2021 (1) TMI 622 - AT - Income Tax

Addition of loss claimed in Future Options ( F O ) - Reliance on statement of third party (Broker) recorded during survey u/s. 133A - AO discarded the primary documents produced by the assessee to establish the veracity of the transaction in F O, by bringing in the statement of director and accountant of M/s KSPL which was the broker of the assessee in the transaction of F O - HELD THAT - The statement of both Shri Harshvardhan Kayan and Shri Mukesh Agarwal extracted by the AO neither bring out any wrong doings on the part of assessee nor say anything about F O transactions. It only says about facilitation of bogus LTCG through jamakharchi companies which were their clients - if the AO had any doubts lingering in his mind, then he should have summoned these persons and questioned them and un-earthed the truth. Rather than doing so, he simply relied upon the statements of both these persons during survey of a third party and without any incriminating oral statements/documentary evidence or material against the assessee or the F O transactions carried out by the assessee, based on suspicion only has drawn adverse inference/finding against the assessee which action of both AO as well as Ld CIT(A) cannot be countenanced. AO himself has admitted that the statement of Shri Harshavardhan Kayan as well as that of Shri Mukesh Agarwal has been recorded during survey u/s. 133A and it is noted that the statement is not incriminating against the assessee since its name or the transaction of F O has not been negatively commented upon by them. Further, it is trite that the statement recorded during survey u/s. 133A cannot be the sole basis on which adverse inference can be drawn against the assessee. The assessee has been kept in the dark and has not been given the entire copy of the statement of Shri Harshavardhan Kayan as well as that of Shri Mukesh Agarwal; and no opportunity has been granted to the assessee to cross examine Shri Harshavardhan Kayan as well as that of Shri Mukesh Agarwal. The statement of Shri Harshavardhan Kayan as well as that of Shri Mukesh Agarwal cannot be looked into for drawing an adverse inference against the assessee. And though their statements are not incriminating against the assessee, any way if both their statements reproduced are kept aside for the legal infirmities, there are no other material against the assessee in respect of its transaction in F O - Based on the supporting evidence produced by the assessee to validate its transaction of F O in recognized stock exchange, the loss suffered in the said transaction has to be allowed and it is ordered accordingly. Appeal of assessee is allowed.

Summary

Issues Involved:
1. Addition of ?29,65,952/- on account of loss claimed by the assessee in Future & Options (F&O) transactions.

Issue-wise Detailed Analysis:

1. Addition of ?29,65,952/- on account of loss claimed by the assessee in Future & Options (F&O) transactions:

The assessee appealed against the order of the Ld. CIT(A) confirming the addition made by the AO regarding the loss claimed in F&O transactions. The AO noted that the assessee had debited a loss of ?29,65,952/- from transactions in the Stock Exchange of F&O, conducted through M/s. Kayan Securities Pvt. Ltd. (M/s. KSPL). The AO relied on statements made by Shri Harshvardhan Kayan, a director of M/s. KSPL, and Shri Mukesh Agarwal, who managed the share trading and accounting for M/s. KSPL, during a survey under section 133A of the Income-tax Act, 1961. Both individuals admitted that M/s. KSPL was involved in providing bogus Long Term Capital Gain (LTCG) entries.

Despite the assessee's explanation that the transactions were conducted through a recognized stock exchange with payments made through banking channels, the AO dismissed the claim, treating the loss as bogus. The Ld. CIT(A) upheld the AO's decision, noting that the assessee failed to provide evidence of past or future transactions and suggesting that the transactions were intended to reduce tax liability.

Upon appeal, it was argued by the assessee's representative that the transactions were legitimate, conducted through recognized stock exchanges (BSE & NSE), and supported by proper documentation. The representative contended that the AO and Ld. CIT(A) dismissed the evidence without proper justification and relied on statements made during a survey, which are considered weak evidence according to the Supreme Court's ruling in CIT Vs. S. Kader Khan & Son (2013) 352 ITR 480 (SC).

The Tribunal noted that the assessee had provided all necessary documentation to support the F&O transactions, and these were conducted through recognized stock exchanges with payments made through banking channels. The statements of Shri Harshvardhan Kayan and Shri Mukesh Agarwal did not specifically implicate the assessee in any bogus transactions related to F&O. Furthermore, the AO did not provide the assessee with the full statements or an opportunity to cross-examine the individuals, violating principles of natural justice as upheld by the Supreme Court in M/s. Andaman Timber Industries Vs. Commissioner Central Excise, Civil Appeal No. 4228 of 2006.

The Tribunal concluded that the AO and Ld. CIT(A) had based their findings on suspicion and selective extracts from statements that did not directly implicate the assessee. Given the lack of incriminating evidence against the assessee and the proper documentation supporting the transactions, the Tribunal allowed the appeal, thereby accepting the loss claimed by the assessee in F&O transactions.

Conclusion:

The Tribunal allowed the appeal, ruling in favor of the assessee, and ordered that the loss of ?29,65,952/- claimed in F&O transactions be accepted. The decision highlighted the importance of proper documentation and adherence to principles of natural justice in tax assessments.