Monal Y.Thakkar, Ahmedabad vs Assessee

अपीलाथ / (Appellant) यथ / (Respondent) ITA No.573/Ahd/2010 (5 Appeals) Smt. Reetaben R. Thakkar and Shri Monal Y. Thakkar Vs.ACIT

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Assessee by : Shri Ankit Talsania Revenue by : Smt.Sonia Kumar, Sr.DR

सन ु वाई क तार ख/ Dateof Hearing : 23/06/2015 घोषणा क तार ख / Date of Pronouncement: 24/07/2015

आदे श/O R D E R

PER RAJPAL YADAV, JUDICIAL MEMBER:

In this bunch of five appeals, common issue is involved. Therefore, we heard them together, and deem it appropriate to dispose of them by this common order.

In the case of Smt. Reetaben R. Thakkar, the assessee and the Revenue are in cross appeals against the order of the ld.CIT(A) dated 11.1.2010 for the Asstt.Year 2006-07. In the Asstt.Year 2009-10, Smt. Reetaben R. Thakkar alone has challenged the order of the CIT(A) dated 24.12.2012.

In the case of Shri Monal Y. Thakkar, the assessee has challenged orders of the CIT(A) dated 16.11.2009 and 24.4.2012 for the Asstt.Years 2006-07 and 2009-10 respectively.

2. Before we carve out specific grievance of the appellants, we deem pertinent to take note, a brief background of the case.

3. In October, 2005, Securities and Exchange Board of India (SEBI for short) noticed large scale off market transactions of shares of Yes Bank Ltd. On detailed examination of data collected from the depositories and Registrar to the Issue, SEBI found that many demat accounts in fictitious/benami names were opened by certain persons, and these persons had cornered the shares of certain Initial Public Offers (IPOs) by making applications in fictitious/benami names with each of the applications being of small value so as to make it eligible for ITA No.573/Ahd/2010 (5 Appeals) Smt. Reetaben R. Thakkar and Shri Monal Y. Thakkar Vs.ACIT

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allotment under retail category. It was also observed that subsequent to the allotment of IPO shares, this fictitious/benami allottees had transferred the said shares to their principals (key operators/master account holders) who in turn transferred the shares to the persons (the financiers) who made available fund for making subscription to the respective IPOs., through off-market transactions prior to the date of listing on the stock exchange. The financiers have also sold the said shares immediately on the date of listing and made huge profit. The SEBI examined the dealings in IPOs. of Yes Bank and IDFC Ltd., where it was found that certain persons including Smt. Rupal Naresh Panchal and Sugandh Estate and Investment Pvt. Ltd. have cornered large portion of the shares in various IPOs., reserved for retail category of investors. In view of this finding, SEBI referred the matter to other government agencies including Income Tax Department, Ministry of Company Affairs and Reserve Bank of India. The Income Tax Department has also carried out survey and search. The assessee, Smt.Reetaben R. Thakkar had made investment of Rs.4 crores, whereas Shri Monal Y. Thakkar had made investment of Rs.2.85 crores. The assessee, Smt. Reetaben R. Thakkar had acquired 1,80,000 shares from Sugandh Estate & Investment P. Ltd., and Shri Monal Y. Thakkar had acquired 85,600 shares from Sugandh Estate & Investment P. Ltd.

4. In the above background, let us note the facts in the appeal.

5. The assessee, Smt. Reetaben R. Thakkar has filed her return of income for the Asstt.Year 2006-07 on 28.12.2006 declaring total income of Rs.51,50,280/-. She has disclosed capital gain of Rs.36,16,736/- which includes profit of Rs.17,060/- as short term capital gain.

6. Shri Monal Y. Thakkar has filed her return of income for the Asstt.Year 2006-07 on 28.12.2006 by declaring total income of ITA No.573/Ahd/2010 (5 Appeals) Smt. Reetaben R. Thakkar and Shri Monal Y. Thakkar Vs.ACIT

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Rs.48,00,570/-. She has shown capital gain in respect of IPOs. Issue at Rs.30,78,423/-.

