DCIT, Kanpur V. Sunil Kumar Gupta, Kanpur

ITA 729/LKW/2010

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 9062 (ITAT-LUCKNOW)
• Duration Of Justice: 3 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-03-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 23-03-2011
• Assessment Year: 2003-2004
• Appeal Filed On: 09-12-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: ANADI VERMA
• Assessee Lawyers: SUDHINDRA JAIN
• Keywords: Business income; Speculation loss; Difference of opinion
• Section: 143(3); 14A; 133(6); 43(5)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL LUCKNOW BENCH A : LUCKNOW BEFORE SHRI H. L. KARWA, HONBLE VICE PRESIDENT AND SHRI N. K. SAINI, ACCOUNTANT MEMBER I.T.A. NO.729/LKW/10 ASSESSMENT YEAR:2003-2004 DY. C. I. T.-4, VS. SHRI SUNIL KUMAR GUPTA, KANPUR. 4/284-A, PARWATI BAGLA ROAD, KANPUR. PAN:ADFPG7408L (APPELLANT) (RESPONDENT) APPELLANT BY: SHRI ANADI VERMA, D. R. RESPONDENT BY: SHRI SUDHINDRA JAIN, C. A. ORDER PER N. K. SAINI: THIS IS AN APPEAL FILED BY THE DEPARTMENT AGAINST T HE ORDER DATED 30/09/2010 OF CIT(A)-I, KANPUR RELEVANT TO ASSESSME NT YEAR 2003-2004. IN THIS APPEAL THE DEPARTMENT HAS RAISED THE FOLLOW ING GROUNDS: 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE THE LD. COMMISSIONER OF INCOME TAX(A) HAS ERRED IN LAW AS W ELL AS WITHOUT APPRECIATING THE FACTS THAT THE AO WAS NOT IN A POSITION AT HIS LEVEL TO WORK OUT THE PROFIT EARNED ON TRANS ACTIONS ON DELIVERY BASIS AND INCOME/LOSS ON TRANSACTION WITHO UT DELIVERY BASIS. AS SUCH THE AO REFERRED THE CASE TO THE LD. CIT FOR REFERENCE U/S 142(2A) OF THE I.T. ACT , 1961 AND EV OKED PROVISIONS OF SECTION 145(3) OF THE I.T. ACT, 1961. 2. ON THE FACTS AND CIRCUMSTANCES OF THE CASE THAT THE LD. COMMISSIONER OF INCOME TAX(A)-I HAS ERRED IN LAW AN D ON 2 FACTS IN DELETING THE ADDITION OF ` 11,36,087/- IN TRADING PROFIT ARE CONTRARY TO THE FACT OF THE CASE AS AO WAS NOT IN A POSITION AT HIS LEVEL TO WORK OUT THE PROFIT EARNED ON TRANS ACTIONS ON DELIVERY BASIS AND INCOME/LOSS ON TRANSACTIONS WITH OUT DELIVERY BASIS. 3. ON THE FACTS AND CIRCUMSTANCES OF THE CASE THE LD.CIT(A)-1 HAS ERRED IN LAW IN DELETING THE ADDITI ON OF ` 1,31,111/- ON THE GROUND THAT SINCE THE ASSESSEE HI MSELF HAS ADMITTED TOTAL WITHDRAWAL OF THE FAMILY AT ` 2,27,111/- INCLUDING ` 1,91,111/-. THEREFORE, DIFFERENCE FROM 1,91,111 - 6 0,000 ) HAS BEEN INCURRED FOR HOUSE HOLD EXPENSES FROM UNDE CLARED SOURCES. 4. THAT THE ORDER OF COMMISSIONER OF INCOME TAX (APPEALS)-I, KANPUR BEING ERRONEOUS, UNJUST AND BAD IN LAW AND ON FACTS DESERVES TO BE VACATED AND THAT THE OR DER OF THE ASSESSING OFFICER BE RESTORED; AND 5. THAT THE APPELLANT CRAVES LEAVE TO MODIFY ANY OF THE GROUNDS OF APPEAL GIVEN ABOVE AND/OR ADD ANY FRESH GROUND AS AND WHEN IT IS CONSIDERED NECESSARY TO DO SO. 2. GROUND NO. 1 & 2 ARE CORRELATED AND RELATE TO TH E DELETION OF ADDITION OF ` 11,36,087/- MADE BY THE ASSESSING OFFICER ON ACCOUN T OF TRADING PROFIT. 2.1 THE FACTS RELATED TO THIS CASE, IN BRIEF, ARE T HAT THE ASSESSEE IS A MEMBER OF U.P. STOCK EXCHANGE ASSOCIATION LTD. AND WAS ENGAGED IN THE BUSINESS OF PURCHASE AND SALE OF SHARES ON BEHALF O F ITS CLIENTS AS WELL AS ON OWN BEHALF. APART FROM TRADING IN THE SHARES ON BEHALF OF HIS CLIENTS AS WELL AS ON HIS OWN BEHALF, THE ASSESSEE ALSO INVEST ED IN SHARES AS AN INVESTMENT AND MAINTAINED THE BOOKS OF ACCOUNTS ON PRINCIPAL TO PRINCIPAL BASIS I.E. WHENEVER ANY CLIENT INTENDED TO SALE ANY SHARE, ASSESSEE 3 PURCHASED IT FROM THE CLIENTS AND SOLD IT TO THE BR OKERS. SAME WAS DONE IN REVERSE ORDER IN CASE OF SALES BY THE CLIENTS. THUS , FOR A SINGLE TRANSACTION ASSESSEE HAS TO REGISTER DUAL ENTRY. THE ASSESSEE FILED THE RETURN OF INCOME ON 29/10/2003 DECLARING AN INCOME OF ` 2,49,140/- WHICH WAS PROCESSED ON 03/12/2003. LATER ON THE CASE WAS SEL ECTED FOR SCRUTINY. DURING THE ASSESSMENT PROCEEDINGS, THE ASSESSEE WAS REQUIRED TO FURNISH THE DETAILS OF SALES AS UNDER: (A) OWN TRADING WHERE DELIVERY OF SHARES TAKEN PLA CE; (B) OWN TRADING WHERE DELIVERY OF SHARES NOT TAKEN PLACE; (C) TRADING ON BEHALF OF CLIENT WHERE DELIVERY OF SHARES TAKEN PLACE; (D) TRADING ON BEHALF OF CLIENT WHERE DELIVERY OF S HARES NOT TAKEN PLACE; AND (E) COMPLETE LIST WITH POSTAL ADDRESS OF SUB BROKER , TERMS AND CONDITIONS, COPY OF AGREEMENT, IF ANY. 2.2 IN COMPLIANCE TO THE ABOVE, THE ASSESSEE, VIDE ITS REPLY DATED 10/11/2005, STATED THAT IT WAS DEALING WITH THE CLI ENTS ON PRINCIPAL TO PRINCIPAL BASIS AND AS A MEMBER OF STOCK EXCHANGE, IT WAS NEITHER PERMITTED TO DO ANY SPECULATION BUSINESS NOR IT HAS DONE ANY SPECULATION BUSINESS. IT WAS FURTHER STATED THAT AS PER STOCK EXCHANGE SYSTEM ALL THE TRANSACTIONS HAVE TO BE SETTLED WITHIN A SETTLEMENT PERIOD AND THAT THE STOCK EXCHANGE SETTLED ITS TRANSACTIONS ON NET BASI S ON THE SETTLED CUT OFF POINT. IT WAS EXPLAINED THAT ALL THE TRANSACTIONS WERE MADE THROUGH STOCK EXCHANGE ONLY AND SETTLEMENT OF AMOUNTS HAD BEEN TH ROUGH ACCOUNT PAYEE CHEQUES OR THROUGH ELECTRONIC CLEARING SYSTEM . IT WAS POINTED OUT 4 THAT THE ASSESSMENTS U/S 143(3) OF THE I.T. ACT (IN SHORT, THE I.T. ACT) HAD BEEN COMPLETED SEVERAL TIMES IN EARLIER YEARS AND I TS REPLY ON THE ISSUE HAD BEEN ACCEPTED BY THE DEPARTMENT. THE ASSESSING OFFICER, AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE, HAD WR ITTEN TO THE U.P. STOCK EXCHANGE LTD. KANPUR U/S 133(6) TO FURNISH THE FOLL OWING INFORMATION: (I) A CERTIFIED COPY OF ACCOUNT OF SRI SUNEEL KUMAR GUPTA, PROP. M/S SUNIL BROS. AS APPEARING IN YOUR BOOK BOOKS OF ACCOUNT FOR THE PERIOD 01/04/2002 TO 31.3.2003. (II) FURNISH YOUR PAN ALONG WITH COMPLETE POSTAL AD DRESS OF YOUR ASSESSING OFFICER, AND (III) DETAILS OF SHARE TRANSACTIONS, IF ANY, WITHOU T TAKING AND GIVING DELIVERY OF SHARES. 2.3 THE U.P. STOCK EXCHANGE ASSOCIATION LTD., KANPU R VIDE THEIR LETTER DATED 13/01/2006 FURNISHED THE REQUIRED DETAILS AS UNDER: I. TOTAL PURCHASE ` 23,21,47,625/- (INCLUDING DEL.) II. TOTAL SALES ` 22,99,36,944/- (INCLUDING DEL.) III. DELIVERY RECEIVED ` 60,20,557/- (DELIVERY BASE) IV. DELIVERY GIVEN ` 39,91,778.50 (DELIVERY BASE) 2.4 AFTER RECEIVING THE ABOVE DETAILS FROM U.P. ST OCK EXCHANGE, THE ASSESSING OFFICER REQUIRED THE ASSESSEE TO EXPLAIN AS TO WHY THE DIFFERENCE WITH RESPECT TO LOSS MAY NOT BE DISALLOW ED BEING LOSS IN SPECULATION BUSINESS. IN RESPONSE, THE ASSESSEE SU BMITTED THAT IT IS A MEMBER OF STOCK EXCHANGE AND SETTLED ALL THE TRANSA CTIONS ENTERED INTO IN 5 A SPECIFIED PERIOD. IT WAS FURTHER SUBMITTED THAT THE SETTLEMENT WAS MADE ON THE NET BALANCE PAYABLE/RECEIVABLE AS PER THE PR OVISIONS OF SECURITIES CONTRACTS (REGULATION)ACT 1956. IT WAS ALSO STATE D THAT SECTION 43(5)(C) OF THE I.T. ACT PROVIDES SPECIFIC EXEMPTION TO THE SHA RE BROKERS WITH REGARD TO JOBBING AND ARBITRAGE DONE BY SHARE BROKERS. THE A SSESSING OFFICER WAS OF THE VIEW THAT THE ASSESSEE HAD MADE TRADING WITH OUT TAKING AND GIVING DELIVERY OF SHARES AND HAD NOT DEALT IN SHARES TO S AFEGUARD THE HOLDING OF SHARES. HE, THEREFORE, ISSUED ANOTHER SHOW CAUSE L ETTER DATED 20.1.2006 AND REQUIRED THE ASSESSEE TO FILE HIS EXPLANATION O N THE ISSUE. THE RELEVANT PORTION OF THE SAID SHOW CAUSE LETTER READ AS UNDER: A LETTER DATED 18.01.2006 WAS WRITTEN TO YOU AND A COPY OF LETTER RECEIVED FROM M/S U.P. STOCK EXCHANGE WAS EN CLOSED AND IT WAS REQUIRED TO EXPLAIN AS TO WHY THE LOSS I NCURRED ON ACCOUNT OF PURCHASE AND SALES OF SHARES WITHOUT TAK ING DELIVERY MAY NOT BE DISALLOWED AS LOSS IN SPECULATI ON BUSINESS. IT IS IMPORTANT TO MENTION HERE THAT AS P ER COPY OF ACCOUNT OF SMT. SHASHI AGARWAL AND SRI SHAILENDRA K UMAR AGARWAL SPECULATION IN SHARE BUSINESS HAS BEEN DONE BY YOU. YOU ARE THEREFORE, REQUIRED TO GIVE DETAILS OF TOTA L PURCHASES AND SALES OF SHARE WITHOUT TAKING DELIVERY OF SHARE S SO THAT LOSS IN SPECULATION BUSINESS MAY BE DETERMINED. PL EASE NOTE IN CASE OF NON-COMPLIANCE THE DIFFERENCE AS PER DET AILS RECEIVED FROM U. P. STOCK EXCHANGE, THE LOSS IN SHA RE SPECULATION BUSINESS WILL BE DISALLOWED. 