2020 (1) TMI 1665 - AT - Income Tax

Addition u/s 68 - disallowance of losses to be bogus since involving alleged client code modification made by the broker - HELD THAT - As decided in KUNDAN INVESTMENT LTD. 2003 (3) TMI 62 - CALCUTTA HIGH COURT impugned loss claimed by assessee is genuine loss in the above facts and circumstances of the case and therefore eligible for deduction. The impugned unexplained cash credit addition is not sustainable in the facts of the present case. The same is directed to be deleted. Decided in favour of assessee.

Summary

Issues Involved:
1. Validity of Section 147 proceedings.
2. Treatment of disallowance of losses as unexplained cash credit under Section 68 of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Validity of Section 147 Proceedings:
The appellant raised a legal issue concerning the validity of the proceedings under Section 147 of the Income Tax Act, 1961. However, this ground was not pressed during the course of the hearing, and thus, it was not adjudicated upon by the Tribunal.

2. Treatment of Disallowance of Losses as Unexplained Cash Credit:
The primary substantive grievance of the assessee was the disallowance of losses amounting to Rs. 19,09,281/-, which the lower authorities treated as bogus due to alleged client code modification by the broker. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the Assessing Officer's (AO) action, stating that the assessee had booked a bogus loss under the pretext of client code modification.

The CIT(A) noted that the investigation by the Directorate of Income Tax (Investigation), Ahmedabad, revealed that the loss was contrived and arranged through the broker. The AO recorded that the appellant failed to substantiate the bonafide nature of the transactions with proper evidence, such as books of accounts or objections raised with the broker. The CIT(A) emphasized that client code modifications are generally not allowed except for genuine mistakes, as per SEBI Circular dated 06.02.2003. The CIT(A) concluded that the modifications were not genuine and upheld the AO's addition of Rs. 19,09,281/- as unexplained cash credit.

The appellant's counsel contended that the CIT(A) erred in upholding the AO's action and argued that the transactions were genuine. The Tribunal referred to a coordinate bench decision in the case of M/s. Khaitan Trade Holdings Pvt. Limited vs. ITO, where similar issues were adjudicated. In that case, it was held that modifications permitted by NSE within the prescribed time limit could not be deemed manipulative, and the loss claimed by the assessee was allowed as genuine.

The Tribunal adopted the reasoning from the Khaitan Trade Holdings case, noting that the assessee provided documentary evidence, including contract notes, bank statements, and payment of security transactions tax, to establish the genuineness of the transactions. The Tribunal found that the CIT(A) and AO's conclusions were based on surmise and conjecture, which is not permissible in law. The Tribunal emphasized that the evidence on record did not support the addition as unexplained cash credit.

Conclusion:
The Tribunal held that the impugned unexplained cash credit addition was not sustainable and directed its deletion. The appeal was partly allowed, with the disallowance of losses being overturned based on the evidence provided and the legal precedents cited. The Tribunal pronounced the order on January 31, 2020.