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Facts
The assessee, an individual trader in shares, filed his return of income for AY 2014-15 under the presumptive tax scheme. The Assessing Officer (AO) disallowed a short-term capital loss of Rs. 9,11,031 claimed by the assessee and made an addition of Rs. 18,220 for commission, both based on an Investigation Wing report alleging bogus transactions. The Commissioner (Appeals) upheld the AO's order.
Held
The Tribunal held that the AO's action was based on a general report from the Investigation Wing without specific evidence linking the assessee's transactions. The assessee was a trader who incurred a genuine business loss, not a capital gain, and did not claim any capital loss in his ITR. The transactions were conducted through a recognized stock exchange, and the assessee provided supporting documents. The addition by the AO and confirmation by the CIT(A) lacked application of mind and proper appreciation of facts.
Key Issues
Whether the disallowance of short-term capital loss and addition of commission as unexplained expenditure, based on an investigation report, is justified when the assessee has incurred genuine business losses and has not claimed capital gains or losses in the ITR.
Sections Cited
143(2), 142(1), 250, 68, 115BBE, 69C, 10(38)
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Income Tax Appellate Tribunal, JAIPUR BENCHES,”SMC” JAIPUR
Before: HON’BLE SHRI SANDEEP GOSAIN, JM vk;dj vihy la-@ITA No. 1036/JP/2024
vkns'k@ ORDER PER: SANDEEP GOSAIN, J.M.
This appeal by the assessee is directed against the order dated 25.07.2024 of ld. Addl/JCIT (Appeals)-3, Delhi passed under section 250 of the Income Tax Act, 1961 for the assessment year 2014-15. The grounds raised in the appeal are reproduced as under :-
1. On the facts and circumstances of the case, the LD. CIT (A) has erred in confirming the addition of Rs. 9,11,031/- made by the AO by disallowing the Short term capital loss which was not even claimed/shown by the assessee in his ITR.
2. On the facts and circumstances of the case, the Ld. CIT (A) has erred in confirming the addition of Rs. 18,220/- made by the AO u/s 69C by assuming the same to be commission paid by the assessee for obtaining accommodation entry of STCL.
2. The brief facts of the case are that the assessee is an Individual, filed his return of income on 30.01.2015 declaring total income of Rs. 2,39,010/-. The case of the assessee was selected for scrutiny and notice under section 143(2) of the IT Act, 1961 was issued on 18.09.2015 which was served on the assessee. Further, notice under section 142(1) along with query notice was issued on 24.05.2016 and duly served on the assessee. In compliance, assessee furnished requisite details and the case was discussed with him. In the course of assessment, the AO noticed that during the year the year under consideration the assessee claimed deduction on account of short term capital loss of Rs. 9,11,031/- occurred to assessee on sale of certain shares. The AO referring to some investigations carried out by the Investigation Wing of the Department in the cases of some penny stock companies and statements of directors of such companies, alleged that the short term capital loss claimed by the assessee is bogus. Accordingly, the AO vide his order dated 29.12.2016 disallowed the above mentioned short term capital loss of Rs. 9,11,031/- as bogus short term capital loss/ unexplained cash credit of assessee under section 68 of the IT Act, 1961 and demanded tax thereon @ 30% as per section 115BBE of the IT Act, 1961. The AO further made addition of Rs. 18,220/- treating the same as unexplained expenditure by holding that the assessee has paid commission @ 2% of STCL value of Rs. 9,11,031/- of shares of M/s. UNNO Industries Limited, as the assessee has not offered any satisfactory explanation about the source of the same. Aggrieved, the assessee preferred appeal before the ld. CIT (A). The ld. CIT (A) rejected the appeal of the assessee by sustaining the additions.
