SAMRAT FINVESTORS PRIVATE LIMITED. ,KOLKATA vs. ITO, WARD- 10(2),KOLKATA. , KOLKATA

The present appeal is directed at the instance of the assessee against the order of the National Faceless Appeal Centre, Delhi, [hereinafter the “ld. CIT(A)”] dt. 27/06/2023, passed u/s 250 of the Income Tax Act, 1961 (“the Act”) for the Assessment Year 2014-15.

The assessee in the instant appeal has raised two effective issues in the various grounds before us which are summed up as under:- (i) That the ld. CIT(A) has erred on facts and in law in confirming the disallowance of Rs.3,98,50,208/- as made by the Assessing Officer on account alleged bogus loss in share trading & in F&O segment. (ii) The ld. CIT(A) has erred on facts and in law in upholding the addition of Rs.11,58,944/- as made by the Assessing Assessment Year: 2014-15 Samrat Finvestors Private Limited Officer by invoking provisions of Section 14A of the Act r.w.r. 8D(2)(iii).

The facts qua the first issue raised by the assessee are that the assessee, during the year, has incurred loss of Rs.3,98,50,208/- which comprised of share trading loss amounting to Rs.2,87,07,277/- and Rs.1,11,42,931/- in respect of loss on trading in F&O segment. The Assessing Officer observed from the details filed by the assessee that the assessee has incurred loss in seven (7) shares which were listed on the stock exchange. The list of the stocks are as follows:-

The ld. Assessing Officer in para 3.4. of the assessment order referred to the large scale manipulations done by some entry operators in connivance with some brokers to provide pre-arranged long term /short term capital gain / loss/trading loss by price rigging and manipulation on the stock exchange platform. The ld. Assessing Officer also referred to the enquiries conducted by the SEBI and the Investigation Wing of the Deptt in which it was found that some brokers have manipulated and rigged the share prices in order to give undue benefit to the beneficiaries and the above stocks are included in Assessment Year: 2014-15 Samrat Finvestors Private Limited the list of shares whose prices were rigged by the operators/stock brokers. Thereafter at para 3.5., the ld. Assessing Officer discussed the mode of price rigging resorted to by the brokers/entry operators. In para 3.6., the Assessing Officer discussed that the assessee company had interest income of Rs.4,14,84,889/- and after setting off the loss as referred to above, the assessee declared taxable income of Rs.5,24,996/-. The Assessing Officer also noted that the assessee has not dealt in any scrip of blue-chip or potentially with good future or companies yielding good dividend. So, the transactions of the assessing officer raised doubts about the genuineness of loss incurred by the assessee. Thereafter the Assessing Officer referred to the show cause notice dated 02/12/2016 given to the assessee and informing him about the investigation Wing’s report in which these shares were referred to as Penny stocks. Finally the Assessing Officer treated the loss from share trading and from F&O segment as prearranged loss meant to evade the payment of legitimate taxes and disallowed the same by giving an observation that the assessee had taken accommodation entries to book this loss in share trading and F&O segment. The ld. Assessing Officer did not issue any notice u/s 133(6) or 131 of the Act in order to independently carry out the investigation into the issue to either to the stock exchange or operators or entry providers. Pertinent to state that all these transactions were carried out as per the stock brokers in a recognised stock exchange platform.

