TaxTMI 
TaxTMI 
2011 (1) TMI 1399
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.... compute the income from capital gain in respect of the transactions entered into through sub-brokers instead of treating it as business income." 3. The facts of the case of all the assessees for all the years are almost similar except variations in the amounts of capital gain shown by the assessees and consequential business income assessed by the Revenue. Therefore, for the sake of brevity we shall discuss herein the facts relating to Shri Ravindra M. Agrawal for A.Y.2001-2002. Both the parties also argued only one appeal of one assessee and admitted that whatever finding is given in one year would be applicable in the remaining departmental appeals. 4. A search action under Section 132 of the Income Tax Act, 1961 was initiated in the case of Shri Ravindra Agarwal and his family members on 29- 10-2004. Shri Ravindra Agarwal, who was Executive Director in Saurashtra Chemicals Ltd., Porbandar at the time of search, is main person of the group. The assessee group has been involved in making large number of transactions in shares and mutual funds over a period of time. A warrant of authorization under Section 132 of the I.T.Act, 1961 was served upon the assessee on 29-10- 2004. Con....
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.... securities of independent companies and not as promoters, the delivery based transactions and the actual payments/receipts and not mere book entries, absence of lack of intra day trading and of repeated transactions of same scripts, etc. are factors, the holistic consideration of which leads to the conclusion that the appellant was an investor. Thus, considering the details, submissions, facts on record, the Board's circular etc., the AO was not justified in holding the appellant as a trader and assessing his income, shown from capital gains, as being income from business. The action of the AO is therefore not sustainable. The AO is directed to treat the appellant as an investor and thereby compute the income from cpiap8tial gains in respect of the transactions entered into through subbrokers. The related ground of appeal is allowed." 6. At the time of hearing before us, it was contended by the learned CITDR that during the course of search of the assessee-premises, no books of accounts were found. The books were prepared subsequent to search and therefore much credence cannot be given to the same. During the course of search, from the lockers of the assessee huge unaccounted cas....
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....ning dividend income and it would be evident from the fact that the year after year, the assessee earned sufficient dividend income; that the assessee is not maintaining any offices or staff for looking after the investment in shares. Thus, no organized activity is being carried out by the assessee for investment in shares; that the allegations of the learned DR that the transactions in the shares were not disclosed to the department is factually incorrect. All the transactions of purchase and sale of shares were duly disclosed in the return of income of the assessee as well as family members from time to time. Any surplus arising from the sale of shares was always shown as capital gain and accepted by the Revenue; that the contentions of the Revenue that there were total 36,000 transactions in purchase and sale of shares by the assessee and his family members is factually incorrect; that the total transaction by the assessee and the family members for all the years taken together is 4,611 and per assessee per year the transaction would be not much; that the assessee is mainly dealing in 'B' group scripts and whenever the assessee wanted to make the investment, bulk number of share....
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....Bharat Kunverji Kenia, 130 TTJ 86 (Mum) 8. The learned DR, in the rejoinder, stated that various decisions relied upon by the learned counsel would not be applicable because they were in respect of the transactions disclosed by the assessee while in the case of the assessee, the transactions of purchase and sale of shares were not disclosed to the department. He also stated that law of res judicata is not applicable to the income tax proceedings, therefore, merely because in the earlier years, the capital gain has been accepted would not debar the AO from examining this in the subsequent years. He also stated that though the assessee had not borrowed the funds, but it has managed the funds of other family members. He also submitted that the assessee has not produced any documentary evidences in support of his contentions that one transactions of purchase/sale of shares was broken up in several transactions due to non-availability of one buyer or seller of those shares. He therefore reiterated that the order of the CIT(A) should be reversed and that of the AO be restored. 9. We have carefully considered the arguments of both the sides and perused the material placed before us. It ....
