INCOME TAX OFFICER, MUMBAI vs. EVERFINE ALLOYS PRIVATE LIMITED, MUMBAI

The genesis of the present reassessments lies in certain information emanating from the Investigation Directorate, Mumbai. A search and survey operation had been carried out on 19/03/2019 in the case of Shri Naresh Jain and his associates. The thrust of that action was on unearthing accommodation entries, whereby Shri Naresh Jain was allegedly engaged in providing contrived long-term capital Everfine Alloyes Pvt. Ltd., gains and artificial losses through manipulation of certain penny stock scrips to a host of beneficiaries across the country. In the course of these proceedings, it was revealed that the scrip Nysaa Corporation Ltd. (scrip code 504378) was one of the counters used by Shri Naresh Jain as an instrument for such accommodation entries. 4.1. The materials gathered during the search were supplemented by the sworn statement of Shri Naresh Jain recorded under section 132(4), wherein he admitted to having manipulated the share prices of various companies, including Nysaa Corporation Ltd., for the avowed purpose of generating book entries of long-term capital gains and short-term capital losses for beneficiaries. It was this broad revelation that formed the sole foundation for the reopening of assessments in the case of the present assessee, even though the assessee’s own transactions were always disclosed as business income and not as exempt capital gains.

In the reasons recorded for reopening, the learned AO has incorporated, almost wholesale, the statements of various persons recorded during the course of the search on Shri Naresh Jain and his associates. These statements, running into several pages, formed part of the dossier prepared by the Investigation Wing. Proceeding on the strength of this material, the AO concluded that there was reason to believe that income had escaped assessment in the case of the assessee. Specifically, he alleged that in A.Y. 2013–14 the assessee had transacted in the scrip of Nysaa Corporation Ltd. for a sale value of Rs. 2,81,42,649/-, which according to Everfine Alloyes Pvt. Ltd., him had escaped assessment. Similarly, for A.Y. 2014–15, the figure was pegged at Rs. 1,42,00,711/-, and for A.Y. 2015–16 at Rs. 1,22,36,335/-. It is noteworthy that the reasons recorded in all three years were identically worded. Thus, the very foundation of the reopening lay entirely in the information/report furnished by the Investigation Wing, buttressed by certain third-party statements, to the effect that the scrip of Nysaa Corporation Ltd. had been used by entry operators for providing bogus accommodation entries of long-term capital gains and short-term capital losses.

In the subsequent reassessment orders, the learned AO went a step further. He incorporated verbatim the statement of Shri Rakesh Shah recorded under section 132(4) on 19/03/2019 during the search in the case of Shri Naresh Jain. This very statement had also been annexed to the reasons recorded. Alongside, the AO referred to notices that had been issued under section 133(6) by the Investigation Wing (and not by the AO himself) to the Bombay Stock Exchange, seeking details of brokers and counterparties engaged in the trading of the impugned scrip, as well as of the persons who had purchased shares of Nysaa Corporation Ltd. during the relevant period. The Investigation Wing compiled a list of 22 such parties. Out of these, 13 failed to respond altogether; two merely sought adjournments; one categorically denied having had any transaction in the said scrip; and only seven furnished replies of some sort. On this rather incomplete canvas, the Investigation Wing remarked that the full details were not forthcoming to enable a logical Everfine Alloyes Pvt. Ltd., conclusion. Yet, the AO, proceeding entirely on this limited material, presumed that the transactions entered into by the assessee were dubious and lacking in genuineness.

