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Facts
The assessee declared a loss, but the Assessing Officer (AO) held that the short-term capital loss from the sale of shares was not genuine and disallowed it. The AO also added back commission expenses, taxed income from property sale as deemed income, and disallowed a bad debt claim.
Held
The Tribunal held that the short-term capital loss claimed by the assessee was genuine, reversing the lower authorities' findings. It also deleted the addition of consequential commission and allowed the bad debt claim as a business loss under Section 37 of the Act. The issue of deemed income was to be verified by the AO to avoid double taxation.
Key Issues
Whether the short-term capital loss claimed by the assessee is genuine, and whether commission expenses, property sale gains, and bad debt claims are allowable.
Sections Cited
115BBE, 68, 69C, 36(1)(vii), 37, 10(38)
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Income Tax Appellate Tribunal, DELHI BENCH ‘F’: NEW DELHI
Before: SHRI VIKAS AWASTHY & SHRI AVDHESH KUMAR MISHRA
A.Y. 2015-16 Rose Serviced Apartments Assistant Commissioner (India) Pvt. Ltd., of Income Tax, 5-E, Local shopping Centre, v/s Circle-21(2), Masjid Moth, Greater Kailash, C. R. Building, I P Estate Part-II, New Delhi New Delhi PAN: AAACP2712M (Appellant) (Respondent) Appellant by Shri Abhishek Kumar Jain, CA Sh. Shivam Bansal, CA Respondent by Ms. Harpreet Kaur Hansra, Sr. DR Date of Hearing 20/02/2025 Date of Pronouncement 20/05/2025 ORDER
PER AVDHESH KUMAR MISHRA, AM
This appeal of the assessee for the Assessment Year (hereinafter, the ‘AY’) 2015-16 is directed against the order dated 19.03.2019 passed by the Commissioner of Income Tax (Appeals)-38, New Delhi [CIT(A)].
Vide six & sub-grounds thereof, the assessee has raised following issues in this appeal: -
i. Determination of income at Rs.1,26,14,520/- as against the returned loss of (-) Rs.5,48,68,471/-, ii. Reopening of the assessment of preceding year, iv. Taxability of Rs.58,00,000/-. v. Disallowance of business loss of Rs.60,00,000/- and vi. Applicability of section 115BBE of the Income Tax Act, 1961 (Act).
The relevant facts giving rise to this appeal are that the assessee filed its Income Tax Return (ITR) on 28.09.2015 declaring loss of (-) Rs.5,48,68,471/- to be carried forward. The case was picked up for scrutiny, wherein the Assessing Officer (AO) had held that the short-term capital loss from sale of share of Jolly Plastic Industries Ltd. was not genuine. Hence, he disallowed the said loss. Further, the AO added back commission of Rs.16,21,835/- as unexplained expenditure incurred thereon for the said non-genuine short-term capital loss of (-) Rs.5,40,61,153/- [@ 3% of Rs. Rs. 5,40,61,153/-]. Accordingly, the AO taxed Rs.5,56,82,988/- (Rs.5,40,61,153/- plus Rs.16,21,835/-) and also invoked the provisions of section 115BBE of the Act on this addition of Rs.5,56,82,988/-. Further, the AO had categorically held that the income of Rs.58,00,000/- claimed having derived from the sale of property was nothing but unexplained credit entry brought into the books of accounts in the garb of sale of the property. Accordingly, he taxed the same under section 68 r.w.s. 115BBE of the Act. The AO also disallowed the claim of bad debt of Rs.60,00,000/- on the reasoning that the same was not revenue
The relevant finding of the Ld. CIT(A) on the issue of non-genuine short-term capital loss of (-) Rs.5,40,61,153/- along with commission of Rs.16,21,835/- reads as under:
“4.2 The AO noted that a income of Rs.5,48,68,471/-had been shown from trading in the stock of M/s Jolly Plastic Industries Ltd. The scrip had been purchased at very high prices and sold at very low prices and the resultant loss was claimed as a business loss and was set off against other income. It was also noted that in the span of two years, even though there was a humongous increase in the price of shares, the number of trades and the number of shares traded for the scrip was very low. The AO had received a report from the office of Principal DIT, Investigation, Kolkata, informing that various BSE listed penny stock companies have been used for providing bogus long term capital gain/business losses and M/s Jolly Plastic Industries Ltd. in which transactions were made by the appellant, were such penny stock companies. The investigation conducted by the Department also identified these companies which were used by the entry operators to provide accommodation entries to various persons by artificially inflating the share price of the company M/s Jolly Plastic Industries Ltd. is a company, scrip of which had been used to accommodate bogus TCG/business losses. The AO has emphasised on the following findings to hold these transactions as sham transaction as these transactions have failed the test of surrounding circumstances, human conduct and preponderance of probability Poor financial position of M/s Jolly Plastic Industries Ltd. Action by SEBI against penny stock companies Investigation report unearthing modus operandi in such cases. Same modus operandi as detected by investigation wing found to be followed in the case of M/s Jolly Plastic Industries Ltd.
