AI Drafter 
TaxTMI 
TaxTMI 
TaxTMI 
2017 (3) TMI 1166
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.... all the assets of persons implicated in the scam. All the persons so implicated were called as "Notified persons". Hence the assessee became one of the notified persons. Prior to the enactment of the above said Special Act, a Committee named as "Janakiraman Committee" was appointed to probe the scam related matters. A Joint Parliamentary Committee was also formed to investigate into the matters. 3. The CBI conducted search on the assessee on 22.06.1992 and the income tax department conducted search on the assessee on 16.10.1992. The appeals under consideration have been filed in the second round of proceedings. The assessments were originally completed after the search operations. The assessee challenged the assessment orders by filing appeal before Ld CIT(A) and then the matters were taken before the ITAT by both the parties on the issues decided by Ld CIT(A) against each of them. Before the Tribunal, the assessee contended that the assessing officer had made huge additions on the basis of certain materials, which were not confronted with him. Hence, the Tribunal set aside the orders of tax authorities and restored all the matters to the file of the Assessing officer with the ....
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..... Based on the observations of the auditors and the replies submitted by the assessee to the queries raised, the assessing officer has summarised certain points relating to method of accounting followed by the assessee as under:- (i) Regarding security transactions, the assessee had not maintained/ records separately for own trading or trading on behalf of clients, institutions or Bank. He further argued that he was following the same practice for last so many years (reply of assessee dated 2.01.1993). (ii) The assessee had not maintained sauda book for share transactions. Here also he had stated that bills to various brokers were not issued by him. (Reply of assessee to auditor dated 16.06.1993) (iii) Deal slips were not prepared by the assessee (reply of assessee to auditor dated 16.06.1993) (iv) Contract notes for securities may or may not have signatures (reply of assessee to auditor dated 16.06.1993) (v) In respect of security transactions no contract notes were issued to market brokers (statement of assessee recorded on 22.09.1993) (vi) No separate records were maintained for receipt and delivery of securities (Statement of assessee recorded on 22.09.1993). ....
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.... those exceptional transactions are also normal commercial transactions entered during the normal course of business. Further the profit or loss of the transactions would depend upon the market conditions prevailing at a particular point of time/date. It was further pleaded that the assessee has also made exceptional profits in certain transactions of purchase and sale of securities aggregating to Rs. 38,08,318/-. 10. With regard to the auditor's observations, the assessee submitted that the auditors have placed on record the cooperation given by the clients and staff. Further they have reported that due to shortage of time, they have not been able to cover all aspects. It was contended that the auditors have not doubted the genuineness of the transactions, but have only expressed the view about the inadequacy of the supporting documents. 11. The AO was not convinced with the above said explanations of the assessee. He took the view that the assessee is urging very same contentions as was urged before him in the original assessment proceedings. Accordingly the AO took the view that the loss arising from sale of securities are not genuine and accordingly disallowed the same. ....
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....ployed brokers for purchase and sale of transactions and hence the assessee was constrained to deal with registered brokers only. The said brokers have entered into the transactions on behalf of the banks and financial institutions. Accordingly the Ld A.R contended that the parameters determined by the Special auditors were not correct and they have been fixed without appreciating the prevailing and practical market practice. He further submitted that the auditors have expressed their reservations about the so called exceptional transactions, since supporting evidences were not available. Hence their report cannot be the basis to suspect genuineness of transactions. However, they have failed to appreciate that the transactions have been entered through banking channels and the ultimate buyer/seller was any one of the banks or financial institutions. Further, most of the records were seized by the CBI and income tax department at the time of special audit. One of the main staffs had left the employment. Hence, the assessee could not offer explanations to the satisfaction of the auditors, which has led the auditors to make such kind of observations. Accordingly the Ld A.R submitte....
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....ly. The assessee has also given certain examples, wherein he had made profits in dealing with very same securities. 17. The Ld A.R, during the course of his arguments, effectively made submissions as to how the observations made by the special auditors were not correct. At the relevant point of time, it was stated that the securities were not traded on daily basis on the floor of the stock exchanges. Hence the prices were determined between the purchasers and sellers. The assessee has also explained that one side of broker is representing a bank/financial institution. Since the transactions were carried through banking channels, it was explained that they have been done during the normal course of carrying on the business. In our view, the above said explanations also appear to be reasonable. When the transactions have been entered between a willing seller and willing buyer, the same should not be doubted with unless some materials to the contrary are brought on record. It would always be difficult to anyone to prove a negative fact. 18. At the same time, there is a major deficiency on the part of the assessee, i.e., he could not furnish relevant contract notes nor he could g....
