2025 (4) TMI 1214 - AT - Income Tax

Disallowance of loss booked through trading in penny scrips and commission paid to the broker - As during search and survey proceedings it was established that the penny stocks in which the assessee traded and booked losses have been used for providing bogus LTCG/STCL - CIT(A) deleted addition - HELD THAT - As the documentary evidences put forth by the assessee could not be rejected without bringing on record any substantial contrary piece of evidence. Moreover the jurisdictional High Court decisions and as also plethora of co-ordinate benches of Mumbai tribunal support the above observations. We have no hesitation in deleting both the additions. The AO is therefore directed to allow the business loss claimed by the assessee. Also the addition made u/s 69C w.r.t alleged commission paid being devoid of any basis is also deleted. Accordingly ground nos. 1 to 3 are dismissed. Addition made in respect being the amount receivable from National Spot Exchange Limited (NSEL) written off and claimed as Bad Debt - AO observed that as per the information received by from NSEL the NSEL exchange platform was misused and exploited by unscrupulous brokers and traders to lend huge sums of black money - HELD THAT - The provisions of law in the matter and find no infirmity in the conclusion drawn by the CIT(A). The disallowance has been made by the AO without any basis and against the well laid down provisions of the Act and also in contraventions of the Board Circular. Similar claim of Bad debt written off has been allowed by the department on similar facts and the circumstances in other assessment years. Therefore there is no justification for disallowing the same in the year under consideration. Though the principles of res judicata are not attracted to income tax proceedings since each assessment year is separate in itself there ought to be uniformity in treatment and consistency when the facts and the circumstances are identical. Order of the AO is silent on this important aspect of the deduction as there is no finding on record showing any justification for adopting divergent approach for the year under consideration. Accordingly the AO is directed to delete the addition made. The ground of appeal no. 4 above is therefore dismissed.

Summary

The core legal questions considered in this appeal revolve around the following issues:

1. Whether the disallowance of business loss and commission paid on trading in certain penny stocks was justified, given allegations that these transactions were sham, pre-arranged, and used to generate bogus capital gains and losses for tax evasion.

2. Whether the addition under section 69C of the Income-tax Act, 1961, relating to commission paid to brokers in connection with the alleged penny stock transactions, was justified.

3. Whether the deletion of disallowance of bad debt claimed by the assessee on account of amounts written off from National Spot Exchange Limited (NSEL) was justified, considering allegations that many traders had lent their PAN and names as fronts for others, rendering the transactions non-genuine.

Issue-wise Detailed Analysis

Issues 1 to 3: Disallowance of Loss and Commission on Penny Stock Trading

Legal Framework and Precedents: The assessment was conducted under section 143(3) of the Income-tax Act, 1961. The Revenue relied on a report from the Kolkata Investigation Wing alleging manipulation and bogus transactions in penny stocks to disallow losses claimed by the assessee. The addition under section 69C was made on the presumption of unexplained expenditure (commission) linked to entry providers. The Tribunal referred to precedents including CIT vs. Jamnadevi Agarwal and PCIT vs. Indravadan Jain (HUF), which emphasize that transactions cannot be deemed bogus if the assessee furnishes documentary evidence establishing genuineness.

Court's Interpretation and Reasoning: The CIT(A) and subsequently the Tribunal examined the facts that the assessee was a SEBI-registered sub-broker engaged in genuine trading activities involving over 1300 scrips, with the alleged penny stocks constituting an insignificant fraction (0.017%) of total turnover. The AO's reliance on a generalized investigation report without any specific incriminating evidence against the assessee was found to be insufficient. The Tribunal underscored that the assessee had produced contract notes, bank statements evidencing payments, and demat account transfers consistent with genuine trading.

Key Evidence and Findings: The assessee submitted detailed trade data, contract notes from SEBI-registered brokers, and demonstrated that losses were incurred not only in the alleged penny stocks but also in other scrips. The AO did not conduct any independent inquiry or produce any evidence disproving the genuineness of these transactions. The Tribunal noted the absence of any adverse findings against the assessee in respect of gains earned on these scrips, further supporting the genuineness of transactions.

