MEGAPODE VYAPAAR PVT. LTD.,KOLKATA vs. D.C.I.T., CENTRAL CIRCLE - 1(2), KOLKATA, KOLKATA

As the issue raised are common and pertains to same assessee, these appeals have been heard together and being disposed of by this common order for sake of convenience and brevity.

Since, the issues are common, we adjudicate the same on the basis of facts for A.Y. 2013-14 for which assessee has raised following grounds of appeal: -

Aggrieved, assessee preferred appeal before the learned CIT (A), but failed to find any success. Aggrieved, assessee is now in appeal before this Tribunal.

The learned Counsel for the assessee apart from referring to the written submission filed before the lower authorities, further, stated that the purchase and sale transactions of the equity share of BCSL and CCLII are genuine and have been carried out on the recognized platform of SEBI. All the transactions are supported by contract notes and the

On the other hand, the learned Departmental Representative (in short Ld DR) vehemently supporting the orders of the learned lower authorities and also stated that assessee has dealt in the penny stock companies and that the issue is covered against the assessee in view of the judgement of the Hon'ble jurisdictional High Court in case of Principal Commissioner of Income-tax Vs. Swati Bajaj [2022] 139 taxmann.com352 (Calcutta).

We have gone through the decisions of this Tribunal in case of Namokar Builders Pvt. Ltd. (supra), wherein reference has been made to another case of this Tribunal in Nalanda Builders Pvt Ltd. Vs. DCIT in ITA No. 763/Kol/2022 dated 11th January, 2024, where appeal of the assessee has been allowed holding the loss from purchase and sale of equity shares alleged to be penny stock company as genuine. The decision of the Tribunal in case of Namokar Builders Pvt. Ltd. (supra), reads as under: -

After hearing the rival contentions and perusing the material available on record, the undisputed fact as gathered from the records before us are that during the year the assessee sold a flat measuring 1682 sft. at Chandra Mahal, 15, Burdwan Road, Kolkata for a consideration of Rs.1,85,00,000/- and earned capital gain on such transfer which was purchased for Rs.15,30,058/- on 11.04.1992 resulting in the LTCG of Rs.1,50,45,540/- after making allowance of index cost of acquisition of Rs.34,54,460/-. During the year, the assessee has also sold equity shares

We have also perused carefully the facts of the decisions passed by the Coordinate Benches in the case of Gateway Financial Services Ltd. (supra) and Raigarh Jute & Textile Mills Pvt. Ltd. (supra) and find that the facts of the assessee’s case are substantially similar to that in the above cases as decided by the Coordinate Benches. We also note that the decision of the Hon’ble Jurisdictional High Court in the case Swati Bajaj & Ors. (supra), relied upon by the ld. D/R, has been distinguished by the Coordinate Bench and held to be not applicable to the facts of those cases. For the sake of ready reference and convenience the relevant part of the order in the case of Gateway Financial Services Ltd. (supra) is expected below: -

Regarding the report of SEBI report dated 19.12.2014 we find that the said order was revoked by SEBI by the final order dated 20.09.2017 in SEBI/WTM/MPB/EFD-1-DRA-III/ 30 /2017 by observing as under:

It is well settled that while acting in their quasi-judicial capacity the income tax authorities have to adhere to the principles of natural justice and in the instant cases Assessing Officers of respective assessee(s) ought to have given opportunity to assessee(s) to cross examine these five persons whose statements were the basis of alleged additions.

Coordinate Bench Delhi in the case of Nokia India (P.) Ltd. vs. DCIT reported in [2015] 59 taxmann.com 212 (Delhi - Trib.) has held that “whether cross-examination is to be provided or not depends upon the facts of each case and there is no thumb rule or straight tight jacket formula for arriving at this conclusion. It all depends on facts of each case whether principles of natural justice have been complied with or not. If decision making authority has provided due opportunity to the person complaining of non-observance of principles of natural justice, then it is for the person so complaining to demonstrate the same and show the prejudice caused to him. Mere bald assertion of non-observance of the principles of natural justice is of no consequence.

Further, Supreme Court in the case of Andaman Timber Industries v. CCE reported in (2015) 281 CTR 241 (SC) has considered that “if there was no material with the Department on the basis of which it could justify its action, and if the statement of the two witnesses who were unknown to the appellant was the only basis of issuing the Show Cause Notice, right to cross examination has to be given and held that we are of the opinion that if the testimony of these two witnesses is discredited, there was no material with the Department on the basis of which it could justify its action, as the statement of the aforesaid two witnesses was the only basis of issuing the Show Cause Notice.”

