Loading judgment…
Facts
The Revenue appealed against the CIT(A)'s order deleting the addition of Rs. 1,65,86,250/- made on account of bogus loss claimed by the assessee. The reassessment was based on information that the assessee engaged in coordinated and pre-mediated trading, utilizing a broker involved in manipulating transactions to generate bogus losses.
Held
The Tribunal held that the AO heavily relied on investigation reports without independent verification or cogent evidence. The assessee had provided sufficient documentary evidence to substantiate the transactions, and the AO failed to demonstrate collusion or fraudulent intent. The denial of loss was not in accordance with law and judicial precedents.
Key Issues
Whether the loss claimed from derivative transactions, based on a broker's involvement in alleged manipulation, can be disallowed without specific evidence of collusion and fraudulent intent by the assessee.
Sections Cited
147, 144
AI-generated summary — verify with the full judgment below
Detected automatically from the text. The count shows how many other judgments on BharatTax rely on the same authority.
Before: SHRI SAKTIJIT DEY & SHRI PRABHASH SHANKAR
PER PRABHASH SHANKAR [A.M.] :- The present appeal is filed by the Revenue against the order passed by the Learned Commissioner of Income-tax (Appeals)/National Faceless Appeal Centre, Delhi [hereinafter referred to as “CIT(A)”] pertaining to assessment order passed u/s. 147 r.w.s. 144 of the Income- tax Act, 1961 [hereinafter referred to as “Act”] dated 26.05.2023 for the Assessment Year [A.Y.] 2015-16. P a g e | 2 A.Y. 2015-16 Haresh Shantichand Jhaveri
The grounds of appeal are as under:
Whether on the facts and circumstances of the case and in law, the Ld.CIT(A) erred in deleting the addition of Rs.1,65,86,250/-made on account of bogus loss claimed by the assessee.
Whether on the facts and circumstances of the case and in law, the Ld.CIT(A) erred in deleting the addition of Rs.1,65,86,250/-without considering the fact that during the course of survey proceedings, the brokers have admitted in statements under oath regarding the modus operandi and their role in the scheme of bogus profit loss through derivatives and the assessee has utilised the services of one such broker, M/s. Trinay Securities Trading Pvt. Ltd., which was involved in manipulating such transactions for the benefit of its members.
Facts in brief are that assessee’s case was re-opened u/s 147 on the basis of actionable information received from the Insight Portal that there was coordinated and pre-mediated trading on BSE and USE by engaging in ‘reversal trade’. It was found that he was also the beneficiary of non-genuine profit/loss through illiquid derivatives on Stock Exchange. The AO has also mentioned the ‘Project Falcon Report’ prepared by investigation wing, Mumbai which was constituted to establish the veracity of claim of losses and to unearth the modus operandi of coordinated and pre-mediated trading in illiquid stock options. Further, AO noted that in the course of investigation carried out by the Investigation wing, it was noticed that a specific/particular set of entities were consistently incurring trading loss by executing a ‘reversal
P a g e | 3 A.Y. 2015-16 Haresh Shantichand Jhaveri of trades’ in option on individual stocks within equity derivative segment. Further, it is stated that during the course of investigation, statements under oath were recorded of various brokers involved in such transactions wherein they had admitted that various clients traded in illiquid stocks through derivative options with sole motive of generating losses. It was noticed that from the records and information received that the assessee had utilised services of one such broker, M/s Trinay Securities Pvt. Ltd(‘TSPL’), which was involved in the manipulating such transactions for the benefit of its members. The AO found from the information available that income had escaped assessment being non genuine profit/loss of illiquid derivatives on Unique Stock Exchange (USE) to the extent of Rs. 1,65,86,250/- which had been carried out through this broker. Before him, during assessment proceedings, the assessee submitted various details and supporting evidences such as ledger account of TSPL, copy of contract note/bill for the transaction with it, profit and loss statement on currency derivative transactions. Further, it was stated that TSPL is registered broker on SEBI recognized stock exchange and transactions of option trading were on faceless electronic platform and hence, the assessee did not know and had no connection and no relation with counter party of the transaction. The AO noted that the assessee’s name was appearing in the list of P a g e | 4 A.Y. 2015-16 Haresh Shantichand Jhaveri beneficiaries were non genuine profit/losses on illiquid derivatives on BSE and USE were generated. There was direct correlation of the assessee with entities and person covered in the investigation. The broker had not responded to the notice issued by the department. Besides, the assessee had executed transactions in currency derivatives with TSPL only in the F.Y. 2014-15 and there were no other transactions with the broker in any previous earlier year which showed that transactions under taken by him were nothing but intentional to get non genuine loss just to avoid taxation. Accordingly, the AO held that TSPL was involved in reversal trades and the assessee was the beneficiary of non-genuine profit/loss through illiquid derivatives from it. Therefore, the loss claimed by the assessee of Rs. 1,65,86,250/- was considered to be not genuine and was disallowed .
