HIGH COURT OF DELHI AT NEW DELHI % Judgment delivered on: 30.04.2015 + ITA 1105/2010 COMMISSIONER OF INCOME TAX ..... Appellant versus VISHISHTH CHAY VYAPAR LTD. ..... Respondent + ITA 1106/2010 COMMISSIONER OF INCOME TAX ..... Appellant versus VISHISHTH CHAY VYAPAR LTD. ..... Respondent + ITA 1107/2010 COMMISSIONER OF INCOME TAX ..... Appellant versus VISHISHTH CHAY VYAPAR LTD. ..... Respondent Advocates who appeared in these cases: For Appellant : Mr Rohit Madan and Mr Ruchir Bhatia. For Respondent : Mr Ajay Vohra, Sr Adv. with Ms Kavita Jha and Mr Vaibhav Kulkarni. CORAM:- HON'BLE MR. JUSTICE S. RAVINDRA BHAT HON BLE MR JUSTICE VIBHU BAKHRU JUDGMENT VIBHU BAKHRU, J 1. These appeals, preferred by Revenue under Section 260A of Income Tax Act, 1961 (hereinafter Act ), impugn common order dated 30.06.2009 passed by Income Tax Appellate Tribunal (hereinafter ITA Nos. 1105/2010, 1106/2010 & 1107/2010 Page 1 of 31 Tribunal ) to extent that appeals preferred by Revenue (being ITA 3763/Del/2007, ITA 3764/Del/2007 and ITA 3732/Del/2007) against orders passed by Commissioner of Income Tax (Appeals) (hereafter CIT (A) ) in respect of assessment years 1997-1998, 1998-1999 and 1999-2000, have been rejected. said common order dated 30.06.2009 also disposed of appeal preferred by Revenue in respect of assessment year 1996-97, however same is not subject matter of these appeals. 2. principal controversy involved in present appeals relates to disallowance of loss on account of alleged transactions entered into by assessee in respect of shares of certain companies and further loss claimed on account of diminution in value of those shares. 3. Briefly stated, relevant facts leading to present appeals are as under:- 3.1 assessee filed its return for assessment year 1997-98 declaring income of `1,05,518/-. said income was calculated after claiming loss of `4,64,82,500/- on account of purchase and sale of shares and diminution in value of shares held by assessee. By assessment order dated 14.03.2000, Assessing Officer (hereafter AO ) disallowed said loss of `4,64,82,500/- and assessed income of assessee as `8,72,20,744/- for assessment year 1997-98. assessee preferred appeal before CIT(A) which, was rejected by order dated 05.03.2001. assessee carried said order in appeal, being ITA No.2978/Del/2001, before Tribunal. ITA Nos. 1105/2010, 1106/2010 & 1107/2010 Page 2 of 31 3.2 assessee filed return for assessment year 1998-99 declaring income of `59,070/-. said income was calculated after claiming loss of `5,36,23,950/- on account of sale and purchase of shares of certain companies. By assessment order dated 07.03.2001, AO disallowed said loss of `5,36,23,950/- and assessed income of asseesse as `11,06,81,611/- for assessment year 1998-99. assessee preferred appeal before CIT(A), which was dismissed by order dated 13.01.2003. assessee appealed against this order, being ITA No.2836/Del/2003, before Tribunal. 3.3 assessee filed return for assessment year 1999-2000 declaring income of `70,120/-. said income was calculated after claiming loss of `6,16,86,500/- on account of sale and purchase of shares of certain companies. By assessment order dated 27.03.2002, AO disallowed said loss of `6,16,86,500/- and assessed income of asseesse as `17,04,95,139/- for assessment year 1999-2000. assessee preferred appeal before CIT(A) which was dismissed by order dated 13.01.2003. assessee appealed against this order (ITA No.2837/Del/2003) before Tribunal. 3.4 Tribunal, by its order dated 19.10.2004, disposed of said appeals (being ITA No.2978/Del/2001 for AY 1997-98, ITA No.2836/Del/2003 for AY 1998-99 and ITA No.2837/Del/2003 for AY 1999-2000) along with appeal (ITA No.2835/Del/2003 for AY 1996-97). By said order, Tribunal deleted most of additions made by AO to assessed income of assessee but insofar as losses claimed by assessee, in relation to shares of companies, Tribunal ITA Nos. 1105/2010, 1106/2010 & 1107/2010 Page 3 of 31 remanded matter to AO to consider it afresh. Tribunal held that statements of persons relied upon by AO justified entertaining suspicion as to transaction of sale/purchase of shares. However, since assessee was not confronted with material collected by AO, same had resulted in material irregularity in respect of three assessments (being assessments relating to assessment years 1997-98 to 1999-2000). Tribunal also held that documents relied upon by assessee - confirmation memos/contract notes, bills, letters confirming registration of shares etc. - were required to be considered. 3.5 Pursuant to order dated 19.10.2004 passed by Tribunal, AO considered question with regard to loss on account of shares claimed by assessee in various years and disallowed same. AO found that assessee had purchased most shares of certain companies from one Sh Nem Chand Jain, who was stated to be broker with Gauhati Stock Exchange. Although value of these transactions was large, no payments for same were made and consideration for purchase of 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 said amount. AO had found that Sh. Nem Chand Jain was not person of means and transactions in question were bogus. 