In the case of Rajiv Arora v. Union of India and Ors. AIR 2009 SC 1100 Hon'ble Supreme Court observed that “effective cross-examination could have been done as regards the correctness or otherwise of the report, if the contents of them were proved. The principles analogous to the provisions of the Indian Evidence Act as also the principles of natural justice demand that the maker of the report should be examined, save and except in cases where the facts are admitted or the witnesses are not available for cross-examination or similar situation. The High Court in its impugned judgment proceeded to consider the issue on a technical plea, namely, no prejudice has been caused to the Appellant by such non- examination. If the basic principles of law have not been complied with or there has been a gross violation of the principles of natural justice, the High Court should have exercised its jurisdiction of judicial review.”

The aforesaid decision makes it evident that, not only should the opportunity of cross-examination be made available, but it should be an effective cross examination, so as to meet the requirement of the principles of natural justice. In the absence of such an opportunity, it cannot be held that the matter has been decided in accordance with law, as cross-examination is an integral part and parcel of the principles of natural justice. Cross-examination is must where Assessing Officer relies upon only on the statement of the Third Party unconnected with the appellant

In the case of Krishna Chand Chela Ram v. CIT reported in (1980) 125 ITR 713 (SC) the Supreme Court has held that “cross-examination is must where Assessing Officer relies upon only on the statement of the Third

In the case of Dhakeswari Cotton Mills Ltd. v. CIT reported in (1954) 26 ITR 775 (SC) the Hon'ble Supreme Court has held that “the rule of law on this subject has been fairly and rightly stated by the Lahore High Court in the case of Seth Gurmukh Singh where it was stated that while proceeding under sub-section (3) of section 23, the Income-tax Officer, though not bound to rely on evidence produced by the assessee as he considers to be false, yet if he proposes to make an estimate in disregard of that evidence, he should in fairness disclose to the assessee the material on which he is going to find that estimate; and that in case he proposes to use against the assessee the result of any private inquiries made by him, he must communicate to the assessee the substance of the information so proposed to be utilized to such an extent as to put the assessee in possession of full particulars of the case he is expected to meet and that he should further give him ample opportunity to meet it." It was held in that case that "In this case we are of the opinion that the Tribunal violated certain fundamental rules of justice in reaching its conclusions. Firstly, it did not disclose to the assessee what information had been supplied to it by the departmental representative. Next, it did not give any opportunity to the company to rebut the material furnished to it by him, and lastly, it declined to take all the material that the assessee wanted to produce in support of its case. The result is that the assessee had not had a fair hearing.

In Suraj Mall Mohta and Co. v. A. V. Visvanatha Sastri reported in (1954) 26 ITR 1 (SC) the Supreme Court has held that “the assessment proceedings before the Income-tax Officer are judicial proceedings and all

In respect of the report of the Investigation Wing of the Department, the appellant pointed out the said report nowhere states the name of the appellant or the transaction of the appellant. The said investigation was carried out in case of any other person and not in case of the appellant. In the said investigation the transaction in question of the appellant was not commented upon by the Investigation Wing and therefore the said Investigation Wing report is not evidence to impeach the transaction of the appellant. We find that the Ld. Departmental Representative could not point out anything to show that the said Investigation report was relied upon by ld. AO in the order of assessment was related to the specific transaction of the appellant. In the circumstances, the said Investigation Report wherein some other persons were found to be involved in some manipulation does not establish that the appellant was also involved in any manipulation.

Recently, Hon'ble High Court of Orissa in the case of PCIT vs. Dipansu Mohapatra reported in [2023] 149 taxmann.com 99 (Orissa) adjudicating similar case of exemption claimed u/s 10(38) of the Act and the assessee was alleged to have taken accommodation entries from Kolkata based companies on the basis of the report of Investigation Wing of Income Tax Department. The relevant finding of the Hon'ble Court dealing with the issue of opportunity of cross-examination and principles of natural justice not given to the assessee held as follows:

Another ground on which the ITAT found fault with the additions made by the AO was that reliance was placed on statement of 'so called entry operator' to justify the additions under sections 68 and 69 of the IT Act. These statements were recorded on various dates in some other proceedings not connected with the Assessee. Further, the statements were recorded much before the date of the survey conducted on the Assessee. It was unable to be disputed by the Department that the Assessee did not have an opportunity to challenge such statements and further, no opportunity to cross-examine the so-called entry providers was given to the Assessee.

