Loss in share trading couldn’t be disallowed alleging it bogus if transactions were carried on stock exchange

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Loss in share trading couldn’t be disallowed alleging it bogus if transactions were carried on stock exchange

IT: Where transactions of purchase and sale of shares was made by assessee through registered stock exchange at prevailing market prices after duly suffering STT and assessee had furnished all primary evidences in form of trade files, contract rates, demat statements and bank statements to prove genuineness of said transactions, loss incurred on such transactions could not be disallowed treating same to be bogus

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[2019] 105 taxmann.com 129 (Kolkata – Trib.)

IN THE ITAT KOLKATA BENCH ‘C’

Deputy Commissioner of Income-tax, Circle-5(1), Kolkata

v.

PRB Securities (P.) Ltd.*

A.T. VARKEY, JUDICIAL MEMBER
AND M. BALAGANESH, ACCOUNTANT MEMBER

IT APPEAL NO. 211 (KOL) OF 2017
[ASSESSMENT YEAR 2013-14]

DECEMBER  5, 2018

Section 28(i), read with section 68, of the Income-tax Act, 1961 – Business loss/deduction – Allowable as (Share transactions) – Assessment year 2013-14 – Assessee, a registered share broker, filed his return claiming loss of certain amount on sale of equity shares – Assessing Officer alleged that he had received an information from investigation wing that assessee had received accommodation entry of bogus/ficticious loss by way of share trading – On basis of same, he held impugned loss claimed by assessee to be bogus and disallowed same – It was noted that assessee had furnished all details of purchase and sale of shares as called for in requisite format by Assessing Officer – Assessee also furnished obligation files of stock exchange and trade files received from stock exchange in which all details were given showing transactions entered into by assessee – Demat transaction and holding statements showing delivery of shares for purchase and sale of shares were also furnished – Assessee also provided copy of bank statements marking payments made to/received from stock exchange in respect of purchase and sale of shares – It also furnished copies of contract notes issued by registered share broker for purchase and sale of shares – It was not case of revenue that assessee had resorted to any client code modification – All transactions were routed through recognized stock exchange with registered share broker at prevailing market prices after duly suffering STT – Whether, on facts, Assessing Officer was unjustified in disallowing loss in respect of purchase and sale of shares by assessee treating same to be bogus – Held, yes [Paras 4.1, 4.2 and 4.5][In favour of assessee]

FACTS

The assessee was a registered share broker with Securities & Exchange Board of India (SEBI). It had active membership of National Stock Exchange (NSE) since 1995, Bombay Stock Exchange (BSE) since 2000 and MCX Stock Exchange of India (MCXSx) since 2008. During the relevant year, the assessee-company filed its return of income and claimed business loss of Rs. 3.85 crores on sale of shares of two scrips namely, BCSL and TTL.
The Assessing Officer alleged that he had received some information from the investigation wing about the assessee that it had claimed bogus/fictitious loss by trading in scrip namely BCSL and TTL. The Assessing Officer observed that the assessee was involved in a long drawn process of rigging of stock market prices in collusion with the various entry operators. He observed that the assessee had invested in the shares of the aforesaid companies which were not having any sound financial position or business activity. Accordingly, he disallowed the business loss incurred by assessee on BCSL and TTML treating same as bogus loss.
On appeal, the Commissioner (Appeals) reversed the order of the Assessing Officer. He held that the assessee was never provided hard copy of the relevant information allegedly received by the Assessing Officer from the Pr. DIT (lnv) relating to alleged false transaction of loss on the basis of which adverse inference was sought to be drawn against the assessee. The Assessing Officer mechanically and arbitrarily followed the investigation report as well as statement recorded during the course of survey proceedings without establishing any link of such statements with that of the assessee. He made various other allegations like price rigging etc. without bringing on record any cogent material and corroborative evidences. The assessee had discharged its onus of proving the genuineness of the transactions resulting in trading loss and when the assessee had discharged its onus of proving the genuineness of the transactions by furnishing all evidences, no adverse inference could be drawn unless the same are proved to be false or bogus.
On revenue’s appeal to the Tribunal:

