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Facts
The assessee, a trader in shares, incurred a loss of Rs. 26,13,000 on the sale of shares of M/s Nyssa Corporation Limited. The Assessing Officer (AO) treated this loss as bogus and disallowed its carry forward, based on information that Naresh Jain was involved in providing bogus long-term capital gain/loss entries. The CIT(A) upheld the AO's action.
Held
The Tribunal held that the AO's assessment was based on general information about penny stock cases and did not discuss the assessee's business affairs or financial statements. The purchase and sale of shares were supported by documentary evidence and occurred at prevailing market rates through a registered broker. The Tribunal found no evidence linking the assessee or their broker to the alleged operations of Naresh Jain.
Key Issues
Whether the disallowance of business loss on sale of shares was justified when the transactions were genuine, supported by evidence, and conducted at market rates, despite the AO's reliance on general information about bogus entries?
Sections Cited
147, 148, 151A, 10(38), 68
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PER PAWAN SINGH, JUDICIAL MEMBER;
This appeal by assessee is directed against the order of Ld. CIT(A) / NFAC Delhi dated 02.07.2025 for assessment year (AY) 2018-19. The assessee has raised following grounds of appeal:
“1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A)/NFAC, erred in not holding the assumption of jurisdiction by the Ld. Assessing Officer ('the Ld. AO') as bad in law as the conditions laid down for initiating assessment proceedings u/s 147 of the Income Tax Act, 1961 have not been fulfilled.
2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A)/(NFAC) erred in not adjudicating and considering that the assumption of jurisdiction for reopening the case by the Ld. AO is bad in law as the Ld. Jurisdictional Assessing Officer ('the Ld. JAO') failed to follow the provision of section 151A of the Act and the notification issued thereunder and without appreciating the fact that the Ld. JAO has no jurisdiction to issue a notice under 148A or 148 of the Act.
3. On the facts and circumstances of the case and in law, the Ld. CIT(A)/NFAC, erred in confirming the disallowance of business loss of Rs. 26,13,000/-, by holding the loss on sale of listed scrips i.e. M/s Nyssa Corporation Limited, as pre-arranged transaction without considering the fact that the appellant had purchased and sold the shares in regular course of business activity at prevailing market prices on the recognised stock exchange through a registered broker and that the appellant had duly submitted all the documentary evidences to substantiate the same.
4. On the facts and in the circumstances of the case, the Ld. Assessing Officer erred in making the addition on the issue other than the issue on which the assessment was reopened, alleging that the assessee is beneficiary of LTCG/LTCL, whereas the addition was made on disallowing the business loss.
5. On the facts and in the circumstances of the case and in law, the Ld. CIT(A)/NFAC erred in confirming the addition made by AO, without appreciating the facts that the Ld. AO relied on the statement of third party, which has nothing to do with the appellant and there is no mention of appellant's name in the said statement.
6. On the facts and in the circumstances of the case and in law, the Ld. CIT(A)/NFAC erred in confirming the addition made by AO, without providing any opportunity of cross examination on whose statements the Ld. AO relied in the assessment order.
7. The appellant craves to add, alter, classify, reclassify, delete or modify any of the above grounds of appeal and requests to consider each of the above grounds without prejudice to one another.”
Brief facts of the case are that case of assessee for assessment year (A.Y.)
2018-19 was reopened on the basis of information received through insight portal that Naresh Jain and his associates were involved in providing bogus accommodation entry of long term capital gain / losses in various scripts to beneficiaries across the country. A search action was carried out in case of Naresh Jain wherein voluminous incriminating documents and data was found which leads to unearth operations of the syndicate of bogus long term capital gain. The assessing officer on the basis of such information formed a belief that income of assessee has escaped assessment. Notice under section 148 dated 25.03.2022 was issued to assessee with the prior approval of competent authority. In response to notice under section 148, the assessee filed its return of income declaring loss of Rs. 1,51,052/- on 25.04.2022. The assessing officer during the assessment noted that assessee has shown bogus loss of Rs. 26,18,000/-. Such bogus loss was on account of transaction in script of Nyasa Corporation Ltd. In para 4.1 of assessment order, the assessing officer recorded that assessee purchased as 850000 share of Nyasa Corporation Ltd. @ 5.90 per share on 13.04.2017 for aggregate value of Rs. 50,15,000/-. The assessee made sale of such share on 12.07.2017 @ Rs. 2.82/- per share for a consideration of Rs. 23,97,000/-. Thus, the assessee had a loss of Rs. 26,13,000/-. The assessing officer issued show cause notice as to why such business loss should not be allowed to carry forward. In response to show cause notice, the assessee filed its reply dated 03.03.2023.
