Loading judgment…
Facts
The assessee declared a short-term capital loss of Rs.14,31,925/- from trading in Kushal Tradelink Ltd. The AO disallowed this loss, alleging it was part of a scheme to create artificial losses through price rigging and pre-arranged trades, relying on SEBI findings and investigation reports. The CIT(A) upheld the AO's order.
Held
The Tribunal held that the AO did not conduct independent investigation to link the assessee with the alleged price manipulation. The addition was based on general findings from SEBI and conjecture, without specific evidence against the assessee. Reliance was placed on a coordinate bench decision that similar reliance on SEBI alerts without direct evidence is insufficient.
Key Issues
Whether the disallowance of short-term capital loss is valid when the AO's findings are based on general SEBI reports and lack of specific evidence connecting the assessee to price manipulation?
Sections Cited
250, 147, 144B, 148, 148A, 142(1), 68
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, “SMCC” BENCH, AHMEDABAD
आदेश/O R D E R आदेश आदेश आदेश
PER MAKARAND V.MAHADEOKAR, AM:
This appeal is preferred by the assessee against the order dated 25.03.2025 passed by the Commissioner of Income-tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi [hereinafter referred to as "CIT(A)"] under section 250 of the Income-tax Act, 1961 [hereinafter referred to as "the Act"], confirming the assessment order dated 24.03.2023 passed by the Assessment Unit, Income Tax Department [hereinafter referred to as "Assessing Officer or AO"] under section 147 r.w.s. 144B of the Act for the Assessment Year 2018–19.
Facts of the Case 2.1 The assessee is an individual and a resident taxpayer. The assessee filed his original return of income for A.Y. 2018–19 on 31.08.2018, declaring total income of Rs.2,61,060/-, which was subsequently revised on 11.02.2019. Information was received from the Investigation Wing, Ahmedabad, based on which the Assessing Officer recorded reasons to believe that the assessee had availed accommodation entries in the form of fictitious short-term capital loss of Rs.14,31,925/- by trading in the scrip of Kushal Tradelink Ltd., allegedly used for creating artificial losses through price rigging and pre-arranged trades. The AO issued notice under section 148 of the Act on 30.03.2022, after complying with the procedure prescribed under section 148A, and passed the reassessment order on 24.03.2023, assessing total income at Rs.16,75,500/-.
2.2 In the assessment order, the AO observed that the scrip of Kushal Tradelink Ltd. was one of the penny stocks manipulated by a known syndicate for providing bogus long-term and short-term capital gains/losses. It was further stated that data from the search action in the Kushal Group revealed synchronized trades, rotation of funds, and lack of genuine business activity. The AO thus, based on the detailed report of SEBI and information received from Investigation wing, held that the short-term capital loss claimed by the assessee was not genuine, and disallowed the same.
2.3 The assessee preferred an appeal before the CIT(A), which was disposed of by the CIT(A). The learned CIT(A) confirmed the action of the AO in full, holding that the assessee had failed to produce any substantial written submission or documentary evidence in support of the grounds of appeal. The CIT(A) also recorded that although the assessee had challenged the reopening as well as the disallowance of short-term capital loss, no persuasive material was filed in the appellate proceedings, and hence, the assessment was sustained on merits.
3. Aggrieved by the order of CIT(A), the assessee is in appeal before us raising following grounds of appeal:
1. It is respectfully submitted that though the Ld. AO has recorded certain findings with regard to the SEBI order, there exists no specific linkage or correlation between the Appellant's activities and the findings contained therein. The entire assessment order primarily deals with the modus operandi of price manipulation in the shares of Kushal Tradelink Ltd. without any incriminating evidence that directly implicates or connects the Appellant with such alleged sham transactions.
2. The Ld. AO has erred in law and facts by failing to record any factual findings explicitly connecting the Appellant with the purported synchronized trading of shares in Kushal Tradelink Ltd.The assessment order lacks both material evidence and explicit findings necessary to attribute involvement to the Appellant in the alleged bogus transactions. Consequently, the transactions undertaken by the Appellant ought to be regarded as legitimate, ordinary-course market transactions, and not unjustifiably categorized as unexplained merely because the concerned scrip is alleged to be a penny stock.
It is humbly submitted that the Appellant's transactions in the shares of Kushal Tradelink Ltd, are genuine, having been executed transparently through a recognized stock exchange trading portal, settled through verifiable normal banking channels, and supported by documentary evidence at each stage. Therefore, the disallowance of the short-term capital loss of Rs.14,31,925/- ought to be deleted as the same is legitimate and allowable.