3.6 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 assessment orders framed with respect to assessment years 1997-98 to 1999-00. CIT(A) ITA Nos. 1105/2010, 1106/2010 & 1107/2010 Page 4 of 31 accepted contract notes and other documents produced by assessee as evidence of genuineness of transactions of sale and purchase of shares as well as reduction in their value at end of relevant year and allowed aforesaid appeals filed by assessee by three separate orders - two orders dated 29.06.2007 in respect of assessment years 1997-98 and 1999-00 and order dated 22.06.2007 in respect of assessment order 1998-99. 3.7 Revenue preferred appeals before Tribunal assailing decision of CIT(A) to allow loss claimed by assessee. Revenue urged that loss claimed by 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 Act. These appeals preferred by Revenue were rejected by Tribunal by common order dated 30.06.2009, which is impugned herein. Tribunal found that purchase bills for shares purchased along with brokers contract note and copy of confirmation from respective companies indicating transfer of shares in name of assessee evidenced genuineness of losses claimed by assessee. Tribunal further noted that shares were bought through Gauhati Stock Exchange and their transfers in name of assessee were confirmed by letters received from respective companies. Tribunal was of view that as shares were held in stock in trade, same could be valued at cost or market price, whichever is lower, and loss on account of diminution in value of stocks could be set off by assessee against its other income. Tribunal noted that companies whose shares were purchased by ITA Nos. 1105/2010, 1106/2010 & 1107/2010 Page 5 of 31 assessee were genuine companies and regularly assessed to tax in their respective wards. Since Tribunal held that transaction in purchases of shares were genuine, decisions of CIT(A) were upheld. 3.8 Revenue s contention that losses claimed by assessee could not be set off against income by way of interest by virtue of Section 73 of Act was rejected. Tribunal held that as said contention had not been urged either before authorities below or before Tribunal, in first round, Revenue could not be permitted to raise said contention for first time in second round. 4. In aforesaid facts, controversy to be addressed is whether Tribunal has erred in holding that loss of `4,64,82,500/- for assessment year 1997-98; loss of `5,36,23,950/- for assessment year 1998-99; and loss of `6,16,86,500/- for 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 order dated 03.09.2014, this Court had indicated that following substantial question of law arose for consideration in these appeals:- Whether finding of Income Tax Appellate Tribunal accepting genuineness of loss as declared in respect of shares purchased and sold or held as stock-in-trade is perverse? 6. AO had concluded that transactions of sale and purchase of shares of certain companies, on basis of which losses were being claimed by Assessee, were not genuine and, accordingly, said losses ITA Nos. 1105/2010, 1106/2010 & 1107/2010 Page 6 of 31 had been disallowed. Before proceedings to examine decision rendered by Tribunal, it would be essential to note reasons which led AO to conclude that transactions in shares were not genuine. 7. nature of transactions in each of assessment years involved i.e. 1997-98 to 1999-2000 are, essentially, similar. Thus, for sake of brevity, transactions relating to previous year 1996-97 relevant to assessment year 1997-98 are being referred to for purpose of appreciating AO s findings and reasoning. 8. following shares were reflected as opening stock in- trade as on 01.04.1996:- Name of Company No. of shares Rate(`) Value(`) Baba Business Services 91300 2.0 1,82,600 Ltd. Sangrahalaya Timber & 30800 2.0 61,600 Crafts Limited Premier Auto Finance Ltd 50000 10 500,000 Pulp Products Limited 10000 2 20,000 Mather & Platt India Ltd 38500 13.5 5,19,750 9. Out of aforesaid shares, shares of Baba Business Services Ltd. were sold during year at value reflected. Thus, no profit or loss was claimed with respect to that transaction. No transactions in shares of Sangrahalaya Timber & Crafts Limited and Premier Auto Finance Limited, were reported during year. shares of Pulp Products Ltd. were purportedly sold at `3.00 per share and, therefore, profit of `10,000 was reported in respect of said transaction. One thousand shares of Mather ITA Nos. 1105/2010, 1106/2010 & 1107/2010 Page 7 of 31 & Platt India Limited were purportedly sold at `13.10 each and aggregate loss of `400/- was reported with respect to that transaction. As is apparent from above, effect of aforesaid transactions was net profit of `9,600/-, which is not significant. paper book filed before this court also does not contain any documents relating to said transactions. 