Delhi High Court
Commissioner Of Income Tax vs M/S Praveen Electronics Limited on 3 October, 2008
Author: Rajiv Shakdher
* THE HIGH COURT OF DELHI AT NEW DELHI
Judgment reserved on : 15.09.2008
% Judgment delivered on : 03.10.2008
+ ITA 87/2006
COMMISSIONER OF INCOME TAX ..... Appellant
-versus-
M/S PRAVEEN ELECTRONICS LTD ..... Respondent
Advocates who appeared in this case:
For the Revenue : Mr R.D. Jolly
For the Respondent : Mr Salil Aggarwal with Mr Prakash Kumar
CORAM :-
HON'BLE MR JUSTICE BADAR DURREZ AHMED
HON'BLE MR JUSTICE RAJIV SHAKDHER
1. Whether the Reporters of local papers may
be allowed to see the judgment ? Yes
2. To be referred to Reporters or not ? Yes
3. Whether the judgment should be reported
in the Digest ? Yes
RAJIV SHAKDHER, J
1. This is an appeal under Section 260A of the Income Tax Act, 1961
(hereinafter referred to as "the Act") preferred by the Revenue against the
judgment dated 28th February, 2005 passed by the Income Tax Appellate
Tribunal (hereinafter referred to in short as "Tribunal") in ITA No. 3273/
Del/2000, in respect of, assessment year 1996-97.
1.1. The Revenue being aggrieved has proposed the following questions of
law which, according to them, are substantial questions of law. These are as
follows:-
(i) Whether the I.T.A.T. has erred in law in deleting the disallowance
of loss of Rs32,10,166/- on account of loss in trading of shares,
treating as speculation loss by the Assessing Officer?
(ii) Whether the I.T.A.T. was correct in law in deleting the
disallowance in spite of the decision of Apex Court in the case of
Mcdowell Vs. CIT reported in 154 ITR 148?
(iii) Whether the order of I.T.A.T. is perverse, as it has ignored the
relevant facts and material on record?
2. After hearing learned counsel for the Revenue, as well as, the assessee
we are of the view that the findings recorded by the authorities below are
pure findings of fact. There are no questions of law which arise for our
consideration much less, substantial questions of law. The reasons for
arriving at this conclusion are indicated by us hereinbelow. Before we
proceed, it must be recorded that in the course of his submissions the learned
counsel for the Revenue, Mr. R.D. Jolly fairly conceded that the first question
of law as proposed in the appeal did not arise in the facts and circumstances
of the present case. Therefore, we are left with only question Nos. (ii) & (iii)
as proposed in the appeal.
3. Our reasons for arriving at the conclusion which we have, as indicated
hereinabove are based on the following facts:-
3.1 On 29.11.1996 the assessee filed his return declaring a loss of Rs
93,220/. The Assessing Officer issued a notice under Section 143(2) of the
Act. In response thereto the authorized representative of the assessee
appeared before the Assessing Officer. It is important to note that in the first
instance the assessee was represented by one set of authorized representatives
and since, assessee had been taken over by M/s Goel Gases Group, it was
subsequently represented by another set of representatives. This is relevant
in view of the fact that the Assessing Officer has made some observations
with regard to the lack of knowledge of the Director of the assessee in respect
of the impugned transactions.
4. Coming back to the facts, the assessee, in his return had declared
income by way of interest to the extent of Rs 38,02,385/-. Against the said
income it had claimed expenditure by way of administrative expenses, in the
sum of Rs 2,475/-, as also, interest charges amounting to Rs 5,62,200/-.
What attracted the attention of the Assessing Officer was the loss claimed by
the assessee in share transactions which resulted in a loss return. The
Assessing Officer noticed that the assessee had purchased shares worth Rs
94,46,601/- which were sold for a total consideration of Rs 61,15,206/-; and
consequently, the assessee had claimed a loss of Rs 33,31,395/-. The
Assessing Officer disallowed this loss. A close scrutiny by the Assessing
Officer revealed that: the loss to the assessee with respect to share
transactions, had resulted from trading in shares of four companies referred to
hereinafter; and also, that, all the share transactions in issue, had been
handled by a share broker by the name of M/s Sushil Kumar Jindal & Co.,
Darya Ganj, New Delhi (hereinafter referred in short as "broker"). The
companies whose shares were traded by the assessee are as follows:-
i) Jindal Capital Ltd.
ii) Karisma Flouriculture Ltd.
iii) Bharthari Financial Services Ltd.
iv) Ambalal Sarabhai Ltd.
