MAVAIYA ENTERPRISES PRIVATE LIMITED (THROUGH VINOD VADHAIYA BEING EX DIRECTOR OF THE COMPANY),DAMAN AND DIU vs. ACIT, CENTRAL CIRCLE 4(3), MUMBAI, MUMBAI

Since the issues involved in all four appeals are common and arise from an identical set of facts, they are being disposed of together. Appeal in ITA No. 4745/Mum/2026 for AY 2015-16 is taken up as the lead case since it covers all the issues arising in this set of four appeals. Our observations and findings arrived on each of the issue for the first year shall apply mutatis mutandis in other years.

Brief facts of the case, confined to the lead case are that the assessee, a company engaged in the business of trading in agri commodities, precious metals and derivatives and securities, filed its return of income on 30.09.2015, reporting total income at Rs. 2,75,280/-. Case was reopened under section 147 on the basis of information received under Project Falcon from DGIT (Investigation), Mumbai, alleging coordinated and premeditated trading on the Bombay Stock Exchange by way of reversal trades in stock and currency options resulting in non-genuine business loss and gains to the beneficiaries, of which the assessee was alleged to be a party. Notice under section 148 was issued on 31.03.2021. In response, the assessee filed return of income on 27.04.2021, reporting total income at the same figure Rs. 2,75,280/-.

Grounds of appeal raised by the assessee are as under:

Ground no. 1 relates to the validity of reassessment proceedings under section 147. This ground was not adjudicated by the ld. CIT(A). We first take up the matter on its merit and thereafter will delve on the said legal aspect, if so requires.

Ground nos. 5 to 9 relate to merits of the additions made by the ld. Assessing Officer and confirmed by the ld. CIT(A). These grounds raise two distinct issues, viz. (i) disallowance of loss of Rs. 27,75,000/- on trades in illiquid options treated as non-genuine along with the consequential addition of Rs. 1,76,500/- under section 69C towards alleged cash commission thereon and (ii) addition of Rs. 53,52,818/- on account of alleged deemed profit at 0.25% on total purchase and sale turnover of Rs. 2,14,11,27,057/- treated as non-genuine. Both issues are dealt with in turn.

Before us, ld. counsel for the assessee submitted that of the two trades picked up by the ld. Assessing Officer, one resulted in neither profit nor loss and the other, dated 20.02.2015, in fact resulted in a profit of Rs. 27,75,000/- and not a loss, as verifiable from the trade contract note filed during assessment proceedings. It was further submitted that the assessee had undertaken several other trades in currency and commodity derivatives during the year yielding an aggregate profit of Rs. 1,01,78,772/-, that trading was conducted on a screen-based electronic platform of the United Stock Exchange where the counterparty is not known to the assessee at the time of execution, that the SEBI interim order dated 20.08.2015 relied upon in the reasons for reopening pertains to illiquid stock options and not to currency derivatives and that no evidence of any cash commission paid or received was found or brought on record during the survey conducted in the group cases.

