MR. MURUGAN KARTHIK MEIYAPPAN,CHENNAI vs. ITO, NCW-10(6), CHENNAI

The SEBI had conducted investigation into the trading activity in illiquid stock options on BSE Limited for the period from 1st April, 2014 to September 30, 2015 after observing large scale reversal of trades in the stock options segment of the BSE. It was alleged that the assessee was also found to be one of such clients who was engaged in reversal of trades involving squaring off open positions with a significant difference without any basis for such change in the contract price. The aforesaid reversal trades allegedly resulted into generation of artificial volumes. It was alleged that the assessee was engaged in 32 instances in 13 unique contracts which led to generation of artificial volume in those contracts.

The notice u/s.148 of the Act was issued on 29.03.2021 after obtaining the requisite approval. In response to notice u/s 148, the assessee e-filed his return of income on 17.04.2021 declared total income at Rs. Nil. Notice u/s 143(2) had been issued on 12.11.2021 and reasons were provided to the assessee on 01.07.2021 by the Jurisdictional Assessing Officer. During the course of assessment proceedings, the notice u/s.142(1) of the Act along with questionnaires were issued to the appellant asking him to furnish justification regarding “Loss on Trading in Derivatives & Shares” claimed at Rs.2,11,50,953/- during the period under consideration.

After consideration of the submission made by the assessee in this regard, the Assessment Order u/s.147 of the Act was passed on 23.03.2022, disallowing the loss claimed on Trading in Derivatives & Shares at Rs.2,11,50,953/- and thereby assessing the Taxable income of the assessee at Rs. 2,11,50,953/-. A demand of Rs.87,51,346/- was also raised, including interest u/s.234B of the Act.

Aggrieved by the Assessment Order passed, the assessee had filed an appeal before the Commissioner of Income Tax (Appeals)(“ld.CIT(A)”) on 15.04.2022. However, the appeal was dismissed by the ld.CIT(A) vide Order dated 10.06.2025 passed u/s.250 of the Act, upholding the assessment reopened u/s.147 of the Act and holding that the assessee had “not discharged his onus of explaining the genuineness of the above trading activity and reasons for undertaking such trades and reversing them, as discussed by the A.O. in the assessment order & SEBI.”, also placing reliance on the decision of the Hon’ble Calcutta High Court in the case of Swati Bajaj (2022) 139 taxman.com 352 (Cal).

Against the ld.CIT(A) Order, the assessee had preferred this appeal before us.

The ld.AR for the assessee submitted that on perusal of the impugned Assessment Order, it is evident that the Assessing Officer had, prima-facie, relied only upon the Order passed by SEBI in Adjudication Order No.Order/PM/AB/2019-20/6692 dated 31.01.2020, imposing a penalty of Rs.5,00,000/- u/s.15HA of the SEBI Act on the assessee for alleged fraudulent trading activity in illiquid stock options, in disallowing the Business Loss of Rs.2,11,50,953/- claimed towards Loss on Trading in Derivatives & shares by the assessee for the subject A.Y.2015-16.

In this regard, the ld.AR contended that no independent inquiry had been conducted by the Assessing Officer; no summons were issued to the brokers involved; trade data was not verified with the exchange; no corroborative evidence was brought on record to establish the non-genuineness of the transactions in dispute other than the reliance placed on SEBI Order imposing penalty.

Further he is submitted that the assessee had claimed the Business loss of Rs.2,11,50,953/- based on genuine trading recorded in books of account and executed through a SEBI registered broker on a recognised stock exchange (“BSE’). The assessee had entered into the transactions in dispute with bonafide intentions, relying on algorithm-based calculations as advised by the expert broker, on an anonymous platform provided by the BSE where he had no knowledge of the counterparty and thus had absolutely no linkage with the counterparty. When loss was incurred on account of such transactions, he had claimed the same.

The ld.AR also submitted that the assessee, aggrieved by such Order passed by SEBI had filed an appeal before the Securities Appellate Tribunal (“SAT”) in A.L.No. 160/2020 which is pending for adjudication as on date. As such, it is submitted that the imposition of penalty by SEBI giving rise to the issue in dispute (i.e.) disallowance of business loss claimed had not yet attained finality. Hence, it is further submitted that, in such a scenario, especially where the Assessing Officer had not arrived at any independent satisfaction on such income escaping assessment in the assessee’s hands other than the borrowed satisfaction arrived at from SEBI Penalty Order as stated above, it was pre- mature on the part of the Assessing Officer / ld.CIT(A to disallow / uphold such disallowance of business loss claimed respectively in the assessee’s hands for the subject A.Y.2015-16.

