CRESTA FUND LIMITED,MAURITIUS vs. DCIT, CIRCLE-1(2)(1), INT. TAXATION, NEW DELHI
Facts
The assessee, a Mauritius-based FPI, claimed a set-off of long-term capital loss from transactions in shares of Odyssey Corporation Ltd. The Assessing Officer (AO) disallowed this claim, alleging that the transactions were bogus and manipulated, leading to artificial capital losses, based on information from the Investigation Wing. The DRP, while agreeing with the manipulation aspect, directed the AO to specifically identify the assessee's involvement and cite relevant legal provisions for disallowance.
Held
The Tribunal found that the Assessing Officer failed to implement the DRP's directions in the final assessment order by not establishing the assessee's specific involvement in the alleged share price manipulation or discussing the relevant provisions of the IT Act/DTAA. Consequently, the issue of disallowance of long-term capital loss was restored to the file of the Assessing Officer for de novo adjudication.
Key Issues
Whether the disallowance of long-term capital loss claimed by the assessee from alleged bogus share transactions was valid when the Assessing Officer failed to establish the assessee's direct involvement in manipulation and cite relevant legal provisions as directed by the DRP.
Sections Cited
147, 148, 144C(13), 48, 112(1)(c)(ii)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, DELHI BENCH: ‘D’ NEW DELHI
Before: SHRI SAKTIJIT DEY, VICE- & SHRI M. BALAGANESH
PER SAKTIJIT DEY, VICE-PRESIDENT
Captioned appeals by the assessee are against the final
assessment orders passed for the assessment years 2015-16 and
2016-17 in pursuance to the directions of learned Dispute
Resolution Panel (DRP).
The grounds raised by the assessee in both the appeals are,
more or less, identical.
ITA Nos.751 & 752/Del/2023 AYs: 2015-16 & 2016-17
Since, the issues arising in both the appeals are identical,
for ease of reference, we propose to take up ITA No.
751/Del/2023 as the lead matter.
In ground no. 1, the assessee has challenged the validity of
reopening of assessment under section 147 of the Act. However,
at the time of hearing, learned counsel appearing for the assessee,
on instructions, did not press this ground. Accordingly, ground
no. 1 is dismissed as not pressed.
Insofar as ground no. 2 is concerned, the issue arising for
consideration is disallowance of assessee’s claim of set off of long
term capital loss arising out of sale of shares.
Briefly the facts are, the assessee is a non-resident corporate
entity incorporated in Mauritius and is a tax resident of
Mauritius. As accepted by the departmental authorities, the
assessee holds a valid Tax Residency Certificate (TRC) and is also
registered with Security and Exchange Board of India (SEBI) as a
Foreign Portfolio Investor (FPI) in accordance with SEBI (FPI)
Regulations. As per information received from the Investigation
Wing of the Department, the Assessing Officer noticed that in the
financial years 2015-15 and 2015-16, the assessee had carried
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out bogus transactions to book bogus long term capital loss on
account of equity/derivative trading. Based on such information,
the Assessing Officer reopened the assessment under section 147
of the Act. In response to the notice issued under section 148 of
the Act, the assessee filed its return of income on 28.05.2021
declaring income of Rs.1,60,400/-.
In course of assessment proceedings, the Assessing Officer
called upon the assessee to furnish details of share transaction,
particularly, regarding sale of shares of Odyssey Corporation Ltd.
From the details furnished by the assessee, he noticed that
shares of Odyssey Corporation Ltd. were purchased by the
assessee in financial years 2010-11 and 2011-12 on the floor of
stock exchange. Whereas, sales were effected in financial years
2014-15 and 2015-16, also on floor of the exchange. The
Assessing Officer observed that as per the analysis of the trading
pattern of shares of Odyssey Corporation Ltd., it was found that
share price was manipulated and bogus profits and losses have
been booked in the name of clients/beneficiaries by trading in the
scrip. After seeking further response from the assessee on the
investigation conducted by the Investigation Wing of the
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Department, the Assessing Officer ultimately concluded that the
transactions relating to sale of shares of Odyssey Corporation Ltd.
are manipulated, hence, bogus. As alleged by the Assessing
Officer, only very few counterparties have picked up major shares
of Odyssey Corporation Ltd. during various financial years
against which huge profits/losses were generated. He further
noted that there are common counterparties who have purchased
the shares of the scrip across the clients.
