2024 (5) TMI 1229 - AT - Income Tax

Disallowance of business loss on account of sale of securities - LTCG in the trading of penny stocks - delivery of physical shares remain unexplained - as per AO Spot delivery contract note alongwith proof of physical share transfer has not been provided as mandatorily required under Securities Contract Act - HELD THAT - Assessee furnished all evidences in the form of bills, contract notes, demat statements and the bank accounts to prove the genuineness of the transactions relating to purchase and sale of shares resulting in LTCG. These evidences were neither found by the ld AO to be false or fabricated. The facts of the case and the evidences in support of the assessee s case clearly support the claim of the assessee that the transactions of the assessee were bonafide and genuine and therefore the ld AO was not justified in rejecting the assessee s claim. We note that the AO having failed to bring on record any material to prove that the transaction of the assessee was a collusive transaction could not have rejected the evidences submitted by the assessee. In fact, in this case nothing has been found against the assessee with aid of any direct evidences or material against the assessee, under these circumstances nothing can be implicated against the assessee. One is bound to consider and rely on the evidence produced by the assessee in support of its claim and base decision on such evidence and not on suspicion or preponderance of probabilities, no material was brought on record by the AO to controvert the evidence furnished by the assessee. It is a settled law that no disallowance on estimation, surmise or conjecture basis can be made. As decided in SHAILESH S. SHAH 1997 (3) TMI 610 - ITAT MUMBAI that no addition can be made purely based on suspicion. Just because assessee s broker has become defaulter, is not conclusive evidence to make addition , the assessing officer should examine other evidences submitted by the assessee, such as, the evidence of the purchase of shares of two concerns; the source of such purchases has been explained by assessee and has been brought to tax by the department, holding of shares in Demat form and consequent sales through the stock exchange after payment of STT and receipt of payment through banking channels. Therefore, considering these facts and circumstances, we delete the addition made by the assessing officer. Assessee appeal allowed.

Summary

Issues Involved:
1. Disallowance of business loss on account of sale of securities.
2. Genuineness of share transactions and the right to cross-examination.

Summary:

Disallowance of Business Loss:
The assessee filed a return of income for AY 2013-14 declaring an income of Rs. 51,36,060/-. The Assessing Officer (AO) issued notices u/s 143(2) and 142(1) of the Act and conducted a detailed examination of the assessee's claim of business loss of Rs. 4,55,72,791/- on account of trading in shares, which was set off against long-term capital gains (LTCG) of Rs. 4,17,53,626/-. The AO found that the transactions involved penny stocks, which were used to book artificial losses. The AO referred to a statement by Shri Rajkumar Kedia, who admitted to providing bogus LTCG and losses. Consequently, the AO disallowed the business loss claimed by the assessee.

Genuineness of Share Transactions and Right to Cross-Examination:
The assessee argued that all transactions were genuine, conducted through a registered broker, and supported by contract notes, demat statements, and bank statements. The assessee requested the cross-examination of Shri Rajkumar Kedia, which was denied by the AO. The CIT(A) upheld the AO's decision, emphasizing the modus operandi of using penny stocks for tax evasion.

Tribunal's Findings:
The Tribunal noted that the assessee provided substantial evidence to support the genuineness of the transactions, including contract notes, broker's pool account details, and demat statements. The Tribunal criticized the AO for not providing the statement of Shri Rajkumar Kedia or allowing cross-examination, which violated the principles of natural justice. The Tribunal referenced several judgments supporting the assessee's right to cross-examination and the need for the revenue to provide concrete evidence rather than relying on suspicion.

Conclusion:
The Tribunal concluded that the AO failed to bring any material evidence to prove that the transactions were collusive or not genuine. The Tribunal emphasized that decisions should be based on evidence and not on suspicion or preponderance of probabilities. Consequently, the Tribunal allowed the appeal and deleted the addition made by the AO.

Order Pronouncement:
The appeal filed by the assessee was allowed, and the order was pronounced on 05/01/2024.