2022 (12) TMI 868 - AT - Income Tax

Disallowances of bogus trading loss in penny stock as well as commission expenses - whether the script Regency Trust Ltd is penny stock and appearing in the investigation report carried out by Kolkata investigation wing? - HELD THAT - The trading loss generated by the assessee cannot be held as bogus only on the basis of the modus operandi, generalisation, and preponderance of human probabilities. In order to hold, the income earned or loss incurred by the assessee as bogus, specific evidence has to be brought on record by the Revenue to prove that the assessee was involved in the collusion with the entry operator/ stock brokers for such an arrangements. In absence of such finding, it is not justifiable to link the fact or the finding unearthed in case of some third party or parties with the transactions carried out by the assessee. The case laws relied by the AO are with regard to the test of human probabilities which may be of greater impact but the same cannot used blindly without disposing off the evidence forwarded by the assessee. In simple words, there were not brought any evidence from independent enquiry to corroborate the allegation. Whether a person who genuinely involved in the trading of scrip of certain company and in the process incurred loss can be disallowed under provision of the Act in a situation where it is established that the share price of the company was rigged up to extend the benefit to certain parties ? - Justice cannot be delivered in a mechanical manner. In other words, what we see on the records available before me, sometime we have to travel beyond it after ignoring the same. Furthermore, while delivering the justice, we have to ensure in this process that culprits should only be punished and no innocent should be castigated. An innocent person should not suffer for the wrongdoings of the other parties. In the case on hand, admittedly there was no evidence available on record suggesting that the assessee or his broker was involved in the rigging up of the price of the script of Regency Trust Ltd. Thus, it appears that the assessee acted in the given facts and circumstances in good-faith. Respectfully following the judgment of Smt. Krishna Devi 2021 (1) TMI 1008 - DELHI HIGH COURT hold that the trading loss incurred by the assessee cannot be held bogus merely on the basis of some modus operandi unearthed in case of third party/parties unless some cogent materials are brought against particular assessee on record. Therefore, no reason to disturb the finding of the learned CIT(A) and direct the AO to delete the addition made by him. Hence the grounds of Revenue s appeal are dismissed.

Summary

Issues Involved:

1. Deletion of addition on account of loss claimed in trading of penny stock script.
2. Deletion of addition on account of commission expenses incurred for obtaining such business loss.

Issue-wise Detailed Analysis:

1. Deletion of Addition on Account of Loss Claimed in Trading of Penny Stock Script:

The Revenue challenged the deletion of an addition of Rs. 36,29,308/- made by the Assessing Officer (AO) on account of a trading loss claimed by the assessee in the scrip of Regency Trust Ltd. The AO argued that Regency Trust Ltd., a non-banking financial company (NBFC) with no significant business activity, was involved in a modus operandi to provide bogus long-term capital gains and losses. The AO based this on the sharp increase and subsequent decrease in the share price of Regency Trust Ltd., suggesting it was a penny stock used for tax evasion. The AO disallowed the trading loss, citing the Supreme Court case of CIT vs. Durga Prasad.

The CIT(A) deleted the addition, noting that the AO's allegations were not supported by specific evidence. The CIT(A) found that the DDIT (Inv.) Kolkata's report did not list Regency Trust Ltd. as a penny stock, nor was the assessee's broker mentioned. The CIT(A) emphasized that all transactions were conducted through recognized stock brokers, and there was no adverse material against the assessee.

Upon appeal, the Tribunal upheld the CIT(A)'s decision, stating that the AO's allegations were based on general modus operandi without specific evidence. The Tribunal noted that the AO accepted profits from the same scrip in earlier years but disallowed the loss in the current year, which was contradictory. The Tribunal emphasized that the mere rise and fall in share prices could not be the sole criterion for disallowing the loss without concrete evidence of manipulation or wrongdoing by the assessee.

2. Deletion of Addition on Account of Commission Expenses Incurred for Obtaining Such Business Loss:

The AO also made an addition of Rs. 72,586/- for unaccounted commission expenses allegedly incurred by the assessee to obtain the bogus loss. The CIT(A) deleted this addition as well, citing a lack of evidence.

The Tribunal agreed with the CIT(A), highlighting that the AO did not provide any material evidence to substantiate the claim that the commission expenses were unaccounted or related to obtaining a bogus loss. The Tribunal reiterated that the AO's findings were based on assumptions and conjectures without concrete proof.

Conclusion:

The Tribunal dismissed the Revenue's appeals for all the assessment years (2013-14 to 2016-17), upholding the CIT(A)'s decision to delete the additions made by the AO. The Tribunal emphasized the need for specific evidence to support allegations of bogus transactions and rejected the AO's reliance on general modus operandi and human probabilities without concrete proof. The Tribunal also referenced the Delhi High Court's judgment in Pr. CIT vs. Smt. Krishna Devi, which underscored the importance of evidence over suspicion in tax matters.