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....ar item is indicative of intention of trade. Similarly, ratio between the purchases and sales and the holdings may show whether the assessee is trading or investing (high transactions and low holdings indicate trade whereas low transactions and high holdings indicate investment). (4) Whether purchase and sale are for realizing profit or purchases are made for retention and appreciation in its value? Former will indicate intention of trade and latter, an investment. In the case of shares whether intention was to enjoy dividend and not merely earn profit on sale and purchase of shares. A commercial motive is an essential ingredient of trade. (5) How the value of the items has been taken in the balance sheet ? If the items in question are valued at cost, it would indicate that they are investments or where they are valued at cost or market value or net realizable value (whichever is less), it will indicate that items in question are treated as stock-in-trade. (6) How the company (assessee) is authorized in memorandum of association/articles of association ? Whether for trade or for investment ? If authorized only for trade, then whether there are separate resolutions of the boar....
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....capital. He, therefore, held that the profit in question was assessable as business income. Held that the undisputed fact was that the assessee was dealing in shares both as business as well as investment. It had kept separate accounts in respect of two portfolios. No material was brought on record to show that demarcation line between business and investment was hazy or that the assessee had not maintained an investment portfolio and it was dealing in shares only like a trader. Thus, on appreciation of cumulative effect of several factors present it was to be held that the surplus was chargeable to capital gains only and the assessee was not to he treated as trader in respect of sale and purchase of shares in the investment portfolio." The ITAT, Mumbai Bench in the case of Janak S. Rangwala (supra) held as under: "The mere volume of transaction transacted by the assessee would not alter the nature of transaction. It is an established principle that income is to be computed with regard to the transaction. The transaction in whole has to be taken into consideration and the magnitude of the transaction does nor after the nature of transaction. Though the principle of res judicat....
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.... the revenue authorities had taken a different view in the year under consideration by holding that principle of res judicata was not applicable to the assessment proceedings. There could not be any dispute on this aspect, but there is also another judicial thought that there should be uniformity in treatment and consistency under the same facts and circumstances and it was as already found that facts and circumstances were identical even though a different stand had been taken by the revenue authorities.: The Revenue filed the appeal before the Hon'ble Bombay High Court against the decision of the ITAT in the case of Gopal Purohit (supra) and a specific question was raised against the rule of consistency applied by the ITAT. The Hon'ble High Court vide order dated 6-1-2010, 228 CTR 582 (Bom) upheld the order of the ITAT and held as under: "3. In so far as Question (b) is concerned, the Tribunal has observed in pare 8. of its judgment that the assessee has followed a consistent practice In regard to the nature of the activities, the manner of keeping records and the presentation of shares as investment at the end of the year, in all the year The Revenue submitted that a differen....
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....he transaction of purchase and sale of shares were not disclosed by the assessee. The same is not assessed as income from undisclosed sources, but assessed as business income. Therefore, the contention of the learned DR that the transaction of purchase and sale of shares was not disclosed to the department is factually not correct. Moreover, whether the transaction of purchase and sale of shares was disclosed before the date of search or not would not be relevant for determining whether the transaction was in the nature of trading transaction or in the nature of investment. Therefore, whether the transaction of purchase and sale of shares was a trading transaction or investment will have to be examined considering the totality of the facts of the assessee's case. We find that Shri Ravindra M. Agarwal is a Chartered Accountant, Cost Accountant as well as Company Secretary by education. He was an Executive Director in Saurahstra Chemicals Ltd., Porbandar at the relevant time. He was not in the business of purchase and sale of shares. In the original return of income furnished prior to the search, the profit from sale of shares was offered to tax as capital gain and the same was accep....
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....or in shares, no single test is conclusive but cumulative effect of all the facts are to be seen. In the case of the assessee, one fact i.e. frequent purchase/sale of shares can be said to be against the assessee but all other facts which can be summarised as under are in favour of the assessee: i) Shri Ravindra Agrawal is a qualified professional being Chartered Accountant, Company Secretary and Cost Accountant; ii) Shri Agrawal was full time director of a public limited company at the relevant time, posted at Porbander; iii) Shares were acquired with own money and there was no borrowing by Shri Ravindra Agrawal or any other family member; iv) No office or any staff was maintained for looking after purchase and sale of shares; v) There was substantial dividend income; vi) His source of income was income from salary, capital gain, dividend and interest and he was not having any business income; vii) In the original return of income furnished from time to time, income from sale of shares was disclosed under the head "capital gain" and was accepted by Revenue as such under Section 143(1). When totality of all the above facts are considered, the inference drawn by the C....