HELD

The Assessing Officer observed that the assessee had acted in collusion with various entry operators for the purpose of obtaining bogus loss in respect of the aforesaid two scrips. This observation of Assessing Officer was admittedly based on the report of the investigation wing of Kolkata Income Tax Department. Certain details and data gathered by the Assessing Officer regarding the investigation carried out by the investigation wing of Income Tax Department were handed over to the assessee during the course of assessment proceedings . The assessee on examination of the same replied before the Assessing Officer that the details and data given to the assessee in Pen Drive did not contain any data or information relating to the transactions of scrips carried out by the assessee herein resulting in the loss of Rs 3.85 crores ( 1.53 crore + 2.32 crores). It was specifically pointed out that the scrips which the Assessing Officer alleged to be bogus, were not suspended by SEBI on independent investigation carried out by it. The tabulation in this regard is reflected in the assessment order. It was also pointed out that in the absence of any such specific information allegedly received by the Assessing Officer from Principal DIT (Inv.) Kolkata and without furnishing the same to assessee, no adverse inference could be drawn against the assessee more particularly when all the details and evidences were produced by the assessee before the lower authorities in respect of all the transactions of dealing in shares and securities on which profits and/losses were earned/incurred during the previous year relevant to assessment year 2013-14. The assessee during the year under consideration had dealt with 743 scrips and had earned profits or incurred losses as the case may be. The Assessing Officer accepted the profits and losses from all other scrips except loss incurred on BCSL and TTL and accordingly proceeded to disallow the business loss claimed thereon in the sum of Rs 3.85 crores in the assessment as bogus loss. [Para 3]
The assessee had furnished several details before the Assessing Officer. It furnished evidence to prove that the assessee itself is a registered stock broker with SEBI having membership of SEBI recognized stock exchanges viz National Stock Exchange (NSE), Bombay Stock Exchange of India (BSE) and MCX Stock Exchange (MCX-SX). It provided statement of quantity of shares purchased and sold for 743 scrips during the year under consideration and the scrip wise profit and loss earned during the year. Details of purchases and sales of scrips as called for in the requisite format by Assessing Officer was furnished by the assessee. Obligation files of the stock exchange for certain settlement numbers were also furnished. Trade files received from the stock exchange in which the settlement number, settlement date, trade date, distinct order numbers, trade numbers and trade time were given showing the transactions entered into by the assessee was also provided. The assessee also furnished demat transaction and holding statements showing delivery of shares for purchase and sale of shares. Copy of bank statements marking the payments made to/received from stock exchange in respect of purchase and sale of shares was also on record. Copies of contract notes issued by registered share broker for purchase and sale of shares of aforesaid two companies were also given. [Para 4.1]
Neither SEBI nor any other regulatory authority had passed any adverse order against the assessee company for having involved in artificial rigging of share prices or for providing alleged accommodation entry of alleged bogus loss on shares . Infact the SEBI on its investigation had not suspended the scrips of BCSL and TTL as is evident from the outcome of the investigation report. It is not the case of the revenue that the assessee had resorted to any client code modification. All the transactions were routed through recognized stock exchange with registered share broker at the prevailing market prices after duly suffering STT. The documentation maintained by the assessee is the same for all the 743 scrips and when the said documents are accepted by the Assessing Officer for 741 scrips, there is no reason to disbelieve the same for shares of BCSL and TTL alone. [Para 4.2]
In view of the aforesaid findings in the facts and circumstances of the case and respectfully following the judicial precedent relied upon hereinabove, it is held that the Assessing Officer had erred in disallowing the business loss incurred in respect of two scrips as bogus which were rightly deleted by the Commissioner (Appeals). [Para 4.5]

CASES REFERRED TO

Sumati Dayal v. CIT [1995] 214 ITR 801/80 Taxman 89 (SC) (para 3), CITv. Durga Prasad More [1971] 82 ITR 540 (SC) (para 3), Smt. Savita Bhurav. Dy. CIT [IT Appeal No. 12 (Kol.) of 2017, dated 19.9.2018] (para 4.4) and Dy. CIT v. Maco Corpn. (India) (P.) Ltd [IT Appeal No. 16(Kol.) of 2017 dated 14-3-2018] (para 7.4).

Saurabh Kumar, Addl. CIT Sr. DRfor the Appellant. Manish Tiwari, AR for the Respondent.

ORDER

  1. Balaganesh, Accountant Member.– This appeal by the Revenue arises out of the order of the Learned Commissioner of Income Tax(Appeals)-2, Kolkata [in short the ld CIT(A)] in Appeal No. 131/CIT(A)-2/201-17 dated 09.12.2016 against the order passed by the DCIT, Circle-5(1), Kolkata [ in short the ld AO] under section 143(3) of the Income Tax Act, 1961 (in short “the Act”) dated 22.03.2016 for the Assessment Year 2013-14.
  2. The first issue to be decided in this appeal is as to whether the ld CITA was justified in disallowing the business loss treating the same as bogus loss in the sums of Rs 1,53,47,039/- in respect of sale of shares of Blue Circle Services Limited and Rs. 2,32,23,735/- in respect of sale of shares of Tuni Textile Mills Ltd, as unexplained cash credit , in the facts and circumstances of the case.
  3. The brief facts of this issue are that the assessee is engaged in the business of share brokingm sub broking etc. The assessee filed its return of income for the Asst Year 2013-14 on 11.9.2013 declaring total income of Rs 3,37,95,314/-. The ld AO observed that the assessee company had bought 310000 shares of Blue Circle Services Limited and incurred trading loss of Rs 1,53,47,039/- thereon on its sale. Similarly, he observed that the assessee purchased 24500 shares of Tuni Textile Mills Limited and incurred trading loss of Rs 2,32,23,735/- on its sale. These two total trading loss worked out to Rs 3,85,70,774/- which was sought to be examined by the ld AO in the assessment. Since the main activity of the assessee is trading in shares in the capacity of broker and as well as dealing on its personal account, the loss incurred on sale of the aforesaid shares were claimed as regular business loss in the return of income. The ld AO observed that the assessee was involved in a long drawn process of rigging of stock market prices in collusion with the various entry operators. He observed that the assessee had invested in the shares of the aforesaid companies which are not having any sound financial position or business activity. The cases of Sumati Dayalv. CIT [1995] 214 ITR 801/80 Taxman 89 (SC) and CIT v. Durga Prasad More [1971] 82 ITR 540 (SC) were quoted in support to plead that the assessee had acted in collusion with various entry operators for the purpose of obtaining bogus loss in issue. The ld AO disallowed the business loss incurred on Blue Circle Services Limited and Tuni Textile Mills Ltd in the sum of Rs 3,85,70,774/- in the assessment as bogus loss. The ld CITA deleted the said disallowance . Aggrieved, the revenue is in appeal before us.
  4. We have heard the rival submissions. We find that the ld AO observed that the assessee had acted in collusion with various entry operators for the purpose of obtaining bogus loss in respect of the aforesaid two scrips. This observation of ld AO was admittedly based on the report of the investigation wing of Kolkata Income Tax Department. Certain details and data gathered by the ld AO regarding the investigation carried out by the investigation wing of Income Tax Department were handed over to the assessee during the course of assessment proceedings . The assessee on examination of the same replied before the ld AO that the details and data given to the assessee in Pen Drive did not contain any data or information relating to the transactions of scrips carried out by the assessee herein resulting in the loss of Rs 3,85,70,774/- ( 1,53,47,039 + 2,32,23,735). It was specifically pointed out that the scrips which the ld AO had alleged to be bogus, were not suspended by SEBI on independent investigation carried out by it. The tabulation in this regard is reflected in pages 5 and 8 of the assessment order. It was also pointed out that in the absence of any such specific information allegedly received by the ld AO from Principal DIT (Inv.) Kolkata and without furnishing the same to assessee, no adverse inference could be drawn against the assessee more particularly when all the details and evidences were produced by the assessee before the lower authorities in respect of all the transactions of dealing in shares and securities on which profits and/losses were earned/incurred during the previous year relevant to Asst Year 2013-14. We find that the assessee during the year under consideration had dealt with 743 scrips and had earned profits or incurred losses as the case may be. The ld AO accepted the profits and losses from all other scrips except loss incurred on Blue Circle Services Limited and Tuni Textile Mills Ltd and accordingly proceeded to disallow the business loss claimed thereon in the sum of Rs 3,85,70,774/- in the assessment as bogus loss.