In view of the above discussion, we notice that so far as the statement of Mr. Praveen Kumar Agarwal is concerned who is the director of one of the group companies namely M/s. Gateway Financial Services Ltd. already stands retracted by him by filing affidavit before the Investigation Wing of Income Tax Department and also as regards the submissions of ld. D/R that proceedings under other Acts were carried out in the case of Mr. Praveen Kumar Agarwal it was stated by ld. Counsel for the assessee as an officer of Court that as on date no proceedings are pending against Mr. Praveen Kumar Agarwal in regard to the alleged transactions before any authorities other than Income Tax Department. Even otherwise, we are not dealing with the case of Praveen Kumar Agarwal. So far as the statements of remaining persons which have been referred by ld. AOs in the assessment orders they have all either been taken during the course of search/survey in some other cases or during the course of any proceeding in the case of the company the shares of which have been traded by the assessee(s), however, there is no documentary evidence either placed by these persons during the course of recording the statement or at any other stage which could show that the assessee(s)

In the preceding paragraphs, we have dealt with the legal issue regarding the matter that since the assessee has not been provided sufficient opportunity to cross examine those persons who were directly related to the assessee company i.e., Gateway Financial Services Ltd., and other assessee(s) even when their statements have been relied heavily by the Assessing Officers to deny the claim of short term capital loss /long- term capital gains as the case may be, we note that apart from placing reliance on the statements, the revenue authorities have also referred to the report of the investigation Wing which carried out search and survey

Now, before us in case of one of the assessee’s, namely, Gateway Financial Services Ltd., the issue relates to bogus short-term capital loss from sale of equity shares of Blue Circle Services Ltd. and in the remaining three cases the issue is regarding alleged bogus Long term capital gain from sale of scrip, namely, Radford Global Ltd.

Since the facts relating to claim of loss and gain are different, we will first take up the issue regarding alleged bogus short-term capital alleged by the AO in the case of Gateway Financial Services Ltd. Though we have discussed the facts of this issue in detail in the preceding paragraphs and have also discussed the finding of the Hon’ble Jurisdictional High Court in the case of Swati Bajaj (supra), wherein also there was a reference to the report of the investigation Wing but in that case the issues were relating to long-term capital gains and additions were made u/s 68 of the Act. But in case of Gateway Financial Services Ltd., which is a share broking firm as well as trader in equity shares and being assessed to tax for past many years has dealt in the equity share, namely, Blue Circle Services Ltd.. Since the AO has only disallowed the claim of bogus loss, it in itself means, that the genuineness of purchases of equity shares of Blue Circle Services Ltd., has not been disputed by the revenue authorities. The assessee in this case has purchased 5232616 equity shares. The ld. AO has also referred to the equity shares price chart of Blue Circle Services Ltd., wherein there is a steep upward trend from 2011-12 onwards then a downward trend which goes up to the end of 2013 and again there is an increase in trend during 2013-14 but not to that extent of the past trend of steep increase. The claim of the assessee is that, looking at the trend of equity share, in the anticipation of earning good profits it made the investment in equity shares of Blue Circle Services Ltd., and there was some increase in the price but subsequently it started decreasing and since the assessee did not want to lose all its capital it sold the equity shares as and when it got the opportunity. Even though, the transactions have been carried out on the recognized stock exchange and well within the rules and regulations provided by the SEBI, we note that in all the alleged statements of the alleged third parties and the report of the investigation Wing there is specifically no indication that whether the assessee was directly involved

Now, we have to examine the contentions of the assessee in the light of the ratio of law laid down by the hon’ble Supreme Court in the case of “NRA steels” (Supra) and by the Calcutta High Court in the case of “Swati Bajaj” (supra).

The Ld. Counsel has further submitted that the facts of the case of the assessee were quite distinguishable from that of the cases of “Swati Bajaj & others” (supra). He has submitted that in most of the cases before the Hon’ble High Court, the purchases were off the Stock Exchange/private placements. That there were orders of SEBI suspending the scrip and/or wherein the concerned trader were found guilty of price manipulation. Further, that there were statements recorded from the brokers of the assessees, who had admitted to have indulged in price manipulation and therefore adverse view was taken. That in the specific facts before the hon’ble High Court, it was noted that the price of the scrips showed steep increase during recessive trends and therefore the movement in prices was held to be ingenuine. That the Hon’ble High Court had observed that the onus was on the assessee to establish that the price rise was genuine in light of the fundamentals of the scrip. However, in case of the assessee, the trades were made on the Stock Exchange. There was no adverse statement of Assessee’s broker. Moreover, the Director of the assessee