10. During previous year ended 31.03.1997 assessee claimed to have purchased shares of following companies for value of `5,35,49,550/-:- S. Name of Coy. Qty Rate(`) Amount(`) No. 1. M/s Hotahoti Wood 96125 15.60 14,99,550 Products Ltd. 2. M/s Purbanchal Pre 1240000 15.60 1,92,29,000 stressed Ltd. 3. M/s Kamini 1635000 20.00 3,27,00,000 Finance & Inv. Ltd. 4. M/s Doyang Wood 13000 10/- 1,30,000 Products Ltd. TOTAL `5,35,49,550 11. All aforesaid shares, except shares of M/s Doyang Wood Products. Ltd. amounting to `1,30,000, were purchased from one Shri Nem Chand Jain. Thus, assessee claimed that it had purchased shares of value of `5,34,19,550/- from Shri Nem Chand Jain. These shares were not sold during year and were reflected as part of closing stock of shares as on 31.03.1997. shares of Doyang Wood Products were stated to be purchased from one Shama Holdings Private Limited at rate of ITA Nos. 1105/2010, 1106/2010 & 1107/2010 Page 8 of 31 `10 each aggregating `1,30,000 ( Rupees One Lac thirty thousand). These shares of Doyang Wood Products Ltd were claimed to have been sold during year at rate of `2.50 each aggregating `32,500/-. copy of ledger produced by assessee indicates that said shares were purchased on credit but same were sold in cash. Plainly, transactions for sale and purchase of these shares, which resulted in loss of `98,500/-, were 'off market' transactions and not through any stock exchange or through any stock broker. 12. For previous year ending 31.03.1997, assessee had claimed loss of `4,64,82,500/-. This loss has two components; first being, loss relating to sale and purchase of shares and second being loss on account of diminution in value of stock of shares held by assessee at end of year. Whilst amount of `88,900/- was claimed as loss on sale of shares, bulk of loss claimed, that is `4,63,93,600/-, was on account of reduction in value of closing stock of shares. Out of aforesaid loss only sum of `56,250/- was on account of reduction in value of shares of Mather & Platt India Limited and remaining amount of `4,63,28,350/- was shown as loss on account of fall in value of shares, as on closing date i.e. 31.03.1997, purportedly purchased by assessee during course of year. break-up of aforesaid amount is as under:- S. Name of Coy. No. of Rate Value Losses (`) No. (M/s) Shares (`) (`) 1. M/s Hotahoti Wood 96125 15.60 2.40 1,26,88,50 Products Ltd. ITA Nos. 1105/2010, 1106/2010 & 1107/2010 Page 9 of 31 2. M/s Purbanchal 124000 15.60 2.50 1,61,20,000 Prestressed Ltd. 3. M/s Kamini Finance & 1635000 20.00 2.30 2,89,39,500 Inv. Ltd. Total 4,63,28,350 13. As indicated earlier, abovementioned shares, which are claimed to have resulted in loss on account of reduction in their value, were claimed to have been purchased by assessee from one Shri Nem Chand Jain for sum `5,34,19,550/-. 14. assessee claims aforesaid transactions to be genuine and in support of said claim, assessee produced: a) confirmation memo from Shri Nem Chand Jain; b) purchase bills from Nem Chand Jain; c) letters of transfer from companies, whose shares had been purchased, confirming that shares had been transferred in name of assessee; d) bill indicating sale of 13000 shares of M/s Doyang Wood Products Ltd. to one Shri Ram Lal Ashoka of Chandni Chowk, Delhi; e) copy of ledger accounts; and f) certificate dated 12.02.2000 from Gauhati Stock Exchange indicating prices at which shares of companies involved were traded. 15. assessee further asserted that Shri Nem Chand Jain was broker with Gauhati Stock Exchange and memos of confirmation as well as bills produced evidenced genuineness of purchase transactions. In addition, assessee also produced certificate indicating value of ITA Nos. 1105/2010, 1106/2010 & 1107/2010 Page 10 of 31 quotations of shares in question from Gauhati Stock Exchange. This, according to assessee, evidenced value of shares. 16. In order to examine genuineness of transactions, AO made reference to Additional Director of Investigation, Income Tax and requested income tax authority to inquire and report on, inter alia, financial position of Shri Nem Chand Jain. 17. In response to aforesaid inquiry, AO was informed that search and seizure operations were conducted in case of Shri Nem Chand Jain on 14.10.1996. During course of said search and further proceedings, statement of Shri Nem Chand Jain was recorded under Section 132(4) and Section 131 of Act and same were forwarded to AO. Shri Nem Chand Jain had stated that he was 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 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. AO was informed that Sh. R.R. Modi had made disclosure that he had promoted following companies by introducing share application money in different names aggregating `170,00,000/-:- 1. M/s Kamala Kal Ltd. 2. M/s Gulmohar Estates Ltd. 3. Dass Apartments Ltd. ITA Nos. 1105/2010, 1106/2010 & 1107/2010 Page 11 of 31 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 & Advertising Co. Ltd. 10. Hotahoti Wood Products Ltd. 11. Purbanchal Presstressed Ltd. 12. Kamini Finance & Investment Co. Ltd. Mr R.R. Modi had further admitted that companies mentioned at serial no. 7 to 12 above were not genuine companies. 