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....ed upon blindly. He submitted that the DOR is determined on the basis of market conditions. The assessee also pointed out a casting error of Rs. 3,92,000/- found in the computation made by the Special auditors. However, the AO did not accept the explanations of the assessee and accepted casting error and further explanations with regard to Rs. 1,65,271/-. Accordingly he again made addition of Rs. 29,23,336/-. The Ld CIT(A) also confirmed the addition by following his decision rendered in the first round of proceedings, wherein he had taken the view that the assessee had claimed bogus losses to wipe out the exceptional profits. 21. We heard the parties on this issue and perused the record. The main contention of the assessee is that the Special auditors have not set any parameter to determine a transaction as exceptional in nature. According to the assessee, these transactions have been entered in the normal course of business. Since the delivery of securities has been made directly by the seller to the buyer, the same has not come to the hands of the assessee. The transactions are supported by the bank advices for paying DOR. The assessee was issuing delivery instructions to the....
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....es to the disallowance of loss arising with purchase and sale of securities on the same date with the same party. The auditors reported transactions in which purchase and sale of securities were found to have been made with the same party on the same date, but at different rates. Such transactions resulted in loss aggregating to Rs. 53,03,007. In the original assessment proceedings, the assessee offered explanations with regard to certain entries, i.e., the assessee had recovered money against loss of Rs. 9,20,527/- pointed by the auditors; certain transactions have taken place on different dates etc. The AO accepted the explanation with regard to the loss of Rs. 9,20,527/- and did not accept explanations of remaining transactions Accordingly he disallowed the loss of Rs. 43,82,480/- (Rs.53,03,007/- less Rs. 9,20,527/-) with the reasoning that the transactions remained unverifiable. 25. The major portion of loss was found to have been incurred in the transactions entered with Shri M.J.Patel, i.e., to the tune of Rs. 33,15,000/-. The AO also recorded a statement from him subsequent to the completion of original assessment, wherein he also confirmed the transactions. However he ha....
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....ecord. We notice that this addition has been made on the basis of observations made by the Special auditors that these losses have been incurred on intraday transactions. During the course of original assessment proceedings and also during the course of second round of assessment proceedings, the assessee has pointed out that certain transactions have not been entered on the very same day, but accounted for on a single date. In the first round, the transactions at Sl. No.11 & 13 were pointed out and in the second round, the transactions shown at Sl. No.5, 12 & 13 were pointed out to be transactions carried on different dates. We notice that this claim of the assessee has not been examined at all by the tax authorities. 29. The major portion of loss has been incurred in the transactions entered with M.J. Patel. The statement from Shri M.J. Patel has been taken after the completion of the original assessment proceedings, i.e., at the time of original assessment, the statement of Shri M.J. Patel was not available before the AO. In the statement, Shri M.J. Patel has confirmed all the transactions, but he submitted that he has received only contract notes and cheques and not any othe....
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....oceedings. Hence we restore the issue relating to transactions noted in Sr. No. 11 to the file of the AO with the direction to delete the addition, if the transactions have been entered on two different dates. With regard to the loss of Rs. 33,15,000/- in relation to the transactions entered with M.J. Patel, we are of the view that a partial disallowance out of the above said loss would settle this dispute, since there are deficiencies on both sides. Accordingly, we direct the AO to restrict the disallowance of the above said item to 20% of Rs. 33,15,000/- to take care of deficiencies, if any, and in our view the same would meet the ends of justice. We order accordingly. In respect of other items of disallowance, we do not find any discussion about the same and accordingly confirm their addition. The order of Ld CIT(A) stands modified accordingly. 31. The next item of addition relates to the disallowance of net loss of Rs. 1.08 crores incurred in ready forward transactions. The Special auditors have prepared a list of transactions wherein the purchase and sale of transactions were entered with the very same party. The assessee had purchased the securities on a higher rate and so....
