1. This appeal filed by the assessee-company is directed against the order of the CIT(A), Central-I, Calcutta and it pertains to the asst.
yr. 1990-91.
2. Assessee's claim of share dealing loss was rejected by the AO on the ground that the transactions are not genuine and the CIT(A) having confirmed the action of the AO by taking aid of the decision of the Supreme Court in the case of McDowell & Co. Ltd. vs. CTO (1985) 154 ITR 148 (SC) the assessee-company is before us.
3. The facts in short are that during the previous year relevant to the asst. yr. 1990-91, assessee claimed to have purchased shares of Bishnauth Tea Co. Ltd. from M/s. Ishwar Prasad Dewkinandan Ltd. and they were said to have been sold to Poddar Gourepore Ltd. and Sixteen Belvedere (I) Ltd., resulting in loss of Rs. 22,26,000. After adjusting the loss, the assessee-company returned a total income of Rs. 2,620.
The case was taken up for scrutiny. Assessing Officer found that the alleged transactions of purchase and sale of shares were peculiar enough, with reference to the dates of purchase and sale and the persons with whom transacted, etc., to accept the genuineness of the transactions. In this regard he observed that the copies of contracts and bills are merely self-serving documents, inasmuch as, no independent evidence has been produced to corroborate the transactions referred to in that bills. The shares were sold first and purchased later. Urgency to buy the shares at a time when the price was higher and the necessity to sell them at a price when it was lower was not brought on record. Shares have been rotated within the same group of the assessee-company and under the control of the same management, without the help or assistance of any middleman or broker. The AO further found that M/s. Poddar Gourepore Ltd., with whom the contract was stated to have been made by the assessee on 4th May, 1989 for sale of 13,500 shares of Bishnauth Tea Co. Ltd. made contract for sale of those 13,500 shares to M/s. Ishwar Prasad Dewkinandan Ltd. on 18th May, 1989. Again the assessee-company had alleged contract for purchase of those 13,500 shares from M/s. Iswar Prasad Dewkinandan Ltd. Therefore, it was concluded that the same brain had controlled the affairs to create artificial profit or loss from the alleged share dealings as the situation demanded. He also observed that this is a colourable device because the transactions of purchase and sale are not at arms length.
In the peculiar facts of this case, it was inferred that the assessee might have manipulated the contract notes and bills to bring on record the alleged purchases when the price was higher than the sale price. As all the companies are in the same management, it is easier for the assessee to prepare papers to manipulate loss by taking advantage of the fluctuation of the share price in the market, as regards the acceptability of the documents on its face value, he observed that no doubt a document or transaction should normally be accepted on its face value but this cardinal principle must not be over-stated or over-extended, inasmuch as, the Court should not look at a document with the blinkers, isolated from the context. Citing the decision of the Privy Council in the case of Bank of Chettinad Ltd. vs. CIT (1940) 8 ITR 522 (PC). AO observed that if the parties have chosen to conceal income by a device of legal relation, it is open to the taxing authority to unravel the device and to decide the true character of the relationship. He finally concluded that the transactions of purchase and sale of shares are not genuine. Thus assessment was made on total income of Rs. 22,29,440 and against the returned income of Rs. 2,620.
4. Aggrieved, assessee contended before the first appellate authority that the sales and purchases were at corresponding prevailing market rates. Genuineness of documents witnessing purchases and sales of shares has not been questioned. Results of transactions disclosed by other parties to the purchase and sales were accepted in their assessments by the same AO. Hence, the action of the AO rejecting genuineness of the transactions is without any basis. CIT(A) called for comments of the AO who maintained that the documents submitted in support of assessee's claim were merely self-serving and there was no corroborating evidence. The group to which the company belongs was found to be making use of holding of shares of companies in the same group by showing only on paper change of ownership from time to time to manipulate profits and losses and the overall situation compelled him to hold that the transactions are not genuine. In this backdrop, the CIT(A) was of the opinion that the delay in settlement of the transactions is a factor which proves the non-genuineness of the transactions. It was also stated that the points made out by the AO in the assessment as well as in the subsequent report were not properly met and explained by the assessee. As regards the submission of the authorised representative that the profit on the same transaction was accounted for in the hands of other sister concern and was assessed as such, the CIT(A) observed that it does not dislodge the AO's finding in this case insofar as the genuineness of the loss on share dealings is concerned. He finally concluded that the AO has made out a case to invoke the doctrine laid down by the Supreme Court in the case of McDowell & Co. Ltd. (supra).