2.5 IN RESPONSE TO THE ABOVE LETTER, THE ASSESSEE S UBMITTED TO THE ASSESSING OFFICER AS UNDER: 6 THAT AS REGARDS YOUR QUERY NO. IV, BASED ON COPY O F LETTER RECEIVED FROM M/S U.P. STOCK EXCHANGE, WE HAVE TRIE D TO RECONCILE THE SAME AS FOLLOWS: PURCHASE MADE AS PER UPSE LETTER ` 23,21,47,625/- LESS:DELIVERY RECEIVED AS PER UPSE LETTER ` 60,20,557/- ` 22,61,27,068/- SALES MADE AS PER UPSE LETTER ` 22,99,36,944/- LESS: DELIVERY GIVEN AS PER UPSE LETTER ` 39,91,778/- ` 22,59,45,166/- CLEARING DIFF. PAID TO UPSE ` 1,81,902/- THIS CLEARING DIFF. HAS BEEN PAID TO U.P. STOCK EXC HANGE AS PER NETTING SYSTEM. FURTHER, TO OUR EARLIER LETTER WE WISH TO CLARIFY THAT ABOVE CLEARING DIFFERENCE CANNOT BE TE RMED AS SPECULATION LOSS ON THE FOLLOWING FOUNDATIONS. (A) THAT AS REGISTERED SHARE BROKER, WE HAVE TO SET TLE ALL THE TRANSACTION ON NETTING BASIS DURING A SETTLEMEN T PERIOD AS PER ESTABLISHED SYSTEM OF STOCK EXCHANGE AND AS PER THE GUIDELINES OF STOCK MARKET REGULATORY BO DY SEBI. (B) THAT WE WISH TO BRING IT TO YOUR KIND MEMORY TH AT SECTION 43(5) ALSO CONFERS SPECIAL EXEMPTION TO SHA RE BROKERS FOR THE TRANSACTIONS DONE BY THEM IN STOCK EXCHANGE. (C) THAT SMT. SHASHI AGARWAL & SRI SAHILENDRA KUMAR AGARWAL ARE OUT CLIENTS AND WE HAVE PROVIDED THEIR COPY OF ACCOUNT TO YOUR HONOUR. THEY ARE NOT THE REGIST ERED BROKERS OF THE EXCHANGE HENCE ANY TRANSACTIONS IF INCURRED BY THEM WITHOUT ANY INTENT TO TAKE/GIVE DE LIVERY MIGHT BE SPECULATIVE TRANSACTION FOR THEM BUT NOT F OR US. MOREOVER WE ARE NOT IN POSSESSION OF THEIR COPY OF ACCOUNT AS PROVIDED TO YOU FOR FURTHER EXPLANATION. (D) THAT WE REITERATE THAT INSPITE OF CLEARING DIFF ERENCE PAYMENT MADE TO U.P. STOCK EXCHANGE WE HAVE SHOWN PROFIT AS SUCH WE ARE NOT CLAIMING ANY LOSS. YOU A RE 7 REQUESTED TO LOOK INTO MY REPLY DATED 30/01/2006 FO R CLARIFICATION. 2.6 THE ASSESSING OFFICER, AFTER CONSIDERING THE AB OVE SUBMISSIONS OF THE ASSESSEE, OBSERVED THAT IT WAS NOT POSSIBLE FRO M THE DETAILS FURNISHED BY THE ASSESSEE AND ALSO FROM THE BOOKS OF ACCOUNT MAINTAINED BY THE ASSESSEE TO WORK OUT THE FOLLOWING DETAILS: (A) OWN TRADING WHERE DELIVERY OF SHARES TAKEN PLA CE; (B) OWN TRADING WHERE DELIVERY OF SHARES NOT TAKEN PLACE; (C) TRADING ON BEHALF OF CLIENT WHERE DELIVERY OF S HARES TAKEN PLACE: (D) TRADING ON BEHALF OF CLIENT WHERE DELIVERY OF S HARES NOT TAKEN PLACE. 2.7 HE FURTHER OBSERVED THAT IT WAS NOT POSSIBLE TO WORK OUT THE PROFIT EARNED ON TRANSACTIONS ON DELIVERY BASIS AND INCOME /LOSS ON TRANSACTIONS WITHOUT DELIVERY BASIS. HE, THEREFORE, REFERRED TH E CASE TO THE COMMISSIONER OF INCOME TAX-II, KANPUR FOR TAKING HI S APPROVAL FOR REFERENCE U/S 142(2A) OF THE INCOME TAX ACT, 1961. THE LD. COMMISSIONER OF LNCOME TAX, VIDE HIS LETTER DATED 1 3.3.2006 APPROVED THE PROPOSAL FOR REFERENCE FOR AUDIT U/S 142(2A) OF THE ACT AND ALSO APPOINTED M/S U.S. GUPTA ASSOCIATES, C.A., KANPUR. CONSEQUENTLY, ORDER U/S 142(2A) OF THE ACT, WAS PASSED BY THE ASSESSING OFFICER ON 14.3.2006 AND ASSESSEE WAS REQUIRED TO FURNISH AUDI T REPORT FROM M/S. U.S. GUPTA AND ASSOCIATES WITHIN 60 DAYS ON THE FOL LOWING POINTS: 8 1. (A) SALES EFFECTED IN OWN ACCOUNT WITH DELIVERY OF SHARES/SECURITIES. (B) SALES EFFECTED ON BEHALF OF CLIENTS WITH DELIVE RY OF SHARES/SECURITIES. (C) SALE EFFECTED IN OWN ACCOUNT WITHOUT TAKING DEL IVERY OF SHARES/SECURITIES. (D) SALES EFFECTED WITHOUT TAKING DELIVERY OF GOODS ON BEHALF OF CLIENTS. (E) BROKERAGE EARNED IN SHARE BUSINESS. 2. TO EXAMINE ALL CLEARING AND TO ASCERTAIN THE LOS S/GAIN IN EACH SCRIP AS REQUIRED IN PARA 1(A) TO 1(E). 3. TO AUDIT AND EXAMINE TRANSACTIONS MADE WITH SPEC IFIED PERSON U/S 40A(2)(B). 2.8 THE ASSESSEE SOUGHT FOR GRANT OF ADDITIONAL TIM E FOR AUDIT U/S 142(2A) OF THE I.T. ACT. THE TIME PERIOD OF SUBMI SSION OF REPORT WAS EXTENDED BY 105 DAYS FROM THE SERVICE OF THE ORDER U/S 142(2A) OF THE ACT. THEREAFTER, THE ASSESSEE FURNISHED AUDIT REPORT ON 28.6.2006 IN FORM NO.6B AS PER RULE 14A OF THE I.T. RULES, IN THE SAI D REPORT THE AUDITOR M/S U.S. GUPTA ASSOCIATES HAS FURNISHED THE INFORMATION AS UNDER: (A) SALES EFFECTED IN OWN ACCOUNT WITH DELIVERY ` 19,09,01,024.79 OF SHARES/SECURITIES (B) SALES EFFECTED ON BEHALF OF CLIENTS WITH ` 8,07,41,170.59 DELIVERY OF SHARES/SECURITIES (C) SALE EFFECTED IN OWN ACCOUNT WITHOUT ` 2,271,210,090.34 TAKING DELIVERY OF SHARES/SECURITIES (D) SALE EFFECTED IN OWN ACCOUNT WITHOUT ` 54,05,58,558.55 TAKING DELIVERY OF SHARES/SECURITIES 9 2.9 AS REGARDS TO THE TRANSACTION ON BEHALF OF CLIE NTS WITH DELIVERY AND WITHOUT DELIVERY, THE AUDITOR REPORTED THAT THE ASS ESSEE HAS SUBMITTED THAT HE HAS DEALT WITH HIS CLIENTS ON PRINCIPAL TO PRINC IPAL BASIS. THE SALE IN THIS ACCOUNT WILL BE A PART OF SALES EFFECTED IN OWN ACC OUNT AND SALES EFFECTED ON BEHALF OF CLIENT WOULD BE NIL. OTHER DETAILS RE LATING TO PURCHASE AND SALES FURNISHED BY THE AUDITOR WERE AS UNDER: ANNEX. A FROM PAGE NO. 18 STATEMENT OF PURCHASES AND SALES. ANNEX. B FROM PAGE NO. 19-29 TOTAL PURCHASE & SAL ES INCLUDING DELIVERY & WITHOUT DELIVERY INCLUDING CLIENT. TOTAL PURCHASES ` 2,22,39,37,281.06 TOTAL SALES ` 2,22,63,02,607.54 ANNEX. B FROM PG. NO.30-40 TOTAL PURCHASE & SALES INCLUDING DELIVERY INCLUDING CLIENT. TOTAL PURCHASES ` 18,88,66,594.72 TOTAL SALES ` 19,09,01,024.79 ANNEX.B FROM PG. 41 TO 44 TOTAL PURCHASE & SALES INCLUDING WITHOUT DELIVERY INCLUDING CLIENT TOTAL PURCHASES ` 2,03,50,70,686.34 TOTAL SALES ` 2,03,54,01,582.75 ANNEXUREB TRADING ACCOUNT (U.P. STOCK EXCHANGE) 2.10 THE ASSESSING OFFICER POINTED OUT THAT THE AUD ITORS ALSO STATED IN THE REPORT REGARDING SALES EFFECTED ON BEHALF OF THE CL IENTS AND DELIVERY OF SHARES AND SECURITIES, THE OBSERVATION MADE BY THE ASSESSING OFFICER ARE AS UNDER: THE AUDITOR HAS FURNISHED THE INFORMATION OF SALES EFFECTED TO CLIENTS WITH DELIVERY OF SHARES/SECURITIES. THIS I S ` 8,07,41,170.59. THE AUDITOR HAS STATED THAT HE HAS DEALT WITH 10 HIS CLIENTS ON PRINCIPAL TO PRINCIPAL BASIS. IN TH IS VIEW THIS SALES WILL BE A PART OF SALES EFFECTED IN OWN ACCOU NT AND SALES EFFECTED ON BEHALF OF CLIENTS WOULD BE NIL. THE AUDITEE HAS FURNISHED THE INFORMATION OF SALES EFFECTED TO CLIENTS WITHOUT DELIVERY OF SHARES/SECURITIES. THI S IS ` 54,05,58,558.55. THE AUDITEE HAS STATED THAT HE HA S DEALT WITH HIS CLIENTS ON PRINCIPAL TO PRINCIPAL BASIS. IN THIS VIEW THIS SALES WILL BE A PART OF SALES EFFECTED IN OWN ACCOU NT AND SALES EFFECTED ON BEHALF OF CLIENTS WOULD BE NIL. 2.11 ON THE BASIS OF THE DETAILS AND FACTS AS FURNI SHED BY THE AUDITOR, THE ASSESSING OFFICER ISSUED A SHOW CAUSE LETTER DATED 05/07/2006 TO THE ASSESSEE TO EXPLAIN/DESCRIBE AND SHOW AS TO WHY THE INCOME OF ` 22,05,074/- MAY NOT BE TREATED AS INCOME FROM SHARE TRADING IN HIS CASE. THE RELEVANT PORTION OF THE SAID LETTER WAS AS UNDE R: AUDITOR HAS FURNISHED DETAILS OF SALES AND PURCHAS ES AS REQUIRED FROM HIM WITH HIS AUDIT REPORT (AT PAGE NO . 