DCIT CC 5.2, MUMBAI, MUMBAI vs. TCK FINANCE & LEASING PRIVATE LIMITED, MUMBAI

Brief facts are that the assessee, TCK Finance & Leasing Private Limited, is an NBFC registered with the RBI and is engaged, inter alia, in the business of advancing loans and trading and investment in shares and securities. For the year under consideration, it filed its return of income on 19.11.2014 declaring total income of ₹88,180. The case was originally selected for scrutiny and assessment under section 143(3) was completed on 18.10.2016 determining total

During the course of reassessment proceedings, the Assessing Officer called upon the assessee to furnish, inter alia, its computation of income, details regarding the nature of its business, contract notes relating to purchase and sale of securities, bank statements, demat account, details of stocks purchased and sold and the source relating to the F&O transactions. The assessee explained that it was an NBFC engaged in advancing loans and trading and investment in shares and securities and furnished the relevant details and documents. Thereafter, in its reply dated 18.01.2022, the assessee specifically pointed out that the fundamental assumption underlying the information available with the

The Assessing Officer, however, rejected the explanation. He referred to the information/report of the Investigation Wing concerning “Tax Evasion & Investigation into Manipulative Transactions using Expiry Trades on BSE Options Derivative Segment”, which, according to him, had been prepared on the basis of data available with SEBI, statements of brokers and other inputs. He observed that the investigation had revealed a pattern in which options were purchased but not exercised and were allowed to expire, thereby generating artificial losses, and that such transactions were undertaken with the object of obtaining

Based substantially upon the aforesaid reasoning, the Assessing Officer held that the assessee had failed to establish the genuineness of the derivative transactions and proceeded to treat ₹1,57,48,000 as unexplained cash credit under section 68, taxable under section 115BBE. At the same time, since the derivative profit had already been credited to the Profit & Loss Account and formed part of the business results, the Assessing Officer reduced an identical sum of ₹1,57,48,000 from the business income and brought the very same amount back to tax under section 68. Thus, in the computation made by him, the income of ₹1,48,870 determined in the original assessment was taken as the

Before the learned CIT(A), the assessee submitted that it had been regularly carrying on transactions in shares and securities and that the impugned F&O transactions had been carried out through recognised stock exchanges and SEBI- registered brokers under the screen-based trading mechanism. The transactions were stated to be supported by contemporaneous contract notes, broker ledger and bank statements reflecting the corresponding pay-ins and pay-outs, besides payment of brokerage, service tax and other statutory charges. It was also pointed out that the transactions related to securities/contracts of several known companies and institutions, including IDFC Ltd., Union Bank of India Ltd., Tata Power, Andhra Bank, Power Grid Corporation of India Ltd., Exide Industries Ltd., Jaiprakash Associates Ltd., Jain Irrigation Systems Ltd. and IFCI Ltd. More importantly, it was contended that neither the assessee nor its broker or the counterparties to its transactions had been shown to be implicated in the SEBI material relied upon by the Assessing Officer and no material had been brought on record

The learned CIT(A), after examining the material, noted that whereas the Assessing Officer had proceeded with the figure of ₹1,57,48,000, the actual net F&O profit credited in the assessee’s books was ₹1,57,29,855. The difference of ₹18,145 stood reconciled with reference to brokerage of ₹8,860, service tax of ₹1,095, transaction charges of ₹7,874 and stamp duty of ₹316. Thus, the difference between the figure considered by the Assessing Officer and the net profit reflected in the Profit & Loss Account was attributable to transaction charges and did not represent any unexplained discrepancy. On the substantive aspect, the learned CIT(A) found that the derivative transactions were executed on recognised stock exchanges and supported by contract notes, bank statements and other contemporaneous records and that the Assessing Officer had not pointed out any defect in such documentary evidence. He further observed that no independent enquiry had been undertaken by the Assessing Officer in relation to the assessee’s particular transactions; there was no finding demonstrating that the assessee had acted in concert with its broker or that the transactions were predetermined; nor had any nexus been established between the assessee and the alleged entry providers. After considering the decisions of the Tribunal in DCIT v. Jainam