5. Further aggrieved assessee is in appeal before us, Learned counsel, appearing on behalf of the assessee-company, submitted that the transaction is fully supported by contract notes and bills and the purchases and sales are at the prevailing rates in the market. The share of Bishnauth Tea Co. Ltd. is quoted in the stock exchange. When neither the bills nor the rate is doubted, the conclusion reached by the AO as well as by the CIT(A) merely because it is a transaction between the sister concerns, is contrary to law. He submitted that the sister concerns carried on their business from the same address i.e., 4, Fairlie Place, Calcutta and, therefore, it is not necessary for the assessee to take the help of middleman. In fact, taking the help of a middleman, under such circumstances, would be unnatural. The AO, therefore, should not have based his conclusion on the ground that independent evidence such as the entries in the middlemen's books, etc.
are required to prove the transactions. Adverting our attention to p. 1 of the paper-book (chart), learned counsel submitted that there is no doubt some delay between the date of contract and the date of bill but this is not a decisive test to hold that the transactions are non-genuine particularly when the basic evidence such as bills, contract notes, etc. are produced before the AO. He relied upon the following decisions of the Tribunal wherein the Calcutta Bench of the Tribunal consistently held that the delay in taking delivery of the shares should not be taken as the basis for holding the transactions to the non-genuine : (a) Capable Udyog Viniyojan Ltd. vs. ITO - IT Appeal No. 10 (Cal) of 1987; (b) Puja Commercial Co. Ltd. vs. Asstt. CIT - IT Appeal Nos. 3573 and 3574 (Cal) of 1988; (c) Asstt. CIT vs. R. K. Commercial Ltd. - IT Appeal No. 3051 (Cal) of 1989; and (d) Shigram Commercial Ltd. vs. Asstt. CIT - IT Appeal Nos. 3050 and 3051 (Cal) of 1992.
6. As regards the submission that in the case of transaction with the sister concerns, it is not necessary to transact through a broker, he relied upon the decision of the Tribunal in the case of Sixteen Belvedere (I) Ltd. vs. Asstt. CIT [IT Appeal No. 2619 (Cal) of 1997], dt. 4th March, 1999. He also placed reliance on the decision of the Tribunal in the case of Faridabad Investment Co. Ltd. vs. ITO [IT Appeal Nos. 2546 and 2547 (Cal) of 1988] wherein the Tribunal observed that selling of shares even before taking delivery of the shares purchased by it is permissible as such transaction is known as 'short-selling'. Adverting our attention to pp. 22 to 26 of the paper book, learned counsel submitted that the shares purchased by the assessee from M/s. Iswar Prasad Dewkinandan Ltd. were taken into consideration by the seller company while filing its return. M/s. Iswar Prasad Dewkinandan Ltd. earned net profit of Rs. 24,87,000 on purchase and sale of shares and the return filed by that company for the asst.
yr. 1990-91 was accepted by the same AO, in an order passed under s.
143(3) of the Act and this proves the genuineness of the transaction and the Department cannot play hot and cold i.e., accepting the transaction as genuine in the case of the seller and treating the loss as non-genuine in the case of the purchaser. He also adverted our attention to pp. 27 to 29 (details of Poddar Gourepore Ltd.) and pp. 30 to 32 [details of Sixteen Belvedere (I) Pvt. Ltd.] to submit that the companies to whom assessee sold shares have accounted for the transactions and filed return accordingly which were accepted by the same AO. Learned counsel therefore, strongly submitted that the assessee furnished primary evidence before the AO to prove that the transactions were genuine and the AO as well as the CIT(A) have rejected the transactions merely on surmises and suspicion, without pointing out any defect in the transactions. He also submitted that the remand report obtained from the AO was never put to the assessee though he conceded that the AO in his remand report has not taken any new line of argument.