Thus, from the aforesaid facts, he concluded that the clients
were pre-arranged to punch matching order for purchase of the
shares sold by the above clients. He also observed that profiling of
the major entities was also done for checking of details of the
parties. Thus, ultimately, the Assessing Officer concluded that the
share price of the scrip has been manipulated and bogus profits
and losses have been booked in the names of clients/beneficiaries
by trading in the scrip. Holding that the assessee is one of the
beneficiaries of such bogus trading in scrip of Odyssey
Corporation Ltd. the Assessing Officer disallowed the long term
capital loss claimed by the assessee, while framing the draft
assessment order. Against the draft assessment order so passed,
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the assessee raised objections before learned DRP. While
disposing of the objections, learned DRP, in principle, agreed with
the Assessing Officer that the analysis of trading pattern in the
scrips of Odyssey Corporation Ltd. gives an impression that there
has been manipulation by certain entities/parties, which are
trading in the shares. However, learned DRP went in to hold that
the Assessing Officer has not specifically discussed the trading in
these scrips by the assessee or what has been the nature and
extent of manipulation in shares of Odyssey Corporation Ltd. to
book artificial/bogus capital losses. Learned DRP also observed
that the Assessing Officer has not discussed the relevant
provisions of IT Law/DTAA to bring home the applicable
provisions under which the said claim of set off of capital losses
by the assessee is disallowable. Accordingly, learned DRP directed
the Assessing Officer to specifically highlight the manipulation in
transactions in the shares of Odyssey Corporation Ltd. by the
assessee and also discuss the relevant provisions of law under
which the claims of the assessee are disallowable. Learned DRP
also directed the Assessing Officer to pass a speaking order on the
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issue. The operative portion of learned DRP’s direction is
reproduced hereunder for better clarity:
“4.2.6 The analysis of the trading pattern in the scrips of M/s. Odyssey Corporation Limited gives a clear impression that there has been an element of manipulation by certain entities/parties trading in these shares who acted in concert to book manipulated/bogus profit and losses in the names of client and beneficiaries. The AO has been able to profile the trading pattern of certain parties and brought out the irregularity/abnormality in the trading behavior in respect of the above scrips. However the AO has not specifically discussed the trading in these scrips by the assessee company or what has been the nature and extent of manipulation in shares of Odyssey Corporation Ltd. to book artificial/bogus capital losses. The AO has also not discussed the relevant provisions of the II law/DTAA to bring home the applicable provisions under which the said claim of losses by the assessee are disallowable. The mere pointing out of anomalies in not sufficient to fix liabilities or disallow claims under IT Law/DTAA. While there is clear indication of manipulation in the penny stocks of Odyssey Corporation Ltd. by certain client and beneficiaries, the AO is directed to specifically highlight the manipulation in transactions in the shares of the above company by the assessee and also discuss the relevant provisions of the law under which the claims of the assessee are disallowable. The AO will pass a speaking order in this regard without providing any further opportunity to the assessee. Ground number 4 is accordingly disposed of.”
However, while framing the final assessment order, the
Assessing Officer reiterated his earlier decision of disallowance of
assessee’s claim of set off of long term capital loss.
Before us, learned counsel appearing for the assessee
submitted that the Assessing Officer has failed to implement the
directions of learned DRP. Drawing our attention to the final
assessment order, she submitted that the Assessing Officer has
not discussed how the assessee was involved in manipulating the 6 | P a g e
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price of shares of Odyssey Corporation Ltd. to book bogus capital
loss. She further submitted that the Assessing Officer has also
failed to discuss the relevant provisions of the IT Act/DTAA under
which the claim of set off of capital loss is disallowable.
Learned Departmental Representative submitted that since
it is the case of the assessee that the Assessing Officer has not
implemented the directions of learned DRP, the issue may be
restored back to the Assessing Officer for fresh adjudication.
