SURESH KUMAR SARDA,MUMBAI vs. ACIT 18(1), MUMBAI

Per Rajesh Kumar, Accountant Member:

The grounds raised by the assessee are as under:

The grounds raised by the Revenue are as under:

1. On the facts and in circumstances of the case and in law the Ld. CIT(A) has erred in allowing the disallowance made by the A.O on account of artificially booked losses by the assessee through 3 brokers namely, R.K. Commodity Service Pvt. Ltd., Ashlar Commodities Pvt. Ltd. and Bhaijee Commodities Pvt. Ltd on the platform of National Spot Exchange Ltd. (NSEL) to the extent of Rs.14,89,56,190/- ignoring the fact that the A.O, during the course of the assessment proceedings, established that the assessee has indulged in circular trading through cartel members for booking artificial losses.

2. On the facts and in circumstances of the case, and in law, the Ld. CIT(A) has erred in not appreciating the fact that the brokers namely, R.K. Commodity Service Pvt. Ltd., Ashlar Commodities Pvt. Ltd, and Bhaijee Commodities Pvt. Ltd have allowed the assessee to carry out huge transactions without seeking any margin money which is highly improbable and against the guidelines set by the SEBI.

3. On the facts and in circumstances of the case, and in law, the Ld. CIT(A) has erred in not appreciating the fact that all the transactions with the three brokers namely, R.K. Commodity Service Pvt. Ltd., Ashlar Commodities Pvt. Ltd. and Bhaijee Commodities Pvt. Ltd were carried out in the last month of the financial year for booking artificial losses, whereas from the Mumbai based broker through whom assessee has booked profit, he carried out transaction during the entire year.

5. For the above mentioned reason and any other reasons that may be urged at the time of hearing, it is requested that the order of the CIT(A) be quashed and that of the A.O. be restored.

3 & ITA No.3991/M/2017 Shri Suresh Kumar Sarda ITA No.3991/M/2017 2. The only issue raised by the Revenue in the various grounds of appeal is against allowing the booked losses by the assessee through 3 brokers namely R.K. Commodity Service Pvt. Ltd., Ashlar Commodities Pvt. Ltd. and Bhaijee Commodities Pvt. Ltd. on the platform of National Spot Exchange Ltd. (hereinafter referred to as NSEL) to the extent of Rs.14,89,56,190/- by ignoring the facts on record as brought out by the AO that said losses were artificial and managed to set off against the income of the assessee.

-7,02,72,500 Loss NSEL 6. R.K. Commodities Services Pvt. Ltd. TOTAL 11,39,17,746

4 & ITA No.3991/M/2017 Shri Suresh Kumar Sarda Thus the AO observed that assessee has made huge profits of Rs.31,41,08,684/- from transactions made through Motilal Oswal Commodities Pvt. Ltd., Angel Commodities Brokering Pvt. Ltd. while huge losses were booked/made from other brokers. Similarly, loss of Rs.19,36,89,465/- was incurred in respect of commodity transactions entered in National Spot Exchange Ltd. through three brokers namely R.K. Commodity Service Pvt. Ltd., Ashlar Commodities Pvt. Ltd. and Bhaijee Commodities Pvt. The AO during the course of assessment proceedings issued notice under section 133(6) of the Act to these brokers and also to the stock exchange seeking the details of these transactions. NSEL vide letter dated 17.03.2015 furnished a CD with details of counter parties pertaining to all these transactions of the assessee. Thereafter, the AO issued a show cause notice dated 18.03.2015 calling upon the assessee to explain the various discrepancies between the contract note furnished by the brokers and by the assessee. The AO also noted that there has been modification of codes in respect of certain transactions. The assessee replied to the said show cause notice vide written submission dated 20.03.2015 and all these issues raised by the AO. The AO after examining the reply of the assessee and after verifying all the transactions in respect of three brokers recorded in the books of accounts of the assessee and matched the same with the information provided by the broker and NSEL and has not drawn any adverse inference on these points. Thereafter, AO again issued show cause notice dated 26.03.2015 stating that approximately 70 to 90 percent are circular transactions done on each day by buying and selling scripts amongst the three brokers and the amount of losses on the circular trading

5 & ITA No.3991/M/2017 Shri Suresh Kumar Sarda was calculated by the AO at Rs.16,15,73,610/- out of total loss of Rs.19,36,89,465/-. The assessee filed reply dated 28.03.2015 before the AO thereafter, but the AO found the same as not tenable and finally framed the assessment by relying on the case of CIT vs. Durgaprasad More (1971) 82 ITR 540 SC and Sumati Dayal vs. CIT (1995) 214 ITR 801 (SC) by making an addition of Rs.14,89,56,190/- for artificial losses from circular trading from three parties namely R.K. Commodity Service Pvt. Ltd., Ashlar Commodities Pvt. Ltd. and Bhaijee Commodities Pvt. and also added Rs.40,06,684/- on the ground that a loss can not be allowed on a transaction which has not taken place and as all the buying and selling documents were held to be false and bogus to defraud the revenue and differ the tax liability in respect of transactions done through Adventure India and framed the assessment under section 143(3) dated 31.03.2015.