18 WHICH IS ANNEXURE-A). ON THE BASIS OF DETAILS (STATIST ICS) AS FURNISHED BY AUDITOR, INCOME FROM BUSINESS IS WORKE D OUT AS UNDER: (A) TRADING IN OWN ACCOUNT WITH DELIVERY OF SHARES: OPENING STOCK AS PER PROFIT & LOSS ACCOUNT ` 43,03,919.10 ADD : PURCHASE FROM BROKER AS PER AUDIT REPORT ` 10,91,84,108.35 U/S 142(2A) ----------------------- TOTAL(A) ` 11,34,88,027.45 SALES AS PER AUDIT REPORT U/S 142(2A) ` 11,01,59,854.20 CLOSING STOCK AS PER PROFIT & LOSS ACCOUNT ` 35,02,380.15 ----------------------- TOTAL(B) ` 11,36,62,234.35 ----------------------- DIFFERENCE (B-A) PROFIT ` 1,74,207.30 11 (B) TRADING ON BEHALF OF CLIENTS WITH DELIVERY OF S HARES: PURCHASE MADE WITH DELIVERY ON BEHALF ` 7,96,82,486.37 OF CLIENTS AS PER AUDITORS REPORT U/S 142(2A) (A) SALES MADE ON BEHALF OF CLIENTS WITH ` 8,07,41,170.59 DELIVERY AS PER AUDITORS REPORT U/S 142(2A) (B) DIFFERNECE (B-A) PROFIT ` 10,58,684.22 (C) SHARE TRADING IN OWN ACCOUNT WITHOUT DELIVERY OF STOCK: SALES AS PER AUDIT REPORT U/S 142(2A) (A) ` 1,49,48,43,024.20 PURCHASE MADE AS PER AUDITORS ` 1,49,28,12,157.59 REPORT U/S 142(2A) (B) DIFFERNECE (B-A) PROFIT ` 20,30,867.00 (D) SHARE TRADING WITHOUT DELIVERY OF STOCK ON BEHALF OF CLIENTS: PURCHASE AS PER AUDITORS REPORT ` 54,22,58,528.75 U/S 142(2A) (A) SALES AS PER AUDITORS REPORT ` 54,05,58,558.55 U/S 142(2A) (B) DIFFERENCE (LOSS (A-B) ` 16,99,970.20 PROFIT AND LOSS AS PER ABOVE PARA (B) & (D) IS NOT LIABLE TO BE ACCOUNTED FOR IN YOUR INCOME SINCE IT IS PROFIT/LOS S IN THE ACCOUNT OF CLIENTS. ONLY THE BROKERAGE OR OTHER CH ARGES EARNED BY YOU IS LIABLE TO INCLUDE IN YOUR INCOME. TAXABLE INCOME IN YOUR HAND COMES TO `1 ,74,207.30 + ` 20,30,867/- TOTAL AT ` 22,05,074/- (A + C). PLEASE SHOW CAUSE AS TO WHY INCOME OF ` 22,05,074/- MAY NOT BE TREATED AS INCOME FROM SHARE TRADING. 2.12 THE ASSESSEE, IN REPLY TO THE ABOVE LETTER DAT ED 05/07/2006, SUBMITTED TO THE ASSESSING OFFICER VIDE LETTER DATE D 27/07/2006 AS UNDER: 12 THAT AS REGARDS YOUR QUERY NO. 1(B) WE WISH TO SUB MIT FOLLOWING RECONCILIATION OF FIGURES AS DEDUCED BY Y OU IN SUB HEAD (A), (B), (C) AND (D). PROFIT IN OWN ACCOUNT WITH DELIVERY ` 1,74,207.30 PROFIT ON BEHALF OF CLIENTS WITH DELIVERY ` 10,58,684.22 PROFIT IN TRADING WITHOUT DELIVERY OF SHARE ` 20,30,867.00 LESS:LOSS ON BEHALF OF CLIENTS WITHOUT DELIVERY ` 16,99,970.20 ` 15,63,788.32 LESS:CLEARING DIFFERENCE PAID TO UPSE 1,81,903.00 BROKERAGE/EXP. CHARGED BY BROKERS 3,22,481.38 10,59,403.94 ADD: OTHER RECEIPT FROM CLIENTS ` 1,530.04 GROSS PROFIT AS PER BOOKS ` 10,60,986.98 IN VIEW OF ABOVE IT IS STATED THAT YOUR CALCULATION OF ` 22,05,074.00 IS BASED ON WRONG PREMISE/MIS-CALCULAT ION OF FACTS AS SUCH WE REQUEST YOU TO NOT TO TREAT ` 22,05,074.00 AS INCOME FROM SHARE TRADING ON FOLLOWING GROUNDS: (I) THAT IN OUR TRADE, WHEREVER WE PURCHASE/SALE, I T HAS DUAL EFFECT BECAUSE WE HAVE TO SHOW PURCHASE FROM BROKER WHENEVER WE SALE TO CLIENTS AND VICE VERSA. (II) THAT OUT OF PROFIT/LOSS DERIVED FROM TRANSACTI ONS WITH BROKERS WE HAVE TO PASS ON THE PROFIT/LOSS TO THE C LIENTS FOR THEIR TRANSACTIONS AS SUCH AMOUNT OF `1 6,99,970.20 SHOWN AS LOSS TO US ON SHARE TRADING WITHOUT DELIVE RY OF STOCK ON BEHALF OF CLIENTS HAS BEEN PASSED ON TO CL IENTS ON THEIR TRANSACTIONS OUT OF ` 20,30,867/- SHOWN AS PROFIT TO US ON SHARE TRADING IN OWN ACCOUNT WITHOUT DELIV ERY OF STOCK. 2.13 THE ASSESSING OFFICER AFTER CONSIDERING THE SU BMISSIONS OF THE ASSESSEE REJECTED THE BOOKS OF ACCOUNT BY INVOKING THE PROVISIONS OF SECTION 145(3) OF THE I.T. ACT BY OBSERVING AS UNDE R: 13 (A) THE PURCHASES AND SALES OF SHARES MADE THROUGH UPSE, KANPUR WHICH IS FOR A SUM OF ` 232147625.50 AND ` 229936944.00 RESPECTIVELY ARE NOT ENTERED IN THE BOOKS OF ACCOUNT. THE PURCHASES OF ` 6020557/- AND SALES OF ` 3991778.5 ARE RELATED TO THE PURCHASE AND SALES OF SHARE WITH DELIVERY. IN FACT, ASSESSEE HAS ENTERED DIFFERENCE OF `1 81903/- BEING DIFFERENCE OF PURCHASE AND SALES MADE THROUGH UPSE. THE DIFFERENCE OF ` 181903/-, WHICH IS LOSS IN TOTAL TRANSACTIONS THROUGH UPSE IS PARTLY RELATED TO THE ASSESSEE IN OWN ACCOUNT AND REMAINING ARE FOR CLIEN TS. IF THE AMOUNT OF DIFFERENCE IS ENTERED IN BOOKS OF ACCOUNT THEN THE ACCOUNT OF THE CLIENTS OR OTHER PE RSONS WHO ARE RELATED TO THE TRANSACTIONS CAN NOT BE PREP ARED I.E. CAN NOT BE DEBITED OR CREDITED BY RESPECTIVE TRANSACTIONS OF SALES AND PURCHASES. AS SUCH THE ACCOUNT OF THE CLIENT, APPEARING IN BOOKS OF THE ASSESSEE ARE NOT RELIABLE. (B) AS REGARDS SERVICE TAX, ASSESSEE HAS NOT MAINTA INED SEPARATE ACCOUNT FOR BROKERAGE. IT HAS BEEN NOTICED THAT ASSESSEE HAD PAID SERVICE TAX OF ` 95,500/- THROUGH CHAILANS WHICH WAS 5% OF BROKERAGE. AS SUCH TOTAL BROKERAGE FOR THE SERVICE TAX PURPOSES WORKED OUT A T `19,10,000/-. THIS AMOUNT IS NEITHER DECLARED IN PROFIT & LOSS ACCOUNT NOR IN TRADING ACCOUNT. THEREFORE, ASSESSEE WAS REQUIRED VIDE SHOW CAUSE LETTER DATED 5.7.2006 TO FILE HIS EXPLANATION ON TH IS ISSUE. ASSESSEE HAS FILED REPLY DATED 27.7.2006 VIDE PARA- L THAT HE HAS DEALT THE TRANSACTIONS WITH CLIENTS ON PRINCIPAL TO PRINCIPAL BASIS AND SERVICE TAX ON TRANSACTIONS WITH THE CLIENTS ARE ADJUSTED IN RATES OR SALES/PURCHASE. THIS FACT HAS ALSO CONFIRMED BY THE AUDITOR APPOINTED U/S 142(2A). THE AUDITOR APPOINTED U/S 142(2A) HAS SUBMITTED AS UNDER: THE AUDITEE HAS STATED THAT HE HAS DEALT WITH HIS CLIENTS ON PRINCIPAL TO PRINCIPAL BASIS. THE CHARGE S IN TRANSACTIONS WITH HIS CLIENTS ARE ADJUSTED IN RATES OF 14 SALES/PURCHASES, AS THE CASE MAY BE, OFFERED TO HIS CLIENTS, THE AUDITEE HAS PAID/INCURRED SERVICE TAX OF ` 95,500/- AND ALSO CHARGED SERVICE TAX TO THE BILLS OF THE CLIENTS. THE ACCOUNTING OF THE AUDITEE DID NOT SHO W THE VALUE OF SERVICES RENDERED. THUS, BROKERAGE IF ANY IS ADJUSTED IN THE SALES/PURCHASES. IT IS SEEN FROM THE REPORT OF THE AUDITOR THAT ACCO UNT OF THE AUDITEE (ASSESSEE) DID NOT SHOW THE VALUE OF SERVIC E RENDERED I.E. BROKERAGE AS SUCH IT IS CLEAR THAT AUDITOR WAS UNABLE TO WORK OUT THE AMOUNT OF BROKERAGE FROM THE BOOKS OF ACCOUNT FOR THE PURPOSE OF SERVICE TAX. CONSEQUENTLY IT IS NOT POSSIBLE TO WORKOUT BROKERAGE CHARGED BY ASSESSEE FROM HIS B OOKS OF ACCOUNT. (C) FURTHER AS PER PROFIT & LOSS A/C TOTAL PURCHASE AND SALES OF SHARES HAVE BEEN DECLARED BY THE ASSESSEE AT ` 2,22,44,41,665.44 AND ` 2,22,63,04,190.58 WHEREAS AUDITOR APPOINTED U/S.142(2A) HAS REPORTED TOTAL PURCHASE AND SALES AT ` 2,46,03,99,166.44 AND ` 2,46,22,61,691.58 RESPECTIVELY. AS SUCH, IT IS EVID ENT THAT TOTAL AMOUNT OF PURCHASES AND SALES ARE NOT RECORDED IN THE BOOKS OF ACCOUNT. IN VIEW OF THE ABOVE FACTS, IT IS EVIDENT THAT THE BOOKS OF ACCOUNT AS MAINTAINED BY THE ASSESSEE ARE NOT CORRE CT AND COMPLETE AND AS SUCH THE CORRECT AMOUNT OF INCOME C ANNOT BE DETERMINED. THEREFORE, CASE IS COVERED UNDER THE PR OVISION OF SECTION 145(3). THE BOOKS OF ACCOUNT AS MAINTAINED BY THE ASSESSEE ARE HEREBY REJECTED. 