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Facts
The assessee, a shares and securities trader, had its assessment reopened under Section 147 of the Income Tax Act based on information regarding trading in alleged penny stocks. The Assessing Officer (AO) disallowed business losses claimed by the assessee and made an addition for alleged commission, treating the transactions as pre-arranged bogus losses. The Ld. CIT(A) upheld the AO's additions.
Held
The Tribunal held that the assessee's losses were genuine business losses incurred in the regular course of trading, supported by extensive documentary evidence like contract notes, bank statements, and DEMAT statements. It noted that the AO failed to provide investigation reports or demonstrate the assessee's involvement in any price rigging. Therefore, the disallowance of losses and the addition for commission were unjustified.
Key Issues
Whether business losses incurred from trading in alleged penny stocks were genuine or pre-arranged bogus transactions, and whether the corresponding addition for commission was justified. The validity of reopening under Section 147 was also raised but not adjudicated on merits.
Sections Cited
147, 148, 143(3), 142(1)
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Income Tax Appellate Tribunal, “D” BENCH MUMBAI
Before: SHRI AMIT SHUKLA & SHRI GIRISH AGRAWAL
Present for: Assessee : Shri Suchek Anchaliya and Ms. Vaishali More, CAs Revenue : Shri. Mahadevan A.M. Krishanan, Addl. CIT Date of Hearing : 24.04.2025 Date of Pronouncement : 23.06.2025 O R D E R
PER GIRISH AGRAWAL, ACCOUNTANT MEMBER:
This appeal filed by assessee is against the order of Ld. CIT(A)- 47, Mumbai, vide order no. ITBA/APL/S/250/2024-25/1069841729 (1), dated 22.10.2024 passed against the assessment order by Assistant Commissioner of Income-tax, Central Circle 1(1), Mumbai, u/s. 143(3) r.w.s. 147 of the Income-tax Act, 1961 (hereinafter referred to as the “Act”), dated 27.12.2019 for Assessment Year 2012-13.
2. Grounds taken by the assessee are reproduced as under: “1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A), erred in not holding the assumption of jurisdiction by the Ld. A. O. as bad in Mark Corporate Advisors Pvt. Ltd. AY 2012-13 law as the conditions laid down for initiating assessment proceedings u/s 147 of the Income Tax Act, 1961 have not been fulfilled.
2. On the facts and circumstances of the case and in law, the Ld. CIT(A), erred in confirming the disallowance of business loss of Rs. 3,28,92,419/-, by holding the loss on sale of listed scrips as pre-arranged transaction without considering the fact that the appellant had purchased and sold the shares in regular course of business activity at prevailing market prices on the recognised stock exchange through a registered broker and that the appellant had duly submitted all the documentary evidences to substantiate the same.
3. On the facts and circumstances of the case and in law, the Ld. CIT(A), erred in confirming the addition of Rs. 9,86,772/- made on arbitrary basis on account of alleged commission paid by the appellant for availing the business loss without appreciating the fact that the appellant had not paid any commission and the business loss occur under general business activity.
4. On the facts and in the circumstances of the case and in law, the Ld. CIT (A) erred in confirming the addition made by AO, without providing any opportunity of cross examination on whose statements the Ld. AO relied in the assessment order and also without providing copies of statements relied upon.”
Brief facts of the case are that assessee is engaged in the business of trading in shares and securities. Assessee filed its return of income on 28.09.2012 reporting total income at Rs.14,35,940/-. Case was reopened for assessment u/s. 147 of the Act for which a notice u/s 148 of the Act dated 30.03.2019 was issued. As per the reasons recorded, the case was reopened on the basis of information received from various offices of the Investigation Wing, Mumbai that the assessee has traded in few scrips which are alleged to be penny stocks, details of which are tabulated below: Sr.No. Information Information Whether Nature of Amount of Addition Source pertaining part of Income Escapement made by to Reasons Escapement (Rs.) the ld. as per AO Reasons 1. DDIT(Inv.), Swarnasarita Yes Sales 4,05,000 No Unit 7(4), Gems Ltd. Consideration Mumbai 2. DDIT(Inv.), Manmade Yes Amount given 1,00,00,000 No Unit 7(3), Fibres Pvt. Mumbai Ltd.
3. DDIT(Inv.), Banas Yes Sales 1,98,65,788 Yes Unit 8(2), Finance Ltd. Consideration Mumbai Mark Corporate Advisors Pvt. Ltd. AY 2012-13 4. JDIT(Inv.), Scan Steels No Sales 88,98,056 Yes Unit 7, Ltd. (earlier Consideration Mumbai known as Clarus Finance & Securities Ltd.)