The ld. CIT(A) also dismissed the appeal of the assessee as the assessee failed to file any written submissions and make compliances to 4 Assessment Year: 2014-15 Samrat Finvestors Private Limited the to the various notices issued during the course of appellate proceedings. 6. The ld. A/R, submitted that in compliance to the questionnaires/directions in terms of order sheet notings by the Assessing Officer, the assessee filed all the evidences comprising contract notes, bills/vouchers, sales bills, copies of bank statements, D- mat a/c and broker bills raised in respect of purchase and sale of shares before the Assessing Officer. However, the assessing officer instead of carrying out an independent verification into these transactions entered into by the assessee during the year, the Assessing Officer has simply relied on the investigation Wing’s report as well as on the SEBI investigation in which the SEBI has prepared a list of 84 shares in which manipulations and rigging were stated to have happened on the stock exchange platform. The ld. A/R argued that though these above securities traded by the assessee have been treated as appearing in the list published by SEBI, however, that list is published by the SEBI cannot be sacrosanct since the transactions in the instant case have been done on a recognised stock exchange platform besides making and receiving the payments through proper banking channels. The ld. A/R reiterated that the contract notes, bills, D-mat a/c and vouchers etc. were duly produced before the Assessing Officer. The ld. A/R further stated that the Assessing Officer has not issued notices u/s 133(6) of the Act nor any summons u/s 131 of the Act to any of the parties to corroborate the allegation as made in the assessment order or to disbelieve the evidences and merely relied on the report of the 5 I.T.A. No. 840/Kol/2023 Assessment Year: 2014-15 Samrat Finvestors Private Limited investigation wing and SEBI. The ld. A/R submitted that though the possibility and chances are there that unscrupulous elements may have indulged in taking undue advantages of the systemic loopholes but the same cannot be applied as a straight-jacket formula in all the cases who have done share trading through stock exchange platform unless any substantive evidences/materials are brought by the Assessing Officer on record qua the brokers and entry operators to the effect they were actually indulged in the rigging and manipulation. The ld. AR also submitted that assessee has not been issued any notice either by the SEBI or by the investigation Wing of the Deptt. in respect of these irregularities as alleged by the assessing officer. The ld AR also submitted that the statements of brokers and various other persons such as entry operators were also recorded by the investigation wing which were never supplied to the assessee nor any cross examination was allowed. The ld AR therefore prayed that the materials collected at the back of the assessee can not be used against the assessee to make addition as the same in in violation of principles of natural justice and has to be deleted. In defense of his arguments the ld AR relied on the decision of Andaman Timber Industries CCE(2015)281 CTR 241(SC) The ld A/R argued that the assessment by the Assessing Officer is purely based on conjectures and surmises sans any enquiry/investigation or substantive evidences and, therefore, cannot be sustained on this count alone. 7. The ld. A/R submitted that the issue involved is squarely covered in favour of the assessee by the decision of the Co-ordinate Bench of the 6 I.T.A. No. 840/Kol/2023 Assessment Year: 2014-15 Samrat Finvestors Private Limited Tribunal in the case of Gateway Financial Services ltd. vs. ACIT in ITA No. 982/Kol/2018; Assessment Year 2014-15, order dt. 14/07/2023 and Raigarh Jute & Textile Mills Pvt. Ltd. in ITA No. 2286/Kol/2019; Assessment Year 2014-15, order dt. 27/06/2023, wherein the decision of the Hon’ble Jurisdictional High Court in the case of PCIT vs. Swati Bajaj & Ors. [2022] 139 taxmann.com 352 (Calcutta), has been distinguished to be not applicable to the facts of those cases. The ld A/R submitted that since the issue involved in the present appeal is similar to ones as decided by the Tribunal in the above appeals , the loss on sale of shares/F&O segment needs to be allowed to the assessee as claimed by following the said decisions. Besides, the ld. A/R also relied on the following decisions: 1) Pr CIT vs. Smt. Renu Aggarwal reported in 456 ITR 249 (SC) 2) PCIT vs. Indravadan Jain [2023] 156 taxmann.com 605 (Bombay) 3) PCIT vs. Dipansu Mahapatra [2023] 149 taxmann.com 99 (Orissa) 4) ITO Vs. Smt. Bimla Debvi Singhania ITA Nos. 212 & 213/CKT/2019 7.1. The ld. A/R submitted that in all these judicial precedents, transactions were done by the assessees on recognised stock exchange platforms and earnings profits//sustaining losses were accepted by the above judicial forums on the ground that the assessee has discharged its onus by filing all the evidences before the Assessing Officer and the Assessing Officer has only made a generalized observation in the assessment order without carrying out any specific enquiry and without bringing on record any cogent material in the absence of which no addition can be made. The ld A/R submitted that assessee has not Assessment Year: 2014-15 Samrat Finvestors Private Limited been named by persons whose statements were recorded by the investigation wing or by the stock exchange and the statements of those persons were relied which are totally unconnected with the assessee. The ld. A/R submitted that though the names of the shares traded by the assessee appeared in the list of 84 companies published by the SEBI, however, this fact by itself could not make the transactions carried out by the assessee on the recognized exchange platform as fictitious and bogus in a generalized manner without establishing the specific complicity of the assessee. 7.2. The ld. A/R further stated that where two constructions/interpretation of law are possible on any issue, the one which is favourable to the assessee has to be followed as held by the Hon’ble Supreme Court in the case of CIT v. Vegetable Products Ltd. [1973] 88 ITR 192.

