Shri Maheshkumar Gupta, Surat v. The Income tax Officer, Ward-2(2),, Surat

ITA 2814/AHD/2007 | 2004-2005
Pronouncement Date: 07-01-2011 | Result: Allowed

Appeal Details

RSA Number 281420514 RSA 2007
Assessee PAN AAWPG2960M
Bench Ahmedabad
Appeal Number ITA 2814/AHD/2007
Duration Of Justice 3 year(s) 6 month(s) 10 day(s)
Appellant Shri Maheshkumar Gupta, Surat
Respondent The Income tax Officer, Ward-2(2),, Surat
Appeal Type Income Tax Appeal
Pronouncement Date 07-01-2011
Appeal Filed By Assessee
Order Result Allowed
Bench Allotted B
Tribunal Order Date 07-01-2011
Date Of Final Hearing 30-12-2010
Next Hearing Date 30-12-2010
Assessment Year 2004-2005
Appeal Filed On 27-06-2007
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH AHMEDABAD (BEFORE S/SHRI G. D. AGARWAL VP AND BHAVNESH SAINI JM) ITA NO.2814/AHD/2007 AND 2828/AHD/2008 A. Y.: 2004-05 AND 2005-06 MAHESH KUMAR GUPTA C-16 ELBEE APARTMENT RING ROAD SURAT VS THE INCOME TAX OFFICER WARD 2 (2) AAYAKAR BHAVAN MAJURA GATE SURAT PA NO. AAWPG 2960 M (APPELLANT) (RESPONDENT) APPELLANT BY SHRI RASESH SHAH AR RESPONDENT BY SHRI ROBIN RAWAL SR. DR O R D E R PER BHAVNESH SAINI: THESE APPEALS BY THE SAME ASSESSEE ARE DIRECTED AGAINST THE DIFFERENT ORDERS OF THE CIT(A)-II SURAT DATED 10-05-2007 AND 22-05-2008 FOR ASSESSM ENT YEARS 2004-05 AND 2005-06 ON THE FOLLOWING GROUNDS: ITA 2814/AHD/2007: AY: 2004-05 1. ON THE FACTS AND IN CIRCUMSTANCES OF THE CASE AS WELL AS LAW ON THE SUBJECT THE LEARNED CIT(APPEALS ) HAS ERRED IN CONFIRMING THE ACTION OF THE ASSESSING OFFICER IN TREATING THE REMUNERATION OF RS.7 25 400 /- RECEIVED BY ASSESSEE FROM COMPANY AS SALARY AS AGAINST ASSESSEES CLAIM OF SUCH REMUNERATION AS BUSINESS INCOME. 2. ON THE FACTS AND IN CIRCUMSTANCES OF THE CASE AS WELL AS LAW ON THE SUBJECT THE LEARNED CIT(APPEALS ) HAS ERRED IN CONFIRMING THE ACTION OF THE ASSESSING OFFICER IN MAKING ADDITION OF RS.5 36 065/- AS ITA NO.2814/AHD/2007 AND 2828/AHD/2008 MAHESH KUMAR GUPTA VS ITO W-2(2) SURAT 2 UNEXPLAINED CASH CREDITS UNDER THE PROVISION OF SECTION 68 OF THE I. T. ACT IN RESPECT OF CLAIM OF ASSESSEE AS INCOME FROM CAPITAL GAIN ON TRANSACTION OF PURCHASE AND SALE OF SHARES. ITA NO.2828/AHD/2008: AY: 2005-06 1. ON THE FACTS AND IN CIRCUMSTANCES OF THE CASE AS WELL AS LAW ON THE SUBJECT THE LEARNED CIT(APPEALS ) HAS ERRED IN CONFIRMING THE ACTION OF THE ASSESSING OFFICER IN TREATING THE REMUNERATION OF RS.11 25 000/- RECEIVED BY ASSESSEE FROM COMPANY AS SALARY AS AGAINST ASSESSEES CLAIM OF REMUNERATION AS BUSINESS INCOME. 2. WE HAVE HEARD THE LEARNED REPRESENTATIVES OF BOT H THE PARTIES PERUSED THE FINDINGS OF THE AUTHORITIES BELOW AND C ONSIDERED THE MATERIAL AVAILABLE ON RECORD. 3. BOTH THE APPEALS ARE DECIDES AS UNDER. ITA NO.2814: AY 2004-05 4. ON GROUND NO.1 OF THE APPEAL THE AO MADE ADDITI ON OF RS.7 25 400/- TREATING THE REMUNERATION RECEIVED BY THE ASSESSEE FROM THE COMPANY AS SALARY AGAINST ASSESSEES CLAIM OF SUCH REMUNERATION AS BUSINESS INCOME. THE FACTS OF THE C ASE ARE THAT THE ASSESSEE IS A DIRECTOR OF M/S. GANESH LAXMI PROCESS ORS PVT. LTD. DURING THE YEAR HE RECEIVED REMUNERATION OF RS.7 2 5 400/- WHICH HE CLAIMED AS BUSINESS INCOME AND CLAIMED VARIOUS EXPE NSES AGAINST SUCH INCOME U/S 30 TO 37 OF THE IT ACT. THE AO ASK ED THE ASSESSEE TO FURNISH A COPY OF THE CONTRACT OR AGREEMENT WHIC H THE ASSESSEE MAY HAVE MAY HAVE ENTERED INTO WITH THE COMPANY. TH E ASSESSEE ITA NO.2814/AHD/2007 AND 2828/AHD/2008 MAHESH KUMAR GUPTA VS ITO W-2(2) SURAT 3 SUBMITTED THAT HE WAS ONLY ACTING AS AN AGENT OF TH E COMPANY FOR WHICH HE WAS GETTING MANAGERIAL REMUNERATION. ACC ORDING TO THE ASSESSEE SUCH REMUNERATION WAS IN THE NATURE OF BU SINESS INCOME. IN SUPPORT OF HIS CONTENTION THE ASSESSEE PLACED R ELIANCE ON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE O F RAM PRASAD VS CIT 86 ITR 722 AND ON THE DECISION OF THE HONBLE M ADRAS HIGH COURT IN THE CASE OF CIT VS B. NAGI REDDY 51ITR 178 . THE ASSESSEE ALSO PLACED RELIANCE ON THE DECISION OF ASSAM AND N AGALAND HIGH COURT IN THE CASE OF DWIJENDRA CHANDRA CHOWDHARY VS CIT 61 ITR 97. THE ASSESSEE ALSO SUBMITTED A COPY OF MEMORANDU M OF ASSOCIATION OF THE COMPANY AND ALSO THE COPY OF EXT RACT OF THE MINUTES OF THE MEETING OF THE BOARD OF DIRECTORS HE LD ON 01-04-2003. THE EXTRACT HAS BEEN REPRODUCED BY THE AO IN PARA 4 .4 OF THE ASSESSMENT ORDER. THE AO NOTED THAT THE ASSESSEE H AD FAILED TO PRODUCE THE ARTICLES OF ASSOCIATION AS ALSO THE AGR EEMENT BETWEEN HIM AND THE COMPANY WHICH WOULD INDICATE THE NATURE OF THE REMUNERATION RECEIVED BY HIM. THE AO TOOK THE VIEW THAT THE MINUTES OF MEETING OF THE BOARD OF DIRECTORS WERE STRUCTURE D IN A MANNER SO AS TO SUIT THE ASSESSEES CASE. HOWEVER THERE WAS NOTHING ON RECORD IN THE MINUTES OF MEETING WHICH WOULD SHOW THAT THE REMUNERATION RECEIVABLE BY HIM WAS IN THE NATURE OF BUSINESS INC OME. PLACING RELIANCE ON THE SAME CASES AS REFERRED TO BY THE A SSESSEE IN THE CASE OF B. NAGI REDDY (SUPRA) AND THAT OF RAM PRASA D (SUPRA) THE AO CAME TO THE CONCLUSION THAT THE ASSESSEE WAS NOT AN AGENT BUT A SERVANT OF THE COMPANY AND HIS POWERS WERE TO BE EX ERCISED WITHIN THE LIMITATION PRESCRIBED BY THE ARTICLES OF ASSOCI ATION AND WAS SUBJECT TO THE CONTROL AND SUPERVISION OF THE BOARD OF DIRECTORS. THE ITA NO.2814/AHD/2007 AND 2828/AHD/2008 MAHESH KUMAR GUPTA VS ITO W-2(2) SURAT 4 BUSINESS WAS CARRIED OUT BY THE COMPANY AND THE ASS ESSEE WAS ENGAGED TO MANAGE ITS AFFAIRS IN ACCORDANCE WITH TH E ARTICLES OF ASSOCIATION AND THE AGREEMENT BETWEEN HIM AND THE C OMPANY. HIS SERVICES THEREFORE COULD BE TERMINATED BY THE COM PANY. CONSEQUENTLY THE AO TREATED THE SUM OF RS.7 25 400 /- AS INCOME FROM SALARY AND AFTER ALLOWING STANDARD DEDUCTION O F RS.20 000/- BROUGHT TO TAX THE BALANCE SUM OF RS. 7 05 400/-. 