2023 (6) TMI 1309 - AT - Income Tax

Bogus Long-term capital loss in trading of shares - onus to prove - As part of larger scheme, whereby, the price of shares of the certain penny stock companies were rigged and there were bogus long-term capital loss were provided to certain parties acted as exit provider and booked corresponding losses which were set off against other business income of companies/persons - HELD THAT - The Hon ble Supreme Court in the case of NRA Steelin the case of PCIT v/s NRA Iron Steel (P) Ltd. 2019 (3) TMI 323 - SUPREME COURT has taken note of the observations made by the Supreme Court in the the land mark case of Kale Khan Mohammed Hanif 1963 (2) TMI 33 - SUPREME COURT and Roshan Di Hatti 1977 (3) TMI 3 - SUPREME COURT playing 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 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. The facts on the file itself show that there was meeting of minds of the entry operators and the share brokers and exit providers. The price rigging was done by giving benefit to various subscribers with connivance of share brokers and the motive was to convert their unaccounted money into tax exempt long-term capital gains and for that purpose, there were certain persons chosen as exit providers who would buy shares when the share prices would be at its peak and those exit providers thereafter would suffer losses on account of fall in the price of the shares. This specific fact on the file shows that the exit providers were already chosen to execute the plan. The motive was to give the benefit of bogus long-term capital gains to various beneficiaries and to make that plan foolproof, the exit providers were already chosen with a pre-determined planning as to at what stage the beneficiaries of bogus long-term capital gains would be given exit. That perhaps was not dependent upon chance exit providers willing to book bogus short-term capital loss. Neither the name of the assessee nor of his share broker is mentioned in the list of exit providers. The circumstances of this case do not suggest of unnatural and unrealistic human conduct. The Assessing Officer in this case has not pointed out any adverse evidence against the assessee. He has simply relied upon the investigation report which is a general investigation report. The Hon ble Calcutta High Court in the case of PCIT vs. Swati Bajaj Ors. 2022 (6) TMI 670 - CALCUTTA HIGH COURT has considered the report and analysed the same vis-a-vis circumstantial evidences like the negligible financial worth of the companies whose shares were traded in, the unrealistic steep hike in the share prices as against the recessive market trend and the failure of the assessee to explain the commercial prudence for making such huge investments. The additions thus have been made on the basis of circumstantial evidences and considering the preponderance of probabilities. Thus in the absence of any direct incriminating evidence against the assessee, the distinguishable and weak circumstantial evidence, in our view, do not suggest the preponderance of probability of the assessee being involved in price rigging of the scrips or being the predetermined and pre planned beneficiary of the devised scheme, therefore, the impugned additions are not warranted in this case, and the same are accordingly ordered to be deleted. Decided in favour of assessee.

Issues Involved:

1. Disallowance and addition of long-term capital loss in share trading.
2. Invocation of Section 14A of the Income Tax Act and addition of Rs. 87,194.
3. Legality of the order passed by the CIT(A).

Summary:

1. Disallowance and Addition of Long-Term Capital Loss in Share Trading:

The assessee contested the disallowance and addition of a long-term capital loss of Rs. 4.02 crores in share trading. The Assessing Officer (AO) noted that the assessee traded in penny stocks and alleged that the transactions were part of a scheme to rig share prices and book bogus losses. The AO identified peculiar facts about the traded companies, such as being listed on BSE, lacking business worth, and having suspended trading due to manipulative price movements. The AO, referring to the investigation report, concluded that the transactions were sham and bogus, aimed at booking capital loss to set off against business income. The CIT(A) upheld the AO's decision, dismissing the appeal with a cryptic order.

The assessee argued that the transactions were genuine, supported by documentary evidence, conducted on recognized stock exchanges, and payments were made through banking channels. The assessee provided detailed financial analysis and rationale for trading in the specific scrips, emphasizing that the trades were based on market trends, financial performance, and technical analysis. The assessee also highlighted that SEBI had investigated two of the companies and found specific entities guilty of price manipulation but did not implicate the assessee or its broker.

The Tribunal found the assessee's explanations credible, noting that the trades were conducted on the stock exchange, shares were kept in the demat account, and there was no evidence of involvement in price rigging. The Tribunal distinguished the case from the precedent set by the Calcutta High Court in "PCIT vs. Swati Bajaj & Ors," emphasizing that the assessee's case involved business loss in share trading, not unrealistic capital gains. The Tribunal concluded that the circumstantial evidence did not suggest the assessee's involvement in a pre-planned scheme, and thus, the additions were unwarranted and ordered to be deleted.

2. Invocation of Section 14A and Addition of Rs. 87,194:

The assessee challenged the confirmation of the addition of Rs. 87,194 under Section 14A of the Income Tax Act. The AO had invoked Section 14A, which pertains to disallowance of expenditure incurred in relation to income not includible in total income. The CIT(A) upheld the AO's action. However, the Tribunal did not provide detailed reasoning or a separate conclusion on this issue in the judgment.

3. Legality of the Order Passed by the CIT(A):

The assessee claimed that the order passed by the CIT(A) was bad in law. The Tribunal found merit in the assessee's argument, noting that the CIT(A) had dismissed the appeal with a cryptic order without properly addressing the assessee's contentions and evidence. The Tribunal emphasized the need for a detailed and reasoned order from the CIT(A), especially when dealing with complex issues involving significant amounts.

Conclusion:

The Tribunal allowed the appeal of the assessee, deleting the additions made by the AO on account of long-term capital loss in share trading and finding the CIT(A)'s order to be inadequate. The Tribunal emphasized the importance of detailed reasoning and evidence-based conclusions in tax assessments and appeals.

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