We find force in the contentions raised by the ld. counsel for the assessee. Firstly, in this case, the assessee has not claimed long-term capital gains on account of unrealistic steep rise in the share prices of these scrips traded in as was in the case of PCIT vs. Swati Bajaj &Ors (supra). The Hon’ble High Court had held, under the circumstances, that the burden was upon the assessee to explain the business prudence of investment in these scrips of the companies having negligible financial worth and thereafter of steep rise in their share price resulting into huge capital gains within a short span of time. The case before us is of business loss in share trading. The assessee, as observed above, has duly explained the factors and considerations which prevailed for making decision by the assessee company of purchasing in the aforesaid five scrips, which included their financial worth, the market position, their income, dividends etc. Further, it was not a case that the shares shown to have been purchased off market/privately and thereafter they were put into demat account after sufficient lapse of time from the alleged date of physical purchase and then sale of the same within a short span of time after they were accounted in the demat account, gaining high monetary capital gains. In the case of the assessee, the shares were traded on the stock exchange, the same were kept in the demat account of the assessee. There is no allegation of involvement of the assessee or even his share broker in any type of price rigging. There even does not seem any probability of meeting minds of the assessee and/or his share broker and the promoters of the companies. A very peculiar fact which is noted from the assessment order/investigation wing report is that in the list of the persons whose statement was allegedly recorded and who in their statement have admitted of price rigging, the names of share brokers, entry operators and

Respectfully following the above decision of this Tribunal in the case of Raigarh Jute & Textile Mills Ltd. vs. ACIT (supra), which is squarely applicable on the facts of the instant case of assessee i.e., M/s. Gateway Financial Services Ltd., we find that the alleged loss has been incurred by the assessee in the regular course of its business. We also note that the statement of various persons recorded by the AO/investigation wing/search team in the course of other proceedings as well as the report of the Kolkata investigation wing, there is no reference to a direct evidence indicating that the transactions in question is in the nature of accommodation entry or for arranging bogus loss. Thus, the addition/disallowance made by the assessee is merely on the basis of preponderance of probabilities. Therefore, in the present case, when the statements and investigation report relied upon by the AO has not been given to the assessee for the purpose of cross-examination as well as rebuttal, we in view of the above decision are inclined to hold that the alleged loss being genuine loss from share trading incurred by the assessee in regular course of business, deserves to be allowed. Thus, impugned disallowance is uncalled for.

In view of the above discussion and in the given facts and circumstances of case, we are inclined to hold that the Assessing Officer has failed to carry out any independent investigations/enquiries into the evidences filed by the assessee and has rejected the claim by the assessee qua loss from shares trading only on the basis of surmises and conjectures and relying on the statements of entry operators who never named the assessee and their statements were recorded long before . Therefore, we set aside the order of first appellate authority and direct the Assessing Officer to delete the allow the loss of Rs.3,19,65,849/- .The first issue raised by the assessee is allowed. The ground Nos. 5 to 9 are allowed.

Since the facts before us are materially same vis-à-vis the facts in the case as discussed above, therefore, we are inclined to follow the decision of Coordinate Bench in the case of Nalanda Builders Pvt. Ltd.(supra), accordingly, we set aside the order of Ld. CIT(A) and direct the AO to allow the loss incurred on sale of shares to the tune of Rs.1,87,25,176/- and allow the set off of the same against the LTCG earned by the assessee. Resultantly, the appeal of the assessee is allowed.

In the result, the appeal of the assessee is allowed.

From perusal of the finding of this Tribunal, we find that the same is squarely applicable on the facts of the instant case

As far as A.Y. 2014-15, is concerned, the facts and issues are identical to that for A.Y. 2013-14 except for change of figure. The loss has been incurred to the tune of ₹1,16,89407/- from trading of equity shares of Cressanda, Nikki Global, Luminaire Tech, Uno Industries, Dhenu Buildcon & Shree Shaleen Tex and that the loss have been incurred in the regular course of business carried out by the assessee which is an NBFC and that the transactions have been carried out on the recognized stock exchange and under the control of SEBI and at that point of time there was no restriction of trading of equity shares of alleged companies. Since, the facts are identical, we therefore, apply our decision of ITA No. 99/KOL/2023 for A.Y. 2013-14, mutatis mutandis on the grounds of appeal raised for A.Y. 2014-15 in ITA No. 100/KOL/2023 and accordingly, set aside the order of the learned CIT (A), and delete the alleged disallowance of trading loss and direct the Ld AO to grant set off of alleged loss against the interest / other income for the

In the result, both the appeals of the assessee in ITA Nos. 99 & 100/KOL/2023 are allowed.