In this regard the ld.AR placed reliance on the following decisions:

The ld.AR submitted that it is pertinent to note that the Adjudicating Officer, while passing the said Order u/s 15-I of SEBI Act, 1992, had relied upon decisions of the Supreme Court in the case of Kishore R. Ajmera [2016] 66 taxmann.com 288 (SC) and that of Rakhi Trading (P.) Ltd [2018] 90 taxmann.com 147 (SC) [Case-law copies enclosed as Item nos. 8 & 9 in page nos. 57 to 103 of Paperbook filed on 28.01.2026] where the cases involved Brokers / Traders with facts and circumstances distinguishable from that of the assessee and hence had been misplaced.

The Ld.CIT(A), in his Order passed u/s.250 of the Act, had placed reliance on the decision of the Hon’ble Calcutta High Court in the case of Swati Bajaj (2022) 139 taxxman.com 352 (Cal) to uphold the disallowance made in the underlying Assessment Order. It is submitted that such reliance was misplaced since the same related to accommodation entries and not to genuine loss suffered on exchange traded derivative transactions as in the assessee’s case.

Further, the ld.AR submitted that the assessee, on payment of such penalty of Rs.5,00,000/- levied u/s 15HA of the SEBI Act on 20.03.2020 in the subsequent F.Y.2019-20 applicable to A.Y.2020-21 had not claimed such payment as expenditure vide his Income tax Return filed on 30.12.2020 vide Acknowledgement No.969707751301220 for the subject A.Y.2020-21. In light of the above arguments and judicial precedents, the ld.AR prayed that the disallowance of Business Loss of Rs. 2,11,50,953/- claimed towards ‘Loss on Trading in Derivatives & shares’ be deleted.

Per contra, the ld.DR for the revenue supported the orders of the AO as well as the ld.CIT(A) and submitted that the penalty has been levied by the SEBI itself shows that the assessee’s transactions are not genuine. Therefore, the AO has rightly disallowed the loss claimed by the assessee and prayed for confirming the same.

We have carefully considered the rival submissions and perused the material available on record and gone through the orders of the authorities along with case laws and paper book filed. It is an undisputed position that the disallowance made by the Assessing Officer is founded entirely upon the SEBI Adjudication Order dated 31.01.2020. A perusal of the assessment order reveals that no independent inquiry was conducted by the AO to verify the contract notes, Ledger accounts, Bank statements, Margin payments, Broker confirmations or Exchange data regarding execution of trades.

Further, we find that there is no material brought on record to demonstrate that the transactions were fictitious, pre-arranged between known parties, or that consideration did not actually pass. The AO has not recorded any independent finding that the loss claimed was artificially engineered for tax evasion.

It is trite law that proceedings under the Income Tax Act are independent of regulatory proceedings under other statutes. Therefore, we are of the considered view that, while findings of SEBI may constitute relevant information, they cannot, ipso facto, be conclusive for income-tax purposes unless corroborated by independent examination in accordance with the provisions of the Act.

Further, the Hon’ble Gujarat High Court in Raajratna Stockholdings (P.) Ltd. v. ACIT has held that jurisdiction cannot be assumed merely on borrowed satisfaction without independent application of mind. Though rendered in the context of reopening, the principle equally applies to framing of assessment.

Similarly, in Kundan Rice Mills Ltd v. ACIT, it was held that addition cannot be sustained merely on the basis of SEBI’s interim order without examination of the genuineness of transactions under the Income Tax Act.

The reliance placed by the ld.CIT(A) on Swati Bajaj v. ITO is, in our considered view, distinguishable on facts. That case pertained to accommodation entries in penny stock transactions involving premeditated price rigging and systematic tax evasion through exempt long-term capital gains. In the present case, the issue relates to derivative transactions executed on a recognised exchange platform, and no material has been brought on record to establish that the assessee was a beneficiary of any accommodation entry scheme.

Further, the pendency of appeal against the SEBI order before the Securities Appellate Tribunal indicates that the findings of SEBI have not attained finality. However, even independent of such pendency, the Income Tax Authorities are duty-bound to examine the claim on merits. We also note that the assessee has not claimed the SEBI penalty as deductible expenditure in subsequent assessment year, which indicates consistency in conduct.

Therefore, we are of the considered view that in the absence of independent inquiry, corroborative material, or evidence demonstrating that the transactions were sham, colourable or fictitious, the disallowance of the entire derivative loss merely on the basis of SEBI’s findings amounts to substitution of statutory satisfaction under the Income Tax Act with regulatory conclusions under another enactment is legally unsustainable.

In view of the foregoing discussion, we hold that the Assessing Officer was not justified in disallowing the derivative loss of Rs.2,11,50,953/- solely on the basis of the SEBI Adjudication Order, without conducting independent inquiry and without bringing cogent material on record to establish that the transactions were non-genuine. Accordingly, we set aside the order of the ld.CIT(A) and the disallowance of Rs. 2,11,50,953/- is hereby directed to be deleted.

In the result the appeal of the assessee is allowed.