In reply, the assessee stated that they are engaged in the business of trading in shares and securities and providing consultancy services to clients. The assessee regularly trading in shares of listed and unlisted securities through registered broker which are recognised stock exchange. The assessee purchased and sale share of Nyasa Corporation Ltd. through registered and reputed broker, Sparkle Securities Solutions Pvt. Ltd. which is registered with stock exchange and in few cases directly from the related parties on market value. The payment of purchase and share were made through account payee cheque. The assessee by referring the contents of show cause notice submitted that allegation of assessing officer that assessee obtained accommodation entry, is baseless and without any supporting evidence. The assessee in fact is trader in shares and declared income from business and profession in respect of scrips of Nyasa Corporation Ltd. and has not shown any long term / short term capital gain or short term capital loss. The assessee does not know who is Naresh Jain and they have not done any transaction with him. The assessee is a regular trader and investor in shares from so many years and has done trading in eight scripts during the year and invested in 4 scripts. The assessee furnished scrip wise purchase and sale with their quantity rate and amount. The assessee also furnished Demat statement for F.Y. 2017-18. It was further stated that shares were sold by broker on stock exchange platform and not off market. The assessee sold the share at prevailing market rate. The assessee objected against the remark of assessing officer about involvement of assessee in penny stock transaction and reiterated that they have made trading in share on the basis of overall market conditions. The entire transactions were through recognised stock exchange. The assessee is not aware about any suspicious character or dealer or about doubtful transactions. The information of assessing officer is general and has no evidentiary value. There is no corroborative evidence against the assessee. The assessee requested for providing copy of statement of Naresh Jain and his cross-examination. The reply of assessee was not accepted by assessing officer. The assessing officer recorded that statement of Naresh Jain was provided to the assessee. The certain part of statement of Naresh Jain is recorded in para 4.6 of assessment order. The AO in para 4.11 of his order recorded that cross-examination is not feasible. The assessee is beneficiary of accommodation entry by way of loss in the script of Nyasa Corporation Ltd. On the basis of statement of Naresh Jain, the assessing officer treated the loss of Rs. 26,18,000/- as bogus loss and not allowed is to carry forward against the other income.
Aggrieved by the additions in the assessment order, the assessee filed appeal before ld. CIT(A). Before ld. CIT(A), the assessee filed detailed written submission reiterating on similar stand as took before assessing officer. The submissions of assessee are recorded from page no. 34 to 54 of impugned order. The assessee also relied on various case laws. The ld. CIT(A) after considering the submission of assessee upheld the action of assessing officer by referring the decision of Delhi High Court in Vikash Jain vs ITO ( citation or case number is not mentioned) wherein Nyasa Corporation Ltd. was noted as penny stock and price were manipulated by Naresh Jain and its associates.
The ld. CIT(A) also referred other various decisions to strengthen his finding.
The ld. CIT(A) held that various evidences furnished by assessee to prove the genuineness of transaction are to cover up true nature of transaction and the facts and circumstances of the case revealed that shares are arranged transactions merely giving a colour of authenticity. The assessee never made similar investment before or after the impugned investment. Further, aggrieved the assessee has filed present appeal before Tribunal.
