2021 (11) TMI 77 - AT - Income Tax

Bogus STCL - Disallowance of Loss arising from the trading in shares - accommodation entry of STCL -- AO has disallowed the claim of the assessee based on analysis of the information received from Directorate of Investigation as a result of enquires undertaken by the officers of the Directorate - HELD THAT - Assessee has produced documents to substantiate the genuineness of the transactions carried out through banking channels, through the medium of portfolio management whereby there is no contact between the buyer and the seller. The fact remains that there is direct evidence placed on record by the assessee to support the genuineness of the impugned transactions such as contract notes, share certificates, corroborative evidence indicating purchase/ sale through registered broker as juxtaposed against the findings of the AO based on the general report from Investigation and the modus operandi adopted by unscrupulous entry providers. There is no denying that there is no assessee-specific material on record of the AO to pin-point that the assessee has entered into an unholy nexus with entry providers so as to stage manage accommodation entry of STCL. Material furnished by assessee to substantiate its claim remains unchallenged and uncontroverted. The purchases were neither off-market nor through preferential allotment. Besides, no copy of any report of information received was supplied to the assessee. The assessee was not confronted with any statement or material allegedly detrimental to the assessee arising or culled out of the Investigation report. Thus, the fact remains that the findings of the lower authorities are not based on evidence but on generalizations and probabilities. The AO could not place anything on record, maybe through a process of his own enquiry, to decisively prove that assessee has obtained bogus STCL through his connivance with entry operators / exit providers. The claim of the assessee appears to have been rejected more on the basis of presumption rather than evidence. An assessment purely based on suspicion, surmises and conjectures without any tangible evidence on record against the assessee of any connivance or collusion is unsustainable in law. - Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance of Short Term Capital Loss (STCL) claimed by the assessee.
2. Alleged manipulation of stock prices and bogus transactions to create artificial capital gains/losses.
3. Reliance on investigation reports and statements from brokers and entry providers.
4. Denial of assessee's rights to cross-examine witnesses and access investigation reports.

Issue-wise Detailed Analysis:

1. Disallowance of Short Term Capital Loss (STCL):
The assessee declared a total income of ?6,52,770 for the assessment year 2014-15 and claimed a set-off of short-term capital loss of ?23,54,71,343 on the sale of shares. The assessing officer (AO) disallowed ?21,23,81,154 of this loss, alleging that the transactions were part of a scheme to generate bogus entries for tax avoidance. The AO's decision was based on investigations by the Directorate of Investigation, Kolkata, which suggested that the shares were manipulated to create artificial losses.

2. Alleged Manipulation of Stock Prices and Bogus Transactions:
The AO concluded that the financials of the companies involved were poor, and their shares were manipulated to provide bogus capital gains/losses. The companies in question were Radford Global Ltd., Dhenu Buildcon India, Shreenath Commercial, and Tuni Textiles Mills. The AO argued that the transactions lacked commercial substance and were primarily for tax avoidance. The assessee countered by stating that the investments were made through a reputed portfolio manager, Standard Chartered Securities (India) Ltd., and were based on prevailing market rates.

3. Reliance on Investigation Reports and Statements from Brokers and Entry Providers:
The AO relied heavily on investigation reports and statements from brokers and entry providers, which indicated that the shares of the involved companies were used to provide bogus capital gains/losses. The AO cited judicial pronouncements to support the view that transactions aimed at tax avoidance could be disregarded. However, the assessee argued that the transactions were genuine, conducted through the stock exchange, and involved no direct dealing with the brokers named in the investigation.

4. Denial of Assessee's Rights to Cross-examine Witnesses and Access Investigation Reports:
The assessee contended that they were not provided with copies of the investigation reports or statements used against them, nor were they given an opportunity to cross-examine the witnesses. The appellate tribunal noted that the findings of the lower authorities were based on generalizations and probabilities rather than concrete evidence. The tribunal highlighted that the AO did not conduct any independent investigation to substantiate the claim of bogus transactions.

Conclusion:
The tribunal concluded that the disallowance of the assessee's claim was based on suspicion and conjecture without tangible evidence. The tribunal emphasized the lack of direct evidence implicating the assessee in any fraudulent scheme and noted that the assessee's documentary evidence remained unchallenged. The tribunal also pointed out the procedural lapse in denying the assessee the right to cross-examine witnesses and access relevant reports. Consequently, the tribunal allowed the appeal filed by the assessee, overturning the disallowance of the short-term capital loss.

Order:
The appeal filed by the assessee is allowed. The decision was pronounced in the open court on 05/10/2021.