By TIOL News Service

MUMBAI, DEC 26, 2014: THE issue before the Bench is - Whether payment on sale of shares can be treated as mere accommodation of cash, in case of availability of DMAT account showing credit of share transactions and contract notes from the brokers. NO is the answer.

Facts of the case

The assessee is an individual. Upon verfication of returns filed by him, the AO observed that the Directors of a company namely Bolton Properties Ltd. had manipulated its share price. Thereafter it was revealed in an investigation report that there were two operators namely Mr.Sushil Purohit and Shri Jagdish Purohit and one of them was the Director of Bolton. Mr.Jagdish reportedly floated several investment companies which were aggressively used in the entire deal with the broker M/s.Prakash Nahata & Co. The shares offloaded by the beneficiaries through M/s.Prakash Nahata & Co. were ultimately purchased by the investment companies controlled by Shri Purohit, and some of such companies have been enlisted. It was noted that the assessee was purchasing and selling the shares through a broker in Mumbai. It was also noted that the assessee however transacted through the broker at Calcutta, which itself raised doubt about the genuineness of the transaction. The companies, whose shares were traded on exchange namely Bolton Properties, Prime Capital and Mantra were not having sufficient business activities justifying the increase in their shares prices. The AO, therefore, concluded that certain operators and brokers devised a scheme to convert the unaccounted money of the assessee to accounted income and the assessee utilized this scheme. Therefore, assessee's claim regarding capital gain was disallowed and addition of Rs.25,93,150/- was made u/s 68. On appeal, the CIT(A) upheld the order of AO. On further appeal, the Tribunal reversed the order of the CIT(A).

Having heard the parties, the High Court held that,

++ the question that ought to be answered by the CIT was whether the transactions in shares were genuine or sham and bogus. If the purchase and sale of shares are reflected in assessee's DMAT account, yet they are termed as arranged transactions and projected to be real, then, such conclusion which has been reached by the CIT and the AO required a deeper scrutiny. It was also revealed during the course of inquiry by the AO that the Calcutta Stock Exchange records showed that the shares were purchased for code numbers of Sagar Trade Pvt Ltd. and Rockey Marketing Pvt. Ltd. respectively. Out of these two, only Rockey Marketing is listed in the appraisal report and it is stated to be involved in the modus-operandi. It is on this material that he holds that the transactions in sale and purchase of shares are doubtful and not genuine. In relation to assessee's role in all this, all that the CIT observed is that the assessee transacted through brokers at Calcutta, which itself raises doubt about the genuineness of the transactions and the financial result and performance of the Company was not such as would justify the increase in the share prices. Therefore, he reached the conclusion that certain operators and brokers devised the scheme to convert the unaccounted money of the assessee to the accounted income and the assessee utilized the scheme;

++ the Tribunal concluded that there was something more which was required, which would connect the assessee to the transactions and which are attributed to the Promoters/Directors of the two companies. The Tribunal referred to the entire material and found that the investigation stopped at a particular point and was not carried forward by the Revenue. There are 1,30,000 shares of Bolton Properties Ltd. purchased by the assessee during the month of Jan, 2003 and he continued to hold them till 31st Mar, 2003. The present case related to 20,000 shares of Mantra Online Ltd for the total consideration of Rs.25,93,150/-. These shares were sold and how they were sold, on what dates and for what consideration and the sums received by cheques have been referred extensively by the Tribunal. A copy of the DMAT account also showed the credit of share transaction. The contract notes in Form-A with two brokers were available and which gave details of the transactions. The contract note is a system generated and prescribed by the Stock Exchange. From this material, it is seen that the Tribunal has concluded that this was not mere accommodation of cash and enabling it to be converted into accounted or regular payment. The discrepancy pointed out by the Calcutta Stock Exchange regarding client Code has been referred to. But the Tribunal concluded that itself is not enough to prove that the transactions in the impugned shares were bogus/sham. The details received from Stock Exchange have been relied upon and for the purposes of faulting the Revenue in failing to discharge the basic onus. If the Tribunal proceeds on this line and concluded that inquiry was not carried forward and with a view to discharge the initial or basic onus, then such conclusion of the Tribunal cannot be termed as perverse.

(See 2014-TIOL-2366-HC-MUM-IT)