JT. CIT (OSD), CC-7(1), MUMBAI vs. M/S HILLVIEW IMPEX PVT. LTD, MUMBAI

ORDER PER RAVISH SOOD, J.M: The present appeal filed by the revenue is directed against the order passed by the CIT(A)-49, Mumbai, dated 19.11.2018, which in turn arises from the order passed by the A.O u/s 143(3) of the Income Tax Act, 1961 (for short „Act‟), dated 30.12.2016 for A.Y 2014-15. The revenue has assailed the impugned order on the following solitary ground before us: “On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in allowing the appeal when the loss of Rs.4,00,08,550/- booked by the assessee in manipulated penny stocks is sham and bogus is nature.”

2 Jt. Commissioner of Income Tax (OSD), CC-7(1) Vs. M/s Hillview Impex Pvt. Ltd.

2. Briefly stated, the assessee company which is engaged in the business of trading and investment in shares and securities had filed its return of income for A.Y 2014-15 on 30.09.2014, declaring a loss of (-) Rs.4,00,72,252/-. Subsequently, the case of the assessee was selected for scrutiny assessment u/s 143(2) of the Act.

3. During the course of the assessment proceedings, it was observed by the A.O that as per the information received from the Kolkata Investigation Directorate the assessee had traded in penny stocks of M/s Shreenath Commercials and M/s Tuni Textiles Mills in Bombay Stock Exchange (BSE) and had fraudulently booked „Short Term Capital Loss‟ (STCL) of Rs.3,86,56,040/-, as under :

Scrip Name : 12105 Shreenath commercials & 31411 Tuni Textiles Buy Sell Scrip code quantity rate Amount quantity rate Amount Loss 12105 100000 39.68 Rs. 3967920 100000 8.71 Rs. 871000 (-) 3096920 31311 1460500 25.65 Rs. 37457770 1460500 1.30 Rs. 1898650 (-) 35559120 Business Loss : Rs. 3,86,56,040/- After exhaustively referring to the findings of the Investigation wing and the modus operandi that was adopted by the operators for facilitating booking of accommodation entries in the form of LTCG/STCL, the A.O concluded that the business loss that was booked by the assessee was nothing but a prearranged method that was adopted by him to evade taxes. Backed by his aforesaid observations, the A.O added the loss of Rs.3,86,56,040/- as an unexplained cash credit u/s 68 of the Act. Resultantly, the A.O vide his order passed u/s 143(3) after making the aforesaid addition scaled down the returned loss of the assessee company to an amount of (-) Rs.14,16,212/-.

4. Aggrieved, the assessee carried the matter in appeal before the CIT(A). It was submitted by the assessee before the CIT(A) that the A.O had failed to appreciate the correct factual position and had most erroneously made an 3 Jt. Commissioner of Income Tax (OSD), CC-7(1) Vs. M/s Hillview Impex Pvt. Ltd.

addition of Rs.3,86,56,040/- u/s 68 of the Act. It was submitted by the assessee that it had during the year suffered a business loss of Rs.4,01,11,372/- out of which loss of Rs.4,00,68,550/- had arisen due to change (i.e decrease) in the value of inventory. Backed by the aforesaid facts, it was submitted by the assessee that the A.O had made a glaring error in treating the business loss that was suffered by it due to change in value of inventory as a loss due to sale of shares. Considering the aforesaid factual position, it was observed by the CIT(A) that the assessee had not undertaken any trading during the year. It was further observed by the CIT(A) that the loss returned by the assessee was on account of diminution in the value of inventory and not a trading loss or a capital loss. In the backdrop of the aforesaid facts, the CIT(A) was of the view that it was not only beyond comprehension as to from where the A.O had inferred that the assessee had suffered a loss from trading of the scrips, but also as to on what basis he had worked out the said impugned loss at an amount of Rs. 3,86,56,040/-. It was categorically observed by the CIT(A) that the assessment order was totally silent on how the figure of loss was arrived at as well as when the shares under consideration had been sold by the assessee. Noticing that the shares in question were still held by the assessee in the succeeding assessment year i.e A.Y. 2015-16, the CIT(A) observed that it could not be understood that as to how the A.O had concluded that the assessee had made a loss from the sale of shares of the above referred two scrips, which thereafter as per him had been set-off against his other income. Taking note of the fact that the assessee had not sold the shares in question and the loss returned by him was on account of diminution in the value of inventory and not a trading loss or capital loss, the CIT(A) vacated the addition made by the A.O.

as to on what basis the A.O had concluded that the assessee had made a loss from the sale of shares of the above referred two scrips and also the basis for quantification of the same, the ld. D.R failed to come forth with any reply.

