2023 (2) TMI 1219 - AT - Income Tax

Disallowance of contrived losses on NMCE - execution of trades on a recognized exchange (MCE) - glaring evidences/ findings of synchronized trades executed by the assessee with a cluster of brokers/counter parties on MCE exchange which had resulted in excessive losses - as per CIT losses obtained by assessee on NMCE platform were contrived losses and these losses were incurred by executing the synchronized trade dealings in illiquid commodities, thus deleted addition - HELD THAT - In the present case, it is not a case of AO that the transactions of the assessee have not been proved with supportive evidence but the action of the AO revolves around the sole allegation that the assessee incurred artificial losses to square up its profit earned from other commodity exchanges and to evade tax liability. AO observed that transactions are not genuine. As we have noted above that it is not a case of the AO that no transactions were undertaken and assessee booked bogus losses but the allegation of the AO is that the losses were incurred by the assessee were only contrived losses and these losses were managed with the help of brokers who always there in group of clusters so as to same can be set off against the profits earned from activities of trading other then NMCE platform. On being asked by the Bench, the CIT(DR), except reading and supporting assessment order could not bring or substantiate any factual position or allegation against the assessee by way of cogent findings and supportive documentary evidence or positive adverse material against the assessee to prove that the alleged losses were not actually accrued to the assessee and the assessee claimed bogus losses CIT(A) noted a very important factual position which is self speaking that the assessee incurred losses on similar commodity in the other stock exchanges on high value and also earned profit in NMCE and incurred losses on MCX in the forward trading of copper. Allegation of the A.O. that assessee has undertaken high volume transaction in 60 second we note that the SEBI has permitted 15 to 20 transactions per minute as per revised Circular No. 97 dated 27.09.2016 and merely because the assessee has incurred losses on a particular platform does not Ipso facto established that the losses are contrived or artificial and the sole intention is to set off the profits earned from other stock exchanges and to reduce and evade the tax liability on the profits earned from other stock exchanges. We are unable to see any ambiguity perversity or any other valid reason to interfere with findings arrived by the Ld. CIT(A). Our conclusion also gets support from Hon ble Kolkata High Court in the case of PCIT vs. BIB Cables and Conductors 2018 (8) TMI 525 - CALCUTTA HIGH COURT Accordingly grounds nos. 1 to 5 of revenue for A.Y. 2011-12 are dismissed. Non-inclusion of the profit accrued to the assessee from the transactions pertaining to M/s. Victory Tip Up Pvt. Ltd. by holding that the said transactions have not been recorded in the books of accounts of the assessee - CIT(A), on examination of books of accounts found that the said speculation business transactions with M/s. Victory Tip Up Pvt Ltd. were reflected in audit report and the transactions highlighted and alleged by the AO in the assessment order were dully recorded in the books of account. Per contra, CIT(A), on examination of books of accounts found that the said speculation business transactions with M/s. Victory Tip Up Pvt Ltd. were reflected in audit report and the transactions highlighted and alleged by the AO in the assessment order were dully recorded in the books of account. Therefore, we are unable to see any valid reason to interfere with the findings arrived by the Ld. CIT(A) and thus we uphold the same. This ground of revenue is also dismissed.

Issues Involved:
1. Deletion of disallowance of contrived losses on NMCE.
2. Genuineness of losses incurred through synchronized trades.
3. Requirement for corroborative evidence against the affidavit filed by the assessee.
4. Reliance on SEBI's allowance of algorithmic trading.
5. Reliance on audit carried out by the Forward Market Commission.
6. Deletion of addition of unaccounted profit.

Detailed Analysis:

1. Deletion of Disallowance of Contrived Losses on NMCE:
The Revenue argued that the losses incurred by the assessee on NMCE were contrived and executed through synchronized trades with a cluster of brokers, intended to reduce taxable income by setting off these losses against profits from other exchanges. The CIT(A) deleted the disallowance, noting that the transactions were conducted through a recognized stock exchange and settled via banking channels. The CIT(A) also observed that the assessee incurred losses on other exchanges, indicating that the losses on NMCE were not unique or contrived. The Tribunal upheld the CIT(A)'s decision, emphasizing the lack of concrete evidence from the AO to prove that the losses were artificial or contrived.

2. Genuineness of Losses Incurred Through Synchronized Trades:
The Revenue contended that the execution of trades on a recognized exchange does not guarantee the genuineness of losses if they are managed or contrived. The CIT(A) and the Tribunal found that the transactions were executed on an online platform where the identity of the counterparty is unknown, making synchronization unlikely. The Tribunal also noted that the Forward Market Commission had conducted an audit and found no violations, further supporting the genuineness of the transactions.

3. Requirement for Corroborative Evidence Against the Affidavit Filed by the Assessee:
The AO dismissed the affidavit filed by the assessee's director without providing corroborative evidence. The CIT(A) criticized this approach, stating that the AO failed to conduct independent inquiries or provide evidence to support the disallowance. The Tribunal agreed, noting that the AO did not bring any evidence to counter the affidavit or prove that the transactions were not genuine.

4. Reliance on SEBI's Allowance of Algorithmic Trading:
The AO alleged that the assessee's high-frequency trading within 60 seconds was indicative of contrived losses. The CIT(A) and the Tribunal noted that SEBI regulations allowed for up to 20 transactions per second, and the mere fact of high-frequency trading did not prove that the losses were artificial. The Tribunal emphasized that the AO's allegations were based on presumptions rather than concrete evidence.

5. Reliance on Audit Carried Out by the Forward Market Commission:
The AO dismissed the audit report by the Forward Market Commission, arguing that it was based on information provided by the assessee and NMCE. The CIT(A) and the Tribunal found that the audit report, which found no violations, was a valid piece of evidence supporting the genuineness of the transactions. The Tribunal noted that the AO failed to provide any evidence to contradict the audit findings.

6. Deletion of Addition of Unaccounted Profit:
The AO added an unaccounted profit of Rs. 5,20,237.5, alleging that the assessee failed to demonstrate its accounting. The CIT(A) found that the transactions were recorded in the books of accounts and reflected in the audit report. The Tribunal upheld the CIT(A)'s decision, noting that the AO's addition was baseless and unsupported by evidence.

Judgment Summary:
The Tribunal dismissed the Revenue's appeals for A.Y. 2011-12, 2012-13, and 2013-14, upholding the CIT(A)'s decisions to delete the disallowance of losses and the addition of unaccounted profit. The Tribunal found that the Revenue failed to provide concrete evidence to support its allegations and that the transactions were genuine and conducted through recognized exchanges. The cross-objections filed by the assessee were also dismissed as academic and infructuous.

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