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TMI Blog2020 (7) TMI 333X X X X Extracts X X X X X X X X Extracts X X X X ..... of rice, import and export of precise metals and stones, import of polymers chemicals etc., The A.O. passed the assessment order under section 143(3) Dated 28.07.2017 making the following additions. 1. Disallowance of loss on sale of stock option Rs. 15,28,20,110/-. 2. Disallowance under section 14A read with Rule 8D(2) Rs. 4,28,556/-. 3.1. The assessee challenged the additions before the Ld. CIT(A). However, both the grounds of appeals were dismissed and appeal of assessee was ultimately dismissed. 3.2. The assessee in the present appeal has challenged both the above additions. 4. On Ground No.2 of the appeal, the assessee challenged the disallowance of Rs. 4,28,556/- under section 14A of the I.T. Act, 1961. 4.1. The A.O. on perusal of the balance-sheet ending on 31.03.2015 noticed that under the head "Current Investments" the following were mentioned. 1. Share of Amtek India - Rs. 1,10,92,321/-. 2. Canara Liquidity Collection - Rs. 25,22,710/-. Also under the head "Advances", assessee has included share application money - KEPL Rs. 64,80,000/-. Share application money AFPL - Rs. 23,25,000/-. 4.2. The A.O. has mentioned that for equity investments, dividend income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ses by their trading in options on individual stocks (Stock Options) which are listed on Bombay Stock Exchange (BSE). Trading by these entities appeared abnormal because they were consistently making losses by their trades which were reversed with the same counter-parties. The SEBI in its Order has outlined the modus operandi used by such entities. The A.O. reproduced the interim ex-parte Order of SEBI above in the assessment order which highlighted that assessee company dealt with three parties/counter-parties. 8.2. The A.O. vide order sheet entry dated 22.03.2017 confronted the Order of the SEBI to the assessee in which it was alleged that assessee had made losses in indulging in suspicious trades including reversal trades. The Counsel for Assessee was asked to provide a report including the following : "1. Past history/practice of assessee in executing such trades. Whether the assessee as a business indulges in such trades. 2. It has been averred in the report that the assessee has even sold the products below their intrinsic value. Reasons for such unreasonableness & irrational financial behaviour ? 3. Details of all such trades entered in by the assessee and identific ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tor to 'choose' at all and there would be no trading since there would be no variation in perception of market participants which is foundation of trading in option segment. In fact, if said assumption is correct, then trading system ought to permit orders to be placed only at fixed price. Instead, investors are allowed to bid whatever premium they deem fit and that too without any price filters/price bands like cash segment. We submit that Hon'ble SAT has held that price of options do not always move in tandem with underlying scrip's price in cash segment which is clearly indicative of fact that price of options are not just combination of 'intrinsic value' and 'time value'. Therefore, it cannot be considered that premium can only be offered at rate which is difference between strike price/rate and price of underlying scrip in cash market. We further submit that trading done by us in option segment was not outside 'permitted range'. The orders punched outside permitted range are automatically rejected by trading system. In fact no objection or questions were raised by BSE or SEBI at any point of time w.r.t our trading in option segment. W ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y automated online module. It is further submitted that all the transactions done in future & options in stock have been done through members / brokers / sub brokers as we are not direct trading member in any stock exchange. We have paid amount of loss / receive the amount of profit only through broker / sub broker / member who in turn being settled by respective exchange only. All our trades are done in normal course of business. Further, we confirm that we have not received any amount whatsoever from any of the independent and unknown counter parties directly or indirectly in shape of loan/advance/capital etc. We have already submitted reply to SEBI and based on our reply we have been given certain relaxation by SEBI which includes allowing us to take hedging position in commodity exchanges etc. We had traded in options contracts of about 48 different scrips including large number of blue chip companies like JSW Energy Ltd, India Cements, Housing Dev. & Infra, Allahabad Bank, L&T, Power Fin Corp Ltd., Dabur India, Tata Power, Bank of India, Syndicate Bank, Bank of Baroda, OBC, HDFC, Coal India, Voltas, Reliance Infra and so on. It can be observed that