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....tely) of the assessee and family members in UCO Bank, Ellisbridge were attached and seized. Documents/books of accounts were seized from residential premises at Porbandar as per Annexure A-1 to Annexure-7. The books of accounts/documents were also impounded in the survey conducted at the office premises of the assessee. The statements of the assessee and his wife were recorded under section 132(4). The books were subject to Special audit under Section 142(2A) of the I.T.Act. The AO apart from consideration of the issue of capital gain in the nature of trade also considered the issue of unexplained cash credit. The AO noted that advances in the form of cash amount have been shown as receipts from number of parties of residents in New Delhi towards the proposed site of flats in the city of Jaipur in the residential scheme stated to have been floated by the assessee in the names of Sundernagar Scheme and Radha Vihar Schemes. The details of sale proceeds/advances shown to have received in various years against the booking of the flats were summarised by the AO as under: A.Y. Amount No. of parties Mode of payment Name of scheme. 2000-01 3,99,10,000 89 By cash Sunder Nagar 2....
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....e sale of flats etc. were furnished. The AO has partly reproduced the reply of the assessee dated 26-4-2007 in his order. The AO vide further letter dated 5- 7-2007 required the assessee to produce parties/allottees of flats i.e. deponents of the affidavits for ascertaining the veracity of the claims/details affirmed in the respective affidavits and provided opportunity to produce the parties. The AO also intimated vide letter dated 3-8-2007 for his proposal to treat the receipts as unexplained income. The assessee filed reply dated 16-8-2007 to the show cause notice. The AO considered the replies/explanation of the assessee and pointed out that the explanation furnished was not only misleading but also incredulous. For example, huge receipts in cash had never been mentioned by the assessee in the statement at the time of search on 29-10- 2004. It was only on 8-12-2006, the assessee first referred to these cash receipts. The AO felt that it was not because of any memory lapse of the assessee but because of the intervening period was used to conceive, concoct and contrive an explanation for the huge undisclosed investment made by the assessee. This was also one of the reasons why th....
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.... which have been reflected in the books of accounts. The assessee had offered to produce the deponents of the affidavits/allottees of the flats before the AO i.e. for five allottees on 2-8-2007 but this offer was not accepted/acted upon by the AO. The other doubts of the AO had also been answered vide reply dated 26-4- 2007. It was therefore submitted that the AO without any basis considered the cash credits as unexplained. The assessee has proved identity of the deponents, their credit-worthiness and the genuineness of the transactions. The flats could not be constructed owing to disputes. 18. The learned CIT(A) however dismissed the appeal of the assessee on this ground. His findings in para 14.1 are reproduced as under: "14.1 The contentions/details on record were carefully considered. It is seen that the explanation/details offered by the appellant to the A.O. as also before me, in the appellate proceedings, is not only far fetched and incredulous but also constitute an attempt to create a facade, elaborately conceived end contrived, in the facts and circumstances of the case. Thus for instance; the affidavits, the stamp paper for which have been bought from the same stamp v....
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....ls were filed before the AO to prove that advance were received against the proposal sale of flats at Sundernagar Scheme and Radha Vihar Schemes for which details have been maintained in the books of accounts. He has referred to the letter of the AO dated 13-4-2007 (PB 1199) through which the AO has asked for further clarification in the matter, which was replied by the assessee on 26-4-2007 (PB-1193) and complete details were filed and all the original affidavits (140 in numbers) of the depositors were also filed before the AO. All the queries raised by the AO were replied with regard to PAN of the depositors about the scheme and the built-up area etc. He has referred to the letter of the AO dated 5-7-2007 (PB 1211) through which assessee was required to produce deponents of affidavits on 13-7-2007 to 24-7-2007 before him which was replied by the assessee on 3-8-2007 (PB-1198) and the assessee offered to produce all the parties/deponents of the affidavits in batches and he has submitted that in the aforesaid letter, it was explained that with the approval of the AO on 2-8-2007 in first batch, five allottees would be produced before him on 3-8-2007. It was also explained that on ea....