5. The Assessing Officer conducted his investigations. In pursuance
thereto summons were issued under Section 131 to the broker. The broker
was represented before the Assessing Officer through his counsel. The
Assessing Officer also examined one of the Directors of the Assessee,
namely, Mr. Sen. On completion of his enquiry the Assessing Officer came
to the conclusion that the loss amounting to Rs 33,31,395/- in respect of
share transactions had to be disallowed. Consequently, the said loss was
added back to the total income of the assessee. The rationale for arriving at
this conclusion is contained in the Assessing Officer‟s order dated 26th
March, 1999. The rationale being:-
(i) the assessee had no experience in dealing in share transactions;
(ii) the former Director of the assessee, Mr. Sen, who was examined
by him had stated that share transactions had not been carried out
throughout the year in issue, or even the succeeding financial
year. Mr. Sen had stated before the Assessing Officer that he was
not only unaware of the loss suffered in the share transactions but
had also not heard of the broker engaged by the assessee.
Furthermore, the other Director of the assessee Mr. S.P. Kapre
was not produced by the assessee;
(iii) the impugned share transactions were carried out at the fag end of
the year i.e., January, 1996 to March, 1996 when, the income
from other sources had almost been determined;
(iv) the share transactions involved huge losses and, in none of the
transactions, assessee had earned profits. This was neither
prudent nor credible;
(v) all transactions had been made through one broker, namely, M/s
Sushil Kumar Jindal & Co. The assessee had not produced the
broker or, his books of accounts;
(vi) enquiry in respect of shares dealt with by the assessee, whose
distinctive numbers had been furnished by the broker, revealed
that they were being dealt by other brokers at the Bombay Stock
Exchange during the relevant period;
(vii) the scrutiny of the assessee‟s accounts and that of the books of
accounts of broker had shown that, in respect of number of,
transactions carried out between 24.2.1996 to 9.3.1996 the
assessee had made payment in respect of net loss incurred by it,
which, was evidence enough to show there was no delivery of
shares;
(viii) though there was a huge volume of transactions of nearly Rs 90
lakhs (approximately) the expenses incurred were incredibly
small, amounting to Rs 2,450/-, and;
(ix) the share transactions was a colourable device which was
employed in collaboration with the broker only to reduce the
taxable income.
6. Being aggrieved, the assessee filed an appeal before the Commissioner
of Income Tax (Appeals) (hereinafter referred in short as "CIT(A)"). The
CIT(A) examined the facts placed before the Assessing Officer and the
submissions made by the assessee including the point-wise rebuttal made by
the assessee before him. The CIT (A) after considering the material on record
and the submissions of the assessee, came to the conclusion that the
impugned share transactions with the broker were substantially in order and
hence, could not be treated as bogus transactions for the reason that:- the
assessee had brought on record documentary evidence in the form of
contract/delivery notes, purchase and sale bills of broker, as also, details of
bank accounts showing payments made and received by account payee
cheques and details of distinctive number of shares as well as proof of taking
physical possession of shares. The CIT(A) noted that against 2,30,300 shares
purchased by the assessee from the four (4) companies referred to above, the
Assessing Officer had doubts with regard to only 8,100 shares against which
the assessee had suffered a loss of Rs 1,21,229/-. In these circumstances, the
CIT (A) came to the conclusion, that having, regard to the fact that the
assessee had rebutted each and every issue raised by the Assessing Officer by
placing on record the relevant documentary proof and, given the fact that the
statement of the ex-director of the company, Mr. Sen, on which reliance was
placed by the Assessing Officer, was taken in the absence of the assessee, as
also, the fact that the said director, Mr. Sen was not involved in the affairs of
the company during the relevant period, and nor was Mr. Sen confronted
with the audited accounts and balance-sheets signed by him - the Assessing
Officer was not right in treating the entire share transaction during the
relevant period as bogus. The CIT (A), thus, thought it reasonable, in these
circumstances, to disallow the loss with respect to 8,100 shares amounting to
Rs 1,21,229/- even though the assessee had given a reasonable explanation by
supplying the necessary data that at the relevant time the broker had in his
possession a larger number of shares of each of the four companies than those
purchased by the assessee, and that, the broker may have dealt with the shares
of which otherwise the assessee was the owner and hence, possessed the
details with respect to their distinctive numbers by breaching the custodian
rule; for which, the assessee could not have been penalized for the infraction
committed by the broker.