I have heard the submission of learned Authorised Representative (ld. AR) of the assessee and the learned Senior Departmental Representative (ld. Sr. DR) for the revenue. The ld. AR of the assessee submits that he has raised the legal issue against the validity of assessment order as well as addition on merit. On merit, the ld. AR of the assessee submits that assessee is trader in share and engaged in the business of purchase and share which is clearly evident from the financial statement furnished before the lower authorities as well as filed before Tribunal. The assessee has not shown any long term capital gain which was the basis of reopening. The assessee is a trader in share and suffered business loss. There is no claim of any exempt income or loss on capital gain. The purchase and sales of share are supported by contract note, ledgers of brokers, Demat statement and bank statement. The books of accounts are audited. The assessing officer has not given any finding on the various documentary evidences furnished by assessee. The assessing officer merely relied upon the general information. Neither the assessee nor his broker is involved in price rigging rather there was a genuine business loss to the assessee. To support his submission, the ld. AR relied upon the following decision: Graceunited Developers Private Limited vs ITO (ITA No. 2046 & 2047/M/2024 dated 12.03.2025) ACIT vs Adihemshree Financial (ITA No. 3069, 3070 & 3071/M/2024 dated 30.09.2024) Naresh Manakchand Jain vs ACIT (ITA No. 247 & 240 to 244/M/2023 dated 27.06.2024)
On the other hand, learned Senior Departmental Representative (ld. Sr. DR) for the revenue supported the order of lower authorities. The ld. Sr. DR submits that Nyasa Corporation Ltd. is a penny script which was managed by Naresh Jain. The department has sufficient evidence that Naresh Jain was providing accommodation entry to various beneficiary across the country either in the form of gain or loss. The assessee is one of the beneficiary.
Hence, the action of assessing officer in disallowing loss claimed on sale of scrips of Nyasa Corporation Ltd is justified.
In short rejoinder submission, the ld. AR of the assessee submits that there is no evidence that assessee or his broker was linked with the alleged operations of Naresh Jain or the assessee is beneficiary of such entry.
I have considered the rival submissions of both the parties and have gone through the lower authorities carefully. I have also deliberated on various case laws relied by AR of the assessee. I find that in assessment order, the assessing officer nowhere discussed about the business affairs of assessee or its financial statement. The assessing officer simply discussed about general modus operandi in penny stock cases. I also find that assessee has not claimed any long term capital gain or any short term capital gain or loss rather the assessee has shown business loss in its computation of income.
The purchase and sale of shares are supported by contract notes, account confirmation and bank statement. The assessing officer has not given any finding on such evidences. The assessing officer framed the assessment merely on general information. We find that on co-ordinate bench of Mumbai Tribunal in Graceunited Developers Private Limited vs ITO (supra). On similar contention of the parties of his following order:
“9. We have carefully perused the orders of the authorities below. A perusal of the assessment order shows that nowhere the AO has discussed the business of the assessee, its financial statements but has simply discussed the general modus operandi in penny stock cases. We are pained to find that nowhere the assessee has claimed any exempt income u/s 10(38) of the Act, meaning thereby that the assessee has not claimed any long-term capital gain/loss in its return of income.
9.1. As mentioned elsewhere, the assessee is trading in shares and engaged in the business of purchase and sale of shares which is evident from the financial statements furnished before the lower authorities and brought to our knowledge. Even in the computation of income there is no claim of any exempt income. The purchase and sale of shares are supported by contract notes, copies of the ledgers of brokers, D-mat statements and the bank statements. The books of accounts are audited. The assessee has shown turnover of Rs.50.29 Crores for the year ending March, 2015 and Rs.28.97 Crores, for the year ending March, 2016. A perusal of the profit and loss account shows that the revenue from operations depicting gross sales do not have any long-term capital gains. In fact, the revenue from operations simply contained sale of shares.
10. We are of the considered view that the entire assessment has been framed on the basis of the information and the general prevailing practice where a section of brokers/entry providers are engaged in rigging the market for providing bogus long-term capital gains so that the beneficiaries can claim the same u/s 10(38) of the Act as exempt from tax and bring their unaccounted money in the books without paying any tax.
10.1. The facts on record show that since the assessee is engaged in the business of trading in shares, any profit arising out of its business as shown under the head profits and gains of illness which is taxable as per the rates applicable and there is no claim of any exemption u/s 10 (38) of the Act.
Considering the facts of the case in totality, we are of the considered view that the entire assessment has been based upon wrong facts since the entire trading in shares has been absorbed in the sale of shares, making addition u/s 68 of the Act of few chosen scrips would amount to double addition of the same transactions. On the given facts of the case, the additions do not survive. The AO is directed to delete the same for both the assessment years.
In the result, appeals of the assessee are allowed.”
Considering the aforesaid factual and legal discussion, I am also of the view that addition made by assessing officer is not justified. Thus, the disallowance of loss made by assessing officer is deleted. In the result, ground No. 3 of the appeal is allowed.
Considering the facts that the additions are deleted on merit, thus, adjudication on other grounds of appeal have become academic.
In the result, the appeal of assessee is allowed.