The ld. A/R also argued that the assessee has furnished all the documents and evidences before the Assessing Officer however he has hopelessly failed to conduct any enquiry on the basis of these evidences. The ld A/R argued that the assessee has discharged its onus by filing the evidences qua the transactions entered into by it, the burden shifts to the revenue to prove otherwise. The ld. A/R, therefore, submitted that any addition made in that scenario has to be deleted. The ld. AR relied on the following decisions of the Hon’ble Apex Court and various Hon’ble High Courts, namely, CIT vs. Orissa Corporation Ltd. (1986) 159 ITR 78 (SC); ITO vs. Cygnus Developers (I) (P.) Ltd. [IT Appeal No. 282 (Kol) of 2012, dated 2-3-2016] & CIT vs. Gagandeep Assessment Year: 2014-15 Samrat Finvestors Private Limited Infrastructure P. Ltd. (2017) 394 ITR 680 (Bom), to buttress his arguments on the issue that where an assessee has filed the evidences before the Assessing Officer concerning the transactions, and the Assessing Officer has not carried out any further investigation or any enquiry into the issue and has not disbelieved those evidences either and in that scenario the additions made by the Assessing Officer could not be sustained. Though the ld. A/R relied on the above decisions but he submitted that these decisions were rendered in the matters relating to Section 68 of the Act in respect of share application & share premium/unsecured loans but the same hold good in the present case also as the assessee has filed all the evidences before the AO proving the genuineness of the transactions. Further, the ld. Assessing Officer has not carried out an investigation and merely relied upon the report of the investigation Wing and SEBI on this issue. The ld. A/R argued that under these circumstances, the order passed by the Assessing Officer, is bad in law.

The ld. D/R, on the other hand, opposed the arguments advanced by the ld. A/R on the ground that the issue is covered against the assessee by the decision of the Hon’ble Jurisdictional High Court in the case of PCIT vs. Swati Bajaj & Ors. (supra). The ld. D/R submitted that a very massive racket was busted by the investigation agencies which was a part of organised rigging in order to yield undue benefits to the beneficiaries by various unscrupulous entry providers and stock brokers whereby the prices of penny stocks were rigged on the stock exchange platform. The ld. D/R submitted that the transactions done Assessment Year: 2014-15 Samrat Finvestors Private Limited by the assessee are nothing but bogus accommodation entries and, therefore, loss sustained by the assessee during the year from share trading and F&O segment was rightly disallowed by the Assessing Officer. The ld. D/R, therefore, prayed that the appeal of the assessee may kindly be dismissed by upholding the orders of the authorities below.

We have heard rival contentions and perused the material placed before including the various decisions cited by either sides before us. Undisputedly, the assessee has dealt in eight stocks which appeared in the list of penny stocks published by SEBI. It is also true that the investigation wing of the department has unearthed a large scale manipulations on the stock exchange platform by the entry providers in connivance with the stock brokers which was carried out on the stock exchange platform by taking advantage of the loopholes in the system. However, keeping in view the facts and circumstances of the case, we observe that the assessee has filed the copies of contract notes, bills/vouchers, evidences of payments and copies of D-MAT Accounts before the Assessing Officer. We also note that the Assessing Officer, instead of carrying out investigations/enquiries into these evidences either by issuing notice under section 133(6) of the Act to the purchaser/sellers or stock exchange or brokers, has merely relied on the investigation wing/SEBI reports. We find no whisper in the assessment order disbelieving the evidences filed by the assessee or rejecting the same and the Assessing Officer has merely proceeded on an assumption that the transactions entered into by the assessee during the 10 Assessment Year: 2014-15 Samrat Finvestors Private Limited year, which have resulted into the loss amounting to Rs.3,98,50,208/-, are bogus and fictitious intended to evade the legitimate taxes due to the assessee.

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: “Considering the fact that there are no adverse findings against the aforementioned 82 entities with respect to their role in the manipulation of the scrip of Radford, I am of the considered view that the directions issued against them vide interim orders dated December 19, 2014 and November 9, 2015 which were confirmed vide Orders dated October 12, 2015, March 18, 2016 and August 26, 2016 are liable to be revoked. In view of the foregoing, I, in exercise of the powers conferred upon me under Section 19 of the Securities and Exchange Board of India Act, 1992 read with Sections 11, 11(4) and 11B of the SEBI Act, hereby revoke the Confirmatory Orders dated October 12, 2015, March 18, 2016 and August 26, 2016 qua aforesaid 82 entities (paragraph 9 above) with immediate effect.”

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 12 Assessment Year: 2014-15 Samrat Finvestors Private Limited 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.”