Application of Law to Facts: The Tribunal applied the principle that suspicion or conjecture cannot replace evidence. Since the assessee's documentary evidence was not rebutted by the AO, the disallowance of loss and commission was unwarranted. The Tribunal also referenced the legal position that genuine business losses, supported by evidence, must be allowed.

Treatment of Competing Arguments: The Revenue contended that the losses were pre-arranged and part of a scheme to evade tax, relying on the investigation report. The assessee countered by asserting the bona fide nature of transactions and lack of any direct evidence implicating it. The Tribunal sided with the assessee, emphasizing the need for specific evidence rather than generalized suspicion.

Conclusions: The disallowance of business loss amounting to Rs. 26,98,630/- and commission of Rs. 69,870/- was deleted. The Tribunal held that the losses were genuine and the addition under section 69C was consequential and thus also deleted.

Issue 4: Disallowance of Bad Debt Written Off from NSEL Transactions

Legal Framework and Precedents: The claim for deduction of bad debts was made under section 36(1)(vii) of the Income-tax Act. The Revenue disallowed the claim on the ground that the transactions were not genuine and that the assessee had lent its PAN and name as a front, based on information from NSEL and related investigations. The Tribunal referred to the Supreme Court judgment in TRF Ltd. vs. CIT, which clarified that once a bad debt is written off as irrecoverable in the books of account, it is allowable as a deduction without the need to prove irrecoverability in the previous year. CBDT Circular No. 12/2016 and various Tribunal decisions (e.g., Megh Sakariya International P. Ltd., Chowdry Associates vs. ACIT) were also cited to support the claim.

Court's Interpretation and Reasoning: The CIT(A) and the Tribunal noted that the assessee had pursued legal recourse through the NSEL Investor Forum and had written off Rs. 45.96 lakh as bad debt after due efforts. The bad debt arose from genuine commodity trading activities through recognized brokers on the NSEL platform. The Tribunal observed that the Revenue failed to establish that the assessee's transactions were not genuine or that the bad debts did not fulfill the statutory conditions. The Tribunal emphasized consistency in treatment, pointing out that similar claims were allowed in preceding years.

Key Evidence and Findings: The assessee submitted contract notes, books of accounts showing income recognition from NSEL transactions, and evidence of legal proceedings. The AO did not dispute fulfillment of conditions under section 36(2) of the Act. The Tribunal also noted the absence of any material to prove that the assessee was a mere front or had lent its PAN to others.

Application of Law to Facts: The Tribunal applied the settled legal position that once a debt is written off as irrecoverable in the books and claimed as deduction, it must be allowed unless conditions under the Act are not met. The Tribunal found that all conditions were satisfied and that the Revenue's reliance on NSEL's advisory not to allow bad debts was legally untenable.

Treatment of Competing Arguments: The Revenue argued the non-genuineness of transactions based on NSEL's misuse and alleged fronting. The assessee rebutted with documentary evidence and legal precedents. The Tribunal gave precedence to documented proof and legal principles over speculative allegations.

Conclusions: The disallowance of Rs. 45,95,746/- as bad debt was deleted. The Tribunal upheld the allowance of the bad debt deduction under section 36(1)(vii), directing the AO to delete the addition.

Significant Holdings

"Additions merely on the basis of suspicions, conjectures or surmises without bringing anything specific on record cannot be sustained in the eyes of law."

"The transactions of purchase and sale of shares cannot be considered to be bogus, when the documentary evidences furnished by the assessee establish genuineness of the claim."

"Once a bad debt is written off as irrecoverable in the accounts of the assessee, it has to be allowed as deduction under section 36(1)(vii) of the Income-tax Act."

"The action of the AO was not correct in as much as he disbelieved only the loss incurred by the assessee in the said scrips while no adverse finding has been adduced in respect of gains/profit earned on them."

"Suspicion however strong, could not take place of evidence or proof."

"The AO has relied on a general report prepared by the Investigation Wing without any independent inquiry or specific finding against the assessee, which is insufficient to disallow genuine business losses."

"There ought to be uniformity in treatment and consistency when the facts and the circumstances are identical."

The Tribunal's final determinations were to dismiss all grounds of appeal raised by the Revenue, thereby upholding the deletion of disallowances of business loss and commission on penny stock trading, as well as the allowance of bad debt deduction related to NSEL transactions. The appeal filed by the Revenue was accordingly dismissed.