4. The Ld. AO grossly erred in law and fact by improperly conducting a financial analysis of M/s. Kushal Tradelink Limited and incorrectly correlating such analysis with the trading price of the stock on the exchange. Such irrelevant considerations cannot, and ought not to, form the basis for determining the genuineness of Appellant's individual transactions. Each transaction must be examined on its own merits, verifiable supported by tangible and evidence. Therefore, the disallowance based on extraneous and irrelevant analysis is erroneous, unjustified, and deserves to be set aside.
5. The Ld. AO further erred by passing the order dated 29.03.2022 under Section 148A(d) of the Act solely based on an alleged non-receipt of a reply from the Appellant. It is respectfully submitted that the mere absence of a response from the Appellant does not empower the Ld. AO to initiate reopening proceedings under Section 148 of the Act. The Ld. AO was obligated to independently evaluate the material and available records, and to explicitly set forth cogent and valid reasons justifying such reopening, which has not been done.
6. The impugned order passed by the Ld. AO is cryptic, vague, and lacks reasoned justification, clearly violating established judicial precedents and principles of natural justice. Such absence of clarity, proper identification of relied-upon materials, and sound reasoning renders the reopening proceedings fundamentally defective and legally untenable.
7. It is submitted that the Ld. AO further committed a grave violation of natural justice principles by neither supplying the material relied upon nor clearly enumerating such material in the impugned order. Such omission constitutes a denial of fair opportunity, adversely affecting the Appellant's fundamental right to a proper defense.
The Ld. CIT(A) erred by mechanically affirming the arbitrary findings of the Ld. AO without independently analyzing the substantive merits, arguments, or documentary evidence presented by the Appellant. Such mechanical affirmation is a manifest deviation from established judicial principles, rendering the order of the Ld. CIT(A) untenable and liable to be reversed.
The Ld. CIT(A) erroneously observed that the Appellant had not submitted any supporting material. On the contrary, the Appellant had duly furnished comprehensive documentary evidence and pertinent submissions before both the Ld. AO and the Ld. CIT(A), rendering such observations factually incorrect.
The impugned disallowance made by the Ld. AO, founded exclusively on conjecture, suspicion, and presumption, and lacking tangible, credible, or cogent evidence, is legally unsustainable and must therefore be set aside. 11. It is respectfully submitted that no incriminating evidence or specific information implicating the Appellant in suspicious or wrongful activities was identified by the Ld. AO, rendering both the reopening and the resultant disallowance proceedings unlawful, arbitrary, and devoid of jurisdiction. 12. The assessment proceedings initiated by the Ld. AO under Section 148 suffer from procedural infirmities, notably the absence of any credible prima facie evidence or reasons suggesting escapement of income, thereby rendering such reopening invalid in the eyes of law. 13. The Ld. AO and Ld. CIT(A) have both failed to appreciate the binding judicial precedents laid down by various Hon'ble Courts, which explicitly mandate thorough and independent analysis of each individual transaction rather than generalized inferences based on broad market analyses. The Appellant respectfully craves leave of this Hon'ble Tribunal to rely upon such other additional grounds, judicial precedents, and legal arguments as may be necessary during the course of hearing, and to further add, alter, or amend the Grounds of Appeal in the interest of substantial justice.
During the course of hearing before us the Authorised Representative (AR) of the assessee submitted that the assessee is a regular and independent investor in the capital market. The transactions in the scrip of Kushal Tradelink Ltd. were carried out through SEBI-registered broker ICICI Direct, executed on the platform of a recognised stock exchange (BSE), and all payments were made through verifiable banking channels. The purchase and sale transactions were backed by demat account statements, purchase and sale contract notes, and bank account statements, all of which were furnished before the Assessing Officer. The AR pointed out the said documents form the paper book. The further submitted that the assessee purchased 19,600 shares of Kushal Tradelink Ltd. in November– December 2016 for Rs.33.5 lakh, received bonus shares in 1:1 ratio on 24.03.2017, and sold the entire 39,200 shares on 21.04.2017. The loss incurred, amounting to Rs.14,31,925/-, was purely due to steep price decline and was correctly disclosed as short-term capital loss in the return of income. The sale consideration was duly received through ICICI Bank and was reflected in the bank statement.