4.1 We find that the assessee had furnished the following details before the ld AO :—

(a) Evidence to prove that the assessee company itself is a registered stock broker with SEBI having membership of SEBI recognized stock exchanges viz National Stock Exchange (NSE), Bombay Stock Exchange of India (BSE) and MCX Stock Exchange (MCX-SX).
(b) Statement of quantity of shares purchased and sold for 743 scrips during the year under consideration and the scrip wise profit and loss earned during the year.
(c) Details of purchases and sales of scrips as called for in the requisite format by the ld AO.
(d) Obligation files of the stock exchange for certain settlement numbers 100, 103, 113, 162, 167, 170, 171, 177, 204,219, 222, 223, 224, 234 & 235.
(e) Trade files received from the stock exchange in which the settlement number, settlement date, trade date, distinct order numbers, trade numbers and trade time were given showing the transactions entered into by the assessee.
(f) Demat transaction and holding statements showing delivery of shares for purchase and sale of shares.
(g) Copy of bank statements marking the payments made to/received from stock exchange in respect of purchase and sale of shares.
(h) Copies of contract notes issued by registered share broker for purchase and sale of shares of aforesaid two companies.

4.2. We find that neither SEBI nor any other regulatory authority had passed any adverse order against the assessee company for having involved in artificial rigging of share prices or for providing alleged accommodation entry of alleged bogus loss on shares . Infact the SEBI on its investigation had not suspended the scrips of Blue Circle Services Limited and Tuni Textile Mills Limited as is evident from the outcome of the investigation report mentioned in pages 5 & 8 of assessment order. It is not the case of the revenue that the assessee had resorted to any client code modification. All the transactions were routed through recognized stock exchange with registered share broker at the prevailing market prices after duly suffering STT . The documentation maintained by the assessee is the same for all the 743 scrips and when the said documents are accepted by the ld AO for 741 scrips, there is no reason to disbelieve the same for shares of Blue Circle Services Limited and Tuni Textile Mills Ltd alone. There is absolutely no dispute that the assessee had duly filed the requisite documents in connection with the purchase and sale of shares as detailed supra and that the prices thereon were market driven.

4.3 We find that the ld CITA had deleted the disallowance by observing as under:—

‘I have considered the submissions of the authorized representative of the appellant as well as the assessment order framed in the light of the materials available on record before the assessing officer during-the assessment proceedings.

The appellant is a registered share broker with Securities & Exchange Board of India (SEBI). It has active membership of National Stock Exchange (NSE) since 1995, Bombay Stock Exchange (BSE) since 2000 and MCX Stock Exchange of India (MCX-Sx) since 2008. During the relevant year under consideration the assessee company filed its return of income electronically declaring an income of Rs 3,37,95,314/-. The ‘said income was declared after claiming loss on purchase and sale of equity shares of Rs 3,85,70,774/-. The said loss was incurred for sale of 3,10,000 equity shares of Blue Circle Service Ltd of Rs 1,53,47,039/- and 1,25,800 equity shares of Tuni Textiles Ltd of Rs 2,32,23,735/-. The case was selected for scrutiny assessment, The AO assessed the income of Rs 8,89,91,088/- while framing the scrutiny assessment the AO has disallowed share loss incurred by the appellant in respect of two scripts namely Blue Circle Services Ltd amounting to Rs 1,53,47,039/- and Tuni Textiles Ltd amounting to Rs 2,32,23,735/-. The total disallowance on account of alleged bogus share loss stood at Rs 3,85,70,774/-: The AO has further disallowed sum of Rs 1,66,25,000/- claimed by the appellant u/s 35(1)(ii) of the Act. It has been alleged by the AO that the donation paid to School of Human Genetics and Population Health (SHG&PH) is bogus in nature and therefore the appellant was not eligible to claim any deduction u/s 35 (l)(ii) of the Act.

At para 1.2 of the assessment order the AO alleges that he has received some information from the investigation wing Kolkata about the appellant that it has claimed bogus/fictitious loss by trading in scripts namely ‘Blue Circle Services Ltd’ & ‘Tuni Textile Ltd. The appellant filed a detailed reply vide letter dated 16.03.2016 which has been reproduced by the AO. at para 1.3 of the assessment order. It was explained to the AO that the alleged information received by the AO did not include name of the appellant.. The information was thoroughly gone through but the appellant could not find any data or information relating to its transactions in these scripts. It was also explained that in absence of any specific information against the appellant no adverse inference can be drawn. The appellant also requested the AO to provide the hard copy of the relevant information allegedly received by him from the investigation wing, Kolkata. The appellant also requested to supply copies of all the statements recorded by the AO or any other authority which are relied upon by the AO against the appellant company. However, no such report or copies of statements were ever provided to the appellant. The AO further at paras 2.4 to 2.9 of the assessment order has reproduced extracts of the report of the investigation wing, Kolkata. Gist of such observations are as follows:—

Survey was conducted on 30 share broking entities and entry operators working in Kolkata. Enquiries revealed that through the various levels of entry operators unaccounted cash of beneficiaries is taken and prices of shares are manipulated to high prices resulting in Long term capital gains to the beneficiary.
Reverse modus operandi is adopted in order to provide short term capital loss.
The beneficiaries buy shares from existing promoters either through offline mode or through online mode and after a period of more than one year prices of such scripts increase 10 to 20 times giving rise to exempt LTCG.
The operators may incorporate new company and get it listed on stock exchange or by way of amalgamation listing can be done at the stock exchange. ‘Thereafter, the operator manipulates the share prices. The investors are those persons who want their unaccounted cash to be converted to bogus tax exempt LTCG.