We note that an identical addition, on an identical basis, was considered by the coordinate bench of this Tribunal in the case of companies forming part of the Abans Group, including Abans Securities Ltd. through whom the present assessee's trades were routed, in ITA No. 3315/Mum/2024 and others (Abans Commodities (I) Pvt. Ltd. and others vs. ACIT, Central Circle 4(3), Mumbai), order dated 30.09.2024. The relevant findings of the coordinate bench are reproduced hereunder for ready reference. “13. We have heard both the parties at length and also perused various materials referred to before us and the relevant finding given in the impugned orders. From the perusal of the assessment order, it is seen that ld. AO has solely relied upon the report of Investigation Wing known as ‘project falcon’. He has not carried out any independent enquiry or any investigation, whether the assessee had entered into any such transaction and has ignored all the evidence placed before the AO in support of all the trade transactions. One very important fact which has been brought on record by the ld. Counsel for the assessee that assessee had done many trades during the year in currency derivatives and commodity derivatives, out of which only couple of trades have been selected by the ld. AO holding it to be non-genuine only because in such trades assessee has incurred loss and under same trade where assessee has shown profit has been accepted. As submitted by the ld. Counsel, assessee is engaged in screen based electronic trading wherein it is not possible to chose or even know the counter party involved in any trade and the identities of the counter parties are not displayed on the screen at the time of the trading. Unlike in the case of stock market that the SEBI has circuit breakers limits (10%, 15% and 20%), however, no such limits are there in derivative markets and therefore, derivative markets are more volatile than the traditional stock market. Further, assessee had produced all the relevant information in respect of all the trades carried out in the united stock exchange to prove the genuineness of the transaction, however, ld. AO has even failed to take note of such contract notes. Further, assessee had submitted that since the trade was executed through sister concern M/s. Abans Securities Pvt. Ltd., there was no question of paying the commission to its own entity. Further, ld. Counsel submitted that there was an action u/s. 133A in the office premises of group companies on 03/09/2019. However, in the comprehensive survey action not a single piece of evidence relating to any manipulation of his alleged trades or unaccounted cash commission, the payments were found in the course of such actions. 14……. From the perusal of the assessment order it is seen that, the entire basis of the ld. AO is based on ‘Project Falcon’ report passed on by the Investigation wing which admittedly pertains to stock option trading carried out on the Bombay Stock Exchange, which has no connection with the assessee as assessee trading was in currency options in United Stock Exchange and it has carried out various opportunities in which assessee had shown profit. All those trades in which assessee disclosed profit has not been disturbed or adversely viewed except for few transactions of losses. … Thus, on these facts it cannot be inferred that assessee was engaged in booking of loss through dubious devise only for two transactions when all the transaction were done in same manner in currency options have been held to be genuine. Ld. AO should have at least analysed all the transactions and how come only two transactions are fictitious and rest all the other transactions conducted in which assessee had declared profit from the same stock exchange conducted in the same manner are genuine and only two transactions in which assessee had incurred minor loss are non-genuine. This shows that AO has just misinterpreted the Report to apply in assessee’s case without independent analyzing the transactions. … Once the transactions are based on screen based electronic trading and the identities of the buyers and sellers are not displayed, then to presume that the transactions have been manipulated are non-genuine cannot be upheld. Thus, prima facie, there is no material that trade transactions in which assessee had incurred losses (that is, in two transactions) is non-genuine especially when assessee had declared huge profit and income from such trade in similar transactions, which has not been doubted. There has to be basis and inquiry to arrive to any conclusion that out of many transactions, few were manipulated to show fictitious loss and were non-genuine. Accordingly, the additions on account of non-genuine loss and illiquid options are deleted. Now coming to the notional addition of commission u/s.69C for non- genuine losses, it is seen that same is based on statement of Shri Arun Shah of M/s. Aryav Securities allegedly recorded in the course of ‘Project Falcon’. However, nowhere in such statement there is any reference of the trade carried out by the assessee or involvement of the assessee. Further, if such statement was to be relied, then law provides that same should have been confronted with the assessee to rebut or cross examine. Ultimately, the addition has been sustained by applying adhoc commission rate of 2% which has been scaled down to 0.25% by the ld. CIT(A) that assessee might have incurred such expenditure in cash. There is no evidence brought on record that assessee had actually paid such expenses outside the books and the entire addition is based on conjecture. In any case we have already held that the transactions in which assessee has incurred loss are genuine, therefore, there is no question of imputing any kind of adhoc commission. Accordingly, addition of Rs.4,718/- in A.Y. 2014-15 and addition of Rs.4,881/- in A.Y. 2015-16 is deleted.”