In the subsequent appeal, the assessee agitated the action of the AO by claiming that he had wrongly treated the loss in F&O transaction presuming this to be bogus loss. The AO did not mention any section of the Act while denying the loss in the course of normal business. He wrongly held that there was collusion between trade parties involved in the transaction. Further, he erred in framing the assessment order without verification, inquiry, investigation and without sharing the P a g e | 5 A.Y. 2015-16 Haresh Shantichand Jhaveri material on record and without allowing the cross examination of the third party. The assessee reiterated that he had made a valid derivatives transaction on the exchange. He had entered derivatives transactions (future and options) on the recognized Stock Exchange through its broker and suffered a loss of Rs.8,88,03,817/-. The assessee had duly maintained the books of account and had reflected the loss in the profit and loss account which were audited by the tax auditor. Such transactions of derivatives were supported by the contract notes in the name of the assessee issued by brokers affiliated to Stock Exchange. The payments in respect of same were made through proper baking channels. Further, he also produced copy of his ledger books in books of broker, copy of contract notes, copy of bank statement highlighting the payments made receipt from the broker along with series wise profit and loss accounts. The TSPL is a registered broker on SEBI recognized Stock Exchange and the transaction of option trading are on faceless electronic trading platform and the assessee did not know and has no connection and relation with counter party of transactions. Further, the document submitted during the assessment proceedings had not been rebutted by the AO. He further submitted that the fundamental right of cross examination was not effectively granted and the department’s assessment wing did not enforce the appearance/presence of the third
P a g e | 6 A.Y. 2015-16 Haresh Shantichand Jhaveri party (Broker).The AO has wrongly placed reliance on the third-party statement without independent verification. The entire addition was premised on show called ‘Project Falcon’ investigation. There is no allegation or proof of collusion existing between the assessee and any alleged third parties. The AO had given his adverse finding on the basis of beneficiary list and generalised approach. It has been stated that merely because assessee’s name figured in a list of constituents or beneficiaries as per investigation did not amount to evidence of escapement of income or bogus transactions. The AO has treated this ‘list’ as gospel of truth and made adverse inferences without independent corroboration. He did not make any independent verification with regard to claim of bogus loss. No inquiry was carried out to test the genuineness of appellant documents- contracts notes, bank statement, broker laser or Demat statements. No broker or alleged operator specifically identified assessee’s trades as ‘bogus’. There has been denial of natural justice on the part of the AO. The assessee argued that there was no material defect in the documents submitted during the assessment proceedings. All the transactions were executed on recognized Stock Exchanges. Settlement of trades was executed through normal banking channels and AO had not identified any mismatch. The addition is not grounded in any factual short coming of assessee’s
P a g e | 7 A.Y. 2015-16 Haresh Shantichand Jhaveri transactions trail. Neither the broker nor any alleged operator identified the assessee’s trades as bogus in any statement. Further, there was no evidence that the assessee had any arrangement of accommodation entries or fictitious trades. There is no evidence of cash trade. It has been submitted that the broker is neither relative of the assessee nor business associate and did not connect with him. The transactions have been executed through ‘BOLT’ where both profit and loss emerged. The AO has accepted the profit and chose to ignore the loss. The assessee was denied a fair opportunity the rebut allegations effectively. The AO’s approach mere borrowed satisfaction without independent tangible material demonstrative escapement of the income by the appellant. The department has neither produced any document nor any witness statement that directly implicate the assessee in any fraudulent or bogus scheme.
1 The assessee cited several judicial decisions and case laws in support of his contention that denial of loss incurred in derivative currency trade is not in accordance with the provisions of law i.e. Gokul Fuelchem (P) Ltd. ITAT Mumbai. ITA No. 187/Mum/2024, A.Y. 2015- 16,Saarthak Vanijya India Pvt. Ltd. ITA No. 1473/Del/2022,Abban P a g e | 8 A.Y. 2015-16 The mere inclusion in a list from “Project Falcon” is insufficient to make any adverse inferences against the assessee. SEBI had not initiated any enquiry and there is no allegation or proof of collusion between the Appellant and any third parties. It has been submitted that no specific script or trade had been declared bogus by any authority. Further, the cited judicial precedents squarely support the contention of the assessee.
