DMSONS METAL PVT LTD,MUMBAI vs. DCIT, CENTRAL CIRCLE-4(1), MUMBAI

The Ld. AR, in the course of arguments, submitted that the assessee is engaged in the business of importing and stocking B.Q. plates. A survey was conducted at the assessee’s premises on 18/12/2017, following which the assessee filed its return of income. Subsequently, a notice under Section 148 of the Act was issued and duly served upon the assessee. In response, the assessee filed the same return as originally submitted under Section 139(1) of the Act. During the assessment proceedings, the Ld. AO observed that the assessee had claimed a trading loss of Rs.2,48,14,586/- in connection with transactions in liquid stock options on the BSE. Relying on the report of the Investigation Wing, Unit-6, Mumbai, the Ld. AO inferred that the assessee had incurred a fictitious loss through coordinated and pre-arranged trading in liquid stock options on the BSE. Consequently, based on the information available, the Ld. AO restricted the disallowance to Rs.2,23,32,905/-, which was added back to the total income, as recorded in paragraph 6.9 of the impugned assessment order. The assessee, however, contended that it was engaged in the regular import and export of goods, and that the claimed loss pertained to foreign currency fluctuations, which were intrinsically linked to its trading business. Accordingly, the assessee asserted that the loss was genuine and allowable under the provisions of the Act.Aggrieved by the disallowance, the assessee preferred an appeal before the Ld. CIT(A). After adjudicating upon the matter, the Ld. CIT(A) noted that since the assessee had recorded the loss amounting to 4 ITA 762/Mum/2023 DM Sons Metals Pvt Ltd Rs.2,48,14,586/- in its books of accounts, an enhancement notice was issued. Consequently, the entire amount of Rs.2,48,14,586/- was sustained as disallowed, in place of the earlier restricted disallowance of Rs.2,23,32,905/-. Dissatisfied with the appellate order, the assessee has now preferred an appeal challenging the impugned order.

During the assessment proceedings, the Ld. AO explicitly stated that, based on information received from the Investigation Wing, Unit-6, Mumbai, the alleged addition was duly confirmed. The Ld. AO concluded that the assessee had generated a fictitious loss through stock market option trading. The relevant excerpts from paragraphs 6 to 6.2 of the assessment order are reproduced below: “6. Disallowance of claim non-genuine loss of derivative trading 6.1 On perusal of your financials, it is seen that assessee have shown loss amounting to Rs. 2,48,14,586/- in other operating revenue head under profit and loss account. 6.2 During the assessment proceedings information received from Investigation wing -Unil-6 (Inv.), Mumbai regarding claim of fictitious losses through coordinated and premeditated trading in illiquid stock options on the Bombay Stock Exchange, it had come to notice that there are several instances/internal alerts wherein a set of entities were consistently seen incurring trading loss by executing Reversal of trades in options on individual stocks ("stock options") in Equity Derivative Segment. However, it has also come into notice that along with Reversal of Trades, huge losses are being generated by various clients by letting the options expire.”

On the other hand, the Ld.AO has considered the submission of the assessee, where the assessee claimed that this loss is not from the liquid option but it is a foreign currency loss related to import of material for business purpose. The relevant excerpts from paragraph 6.8 of the assessment order are reproduced below: -

Assessee have stated that he is importing materials from foreign country for the business purpose against which the payment is to be made in foreign currency and they have entered into such transaction to cover up foreign exchange transactions. However, assessee have not substantiated its claim with the documentary evidence. Assessee have not submitted the underlying item documentary evidences for hedging of imports for every foreign exchange transaction, On review of the data for foreign exchange it seems that in majority of the cases the foreign exchange transaction is not adjusted against the import payments it is merely daily trade transaction in currency having buy and sale on the same day executed in fraction of seconds to few minutes. Normally business books forward contract with authorised dealer bank to hedge their import payments mentioned the period of contract and expected date of payment. However, no such hedging transaction emanates from the contract note submitted by assessee.

On perusal of the contract notes it is seen that the assessee has traded in 66 unique contracts and has undertaken both sell as well as buy trades in each of the contracts. Further, it is relevant to mention that the buy quantity and sell quantity for each of the 66 contracts in which trades have been undertaken by assessee is almost identical. Also, it is seen that by trading in the 66 contracts enumerated in the table above, the assessee has consistently recorded losses for almost each of the contract. The sample contract highlighting the similar trade quantity, their prices, time lag between buy and sale is reproduced as under.”

The Ld. DR fully relied on the orders of the revenue authorities; but has not made any comment on the fact of the case.

We have heard the rival submissions and perused the documents available on record. It is observed that the Ld. AO disallowed an amount of Rs.2,23,32,905/- based on the report from the Investigation Wing, Unit-6, Mumbai, treating the assessee’s loss as one arising from transactions in liquid stock options on the BSE.The assessee has vehemently denied this characterization, contending that 6 ITA 762/Mum/2023 DM Sons Metals Pvt Ltd the alleged loss was incurred in connection with the import of goods and was duly recorded in its books of accounts as an adjustment for foreign currency losses. However, we find that the Ld. AO did not conduct any independent verification of the assessee’s claims and instead relied solely on the report of the Investigation Wing while finalizing the assessment.This factual inconsistency was duly raised before the Ld. CIT(A), yet no specific adjudication was made on this issue. Furthermore, while the Ld. AO had disallowed a loss of Rs.2,23,32,905/-, the Ld. CIT(A) enhanced the disallowance to Rs.2,48,14,586/-, in line with the amount claimed by the assessee in its books of accounts as loss from business.In our considered view, the entire matter has been improperly adjudicated without due consideration of the assessee’s submissions. Therefore, we deem it appropriate to remit the issue for reconsideration by the Ld. AO, directing a fresh adjudication on its merits. Accordingly, the assessee’s grounds of appeal