CRESTA FUND LIMITED,MAURITIUS vs. DCIT, CIRCLE-1(2)(1), INT. TAXATION, NEW DELHI

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 & 752/Del/2023 AYs: 2015-16 & 2016-17 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, & 752/Del/2023 AYs: 2015-16 & 2016-17 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 & 752/Del/2023 AYs: 2015-16 & 2016-17 issue. The operative portion of learned DRP’s direction is reproduced hereunder for better clarity:

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 & 752/Del/2023 AYs: 2015-16 & 2016-17 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 & 752/Del/2023 AYs: 2015-16 & 2016-17 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 & 752/Del/2023 AYs: 2015-16 & 2016-17 observations of the Assessing Officer while upholding the disallowance in the final assessment order are as under:

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 & 752/Del/2023 AYs: 2015-16 & 2016-17 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.

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.