THE issue before the Bench is - Whether when the assessee mainly provided a link between the companies floated by an entry provider and no sum was paid for purchase of untraded shares, such sale and purchase is to be construed as sham. YES is the answer.
Facts of the case
Assessee claimed loss of Rs. 4.64 crores on account of purchase and sale of shares and diminution in the value of shares held by the assessee. AO disallowed the said loss of Rs. 4.64 crores and assessed the income of the assessee as Rs. 8.72 crores. The CIT (A) rejected the appeal of assessee. ITAT deleted most of the additions made by the AO to the assessed income of the assessee but insofar as the losses claimed by the assessee, in relation to the shares of companies, the Tribunal remanded the matter to the AO to consider it afresh. The Tribunal held that the statements of persons relied upon by the AO justified entertaining suspicion as to the transaction of sale/purchase of shares. However, since the assessee was not confronted with material collected by AO, the same had resulted in a material irregularity in respect of the assessments. The Tribunal also held that the documents relied upon by the assessee - confirmation memos/contract notes, bills, letters confirming registration of shares etc. - were required to be considered.
In second round, 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. 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 of the relevant year and allowed the appeals filed by the assessee.
Revenue contended before ITAT that the loss claimed by the assessee on account of sale and purchase of shares and diminution in their value could not be set off from business income in view of Section 73 of the Act. ITAT rejected the claim of revenue stating that the purchase bills for the shares purchased along with brokers contract note and copy of the confirmation from the respective companies indicating the transfer of shares in the name of the assessee evidenced the genuineness of the losses claimed by the assessee. The shares were bought through the Gauhati Stock Exchange and their transfers in the name of the assessee were confirmed by letters received from the respective companies. As the shares were held in stock in trade, the same could be valued at cost or market price, whichever is lower, and a loss on account of diminution in value of the stocks could be set off by the assessee against its other income. The companies whose shares were purchased by the assessee were genuine companies and regularly assessed to tax in their respective wards.
ITAT also rejected the plea of revenue that losses claimed cannot be set off by virtue of Section 73 stating that as the said contention had not been urged either before the authorities below or before the Tribunal, in the first round, the Revenue could not be permitted to raise the said contention for the first time in the second round.
After hearing both the parties, the High Court held that,
++ in search and seizure operations on Shri New Chand Jain, he stated that he was not aware of affairs of the companies but had acted at the instruction of one Mr ‘R’. He received expenses from ‘R’ in lieu of services rendered. ‘R’ had made a disclosure that he had promoted several companies by introducing share application money in different names. Some of the companies were not genuine. On the basis of the said statements, AO concluded that the transactions claimed by the assessee were not genuine;
++ AO disallowed the claim of assessee, observing that the assessee had not paid for the shares that he had purchased and the consideration was only reflected as book entries, although Shri Nem Chand Jain had financed almost the entire purchase of shares, there was no agreement with Shri Nem Chand Jain for this financing arrangement. He had also not charged any interest on the amounts outstanding. Shri Nem Chand was not a person of means and his creditworthiness was not established. Trading in shares of the companies in question, on the Gauhati Stock Exchange, were to be on "spot basis" and thus the transactions claimed by the assessee were contrary to the practice of the said Stock Exchange; admittedly, there was no settlement of accounts through the Stock Exchange. The shares of the companies which were involved were not actively traded and thus the quotations indicating the value of the shares could not be accepted. No material was produced to controvert the finding that the shares of the companies were not actively traded. Assessee and the companies in question were interlinked. Shri ‘R’ had floated certain number of companies by introducing his undisclosed capital and he was also a Director on the Board of the assessee company. Assessee also owed money to certain companies, whose shares it held/purchased. 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;
++ the facts as outlined by the AO clearly indicate an established link between the companies floated by Shri ‘R’ and the assessee. This fact has also not been disputed by the assessee in the present proceedings. The AO found that the shares of those companies were not actively traded; there is no material on record, which would indicate otherwise. The certificate of Gauhati Stock Exchange 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. 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’ and share application money was introduced through other names, it is obvious that he owned/controlled a good part of the share holding. The shares, which are alleged to have been purchased by the assessee, were not paid for and only book entries were passed. There is no evidence to show that the transaction of purchase of shares was done through the Gauhati Stock Exchange. On the contrary, the certificates issued by the Gauhati stock exchange put it beyond any pail of doubt that the transactions in question were "off the floor transaction". Thus, it is held that the transactions entered by purchase and sale of shares were, in fact, sham transactions and could not be relied upon.