7. Dispute in the present appeals for the Asstt.Year 2006-07 is, whether the profit resulted to the assessee on share transactions through IPOs, is to be assessed as business income or under the head "Capital Gains".

8. In the Asstt.Year 2009-10, the grievance of both the assessees is that the SEBI has passed orders in the case of both the assessees, vide which, the amounts earned by the assessees through this IPOs. Issue have been directed to be disgorged, and accordingly, assessees have remitted this amount to the SEBI. Therefore, they have not earned any income and the alleged assessment of business income in the Asstt.Year 2006-07 is to be allowed as business expenditure in the year in which the assessees have made payment to the SEBI. Apart from the above, the assessees had raised additional grounds of appeal in the Asstt.Year 2006-07, whereby they have claimed that since the alleged capital gain has been deposited in pursuance of SEBI's order to the SEBI, therefore, no income resulted to the assessee, which can be assessed in the hands of the assessee either under the head "capital gains" or under the head "business income".

9. In the appeal of the Revenue for the Asstt.Year 2006-07, in the case of Reetaben R. Thakkar, solitary issue is that the ld.CIT(A) has erred in accepting a sum of Rs.5,48,385/- out of the total alleged capital gain of Rs.36,16,736/- as assessable under the head "capital gains".

10. With the assistance of learned representative, we have gone through the record carefully. Before we embark upon an inquiry, as to assessability of Rs.36,16,736/- and Rs.30,78,423/- in the hands of Smt. ITA No.573/Ahd/2010 (5 Appeals) Smt. Reetaben R. Thakkar and Shri Monal Y. Thakkar Vs.ACIT

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Reetaben R. Thakkar and Shri Monal Y. Thakkar, in the Asstt.Year 2006- 07 respectively, it is pertinent to bear in mind certain basic features emerge out from the proceedings of the SEBI. As stated earlier, the assessees have financed certain benami/fictitious applicants to apply for allotment of shares in initial public offer, which is against section 12A of Securities and Exchange Board of India Act, 1992. The SEBI has initiated inquiry and ultimately issue was settled. The SEBI has passed order in the case of Smt. Reetaben R. Thakkar on 6.11.2008 whereby, Smt. Reetaben R. Thakkar was directed to disgorge a sum of Rs.30,98,785/- as well as settlement charge of Rs.6,20,215/-. The order of the SEBI reads as under:

"CO/ISD/ 86 /2008

BEFORE THE SECURITIES AND EXCHANGE BOARD OF INDIA, MUMBAI CONSENT ORDER ON THE APPLICATION SUBMITTED BY SHRI MONAL Y. THAKKAR IN THE MATTER OF IRREGULARITIES RELATING TO INITIAL PUBLIC OFFERINGS (CONSENT APPLICATION NO.21/2007)

1. As a part of its on going surveillance, SEBI had launched an investigation under Section 11C of the SEBI Act, 1992 into the dealings in the shares issued through Initial Public Offerings (IPOs) during 2003-05 before these were listed on the Stock Exchanges. The preliminary investigations, prima facie, revealed that a large number of dematerialized accounts with common addresses had been opened in benami or fictitious names with a view to cornering the shares meant for retail individual investors.

A few financiers, including Ms.Ritaben R. Thakkar (hereinafter referred to as applicant), provided money for making IPO applications in fictitious/ benami names. The applicant was, therefore, alleged to have violated Section 12A of the SEBI Act 1992, Regulation 3 of the SEBI (Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 and the provisions of the SEBI (Disclosure and Investor Protection) Guidelines, 2000 and to have made an unlawful gain of Rs. 30,98,785 in the process.