19. AO took note of above statements received from Income Tax Authorities in Gauhati and also examined books of accounts produced by assessee. AO concluded that transactions claimed by assessee were not genuine. facts that led him to come to this conclusion are summarized as under:- a) assessee had not paid for shares that he had purchased and consideration was only reflected as book entries. During previous year ended 31.03.1997 assessee had purchased shares for sum of `5,35,49,550/- including shares of value of `5,34,19,550/- from Shri Nem Chand Jain. And, said consideration was shown as credit in name of sellers. ITA Nos. 1105/2010, 1106/2010 & 1107/2010 Page 12 of 31 b) Although Shri Nem Chand Jain had financed almost 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 amounts outstanding. c) Shri Nem Chand was not person of means and his creditworthiness was not established. report of Income Tax Authorities from Gauhati indicated that Shri Nem Chand Jain had returned income of `40,000/- by way of salary. assessee did not produce any material to establish creditworthiness of Shri Nem Chand Jain d) Trading in shares of companies in question, on Gauhati Stock Exchange, were to be on spot basis and thus transactions claimed by assessee were contrary to practice of said Stock Exchange; admittedly, there was no settlement of accounts through Stock Exchange. e) AO further noted that shares of companies which were involved were not actively traded and thus quotations indicating value of shares could not be accepted. No material was produced to controvert finding that shares of companies were not actively traded. f) assessee and companies in question were interlinked. Shri R. R. Modi had floated certain number of companies by introducing his undisclosed capital and he was also Director on Board of assessee company. In addition, assessee also owed money to certain companies, whose shares it held/purchased. These companies ITA Nos. 1105/2010, 1106/2010 & 1107/2010 Page 13 of 31 also held shares of assessee company. fact that companies in question and assessee were connected was also not disputed. g) assessee explained that since it was facing financial crisis, it could not pay amount due to Shri Nem Chand Jain for transactions executed during year. However, this did not explain as to why Shri Nem Chand Jain continued to sell shares to assessee even in following year, i.e., year ended 31.3.1998. No explanation was provided as to why Shri Nem Chand Jain, inspite of being unpaid seller would physically deliver shares sold by him. 20. In first round, Tribunal remanded matter to AO ( by order dated 19.10.2004) principally on ground that assessee had not been confronted with material relied upon by AO and further to examine effect of contract notes bills, stock exchange quotations and confirmation statement filed by brokers. On remand, AO again found against assessee disbelieving documents produced by it. AO noted that memos relating to transaction were serially numbered or signed by Shri Nem Chand Jain. assessee further noted that no evidence from Gauhati Stock Exchange had been produced. quotations indicated by Gauhati Stock Exchange were also rejected as AO found that except some transaction done by assessee, shares in question were not quoted and thus, they did not reflect true value of shares in question. It was held that documents produced by assessee ITA Nos. 1105/2010, 1106/2010 & 1107/2010 Page 14 of 31 were only for purpose of misleading authorities and could not establish that transactions were genuine. 21. nature of transactions relating to assessment years 1998-99 and 1999-2000 are not materially different. 22. During year ended 31.03.1998, 30800 number of shares of Sangrahalaya Timber and Crafts Limited that were reflected as closing stock as on 31.03.1997 at value of `2/- each, were purportedly sold at said book value, i.e. at rate of `2/- per share. memo of confirmation dated 23.04.1997, issued by N.C. Jain in respect of aforesaid transaction indicates that he had purchased said shares - as opposed to selling shares on behalf of assessee through stock exchange - and transaction was on principal to principal basis. Thereafter, on 15.05.1997 assessee is stated to have purchased 27,50,000 shares of Sangrahalaya Timber and Crafts Limited @ `10/- each. These shares were also purchased from Mr N.C. Jain and memo of confirmation also indicates that transaction between assessee and Mr N.C. Jain was on principal to principal basis. said shares were valued at rate of `2.25/- each at end of year and on this basis assessee claimed loss of `2,13,12,500/-. 23. shares of Hotahoti Wood Products Ltd., Purbanchal Prestressed Ltd. and Kamini Finance and Investment Company Ltd. which had been purchased in earlier year were sold during year ending 31.03.1998 at `2/- each and further losses aggregating `11,48,950/- were booked by assessee. ITA Nos. 1105/2010, 1106/2010 & 1107/2010 Page 15 of 31 24. During year ended 31.03.1998, assessee purportedly purchased shares of Sangrahalaya Timber and Crafts Limited, Doyang Wood Products Ltd. and North Eastern Publishing & Advertising Company Limited. memos of confirmation relied upon by assessee reflect that shares of abovementioned companies were purchased from Mr N.C. Jain on principal to principal basis. These transactions were not through stock exchange; certificate produced by assessee from Gauhati Stock Exchange indicates that these transactions were off floor transactions and were merely informed to said stock exchange. assessee valued these shares at fraction of its purchase price and claimed loss on account of diminution in their value. statement indicating losses claimed by assessee on reduction of value of shares for year ended 31.03.1998 relevant to assessment year 1998-99 is indicated below:- NAME OF SHARE PURCHASE LOSS SCRIPTS No. of Rate (`) Amount (`) Amount (`) shares Sangrahalaya 2750000 10.00 27500000 21312500 Timber and Crafts Limited Doyang Wood 640000 10.00 6400000 4800000 Products Ltd. North Eastern 3500000 10.00 35000000 26250000 Publishing & Advertising Company Ltd. Total 52362500 25. In addition to above, assessee also claimed loss of `1,12,500/- on account of diminution in value of 37,500 shares of ITA Nos. 1105/2010, 1106/2010 & 1107/2010 Page 16 of 31 Mather & Platt India Ltd. as on 31.03.1998. Thus, total loss claimed by assessee for year ended 31.03.1998 was `5,36,23,950/- out of which `11,48,950/- was loss on account of sale of shares and `5,24,75,000 on account of diminution in value of shares. 