The business transactions of such companies are mere paper transactions. The share prices consistently rise northwards till the purported market price of share attains the desired level. The rise & fall in price of the shares is sharp and it is not at all correlated & commensurate with fundamentals of the company. The financials of such companies do not justify such, rise and fall in the prices of shares of such companies.

When the time is ripe for the LTCG, cash is provided by the beneficiaries to the agents and then this cash is handed over to operator. These persons then receive RTGS in lieu of such cash from small RTGS operators.
The initial transfer of shares in the name of beneficiary cm be an ‘off market transaction’ or ‘online transaction’ and, thereafter, issue of ‘ preferential shares’ at nominal rates or issue of bonus shares even though there is hardly any profit or business activity in these companies.
Enquiries further revels that the funds for the purchase of shares which are off- loaded to book factious LTCG, .as already mentioned above, are in fact provided by the beneficiaries in cash.

Finally at para 2.8 the AO has summarized that as reported by the investigation wing Kolkata the promoters of the listed penny stock companies run the syndicate, the brokers and the entry operators through whose paper/shell companies cash were routed were mainly commission agents. The penny stock listed company is such that though its capital base is small its market capitalization is many times its capital base. This was managed gain through small volume predetermined transaction amongst members of the syndicate. The prices of shares were thus manipulated many times the face value. The purchase consideration is again provided in cash by the investor which is laundered to the buyer account through maze of shell companies as mentioned in the previous method.

In para 2.9 it is mentioned that people who have huge profit take short term loss to set-off their profit. The methodology used was the same. The beneficiary who wants loss buys the share at high rate from the beneficiary who is taking LTCG. ‘

In para 2.10 the AO has listed names of 84 scripts furnished by the investigation ring which are alleged to be used for providing bogus accommodation entries of loss or gain. Out of such 84 entities 24 entities have been suspended by SEBI. The name of Blue Circle and Tuni textile in which the appellate claimed loss are appears at serial number 8 & 61 in the said list, but both the scripts were not suspended by SEBI. It clearly indicated that there was no such evidence which suggest any action against the company. Therefore, reliance upon the list by the AO cannot be made to disallow any loss incurred by the appellant. ‘

At para 2.11 of the assessment order the AO has mentioned names ‘of promoters/key operators of the penny stock. In such list, name of Blue Circle Services Ltd appear at serial number 1 and the name of promoter/operator Sri Jagdish Purohitwhose statements has been recorded by investigation wing is mentioned but no linkage or nexus has been established by the investigation wing in their report or by the AO during the assessment proceedings of Sri Jagdish Purohit and the appellant company. The copy of such statement was never furnished to the appellant. Further it is pertinent to mentioned that there is no mention of name of Tuni Textile in this list. The AO, reason best known to him in spite of having the statement of Shri Jagdish Purohit, did not investigate the matter to collect the further evidence in the matter to strengthen his case and there is no such material on record that Mr. Purohit was cross examined and confronted.

In para 2.12 the AO has reproduced the report of investigation wing describing how Bogus short term capital loss is undertaken. It is also strange that the modus operandi and procedure of price rigging was very much in the knowledge of the AO at the time of passing of the assessment order but in spite of that he failed to establish the presumption into facts. Since it’s a general observation without any supporting material. The observations are just opinion of the investigation wing without establishing any nexus with the appellant company. It is a settled position of law that a disallowance cannot be made merely upon presumption and whims or suspicion of the AO. No matter how so ever strong the suspicion is, in absence of any corroborative material disallowance is unjustified and bad in law..

The AO at page 13 to 15 has made some charts to indicate how the prices of Tuni Textile Mills Ltd and Blue Circle Services Ltd moved over a period of five years in BSE. This is academic in nature and has no bearing of upon the appellant’s claim of loss on sale of these shares. The AO in his order very much explain the theory but at the same time he failed to establish the loss as bogus with documentary evidences.

Finally at para 2.14 and 2.15 AO relying entirely upon the vague report of the investigation wing Kolkata, AO held that loss incurred by appellant company by trading in scripts of Blue Circle Services Limited amounting to Rs 1,53,47,039/- and Tuni Textile Mills Ltd amounting to Rs 2,32,23,735/- is a fictitious loss and accordingly, he disallowed and made addition of Rs 3,85,70,774/-

During the course of scrutiny assessment proceedings the AO asked the appellant company to justify its claim of loss in respect of the shares mentioned herein above. The AR of the appellant filed complete details in respect of shares purchased and sold by the appellant company vide his letter, dated 10.03.2016. The said letter included complete details of purchase, sale, payments, movement of shares, Trade Files and Obligation Statement received from respective Stock Exchange, loss/gains etc, in respect of each and every shares which were traded by the appellant during the relevant assessment year. The documents, evidences filed by the appellant were not found to be bogus or false. There was no irregularity or discrepancy pointed out by the AO in respect of details filed by the appellant in support of its claim that the share loss is a genuine loss. The AO in the assessment order; besides relying upon the general report of the investigation wing, Kolkata has not brought on record any cogent, relevant evidences and facts which can. prove that in reality there was in fact no purchase & sale of shares by the appellant.