Apart from reproducing the investigation report, the learned AO noted that the share price of Nysaa Corporation Ltd. had witnessed a steep upward trajectory between 02/01/2013 and January 2014, followed by a sharp decline, and once again showed a spurt post-January 2017. He cursorily referred to the financial statements of the company and observed that there had been no substantial movement in its sales or profitability to justify such price fluctuations. From this, he inferred that the trading in the scrip lacked commercial rationale. 7.1. On this premise, and placing exclusive reliance upon the report of the Investigation Wing, the AO concluded that the assessee’s trading results in the scrip were not genuine. He further sought to fortify his conclusion by invoking the judgment of the Hon’ble Supreme Court in SEBI v. Rakhi Trading Pvt. Ltd. (dated 18/08/2018). However, that decision pertained to the issue of synchronised trades in the context of securities regulation, and bore no direct nexus either with the scrip of Nysaa Corporation Ltd. or with the factual matrix of the assessee’s case. Nevertheless, proceeding on this tenuous foundation, the AO treated the assessee’s profits and losses from trading in Nysaa Corporation Ltd. as unexplained income, and made additions under section 68. 7.2. The learned CIT(A), on the other hand, after calling for a remand report and considering the entirety of the assessee’s Everfine Alloyes Pvt. Ltd., submissions along with the material on record, arrived at a diametrically opposite conclusion. He passed separate orders for each year, but recorded a common finding that the trades were genuine. For the sake of ready reference, the finding in A.Y. 2013–14 is reproduced below, leaving space for its verbatim incorporation: Ground no. 4 and 5- Facts of the case and submission of the assessee have been examined. It is seen that the assessee had purchased 1,33,785 shares of Nysaa Corporation Ltd(formerly known as Ravinay Trading Company Ltd.)for a consideration of Rs. 6,99,33,899/- during the month of March 2013 (A.Y.2013-14). The said purchase was treated as inventory by the assessee in its books of accounts. Out of these shares, 89869 shares were sold by the assessee for Rs. 2,80,63,703/- in the same month and the assessee has shown business loss of Rs. 1,87,66,336/-in the said transaction. The AO in the assessment order has relied on the statements of various entry operators such as Shri. Naresh Jain, Shri. Rakesh Shah, Shri. Hemant Sheth, & Shri. Bhupesh Rathod. On the basis of the said statements, the AO concluded that M/s. Nyssa Corporation Limited has been used to provide accommodation entries to various persons. The AO has made an enquiry u/s 133(6) of the Act with Bombay Stock Exchange and with the purchasers of Nysaa Corporation Ltd and has also discussed the price movements in the shares of M/s. NyssaCorporationLtd.Thus,consideringallthematerialsonrecord, theAOmadeaddition of Rs. 1,87,66,336/-as unexplained cash credit on account of loss on sale of shares and has also added Rs. 67,67,000/- as unexplained cash credit on account of loss on revaluation of shares. 14.1 The assessee had filed detailed submissions wherein it has taken the following contentions: The appellant is engaged in the business of trading of i. alloys, shares, mutual funds and derivatives. The said shares were treated as inventory during the year under consideration. ii. Sales transaction has been carried out through recognised stock exchange and STT has duly been paid on the same. The Everfine Alloyes Pvt. Ltd., entire sale consideration was duly credited in the books of accounts of the appellant. The broker notes and bank statements were submitted before the AO. iii. The AO has nowhere pointed out any discrepancy in the documents submitted by the appellant. The genuineness of the share transaction was doubted with the predetermined mind set by purely relying on the information received from the investigation wing. iv. The AO has relied on the statements of various entry operators to which the appellant submits that the statement of the above persons have been recorded at the back of the appellant and no opportunity of cross examination has been provided to the appellant. Such statements were recorded in isolation and the appellant is not aware the condition and circumstances in which they were recorded. Also, the appellant is not aware of the subsequent fate of these statements as to whether these were subsequently altered or retracted. Further, no nexus has been established of such operators with the appellant. v. With regard to the enquiry with BSE and non-response of certain parties, the appellant submits that the shares are sold through the stock broker who is registered with the Stock Exchanges and are subject to SEBI Regulations. The recognised stock exchanges provide computer terminal where the transactions of purchase and sale of shares/securities are carried out through the terminals without any interference as to the parties trading. Thus, one who carries out thetransactiondoesnotknowwhoisthebuyerorselleroftheshares.F urther, with regard to non-response, the appellant submits that responding to a notice is at the discretion of the said person and is beyond the control of the appellant. Also, no legal action whatsoever has been taken by BSE Regardingjackingupofshareprice,theappellanthassubmitted vi. thattheprice fluctuation on stock exchange is not in the hands or control of the appellant. Secondly, the prices quoted on stock exchange are not purely based on EPS, financial health or net worth of the company. It also depends upon the potential prospects of the respective company for future growth, windfall in profits, increase in gross revenue, potential of turnaround, etc. The appellant has given examples of price rise of shares of Everfine Alloyes Pvt. Ltd., Satyam Computers Services Limited, Bombay Burmah Trading Corporation (BBTC), Graphite India Limited and HEG Limited. For this, the appellant has relied upon the judgment of the Hon’ble High Court of Delhi, delivered on 15.01.2021 in the case of PCIT v. Smt. Krishna Devi (ITA 125/2020). vii. The appellant has invested an amount of almost Rs. 7 Crs. in AY 2013-14 against which he has earned a reasonable profit of Rs.0.60 Crs. in AY 2014- 15 and Rs.0.20 Crs. in AY 2015- 16. Moreover, it has suffered loss of Rs. 1.87 Crs.inAY2013- 14.Therefore,itisnotacasewherethepriceofthescripthas jacked up several times which could have benefitted the appellant. viii. Regarding the inability of the AO to download the consolidated financials for period March 2012 to March 2016, the appellant submits that AO has himself reproduced the financial results of the company for each year in the order itself. In support of its contention, the appellant relied on the ix. following case laws: Here's your list with proper spacing between words for better readability: a) CIT vs. Shyam R. Pawar 54 Taxmann.com 108 (Bombay) b) ITO vs. Arvind Kumar Jain HUF** (Mumbai Tribunal) c) ITO vs. Indravadan Jain HUF ITA 4861/M/2014 (Mumbai Tribunal) d) Sunil Prakash vs. ACIT (Mumbai Tribunal) e) Pratik Suryakant Shah vs. ITO 77 Taxmann.com 260 (Ahmedabad Tribunal) f) ITO vs. Smt. Aarti Mittal 41 Taxmann.com 118 (Hyderabad Tribunal) g) Sunita Jain vs. ITO ITA No. 501-502/AHD/2016 (Ahmedabad Tribunal)

