ITO,Ward-9(1), Kolkata, Kolkata V. M/s Acytelene Trexim (P) Ltd., Kolkata

ITA 1429/KOL/2012

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 4762 (ITAT-KOLKATA)
• Duration Of Justice: 3 year(s) 9 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-08-2016
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 20-07-2016
• Assessment Year: 2009-2010
• Appeal Filed On: 08-10-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: DEBASISH BANERJEE JCITSRDR
• Assessee Lawyers: S M SURANA
• Keywords: Business income; Business expenditure; Maximum Marginal Rate; Assessment record
• Section: 143(3); 10(10D); 133(6); 37(1); 131; 37; 132

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL KOLKATA BENCH C KOLKATA BEFORE SHRI N.V.VASUDEVAN, JUDICIAL MEMBER AND SHRI WASEEM AHMED, ACCOUNTANT MEMBER ITA NO. 1429 / KOL / 2012 ASSESSMENT YEAR :2009-10 ITO, WARD-9(1), P-7, CHORINGHEE SQUARE, AAYAKAR BHAWAN, 5 TH FLOOR, ROOM-14, KOLKATA- 700 069 V/S . M/S ACYTELENE TREXIM (P) LTD., 14, N.S. ROAD (4 TH FLOOR), CLIVE ROW, KOLKATA-700 001 [ PAN NO.AACCA 4045 J ] /APPELLANT .. / RESPONDENT /BY APPELLANT SHRI DEBASISH BANERJEE, JCIT-SR-DR /BY RESPONDENT SHRI S.M.SURANA, ADVOCATE /DATE OF HEARING 20-07-2016 /DATE OF PRONOUNCEMENT 03-08-2016 / O R D E R PER WASEEM AHMED, ACCOUNTANT MEMBER:- THIS APPEAL BY THE REVENUE IS ARISING OUT OF ORDER OF COMMISSIONER OF INCOME TAX (APPEALS)-VIII, KOLKATA IN APPEAL NO.75A /CIT(A)-VIII/KOL/11-12 DATED 06.07.2012. ASSESSMENT WAS FRAMED BY ITO WARD -9(1), KOLKATA U/S 143(3) OF THE INCOME TAX ACT, 1961 (HEREINAFTER REF ERRED TO AS THE ACT) VIDE HIS ORDER DATED 07.09.2011 FOR ASSESSMENT YEAR 2009 -10. GROUNDS RAISED BY REVENUE ARE AS UNDER:- 1. THAT ON THE FACT AND IN THE CIRCUMSTANCES OF TH E CASE, THE LD. CIT(A) HAS ERRED IN DELETING THE ADDITION OF RS.1,05,36,00 0/- MADE ON ACCOUNT ITA NO.1429/KOL/2012 A.Y. 2009-10 ITO WD-9(1) KOL. V. M/S ACYTELENE TREXIM ( P) LTD. PA GE 2 OF INFLATION OF PURCHASE PRICE OF 160000 EQUITY SH ARES OF GUJRAT HEAVY CHEMICALS LTD. 2. THAT LD. CIT(A) HAS ERRED IN NOT DISCUSSING THE ISSUE RAISED IN GROUND NO.1 BY THE ASSESSEES APPEAL BEFORE HIM WHICH RUNS AS UNDER: THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE THE LEARNED A.O ERRED IN COMING TO THE CONCLUSION THAT THE PURC HASE OF SHARES WAS NOT ON THE CONTRACT DATE BEING 29.08.200 8. 3. THAT LD. CIT(A) HAS ERRED IN NOT DISCUSSING THE MATERIAL FACTS BROUGHT ON RECORD BY THE A.O AND DISCUSSED IN HIS ASSESSMEN T ORDER IN COMING TO THE CONCLUSION THAT THE PURCHASE OF SHARES WAS N OT ON IMPUGNED CONTRACT DATE BEING 29.08.2008 AS CLAIMED BY THE AS SESSEE. 4. THAT LD. CIT(A) HAS ERRED IN OBSERVING THAT THE DISCUSSION MADE BY THE AO IN THE ASSESSMENT ORDER WAS ACADEMIC AND THEREBY NOT DISCUSSING AS TO HOW THE MATERIAL FACTS RECORDED BY THE AO IN COMING TO THE CONCLUSION THAT THE PURCHASE OF SHARES WAS NOT ON THE CONTRACT DATE BEING 29.08.2008 WAS NOT RELEVANT TO THE ISSUE AND AS SUCH HIS ORDER IS BAD IN LAW AND PERVERSE. 5. THAT LD. CIT(A) HAS ERRED IN ACTING ON IRRELEVAN T FACTS NOT MATERIAL TO THE ISSUE IN THE OPERATIVE PART OF HIS ORDER BEFORE COMING TO HIS CONCLUSION; AND AS SUCH HIS ORDER IS BAD IN LAW AND PERVERSE. 6. THAT, ON THE FACTS AND IN THE CIRCUMSTANCES OF T HE CASE, LD. CIT(A) IS NOT JUSTIFIED IN DELETING THE DISALLOWANCE OF RS.15 ,00,000/- ON ACCOUNT OF PAYMENT MADE FOR KEYMANS INSURANCE POLICY FOR THE DIRECTORS. SHRI S.M.SURNA, LD. AUTHORIZED REPRESENTATIVE APPEA RED ON BEHALF OF ASSESSEE AND SHRI DEBASISH BANERJEE, LD DEPARTMENT AL REPRESENTATIVE APPEARED ON BEHALF OF REVENUE. 2. THE ISSUES RAISED IN GROUND NO. 1 TO 5 ARE INTER -CONNECTED, THEREFORE THESE ARE BEING TAKEN UP TOGETHER FOR THE PURPOSE O F ADJUDICATION. THE COMMON ISSUE IS THAT LD CIT(A) ERRED IN DELETING T HE ADDITION MADE BY ASSESSING OFFICER FOR 1,05,36,000/- ON ACCOUNT OF INFLATION OF PURCHASE PRICE OF 1.60 LAKH EQUITY SHARES OF GUJRAT HEAVY CHEMICAL S LTD. (GHCL FOR SHORT). ITA NO.1429/KOL/2012 A.Y. 2009-10 ITO WD-9(1) KOL. V. M/S ACYTELENE TREXIM ( P) LTD. PA GE 3 3. FACTS IN BRIEF ARE THAT ASSESSEE IN THE PRESENT CASE IS A PRIVATE LIMITED COMPANY AND POSSESSES THE VALID LICENSE OF NON BANK ING FINANCIAL CORPORATION (NBFC FOR SHORT) FROM THE RESERVE BANK OF INDIA. THE ACTIVITIES OF THE ASSESSEE ARE REGULATED BY THE RBI. THE ASSESSEE FOR THE YEAR UNDER CONSIDERATION FILED ITS RETURN OF INCOME DECLARING BUSINESS INCOME OF 8,04,561/- WHICH WAS SUBSEQUENTLY PROCESSED U/S 143 (1) OF THE ACT. THEREAFTER THE CASE WAS SELECTED FOR SCRUTINY WITH THE PRIOR APPROVAL OF CCIT- III/ KOLKATA. CONSEQUENTLY, NOTICE WAS ISSUED U/S 1 43(2)/142(1)/142(2) OF THE ACT. 3.1 ASSESSEE DURING THE YEAR HAS PURCHASED 1.60 LAC S EQUITY SHARES OF GHCL @ 92/- PER SHARE FOR TOTAL CONSIDERATION OF 1,47,20,000/- IN OFF MARKET ON 29.08.2008 THROUGH A BROKER NAMELY M/S PU SKAR BANIJYA (MPB FOR SHORT). THE ASSESSEE HAS VALUED THE AFORESAID SHARE S AT THE END OF FINANCIAL YEAR AS ON 31.03.2009 AS CLOSING STOCK (TRADING ASS ETS) AT 44.80 LACS. ON QUESTION BY AO, ASSESSEE HAS SUBMITTED A COPY OF TH E PURCHASED BILLS OF MPB AND MARKET QUOTATION OF THE SHARES AS ON 31.03.2009 . THE AO OBSERVED THAT THE VALUE OF THE SHARES OF GHCL HAS DRASTICALLY CAM E DOWN FROM 92/- PER SHARE TO 27.85 PER SHARE AS ON 31.03.2009. DURING THE COURS E OF ASSESSMENT PROCEEDINGS, AO OBSERVED THAT THE PAYMEN T FOR PURCHASE OF SHARES FROM MPB WAS MADE ON 