Accountants Sd/-
(G. SURESH) Partner The assessee's authorised representative Shri Siddharth Mehta, CA, appeared on 20.12.2007 and filed a letter dated 19.12.2007. The contents of the letter are as under:
"As advised by my client, he is in receipt of your letter dated 13.:- 21 -: ITA 1585/09
12.2007, wherein your goodself had called for certain clarifications. The same are provided below:
1. As regards the turnover reflected in the Form 10oB, brokers account statement and that of reflected by my client in the return of income filed, as stated earlier, that the turnover in Form 100B reflects both purchase and sales. The turnover in the broker's account statement reflects net settlement amounts, cheques received and paid, Share transaction tax, brokerage etc., the turnover in the return of income filed is cheques received and issued.
Your goodself had expressed apprehensions towards suppression of sales / purchases and also recommended audit u/s.142(2A) of the Income Tax Act 1961. In this regard, I would like to state that your goodself is in possession of broker's account statements, which were provided to you directly. Your goodself is also in possession of account statements of the brokers, as provided by my client. Similarly you are also in possession of Form 10DB. Your goodself is also in possession of our bank statements, from all these records, you goodself will find that the closing balances, the profit I loss is same even though the method of accounting may be difference.
As already stated in our earlier letter that my client is convenient in maintaining his accounts by keeping a track on cheques issued and received.
I am hereby enclosing a detailed working towards the turnover adopted by my client. The statement will provide the date, name of the bank, cheque numbers and the amounts. These details will tally with that of the broker's statement directly provided by them. Even though the method of arising at the turnover may be crude, the ultimate result of reflecting the profit or loss is correct.
Hence it is hereby requested that the submissions and the reconciliation providing may kindly be accepted, however in case your goodself deems fit, may recommend audit u/s. 142(2A) of the Income Tax of the Income-tax Act 1961.
2. Valuation of Opening and Closing stock: Please find a separate enclosure attached along with this letter, wherein the details for shares held and the values thereof are provided.
3. Books of Accounts: I am hereby providing the same for your perusal and return.
4.Applicabilitv of section 94(7) of the Income Tax Act: In this regard, I would like to state that this section is not applicable in my client's :- 22 -: ITA 1585/09 case, as your goodself is aware that there is only gain on sale of shares (delivery basis).
5. Computation of gain on delivery/Intra day & F/o: The calculations has been arrived at based on the actual transactions as may be seen from the contract notes and brokers statement. I am however providing the breakup for the same along with this letter. I am also providing the relevant ledger copies as appearing the books of brokers for your ready reference.
I hereby sincerely hope that I have duly provided all the details and clarifications called for.
In case of any further details required in this regard, the same shall be duly furnished."
4. Still, thereafter, the Assessing Officer, being not fully satisfied demanded more information which were also filed by the assessee .
Finally, not being in agreement with the submissions made on behalf of the assessee, the Assessing Officer has treated the transactions undertaken in shares as income from business and has made the impugned additions. Against this finding, the assessee preferred appeal before the ld. CIT(A) who has reversed the finding of the Assessing Officer and has given relief to the assessee, against which the Department is in appeal before us by raising following grounds:
"1. The order of the learned CIT(A) is contrary to law and facts of the case.
2. The Learned CIT(A) erred in deleting the addition made based on the Special Audit report u/s 142(2A).
3. The Id CIT(A) ought to have appreciated the fact that the assessee had not furnished any objections against the special audit report in the course of assessment proceedings.:- 23 -: ITA 1585/09
4. The Id CIT(A) erred in not considering the entries in the Form 3CD filed alongwith the return wherein the shares had been held as closing tock and valued at cost or market value whichever is less.
5. The Id CIT(A) ought to have appreciated the fact that the assessee himself has admitted as "Nature of business of profession - Shares"
6. The Id CIT(A) ought to have appreciated the fact that the Assessing Officer has rightly considered the income on transaction of shares under the head 'business" since the assessee himself had valued the shares as on 31.03.2005 at Market value.
7. The Id CIT(A) ought to have appreciated the fact that the frequency of transaction implies the intention of the assessee is trading in shares rather than to keep them as Investments.
8. The Id CIT(A) ought to have appreciated the fact that the assessee is also doing in the derivative segment, which is a pure form of business.
9. For these and other grounds that may be adduced at the time of hearing, it is prayed that the order of the learned CIT(A) ma be set aside and that of the Assessing Officer be restored. "
5. We have heard the rival submissions and have carefully perused the material available on record before us. In nutshell, the main dispute is regarding the fact as to whether the assessee has dealt in shares as a business or these are only transactions wherefrom short term capital gains has arisen to him. According to the Assessing Officer, the assessee has carried on business in shares whereas according to the ld. CIT(A) and the assessee, these are only the :- 24 -: ITA 1585/09 transactions where from short term capital gain has arisen to the assessee. After carefully circumspecting the entire records and evidence, we find that the main source of income of the assessee is receipt of rent from a house property, interest income, gain on sale of shares and dividend income. The Assessing Officer has referred the case of the assessee to special audit u/s 142(2A) of the Act by specifically mentioning that the auditor would require to clarify the following points:
a. Actual sale and purchase of shares - on actual delivery b. Actual sale and purchase of shares - otherwise than actual delivery c. Valuation of closing stock of shares and details of valuation d. Details and valuation of opening stock of shares e. Total amount of payment made and received towards the purchase and sale of shares f. Applicability of provisions of section 94(7) and 94(8) and 14A of the IT Act g. Finding on the "Valuation of transactions entered into during the financial year" as reflected in Form 10DB filed along with the return of income. Whether the value reported is taken into while arriving at total income of the assessee.