The Hon’ble Supreme Court of India in New India Assurance Company Ltd. v. Nusli Neville Wadia & Anr., AIR 2008 SC 876, while considering a case under the Public Premises (Eviction of Unauthorised Occupants) Act, 1971, held that though the statute may not provide for cross- examination, the same being a part of Principles of Natural Justice should be held to be an indefeasible right. It was held as follows: “If some facts are to be proved by the landlord, indisputably the occupant should get an opportunity to cross-examine. The witness who intends to prove the said fact has the right to cross-examine the witness. This may not be provided by under the statute, but it being a part of the principle of natural justice should be held to be indefeasible right"

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 13 I.T.A. No. 840/Kol/2023 Assessment Year: 2014-15 Samrat Finvestors Private Limited 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 29. 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 Party unconnected with the appellant. Hon’ble Supreme Court has held that the letters, dated 14.02.1955 and 09.03.1959, did not constitute any material evidence which the Tribunal could legitimately taken into account for the purpose of arriving at the finding that the amount of Rs. 1,07,350 was remitted by the assessee from its Madras Office, and if these two letters were eliminated from consideration, there was no material evidence at all before the Tribunal which could support its finding. What the manager of the bank wrote in his letters could not possibly be based on his personal knowledge but was based on here say. The revenue authorities ought to have called upon the manager to produce the documents and papers on the basis of which he made the statement and confronted the assessee with those documents and papers.”

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 the incidents of such judicial proceedings have to be observed before any 14 I.T.A. No. 840/Kol/2023 Assessment Year: 2014-15 Samrat Finvestors Private Limited conclusion is arrived at. The assessee has a right to inspect the record and all relevant documents before he is called upon to lead evidence in rebuttal. This right has not been taken away by any express provision of the Income Tax Act.”

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: “6. 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 Assessees.

Having heard learned Senior Standing Counsel for the Department (Appellant) and having perused the impugned orders of the AO, CIT(A) and the ITAT, the Court finds that both the grounds viz., the claim for benefit of section 10(38) of the Act and denial of an opportunity to cross examine the entry providers, turned on facts. The ITAT was justified in accepting the plea of the Assessee that the failure to adhere the principles of natural justice went to the root of the matter. Also, the CBDT circular that permitted to the Assessee to file revised returns if he omitted to make a claim was also not noticed by the AO.” Therefore the Assessing Officer was bound to supply those statements and allow the cross examination of the maker of the statements to the assessee according to the judgement of the Hon'ble Calcutta High Court in Swati Bajaj Assessment Year: 2014-15 Samrat Finvestors Private Limited (supra) case as well as in view of the judgments of Hon'ble Supreme Court in the case of Andaman Timber Industries Vs Commissioner of Central Excise reported in [2016] 38 GSTR 117 (SC), Principal Commissioner of Income Tax (Central) Vs Oriental Power Cables Ltd reported in [2022] 143 taxmann.com 371 (SC), Kishinchand Chellaram (AIR 1980 14 SC 2117) and the Hon'ble Calcutta High Court in the case of Eastern Commercial Enterprise (1994) (Cal) [210 ITR 103].”

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) were directly involved in the racket of providing accommodation entries or were aware of such activities being carried out. The claim of the assessee has always been that as a prudent investor it had made the investments and some investments did not give any return rather gave losses and, in some cases, profits were earned. It was incumbent upon ld. AO to provide the assessee(s) a proper opportunity of cross-examination with all those persons who stated to be either involved in accommodation entries or were having some connection with the alleged transactions. There was no opportunity with the assessee(s) to cross-examine those persons, that why they have referred these transactions as bogus or accommodation in nature. No such exercises have been carried out at any stage by the Revenue authority. Though the assessee has placed material on record to show that on merits also the case of the assessee is strong and the alleged transactions have been carried out through banking channel as well as through recognised stock exchange and demat accounts and also it has been claimed that in one case there is a loss and there is no addition u/s 68 of the Act but without going into the merits of the case even on legal ground itself, we, in view settled judicial procedure referred hereinabove, are inclined to hold that there is a violation of principles of natural justice as opportunity of cross- Assessment Year: 2014-15 Samrat Finvestors Private Limited examination of all those persons whose statements though not directly referred to the alleged transactions but the statements having been used by ld. AO to make additions in the hands of the assessee(s) in appeal before us, was not provided to the assessee(s) even though requested during the course of hearing before the AO well as ld. CIT(A). Based on these facts, we find merit in the contention of the ld. Counsel for the assessee that principles of natural justice have been violated in the case of all the four assessees namely M/s. Gateway Financial Services Ltd., M/s. Nishit Agarwal Beneficiary Trust, Pinky Agarwal and Pratik Agarwal Beneficiary Trust.