Rose Serviced Apartments (India) P. Ltd. The assessee traded only in the stock of this share and never traded in any blue chip company share and almost the entire capital was invested in these two stocks. The assessee defying all human probability invested in risky companies having small capital and no financial history of yielding dividends or capital gains. 4.3. After a detailed analysis of the investigation report with the materials available on record in the case of the assessee, and on further examination of the financials of M/s Jolly Plastic Industries Ltd., the AO concluded that the modus operandi adopted by the assessee followed the same pattern discovered by the Investigation wing during various search and survey operations wherein similar method adopted by the operators/brokers for providing bogus LTCG/business losses had been adopted. The trading income of Rs.5,48,68,471/- which was claimed as a business loss was not allowed. The appellant has submitted that the transactions in the scrip was conducted through a broker on the Exchange and copies of all contract notes, demat accounts, bank statement, account statement of broker etc. were submitted. It has also been submitted that the AO has not accepted the submissions and explanations provided by the assessee and has overlooked the supporting documents of the transactions filed by the assessee in support of its claim and that the AO has not proved them to be bogus either. It is also been submitted that the transactions have been treated as bogus only on the basis of suspicion. 4.4 I have considered the facts of the case, the assessment order and the written submissions of the appellant. Prima facie it appears that copies of all the documents have been submitted to substantiate the genuineness of transactions related to purchase and subsequent sale of shares leading to the business loss claim by the appellant. I find that these documents, which were placed before the AO who, after detailed examination and discussion and going beyond these documents, has established that these documents are mere masks to hide the real nature of transactions. By analyzing the balance sheet, Profit & loss account and the trade pattern of M/s Jolly Plastic Industries Ltd. the Rose Serviced Apartments (India) P. Ltd. AO has pointed out that the share price of this company was neither affected by the movement of sensex nor the financials of the company could justify such extraordinary jump in the price of its shares. It is noticed that apart from being based on evidences gathered during search and survey operations, analysis of the materials on record and analysis of information from various sources, the findings of the AD are also based on strong surrounding circumstances, preponderance of probability and human conduct in the light of detailed analysis of the modus operandi adopted by brokers and operators engaged in the business of providing entries of long term capital gains/business losses to the interested beneficiaries which has come to surface as a result of deep and wide investigation. Initial purchase of shares of companies of unknown credentials at high rates and subsequent sale within a short span after drastic fall in the share price cannot be an accident or windfall but as has been clearly brought on record by the AO, was possible because of manipulations in the price of shares in a pre- planned manner by the interested broker and entry operators. 4.5 The insistence of the appellant that the transactions in the two shares leading to business loss are supported by documents such as sale and purchase invoices, bank statements, brokers notes etc. cannot be accepted in view of the fact and circumstances of the case brought on record by the AO after proper examination of the material facts and after taking into account the findings of SEBI and corroborating evidences gathered by the Directorate of Investigation, Kolkata against a network of brokers and operators engaged in manipulation of market price of shares of certain companies controlled and managed by such persons with a purpose to provide accommodation entries in the form of business losses to those who want to reduce their tax lability. Further, the appellant's contention that the business losses cannot be treated as bogus merely because some investigation with regard to certain company and broker or investigation has been carried out by the Directorate of Investigation, Kolkata only proves that the appellant wants to take shelter under such documentary evidences which themselves have been created as masks to cover up the true nature of transaction. A genuine transaction must be proved to be genuine in all respect. The onus was on the appellant to prove that the transactions leading to claim of business loss was distinctly genuine transaction and not bogus, premeditated transaction arranged with a view to Rose Serviced Apartments (India) P. Ltd. evade taxes. The onus was on the