26. During year ended 31.03.1999, relevant to assessment year 1999- 00, assessee sold shares held in Sangrahalaya Timber and Crafts Ltd. and Premier Auto Finance Ltd. at their book value i.e. at rate ` 2.25 each. shares of North Eastern Publishing and Advertising Company Ltd. were purportedly sold at loss of `7,00,000/- and shares of Doyang Wood Products Ltd. were purportedly sold and loss of `1,92,000/-. 27. assessee purchased 86,85,000 shares of Hotahoti Wood Products Ltd. at rate of `10/- each, details of which are as under:- Name of Seller No. of shares Date Value Purbanchal Prestressed 50,00,000 14.05.1998 5,00,00,000 Ltd. Sangrahalaya Timber and 36,85,000 13.05.1998 3,68,50,000 Crafts Limited 28. Out of aforementioned, 82,16,750 shares of Hotahoti Wood Products Ltd. were purportedly sold for aggregate amount of `2,46,50,250/- thus resulting in loss of `5,75,17,250/-. Out of these shares 66,29,850 shares were sold to Mr N.C. Jain. balance shares were sold to Toko Fin & Associates, P.L. Mittal, Doyang Wood Products Ltd., Sangrahalaya Timber and Crafts Ltd., Kamini Finance and Investment ITA Nos. 1105/2010, 1106/2010 & 1107/2010 Page 17 of 31 Company Ltd. certificate produced from Gauhati Exchange Ltd. also indicates that none of transactions were through stock exchange but were off market transactions and were merely reported to stock exchange. 29. It is apparent from above that shares of companies in respect of which losses were booked were floated by Mr R.R. Modi by introducing his undisclosed income. assessee had not only purchased shares of companies floated by Mr Modi but had also purchased and sold shares of said companies. In addition, said companies also held substantial shares of assessee. 30. In our view, facts as outlined by AO clearly indicate established link between companies floated by Shri R. R. Modi and assessee. This fact has also not been disputed by assessee in present proceedings. AO found that shares of those companies were not actively traded; there is no material on record, which would indicate otherwise. certificate of Gauhati Stock Exchange enclosed by assessee in paper book filed in ITA 3763/Del/2007 (i.e. in respect of assessment year 1997-98) is dated 12.02.2000. said certificate does not indicate volume of shares traded but only indicates quotation of shares on certain dates. only inference that can be drawn is that there was no trading on other dates and this confirms view that there was hardly any trading on shares of company in question. Since shares in question are not actively traded, their quotations at 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. stock ITA Nos. 1105/2010, 1106/2010 & 1107/2010 Page 18 of 31 certificates of Gauhati Stock Exchange for assessment years 1998-99 and 1999-00 also indicate that traded prices related to off floor transactions which were reported to exchange. Thus, transactions entered into by assessee and/or related entities were itself basis of quotations; obviously, no reliance could be placed on these quotations for justifying value of shares in question. Since companies in question had been floated by Shri R. R. Modi and share application money was introduced through other names, it is obvious that he owned/controlled good part of share holding. shares, which are alleged to have been purchased by assessee, were not paid for and only book entries were passed. Although, it is stated that shares were through broker of Guwhati Stock Exchange. There is no evidence to show that transaction of purchase of shares was done through Gauhati Stock Exchange. On contrary, certificates issued by Gauhati stock exchange put it beyond any pail of doubt that transactions in question were off floor transaction . 31. inescapable conclusion is that through series of transactions - which were, essentially, book entries - assessee had devised loss to set off against its other income. In our view, AO s reasoning that transactions were not genuine was based on cogent material and after examining entire facts. 32. CIT(A) set aside assessment orders, without considering above facts but by simply relying on following decisions:- CIT Vs Dhawan Investment and Trading Co. Ltd. (1999) 238 ITR 486 (Cal); ITA Nos. 1105/2010, 1106/2010 & 1107/2010 Page 19 of 31 CIT Vs Currency Investment Co. Ltd. (2000) 244 ITR 494 (Cal); CIT Vs Carbo Industrial Holdings Ltd. (2000) 244 ITR 422 (Cal); CIT Vs Kundan Investment Ltd. (2003) 263 ITR 626: & CIT Vs Janki Textiles & Industries Ltd.(2003) 132 Taxman 231 (Gau). 