underlying scrips in almost ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... screen-based systems through a stock broker or sub-broker or such other intermediary registered under section 12 of the Securities and Exchange Board of India Act, 1992 (15 of 1992) in accordance with the provisions of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) or the Securities and Exchange Board of India Act, 1992 (15 of 1992) or the Depositories Act, 1996 (22 of 1996) and the rules, regulations or bye-laws made or directions issued under those Acts or by banks or mutual funds on a recognized stock exchange; and (B) which is supported by a time stamped contract note issued by such stock broker or sub-broker or such other intermediary to every client indicating in the contract note the unique client identity number allotted under any Act referred to in sub-clause (A) and permanent account number allotted under this Act; (ii) "recognised stock exchange" means a recognised stock exchange as referred to in clause (f) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) and which fulfils such conditions as may be prescribed and notified by the Central Government for this purpose;] [Explanation 2. -For the purposes of clause (e), the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... istered intermediary. v. We are not connected to counterparties of our trade and neither do we have any relation with promoters/ directors/key management person of underlying parties. vi. We believe there has been no grievance by any investor, broker, stock exchange or any other agency concerned in the matter. vii. We have a clean and unblemished track record, this is the first time in our history that proceeding is initiated by any regulatory authority against us for our trading in the stock market. Taking in view totality of the facts and circumstances of the case and particulars of our submissions and denials as aforesaid, we submit that no adverse inference may be drawn in our case." 8.4. The Counsel for Assessee also submitted the list of counter-parties detailing the name of instrument, position taken by assessee, reversal of trade and counter party details and also explained that vide Order Dated 22.08.2016 SEBI further released confirmatory Order in the case of confirming the earlier Order and Order dated 22.08.2016 is also reproduced in the assessment order in which interim relief was provided to the assessee like permission to buy/sell and deal in commoditie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see has also traded with three entities in a sum of Rs. 48,91,000/-. (viii) The A.O. reproduced the reply of assessee in this para, in which, assessee denied to have any connection or relation with any of the counterparties to the trade because it was an independent of any other parties and transactions were carried out on the floor of the Stock Exchange. All the transactions were carried-out online through Sophisticated On-line Surveillance Software and in case of Screen based Trading, Automated System itself match the Orders on a price time priority basis and hence, it is not possible for anybody to have access over identity of the counter party. Since counter party identity is not displaced one can never have any choice with whom it wants to deal or not to deal. 8.6. However, the A.O. did not accept the above contention of assessee and rejected the same by holding as under : "The argument presented by the assessee is considered but not found acceptable. It is true that in screen based electronic trading ideally it is not possible to choose the counterparty for trade. But certain entities mentioned in the SEBI order manipulated the trading by participating in illiquid stock ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions taking the arguments against the position taken by the A.O. which is reproduced in the appellate order at pages 7 to 19 which are reproduced as under : Arguments against the position taken by the learned AO The assessee company is engaged in import and export of precious metals, import and trading of Chemicals, polymers, pulses, dyes, pharma and manufacturing & trading of Rice and also deals in shares, futures and options. The company is maintaining regular books of accounts. The Books of Accounts are being audited under section 44AB of the Income tax Act and the Companies Act 1956. The assessee company has originally filed the return of income on 28.09.2015 vide acknowledgement number 828471411280915 declaring total income of INR 87,134,240. During the year under consideration, assessee transacted in various derivative contracts which includes securities contracts, commodities contracts and currency contracts. Al/ these transactions were carried out in the normal course of business after complying with all the procedures and requirements as per the statute. The details of profit and loss on the same are provided hereunder: S. No. Particulars Amount 1 Profit