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 in some other cases prior to the conclusion of assessment proceedings in the instant appeals and such investigation included the persons who have been alleged to be entry providers/operators, share brokers etc.

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 Assessment Year: 2014-15 Samrat Finvestors Private Limited 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 recognised 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 with the promoters/directors of Blue Circle Services Ltd., for such a steep increase/decrease of the prices. It prima facie seems to be a case where the assessee has made an adventure in the business of trading in equity shares being in the business of share trading and investment and shares brokerage were given past many years. At this juncture when the purchase of equity shares has not been doubted by the revenue authorities, and the claim of the assessee is that it has entered into the purchase and sale transactions in the regular course of business and also considering the fact that it is not the case of earning long-term capital gains for claiming exemption u/s 10(38) of the Act, but is a case where the assessee has lost its capital by incurring huge loss. This Tribunal in the case of Raigarh Jute & Textile Mills Ltd. vs. ACIT in AY 2014-15; order dt. 27/06/2023, wherein the same combination of Judicial and Accountant Member has dealt with the issue regarding the claim of short term capital loss/business loss from sale of equity shares which was alleged by the revenue authorities being arranged from penny stock companies has decided in favour of the assessee after dealing with the facts of the case, modus operandi of carrying out such transactions by the assessee and also dealing with the judgement of the Hon’ble jurisdictional High Court in the case of Principal CIT Vs Swati Bajaj 446 ITR 56 (Cal), and also examining that the facts of the case are different with that of Swati Bajaj (Supra) and the same being not applicable in the case and has held as follows:- “9. We have considered the rival contentions and gone through the record. The Hon’ble Supreme Court in the case of NRA Steelin the case of “PCIT v/s NRA Iron & Steel (P) Ltd.” reported in [2019] 103 taxmann.com 48(SC) has taken note of the observations made by the Supreme Court in the the land mark case of “Kale Khan Mohammed Hanif v. CIT”[1963] 50 ITR 1 (SC) and“Roshan Di Hatti v. CIT” [1977] 107 ITR 938 (SC) laying down the proposition that the onus of proving the source of a sum of money found to have been received by an assessee, is on the assessee. Once the assessee has submitted the documents relating to identity, genuineness of the transaction, and credit-worthiness, then the AO must conduct an inquiry, and call for more details before invoking Section 68. If the Assessee is not able to provide a satisfactory explanation of the nature and source, of the 18 I.T.A. No. 840/Kol/2023 Assessment Year: 2014-15 Samrat Finvestors Private Limited investments made, it is open to the Revenue to hold that it is the income of the assessee, and there would be no further burden on the revenue to show that the income is from any particular source. Thereafter the hon’ble Supreme court summed up the principles, which emerged after deliberating upon various case laws, as under: i. The assessee is under a legal obligation to prove the genuineness of the transaction, the identity of the creditors, and credit-worthiness of the investors who should have the financial capacity to make the investment in question, to the satisfaction of the AO, so as to discharge the primary onus. ii. The Assessing Officer is duty bound to investigate the credit-worthiness of the creditor/subscriber, verify the identity of the subscribers, and ascertain whether the transaction is genuine, or these are bogus entries of name-lenders. iii. If the enquiries and investigations reveal that the identity of the creditors to be dubious or doubtful, or lack credit-worthiness, then the genuineness of the transaction would not be established. “11. The principles which emerge where sums of money are credited as Share Capital/Premium are : In such a case, the assessee would not have discharged the primary onus contemplated by Section 68 of the Act.” 9.1 The Hon’ble Supreme court, thus, has held that once the assessee has submitted the documents relating to identity, genuineness of the transaction, and credit-worthiness of the subscribers, then the AO is duty bound conduct to conduct an independent enquiry to verify the same. Once the assessee having discharged initial burden upon him to furnish the evidences to prove the identity and creditworthiness of the share subscribers and genuineness of the transaction, the burden shifts upon the Assessing Officer to examine the evidences furnished and even make independent inquiries and thereafter to state that on what account he was not satisfied with the details and evidences furnished by the assessee and confronting with the same to the assessee. 9.2 The Hon’ble Calcutta High Court, however, in the case of PCIT vs. Swati Bajaj &Ors (supra) has observed that to prove the allegations a logical process of reasoning from the totality of the attending facts and circumstances surrounding is to be adopted. That it is the duty of the Court to take note of the immediate and proximate facts and circumstances surrounding the events on which the charges/allegations are founded so as to reach a reasonable conclusion and the test would be what inferential process that a reasonable/prudent man would apply to arrive at a conclusion. Further proximity and time and prior meeting of minds is also a very important factor. A holistic approach is required to be made and the test of preponderance of probabilities has to be applied. The Hon’ble High Court observed that the assessees therein had failed to justify the rationale behind investment in the companies not having financial worth. They had failed to establish genuineness of steep rise in price of shares within a short period of time that too when general market trend was recessive. That the ld. Assessing Officer has pointed out that the assessee could not explain, why it invested in such script without knowing the financial performance of the company. That such cannot be case of intelligent investment or simple and straight case of tax planning to gain benefit of long term capital gains earnings @ 491% over period of 5 months which is beyond human probability and defies business logic of any business enterprises dealing with share transactions. Even brokers who coordinated transactions were also unknown to assessee. All these facts give credence to unreliability of entire transaction of shares giving rise to such capital gains ratio. That the Assessing officer was justified in 19 I.T.A. No. 840/Kol/2023 Assessment Year: 2014-15 Samrat Finvestors Private Limited making the additions on the basis of the material available on record, the surrounding circumstances, the human conduct and preponderance of probabilities.