Before us, the learned DR strongly relied upon the assessment order and submitted that the learned CIT(A) has given undue importance to the formal documentation of the transactions without appreciating the larger investigation conducted by the Department into manipulation in the derivatives segment. According to her, merely because transactions had been routed through a recognised stock exchange, were supported by contract notes and settled through banking channels would not conclusively establish their genuineness where investigation had revealed a mechanism for generating artificial profits and losses through expiry trades. She submitted that manipulation undertaken through the stock-exchange mechanism would necessarily carry the outward appearance of regular transactions and, therefore, contract notes and banking entries could not be viewed in isolation. She further emphasised that the statements referred to by the Assessing Officer and the findings of the Investigation Wing demonstrated a modus operandi under which an artificial loss in the hands of one participant correspondingly generated an artificial profit in the hands of another and, therefore, the circumstance that the assessee had disclosed profit instead of loss did not take

The learned counsel for the assessee, on the other hand, strongly relied upon the findings of the learned CIT(A) and submitted that the entire case of the Revenue rests upon general observations contained in the Investigation Wing report without any material connecting the assessee with the alleged arrangement. He drew our attention to the documents placed in the paper book and submitted that the assessee was engaged in securities transactions as part of its regular business and that each stage of the impugned transactions was contemporaneously recorded and capable of independent verification. Particular emphasis was placed upon the fact that the Assessing Officer had not identified any counterparty with whom the assessee had allegedly colluded, had not brought on record any communication or prior arrangement between the assessee and any alleged entry provider, had not demonstrated any movement of unaccounted money and had not shown that SEBI or the concerned stock exchange had held the assessee’s particular transactions to be manipulated. The learned counsel further relied upon the coordinate Bench decisions considered by the learned CIT(A) and submitted that in the absence of any assessee-specific material, a

We have heard the rival submissions and carefully perused the assessment order, the findings recorded by the learned CIT(A) and the material placed before us. At the outset, one significant feature needs to be kept in perspective. This is not a case where an unexplained amount was found credited in the books without any identified underlying transaction and the assessee subsequently sought to explain its source through self-serving material. The impugned amount represents the result of derivative transactions which, according to the assessee, were undertaken in the ordinary course of its securities business; the trades were recorded through its broker; corresponding contract notes were generated; the transactions travelled through the stock- exchange mechanism; and the resultant profit was recorded in the books and financial statements. The paper book contains the detailed transaction ledger of Arch Finance Ltd. at pages 124 and 126 reflecting the F&O transactions and related fund movements and charges; the Futures and Options Segment contract note at page 129 issued by Arch Finance Ltd., a BSE member, containing individual trade particulars, quantities, rates and charges; and the financial statement at page 27 recording income from F&O share trade of ₹1,57,29,855. Significantly, the assessment order itself

Once these primary evidences were placed before the Assessing Officer, it was undoubtedly open to him to examine their real substance and establish, on the basis of enquiry and material, that notwithstanding the documentary trail, the transactions were predetermined, collusive or merely constituted accommodation entries. The fact that a transaction has passed through a recognised stock exchange or banking channel does not confer upon it an irrebuttable presumption of genuineness and, therefore, production of contract notes and bank statements cannot, irrespective of contrary material, foreclose further enquiry. At the same time, the converse proposition is equally untenable that once an investigation reveals a particular modus operandi prevalent in a segment of the market, every transaction displaying some features associated with that modus operandi can be discarded without establishing its connection with the particular assessee. General investigation material may furnish a legitimate basis for initiating enquiry and subjecting a transaction to closer scrutiny; but for sustaining an addition after such enquiry, there has to be some evidentiary link connecting that material with the assessee and the transactions sought to be disbelieved. It is precisely on this

The Assessing Officer has referred to the statements of Shri Sanjay Kumar Paliwal and Shri Harshvardhan Kayan and the Investigation Wing’s findings concerning bogus loss/gain transactions. However, neither from the assessment order nor from any material brought before us has it been demonstrated that either of these persons named the assessee, identified any of its transactions or stated that the assessee was a participant in a predetermined arrangement. There is no finding identifying the counterparty to any particular transaction and establishing a connection between such counterparty and the assessee; no correspondence, communication or other material evidencing a prior arrangement has been brought on record; no flow of unaccounted consideration from or to the assessee has been demonstrated; nor has any adverse finding by SEBI or the concerned stock exchange qua these particular transactions been shown. The Assessing Officer’s proposition that an artificial loss in one hand would have a corresponding artificial profit in another may explain the mechanics of a possible accommodation arrangement, but it does not establish that the profit earned by this assessee constituted the corresponding artificial profit generated under such arrangement. That crucial link had to emerge from material