2.1. Assessee filed a written objection against the reason recorded by ld. Assessing Officer on 07.08.2019. which was disposed of by the ld. Assessing Officer by passing an order on 29.08.2019. Further, notices u/s 142(1) of the Act were issued from time to time, requiring the assessee to submit the details and documents. Assessee complied with all the notices, explaining in detail the facts of the case and furnishing all the supporting documents.
2.2. During the course of assessment proceedings, assessee submitted the following documents in support of genuineness of transactions in the particular scrips for which additions were made by ld. Assessing Officer:
1. 1. Statement of Profit/Loss on sale of shares of the aforesaid shares 2. Contract Note cum bill for purchase of shares.
3. Bank Statement recording payment made for purchase. 4. DMAT statement reflecting delivery of shares. 5. Contract Note cum Bill for sale of shares. 6. Bank Statement showing payment received.
7. Broker Ledger Account 8. Statement of Purchase and Sale of the two scrips, tabulated below:-
Mark Corporate Advisors Pvt. Ltd. AY 2012-13 2.3 Transactions in aforesaid shares are supported by copies of contract notes of stock broker evidencing transactions through BSE & NSE with payment of Securities Transaction Tax (STT) and margin money as per rules of Stock Exchange and SEBI. All transactions in delivery-based shares were received in the DEMAT account and transferred through the DEMAT account of the assessee and all payments/receipts with the brokers are through proper banking channels and are reflected in the bank statements of the assessee. According to the assessee, each contract cum bill of the assessee has a unique contract number, settlement number, trade date, pay in date and pay out date. Further, each trade of the assessee has a unique order no, order time, trade no, and trade time. All STT, Stamp Duty, Service Tax and other charges in respect of each transaction is paid and is reflected in all the contracts cum bills. Assessee paid margin money on each contract executed in futures and options as per requirement of SEBI. Assessee submitted in the paper book, an analysis of the share trading account to give the gist of its trading activity during the year under consideration. The same is reproduced as under: Sr.No. Particular No. of Value of shares scrips (in Rs.) 1. No. of the Stocks outstanding at 16 2,44,79,243/- 01.04.2011 2. No. of Stocks purchased during 50 17,31,41,678/ the year 3. No. of Stocks sold during the year 23 16,61,83,875/- 4. No. of Stocks Sold at Profits 11 3,78,32,614/ 5. No. of Stocks Sold at Loss 13 3,91,89,860/- 6. No. of Stocks outstanding as on 46 3,01,79,978/- 31.03.2012 7. No. of Stocks losses disallowed by 2 3,28,92,419- the Ld. AO 2.4. Assessee, thus demonstrated that it is a trader with huge volume in the said trading activity. According to the assessee, being a trader, it inherently carries the risk of significant losses sometimes in particular scrips, which are typical in a trader's normal course of business. These losses are a direct outcome of market volatility and are part of the trading process. This is not the isolated financial year in which the assessee had done the share market transactions. Assessee experienced both gains and losses throughout the year, details of which are as under:- i. Profits: Assessee recorded profits from selling 11 stocks at Rs. 3,78,32,614/- ii. Losses: Conversely, losses were incurred on 13 stocks amounting to Rs. 3,91,89,860/-- 2.5. Further, out of the 65 scrips traded as per the share trading account, 21 Scrips were both purchased and sold during the year. Out of 21 scrips, assessee incurred profit in 9 and losses in 13 scrips (including 2 alleged scrips traded). Assessee furnished the details of scrip-wise purchase and sale of shares. The same is extracted below:
Mark Corporate Advisors Pvt. Ltd. AY 2012-13 2.6. It is asserted that these losses are neither unusual nor isolated but are integral to the trading activities and are natural consequences of speculative and short-term trades. The loss incurred on specific scrips, including those alleged 'penny stocks' by the ld. Assessing Officer, represents genuine business losses arising from regular trading operations. Hence, they should be recognized as business losses incurred in the ordinary course of a trader's operations. It is also further noted that the assessee has never been questioned by SEBI or any other regulatory authority regarding the alleged penny stocks or at any point to date. Ld. Assessing Officer, relying solely on the Investigation Wing reports (which were not shared with the assessee), concluded that the assessee is engaged in accommodation entries by allegedly generating a bogus loss through these stocks. However, this analysis by the Ld. Assessing Officer does not consider the dynamics of developing share markets, where rapid and unpredictable fluctuations are common.
