AI Drafter 
TaxTMI 
TaxTMI 
2015 (5) TMI 125
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.... 1996-97, however the same is not subject matter of these appeals. 2. The principal controversy involved in the present appeals relates to disallowance of loss on account of alleged transactions entered into by the assessee in respect of the shares of certain companies and further the loss claimed on account of diminution in value of those shares. 3. Briefly stated, the relevant facts leading to the present appeals are as under:- 3.1 The assessee filed its return for the assessment year 1997-98 declaring an income of Rs. 1,05,518/-. The said income was calculated after claiming a loss of Rs. 4,64,82,500/- on account of purchase and sale of shares and diminution in the value of shares held by the assessee. By an assessment order dated 14.03.2000, the Assessing Officer (hereafter 'AO') disallowed the said loss of Rs. 4,64,82,500/- and assessed the income of the assessee as Rs. 8,72,20,744/- for the assessment year 1997-98. The assessee preferred an appeal before the CIT(A) which, was rejected by an order dated 05.03.2001. The assessee carried the said order in appeal, being ITA No.2978/Del/2001, before the Tribunal. 3.2 The assessee filed a return for the assessment year ....
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....uestion with regard to the loss on account of shares claimed by the assessee in various years and disallowed the same. The AO found that the assessee had purchased most shares of certain companies from one Sh Nem Chand Jain, who was stated to be a broker with the Gauhati Stock Exchange. Although the value of these transactions was large, no payments for the same were made and the consideration for purchase of the said shares was reflected as outstanding and payable to Sh. Nem Chand Jain. Sh. Nem Chand Jain had neither charged any interest nor instituted any proceedings for recovery of the said amount. The AO had found that Sh. Nem Chand Jain was not a person of means and the transactions in question were bogus. 3.6 The assessee filed appeals (being Appeal No.47/2007-08 for AY 1997-98, Appeal No.48/2007-08 for AY 1998-99 and Appeal No.49/2007- 08 for AY 1999-2000), inter alia, against the assessment orders framed with respect to the assessment years 1997-98 to 1999-00. The CIT(A) accepted the contract notes and other documents produced by the assessee as evidence of the genuineness of the transactions of sale and purchase of shares as well as reduction in their value at the end o....
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....50/- for the assessment year 1998-99; and the loss of Rs. 6,16,86,500/- for the assessment year 1999-2000, on account of sale and purchase of shares of certain companies and on account of diminution in their value were allowable. 5. By an order dated 03.09.2014, this Court had indicated that the following substantial question of law arose for consideration in these appeals:- "Whether the finding of the Income Tax Appellate Tribunal accepting the genuineness of the loss as declared in respect of shares purchased and sold or held as stock-in-trade is perverse?" 6. The AO had concluded that the transactions of sale and purchase of shares of certain companies, on the basis of which losses were being claimed by the Assessee, were not genuine and, accordingly, the said losses had been disallowed. Before proceedings to examine the decision rendered by the Tribunal, it would be essential to note the reasons which led the AO to conclude that the transactions in shares were not genuine. 7. The nature of transactions in each of the assessment years involved i.e. 1997-98 to 1999-2000 are, essentially, similar. Thus, for the sake of brevity, the transactions relating to the previous....
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....to be purchased from one Shama Holdings Private Limited at the rate of Rs. 10 each aggregating Rs. 1,30,000 ( Rupees One Lac thirty thousand). These shares of Doyang Wood Products Ltd were claimed to have been sold during the year at the rate of Rs. 2.50 each aggregating Rs. 32,500/-. The copy of the ledger produced by the assessee indicates that the said shares were purchased on credit but the same were sold in cash. Plainly, the transactions for sale and purchase of these shares, which resulted in loss of Rs. 98,500/-, were 'off market' transactions and not through any stock exchange or through any stock broker. 12. For the previous year ending 31.03.1997, the assessee had claimed a loss of Rs. 4,64,82,500/-. This loss has two components; the first being, loss relating to sale and purchase of shares and the second being loss on account of diminution in value of the stock of shares held by the assessee at the end of the year. Whilst an amount of Rs. 88,900/- was claimed as loss on sale of shares, the bulk of the loss claimed, that is Rs. 4,63,93,600/-, was on account of reduction in value of the closing stock of shares. Out of the aforesaid loss only a sum of Rs. 56,250....