4. In the appellate proceedings, Ld. CIT(A) partly allowed the appeal of the assessee by directing the AO to allow the loss of Rs.14,89,56,190/- after considering the submission of the assessee. However, the loss of Rs.40,06,684/- was held to be rightly disallowed which was incurred with the transaction made through Adventure India on MCX by observing and holding as under: “5.2.3. I have carefully considered the assessment order, submissions of the appellant, remand report of the assessing officer and the appellant's rejoinder to the remand report. The AO has discussed this issue at pages 12 to 14 of her assessment order and has given the reasons for disallowing the loss incurred by the appellant in commodity transactions made through the three brokers namely RK Commodities Service Private Ltd, Ashlar Commodities Private Ltd and Bhaijee Commodities Private Ltd on the NSEL exchange platform. The reasons given in her order are that the appellant has only booked a loss in all transactions with these brokers, the EOW of the Mumbai police is investigating the NSEL scam and in more than 95% of the cases the counterparty is one of the above three brokers and it is a 6 & ITA No.3991/M/2017 Shri Suresh Kumar Sarda case of circular trading to generate artificial loss. Most of the losses are booked in the month of March and therefore they fail the test of human probabilities. The appellant on the other hand explained the modus operandi of the transactions in the exchange and contended that in online terminal, selection of buyer and seller is beyond human control, AO doubted the genuineness of the transaction without bringing any specific infirmity or falsity in the transaction entered by the appellant through these brokers. In similar transaction at NCDEX the appellant has earned profit of Rs. 34.41 crores from his dealing with two brokers and therefore the loss of Rs. 19.37 crores incurred from his dealing with three brokers at NSEL cannot be said to be purchased loss. The AO herself accepted loss of Rs. 4.47 crores from these brokers as genuine while disallowing the loss of Rs, 14.90 crores. The report of NSEL scam is not relevant as there is no charge against the assessee or the three brokers with whom the assessee has dealt with, in this report. The brokers through whom the appellant transacted have not been blacklisted in spite of the NSEL scam. The test of human probabilities supports the case of the appellant, when he had earned substantial profit in commodity transaction and in subsequent years also such profit has been declared by him in the returns. The AO in the remand proceedings has carried out verification from NSEL, the three brokers and other clients of these brokers. The enquiries conducted from the clients of these three brokers revealed that most of them have entered into commodity transactions with the brokers where the losses/profit incurred/earned by them have been offered to tax. The AO herself out of the total loss of Rs. 19,36,89,465/- incurred in these transactions, issued show cause notice to disallow loss of Rs. 16,15,73,6107/- but finally disallowed only a loss of Rs. 14,89,56,190/- and accepted the loss of Rs. 4,47,33,275/- as per the following details:

Name of the Broker Total Loss (Rs.) Loss Allowed (Rs-L Loss Disallowed (Rs.) Ashlar Commodities Pvt. 5,50,99,270/- 1,52,09,620/- 3,98,89,650/- Ltd. Bhaijee Commodities Pvt. 6,81,05,890/- 1,90,93,130/- 4,90,12,760/- Ltd. R.K. Commodities 7,00,88,240/- 1,00,34,460/- 6,00,53,780/- Services Pvt. Ltd. Total as per AO 19,36,89,465/- 4,47,33,275/- 14,89,56,190/- Correct Total 19,32,93,400/- 4,43,37,210/- 14,89,56,190/-

5.2.4. The AO has not substantiated why part of the loss incurred from similar transactions with the same brokers is accepted. The AO has disallowed the loss of Rs. 40,06,6847/- incurred by the appellant in the transactions with Adventure India as MCX has informed that Adventure India has not executed any transaction on its exchange platform and the inspector enquiry revealed that Adventure India is not found in the given address. This disallowance has been confirmed by me at para