on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... change (BSE) which is a recognized stock exchange and has duly paid the Securities Transaction Tax on ah' the transactions. All the transactions were carried out through registered brokers which were duly supported by contract notes. We are herewith submitting before your goodself the copies of contract notes issued by the brokers as Annexure- 2 in order to prove the genuineness of the transactions. * Payment of Margin amount by assessee: The Ld. AO in his order has alleged that the loss incurred by the assessee was not genuine. In this regard kindly note that, the assessee has duly made the payments of margin to exchange through its brokers. The payment has been made from the bank account of the assessee regularly. The same is evident from the daily obligation bills as issued by the broker. Further, the margin amounts have been duly paid to the brokers for undertaking the trading on behalf of assessee which is evident from bank statement of assessee. (Bank statements of the assessee and Account of Brokers are enclosed for your records as Annexure 3 & 4). * No prior knowledge of or connection with counterparties: The main reason for addition made by AO was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent. Please note that this was the first time where assessee got to know about the names of its counterparties. The assessee does not have any relation with any of the counterparties. The complete sheet depicting the details of transaction alongwith counterparty is attached as Annexure-6. All this information was on record of the Ld. AO. * Out of the list of 179 counterparties given by SEBI, only 3 formed part of the SEBI order: The trade detail provided by SEBI in the CD lists the names of 179 counterparties with which the assessee company bought and sold option contracts. The order of SEBI mentions the name of 25 counterparties which are alleged to be involved in reversal of trades as per interim order. However, further analysis by us depicts that merely 3 counter parties out of 25 entities have been matched with names of parties as mentioned in the Interim order of SEBI.A sheet depicting the analysis of the same is attached as Annexure-7 to this submission. S. No LIST OF COUNTERPARTIES ALLEGED IN SEBI ORDER Buy Value Sell Value Profit/ (Loss) 1 N M Impex Pvt. Ltd. NIL NIL NIL 2 Vision Sponge Iron Pvt. Ltd. NIL NIL NIL 3 Umang Nemani NIL NIL ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es as per the Interim order of SEBI. Accordingly, the loss of only INR 3,094,100 should have been in dispute as even SEBI is questioning only these trades. But the AO without even noticing the same went ahead and disallowed the complete loss of Rs. 15,28,20,110/-. It is inappropriate to allege that the assessee is connected and had prior arrangements with the entities named in the order merely because 3.06% of buy transactions and 4.85% of sale transactions allegedly matched with the entities who are debarred vide the interim order of SEBI. The Interim order does not delineate with whom the trades were allegedly 'reversed'. The assessee got to know about the counterparties only after the CD was provided to it during inspection where details of counterparties were made available by the SEBI. Thus, out of 179 counterparties, only 3 counterparties could have been part of the present proceedings. It is again reiterated that the assessee at no point of time was aware of counterparty with which its transactions got matched since all the transactions were executed through normal screen based trading system of stock exchange Accordingly, one cannot predecide the counter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany. It was further allegated by the Assessing officer that out of the 169 scrips traded by the assessee, the assessee was the only or the main investor in over 90% of contracts traded by the assessee. For this, assessee has performed an analysis of 10% of the total scrips as sample in which assessee has traded with the volume of transactions carried out in Bombay Stock Exchange on day, month and year basis. It will be important to note on the basis of scrip analysis done that the allegation of the Assessing Officer is completely false and based on surmises. The analysis done on sample basis for some scrips have been attached as Annexure-9 to this submission. The working clearly shows that allegation of AO that "in over 90% of the contracts traded by assessee, it was only or main investor" is completely baseless and bad in the eyes of law. This also depicts that the AO has not carried out any analysis and failed to record his own findings and passed an order by merely relying over the order passed by SEBI. In the sample of 17 cases, the % of trading done by the assessee in comparison to total trading of derivatives on BSE & NSE in all cases is very less. *The s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ame is true, there is nothing for an investor to choose at all and