3. Before me, the ld. A/R reiterated his submissions as made before the revenue authorities and submitted his written submissions as under :
“1.1 As already stated in the facts supra, the assessee is a trader of shares/securities and not an investor. The Balance sheet of the assessee vouches this fact. It may be mentioned that the appellant in the ITR filed by him had never claimed any STCL. So, the question of disallowing it and adding it as income of the assessee by the AO and confirmation of the action of the AO by the Ld.CIT(A) is erroneous, baseless and arbitrary. As a matter of fact, the assessee has neither claimed carry forward of the capital loss nor had any capital profits for the year against which he could have set off the impugned loss. So the theory of claiming bogus short term capital loss falls flat. Here, we have a case in hand, wherein only on the basis of transacting in the name of the scrip (SMIL), tax liability has been fastened on the appellant.
1.2 The assessee initially worked with Indra Securities Pvt. Ltd. (the share broker & DP in this case) and was thus friendly with the director of the company. During his service with the company, he also opened a Demat account with it and started share trading. Due to their personal relations and faith, the Company provided trading facility to the appellant, without Margin amount. The assessee bought shares through Indra Securities Pvt. Ltd. and usually squared them off at the end of the day, and either made profit or incurred loss in the intra day transactions (Speculative business). Whatever shares remained unsquared, were considered as delivery based equity trades (Non- speculative business).
1.3 The assessee was a regular trader in shares and had a fair idea of the market. On 31.05.2013, he purchased 216979 shares of SMIL through online mode @ Rs.13.29 per share, which were credited directly to his Demat account. The assessee was given to believe that the prices of the shares of SMIL would increase as had happened in 2012 (Constant increase after fall in the prices) but unfortunately for the assessee, the prices went on falling. On the very same day, he sold 117505 of these shares @ Rs.13.24 per share, incurring a speculative loss of Rs.8,544/-. He was eventually left with 99474 shares (delivery based). The prices of the share, thereafter, continued to come down and on 04.06.2013, the appellant managed to sell 20002 shares @ Rs.10.30 per share. After this date, the stock hit its lower circuit, and trading in this particular stock was temporarily suspended. For SMIL, only SELL orders were available and there were no BUY orders. It is a bearish trend where investors are willing to sell the stocks but there are no buyers. Finally, during December 2013, the appellant, somehow, managed to sell the remaining 77,472 shares. The appellant incurred a total loss of Rs.918535/- on the sale of these shares. The purchase as well as sale of the impugned shares was made online at prevailing market rates.
1.4 From the above facts, it is clear that the appellant did not acquire the shares from any of the modes (Rights issue, Preferential allotment, Amalgamation/merger) listed in the report of the Investigation wing, Calcutta, circulated PAN-INDIA to all the CCsIT, and which has been made the basis by the AO for making the impugned addition. He had genuinely purchased the shares online, as a trader, through a recognized broker from stock exchange at prevailing price with the motive to earn profit but ultimately ended up incurring loss due to the stock hitting the lower circuit. Also he did not make any investment for the purchase of the impugned share as is evident from his ledger account at Page-18 of the Paper book. The loss on the sale of the impugned shares suffered by him was compensated to the broker by transferring other shares held by him in his Demat account with Arihant Capital Markets Ltd.
1.5 From the above facts, it is absolutely clear that it is not a case of manipulation or of obtaining any accommodation entry in the form of LTCG/STCL, as had been trending nationwide, at that particular point of time. The assessee suffered only on account of dealing in the scrip blacklisted by the Department. It can not be equated with a case of penny stock as here the purchase and sale took place at almost the same rate. Had the assessee carried out the transaction with the motive of generating bogus capital loss, he would not have sold 117505 of the impugned shares out of his kitty the very same day. Without prejudice to the above, for proving the genuineness of the purchase and sale of shares of the Company, the appellant filed the following documents before the Assessing officer - (a) Investor’s report (b) Demat account (c)Settlement scrip summary (d) Ledger account in the books of Indira Securities Pvt. Ltd. (e) Global Net Outstanding position with Arihant Capital Markets Ltd. (f) Chart showing movement of shares.
