2017 (11) TMI 193 - AT - Income Tax

Treatment to speculation profit as unexplained cash credit under section 68 - Held that - There was no enquiry made by the Assessing Officer in the said case directly with the concerned Stock Exchange which clearly revealed that the relevant transactions were not done through the Stock Exchange as claimed by the assessee on the basis of Contract Notes issued by the broker. In the present case, such enquiry was made by the Assessing Officer, which clearly revealed that not only the assessee but even the concerned broker was never active on the Stock Exchange. It also revealed that the said broker was indulging in issuing fraudulent Contract Notes which resulted into his expulsion from the membership of the Exchange from 15th May, 2013. As find myself in agreement with the CIT(Appeals) that the genuineness of the assessee s claim of having earned the speculation profit of ₹ 3,00,905/- was not established and the Assessing Officer, therefore, was fully justified in treating the said amount as unexplained cash credit under section 68 chargeable to tax at the flat rate of 30%. Therefore, uphold the impugned order of the ld. CIT(Appeals) on this issue and dismiss Ground No. 1 of the assessee s appeal. Claim for short-term capital loss - Held that - As observed that the shares were purchased by the assessee at ₹ 10/- per share on 01.11.2012 and there is nothing brought on record by the Assessing Officer to show that the fair market value of the said shares as on the date of purchase by the assessee was different from the purchase price shown by the assessee. As regards the allegation of the Assessing Officer that there was no monetary involvement in the transactions in question, the assessee has placed on record the copies of current accounts of the concerned family members as appearing in the books of account of the assessee at page nos. 27 & 28 of his paper book to show that there were substantial monetary transactions between the parties against which the value of share transactions in question was adjusted. Having regard to all these facts of the case, I am of the view that the action of the Assessing Officer in disallowing the short-term capital as claimed by the assessee by doubting the genuineness of the relevant share transaction was not well founded and the ld. CIT(Appeals) was not justified in upholding the said action of the Assessing Officer. Therefore, set aside the impugned order of the ld. CIT(Appeals) on this issue and direct the Assessing Officer to allow the claim of the assessee for short-term capital loss of ₹ 1,00,000/-. Ground No. 2 of the assessee s appeal is accordingly allowed.

Issues Involved:
1. Treatment of speculation profit as unexplained cash credit under section 68 of the Income Tax Act, 1961.
2. Disallowance of short-term capital loss of ?1,00,000.

Issue-Wise Detailed Analysis:

1. Treatment of Speculation Profit as Unexplained Cash Credit:

The assessee, a HUF, declared speculation profit of ?3,00,805/- in its return of income for the year under consideration. This profit was claimed to have been earned through transactions made in the National Multi Commodity Exchange of India Limited (NMCE) via broker M/s. Jagtarni Commodities Pvt. Limited. The Assessing Officer (AO) issued notices under section 133(6) to both the broker and NMCE to verify the claim. NMCE responded that the assessee was never registered with the Exchange and that the broker was never active on the Exchange. The broker did not respond to the notice. Consequently, the AO treated the speculation profit as unexplained cash credit under section 68 and taxed it at 30% as per section 115BBE.

The assessee challenged this action before the Commissioner of Income Tax (Appeals) [CIT(A)], arguing that the profit was shown on an accrual basis and received by cheque in the subsequent financial year, thus not applicable under section 68 for the relevant assessment year. The assessee also contended that the broker's identity was established and any default by the broker should not adversely affect the assessee.

The CIT(A) upheld the AO's decision, citing suspicions about the transactions and referencing the NMCE's letter and the broker's non-compliance. The CIT(A) concluded that the transactions were "suspicious" and "dubious," and the AO had rightly considered the surrounding circumstances.

Upon further appeal, the Tribunal noted that the AO's enquiry with NMCE revealed that neither the assessee nor the broker was active on the Exchange and that the broker was expelled for issuing fraudulent Contract Notes. The Tribunal agreed with the CIT(A) that the genuineness of the speculation profit was not established and upheld the treatment of the amount as unexplained cash credit under section 68, dismissing the assessee's appeal on this ground.

2. Disallowance of Short-Term Capital Loss:

The assessee declared a short-term capital gain of ?1,12,118/- and set it off against a short-term capital loss of ?1,00,000/- from the sale of shares of M/s. Paul & Chakraborty Pvt. Limited. The AO examined the transactions and found that the shares were purchased from a family member and sold to another family member, with no monetary involvement as the transactions were done through journal entries. The AO also noted discrepancies in the fair market value of the shares and the shareholders' list.

The assessee contended that transactions with family members were regular and supported by journal entries. However, the CIT(A) confirmed the AO's disallowance, finding no merit in the assessee's submissions.

The Tribunal, upon review, found that the AO's disallowance was based on the transactions being with family members and the fair market value discrepancy. The Tribunal noted that similar transactions with family members were accepted by the AO and that substantial monetary transactions were adjusted against the share transactions. The Tribunal concluded that the disallowance was not well-founded and set aside the CIT(A)'s order, directing the AO to allow the short-term capital loss of ?1,00,000/-.

Conclusion:

The appeal was partly allowed, with the Tribunal upholding the treatment of speculation profit as unexplained cash credit under section 68 but allowing the claim for short-term capital loss.

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