We have gone through the material placed on record, orders of the authorities below, judicial precedents in assessee’s own case as well as in the case of Munish Financials (supra) and have also considered the submissions made by both the parties before us, corroborated by material placed in the paper book. We find that the issue raised before us is squarely covered by the decision of Coordinate Bench in assessee’s own case for the same years though arising out of assessment made u/s. 143(3). Submissions made by the assessee in the original Everfine Alloyes Pvt. Ltd., assessment in respect of the conduct of its business, more particularly for the scrips in which assessee incurred business loss, has been held in favour of the assessee by the Coordinate Bench after considering all the explanations and submissions alongwith with corroborative material placed before it. The observations and findings arrived at by the Co-ordinate Bench applies mutatis mutandis on the two scrips for which disallowance has been made by the ld. Assessing Officer while making reassessment u/s.147 r.w.s. 143(3). Ld. Sr. DR states that in the present appeals, it is a case of reassessment arising out of information supplied by the Investigation Wing of the Department whereas which is not so in the order of Co-ordinate Bench in assessee’s own case against assessment orders u/s. 143(3). On this, we note that even in the original assessments, information had come from the Investigation Wing as observed by the Co-ordinate Bench in its order (supra). Unhesitatingly, we follow the observations and findings of the Coordinate Bench (supra) and do not find any reason to interfere in the findings arrived at by ld. CIT(A) while allowing the claim of the assessee.” 14.7 Further, I find that Mumbai Tribunal in the case of Mr.Mohammed Sajid Shahid Shaikh in ITANo.2119/M/2023 dated 31.10.2023 has rejected the addition merely based on statement of Naresh Jain and held as under:-: “7.The ld.CIT(A)has rightly and validly concluded that the source of purchase of shares is satisfactorily explained by the assessee. Moreover, when the assessee has not transferred the purchase amount for purchase of the shares he was not required to explain the source of income, moreover the loss suffered by the assessee is adjusted, and ought to be adjusted against the credit available with the broker. So the Ld. CIT(A) has rightly treated the addition made by the AO being based upon conjectures and presumption. Even otherwise there is no evidence on record if the assessee was engaged into the manipulation of share transaction of penny stock through Shri Naresh Jain and his syndicate.” 14.8. Further, I find that similar action of the AO in doubting the share transactions has been deleted in the case of director of the assessee company in the case of Nitin Chhatwal by Everfine Alloyes Pvt. Ltd., Mumbai ITAT vide their order in for AY 2012-13 dated 25.10.2021 wherein it was held as under:- “30. After hearing the rival contentions and perusing the material on record, we note that the assessee is a very high networth individual and is a regular investor. We note that during the year he has earned the huge capital gain income of more than Rs.200 crores. We furthe1r note that the assessee has submitted the documentary evidences before the AO such as bank statement, broker notes evidencing the share of the transaction in shares of Ken Financial Services Ltd and the A.O. has not doubted the purchase and sale of shares by the assessee. Besides on the basis of records before us we observe that the transactions have been carried out on the stock exchange. Moreover, there is no mention by either of the lower authorities that there is a statement by any broker which suggests that the transactions carried out by the assessee were bogus and non genuine transactions. We also note that a similar addition has been made in the assessee’s own case in A.Y. 2014-15, wherein the capital gain was termed as an accommodation entry which has been deleted by the ld. CIT(A) and the order of the ld. CIT(A) has been upheld by the Tribunal in vide order dated 08.06.2018. We also note that the assessee has revalued the Shares at the year end on the market value of the shares and recognised the loss in the profit and loss account in accordance with the accounting standard and therefore we do not find any anomaly in recognising the loss from revaluation of shares. Under these circumstances, keeping in view the assessee’s conduct, net worth and also the fact that the assessee has also filed evidences before the authorities below we are not in agreement with the conclusion drawn by the ld. CIT(A) on this issue. Accordingly, we set aside the order of the ld. CIT(A) and direct the AO to delete the disallowance. Ground No.7 is allowed.” 14.9. Therefore, taking into consideration the submissions of the assessee and the judicial decisions, it is held that the share transaction is genuine and hence, AO is directed to delete the addition of Rs. 1,87,66,336/- made u/s 68 of the IT Act as unexplained cash credit. Accordingly, ground no.4&5 of the appeal are Allowed.