7. On the other hand, learned Senior Departmental Representative submitted that the so-called transactions in the instant case are only on paper. The evidence furnished by the assessee-company to support the transactions are all self-serving evidence such as contract notes, bills, entries in the books, etc. of the assessee-company as well as the sister concern. The brain behind all of them being one, and under such circumstances, corroborative evidence of a third party or otherwise becomes more important to prove genuineness of the transactions in this regard highlighted that the transactions were said to be without help of broker or middleman. The transactions were not at the market price. The fact that the alleged sales proceeded the purchases, particularly between the sister concerns and that to after a long gap between the date of contract and the date of bill would certainly cast doubt about the genuineness of the transactions and thus supported the order of the AO. He further submitted that the transactions of sale having preceded the purchase they can, at best, be said to be speculative transaction in the alternative.
8. Joining the issue, learned counsel submitted that the transactions were at market price and it is not a speculative transaction as there is delivery of shares.
9. We have carefully considered the rival submissions and perused the record. As could be seen from the orders of the tax authorities, the claim of the assessee was rejected on two counts i.e., (a) the transactions are not genuine; and (b) the transactions are intended to avoid taxation which is not permissible under law in the light of the decision of the Hon'ble Supreme Court in the case of McDowell & Co.
Ltd. (supra).
10. These two issues need be dealt with independently inasmuch as, in the case of appreciating the first issue, it is necessary to examine the material which, prompted the tax authorities to come to the conclusion that the alleged such transactions have not taken place at all and whether assessee discharged its primary onus of proving the genuineness of transactions whereas, to consider the second issue, the matter has to be looked at from a different angle; even the transactions are admitted to have taken place, whether the resultant profit or loss deserves to be accepted if it is found that such transactions are entered into to avoid payment of legitimate tax.
11. Before analysing first issue, it would be appropriate to highlight certain facts which prompted the tax authorities to reject the claim of the assessee. In the previous year, relevant to the asst. yr. 1990-91, assessee claimed to have dealt with 21,500 equity shares of Bishnauth Tea Co. Ltd. The contract for purchase of shares of 13,500 was dt. 4th May, 1989, whereas, the bill was dt. 28th December, 1989. The shares were said to have been sold to M/s. Poddar Gourepore Ltd., 4 Fairlie Place, Calcutta @ Rs. 87 per share, which is said to be the price quoted in the stock exchange as on the date of contract. M/s. Poddar Gourepore Ltd. carries on its business from the same place at which the assessee-company is situated and, in fact, enjoys common telephone lines and Grams (telephone Nos. 22-9965/66 and Grams-Darinteaex). On 4th April, 1989, assessee-company claimed to have entered into a contract for sale of 8,000 equity shares of Bishnauth Tea Co. Ltd. to M/s. Sixteen Belvedere (I) (P) Ltd., 4, Fairlie Place, Calcutta @ Rs. 69 per share. The bill was dt. 30th December, 1989. It may be noted that M/s. Sixteen Belvedere (I) (P) Ltd. also functions from the same place at which the assessee is situated. Long after entering into the sale contract, the company intended to purchase shares from M/s. Iswar Prasad Dewkinandan Ltd., 4 Fairlie Place, Calcutta. This company also enjoys the same telephone and Gram facilities as that of the assessee and the other companies i.e., M/s. Poddar Gourepore Ltd. The contract for purchase of 13,500 shares was entered into on 30th October, 1989 at Rs. 179 per share whereas, bill was dt. 28th December, 1989. Another 8,000 shares were purchased by contract note dt. 26th December, 1989 and bill dt. 30th December, 1989 @ Rs. 192 per share. From the paper-book filed before us, we also find that Poddar Gourepore Ltd, with whom the assessee entered into a contract to sell, has, in fact, sold 21,500 shares of Bishnauth Tea Co. Ltd. to M/s. Iswar Prasad Dewkinandan Ltd. out of which 13,500 shares were, in turn, sold by M/s.
