2010 (1) TMI 805 - AT - Income Tax

Tribunal decision: Share transactions analyzed, expenses reduced.

DCIT Versus Pawan Kumar Malhotra

The Tribunal partially allowed the revenue's appeal by restoring the Assessing Officer's additions concerning suspicious share transactions, emphasizing ... Income from undisclosed sources and commission paid thereon - assessee claimed long term capital gains on sale of shares - Held that:- sale price is exorbitant and logically absurd merely payment of STT will also not make the transaction genuine inasmuch as it is a voluntary payment by the broker. AO has carried out meticulous enquiries, non availability of relevant supporting material clearly questions the veracity of purchase and sale transaction of shares by assessee. The same is further strengthened by the fact that the assessee in his return for Asstt. Year 2004-05 did not report the cash purchases of shares. On the sale front also except cheque payments, Strength of shares of QSIL, its trading activities still remain mysteries and exorbitant share price is unbelievable on the facts, merely on the broker's note, it cannot be held that the transaction was infallible. order of CIT(A) set aside and restore the order of AO confirming additions on this account. This ground of revenue is allowed.Addition made on account of vehicle running expenses - personal use of car for non-business purposes - petrol, repair etc in which the use of the personal nature cannot be ruled out. Therefore, the AO's 'action in disallowing 1/5th out of these expenses is upheld.Disallowance of telephone expenses - personal use of telephone for non business purposes - disallowance to the extent of one fifth out of the total telephone expenses – Held that:- expenses have been incurred on the office. Yet the personal element cannot be ruled out of such expenses. Keeping in view the turnover and the business results of the appellant, the disallowance is restricted to 1/8th of such expenses Issues Involved:1. Deletion of addition on account of income from undisclosed sources and commission paid thereon.2. Restriction of addition on account of vehicle running expenses.3. Restriction of disallowance of telephone expenses.Detailed Analysis:1. Deletion of Addition on Account of Income from Undisclosed Sources and Commission Paid Thereon:The core issue revolves around the genuineness of the share transactions conducted by the assessee. The assessee claimed long-term capital gains on the sale of shares of M/s Quality Synthetic Industries Ltd. (QSIL). The Assessing Officer (AO) suspected the transactions due to the significant appreciation in the value of shares within a short period and conducted an investigation. The AO issued a commission under section 131(1)(d) to the concerned ADIT in Kolkata, who reported that the entities involved in purchasing the shares were either non-existent or non-compliant, suggesting the transactions were sham and a means of money laundering. The AO relied on the Supreme Court judgment in McDowell and Co., holding the transactions as colorable devices and added Rs.81,72,340/- as income from undisclosed sources under section 68, along with an additional 5% commission amounting to Rs.4,08,615/- under section 69C for unexplained expenditure.On appeal, the CIT(A) found that the assessee had provided all necessary documents, including broker contract notes, demat account statements, and bank statements, proving the transactions were conducted through the Kolkata Stock Exchange at prevailing market prices. The CIT(A) held that the AO's conclusions were based on suspicions and conjectures without substantial evidence, and thus, deleted the additions.The Tribunal, however, emphasized the importance of considering surrounding circumstances and human probabilities as per the Supreme Court's guidance in Sumiti Dayal. The Tribunal noted discrepancies, such as the non-reporting of share purchases in the assessee's return for the relevant year, the inability to trace the purchasing entities, and the unexplained exorbitant increase in share prices. Consequently, the Tribunal found the AO's meticulous inquiries justified and restored the AO's additions, overturning the CIT(A)'s order.2. Restriction of Addition on Account of Vehicle Running Expenses:The AO had disallowed 1/5th of the vehicle running expenses amounting to Rs.1,87,063/- due to personal use. The CIT(A) reviewed the expenses, which included petrol, repairs, and interest on car loans, and concluded that while some personal use could not be ruled out, the disallowance was excessive. The CIT(A) reduced the disallowance to Rs.70,099/-, providing relief of Rs.1,16,964/-.The Tribunal upheld the CIT(A)'s decision, finding no infirmity in the rationale that the expenses were primarily business-related and the reduction was reasonable.3. Restriction of Disallowance of Telephone Expenses:The AO disallowed 1/5th of the telephone expenses amounting to Rs.90,295/- due to personal use. The CIT(A) acknowledged the possibility of personal use but deemed the disallowance excessive given the business's turnover and results. The CIT(A) restricted the disallowance to 1/8th of the expenses, amounting to Rs.56,434/-, providing relief of Rs.33,861/-.The Tribunal found the CIT(A)'s approach reasonable and upheld the decision, noting that the AO's estimate was not shown to be unreasonable.Conclusion:The Tribunal allowed the revenue's appeal in part. It restored the AO's additions regarding the share transactions, emphasizing the importance of considering surrounding circumstances and human probabilities. However, it upheld the CIT(A)'s reductions in disallowances related to vehicle running and telephone expenses, finding the adjustments reasonable and justified.