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Income Tax Appellate Tribunal, ‘B’ BENCH, KOLKATA
Before: Sri J. Sudhakar Reddy & Sri S.S. Viswanethra Ravi
Date of concluding the hearing : January 15th, 2019 Date of pronouncing the order : March 15th , 2019 O R D E R Per J. Sudhakar Reddy :- This is an appeal is filed by the Revenue and is directed against the order of the ld. Commissioner of Income Tax (Appeals) - 2, Kolkata (hereinafter the ‘ld. CIT (A)’), passed u/s 250 of the Income Tax Act, 1961 (the ‘Act’), dated 05/05/2017.
Brief fact of this case are that the assessee is a company and is a SEBI registered stock broker. The assessee company has membership of the National Stock Exchange of India (NSE), Bombay Stock Exchange Ltd. (BSE) and MCX Stock Exchange (MCX-SX). This company is mainly engaged in the business of dealing in shares and securities. It filed return of income on 29.09.2014 declaring total income of Rs.3,12,23,356/-. The Assessing Officer competed assessment u/s 143(3) on 28.12.2016 determining the total income of the assessee at Rs.6,52,94,158/-, inter alia disallowing, trading loss arising out of purchase and sale of shares of five companies namely (i) COMFINCAP, (ii) FIRFIN, (iii) GBLINFRA, (iv) NIKKIGL AND (v) RUTRINT during the year, on the ground that the same is treated as bogus. The Assessing Officer relied on M/s.PRB Securities Pvt. Ltd Assessment Year: 2014-15 information/data provided to his office by the DIT(Inv.), Kolkata for making this disallowance. The assessee requested the Assessing Officer to furnish a copy of the investigation report and the statements of third parties as recorded by the DIT(Inv.), Kolkata. The Assessing Officer records at Para 1.8 that he does not feel it proper to provide a copy of such report and a copy of the statements to the assessee, nor it is prudent to grant the assessee an opportunity of cross- examination of such persons. Based on the investigation report, he came to the following conclusions:
“1.9 The undersigned has gone through the details submitted by the assessee. In this case the assessee has intentionally accumulated loss through accommodation entries. The assessee has provided evidence of transaction in black and white and tried to prove that this transaction is bona fide. However, circumstantial evidence suggests mala fide intention of the assessee. Further it is justified to state that the business activities which may be shown by such companies are mere paper transactions which cannot be substantiated at ground level. The rise & fall in price of shares is sharp and is not at all correlated & commensurate with the fundamentals of the company. As per the investigation conducted by the DIT(Inv), Kolkata it has been proved beyond doubt that the companies i.e. COMFINCAP, FIRFIN , GBLINFRA, NIKKIGL and RUTRINT are just a face off to cover up the ill contention of the assessee to claim bogus loss. Since assessee has traded and incurred losses in shares of these five scripts and these scripts are among the 84 companies which has been identified and unearthed by the DIT (lnv.), Kolkata for being used for providing bogus accommodation entries of losses and gains, I do not consider it imperative to conduct any further enquiry into the documents submitted by the assessee, Hence, Rs.3,37,70,302/- is disallowed u/s 68 and added back to the total income of the assessee company. Penalty proceeding u/s 271(1)(c) is initiated separately.”
Aggrieved the assessee carried the matter in appeal before the ld. CIT(A). The ld. First Appellate Authority considered all the submissions of the assessee and granted relief to the assessee by holding that the Assessing Officer was wrong in coming to a conclusion that this claim of loss by the assessee is not genuine.
Aggrieved the Revenue is in appeal before us on the following grounds: 1. “Whether on the facts and in the circumstances of the case, the ld. CIT(A) erred in considering disallowance of the losses of Rs.3,37,70,302/- claimed by the assessee company in dealing in shares of five companies on the basis of judicial decisions differing with the issue involved.”