The appellants being a registered share broker its income is from share trading and brokerage done on behalf of its clients. The purchase and sale of shares is the regular business activity of the appellant. It is not that the appellant has only dealt in shares of these two companies, The ‘appellant has traded in number of scripts’ which has resulted in profits as well as losses also. So, it’s a regular business activity of the appellant company. The appellant filed complete details of entire share transaction including those mentioned herein above before the AO. Such details included Statement of quantity of shares purchased and sold of each scrip, scrip wise profit and loss earned during the relevant AY, details of purchase and sale of Tuni Textile Mills Ltd and Blue Circle Services Ltd along with Trade Files and Obligation Statement received from respective Stock Exchange including settlement number, demat statement (duly certified by the Depository participant) showing inward and outward movement in such scripts. Copies of bank statements were also furnished to substantiate the payments made and payments received in respect of trading of shares of these scripts. An explanation was also filed vide letter dated 16.03.2016 explaining as to why no disallowance of share loss should be made by the AO.

During the appellate proceeding, I have gone through the details of the appellate as filed during the assessment proceedings. The information reveals that the assessee during the year under consideration purchase and sold 743 script. The total purchase amount is of Rs 39648.59 Crores and sale amount is of Rs 39667.05 Crores. The net profit is of Rs 18.46 Crores. I have also gone through the script wise details of traded scripts which is part of paper book filed by the appellate during the appellate proceedings and it was also filed before the AO during the assessment proceedings. So it cannot be said that the appellate deals only in these two scripts and to claim bogus losses.

I have also gone through the demat statement of the appellate. It was maintained with the authorized OP R. M. Shares Trading Pvt. Ltd (a third party). The purchased shares were very much deposited/credited in the demat account maintained with third party in due course and at the same time the sold shares were also debited from the demat account in due course. The details of these shares purchased and deposited/sold and debited in the demat account are as under:

SCRIP DATE OF PURCHASE DATEOF
CREDIT
IN DEMAT A/C
QTY.. DATE OF
SALE
DATE OF
DEBIT FROM
DEMAT A/C
QTY.
BLUE CIRCLE 21-08-2012 23-08-2012 60000
07-09-2012 11-09-2012 60000
30-11-2012 04-12-2012 100000
11-12-2012 13-12-2012 90000
08-02-2013 08-02-2013 20000
13-02-2013 13-02-2013 50000
14-02-2013 14-02-2013 150000
15-02-2013 15-02-2013 90000
SCRIP DATE OF
PURCHASE
DATE OF
CREDIT IN
DEMAT A/C
QTY. DATE OF
SALE
DATE OF
DEBIT FROM
DEMAT A/C
QTY.
TUNI TEXTILE 24-08-2012 28-08-2012 25000
19-11-2012 21-11-2012 59800
26-11-2012 29-11-2012 17000
03-12-2012 05-12-2012 24000
27-02-2013 27-02-2013 100000
01-03-2013 02-03-2013 1800
04-03-2013 04-03-2013 24000

All the transactions of purchase and sale of shares were made through online trading system. The transaction statement clearly indicated the trade no and time, order date and time. The scripts were not suspended by SEBI either at the time of transaction entered by the appellant or thereafter. There is no denial of any of the transaction of either purchase or sale by the stock exchanges where the transactions were entered upon. The shares were purchased and sold at prevailing market rate through the stock exchange and the entire transactions were routed through proper Banking channel. The shares were duly reflected in the demat account of the appellant company. The AO has disregarded the claim of the appellant and disallowed share trading loss of Rs 3,85,70,774/- merely relying upon a general report of Investigation wing Kolkata in respect of various 84 scripts and held that from the date wise chart of the price movement of the aforesaid scripts there was sharp increase and decline in the price of the scripts and the modus operandi adopted by the appellant was to avoid taxes. The Trade Files and Obligation Statement received from respective Stock Exchange in support of purchase and sale such shares, clearly indicated that the appellant has paid all the statutory charges levied by the stock exchanges. The demat account and bank statement of the appellant company placed in the paper book reflect all the transactions of the appellant.

The materials as available in paper book, it can safely be concluded that the transactions were complete in terms of documentation and there was no defect in the papers submitted by the appellant in support of the transactions. The appellant has proved the transaction on the basis of documents. No investigation has been carried out by the AO or by the investigation wing to bring on record any material to disbelieve the claim of the appellant. The AO or the investigation wing has made academic discussion regarding the probability of the appellant having entered into transactions in collusion with operator of scripts with a view to claim loss in share trading business and thereby reducing the taxable income and tax liability. In fact there is no evidence that the prices of the scripts have been deflated. The AO has not doubted the purchase or sale price prevailing at the material point of time.. There is no allegation that the transactions were entered between related parties. In absence of any evidence to show that loss incurred by the appellant is a fictitious loss, the entire general discussion in the assessment order should fade into insignificance. It is a ‘settled law that no addition or disallowance should be made or sustained on conjectures, speculation & suspicion, how high or strong they may be, because suspicion and surmises without any evidence cannot take the place of proof.

It is further submitted that on 16.03.2016 the appellant submitted written submission before the Assessing Officer and also made a specific request before AO to provide hard copy of the relevant information allegedly received by the AO from the Pr. DIT(Inv) relating to alleged false transaction of loss of Rs.3,85,70,774/- on the basis of which adverse inference is sought to be drawn against the appellant but AO has never handed over the hard copy of the relevant information received by him from the Pr. DIT(Inv.). The assessee company also asked the Assessing Officer to allow opportunity of cross-examination of those persons whose statements are used against the assessee to draw any adverse inference. Therefore, it is clear cut violation of principle of natural justice.