appellant to contradict the findings that M/s Jolly Plastic Industries Ltd. is a company whose scrip were capable of being traded at high price as it was the appellant who had traded in the shares of the this company which resulted into business loss. This is more so in view of the fact that these were the only one scrip traded by the appellant company who is in the business of dealing in sale/purchase of shares. Once the appellant was made aware of the result of investigation which proved that trading of shares leading to business loss was not genuine, as noted by the AO also, the onus was on the assessee to prove that the business loss was genuine under section 101 of the Indian Evidence Act, 1972 as it is the assessee who is asserting a claim that it was engaged in genuine share transactions. It is relevant to note here that Hon'ble Supreme Court in the case of Shri Charan Singh versus Chandra Bhan Singh (AIR 1988 SC 637) have clarified that the burden of proof relies on the party who substantially asserts the affirmative of the issue and not upon the party who denies it. It has been further held that the party cannot, on failure to establish a prima facie case, take advantage of the weakness of his adversary's case. The party must succeed by the strength of his own right and the clearness of his own proof. He cannot be heard to say that it was too difficult or virtually Impossible to prove the matter in question. Since in this case the appellant had made the claim that he had incurred genuine business loss while transacting in the shares, all the facts were especially within its knowledge. Section 102 of Indian Evidence Act makes it clear that initial onus is on person who substantially asserts a claim. If the onus is discharged by him and a case is made out, the onus shifts on to deponent. It is pertinent to mention here that the phrase "burden of proof is used in two distinct meanings in the law of evidence viz, 'the burden of establishing a case', and 'the burden of introducing evidence'. The burden of establishing a case remains throughout trial where it was originally placed, it never shifts. The burden of evidence may shift constantly as evidence is introduced by one side or the others. In this case, once the evidence that assessee has claimed bogus business loss was introduced by the AO, the burden of evidence shifted to the assessee. During the assessment proceeding and even during the appellate proceeding, the assessee has failed to produce any evidence to prove that the business loss claimed by it was genuine.
Rose Serviced Apartments (India) P. Ltd. 4.6 In the present case, it is seen that the appellant has failed to discharge its burden of proof and the AO, on the other hand, has proved that the claim of the appellant was incorrect. The enquiry conducted by SEBI was further corroborated by the investigation carried out by the Directorate of Investigation which has been thoroughly analysed by the AO to prove that the assessee had introduced fictitious business loss in its books of account by routing its unaccounted income through a tax evasion scheme. The statement of brokers engaged in providing bogus LTCG/business losses clearly proves M/s Jolly Plastic Industries Ltd. is a company whose scrip have been manipulated to provide bogus LTCG/business losses.” 4.1 The Ld. CIT(A), keeping in view the entire facts of the case, material placed on the record and placing reliance on various case laws mentioned in para 4.8 to 4.13 (page 49 to 55) of the impugned order, sustained the addition of Rs.5,56,82,988/-.
As per the material available on the record, the assessee purchased 2,24,100/- shares of Jolly Plastic Industries Ltd. in AY 2014-15 for Rs.6,72,67,815/- and these shares were sold in the subsequent year for Rs.1,34,34,071/-. Resultantly, there was short-term capital loss of (-) Rs.5,40,61,153/-. The Ld. AR submitted that the Investigation Report mentioned in the assessment order did not contain the name of M/s. Jolly Plastic Industries Ltd. anywhere. Further, he emphasized that the AO did not provide/make available the part of said Investigation Report detailing involvement of the assessee in accommodation entries. Since the AO did not make available any adverse material to the assessee; therefore, such material could not be used at the back of the assessee, contended the Ld. Rose Serviced Apartments (India) P. Ltd. AR. Further, the Ld. AR contended that the statement referred in the assessment order, wherein it had been categorically admitted by any individual in his statement recorded by the Investigation Wing of Income Tax Department that the assessee was involved in accommodation entry, was also not provided to the assessee. Further, the Ld. AR drew our attention to the fact that none of the orders passed by the SEBI in the cases mentioned in the assessment order as under contained the name of Jolly Plastic Industries Ltd. and the appellant assessee as a beneficiary.