5. THE ADDITION WAS CHALLENGED BEFORE THE LEARNED C IT(A) AND IT WAS EXPLAINED THAT THE LEARNED COUNSEL FOR THE ASSE SSEE HAS EXPLAINED THE ROLE PLAYED BY THE ASSESSEE IN PROMOT ING THE COMPANY AND DEVELOPING ITS BUSINESS. IT HAS BEEN CONTENDED THAT THE AO HAD WRONGLY PLACED RELIANCE ON THE CASE OF B. NAGI REDD Y (SUPRA) AND THAT OF RAM PRASAD (SUPRA). BY RELYING ON THE DECIS ION IN THE CASE OF B. NAGI REDDY (SUPRA) THE POINT THAT THE AO WAS TRY ING TO MAKE WAS THAT IF THE ASSESSEE WAS PURSUING THE CONDUCT OF T HE COMPANY AS HIS BUSINESS THEN THE INCOME EARNED BY HIM WOULD BE ASS ESSABLE AS BUSINESS INCOME. THERE WAS NOTHING IN THE FORMATION AND MAINTENANCE OF THE SAID COMPANY WHICH WOULD CONTRAD ICT SUCH PRINCIPLE. BY RELYING ON THE CASE OF RAM PRASAD (SU PRA) WHAT THE AO WAS TRYING TO ARGUE WAS THAT IF THE ARTICLE PUT A LIMITATION ON THE POWERS OF THE DIRECTORS AND HE WAS SUBJECTED TO SUP ERVISION AND CONTROL OF THE BOARD OF DIRECTORS HE WOULD BE TREA TED AS A SERVANT OF THE COMPANY. HOWEVER IN THE CASE OF THE ASSESSEE NEITHER THE ARTICLES NOR THE BOARD OF DIRECTORS PUT ANY RESTRIC TION ON THE FUNCTIONING OF THE ASSESSEE AS A DIRECTOR. THE RESO LUTION ADOPTED BY THE BOARD OF DIRECTORS DID NOT CALL FOR ANY SUPERVI SION OR CONTROL OVER ITA NO.2814/AHD/2007 AND 2828/AHD/2008 MAHESH KUMAR GUPTA VS ITO W-2(2) SURAT 5 THE ASSESSEE. THEREFORE NO RELATIONSHIP OF EMPLOYE R AND EMPLOYEE COULD BE ESTABLISHED BETWEEN THE COMPANY AND THE AS SESSEE WHO WAS IN FACT RUNNING THE AFFAIRS OF THE SAID COMPANY AND COULD NOT BE TREATED AS A SERVANT OF THE COMPANY. THEREFORE THE AO WAS NOT JUSTIFIED IN TREATING THE REMUNERATION AS ASSESSEE S INCOME FROM SALARY. 6. THE LEARNED CIT(A) CONSIDERING THE SUBMISSIONS O F THE ASSESSEE CONFIRMED THE ADDITION. HIS FINDINGS IN PA RA 6 TO 6.2 ARE REPRODUCED AS UNDER: 6. I HAVE CAREFULLY CONSIDERED THE VIEW TAKEN BY T HE AO ON ONE HAND AND THE DETAILED SUBMISSIONS OF THE AR ON THE OTHER HAND. FIRST AND FOREMOST I FIND THAT IN COURSE OF THE ASSESSMENT PROCEEDINGS THE ASSESSEES RELIA NCE ON THE CASES OF B. NAGI REDDY AND OF RAM PRASSAD (SUPRA) WAS COMPLETELY MISPLACED. SUCH RELIANCE WAS PLACED VIDE LETTER DATED 7/9/2006 WHICH WAS ADDRES SED TO THE AO. HOWEVER THE AO CORRECTLY PLACED RELIANC E ON THESE TWO CASES WHERE IT WAS HELD THAT THE APPOINTM ENT OF A MANAGING DIRECTOR WOULD NOT BE BY ITSELF SUFFICIE NT TO DESCRIBE HIS FUNCTION AS BEING IN THE NATURE OF A B USINESS PURSUIT. EVEN IF SUCH DIRECTOR OCCUPIES A POSITION SIMILAR TO THAT OF A MANAGING AGENT OF A LIMITED COMPANY YET THE ESTABLISHMENT OF JURAL RELATIONSHIP BETWEEN THE PRI NCIPAL AND THE AGENT WOULD NOT BE SUFFICIENT TO HOLD THAT THE REMUNERATION RECEIVED BY THE MANAGING DIRECTOR IS I N THE NATURE OF BUSINESS INCOME. THIS WAS THE VIEW TAKEN BY THE MADRAS HIGH COURT IN THE CASE OF B. NAGI REDDY. IN THE CASE OF RAM PRASAD IT WAS CLEARLY HELD THAT TH E MANAGING DIRECTOR WAS NOT AN AGENT OF THE COMPANY BUT A SERVANT. HIS POWERS ARE LIMITED BY THE ARTICLES O F ASSOCIATION AND HE FUNCTIONS UNDER THE CONTROL AND SUPERVISION OF THE BOARD OF DIRECTORS. EVEN THOUGH THE MANAGING DIRECTOR IS ENGAGED TO MANAGE THE AFFAIRS OF ITA NO.2814/AHD/2007 AND 2828/AHD/2008 MAHESH KUMAR GUPTA VS ITO W-2(2) SURAT 6 THE COMPANY YET HE COULD BE DISMISSED OR HIS EMPLOYMENT TERMINATED. IN SUCH A CASE HE IS NOTHIN G BUT A SERVANT OF THE COMPANY. THE RATIO OF BOTH THESE C ASES WAS THUS SQUARELY APPLICABLE TO THE CASE OF THE ASS ESSEE. 6.1 COMING TO THE SPECIFIC FACTS OF THE ASSESSEES CASE THE REMUNERATION PAYABLE TO A DIRECTOR INCLUDING T HE REIMBURSEMENT OF EXPENSES ARE CONTAINED IN ARTICLE- 16 47 AND 48 OF THE ARTICLES OF ASSOCIATION OF M/S. GA NESH LAXMI PROCESSORS PVT. LTD. ARTICLE 53 DEALS WITH TH E APPOINTMENT OF THE MANAGING DIRECTOR WHILE ARTICLE 55 DEALS WITH THE REMUNERATION PAYABLE TO A WHOLE TIME DIRECTOR. AS PER THIS ARTICLE A DIRECTOR MAY BE PA ID SUCH REMUNERATION AND/OR COMMISSION OR UNDER PARTICIPATI ON IN PROFITS OR BY ANY OTHER MODE OR MODES. THE ASSESSEE S FUNCTIONS AND HIS REMUNERATION WERE DETERMINED BY T HE BOARD OF DIRECTORS IN A MEETING HELD ON 1/4/2003. T HE MINUTES BEGINS WITH THE SENTENCE RESOLVED THAT SHRI MAHESHKUMAR GUPTA DIRECTOR IS HEREBY APPOINTE D AS DIRECTOR-IN-CHARGE OF FINANCE AND PRODUCTION OF TH4E COMPANY ON THE FOLLOWING TERMS. THE VERY FIRST SEN TENCE OF THE RESOLUTION CLEARLY SHOWS THAT THE ASSESSEE W AS APPOINTED AS A DIRECTOR WHICH CLEARLY ESTABLISH T HE EMPLOYER-EMPLOYEE RELATIONSHIP. CLAUSES (A) (B) & (C) OF THE MINUTES LAY OUT THE POWER AND FUNCTION OF THE ASSESSEE WHILE CLAUSE (D) DEALS WITH HIS REMUNERAT ION. AS PER THIS CLAUSE THE ASSESSEE WAS TO BE PAID A MONTHLY REMUNERATION OF RS.40 080 PER MONTH FOR 5 MONTHS AND RS.75 000 PER MONTH FOR 7 MONTHS ENDING WITH MARCH 2004. THE TOTAL SUM PAYABLE AS REMUNERA TION WAS THUS RS.7 25 400 FOR THE WHOLE YEAR. IT WAS FUR THER MADE CLEAR THAT THE COMPANY WAS NOT TO BEAR ANY EXPENDITURE OR REIMBURSE ANY EXPENSE INCURRED BY TH E ASSESSEE. THE REMUNERATION PAYABLE TO HIM WAS INCLUSIVE OF ALL EXPENSES WHICH HE MAY HAVE BEEN REQUIRED TO INCUR. IT IS THUS CLEAR THAT THE ASSESS EE WAS PAID A FIXED RATE OF REMUNERATION DURING THE WHOLE YEAR. FIRST HE WAS APPOINTED AS A DIRECTOR-IN-CHARGE OF FINANCE & PRODUCTION AND THEN HE WAS ALLOWED A FIXE D REMUNERATION FOR THE YEAR. SUCH APPOINTMENT AS WELL AS ITA NO.2814/AHD/2007 AND 2828/AHD/2008 MAHESH KUMAR GUPTA VS ITO W-2(2) SURAT 7 THE TERMS OF HIS APPOINTMENT CLEARLY ESTABLISHED A N EMPLOYER-EMPLOYEE RELATIONSHIP. 