2024 (8) TMI 812 - AT - Income Tax

Disallowance of claim of F O loss - AO received information that certain stock brokers were manipulating F O transactions in the stock market in order to generate bogus losses and gains - case of the Ld CIT(A) was that the loss of the assessee was generated through alleged client code modification - HELD THAT - Hon ble Bombay High Court has held in the case of Coronation Agro Industries Ltd 2017 (1) TMI 904 - BOMBAY HIGH COURT that the client code modification done by the assessee s broker cannot be a ground to believe that there had been any escapement of income. CIT(A) has also confirmed the disallowance primarily on the basis of report of the investigation wing. Since the transactions are supported by proper documents and since they cannot be disbelieved based on the generalized report of the investigation wing, we are of the view that the disallowance confirmed by the CIT(A) was not justified. Accordingly, we set aside the order passed by CIT(A) on this issue and direct the AO to delete the disallowance of F O loss made by the AO. Assessee appeal allowed.

Summary

Issues: Disallowance of F & O loss of Rs. 1.35 crores in the assessment year 2015-16.

Detailed Analysis:
1. The assessee appealed against the disallowance of F & O loss of Rs. 1.35 crores by the AO in the assessment year 2015-16. The AO reopened the assessment after finding that the assessee had incurred losses in reversal trade through a broker involved in manipulative practices.

2. The assessee contended before the Ld CIT(A) that the F & O transactions were legitimate and carried out in the normal course of business. However, the Ld CIT(A) upheld the disallowance, stating that it was the assessee's responsibility to prove the genuineness of the transactions, which the assessee failed to do. The loss was attributed to client code modification by the broker.

3. The ITAT observed that the AO relied on a report of the investigation wing regarding manipulative practices, but the assessee's transactions were supported by contract notes and invoices. The ITAT found no fault in the assessee's documentation or banking transactions. Notably, the assessee was not directly investigated by SEBI or the Income Tax Department, and the broker did not specifically identify the assessee's transactions as bogus.

4. Referring to a Bombay High Court case, the ITAT concluded that client code modification by the broker does not necessarily indicate income escapement. The disallowance was primarily based on the investigation wing's report, which was deemed insufficient to discredit the genuine transactions supported by proper documentation. Consequently, the ITAT set aside the Ld CIT(A)'s order and directed the AO to delete the disallowance of F & O loss of Rs. 1,34,95,517/-.

5. Ultimately, the ITAT allowed the appeal filed by the assessee, emphasizing the lack of concrete evidence to support the disallowance of the F & O loss. The judgment was pronounced on 29/07/2024, granting relief to the assessee in this matter.