LAURELS PROPERTIES PRIVATE LIMITED,DELHI vs. DCIT CC-1(4), MUMBAI

Date of Hearing 05.06.2025 Date of Pronouncement 04.09.2025 आदेश / ORDER

PER SANDEEP GOSAIN, JM:

1. On the facts and in the circumstances of the appellant's case and in law, the Ld. Commissioner of Income Tax (Appeals) erred in not quashing the assessment order passed u/s 143(3) r.w.s. 147 of the Income Tax Act, 1961 [hereinafter referred to as 'the Act'] despite the fact that re-opening was illegal, bad-in- law or otherwise void for want of jurisdiction.

2. On the facts and in the circumstances of the appellant's case and in law, the Ld. Commissioner of Income Tax (Appeals) erred in not treating the re-opening of assessment as bad-in-law since the re-opening was entirely based on borrowed satisfaction and without application of mind or independent enquiries on the part of the Ld. Assessing Officer.

3. On the facts and in the circumstances of the appellant's case and in law, the Ld. Commissioner of Income Tax (Appeals) erred in not quashing the assessment order as the assessment was re-opened merely on the basis of information received from Investigation Wing and SEBI Interim Order, which was under a different law with a different purpose and which was subsequently set aside and no independent enquiry was made by the Ld. Assessing Officer before the re-opening of assessment proceedings to translate the information into a 'reason to believe' or even before passing the assessment order.

4. On the facts and in the circumstances of the appellant's case and in law, the Ld. Commissioner of Income Tax (Appeals) erred in upholding the disallowance of set off of loss of Rs 1,93,37,131/- made by the Assessing Officer in the impugned assessment order, incurred on account of in trading in stock options by treating the same as bogus even though the sale / purchase was made in the normal course of business through online transactions on recognized stock exchange in the prescribed and legal manner as a bonafide trader without any acquaintance with counter parties to the transaction and the Ld. Commissioner of Income Tax (Appeals) ignoring the decision of Hon'ble Income Tax Appellate Tribunal Delhi, in the Assistant Commissioner of Income Tax [2020] 120 taxmann.com 422 (Delhi - Trib.) provided in the paper book and the reliance on decision of Hon'ble Apex Court in Rakhi Trading P Limited was misplaced and irrelevant as the said judgement of the was rendered under the Securities Exchange Board of India Act, 1992 and not under Income Tax Act, 1961.

5. On the facts and in the circumstances of the appellant's case and in law, the Ld. Commissioner of Income Tax (Appeals) erred in upholding the disallowance of set off of loss of Rs 1,93,37,131/- made by the Assessing Officer disregarding the relevant supporting documents in the form of demat statement, ledger, financial statements and bank statement furnished by the appellant during the course of assessment proceedings, thereby discharging the onus cast on the appellant.

6. On the facts and in the circumstances of the appellant's case and in law, the Ld. Commissioner of Income Tax (Appeals) erred in upholding the disallowance of set off of loss of Rs 1,93,37,131/- made by the Assessing Officer by relying on the statement of Shri Arun Shah, Director of M/s Aryav Securities Private Limited (the alleged accommodation entry provider) even though he had not stated anything incriminating as regards the transactions by the appellant company.

7. On the facts and in the circumstances of the appellant's case and in law, the Ld. Commissioner of Income Tax (Appeals) erred in upholding the disallowance of set off of loss of Rs 1,93,37,131/- made by the Assessing Officer without providing copy of statement of Shri Arun Shah relied upon by him and without providing an opportunity to cross-examine Shri Arun Shah despite repeated requests, which is therefore highly preposterous and lacks evidentiary value against the principles of natural justice.

8. On the facts and in the circumstances of the appellant's case and in law, the Ld. Commissioner of Income Tax (Appeals) erred in upholding the addition of Rs 3,86,743/- made by the Assessing Officer on account of alleged ad-hoc commission @2% on the amount of alleging the loss incurred, treating the transaction as a bogus accommodation entry.

9. On the facts and in the circumstances of the appellant's case and in law, the Ld. Commissioner of Income Tax (Appeals) erred in upholding the disallowance of set off of loss of Rs 1,93,37,131/- and addition of commission of Rs 3,86,743/- made by the Assessing Officer in absence of any incriminating material / evidence against the appellant company solely on the guesswork of prior meeting of minds, suspicion, assumption, presumption, surmises and conjectures.