We have considered rival submissions and perused the
materials on record. Insofar as the primary facts are concerned,
there is no dispute that the assessee is a tax resident of Mauritius
holding a valid TRC. It is also a fact that the assessee is registered
with SEBI as FPI and in terms with and on the strength of such
registration with SEBI, the assessee has carried out investment
and trading activities in shares and securities in India. Based on
investigation carried out by the Investigation Wing of the
Department the Assessing Officer has concluded that the price of
scrips of Odyssey Corporation Ltd. has been manipulated by
certain persons/entities to help certain buyers/sellers of shares
to either book profit or loss. Thus, he has ultimately concluded
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that the transactions in shares of the particular company, being
bogus in nature, the long term capital gain derived from such
transaction is also bogus. He has disallowed assessee’s claim of
set off of long term capital loss. However, the observations made
by learned DRP clearly demonstrates that while concluding that
the assessee has booked bogus long term capital loss, hence, set
off is not allowable, the Assessing Officer has not specifically
discussed to what extent the assessee is involved in the
manipulation in share price of Odyssey Corporation Ltd. so as to
book bogus capital loss.
Learned DRP has further observed that the Assessing Officer
has not discussed the relevant provisions of the IT Act/DTAA to
bring home the applicable provisions under which assessee’s
claim of set off of capital loss can be disallowed. In fact, while
directing the Assessing Officer to examine the issue again, learned
DRP has made it clear that the Assessing Officer has to
specifically highlight the manipulated transactions in the shares
of Odyssey Corporation Ltd. by the assessee through a speaking
order. As against the aforesaid directions of learned DRP, the
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observations of the Assessing Officer while upholding the
disallowance in the final assessment order are as under:
“As per the DRP directions for Ground no.4, following observations are being made: - 1. The bogus capital loss on the share transaction of the company M/s Odyssey Corporation Ltd. is being disallowed as per the provisions of Section 48 r.w.s.112(1)(c)(ii) of the IT Act, 1961. 2. Further, with respect to the assessee's manipulation of shares of M/s Odyssey Corporation Ltd, it is claimed by the assessee that the shares were purchased in FY 2010-11 and FY 2011-12 on the floor of the stock exchange and the sales were made in FY 2014-15 and 2015-16 of the same. Further, as highlighted that the shares of the scrip of the M/s Odyssey Corporation Ltd. was manipulated in the above time frame. So. it can be said quite evidently that the assessee is also beneficiary of the same manipulation. And hence, the bogus loss needs to be disallowed. 8. Accordingly the set-off claimed by the assessee of capital loss of Rs. 1,59,59,283/- is being disallowed by treating the same as bogus capital loss.”
From the aforesaid observations of the Assessing Officer, it
is quite evident that he has neither discussed the extent of
involvement of the assessee in manipulation of share price of
Odyssey Corporation Ltd by the assessee. He has also failed to
discuss the relevant provisions of IT Act/DTAA under which
assessee’s claim of set off of loss is disallowable. The conclusion
drawn by the Assessing Officer while disallowing assessee’s claim
lacks reasoning and under no circumstances can be considered to
be a speaking order. Thus, it is manifest, the Assessing Officer
failed to implement the directions of learned DRP. Whether the
assessee is directly involved in manipulation of price of shares of 9 | P a g e
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Odyssey Corporation Ltd. is a purely factual issue and has to be
established on the basis of inquiry. Neither at the draft
assessment stage, nor while passing the final assessment order,
the Assessing Officer has established the nature and extent of
assessee’s involvement in manipulating the price of scrips of
Odyssey Corporation Ltd. He has failed to discuss the relevant
statutory provisions or the provisions of the DTAA under which he
can disallow assessee’s claim of set of loss, despite clear
directions of learned DRP.
Thus, it is a clear case of non-implementation of directions
of learned DRP in letter and spirit, which the Assessing Officer is
duty bound to implement, in terms of section 144C(13) of the Act.
Since, the primary facts relating to allowability or otherwise of
assessee’s claim of long term capital loss out of sale of shares
have not been established on record, we are inclined to restore
the issue to the file of the Assessing Officer for de novo
adjudication after providing reasonable opportunity of being
heard to the assessee. Ground no. II is allowed for statistical
purposes. The appeal is partly allowed for statistical purposes.
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Our decisions above would apply mutatis mutandis to ITA
No. 752/Del/2023.
In the result, both the appeals are partly allowed for
statistical purposes.
Order pronounced in the open court on 27th June, 2024
Sd/- Sd/- (M. BALAGANESH) (SAKTIJIT DEY) ACCOUNTANT MEMBER VICE-PRESIDENT Dated: 27th June, 2024. RK/- Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR Asst. Registrar, ITAT, New Delhi
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