2023 (12) TMI 502 - AT - Income Tax

Bogus short-term capital loss on sale of shares - assessee, an individual, claimed to be engaged in the activity of trading of shares securities -principle of surrounding circumstantial evidence relied upon - lower authority treated the transaction carried out by the assessee as sham transaction based on certain general facts like the company company was not finically viable in which general public should show interest. The price of the scrip was unusually skyrocketed without any financial or economic basis and unusually decreased and script in that period were traded in bulk and most people who indulged in bulk trading were from Ahmedabad city only HELD THAT - AO in its order has stated nowhere that any enquiry or investigation was carried out with any concerned authority or income tax department regarding rigging up of the price of M/s Looks Health Services Ltd or by the assessee s broker. AO predominantly proceeded to hold the price of the shares was rigged up merely on analysis of trade data of impugned script and financial strength of the company. Thus, the AO based on sweeping observation held that the assessee entered a prearranged transaction to set off the long-term capital gain earned by him during the year. As such, there is no information or finding based on corroborative material available with the AO that the price of impugned script was rigged up or the assessee along with his broker have rigged up the price or prearranged the transaction. The principle of surrounding circumstantial evidence is also not as strong to draw adverse inference against the assessee especially considering the fact that the transaction of purchases and sales were made on the BSE platform where seller and buyer do not know each other, and transaction entered on the basis of current market scenario. Assessee during the year under consideration has earned LTCG of Rs. 2,46,90,000/- whereas claimed setoff of STCL of Rs. 1,78,23,848/- only, had the assessee prearranged the transaction to set off the gain then he might have setoff entire capital gain. It is also pertinent to mention that the assessee during the year entered into share trading on short term basis in 48 different scripts and he incurred losses as well as earned profit which were not doubted. We find it necessary to refer to the judgment of the Krishna Devi 2021 (1) TMI 1008 - DELHI HIGH COURT wherein High court decided the issue in favour of the assessee as held that reliance placed on the report, without further corroboration on the basis of cogent material, does not justify his conclusion that the transaction is bogus, sham and nothing other than a racket of accommodation entries. We do notice that the AO made an attempt to delve into the question of infusion of Respondent's unaccounted money, but he did not dig deeper. AO simply proceeded on the basis of the financials of the company to come to the conclusion that the transactions were accommodation entries, and thus, fictitious. The conclusion drawn by the AO, that there was an agreement to convert unaccounted money by taking fictitious LTCG in a pre-planned manner, is therefore entirely unsupported by any material on record. This finding is thus purely an assumption based on conjecture made by the AO. Thus following same we direct the AO to delete the addition made by him. Hence, the ground of appeal of the assessee is hereby allowed.

Issues Involved:

1. Validity of the Assessment Order
2. Disallowance of Short-Term Capital Loss
3. Allegations of Penny Stock Transactions
4. Basis of AO's Action on Suspicion and Presumptions
5. Reliance on Search Reports
6. Levy of Interest under Sections 234A, 234B, 234C, and 234D of the Act

Summary:

1. Validity of the Assessment Order:
The assessee contended that the assessment order passed by the Assessing Officer (AO) is void ab initio and deserves to be quashed. However, this was not elaborated further in the judgment.

2. Disallowance of Short-Term Capital Loss:
The main issue raised by the assessee was that the AO and the learned CIT(A) erred in treating the short-term capital loss of Rs. 1,78,23,848/- on the sale of shares of M/s Looks Health Services Ltd as bogus. The AO observed deficiencies such as the source of funds for the purchase being from the assessee's father's account, transactions through a specific broker, and the financial non-viability of the company. The AO concluded that the transactions were prearranged to set off long-term capital gains, relying on principles of surrounding circumstantial evidence and judgments from the Hon'ble Supreme Court and Guwahati High Court.

3. Allegations of Penny Stock Transactions:
The AO and CIT(A) treated the transactions as penny stock transactions based on the financial analysis of M/s Looks Health Services Ltd, unusual price movements, and bulk trading predominantly by individuals from Ahmedabad. The learned CIT(A) emphasized that the transactions were sham and aimed at setting off long-term capital gains by creating a facade of legitimate transactions.

4. Basis of AO's Action on Suspicion and Presumptions:
The AO's conclusions were based on general observations and financial analysis without any corroborative material or specific enquiry. The judgment highlighted that the AO did not carry out any investigation with concerned authorities or the broker involved. The principle of surrounding circumstantial evidence was deemed insufficient to draw adverse inferences against the assessee.

5. Reliance on Search Reports:
The AO's reliance on search reports from the DDIT Investigation Wing, Calcutta, was based on general findings about penny stock transactions without specific evidence linking the assessee to such activities. The judgment noted that the assessee's transactions were conducted on the Bombay Stock Exchange platform, where buyers and sellers do not know each other.

6. Levy of Interest under Sections 234A, 234B, 234C, and 234D of the Act:
The learned CIT(A) also confirmed the AO's action of levying interest under Sections 234A, 234B, 234C, and 234D of the Income Tax Act, 1961.

Conclusion:
The ITAT concluded that the AO's findings were based on presumptions and general observations without specific evidence. The judgment referenced the Hon'ble Delhi High Court's decision in PCIT vs. Krishna Devi, which emphasized the need for corroborative material to support allegations of bogus transactions. The ITAT set aside the findings of the learned CIT(A) and directed the AO to delete the addition, allowing the assessee's appeal.

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