17.03.2009 AND THE SHAR ES WERE TRANSFERRED TO THE DEMAT ACCOUNT OF THE ASSESSEE ON 28.03.2009. ACCORDINGLY, AO SOUGHT CLARIFICATION FROM ASSESSEE BY ISSUING SHOW CAUSE N OTICE STATING THAT WHY THE SHARE VALUE AS ON 15.03.2009 SHOULD BE CONSIDERED A S PURCHASE PRICE OF THE SHARE. IN COMPLIANCE TO THE NOTICE, IT WAS SUBMITTE D BY ASSESSEE THAT ITS BOOKS OF ACCOUNT ARE MAINTAINED ON MERCANTILE BASIS AND S HARES WERE ORIGINALLY PURCHASED ON 29.08.2008. THEREFORE, THE PRICE PREVA ILING ON THE DATE OF PURCHASE SHOULD BE TAKEN FOR THE PURCHASE VALUE. HO WEVER, AO HAS DISREGARDED THE PLEA OF ASSESSEE ON ACCOUNT OF FOLL OWING REASONS:- A) ASSESSEES MAIN INCOME IS ONLY FROM SOURCE OF TE NDERING LOAN TO EARN INTEREST FOR THE LAST THREE ASSESSMENT YEARS A ND DID NOT PARTICIPATE ITA NO.1429/KOL/2012 A.Y. 2009-10 ITO WD-9(1) KOL. V. M/S ACYTELENE TREXIM ( P) LTD. PA GE 4 IN THE SALE-PURCHASE OF SHARE. THE ASSESSEE DURING THE YEAR UNDER CONSIDERATION HAS ONLY DONE A SINGLE TRANSACTION WH ICH WAS TREATED AS BUSINESS TRANSACTIONS. FROM THE ABOVE, AO NOTED THA T IT CANNOT BE TREATED AS BUSINESS TRANSACTIONS AND SHOULD BE TREA TED AS INVESTMENT OF ASSESSEE-COMPANY; B) THE SALE-PURCHASE OF SHARE IS REGULATED UNDER TH E SECURITIES CONTRACT (REGULATIONS) ACT, 1956 (SCRA FOR SHORT) A ND THIS IS NOT GOVERNED BY THE SALE OF GOODS ACT, 1930. AS PER TH E SCRA ACT, A PERSON CANNOT TRANSACT IN SHARE WITHOUT THE INVOLVE MENT OF THE BROKER, HOWEVER, GENERAL EXCEPTION IN SEC. 18(1) OF SCRA WH ICH STATES THAT A TRANSACTION WITHOUT THE INVOLVEMENT OF BROKER CAN B E MADE ON THE BASIS OF SPOT DELIVERY WHICH MEANS THAT THE TRANSACTION S HOULD BE CLOSED FOR THE DELIVERY OF SHARES AND PAYMENT WITHIN 24 HRS. I N THE INSTANT CASE, THE DELIVERY OF SHARE WAS MADE TO THE DEMAT ACCOUNT OF ASSESSEE AFTER SIX MONTHS AND 23 DAYS AND PAYMENT WAS MADE AFTER S IX MONTHS AND 19 DAYS. SO THE SAME TRANSACTION IS NOT FOLLOWING T HE PROVISION OF SCRA AND THEREFORE IT IS ILLEGAL IN NATURE. SO THE ILLEG AL LOSS CANNOT BE ADJUSTED WITH THE LEGAL INCOME OF ASSESSEE, C) THE LOSS CLAIMED BY ASSESSEE OUT OF AFORESAID TR ANSACTION IS FROM SHAM ACTIVITIES AND CONSEQUENTLY THE LOSS OF 1,05,36,000/- FROM SUCH MANIPULATED SHARE BUSINESS BY BACK DATED BILL TO AD JUST THE BUSINESS INCOME WITH A VIEW TO AVOIDING THE TAX LIABILITY. 4. AGGRIEVED, ASSESSEE PREFERRED AN APPEAL BEFORE L D CIT(A) WHEREAS ASSESSEE SUBMITTED THAT ASSESSEE HAS BEEN FOLLOWING THE ACCOUNTING STANDARD 2 FOR THE VALUATION OF STOCK-IN-TRADE AND ACCORDINGLY THE ASSESSEE HAS DECLARED THE VALUE OF STOCK AT COST AT MARKET P RICE WHICHEVER IS LESS. THE ASSESSEES REGULAR COURSE OF BUSINESS INCLUDES PURC HASE AND SALE OF SHARE OF COMPANIES. THEREFORE THE SHARES PURCHASED WERE SHOW N AS STOCK-IN-TRADE. THE AO FAILED TO APPRECIATE THAT THE ASSESSEE WAS B OUND TO PURCHASE THE SHARE AT AGREED PRICE ON DATE 29.08.2008 AND HE HAD NO OPTION EXCEPT TO ITA NO.1429/KOL/2012 A.Y. 2009-10 ITO WD-9(1) KOL. V. M/S ACYTELENE TREXIM ( P) LTD. PA GE 5 MAKE THE PAYMENT OF THE SHARE AT AGREED PRICE. REGA RDING THE ALLEGATION OF AO FOR FOLLOWING PROVISION OF SCRA THE ASSESSEE SUB MITTED THAT AN EXCEPTION HAS BEEN PROVIDED U/S 14(2) OF SCRA ACT WHICH SAYS THAT NOTHING SHALL AFFECT THE RIGHT OF ANY PERSON OTHER THAN A MEMBER OF A RE COGNIZED STOCK EXCHANGE TO ENFORCE SUCH CONTRACT OR TO RECOVER ANY SUM UNDE R OR IN RESPECT OF SUCH CONTRACT IF SUCH PERSON HAD NO KNOWLEDGE THAT THE T RANSACTION WAS IN CONTRAVENTION OF ANY BYLAWS SPECIFIED UNDER THE ACT . IN THE INSTANT CASE, NEITHER PARTY WAS AWARE OF THE LAW AS STATED ABOVE. 4.1 THE ALLEGATION OF AO THAT THERE WAS A SINGLE TR ANSACTION FOR THE PURCHASE/SALE OF SHARE IN THE LAST THREE YEARS AND THEREFORE IT SHOULD BE TREATED AS INVESTMENT IS FACTUALLY INCORRECT. THE A SSESSEE HAS MADE SALE PURCHASE OF THE SHARE IN THE AY 2008-09 PURCHASED 63,96,075/- AND SALE AT 25,14,958/- AND AY 2010-11 PURCHASE 3,71,68,025.20 AND SALES AT 3,61,38,633.41. AFTER CONSIDERING THE SUBMISSION OF ASSESSEE AND OTHER RELEVANT RECORDS LD. CIT(A) HAS DELETED THE ADDITIO N MADE BY AO BY OBSERVING AS UNDER:- I HAVE CAREFULLY CONSIDERED THE SUBMISSION OF THE APPELLANT INCLUDING THE JUDGMENT OF THE REFERRED CASE LAWS AND THE RELE VANT PROVISIONS OF SCRA, 1956, PERUSED THE FACTS OF THE CASE, THE MATE RIAL PLACED ON RECORD AND THE FINDING OF THE ASSESSING OFFICER IN THE MATTER. ON GOING THROUGH THE ASSESSMENT ORDER, IT WOULD APPEAR THAT THE ASSESSING OFFICER HAS MADE AN ACADEMIC DISCUSSION REGARDING T HE PROBABILITY OF THE APPELLANT HAVING ENTERED INTO TRANSACTIONS IN C OLLUSION WITH PUSHKAR BANIJYA LTD., WITH A VIEW TO MANIPULATE THE ACCOUNT S BY CLAIMING LOSS IN SHARE TRADING AND THEREBY REDUCING THE TAXABLE INCO ME AND CONSEQUENT TAX LIABILITY. FROM THE RECORDS, IT IS, HOWEVER, SE EN THAT THE ASSESSING OFFICER HAS MADE ENQUIRIES WITH THE AFORESAID COMPA NY TO ASCERTAIN THE GENUINENESS OF THE TRANSACTIONS, BUT NO MATERIAL EV IDENCE IS BROUGHT ON RECORD TO SHOW THAT THE TRANSACTIONS BETWEEN THE AP PELLANT AND PUSHKAR BANIJYA LTD., WAS SHAM. THE COST OF PURCHASE OF EAC H SHARE AT RS.92/- IS EVIDENCED BY THE DEMAT ACCOUNTS. IN FACT, THERE IS NO EVIDENCE BROUGHT ON RECORD TO SHOW THAT PURCHASE PRICE HAS B EEN INFLATED. THE ASSESSING OFFICER HAS NOT DOUBTED THE PRICE OF THE SHARE OF GUJARAT HEAVY CHEMICALS LTD. AT RS.27.85 AS ON 31.3.2009. I T IS AN INHERENT PART OF SECTION 143(3) THAT WHERE THE