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....ar away from Ahmedabad, therefore, according to the general provisions of the Code of Civil Procedure, the AO should have got the transactions verified by issuing commission at Delhi through the departmental officers which have also not been done by the AO. He has submitted that since the assessee produced all the evidences before the AO to explain the advances and deposits and also offered to produce the parties for cross-examination before the AO, therefore, if the AO did not cross-examine the deponents, no addition should have been made against the assessee. He has submitted that all the evidences on record shall have to be examined by the authorities. In support of this contention, he has relied upon the following decisions: i) CIT Vs. Pragati Co-operative Bank Ltd., 278 ITR 170 (Guj) ii) CIT Vs. Orissa Corpoation P. Ltd., 159 ITR 78 (SC); iii) Murlidhar Lahorimal Vs. CIT, 280 ITR 512 (Guj); iv) Sarogi Credit Corporation Vs. CIT, 103 ITR 344 (Pat) 20. On the other hand, the learned DR relied upon the orders of the authorities below and submitted that return of income filed by the depositors showed that the same have been filed at meager income. Brochures were not recov....
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....he same have not been considered and discussed. 22. We have considered rival submissions and material available on record. The assessees vide reply dated 15-3-2007 (PB-1196) have filed a detailed reply before the AO in response to notices under Section 142(1) calling for the details on the issue. The assessee in the reply submitted details of advances received/refunded against the proposed sale of flats at Sundernagar and Radha Vihar schemes. Complete details, as were required in the performa were submitted. The same were supported by the documents i.e. copies of the provisional allotment letter, receipts/vouchers of the advances received and the refund issued, copies of the affidavits, complete addresses, PAN and the income tax ward where these persons were assessed to tax along with their confirmations which were supported by the copies of the income-tax acknowledgements. The complete details of the ownership of the property in question were also filed to support that the depositors have made advances against the proposed sale of flats at Sundernagar Scheme and Radha Vihar. The AO instead of examining the above details on record asked the assessee on 13-4-2007 to file all the or....
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....ined (Volume 1 & 2) in which all the replies of various allottees under Section 133(6) have been filed by the department which were filed in response to the notice under Section 133(6) dated 11-5-2007 issued by the AO. In the department's paper book, replies of the allottees in response to the notice issued by the AO, the detail of the amount, mode of payment and reasons for the booking of the flats and the return of the amount and copies of the affidavits were also filed. Thus, the replies of the allottees in response to notice under Section 133(6) contained their confirmations of the transactions with the assessee, their PAN, copies of the income-tax returns, replies, provisional allotment letters. These details and replies filed in the department's paper book support the case of the assessee that all the depositors not only confirmed their transactions by filing their affidavits but also supported the case of the assessee by independently confirming the transaction of deposits of the amount with the assessee, in their replies filed in response to their replies on the letter issued by the AO under Section 133(6) of the Act. The AO however did not discuss these replies and the doc....
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....sting in mutual funds, but no question is put to the assessee in this regard in the statement of the assessee recorded by the search party, therefore, there was no reason for the assessee to give reply of the same. It is not in control of the assessee to ask questions. It is undisputed above, purchase of shares and mutual fund, have not been disputed by the authorities below. In answer to question no.10, as noted at page no.12 of the assessment order, it was replied by the assessee to file details and disclose source. The repayments of the advances have not been disputed by the AO. Further, the AO noted that no papers have found in search to indicate the receipt of the advances, but the AO forgot to note that the books were prepared on the basis of the material found in search and others. The AO further noted that the assessee failed to produce the parties before the AO for cross-examination. However, the AO as noted above, did not take any proper step in cross-examining the deponents of the affidavits/persons who have given the advances to the assessee. The assessee in his reply dated 3-8-2007 (PB-1198) explained that the assessee has arranged the personal appearance of first batc....
