2014 (5) TMI 10 - HC - Income Tax

High Court affirms lower authorities, rejects Revenue's appeals, emphasizes legality of off-market transactions

COMMISSIONER OF INCOME TAX AHMEDABAD III Versus PRUDENT FINANCE PVT LTD

The High Court upheld the decisions of the CIT (Appeals) and the Tribunal, dismissing the Revenue's appeals. The Court found no legal question arising ... Addition on account of loss in sale of shares – Off market transactions – Genuineness of the transactions – tax avoidance device, - Held that:- The Tribunal rightly upheld the view of the CIT(A) that the disallowance has been made without any justifiable basis - Tribunal rejected the Revenue's objection that the transactions were not carried out at the market rate observing that there was not a single instance brought on record by the AO saying that the purchase and sale were effected not at market rates – it was not seriously argued that the transactions breached any of the statutory provisions and in particular section 19(1) of the Securities Contract (Regulation) Act - the Tribunal accepted that necessary entries were made and delivery slips were also passed. The additions made were in the hands of the company on substantive basis and in the hands of individuals on protective basis - the question was about the genuineness of the transaction - Revenue seems to be contending that the transactions were deliberately attempted to create loss/profit in order to transfer such corresponding loss/profit to the related parties to avoid legitimate tax liabilities - the allegation that the transactions were not at market rate has been dispelled by the Tribunal referring to the materials on record - necessary entries were made in the account books of both sides, i.e. purchaser and seller and delivery receipts were also passed demonstrating contemporaneous sale and purchase of the shares - off market transactions were permitted in law, that there was no evidence to suggest that artificially they were sold at rates lower than the prevailing market rate – the question involved is not a substantial question of law – Decided against Revenue. Issues involved:1. Additions made by the Assessing Officer on account of loss booked in off-market share transactions.2. Disallowance made under section 14A of the Income Tax Act.Analysis:Issue 1: Additions in Off-Market Share Transactions:The case involved additions made by the Assessing Officer due to loss booked in off-market share transactions, which were later deleted by the CIT (Appeals) and confirmed by the Tribunal. The Assessing Officer suspected the transactions to be contrived to create losses for some assessees and profits for others within the same group. The Assessing Officer believed that the transactions were not genuine, as they were not at market price, lacked actual payments, and did not involve share transfers in the purchasers' names. The CIT (Appeals) and the Tribunal, however, found the transactions to be legitimate and genuine. They noted that the transactions were confirmed by parties, funds were genuine, and deliveries were made promptly. The Tribunal specifically rejected the Revenue's claim that transactions were not at market rates, finding evidence that prices were in line with prevailing market rates. The Tribunal concluded that the Assessing Officer had no basis to disallow the losses, as the transactions were genuine and legitimate.Issue 2: Disallowance under Section 14A:The second issue revolved around the disallowance made by the Assessing Officer under section 14A of the Income Tax Act, which was also deleted by the CIT (Appeals) and upheld by the Tribunal. The Tribunal rejected the Revenue's objections, stating that there was no evidence to support the disallowance. The Tribunal found that necessary entries were made, deliveries were passed, and there was no violation of statutory provisions. The Tribunal emphasized that off-market transactions were permissible, and there was no evidence of deliberate backdating or tax avoidance. The Tribunal's detailed analysis concluded that there was no justification for disallowing the losses and that the transactions were conducted legitimately.In summary, the High Court upheld the decisions of the CIT (Appeals) and the Tribunal, dismissing the Revenue's appeals. The Court found no legal question arising from the case and refused to entertain further appeals. The judgment highlighted the genuine nature of the off-market transactions, the lack of evidence supporting disallowances, and the permissible nature of such transactions under the law. The detailed analysis provided by the Tribunal and the lower authorities supported the conclusion that the transactions were conducted legitimately and did not warrant disallowances.