33. CIT(A) failed to consider any of reasons provided by AO for holding transactions to be not genuine; CIT(A) did not address any of following aspects. a) That assessee company and companies whose shares were bought by company were interlinked. companies in question owned shares of assessee company. Mr R. R. Modi who was Director of assessee company was also closely connected with companies in question. These companies owned shares of assessee and also had entered into transactions with assessee. b) Even though companies in question may have been listed on Gauhati Stock Exchange, their shares were not actively traded and transactions were amongst inter related parties. Thus, quotations reflected on Gauhati Stock Exchange could not be relied upon to reflect their value. c) There was no evidence produced to show that Shri Nem Chand Jain who is stated to have funded purchase of shares by assessee, had any means to do so. AO had found that Shri Nem Chand ITA Nos. 1105/2010, 1106/2010 & 1107/2010 Page 20 of 31 Jain was not man of means. assessee had produced no evidence to contradict this. d) Admittedly, transactions were done by book entries and no payment was made for purchase of shares during year. 34. In our view, aforesaid aspects were important and clearly indicated that transactions entered by purchase and sale of shares were, in fact, sham transactions and could not be relied upon. CIT (A) failed to apply its mind to aforesaid aspects and therefore, in our view, orders passed by CIT(A) were clearly unsustainable. 35. Given facts of this case, 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 shares in question had not been made and transaction consisted of only book entries. On contrary, Court found that all payments had been made and received through account payee cheques and/or drafts. In that case, Court specifically noted that no evidence was placed by Revenue to indicate that disputed share transactions were entered into between parties that were related or had common interest. In present case, AO had clearly brought on record that transactions were of companies that were linked with assessee company. companies in question were promoted by one Mr R.R Modi who was also Director of assessee company. shares of assessee company were also held by some of companies whose shares had been purchased by assessee. AO had further found that Mr N.C. Jain was not person of means and his declared ITA Nos. 1105/2010, 1106/2010 & 1107/2010 Page 21 of 31 income was only `40,000/- by way of salaries. assessee sought to dispute this by producing balance sheet of Mr N.C. Jain. However, that also indicated that he owed large sum of money - `7.5 crores to his creditors. There was no finding as to net worth of Mr. N.C. Jain. In addition to above, no payment had been made for purchase of shares during relevant period. Mr N.C. Jain was stated to be broker. No explanation was provided as to why broker would extend credit without any interest. explanation given by assessee was that assessee was undergoing financial crises and, therefore, although it owed money to N.C. Jain, it could not discharge its debts at material time. Even if this is accepted, there is no plausible explanation why despite not being paid for shares sold, Mr N.C. Jain would continue to sell and deliver further shares to assessee, specially when he knew assessee to be financially constrained. Shri NC Jain is stated to have sold shares for `6,89,00,000/- in year ended 31.03.1998 thus swelling his outstanding credit to `12,22,57,950/- as on 31.03.1998 after adjusting `60,600/- on account of shares purportedly purchased by Sh. N. C. Jain. 36. In our view, CIT(A) completely ignored aforesaid facts and merely cited judgments where contract notes had been accepted as evidence of genuine transaction. Undoubtedly, contract notes, confirmation memos, bills, books of accounts are evidence of genuine transactions. However, where fundamental transaction is shown to be sham transaction, same cannot necessarily be accepted as genuine merely because broker s confirmation and invoices have been produced. In our ITA Nos. 1105/2010, 1106/2010 & 1107/2010 Page 22 of 31 view, CIT(A) erred in applying decision in Janki Textiles (supra) in facts of this case. 37. In Cargo Industrial Holdings Ltd. (supra), Court upheld decision of Tribunal in accepting transactions in shares to be genuine as assessee had furnished names and addresses of brokers and also shown payments made to them by account payee cheques. companies whose shares were subject matter of transaction were blue chip companies and extensively traded on stock exchange. Revenue had rejected transactions only on ground that assessee could not produce certain brokers. Court held that even if share brokers did not appear claim of assessee could not be denied as neither existence of broker nor payments made to them were in dispute. Court held that assessee could not be punished for fault of broker. 38. In Dhawan Investment and Trading Co. Ltd. (supra), AO had disallowed loss on account of purchase and sale of shares on ground that record was inadequate in respect of share dealings. said conclusion was rejected by Tribunal as it found that transactions were genuine and made through registered brokers. There was no allegation that consideration for sale and purchase was not paid through banking channels or that transactions in question concerned related companies. 