Iswar Prasad Dewkinandan Ltd. to the assessee and again 13,500 shares goes from the assessee to M/s. Poddar Gourepore Ltd. that means the shares come back to the company from where it commenced its journey and that too within the same previous year, but the tax ramifications are different in the case of each company. In the case of Iswar Prasad Dewkinandan Ltd. it is said to have made a profit of Rs. 24,87,000 in share dealing which includes the impugned transactions. A careful perusal of the P&L a/c and the return filed by M/s. Iswar Prasad Dewkinandan Ltd. indicates that but for the purchase by the assessee of the shares of M/s. Bishnauth Tea Co. Ltd. at a higher rate, the seller company would not have earned such huge profits from share dealing and, in there twin, it would have had to file a loss return of more than Rs. 20 lakh, as against which M/s. Iswar Prasad Dewkinandan Ltd. filed a return declaring total income of Rs. 23,410; the tax payable by the company is negligible. In the case of Poddar Gourepore Ltd., share dealings resulted in a net loss of Rs. 2,58,500; but for this loss, the taxable income would have been about Rs. 2 lakh. The return was, however, filed declaring a total income of Rs. 9,440 having negligible tax effect. M/s. Sixteen Belvedere (I) (P) Ltd. showed a net profit of Rs. 3,000 on purchase and sale of shares but declared total income of Rs. 610 in its return for the asst. yr. 1990-91.
12. In the case of the assessee, but for these transactions, the assessable income, as could be seen from the assessment order, is Rs. 22,29,440 whereas, the assessee filed a return declaring total income of Rs. 2,620 only. It could thus be seen that by virtue of the alleged transactions, assessee-company's taxable income was reduced by Rs. 22,26,000. M/s. Iswar Prasad Dewkinandan Ltd. could adjust its loss in the same year by showing a profit of Rs. 24,87,000 from share dealing, M/s. Poddar Gourepore Ltd. could reduce its profit by Rs. 2,58,500, and M/s. Sixteen Belvedere (I) (P) Ltd. could adjust its loss to the tune of about Rs. 2,000. The fact remains that all the companies function from the same place. It appears that one of the directors of the assessee-company has appeared before the AO in the case of M/s. Iswar Prasad Dewkinandan Ltd. as well as in the cases of Poddar Gourepore Ltd. and Sixteen Belvedere (I) (P) Ltd. It is well known that while purchasing shares, reasonable study of the net worth of company is made. Even a common man who purchases 100 shares makes reasonable study by consulting at least one newspaper, if not journals. When a company takes a decision to purchase shares in bulk, that too of a particular company only, it is expected to have made reasonable amount of study about the net worth of that company. No material was brought on record to indicate that the contract for purchase on a particular date or contract for sale on a particular date was prompted by strong business consideration. One cannot lose sight of the fact that the transactions are between sister concerns having its office at the same place with the same telephone numbers and telegram codes. A prima facie inference from the facts would be that the brain behind all these transactions is only one person or one group of persons as, otherwise, the same shares cannot travel from one place and ultimately come back to the same company within the same year and consequently benefit the companies which deserve most by reducing the taxes effect or by way of adjustment of loss immediately. The suspicion that the transactions are not genuine becomes stronger because of the fact that the bills for sale were long after the dates of contract. As per the share market norms, the shares have to be delivered within a period of 14 days. The strict norms of delivery within 14 days may not be applicable to the share transactions outside the stock exchange but at the same time, it is presumed that the party who purchases the shares would insist upon the delivery of the shares at least after a lapse of reasonable period. The parties herein appeared to have been contented with contract note though the shares were alleged to have been delivered to them in the month of December i.e., after a gap of about 8 to 9 months. The facts also indicate that M/s. Poddar Gourepore Ltd. is well aware of the fact that the assessee does not possess the shares and the shares which M/s.
Poddar Gourepore Ltd., is holding with it are likely to be sold to M/s.