1.6 It may be noted that that all evidences of purchase and sales were submitted by the assessee. The Assessing officer has not found any fault in these documents. The transactions were done through recognized stock exchange (BSE). The inflow and outflow of shares is duly reflected in demat account. The shares were transferred through demat account and the assessee does not know the buyer. It is not a case of cash being recycled. The assessee is not a party to alleged price rigging. He has no nexus with the company, its directors or operators. He is not concerned with the activity of broker and has no control over the same. The fact that the assessee invested in shares, which resulted into loss in a short period, does not mean that the transaction is bogus, as all the documents and evidences have been produced before Assessing officer. The shares were sold in piecemeal on different dates through recognized stock exchange at quoted price.
1.7 The case of the assessee is supported by online purchase and online sale on recognized stock exchange through a registered broker, at the prevailing prices, through the settlement mechanism of the exchange. There is no doubt on the broker who purchased and sold the shares. In the present case, the AO did not raise any question to the broker. It is in fact, the broker who sold the shares, logged in to his terminal and sold the shares on electronic online platform of the exchange. It is not the case of the assessee that the shares have not been sold by the assessee on the stock exchange. The Ld.AO has erroneously presumed the assessee to be an investor rather than a trader and proceeded further presuming the business loss to be a capital loss, ignoring the ITR and the other evidences put forth by the assessee. Here, the learned Assessing officer is challenging the whole cycle of the transaction, starting from purchase of the shares by the assessee and subsequently holding it and selling it on stock exchange at prevailing prices as sham transaction as an attempt to book short term capital loss.
1.8 In the present case, the transaction of the assessee is held bogus only and only on the basis of general report of the Investigation Wing. The report was prepared only on the basis of statements of various persons without referring to any underlying documents. From the extract of report, as appearing in the assessment order, it can be seen that the name of the assessee or his broker or his transaction has not been discussed. Thus, no link with the case of the assessee has been established, no direct evidence is found against the assessee. Chain of flow of cash has also not be established. Except oral testimony, which also remains uncorroborated, as there is no reference of any material found, nothing was brought on record by ld. AO. The evidences submitted by the assessee have not been found to be false or forged. Documentary evidences shall prevail when weighed against the oral evidences. Reports of Investigation Wings have not been confronted to the assessee. The assessee has not been provided with the opportunity to cross examine the persons whose statements have been relied upon. The assessee has also not been provided opportunity to cross examine the persons who have prepared the said report. It is submitted that if the information is gathered behind the back of the assessee and the same is acted upon then, as per the principles of natural justice, the assessee should be provided with such information and should be allowed opportunity of cross examination. 1.9 A perusal of the assessment order clearly shows that the Assessing officer was carried away by the report of the Investigation Wing. It can be seen that the entire assessment has been framed by the Assessing Officer without even going through the entire report meticulously. The report on page 15, clearly states that People who have huge profit take the Short Term Capital loss (STCL) to set-off their profit. (Relevant extract attached for your honor’s ready reference) As already stated supra, the assessee is a trader and his transactions of sale do not give rise to any Capital gains, as could have been set off by him. The AO has conveniently ignored this issue. 1.10 There is least application of mind by the AO in making the impugned addition as would beevident from the points stated hereunder -
In his entire assessment order running into 33 odd pages, not even a single page has been spared to discuss as to why the evidence put forth by the assessee has been disbelieved. 31 pages of the order contain references to the Investigation report which has been made the basis for making the additions.The facts of the case have not at all been discussed.
In Para-2 of his order he has stated- The assessee has shown short term capital loss of Rs.9,11,031/- It may be mentioned that the said loss was not a part of Computation of income or the ITR filed by the assessee. It was the working of capital loss on sale of shares of SMIL, which was called for by the AO. The assessee never claimed it. The Ld.AO presumed it to be a claim of the assessee and went on to disallow it and add it as income of the assessee.
The AO has discussed the Modus-operandi adopted by the assessee from page-22 of his order.