P a g e | 9 A.Y. 2015-16 Haresh Shantichand Jhaveri
2 The ld.CIT(A) observed that AO heavily relied upon the information received from the insight portal and general report emanating from Project Falcon received from the Investigation wing of the Department in arriving at conclusion with regard to denial of bogus loss claimed by the assessee. The moot point for adjudication was whether, on the given facts and circumstances, the derivative transactions in the currency undertaken by him on the recognized stock exchange and resulting loss to the tune of Rs.1,65,86,250/-, was a genuine financial transaction, or it was a colourable device solely aimed at claiming substantial tax benefit in the hands of the assessee who in the course of assessment proceeding, had brought on record the necessary particulars of transactions along with supporting documents relating to each transaction, viz, contract notes, ledger account of the broker, Demat account statement and relevant bank statement. On careful perusal of evidence brought on records, he found that the assessee had satisfactorily discharged the primary onus cast upon it to substantiate the impugned transactions by furnishing all the relevant material evidences. In the course of assessment proceedings, the AO has merely doubted transactions under taken on the recognized stock exchange and resultant loss, primarily relying upon the report of the investigation wing and has brushed aside the plethora of documentary
P a g e | 10 A.Y. 2015-16 Haresh Shantichand Jhaveri evidence furnished. The report of the Investigation wing related to share transaction for providing bogus accommodation entry by the brokers. The AO has not pointed out the specific reference of the impugned transaction in his finding in the assessment order and primarily relied upon generalised report of the investigation wing. The AO has merely referred the statement of certain brokers; however, any such broker has not specifically mentioned the name of the assessee. Further, the AO failed to examine them on oath during assessment proceedings in relation to the impugned transactions in derivative currency segment under taken. It is also relevant to note that AO has not made any independent enquiry/verification during the assessment proceedings with regard to allegation of impugned transaction being colourable device to avoid the tax. It is also relevant to highlight the fact that all the transactions in derivatives segment have taken place on the platform of recognized Stock Exchange through registered stock broker and payment have been made/received through banking channel. It is also noted that the assessee regularly undertakes such transaction in the normal course of his business and this not the only transaction. He has been showing income arising from shares and derivatives trade regularly. Further, it was noted that all the transactions were duly accounted for in the books of account and AO has not pointed out any P a g e | 11 A.Y. 2015-16 Haresh Shantichand Jhaveri mistake/wrongdoing in such transaction. He merely made certain generally observation regarding modus operandi adopted by certain share brokers to generate bogus LTCG/STCG and non-genuine loss. The ld.CIT(A), in view of the specific, relevant and material evidence adduced by the assessee to substantiate the impugned transaction rejected the adverse findings of the AO regarding genuineness of derivative currency transaction and resultant loss, particularly so due to absence of any cogent evidence to the contrary being brought on record by the AO. A genuine transaction, in absence of any cogent contrary evidence, could not be considered as a colourable device to evade taxes, merely on the basis of general observations, devoid of any specific factual finding which is relevant to the impugned transaction. He observed that the principles relating to use of colourable device laid down by the Hon'ble Supreme Court in the case of McDowell & Co Ltd. Vs CTO (1977) (1 SCR 914) (SC) could not be applied on the facts of the present case. On similar facts, he placed reliance on hon'ble Gujrat High Court in the case of Banyan & Berry Vs CIT (1996) (222 ITR 831) (Gujarat), Sandipkumar Parsottam bhai Patel Vs ITO (2022) (137 taxmann.com 373) (Surat-Trib.), Champalal Gopiram Agarwal [2023] 155 taxmann.com 66 (Gujarat)/[2024] 460 ITR 277 (Gujarat)[25-07- 2023]. In the case of Gokul Fuelchen Pvt Ltd., ITA No.
P a g e | 12 A.Y. 2015-16 Haresh Shantichand Jhaveri 187/Mum/2024 dated 29.07.2024 has held that trading loss on account of derivatives currency transaction on the recognized stock exchange could not be denied on in the absence of any specific findings by the AO. In the case of Abans Commodities(I) Pvt. Ltd. Mumbai ITAT, in ITA no.3315/Mum/2024, AY 2014-15, held that derivatives loss on recognized stock exchange could not be denied on the basis of general report of the Investigation Wing unless the AO has independently analysed the transactions and has arrived the findings. Thus, considering the totality of facts and circumstances, keeping in view of position of law, he concluded that the transactions under taken by the assessee on the recognized Stock Exchange were genuine financial transaction and not a colourable device to evade tax. The AO was accordingly directed to delete the addition of Rs. 1,65,86,250/- made on account of bogus loss claimed.