6.1 ELABORATING FURTHER ON WHAT IS REMUNERATIONS IN THE CASE OF ACCOUNTANT GENERAL (BIHAR) V. N. BAKSHI AIR 1962 (SC) 505 IT WAS HELD THAT THE EXPRESSION REMUNERATION IN ITS ORDINARY CONNOTATION MEANS RE WARD RECOMPENSE PAY WAGES OR SALARY FOR SERVICE RENDER ED. IN THE CASE RESHMIKANT C. PATEL V. ITO (1983) 17 T TJ 368 THE HON. ITAT AHMEDABAD BENCH OBSERVED THAT SECTION 17 GIVES ONLY AN INCLUSIVE DEFINITION OF T HE TERM SALARY. THEREFORE THE FACT THAT TERM SALARY IS NOT MENTIONED IN IT DOES NOT NECESSARILY MEAN THAT REMUNERATION IS NOT SALARY. THUS IN THE CASE OF TH E ASSESSEE EVEN THOUGH THE TERM SALARY WAS NOT MENTIONED IN THE RESOLUTION ADOPTED BY THE BOARD OF DIRECTORS YET THE REMUNERATION WHICH THE BOARD DEC IDED FOR THE ASSESSEE WAS BASICALLY IN THE NATURE OF SAL ARY. THE AR HAS CLAIMED THAT THE ASSESSEE HAD HIMSELF PROMOTED THE COMPANY AND THEREFORE THERE WAS NO QUESTION OF ANY CONTROL OR SUPERVISION BY THE BOARD OF DIRECTORS. WHATEVER MAY HAVE BEEN THE FACTUAL BACKGROUND OF THE INCORPORATION OF THE COMPANY AND T4HEDEVELOPMENT OF ITS BUSINESS YET AS PER THE CL EAR PROVISIONS OF THE COMPANIES ACT A DIRECTOR COMES WITHIN THE CONTROL AND SUPERVISION OF THE BOARD OF DIRECTO RS AFTER HE IS APPOINTED AS SUCH. UNLESS THIS WAS SO THERE WOULD NOT BE ANY QUESTION OF APPOINTMENT OR OF DETERMININ G HIS POWERS AND FUNCTIONS AS ALSO HIS REMUNERATION. IN THE CASE OF THE ASSESSEE ALL THESE WERE CLEARLY LAID O UT IN THE RESOLUTION ADOPTED BY THE BOARD. 6.2 THUS FROM THE TOTALITY OF THE FACTS OF THE CAS E INCLUDING THE SPECIFIC ARTICLE OF ASSOCIATION OF TH E COMPANY PERTAINING TO THE APPOINTMENT OF A DIRECTOR AND HIS REMUNERATION AS ALSO THE RESOLUTION ADOPTED BY THE BOARD IT BECOMES CLEAR THAT THERE WAS A CLEAR RELATIONSHIP OF EMPLOYER AND EMPLOYEE BETWEEN THE COMPANY AND THE ASSESSEE. IN VIEW OF THE CASE-LAWS REFERRED TO AND DISCUSSED ABOVE IT IS HELD THAT TH E ITA NO.2814/AHD/2007 AND 2828/AHD/2008 MAHESH KUMAR GUPTA VS ITO W-2(2) SURAT 8 REMUNERATION RECEIVED BY THE ASSESSEE WAS IN THE NA TURE OF SALARY INCOME. THE AO THEREFORE WAS FULLY JUSTI FIED IN TREATING THE SUM OF RS.7 25 400 AS INCOME FROM SALA RY. 7. THE LEARNED COUNSEL FOR THE ASSESSEE REITERATED THE SUBMISSIONS MADE BEFORE THE AUTHORITIES BELOW AND S UBMITTED THAT THERE IS NO RELATIONSHIP OF EMPLOYEE EMPLOYER BETWE EN THE ASSESSEE AND THE COMPANY AND REFERRED TO ARTICLES OF ASSOCIA TION OF THE COMPANY COPY OF WHICH IS FILED AT PAGE 11 OF THE PA PER BOOK AND ALSO SUBMITTED THAT THE ASSESSEE CANNOT BE DISMISSED FRO M HIS ASSIGNMENT AND THERE WAS NO SUPERVISORY CONTROL UPO N THE ASSESSEE BY THE BOARD OF DIRECTORS OR BY THE MANAGING DIRECT OR. THEREFORE THE ASSESSEE RIGHTLY CLAIMED THE RECEIPT AS BUSINESS IN COME. HE HAS RELIED UPON THE FOLLOWING DECISIONS: 1) RAM PRASAD VS CIT 86 ITR 122 2) SARDAR HARPEET SINGH VS CIT 187 ITR 679 3) CIT VS SMT. SHANTI DEVI AND OTHERS 199 ITR 800 4) DWIJENDRA CHANDRA CHOWDHURY VS CIT 61 ITR 97 HE HAS ALSO SUBMITTED THAT IN THE EARLIER YEARS THE CLAIM OF THE ASSESSEE HAS NOT BEEN DISPUTED BY THE REVENUE DEPAR TMENT EVEN THOUGH RETURNS WERE PROCESSED U/S 143(1) OF THE IT ACT. 8. ON THE OTHER HAND THE LEARNED DR RELIED UPON TH E ORDERS OF THE AUTHORITIES BELOW AND SUBMITTED THAT SECTION 17OF T HE IT ACT PROVIDES INCLUSIVE DEFINITION OF SALARY WHICH EXTENDED TO TH E CASE OF THE ASSESSEE ALSO. HE HAS SUBMITTED THAT THE ASSESSEE W AS APPOINTED AS SERVANT AND HE CAN BE REMOVED FROM THE SERVICE. REL ATIONSHIP OF EMPLOYER AND EMPLOYEE IS ESTABLISHED AND THE ASSESS EE WAS UNDER ITA NO.2814/AHD/2007 AND 2828/AHD/2008 MAHESH KUMAR GUPTA VS ITO W-2(2) SURAT 9 DIRECT CONTROL OF THE MANAGING DIRECTOR AND THAT SA LARY IS PROVIDED TO THE ASSESSEE FOR DOING WORK. HE HAS ALSO RELIED UPO N THE DECISION IN THE CASE OF RESHMIKANT C. PATEL VS ITO 17 TTJ 368 A S IS RELIED UPON BY THE LEARNED CIT(A) IN THE IMPUGNED ORDER. 9. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND THE MATERIAL AVAILABLE ON RECORD. THE HONBLE SUPREME COURT IN T HE CASE OF RAM PRASAD VS CIT 86 ITR 122 HELD AS UNDER: THERE IS NO DOUBT THAT FOR ASCERTAINING WHETHER A PERSON IS A SERVANT OR AN AGENT A ROUGH AND READY TEST IS WHETHER UNDER THE TERMS OF HIS EMPLOYMENT THE EMPLOYER EXERCISES A SUPERVISORY CONTROL IN RESPECT OF THE WORK ENTRUSTED TO HIM. A SERVANT ACTS UNDER THE DIR ECT CONTROL AND SUPERVISION OF HIS MASTER. AN AGENT ON THE OTHER HAND IN THE EXERCISE OF HIS WORK IS NOT SUBJ ECT TO THE DIRECT CONTROL OR SUPERVISION OF THE PRINCIPAL THOUGH HE IS BOUND TO EXERCISE HIS AUTHORITY IN ACCORDANCE WI TH ALL LAWFUL ORDERS AND INSTRUCTIONS WHICH MAY BE GIVEN T O HIM FROM TIME TO TIME BY HIS PRINCIPAL. BUT THIS TEST I S NOT UNIVERSAL INIT APPLICATION AND DOES NOT DETERMINE I N EVERY CASE HAVING REGARD TO THE NATURE OF EMPLOYMENT TH AT HE IS A SERVANT. A PERSON WHO IS ENGAGED TO MANAGE A BUSINESS MAY BE A SERVANT OR AN AGENT ACCORDING TO THE NATUR E OF HIS SERVICE AND THE AUTHORITY OF HIS EMPLOYMENT. A MANAGING DIRECTOR MAY HAVE A DUAL CAPACITY. HE MAY BOTH BE A DIRECTOR AS WELL AS AN EMPLOYEE. IN T HE CAPACITY OF A MANAGING DIRECTOR HE MAY BE REGARDED AS HAVING NOT ONLY THE CAPACITY AS PERSONA OF A DIRECT OR BUT ALSO HAS THE PERSONA OF AN EMPLOYEE OR AN AGENT DEPENDING UPON THE NATURE OF HIS WORK AND THE TERMS OF HIS EMPLOYMENT. WHERE HE IS SO EMPLOYED THE RELATIONSHIP BETWEEN HIM AS THE MANAGING DIRECTOR A ND ITA NO.2814/AHD/2007 