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2. Based on these findings, SEBI passed an ad interim ex parte Order dated April 27, 2006 under Sections 11 and 11B of the SEBI Act, 1992 directing the applicant not to buy, sell or deal in securities market, including IPOs, directly or indirectly, till further directions. The applicant submitted reply vide letter dated May 09, 2006. SEBI also initiated an adjudication proceedings under Chapter VI of the SEBI Act, 1992 against the applicant. The Adjudicating Officer issued show cause notice to the applicant on June 16, 2006. The applicant submitted reply to the Adjudicating Officer vide letters dated July 22, 2006 and December 15, 2006.

3. While further proceedings in the matter were in progress, the applicant, vide letter dated July 12, 2007 proposed settlement of the pending proceedings through a consent order. The High Powered Advisory Committee, constituted by SEBI, considered the consent terms proposed by the applicant and after considering the period of prohibition on buying, selling or dealing in securities undergone by the applicant since April 27, 2006, recommended the case for settlement. As per the terms of settlement, the applicant shall disgorge Rs. 30,98,785 (Rupees thirty lakh ninety eight thousand seven hundred and eighty five only) being the unlawful gain made by her in the alleged irregularity and Rs. 6,20,215 (Rupees six lakh twenty thousand two hundred and fifteen only) as the settlement charges.

4. For the sole purpose of settling the matter on hand and without admission or denial of guilt on the part of applicant to the findings of fact or conclusion of law, the applicant has remitted a total sum of Rs. 37,19,000 (Rupees thirty seven lakh nineteen thousand only) comprising of Rs.30,98,785 (Rupees thirty lakh ninety eight thousand seven hundred and eighty five only) towards disgorgement and Rs. 6,20,215 (Rupees six lakh twenty thousand two hundred and fifteen only) towards settlement charges vide demand drafts No. 982666 (Rs. 8,00,000), 982668 (Rs. 8,00,000), 982669 (Rs. 8,00,000), 982670 (Rs. 5,19,000), dated October 27, 2008, drawn on State Bank of Patiala, payable at Mumbai.

5. In view of the above, it is hereby ordered that this consent order disposes of the proceedings under Sections 11 and 11B of the SEBI Act, 1992 and the adjudication proceedings against the applicant and revokes the directions in the ad interim ex parte Order dated April 27, 2006 passed by SEBI to the extent such directions are against the applicant in the matter of IPO irregularities.

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6. This order is without prejudice to the right of SEBI to take enforcement actions, including commencing / reopening of the pending proceedings against the applicant, if:

a. any representation made by the applicant in this consent proceedings is subsequently discovered to be untrue;

b. the applicant breaches any of the consent terms or undertakings filed in this consent proceedings.

7. This consent order is passed on this day, the 5th November, 2008 and shall come into force with immediate effect.

Sd/-

T. C. Nair Whole Time Member

Sd/-

M. S. Sahoo Whole Time Member"

11. A similar order has been passed in the case of Shri Monal Y. Thakkar on 4.11.2008 vide which she was directed to disgorge a sum of Rs.29,17,331 and Rs.5,83,669/- as settlement charges. During the pendency of the appeals before the CIT(A), on the strength of these orders, the assessees have raised additional grounds of appeals, whereby, they pleaded that whatever assessee had received in these share transactions, which was found to be assessed as business income, ultimately not resulted in any income to the assessees, because, they have disgorged that amount to the SEBI. With regard to the question that the moment exclusion of the amount made would bring their return of income lower than the one disclosed by them, they, on the strength of the Hon'ble Gujarat High Court decision in the case of Gujarat Gas Co. Ltd. Vs. CIT, 245 ITR 84 contended that the AO has to compute the income as per the provisions of the Act, notwithstanding the income disclosed in the return of income. In other words, even if an amount was shown as taxable income in the return of income, and it is not taxable, the same cannot be taxed by the AO. The ld.First Appellate Authority has considered this alternative contention of the assessees, ITA No.573/Ahd/2010 (5 Appeals) Smt. Reetaben R. Thakkar and Shri Monal Y. Thakkar Vs.ACIT