2.14 THE ASSESSEE SUBMITTED TO THE ASSESSING OFFICE R THAT WHEREVER HE PURCHASES AND MAKES SALES IT HAS DUAL EFFECT BECAUS E HE HAS TO SHOW PURCHASE FROM BROKER WHENEVER HE MAKES SALES TO CLI ENTS AND VICE VERSA. IT WAS FURTHER SUBMITTED THAT THE ASSESSEE HAS MADE PURCHASE AND SALES FOR THE CLIENTS ON PRINCIPAL TO PRINCIPAL BASIS BUT WAS UNABLE TO FURNISH THE EXACT AMOUNT OF PURCHASE AND SALES MADE ON BEHALF O F CLIENTS. 15 2.15 THE ASSESSING OFFICER, AFTER CONSIDERING THE A BOVE SUBMISSIONS OF THE ASSESSEE, POINTED OUT THAT THE AUDITORS WERE AL SO UNABLE TO FURNISH THE DETAILS OF PURCHASE AND SALES MADE IN THE ACCOUNT O F THE CLIENTS. HE QUOTED THE RELEVANT PORTION OF THE REPORT U/S 142(2 A) OF THE I.T. ACT WHICH READ AS UNDER: THE AUDITEE HAS FURNISHED THE INFORMATION OF SALES EFFECTED TO CLIENTS WITH DELIVERY OF SHARES/SECURITIES. THIS I S ` 8,07,41,170.59. THE AUDITEE HAS STATED THAT HE HAS DEALT WITH HIS CLIENTS ON PRINCIPAL TO PRINCIPAL BASIS. IN THIS VIEW THIS SALES WILL BE A PART OF SALES EFFECTED IN OWN ACCOU NT AND SALES EFFECTED ON BEHALF OF CLIENTS WOULD BE NIL. 2.16 THE ASSESSING OFFICER POINTED OUT THAT THE AUD ITOR IN HIS REPORT FURNISHED INFORMATION OF THE SALES EFFECTED TO CLIE NT WITH DELIVERY OF SHARES/SECURITY WAS ` 8,0741,170.59 AND THAT THE SALES WOULD BE A PART OF SALES EFFECTED IN OWN ACCOUNT OF THE ASSESSEE BECAU SE THE ASSESSEE HAS DEALT WITH CLIENTS ON PRINCIPAL TO PRINCIPAL BASIS, AS SUCH THE SALES EFFECTED ON BEHALF OF CLIENTS WOULD BE NIL WHICH IMPLIES THA T THERE SHOULD BE NO DIFFERENCE IN PURCHASE AND SALES MADE BY THE ASSESS EE AND AS SUCH THE LOSS OR INCOME EARNED IN THIS ACCOUNT SHOULD NOT BE ACCOUNTED FOR WITH THE INCOME/LOSS EARNED BY THE ASSESSEE IN HIS OWN ACCOU NT. THEREFORE, THE PURCHASE AND SALES MADE FOR THE CLIENTS, IF ANY, SH OULD BE TAKEN FROM THE 16 TOTAL PURCHASES AND SALES DECLARED BY THE ASSESSEE IN HIS ACCOUNT. THE SUBMISSIONS OF THE ASSESSEE BEFORE THE ASSESSING OF FICER WAS AS UNDER: 8.2 THE ASSESSEE HAS FURTHER SUBMITTED THAT OUT OF PROFIT/LOSS DERIVED FROM THE TRANSACTION WITH BROKE RAGE, HE HAS TO PASS ON THE PROFIT/LOSS TO THE CLIENTS FOR THEIR TRANSACTIONS AS SUCH. ASSESSEE HAS STATED THAT THE AMOUNT OF ` 1699970.20 SHOWN AS LOSS ON SHARE TRADING WITHOUT DELIVERY OF STOCK ON BEHALF OF CLIENT HAS BEEN PASSED ON TO CLIENTS ON T HEIR TRANSACTIONS OUT OF ` 2030867/- SHOWN AS PROFIT TO HIM ON SHARE TRADING IN OWN ACCOUNT WITHOUT DELIVERY OF STOCK. 2.17 THE ASSESSING OFFICER WAS NOT CONVINCED FROM T HE SUBMISSIONS OF THE ASSESSEE AND MADE THE ADDITION OF ` 11,36,087.81 BY OBSERVING AS UNDER: 8.3 IT IS QUITE CLEAR FROM THE REPLIES THAT THE AS SESSEE HAS MADE PURCHASE AND SALES ON BEHALF OF CLIENT WITH PR INCIPAL-TO- PRINCIPAL BASIS AND HE HAS TRANSFERRED THE LOSS/INC OME EARNED BY CLIENT ON THOSE TRANSACTIONS TO THEM. THEREFORE, INCOME FROM SHARE DEALING AS WORKED OUT AT ` 22,05,074/- IN SHOW CAUSE LETTER DATED 5.7.06 WILL BE TAKEN IN PLACE OF `10 ,68,986.19 AS DECLARED IN TRADING ACCOUNT. AS REGAR DS SERVICE TAX AND BROKERAGE IT HAS BEEN DISCUSSED IN PARA 7(B) AT PAGE NO.8 OF THE ORDER. IF BROKERAGE AT ` 19,10,000/- ON WHICH SERVICE TAX PAID, IS DEDUCTED FROM TRADING AC COUNT OR FROM G. P. AT ` 10,68,986.19 THERE WOULD BE LOSS OF ` 8,41,013.81. IT IMPLIES THAT THERE MUST BE LOSS EIT HER IN TRADING OF SHARE WITH DELIVERY OR WITHOUT DELIVERY. AS PER AUDITOR'S REPORT U/S 142(2A) THE BROKERAGE IS MERGE D WITH PURCHASE AND SALES AS SUCH THE GROSS PROFIT AS WOR KED OUT IS INCLUSIVE WITH BROKERAGE. ASSESSEE, DURING THE COUR SE OF ASSESSMENT PROCEEDING, HAS FILED COPY OF SERVICE TA X BUT WAS UNABLE TO FILE COPY OF BROKERAGE. AS SUCH BROKERAGE IS NOT VERIFIABLE WITH TRANSACTIONS MADE WITH CLIENTS. NO SEPARATE ADDITION ON ACCOUNT OF BROKERAGE IS MADE BECAUSE TH E 17 RECASTED G. P. AT ` 22,05,074/- IS MORE THAN THE AMOUNT OF BROKERAGE AT ` 19,10,000/-. THEREFORE, DIFFERENCE OF `11 ,36.087.81 ( ` 22,05,074/- - `10, 68.986.19) WILL BE ADDED TO THE TOTAL INCOME OF THE ASSESSEE AGAINST THE SHARE BUSINESS. 3. THE ASSESSEE CARRIED THE MATTER TO LEARNED CIT(A ) AND FURNISHED THE DETAILS OF THE GROSS PROFIT AS UNDER: PROFIT IN OWN ACCOUNT WITH DELIVERY ` 1,74,207.30 PROFIT ON BEHALF OF CLIENTS WITH DELIVERY ` 10,58,684.22 PROFIT IN TRADING WITHOUT DELIVERY OF SHARE ` 20,30,867.00 LESS:LOSS ON BEHALF OF CLIENTS WITHOUT DELIVERY ` 16,99,970.20 ` 15,63,788.32 LESS:CLEARING DIFFERENCE PAID TO UPSE ` 1,81,903.00 BROKERAGE/EXP. CHARGED BY BROKERS ` 3,22,481.38 ` 10,59,403.94 ADD: OTHER RECEIPT FROM CLIENTS ` 1,530.04 GROSS PROFIT AS PER BOOKS ` 10,60,986.98 3.1 IT WAS FURTHER STATED THAT THE CALCULATION OF ` 22,05,074.00 MADE BY THE ASSESSING OFFICER WAS BASED ON WRONG PREMISE/MI SCALCULATION OF THE FACTS THAT IN THE TRADE OF THE ASSESSES, WHEREVER H E PURCHASES/SALES IT HAS DUAL EFFECT BECAUSE HE HAS TO SHOW PURCHASE FROM BR OKER WHENEVER HE SALES TO CLIENTS AND VICE VERSA. IT WAS STATED THA T OUT OF PROFIT/LOSS DERIVED FROM TRANSACTIONS WITH BROKERS HE HAS TO PASS ON TH E PROFIT/LOSS TO THE CLIENTS FOR THEIR TRANSACTIONS AS SUCH AMOUNT OF ` 16,99,970.20 SHOWN AS LOSS ON SHARE TRADING WITHOUT DELIVERY OF STOCK ON BEHALF OF CLIENTS HAS BEEN PASSED ON TO CLIENTS ON THEIR TRANSACTIONS OUT OF ` 20,30,867.00 SHOWN AS 18 PROFIT TO THE ASSESSEE ON SHARE TRADING IN OWN ACCO UNT WITHOUT DELIVERY OF STOCK. IT WAS CONTENDED THAT THE BOOKS OF ACCOUNT S OF THE ASSESSEE HAD BEEN AUDITED TWICE, FIRSTLY UNDER THE PROVISIONS OF SECTION 44AB OF INCOME TAX ACT AND LATER UNDER SECTION 142(2A) OF THE INCO ME TAX ACT BY THE AUDITORS APPOINTED BY THE COMMISSIONER OF INCOME TA X. IN BOTH OF THE CASES AUDITORS HAVE COMMENTED THAT ' . IN OUR OPINION, PROPER BOOKS OF ACCOUNT HAVE BEEN KEPT BY THE HEAD OFFICE OF THE AS SESSES VISITED BY US SO FAR AS APPEARS FROM EXAMINATION OF BOOKS.' IT WAS ALSO STATED THAT THE AUDITOR COMMENTED THAT BALANCE SHEET AND PROFIT & L OSS ACCOUNT OF THE ASSESSEE GIVE TRUE AND FAIR VIEW. THE ASSESSEE AL SO FURNISHED THE WRITTEN SUBMISSIONS BEFORE THE LEARNED CIT (A) WHICH ARE RE PRODUCED VERBATIM AS UNDER: THAT AS REGARDS WRONGFULLY REJECTION OF THE BOOKS OF THE APPELLANT BY LD. AO, THE APPELLANT HAS TO SUBMIT AS UNDER: A. THAT APPELLANT IS A MEMBER OF UP STOCK EXCHANGE ASSOCIATION. ASSESSEE IS ENGAGED IN THE BUSINESS O F PURCHASE AND SALE OF SHARES AS TRADERS AND INVESTOR . ASSESSEE IS MAINTAINING HIS BOOKS OF ACCOUNT ON 'PR INCIPAL TO PRINCIPAL' BASIS I.E. WHEREAS ANY CLIENT IS INTENDI NG TO SALE ANY SHARE APPELLANT PURCHASE IT FROM THE CLIENT AND SAL E IT TO BROKERS SAME IS DONE IN REVERSE ORDER IN CASE OF CL IENTS INTENDING TO BUY ANY SHARE. THUS FOR A SINGLE TRANS ACTION APPELLANT HAS TO REGISTER DUAL ENTRY. AS PER THE PR EVAILING PRACTICE OF STOCK EXCHANGES, TRANSACTIONS RECORDED DURING A SPECIFIC SETTLEMENT PERIOD ARE RETTED AT THE END OF SETTLEMENT PERIOD. DELIVERIES ARE GIVEN/TAKEN ON NET BASIS, AC COUNTING IS DONE FOR DIFFERENCE AMOUNT ONLY WITHOUT ANY IMPACT ON PROFITABILITY OF THE CONCERN. 