10. On the facts and in the circumstances of the appellant's case and in law, the Ld. Commissioner of Income Tax (Appeals) erred in upholding the disallowance of set off of loss of Rs 1,93,37,131/- and addition of commission of Rs 3,86,743/- made by the Ld. Assessing Officer without there being any evidence for payment of cash by the appellant company or receipt of any money by the alleged entry provider or any person from the appellant company i.e. without establishing a cash trail for receipt / payment of cash in lieu of alleged accommodation entries or on account of payment of commission by the appellant company.

11. The appellant craves leave to add to, alter, amend, modify and/or delete all or any of the foregoing grounds of appeal.

2. As per the facts of the present case the assessee is a Private Limited Company and filed its return of income for A.Y. 2015-16 on 30.09.2015, thereby declaring total income at Rs.18,35,140/-. However on the basis of information received from DDIT(Investigation), Unit-6(4), Mumbai to the effect that various entities were involved in coordinated and premeditated trading on the Bombay Stock Exchange by engaging in reversal trades in illiquid stock options and currency options resulting in generating non-genuine business loss/gains. As per AO the assessee was one of the beneficiaries indulged in the above- mentioned activity and generating bogus losses. Therefore the case of the assessee company was reopened u/s 147 of the Act. It was also noticed by the AO that from the data available on record, the assessee has purchased and sold stock options on BSE resulting in loss of Rs 1,93,37,131/- for AY 2015-16.

3. Thus while relying upon the interim order dated 20.08.2015 of SEBI, decision of Hon’ble Supreme Court in Rakhi Trading Private Limited delivered on 08.02.2018 in CA No 1969 of 2011 and third party statement of one Shri Arun Shah, director of share broking firm M/s Aryav Securities P Limited. It was concluded that the assessee had befitted from engaging in reversal trades in illiquid stock options on BSE resulting in non- genuine loss amounting to Rs 1,93,37,131/- and has incurred cash expenses amounting to Rs 3,86,743/- towards commission for the year under consideration.

4. The order of assessment was challenged by the assessee, however the Ld.CIT(A) dismissed the same. Against this order of dismissal, the assessee has preferred the present appeal before us on the grounds mentioned herein above.

5. All the grounds raised by the assessee are interrelated and interconnected and relates to challenging the order of CIT(A) in upholding the order of AO on various grounds as mentioned in the grounds of appeal, therefore we have decided to adjudicate these grounds through the present consolidated order.

6. Ld. AR appearing on behalf of the assessee while relying upon its written submissions also reiterated the same arguments as were raised by him before the revenue authorities and submitted that the reopening and consequently the order of the assessment was illegal, bad in law and without jurisdiction. It was submitted that the reopening was entirely based on borrowed satisfaction and without application of mind or independent enquiries on the part of the AO. It was further argued that the assessment was re-opened merely on the basis of information received from Investigation Wing and SEBI Interim Order, which was under a different law with a different purpose and which was subsequently set aside and no independent enquiry was made by the AO before the re- opening of assessment proceedings to translate the information into a 'reason to believe' or even before passing the assessment order. Apart from the above, it was also argued Ld. CIT(A) erred in upholding the disallowance of set off of loss of Rs 1,93,37,131/- made by the AO in the assessment order, incurred on account of trading in stock options by treating the same as bogus even though the sale / purchase was made in the normal course of business through online transactions on recognized stock exchange in the prescribed and legal manner as a bonafide trader without any acquaintance with counter parties to the transaction and thus Ld. CIT(A) while ignoring the decision of the Coordinate Bench of the ITAT in the case of the Assistant Commissioner of Income Tax [2020] 120 taxmann.com 422 (Delhi - Trib.) and even the reliance on the decision of Hon'ble Apex Court in the case of Rakhi Trading P Limited was misplaced and irrelevant as the said judgement was rendered under the Securities Exchange Board of India Act, 1992 and not under Income Tax Act, 1961. It was also submitted that Ld. CIT(A) erred in upholding the disallowance of set off of loss of Rs 1,93,37,131/- made by the AO by relying on the statement of Shri Arun Shah, Director of M/s Aryav Securities Private Limited (the alleged accommodation entry provider) even though he had not stated anything incriminating as regards the transactions by the assessee. It was submitted that the disallowance of set off of loss of Rs 1,93,37,131/- made by the AO was without providing copy of statement of Shri Arun Shah relied upon by him and without providing an opportunity to cross-examine Arun Shah despite repeated requests, which is against the principles of natural justice. It was argued the addition of Rs 3,86,743/- made by the AO on account of alleged ad-hoc commission @ 2% on the amount of alleging the loss incurred, treating the transaction as a bogus accommodation entry was wrong.