2.7. Ld. Assessing Officer issued a show cause notice to the assessee on 18.12.2019 which was duly served upon the assessee, proposing to make disallowance of claim of business loss of Rs. 2,18,53,696/-from the sale of shares of M/s Banas Finance limited along with 3% of Rs. 2,18,53,696/-i.e. Rs. 6,55,610/- as commission provided for arranging the said loss. Ld. Assessing Officer issued another show cause notice to the assessee on 23.12.2019 which was duly served upon the assessee, seeking the reason why the disallowance of claim of business loss of Rs. 1,10,38,723/- from the sale of shares of M/s Scan Steel should not be made.
2.8. However, ld. Assessing Officer disregarded all the submissions of assessee and proceeded to make an addition of business loss of Rs. Mark Corporate Advisors Pvt. Ltd. AY 2012-13 3,28,92,419/ on account of sale of shares of M/s Banas Finance Limited and M/s Clarus Finance & Securities Limited, by alleging such genuine loss to be a prearranged transaction to bring losses in the books of the assessee and addition of alleged commission Rs. 9,86,772/-, paid at the rate of 3% for allegedly prearranging the impugned transaction of business loss and passed the order u/s 147 r.w.s. 143(3) of the Act on 10.03.2016. Aggrieved, assessee went in appeal before the ld. CIT(A), who sustained the additions made by the ld. Assessing Officer. Aggrieved, assessee is in appeal before the Tribunal.
Important fact to be borne in mind is that assessee is a regular trader in stock market having main business of share trading in all the segments of stock market especially but not limited to delivery based speculation, F&O, derivative, currency derivative, call and put options, etc., having revenue from operations of Rs. 16.60 Crores in the year under consideration. Assessee had traded in 65 scrips, out of that in 11 scrips, assessee had earned profit of Rs. 3.78 Crores and cut-off the losses of Rs.3.92 Crores in 13 scrips in the year under consideration. Such has been the trading results and business performance of the assessee for year-on-year basis, this being not a year in isolation, wherein assessee has traded in such volumes.
We have gone through the material placed on record, orders of the authorities below, judicial precedents in the case of Munish Financials in dated 31.03.2023 and Adihemshree Financial in and others, dated 30.09.2024 by the Coordinate Bench of ITAT, Mumbai 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 have been dealt in the decisions of Co-ordinate Bench in the case of Munish Financials (supra) and Adihemshree Financials (supra) though arising out of assessment made u/s. 143(3). Submissions made by the assessee in respect of the conduct of its business, more particularly for the scrips in which assessee incurred business loss convince us to hold in favour of the assessee.
We have carefully considered the underlying facts from all possible angles in the light of nature and volume of business in which the assessee is engaged in. We find that losses incurred by the assessee which the ld. Assessing Officer has alleged to be bogus are losses incurred by it in the regular course of business considering corroborative material placed on record and the submission made. The said loss so incurred by the assessee deserves to be set off against its regular business profit. Ld. Assessing Officer completely overlooked various documents, supporting evidences and explanations furnished by the assessee. He has not analysed all these and merely proceeded to make the addition based on investigation reports. There is nothing brought on record to demonstrate that name of the assessee finds place in the investigation reports to hold that it is involved in price rigging of the alleged two scrips as penny stock. Merely because some shareholders/operators colluded in the alleged rigging of share prices and merely because assessee was benefited indirectly, cannot be the reason to disallow the claim of loss by the assessee by alleging that assessee has participated in price rigging of the two scrips. Considering the overall factual matrix of the present case, as narrated above in detail, supported by the judicial precedents referred above, we allow ground no.2 raised by the assessee in this respect.
Mark Corporate Advisors Pvt. Ltd. AY 2012-13 7. Further, vide ground no.3, assessee has contested on the addition of Rs.9,86,772/- which is made on arbitrary basis towards alleged commission paid by the assessee for availing the above stated business loss. Since, we have already allowed the claim of assessee on the claim of business loss in the aforesaid two scrips, the addition made towards commission is in respect of this very business loss and consequently deserved to be deleted. Ground no.3 raised by the assessee is allowed.
Assessee has raised legal issues vide ground no.1 and 4. Since, appeal of the assessee is allowed on the merits of the case, in terms of our observations and findings, as stated above, in respect of ground no.2 and 3, the legal issues raised by the assessee are not adjudicated and are kept open.
In the result, appeal of the assessee is allowed.
Order is pronounced in the open court on 23rd June, 2025