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....mination. These facts would show that the AO did not have any intention to crossexamine the deponents of the affidavits on oath. Otherwise, the AO could have taken some steps in the matter to cross-examine some of the deponents starting from 3rd August,2007. The AO took another reason for rejecting the claim of the assessee that no sufficient time was available for concluding the assessment because the assessment was going to be time barred. However, he would have started examining the deponents from 3rd August, 2007. The AO has failed to note that in this case search was conducted on 29th October, 2004 and according to Section 153B of the IT Act, the assessment could have framed within a period of two years from the end of the financial year in which the last of the authorisation for search was executed. The Explanation to the above provision further extend the period of limitation, during which the AO directs the assessee to get the accounts audited under Section 142(2A) of the Act till the date of furnishing of audit report. This period of limitation would be extended till the date of filing of the special audit report under Section 142(2A) of the IT Act. In this case, the speci....
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.... 140 persons have filed their original affidavits before the AO admitting transaction with the assessee and made deposits with the assessee. They also explained that they all were assessed to tax and also explained their source of income for making these deposits. Even if the contention of the AO is considered that only 102 persons filed their reply under Section 133(6) of the Act, the AO however did not discuss and consider any of their reply in proper perspective. The AO failed to note all the 102 persons in their replies under Section 133(6) confirmed the transaction with the assessee giving the amount in cash to him for the purpose of booking of the flats. They have also confirmed that they are assessed to tax and their refunds have been granted to them. The learned counsel for the assessee by referring to the PB filed by the department has been able to show that even some of the replies under Section 133(6) have been filed in August, 2007 and he has further submitted that some of the replies were not accepted at the later stage of the assessment which were filed at the dak counter. This fact would show that the AO was not interested in investigating the case in proper manner a....
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....unal was right in deleting the addition of ₹ 1,80,95,811 in respect of fixed deposits and ₹ 21,71,500 in respect of the interest." ii) Hon'ble Supreme Court in the case of CIT Vs. Orissa Corporation P. Ltd., 159 ITR 78 held as under: "...that in this case the respondent had given the names and addresses of the alleged creditors. It was in the knowledge of the Revenue that the said creditors were income-tax assessees. Their index numbers were in the file of the Revenue. The Revenue, apart from issuing notices under section 131 at the instance of the respondent, did not pursue the matter further. The Revenue did not examine the source of income of the said alleged creditors to find out whether they were crediworthy. There was no effort made to pursue the so-called alleged creditors. In those circumstances, the respondent could not do anything further. In the premises, if the Tribunal came to the conclusion that the respondent had discharged the burden that lay on it, then it could not be said that such a conclusion was unreasonable or perverse or based on no evidence. If the conclusion was based on some evidence on which the conclusion could be arrived at, no question....
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....d that the entry, though purporting to be in the name of a third party, still represented the income of the assessee from a suppressed source. And, in order to arrive at such a conclusion, even the department has to be in possession of sufficient and adequate materials. The Income-tax Officer's rejection, not of the explanation of the assessee, but of the explanation regarding the source of income of the depositors, could not by itself lead to any inference regarding the non-genuine or fictitious character of the entries in the assessee's books of account. The Appellate Assistant Commissioner clearly pointed out that the findings recorded by the Income-tax Officer were not positive findings. Further, the Tribunal had partly accepted the source to the extent of ₹ 5,000 and partly rejected it to the extent of ₹ 15,000. Having accepted the genuineness of the entries in the books of account, having accepted the explanation offered by the third parties with regard to their sources of money in part at least, there was no material for the Tribunal to hold that the assessee had not discharged the onus on him and the finding to that effect must be held to be without ....