39. In Kundan Investment Co. Ltd. (supra), Court found that sale and purchase transactions, which were questioned by Revenue, were in ITA Nos. 1105/2010, 1106/2010 & 1107/2010 Page 23 of 31 respect of shares of reputed companies which were quoted on stock exchange. transactions were supported by contract notes and bills and payments made through cheques. Calcutta High Court did not find decision of Tribunal to be perverse in given facts. 40. It is apparent from above that aforesaid decisions have no application in facts of this case. factual controversy involved in these appeals is materially different from issues involved in cases referred by CIT(A). 41. In our view, Tribunal also erred in upholding orders of CIT(A) and failed to consider controversy in issue. Tribunal proceeded on erroneous footing that all shares have been bought through recognised stock exchange through main broker of exchange . There was no evidence to indicate that all shares were bought through stock exchange. assessee also did not claim this; assessee had claimed before AO that all shares were bought from broker of Gauhati Stock Exchange . In submissions filed before AO, assessee contended that transaction for purchase of shares were carried out by assessee company through main broker of Gauhati Stock Exchange . Thus, it was not assessee s claim that all shares were purchased through Gauhati Stock Exchange. This aspect is material as, admittedly, transactions in question could not have been made through Gauhati Stock Exchange. In case of transactions through stock exchange selling broker is required to submit share scrips with clearing system of stock exchange. purchasing brokers are required to pay consideration on pay in date . consideration for shares ITA Nos. 1105/2010, 1106/2010 & 1107/2010 Page 24 of 31 transacted through stock exchange is paid to selling broker on pay out date . Thus, in cases of transaction through stock exchange purchasing broker is required to deposit consideration with clearing system of stock exchange. However, in present case bulk of shares in question were claimed to have been sold/purchased by Mr N.C. Jain. memos of confirmations by Mr N.C. Jain in respect of shares purportedly purchased by assessee indicate that Mr N.C. Jain had sold shares to assessee. Similarly memos of confirmation regarding shares purportedly purchased by assessee reflected that shares had been sold by Nem Chand Jain to assessee. These memos of confirmations were not contract notes evidencing purchase or sale of shares by Mr N.C. Jain through stock exchange for and on behalf of assessee. In case, Mr N.C. Jain had purchased shares through stock exchange for assessee, in normal course, he would have issued contract note indicating shares bought for assessee. assessee had also produced bills from Mr N.C. Jain evidencing sale of shares to assessee. These documents produced by assessee clearly indicated that transactions for purchase of shares were not being claimed as transactions done through stock exchange. AO had, therefore, found and in our view rightly so, that transactions were not through stock exchange. 42. AO had also found that shares of companies in question were listed on spot basis i.e. transactions on stock exchange in respect of shares in question were required to be settled on day of trade itself. ITA Nos. 1105/2010, 1106/2010 & 1107/2010 Page 25 of 31 However, in present case, assessee had admittedly not made payment for said shares and this was contrary to prevalent practice. 43. Thus, finding of Tribunal, to effect that all shares were transacted through Gauhati stock exchange, is not supported by any material and is perverse. Tribunal held that All documentary evidences itself prove that assessee had bought/sold these shares at prevailing market price and based on same, genuineness of transactions could not be doubted . This finding is also patently erroneous. 44. None of material produced by assessee could be relied upon to indicate market value of shares. certificates issued by Gauhati Stock exchange for previous years 1997-98 and 1998-99 certified traded prices of shares.. as intimated by member as off floor transactions . This, clearly, indicated that: (a) transactions were not conducted through stock exchange but merely reported as off market transactions; and (b) transaction was reported by singular member thus, transaction did not involve any other broker. Further dates and quotations certified, clearly pertained to transactions involving assessee and or related companies as parties. dates of memos of confirmation and date of transaction reported to stock exchange are same in almost all instances. Thus, these certificates, which only certify prices at which transactions in question were reported cannot prove that transactions were executed at market value. Since these transactions in question were not done in open market, but between related concerns and no other transactions in those shares were ITA Nos. 1105/2010, 1106/2010 & 1107/2010 Page 26 of 31 reported, any price at which assessee transacted would, obviously, be reflected as quotation by Gauhati Stock Exchange. 