Iswar Prasad Dewkinandan Ltd. so as to, in turn, reach the hands of the assessee and finally the delivery of these shares can be shown. These circumstances further cast a doubt on the actual delivery of the shares, if not the very genuineness of the transactions itself.
13. It is well settled that under the IT Act, the AO is not bound by the rigours of Evidence Act. This share transactions appeared to the AO to be sham and, therefore, be called upon the assessee to corroborate the transactions by producing third party evidence but the assessee-company could file none of it. The reasons which prompted the assessee to enter into short-sale of Bishnauth Tea Co. shares on a low price or the reason for the long time to take delivery of the shares or the reason for purchase of the shares at very high price were not explained. It is also not known whether the share value was highly volatile during the period between April, 1989 and December, 1989 as no such chart appears to have been filed before the authorities below.
What prompted the assessee to purchase only on those dates can, at best be explained by showing the market quotation for considerable length of time and looking into the other factors such as the balance sheet of M/s. Bishnauth Tea Co. the reports of the analysts, Government policies reflecting upon better prospects of company etc. Every time a purchase transaction or sale transaction of shares in bulk is entered into by the assessee-company, it is expected of the company to put on record, in the form of resolution or otherwise which may explain the bona fides of purchase/sale. No such material was placed either before us or before the tax authorities. All these factors led the AO to come to the conclusion that the material such as contract notes, bills, etc. are merely self-serving documents and do not advance the case of the assessee in proving the genuineness of the transactions.
14. It is well settled that at what stage an assessee can be said to have discharged his primary onus of proving the genuineness of transactions depends largely on the facts of each case and there is no straightjacket formulae applicable in this regard. The assessee's case is that in the cases of sister concerns, the returns were accepted by the same AO. It is well known that res judicata is not applicable to the IT proceedings. It is also not necessary for an AO to continue the same mistake even after realising the truth that the transactions are not genuine. We may quote, in this context, the observations of Hon'ble Justice P. N. Bhagwati in the case of Distributors (Baroda) (P) Ltd. vs. Union of India (1985) 155 ITR 120 (SC) wherein his Lordships stated that "to perpetuate an error is no heroism. To rectify it is the compulsion of the judicial conscience." Assessee cannot highlight his case on the basis of the mistake committed by the AO while passing an order of the sister concern. Learned counsel relied upon several decisions of this Tribunal wherein the impact of the long gap between the date of contract and date of bill was considered. In our opinion, all the cases cited by the learned counsel are distinguishable. In the case of M/s. Capable Udyog Viniyojan Ltd. (supra), the shares were purchased through broker. There was a gap of three months between the date of contract and the date of bill. It does not appear to be a transaction between sister concerns. It is a case of purchase through broker who is a third party to the transaction and the evidence in the form of contract note and bill of the third party/broker is on record.
The broker being an outside party, it was the duty of the AO to issue notice and insist upon his appearance but the investigations were not done completely. When the share broker did not respond to the summons adverse inference was drawn wherein the factum of three months' gap between the date of contract and date of bill was also highlighted by AO. Under these circumstances, the Tribunal observed that looking to the other material, mere gap between the date of contract and the date of bill would not tilt the issue.
15. In the case of Puja Commercial Co. Ltd. (supra) and other cases also, there were other facts which supported the case of the assessee and, therefore, Tribunal has come to the conclusion that mere gap between the date of contract and date of bill would not be material and decisive to doubt the genuineness of the transactions.