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but rejected the same. The relevant findings of the CIT(A), in the case of Smt. Reetaben R. Thakkar is worth to note in this connection. It reads as under:

14. I have considered the submission of the appellant and I have also perused the copy of the order passed by the SEBI on 05.11.2008. In the SEBI order, supra, it has been clearly -

mentioned that the appellant, vide letter dated 12.07.2007, proposed settlement of the pending proceedings. Thereafter, SEBI constituted one high power advisory committee, which considered the consent terms proposed by the appellant and recommended the case for settlement. As per the terms of settlement, the appellant shall disgorge Rs.30,98,785/-, being the unlawful gain made by the appellant and Rs.6,20,215/-as the settlement charges. In consideration to this order, the appellant has remitted total sum of Rs.37,19,000/- vide demand draft, drawn on State Bank of Patiala payable at Mumbai.

15. The appellant's contention that income earned out of the share transactions to the extent of Rs.30,68,351/- should be directed to be reduced from the income assessed by the Assessing Officer, is not accepted for the following reasons :-

(a) The SEBI's order has been passed on 05.11.2008, whereas the previous year in the impugned assessment orders ended on 31.03.2006. Therefore, the SEBI's order has been passed after the end of the previous year of the assessment year under consideration.

(b) As mentioned in the instant appellate order, the appellant has acquired certain shares in the IPOs by fraudulent and illegal methods. Therefore, 'payment made or any expenditure incurred for the settlement of such fraudulent and illegal methods, cannot be allowed as deduction in the Income Tax proceedings in view of the proviso to section 37(1) of the I.T. Act.

(c) The gain of Rs.30,68,351/- is the unlawful gain, as is evident from SEBI's order dated 05.11.2008. The appellant has agreed to consent terms and made the payment thereof, in order to get revoked the directions made in the interim order dated 27.04.2006, passed by SEBI. Any payment made for regularizing such fraudulent and illegal ITA No.573/Ahd/2010 (5 Appeals) Smt. Reetaben R. Thakkar and Shri Monal Y. Thakkar Vs.ACIT

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transactions, can not be allowed as deduction in Income tax proceedings.

16. In view of the above, the additional ground of appeal is treated as dismissed. In the result, the appeal is treated as partly allowed.

17. In the result, the appeal is treated as partly allowed."

12. In view of the above discussions, four issues emerge out for our adjudication, namely,

(a) Whether the gain arisen to both the assessees on purchase and sale of shares is to be assessed under the head "capital gains" or "business income" ?

(b) Whether after disgorgement of Rs.30,98,785/- by Smt.Reetaben R. Thakkar and Rs.29,17,331/- by Shri Monal Y. Thakkar, no amounts left in their hands, therefore, whether the income to this extend is to be assessed in the hands of both these assessees, either under the head "business income" or under the head "capital gains" ?;

(c) If the income is assessed under the head business income, then whether the amount of disgorgement of Rs.30,98,785/- paid by Smt.Reetaben R. Thakkar and Rs.29,17,331/- paid by Shri Monal Y. Thakkar along with settlement charges of Rs.6,20,215/- and Rs.5,83,669/- paid by these assessees is to be allowed as business loss ?

(d) That even if income of Rs.30,98,785/- and Rs.29,17,331/-

is to be excluded from the hands of both these assesses, being not received in view of SEBI orders, then whether the settlement charges of Rs.6,20,215/- and Rs.5,83,669/- are to be allowed to the assessees, viz. Smt.Reetaben R. Thakkar and Shri Monal Y. Thakkar respectively ?

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13. The ld.counsel for the assessee, while impugning the orders of the CIT(A) contended that the activity of the assessee in the purchase and sale of shares is of investment in the shares, and it cannot be assessed under the head "business income". Alternatively, on the strength of SEBI order, he contended that no income ultimately resulted to both the assessee, therefore, the amount of Rs. Rs.30,98,785/- and Rs.29,17,331/- is to be excluded from the assessments of both these assessees, respectively in the Asstt.Year 2006-07. He further contended that capital gain is assessed under the head "business income" by the ld.CIT(A). Consequently, loss on account of repayment of this income to the SEBI is to be allowed to the assessees. The payment has been made in the Asstt.Year 2009-10, therefore, this amount is to be allowed to the assessees in the Asstt.Year 2009-10.