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....ound Nos.1 and 2 of the appeal of the assessee are allowed. 26. Ground No.3 is regarding charging of interest under Section 234A, 234B and 234C which is consequential in nature and is mandatory and accordingly rejected. 27. Ground No.4, 5 and 6 of the assessee's appeal are initiation of the penalty under Section 271(1)(c) and under Section 269SS and 269T of the IT Act, which is independent proceedings and therefore these grounds are premature. The same are accordingly dismissed. 28. In result, ITA No.1821/Ahd/2008 is partly allowed. ITA No.1822/Ahd/2008 : A.Y.2001-02 (Assessee's appeal) 29. Ground No.1 and 2 of this appeal challenging addition of ₹ 42,30,000/- on account of unexplained cash credit were considered in ITA No.1821/Ahd/2008. By following the same reasons, we set aside the orders of the authorities below and delete the addition. Accordingly, Ground Nos.1 and 2 of the assessee's appeal are allowed. 30. Ground No.3 is regarding charging of the interest under Section 234A, 234B and 234C which is consequential in nature and is mandatory and accordingly rejected. 31. Ground No.4, 5 and 6 of the assessee's appeal are initiation of the penalty under Section 271(1)....
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....oom of textile/carpet would be constructed. In addition, one flat at Sarojini Marg, Jaipur was also purchased for ₹ 9 lakhs. The entries on seized page 54 of Annexure A-4 showed the figure of 85 under the head 'estimates' while the figure of 10 (DDS) is the cost of the Tabela and the figure of 9 under the head 'flat' is the cost of the flat. The figure of 85 was an estimate for renovation of Tabela. The old structure however could not be demolished as the Tabela was a part of heritage property. Hence only about ₹ 55 lakhs were spent for modification/ addition to the same structure for strengthening it. Thus the total expenditure also verified and certified by the auditors, came to be around ₹ 55.87 lakhs excluding the consideration and cost of registration. As a matter of fact, the cost of modification/ addition has been estimated at ₹ 56.87 lakhs by the DVO i.e. an additional amount of ₹ 1 lakhs but the DVO has arbitrarily adopted the value of land at ₹ 33.20 lakhs instead of the correct value of ₹ 10 lakhs. The AO has noted the differences as under: F.Y. Cost of construction as estimated by DVO Declared by the assessee As estimated b....
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....,000/- Rs.41,474/- 2005-06 Rs.21,06,752/- (Rs.16,26,802 + ₹ 4,79,950/- ) Rs.125,98,000/- Rs.5,08,752/- Total Rs.95,00,000/- 36. The AO in respect of A.Y.2004-05 noted that the cost of construction declared by the assessee at ₹ 23.01 lakhs was short of the estimate of ₹ 23.42 lakhs made by the AO and so made an addition for the difference of ₹ 41,470/-. It was pointed out to the learned CIT(A) that valuation was not being done on scientific method and the difference was less than 15%, therefore, there are various judicial pronouncements to delete such additions. The learned CIT(A) accepted the contentions of the assessee and deleted the addition of ₹ 412,471/- in A.Y.2004-2005. In respect of asstt.year 2003-04 under appeal addition of ₹ 23.62 lakhs was challenged before the learned CIT(A) and it was submitted that the estimation of the land valued by the DVO was incorrect because the sale deed is registered with the sub-registrar and the proper stamp duty has been paid therefore there cannot be any doubt in the valuation. The learned CIT(A) considering the facts and circumstances of the case and the report of the DVO and the sale deed etc.....
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....ven the DVO has not brought any comparable case to support his finding that the value of the land was more. Considering the explanation of the assessee and the situation of the property in Muslim dominated area and the entry on the back side would prove that even the DLC rate would not be applicable in such situation against the property owned by the assessee. The attending circumstances shall have to be considered properly in the light of the explanation given by the assessee. In the absence of any independent and corroborative material available on record, we do not find any justification to sustain even the part addition on this issue. We accordingly set aside the orders of the authorities below and delete the addition. 39. In the result Ground No.1 and 2 of the appeal of the assessee are allowed. 40. Ground No.3 is regarding charging of the interest under Section 234A, 234B and 234C which is consequential in nature and is mandatory and accordingly rejected. 41. Ground No.4, 5 and 6 of the assessee's appeal are initiation of the penalty under Section 271(1)(c) and under Section 269SS and 269T of the IT Act, which is independent proceedings and therefore these grounds are prem....