Before us, the ld.DR has relied n the assessment order and the grounds of appeal while the ld.AR has reiterated the contentions made before the lower authorities in this regard. It is also stated that the impugned transaction was miniscule seen in the light of the fact that the assessee made total transactions worth Rs 110 cr. during the year and none of which were doubted. All the transactions were spread over
P a g e | 13 A.Y. 2015-16 Haresh Shantichand Jhaveri through out the year as well and the AO only picked up a few which suited his purpose.
We have heard both the parties and also perused the relevant finding given in the impugned orders. The entire premise of the AO for treating the transaction with TSPL is based on the Investigation wing report. The ld. CIT (A) has duly analysed the case from all possible angles before allowing the relief to the assessee holding that the assessee was a regular trader in option / currency derivatives and had worked through various brokers in the past as well as during the year and had shown profits from transaction with some brokers while losses in other transactions. The consolidated income/loss declared in the return of income had not been doubted nor the AO has carried out any enquiry to dislodge the authenticity of the trades done through any broker. In view such facts, it cannot be stated that only one isolated transaction was pre-meditated only to incur loss. From the investigations carried out under the Falcon project, no evidence had been gathered or found which could even remotely suggest that one particular transaction with TSPL was sham or non-genuine. Once the assessee has filed copies of contract notes in respect of the transactions of the derivative trading, copy of bank statements, reflecting payment of P a g e | 14 A.Y. 2015-16 Haresh Shantichand Jhaveri requisite margin money to the brokers, copy of statement of accounts of the broker in the books of the assessee company etc., the AO should have brought some material, carried out enquiry to bring any adverse material on record. With regard to the transactions done through TSPL, the assessee has provided all the necessary documents which have not been rebutted by the AO and also it has not been demonstrated by AO that assessee had colluded with the counter parties to generate fake loss. There is no iota of evidence w.r.t. action taken by SEBI or the Income Tax Department in the case of such counter party and the underlying motive of those parties behind such reversal. The transactions so executed were settled through online portal of stock exchange only and cannot be done directly with buyer or seller as they are unknown to each other. Moreover ,matching of transactions on the exchange is done by Exchanges and there is no role of assessee or its broker and in case transactions do not match, they are reversed by them. In case of F&O transactions, the difference in bid and ask price is also uncontrolled and is reflected on the online portal of exchanges based on the demand and supply and such bid and ask price also varies with the strike rate of a particular script and is available online to all the traders without any control by assessee. Thus, prima facie, there is no material that trade transactions in which assessee had incurred losses were non-genuine.
P a g e | 15 A.Y. 2015-16 Haresh Shantichand Jhaveri There has to be basis and inquiry to arrive at such conclusion that out of many transactions, few were manipulated to show fictitious loss and were non-genuine which is lacking here.
1 After taking into account all relevant facts of the case and also in the light of coordinate bench decisions(supra) applicable to the facts of the case involving similar facts and circumstances, we do not find any infirmity in the conclusion drawn by the ld.CIT(A) which is therefore, affirmed. Consequently, grounds of appeal of the Revenue are dismissed.
In the result, appeal of the Revenue is dismissed.
Order pronounced in the open court on 12.08.2025. SAKTIJIT DEY PRABHASH SHANKAR (उपाध्यक्ष/ VICE PRESIDENT) (लेखाकार सदस्य/ACCOUNTANT MEMBER)
Place: म ुंबई/Mumbai ददनाुंक /Date 12.08.2025 Lubhna Shaikh / Steno
आदेश की प्रतितलति अग्रेतिि/Copy of the Order forwarded to : 1. अपीलार्थी / The Appellant
P a g e | 16 A.Y. 2015-16 Haresh Shantichand Jhaveri 2. प्रत्यर्थी / The Respondent. 3. आयकर आयुक्त / CIT 4. विभागीय प्रविविवि, आयकर अपीलीय अविकरण DR, ITAT, Mumbai 5. गार्ड फाईल / Guard file. सत्यावपि प्रवि //// आदेशानुसार/ BY ORDER,
उि/सहायक िंजीकार (Dy./Asstt.