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....search and seizure operations were conducted in the case of Shri Nem Chand Jain on 14.10.1996. During the course of the said search and further proceedings, statement of Shri Nem Chand Jain was recorded under Section 132(4) and Section 131 of the Act and the same were forwarded to the AO. Shri Nem Chand Jain had stated that he was a Director/Managing Director of M/s Doyang Wood Products Ltd., M/s Kamini Finance & Investment Ltd., M/s Hotahoti Wood Products Ltd. in addition to other companies. He had stated that he was not aware of affairs of those companies but had acted at the instruction of one Mr R. R. Modi. He further stated that he received expenses from Shri R. R. Modi in lieu of services rendered. 18. The AO was informed that Sh. R.R. Modi had made a disclosure that he had promoted the following companies by introducing share application money in different names aggregating Rs. 170,00,000/-:- 1. M/s Kamala Kal Ltd. 2. M/s Gulmohar Estates Ltd. 3. Dass Apartments Ltd. 4. Manipur Pharmaceuticals Ltd. 5. Pulp Products Ltd. 6. M/s Raksha Audio Ltd. 7. Sangrahalaya Timber & Crafts Ltd. 8. M/s Doyang Wood Products Ltd. 9. M/s North Eastern Publishing ....
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....ertain companies, whose shares it held/purchased. These companies also held shares of the assessee company. The fact that the companies in question and the assessee were connected was also not disputed. g) The assessee explained that since it was facing a financial crisis, it could not pay the amount due to Shri Nem Chand Jain for the transactions executed during the year. However, this did not explain as to why Shri Nem Chand Jain continued to sell shares to the assessee even in the following year, i.e., year ended 31.3.1998. No explanation was provided as to why Shri Nem Chand Jain, inspite of being an unpaid seller would physically deliver the shares sold by him. 20. In the first round, the Tribunal remanded the matter to the AO ( by an order dated 19.10.2004) principally on the ground that the assessee had not been confronted with the material relied upon by the AO and further to examine the effect of contract notes bills, stock exchange quotations and confirmation statement filed by the brokers. On remand, the AO again found against the assessee disbelieving the documents produced by it. The AO noted that the memos relating to the transaction were serially numbered or si....
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....principal basis. These transactions were not through stock exchange; the certificate produced by the assessee from the Gauhati Stock Exchange indicates that these transactions were "off the floor transactions" and were merely informed to the said stock exchange. The assessee valued these shares at a fraction of its purchase price and claimed loss on account of diminution in their value. A statement indicating the losses claimed by the assessee on the reduction of value of shares for the year ended 31.03.1998 relevant to assessment year 1998-99 is indicated below:- NAME OF THE SCRIPTS SHARE PURCHASE LOSS No. of shares Rate (Rs.) Amount (Rs.) Amount (Rs.) Sangrahalaya Timber and Crafts Limited 2750000 10.00 27500000 21312500 Doyang Wood Products Ltd. 640000 10.00 6400000 4800000 North Eastern Publishing & Advertising Company Ltd. 3500000 10.00 35000000 26250000 Total 52362500 25. In addition to the above, the assessee also claimed a loss of Rs. 1,12,500/- on account of diminution in the value of 37,500 shares of Mather & Platt India Ltd. as on 31.03.1998. Thus, the total loss claimed by the assessee for the year ended 31.03.1998....
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....e enclosed by the assessee in the paper book filed in ITA 3763/Del/2007 (i.e. in respect of assessment year 1997-98) is dated 12.02.2000. The said certificate does not indicate the volume of shares traded but only indicates quotation of shares on certain dates. The only inference that can be drawn is that there was no trading on other dates and this confirms the view that there was hardly any trading on the shares of the company in question. Since the shares in question are not actively traded, their quotations at the Stock Exchange could easily be manipulated by showing transaction in small number of shares. And, in any case would not be reflective of their value. The stock certificates of Gauhati Stock Exchange for the assessment years 1998-99 and 1999-00 also indicate that the traded prices related to off the floor transactions which were reported to the exchange. Thus, the transactions entered into by the assessee and/or the related entities were itself the basis of the quotations; obviously, no reliance could be placed on these quotations for justifying the value of the shares in question. Since the companies in question had been floated by Shri R. R. Modi and share applicatio....