16. In the case before us, however, the delay is abnormal i.e., about 8 to 9 months and the assessee could not furnish any independent corroborative evidence. The fact that the transactions are between sister concerns rendering business from the same place and the same shares have been rotated between the sister concern and such co-incidence helped all the sister concerns, whether in its tax effect or adjusting the loss, etc. were factors against the assessee and the fact that there is long gap between date of contract and date of delivery of shares further cushioned the view of the AO in holding that the transactions are not genuine. The order of the Tribunal in the case of Sixteen Belvedere (I) (P) Ltd. is also distinguishable on facts. In the said case, the Tribunal observed that M/s. Sixteen Belvedere (I) (P) Ltd. not only sold the shares to its sister concern but on the same date it also sold to a third party which fact proves the sanctity of the rate at which the shares were sold. About delivery of the shares, etc. it was found that the tax authorities have not harped on the contention that the transactions should be considered as speculative transaction. Therefore, much credence was not given to those observations of the AO. Regular entries in the books of account are held to be prima facie evidence in support of the genuineness of the transactions particularly in the light of the fact that no evidence was brought by the Department in support of the contention that the transactions were not genuine. The Tribunal further observed that what has been claimed as loss by the assessee M/s. Sixteen Belvedere (I) (P) Ltd. is shown as gain in the books of M/s. Hemraj Mahabir Pd. Ltd. (sister concern) and the said gain has also been subjected to tax. We may point out that the strong point in that case was the evidence in the form of sale of shares on the same date to a third party which is lacking in the instant case.
17. The AO has brought home the point that the circuitous way in which the shares held by M/s. Poddar Gourepore Ltd. reached them back after changing two hands would clearly indicate that the shares never moved from its original place.
18. In the case of M/s. Sixteen Belvedere (I) (P) Ltd. the Tribunal observed that entries in the books are prima facie evidence. This observation appears to have been made in the backdrop of the fact that on the same date if transacted shares with a third party also. This proves the genuineness of the rate as well as the transactions. It is well settled that strict rules of Evidence Act are not applicable to IT proceedings. In the absence of any corroborative evidence, in the case before us, the AO refused to solely rely upon the self-serving documents in the form of entries in the books, etc. In cases of this nature, the facts would be in the personal knowledge of the person who entered into the transaction and, therefore, asking the Revenue to prove otherwise would be to expect them to do an impossibility. It is for the assessee to produce some corroborative evidence to prove the genuineness of the transaction. It should have furnished evidence in the form of analyst's report, balance sheet, newspaper cuttings, Board's resolutions, etc. to indicate the bona fides of the assessee in taking the decision of purchase/sale of shares and also for taking long time in delivering the shares, etc. Corroborative evidence have to be taken into consideration in order to appreciate whether the primary onus that cast upon the assessee has been discharged. It is only when the primary onus is fully discharged by assessee, the burden shifts on to the Revenue. In our opinion assessee has not discharged its primary onus.
19. It will be relevant here to extract the following observation of the Hon'ble High Court of Madhya Pradesh in the case of Prafulla Kumar Tongya vs. Smt. Sarla AIR 1998 MP 285 : "Truth seldom appears directly face to face. It exhibits its presence in a concealed way. It is to be gathered from surrounding circumstances." 20. The Court, therefore, felt that the principle of sifting grains from the chauff is necessary. The Courts have also time and again observed that circumstantial evidence, not infrequently, indicates the truth more unerringly than direct evidence. In the case before us, circumstances speak for itself which prompted the AO to hold that transactions are not genuine. The famous phrase "men may lie but the circumstances may not" aptly applies to this case.
21. Even if it is admitted, for the sake of argument, that the transactions have, in fact, taken place, the next question that arises for our consideration is whether the transactions were entered into with a view to avoid tax liability. We have already highlighted as to how the transactions appeared to have benefited not only the assessee but also the sister concerns in taking advantage under law. In our opinion, this is a fit case where the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) applies. The following observation of the Hon'ble Supreme Court aptly applies in this context : "We must recognise that there is behind taxation laws as much moral sanction as behind any other welfare legislation and it is a pretence to say that avoidance of taxation is not unethical and that it stands on no less a moral plane than honest payment of taxation.
In our view, the proper way to construe a taxing statute, while considering a device to avoid tax, is not to ask whether the provision should be construed literally or liberally, not whether the transaction is not unreal and not prohibited by the statute, but whether the transaction is a device to avoid tax, and whether the transaction is such that the judicial process may accord its approval to it.
Colourable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by resorting to dubious method." 22. Ground Nos. 3 to 5 pertain to the justification in charging interest under ss. 234A, 234B and 234C of the Act. Learned counsel has not advanced any argument on this ground. We, therefore, reject the ground taken before us and uphold the action of the CIT(A).