6. The defects which were found in the audit report by the ld.
CIT(A) are as under:
a. Audit report - Form 6B b. Script vise purchase and sale and gain, including quantity c..Value of Closing Stock of shares and quantity (Rates not Given) d. Value to opening stock of shares and quantity ( Rates not Given) ( e. Payments received and made for purchase and sale ( Bank entries missing/ Omitted) f. Note on Applicability of Section 94(7) and 94(8) and 14 A g. Copies of 10 DB :- 25 -: ITA 1585/09
7. We are in agreement with the ld. CIT(A) that the main purpose for which the Assessing Officer has referred the auditing of these transactions was the reconciliation of the data provided in Form 10DB and that of the total turnover reflected by the assessee but the same are not provided in the audit report. The ld. CIT(A) has specifically mentioned that the Assessing Officer has accepted the erroneous audit report submitted u/s 142(2A) of the Act without going into the following details:
a. Whether the balance of the brokers are tallying with that of the details furnished under the audit.
b. Whether the expenses like brokerage, STI, Service tax, Cess, etc., have been considered before arriving at the profit on sale of shares.
c. Whether the closing stock of quantity as reflected in the audit report tally with the demat account. d. Whether the bank reconciliation had been undertaken, because only then can the total payments received and paid by the appellant can be tallied.
e. How can the appellant sell the shares if he has not purchased, since the report states that sale is there but no purchase.
f. How can there be stock if there is no purchase, because the report states that no purchase but stock available.
8. After considering all these, we are of the considered opinion that the Assessing Officer has failed to consider the important aspect that for any transaction or act of business various factors are required and only frequency of transactions cannot be made a sole basis to arrive at the conclusion that it was the activity of a business. The fact that the assessee was holding shares of various companies, sometimes, for :- 26 -: ITA 1585/09 more than two months, and further few shares even beyond one year coupled with the fact that the assessee has opened a de-mat account, these transactions cannot be treated as business transactions. The detailed letters named below which are part of the assessment order, the perusal of which would show that regarding them no adverse comment has been made by the auditor:
(a) Letter dt 29-10-2008 from the representative addressed to the AO
(b) Letter dt 30-10-2008 in PAN AAEPA 4832E from the AO to the CIT(A)-VI (remand report copy)
(c) Letter dt 19-01-2009 from the representative addressed to CIT(A)
(d) Copy of letter dt 23-04-2008 from Sri G Suresh, Partner, Ramesh and Ramachandran, Chartered Accountants addressed to the assessee, copy endorsed to Sri Siddharth Mehta, CA, submitting audit report u/s 142(2A) in Form No 6B.
9. There are gross mistakes in the special audit report like expenditure in the nature of service charges, brokerage to share broker, stamp charges, etc have not been considered at all in arriving at the profit and loss of share dealings. The following other reasons also support the case of the assessee :
" It was also pointed out and seen that, the bank balance - brokers balance have not been tallied. There is a vast difference. It is also seen that in the closing stock shares, quantity does not tally with demat account.:- 27 -: ITA 1585/09
The letter dt 19-01-2009 of the special auditor, clearly stated that, service tax has not been considered as the same was not furnished. One fails to understand as to how this was not furnished when all the items like buying, selling, stamp charges, brokerage, service tax etc are already available in the contract notes/broker's statement. Even a layman would know that, these are statutory expenses incurred in share dealings through stock exchange.
These objections and mistakes including the reply of the special auditor were duly forwarded to the AO. However, no adverse comments were received. The remand report also does not throw any light on these specific issues.
Hence, based on all the above submissions, remand report, letters of special auditor, audit report and other facts established, it is clearly seen that the special auditor has failed in his special audit, to consider all the relevant data before finalizing the special audit, even the details furnished in the audit report like total cheques issued for purchase/sale, total value of purchase/sale etc is also erroneous. "
10. Moreover, the ld.AR has vehemently stated that the assessee has made only investment in shares and has relied on the decision of Hon'ble Madras High Court in the case of CIT vs S. Ramaamirtham, [306 ITR 239], in which it has been held as under:
"Held, dismissing the appeal, that on the facts it was found that the assessee had been maintaining separake books of account for trading in shares and investment in shares. The assessee was carrying on the business only in the name of the company and the surplus earned from the company had been shown as business income. The payments for the shares had been done by the assessee in his personal account. Further, it was found that the assessee had been holding shares for a long time and had been utilizing the surplus funds only for the investments. In earlier years also, the assessee had been showing only capital gains on similar transactions and that was accept by the Revenue. The intention of the assessee was relevant :- 28 -: ITA 1585/09 to determine whether he was carrying on the business in shares or investments. On the facts both the first appellate authority and the Tribunal had correctly held that the surplus derived from the sale of shares had to be assessed under the head "Capital gains". The finding was based on valid materials and evidence and the order of the Tribunal was not a perverse one warranting interference."
11. In our opinion, the claim of the assessee is correct and the above jurisdictional High Court's decision applies to the facts of this case.
12. We have seen from the entire records that the intention of the assessee is not to carry on the business of shares but he only had the intention of investment. Therefore, the impugned income has to be assessed under the head short term capital gains and not as business income. We do not find any merit in the grounds of appeal raised before us by the Revenue.
13. In the result, the appeal of the Revenue stands dismissed.
The order pronounced in the open court on 13.10.2010 Sd/- Sd/-
(ABRAHAM P GEORGE) ( HARI OM MARATHA ) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated: 13th October, 10 RD
Copy to: Appellant /Respondent/CIT(A)/CIT/DR