ASSESSING OFFICER IS NOT INCLINED TO ACCEPT THE RETURN SUBMITTED BY THE ASSESSEE AND IF HE WANTS TO MODIFY THE ASSESSMENT, A SHOW CAUSE NOTICE IS REQUIRED TO BE GIVEN TO THE ITA NO.1429/KOL/2012 A.Y. 2009-10 ITO WD-9(1) KOL. V. M/S ACYTELENE TREXIM ( P) LTD. PA GE 6 ASSESSEE. GIVING OF THIS OPPORTUNITY WILL INCLUDE O PPORTUNITY TO ERASE PROCEDURAL DEFECTS IF ANY, WHICH IS DIRECTORY IN NA TURE ZENITH PROCESSING MILLS V. CIT [1996] 219 ITR 721 (GUJ). I N THE INSTANT CASE, NO SUCH OPPORTUNITY APPEARS TO HAVE BEEN GIVEN TO THE APPELLANT TO PUT HIS SIDE OF THE CASE EFFECTIVELY. NOW, AS A NORMAL RULE, THE PROFITS SHOULD BE ASCERT AINED BY VALUING THE STOCK-IN-TRADE AT THE BEGINNING AND AT THE END OF T HE ACCOUNTING YEAR P.M. MOHAMMAD MEERAKHAN [1969] 73 ITR 735 (SC). IT IS SETTLED LAW THAT THE TRUE TRADING RESULTS OF A BUSINESS FOR AN ACCOUNTING PERIOD CANNOT BE ASCERTAINED WITHOUT TAKING INTO ACCOUNT T HE VALUE OF THE STOCK-IN-TRADE REMAINING AT THE END OF THE PERIOD A.LA. FIRM V. CIT [1999] 189 ITR 285 (SC); CIT V. BRITISH PAINTS INDI A LTD. [1991] 188 ITR 44 (SC). HERE AGAIN, THOUGH LOSS DUE TO A FALL IN P RICE BELOW COST IS ALLOWED EVEN IF SUCH LOSS HAS NOT BEEN ACTUALLY REA LIZED, NO QUESTION OF CHARGING THE APPRECIATED VALUE OF CLOSING STOCK AS NOTIONAL PROFITS CAN ARISE. IT IS MISCONCEPTION TO THINK THAT ANY PR OFIT ARISES OUT OF THE VALUATION OF THE CLOSING STOCK AND THE SITUS OF ITS ARISING OR ACCRUAL IS WHERE THE VALUATION IS MADE CHAIRUP SAMPATRAM V. CIT [1953] 24 ITR 481 (SC). ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE PURCHASE HAVING ESTABLISHED WITH DOCUMENTARY PROOF AND THE MARKET VALUE AS AT THE CLOSE OF THE FINANCIAL YEAR ALSO HA VING BEEN CORROBORATED WITH MATERIAL EVIDENCE THERE IS NO REASON TO HOLD T HAT THE TRANSACTION IS A SHAM. THEREFORE, IT IS HELD THAT THE ADDITION OF RS.10,53,6000/- MADE BY THE ASSESSING OFFICER ON ACCOUNT OF INFLATION O F PURCHASE PRICE IN UNJUSTIFIED AND UNWARRANTED. THE SAME IS HEREBY DEL ETED AND THIS GROUND OF APPEAL OF THE APPELLANT IS DECIDED IN FAV OUR OF THE APPELLANT. BEING AGGRIEVED BY THIS ORDER OF LD. CIT(A) REVENUE IS IN APPEAL BEFORE US. 5. BEFORE US LD. DR HAS FILED WRITTEN SUBMISSION WH ICH IS REPRODUCED BELOW:- THE FACTS OF THE CASE IN BRIEF ARE THAT THE APPELLA NT PURCHASED 160000 EQUITY SHARES OF M/S. GUJARAT HEAVY CHEMICALS LTD. AT OFF MARKET FROM PUSKAR BANIYA (P) LTD. UNDER THE CONTRACT OF PURCHASE DATE 29.08. 2008 THE APPELLANT DID NOT SELL THE SHARES AND SHOWED THEM AS CLOSING STOCK AS ON 31.03.2009 AND VALUED AT COST OR MARKET PRICE WHICHEVER IS LOWER. AS THE MARKET QUOTATION WAS LOWER ON 1.03.2009 THE VALUE OF THE SAME WAS SH OWN AT THE RATE OF RS. 27.85 PER SHARE WHEREAS THE PURCHASE WAS AT RS. 92/ - PER SHARE. THE APPELLANT WAS CARRYING ON THE BUSINESS OF PURCHASE AND SALE OF SHARES IN ITA NO.1429/KOL/2012 A.Y. 2009-10 ITO WD-9(1) KOL. V. M/S ACYTELENE TREXIM ( P) LTD. PA GE 7 EARLIER YEAR ALSO AND CLAIMED THE SAME AS BUSINESS LOSS. THE APPELLANT COMPANY IS A NBFC UNDER THE RESERVE BANK OF INDIA D IRECTIONS AND PURCHASE AND SALE OF SHARES HAVE BEEN THE TRADING ACTIVITY O F THE COMPANY. THE ASSESSING OFFICER AFTER DETAILED DISCUSSION IN THE ORDER HAS ADDED BACK TO THE INCOME OF APPELLANT OF RS. 10,53,6000/- AS INFLATIO N OF PURCHASE PRICE. THE ASSESSING OFFICER IN THE ASSESSMENT ORDER AS DI SCUSSED IN DETAIL WHILE THE SOLITARY TRANSACTION SHOULD BE TREATED AS INVES TMENT AND NOT A SHARE TRADING TRANSACTION. HOWEVER, FOR THE SAKE OF ARGUM ENT, IF IT IS CONCEDED THAT THE TRANSACTION IS ONE OF-TRADING AS HELD BY THE LD . CLT(A), THE IMPUGNED EXPENDITURE IS NOT ALLOWABLE. A REFERENCE IS MADE T O PAGE NO. 4 OF THE ASSESSMENT ORDER WHICH HAS RECORDED AS UNDER: 'THE GOVERNMENT OF INDIA INTRODUCED SPECIAL ACT, NA MELY SECURITIES CONTRACT (REGULATIONS) ACT 1956 (SCRA) FOR THE PURPOSE TO RE GULATE THE SHORE TRADING. ON INTRODUCTION OF THE SECURITIES CONTRACT (REGULATION S) ACT 1956 (SCRA), THE SHORE TRADING IS GOVERNED BY THIS ACT, NOT BY THE CONTRAC T SOLE OF GOODS ACT, 1930. THE SECURITIES CONTRACT (REGULATIONS) ACT 1956 (SCRA) P ROHIBITS PERSON TO TRANSACT IN SHORES WITHOUT INVOLVEMENT OF BROKER. THIS IS PROVI DED IN SECTION 17 OF THE SCRA WHICH IS GIVEN AS UNDER: SECTION 17(1), SUBJECT TO THE PROVISIONS OF SUB-SEC TION(3) AND TO THE OTHER PROVISIONS CONTAINED IN THIS ACT, NO PERSON SHALL CARRY ON OR PURPORT TO CARRY ON, WHETHER ON HIS OWN BEHALF OR ON BEHALF OF OTHER PERSON, THE BUSINE SS OF DEALING IN SECURITIES IN ANY STATE OR AREA TO WHICH SECTION 13 HAS NOT BEEN DECL ARED TO APPLY AND TO WHICH THE CENTRAL GOVERNMENT MAY, BY NOTIFICATION IN THE OFFI CIAL GAZETTE, DECLARE THIS SECTION TO APPLY, EXCEPT UNDER THE AUTHORITY OF A LICENSE GRAN TED BY THE SECURITIES AND EXCHANGE BOARD OF INDIA IN THIS BEHALF. HOWEVER, EXCEPTION IN THIS RULE OF PROHIBITION IS P ROVIDED IN SECTION 18(1) OF SCRA WHICH STATES THAT SECTION 17 SHALL NOT APPLY TO SPO T DELIVERY CONTRACTS. THE TERM ' SPOT DELIVERY ' IS DEFINED UNDER CLAUSE (I) OF SECTION 2 OF SCRA WHICH IS REPRODUCED AS UNDER: 'SPOT DELIVERY CONTRACT' MEANS A CONTRACT WHICH PRO VIDES FOR- (A) ACTUAL DELIVERY OF SECURITIES AND THE PAYMENT O F A PRICE THEREFORE EITHER ON THE SAME DAY AS THE DATE OF THE CONTRACT OR ON THE NEXT DAY, THE ACTUAL PERIOD TAKEN FOR DISPATCH OF THE SECURITIES OR THE REMITTA NCE OF MONEY THEREFORE THROUGH THE POST BEING EXCLUDED FROM THE COMPUTATIO N