19 B. THAT APPELLANT IS REGULARLY ASSESSED TO THE INC OME TAX FOR MORE THAN 20 YEARS. HIS RETURN OF INCOME HAS BE EN SUBJECTED TO SCRUTINY U/S143 (3) OF THE INCOME TAX ACT AT SEVERAL TIME IN THE PART AS PER GIVEN CHART OVER AC COUNTING SYSTEM AND PROCEDURE OF MAINTENANCE OF ACCOUNT WERE ALWAYS ACCEPTED BY THE DEPARTMENT. DETAILS OF EARLIER SCRU TINY ARE GIVEN AS BELOW: A.Y. ORDER PASSED U/S A.O. COMMENTS 2000-01 U/S 143(3) ACIT-4, KANPUR BOOKS ACCEPTED 1995-96 U/S 143(3)/147 JCIT, SPL RANGE, KANPUR BOOKS ACCEPTED 1994-95 U/S 143(3) ACIT-3(4), KANPUR BOOKS ACCEPTED 1992-93 U/S 143(3) ACIT-4, KANPUR BOOKS ACCEPTED C. THAT AUDITOR APPOINTED U/S 44AB OF THE INCOME TA X ACT AND AUDITOR APPOINTED U/S142(2A) OF THE INCOME TAX ACT BY THE INCOME TAX DEPARTMENT HAVE GIVEN CLEAR CUT OPIN ION THAT BOOKS OF ACCOUNTS OF THE APPELLANT FOR THE ASSTT. Y EAR - 2003- 04 EXHIBIT TRUE & FAIR VIEW OF BALANCE SHEET AS WEL L AS OF PROFIT & LOSS ACCOUNT. D. THAT TRADING ACCOUNT CONSISTS OF FOUR KEY FIGURE S I.E. OPENING BALANCE, PURCHASE, SALE & CLOSING STOCK. TH ERE IS NO DISPUTE AS REGARDS OPENING & CLOSING STOCK FIGURES BETWEEN APPELLANT & LD. A.O. AS REGARD PURCHASE AND SALES WE ARE GIVING BELOW THE FIGURES FOR FURTHER CLARIFICATION. (I) FIGURES AS PER BOOKS OF ACCOUNT (TAKEN ON NET BASIS) PURCHASE SALES DIFFERENCE BETWEEN PURCHASE & SALES ------------- --------- ------------------------ -- 222,44,41,665.44 222,63,04,190,58 18,62,525.14 (II) FIGURES AS DEDUCTED BY AUDITOR U/S 142(2A) (TA KEN ON GROSS BASIS) PURCHASE SALES DIFFERENCE BETWEEN PURCHASE & SALES ------------- --------- ------------------------ -- 246,03,99,166.44 246,22,6,691.58 18,62,525.14 20 IT IS PERTINENT TO MENTION HERE THAT APPELLANT HAS SHOWN THE FIGURES OF PURCHASE/SALE ON NET BASIS AS PER SETTLE MENT PROCEDURE OF STOCK EXCHANGE WHEREAS AUDITOR APPOINT ED U/S142(2A) HAS TAKEN FIGURE OF PURCHASE/SALE AS GRO SS AMOUNT. IRRESPECTIVE OF METHOD, THERE IS NO IMPACT ON THE PROFITABILITY. IN VIEW OF THE ABOVE, WHEN APPELLANT IS EMPLOYING P ROPER SYSTEM OF ACCOUNTING WHICH HAS BEEN SCRUTINIZED AT SEVERAL ASSESSMENT YEARS BY THE INCOME TAX DEPARTMENT AND B OOKS OF ACCOUNTS HAVE BEEN CERTIFIED AS TRUE & FAIR BY A UDITOR APPOINTED U/S 44AB AS WELL AS BY THE AUDITOR APPOIN TED U/S 142(2A) AND ALL THE KEY FIGURES RELEVANT FOR CALCUL ATION OF PROFITABILITY HAVE BEEN PRECISELY DEDUCED, REJECTIO N OF BOOKS OF ACCOUNTS ASSIGNING THE REASON THAT BOOKS OF ACCOUNT AS MAINTAINED BY THE ASSESSEE ARE NOT CORRECT AND COMP LETE, IS NOT TENABLE UNDER LAW. THEREFORE, BOOKS OF ACCOUNT AS MAINTAINED BY THE APPELLANT CANNOT BE REJECTED ON T HIS GROUND. THAT WITHOUT ANY PREJUDICES TO POINT NO. 1, RECONC ILIATION OF GROSS PROFIT IS GIVEN AS BELOW: S.NO. PARTICULARS AS PER LEARNED. ASSESSING OFFICER AS PER APPELLANT REMARKS 1. TRADING IN OVER ACCOUNT WITH DELIVERY OF SHARES (174207.30) 1,74,207.30 1,74,207.30 2. PROFIT ON BEHALF OF CLIENT WITH DELIVERY OF SHARES (1058684.22) NOT CONSIDERED 10,58,684.22 3. PROFIT IN SHARE TRADING IN OVER ACCOUNT WITHOUT DELIVERY (20,30,687.00) 20,30,867.00 20,30,867.00 SUB TOTAL 22,05,074. 00 32,63,758.52 4. LOSS IN SHARE TRADING ON BEHALF OF CLIENT WITHOUT DELIVERY (16,99,970.20) NOT CONSIDERED 16,99,970.20 AMOUNT AS CONSIDERED BY ASSESSING OFFICER 22,05,074.00 5. LESS CLEARING DIFFERENCE PAID TO UPSE 1,81,903.00 6. LESS BROKERAGE/EXP. PAID TO BROKERS 3,22,481.38 7. ADD. OTHER RECEIPT FROM CLIENTS 153.04 GROSS PROFIT AS PER BOOKS 10,60,986.98 21 3.2 THE LEARNED CIT(A), AFTER CONSIDERING THE SUBMI SSIONS OF THE ASSESSEE, DELETED THE ADDITION BY OBSERVING AS UNDE R: 11. AFTER GOING THROUGH ALL THE FACTS OF THE CASE, AS SUBMITTED AND EXPLAINED, NOTED ABOVE, THE DIFFERENC E OF SHARE DEALING ACCOUNTS WITH ACCOUNTS OF OTHER BUSINESS IS OBVIOUS, DUE TO 'DUAL ENTRY'. THE APPELLANT IS MAINTAINING H IS BOOKS OF ACCOUNT ON 'PRINCIPAL TO PRINCIPAL' BASIS WHEREIN H E HAS TO MAKE DUAL ENTRY FOR A SINGLE TRANSACTION. SINCE SEV ERAL SHARES ARE ALSO SETTLED AT NET BASIS, APPELLANT HAS ACCOUN TED FOR PURCHASE/SALE ON NET BASIS. AS SUCH PURCHASE AND SA LE FIGURES ACCOUNTED ON GROSS BASIS AS REPORTED BY U.P . STOCK EXCHANGE ASSOCIATION LTD. AND FIGURES OF PURCHASE A ND SALES ACCOUNTED FOR BY THE APPELLANT ON NET BASIS ARE BOU ND TO DIFFER. IMPORTANT QUESTION IS AS TO HOW THIS IS GOI NG TO AFFECT THE PROFITABILITY OF THE APPELLANT. THIS CAN ALSO BE VE RIFIED FROM THE FACT OF THE CASE THAT AS PER PROFIT & LOSS A/C, TOT AL PURCHASE AND SALES OF SHARES HAVE BEEN DECLARED BY THE ASSES SES AT ` 2,22,44,41,665.44 AND ` 2,22,63,04,190.58 WHEREAS AUDITOR APPOINTED U/S 142(2A) HAS REPORTED TOTAL PURCHASE A ND SALES AT ` 2,46,03,99,166.44 AND ` 2,46,22,61,691.58 RESPECTIVELY. DIFFERENCE BETWEEN PURCHASE AND SALES AS ACCOUNTED BY THE APPELLANT IS ` 18,62,525.14 ( ` 2,22,63,04,190.58 - ` 2,22,44,41,665.44) WHEREAS DIFFERENCE BETWEEN PURC HASE AND SALES AS REPORTED BY AUDITOR APPOINTED U/S 142( 2A) IS ALSO ` 18,62,525.14( `2 ,46,22,61,691.58 - ` 2,46,03,99,166.44). THERE IS NO DIFFERENCE OF OPINION AS REGARDS OPENIN G OR CLOSING STOCK. 12. LOOKING TO THE ABOVE CALCULATIONS WHEN FIGURES CERTIFIED BY AUDITOR APPOINTED U/S 142(2A) AND FIGURES GIVEN BY APPELLANT ARE GIVING SAME TRADING RESULTS, I DO NOT FIND ANY RATIONALE IN REJECTING THE BOOKS OF ACCOUNTS OF THE APPELLANT. AS REGARDS THE DIFFERENCE IN GROSS FIGURES OF PURCH ASE AND SALES, IT IS ATTRIBUTED TO THE SYSTEM OF ACCOUNTING EMPLOYED BY THE APPELLANT. MOREOVER HIS SYSTEM OF ACCOUNTING IS ACCEPTED BY THE DIFFERENT ASSESSING OFFICERS IN DIFFERENT YE ARS AS IS 22 EVIDENT FROM RECORDS. THUS, GROUNDS NO.2 AND 3 OF A PPEAL ARE ALLOWED. NOW THE DEPARTMENT IS IN APPEAL. 