INCOME TAX ACT, 1961

Income from undisclosed sources-Addition under section 69-unaccounted investment-Off market transactions

Assessee, a proprietor, was carrying on the business of manufacturing handkerchief. The income returned by the assessee included agricultural income, business income, income from other sources, long-term capital gains on sale of shares and sale of office premises. The assessee had purchased a residential flat during the relevant previous year, which was jointly purchased with his wife. As per the assessee, the investment in the flat was made out of the sale proceeds of shares and office premises thereby utilizing the sale consideration for the purchase of eligible asset for claiming deduction under section 54E. In the course of assessment proceedings, AO held that the claim of the assessee regarding purchase of shares was bogus and the assessee purchased no such shares and consequently the sale of shares also was bogus. Therefore, he treated the amount invested by the assessee in the purchase of residential flat as unexplained investment and further perpetuated by the refusal to grant deduction claimed by the assessee under section 54E. Held:Purchase and sale of shares outside the floor of Stock Exchange is not an unlawful activity. Off-market transactions are not illegal. It is always possible for the parties to enter into transactions even without the help of brokers. Therefore, it was not possible to hold that the transactions reported by the assessee were quite sham on the legal proposition arrived at by CIT (A) that off-market transactions were not permissible. The assessee submitted that the transactions were made with the help of professional mediators who were experts in off-market transactions. When the transactions were off-market transactions, then Stock Exchanges could not give details of transactions entered into between the parties outside their floor. Therefore, the reliance placed by AO on the communications received from the Stock Exchanges that the particulars of share transactions entered into by the assessee were not available in their records, was out of place. While accepting and rejecting statements given by the parties, AO had made a mistake of accepting irrelevant statements and rejecting relevant statements. There is no force in the action of AO in relying on the negative statements of the other parties whose role during the relevant period was either irrelevant or insignificant. Therefore, it was held that certain statements relied on by AO do not dilute the probative value of the statements given by other persons in favour of the assessee confirming the share transactions entered into by the assessee. Every transaction of the assessee has been accounted, documented and supported. Even the evidences collected from the concerned parties have been ultimately turned in favour of the assessee. Therefore, it is, very difficult to brush aside the submissions of the assessee that he had purchased shares and he had sold shares and ultimately he had purchased a flat utilizing the sale proceeds of those shares. It was not possible to presume that the assessee had collected certain fabricated documents and kept at his business premises so as to hoodwink the survey party to lead them to believe that the assessee had entered into share transactions. The department had no defence against the forcible argument that the survey conducted by the department had out and out upheld the submission of the assessee that he had purchased and sold shares. Therefore, on the basis of the internal evidences available with the assessee and the fact that the sale proceeds were collected through bank accounts and coupled with the external evidence of survey and statement of parties, so, the said addition was deleted and the assessee was entitled for the benefit of section 54E against the purchase of flat, in accordance with law.