In step-1, he has observed that the assessee is in possession of unaccounted cash which he wants to bring into his books of accounts without paying any tax on it - This is only a presumption by the AO without any supporting evidence. The assessee never paid cash or even cheque to his broker for purchasing the shares. The assessee initially purchased 216979 shares of SMIL (later renamed Luharuka Media & Infra Ltd. ) through his broker Indira Securities Pvt. Ltd., who had provided him credit facility. Out of this lot, 117505 shares were sold on the same day (intraday sale) The broker debited his account for an amount of Rs.13,31,355/- post intra day trading for the balance of 99474 shares (delivery) as is evident from Page-xx of the PB. This outstanding balance was cleared by the assessee by transferring his other shares held with Arihant Capital Markets Ltd. to Indira Securities Pvt. Ltd., who sold them off and adjusted the amount due against the assessee, as is evident from the ledger (page-xx of the PB)
In step-2, the AO has observed that the assessee was asked to give cheques which were used for purchasing shares of some unlisted companies. In assessee’s case it was M/s Paridhi Properties Ltd. And the assessee allegedly purchased shares of M/s Paridhi Properties Ltd. The assessee never gave any cheque to to anybody. He never purchased any shares of M/s Paridhi Properties Ltd.
In step-3, the AO has observed that In assessee’s case, Paridhi Properties Ltd. was merged with Luminaire Technologies Ltd. Accordingly, the assessee received the shares of Luminaire Technologies Ltd. in exchange of shares of M/s
Paridhi Properties Ltd. As the assessee never purchased any shares of Paridhi Properties Ltd., there arises no question of receiving the shares of Luminaire Technologies Ltd. in exchange thereof.
In step-4, the AO has observed - thereafter the operators start rigging the price of the shares through circular trading and increase the price of the shares keeping in mind 5% upper circuit of Stock Exchange. The prices are rigged to an optimum amount over a period of one year from the issue of shares to the beneficiaries. Then to accommodate further increase in the price , the operators cunningly split the shares and repeat the operation to manipulate the prices again after splitting. The above observation is not applicable to the assessee. The assessee was forced to hold the shares for 8 months as the stock hit lower circuit. Further, there was no splitting of the shares of SMIL ever.
In step-5, the AO has has observed - When the period of one year [for claim of exemption on LTCG u/s 10(38)] is over, the beneficiary delivers the unaccounted cash to the operators who route through bogus companies and buy the shares of the beneficiary at high prices. Here, the impugned shares were sold at very low prices. It is a case of capital loss which has not even been claimed by the assessee.
In the conclusion, the Ld.AO has held - The aforesaid modus operandi has been adopted in the case of the assessee as discussed above. The above facts clearly show that there is absolutely no application of mind by the ld.AO.
In Para-(g)(iv) of his order (Page-29) the AO has stated - The particular scrip has been held for one year or so as required under the prevailing instructions and after such period and with the connivance of various entities, when the prices of shares have increased to optimal level or so, the assessee made exit. This is absolutely incorrect. Firstly, the assessee never held the scrip for one year or more and secondly he sold it at the lowest prices.
In Para-(g)(v) of his order (Page-29 & 30) the AO has stated - There was no need that the assessee purchase shares from a broker, who was indulged in the racket of providing bogus entries of capital gain/loss, living in Calcutta, when every facility of purchase was available at Jaipur, where the assessee was residing. This is again totally incorrect. Firstly, the name of the broker, Indira Securities Pvt. Ltd. nowhere appears in the Investigation report or the statements of any of the parties recorded during search/survey/investigation, alleging that it is involved in the racket of providing bogus entries of capital gain/loss. Secondly, the broker Indira Securities Pvt. Ltd. was not Calcutta based but had its registered office at Bombay and branch at Jaipur, in Vaishali Nagar, where the assessee was employed for a substantial period.
In Para-7 of his order (Page-32) the AO has stated - Looking to the facts and circumstances of the case, it is held that the assessee has paid commission @ 2% of STCL value of Shares of M/s UNNO Industries Ltd. and paid a sum of Rs.18,220/- The assessee has never held the shares of UNNO Industries Ltd. at any point of time. So there arises no question of incurring loss on sale of these shares and consequently payment of any commission thereon.