Coming now to the addition of Rs. 67,67,000/- under section 68 in A.Y. 2013–14, the brief facts are that the assessee had booked a revaluation loss of the said amount on its closing stock of shares. The AO, however, neither dealt with the reasons for disallowing the revaluation loss nor pointed out any infirmity in the assessee’s accounting treatment. Proceeding solely on suspicion, and only because the scrip in question happened to be Nysaa Corporation Ltd., the AO disallowed the revaluation loss and treated it as unexplained income under section 68. The CIT(A), in contrast, found that the AO had not discussed any reason for denial, nor identified any discrepancy in the assessee’s accounting policy. Since he had already held that the transactions in the scrip were genuine, he concluded that the disallowance of the revaluation loss was merely consequential and thus unsustainable. He therefore directed deletion of the addition.

Before us, learned counsel for the assessee once again drew our attention to the financial statements for A.Ys. 2013– 14 to 2015–16, emphasising that the assessee is a regular trader, and even in the case of Nysaa Corporation Ltd. had conducted genuine trading, incurring losses in one year and booking profits in the others. This, it was urged, was not a case of bogus long-term capital gains or short-term capital Everfine Alloyes Pvt. Ltd., losses. On the contrary, income and losses from these shares were duly declared under the head “Business Income.” Counsel further pointed to contract notes, broker ledgers, and bank statements evidencing the purchase and sale transactions, all of which had been filed before the AO right from A.Y. 2013–14 to 2015–16. He emphasised that the sales were routed through recognised stock exchanges with STT duly paid, and the consideration credited to the assessee’s bank accounts. Samples of broker ledgers, contract notes and bank statements are placed in the paper book at pages 109– 206. 10.1. It was further submitted that the assessee’s business activities were not confined to one scrip or even to equity trading alone, but extended across F&O trading, currency derivatives, and commodity derivatives. The total trading volumes stood at Rs. 809.59 crores in A.Y. 2013–14; Rs. 52.39 crores in A.Y. 2014–15; and Rs. 37.40 crores in A.Y. 2015–16. The assessee had traded in hundreds of scrips besides Nysaa Corporation Ltd. The activity, counsel argued, clearly shows that the trading in Nysaa Corporation Ltd. was part of a continuous and regular business, and not an isolated or contrived transaction. Copies of the financial statements substantiating this are placed at pages 41–108 of the paper book.

