2024 (5) TMI 1454 - AT - Income Tax

Long term capital loss generated from sale of shares - large scale manipulations on the stock market platform done by some unscrupulous entry operators to provide some pre-arranged long term capital gain and short term capital loss/trading loss by price rigging in some shares in a syndicate manner - HELD THAT - Undisputed fact as gathered from the records before us are that during the year the assessee sold a flat measuring 1682 sft. at Chandra Mahal, 15, Burdwan Road, Kolkata for a consideration of Rs.1,85,00,000/- and earned capital gain on such transfer which was purchased for Rs.15,30,058/- on 11.04.1992 resulting in the LTCG of Rs.1,50,45,540/- after making allowance of index cost of acquisition of Rs.34,54,460/-. During the year, the assessee has also sold equity shares of two companies viz. M/s. Tuni Textiles Ltd. and M/s. Blue Circle Services Limited on which the assessee had incurred loss of Rs.1,87,25,176/-. The above STCG was set off against LTCG realized from the sale of flat as stated supra. We have also perused the decision referred before us in the case of Nalanda Builders Pvt. Ltd. 2024 (2) TMI 330 - ITAT KOLKATA wherein the issue of sale of two stocks namely, M/s. Tuni Textiles Ltd. and M/s. Blue Circle Services Limited was involved and the losses suffered on the sale of above shares was adjusted against the LTCG accrued from sale of fixed asset i.e flat. We have perused the above decision carefully and observed that the facts are quite similar and also that the decision in the case of Gateway Financial Services Ltd. 2023 (7) TMI 743 - ITAT KOLKATA has been followed by the Coordinate Bench. We also note that the decision in the case of Nalanda Builders Pvt. Ltd. 2024 (2) TMI 330 - ITAT KOLKATA as relied upon by the Ld. AR has considered the decision of Gateway Financial Services Ltd 2023 (7) TMI 743 - ITAT KOLKATA which has distinguished the decision of the Hon ble High Court in the case of Swati Bajaj 2022 (6) TMI 670 - CALCUTTA HIGH COURT . We set aside the order of CIT(A) and direct the AO to allow the loss incurred on sale of shares and allow the set off of the same against the LTCG earned by the assessee. Resultantly, the appeal of the assessee is allowed.

Summary

Issues Involved:
1. Legitimacy of the short-term capital loss on the sale of equity shares of M/s. Tuni Textiles Ltd. and M/s. Blue Circle Services Limited.
2. Application of the principles of natural justice in the assessment proceedings.
3. Relevance and applicability of precedents and judicial decisions.

Detailed Analysis:

1. Legitimacy of the Short-Term Capital Loss:
The primary issue raised by the assessee was against the order of the Ld. CIT(A) upholding the assessment order passed under Section 143(3) of the Income Tax Act, 1961, wherein the AO rejected the short-term capital loss of Rs. 1,87,25,176/- on the sale of equity shares of M/s. Tuni Textiles Ltd. and M/s. Blue Circle Services Limited. The AO deemed these transactions as accommodation entries intended to set off against the long-term capital gain from the sale of a flat. The assessee provided details of the transactions, including contract notes, Demat account copies, and payment details, asserting that the transactions were genuine and conducted through a SEBI registered trading member. However, the AO, referencing large-scale manipulations in the stock market and the inclusion of these shares in the list of penny stocks, concluded that the transactions were sham and rejected the loss.

2. Application of the Principles of Natural Justice:
The assessee argued that the issue was covered by the decision of the Coordinate Bench in the case of Nalanda Builders Pvt. Ltd. vs. DCIT, where similar transactions were deemed genuine. The assessee also relied on multiple judicial decisions, emphasizing that the principles of natural justice were violated as the AO did not provide an opportunity for cross-examination of the witnesses whose statements were relied upon. The Tribunal, after hearing the rival contentions, noted that the AO's reliance on statements and investigation reports without providing cross-examination opportunities violated the principles of natural justice. The Tribunal highlighted that the SEBI had revoked its interim orders against the entities involved, indicating no adverse findings against them.

3. Relevance and Applicability of Precedents and Judicial Decisions:
The Tribunal considered various judicial precedents, including the decision in the case of Gateway Financial Services Ltd., where the facts were substantially similar. The Tribunal observed that the decision in the case of Swati Bajaj, relied upon by the revenue authorities, was distinguished in the case of Nalanda Builders Pvt. Ltd. The Tribunal emphasized that the AO's findings were based on preponderance of probabilities rather than direct evidence. The Tribunal also referred to the decision of the Hon'ble Supreme Court in the case of NRA Steel, which laid down the principles for proving the genuineness of transactions, identity, and creditworthiness. The Tribunal concluded that the AO failed to carry out independent investigations and relied on statements recorded long before the assessment proceedings.

Conclusion:
The Tribunal, following the decision of the Coordinate Bench in the case of Nalanda Builders Pvt. Ltd., set aside the order of the Ld. CIT(A) and directed the AO to allow the loss incurred on the sale of shares amounting to Rs. 1,87,25,176/- and permit the set-off against the long-term capital gain. The appeal of the assessee was allowed, emphasizing the need for adherence to the principles of natural justice and proper investigation by the AO.