In the case of Colonizers v. ACIT [1992] 41 ITD 57 (Hyd) (SB), the issue before the Hon’ble Special Bench was whether the additions made by the Assessing Officer in violation of the principles of natural justice should be set aside as void ab initio and thus deleted or should the case be restored to the ITO with directions for-redoing? In this respect, it was held as under: —

“In regard to the second point of difference, two segments of it existed. The first segment was as to whether the additions made in violation of the principles of natural justice should be set aside as void ab initio. The second segment was as to whether the addition should be deleted or should the case be restored to the ITO, with a direction for re-doing. The rules of natural justice operate as implied mandatory requirement, non-observance of which amounts to arbitrariness and discrimination. The principles of natural justice have been elevated to the status of fundamental rights guaranteed in the Constitution as is evident from the decision of the Full Bench of the Supreme Court in the case a/Union of India v. Tulsiram Patel AIR 1985 SC 1416 at p. 1460, holding ‘{fiat the principles of natural justice have thus come to be recognised as being a part of the guarantee contained in article 14 of the Constitution because a/the new and dynamic interpretation given by the Supreme Court to the concept of equality which is the subject-matter of that article and that violation of principles of natural justice by a State action is a violation of article 14.

In fact, the principles of natural justice, in the realm of life and liberty, would ipso facto even be read into article 21 because any procedure which affected life or liberty had to be a just, fair and reasonable procedure which necessarily meant the observance of the principles of natural justice. That is why these principles have been called as part of the universal law, as part of the rule of law and have also been termed as fair play in action.

Audi alterarm partem is one of the fundamental principles of natural justice. A quasi-judicial or administrative decision rendered or an order made in violation of the rule of audi alteram partem is null and void and the order made in such a case can be struck down as invalid on that score alone – Maneka Gandhi v. Union of India AIR 1978 SC.597, Gangadharan Pillai v. ACED [1980] 126 ITR 356 at pp. 365 to 367 (Ker.). In other words, the order which infringes the fundamental principle, passed in violation of audi alteram partem rule, is a nullity. When a competent Court of authority holds such an order as invalid or sets it aside, the impugned order becomes null and void – Nawabkhan Abbaskhan v. State of Gujarat AIR 1974 SC 1471 at p. 1479. In the light of these decisions, the additions made by the Assessing Officer in violation of the principles of natural justice had to be set aside as void only insofar as the additions by way of cash credits alone were concerned, which were separable from the other additions in the order that were not challenged.”

In view of such authoritative legal position, I am of the considered view that the well-settled principles of natural justice have not been followed by the AO. The appellant was never provided hard copy of the relevant information allegedly received by the AO from the Pr. DIT (lnv) relating to alleged false transaction of loss of Rs 3,85,70,774/-on the basis of which adverse inference is sought to be drawn against the appellant but AO has never handed over the hard copy of the relevant information received by him from the Pr. DIT(Inv.). Most respectfully, following the ratio laid down in the case of Colonizers v. ACIT [Supra] as discussed above, the conclusion reached by the AO without adhering to the rule of audi alteram partem is ex-facie null and ab initio void and the same is hereby struck down on this score only.

Be that as it may, on merits also it is observed that ‘the addition was made with the predetermined mind-set that the losses are bogus and the appellant having entered into transactions in collusion with operator of scripts with a view to claim loss in share trading business and thereby reducing the taxable income and tax liability.

This proposition is supported by the judgment of the Patna High Court in the case of Additional CIT v. Bahri Brothers Pvt. Ltd. [1985] 154 ITR 244 and the judgment of the Supreme Court of India in the case of CITv. Orissa Corporation Pvt. Ltd. [1986] 159 ITR 78 (SC). Thus the appellant having discharged the burden, it is the Revenue which had to verify the genuineness of the transaction and the primarily in case AO did not discharge the burden which had shifted on him and had just mechanically adhered to disallow the loss .aimed by the appellant without rebutting any of the submissions of the appellant. .

The Hon’ble Jurisdictional High Court in the case of the CIT v. Eastern Commercial Enterprises[1994] 210 ITR 103, held that right to cross-examine a witness adverse to the assessee is an indispensable right and the opportunity of such cross-examination is one of the corner-stones of natural justice. Thus on this limb of the argument itself the assessment order should be held to be bad in law. When the AO is having the statement of Mr Jagdish Purogit, he must have cross examined with the appellate to collect the evidence in the matter, which has not been done in the case. Thus the AO has failed to discharge his duties.

The Hon’ble Delhi High Court in the case of in the case of Dharam Pal Prern Chand Ltdreported in 295 ITR 105; while dismissing the appeal filed by the Revenue has held as under (page 108): There is no doubt that even if the strict rules of evidence may not apply, the basic principles of natural justice would apply to the facts of the case. The Assessing Officer placed reliance upon the report of the Shri Ram Institute for Industrial Research for deciding against the assessee. The report cannot be automatically accepted particularly since there is a challenge to it and the assessee had sought permission to cross-examine the analyst making the report. Since the Assessing Officer did not permit the correctness or otherwise of the report to be tested, there is a clear violation of the principles of natural justice committed by him in relying upon it to the detriment of the assessee.

The Assessing Officer failed to appreciate that reply letters dated 10.03.2016 and 16.03.2016 filed by the appellant seeking copies of statements of operators recorded by the investigation wing. But the AO mechanically and arbitrarily followed the Investigation Report as well as statement recorded during the course of survey proceedings without establishing any link of such statements with that of the appellant company: It is also apparent from the impugned assessment order that no independent finding is recorded in disallowing the loss incurred in respect of Blue Circle Services Limited amounting to Rs 1,53,47,039/- and Tuni Textile Mills Limited amounting to Rs 2,32,23,735/- because the AO failed to investigate the matter to collect the evidences.