AND 2828/AHD/2008 MAHESH KUMAR GUPTA VS ITO W-2(2) SURAT 10 THE COMPANY MAY BE SIMILAR TO A PERSON WHO IS EMPLO YED AS A SERVANT OR AN AGENT FOR THE TERM EMPLOYED I S FACILE ENOUGH TO COVER ANY OF THESE RELATIONSHIPS. THE NAT URE OF HIS EMPLOYMENT MAY BE DETERMINED BY THE AURICLES OF ASSOCIATION OF A COMPANY AND/OR THE AGREEMENT IF A NY UNDER WHICH A CONTRACTUAL RELATIONSHIP BETWEEN THE DIRECTOR AND THE COMPANY HAS BEEN BROUGHT ABOUT WH ERE UNDER THE DIRECTOR IS CONSTITUTED AN EMPLOYEE OF T HE COMPANY IF SUCH BE THE CASE HIS REMUNERATION WILL BE ASSESSABLE AS SALARY UNDER SECTION 7. IN OTHER WORD S WHETHER OR NOT A MANAGING DIRECTOR IS A SERVANT OF THE COMPANY APART FROM HIS BEING A DIRECTOR CAN ONLY BE DETERMINED BY THE ARTICLES OF ASSOCIATION AND THE T ERMS OF HIS EMPLOYMENT. IF THE COMPANY IS ITSELF CARRYING ON THE BUSINESS A ND THE ASSESSEE IS EMPLOYED TO MANAGE ITS AFFAIRS IN T ERMS OF ITS ARTICLES AND THE AGREEMENT AND HE COULD BE DISMISSED OR HIS EMPLOYMENT CAN BE TERMINATED BY TH E COMPANY IF HIS WORK IS NOT SATISFACTORY IT CAN HAR DLY BE SAID THAT HE IS NOT A SERVANT OF THE COMPANY. 9.1 THE HONBLE ALLAHABAD HIGH COURT IN THE CASE OF SARDAR HARPEET SINGH VS CIT 187 ITR 679 OBSERVED AS UNDER: THE APPELLATE ASSISTANT COMMISSIONER AFTER TAKING INTO ACCOUNT THE RESOLUTIONS AND THE RELEVANT ARTICLES O F ASSOCIATION PASSED BY THE COMPANY BY WHICH THE ASSESSEE WAS APPOINTED JOINT MANAGING DIRECTOR HEL D THAT THE ASSESSEE WHILE ACTING AS JOINT MANAGING DI RECTOR WAS NO WORKING AS AN EMPLOYEE OF THE COMPANY AND WA S ALSO NOT SUBJECT TO THE CONTROL OF THE BOARD OF DIR ECTORS AND HENCE WAS NOT ENTITLED TO STANDARD DEDUCTION UN DER SECTION 16(I) ON REMUNERATION RECEIVED BY HIM AS JO INT MANAGING DIRECTOR. REGARDING THE DEDUCTION UNDER SECTION 80U THE APPELLATE ASSISTANT COMMISSIONER H ELD THAT SINCE THE ASSESSEE WAS ACTIVELY ENGAGED IN THE CONDUCT OF THE BUSINESS OF THE COMPANY AND WAS ENJO YING A REGULAR REMUNERATION IT COULD NOT BE SAID THAT H E WAS ITA NO.2814/AHD/2007 AND 2828/AHD/2008 MAHESH KUMAR GUPTA VS ITO W-2(2) SURAT 11 HAVING A PERMANENT PHYSICAL INABILITY AND WITHDREW THE DEDUCTION UNDER SECTION 80U. THE TRIBUNAL AFFIRMED THE ORDER OF THE APPELLATE ASSISTANT COMMISSIONER. AND FURTHER HELD AS UNDER- HELD (I) THAT THE TRIBUNAL WAS RIGHT IN HOLDING T HAT THE ASSESSEE WAS NOT ENTITLED TO STANDARD DEDUCTION UND ER SECTION 16(I). 9.2 THE HONBLE ASSAM AND NAGALAND HIGH COURT IN TH E CASE OF DWIJENDRA CHANDRA CHOWDHURY VS CIT 61 ITR 97 HELD AS UNDER HELD FURTHER THAT THE FOLLOWING PROVISIONS OF THE ARTICLES OF ASSOCIATION OF THE COMPANY VIZ. (1) THE OBJECT OF APPOINTING JOINT MANAGING DIRECTORS WAS TO SECURE B ETTER MANAGEMENT OF THE COMPANY; (2) THAT THE JOINT MANAG ING DIRECTORS HELD OFFICE TILL DEATH; (3) THAT THE JOIN T MANAGING DIRECTORS HAD THE RIGHT TO APPOINT ANY OTHER PERSON AS MANAGING DIRECTOR IN CERTAIN CIRCUMSTANCES; (4) THA T ALL THE EXECUTIVE POWERS AND DUTIES OF THE BOARD OF DIRECTO RS VESTED IN THE JOINT MANAGING DIRECTOR; (5) THAT TH E JOINT MANAGING DIRECTORS HAD THE POWER TO APPOINT MANAGER S AND OTHER SERVANTS; (6) THAT THE JOINT MANAGING DIR ECTORS HAD POWER TO MAKE INVESTMENTS OF THE COMPANYS FUND S; (7) THAT THE JOINT MANAGING DIRECTORS HAD THE POWER TO MAKE CONTRACTS SIGN SECURITIES ETC.; (8) THAT THE JOINT MANAGING DIRECTORS HAD THE RIGHT TO DELEGATE THEIR POWERS AND TO EXECUTE POWERS TO RAISE LOANS ETC. WITH TH E APPROVAL OF THE DIRECTORS; AND (10) THAT THE JOINT MANAGING DIRECTORS COULD BE REMOVED ONLY IF DECLARED INSOLVE NT OR FOUND GUILTY OF MISAPPROPRIATION CLEARLY ESTABLISH ED THAT THE JOINT MANAGING DIRECTORS WERE AGENTS OF THE COM PANY AND NOT MERE SERVANTS OF THE COMPANY AND THE REMUNERATION PAID TO THEM WAS BUSINESS INCOME ASSESSABLE UNDER SECTION 10 OF THE ACT AND NOT SALA RY PAID TO SERVANTS OR EMPLOYEES WHICH WOULD BE ASSESSABLE UNDER SECTION 7 OF THE ACT. ITA NO.2814/AHD/2007 AND 2828/AHD/2008 MAHESH KUMAR GUPTA VS ITO W-2(2) SURAT 12 9.3 THE HONBLE ORISSA HIGH COURT IN THE CASE OF CI T VS SMT. SHANTI DEVI AND OTHERS 199 ITR 800 HELD AS UNDER: A DIRECTOR OF A COMPANY ENJOYS A DUAL CAPACITY. HE MIGHT BE A DIRECTOR AS WELL AS AN EMPLOYEE BUT THA T HE IS AN EMPLOYEE MUST NOT BE MERELY ON PAPER RATHER IT WOULD BE PROVED AND ESTABLISHED ON RECORD AS A FACT. WHERE THE MEMORANDUM OF ASSOCIATION STATED THAT A DIRECTOR MAY BE CALLED UPON TO PERFORM EXTRA SERV ICE FOR THE COMPANY AND IN SUCH AN EVENT THE COMPANY WOUL D REMUNERATE SUCH DIRECTOR AND THERE WAS A RESOLUTION BY THE BOARD OF DIRECTORS ALLOTTING SPECIFIC DUTIES TO THE DIRECTORS BUT NO PROOF OF EXTRA SERVICES RENDERED B Y THE DIRECTORS: HELD THAT IN THE INSTANT CASE THE RELATIONSHIP O F EMPLOYEE AND EMPLOYER WAS LACKING AND THIS BEING S O THE ASSESSEE WAS RIGHTLY ASSESSED BY THE INCOME-TAX OFFICER WITHOUT TAKING INTO ACCOUNT THE CLAIM FOR D EDUCTION UNDER SECTION 16(I) OF THE INCOME-TAX ACT 1961. 