2019 (3) TMI 697 - AT - Income Tax

Bogus Short Term Capital Loss on sale of shares - Penny Socks - colorable devise to evade tax - HELD THAT - AO mentions about the role of brokers in allowing entry operators to register their bogus companies as their client and also certain admission made by some brokers about their involvement in so called Jama kharchi companies. In the said para some names of few brokers and Jama Kharchi operators have been mentioned. However, we note that the name of assessee s broker, M/s. Guiness Securities Ltd., through whom the assessee sold his shares, does not appear at all in that report. We note that M/s Guiness Securities Ltd was not named in the assessment order / D.I. report as a broker who was involved in price rigging of penny stocks. On the other hand, we note that M/s. Guiness Securities Ltd is a SEBI registered stock broking company having registration no. INB 011146033 and also is a member of Bombay Stock Exchange having membership no. 3027; Neither during the time of execution of the contract in FY 2013-14 nor even today, this stock-broking company was suspended by SEBI or BSE on any charge of irregularities like price rigging etc as alleged by the AO. We note that AO failed to bring on record any material to connect the assessee to any of the alleged entry operators/ brokers who are a part of this so called price rigging group or LTCG Generator Group. We note that in an identical/similar case, wherein the AO made addition of the LTCG claim made on sale of M/s. KAFL scrips on similar reasoning based on the SEBI interim report, investigation report of the Wing of the Department and certain statements recorded by the Department in the case of Sanjiv Shroff Vs. ACIT 2019 (1) TMI 213 - ITAT KOLKATA and and particularly the Hon ble jurisdictional High Court decision in the case of M/s. Blb Cables And Conductors 2018 (8) TMI 525 - CALCUTTA HIGH COURT we, therefore, respectfully following the same, allow the claim of loss as claimed by the assessee - Appeal of the assessee is allowed

Summary

Issues Involved:
1. Legitimacy of the Short Term Capital Loss (STCL) claim by the assessee.
2. Allegations of bogus transactions and tax evasion.
3. Evidentiary support for the transactions.
4. Legal precedents and principles applicable to the case.

Detailed Analysis:

Legitimacy of the Short Term Capital Loss (STCL) Claim by the Assessee:
The primary grievance of the assessee pertains to the confirmation of an addition of ?18,46,180/- by the Ld. CIT(A). The assessee reported an interest receipt of ?30,99,300/- and claimed a loss from the sale of shares of M/s. Shree Shaleen Textiles Ltd. The AO alleged that the transactions were bogus, aimed at evading taxes by setting off the interest income with a fabricated Short Term Capital Loss (STCL). The AO's conclusion was based on an investigation report and the assertion that the loss was booked through circular and collusive trading. The Ld. CIT(A) upheld this view, considering it a colorable device to evade tax.

Allegations of Bogus Transactions and Tax Evasion:
The AO's stance was that the loss claimed by the assessee was fabricated to reduce taxable income. The AO suspected collusion between the assessee and the broker, suggesting that the transactions were part of a scheme involving circular trading and price rigging. The AO relied heavily on the investigation report and the observations of the Special Investigation Team (SIT) on black money laundering through bogus claims of Long Term Capital Gains (LTCG) or losses.

Evidentiary Support for the Transactions:
The assessee provided extensive documentation to substantiate the genuineness of the transactions, including:
- Demat Account statements
- Share Broker’s contract notes
- Annual Reports of Shree Shaleen Textiles Ltd.
- Ledger accounts of the share broker
- Price movement and trade volume data
- Closing stock details

The Tribunal noted that these documents were not found to be false or fabricated. The transactions were conducted through a registered share broker and settled via account payee cheques, with securities transaction tax (STT) paid on both purchases and sales. The Tribunal emphasized that the AO failed to provide concrete evidence of collusion or fabrication.

Legal Precedents and Principles Applicable to the Case:
The Tribunal relied on several legal precedents to support its decision:
1. Principal Commissioner of Income vs. M/S. BLB Cables And Conductors: The Calcutta High Court upheld the Tribunal's decision, emphasizing that transactions supported by documentary evidence cannot be deemed bogus without concrete proof.
2. Pr. CIT vs. Jatin Investment (P) Ltd.: The Delhi High Court ruled that transactions cannot be treated as fraudulent if supported by documentary proof and if no discrepancy is found.
3. CIT vs. Lavanya Land Pvt Ltd.: The Bombay High Court highlighted that allegations must be supported by evidence of cash transactions.
4. DOLARRAI HEMANI vs. ITO: The Tribunal held that thinly traded stocks and high gains alone are insufficient to deem transactions bogus without material evidence.
5. DCIT Vs. Sunita Khemka: The Kolkata ITAT ruled that the AO must provide material evidence of collusion to treat transactions as bogus.
6. KAMALA DEVI S DOSHI VS. ITO: The Mumbai ITAT emphasized the need for cross-examination of witnesses whose statements are used against the assessee.

The Tribunal concluded that the AO's decision was based on suspicion and predetermined notions, without concrete evidence. The Tribunal directed the AO to accept the assessee's claim of loss, as the documents provided substantiated the genuineness of the transactions.

Conclusion:
The Tribunal allowed the appeal of the assessee, directing the AO to accept the claim of Short Term Capital Loss (STCL) and delete the addition of ?18,46,180/-. The Tribunal emphasized the need for concrete evidence to support allegations of bogus transactions and tax evasion and relied on multiple legal precedents to uphold the assessee's claim. The order was pronounced in the open court on 8th March 2019.