OF THE PERIOD AFORESAID IF THE PARTIES TO THE CONTRACT DO NOT RESIDE IN THE SAME TOWN OR LOCALITY; (B) TRANSFER OF THE SECURITIES BY THE DEPOSITORY FR OM THE BENEFICIAL OWNER TO THE ACCOUNT OF ANOTHER BENEFICIAL OWNER WHEN SUCH S ECURITIES ARE DEALT WITH BY A DEPOSITORY; THEREFORE, COMBINED READING OF SECTION 17, DEFINITI ON OF 'SPOT DELIVERY' AND SECTION 18 OF SCRA SHOW THAT TWO PERSONS CAN TRANSACT WITHO UT INVOLVEMENT OF SHARE BROKER, ITA NO.1429/KOL/2012 A.Y. 2009-10 ITO WD-9(1) KOL. V. M/S ACYTELENE TREXIM ( P) LTD. PA GE 8 WHO IS MEMBER OF RECOGNIZED STOCK EXCHANGE, ONLY WH EN THE DELIVERY OF SHARE IS GIVEN AND PAYMENT WERE ALSO MADE AT MOST, WITHIN 24 HOURS OF TRANSACTION. IN THE INSTANT CASE, THE ASSESSEE-COMPANY DID NOT P URCHASE THROUGH ANY SHARE BROKER, ACTUAL DELIVERY OF SHARES DID CREDIT/TAKE P LACE AFTER 6 MONTH 23 DAYS AND PAYMENT OF PRICE WAS MADE AFTER 6 MONTHS 19 DAYS. I N VIEW OF THE ABOVE FACT, IT IS, THEREFORE, CLEAR THAT AS THE SAID TRANSACTION DID N OT RESULT IN DELIVERY OF SHARE OR IN PAYMENT OF PRICE CONSIDERATION, THEY CANNOT BE TERM ED AS SPOT DELIVERY CONTRACT. THIS TRANSACTION WAS, THEREFORE, NOT EXEMPTED UNDER SECT ION 18 OF THE ACT FROM BEING GOVERNED BY SECTION 13 OF THE SCRA AND THUS WAS ILL EGAL CONTRACT BY VIRTUE OF THE PROVISION OF THE SCRA. SUCH ILLEGAL LOSS CANNOT BE ADJUSTED WITH THE LEGAL INCOME. IN THIS REGARD, RELIANCE MAY BE PLACED ON APEX COURT'S DECISION IN MADDI VENKATARAMAN AND COMPANY PVT. LTD. VS. CIT (1998) 229 ITR 534(SC ) WHEREIN IT WAS HELD THAT INFRACTION OF LAW IS NOT A NORMAL INCIDENCE OF BUSI NESS. THAT THE TRANSACTION IS ILLEGAL, HAS BEEN CONCEDED BY THE APPELLANT IN THE SUBMISSION BEFORE THE LD. CIT(A). VIDE PAGE 3 OF TH E APPELLATE ORDER, THE RELEVANT PORTION OF THE APPELLANT'S SUBMISSION IS Q UOTED AS FOLLOWS: 'THE AO HAS RAISED A NUMBER OF OTHER NORMS FOR FOUN DATION OF HIS CASE FOR DISALLOWING THE LOSS WHICH WILL BE DEALT WITH PRESE NTLY. BUT IT IS FELT NECESSARY RIGHT AT THIS STAGE TO DISLODGE HIS LEGAL CONTENTION THAT TH E TRANSFER IS IN VIOLATION OF THE PROVISIONS OF THE SECURITIES CONTRACT (REGULATION A CT 1956). HIS POINT IS THAT THE PURCHASE NOT EFFECTED THROUGH A STOCK BROKER IS AGA INST THE PROVISION OF THE SAID ACT. IN THAT CONNECTION HE HAS REFERRED TO SECTIONS 17(1 ) AND 18(1) IBID. SECTION 17(1) PROHIBITS ANY PERSON FROM DEALING IN SECURITIES EXC EPT UNDER THE AUTHORITY OF A LICENSE GRANTED BY THE SEBI. THIS PROHIBITS PURCHASE AND SALE OF SECURITIES OUTS IDE THE RECOGNIZED STOCK EXCHANGE. IN THIS CASE, THE TRANSACTION HAS BEEN OU TSIDE THIS STOCK EXCHANGE BY CONTRACT BETWEEN THE PARTIES WITHOUT THE AGENCIES O F A MEMBER OF STOCK EXCHANGE AND SO, IN VIOLATION OF THE LAW. THUS THE TRANSACTI ON IS ILLEGAL AND THE LOSS FARES NO BETTER. THE LOSS FROM AN ILLEGAL TRANSACTION CANNOT BE ALLOWED. BUT THE AD HAS MISSED OUT THE FACT THAT SECTION 14( 2) CARVES OUT AN EXCEPTION WHERE THE PARTIES TRANSACT IN SECURITIES BY DIRECT TREATI ES WITHOUT THE AGENCIES OF A MEMBER OF THE STOCK EXCHANGE FOR WANT OF KNOWLEDGE. THE SA ID PROVISION READS AS UNDER: 2) NOTHING IN SUBSECTION (1) SHALL BE CONSTRUED TO EFFECT THE RIGHT OF ANY PERSON OTHER THAN A MEMBER OF THE RECOGNIZED STOCK EXCHANGE TO E NFORCE ANY SUCH CONTRACT OR TO RECOVER ANY SUM UNDER OR IN RESPECT OF SUCH CONTRAC T IF SUCH PERSON HAD NO KNOWLEDGE THAT THE TRANSACTION WAS IN CONTRAVENTION OF ANY BYLAWS SPECIFIED IN CLAUSE (A) OF SUBSECTION (3) OF SECTION 9. IN THE PRESENT CASE, NEITHER PARTY WAS INFORMED OF THE STATE OF LAW AS IS OBVIOUS FROM THE ACTS OF THE CASE. IT IS NOW ACCEPTED THAT THERE COULD BE NO PRESUMPTION THAT EVERYBODY KNOWS LAW VIDE MP SUGAR MILLS LTD. 118 IT R (SC). THIS VIEW HAS BEEN TAKEN BECAUSE THE STATE HAS NOW DIVERSE CONTROLS AN D ALSO PARTICIPATION IN EVERY WALK OF LIFE AS HAS TO BE IN A WELFARE STATE SO MUCH SO THAT IT IS NOT POSSIBLE FOR EVERYONE TO KEEP ABREAST OF THE GALORE OF LAWS THE LEGISLATURE CHURNS OUT. ITA NO.1429/KOL/2012 A.Y. 2009-10 ITO WD-9(1) KOL. V. M/S ACYTELENE TREXIM ( P) LTD. PA GE 9 THE ARGUMENT OF THE APPELLANT IS SELF-DEFEATING. TH E ILLEGAL PURCHASE TRANSACTION IS HIT BY EXPLANATION 1 TO SECTION 37 ( 1) WHICH IS QUOTED AS FOLLOWS: 'FOR THE REMOVAL OF DOUBTS IT IS HEREBY DECLARED TH AT ANY EXPENDITURE INCURRED BY ASSESSEE FOR ANY PURPOSE WHICH IS AN OF FENCE OR WHICH IS PROHIBITED BY LAW SHALL NOT DEEMED TO HAVE INCURRED FOR THE PURPOSE OF BUSINESS OR PROFESSION AND NO DEDUCTION OR ALLOWANC E SHALL BE MADE IN RESPECT OF SUCH EXPENDITURE. THE ABOVE PROVISION OF LAW IS UNAMBIGUOUS AND THERE IS NO EXCEPTION ON GROUNDS OF IGNORANCE ETC. AS PURPORTED TO BE ARGUED BY THE APPELLANT. IN FACT, IF THE ASSESSEE COMPANY IS ENGAGED ON TRADING OF SH ARES ON A HISTORICAL BASIS, IT IS UNLIKELY THAT IT WOULD BE IGNORANT OF THE REL EVANT LEGAL PROVISION OF SEBI AND ITS TAX IMPLICATION. IT IS TO BE REMEMBERED THA T ACCOUNTS OF THE COMPANY ARE SUBJECT TO FINANCIAL AUDIT AS WELL AS TAX AUDIT AND THE COMPANY IS SUPPORTED BY LEGAL EXPERTS TO ADVICE ON TAXATION AN D FINANCIAL MATTERS. TO CONCLUDE, EVEN CONCEDING THE GENUINENESS OF THE TRANSACTION, THE SAME IS NOT ALLOWABLE U/S 37(1) OF THE INCOME TAX ACT. THE APPELLANT ALSO HAS MENTIONED ABOUT A CONTRACT WITH MPB IN RESPECT OF T HE PURCHASE TRANSACTION, BUT NO SUCH CONTRACT HAS BEEN PRESENTED BEFORE THE ASSESSING OFFICER. FROM ANOTHER ANGLE, SINCE THE TRANSACTION IS OFF MARKET, THERE HAS BEEN NO