10. CONSIDERING THE FACTS OF THE CASE IN THE LIGHT OF THE ABOVE DECISIONS IT IS CLEAR THAT THE AUTHORITIES BELOW W ERE NOT JUSTIFIED IN DENYING THE CLAIM OF THE ASSESSEE. THE ARTICLES OF ASSOCIATION OF THE COMPANY PROVIDE WHOLE TIME DIRECTORS AND MANAGING D IRECTORS AS SERVANT. ARTICLE 40 PROVIDES THE FIRST TIME DIRECTO RS OF THE COMPANY SHALL BE MAHESHKUMAR HUKAMCHAND GUPTA SHRI DINESHK UMAR RAGHUBIRPRASAD AGAWALLA AND SHRI VASUDEV MEMANDDAS LAKHUPOTA ARTICLE 43 PROVIDES THAT THE BOARD MAY APPOINT ONE OR MORE OF THE DIRECTORS AS EXECUTIVE DIRECTOR FOR DOING ADMINISTR ATIVE ACTS ON SUCH TERMS AND CONDITIONS AND AT SUCH SPECIAL REMUNERATI ON AS IT MAY DETERMINE. ARTICLE 52 PROVIDES THAT THE FIRST DIREC TOR OF THE COMPANY ITA NO.2814/AHD/2007 AND 2828/AHD/2008 MAHESH KUMAR GUPTA VS ITO W-2(2) SURAT 13 SHALL NOT BE LIABLE TO RETIREMENT BY ROTATION. THEY SHALL HOLD OFFICE UNTIL THEY RESIGN OR VACATE OFFICE BY DEATH OR ANY OTHER CONTINGENCY. ARTICLE 46 PROVIDES REMUNERATION OF DIRECTORS FOR ATTENDING MEETINGS. ARTICLE 47 PROVIDES REIMBURSEMENT OF EXPENSES TO A DIRECTOR AND ARTICLE 55 PROVIDES REMUNERATION TO THE WHOLE TIME DIRECTORS. THE RESOLUTION OF THE COMPANY DATED 01-04-2003 AS IS REFERRED TO BY T HE LEARNED CIT(A) IN THE IMPUGNED ORDER (PB -5) PROVIDES THAT THE ASSESSEE SHALL BE IN-CHARGE OF FINANCE & PRODUCTION OF THE C OMPANY AFFAIRS AND HE WILL LOOK AFTER THE WORKING CAPITAL FINANCE AND THE SOURCE THEREOF. HE WILL ALSO ASSESS REQUIREMENT OF CAPITAL EXPENDITURE ETC. AND HE SHALL BE IN-CHARGE OF ALL THE MATERS CONNECT ED WITH FINANCE AND PRODUCTION AND WOULD BE PAID THE MONTHLY REMUNE RATION AS PROVIDED AND HE WOULD NOT BE ENTITLED FOR ANY REIMB URSEMENT OF THE EXPENDITURE. THEREFORE IN THE INSTANT CASE NEITHER ARTICLES OF ASSOCIATION PUT ANY LIMITATION ON THE POWERS OF THE FIRST DIRECTORS NOR THUS THE RESOLUTION PROVIDED FOR SUPERVISION AND CO NTROL OF THE BOARD OF DIRECTORS. EVEN THE SHAREHOLDERS OR THE OTHER LI KE THE MANAGING DIRECTOR ETC. SHALL NOT SUPERVISE AND CONTROL THE W ORK OF THE ASSESSEE. THERE IS NO QUESTION OF DISMISSING OR EXPELLING THE ASSESSEE FROM HIS ASSIGNMENT. A COMBINED READING OF THE ARTICLES OF A SSOCIATION AND THE RESOLUTION OF THE COMPANY AND FACTS OF THE CASE CLEARLY PROVIDES THAT THE ASSESSEE CANNOT BE TREATED AS SERVANT OF T HE COMPANY. THEREFORE THE AMOUNT PAYABLE TO HIM CANNOT BE TREA TED AS SALARY. THE ABOVE FACTS THEREFORE CLEARLY PROVIDE THAT TH ERE WAS NO SUPERVISION AND NO CONTROL BY THE BOARD OF DIRECTOR S OR THE MANAGING DIRECTOR UPON THE ACTIONS OF THE ASSESSEE. THE ASSE SSEE CANNOT BE REMOVED OR DISMISSED FROM HIS ASSIGNMENT. THE CLAIM OF THE ITA NO.2814/AHD/2007 AND 2828/AHD/2008 MAHESH KUMAR GUPTA VS ITO W-2(2) SURAT 14 ASSESSEE HAS BEEN STATED TO BE ACCEPTED IN THE EARL IER YEARS U/S 143(1) OF THE IT ACT. THESE FACTS WOULD PROVE THAT THE ASSESSEE HAS BEEN RUNNING THE CONDUCT OF THE BUSINESS OF THE COM PANY AS ITS OWNER AND NOT AS A SERVANT/EMPLOYEE. HE WAS WORKING FOR HIMSELF AND NOT FOR OTHERS AND NO RELATIONSHIP OF EMPLOYEE AND EMPLOYER WAS ESTABLISHED BETWEEN THE ASSESSEE AND THE COMPANY. I N VIEW OF THE ABOVE DISCUSSIONS IT IS CLEAR THAT THE AMOUNT RECE IVED BY THE ASSESSEE WAS HIS BUSINESS/PROFESSIONAL INCOME. THE AUTHORITIES BELOW WERE THEREFORE NOT JUSTIFIED IN DENYING THE CLAIM OF THE ASSESSEE. WE ACCORDINGLY SET ASIDE THE ORDERS OF T HE AUTHORITIES BELOW AND DIRECT THE AO TO TREAT THE RECEIPT OF THE ASSESSEE AS BUSINESS INCOME OF THE ASSESSEE AND SHALL GRANT BEN EFIT ACCORDINGLY. IN THE RESULT GROUND NO.1 OF THE APPEAL OF THE ASS ESSEE IS ALLOWED. 11. ON GROUND NO.2 OF THE APPEAL THE AO MADE ADDIT ION OF RS.5 36 065/- AS UNEXPLAINED CASH CREDIT U/S 68 OF THE IT ACT. THE AO NOTED THAT THE ASSESSEE HAD CLAIMED A SUM OF RS.5 3 6 065/- AS LONG TERM CAPITAL GAIN ON SALE OF SHARES. THE DETAILS OF THE TRANSACTIONS LEADING TO THE ALLEGED EARNING OF CAPITAL GAIN WHIC H WAS FURNISHED BY THE ASSESSEE HAS BEEN REPRODUCED BY THE AO AT PARA 5 OF THE ASSESSMENT ORDER. WHEN ASKED TO PRODUCE THE REQUISI TE EVIDENCE IN SUPPORT OF SUCH CLAIM THE ASSESSEE FURNISHED COPIE S OF CONTRACT NOTES AND BILLS AS EVIDENCE OF ALLEGED SHARE TRANSA CTION. ON A SCRUTINY OF THE CONTRACT NOTES THE AO OBSERVED THA T THE CONTRACT NOTE NUMBER DATE SETTLEMENT NUMBER DATE OF SETTLEMENT ORDER NUMBER TRADE NUMBER AND TRADE TIME WERE NOT MENTIONED ON S UCH NOTES WHICH PRIMA-FACIE INDICATED THAT THE TRANSACTIONS W ERE DONE ON-LINE ITA NO.2814/AHD/2007 AND 2828/AHD/2008 MAHESH KUMAR GUPTA VS ITO W-2(2) SURAT 15 THROUGH THE STOCK EXCHANGE. THE AO CONDUCTED INQUIR IES WITH THE AHMEDABAD AND BOMBAY STOCK EXCHANGES AS ALSO THE NA TIONAL STOCK EXCHANGE. HE ALSO MADE INQUIRIES WITH THE ALL EGED BROKERS. ALL THE STOCK EXCHANGES THROUGH WRITTEN REPLIES (MENTI ONED IN PARA 5.3 OF THE ASSESSMENT ORDER) CLEARLY STATED THAT THE SH ARES WERE NOT TRANSACTED THROUGH THEIR EXCHANGES BY THE ALLEGED B ROKERS. THE AO THEREFORE ISSUED A SHOW CAUSE NOTICE ON 13-11-2006 ASKING THE ASSESSEE TO EXPLAIN WHY THE SUM OF RS.5 36 065/- SH OULD NOT BE TREATED AS UNEXPLAINED CASH CREDIT UNDER THE PROVIS IONS OF SECTION 68 OF THE IT ACT. THE ASSESSEE SUBMITTED THAT ALL THE THREE SHARES WERE LISTED SECURITIES AS DEFINED IN CLAUSE (H) OF SECTI ON 2 OF THE SECURITIES CONTRACTS (REGULATION) ACT OF 1956. REFERRING TO PR OVISO TO SECTION 112(1) THE ASSESSEE ARGUED THAT THE ONLY CONDITION WHICH WAS REQUIRED TO BE FULFILLED FOR THE PURPOSE OF BEING T AXED A THE REDUCED RATE OF 10% ON LONG TERM CAPITAL GAINS WAS THAT THE SHARES OR SECURITIES SHOULD BE LISTED ON A RECOGNIZED STOCK E XCHANGE. THERE WAS NO STIPULATION THAT THE TRANSACTIONS SHOULD BE ROUTED THROUGH THE STOCK EXCHANGE IN THE ASSESSEES CASE ALL THE THR EE SECURITIES WERE LISTED THROUGH THE RECOGNIZED STOCK EXCHANGES DURIN G THE RELEVANT YEAR. FURTHER ALL THE PAYMENTS FOR PURCHASE AND SA LES OF THE SHARES WERE MADE THROUGH ACCOUNT-PAYEE CHEQUES AND THE SHA RE WERE HELD IN THE ASSESSEES DEMAT ACCOUNT FOR MORE THAN 12 MO NTHS. THEREFORE THERE WAS NO SCOPE FOR TREATING THE CAPITAL GAIN OF RS.5 36 065/- AS INCOME FROM UNDISCLOSED SOURCES. THE AO REJECTED TH E ASSESSEES SUBMISSIONS AND HE OBSERVED THAT AS REPORTED BY TH E THREE STOCK EXCHANGES THE