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....venue. A perusal of the statement would show that the assessee has given details of purchase and sale, party's name, the loss or profit in the purchase and sale, interest received and interest paid, the net result (profit/loss in trading plus net interest). The very fact that the Special auditor has noted down the interest receipts and payments show that the claim of the assessee that these transactions are, in effect, funding transactions appears to be a correct claim. 35. According to the assessee, these kind of funding transactions are quite common in the securities trading circles. We notice that the assessee has transacted with reputed banks and companies. Hence the loss claimed by the assessee is in the nature of "interest expenditure" only. We also notice that the assessing officer has considered these transactions as stage managed one, since the assessee did not give any specific explanation with any specific transaction. However we notice that the assessee has offered general explanations with regard to these transactions. In that case, the tax authorities could have examined the net loss vis-à-vis normal interest expenditure. These kind of examination has not be....
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....lal Khandwala and submitted that the transactions were entered with the above said party only, who was the broker of Maruti Udyog Ltd. Accordingly it was submitted that Ledger account was wrongly opened in the name of Maruti Udyog Ltd. The AO did not accept the said explanations and hence he disallowed the loss of Rs. 16,95,247/-. The Ld CIT(A) also confirmed the same. 40. We heard the parties and perused the record. We have gone through the Ledger account copy in the name of the assessee as available in the books of M/s Jayantilal Khandwala, which is placed at page 505 of paper book. A perusal of the same shows that the assessee has received a sum of Rs. 15,03,68,128/- on 19.5.1989 and repaid a sum of Rs. 15,23,55,557/- on 10.7.1989. The difference between the two works out to Rs. 19,87,429/-. The ledger account further shows that these transactions were in connection with purchase and sale of 13.50 crores 7.25% IDBI Loan and 1.35 crores 7.50% IDBI Loan. The aggregate par value of both the securities is 14.85 crores. However the ledger account copy as extracted in page 47 of the assessment order refers the security as 14.85 crores 6.25% IDBI-92. Thus there is a contradiction in....
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.... Jayantilal Khandwala creates further confusion, yet the fact that the sum of Rs. 15.47 crores has been instructed to be paid to the account of Maruti Udyog Ltd, in a way, supports the claim of the assessee. Further the ledger account in the books of M/s Jayantilal Khandwala shows that it was acting as broker of M/s Maruti Udyog Ltd and the same further proves that the assessee did not have direct dealing with M/s Maruti Udyog Ltd. Hence the explanation of the assessee that the ledger account was wrongly opened in the name of Maruti Udyog Ltd needs to be accepted under these set of facts. 46. However, since there is confusion about the amount that was received and paid, we are of the view that the explanations of the assessee are insufficient. However, the fact remains that the assessee has received a sum of Rs. 15.30 crores on 27.6.1989 and repaid a sum of Rs. 15.47 crores on 10.07.1989, i.e., the assessee has used the funds for 13 days. According to the assessee, the above said purchase and sale were in the nature of funding transactions only. Hence, in our view, the interest calculated at 12% p.a. on the above said transaction may be accepted and the same would meet the ends ....
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....aid to any related party. In the instant case, it is the submission of the assessee that the impugned interest has been paid in the normal course as per trade practice to the third parties. 50. The issue relating to interest paid on securities has been dealt by us in detail while dealing with the appeal of the assessee relating to AY 1987-88. The observations made by us in that year shall apply to the issue under consideration in this year also. In the set aside proceedings, we notice that the assessee has reconciled certain interest payments and interest receipts as under:- (a) Interest paid to Citi Bank Rs. 34,83,892/-. (Sl. No. 8 of Annexure 6 of original assessment order). Corresponding interest received was Rs. 34,83,892/- transferred from Hiten Dalal account to "Interest from PDO Account" as on 31.3.1990. (b) Sl. No.7 of Annexure 6 - 7% AP 1993 sold to Bank of America. The assessee has explained sequence of events, i.e., he received interest of Rs. 35.00 lakhs on sale of 7% AP 1993 security worth Rs. 10.00 crores. But the assessee repaid Rs. 6.00 crores and hence the corresponding interest of Rs. 20.50 lakhs was remitted to Bank of America. (c) Sl. No.14 & 15 - In....