CONTRACT NOTE. THEREFORE, THE DATE OF PAYMENT/DELIVERY SHOUL D BE TAKEN INTO ACCOUNT FOR DETERMINATION OF THE PURCHASE PRICE OF SHARES OF GH CL. ON THE OTHER HAND, LD. AR FILED PAPER BOOK WHICH IS COMPRISING PAGES FROM 1 TO 155 AND SUBMITTED THAT SHARES WERE PURCHASED FOR A VALUE OF 1,47,20,000/- ON 29.08.2008. THESE SHARES WERE VALU ED AT THE END OF FINANCIAL YEAR (08-09) AT 44.56 LAKH AND THEREFORE THERE AROSE A DIFFERENCE O F 1026400.00 AND THIS DIFFERENCE WAS OF LOSS DUE TO THE VALUATION OF SHARE WHICH WAS DENIED BY AO. FROM THE ASSESSEE ORDER, IT IS CLEAR THAT THE PURCHASE OF THE SHARE WAS NOT DENIED BY AO. LD. AR DREW OUR ATTENTION ON PAGE 37 OF THE PAPER BOOK WHERE THE PURCHASE BILL F OR THE AFORESAID SHARE WAS PLACED ALONG WITH PAN OF MPB. FURTHER LD. AR SUBMIT TED THAT AO HAS NOT REJECTED / DOUBTED THE BOOKS OF ACCOUNT OF ASSESSEE . HE SUBMITTED THAT THERE ITA NO.1429/KOL/2012 A.Y. 2009-10 ITO WD-9(1) KOL. V. M/S ACYTELENE TREXIM ( P) LTD. PA GE 10 WAS A SEARCH CONDUCTED IN THE BUSINESS PREMISES OF ASSESSEE AND ALL THE BOOKS OF ACCOUNT INCLUDING FOR THE YEAR UNDER CONSI DERATION WERE DULY ACCEPTED. IT IS ALSO IMPORTANT TO NOTE THAT SAME SH ARES IN THE SUBSEQUENT YEAR WERE SOLD AT PROFIT. LD AR IN SUPPORT OF HIS CONTEN TION SUBMITTED COPY OF ASSESSMENT ORDER WHICH IS PLACED ON RECORD AND ALLE GATION OF AO THAT THERE IS A SINGLE BUSINESS TRANSACTION IN THE LAST THREE YEA RS IS FACTUAL INCORRECT AS ASSESSEE HAS DEALT INTO SHARE BUSINESS IN THE EARLI ER AND SUBSEQUENT YEAR ALSO INCLUDING THE RELEVANT YEAR UNDER CONSIDERATIO N. LASTLY, LD AR RELIED ON THE ORDER OF LD. CIT(A). 6. WE HAVE HEARD RIVAL PARTIES AND PERUSED THE MATE RIALS AVAILABLE ON RECORD. LD. DR FILED WRITTEN SUBMISSION WHICH IS PL ACED ON RECORD. ON THE OTHER HAND, LD. AR SUBMITTED PAPER BOOK WHICH IS RU NNING FROM PAGES 1 TO 155 PAGES AND CITED CASE LAWS. 6.1 FROM THE FOREGOING DISCUSSION, WE FIND THAT ASS ESSEE HAS PURCHASED SHARE OF THE GHCL ON 29.08.2008 BUT MADE THE PAYMEN T FOR THE PURCHASE OF SHARE IN THE MONTH OF MARCH09 AND ALSO SHARES WERE TRANSFERRED TO THE DEMAT ACCOUNT OF ASSESSEE IN THE MONTH OF MARCH09. THE V ALUE OF SHARE CAME DOWN DRASTICALLY ON THE BALANCE-SHEET DATE AS ON 31.03.2 009 AS A RESULT DUE TO DECLINE IN THE VALUE OF SHARES A LOSS OF 1,05,36,000/- WAS BOOKED IN ITS BOOKS OF ACCOUNT. WE FIND THAT AO TREATED THIS LOSS CLAIM ED BY ASSESSEE AS ILLEGAL LOSS AND IT WAS CREATED WITH THE SOLE PURPOSE OF AV OIDING THE TAX LIABILITY AGAINST THE INCOME FROM THE GENUINE SOURCE OF THE A SSESSEES BUSINESS. HOWEVER, LD. CIT(A) DELETED THE ADDITION MADE BY AO . NOW THE QUESTION BEFORE US IS AS TO WHETHER THE LOSS ARISING AS A RE SULT OF VALUATION OF CLOSING STOCK OF SHARE IS GENUINE BUSINESS LOSS IN THE AFOR ESAID FACTS AND CIRCUMSTANCES. AT THE OUTSET, WE FIND THAT SHARES W ERE PURCHASED ON 29.08.2008 FROM MPB AND ON THE DATE OF PURCHASE STO CK OF SHARE WAS VERY MUCH AVAILABLE IN THE DEMAT ACCOUNT OF MPB AS EVIDE NCED IN THE DEMAT ACCOUNT OF MPB WHICH IS PLACED ON PAGE 45 OF THE PA PER BOOK. WE ALSO FIND ITA NO.1429/KOL/2012 A.Y. 2009-10 ITO WD-9(1) KOL. V. M/S ACYTELENE TREXIM ( P) LTD. PA GE 11 THAT A NOTICE WAS ISSUED TO MPB U/S 133(6) OF THE A CT FOR CONFIRMING THE AFORESAID TRANSACTIONS IN ITS BOOKS OF ACCOUNT. WE FIND THAT MPB HAS DULY REFLECTED THE TRANSACTIONS WITH THE ASSESSEE IN ITS BOOKS OF ACCOUNT AND IN SUPPORT OF ITS CLAIM, THE BALANCE-SHEET ALONG WITH OTHER DOCUMENTS AND BANK A/C ARE PLACED ON PAGES 42 TO 64 OF THE PAPER BOOK. WE FURTHER FIND THAT AFORESAID SHARES WERE SOLD SUBSEQUENTLY IN THE FINA NCIAL YEAR 2009-10 AND THE DETAILS OF THE SAME IS PLACED ON PAGES 68 TO 81 OF THE PAPER BOOK. WE ALSO FIND THAT IN THE SIMILAR FACTS, CO-ORDINATE BENCH D ECIDED THE SAME ISSUE IN FAVOUR OF ASSESSEE IN ITA NO. 1595/KOL/2012 DATED 30-01-2015 IN THE CASE OF ITO V. KIRAN CONSORTIUM TRADE (P) LTD. THE RELEVANT EXTRACT IS REPRODUCED BELOW:- 5. WE HAVE HEARD RIVAL CONTENTIONS AND GONE THROUG H FACTS AND CIRCUMSTANCES OF THE CASE. WE FIND FROM THE FACTS T HAT THE ASSESSEE PURCHASED THESE SHARES FROM BEEJAY INVESTMENTS AND FINANCIAL CONSULTANTS P. LTD (IN SHORT BIFC) AND CONSEQUENTLY , THE SAID PARTY ISSUED THE SALE BILL TO ASSESSEE, COPY OF WHICH WAS FILED BEFORE THE ASSESSING OFFICER AND THE SAME IS NOT DISPUTED. THE ASSESSING OFFICER HAS RAISED THE ISSUE THAT BIFC DID NOT HAVE THE ADE QUATE NUMBER OF SHARES IN THEIR STOCK AS ON THE DATE SALE. HOWEVER, THE FACTS ARE CONTRARY TO THE FINDINGS OF THE ASSESSING OFFICER, AS WOULD APPEAR FROM THE COPY OF ACCOUNT ENCLOSED HEREWITH, THAT THE SAI D BFIC HAD THE REQUIRED NUMBER OF SHARES IN THEIR STOCK AND IN RES PONSE TO THE QUERY OF THE ASSESSING OFFICER, AN EXPLANATION WAS FILED VID E LETTER DATED 30-11- 2011 (COPY IS ENCLOSED IN ASSESSEE'S PAPER BOOK). F URTHER, THE ASSESSING OFFICER ALSO MADE ENQUIRY UNDER SECTION 1 33(6) FROM THE SELLER BIFC, WHO ALSO REPLIED AND ADMITTED THE FACT UM OF THE SALE OF SHARE. THEREFORE SIMPLY BECAUSE THE SHARES AMOUNT T RANSFERRED TO THE DEMAT ACCOUNT OF THE ASSESSEE OR THAT THE PAYMENTS WERE MADE IN THE SUBSEQUENT YEAR, THE TRANSACTION CANNOT BE TAKEN TO BE NOT GENUINE. THE ASSESSING OFFICER NOTED THAT THE TRANSACTION IS BOGUS AND FURTHER THE PURCHASE WAS INFLATED. HOWEVER, THERE IS NO BASIS F OR THE SAME BUT IT IS ONLY THE PRESUMPTIONS OF THE ASSESSING OFFICER. MOR EOVER, AS INFORMED DURING THE COURSE OF THIS APPEAL