2024 (11) TMI 359 - AT - Income Tax

Fraudulent transaction resulting into non-genuine loss - Commission on impugned illiquid option trades - materials available under the project falcon available on ITBA portal wherein there was some statement of Shri Arun Shah, Director of one of the share broking firm wherein he has admitted that in such kind of accommodation entries an unaccounted commission amounting to 2% on the buy and sell are received or paid - CIT(A) Reduced the percentage to 0.25% from 2% - HELD THAT - The entire basis of the ld. AO is based on Project Falcon report passed on by the Investigation wing which admittedly pertains to stock option trading carried out on the Bombay Stock Exchange, which has no connection with the assessee as assessee trading was in currency options in United Stock Exchange and it has carried out various opportunities in which assessee had shown profit. All those trades in which assessee disclosed profit has not been disturbed or adversely viewed except for few transactions of losses. For instance in A.Y.2 014-15 there were 11 trades in United Exchange segment, some in futures and some in options, out of which only two trades of currency options have been alleged by the ld. AO. Similarly, in A.Y. 2015-16, the alleged trades in question which were executed in April 2014. The assessee had declared trading profit of Rs. 6,72,64,310/- in A.Y.2014-15 and the alleged non-genuine loss which has been picked up by the ld. AO is only Rs. 7,20,400/-. AO has just misinterpreted the Report to apply in assessee s case without independent analyzing the transactions. At least ld. AO should have conducted some enquiry qua these transactions on which assessee had claimed loss instead of blindly relying upon the Project Falcon report which has nothing to do with trades in USE. Once the transactions are based on screen based electronic trading and the identities of the buyers and sellers are not displayed, then to presume that the transactions have been manipulated are non-genuine cannot be upheld. Thus, prima facie, there is no material that trade transactions in which assessee had incurred losses (that is, in two transactions) is non-genuine especially when assessee had declared huge profit and income from such trade in similar transactions, which has not been doubted. There has to be basis and inquiry to arrive to any conclusion that out of many transactions, few were manipulated to show fictitious loss and were non-genuine. Accordingly, the additions on account of nongenuine loss and illiquid options are deleted. Addition of commission u/s. 69C for non-genuine losses - As it is seen that same is based on statement of Shri Arun Shah of M/s. Aryav Securities allegedly recorded in the course of Porject Falcom . However, nowhere in such statement there is any reference of the trade carried out by the assessee or involvement of the assessee. Further, if such statement was to be relied, then law provides that same should have been confronted with the assessee to rebut or cross examine. Ultimately, the addition has been sustained by applying adhoc commission rate of 2% which has been scaled down to 0.25% by the ld. CIT (A) that assessee might have incurred such expenditure in cash. There is no evidence brought on record that assessee had actually paid such expenses outside the books and the entire addition is based on conjecture. In any case we have already held that the transactions in which assessee has incurred loss are genuine, therefore, there is no question of imputing any kind of adhoc commission. Bogus sales/purchase or accommodation entry - It is not a case where the entire purchases have been added, albeit ld. AO has presumed that assessee might have earned commission on such purchases made from non-genuine parties. Accordingly, such adhoc application of commission of 0.25% is deleted.

Summary

Issues Involved:

1. Re-opening of assessments.
2. Disallowance of loss on selected trades.
3. Commission on impugned illiquid option trades.
4. Estimated commission on purchases from select parties treated as non-genuine transactions.
5. Estimated commission on all purchases and sales treating appellant as a non-entity.

Detailed Analysis:

1. Re-opening of Assessments:

The re-opening of assessments under section 147/148 was challenged by the assessees for various assessment years. The tribunal noted that the re-opening was primarily based on the 'Project Falcon' report, which alleged manipulative trading activities. However, the tribunal found that the Assessing Officer (AO) did not conduct any independent investigation or inquiry to substantiate these claims. The tribunal emphasized that the AO's reliance solely on the report without any corroborative evidence was insufficient to justify the re-opening of assessments. Consequently, while the tribunal addressed the substantive issues on merits, the legal validity of re-opening was left open as all additions were deleted on merits.

2. Disallowance of Loss on Selected Trades:

The AO disallowed losses claimed by the assessees on certain trades, labeling them as non-genuine based on the 'Project Falcon' report. The tribunal observed that the AO selectively targeted trades where losses were reported, while ignoring similar trades where profits were declared. It was highlighted that the assessee conducted numerous trades in currency derivatives, and the AO failed to demonstrate why only specific loss-making trades were considered non-genuine. The tribunal concluded that the AO's approach was arbitrary and lacked a factual basis, leading to the deletion of the disallowance.

3. Commission on Impugned Illiquid Option Trades:

The AO estimated a commission at 2% (later reduced to 0.25% by the CIT(A)) on alleged non-genuine illiquid option trades. The tribunal found that this estimation was based on conjecture and lacked any supporting evidence. The tribunal noted that the AO did not provide any material to demonstrate that the assessee paid or received such commission. Furthermore, the tribunal emphasized that the AO's reliance on a statement from a third party (Shri Arun Shah) without allowing the assessee an opportunity to cross-examine was procedurally flawed. As a result, the tribunal deleted the additions related to commission on illiquid option trades.

4. Estimated Commission on Purchases from Select Parties Treated as Non-Genuine Transactions:

The AO made additions based on an estimated commission of 0.25% on purchases from certain parties deemed non-genuine. The tribunal found that the AO's conclusions were largely based on assumptions and an investigation report without independent verification. The tribunal noted that the assessees provided substantial documentary evidence, including purchase invoices, bank statements, and GST returns, to substantiate the genuineness of the transactions. The tribunal criticized the AO for not considering this evidence and relying solely on the investigation report. Consequently, the tribunal deleted the additions related to commission on non-genuine purchases.

5. Estimated Commission on All Purchases and Sales Treating Appellant as a Non-Entity:

In some cases, the AO treated the appellant as a non-entity, estimating a commission of 0.25% on all purchases and sales. The tribunal found that this approach was speculative and unsupported by evidence. The tribunal reiterated that the AO failed to conduct any independent inquiry or provide concrete evidence to substantiate the claim that the appellant earned commission on these transactions. The tribunal emphasized the need for a factual basis before making such additions and accordingly deleted the estimated commission on all purchases and sales.

Conclusion:

The tribunal allowed all appeals, deleting the additions made by the AO on the grounds of non-genuine trades and estimated commissions. The tribunal underscored the importance of evidence-based assessments and criticized the AO's reliance on assumptions and external reports without independent verification. The tribunal's decision highlights the necessity for tax authorities to substantiate their claims with concrete evidence and follow due process in assessment proceedings.