7. On the other hand Ld. DR relied upon the orders passed by the revenue authorities and also its written submissions and the same is reproduced herein below:

1. This synopsis is compiled as per direction given in the hearing held on 05/06/2025.

8. The Ld.CIT(A) has made some important observations regarding the trade done by the appellant in various scrip's. It is observed that the appellant has entered into contract EQUOPTABNV30APR2015-1650- CE it is noted that the buy order time is 12:38:54, at a rate of Rs.64/-, while the 'sell' is done in the very next minute at 12:39:54 at Rs.26/-.Again 'buy' is done in the very next minute of 'buy' is done at rs.54.50/- at 12:40:37, while 'sell' is done at Rs.15/- at 12:05:25 i.e within 10 seconds of buy and at Rs.28/- at 12:41:11 i.e within 30 seconds of buy similarly other trades are done in similar manner reversal buy/sell trade are done within a period of seconds without much time lag. Such precise synchronization in placement of buy/sell orders by appellant and its counterparty to match trades have shown substantial variation in prices leading to huge losses to the appellant and big gains for its counter party. Hence, it is not mere coincidence that assesse could match its trades with the same counterparties with whom it had undertaken first leg of the respective trades.

9. Further, these reversal trades were not undertaken in normal course of trading, as the same were reversed by the appellant in a matter of few seconds and that too, at such low prices that it lead to consistent losses every time. It is seen that the appellant indulged in repeated reversal of trades through synchronized placement of orders with counterparties in pre- determined manner resulting into generation of artificial volumes.

11. Also placing reliance on SEBI vs. Kishore R Ajmera in civil appeal no.2818 of 2008 decided on February 23.2016 A proof may have to be inferred by a logical process of reasoning from the totality of the attending facts and circumstances surrounding the allegations / charges made and leveled'. 12. We would also like to place some additional evidences under section 254 read with rule 29 of IT Act, 1961 for substantial cause. Kindly Hon'ble members accept our prayer for addition of additional evidence. 13. The additional evidence contains SEBI order no. KS/AA/2019-20/3407 dated on 13 June, 2019 SEBI conducted an investigation into the trading activities of Rector Investment Pvt Ltd.in illiquid stock options at BSE for the period 1st April, 2014 to 30th September, 2015.[ The first trade is reversed on 27/03/2015 by the assesse which is directly linked to the order]. 14. In the same order Para no.22 pg no.37 states: The trading behavior of the Noticee confirms that such trades were not normal and wide variation in prices of the trades in the same contract in a short time without any basis for such wide variation, all indicate that the trades executed by the Notices were not genuine trades and being non-genuine, created an appearance of artificial trading volumes in respective contracts it is worth considering that entities involved in these non- genuine trades have either booked gains or loss and the gains or loss appears to be of notional in nature. [PARA 28 pgno.41] Generally, there is nil or negligible participation of the public in the trading in illiquid stock option contracts. Hence, the impact of these non-genuine trade has been considered. When the impact of artificial volume created by the two counterparties is seen as a whole, it is not possible from the material on record to quantify the amount of disproportionate gain or unfair advantage resulting from the artificial trades between the counter parties or the consequent loss caused to investors as a result of the default. The Noticee has entered into 2,319 non genuine trades in 118 stock option contracts which demonstrates the repetitive nature of the default on its part.

15. The copy of SEBI order dated 13 June,2019 is attached herewith to accept our submission. It is our humble your prayer to the Hon'ble ITAT members.

