2024 (1) TMI 1306 - AT - Income Tax

Bogus loss in share trading in F O segment - AO treated the loss from share trading and from F O segment as prearranged loss meant to evade the payment of legitimate taxes and disallowed the same by giving an observation that the assessee had taken accommodation entries to book this loss in share trading and F O segment - HELD THAT - Investigation wing of the department has unearthed a large scale manipulations on the stock exchange platform by the entry providers in connivance with the stock brokers which was carried out on the stock exchange platform by taking advantage of the loopholes in the system. In the present case assessee has filed the copies of contract notes, bills/vouchers, evidences of payments and copies of D-MAT Accounts before the Assessing Officer. We also note that the Assessing Officer, instead of carrying out investigations/enquiries into these evidences either by issuing notice under section 133(6) of the Act to the purchaser/sellers or stock exchange or brokers, has merely relied on the investigation wing/SEBI reports. We find no whisper in the assessment order disbelieving the evidences filed by the assessee or rejecting the same and the AO has merely proceeded on an assumption that the transactions entered into by the assessee during the year, which have resulted into the lossare bogus and fictitious intended to evade the legitimate taxes due to the assessee. See RENU AGGARWAL 2023 (7) TMI 288 - SC ORDER We are inclined to hold that the AO has failed to carry out any independent investigations/enquiries into the evidences filed by the assessee and has rejected the claim by the assessee qua loss from share trading in F O segment only on the basis of surmises and conjectures and relying on the statements of entry operators who never named the assessee and their statements were recorded long before. Therefore, we set aside the order of first appellate authority and direct the Assessing Officer to delete the allow the loss. Assessee appeal allowed. Addition u/s 14A of the Act r.w.r. 8D(2)(iii) - AO observed that the assessee made huge investments in equity shares, however, the assessee has not made any disallowance u/s 14A - HELD THAT - We observe that during the year, the assessee has not earned any exempt income and accordingly the assessee has not made any disallowance u/s 14A of the Act. The well settled legal position on this issue is that when there is no exempt income earned during the year then there is no question of disallowance u/s 14A of the Act. Accordingly, we are inclined to hold that the disallowance made by the Assessing Officer is not correct and therefore cannot be sustained. The case of the assessee finds support from the decisions of the Hon ble Apex Court in the case of CIT vs. Chettinad Logistics (P.) Ltd. 2018 (7) TMI 567 - SC ORDER and Maxopp Investment Pvt. Ltd. 2018 (3) TMI 805 - SUPREME COURT wherein it has been held that no disallowance is to be made where there is not exempt income. Thus, we direct the Assessing Officer to delete the addition - Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance of Rs. 3,98,50,208/- on account of alleged bogus loss in share trading and F&O segment.
2. Addition of Rs. 11,58,944/- by invoking provisions of Section 14A of the Income Tax Act read with Rule 8D(2)(iii).

Issue-wise Detailed Analysis:

1. Disallowance of Rs. 3,98,50,208/- on Account of Alleged Bogus Loss in Share Trading and F&O Segment:
The assessee incurred a loss of Rs. 3,98,50,208/- during the year, which included a share trading loss of Rs. 2,87,07,277/- and a loss of Rs. 1,11,42,931/- in the F&O segment. The Assessing Officer (AO) observed that the losses were incurred in seven shares listed on the stock exchange, suspected to be manipulated by brokers and entry operators as per SEBI and Investigation Wing reports. The AO concluded that these losses were prearranged to evade taxes and disallowed them, without issuing any notice under Section 133(6) or 131 for independent verification.

The CIT(A) dismissed the appeal as the assessee did not comply with various notices issued during the appellate proceedings. The assessee argued that all necessary evidence, such as contract notes, bills, vouchers, bank statements, and Demat accounts, were submitted to the AO. However, the AO did not conduct an independent investigation and relied solely on SEBI and Investigation Wing reports. The assessee contended that the transactions were carried out on a recognized stock exchange platform with proper banking channels, and no specific evidence was presented to prove the transactions as fictitious.

The Tribunal noted that the AO failed to carry out any independent investigations and relied solely on generalized observations. The Tribunal referenced similar cases where the loss on sale of shares/F&O segment was allowed, citing decisions such as Gateway Financial Services Ltd. vs. ACIT and Raigarh Jute & Textile Mills Pvt. Ltd. The Tribunal emphasized the importance of cross-examination and the principles of natural justice, noting that the AO did not provide the assessee with an opportunity to cross-examine the witnesses whose statements were relied upon.

The Tribunal concluded that the AO's assessment was based on conjectures and surmises without substantive evidence. The Tribunal allowed the assessee's claim for the loss of Rs. 3,98,50,208/-.

2. Addition of Rs. 11,58,944/- by Invoking Provisions of Section 14A of the Income Tax Act read with Rule 8D(2)(iii):
The AO observed that the assessee made substantial investments in equity shares but did not disallow any expenses under Section 14A of the Act, despite not earning any exempt income during the year. The AO made a disallowance of Rs. 11,58,944/-, calculated as 0.5% of the total average investments, limited to the amount charged to the profit and loss account.

The Tribunal noted that the well-settled legal position is that no disallowance under Section 14A can be made if there is no exempt income earned during the year. This principle is supported by decisions of the Hon'ble Supreme Court in CIT vs. Chettinad Logistics (P.) Ltd. and Maxopp Investment Pvt. Ltd. vs. CIT, and the Hon'ble Delhi High Court in Cheminvest Ltd. v. CIT. Consequently, the Tribunal directed the AO to delete the addition of Rs. 11,58,944/-.

Conclusion:
The Tribunal allowed the appeal of the assessee on both issues, directing the deletion of the disallowance of Rs. 3,98,50,208/- on account of alleged bogus loss in share trading and F&O segment, and the addition of Rs. 11,58,944/- under Section 14A of the Income Tax Act. The decision emphasized the importance of independent investigation, cross-examination, and adherence to the principles of natural justice.