4. THE LEARNED D. R. REITERATED THE OBSERVATIONS MA DE BY THE ASSESSING OFFICER IN THE ASSESSMENT ORDER DATED 17/ 08/2006. HE FURTHER SUBMITTED THAT THE ASSESSING OFFICER, AFTER CONSIDE RING THE VARIOUS DETAILS AND THE SUBMISSIONS OF THE ASSESSEE, CAME TO THE CO NCLUSION THAT IT WAS NOT POSSIBLE TO WORK OUT THE PROFIT EARNED ON TRAN SACTIONS ON DELIVERY BASIS AND INCOME/LOSS ON TRANSACTIONS WITHOUT DELIVERY BA SIS. ACCORDINGLY, A REFERENCE WAS MADE U/S 142(2A) OF THE I.T. ACT FOR THE SPECIAL AUDIT AND THEREAFTER THE ASSESSING OFFICER BROUGHT TO THE KNO WLEDGE OF THE ASSESSEE THE DISCREPANCIES BETWEEN THE TRADING RESULTS ON TH E BASIS OF THE AUDIT REPORT AND CAME TO THE CONCLUSION THAT THE TRANSACT IONS ON ACCOUNT OF CLIENTS COULD NOT BE PART OF THE TAXABLE PROFIT OF THE ASSESSEE. IT WAS FURTHER STATED THAT THERE WAS A BASIC DIFFERENCE IN THE UNDERSTANDING OF THE ISSUE BETWEEN THE ASSESSEE AND THE ASSESSING OFFICE R AND THAT, THE ASSESSING OFFICER, AFTER EXAMINING THE BOOKS OF ACC OUNTS, HAD GIVEN EXHAUSTING FINDINGS IN PARA 7 AT PAGE 8 OF THE ASSE SSMENT ORDER AND THEREAFTER REJECTED THE BOOKS OF ACCOUNT. HE FURTH ER SUBMITTED THAT THE SUBMISSIONS OF THE ASSESSEE BEFORE THE LEARNED CIT (A) THAT THE ASSESSING OFFICER HAS NOT UNDERSTOOD THE WAY THE ASSESSEE DID BUSINESS WAS NOT CORRECT BECAUSE THE ASSESSING OFFICER CLEARLY UNDER STOOD THE BUSINESS 23 ACTIVITIES OF THE ASSESSEE AND GAVE THE RELEVANT FI NDING IN PARA 2.1 AT PAGE 2 OF THE ASSESSMENT ORDER. IT WAS CONTENDED THAT T HE ASSESSEE HAD NOT BEEN ABLE TO CONTRADICT THE REJECTION OF BOOKS OF A CCOUNT DONE BY THE ASSESSING OFFICER AND ALSO THE ASSESSEE WAS UNABLE TO CLARIFY THE EXACT AMOUNT OF PURCHASE AND SALE MADE ON BEHALF OF THE C LIENTS. THEREFORE, THE ASSESSING OFFICER WAS JUSTIFIED IN MAKING THE ADDIT ION OF ` 11,36,087/-. IT WAS FURTHER CONTENDED THAT THE LEARNED CIT (A) HAD NOT AT ALL APPRECIATED OR DEALT WITH THE MULTIPLE ISSUES RAISED BY THE ASS ESSING OFFICER AND MERELY REPEATED THE ARGUMENTS OF THE ASSESSEE REGARDING DU AL ENTRY SYSTEM AND PRINCIPAL TO PRINCIPAL BASIS AS WELL AS THE NETTING SYSTEM WHICH COULD NOT HAVE ANY IMPLICATION UNLESS AND UNTIL THE ARGUMENTS WHICH WERE RAISED BY THE ASSESSING OFFICER WERE DEALT WITH. IT WAS ALSO STATED THAT THE LEARNED CIT (A) HAD NOT MADE ANY COMMENT ON THE REJECTION O F BOOKS FOR WHICH DETAILED REASONS HAVE BEEN GIVEN BY THE ASSESSING O FFICER. THEREFORE, THE ORDER PASSED BY THE LEARNED CIT (A) WAS COMPLETELY NON SPEAKING. HE ACCORDINGLY PRAYED TO RESTORE THE ADDITION MADE BY THE ASSESSING OFFICER. 5. IN HIS RIVAL SUBMISSIONS, THE LEARNED COUNSEL F OR THE ASSESSEE REITERATED THE SUBMISSIONS MADE BEFORE THE AUTHORIT IES BELOW. IT WAS FURTHER STATED THAT THE ASSESSEE IS A MEMBER OF U.P . STOCK EXCHANGE ASSOCIATION LTD. AND WAS CARRYING ON TRADING IN SHA RES AND SECURITIES ON 24 PRINCIPAL TO PRINCIPAL BASIS ON BEHALF OF ITS CLIEN T AS WELL AS ON ITS OWN ACCOUNT. IT WAS SUBMITTED THAT THE U.P. STOCK EXCH ANGE WAS HAVING WEEKLY SETTLEMENT PERIOD I.E. FROM MONDAY TO FRIDAY AND ALL THE TRANSACTIONS TAKING PLACE IN SAID SETTLEMENT PERIOD WERE SQUARED UP/SETTLED ON THE LAST DAY OF THE SETTLEMENT PERIOD AND THEN S ETTLEMENT OF ACCOUNT AND DELIVERY WAS AFFECTED ON NET BASIS. IT WAS FURTHER SUBMITTED THAT EVERY BROKER IS REQUIRED TO PAY EXCESS OF PURCHASE AMOUNT OVER SALE AMOUNT ON SQUARED UP TRANSACTIONS AND EXCESS OF AMOUNT OF SHA RES PURCHASED OVER SHARES SOLD ON DELIVERY ACCOUNT FOR THE SETTLEMENT PERIOD AND THE SAID AMOUNT SO DERIVED WAS CALLED AS 'PAY IN', WHICH TOO K PLACE ON THE FOLLOWING THURSDAY AND CALLED AS PAY-IN DAY. SIMILARLY, EV ERY BROKER IS REQUIRED TO RECEIVE EXCESS OF SALE AMOUNT OVER PURCHASE AMOUNT ON SQUARED UP TRANSACTIONS AND EXCESS OF AMOUNT OF SHARES SOLD OV ER SHARES PURCHASED ON DELIVERY ACCOUNT FOR THE SETTLEMENT PERIOD AND T HE AMOUNT SO DERIVED WAS CALLED 'PAYOUT' WHICH ALSO TAKES PLACE ON THE F OLLOWING THURSDAY AND CALLED AS PAY-OUT DAY. IT WAS CLARIFIED THAT THE DELIVERY OF SHARES WERE SETTLED AT THE CLEARING (SETTLEMENT) RATE AT WHICH THE LAST TRANSACTION IN EVERY SCRIP WAS ENTERED IN THE STOCK EXCHANGE ON TH E SETTLEMENT DAY. IT WAS EMPHASIZED THAT THE PERMISSION WAS GRANTED BY S EBI TO SETTLE ALL THE TRANSACTIONS OF A SETTLEMENT PERIOD ON NET BASIS BO TH IN TERMS OF DELIVERY AS WELL AS IN TERMS OF PAYMENT. THE SAID SETTLEMENT O N NET BASIS IS SIMILAR TO 25 THE WORKING OF CLEARING HOUSE OF R.B.I. WHERE ALL T HE BANKS SIT TOGETHER AND SETTLE NET RECEIVABLE AND/OR PAYABLE INTERSE ON NET BASIS. AS THE STOCK EXCHANGE SETTLES ACCOUNT OF EVERY BROKER FOR ALL TH E TRANSACTIONS ENTERED DURING THE SETTLEMENT PERIOD ON NET BASIS AND THUS, ALL THE BROKERS TAKING TOGETHER SHALL ALWAYS HAVE NIL DELIVERY AND NIL PAY MENT POSITION. HOWEVER, INDIVIDUALLY, I.E. BROKER-WISE, PURCHASES AND SALES ARE NETTED (SET OFF) AGAINST EXCESS OF PURCHASE OVER SALE AND IS SETTLED BY GIVING DELIVERY OF SUCH EXCESS SHARES TO THE BROKERS AND THAT THE EXCE SS OF SALE OVER PURCHASE IS SETTLED BY TAKING DELIVERY OF SUCH EXCE SS SHARES FROM THE BROKERS. SIMILARLY, EXCESS OF AMOUNT PAYABLE BY T HE BROKER WAS SET OFF AGAINST THE AMOUNT RECEIVABLE FROM THE BROKER OR VI CE VERSA AND THE NET AMOUNT IS PAID TO AND/OR RECEIVED FROM THE BROKER. IT WAS FURTHER STATED THAT IN EVERY SETTLEMENT PERIOD SOME AMOUNT WAS PAI D TO OR RECEIVED FROM THE BROKER AS DIFFERENCE AND THE SAID DIFFERENCE CO NSTITUTED OF ; (A) DIFFERENCE BETWEEN TRANSACTION RATE AND THE CL EARING SETTLEMENT RATE) ON EXCESS OF PURCHASE OVER SALE OR EXCESS OF SALE OVER PURCHASE OF ALL THE SHARES DEALT WITH BY THE BROKER WITHIN THE SETTLEMENT PERIOD, (B) DIFFERENCE BETWEEN TRANSACTION RATE AND THE CO RRESPONDING SQUARING UP TRANSACTION OF ALL THE SHARES PURCHASED AND SOLD OR SOLD AND PURCHASED WITHIN THE SETTLEMENT PERIOD. AS SUCH THE DIFFERENCE REFERRED TO IN (A) ABOVE, WI LL AFFECT THE PURCHASE OR SALE RATE OF THE SHARES DELIVERED, THEREFORE, CREDI T IN DIFFERENCE ACCOUNT WILL 26 REPRESENT DELIVERY OF SHARES AT A HIGHER RATE THAN THE TRANSACTION RATE AND DEBIT IN DIFFERENCE ACCOUNT WILL REPRESENT DELIVERY OF SHARES AT LOWER RATE THAN THE TRANSACTION RATE. THE LEARNED COUNSEL FOR THE ASSESSEE ALSO EXPLAINED THE PRINCIPAL TO PRINCIPAL BASIS SYSTEM B Y STATING THAT WHEN A BROKER MAKES PURCHASES OR SELLS IN OF HIS OWN ACCOU NT IRRESPECTIVE OF WHETHER CORRESPONDING PURCHASE OR SALE TRANSACTION HAS BEEN SIMULTANEOUSLY DONE IN THE STOCK EXCHANGE OR NOT TH EN SUCH TRADING BETWEEN SHARE BROKER AND HIS CLIENT IS CALLED TRADI NG ON PRINCIPAL TO PRINCIPAL BASIS AND WHEN PURCHASES OR SALES ARE DON E BY THE BROKER ON PRINCIPAL TO PRINCIPAL BASIS THEN AGREED BROKERAGE IS CHARGED AND THE CONSEQUENTIAL SERVICE TAX THEREON IS PRESUMED TO BE INCLUDED IN THE PURCHASE OF SALE RATE SHOWN IN THE BILL. IT WAS CO NTENDED THAT THE ASSESSING OFFICER SPECIFICALLY REQUIRED THE SPECIAL AUDITOR APPOINTED U/S 142(2A) OF THE I.T. ACT TO GIVE A FINDING OF FACT I N RELATION TO THE FOLLOWING FIVE ITEMS: (I) OWN TRADING WHERE DELIVERY OF SHARES TAKEN PLA CE. (II) OWN TRADING WHERE DELIVERY OF SHARES NOT TAKEN PLACE. (III) TRADING ON BEHALF OF CLIENT WHERE DELIVERY OF SHARES TAKEN PLACE. (IV) TRADING ON BEHALF OF CLIENT WHERE DELIVERY OF SHARES NOT TAKEN PLACE. (V) COMPLETE LIST WITH POSTAL ADDRESS OF SUB BROKER (S), TERMS AND CONDITIONS 27 AND THE AUDITOR IN THEIR REPORT HAD CATEGORICALLY G IVEN A FINDING THAT THE SALES EFFECTED ON BEHALF OF THE CLIENTS WITH DELIVE RY OF SHARES WAS NIL AS WELL AS SALES EFFECTED WITHOUT TAKING DELIVERY ON B EHALF OF THE CLIENTS WAS ALSO NIL AS ALL THE TRANSACTIONS WERE ON PRINCIPAL TO PRINCIPAL BASIS. HOWEVER, THE ASSESSING OFFICER HAS ARBITRARILY ADOP TED SOME FIGURES AND ARBITRARILY WORKED OUT PROFIT AND LOSS ALLEGEDLY BE LONGING TO