10. We further noticed that the assessee vide letter dated 08.02.2022, also requested the AO to provide the following documents as relied upon by the AO:

i. Copy of information report received from the office of the DDIT (Investigation), Unit- 6(4), Mumbai. ii. Copy of Statement of Shri Arun Shah which proves that the appellant company is involved in reversal trading and cross examination of such persons. iii. Copy of proposal letter and approval given by PCIT on such proposal given by PCIT on such proposal as required u/s 151 of the Act.

i. Ledger account of appellant company in the books of the broker. (copy enclosed at page number 88 of the Factual Paper book) ii. Contact notes for purchase and sale of options. (copy enclosed at page number 89-97 of the Factual Paper book) iii. Bank account statement highlighting payment to broker on account of net settled amount. (copy enclosed at page number 98 of the Factual Paper book)

“14.3 The A.O. however relied upon ad-interim order of the SEBI dated 20/22-8-2015 in which it was found prima facie that profit making entities were deliberately making repeated losses through their reversal trading in stock option which do not make economic sense and facilitating their counter parties, thus, contravening the provisions of SEBI Act and restrain such entities from buying or selling or dealing in the Securities Markets and their objections were called for. The A.O. further referred to the Order of the SEBI dated 22-8-2016 in which SEBI released the confirmatory order and interim order was diluted with permission to the assessee and others for dealing in the scrips. It was further directed in the said order that these directions shall continue to be in force till further directions. These facts clearly show that the ad- interim order of the SEBI was passed without hearing the objections of the assessee and when objections of the assessee were considered, the interim order was diluted by giving permission to the assessee to deal in the transactions. Ultimately, both the orders of the SEBI relied upon by the A.O. have been vacated by the SEBI vide order dated 5-4 2018. Thus, there were no material available with the authorities below so as to conclude that assessee has entered into any dubious or other transactions deliberately to show business loss. In such circumstances, it was imperative on the part of the authorities below to examine the issue on merit and to decide whether assessee has suffered genuine business losses out of the transactions/trades in question. However, the authorities below did not examine the issue on merits and merely relying upon the ad-interim order concluded the issue against the assessee. It is also clear from these facts that the ad-interim order which was passed exparte - Whether would disclose any binding precedent or ratio which may be binding on the Income-tax Department?". In our humble view, it would not be binding precedent. It may create some suspicion or doubt. It is well settled Law that "suspicion howsoever strong may be but it cannot take place of legal proof." The Ld. D.R. submitted that if the test of human probability is applied to the facts and circumstances of the case, it would prove that assessee has not suffered genuine business loss. However, such a principle is to be applied to weigh the evidences of either side and draw a conclusion in favour of the party which has more favourable factors in his side. Further in the present case the findings of the A.O./Ld. CIT(A) are merely based upon the findings given by the SEBI in ad-interim order and subsequent order which have been vacated subsequently by the SEBI. Even such orders cannot be relied upon at this stage as there were nothing against the assessee so as to conclude that assessee has not suffered genuine business loss because the SEBI itself have mentioned in its Orders that the issue will require detailed verification from the Income-tax Department. The issue before the SEBI Authorities were in fact violation of SEBI provisions and Rules and they have not adjudicated upon if there were any violation of the Income-tax provisions which they also were not competent to deal with it. Therefore, reliance placed by the A.O. of such Orders which are ultimately vacated was totally misplaced and cannot be read against the assessee.

14.4 The Ld. D.R. also relied upon the Judgment of the Hon'ble Supreme Court in the case of Rakhi Trading (P.) Ltd., (supra). In this case the issue was against the Traders and Brokers for violation of Regulation of SEBI

Act and relating to synchronized trading in which the penalty was imposed under section 15HA of the SEBI Act against the respondent company which was set aside by the Securities Appellate Tribunal ("SAT") and SEBI has preferred an appeal before the Hon'ble Supreme Court. It is a concurrent Judgment of the Hon'ble Judges of the Hon'ble Supreme Court dated 8-2-2018. The appeal against the Traders were allowed and Orders of the SAT are set aside and the Order of the SEBI was restored. However, the appeals filed against the Brokers were dismissed. In para 20 of the subsequent concurrent order, the Hon'ble Supreme Court held as under:

"20. The question whether there was fictitious transactions creating illegal synchronization has to be gathered from the facts and circumstances and intention of the parties. Acting in concert is something about which it is difficult to obtain direct evidence. Proof of manipulation might depend upon inferences drawn from factual details. Such inferences could be gathered from pattern of trading data and the nature of the transactions etc."