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....ssessee also submitted that the transactions of purchase and sale are carried out for RBI, banks and other reputed institutions. He also submitted that the assessee sells securities without having stock, but later cover the same by buying from the market. The assessee also submitted that the ready forward transactions, in which the sale made shall be reversed subsequently, would also give rise to a situation of negative balance. The said explanations were not satisfactory to the AO and hence he again made the addition of Rs. 75,69,07,150/- in the set aside proceedings also. The Ld CIT(A) also confirmed this addition by following his decision rendered in the original assessment proceedings. 54. We heard the parties on this issue and perused the record. Identical additions towards negative balance of securities were made in AY 1987-88. We have dealt with the same in a detailed manner in that year. In the instant year, the assessing officer has listed out 35 scrips, wherein the alleged negative balance was noticed. However, detailed workings have been given in respect of three scrips only. In respect of the three scrips, the assessee has offered following explanations:- (a) 7% U....
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....nsidered 2,85,47,850 c) Sales to Provident fund for which delivery completed later 1,35,000 d) Sales reversed 42,000 e) Ready forward transactions 46,92,20,000 f) Double entry (Sr. No.26 & 34) 10,45,46,000 g) No negative balance in Sr. No.31 1,00,00,000 h) Opening balance not considered 46,000 75,69,07,150 56. Thus, we notice that the assessee has offered explanations in respect of the items that were pointed out by the AO. In respect of remaining items, no details were furnished to the assessee, since the workings were not given by the AO and hence there was no occasion for the assessee to furnish any explanation. We have noticed earlier that the tax authorities have not examined these explanations and proved the same to be false. In the absence of any contradiction, we are of the view that the explanations offered by the assessee should be accepted. We have also noticed that the assessee also makes short sales and it is submitted that this is also a prevalent commercial practice. Hence, what is required to be seen is that the short sale was ultimately covered up or not. In our view, the c....
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....isation of funds received from Oswal Agro. 61. Having heard rival contentions, we are of the view that there is merit in the contentions of the assessee. Out of the aggregate amount of about Rs. 90 crores, the assessee submits that he has received about Rs. 72 crores by way of securities, wherein there is no question of diversion. In respect of remaining funds also, the same has been received through the bank account of the assessee and, in the absence of specific finding about diversion, it would get mixed up with the business funds and accordingly it should be presumed that the same has been used for the purposes of business of the assessee. In that view of the matter, the excess payment of Rs. 12,56,943/- would partake the character of interest only, which the assessee is entitled to claim. The assessee has also pointed out that he has made a profit of Rs. 12,56,943/- in respect of securities transactions entered with M/s Oswal Agro. In view of the above, we set aside the order passed by Ld CIT(A) on this issue and direct the AO to delete this disallowance. 62. The next item of addition relates to the disallowance of loss arising in the security transaction entered with Ga....
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....CIT(A) also confirmed the same. 66. We heard the parties and perused the record. The contention of the assessee is that the share transactions were entered in the normal course of business and certain shares have resulted in loss. It was submitted that the assessee has made net profit of Rs. 11,99,386/- from share transactions and hence it was not correct to isolate the loss transactions alone and disallow the same. We find merit in the said contentions of the assessee. The auditors have merely highlighted the loss transactions and they have not reported the same to be bogus. When the AO is accepting the profit making transactions, there is no reason to isolate the loss making transactions and disallow the same. With regard to the loss of Rs. 1,13,231/- pointed out by the auditors are concerned, we have noticed in AY 1988-89 that the Patawat sheets contain transactions entered throughout the month and hence it was not correct to presume that the purchase and sale has taken place on the last day of month. Further the contention of the assessee is that these transactions have been routed through bank account. Hence there is no reason to make such kind of presumption and hence the ....
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....e the shares were sold on cum-dividend basis and since the assessee received the dividends in respect of sold shares, the same was reimbursed to the buyers by passing journal entries by crediting their respective accounts. In respect of other transactions, the assessee contended that they have been entered in the normal course of business. He further submitted that these transactions are not same day transactions as presumed by the AO. However, the AO was not convinced with the explanations of the assessee and accordingly disallowed the loss of Rs. 42,42,350/- in both original as well as in set aside proceedings. The Ld CIT(A) also confirmed the same. 70. We heard the parties on this issue. We notice that there is a totalling mistake in the aggregate amount computed by the AO. The total of the eight transactions work out to Rs. 41,42,350/-, where as the AO has casted the same as Rs. 42,42,350/-. Accordingly, the assessee gets relief of Rs. 1.00 lakh on this account. 71. In respect of Rs. 34,54,000/- referred above, the assessee has claimed that he has passed journal entries in order to transfer dividend amount to their respective accounts, since the shares were sold on cum-di....