7. The Revenue being aggrieved by the order of the CIT(A) preferred an
appeal to the Tribunal. The Tribunal after examining the matter in detail
sustained the order of the CIT(A). The Tribunal‟s order was in line with the
reasoning adopted by the CIT(A) - which was, that the Assessing Officer
could not have treated the entire share transaction as bogus when he had
asked the assessee to show cause with respect to only 6000 shares of Jindal
Capital Ltd., 1100 shares of Karishma Flouriculture Ltd. and, 1000 shares of
Bharthari Financial Services Ltd, on the ground, that during the month of
February-March, 1996 the said shares were being dealt by some other broker
in the Bombay Stock Exchange. The Tribunal found the view of the CIT(A)
reasonable in disallowing the loss to the extent of Rs 1,21,600/- even while
noticing the explanation of the assessee that the broker may have violated the
custodian rule by permitting a transaction in shares which had been sold to
the assessee in respect of which the assessee could not have been faulted.
8. Before us the learned counsel for the Revenue reiterated the stand of
the department as contained in the order passed by the Assessing Officer. On
the other hand, the learned counsel for the assessee submitted that even
though the entire share transaction was genuine in order to buy peace with the
department it had decided not to file an appeal against the order of the
CIT(A) in respect of a portion of the disallowance, amounting to Rs 1,21,600
sustained by the CIT(A).
9. On perusal of the record, we find that the heart of the matter is; that the
Assessing Officer was dissatisfied with the explanation offered by the
assessee with regard to 8,100 shares in respect of three (3) of the four (4)
entities out of a total number of 2,30,300 shares traded by the assessee.
Based on the perceived lack of explanation by the assessee, the Assessing
Officer dubbed the entire transaction of shares conducted by the assessee
through the broker, as a colourable device, with a view to evade tax. In our
opinion the approach adopted by both the CIT (A) and the Tribunal was
correct. Both the CIT(A), as well as, the Tribunal having examined the
record and weighed the evidence placed before them came to the conclusion
that the transaction was substantially genuine and in their wisdom they
thought it fit and reasonable to disallow the loss with respect to 8,100 shares,
amounting to Rs 1,21,600/-.
9.1 In our view the question whether the impugned share transaction in
which the assessee was engaged was a colourable device or not, is essentially
a question of fact. The observations of a Division Bench of this Court in the
case of Bhagat Construction Co. (P.) Ltd. v. Commissioner of Income
Tax:(2001) 250 ITR 291 (at page 301) are apposite. The same are extracted
below:-
"..... It may be necessary to deal with the question of "colourable
device". A colourable transaction is one which is seemingly
valid, but a feigned or counterfeit transaction entered into for
some ulterior purpose. A conclusion about the nature of a
transaction, i.e., whether it is colourable or otherwise, if
supported by material or evidence is essentially one of fact."
As regards the contention of the Revenue in respect of the applicability
of the judgment of the Supreme Court in Mcdowell v. CIT; 154 ITR 148, the
scope of the same stands fully explained in the judgment of the Supreme
Court in the case of Union of India v. Azadi Bachao Andolan; 263 ITR 706.
In any event, in view of our discussion above, the same is not relevant in the
fact situation arising in the present case.
9.2 Furthermore, nothing has been brought to our notice by the learned
counsel for the Revenue which would persuade us to hold that the findings
returned by the authorities below were either contrary to the evidence placed
on record, or was a case of „no evidence‟ and hence, perverse.
10. In these circumstances, we are of the view that the orders of the
authorities below do not call for any interference. In the result, the Revenue‟s
appeal is dismissed.
RAJIV SHAKDHER, J
BADAR DURREZ AHMED, J
October 03, 2008
da/mb