SHARES WERE NIT TRANSACTED THROUGH T HE EXCHANGES. SECONDLY NO CONFIRMATION HAD BEEN FURNISHED BY THE ASSESSEE FROM ITA NO.2814/AHD/2007 AND 2828/AHD/2008 MAHESH KUMAR GUPTA VS ITO W-2(2) SURAT 16 THE ALLEGED BROKERS. MERE FILING OF CONTRACT NOTES WAS NOT SUFFICIENT EVIDENCE. THE DETAILS CONTAINED IN THE CONTRACT NOT ES CLEARLY SHOWED THE TRANSACTIONS WERE DONE ON-LINE. HOWEVER SINCE SUCH TRANSACTIONS WERE DENIED BY THE STOCK EXCHANGES THE CONTRACT NO TES WERE PROVED TO BE BOGUS. CONSEQUENTLY THE GENUINENESS OF THE S ALE PROCEEDS OF THE SHARES COULD NOT BE ACCEPTED. HENCE ALL THE TH REE ALLEGED TRANSACTIONS OF THREE DIFFERENT SHARES THROUGH THRE E DIFFERENT BROKERS AND THREE DIFFERENT STOCK EXCHANGES WERE BOGUS. TH E AO THEREFORE TREATED THE UM OF RS.5 36 065/- AS INCOME FROM UNDI SCLOSED SOURCES WITHIN THE MEANING OF SECTION 68 OF THE IT ACT AND CONSEQUENTLY ADDED THE SAME TO THE INCOME OF THE ASSESSEE. 12. THE ASSESSEE SUBMITTED DURING THE COURSE OF APP ELLATE PROCEEDINGS THAT ALL THE TRANSACTIONS WERE OFF MARK ET TRANSACTIONS AND WERE NOT CONDUCTED THROUGH THE STOCK EXCHANGES. THE REFORE INFORMATION FURNISHED BY THE STOCK EXCHANGES WAS IR RELEVANT. THIS WAS BECAUSE; THERE WOULD BE NO RECORD OF SUCH TRANS ACTIONS WITH THE CONCERNED STOCK EXCHANGES. THE PURCHASE AND THE SAL E OF SHARES WERE FULLY SUPPORTED BY COPIES OF CONTRACT NOTES AN D BILLS ALONG WITH ACCOUNT CONFIRMATION ETC. IT HAS BEEN FURTHER SUBMI TTED THAT THE PURCHASE OF THE SHARES WERE DULY RECORDED THESE WE RE MADE OUT OF DISCLOSED FUNDS AND THE PAYMENTS WERE MADE BY ACCOU NT PAYEE CHEQUES. BOTH THE PURCHASES AND SALES WERE FULLY DI SCLOSED IN THE RETURNS OF INCOME FILED BY THE ASSESSEE. THE BROKER S THROUGH WHOM SUCH TRANSACTIONS WERE MADE WOULD HAVE CONFIRMED TH E SAME IF THE AO HAD MADE REQUISITE VERIFICATIONS FROM THEM. THE ASSESSEE HAD ALSO PRODUCED THE DEMAT STATEMENT FROM THE BANK CON FIRMING THE ITA NO.2814/AHD/2007 AND 2828/AHD/2008 MAHESH KUMAR GUPTA VS ITO W-2(2) SURAT 17 HOLDING OF SHARES BY THE ASSESSEE DURING THE RELEVA NT PERIOD. OUT OF THE THREE COMPANIES WHOSE SHARES WERE TRANSACTED T HE SHARES OF M/S. ELTORL LTD. AND OF M/S. HAZOOR MEDIA WERE LIST ED IN AHMEDABAD AND BOMBAY STOCK EXCHANGES. THE SHARES OF M/S. SARI TA SOFTWARE WERE ORIGINALLY LISTED ON THE BOMBAY STOCK EXCHANGE WHEN IT WAS BOUGHT BY THE ASSESSEE. THE COMPANY WAS SUBSEQUENTL Y DE-LISTED AND ITS SHARES WERE SOLD IN OFF-MARKET TRANSACTIONS . THE LEARNED COUNSEL FOR THE ASSESSEE ARGUED THAT OFF-MARKET TRA NSACTIONS ARE NOT ILLEGAL. THEREFORE THE TRANSACTIONS AS REPORTED BY THE ASSESSEE COULD NOT BE TREATED AS SHAM TRANSACTIONS. THE BROKERS HA D CONFIRMED THAT THE TRANSACTIONS WERE GENUINE. THEREFORE THE AO WA S NOT JUSTIFIED IN TREATING THE CAPITAL GAINS ARISING FROM SUCH TRANSA CTIONS AS INCOME FROM UNDISCLOSED SOURCES. 13. THE LEARNED CIT(A) CONSIDERING THE SUBMISSIONS OF THE ASSESSEE CONFIRMED THE ADDITION. HIS FINDINGS IN PA RA 10 TO 10.2 ARE REPRODUCED AS UNDER: 10. I HAVE CONSIDERED BOTH THE POSITIONS. THERE ARE CLEARLY TWO ASPECTS TO THE ISSUE. FIRST IS WHET HER THE ASSESSEE WAS ELIGIBLE TO BE ASSESSED AT A REDUCED R ATE OF 10% ON THE CAPITAL GAIN IN TERMS OF SECTION 112( 1(D) READ WITH THE PROVISO TO THE SAID SECTION. THE SECO ND ASPECT IS WHETHER OR NOT THESE TRANSACTIONS THEMSEL VES WERE GENUINE. AS REGARDS THE FIRST ISSUE FOR THE A SSESSEE TO AVAIL OF THE BENEFIT OF THE PROVISO TO SECTION 1 12(1) (D) THE LONG TERM CAPITAL ASSET BEING SHARES IN THIS CA SE SHOULD HAVE BEEN LISTED IN A STOCK EXCHANGE. IN THE CASE OF THE ASSESSEE THE AHMEDABAD AND THE BOMBAY STOCK EXCHANGES REPORTED THAT THERE WERE NO TRANSACTIONS OF THE SHARES OF M/S. ELTROL LTD. AND M/S. HAZOOR MEDI A ON THE RELEVANT DATES. ACCORDING TO THE AO THE NATION AL ITA NO.2814/AHD/2007 AND 2828/AHD/2008 MAHESH KUMAR GUPTA VS ITO W-2(2) SURAT 18 STOCK EXCHANGE ALSO REPORTED SIMILARLY WITH REGARD TO M/S. SARITA SOFTWARE LTD. THE ARS CONTENTION IS TH AT THESE SHARES WERE SOLD IN OFF-MARKET TRANSACTIONS. AS PER THE CIRCULAR ISSUED BY THE SEBI ON 14/3/1995 TO ALL THE STOCK EXCHANGES IN THE COUNTRY ALL SPOT TRANSACTIO NS AND OFF THE FLOOR TRANSACTIONS ARE REQUIRED TO BE REPOR TED TO THE CONCERNED STOCK EXCHANGE ON THE SAME DATE IRRESPECT IVE OF WHETHER THE TRANSACTIONS ARE BETWEEN TWO CLIENTS OR BETWEEN A CLIENT AND THE BROKER. THE EXCHANGES ARE REQUIRED TO SEND A REPORT TO SEBI WITH REGARD TO SU CH TRANSACTIONS. THUS IN CASES OF ALL LISTED SHARES/S ECURITIES WHICH ARE NOT TRANSACTED THROUGH THE STOCK EXCHANGE SUCH TRANSACTIONS ARE REQUIRED TO BE REPORTED TO TH E STOCK EXCHANGE ON THE SAME DATE. IN THE CASE OF THE ASSES SEE NO SUCH REPORT WAS RECEIVED BY THE CONCERNED EXCHANGES. THIS CLEARLY MEANT THAT THE SHARES OF M/ S. ELTROL LTD. WAS NOT LISTED ON THE AHMEDABAD STOCK EXCHANGE AND THE SHARES OF M/S. HAZOOR MEDIA WERE N OT LISTED ON THE BOMBAY STOCK EXCHANGE. AS REGARDS M/S . SARITA SOFTWARE THE NATIONAL STOCK EXCHANGE REPORT ED THAT NEITHER THE BROKER WAS REGISTERED WITH THE SOC K EXCHANGE NOR WAS THE COMPANY LISTED. THE AR HAS STA TED THAT THE SHARES OF M/S. SARITA SOFTWARE WERE ORIGIN ALLY LISTED ON THE BOMBAY STOCK EXCHANGE AND NOT ON THE NATIONAL STOCK EXCHANGE. IN ANY CASE WHEN THE SHAR ES OF THIS COMPANY WERE ALLEGEDLY TRANSACTED IT WAS N OT LISTED IN ANY STOCK EXCHANGE. THESE FACTS CLEARLY S HOW THAT SHARES OF NONE OF THE THREE COMPANIES WERE LIS TED IN ANY OF THE STOCK EXCHANGES. THEREFORE THE ASSESSEE WAS NOT ENTITLED TO BE TAXED AT A REDUCED RATE OF 10% O N THE CAPITAL GAINS. 