M/s.PRB Securities Pvt. Ltd Assessment Year: 2014-15
2. “Whether on the facts and in the circumstances of the case, the ld. CIT(A) erred to consider the detailed Investigation report submitted by the DIT(Investigation), Kolkata ignoring the fact that SEBI has suspended operation of company share in which the assessee has allegedly transacted and whether such ignorance of fact pointed out by competent authorities like SEBI, is perverse or not? 3. “That the appellant craves for leave to add, delete amend or modify any ground before or at the time of appellate proceedings.”
4.1 The ld. Departmental Representative relied on the order of the Assessing Officer and submitted that the addition was made based on detailed investigation by the DIT(Inv.), Kolkata. He submitted that certain search and survey operations were conducted by DIT(Inv.), Kolkata on 30 share broking entities and entry operators. During the course of such operations, it has come to light that unaccounted cash was taken from beneficiaries and prices of shares were manipulated to ensure that some of the beneficiaries received long term capital gain and that reverse modus operandi was adopted in order to provide short term capital loss to certain persons. He argued that the beneficiaries bought shares from existing promoters either through offline mode or through online mode and after a period of more than one year, prices of such scripts increased about 10 to 20 times the price of purchase giving rise to exempt long term capital gain. He submitted that the associated operators on his own or with the help of financial support of intermediary agent purchased a company listed on BSE and having a small capital base and thereafter the operators manipulated the share prices to provide bogus long term capital gain. He disputed the finding of the ld. CIT(A) and submitted that the same should be reversed. 4.2 The ld. Counsel for the assessee, on the other hand, relies strongly on the order of the ld. CIT(A) and submitted that in similar and identical circumstances, this Bench of the Tribunal in the assessee’s own case for Assessment Year 2013-14 in order dated 05.12.2018
M/s.PRB Securities Pvt. Ltd Assessment Year: 2014-15 upheld the order of the ld. CIT(A), wherein such an addition on account of bogus loss was deleted. He prayed that the order of the ld. CIT(A) be upheld. As the was never given a copy of the report of the DIT(Inv.), Kolkata nor provided any copy of the alleged statements recorded by the Investigation wing, which were the only material based on which this disallowance was made.
We have heard rival contentions. On careful consideration of the facts and circumstances of the case, perusal of the papers on record, we find that ld. CIT(A) at Page 23 held as follows:
I find the following facts in the case of the appellant:
1. 1. All the transactions relating to purchase and sale has been done through screen based online trading system of the recognized Stock Exchange, i.e. Bombay Stock Exchange Ltd. (BSE).
2. All the shares purchased were credited/transferred by the Stock Exchange to appellant’s demat account within the prescribed settlement period of the Stock Exchange.
3. Similarly entire sale of these shares were debited by the Stock Exchange from demat account within the prescribed settlement period of the Stock Exchange.
4. These demat accounts are maintained under the relevant provisions contained in the Depository Act, 1996.
5. The copy of the entire demat account for the relevant year were filcd and the AO has not pointed out any discrepancy in such demat account. (PB, page- 199 to 224 & 322 to 323) 6. There is no offline transaction by the appellant. There is no transaction in the nature of bonus/preferential allotment/private placement etc. Even the AO has not doubted that the transactions were not through online trading system. 7 The appellant during the relevant Assessment Year 2014-15, has traded in more than 672 scripts listed in the SEBI recognized stock exchanges, viz., National Stock Exchange (NSE), Bombay Stock Exchange (BSE) and MCX Stock Exchange Ltd. (MCX-Sx). The appellant has substantial share transactions in the earlier years as well. (PB- Page 321) 8. It is not the case of the AO that the appellant has resorted to any Client Code Modification. No client code modification has been done and all trades have been executed in appellant's Proprietary account.