there would be no trading since there would be no variation in perception of market participants which is the foundation of trading in option segment. Therefore, it cannot be considered that premium can only be offered at rate which is difference between strike price and price of underlying scrip in cash market. Thus, allegation of Ld. AO that assesse has done trades below intrinsic value is baseless. Allegation that "The Loss making entities as well as the profit-making entities were seen trading repeatedly in deep in- the-money options and deep out-of-the-money options on individual stocks, which were thinly traded." It may be noted that there are no instances and no such transactions done by the assessee which are deep-in-money options and deep out-of-money options on individual stocks. There are no such facts analysed or presented by the Ld. AO in the order." 10. The Ld. CIT(A) considered the issue in the light of findings of the A.O, SEBI Order and submissions of the assessee. The Ld. CIT(A) reproduced the findings of the SEBI in brief in the appellate order and objections taken by assessee before th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re of the other party with whom transactions have been carried out. There is no business transaction with other parties. The assessee subsequently filed letter to SEBI to seek details of the parties, copies of which are filed at page-140 of the PB. PB 150-158 are the details of the assessee company provided by the SEBI in response to the letter of the assessee. PB 159-162 are analysis of trade data submitted by SEBI to prove that assessee company has only carriedout transactions with 03 parties out of 25 parties mentioned in the Order of the SEBI. There is no prior arrangement known to the assessee. Their findings are simply based on surmises and conjectures without bringing any evidence on record against the assessee. Copy of the Circular of the SEBI dated 23.07.2012 is filed at pages 163-164 of the PB revising the referring the eligibility criteria for stocks in derivates segment which assessee has fulfilled. PB 165 is the chart showing the proportion of the transactions carried out by the assessee in various scrips vis-a-vis total transactions carried out on the BSE on day, month and year basis. No independent investigation have been carried out by the A.O. or the Ld. CIT(A) and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see. Once nothing has been proved against the assessee with aid of any direct material especially when various rounds of investigations have been carried out then nothing can be implicated against assessee. 12.1. He has submitted that since initial burden upon assessee have been discharged by producing relevant and cogent documentary evidences, therefore, onus is shifted upon the Revenue to prove that assessee did not suffer genuine business loss and in this case the Revenue has not brought any evidence on record against the assessee, therefore, deduction on account of business loss is allowable. In support of this proposition, he has relied upon Judgments of Hon'ble Delhi High Court in the cases of Commissioner of Income Tax vs., Gangeshwar Metals Pvt. Ltd., 361 ITR 10 (Del.), Commissioner of Income Tax vs., Kamdhenu Steel & Alloys Ltd., 361 ITR 220 (Del.) and Commissioner of Income Tax vs., Value Capital Services Pvt. Ltd., 307 ITR 334 (Del.). 13. The Ld. D.R. on the other hand relied upon the Orders of the authorities below. The Ld. D.R. submitted that SEBI is a statutory authority, therefore, their findings of fact are binding. He has submitted that Ld. CIT(A) has summarised ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fit and Loss earned/incurred from trade in Commodities Exchange are also part of the financial statements. It was explained before A.O. regarding intrinsic value as mentioned in the Order of the SEBI that SEBI has circulated intrinsic value as difference between strike price and price of underlying scrip in cash market. Whereas intrinsic value is based on various factors like time factor, demand and supply, volatility in the underlying scrip and overall market and market conditions domestically as well as globally etc., in addition to the difference between strike price, the price of underlying scrip in cash market. There is no set Formula/Law/Rule/Circular which defines intrinsic value or prohibits trading below intrinsic value. The A.O. at page- 80 of the assessment order has accepted that in Screen based Electronic Trading, ideally it is not possible to choose the counter party for trade. This para is also reproduced above. Thus, the identity of the counter-parties are not displayed on the Screen at the time of trades. It may be noted here that stock market is a highly volatile market, and keeping in mind the volatility, SEBI has set circuit breaker limits at 10%, 15% and 20% fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctions in question of derivative tradings [PB 69-109], copies of the