14.5 In para 45 the Hon'ble Supreme Court further held as under:

"45. No grounds have been raised in the show cause notice alleging that the impugned fictitious transactions have been entered into with a view to avoid payment of tax and was an act of tax planning. Adjudicating officer also has not gone into this aspect. Hence, I am not inclined to go into this aspect, whether the impugned transactions were intended to reduce the brunt of taxation and an act of tax planning. The correctness of findings of SAT in the case of Viram Investment (P.) Ltd. is left open."

14.6 The issue in appeal regarding violation of provisions of SEBI Rule was decided based on the facts and circumstances available on record and intention of the parties and ultimately the issue with regard to avoidance of payment of tax and act of tax planning was not adjudicated because the Adjudicating Officer has not gone into this aspect. However, in the present case, the A.O./Ld. CIT(A) have not gone into the facts and material evidence on record and merely referring to the interim order of the SEBI and subsequent order have decided the issue against the assessee. Since in the case of Rakhi Trading (P.) Ltd., (supra), the issue under Income-tax Act was also not adjudicated upon, therefore, in our humble opinion the decision in the case of Rakhi Trading (P.) Ltd., (supra), would not support the case of Revenue.

14.7 Considering the totality of the facts and circumstances of the case in the light of material/evidences available on record and in the absence of any investigation carried-out by the authorities below, we are of the view that assessee has been able to establish that assessee company has suffered genuine business loss as had also been suffered in earlier years, therefore, authorities below should not have disallowed the same against the assessee. In view of the above f indings, we set aside the Orders of the authorities below and delete the entire addition. In the result, Ground No. 1 of the appeal of Assessee is allowed.”

It is well settled Law that "suspicion howsoever strong may be but it cannot take place of legal proof." The Ld. D.R. submitted that if the test of human probability is applied to the facts and circumstances of the case, it would prove that assessee has not suffered genuine business loss. However, such a principle is to be applied to weigh the evidences of either side and draw a conclusion in favour of the party which has more favourable factors in his side. In the present case the findings of the A.O./Ld. CIT(A) are merely based upon the findings given by the SEBI in ad-interim order and what happened finally has not been mentioned anywhere throughout the assessment order. Even such order cannot be relied upon at this stage as there were nothing against the assessee so as to conclude that assessee has not suffered genuine business loss. As it was further Income-tax department to carryout detailed verifications, thus it is clear from the records that the issue before the SEBI Authorities were in fact violation of SEBI provisions and Rules and they have not adjudicated upon if there were any violation of the Income-tax provisions which they also were not competent to deal with it. Therefore, reliance placed by the A.O. of such Orders totally misplaced and cannot be read against the assessee.

Although Ld. D.R. also relied upon the Judgment of the Hon'ble Supreme Court in the case of Rakhi Trading (P.) Ltd., (supra), However in this case the issue was against the Traders and Brokers for violation of Regulation of SEBI Act and relating to synchronized trading in which the penalty was imposed under section 15HA of the SEBI Act against the respondent company which was set aside by the Securities Appellate Tribunal ("SAT") and SEBI has preferred an appeal before the Hon'ble Supreme Court. It is a concurrent Judgment of the Hon'ble Judges of the Hon'ble Supreme Court dated 8-2-2018. The appeal against the Traders were allowed and Orders of the SAT are set aside and the Order of the SEBI was restored. However, the appeals filed against the Brokers were dismissed. In para 20 of the subsequent concurrent order, the Hon'ble Supreme Court held as under:

"20. The question whether there was fictitious transactions creating illegal synchronization has to be gathered from the facts and circumstances and intention of the parties. Acting in concert is something about which it is difficult to obtain direct evidence. Proof of manipulation might depend upon inferences drawn from factual details. Such inferences could be gathered from pattern of trading data and the nature of the transactions etc."

