Stock Exchange and Demat Records Prove Share Transactions: ITAT deletes Additions u/s 153A [Read Order]

The Income Tax Appellate Tribunal (ITAT), Mumbai examined whether additions towards disallowance of interest expenditure, capital gains, and estimated commission expenses made under Section 153A of the Income Tax Act, 1961, were sustainable in light of documentary evidence furnished by the assessee.

The Tribunal deleted additions made on account of capital gains and estimated commission expenses, holding that documentary evidence such as stock exchange records, demat account entries, and banking channel payments substantiated the genuineness of transactions.

The appellant, Vikram Biharisaran Khandelwal, was subjected to search and seizure operations on 10 November 2006 as part of proceedings in the Balaji Group cases. Consequent to the search, assessments were framed under Section 153A of the Income Tax Act, 1961.

The Assessing Officer (AO) disallowed interest expenses on borrowed funds, treated short-term and long-term capital gains declared on sale of shares as accommodation entries, and further added notional commission expenses alleged to have been incurred for arranging such entries. These additions were sustained by the Commissioner of Income Tax (Appeals) [CIT(A)].

The present proceedings were the second round of litigation, following an earlier remand by the Tribunal.

S.M. Bandi, representing the assessee argued that the interest disallowance was excessive, as own funds were available to cover interest-free advances, thereby reducing the proportion of borrowed funds diverted. It was submitted that the average interest rate of 9.39% (AY 2005 - 06) and 10.41% (AY 2006 - 07) should be applied instead of 18%.

Regarding capital gains, the assessee contended that transactions were genuine, having been carried out through stock exchange platforms with payment of Securities Transaction Tax (STT). The shares were credited and debited in the demat account, and payments were made through banking channels.

All documents were placed before the AO, who failed to disprove them in the remand proceedings. The assessee further argued that there was no evidence to support the addition of estimated commission expenses.

Solgy Jose T. Kottaram, CIT–DR, representing the revenue, supported the orders of the AO and CIT(A). It was argued that the disallowances and additions were justified in light of the assessee’s interest-free loans and capital gains transactions.

The Bench comprising B.R. Baskaran, Accountant Member and Sunil Kumar Singh, Judicial Member on the issue of interest expenditure, applied the principle laid down by the Bombay High Court in Reliance Utilities and Power Ltd. (313 ITR 340), holding that own funds are presumed to be used first for making interest-free advances.

Accordingly, disallowance was restricted to the portion of borrowed funds attributable to advances, with interest computed at the assessee’s actual average borrowing rate.

Simultaneously, on the issue of capital gains, the Tribunal observed that the assessee’s transactions were supported by verifiable evidence trading through stock exchange, payment of STT, demat account entries, and banking transactions.

Since the AO failed to disprove these documents, thus, directed deletion of additions relating to capital gains and estimated commission expenses.

Therefore, partly allowed the appeals.

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