4.1 The Ld. AR argued that while the AO relied upon findings from the SEBI order and search conducted in the Kushal Group, no material or evidence was brought on record to link the assessee personally with any accommodation entry, price rigging, or manipulation. The order of the AO was based on assumptions, general market trends, and financials of the company, without any transaction-specific adverse inference. The assessee submitted that despite filing detailed responses to notices dated 28.09.2022, 01.11.2022, and 24.02.2023 under section 142(1), the AO proceeded to complete the assessment without rebutting the evidences filed. No material relied upon by the AO (including SEBI alerts, investigation reports, or trade logs) was ever shared with the assessee, constituting a gross violation of principles of natural justice.
4.2 The Ld. AR strongly contended that the CIT(A) grossly erred in stating that no documentary evidence was filed during appellate proceedings. On the contrary, the assessee had submitted a full set of supporting materials such as demat statements, purchase/sale contract notes, and bank statements. The CIT(A)’s order is thus non-speaking, mechanical, and deserves to be set aside.
4.3 The Ld. AR relied upon the decision of the Co-ordinate Bench in Bao Value Funds (ITA No. 947/Mum/2024), where it was held that without any direct evidence connecting the assessee with rigging or accommodation entries, mere reliance on SEBI alerts or third-party investigations cannot justify disallowance.
The Departmental Representative (DR) relied on the order the Assessing Officer and stated that the AO had discussed the findings of SEBI in detail to conclude that the Short Term Capital Loss through Kushal Trade Link was no genuine and hence not allowed to setoff against the Long Term Capital Gain on property.
Upon careful consideration of the facts of the case, submissions advanced on behalf of the assessee, and the orders of the lower authorities, we find merit in the contention that the Assessing Officer has not carried out any independent investigation to establish a direct linkage or nexus between the assessee and the alleged price manipulation in the scrip of Kushal Tradelink Ltd. The impugned addition has been made solely on the basis of general findings contained in the SEBI order and the alleged modus operandi concerning the Kushal Group, without bringing on record any cogent or incriminating material to specifically implicate the assessee.
6.1 In this context, it is pertinent to refer to the binding ratio laid down by the Co-ordinate Bench in the case of Bao Value Fund [ITA No. 947/Mum/2024, order dated 27.02.2025], wherein the Mumbai Bench has dealt with identical facts and circumstances. The relevant observations in paragraph 5 of the said order are extracted below for ready reference: "Though the AO has recorded a detailed finding with regard to the SEBI order, we notice that the assessee's name has not been linked to the SEBI report and the entire finding is with regard to the modus operandi as to how the share prices have been rigged in the case of Kushal Ltd. We further notice that the statement recorded and the seized material relied on by the AO to make the addition do not contain anything connecting the assessee to the sham transactions carried out by various parties. The assessee is a registered FPI and the impugned transaction as per AO's own admission forms part of only 0.34% of the total investments in shares by the assessee. The primary allegation of the AO for making the addition is that there is a synchronized operation carried out by few individuals due to which the share prices of M/s Kushal Trade Link Ltd. (now known as Kushal Ltd.) have been rigged. However, the AO in his order has not recorded any factual finding connecting the assessee to the alleged synchronized trading of the impugned shares. We also notice that the AO other than elaborately discussing the SEBI order and the findings of the search operation has not recorded any finding to impute the assessee to be alleged bogus transactions. Therefore, we see merit in the submission of the ld. AR that the transactions made by the in the regular course of business cannot be treated as unexplained for the reason that the scrip is allegedly is a penny stock. It is a settled position that unless the assessee is connected with the synchronized operation of price rigging no addition can be made under section 68 merely for the reason that the assessee as a regular investor has transacted in the impugned shares. In view of this discussion and following the ratio laid down in various judicial pronouncements in this regard we hold that the AO is not correct in making addition under section 68 of the Act."
6.2 In the present case, we find no material brought on record by the Assessing Officer to show that the assessee was party to any such alleged synchronized trading or was privy to the price rigging in the said scrip. The addition has been made on pure conjecture and surmise, which is impermissible under the settled principles of law. Merely because the assessee dealt in a scrip which was later found to be manipulated by certain third parties, cannot ipso facto justify an adverse inference against the assessee in the absence of any specific and tangible nexus.
6.3 Accordingly, respectfully following the aforesaid decision of the Coordinate Bench in Bao Value Fund (supra) and in the absence of any corroborative evidence establishing the assessee's involvement in any such manipulative activity, we are of the considered view that the disallowance made by the Assessing Officer under section 68 of the Act cannot be sustained and deserves to be deleted.
In the result, the appeal filed by the assessee is allowed.
Order pronounced in the Court on 12th August, 2025 at Ahmedabad.