7 & ITA No.3991/M/2017 Shri Suresh Kumar Sarda 4.2, however, in respect of transactions with these three brokers, NSEL has informed that these brokers are registered with it and these brokers have also confirmed that the assessee has entered into commodity transactions through them. Therefore, for parity of reasons, the loss suffered in transactions with these three brokers by the appellant cannot be considered as non-genuine or purchased loss unless it is proved that the amount paid to these brokers has come back to the appellant. The law is well-settled that burden to prove that the apparent is not real is on the person who claims so and the same is required to be discharged by bringing positive material on record and not on hypothesis, surmises and conjectures. I find that there is no material on record to conclude that the loss incurred by the appellant in transactions with these three brokers is an engineered loss and not a genuine loss. The assessing officer appears to have made the disallowance merely on suspicion and, suspicion however strong it may be, cannot take the place of evidence as held by the Hon'ble Apex Court in the case of Umacharan Shah & Bros Co vs CIT (1959) 37 ITR 271. Therefore, considering the entire facts of the case, I’m not inclined to agree with the conclusion of the AO that loss of Rs.14,89,56,190/- disallowed by her is not the real loss but an engineered loss. More so when she herself has accepted the loss of Rs.4,47,33,275/- without giving any substantial reason. This ground of appeal is allowed.”

8 & ITA No.3991/M/2017 Shri Suresh Kumar Sarda whom this artificial losses were generated by entering into 1800 transactions when there are 600 brokers on NSEL. The Ld. D.R. relying heavily on the order of Hon’ble Supreme Court in the case of CIT Vs. Durga Prasad More (1971) 82 ITR 540 (SC) and Sumati Dayal vs. CIT (1995) 214 ITR 801 (SC) argued that this was a fit case to apply the doctrine of preponderance of probabilities. The Ld. D.R. submitted that Ld. CIT(A) also directed the AO to conduct enquiry regarding beneficiary of the loss taken by the assessee from three brokers as per the counter party client code annexed to the assessment order. The Ld. D.R. stated that AO after carrying out the necessary verification has filed a remand report before Ld. CIT(A) by submitting that on some clients notice could not be served whereas some clients did not respond to the notice and one client Smt. Vijayalaxmi Aggarwal denied having done any transaction with broker Ashlar Commodities Pvt. Ltd. The Ld. D.R. contended that Ld. CIT(A) by ignoring the report of the AO has incorrectly observed that enquiries conducted by clients to these brokers revealed that most of them have entered into commodity trading transactions with brokers where losses/profits were incurred or profit earned by them has been offered to tax. The Ld. CIT(A) confirmed the disallowance of Rs.40,06,684/- incurred by the assessee in the transaction with Adventure India on MCX but has wrongly allowed the loss of Rs.14,89,56,190/- incurred through three brokers as stated above. Thus the Ld. D.R. prayed before the Bench that since the case of the assessee is a case of circular trading and all the losses were artificial and engineered and therefore order of Ld. CIT(A) may be set aside and that of AO may be restored.

9 & ITA No.3991/M/2017 Shri Suresh Kumar Sarda 6. Per contra, the Ld. A.R. argued before the Bench that modus operandi of the transactions as carried out on NSEL was very clear and transparent which is online, automatic and without any intervention except putting to sauda on terminal. The Ld. A.R. submitted that it is not practically possible for anyone to buy quantity from specific seller on higher price and then to sell the same quantity to the same seller on lower price to book the losses. The Ld. A.R. further stated that on online terminal, selection of buyers and sellers is beyond human control and in order to prove the transaction entered into with three brokers the necessary documents in the form of contract notes, ledger accounts of the brokers, bank statements showing receipt and transactions of payments were placed before the authorities below. The Ld. A.R. while countering the allegation of the Ld. D.R. stated that AO has even cross confirmed the same from brokers and these transactions were also verified from information received from NSEL but still the AO doubted the genuineness of these transactions without bringing on record any material to show any specific defects, infirmity or falsity in the documents produced by the assessee in support of the said transactions. The Ld. A.R. while referring to the remand proceedings stated that AO has carried out verification from the above three brokers and also from their clients. All these three brokers have confirmed these transactions. Further, the clients of these brokers have also confirmed the said transactions in reply to notice issued under section 133(6) of the Act. Though the Ld. A.R. admitted that in some cases the notice under section 133(6) could not be served which may have happened due to change of address but without any further