In spite of specific request for providing information of Pr. DIT (Inv.), Kolkata and the statements of various persons used against the assessee company, the Assessing Officer disallowed the loss of Rs..3,85,70,774 suffered by the assessee company in dealing in shares of Blue Circle and Tuni Textiles, without furnishing the said information and the statements of third parties. While disallowing the aforesaid loss, the Assessing Officer alleged that the shares of the two companies were “penny stocks” run by the brokers and the entry operators. The Assessing Officer, in Paras 2.4 to 2.15 of the impugned assessment order referred to the report of the Investigation Wing of the department and also the statements of various persons recorded under section 131 of the Act to hold that the prices of the shares of many companies listed in Stock exchange were rigged by brokers/persons to provide Long Term Capital gains’ and/or profits and losses to desired persons. The Assessing Officer, referring to the report of Investigation Wing, furnished the list of scrips of various companies listed in BSE/NSE which were suspended for dubious trading. However, the said list of suspended shares did not include the name of ‘Blue Circle’ and “Tuni Textiles” in which the assessee company traded and suffered losses. The said report, as is evident from Para2.4 to 2.15 of the Assessment Order, contains various presumptions and allegations without any authentic legal evidences thereof.

The Assessing Officer disallowed the loss of Rs.3,85,70,77 4 suffered by the assessee company on various allegations made in para 2.4 to 2)5 of the impugned assessment order which were based on suspicion, surmises and conjectures only although it is settled law that no assessment can be made on suspicion howsoever strong it may be. The Hon’ble Supreme Court in the case of Umacharan Shaw & Brothers v. CIT [1959] 37 ITR 271 (SC) held that ” there are many surmises and conjectures, and the conclusion is the result of suspicion which cannot take the ‘place of proof in these matters……… “.’ Reliance in this connection is placed on the celebrated decision of the Hon’ble Supreme Court in Lalchand Bhagat Ambica Ram v. CIT [1959] 37 ITR 288 (SC)wherein the Hon’ble Apex Court had relied on its earlier judgement rendered in the case of Omar Salay Mohamed Sait [1959] 37 ITR 151 (SC) and had held that:

“It is, therefore, clear that the Tribunal in arriving at the conclusion it did in the present case indulged in suspicions, conjectures and surmises and acted without any evidence or upon a view of the facts which could not reasonably be entertained or the facts found were such that no person acting judicially and properly instructed as to the relevant law could have found, or- the finding was, in other words, perverse and this court is entitled to interfere,”

It is settled law that, no addition can be made on the basis of surmises, suspicion and conjectures. Reliance is also placed on the decision of the Hon’ble Supreme Court of India in the case of C.I.T. (Central) Calcutta v.. DaulatRarn Rawatmull ([1979] 87 ITR 349) wherein it had held that “The onus to prove that the apparent is not the real is on the party who claims it to be so.”

The Assessing Officer made various other allegations like price rigging etc. without bringing on record any cogent material and corroborative evidences. There is nothing on record to suggest that the prices were rigged by the Assessee Company and/or any other person to provide any such benefit to it as alleged by the Assessing Officer. The Assessing Officer also alleged that some unscrupulous operators were running a scheme of providing entries of LTCG/STCG for a commission. The Assessing Officer also alleged that in the statement recorded of brokers/Operators/Directors of paper Companies they have confessed to such scheme with detailed data. The Assessing Officer has not brought any evidence on record which suggested involvement of the Assessee Company in such alleged manipulations. The aforesaid allegations clearly show that these are suspicion, surmises and conjectures and are definitely alien to the facts and the evidences brought on record by the Assessee Company. There were no evidence and materials on record which can be aid to be legal positive evidence, supporting the case of the Assessing Officer, more so then the appellate company had discharged its primary onus by producing the books of accounts and all evidences in support of its claim of the aforesaid trading loss of Rs.3,85,70,774. Thus all the inferences drawn by the Assessing Officer, more particularly at.para’2.4 to 2.14 of the impugned assessment order are based on suspicion, surmises and conjectures alone without any cogent materials and/or evidences brought on record by him against the assessee company.

The Appellant had discharged its onus of proving the genuineness of the transactions resulting in trading loss and when the assessee has discharged its onus of proving the genuineness of the transactions by furnishing all evidences, no adverse inference could be drawn unless the same are proved to be false or bogus. The Hon’ble Jurisdictional High Court of Calcutta where the Gains/losses arising from the transactions of purchase and sale of shares were held to be genuine when it was found that the transactions are supported by documentary evidences like Contract Notes, Bills and vouchers and where the transactions were settled by account payee cheques/banking channels. The courts held that the same could not held to be bogus on the basis of general adverse reports of Investigation Wing and/or some other agencies of the Government and/or enquiry made by the Assessing Officer.

The Hon’ble High Court in the case of CIT v. Lakshmangarh Estate & Trading Co. Ltd. – ITA No, 270 of 1999 (Judgment dated 7th October, 2013) held that –

“On-the basis of a suspicion howsoever strong it is not possible to record any finding of fact. As a matter of fact. suspicion can never take the place of proof What were the individual facts and circumstances in the case of other investors indicated in the chart appearing at Page-51 of the paper book are not known to us.. In so far as the assessee is concerned, the facts and circumstances are before us which we have also tabulated. The finding arrived at by the Tribunal indicated above was not even alleged by Mr. Dutta to have not been based on evidence. In, the teeth of the aforesaid findings made by the Tribunal on the basis of evidence, it is difficult, if not impossible, to hold that the transaction of buying and selling of shares of Hindustan Development Corporation Ltd. was a colourable transaction or was resorted to with any ulterior motive of reducing the tax payable for long term capital gain.”