14. As far as the settlement charges are concerned, he contended that payment was not made for violation of any law. It was paid for settlement of dispute with the SEBI and it is compensatory in nature. It does not come within the ambit of Explanation-1 appended to section 37 of the Income Tax Act. Therefore, the settlement charges paid by these assessees deserve to be allowed to the assessees. In support of his contentions, he relied upon the order of the ITAT, Mumbai in the case of Kaira Can Company Ltd. Vs. DCIT, 127 TTJ 514 (Mum).

15. On the other hand, the ld.DR relied upon the orders of the Revenue authorities below. She contended that SEBI order was passed after the end of the accounting period, and therefore, before the SEBI order, the income had resulted to both the assessees. Assessees have made investment of Rs.4 crores and Rs.2.8 crores by financing benami investors. This shows their modus operandi and how they have undertaken the activity in an organized manner. It is to be assessed as business income. She further contended that as far as settlement ITA No.573/Ahd/2010 (5 Appeals) Smt. Reetaben R. Thakkar and Shri Monal Y. Thakkar Vs.ACIT

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charges are concerned, these are paid by the assessee in violation of SEBI rules. These are in violation of rules, and therefore, not compensatory in nature. Alternatively, she contended that if the alternative contention of the assessees is accepted by the Revenue, then there is no income left with the assessee, against whom they can claim settlement charges.

16. We have duly considered rival contentions, and gone through the record carefully. From the findings of the SEBI, it is implicit clear that both the assessees have indulged in violation of SEBI regulations, while making investments in IPOs. Whatever amounts they have illegally earned, which could be assessed as their income, has been taken away from them. They have already disgorged the amount, though, the payment was made after the close of accounting year, and even after passing of the assessment order. But these payments related to same share transactions, which have given rise to the alleged income in the hands of the assessee. The appeal before the CIT(A) is a continuation of the original proceedings. Before the CIT(A), the assessee have already taken additional grounds of appeal on the strength of the SEBI order. Therefore, we find force in the contentions of the ld. Counsel for the assessee that ultimately no income has resulted to the assessees, out of these share transactions. The income of Rs.30,98,785/- and Rs.29,17,331/- is to be excluded from the hands of Smt.Reetaben R. Thakkar and Shri Monal Y. Thakkar respectively in the Asstt.Year 2006-

07.

17. As far as the claim of the assessee with regard to settlement charges are concerned, we find that there is no corresponding income against this expenditure. The income, which we have already excluded, therefore, the assessees cannot claim the expenditure, because, the expenditure has to be incurred for earning some income. Once the ITA No.573/Ahd/2010 (5 Appeals) Smt. Reetaben R. Thakkar and Shri Monal Y. Thakkar Vs.ACIT

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income is not form part of the total income, then against that activity, how the assessee can claim that expenditure ? Apart from the above, we find that the order of the ITAT in the case of Kaira Can Company Ltd. (supra) is altogether on different footings, rather, it is against the assessees. The Tribunal has considered the expression of "offence" and made the following discussion:

"20. The word 'offence' has not been defined in the Act. As per Websters Encylopedic Abridged Dictionary, it means violation or breach of law or rule; a transgression of the criminal law, especially one which is not felony; a cause of transgression.

As per Blacks Law Dictionary, it means,--a violation of the law; a crime, often a minor one. As per Illustrated Oxford Dictionary, it means--illegal act or a transgression.

A perusal of the above definitions clearly shows that if there is a breach or violation of law or rule then it is to be treated as offence.