In para 45 the Hon'ble Supreme Court further held as under:

"45. No grounds have been raised in the show cause notice alleging that the impugned fictitious transactions have been entered into with a view to avoid payment of tax and was an act of tax planning. Adjudicating officer also has not gone into this aspect. Hence, I am not inclined to go into this aspect, whether the impugned transactions were intended to reduce the brunt of taxation and an act of tax planning. The correctness of findings of SAT in the case of Viram Investment (P.) Ltd. is left open."

The issue in appeal regarding violation of provisions of SEBI Rule was decided based on the facts and circumstances available on record and intention of the parties and ultimately the issue with regard to avoidance of payment of tax and act of tax planning was not adjudicated because the Adjudicating Officer has not gone into this aspect. However, in the present case, the A.O./Ld. CIT(A) have not gone into the facts and material evidence on record and merely referring to the interim order of the SEBI have decided the issue against the assessee. Since in the case of Rakhi Trading (P.) Ltd., (supra), the issue under Income-tax Act was also not adjudicated upon, therefore, in our humble opinion the decision in the case of Rakhi Trading (P.) Ltd., (supra), would not support the case of Revenue.

Therefore considering the totality of the facts and circumstances of the case in the light of material/evidences available on record and in the absence of any investigation carried-out by the authorities below, we are of the view that assessee has been able to establish that assessee company has suffered genuine business loss, therefore, authorities below should not have disallowed the same against the assessee. In view of the above findings, we set aside the Orders of the authorities below and delete the entire addition.

i. Decision of Hon’ble Delhi High Court in the case of Sabh Infrastructure Limited v. ACIT reported in 99 taxmann.com 409 (Delhi), the facts of the case are that where during assessment proceedings, assessee had disclosed all relevant information regarding companies from which it had received share application money and Assessing Officer had not doubted such transaction, mere statement of an entry operator that companies in question were 'paper companies', by itself was insufficient to reopen assessment, unless Assessing Officer had further information that those companies were non-existent after making further inquiries into matter. ii. Decision of Hon’ble Jurisdictional Bombay High Court in the case of Rita Rajkumar Singh Vs. Assistant Commissioner of Income Tax., the facts of the case are thatwhere assessment was sought to be reopened in case of assessee on ground that assessee had done transactions in shares of 'F', which was a penny stock company traded in Bombay Stock Exchange, however, there was no allegation at all in reasons recorded for reopening that assessee was mastermind or actively involved in rigging of share price of 'F' in stock market and assessee having admitted that it had traded in 'F' and even provided documents thereto during assessment, there being no failure to truly and fully disclose material facts, reopening of assessment after four years was not justified. iii. Decision of Hon’ble High Court of Gujarat in the case of Nila Infrastructures Ltd. Vs. Assistant Commissioner of Income., the facts of the case are that the Assessing Officer issued reopening notice on assessee company on ground that assessee was involved with a company which was engaged in issuing bogus bills to various entities, since said reason for reopening was based on borrowed view of ITO, Kolkata in case of different assessee and there was no independent finding of Assessing Officer stating any failure on part of assessee, impugned reopening to fish out evidence was impermissible and arbitrary.

21 Therefore, keeping in view the entire facts and circumstances and also the legal prepositions, as discussed by us above, we are of the view that the additions of Rs 1,93,37,131/-made on account of disallowance of set off of loss and addition of Rs 3,86,743/- made u/s 69C of the Act are not in accordance with the provisions of law, thus the same are directed to be deleted. Consequently, the grounds raised by the assessee are allowed.

22 In the result, the appeal filed by the assessee stands allowed.

Order pronounced in the open court on 04.09.2025 Sd/- Sd/- (PRABHASH SHANKAR) (SANDEEP GOSAIN) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai, Dated 04/09/2025 KRK, PS आदेश की �ितिलिप अ�ेिषत/Copy of the Order forwarded to : अपीलाथ� / The Appellant 1. ��थ� / The Respondent. 2. संबंिधत आयकर आयु� / The CIT(A) 3. आयकर आयु�(अपील) / Concerned CIT 4. िवभागीय �ितिनिध, आयकर अपीलीय अिधकरण,मु�बई/ DR, ITAT, Mumbai 5. गाड� फाईल / Guard file. 6. आदेशानुसार/BY ORDER, स�ािपत �ित //True Copy//