HEARING BEFORE US BY LEARNED COUNSEL THAT AFTER COMPLETION OF THE ASSESSMENT OF THE ASSE SSEE, SCRUTINY ASSESSMENT OF THE SELLER WAS TAKEN UP AND IN SUCH S CRUTINY ASSESSMENT, THE SALE OF THE HAVE BEEN TREATED TO BE GENUINE. THIS FACT WAS ALSO NOT EXAMINED BY THE ASSESSING OFFICER FROM THE ASSESSMENT RECORDS OF THE SELLER, AS THE PAN WAS GIVEN. WE ARE OF THE VIEW THAT IN CASE THE TRANSACTION HAVE BEEN TREATED AS GENUINE I N THE HANDS OF THE SELLER, THE SAME VERY TRANSACTION CANNOT BE NON-GEN UINE IN THE HANDS OF THE PURCHASER. APART FROM THIS, LEARNED COUNSEL ALS O RELIED ON THE ITA NO.1429/KOL/2012 A.Y. 2009-10 ITO WD-9(1) KOL. V. M/S ACYTELENE TREXIM ( P) LTD. PA GE 12 JUDGEMENT OF HON'BLE GUJARAT HIGH COURT IN THE CASE OF CIT V. PRUDENT FINANCE (P.) LTD. (2014) 225 TAXMAN 0125 (GU)), WHE REIN EXACTLY IDENTICAL ISSUE WAS TAKEN UP AND THE FACTS DISCUSSE D BY HON'BLE HIGH COURT AS UNDER: - 'RESPONDENT OF TAX APPEAL NO. 1003/2013 AND OTHER C ONNECTED APPEALS IS ONE PRUDENT FINANCE PVT. LTD. A COMPANY REGISTERED UNDER THE COMPANIES ACT. ONE NITIN B. PARIKH AND OT HER MEMBERS OF HIS FAMILY REFERRED TO AS NTTIN B. PARIK H GROUP OF ASSESSEE WHO HAD CONTROL OVER OTHERS, WAS SUBJECTED TO SEARCH ACTION UNDER SECTION 132 OF THE ACT. IT WAS FOUND T HAT LARGE NUMBER OF SHARES WERE TRADED BETWEEN THE COMPANY AN D THE SAID GROUP OF PERSONS AT OFF-MARKET TRANSACTIONS. S UCH OFF MARKET TRANSACTIONS WERE ENTERED BY THE COMPANY WITH OTHER UNRELATED ASSESSES ALSO. THE ASSESSING OFFICER CARRIED A BELI EF THAT SUCH TRANSACTIONS WERE NOT GENUINE, IN THE SENSE THAT TH E SAME WOULD HAVE TAKEN PLACE WITH ANTERIOR DATES IN THE OPINION OF THE ASSESSING OFFICER, THIS WAS DONE TO CONTRIVE LOSS I N THE HANDS OF SOME OF THE ASSESSEE WHO IN TURN TRANSFERRING THE P ROFITS IN THE HANDS OF OTHER ASSESSEES. THIS WAS DONE TO ENSURE T HAT THE ASSESSEES WHO HAD SIZABLE PROFITS FROM SALE OF SHAR ES COULD CLAIM SUCH LOSSES AS SET OFF. THE ASSESSING OFFICER QUESTIONED THE ASSESSEE COMPANY IN DETAIL. THE ASSESSING OFFICER I N THE ORDER OF ASSESSMENT FORMED A BELIEF THAT FULL DETAILS WERE N OT MADE AVAILABLE WITH RESPECT TO SUCH TRANSACTIONS. THE SA LES WERE NOT AT MARKET PRICE. THE AMOUNTS WERE NOT PAID, BUT ONLY A CCOUNT ENTRIES WERE MADE. THE SHARES WERE ALSO NOT TRANSFE RRED IN THE NAME OF THE PURCHASERS. ON SUCH BASIS, THE ASSESSIN G OFFICER CONCLUDED THAT THE TRANSACTIONS WERE NOT GENUINE AN D APPLYING THE RATIO OF THE JUDGMENT OF THE SUPREME COURT IN T HE CASE OF MCDOWELL CO. LTD V. COMMERCIAL TAX. OFFICER (1985) 154 ITR 148/22 TAXMAN 11, HELD THAT SUCH LOSS CANNOT BE ALL OWED. THE ASSESSING OFFICER OBSERVED THAT WHENEVER SALES WERE MADE TO OTHER ENTITIES, THEY WERE NOT FOLLOWED BY CHEQUE RE CEIPTS. SIMILARLY WHEN PURCHASES WERE MADE FROM OTHER ENTIT IES, THEY WERE ALSO NOT FOLLOWED BY CHEQUE PAYMENTS. HE CONCL UDED THAT THE ASSESSEE CARRIED OFF MARKET TRANSACTIONS BY SIM PLE PURCHASE BILLS OR SALES BILLS IGNORING MARKET RATES. THIS WA S DONE TO AVOID TAX.' AND FINALLY HELD AS UNDER: '8. ADDITIONALLY, WE ALSO NOTE THAT NECESSARY ENTRI ES WERE MADE IN THE ACCOUNT BOOKS OF BOTH SIDES, I.E. PURCHASER AND SEL LER AND DELIVERY RECEIPTS WERE ALSO PASSED DEMONSTRATING CONTEMPORAN EOUS SALE AND PURCHASE OF THE SHARES. IT IS NOT EVEN THE EASE OF THE REVENUE THAT SUCH ITA NO.1429/KOL/2012 A.Y. 2009-10 ITO WD-9(1) KOL. V. M/S ACYTELENE TREXIM ( P) LTD. PA GE 13 OFF MARKET TRANSACTIONS WERE NOT PERMISSIBLE. WHEN WE FIND THAT OFF MARKET TRANSACTIONS WERE PERMITTED IN LAW, THAT THE RE WAS NO EVIDENCE TO SUGGEST THAT ARTIFICIALLY THEY WERE SOLD AT RATE S LOWER THAN THE PREVAILING MARKET RATES AND WE FURTHER FIND THAT TH E ASSESSING OFFICER COULD NOT BRING ON RECORD ANY MATERIAL TO SHOW THAT THE TRANSACTIONS WERE SHOWN TO BE DELIBERATELY BACK-DATED, THE FINDI NGS OF THE COMMISSIONER (APPEALS) AS WELL AS THAT OF THE TRIBU NAL, IN OUR OPINION, CALL FOR NO INTERFERENCE.' IN VIEW OF THE ABOVE FACTS AND IDENTICAL ISSUE TAKE N UP BY HON'BLE GUJARAT HIGH COURT IN THE CASE OF PRUDENT FINANCE (P.) LTD. , SUPRA, WE ARE OF THE VIEW THAT THE TRANSACTION TO UNRELATED PARTIES I.E. OFF MARKET TRANSACTION, THERE WAS NO EVIDENCE IN THE PRESENT CASE ALSO WHICH SUGGESTS THAT THE SHARES WERE ARTIFICIALLY SOLD AT A LOWER RATE THAN THE PREVAILI NG MARKET RTE. EVEN THE ASSESSING OFFICE COULD NOT BRING ANYTHING ON RECORD , WHICH SUGGESTS THAT THE SELLING RATE WAS LOWER THAN THE MARKET RATE. RESPEC TFULLY FOLLOWING HON'BLE GUJARAT HIGH COURT, WE CONFIRM THE ORDER OF COMMISS IONER (APPEALS) AND THE ISSUE OF REVENUES APPEAL IS DISMISSED. FURTHER WE ALSO RELYING ON THE JUDGMENT OF HON'BLE GUJARAT HIGH COURT IN THE CASE OF CIT V. PRUDENT FINANCE (P) LTD. (2014) TAXMAN 125 WHERE THE HEAD NOTE AS UNDER:- -BUSINESS LOSS ALLOWABILITY GENUINENESS OF LOSS ON OFF MARKET TRANSACTIONS ASSESSEE-COMPANY FOUND TO BE TREATED IN OFF MARKET SHARE TRANSACTIONS WITH ITS RELATED GROUP OF PERSON S AS WELL AS WITH UNRELATED GROUPS OF PERSONS. AO DISALLOWED LOSSES O N IMPUGNED TRANSACTIONS ON THE GROUND THAT TRANSACTIONS WERE N OT GENUINE AS ASSESSEE CARRIED OFF MARKET TRANSACTIONS BY SIMPLE PURCHASE BILLS OR SALES BILLS IGNORING MARKET RTES. THIS WAS DONE TO AVOID TAX. MOREOVER NEITHER ANY AMOUNT WAS PAID NOR ANY SHARES WERE TRA NSFERRED IN THE NAME OF PURCHASERS, ONLY ACCOUNT ENTRIES WERE MADE. HELD: NECESSARY ENTRIES WERE MADE IN THE ACCOUNT BOOKS OF BOTH SIDE S, I.E. PURCHASER