Identical issue, involving the identical set of six entities of which the present assessee is one, came up for consideration before the coordinate bench in ITA No. 3315/Mum/2024 and others (supra). The relevant findings are reproduced hereunder for ready reference: “24. We have heard the rival submissions and also perused the materials placed on record. It is seen that the ld. AO had treated the purchases from 6 entities as non-genuine and has applied profit rate of commission on such purchases @0.25%. He has accepted that these purchases are duly recorded in the books of accounts, and has not disturbed the purchases. However, according to him as per market practice there is commission rate of obtaining such entry at @ 0.25% which needs to be added. First of all in so far as the transactions of purchases from these parties are concerned, the same had not been doubted for the reason that ultimately the ld. AO’s allegation is that assessee might have earned commission on such purchases as these are non genuine parties with no credentials and on inquiry by the investigation wing various facts have emerged about their credibility. If the purchases are from the books and source of purchases are not in doubt and assessee has produced all the evidences to prove the purchases then how can on such purchases adhoc addition on account of commission can be made. Before the AO assessee has submitted following details to prove the purchases:  Purchase invoices;  Warehouse receipts showing physical receipt of the goods in the warehouse;  Delivery Orders;  Bank statements demonstrating payment towards the purchases;  GST returns showing receipt of the goods and availment of input tax credit on such purchases. If these documents have not been doubted then where is the question of making adhoc addition of commission on such purchases. 25. Coming to the various allegations made by the AO and the rebuttal given by the assessee before the AO as well as before the CIT(A), it is seen that one of the allegations of the AO was that the source of funds in capital of these entities are less compared to the turn over. What was required to be seen is whether there was actual trading or not as trading does not require large own capital but what are the source of funds in their balance sheet. Another allegation regarding e-mail was only by the Abans group. There was nothing which has been brought on record by the ld. AO that e-mail was actually being handled by the Abans group nor he has mentioned who was operating the said e-mail. Assessee had already countered that e-mail and ITR of the company was not operated from the office of the Abans group and had given detailed explanation before the ld. CIT(A) also which was not even being committed upon. In so far as ITR filed from the premises of Abans group from a particular IP address, assessee has categorically denied that it is incorrect and no such ITR has been filed from the IP mentioned in the order but from some other IP address which was provided before the ld. CIT (A). This has not been rebutted by the department. … In so far as the shareholders were not men of means, already it has been brought on record that they were filing their regular income tax returns and have shown investment of share capital from their own sources. In any case, this cannot be the ground for treating the transaction as non-genuine. 25.1 Now, coming to the summons issued to the Directors, it has been stated that the summons were issued during the peak Covid 19 lockdown period and directors had actually responded their inability to attend due to lockdown which has been ignored. … In so far as books of accounts found in the audit report from the premises, the assessee’s contention was that neither, the Investigation Wing nor the ld. AO had provided the evidence in support of such allegation nor any details of content of date and period to which it pertain was provided or found. Thus, such ground cannot be adversely viewed. … Thus, in view of the aforesaid submissions given by the assessee and rebuttal given against various allegations of the AO are liable to be accepted. In any case, the case of the ld. AO is that assessee might have earned commission from such purchases of 0.25% which cannot be sustained as ld. AO has applied commission of 2% and reduced to 0.25% by CIT (A) are on mere conjecture. It is not a case where the entire purchases have been added, albeit ld. AO has presumed that assessee might have earned commission on such purchases made from non-genuine parties. Accordingly, such adhoc application of commission of 0.25% is deleted.

Ground no. 10 relates to levy of interest under sections 234B and 234D. Levy of interest under these provisions is consequential in nature.

Ground no. 11 relates to initiation of penalty proceedings under section 271(1)(c). Initiation of penalty at this stage being premature, no adjudication is called for and this ground is dismissed as such.

Since relief is granted to the assessee on the merits of the case for the reasons discussed hereinabove, legal ground raised vide ground no. 01 is left open with the liberty to raise the same at the appropriate forum, if so required. Also, our observations and findings on each of the issues apply mutatis mutandis on the respective issues in appeals for other years.

In the result, all the four appeals filed by the assessee are partly allowed. Order pronounced in the open court on 25.09.2026