10 & ITA No.3991/M/2017 Shri Suresh Kumar Sarda enquiry, the conclusion of the AO that these transactions are not genuine is wrong and contrary to the provisions of law. The Ld. A.R. stated that only one client Smt. Vijayalaxmi Aggarwal has denied transaction but the payment of Rs.6,71,640/- made by Ashlar Commodities Pvt. Ltd. is duly credited in her bank account which shows that her denial to the transaction is factually incorrect. The Ld. A.R. while referring to the order of AO submitted that even the AO has allowed the loss to the tune of Rs.4,47,33,275/- out of the total loss of Rs.19,36,89,465/-. The Ld. A.R. while countering the allegation of the AO that assessee has not made profit even on a single transaction with these three brokers, the Ld. A.R. submitted that transactions in NSEL are spot transaction and not future transaction. Therefore, at the end of the day either Sauda should be squared off or delivery be taken. The Ld. A.R. submitted that it can not be thrust on the assessee as to why he has squared off the sauda in loss when he has option of taking delivery because all these are business decisions depending upon the availability of funds, future market estimation, cost of funds required for investments and other available opportunities. The Ld. A.R. submitted that AO has only selected the loss making transactions out of total transactions entered into by the assessee and gave a finding that no single transaction with brokers at NSEL has resulted into profit. However, the AO has ignored the business considerations as the traders in this line of business focus on the overall business loss or gain. Therefore, linking all these issues with the assessee’s intention to book losses is not correct. On the issue of margin money the Ld. A.R. submitted that assessee has only carried out spot transaction

11 & ITA No.3991/M/2017 Shri Suresh Kumar Sarda and therefore no margin money is required in as much as payment is required to be made immediately on settlement of transaction or adjusted from the advance already given when client is new to the broker. The Ld. A.R. vehemently submitted that report regarding NSEL scam/transparency in NSEL is not at all relevant in as much as none of these reports have charged the assessee or any of three brokers with whom assessee has dealt with for doing these transactions, therefore the Ld. A.R. argued that on the basis of hearse report of scam in NSEL the transaction of the assessee can not be held to be non genuine. On the allegation of AO that assessee was constantly dealing with these three brokers when there are more than 600 broker members of NSEL. The Ld. A.R. submitted that AO has completely ignored the modus operandi of the exchange where human interventions are not possible and all these terminals are automatically and fully mechanized. Therefore all the presumptions of the AO in rejecting the loss are wrong and against the facts of the case. Finally, the Ld. A.R. submitted that assessee was not confronted with any investigation report of the economic offence wing of Mumbai police nor any material was brought on record by the AO that assessee or any of these three brokers were party to the NSEL scam. Therefore, the presumption and assumption of the AO on the loss incurred by the assessee are without any basis and merit rejection.

12 & ITA No.3991/M/2017 Shri Suresh Kumar Sarda loss through client code modifications through these brokers of Rs.86.75 lakhs but when the assessee filed written submission but further taking into consideration the submission and contentions of the assessee as made in the course of assessment proceedings the AO dropped the said issue. Thereafter, the AO came to the conclusion that the loss through circular trading was generated to the tune of Rs.16,15,73,610/- which was again replied by the assessee thereafter the AO disallowed loss of Rs.14,89,56,190/- out of the total loss of Rs.19,36,89,465/-. We further notice that the assessee has filed all the documentary evidences in the form of ledger accounts, bank account statement showing the payment and receipt of the transactions besides confirming the transaction from brokers and NSEL and also from the clients. In our opinion the Ld. CIT(A) has considered all these aspects of the matter while passing the order and passed a very detailed and reasoned order considering all the issues raised by the AO in the assessment order and therefore, we do not find any reason to interfere in the order of the Ld. CIT(A). We note that AO has not brought any material on record to prove the infirmity/falsity in the document furnished by the assessee in support of these transactions. In our opinion, the AO can not act on the basis of mere presumption and assumptions. We further find that none of these brokers were either implicated in the NSEL scam or blacklisted by the stock exchange inspite of the NSEL scam. In our opinion, the AO has wrongly rejected the loss on the transactions through three brokers to the tune of Rs.14,89,56,190/- while allowing a part of the loss to the tune of Rs.4,47,33,275/- as genuine. We further find from the facts

13 & ITA No.3991/M/2017 Shri Suresh Kumar Sarda before us that neither the assessee nor any of these brokers were implicated in any investigation carried out by the economic office wing of Mumbai Police or tainted in the NSEL scam. We further find that in the subsequent assessment years i.e. AY. 2014-15 & 2015-16 assessee has declared substantial profit from such transactions. Thus we are not in agreement with the conclusion of AO on the human probabilities. In view of our discussion hereinabove we upheld the order of Ld. CIT(A) by dismissing the appeal of the Revenue.

16 & ITA No.3991/M/2017 Shri Suresh Kumar Sarda trading transactions. Under these facts and circumstances, we hold that the loss incurred by the assessee in transaction with the Adventure India can not be treated as bogus on the ground that stock exchange has denied that assessee is not registered as client with the Adventure India when nowhere it has been denied that Adventure India is not a trading member of the stock exchange. The loss can not be disallowed on the basis of assumptions and presumptions. Accordingly, we are inclined to allow the appeal of the assessee by setting aside the order of Ld. CIT(A) on this issue.

Order pronounced in the open court on 17.05.2019.