The Hon’ble High Court in the case of CIT v. Bhagwati Prasad Agarwal– ITA No.. 22 of 2009 (Judgment dated 29th April, 2009) held that the chain of transaction entered into by the assessee have been proved, accounted for, documented and supported by evidence. The assessee produced the contract notes, details of his DEMAT account and, also, produced documents showing that all payments were received by the assessee through bank. In these circumstances the information from stock exchange cannot be used to deny exemption of LTCG claimed by Assessee.

The Hon’ble High Court in the case of Classic Growers Ltd. v. CIT – ITA No. 129 of 2012 (Judgment dated 28th February, 2013), while dealing with the case where the assessee claimed loss in transactions of purchase and sale of shares and claimed set off against the income from interest year after year and the Aa held that the Assessee was indulging in such activity of generating losses year after year to reduce its tax liability, held as under.

“Therefore, it cannot be said by any stretch of imagination that any loss was generated. The opinion that the assessee generated a sizeable amount of loss out of pre-arranged transactions so as to reduce the quantum of income liable for tax might have been the view expressed by the Assessing Officer, but he miserably failed to substantiate that Loss might have been suffered. If the loss was suffered, then appropriate deduction has to be made and there is no reason why the Assessing Officer should have refused to do so. The learned Tribunal restored the order of the Assessing Officer and set aside the order passed by the CIT (Appeal) without application of mind. The learned Tribunal ignored the fact that the transaction was carried out at the prevailing price. Therefore, the question of generating loss could not have arisen. The suspicion entertained by the Assessing Officer was misplaced or in any event not substantiated.”

The Hon’ble High Court in the case of CIT v. Shreyashi Ganguli– ITAT No. 196 of 2012 (Judgment dated 5th September, 2012) found that the transactions were as per norms under controlled by the Securities Transaction Tax, brokerage service tax and cess, which were already paid. They were complied with. All the transactions were through bank. There is no iota of evidence over the above transactions as it were through d-mat format. Hence, Hon’ble Court agreed with the findings of the learned Commissioner of the Income-tax (Appeals) in accepting the transactions as genuine. Jurisdictional Hon’ble Calcutta High Court had held that:

“The Assessing Officer has doubted the transaction since the selling broker was-subjected to SEBI’s action. However, the d-mat account given the statement of transactions from 1.4.04 to 31.3.2005 i.e. relevant for the assessment year under appeal [2005-06] are before us. There cannot be any doubt about the transaction as has been observed by the Assessing Officer. The transactions were as per norms under controlled by the Securities Transaction Tax. brokerage service tax and cess. which were already paid. They were complied with. All the transactions were through bank. There is no iota of evidence over the above transactions as it were through d-mat format. Hence, we agree with the given findings of the learned Commissioner of the Income-tax (Appeals) in accepting the transactions as genuine toto.” In view of the fact findings we cannot re-appreciate, recording is such, cannot be said to be perverse as it is not fact finding of the learned Tribunal alone. The Commissioner of Income Tax came to the same fact finding. Concurrent fact finding itself make the story of perversity, unbelievable. And the appeal was preferred on the same point. That was dismissed in view of the decisions rendered in the first mentioned appeal on the identical point.”

The Hon’ble High Court in the case of CIT v. Kedarnath Agarwal (HUF) ITAT No. 6 of 2011 – In this case the AO observed that the assessee suffered huge losses on sale of shares of Hindustan Development Corporation Ltd. Inquiry was made by the AO from Calcutta Stock Exchange Ltd. On receipt of information from Stock Exchange it was observed by the Assessing Officer that there were many anomalies in the share transactions carried out by the assessee. The assessee, however, clarified that he had carried out all the transactions of purchase and sale of those shares through registered share brokers of Calcutta Stock Exchange and that they had issued the contract notes which had been duly submitted. It was also pointed out that the consideration for purchase and ‘sale of those shares have been paid or received through banking channels and copies of bank statements have also been submitted. It further appeared that on purchase of these shares the delivery was taken in Demat account and similarly when the shares were sold, the delivery to the respective brokers have also been given through Demat account. The copy of the Demat account was also submitted during the assessment proceeding. The Assessing Officer was of the view that the assessee had incurred loss in those shares which were listed on the Calcutta Stock Exchange which was bogus. However, the Appellate Authority came to the conclusion that so far the assessee was concerned, he had entered into transactions of purchase and sale through brokers and he was not responsible for the manner in which the brokers carried out the transactions. It was pointed out that the assessee was concerned only about the receipts of the shares on purchase and delivery of shares to the brokers on their sale and the Assessing Officer had not brought anything on record to prove that there was any connivance between the assessee and the share brokers. The Appellate Authority further came to the conclusion that the Assessing Authority had disallowed the capital loss of Rs.15,29,049 only on the basis of information submitted by the Stock Exchange and the Assessing Officer himself had not brought anything on record to prove that the transactions of purchase and sale of the shares in which the assessee had suffered the loss were not genuine transactions. It is further recorded by the Appellate Authority that the assessee had submitted the complete documentary evidences to prove his transactions of purchase and sale of those shares and the Assessing Officer could not prove that the evidence submitted by the assessee was either false or fictitious.’ It was further pointed out that the assessee had- purchased and sold the shares through the registered share brokers of the CSE, the delivery of shares was received or given through the Demat account and the payments were made or received through the account payee cheques and the correctness of those documents was beyond any doubt. The Hon’ble High Court held that on the facts and materials available on record the capital loss incurred by the assessee on the sale of shares listed on CSE and others was really genuine loss and thus, the Tribunal below rightly confirmed the order passed by the Appellate Authority and the Appeal filed by Revenue was dismissed being devoid of any merit.

The Hon’ble Bombay High Court in the case of Shyam R Pawar 

 

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