TOJO JACOB,MUMBAI vs. ITO 41(1)(5), MUMBAI

The NFAC erred in law and on facts by confirming the addition of Rs.21,35,173/- as bogus Long Term Capital Loss, disregarding that the shares were purchased through banking channels, held in a Demat account, purchased and sold on a recognized stock exchange (BSE/NSE) through a recognised registered broker. The transactions were supported by documentary evidence (contract notes, Demat statements, bank entries).

The NFAC failed to appreciate that the Assessing Officer (AO) relied solely on general investigations by the Directorate of Investigation without specific evidence linking the Appellant to any manipulation or wrong doing and without allowing cross-examination of third parties, thereby violating principles of natural justice.

The NFAC erred in law in confirming the addition of Rs. 21,35,173/- under section 68 as unexplained cash credits, despite the fact that the appellant having discharged the burden of proof as per law, and without pointing out any defect in the evidences submitted.

The NFAC erred in confirming the disallowance of set off of long term Capital gain and treating the same as taxable.

On the facts and in the circumstances of the case and in law, The NFAC erred in confirming the addition under 68 as unexplained cash credit although the assessee has incurred huge losses.

On the facts and in the circumstances of the case and in law, The NFAC erred in confirming the charging of interest under section 234A and 234B of the Income Tax Act 1961. 7. On the facts and in the circumstances of the case and in law, The NFAC erred in upholding initiation of penalty proceeding under section u/s 271AAC(1) of the Income Tax Act 1961. 3. Ground nos. 1 to 5 pertain to the addition of Rs.21,35,173/- as alleged bogus Long Term Capital Loss. Brief facts of the case are that assessee is an individual and his income includes salary and other sources of income from investment in shares and capital gain earned on P a g e | 3 A.Y. 2019-20 Tojo Jacob them as also dividends and bank interest. He filed the return of income of income of 27,60,680/-. It was noted by the AO that during the year he had shown loss in transactions in the equity shares of Syncon Formulations(India) Ltd.(SFIL) of Rs. 21,35,173/- and set off of the gain of Rs. 5,21,997/-, being sale of shares of Tanla Platforms Ltd. against it. As per the information with the AO, the assessee had been provided fictitious losses in equity/derivative trading in shares of SFIL of Rs.20,55,141/-.As per the Investigative Report of the Investigation Unit w.r.t. information of beneficiaries of bogus LTCG/STCL pertaining to FY 2013-14 to FY 2018-19, during the investigation carried out certain penny scrips were identified and SFIL was one of them, where manipulation in trade by way of complex web of prearranged or artificial web of transactions was carried out to book bogus LTCG/STCL entries to the interested persons / beneficiaries. From the detailed analysis carried out of the trading data of SFIL, it was noted that large scale manipulation of trades and fabricated trading activity had taken place in the scrip. This had led to generation of fictitious profits and loss derived by various traders which were not genuine and were pre-determined. The trades were carried out between a set of very few persons which were responsible for trade matching and placing huge orders which were matched against the corresponding counter orders immediately after the P a g e | 4 A.Y. 2019-20 Tojo Jacob orders were placed. Even the price of the scrip was manipulated by the traders by manipulating closing price of the scrip on a particular trading day. This is important as closing price directly influences the opening price of the next trading day. This also is necessary to artificially jack up the price of the scrip so that it can be raised up to certain level and the shares are sold to predetermined parties thereby earning bogus long- term capital gains which is exempt from tax u/s 10(38) of the Act. Reverse modus operandi was adopted in order to provide entry of bogus Short-Term Capital Loss. Based on the above observations, analysis of trading data of the clients was carried out, it was concluded by the AO that SFIL had adopted reverse modus operandi in order to provide entry of bogus Long Term Capital Loss.

1 The assessee had submitted that he had invested Rs.27,99,145/- in shares of SFIL and had incurred Long Term Capital Loss on sale of shares of Rs.21,35,166/-, thereby setting off the loss from the total capital gains earned during the year. He, in response to the query claimed that the transaction was genuine as evident from the details submitted. However, the submission was not found acceptable on the basis of the report of the Investigation Wing as the assessee was one of the beneficiaries identified it. The loss claimed was accordingly, disallowed. Since the entire loss claimed by the assessee in trading of P a g e | 5 A.Y. 2019-20 Tojo Jacob SFIL was treated as bogus, the set off of gain of Rs.5,21,997/-, being sale of shares of Tanla Platform Ltd was brought to tax as Long Term Capital Gain and the loss claimed at Rs.20,55,141/- was disallowed and the same was not available to be carried forward to set off future years.

Aggrieved, the assessee filed further appeal before the ld.CIT(A) contesting the action of the AO by claiming that all purchases and sales of shares, including those of SFIL, were carried out through recognized stock exchanges, supported by Contract Notes. During the relevant assessment year, he had been dealing in sale of numerous shares other than the suspected scrip. He exited SFIL in August– September 2018 and did not re-invest in the said scrip for nearly three years, re-entering only in 2021, which negated any allegation of systematic manipulation or circular trading. The investments were made from accumulated salary savings and earlier investment proceeds, and not from any unexplained or unaccounted sources. All transactions were executed through BSE, via banking channels, with proper STT payment and reflected in demat account. No evidence of cash transactions, price rigging, or collusion with brokers or operators has been brought on record by the AO. The assessee submitted that the AO had merely relied on presumptions, general investigation reports, and third-party

1 The ld.CIT(A), however, rejected the submissions of the assessee observing that three principles were required to be fulfilled namely identity, creditworthiness and genuineness of the transaction which were not fulfilled by him. The transactions were well planned and stage managed to show genuineness via 'round tripping' of funds. While the companies were registered with the