M/s.PRB Securities Pvt. Ltd Assessment Year: 2014-15
The rate at which shares were purchased/sold as reflected in the statement are fully in conformity with the prevailing market rates on respective date at Bombay Stock Exchange (BSE). (PB- Page-236 to 250) 10. The Assessment order does not suggest that the AO has made any enquiry about the directors of the company whose shares were traded by the appellate, that any cash trail of the company was prepared by the Investigation Wing, or by the Assessing Officer, that the appellant has ever been confronted by any investigation wing of the country in course of any investigation, that the any company whose share were purchased has been confronted by any investigation wing of the country, that the any company whose share were purchased has accepted having taken the entries for a commission and has voluntarily surrendered or not, that the alleged beneficiaries who had taken entries of nearly 40 crores have voluntarily surrendered it for taxation without any further enquiry and that the appellant or the shares which were traded by the appellant were not one of those alleged beneficiaries and the appellant have not filed any revised return to surrender the claim of loss and no investigation was ever conducted by any investigation wing in appellant's case. 11. All the transactions were in the nature of proprietary trades and were executed in appellant's proprietary account for which no broker note is generated as per the trading regulation of the Stock Exchanges. In case of proprietary trades, the assessee is provided with system generated trade files by the stock exchange in which the settlement number, settlement date, trade date, distinct order numbers, order time, trade numbers and trade time are mentioned, which has been duly filed before the Assessing Officer during the course of assessment proceedings vide letter dated 26th December,20l6. A statement detailing the trading time/duration and days for all the shares purchased and sold is enclosed. (PB-Page-97 to 198) 12. As regards to payment for purchase and sale of shares, under the online trading system of the Stock Exchanges, all the settlement of trades are carried out by the Clearing Corporation of the Stock Exchanges set up in pursuant to the Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2012 by virtue of which the Clearing Corporation acts as a central counterparty between the buyer and the seller and guarantees contractual performance by becoming buyer to every seller and seller to every buyer. In case of Bombay Stock Exchange Ltd. (BSE), Indian Clearing Corporation Ltd. (ICCL) acts as clearing corporation. Furthermore as per SEBI guideline, the appellant is required to operate a separate Settlement Bank Account specifically for the clearing and settlement of trades executed on a Stock Exchange. Payments for all purchases are made to the ICCL through the Settlement Bank Account of the Company. Similarly receipts against all sale of shares are received from ICCL in the Settlement Bank Account of the Company. No part of payment for purchase of shares made or receipt against sale of shares were done in cash. In view of above, I find that the assessing officer did not have any material on record to show that the purchase and sale of shares were bogus. Purely relying on the report forwarded by the Investigation wing, the Assessing Officer came to a conclusion that the entire transaction of loss on purchase and sale of shares as bogus. Therefore, I am inclined to hold that the action of AO was predetermined and completely guided by the DDIT (Inv) Kolkata’s report. Thus after careful consideration of the entire gamut of assessment order, report of the investigation wing, an independent enquiries conducted by the AO during the assessment proceeding from Bombay Stock Exchange and the result of such enquiry as mentioned at para 1.7 of the assessment order, written submissions as well as the paper book submitted by the AR during the appellate proceeding and the decisions relied upon by the AR
M/s.PRB Securities Pvt. Ltd Assessment Year: 2014-15 of the appellant, the disallowance as made by AO is deserve to be deleted. Accordingly, the AO is directed to delete the addition. This ground of appeal is allowed.”
6. This factual findings of the ld. CIT(A) are not controverted by the ld. DR. When the purchase and sale of shares were made through online trading system and when these transactions were made at the prevailing market rate through stock exchange and when the entire transactions were routed through proper banking channels and were duly reflected in the demat account of the parties and when the BSE in response to notices u/s 133(6) confirmed these transactions as genuine to the Assessing Officer, it is not right on the part of the Assessing Officer to disregard these evidences and disallow the trading loss of Rs.3,37,70,302/- on the basis of some alleged report of DIT(Inv.), Kolkata and some alleged statements recorded from certain persons, which were never brought on record by the Assessing Officer. This Bench of the Tribunal in the assessee’s own case for the Assessment Year 2013-14, under identical circumstances, upheld the order of the ld. CIT(A) deleting this said addition. For the sake of brevity, we do not extract the detailed findings of the ITAT in this order. 6.1 Consistent with the view taken therein, we uphold the order of the ld. CIT(A) and dismissed this appeal of the Revenue.
7. In the result, the appeal of the Revenue is dismissed.
Kolkata, the 15th March, 2019.