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....shares by the assessee, had any means to do so. The AO had found that Shri Nem Chand Jain was not a man of means. The assessee had produced no evidence to contradict this. d) Admittedly, the transactions were done by book entries and no payment was made for the purchase of shares during the year. 34. In our view, the aforesaid aspects were important and clearly indicated that the transactions entered by purchase and sale of shares were, in fact, sham transactions and could not be relied upon. The CIT (A) failed to apply its mind to the aforesaid aspects and therefore, in our view, the orders passed by the CIT(A) were clearly unsustainable. 35. Given the facts of this case, the decisions referred to by CIT(A) are also, plainly, not applicable. In case of Janki Textiles and Industries Ltd. (supra), there was no allegation that payments for the shares in question had not been made and the transaction consisted of only book entries. On the contrary, the Court found that all payments had been made and received through account payee cheques and/or drafts. In that case, the Court specifically noted that no evidence was placed by the Revenue to indicate that the disputed share tra....
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....o Industrial Holdings Ltd. (supra), the Court upheld the decision of the Tribunal in accepting the transactions in shares to be genuine as the assessee had furnished the names and addresses of brokers and also shown payments made to them by account payee cheques. The companies whose shares were subject matter of transaction were blue chip companies and extensively traded on the stock exchange. The Revenue had rejected the transactions only on the ground that the assessee could not produce certain brokers. The Court held that even if the share brokers did not appear the claim of the assessee could not be denied as neither the existence of the broker nor the payments made to them were in dispute. The Court held that the assessee could not be punished for fault of the broker. 38. In Dhawan Investment and Trading Co. Ltd. (supra), the AO had disallowed a loss on account of purchase and sale of shares on the ground that the record was inadequate in respect of the share dealings. The said conclusion was rejected by the Tribunal as it found that the transactions were genuine and made through registered brokers. There was no allegation that the consideration for the sale and purchase wa....
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....ations by Mr N.C. Jain in respect of shares purportedly purchased by the assessee indicate that Mr N.C. Jain had sold the shares to the assessee. Similarly the memos of confirmation regarding the shares purportedly purchased by the assessee reflected that the shares had been sold by Nem Chand Jain to the assessee. These memos of confirmations were not contract notes evidencing purchase or sale of shares by Mr N.C. Jain through the stock exchange for and on behalf of the assessee. In case, Mr N.C. Jain had purchased the shares through the stock exchange for the assessee, in the normal course, he would have issued a contract note indicating the shares bought for the assessee. The assessee had also produced bills from Mr N.C. Jain evidencing sale of shares to the assessee. These documents produced by the assessee clearly indicated that the transactions for purchase of shares were not being claimed as transactions done through the stock exchange. The AO had, therefore, found and in our view rightly so, that the transactions were not through the stock exchange. 42. The AO had also found that the shares of companies in question were listed on spot basis i.e. the transactions on the st....
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....ehalf of the assessee:- "Shri Vohra also drew our attention to the audited balance sheet of Shri N.C. Jain (Pages 64 to 67 of the Paper Book) to show that Mr. Jain was man of means having a closing stock of shares worth Rs. 1.70 crores and a liability of Rs. 7.50 crores to its creditors." However the Tribunal did not return any finding on the question of Mr N.C. Jain's creditworthiness. In our view, the Tribunal grossly erred in holding that this issue was covered by its earlier decision of 19.10.2004. 46. The Tribunal has held that the amount payable to Mr N.C. Jain had been discharged by the assessee in the year 2005-06 and, therefore, found that the transactions in question were genuine. It is relevant to note that Mr N.C. Jain had expired in the year 1999 and the material placed on record indicated that he was not a person of means and had been acting at the instance of Mr R.R. Modi. Mr R.R. Modi had created several entities which were involved or connected with the transactions in question. In the circumstances, the payment of money to Mr N.C. Jain was required to be investigated further to ascertain as to the ultimate recipient of those funds. No such exercise has be....