Particulars Purchase Cost 31.03.2013 31.03.2014 M/s Shreenath Commercial & Rs.39.60 (26.02.2013) Rs.20.80 Rs.8.32

5 Jt. Commissioner of Income Tax (OSD), CC-7(1) Vs. M/s Hillview Impex Pvt. Ltd.

Finance Ltd. (now known as Proaim Enterprises Ltd.) M/s Tuni Textiles Mills Ltd. Rs.27.35 (01.03.2013) Rs.20.30 Rs.1.25 Rs.26.90 (04.03.2013) Rs.26.00 (06.03.2013) Rs.25.60 (07.03.2013) Rs.25.20 (08.03.2013) Rs.24.80 (11.03.2013) Rs.24.45 (12.03.2013) Accordingly, it was on the basis of the aforesaid drastic fall in the price of the aforesaid shares that the assessee had suffered a loss of Rs.4,00,08,550/- on account of valuation of inventories. As is discernible from the order of the CIT(A), we find that it was observed by him that the assessee had returned a loss of Rs.4,00,72,252/- (out of which the loss of Rs.4,00,08,550/- was on account of valuation of inventories). Accordingly, taking cognizance of the aforesaid incorrect and misconceived facts on the basis of which the A.O had concluded that the assessee had booked a bogus loss of Rs. 3,86,56,040/- on sale of the aforesaid shares and added the same u/s 68 of the Act, the CIT(A) had vacated the aforesaid addition by observing as under :

“7.0 The second and third grounds of appeal are against the addition of Rs.3,86,56,040/- as sale proceeds of shares u/s. 68 of the IT Act. The AO observed in the assessment order that the return of income was filed by the assessee declaring a total loss of Rs.4,00,72,252/-. He thereafter went on to explain the modus operandi followed by certain entry operators in Kolkata. He referred to the information received from the Investigation Directorate of Kolkata and stated that the assessee has dealt in two penny stock shares, Shreenath Commercial and Finance Ltd and Tuni Textiles Mills Ltd. According to the AO, the assesses had fraudulently booked short term capital loss of Rs.3,86,56,040/- from sale of the scrips of these two companies. The details of the toss according to the AO are as under: Business Loss on sale of shares in assessee's case: Scrip name: 12105 Shreenath commercials & 31411 Tuni Textiles Buy Sell Scrip Quantity Rate Amount Quantity Rate Amount Loss Code 12105 100000 39.68 3967920 100000 8.71 871000 (-) 3096920 31411 1460500 25.65 37457770 1460500 1.30 1898650 (-) 35559120 Business Loss Rs.3,86,56,040/- 7.1 As seen from the above, on the one hand the AO states that the assesses booked short term capital loss of Rs.3,86,56,040/- while on the other hand in the table

6 Jt. Commissioner of Income Tax (OSD), CC-7(1) Vs. M/s Hillview Impex Pvt. Ltd. which is a part of the assessment order, he shows the same amount as business loss. At para 5 of the assessment order, the AO discusses the modus operand! of how the long term capital gains/short term capital losses are booked/managed by certain assessees. At para 6 of the assessment order, the AO again states that the assesses has booked business losses on account of sale of shares in the current year and set it off against business profit from transactions in shares and securities. He further states that as the transactions in the above two scrips were found suspicious, detailed investigation was undertaken. Various tools which were available like ITD data, BSE data, money control website, taxman etc. were examined. At para 7 of the assessment order, he states that after examination of records the business loss of Rs.3,86,56,040/- claimed by the assessee from the sale of shares of Shreenath Commercial and Finance Ltd. and Tuni Textiles Mills Ltd, was not genuine and pre arranged to evade taxes, He further mentioned that the assessee has shown very negligible profit on account of sale of shares. He contradict himself when he says "no other substantial transactions were done during the year except these transactions". He made another absurd observation that the transaction in the shares of Shreenath Commercial and Finance Ltd. and Tuni Textiles Mills td, were at fag end and it shows that the assessee was having a clear idea of profit earned at the month of December, 2013, Hence, to avoid taxes, the assessee took bogus loans on account of purchase/safe of the scrips of Shreenath Commercial and Finance Ltd. and Tuni Textiles Mills Ltd. After a few more absurd and contradictory statements, the AO finally concluded that the business loss of Rs.3,86,56,040/- cannot be allowed and made an addition of Rs.3,86,56,040/- u/s- 68 of the IT Act. 7.2 During the course of appellate proceedings, the Learned Counsel for the appellant made the following submissions: "Ground 2 1. The Assessment order contains an apparent: error passed by the ld. Assessing Officer. The id. Assessing Officer has failed to appreciate the true facts produced before him arid without appreciating the true facts the Ld. Assessing officer has made the application for section 68 of Income tax Act, 1961 instead considering business loss on account of change in the value of inventories under section 145 of Income Tax Act, 1961. The facts of the case are that during the F.Y. 2013-14 relevant to the A.Y. 2014-15, the Assessee Company has suffered business toss of Rs.4,01,11,372/- out of which toss of Rs.4,00,08,550/- has arisen due to Change (decrease) in value of inventories. Therefore, the ld. Assessing Officer has made an apparent error by treating business loss arising due to change in inventory as toys due to sale of shares. The copies of statement showing stock in trade for FY 2013-14 have been furnished to you which are enclosed herewith.

