2020 (2) TMI 889 - AT - Income Tax

Set off of trading loss as incurred in commodity trading denied - AO treated the entire transaction as non genuine and bogus - HELD THAT - Facts on record show that the Assessing Officer did not make any enquiry from M/s Lazara Commodities Pvt Ltd and treated the entire transaction as non genuine and bogus on the strength of the statement of Shri Vikas Kumar Agarwal. We find that vide reply dated 25.12.2018, while submitting the financial and tax details of M/s Lazara Commodities Pvt Ltd, the assessee had made a specific mention that if any direct confirmation from the broker is required for the transactions done with it, the Assessing Officer may obtain directly from the broker by using his powers u/s 133(6) of the Act. Assessing Officer has not made any independent enquiry from M/s Lazara Commodities Pvt Ltd and disallowed the claim of loss solely on the statement given by Shri Vikas Kumar Agarwal, some entry provider based in Kolkata. Assessing Officer should have made enquiry directly from M/s Lazara Commodities Pvt Ltd. Therefore, in the interest of justice and fair play, we restore this issue to the file of the Assessing Officer. Ground No. 1 allowed for statistical purposes. Disallowance of short term capital loss - sale of shares - HELD THAT - The fact that the shares were sold to the mother of the assessee, raises a suspicion on the genuineness of the transaction. We are surprised to find that when the shares were purchased, the Assessing Officer did not make any enquiry and at the time of sale, the Assessing Officer is questioning the purchase price of the shares. Further, Rule 11UA of the Rules contains rules for determination of fair market value and Rule 11UA(1)c)(b) of the Rules provides for determination of fair market value of unquoted equity shares. Though the assessee has furnished a valuation report, but whether the said report is in line with the relevant rules has not been examined by the Assessing Officer. Restore this issue to the file of the Assessing Officer as directed to examine the valuation report to determine whether the same is in line with Rule 11UA of the Rules. The Assessing Officer may also make necessary enquiries from the valuer and after giving reasonable and fair opportunity of being heard to the assessee, decide the issue afresh.

Summary

Issues:
1. Denial of set off of trading loss
2. Disallowance of short term capital loss

Analysis:

Issue 1: Denial of set off of trading loss
The assessee claimed a trading loss of ?3 crores incurred during the year in commodity trading, seeking a set off of ?63,76,709. The Assessing Officer disallowed the entire loss based on information from a search operation on a broker providing accommodation entries, including M/s Lazara Commodities Pvt Ltd. The Assessing Officer did not independently verify the transactions with M/s Lazara Commodities Pvt Ltd and solely relied on the statement of the entry provider. The ITAT found this approach lacking and directed the Assessing Officer to conduct necessary enquiries directly with M/s Lazara Commodities Pvt Ltd to determine the genuineness of the transactions. The ITAT emphasized the importance of fair play and justice in such assessments.

Issue 2: Disallowance of short term capital loss
The assessee purchased shares and later sold them resulting in a short term capital loss of ?2.43 crores. The Assessing Officer questioned the genuineness of the transaction, suspecting it to be a colorable device for tax benefits. The ITAT noted that the shares were sold to the mother of the assessee, raising doubts about the transaction. The valuation report submitted by the assessee was not adequately considered against Rule 11UA of the IT Rules, 1962. The ITAT directed the Assessing Officer to re-examine the valuation report in line with the rules, make necessary enquiries, and provide a fair opportunity for the assessee to present their case. The ITAT clarified that the Assessing Officer should focus on the selling price of the shares while deciding the issue afresh.

In conclusion, the ITAT allowed the appeal of the assessee for statistical purposes, emphasizing the need for proper verification and adherence to rules in assessing trading and capital losses.