It was further contended that the AO had not identified a single discrepancy in the voluminous documentary evidence submitted by the assessee. Instead, the AO approached the matter with a preconceived mindset, doubting the Everfine Alloyes Pvt. Ltd., genuineness of the trades solely on the basis of information received from the Investigation Wing. Reliance was placed on the statements of certain alleged entry operators. However, the assessee pointed out that these statements were recorded entirely behind its back, and no opportunity for cross- examination was ever afforded. The assessee was unaware of the circumstances in which such statements were recorded, or whether they were subsequently altered, clarified, or even retracted. 11.1. More importantly, even on a plain reading of the statement of Shri Naresh Jain, it emerges that he had only admitted to providing accommodation entries of bogus long- term capital gains and short-term capital losses. Such a statement, the assessee argued, had no relevance to its case, since it had never claimed exempt capital gains, but had only disclosed business income and losses from trading. Similarly, the allegation of price rigging was said to be irrelevant, as the assessee had not derived any abnormal profits or windfalls. On the contrary, it had invested nearly Rs. 7 crores and, over the span of three years, suffered a net loss of Rs. 1.55 crores. There was also no allegation, let alone proof, that the assessee was a participant in, or connected to, any price rigging arrangement. Thus, no nexus was established between the assessee and the alleged operators.

With regard to the enquiries made by the AO through the BSE and the alleged non-response of certain exit providers, the assessee submitted that such objections were wholly misconceived. It was pointed out that shares are bought and Everfine Alloyes Pvt. Ltd., sold only through registered stock brokers, functioning under the strict framework of SEBI Regulations. Recognised stock exchanges provide computerised trading terminals where purchase and sale transactions are executed in an automated manner, without either party having knowledge of the identity of the counterparty. Thus, the seller does not know who the buyer is, and vice versa. The assessee, therefore, cannot be faulted for the non-response of third parties to departmental notices. Whether or not a notice is replied to lies entirely within the discretion of the noticee and is wholly beyond the assessee’s control. It was further highlighted that the BSE has not initiated any legal action whatsoever in respect of Nysaa Corporation Ltd. and that the company continues to remain listed on the exchange even today.

The assessee also drew attention to the fact that its own case had been subjected to a search, followed by assessment under section 143(3) read with section 153A of the Act. In those proceedings, no incriminating evidence against the assessee was found or brought on record. On the contrary, the returns of income were accepted. This, it was argued, clearly demonstrated that no material had been unearthed to suggest that the assessee’s trades were bogus. In support, reliance was placed on the following judicial precedents: a) CIT v. Mukesh Ratilal Marolia (Bom HC, of 2007) b) CIT v. Shyam R. Pawar (54 taxmann.com 108, Bom HC) c) PCIT v. Ziauddin A. Siddique (Bom HC, of 2017)

The learned Departmental Representative, however, strongly supported the orders of the AO. He submitted that once the Investigation Wing had found that transactions in Nysaa Corporation Ltd. were manipulated by entry operators to provide accommodation entries, no trade in that scrip could be regarded as genuine. He drew our specific attention to the financial statements of the company and the trading data, arguing that the inference drawn by the AO from the Investigation Wing’s report was correct and well-founded. He further stressed that enquiries made from exit providers had, in most cases, gone unanswered, as notices issued under section 133(6) remained largely uncomplied with. According to him, these cumulative circumstances clearly proved that the transactions conducted by the assessee were not genuine. On this footing, the AO was justified in treating the profits and losses in the scrip as unexplained income under section 68.