7 Jt. Commissioner of Income Tax (OSD), CC-7(1) Vs. M/s Hillview Impex Pvt. Ltd.

The facts of the case are that Inventories in case of Assessee Company comprises of Investment in shares of M/s Royal India Corporation Limited, M/s Shreenath Commercials & Finance Ltd. (Now known as Proaim Enterprises Ltd.) and M/s Tuni Textiles Mitts Ltd. The quoted shares are listed on Bombay Stock Exchange and they are subject to securities transaction tax. The shares of M/s Shreenath Commercials & Finance Ltd. (Now known as Proaim Enterprises Ltd.) and M/s Tuni Textiles Miffs Ltd. were purchased in the financial year 2012-13 at the rates prevailing on the relevant dates and were recorded at cost. The above shares were valued as on 31 -03-2013 and thereafter on every 31sr March of each financial year at the rates prevailing on the relevant dates. During the A.Y. 2014-15, the abovementioned shares have not been traded at all and have only been valued as on 31-03-2014 at the rates prevailing as on that date. On perusal of records, the price of Quoted shares has drastically fallen down during the end of assessment year 2014-15.” The table showing the fluctuation of the price of shares at each year end; Particulars Purchase Cost 31.03.2013 31.03.2014 M/s Shreenath Commercial & Finance Ltd. (now Rs.39.60 (26.02.2013) Rs.20.80 Rs.8.32 known as Proaim Enterprises Ltd.) M/s Tuni Textiles Mills Ltd. Rs.27.35 (01.03.2013) Rs.20.30 Rs.1.25 Rs.26.90 (04.03.2013) Rs.26.00 (06.03.2013) Rs.25.60 (07.03.2013) Rs.25.20 (08.03.2013) Rs.24.80 (11.03.2013) Rs.24.45 (12.03.2013)

The copies of rates at which the securities were traded on Bombay Stock Exchange on the relevant dates have been enclosed herewith.

8 Jt. Commissioner of Income Tax (OSD), CC-7(1) Vs. M/s Hillview Impex Pvt. Ltd.

 ACITVs Shri Ravindrakumar Toshiwal [2008] ITA 5302 (ITAT Mumbai)  ITO-24(3)(1) Vs. M/s Arvindkumar Jain HUF Held in ITAT "H" Bench (Mumbai) The copies of contract notes of the above transactions and bank statement for the relevant period has been furnished to you your honor.

9 Jt. Commissioner of Income Tax (OSD), CC-7(1) Vs. M/s Hillview Impex Pvt. Ltd.

Ltd, These shares are still held by the assessee even in the succeeding assessment year i.e, AY 2015-16, In the absence of any sale made by the assessee, it is not understood as to how the AO can conclude that the assessee had made loss from the sale of shares of the above referred two scrips which has been set off against his other income. As the assessee has not sold these shares and as the loss returned by him is on account of valuation of inventory and not trading loss or capital loss, the addition made by the AO cannot be sustained- As already stated when the loss claimed by the assessee is Rs.4,00,72,252/- and the loss from valuation of inventory is Rs.4,00,08,550/, it is not understood as to where the figure of Rs.3,86,56,040/- is derived from by the AO. It is also not understood how a loss from sale of shares can be added u/s. 68 of the IT Act. In view of the above, the addition made by the AO of Rs.3,86,56,040/- is deleted. These grounds of appeal are allowed.” We have given a thoughtful consideration to the aforesaid observations of the CIT(A), and concur with him that the A.O had absolutely on the basis of glaringly incorrect and misconceived facts made an addition of Rs.3,86,56,040/- u/s 68 of the Act. Admittedly, it is a matter of fact borne from the record that the assessee had during the year under consideration not traded in the shares of the aforementioned companies. Rather, the scrips in question, viz. (i). M/s Shreenath Commercials & Finance Ltd. (1,00,000 shares); and (ii). M/s Tuni Textiles Mills Ltd. (14,60,500 shares) were even held by the assessee in the succeeding year i.e A.Y. 2015-16. We are unable to comprehend that now when the assessee had not sold any of the aforementioned scrips during the year, then, how and on what basis the A.O had concluded that the assessee had booked a bogus loss on sale of shares, which thereafter had been set-off against its other income. As the loss suffered by the assessee company is on account of the valuation of inventory and not a trading loss or a capital loss, therefore, in our considered view the CIT(A) had rightly vacated the addition of Rs. 3,86,56,040/- made by the A.O u/s 68 of the Act. At this stage, we may herein observe that as the valuation of the „closing stock‟ of the shares held by the assessee is as per the provisions of Sec. 145 of the Act and in conformity with the Accounting Standard

2. (AS-2), therefore, no infirmity qua the loss suffered by the assessee pursuant to the diminution in the value of the inventory therein arises. Backed by the aforesaid facts, we are of the considered view that as the A.O had framed the assessment

10 Jt. Commissioner of Income Tax (OSD), CC-7(1) Vs. M/s Hillview Impex Pvt. Ltd. on the basis of glaringly misconceived and incorrect facts, the same, thus, had rightly been vacated by the CIT(A). Accordingly, finding no infirmity in the view taken by the CIT(A), we uphold the same. We, thus, finding no merit in the appeal of the revenue dismiss the same.

Order pronounced in the open court on 29.09.2021