10.1 COMING TO THE ISSUE REGARDING GENUINENESS OF THE TRANSACTIONS THE AO CLEARLY RECORDED THE FACT THAT NO CONFIRMATION WAS FURNISHED FROM THE ALLEGED BROKERS REGARDING SUCH TRANSACTIONS. MOREOVER SINCE THE AL LEGED TRANSACTIONS WERE NOT REPORTED TO THE STOCK EXCHANG ES AS IS REQUIRED BY THE SEBI IT COULD BE ASSUMED THAT N O TRANSACTION HAD TAKEN PLACE AT ALL. I AM THUS IN AG REEMENT WITH THE VIEW TAKEN BY THE AO. THE AR HAS CONTENDED ITA NO.2814/AHD/2007 AND 2828/AHD/2008 MAHESH KUMAR GUPTA VS ITO W-2(2) SURAT 19 THAT THE SHARES WERE HELD IN A DEMAT ACCOUNT IN THE BANK FOR MORE THAN 12 MONTHS. EVEN IF THE ARS CONTENTIO N IS TO BE ACCEPTED THERE WAS NO EVIDENCE REGARDING THE GENUINENESS OF THE SALES CLAIMED TO HAVE BEEN MADE BY THE ASSESSES. IN OTHER WORDS THERE WAS NO EVIDENCE TO SUBSTANTIATE THE ASSESSEES CLAIM THAT THE SUM OF RS.5 36 065 REPRESENTED THE PROFIT EARNED OR THE CA PITAL GAINED FROM THE PURCHASE AND SALE OF SUCH SHARES. I N SUCH CIRCUMSTANCES THERE WAS NO OTHER OPTION FOR T HE AO BUT TO TREAT THE SAID SUM AS THE INCOME FROM UNDISCLOSED SOURCES. 10.2 ROUNDING UP THE DISCUSSION ABOVE IT IS HELD THAT THE GENUINENESS OF THE TRANSACTION WAS NOT ESTABLISHED BY THE ASSESSEE NOR WAS THE CLAIM UNDE R THE PROVISO TO SECTION 112(1) (D) SUBSTANTIATED. THE AO THEREFORE WAS FULLY JUSTIFIED IN TREATING THE SUM OF RS.5 46 065 AS INCOME FROM UNDISCLOSED SOURCES WITH IN THE MEANING OF SECTION 68 OF THE I. T. ACT. THE ADD ITION OF THE SAID SUM IS THEREFORE CONFIRMED. 14. THE LEARNED COUNSEL FOR THE ASSESSEE REITERATED THE SUBMISSIONS MADE BEFORE THE AUTHORITIES BELOW AND S UBMITTED THAT THE ENTIRE DOCUMENTS SUPPORTING THE TRANSACTIONS WE RE FILED COPIES OF WHICH ARE FILED IN THE PAPER BOOK AT PB 25 TO 44. H E HAS SUBMITTED THAT MERELY BECAUSE TRANSACTION WAS MADE OFF MARKET HAS NO GROUND TO TREAT THE GENUINE TRANSACTION AS UNEXPLAINED CAS H CREDIT. HE HAS SUBMITTED THAT CAPITAL GAIN TAX WAS PAID AND ENTIRE TRANSACTIONS WERE NOTED IN THE DEMAT ACCOUNT. THE SHARES WERE HELD FO R MORE THAN ONE YEAR WOULD PROVE THAT THE ASSESSEE GENUINELY DEALT IN THE SHARE TRANSACTION. HE HAS REFERRED TO THE ORDER OF THE LE ARNED CIT(A)-II SURAT DATED 29-05-2007 (PB-23) IN THE CASE OF SHRI SANJAYKUMAR AGARWAL IN WHICH THE SAME CIT(A) WHO HAS PASSED THE IMPUGNED ORDER ON THE IDENTICAL FACTS DELETED THE ADDITION A ND HELD THAT THERE ITA NO.2814/AHD/2007 AND 2828/AHD/2008 MAHESH KUMAR GUPTA VS ITO W-2(2) SURAT 20 WAS NO BASIS FOR THE AO TO HOLD THAT TRANSACTION WA S BOGUS. HE HAS SUBMITTED THAT THE ORDER OF THE LEARNED CIT(A) IN T HE CASE OF SHRI SANJAYKUMAR AGARWAL DELETING THE SIMILAR ADDITION I S CONFIRMED BY ITAT AHMEDABAD BENCH IN THE CASE OF DCIT VS SHRI SA NJAYKUMAR AGARWAL IN ITA NO.3142/AHD/2007 DATED 12-02-2010 (C OPY AT PB-18). HE HAS SUBMITTED THAT SAME DECISION IS FOLLOWED BY THE TRIBUNAL IN THE CASE OF SHETH HEENA AKSHAY VS DCIT IN ITA NO.11 8/AHD/2008 VIDE ORDER DATED 04-06-2010 (COPY OF WHICH IS FILED AT PAGE 5 OF THE PAPER BOOK). HE HAS ALSO RELIED UPON THE DECISION O F THE HONBLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF CIT VS A NUPAM KAPOOR 299 ITR 179. 15. ON THE OTHER HAND THE LEARNED DR RELIED UPON T HE ORDERS OF THE AUTHORITIES BELOW AND SUBMITTED THAT GENUINENESS OF THE SOURCES OF SALE OF SHARES IS DOUBTED. THEREFORE ADDITION U/S 68 OF THE IT ACT HAS BEEN RIGHTLY MADE. THE LEARNED DR SUBMITTED THAT SO ME OF THE PAPERS IN THE PAPER BOOK HAVE NOT BEEN SIGNED BY TH E PARTIES WHICH CREATE DOUBT. THE LEARNED COUNSEL FOR THE ASSESSEE IN THE REJOINDER HOWEVER SUBMITTED THAT SOME OF THE PAPERS ARE COMP UTERIZED PAPERS ON WHICH NO SIGNATURES ARE REQUIRED AS PER THE PRACTICE AND COPY ITSELF IS ADMISSIBLE. 16. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND MA TERIAL AVAILABLE ON RECORD. IT WAS SUBMITTED BY THE ASSESS EE THAT ALL THE TRANSACTIONS WERE OFF MARKET TRANSACTIONS AND WERE NOT CONDUCTED THROUGH STOCK EXCHANGE. THEREFORE INFORMATION FUR NISHED BY THE STOCK EXCHANGES WAS IRRELEVANT. THE PURCHASE AND SA LES OF SHARES ITA NO.2814/AHD/2007 AND 2828/AHD/2008 MAHESH KUMAR GUPTA VS ITO W-2(2) SURAT 21 WERE FULLY SUPPORTED BY THE COPIES OF CONTRACT NOTE S AND BILLS ALONG WITH ACCOUNT CONFIRMATION ETC. THE PURCHASES OF SHA RES WERE DULY RECORDED AND THESE WERE MADE OUT OF DISCLOSED FUNDS AND THE BILLS WERE MADE BY ACCOUNT PAYEE CHEQUES. THE BILLS OF PU RCHASE AND SALES OF SHARES WERE DULY RECORDED AND SUPPORTED BY THE DOCUMENTS. THE BROKERS THROUGH WHOM SUCH TRANSACTIONS WERE MAD E HAVE CONFIRMED THE SAME AND SAME CONFIRMATIONS ARE FILED IN THE PAPER BOOK. THE ASSESSEE HAD ALSO FILED COPY OF DEMAT ACC OUNT SHOWING THE PURCHASES AND SALES OF THE SHARES OF THE3 COMPA NIES WITH WHOM THE ASSESSEE DEALT WITH. SAME ARE FILED AT PAGE 25 AND 26 OF THE PAPER BOOK. THE PURCHASE CONTRACTS BILLS SALE CON TRACTS AND CONFIRMATIONS OF THE BROKERS ARE ALSO FILED IN THE PAPER BOOK TO SHOW THAT GENUINE TRANSACTIONS ARE RECORDED BY THE ASSES SEE THROUGH THE BROKERS. THE SOURCES OF THE FUNDS ARE ACCOUNT PAYEE CHEQUES AND ALL THE PAYMENTS HAVE BEEN MADE THROUGH ACCOUNT PAYEE C HEQUES. OUT OF THE 3 COMPANIES WHOSE SHARES WERE TRANSACTED TH E SHARES OF M/S. ELTORL LTD. AND M/S. HAZOOR MEDIA WERE LISTED ON AH MEDABAD STOCK EXCHANGE AND ON BOMBAY STOCK EXCHANGE. THE SHARES O F M/S. SARITA SOFTWARE WERE ORIGINALLY LISTED ON BOMBAY ST OCK EXCHANGE AS PER EXPLANATION OF THE ASSESSEE. THEREFORE THE TRA NSACTIONS CONDUCTED BY THE ASSESSEE CANNOT BE TREATED AS ILLE GAL. THE ABOVE EVIDENCES PRODUCED BEFORE THE AUTHORITIES BELOW CLE ARLY PROVE THAT THE ASSESSEE ENTERED INTO GENUINE TRANSACTIONS