2023 (1) TMI 913 - AT - Income Tax

Disallowing the bogus loss incurred by the assessee in trading of penny stocks - information received from the Investigation Wing, Kolkata - Necessity of independent application of mind by AO - HELD THAT - In the present case, it is evident that the assessee is engaged in the business of shares and stocks broking. Profit and loss account, wherein the assessee has duly credited the consideration from the sale of shares and speculation gain. Assessee has also debited the Demat charges, Securities Transaction Tax, loss on future shares, purchase of shares, and other charges. During the year, the assessee traded in shares of NCL Research and M/s Shreenath, on which the assessee incurred a loss - On the basis of information received from Investigation Wing, Kolkata, the shares of the aforesaid companies were treated as penny stocks by the Revenue and therefore the loss was disallowed. As per the assessee, he has been trading regularly in recognised stock exchanges through the brokers registered under the SEBI. As per the assessee, the aforesaid transaction was also done through a SEBI register broker, and in support of his claim, the assessee furnished contract notes, broker notes, and Demat account before lower authorities. AO made the impugned addition merely on the basis of information received from the Investigation Wing, Kolkata without conducting any independent inquiry or doubting the evidence furnished by the assessee in support of its claim. It is also evident that the AO has not examined or issued summons or notice under section 133(6) of the Act to the broker through whom the assessee has traded in shares of aforesaid companies From the perusal of statements of persons, who are alleged to be the promoter of NCL Research and M/s Shreenath, we find no mention of the name of the aforesaid companies or the assessee. Further, there is no evidence on record that the assessee has engaged in any manipulative activities with respect to the purchase and sale of shares of aforesaid two companies. The lack of enquiry on the part of the AO and non-appreciation of facts on record is also evident from the fact that the loss incurred by the assessee as a trader of shares has been considered to be the short-term capital loss when such shares were not even held as an investment by the assessee. No infirmity in the impugned order deleting the addition made by the AO. As a result, both the grounds raised by the Revenue are dismissed.

Summary

Issues Involved:

1. Deletion of the addition of Rs.2,19,22,836 as alleged bogus short-term capital loss (STCL).
2. Whether the loss incurred by the assessee in trading penny stocks should be disallowed as a business loss.

Issue-wise Detailed Analysis:

1. Deletion of the addition of Rs.2,19,22,836 as alleged bogus short-term capital loss (STCL):

The Revenue challenged the deletion of the addition of Rs.2,19,22,836 by the learned CIT(A), arguing that the loss was due to manipulation of stocks to provide bogus STCL entries to the assessee. The assessee, engaged in share and stock broking, filed a return declaring a total income of Rs.1,47,561/-, which was later revised to Rs.8,19,953/- after rectification. Reassessment proceedings were initiated based on information from the DGIT (Investigation), Kolkata, indicating manipulative activities involving penny stocks. The AO observed that the assessee booked significant losses from transactions in shares of NCL Research and M/s Shreenath, treating the entire loss as short-term capital loss from trading in shares, and added it to the total income.

The learned CIT(A) allowed the appeal, noting that the assessee is a share broker and the losses were incurred in the normal course of business. The assessee provided necessary documentary evidence, including contract notes, broker notes, and Demat account statements. The learned CIT(A) highlighted that the AO relied solely on information from the Investigation Wing without conducting an independent investigation or providing cross-examination opportunities. The learned CIT(A) referenced the Bombay High Court's decision in CIT-13 vs Shyam R. Pawar, emphasizing that mere reliance on statements without further investigation is insufficient to prove transactions as bogus.

2. Whether the loss incurred by the assessee in trading penny stocks should be disallowed as a business loss:

The learned DR argued that the reassessment was based on detailed investigations by the Investigation Wing, Kolkata, which revealed the modus operandi of companies providing bogus capital gains/losses through penny stocks. Statements from promoters and stock brokers indicated that the companies involved were used for accommodation entries of bogus losses. The learned AR countered, asserting that the assessee has been a share trader for two decades, and transactions were conducted through SEBI-registered brokers with proper documentation provided.

The Tribunal considered the rival submissions and noted that the assessee's business activities were evident from the profit and loss account, showing regular trading in shares. The AO's addition was based solely on information from the Investigation Wing without independent inquiry or examination of the broker involved. The Tribunal found no evidence linking the assessee to manipulative activities or the alleged bogus transactions. The Tribunal upheld the learned CIT(A)'s decision, finding no infirmity in deleting the addition, as the loss was incurred in the regular course of business and not as a manipulated share capital loss.

Conclusion:

The Tribunal dismissed the Revenue's appeal, upholding the learned CIT(A)'s order that the loss of Rs.2,19,22,836 incurred by the assessee was a regular trading loss and not a bogus short-term capital loss. The decision emphasized the lack of independent investigation by the AO and the absence of evidence linking the assessee to manipulative activities. The appeal by the Revenue was dismissed, and the order was pronounced on 20/01/2023.