THE CLIENTS. IT WAS ALSO STATED THAT THE AUDITORS IN THEIR REPORT C LEARLY MENTIONED 'SALE TO CLIENTS (DELIVERY)' AND 'SALE TO CLIENTS (WITHOUT D ELIVERY)', 'PURCHASE FROM CLIENT (DELIVERY) AND 'PURCHASE FROM CLIENT (WITHO UT DELIVERY)' AND THE ASSESSING OFFICER FOR THE REASONS BEST KNOWN TO HIM , TWISTED THE PRIMARY FACTS BY MENTIONING ''TRADING ON BEHALF OF CLIENTS WITH DELIVERY OF SHARES', AND 'SHARE TRADING WITHOUT DELIVERY OF STOCK ON BEH ALF OF THE CLIENTS'. IT WAS POINTED OUT THAT THE ASSESSING OFFICER FAILED TO UN DERSTAND THE ACCOUNTING DONE BY THE ASSESSEE AND THE ACCOUNTING DONE BY THE STOCK EXCHANGE EVEN WHEN THE ASSESSEE SUBMITTED THE RECONCILIATION OF THE SAME VIDE HIS REPLY DATED 27.07.2006. IT WAS POINTED OUT THAT IN THE SUBSEQUENT YEAR I.E. ASSESSMENT YEAR 2004-2005, THE SAME ASSESSING OFFIC ER, IN THE SAME SET OFF CIRCUMSTANCES AND THE ACCOUNTING METHOD CONSIST ENTLY FOLLOWED BY THE ASSESSEE, HAS ACCEPTED THE BOOKS OF ACCOUNT AND THE TRADING RESULTS SHOWN BY THE ASSESSEE. EVEN IN THE PRECEDING YEARS I.E. A.Y. 2000-2001 TO 2002-2003 ALSO, THE BOOKS OF ACCOUNT AND TRADING RESULTS OF THE 28 ASSESSEE HAVE BEEN ACCEPTED UNDER SAME SET OF FACTS , CIRCUMSTANCES AND ACCOUNTING POLICIES WHILE PASSING THE ASSESSMENT OR DERS U/S 143(3) OF THE I.T. ACT. IT WAS EMPHASIZED THAT THE TAX AUDITOR , WHO HAD GIVEN AN AUDIT REPORT U/S 44AB OF THE I.T. ACT AS WELL AS THE SPEC IAL AUDITOR APPOINTED U/S 142(2A) OF THE I.T. ACT BY THE ASSESSING OFFICER HI MSELF, HAD CATEGORICALLY STATED IN THEIR AUDIT REPORTS THAT PROPER BOOKS OF ACCOUNTS WERE MAINTAINED AND THE PROFIT & LOSS ACCOUNT FOR THE YEAR ENDED ON 31.03.2003 GAVE A TRUE AND FAIR VIEW OF THE PROFIT OF THE ASSESSEE AN D EVEN FROM THE OBSERVATIONS OF THE ASSESSING OFFICER AT PAGE NO. 9 OF THE ASSESSMENT ORDER, IT IS CLEAR THAT THE SPECIAL AUDITOR NEVER E XPRESSED HIS INABILITY TO GIVE THE DETAILS OF PURCHASES AND SALES MADE IN THE ACCOUNT OF THE CLIENTS AND CATEGORICALLY MENTIONED THAT SINCE THE AUDITEE (THE ASSESSEE) HAS DEALT WITH HIS CLIENTS ON PRINCIPAL TO PRINCIPAL BA SIS THEREFORE, THE PURCHASES AND SALES MADE ON BEHALF OF THE CLIENTS WOULD BE NI L. IT WAS CONTENDED THAT THE ASSESSEE EXPLAINED ALL THE SHORTCOMINGS PO INTED OUT BY THE ASSESSING OFFICER VIDE HIS REPLY DATED 27/07/2006 B UT THE ASSESSING OFFICER, UNDER MISCONCEIVED NOTION, ARBITRARILY INV OKED THE PROVISIONS OF SECTION 145(3) OF THE I.T. ACT AND MADE AN ADDITION OF ` 11,36,087.81 IN THE INCOME OF THE ASSESSEE BUT THE LEARNED CIT (A) AFTE R CONSIDERING FULL FACTS, METHOD OF ACCOUNTING AND THE EXPLANATION GIVEN BY T HE ASSESSEE, FOUND THAT THE OBSERVATION OF THE ASSESSING OFFICER WERE NOT TENABLE IN LAW MUCH 29 LESS GROSSLY UNFOUNDED. THEREFORE, THE ORDER PASSE D BY THE LEARNED CIT (A) DESERVES TO BE UPHELD. 6. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND CAR EFULLY GONE THROUGH THE MATERIAL AVAILABLE ON THE RECORD. IN T HE PRESENT CASE, THE ASSESSEE IS DEALING IN THE SHARES AND SECURITIES AN D WAS ENGAGED IN TRADING ON BEHALF OF HIS CLIENTS AS WELL AS DOING O WN TRADING. THE BUSINESS ACTIVITY OF THE ASSESSEE WAS SUCH THAT THE TRADING ACTIVITY INVOLVED TWO TYPE OF TRANSACTION, ONE WHERE THERE WAS DELIVERY OF SHA RES AND THE OTHER WHERE THE DELIVERY OF SHARES WAS NOT THERE. THE BOOKS OF ACCOUNT OF THE ASSESSEE WERE AUDITED U/S 44AB OF THE I.T. ACT. TH E ASSESSING OFFICER WAS NOT SATISFIED AND WANTED MORE CLARIFICATION AS REGARDS TO THE TRADING RESULTS. HE, THEREFORE, MADE A REFERENCE U/S 142(2 A) OF THE I.T. ACT TO GET THE ACCOUNTS OF THE ASSESSEE AUDITED FROM THE SPECI AL AUDITOR. THE ASSESSEE HAD SHOWN PROFIT OF ` 1,74,207.30 IN THE TRADING IN OWN ACCOUNT WHERE DELIVERY OF SHARES/STOCKS TOOK PLACE AND ALSO HAD SHOWN PROFIT OF ` 20,30,867/- WHERE DELIVERY OF STOCK/SHARES WAS NOT THERE. SIMILARLY, IN THE TRADING ON BEHALF OF THE CLIENTS THE ASSESSEE HAD S HOWN A PROFIT OF ` 10,58,684.22 WHERE THE DELIVERY OF SHARES WAS THERE AND HAD SHOWN A LOSS OF ` 16,99,970.20 WHERE THE DELIVERY OF STOCK ON BEHALF OF THE CLIENTS WAS NOT THERE. THE ASSESSING OFFICER HAD ACCEPTED THE TRADING RESULTS RELATING TO THE OWN TRADING BUT DID NOT ACCEPT THE TRADING RESULTS ON BEHALF 30 OF THE CLIENTS. HE WAS OF THE VIEW THAT THE PROFIT AS WELL AS LOSS IN THE TRANSACTION RELATING TO THE CLIENTS WAS NOT OF THE ASSESSEE BUT OF THE CLIENTS AND ONLY THE BROKERAGE OR OTHER CHARGES EARNED BY T HE ASSESSEE WAS LIABLE TO BE INCLUDED IN THE INCOME. THE ASSESSEE HAD SHOWN THE NET PROFIT OF ` 10,60,986.98, THE DETAIL OF WHICH HAS BEEN GIVEN AT PARA 3 OF THIS ORDER BUT THE ASSESSING OFFICER WAS OF THE VIEW THAT THE ASSESSEE EARNED AN INCOME OF ` 22,05,074/- (1,74,207.30 + 20,30,867). HE DID NOT ALLOW THE LOSS OF ` 16,99,970.20 INCURRED BY THE ASSESSEE ON THE TRADIN G IN CLIENTS ACCOUNT WITHOUT DELIVERY OF STOCK AND ALSO NOT CONS IDERED THE PROFIT OF ` 10,58,684.22 ON BEHALF OF THE CLIENT WITH DELIVERY. THE ASSESSING OFFICER WAS OF THE VIEW THAT THE ASSESSEE EARNED THE INCOME OF ` 22,05,074/- INSTEAD OF ` 10,60,986.19 DISCLOSED BY THE ASSESSEE. HE ACCORDI NGLY MADE THE ADDITION OF ` 11,36,087.81. THE ASSESSEE MAINTAINED PROPER BOOKS OF ACCOUNT WHICH WERE AUDITED TWICE; FIRSTLY, UNDER TH E PROVISIONS OF SECTION 44AB AND LATER U/S 142(2A) OF THE I.T. ACT BY THE A UDITOR APPOINTED BY THE COMMISSIONER OF INCOME TAX ON A REFERENCE OF THE AS SESSING OFFICER. BOTH THE AUDITORS CATEGORICALLY STATED THAT THE ASS ESSEE MAINTAINED PROPER BOOKS OF ACCOUNT AND THAT THE BALANCE SHEET AND PRO FIT & LOSS ACCOUNT OF THE ASSESSEE GAVE TRUE AND FAIR VIEW. IN OTHER WOR DS, NO DISCREPANCY WAS POINTED OUT IN THE BOOKS OF ACCOUNT MAINTAINED BY T HE ASSESSEE IN REGULAR COURSE OF BUSINESS AND ALSO IN THE METHOD OF ACCOUN TING FOLLOWED 31 CONSISTENTLY BY THE ASSESSEE. THE ASSESSEE WAS MAI NTAINING HIS BOOKS OF ACCOUNT ON PRINCIPAL TO PRINCIPAL BASIS. THE SAID METHOD I.E. PRINCIPAL TO PRINCIPAL IS GENERALLY FOLLOWED BY THE BROKER. IN THIS TYPE OF METHOD OF ACCOUNTING THE BROKER WHEN MAKES PURCHASES OR MAKES SALES OF OWN ACCOUNT IRRESPECTIVE OF THE CORRESPONDING PURCHASE OR SALE TRANSACTION DONE IN THE STOCK EXCHANGE OR NOT. THE SAID TRADIN G BETWEEN THE SHARE BROKER AND HIS CLIENT IS CALLED TRADING ON PRINCIPA L TO PRINCIPAL BASIS. IN SUCH TYPE OF CASES, THE AMOUNT PAYABLE OR AMOUNT RE CEIVABLE BY THE CLIENT CONSISTS OF TWO PARTS; (1) EXCESS OF SALE OVER PURC HASE OR EXCESS OF PURCHASE OVER SALES SQUARED UP WITHIN THE SETTLEMEN T PERIOD; (2) EXCESS OF SALE OVER PURCHASE SETTLED BY EFFECTING PHYSICAL DE LIVERY OF SUCH EXCESS PURCHASE AND SIMILARLY EXCESS OF SALE OVER PURCHASE SETTLED BY EFFECTING PHYSICAL DELIVERY OF SUCH SHARES. IN OTHER WORDS, IN THOSE TRANSACTIONS WHERE THE SETTLEMENT IS DONE WITHIN THE SETTLEMENT PERIOD NO PHYSICAL DELIVERY OF SHARES TAKES PLACE. HOWEVER, IN THE TRA NSACTION WHICH ARE NOT SETTLED WITHIN THE SETTLEMENT PERIOD PHYSICAL DELIV ERY OF SHARES TAKES PLACE. AS THE ASSESSEE WAS MAINTAINING BOOKS OF ACCOUNT ON PRINCIPAL TO PRINCIPAL BASIS AND SEVERAL TRANSACTIONS WERE SETTLED