(i) M/s. First Financial Services Ltd. (WTM/RKA/ISD/162/2014 dt. 19/12/14 (ii) M/s. Moryo Industries Ltd (WTM/RKA/140/ISD/2014 dt. 04/12/2014 (iii) M/s. Pine Animation Ltd. (WTM/RKA/ISD/36/2015 dt. 08/05/2015 (iv) M/s. Radford Global Ltd. (WTM/RKA/ISD/143/2015 dt. 09/11/2015 (v) M/s. Sunrise Asian (WTM/RKA/ISD/143/2015 dt. 09.11.2015 5.1 It was further submitted that the SEBI had suspended the trading of Jolly Plastic Industries Ltd. in January, 2015 whereas the assessee had sold its share in April, 2014 i.e. 9 months before the SEBI order. The Ld. AR further submitted that the AO’s finding regarding (i) weak financials, (ii) astronomical rise in prices of shares and (iii) abrupt fall in share prices of Jolly Plastic Industries Ltd. did not establish the involvement of the assessee or its broker or its Director (s) in any price manipulation of shares of Jolly Plastic Industries Ltd. Hence, the finding of the lower authorities Rose Serviced Apartments (India) P. Ltd. regarding non-genuine short term capital loss was not based on sound footing. The Ld. AR therefore, prayed for setting aside of such finding.
5.2 The Ld. AR categorically admitted at the Bar that the assessee had never claimed set off of any capital gain/income against the short-term capital loss of the relevant year in subsequent 8 years. Hence, the assessee could not be held as beneficiary of the alleged accommodation entry; i.e. short-term capital loss. Further, it was admitted by the Ld. AR that the assessee did not own any property in Dubai as mentioned in the assessment order.
On the issue of addition of Rs.58,00,000/-, the Ld. AR submitted that the assessee had paid Rs.14,00,000/- to Smt. Rashmi Gupta for purchasing property in the AY 2004-05. However, the assessee was not able to get the said property registered in its name. Therefore, the advance of Rs.14,00,000/- had been disclosed as loans & advances in the balance sheet/books of accounts of the assessee. It was further submitted that the said property was sold in the relevant year for Rs.72,00,000/- and the entire gains of Rs.58,00,000/- (Rs.72,00,000/- minus Rs.14,00,000/-) had been offered as income in the ITR as the entire sale consideration of Rs.72,00,000/- was received by the assessee through Smt. Rashmi Gupta. However, it was specifically admitted by the Ld. AR that the assessee had not have any proof in form of any agreement with Smt. Rashmi Gupta to establish that the assessee had paid Rs.14,00,000/- to Smt. Rashmi Gupta Rose Serviced Apartments (India) P. Ltd. in the AY 2004-05 for acquiring the property. Further, it was also admitted that the said property was never disclosed as an asset in the balance sheet of the assessee. However, the same was shown as a loan & advance in the balance sheet of the assessee. It was further contended that this income had already offered for the tax; therefore, the same could not be taxed twice. The provision of 115BBE of the Act for not allowing set off of same was not justified.
The next issue is in respect of the disallowance of Rs.60,00,000/- under section 36(1)(vii) of the Act. The Ld. AR submitted that the assessee had advanced the sum of Rs.60,00,000/- to K.M.B. Exports Pvt. Ltd. in the AY 2003-04 for arranging suitable land for residential projects. However, such property was never arranged by the assessee nor the advance was refunded back. Therefore, the said advance was claimed as bad debt written off in the relevant year. However, the AO disallowed it simply on the reason that the said advance was capital in nature. The Ld. AR further submitted that the assessee, a real estate company, had advanced the said sum for its business purpose as the said advance for acquiring land was nothing but for the stock-in-trade. Hence, it had been wrongly held by the Ld. CIT(A) as capital in nature. Further, such loss was claimed as business loss. The Ld. AR drew our attention to the CBDT Circular 12/2016 to submit that the assessee was not under obligation to take any legal recourse for recovery of the said advance to write off the same as bad debt in its books of accounts.