The Ld. Counsel has further submitted that the facts of the case of the assessee were quiet 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 was examined and confronted with the allegations u/s 131 of the Act and he had specifically denied the same. That the assessee has sufficiently demonstrated that the financial results and the fundamentals of the scripswas mirrored in their price movements and therefore it was not a case that the movement in prices was not explained.Evenas demonstrated above, in three (3) out of the five Assessment Year: 2014-15 Samrat Finvestors Private Limited (5) scrips, there were no adverse orders of SEBI regarding any kind of price manipulation. Further in the remaining two scrips, the SEBI upon completion of investigation found specific entities/persons guilty of manipulation. The Ld. Counsel has further submitted that in the similar facts and circumstances, the coordinate benches of the Tribunal have opined in favour of the assessees therein.

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.

Thus, to conclude we hold that firstly the principles of natural justice have been violated while carrying out the assessment proceedings in the case of the assessee(s) since no opportunity for cross-examination was provided for those persons whose statements have been relied upon by the assessing officer Assessment Year: 2014-15 Samrat Finvestors Private Limited for making the alleged additions. Secondly, there is no direct evidence referred to by the assessing officer or in the report of the investigation Wing that the assessee(s) have made arrangements with the entry operators/company owners for carrying out the alleged transactions. Thirdly, additions made by the assessing officer are merely based on a theory called preponderance of probability that in same type of cases prices are rigged up and down by the entry operators in order to provide accommodation entry to various persons in the form of Long term capital gain and though, the assessing authority can apply preponderance of probabilities in some cases on account of surrounding circumstances but so far as the cases on hand are concerned, we notice that firstly some observations were made by the SEBI regarding some fishy transactions carried out in case of few companies. Based on such primary information, the income tax department has carried out extensive enquiries and search and surveys in the case of various entry operators and alleged companies and based on such statements, a theory was established regarding such accommodation/bogus entries in the form of capital gains. However, since in the case of the assessee, SEBI at a later stage has intensively carried out the investigation on the facts of the assessee(s) along with other persons as referred in the order of the SEBI (extracted supra), and after a detailed investigation and examination of records exonerated, the assessee(s) from the charges levelled in the show cause notice issued to them. Therefore, when the assessee(s) have been exonerated and the charges against them have been waived and the transactions of purchase and sale of equity shares carried out by them have been found to be genuine, the theory of preponderance of probabilities is ruled out in the case of the present assessee(s). Thus, when the transactions giving rise to the long term capital gain have been found to be genuine, and as per rules and regulation of SEBI, the finding of the ld. CIT(A) deserves to be set aside and the impugned additions in case of assessee(s) in appeal before us are uncalled for. 11.1. In the case of Pr. CIT Vs. Renu Aggarwal (Supra), the Hon’ble Apex Court has dismissed the special leave petition filed by the revenue affirming the decision the Hon’ble High court of Allahabad in of 2022 which in turn has upheld the decision of the tribunal in ITA No. 204/Lkw/2020 A.Y. 2014-15 & anors. The Hon’ble Apex Court, however, kept the legal issue open. We have perused the decision of the tribunal wherein the following findings of fact were recorded:

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 share trading in F&O segment 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