ON NET BASIS. THE ASSESSEE ACCOUNTED FOR PURCHASE AND SALES ON NET BASIS, THER EFORE, THE DIFFERENCE MAY OCCUR IN THE FIGURES ACCOUNTED FOR ON GROSS BAS IS. IN THE PRESENT CASE, TOTAL PURCHASE AND SALES DECLARED BY THE ASSE SSEE WERE AT 32 `2 22,44,41,665.44 AND ` 222,63,04,190.58 RESPECTIVELY. THE DIFFERENCE BETWEEN THE PURCHASE AND SALES WAS AT ` 18,62,525.14 (222,63,04,190.58 - 2 22,44,41,665.44) AND WHEN THE MATTER WAS REFERRED T O THE SPECIAL AUDITOR U/S 142(2A) OF THE I.T. ACT, THE FIGURES REPORTED O F SALES AND PURCHASE WERE AT ` 246,03,99,166.44 AND ` 246,22,61,691.58 RESPECTIVELY. THE RESULTANT DIFFERENCE WAS AT THE SAME FIGURE OF ` 18,62,525.14 (246,22,61,691.58 - 246,03,99,166.44). FROM THE ABOVE IT IS CLEAR THAT THERE WAS NO DIFFERENCE IN THE SALES AND PURCHASE AS THE RESULTANT FIGURE W AS THE SAME. THE ONLY DIFFERENCE OCCURRED FOR THE REASON THAT THE ASSESSE E HAS TAKEN THE FIGURES ON NET BASIS WHILE THE SPECIAL AUDITOR HAS TAKEN TH E FIGURES ON GROSS BASIS. HOWEVER, THE FIGURES CERTIFIED BY AUDITOR APPOINTED U/S 142(2A) OF THE I.T. ACT AND THE FIGURES GIVEN BY THE ASSESSEE WERE DEPI CTING THE SAME TRADING RESULTS. FURTHERMORE, IN THE INSTANT CASE, THE ASS ESSING OFFICER HAD NOT POINTED OUT ANY SPECIFIC DEFECTS IN THE BOOKS OF AC COUNT MAINTAINED BY THE ASSESSEE BUT ARBITRARILY REJECTED THE BOOK RESULTS IN PART. THE ASSESSING OFFICER ACCEPTED THE BOOK RESULTS RELATING TO THE T RADING BY THE ASSESSEE IN HIS OWN ACCOUNT BUT DID NOT ACCEPT THE BOOK RESULTS ON ACCOUNT OF THE TRADING BY THE ASSESSEE ON BEHALF OF THE CLIENTS. IN THE PRESENT CASE, SIMILAR METHOD OF ACCOUNTING ADOPTED BY THE ASSESSE E HAS BEEN ACCEPTED IN THE PRECEDING YEARS I.E. THE ASSESSMENT YEAR 92- 93 TO 95-96 AND 2000- 2001. IN THESE YEARS THE ASSESSMENTS WERE FRAMED U /S 143(3) OF THE I.T. 33 ACT AND THE BOOK RESULTS WERE ACCEPTED. SIMILARLY IN THE SUBSEQUENT YEAR I.E. THE ASSESSMENT YEAR 2004-2005, SAME ASSESSING OFFICER IN THE SAME SET OF CIRCUMSTANCES AND THE ACCOUNTING METHOD FOLL OWED BY THE ASSESSEE CONSISTENTLY, HAS ACCEPTED THE BOOKS OF ACCOUNT AND THE TRADING RESULTS SHOWN BY THE ASSESSEE WERE NOT DISTURBED. WE, THER EFORE, CONSIDERING THE TOTALITY OF THE FACTS OF THE PRESENT CASE, ARE OF T HE VIEW THAT THE ASSESSING OFFICER WAS NOT JUSTIFIED IN REJECTING THE BOOKS OF ACCOUNT OF THE ASSESSEE WITHOUT POINTING OUT ANY SPECIFIC DEFECTS IN THOSE BOOKS PARTICULARLY WHEN THE AUDITORS WHILE AUDITING THE BOOKS OF ACCOUNT U/ S 44AB AND THE SPECIAL AUDITORS APPOINTED U/S 142(2A) OF THE I.T. ACT CLEA RLY STATED THAT THE BALANCE SHEET AND PROFIT & LOSS ACCOUNT OF THE ASSE SSEE GAVE A TRUE AND FAIR VIEW AND THAT THE PROPER BOOKS OF ACCOUNT WERE MAINTAINED FOR THE YEAR UNDER CONSIDERATION. WE, THEREFORE, ARE OF THE VIE W THAT THE LEARNED CIT (A) WAS JUSTIFIED IN DELETING THE IMPUGNED ADDITION MADE BY THE ASSESSING OFFICER. 7. THE NEXT ISSUE, VIDE GROUND NO. 3, RELATES TO TH E DELETION OF ADDITION OF ` 1,31,111/- MADE BY THE ASSESSING OFFICER ON ACCOUNT OF LOW WITHDRAWAL FOR HOUSE HOLD EXPENSES. 8. THE FACTS RELATED TO THIS ISSUE, IN BRIEF, ARE T HAT THE ASSESSING OFFICER, DURING THE ASSESSMENT PROCEEDINGS, ASKED T HE ASSESSEE ABOUT THE 34 DETAIL OF FAMILY MEMBERS AND WITHDRAWAL FOR HOUSE H OLD EXPENSES. THE ASSESSEE SUBMITTED THAT HIS FAMILY CONSISTS OF FOLL OWING MEMBERS: 1. SHRI S. K. GUPTA, ASSESSEE HIMSELF 2. SMT. MAMTA GUPTA, WIFE 3. SHRI A. S. GUPTA, FATHER 4. SMT. SHEELA DEVI GUPTA, MOTHER 5. MASTER SAMARTH GUPTA, (SON) STUDYING IN CLASS-IV PURANCHAND VIDYALAYA 6. MASTER SARTHAK TUPTA (SON) PLAY GROUP IN WEND SC HOOL AS REGARDS TO THE WITHDRAWAL, THE ASSESSEE SUBMITTE D AS UNDER: 1. SHRI S. K. GUPTA, ASSESSEE HIMSELF 1,91,111/- 2. SMT. MAMTA GUPTA, WIFE 8,000/- 3. SHRI A. S. GUPTA, FATHER 12,000/- 4. SMT. SHEELA DEVI GUPTA, MOTHER 10,000/- 5. MASTER SAMARTH GUPTA, (SON) - STUDYING IN CLASS-IV PURANCHAND VIDYALAYA 6. MASTER SARTHAK TUPTA (SON) PLAY GROUP - IN WEND SCHOOL ------------- TOTAL ` 2,27,142/- ------------- 8.1 THE ASSESSING OFFICER POINTED OUT THAT THE COPY OF CAPITAL ACCOUNT OF THE ASSESSEE IN HIS BOOKS OF BUSINESS REVEALED THAT ` 60,000/- HAS BEEN WITHDRAWN FOR HOUSE HOLD EXPENSES, ` 18,500/- FOR SCHOOL FEES OF MASTER SAMARTH GUPTA AND ` 9,600/- FOR SCHOOL FEE OF MASTER SARTHAK GUPTA, ` 6,000/- HAS BEEN DEPOSITED AS SECURITY IN THE CASE OF SAMARTH GUPTA, ` 15,460/- HAS BEEN INCURRED FOR HOUSE MAINTENANCE, ` 19,380/- PAID FOR INCOME TAX, ` 46,400/- AND 5,400/- PAID FOR STAMP DUTY AND REGIST RY FEES, ` 6,408/- FOR LIC, ` 1,620/- PAID FOR NAGAR NIGAM, ` 1,795/- PAID TO JAL 35 NIGAM, ` 500/- FOR ATM, ` 48.10 FOR INTEREST PAID TO LIC. THE TOTAL OF ABOVE FIGURES CAME TO ` 1,91,111/-. ACCORDING TO THE ASSESSING OFFICER, TH E ASSESSEE HAD WITHDRAWN ONLY A SUM OF ` 60,000/- FROM HIS CAPITAL ACCOUNT FOR THE HOUSE HOLD EXPENSES WHICH WAS CONTRARY TO T HE FACTS AS PER CAPITAL ACCOUNT THAT HE HAS WITHDRAWN A SUM OF ` 1,91,111/-. HE THEREFORE, ADDED A SUM OF ` 1,31,111/- ( ` 1,91,111- ` 60,000) ON ACCOUNT OF HOUSE HOLD EXPENSES FROM UNDECLARED SOURCES. 9. THE ASSESSEE CARRIED THE MATTER TO LEARNED CIT(A ) WHO OBSERVED THAT IN THE CAPITAL ACCOUNT OF THE ASSESSEE, IT WAS CLEARLY SHOWN THAT HE HAD MADE TOTAL DRAWING OF ` 1,91,111/- INCLUDING HOUSE HOLD DRAWING OF ` 60,000/- AND THE ASSESSING OFFICER HAD ALSO TAKEN T OTAL DRAWING AT ` 1,91,111/- INCLUDING HOUSE HOLD DRAWING OF ` 60,000/-. ACCORDING TO THE LEARNED CIT (A), THE ASSESSING OFFICER HIMSELF ADMI TTED IN THE ASSESSMENT ORDER THAT THE ASSESSEE HAD MADE A WITHDRAWAL OF ` 1,91,111/-. THE LEARNED CIT (A), THEREFORE, DELETED THE ADDITION OF ` 1,31,111/-. 10. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND CA REFULLY GONE THROUGH THE MATERIAL AVAILABLE ON THE RECORD. THE COPY OF CAPITAL ACCOUNT OF THE ASSESSEE IS PLACED AT PAGE NO. 31 OF THE ASS ESSEES COMPILATION. IN THE SAID COPY OF CAPITAL ACCOUNT THE TOTAL WITHDRAW ALS FOR THE YEAR UNDER CONSIDERATION HAS BEEN SHOWN AT ` 1,91,111.10 WHICH INCLUDED ` 60,000/- 36 WITH THE NARRATION CASH WITHDRAWN FOR HOUSE HOLD E XPENSES. THE SAID WITHDRAWAL OF ` 60,000/- IS SHOWN IN EVERY MONTH @5,000/- APART FRO M THAT OTHER WITHDRAWALS WERE ALSO THERE. FROM THE ABOVE FACTS, IT IS CLEAR THAT THE WITHDRAWAL OF THE ASSESSEE WAS AT ` 1,91,111/- AND NOT ` 60,000/- AS MENTIONED BY THE ASSESSING OFFICER. IT THEREFORE A PPEARS THAT THE ASSESSING OFFICER, WITHOUT APPRECIATING THE FACTS I N RIGHT PERSPECTIVE, MADE THE ADDITION ARBITRARILY AND THE LEARNED CIT (A), A FTER APPRECIATING THE FACTS AND PERUSING THE DETAILS OF THE HOUSE HOLD WITHDRAW ALS MENTIONED IN THE CAPITAL ACCOUNT OF THE ASSESSEE, RIGHTLY DELETED TH E ADDITION. WE DO NOT SEE ANY INFIRMITY IN THE ORDER OF THE LEARNED CIT ( A) ON THIS ISSUE. 11. IN THE RESULT, THE APPEAL IS DISMISSED. (THE ORDER WAS PRONOUNCED IN THE OPEN COURT ON 30/0 3/2011) SD/. SD/. ( H. L. KARWA ) (N. K. SAINI) VICE PRESIDENT ACCOUNTANT MEMBER DATED: 30/03/2011 *SINGH COPY FORWARDED TO THE: 1. APPELLANT. 2. RESPONDENT. 3. CIT (A) 4. CIT 5. DR. ASSISTANT REGISTRAR