Rose Serviced Apartments (India) P. Ltd. It was submitted that the precondition for claim of bad debt is to write off the same in the regular books of accounts. Accordingly, the Ld. AR prayed for relief.
On the other hand, the Ld. Sr. DR, placing reliance on various paras of orders of the lower authorities, prayed for dismissal of the appeal of the assessee. She further placed reliance on following decisions: 1. Suman Poddar (ITA No.841/2019) 2019-TIOL-2243-HC-DEL-IT 2. Udit Kalra 2019-TIOL-751-HC-DEL-IT (Copy Enclosed) 3. Sanat Kumar (2019-TIOL-1296-ITAT-DEL, ITA No.1881/Del./2018) 4. Pooja Ajmani [2019] 106 taxmann.com 65 (Delhi - Trib.)
We have heard both the parties at length and have perused the material available on record. We find that the Hon'ble Supreme Court, in the case of in the case of Charan Singh v. Chandra Bhan Singh AIR 1988 SC 6370, have clarified that the burden of proof lies on the party who substantially asserts the affirmative of the issue and not upon the party who denies it. It has been further held that the party cannot, on failure to establish a prima facie case, take advantage of the weakness of his adversary's case. The party must succeed by the strength of his own right and the clearness of his own proof. In the present case, the assessee has claimed the short-term capital loss. Section 102 of Indian Evidence Act makes it clear that initial onus is on person who substantially asserts a
Here, the assessee has not explained that how the share price of Jolly Plastic Industries Ltd. has been determined at the time of purchase and subsequent sale of shares particularly when Jolly Plastic Industries Ltd. was having very weak financials. In support of the share prices on the date of purchase and sale of shares of Jolly Plastic Industries Ltd. by the assessee, no material was placed before us by the Ld. AR. Further, the Ld. AR also failed to demonstrate with corroboratory evidence the abrupt fall in share prices of Jolly Plastic Industries Ltd. from Rs.6,72,67,815/- to Rs.1,34,34,071/- within the span of less than a year. The assessee has invested its entire fund in shares of Jolly Plastic Industries Ltd., which has never declared any dividend so far (till the relevant year). Further, what prompted the assessee to sale shares of Jolly Plastic Industries Ltd. at such huge loss. Such investment at exorbitant price cannot be made by any prudent investor. All these factors have been considered by the lower authorities.
The enquiry conducted by the SEBI and the investigation carried out by the Directorate of Investigation of the Income Tax Department, has been thoroughly analysed by the Assessing Officer. The perusal of the assessment order reveal that the assessee has helped two different assessees; one at the time of purchase of shares and second at the time of Rose Serviced Apartments (India) P. Ltd. sale of shares resulting consequential gains/accommodating entries with vicious chain of purchase and sale of shares to various assessees. The statement of various persons mentioned in the assessment order buttress the inference drawn by the lower authorities that the said short-term capital gains are non-genuine.
The present case in hand is akin to the case of Anip Rastogi (ITA No. 3809/DEL/2018), wherein the coordinate bench of the Tribunal upheld the credits additions made under section 68 of the Act in respect of income claimed exempt under section 10(38) of the Act in view of following facts: (i) The assessee has not been dealing in shares on a regular basis (ii) Purchase of shares were claimed to be through off market deals (iii) The financials of penny stock company and movement of its price are abrupt, unrealistic and based upon any realistic parameters. There is no extraordinary increase in the profits of the company to justify the increase in value of the shares. (iv) Investigation Wing had recorded the statement of one of the Directors of the company for providing entry of bogus long term capital gains of another penny stock company, who had admitted that he was involved in scam of providing bogus long term capital gains through shares of penny stock companies through manipulative transactions in securities to either artificially raise or lower the market rate of the shares.