The entire order of the AO is a cut paste exercise, without adverting to the facts of the case. His order is solely based on he findings mentioned in the report of the Investigation wing on penny stock cases. In his endeavour to tax the assessee, he has forgot that it is a case of loss, (which has not even been claimed by the assessee) and not of LTCG. The final para of the SCN reproduced on page-16 of his order reads - Consequently you are requested to show cause as to why exemption claimed u/s 10(38) towards short term capital gain/loss, be denied and why it should not be added u/s 68 to the returned income. The SCN stated to be issued after considering the documents and evidences collected from various sources and entire material available on record including the submission filed, itself shows that the Ld.AO has not even bothered to look into the ITR of the assessee, which is the first basic thing in case of a scrutiny assessment. Had he even looked at the ITR form (4S-Sugam) filed by the assessee, he would have noticed that there is no column for Income for Capital gains, meaning thereby that no claim in respect of capital loss has been made. Further, the exempt income shown in the ITR by the assessee is Nil(0). So, the very foundation of making the addition is missing in the case. This shows that there is non application of mind even to the least extent.
1.11 Now coming on to the decision of the Ld.CIT(A) confirming the action of the AO, the CIT(A) has erred in overlooking the basic fact. On page-7 of his order, he has stated that - in the return of income for AY 2014-15, the appellant had declared short term capital loss of Rs.9,11,031/- As a matter of fact, the assessee had filed his ITR in Form - 4S, which is applicable to assessees showing income from business on presumptive basis. It does not even contain any column relating to capital gains. In this view of the matter, there is no question of declaring any short term capital loss or claiming it. Further, when no claim has been made, there is no logic in disallowing the same and adding it to the income of the assessee holding it to be bogus. He has turned a blind eye to all the evidences put forth by the appellant. In his entire , he has not addressed as to why the direct evidence put forth by the appellant in respect of purchase and sale of shares does not appeal him.The least that is expected from an CIT(A) is justice through a speaking order, after considering the order of the AO and the stand of the assessee against it. But, what the Ld.CIT(A) is up to, is not discernible from his present order. He has stepped into the shoes of the AO and acted and commented as an AO rather than as an appellate authority. He has blindly endorsed the AO’s action which is a breach of section 250(6) of the Income Tax Act.
It is therefore submitted that the transaction entered into by assessee was completely genuine and by no stretch of imagination, it can be regarded as bogus and therefore addition made by ld.AO is not in accordance with law.”
On the other hand, the ld. D/R supported the orders of the revenue authorities and submitted that the order of ld.CIT (A) be upheld.
I have heard the rival submissions and perused the material available on record.
The AO made the addition on account of bogus short term capital loss. From perusal of record, I find that the assessee being a trader, buys and sells stocks or other securities frequently with the intention of making a profit through short-term price movement. His income from trading is treated as business income and he filed his return of income under the head “Profits and gains from business or profession”. For the year under consideration the assessee filed his return of income under the presumptive tax scheme in Form 4S (SUGAM). During the year in trading of shares, the assessee suffered business losses. The ld. A/R submitted that apart from the business loss on shares, the assessee did not earn any capital gain during the year as an investor in shares or on the sale of any other capital asset, as could have been set off, thus allowing the assessee to save on the tax. The assessee having filed his ITR in Form 4S, is not entitled to carry forward of the resultant business loss arose and it was not claimed either. On perusal of ITR/computation of income, it is noted that the assessee did not have any short term capital loss as alleged by the AO nor it was claimed. While trading in shares, the assessee had business loss but as the ITR was filed under the Presumptive Tax Scheme, there arose no question of carry forward of business loss.
Thus, it is clear that the assessee neither had any capital loss which could have been adjusted against any capital gain nor could have been carried forward to be set off in later years. The assessee carried on the share trading through On-line.