The purchases were undertaken transparently through the online BSE portal, routed via a well-known registered broker, Shri Anand Rathi Share and Stock Brokers Ltd., on 05/03/2013 and 06/03/2013. The loss suffered in A.Y. 2013–14 was followed by modest recoveries in subsequent Everfine Alloyes Pvt. Ltd., years. In A.Y. 2014–15, the assessee booked profits in the following manner:- A.Y. Particulars Amount (Rs.) 2014–15 Sale of 21,916 1,41,60,593 shares (various dates & rates) Less: Cost of 81,52,752 Acquisition of 21,916 shares Business Profit 60,07,841

Again, in A.Y. 2015–16, the assessee realised a small profit as under: A.Y. Particulars Amount (Rs.) 2015–16 Sale of 2,20,000 1,22,02,176.43 shares (various dates & rates) Less: Cost of 1,02,19,000 Acquisition of 2,20,000 shares Business Profit 19,83,176.43

The computation statements evidencing the above trading results have been duly placed in the paper book. To substantiate these transactions, the assessee furnished contract notes issued by its broker, bank statements reflecting payments and receipts, broker ledgers, and other Everfine Alloyes Pvt. Ltd., supporting material. All trades were executed on the Bombay Stock Exchange and were subject to levy of STT. Yet, in his assessment order, the AO made no reference to, nor any examination of, this documentary evidence. Instead, his entire premise rested on the investigation report and the general observations made therein, without verifying the specific facts of the assessee’s case. 18.1. It is significant that the investigation report only alleged that the scrip of Nysaa Corporation Ltd. had been misused by certain entry operators for providing accommodation entries in the form of bogus long-term capital gains and short-term capital losses. In the present case, however, neither circumstance applies. The assessee has never claimed exempt long-term capital gains, nor has it set off any contrived short- term capital losses. On the contrary, it has consistently disclosed its trading results in this scrip as part of its regular business income, offering them transparently in the profit and loss account. This, therefore, is not a case of sham capital gains, but of genuine trading results declared under the business head. 18.2. Accordingly, the AO’s reliance on the alleged statement of Shri Naresh Jain and other materials in the investigation report is wholly misplaced. Not only do these statements not name the assessee, but they are also irrelevant to its factual situation. The AO has, thus, coloured his entire assessment with suspicion borrowed from the investigation report, without establishing any direct nexus between the assessee and the alleged operators.

We now turn to the addition of Rs. 67,67,000/- on account of revaluation loss in A.Y. 2013–14. As already noted, the AO has not explained why such revaluation loss should be denied. The assessee is engaged in the business of share trading, and the shares and securities are part of its stock-in- trade. It is a fundamental principle of accounting, codified in Accounting Standard–2, that stock-in-trade must be valued at cost or net realisable value, whichever is lower. 20.1. In the present case, the assessee had purchased shares of Nysaa Corporation Ltd. in early March 2013 at an average cost of approximately Rs. 520 per share. By the close of the financial year, in the last week of March, the market price had declined sharply to Rs. 372 per share. In these circumstances, recognition of revaluation loss was not merely permissible but mandatory under the governing accounting principles. The assessee accordingly recognised a revaluation loss of Rs. 67,67,000/-. 20.2. It is pertinent to note that this revaluation loss was subsequently neutralised when, in A.Ys. 2014–15 and 2015– 16, the assessee booked profits from sale of the same scrip, which were duly offered to tax. Thus, the accounting treatment was consistent, rational, and in accordance with established norms. The AO, however, chose to disallow the loss without giving any reason or pointing out any flaw in the accounting policy. Such an approach, in our view, cannot be Everfine Alloyes Pvt. Ltd., sustained. The CIT(A), in deleting the addition, has taken a correct view.

In light of the foregoing discussion, we hold that all the additions made by the AO under section 68, whether in respect of trading losses, trading profits, or revaluation losses, are unsustainable. The assessee has demonstrated with ample evidence that the transactions were genuine and part of its regular business, while the Revenue has failed to establish any nexus between the assessee and the alleged entry providers. The findings of the learned CIT(A), being reasoned and well-supported, call for no interference.

Accordingly, all the grounds raised