We have gone through the rationale given by both parties. In this case, the AO has specifically pointed out certain facts indicative of non- genuine nature of the share transactions under reference, which cannot be ignored as the assessee has failed to explain the same satisfactorily with corroborative evidence. Astronomical share price at the time of purchase and abrupt fall at the time of its sale by the assessee was not explained by the assessee. In the relevant year, the assessee has sold shares at very low price and incurred losses after purchasing share of face value Rs. 10/- @ Rs.300/-. In this whole exercise of purchase and sale of share, the assessee has lost its accounted money in the form of short-term capital gains. After analysing the facts in entirety, the inference that emerged here is that the assessee is not a real beneficiary of bringing back its unaccounted money in its regular books of account in the garb of exempted capital gains, which also gets buttressed by the fact that the assessee has not claimed set off of the short-term capital gains in subsequent year (upto 8 years). At most, the assessee might have provided accommodation entry at the time of purchase of shares by acquiring the share of face value Rs. 10/- @ Rs.300/-. However, the same has not been conclusively proved by the Revenue. Had the assessee brought back capital gains subsequently, the case would have been different.
Hence, keeping in view the overall facts and circumstances of the case, we do not find any justification in the impugned order sustaining the disallowance of short-term capital loss particularly in view of the fact that the overall impact of tax on this matter, in view of non-claim of set off of the short-term capital loss in subsequent year, is NIL. Therefore, we reversed the finding of the Ld. CIT(A) that the short-term capital loss is non-genuine. Accordingly, the short-term capital loss is held genuine.
Since the assessee is not a beneficiary of any accommodation entry in the garb of exempted capital gains. Therefore, paying commission for that is against the normal business principle as no one will incur any expenditure for such purpose. Hence, the addition of consequential commission paid for non-genuine short-term capital loss under section 69C of the Act is deleted. The assessee gets consequential relief.
The next issue is the addition of Rs.58,00,000/-. There is no proof that the sum of Rs.14,00,000/- given to Smt. Rashmi Gupta is for acquiring an immovable property in the AY 2004-05 as there is neither any agreement nor the registered sale deed in this regard. Further, no material has been brought on the record to demonstrate that the same has been accepted by Smt. Rashmi Gupta along with the confirmation letter. Therefore, the claimed receipt of Rs.72,00,000/- from Smt. Rashmi Gupta cannot be held arisen on the transfer of the property as assessee being beneficial owner. We therefore, hold that the AO has rightly taxed it as deeming income Rose Serviced Apartments (India) P. Ltd. under section 68 of the Act. However, we find merit in the assessee’s claim that this income (quantum only) has already been offered for tax in the ITR, then the same cannot be taxed twice. In other words, it is clarified that we find merit in the Ld. AR’s submission as far as the quantum of income is concerned and not the section under which the same has been assessed by the AO. Keeping in view the material brought on the record, we hereby direct the AO to verify the facts and give relief on account of double taxation by taking this income in the return as Nil and taxing the same income under section 68 r.w.s. 115BBE of the Act, if the same has been offered for tax in the ITR.
The last issue is in respect of the disallowance of bad debt claim under section 36(1)(vii) of the Act. The Ld. AR pleaded for its allowance alternatively under section 37 of the Act as business loss. The AO, in para 10.4 of the assessment order, has clearly held that the nature of said transaction of Rs.60,00,000/- with KMB Exports Pvt. Ltd. is dubious, whereas the Ld. CIT(A) has held it as advance, being capital in nature, given to KMB Exports Pvt. Ltd. for the property. It was argued that the advance given for business purpose, if not returned back, has to be allowed as expenditure under section 37 of the Act. Reliance is placed on the decisions of Idea Cellular Ltd. [2014] 47 taxmann.com 341(Mum) and Asia Power Projects (P) Ltd. [2014] 49 taxmann.com 428 (Karn). We find merit in the alternate claim of the Ld. Counsel on the simple reasoning that every item Rose Serviced Apartments (India) P. Ltd. of expenditure, if spent wholly and exclusively for business purposes even it does not yield results should be allowed for tax purposes as an expense. In view of the reasoning given in the above cited cases of Idea Cellular Ltd. and Asia Power Projects (P) Ltd., we are of the considered view that the advance of Rs.60,00,000/- KMB Exports Pvt. Ltd. is allowable under section 37 of the Act.
In the result, the appeal of assessee is partly allowed as above.