5.1 On 31.05.2013 the assessee purchased 2,16,979 shares of M/s. Splash Media & Infra Ltd. (SMIL) through on-line mode at prevailing market rate @ Rs. 13.29 per share, which were credited directly to his Demat account. On the very same day, out of the above shares, the assessee sold 1,17,505 shares @Rs. 13.24 per share incurring a speculative loss of Rs. 8,544/- and thus left with 99,474 shares (delivery based). Since the prices of shares continued to come down, the assessee sold 20,002 shares @ Rs. 10.30 per share on 04.06.2013. Finally, in December, 2013 the assessee sold the remaining 77,472 shares. From the above share transactions, the assessee incurred total loss of Rs. 9,18,535/-. Thus, it is clear that the appellant did not acquire the shares from any of the modes i.e. Rights issue, Preferential allotment, Amalgamation/merger listed in the report of the Investigation Wing, Calcutta, circulated PAN-INDIA to all the CCsIT, and which has been made the basis by the AO for making the impugned addition. The assessee had genuinely purchased the shares online, as a trader, through a recognized broker from stock exchange at prevailing price with the motive to earn profit but ultimately ended up incurring loss due to the stock hitting the lower circuit. The assessee did not make any investment for the purchase of the impugned share as is evident from his ledger account furnished at Paper Book page 18.
The loss on the sale of the impugned shares suffered by the assessee was compensated to the broker by transferring other shares held by him in his Demat account with Arihant Capital Markets Ltd. The assessee, for proving the genuineness of purchase and sale of shares of the company, filed the before the AO the relevant documents viz. (a) Investor’s report, (b) Demat account, (c) Settlement scrip summary, (d) Ledger account in the books of Indira Securities Pvt. Ltd., (e) Global Net Outstanding position with Arihant Capital Markets Ltd and (f) Chart showing movement of shares. The ld. A/R submitted that the broker who sold the shares, logged in to his terminal and sold the shares on electronic online platform of the exchange. It is not the case of the assessee that the shares have not been sold by the assessee on the stock exchange. The AO erroneously presumed the assessee to be an investor rather than a trader and proceeded further presuming the business loss to be a capital loss, ignoring the ITR and the other evidences put forth by the assessee. The AO has not brought on record any evidence to controvert the genuineness of the transactions done through recognized stock exchange (BSE). The AO made the addition treating the transactions as bogus only on the basis of report of the Investigation Wing who prepared the report only on the basis of statement of various persons without referring to any underlying documents. The AO has narrated the modus operandi of various entry providers which is a general statement so far as the indulgence of certain persons in providing the accommodation entry of bogus long term capital gains as well as other transactions.
However, in the said narration of modus operandi there is nothing against the particular transaction of purchase and sale of shares by the assessee. The AO has specifically mentioned that during the course of enquiry in certain cases it has come to light that large scale manipulation has been done in the market price of shares of certain companies listed on Stock Exchange by a group of persons working as a syndicate for the purpose of providing entry of tax exempt bogus long term capital gains to large number of beneficiaries in lieu of unaccounted cash. Thus, no link with the case of the assessee has been established, no direct evidence is found against the assessee.
Except oral testimony, which also remains uncorroborated, as there is no reference of any material found, nothing has been brought on record by the AO. The evidences submitted by the assessee have not been found to be false or forged. The assessee has not been provided with the opportunity to cross examine the persons whose statements have been relied upon. As per the principles of natural justice, the assessee should be provided with such information and should be allowed opportunity of cross examination. The assessment order is basically based on findings mentioned in the report of the Investigation Wing on penny stock cases. On perusal of the ITR filed by the assessee, it is noticed that there is no column for Income for Capital gains, meaning thereby that no claim in respect of capital loss has been made. Further, the exempt income shown in the ITR by the assessee is NIL. So, the very foundation of making the addition is missing in the case. In regard to unexplained expenses on account of commission paid by the assessee @ 2% of STCL value of shares of M/s.
UNNO Industries and payment of a sum of Rs. 18,220/-, the assessee strongly denied the purchase of shares of M/s. UNNO Industries. The AO has not brought on record any material/evidence to substantiate that the assessee has purchased shares of M/s.
Unno Industries and paid commission. From the facts narrated above, I also find that the ld. CIT (A) has not recorded any finding for sustaining the addition.
Thus considering the detailed discussions narrated above, I am of the view that the addition deserves to be deleted.
Ground No. 2.
I have deleted the addition in respect of ground no. 1 above, therefore, no adjudication requires on this ground.
In the result, the appeal of the assessee is allowed.
Order pronounced in the open court on 17/10/2024.