Value of Shares not an undisclosed investment is pledged as security for loans

Facts and Issues of the case

The assessee is a company which is a member of National Stock Exchange (“NSE”) and also of Bombay Stock Exchange (“BSE”). It is engaged in the business of share broking and depository service and brokerage from such services.

The appeal relates to addition of Rs. 24,86,72,622/- made by the AO under the head ‘Income from other sources’ which has been deleted by the Ld. CIT(A).

The Ld. AO found that the assessee had taken overdraft facility against pledge of shares from Citi Bank and Kotak Mahendra Bank Ltd.. The outstanding balance as on 31.03.2014 was Rs. 4,04,41,488/- and Rs. 3,72,99,393/- respectively. On perusal of details filed by the banks, the Ld. AO found that the assessee has pledged shares of total value of Rs. 11,70,78,843/- with Citi bank and shares of total value of Rs. 13,64,71,060/- with Kotak Mahendra Bank Ltd. as on 31.03.2014. The value of assessee’s own shares in stock as per book was Rs. 48,76,981/- as on 31.03.2014.

The Ld. CIT(A) deleted the impugned addition.

Observations by the Court

The Court has given careful thought to the submissions of the rival parties. While making the impugned addition the Ld. AO observed that “it seems that the shares pledged by the assessee company with bank for obtaining working capital facilities were their own shares. In this light I am of the view that the value of shares is an unexplained income of the assessee”. It is obvious that the addition made by the Ld. AO was not based on any sound legal foundations but on conjecture and surmises. The Ld. CIT(A) quoted extensively from Circular No. 395 of NSE which allows the brokers to provide margin trading facility to their clients. For this purpose a broker may use his own funds or borrow from scheduled commercial bank and / or NBFCs, regulated by Reserve Bank of India. The Ld. CIT(A), therefore came to the conclusion that the assessee pledged shares of the clients with banks for obtaining bank finance in order to meet the requirement of depositing margin money by each of the clients as per the regulation of SEBI. We concur with the view of the Ld. CIT(A) and hold that the Ld. AO was not at all justified in taking value of shares pledged as security for taking loans from the banks as undisclosed investment of the assessee. The impugned addition has rightly been deleted by the Ld. CIT(A).