21. In the present case, admittedly, the assessee is governed by the provisions of SEBI Act. Certain Regulations were made under this Act which arc called as SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997. Under these Regulations, the assessee was admittedly required to make certain disclosures and non-compliance of the same was liable to penalty not exceeding Rs. 5,000 for every day during which such non compliance continued. In addition, such persons are also liable for prosecution under s. 24 of the SEBI Act. In view of the above provisions, it is clear beyond doubt that non-disclosure under the Regulations of 1997 would amount to violation of law or the rule which, in turn, would amount to an offence. Therefore, if any payment is to be made by way of penalty under the provisions of s. 15 A of SEBI Act, then such payment cannot be allowed as deduction under s. 37 r/w Explanation."

18. In the case of Kaira Can Company Ltd. (supra), the Tribunal recorded a finding that the payment was by the company to regularize default, which had occurred on account of oversight and lack of knowledge. The SEBI has issued a scheme permitting such defaulters to make payment in order to overcome that default. Thus, the ITA No.573/Ahd/2010 (5 Appeals) Smt. Reetaben R. Thakkar and Shri Monal Y. Thakkar Vs.ACIT

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payments were not made in violation of certain penalty provisions. In the present case, no such payment was made by the assessees. The assessees have financed certain fictitious entities and benami persons to apply for IPOs. There modus operandi is against SEBI regulatons, particularly, Section 12A of the SEBI Act, and therefore, the payment was on account of violation of provisions of SEBI. The assessees cannot claim that these payments are compensatory in nature. For these reasons we do not find any force in the contentions of the assessees.

19. As far as the appeal of the Revenue in the case of Smt.Reetaben R. Thakkar is concerned, the ld.First Appellate Authority has held that amount of Rs.5,48,385/- is to be assessed as short term capital gain. We find that the ld.CIT(A) has recorded a specific finding that investment to this is a bona fide investment of the assessees, and it has no link with the other IPOs investments. An assessee could be trader and investor at the same time. For the investment in IPOs. through fictitious entities was considered by the CIT(A) as organized business activity, and rest was as a simple investment. The ld.CIT(A) has rightly treated the assessees as investor qua the surplus amount of Rs.5,48,385/-. Therefore, we do not find force in the appeal of the Revenue. This ground of appeal is rejected.

20. In the result, the ITA No.573/Ahd/2010 and 574/Ahd/2010 is partly allowed, whereas, the ITA No.786/Ahd/2010 is dismissed.

21. As far as the appeals of the assessees i.e. ITA No.555/Ahd/2010 and 554/Ahd/2010 for the Asstt.Year 2009-10 are concerned, these are consequential appeals. We have held that a sum of Rs.30,98,785/- and Rs.29,17,331/- are to be excluded from the taxable income of the assessees in the Asstt.Year 2006-07, on the ground that this income has ultimately not resulted to the assessees. In this year, both the assessees have claimed expenditure on account of payments of these ITA No.573/Ahd/2010 (5 Appeals) Smt. Reetaben R. Thakkar and Shri Monal Y. Thakkar Vs.ACIT

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amounts to the SEBI. Since we have already excluded these amounts from the taxable income of the assssees in the Asstt.Year 2006-07, resultantly, the assessees cannot claim expenditure in the Asstt.Year 2009-10 i.e. the year of payment.

22. In view of the above, we do not find any merit in the appeals of the assessees.

21. We summarize the result as under:

i) The ITA No.573/Ahd/2010 and ITA No.574/Ahd/2010 for the Asstt.Year 2006-07 are partly allowed.

ii) The ITA No.554/Ahd/2010, ITA No.555/Ahd/2010 and ITA No.786/Ahd/2010 are dismissed.

Order pronounced in the Court on 24th July, 2015 at Ahmedabad.

Sd/- Sd/- (G.D. AGRAWAL) (RAJPAL YADAV) VICE-PRESIDENT JUDICIAL MEMBER

Ahmedabad; Dated 24 /07/2015