OF S HARES. ALL THE SHARES REMAINED IN THE DEMAT ACCOUNT OF THE PARTIES AND GENUINENESS OF WHICH IS NOT DOUBTED. THE SALES OF S HARES ARE SUPPORTED BY THE DETAILS ISSUED BY THE BROKERS. PAY MENTS WERE ISSUED BY ACCOUNT PAYEE CHEQUES. THE IDENTITY OF TH E BROKERS HAVE ITA NO.2814/AHD/2007 AND 2828/AHD/2008 MAHESH KUMAR GUPTA VS ITO W-2(2) SURAT 22 NOT BEEN DOUBTED. EVEN IF THE SALE TRANSACTIONS WER E OFF MARKET TRANSACTIONS THEY WERE PROPERLY DOCUMENTED AND SUP PORTED BY THE ABOVE EVIDENCES. THE ABOVE FACTS AND EVIDENCES ON R ECORD CLEARLY SUPPORT THE CASE OF THE ASSESSEE THAT THE ASSESSEE ENTERED INTO THE GENUINE TRANSACTIONS. THE DETAILS OF THE SOURCES OF THE SALE OF SHARES HAVE BEEN PROVED. THEREFORE NO ADDITION U/S 68 OF THE IT ACT COULD BE MADE AS IS MADE BY THE AO. THE LEARNED COUNSEL F OR THE ASSESSEE SUBMITTED THAT THE SAME CIT(A) WHO PASSED THE IMPUGNED ORDER HAS CONSIDERED IDENTICAL ISSUE IN THE CASE OF SHRI SANJAYKUMAR AGARWAL (SUPRA) AND DELETED THE SIMILAR ADDITION VI DE ORDER DATED 29- 05-2007 COPY OF WHICH IS FILED AT PAGE 23 OF THE PA PER BOOK. THE ORDER OF THE LEARNED CIT(A) IN THE CASE OF SHRI SAN JAYKUMAR AGARWAL HAS BEEN CONFIRMED BY THE TRIBUNAL IN ITA NO 3142/A HD/2007 DATED 12-02-2010 AND PARA 7 OF THE ORDER OF THE TRIBUNAL READS AS UNDER: 7. WE HAVE HEARD THE RIVAL CONTENTIONS OF BOTH THE PARTIES. LOOKING TO THE FACTS OF THE CASE AND CIRCUMSTANCES OF THE CASE THE CIT(A) HAS CALLED FO R THE REMAND REPORT AND THE REMAND REPORT OF THE A. O. IT WAS SEEN THAT CSE VIDE THEIR LETTER HAD CLEARLY CONFIRM ED THAT THE SHARES OF BOTH THE COMPANIES WERE LISTED WITH T HE EXCHANGE. WE FIND THAT THE GENUINENESS OF THE TRANSACTIONS OF PURCHASE AND SALES OF SHARES. IN TH E REMAND REPORT IT WAS CLEARLY MENTIONED THAT THE TRANSACTION HAS BEEN CLEARLY CONFIRMED BY THE BROKE RS BUT ALSO THROUGH SEPARATE LETTER ISSUED BY THE BROKERS DT. 6.3.2006. WE FIND THAT THE CIT(A) HAS CALLED FOR T HE REMAND REPORT AND THE INQUIRIES WERE CONDUCTED TO ASCERTAIN WHETHER OR NOT TRANSACTIONS EVEN THOUGH T HEY WERE CONDUCTED ON-LINE IT HAS BEEN DULY REPORTED BY EXCHANGE AS REQUIRED BY THE GUIDELINES ISSUED BY TH E SEBI. THE AO HAS FURNISHED REPORT DT. 24.4.2007 WHE REIN IT HAS BEEN MENTIONED THAT THE BROKERS AND THE DEPO SITORY ITA NO.2814/AHD/2007 AND 2828/AHD/2008 MAHESH KUMAR GUPTA VS ITO W-2(2) SURAT 23 HAVE CONFIRMED THE SAID SHARE TRANSACTIONS. THEREFO RE WE ARE OF THE VIEW THAT THE CIT(A) IS JUSTIFIED IN DELETING THE SAME AND OUR INTERFERENCE IS NOT REQUIRED. THE SAME DECISION IS ALSO CONSIDERED BY ANOTHER BEN CH OF THE TRIBUNAL IN THE CASE OF SHETH HEENA AKSHAY VS DCIT (SUPRA) AND ADDITION HAS BEEN DELETED (PB-5). THESE FACTS WOULD PROVE THAT THE ADDITION MADE IN THE CASE OF SHRI SANJAYKUMAR AGARR WAL HAS BEEN DELETED BY THE LEARNED CIT(A) AND HIS APPELLATE ORD ER HAS BEEN CONFIRMED BY THE TRIBUNAL. THEREFORE FOLLOWING THE ORDER OF THE TRIBUNAL IN THE CASE OF SHRI SANJAYKUMAR AGARWAL W E DO NOT FIND IT TO BE A FIT CASE FOR CONFIRMING THE ADDITION. THE LEAR NED COUNSEL FOR THE ASSESSEE ALSO RELIED UPON THE DECISION OF THE HONB LE PUNJAB & HARYANA HIGH COURT IN THE CASE OF CIT VS ANUPAM KAP OOR (SUPRA) IN WHICH PURCHASE AND SALE WAS ACCEPTED BY THE DEPARTM ENT AND SALE PROCEEDS WERE RECEIVED THROUGH ACCOUNT PAYEE CHEQUE S AND HAVE BEEN ACCOUNTED FOR IN THE ACCOUNTS OF THE ASSESSEE. THE SHARES WERE LISTED AND TRANSACTIONS TOOK PLACE THROUGH REGISTER ED BROKERS OF THE STOCK EXCHANGE. THE DEPARTMENTAL APPEAL WAS ACCORDI NGLY DISMISSED FINDING NO SUBSTANTIAL QUESTION OF LAW. THE ABOVE F ACTS WOULD PROVE THAT THE ASSESSEE EXPLAINED GENUINE TRANSACTION OF SALE AND PURCHASE OF THE SHARES. THE SOURCES OF THE SALE OF SHARES ARE EXPLAINED THROUGH EVIDENCE AND MATERIAL ON RECORD. CONSIDERIN G THE FACTS AND CIRCUMSTANCES OF THE CASE IN THE LIGHT OF THE ABOVE DECISIONS AND EVIDENCES ON RECORD WE ARE OF THE VIEW THAT THE AU THORITIES BELOW HAVE WRONGLY MADE THE ADDITION U/S 68 OF THE IT ACT . THE ORDERS OF THE AUTHORITIES BELOW ARE ACCORDINGLY SET ASIDE AND THE ADDITION IS ITA NO.2814/AHD/2007 AND 2828/AHD/2008 MAHESH KUMAR GUPTA VS ITO W-2(2) SURAT 24 ACCORDINGLY DELETED. IN THE RESULT GROUND NO.2 OF THE APPEAL OF THE ASSESSEE IS ACCORDINGLY ALLOWED. 17. IN THE RESULT THE APPEAL OF THE ASSESSEE IS AL LOWED. ITA NO.2828/AHD/2008 18. THIS APPEAL BY THE ASSESSEE IS DIRECTED CHALLEN GING THE ORDERS OF THE AUTHORITIES BELOW IN TREATING THE REMUNERATI ON OF RS.11 25 000/- RECEIVED BY THE ASSESSEE FROM THE COMPANY AS SALARY AGAINST ASSESSEES CLAIM OF SUCH REMUNERATION AS BUSINESS I NCOME. THE LEARNED CIT(A) FOLLOWING HIS APPELLATE ORDER FOR AS SESSMENT YEAR 2004-05 DATED 10-05-2007 CONFIRMED THE ADDITION. IN THE ASSESSMENT YEAR 2004-05 WE HAVE SET ASIDE THE ORDER OF THE LE ARNED CIT(A) AND DELETED THE ADDITION. THE APPEAL OF THE ASSESSEE WA S ACCORDINGLY ALLOWED. BY FOLLOWING THE SAME REASONS FOR DECISION WE SET ASIDE THE ORDERS OF THE AUTHORITIES BELOW AND DELETE THE ADDI TION FOR ASSESSMENT YEAR 2005-06 ALSO. IN THE RESULT THE APPEAL OF THE ASSESSEE IS ALLOWED. 19. IN THE RESULT BOTH THE APPEALS OF THE ASSESSEE ARE ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 07-01-2011 SD/- SD/- (G. D. AGARWAL) VICE PRESIDENT (BHAVNESH SAINI) JUDICIAL MEMBER DATE : 07-01-2011 LAKSHMIKANT/- ITA NO.2814/AHD/2007 AND 2828/AHD/2008 MAHESH KUMAR GUPTA VS ITO W-2(2) SURAT 25 COPY OF THE ORDER FORWARDED TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT CONCERNED 4. THE CIT(A) CONCERNED 5. THE DR ITAT AHMEDABAD 6. GUARD FILE BY ORDER D Y. REGISTRAR ITAT AHMEDABAD