In second round, 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. 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 of the relevant year and allowed the appeals filed by the assessee.
Revenue contended before ITAT that the loss claimed by the assessee on account of sale and purchase of shares and diminution in their value could not be set off from business income in view of Section 73 of the Act. ITAT rejected the claim of revenue stating that the purchase bills for the shares purchased along with brokers contract note and copy of the confirmation from the respective companies indicating the transfer of shares in the name of the assessee evidenced the genuineness of the losses claimed by the assessee. The shares were bought through the Gauhati Stock Exchange and their transfers in the name of the assessee were confirmed by letters received from the respective companies. As the shares were held in stock in trade, the same could be valued at cost or market price, whichever is lower, and a loss on account of diminution in value of the stocks could be set off by the assessee against its other income. The companies whose shares were purchased by the assessee were genuine companies and regularly assessed to tax in their respective wards.
ITAT also rejected the plea of revenue that losses claimed cannot be set off by virtue of Section 73 stating that as the said contention had not been urged either before the authorities below or before the Tribunal, in the first round, the Revenue could not be permitted to raise the said contention for the first time in the second round.
After hearing both the parties, the High Court held that,
++ in search and seizure operations on Shri New Chand Jain, he stated that he was not aware of affairs of the companies but had acted at the instruction of one Mr ‘R’. He received expenses from ‘R’ in lieu of services rendered. ‘R’ had made a disclosure that he had promoted several companies by introducing share application money in different names. Some of the companies were not genuine. On the basis of the said statements, AO concluded that the transactions claimed by the assessee were not genuine;
++ AO disallowed the claim of assessee, observing that the assessee had not paid for the shares that he had purchased and the consideration was only reflected as book entries, although Shri Nem Chand Jain had financed almost the entire purchase of shares, there was no agreement with Shri Nem Chand Jain for this financing arrangement. He had also not charged any interest on the amounts outstanding. Shri Nem Chand was not a person of means and his creditworthiness was not established. Trading in shares of the companies in question, on the Gauhati Stock Exchange, were to be on "spot basis" and thus the transactions claimed by the assessee were contrary to the practice of the said Stock Exchange; admittedly, there was no settlement of accounts through the Stock Exchange. The shares of the companies which were involved were not actively traded and thus the quotations indicating the value of the shares could not be accepted. No material was produced to controvert the finding that the shares of the companies were not actively traded. Assessee and the companies in question were interlinked. Shri ‘R’ had floated certain number of companies by introducing his undisclosed capital and he was also a Director on the Board of the assessee company. Assessee also owed money to certain companies, whose shares it held/purchased. 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;
++ the facts as outlined by the AO clearly indicate an established link between the companies floated by Shri ‘R’ and the assessee. This fact has also not been disputed by the assessee in the present proceedings. The AO found that the shares of those companies were not actively traded; there is no material on record, which would indicate otherwise. The certificate of Gauhati Stock Exchange 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. 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’ and share application money was introduced through other names, it is obvious that he owned/controlled a good part of the share holding. The shares, which are alleged to have been purchased by the assessee, were not paid for and only book entries were passed. There is no evidence to show that the transaction of purchase of shares was done through the Gauhati Stock Exchange. On the contrary, the certificates issued by the Gauhati stock exchange put it beyond any pail of doubt that the transactions in question were "off the floor transaction". Thus, it is held that the transactions entered by purchase and sale of shares were, in fact, sham transactions and could not be relied upon.
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