45. AO had found that Mr N.C. Jain was not person of means. His returns disclosed income of `40,000 by way of salaries. Tribunal rejected AO s finding that N.C. Jain was not person of means by holding that issue of Mr N.C. Jain creditworthiness was covered by Tribunal s order dated 19.10.2004. perusal of said order indicates that Tribunal had noted following submission on behalf of assessee:- Shri Vohra also drew our attention to audited balance sheet of Shri N.C. Jain (Pages 64 to 67 of Paper Book) to show that Mr. Jain was man of means having closing stock of shares worth Rs.1.70 crores and liability of Rs.7.50 crores to its creditors. However Tribunal did not return any finding on question of Mr N.C. Jain s creditworthiness. In our view, Tribunal grossly erred in holding that this issue was covered by its earlier decision of 19.10.2004. 46. Tribunal has held that amount payable to Mr N.C. Jain had been discharged by assessee in year 2005-06 and, therefore, found that transactions in question were genuine. It is relevant to note that Mr N.C. Jain had expired in year 1999 and material placed on record indicated that he was not person of means and had been acting at instance of Mr R.R. Modi. Mr R.R. Modi had created several entities which were involved or connected with transactions in question. In circumstances, payment of money to Mr N.C. Jain was required to be investigated further to ascertain as to ultimate recipient of those funds. ITA Nos. 1105/2010, 1106/2010 & 1107/2010 Page 27 of 31 No such exercise has been done in this case. Thus, in our view, fact that certain payments were shown to have been made to Mr N.C. Jain in 2005-06, would not be sufficient to conclude that transactions in question were genuine. 47. AO had found that assessee and companies whose shares purchased were related. It was pointed out that those companies were promoted by Mr Modi who had disclosed that he had used his undisclosed funds to promote those companies. assessee had argued that fact that undisclosed funds were used in promoting companies did not mean that companies did not carry on its business or were not genuine. However, it was apparent that Mr Modi was prime mover of companies in question. assessee had booked losses in respect of shares of certain companies. close link between said companies and assessee was clearly established. In our view, link established between assessee and these companies was important in considering question whether transactions of shares were genuine or not. It is relevant to take note of following:- (a) That assessee had booked losses in respect of shares of following companies:- (i) Sangrahalaya Timber & Crafts Ltd. (ii) Matther & Platt India Ltd. (iii) Hotahoti Wood Products Ltd. (iv) Purbanchal Presstressed Ltd. ITA Nos. 1105/2010, 1106/2010 & 1107/2010 Page 28 of 31 (v) Kamini Finance & Investment Co. Ltd. (vi) M/s Doyang Wood Products Ltd. (vii) M/s North Eastern Publishing & Advertising Co. Ltd. Out of above companies, all except Mather & Platt India Ltd. were companies promoted by Mr R.R. Modi by introduction of his undisclosed funds as share application money in various names. (b) fact that share application money was introduced in different names by Mr R.R. Modi indicates that although there may have been number of shareholders, de facto control of companies as well as its shares vested with Mr R.R. Modi. (c) Sh. R.R. Modi was also Director of assessee company. (d) aforesaid companies also held substantial shares of assessee. (e) assessee had not only dealt with shares of aforementioned companies but also had purchased certain shares from some of companies. (f) Although shares of these companies were listed, there is no evidence that shares were traded through stock exchange or there was any other genuine transaction not involving these companies, assessee and named brokers. ITA Nos. 1105/2010, 1106/2010 & 1107/2010 Page 29 of 31 (g) AO had found that except assessee s own transaction value of shares were never quoted at Guwahati Stock Exchange on any other date . 48. In view of above, AO had further concluded that purchases of shares and valuation was done through series of steps involving inter-related companies, which accommodated one another and made fictitious dealing through convenient book entries in their respective books of accounts 49. In our view, Tribunal grossly erred in completely ignoring aspect of inter linked entities and overlooking perspective outlined by AO. 50. Insofar as loss in relation to shares of Mather & Platt India Ltd. is concerned, there is no allegation that assessee is related in any manner to said company. In this view, losses as claimed by assessee in respect of Mather & Platt India Ltd. cannot be rejected. losses claimed by assessee, except losses relating to shares of Mather and Platt India Ltd. i.e. `56,650/- in assessment year 1997-98, `1,12,500 in assessment year 1998-99; and `67,500/- in assessment year 1999-00, are liable to be disallowed. 51. We find that Tribunal erred in ignoring certain relevant facts and its finding that transactions for purchase and sale of shares are genuine, is perverse. Accordingly, question of law as indicated in paragraph 5 above, is answered in affirmative and in favour of Revenue. ITA Nos. 1105/2010, 1106/2010 & 1107/2010 Page 30 of 31 52. appeals are allowed. No order as to costs. VIBHU BAKHRU, J S. RAVINDRA BHAT, J APRIL 30, 2015 MK/RK ITA Nos. 1105/2010, 1106/2010 & 1107/2010 Page 31 of 31 Commissioner of Income-tax v. Vishishth Chay Vyapar Ltd