AND SELLER AND DELIVERY RECEIPTS WERE ALSO PASSED D EMONSTRATING CONTEMPORANEOUS SALE AND PURCHASE OF THE SHARES. IT WAS NOT EVEN THE CASE OF THE REVENUE THAT SUCH OFF MARKET TRANSACTIO NS WERE NOT PERMISSIBLE. WHEN OFF MARKET TRANSACTIONS WERE PER MITTED IN LAW, AND THERE WAS NO EVIDENCE TO SUGGEST THAT ARTIFICIALLY THEY WERE SOLD AT RATES LOWER THAN THE PREVAILING MARKET RATES AND AO COULD NOT BRING ON RECORD ANY MATERIAL TO SHOW THAT THE TRANSACTIONS WERE NOT GENUINE, THE FINDINGS OF CIT(A) AS WELL AS TRIBUNAL THAT IMPUGNE D TRANSACTIONS WERE GENUINE, CALLED FOR NO INTERFERENCE. FROM THE ABOVE JUDGMENTS, WE FIND THAT THE TRANSACT IONS OF SALE-PURCHASE WAS DULY RECORDED IN THE BOOKS OF ACCOUNT OF THE RESPEC TIVE PARTIES, THE ALLEGATION ITA NO.1429/KOL/2012 A.Y. 2009-10 ITO WD-9(1) KOL. V. M/S ACYTELENE TREXIM ( P) LTD. PA GE 14 BY THE ASSESSING OFFICER THAT THE OFF MARKET TRANSA CTIONS CANNOT BE ACCEPTED UNDER SCRA IS FACTUAL INCORRECT RELATING IN THE AFO RESAID APPELLATE ORDER. WE ALSO FIND THAT THE EXCEPTION HAS BEEN PROVIDED IN T HE SCRA ACT UNDER SECTION 14(2) OF THE SCRA ACT AS DISCUSSED ABOVE. ACCORDING LY WE UPHOLD THE ORDER OF LD. CIT(A) AND GROUND RAISED BY REVENUE IS DISMI SSED. 7. NEXT ISSUE IS AGAINST THE ORDER OF LD. CIT(A) IN DELETING THE ADDITION MADE BY AO FOR 15 LAKH ON ACCOUNT OF PAYMENT MADE FOR KEYMANS INSURANCE POLICY (KIP FOR SHORT) FOR THE DIRECTOR. 8. THE ASSESSEE HAS TAKEN KIP IN THE NAME OF ITS TW O DIRECTORS NAMELY MRS. ANITA AGARWAL AND MR. DINESH KR. AGARWAL. THE PREMIUM WAS PAID FOR EACH OF THE DIRECTOR FOR 7.50 LAKH EACH WHICH WAS CLAIMED AS AN EXPENSE IN THE PROFIT AND LOSS ACCOUNT OF ASSESSEE FOR THE YEA R ENDED 31.03.2009. THE AO DURING THE COURSE OF ASSESSMENT PROCEEDINGS RECO RDED THE STATEMENT OF DIRECTOR, MRS. ANITA AGARWAL U/S 131 OF THE ACT WHI CH IS REPRODUCED BELOW:- Q. NO. 2 PLEASE TELL ME WHAT KIND OF WORK ON BEHAL F OF THE COMPANY DO YOU DO? ANS. THE STUDY OF THE COMPANY TO WHOM LOAN SHOULD B E GIVEN OR NOT. Q. NO. 8 HOW DO YOU CONSIDER ANY LOAN CREDITORS FIT FOR GRANTING LOAN, I.E CRITERIA? ANS. MARKET REPUTATION, PROFIT AND LOSS ACCOUNT AND BALANCE SHEET. Q. NO.4 DO ANYONE INTRODUCE LOAN CREDITORS TO YOU? ANS. SOMETIMES FRIENDS OR OTHER WAY LOAN CREDITORS KNOW THAT THE COMPANY TENDERS LOAN. Q. NO. WOULD YOU NOTE THE FEASIBILITY REPORT IN ANY REGISTER? ANS. NO, NO ANY STAFF RECORDS THE FEASIBILITY RECOR DS. I ONLY MEMORIZED REPORTS OF THE COMPANY. I DONT MEMORIZE THE NOS. O F THE COMPANY TO WHOM HE LOANS WERE GIVEN FOR FINANCIAL YEAR 2008-09 . Q. NO. 13 HOW MANY STAFF ARE IN YOUR COMPANY AT PRE SENT? ITA NO.1429/KOL/2012 A.Y. 2009-10 ITO WD-9(1) KOL. V. M/S ACYTELENE TREXIM ( P) LTD. PA GE 15 ANS. I DO NOT KNOW. Q. NO. 14 WHAT ARE THE SOURCES OF LOAN TENDERED BY YOUR COMPANY? ANS. I AM NOT SURE ABOUT IT. Q. NO. 15 DO YOUR COMPANY DO OTHER BUSINESS OTHER T HAN TENDERING LOANS? ANS. NO. Q. NO. 16 ARE THERE ANY FIXED ASSETS OF THE COMPANY ? ANS. I DONT KNOW ABOUT THAT. FROM THE STATEMENT OF SAID DIRECTOR, AO OBSERVED TH AT THE DIRECTOR OF ASSESSEE-COMPANY IS JUST ACTING AS SIGNATORY ONLY A ND HAS NO ROLE IN THE DAY- TO-DAY AFFAIRS OF THE BUSINESS OF ASSESSEE-COMPANY. THEREFORE, THE EXPENSE INCURRED FOR 15 LAKHS ON ACCOUNT OF KIP ARE NOT HAVING ANY BUSIN ESS CONNECTION AND AO DISALLOWED THE SAME AND ADDED TO THE TOTAL INCOME OF ASSESSEE. 9. AGGRIEVED, ASSESSEE PREFERRED AN APPEAL BEFORE L D. CIT(A) WHO DELETED THE ADDITION MADE BY AO BY OBSERVING AS UND ER:- THE CENTRAL BOARD OF DIRECT TAXES VIDE CIRCULAR NO . 762 CLARIFIES THAT THE PREMIUM PAID BY COMPANY ON TAKING KEY-MAN INSUR ANCE POLICY AS A DEDUCTIBLE BUSINESS EXPENDITURE FOR THE COMPANY. FU RTHER, THE TERM INCOME AS DEFINED UNDER THE ACT SPECIFICALLY INCLUDES WI THIN ITS AMBIT ANY SUM RECEIVED UNDER A KEYMAN INSURANCE POLICY IN CLUDING ANY SUM ALLOCATED AS BONUS. THE AMOUNT RECEIVED BY THE COMP ANY PAYING THE KEYMAN INSURANCE PREMIUM ON CLAIM OR MATURITY OF PO LICY INCLUDING THE SUM ALLOCATED BY WAY OF BONUS ON SUCH POLICY IS NOT EXEMPT UNDER SECTION 10(10D) OF THE ACT WHICH EXEMPTS FROM, TAX ANY SUM RECEIVED UNDER A LIFE INSURANCE POLICY OTHER THAN, AMONG OTH ER THINGS, A KEYMAN INSURANCE POLICY. IT MAY ALSO BE NOTED HERE THAT TH E COMPANY ALSO HAS AN OPTION TO ASSIGN/ENDORSE THE INSURANCE POLICY IN FAVOUR OF THE KEY EMPLOYEE (KEYMAN) WHO HAS BEEN INSURED UNDER THE KE YMAN INSURANCE POLICY. IF SUCH AN ASSIGNMENT HAPPENS WHEN THE KEYM AN IS AN EMPLOYEE OF THE COMPANY OR AT THE TIME OF RETIREMEN T THE SURRENDER VALUE OF THE POLICY AT THE TIME OF ASSIGNMENT IS TA XABLE IN THE HANDS OF THE KEYMAN AS PROFIT IN LIEU OF SALARY AND TAXABLE AT THE APPLICABLE RATE. THE MAXIMUM MARGINAL RATE OF TAX IN THE HANDS OF TH E INDIVIDUALS IS ITA NO.1429/KOL/2012 A.Y. 2009-10 ITO WD-9(1) KOL. V. M/S ACYTELENE TREXIM ( P) LTD. PA GE 16 33.99%. IT IS ALSO TO BE NOTED THAT WHERE NO EMPLOY ER-EMPLOYEE RELATIONSHIP EXISTS AT THE TIME OF ASSIGNMENT, SUCH SURRENDER VALUE OR ANY OTHER PAYMENT IS TAXABLE AS INCOME FROM OTHER S OURCES IN THE HANDS OF THE KEYMAN. THE TAX INCIDENCE IS THE SAME AS ABOVE. IN THE INSTANCE CASE, THE KEY PERSONS WHO ARE COVER ED BY THE POLICY OF RS.7,500,000/- EACH ARE BOTH DIRECTORS OF THE COMPA NY AND THERE IS NO DENYING THE FACT THAT THE DIRECTOR AS EMPLOYEES WOR KED FOR THE COMPANY. ACCORDING TO THE APPELLANT COMPANY, THE PE RSONS PLAYED KEY ROLE IN MANAGING THE AFFAIRS AND IN TURN