bank statements of the assessee company reflecting payment of requisite margin money to brokers [PB 110-128], copies of the statements of accounts of Brokers in the books of the assessee company [PB 129-139], copy of the letter dated 01.10.2015 filed before SEBI seeking details of trades conducted by assessee [PB 140-149], trade details of assessee company as provided by SEBI in response to such letter [PB 150-158], analysis of trade data supplied by SEBI to prove that assessee company has only carried out transactions with three parties out of 25 parties mentioned in the Order of the SEBI [PB 159-162], copy of the Circular dated 23.07.2012 issued by SEBI about eligibility criteria for stock in derivatives segments complied by assessee [PB 163-164], chart showing the proportion of transactions carried out by assessee company in various scrips through BSE [PB165], analysis of price on which trades were executed by the assessee company [PB 166-167] and copy of the Order of the SEBI dated 05.04.2018 disposing off the proceedings initiated vide Order dated 22.08.2015 [PB 298- 306]. The subsequent Order of the SEBI dat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsactions are proved by contract notes. There is also no allegation made by BSE against any of the transactions carried out by the assessee company. All the transactions are carried out and settled through banking channel through BSE. No action have been taken by BSE against any of the party. The A.O. has further referred to the subsequent order of the SEBI dated 22.08.2016 in the assessment order and in para-22 of the aforesaid order of the SEBI, it is clearly directed that "Therefore, at this juncture, pending investigation, I am not incline to take any cognizance of their submissions that the entities have paid the tax. Moreover, this issue will require detailed verification from the Income Tax Department." However, the A.O. as well as the Ld. CIT(A) have not conducted any investigation in any on the documentary evidences filed by assessee. The Ld. CIT(A) has gone to the extent in holding that "no separate investigation is required to be done by the A.O. to disallow the bogus loss". PB 24 shows notes No.25 with regard to other expenses to show that in preceding A.Y. 2014-2015 assessee has suffered loss on trading in Commodity Exchange in a sum of Rs. 18,81,82,852/- which have no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... these facts that the ad-interim order which was passed ex-parte - Whether would disclose any binding precedent or ratio which may be binding on the Income Tax Department?". In our humble view, it would not be binding precedent. It may create some suspicion or doubt. It is well settled Law that "suspicion howsoever strong may be but it cannot take place of legal proof." The Ld. D.R. submitted that if the test of human probability is applied to the facts and circumstances of the case, it would prove that assessee has not suffered genuine business loss. However, such a principle is to be applied to weigh the evidences of either side and draw a conclusion in favour of the party which has more favourable factors in his side. Further in the present case the findings of the A.O./Ld. CIT(A) are merely based upon the findings given by the SEBI in ad-interim order and subsequent order which have been vacated subsequently by the SEBI. Even such orders cannot be relied upon at this stage as there were nothing against the assessee so as to conclude that assessee has not suffered genuine business loss because the SEBI itself have mentioned in its Orders that the issue will require detailed verif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the facts and circumstances available on record and intention of the parties and ultimately the issue with regard to avoidance of payment of tax and act of tax planning was not adjudicated because the Adjudicating Officer has not gone into this aspect. However, in the present case, the A.O. / Ld. CIT(A) have not gone into the facts and material evidence on record and merely referring to the interim order of the SEBI and subsequent order have decided the issue against the assessee. Since in the case of Rakhi Trading Pvt. Ltd., (supra), the issue under Income Tax Act was also not adjudicated upon, therefore, in our humble opinion the decision in the case of Rakhi Trading Pvt. Ltd., (supra), would not support the case of Revenue. 14.7. Considering the totality of the facts and circumstances of the case in the light of material/evidences available on record and in the absence of any investigation carried-out by the authorities below, we are of the view that assessee has been able to establish that assessee company has suffered genuine business loss as had also been suffered in earlier years, therefore, authorities below should not have disallowed the same against the assessee. In v ..... X X X X Extracts X X X X X X X X Extracts X X X X
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