It is also pertinent that the information which triggered the proceedings proceeded substantially on the premise that the assessee was a beneficiary of fictitious losses generated through manipulated option transactions, whereas during reassessment it emerged that the assessee had not claimed such F&O loss and had, on the contrary, recorded substantial F&O profit. The Assessing Officer thereafter proceeded on the premise that the profit itself represented the other side of the alleged accommodation mechanism. Such a possibility could certainly have been investigated, but it required an enquiry directed towards establishing that the assessee’s particular profit was generated as part of that mechanism. Instead, the ultimate conclusion continued substantially to rest upon the generalized investigation material. The net profit of ₹1,57,29,855 also stands reconciled with the gross figure of ₹1,57,48,000 after accounting for brokerage and statutory transaction charges, and no defect has been demonstrated in this reconciliation. Nor has the Assessing Officer identified any falsity in the specific contract notes, broker ledger or banking entries. Therefore, while the Investigation Wing information provided sufficient cause for scrutiny of the transactions, the enquiry did not yield the further material

We further find that the impugned amount was not an unexplained credit standing independently in the assessee’s books for which no underlying source or transaction had been disclosed. Its genesis was specifically identified as the result of F&O transactions and the corresponding transactional documents were placed before the Assessing Officer. Indeed, the Assessing Officer himself recognised the accounting presence of the derivative profit by first reducing ₹1,57,48,000 from the business income and thereafter bringing exactly the same amount back under section 68. What has effectively been done, therefore, is to recharacterise an already recorded business receipt as unexplained cash credit so as to subject it to the treatment under section 115BBE. Such recharacterisation could have been justified if material had been brought on record establishing that the ostensible derivative profit was merely a device for introducing the assessee’s unexplained money. However, in the absence of any identified counterparty nexus, prior arrangement, unaccounted money trail, adverse finding in respect of the particular trades or other assessee-specific evidence, the apparent source disclosed in the books cannot be treated as false merely by referring back to the general investigation which had occasioned the enquiry.

The aforesaid conclusion also finds support from the coordinate Bench decisions considered by the learned CIT(A). In DCIT v. Jainam Investments, the Tribunal, while examining derivative transactions questioned on the basis of Investigation Wing material, noticed that the assessee had produced the broker’s ledger, contract notes, bank statements and details of margin payments and that there was no material establishing reversal or matched transactions, collusion or pre-arrangement with any counterparty, or any assessee-specific investigation capable of dislodging the documentary evidence. The Tribunal accordingly held that general investigation findings, in the absence of a live nexus with the transactions of the particular assessee, could not by themselves render otherwise documented and verifiable trades non-genuine. Similarly, in ACIT v. Vinay Ramanlal Shah, while dealing with transactions questioned on the basis of Project Falcon, the coordinate Bench found that no incriminating material had been brought on record demonstrating any connection between the assessee and the counterparties or showing that the particular transactions were sham or pre-arranged; whereas the contract notes, bank statements, margin payments and broker accounts furnished by the assessee remained unrebutted. The Tribunal also noticed that the very SEBI ad-interim order forming an important part of the foundation of the addition had

Thus, when the material on record is viewed cumulatively, we find that the learned CIT(A) has not deleted the addition merely on the premise that transactions routed through a recognised stock exchange and banking channels must necessarily be accepted as genuine. His conclusion rests upon the more fundamental fact that the assessee had produced contemporaneous and verifiable evidence supporting the transactions, including the contract notes, broker ledger, bank statements and financial accounts; the difference between the gross figure of ₹1,57,48,000 considered by the Assessing Officer and the net F&O profit of ₹1,57,29,855 reflected in the books stood duly reconciled through brokerage and other transaction charges; and none of these primary evidences was found to be false or defective. Against this documentary trail, the Revenue has relied upon the Investigation Wing material and statements concerning the

Accordingly, on the facts and material placed before us, we do not find any infirmity in the finding of the learned CIT(A) deleting the addition of ₹1,57,48,000 made by the Assessing Officer under section 68 of the Act. The assessee had discharged the initial onus by producing contemporaneous evidence explaining the nature and source of the impugned credit as profit arising from recorded F&O transactions. If the Revenue sought to disregard the apparent character of those transactions and treat the profit as a mere device for introducing unexplained money, the burden thereafter was upon it to bring some cogent material connecting the assessee with the alleged manipulative arrangement. No such material has been brought on record.

In the result, the appeal filed by the Revenue is dismissed.