ADDING TO THE PROFITABILITY OF THE COMPANY. ACCORDING TO THE APPELLANT COMPANY, THE PE RSONS PLAYED KEY ROLE IN MANAGING THE AFFAIRS AND IN TURN ADDING TO THE PROFITABILITY OF THE COMPANY. THEREFORE, THE MERE FACT THAT THE LADY DIR ECTOR COULD NOT ANSWER SOME OF THE QUESTIONS POSTED BY THE ASSESSIN G OFFICER, DID NOT BY ITSELF MAKE HER OBSOLETE OR NON-PRODUCTIVE FOR T HE APPELLANT COMPANY. IN ANY CASE, THE ASSESSING OFFICER CANNOT SIT ON THE CHAIR OF THE BUSINESSMAN AND DICTATE TERMS AS TO HOW THE BUS INESS WOULD HAVE BEEN RUN. IT WAS INCUMBENT ON HIS PART TO ENSURE TH AT THE CLAIM IS WITHIN THE FOUR CORNERS OF THE PROVISIONS OF THE ACT AND T HE SCHEME. IN THE CASE OF CIT VS. RAJAN NANDA [2012] 205 TAXMA N 138/18 TAXMANN.COM 98 (DELHI), IT IS HELD THAT WHERE THE ASSESSEE COMPANY HAD TAKEN KEYMAN INSURANCE POLICIES ON LIFE OF ITS CHAIRMAN AND DIRECTOR BUT IN SUBSEQUENT YEAR SAID POLICIES WERE ASSIGNED TO CHAIRMAN AND DIRECTOR RECEIVING SURRENDER VALUE FROM THEM, A ND, FOR THE REMAINING PERIOD OF ALL THOSE POLICIES, THE INSURANCE PREMIUM S WERE PAID BY THE ASSIGNEE, THE DEDUCTION CLAIMED TOWARDS PREMIUM SO PAID (LESS SURRENDER VALUE RECEIVED BACK) COULD NOT BE DISALLO WED BY THE ASSESSING OFFICER ON THE GROUND THAT IT WAS A COLOU RABLE DEVICE ADOPTED BY THE ASSESSEE-COMPANY TO CLAIM BUSINESS EXPENDITU RE AND THAT THE EXPENDITURE WAS NOT WHOLLY AND EXCLUSIVELY FOR THE BUSINESS OF THE ASSESSEE-COMPANY. ONE OF THE BROAD PRINCIPLES FOR ALLOWANCE OF DEDUCT ION UNDER SEC. 37(1) OF THE ACT AS LAID DOWN BY THE HON'BLE SUPREME COUR T IN CIT V. CHANDULAL KESHAVLAL & CO. [1960] 38 ITR 601 (SC) IS THAT IF THE PAYMENT OR EXPENDITURE IS INCURRED FOR THE PURPOSE OF THE TRADE OF THE ASSESSEE IT DOES NOT MATTER THAT THE PAYMENT MAY EN SURE TO THE BENEFIT OF A THIRD PARTY. ANOTHER TEST IS WHETHER THE TRANS ACTION IS PROPERLY ENTERED INTO AS PART OF THE ASSESSEES LEGITIMATE C OMMERCIAL UNDERTAKING IN ORDER TO FACILITATE THE CARRYING ON ITS BUSINESS; AND IT IS IMMATERIAL THAT A THIRD PARTY ALSO BENEFITS THERE. IN THE LIGHT OF THE ABOVE OBSERVATION AND DISCUSSIO N AND ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND EMERGING L EGAL POSITION, I AM OF THE CONSIDERED VIEW THAT THE APPELLANT COMPANY I S ENTITLED FOR ITA NO.1429/KOL/2012 A.Y. 2009-10 ITO WD-9(1) KOL. V. M/S ACYTELENE TREXIM ( P) LTD. PA GE 17 DEDUCTION IN RESPECT OF THE PAYMENT OF THE PREMIUMS MADE FOR KEYMAN INSURANCE COVER FOR ITS DIRECTORS-EMPLOYEES AT RS.7 ,50,000/- EACH AGGREGATING TO RS.15,00,000/-.THUS, THE ADDITION OF RS.15,00,000/- MADE BY THE AO BY WAY OF THE DISALLOWANCES IS HEREBY DE LETED AND THIS GROUND OF APPEAL IS ALLOWED. BEING AGGRIEVED BY THIS ORDER OF LD. CIT(A) REVENUE IS IN APPEAL BEFORE US. 10. BEFORE US LD. DR SUBMITTED THAT AS PER THE PROV ISION OF THE ACT, PREMIUM UNDER KIP IS PAID FOR THOSE PERSONS WHO ARE PLAYING AN ACTIVE ROLE FOR THE GROWTH AND SURVIVAL OF THE ASSESSEES BUSIN ESS. BUT IN THE INSTANT CASE, THE DIRECTOR OF ASSESSEE-COMPANY, IS PLAYING NO ROL E IN THE DAY-TO-DAY AFFAIRS BUSINESS OF ASSESSEE-COMPANY AND ARE MERELY ACTING AS SIGNATORY. THEREFORE THEY ARE NOT ENTITLED FOR THE KIP. HE VEHEMENTLY RE LIED ON THE ORDER OF AO. ON THE OTHER HAND, LD. AR DREW OUR ATTENTION ON PAG E 152 OF PAPER BOOK AND DEMONSTRATED THAT THE DIRECTORS ARE ACTIVELY ENGAGE D IN THE BUSINESS AFFAIRS OF THE BUSINESS. THE KIP PREMIUM HAVE ALSO BEEN PAID I N EARLIER YEAR WHICH WAS ALLOWED AS DEDUCTION AND HE VERY MUCH RELIED ON THE ORDER OF LD. CIT(A). 11. WE HAVE HEARD RIVAL CONTENTIONS AND PERUSED THE MATERIALS AVAILABLE ON RECORD. WE FIND THAT AO DISALLOWED THE PAYMENT OF K IP PREMIUM ON THE GROUND THAT THE DIRECTORS OF ASSESSEE-COMPANY ARE N OT ACTIVELY ENGAGED IN THE DAY-TO-DAY AFFAIRS. AT THIS JUNCTURE, WE WOULD LIKE TO REPRODUCE THE MEANING OF KIP AS PER EXPLANATION-I TO SEC. 10(10D) OF THE ACT WHICH READS AS UNDER:- [EXPLANATION 1]. FOR THE PURPOSES OF THIS CLAUSE, KEYMAN INSURANCE POLICY MEANS A LIFE INSURANCE POLICY TAKEN BY A PERSON O N THE LIFE OF ANOTHER PERSON WHO IS OR WAS THE EMPLOYEE OF THE FI RST-MENTIONED PERSON OR IS OR WAS CONNECTED IN ANY MANNER WHATSOE VER WITH THE BUSINESS OF THE FIRST-MENTIONED PERSON [AND INCLUDE S SUCH POLICY WHICH HAS BEEN ASSIGNED TO A PERSON, AT AN TIME DURING TH E TERM OF THE POLICY, WITH OR WITHOUT ANY CONSIDERATION];] ITA NO.1429/KOL/2012 A.Y. 2009-10 ITO WD-9(1) KOL. V. M/S ACYTELENE TREXIM ( P) LTD. PA GE 18 ON A BARE READING, WE FIND THAT SAID SECTION REQUIR ES THE CONNECTION BETWEEN THE ASSESSEE AND PERSON TO BE COVERED UNDER INSURAN CE. IT IS NOT NECESSARY THAT HE SHOULD BE AWARE OF ALL THE AFFAIRS OF BUSIN ESS OF ASSESSEE. IN VIEW OF ABOVE, WE FIND NO REASON TO INTERFERE IN THE ORDER OF LD. CIT(A). WE UPHOLD ACCORDINGLY. GROUND RAISED BY REVENUE IS DISMISSED. 12. IN THE RESULT, REVENUES APPEAL STANDS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT 03/ 08/2016 SD/- SD/- ( !') ( !') (N.V.VASUDEVAN) (WASEEM AHMED) (JUDICIAL MEMBER) (ACCOUNTANT MEMBER) KOLKATA, *DKP $!% &- 03 / 08 /201 6 / COPY OF ORDER FORWARDED TO:- 1. /APPELLANT-ITO, WARD-9(1), P-7, CHOWRINGHEE SQ., AA YAKAR BHAWAN, 5 TH FLOOR, R OOM-14, KOLKATA-69 2. /RESPONDENT-M/S ACYTELENE TREXIM (P) LTD. 14, N.S.R OAD 4 TH FL, CLIVE ROW, KOL-01 3. %.%/0 1 1 2 / CONCERNED CIT KOLKATA 4. 1 1 2- / CIT (A) KOLKATA 5. 567 /0, 1 /0 , / DR, ITAT, KOLKATA 6. 7:; <= / GUARD FILE. BY ORDER/ 1! , /TRUE COPY/ / % 1 /0 ,