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....y one. Accordingly we are of the view that there is no justification in making addition of remaining amount of loss. Accordingly we set aside the order passed by the Ld CIT(A) in respect of remaining items and direct the AO to delete the same. 74. The next issue relates to the addition of difference in closing stock of Rs. 2.64 crores. During the course of search floppies containing data were seized and the print outs were generated from them. A list of closing stock as on 31.3.1990 was generated, which disclosed shares of 130 companies valued at Rs. 1,04,48,151/-. The floppies also contained another list of stock on which no date was mentioned. The said list contained shares of 153 companies valued of Rs. 3,69,47,542/-. Though the second statement was undated, most of the items of shares tallied with the first statement. Hence, the AO confronted the same with the assessee. He replied that the same was rough sheet prepared before carrying out necessary corrections, i.e., it may include shares that were purchased on behalf of its clients etc. It was submitted that the second list is the final copy which has been accepted by the auditors u/s 44AB of the Act as well as by the Speci....
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....ss of the same lies upon the assessee, which he has failed to discharge. 79. We notice that the assessee has incurred loss in all the three occasions of purchase of shares of HCL Ltd from CIFCO Ltd and sale of same shares again to CIFCO. The repeated transactions of purchase and sale of very same shares at a lower price, in fact, creates doubt in the minds of anyone. Hence, the possibility of stage managing the loss by the transactions entered with the sister concern cannot be ruled out. Though the assessee claims that these transactions have been entered in the normal course of business, yet the fact that the assessee was incurring loss on every occasion is not understandable. The assessment of profits in the hands of sister concern, in our view, will not take away the responsibility of the assessee to prove the genuineness of these transactions. In the absence of anything to prove their genuineness, we are of the view that the Ld CIT(A) was justified in confirming the addition of Rs. 1,61,950/- made by the AO by disallowing the loss incurred on security transactions entered with CIFCO Ltd. 80. The next item of addition relates to the unexplained Cash deposit of Rs. 5.00 lak....
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....by Ld CIT(A) and direct the AO to confirm the addition on this issue to the extent of Rs. 2,50,000/-. 83. The next addition relates to the disallowance of loss incurred in the security transaction entered with Milan Mahindra amounting to Rs. 4,73,472/-. The AO made this addition in the set aside proceedings without discussing the same. Since this addition was set aside by the ITAT in the original assessment proceedings, the Ld CIT(A) (and also the AO in his remand report) took the view that the assessee should have taken the responsibility to explain the transactions entered with M/s Milan Mahindra. The Ld CIT(A) also expressed the view that the failure on the part of the AO to discuss about this addition will not make the addition void. Since the assessee failed to adduce any argument or evidence, the Ld CIT(A) confirmed this addition. 84. The Ld A.R submitted that the assessing officer did not discuss about this addition and hence the assessee could not have visualized the same and met the contentions of the AO. 85. We heard Ld D.R and perused the record. Since there is no discussion about this addition either in the assessment order or in the order of Ld CIT(A), there i....
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.... also confirmed the same. 88. We heard the parties and perused the record. Both the concerns referred above are not related parties. All the transactions have been entered through banking channels. The very fact that the assessee did not deliver the shares shows that the same may be a funding transaction as claimed by the assessee. In the case of funding transaction, the receiver of the funds has to give interest to the lender. According to the assessee, the loss on securities is actually in the nature of interest paid to the above said lenders. According to the assessee, the above said method of funding is quite prevalent in the share trading circles. The said claim has not been proved to be wrong. Further the AO has not brought on record the details of quantum of funds raised and the rate at which the interest actually works out to. The assessee has also not furnished those details. In any case, the transactions have been entered through banking channels and both these parties are not related parties. We further notice that the explanations of the assessee that the same were funding transactions have been rejected by the tax authorities without examining the corresponding part....