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TMI Blog2024 (7) TMI 1418X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to disallow the entire loss arising out of trading in shares, at Rs. 1,13,70,981/- and assessed the total income at Rs. 97,32,741/-. In brief, the ld. AO has given a finding that he was of the considered opinion that the trading loss arising on account of dealing in penny shares, that too at the fag end of the financial year, could not be understood from any prudent commercial point of view. The ld. AO proceeded to cast a doubt that the transactions leading to the said loss were artificially designed in such a manner that the gain in dealing in the shares of Eros International Media Ltd. could be erased through the resultant loss. In the body of the assessment order the ld. AO has gone to great lengths to show that the three companies in which loss has occurred are either having negligible profits or are loss-making entities. The ld. AO has also presumably used publicly available data to show that these three companies have the kind of financials and profitability that should warn a prudent investor from staying away from them. Ld. AO has also reproduced share price movement charts in his order to allege that the trading pattern shows a degree of pre-mediation, in as much as the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n such basis be deleted. 6. For that the Lower Authorities erred in not providing cross examination of the adverse statement and as such therefore such statement be held to be inadmissible for purpose of assessment and all addition and disallowance on such basis be deleted. 7. For that in the facts and circumstances of the case the assessment order was passed merely based on report provided by third party and no independent inquiry was made by the Learned Assessing Officer. Hence the addition / disallowances made be deleted. 8. The appellant prays that leave be granted to produce additional evidence in terms of Income Tax Appellate Tribunal Rules at the time of hearing of the appeal. 9. The appellant craves leave to press new, additional grounds of appeal or modify, withdraw any of the above grounds at the time of hearing of the appeal." 2.1. Before us, ld. Counsel for the assessee has primarily reiterated the contentions raised before both the ld. AO and the ld. CIT(A) and has put before us the following issues in brief covering all the grounds of appeal: a) The assessee's business is investment and trading in shares and mutual funds, and also to provide secured and unse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... days the price was reduced @Rs.32.55 - which tempted the assessee to buy more shares to reduce the average price per share and the assessee acquired further 80,000 shares of Unno Industries Ltd. Such course of actions, are quite usual in the business of share-trading and not driven by ill-motive as alleged by the AO." e) The price movement of the three scrips in which loss occurred does not in any way show that the exit price, leading to the impugned loss, was artificially arranged in such a manner that an allegedly bogus loss could be booked by this assessee. It has been averred that while the assessee has dealt with in shares numbering in several thousands the charts reproduced in the body of the assessment order by the ld. AO show volumes in millions of shares traded in specified time periods, which have apparently been noticed for adverse consideration by the ld. AO. f) The said shares were sold or purchased from the Bombay Stock Exchange at rates prevailing on particular dates and through brokers whose identity cannot be doubted considering that their addresses and SEBI registration etc. were duly available with the ld. AO. Also all the transactions took place through banki ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich do not exist for business profit but they all resemble to be the nominal companies and penny stock companies meant for providing accommodation entries to the targeted beneficiaries. The bell shaped transactions in the share trading of the involved companies depicts that what appears is not real and the claimed financial yields are not at all reliable and they appear to be the fabricated ones. On the basis of the petty turn over, meagre cash and bank balance, meagre income, meagre operating profit, and net profit, non-payment of dividend against huge unsecured investment, poor EPS, the price movement chart allied with weak financial credentials of the investee companies and report from investigation wing, it can be objectively & rationally inferred that the claimed share transaction loss is not real loss but artificially make arrangement loss. In the background of these facts, the assessing officer rightly disallowed the trading loss on penny stock, which was later upheld by the Ld. CIT(A). Taking cognizance of merits of the self-speaking contents of the assessment order, this order deserves to be upheld by the Hon'ble ITAT." c) The ld. Counsel for the assessee repeat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Nalanda Builders Pvt. Ltd. (supra) wherein the issue of sale of two stocks namely, M/s. Tuni Textiles Ltd. and M/s. Blue Circle Services Limited was involved and the losses suffered on the sale of above shares was adjusted against the LTCG accrued from sale of fixed asset i.e flat. We have perused the above decision carefully and observed that the facts are quite similar and also that the decision in the case of Gateway Financial Services Ltd. (supra) has been followed by the Coordinate Bench. We also note that the decision in the case of Nalanda Builders Pvt. Ltd. as relied upon by the Ld. AR has considered the decision of the Coordinate Bench in the case of Gateway Financial Services Ltd. (supra) which has distinguished the decision of the Hon'ble High Court in the case of Swati Bajaj(supra). The operative part of the decision in the case of Nalanda Builders Pvt. Ltd. (supra) is extracted below: "13. We have also perused carefully the facts of the decisions passed by the Coordinate Benches in the case of Gateway Financial Services Ltd. (supra) and Raigarh Jute & Textile Mills Pvt. Ltd. (supra) and find that the facts of the assessee's case are substantially similar to that i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r. Amit Singh of an employee of him, who in reply to Question No. 6 confirmed that he was indulging in providing accommodation entries to various parties and in reply to Question No. 12 he stated that he confirms that Sri Amit Singh was the Proprietor of M/s SS Enterprises which is controlled and managed by him have purchased 2,69,870 shares of Radford Global through Calcutta Stock Exchange which were sold by Pratik Agarwal Beneficiary Trust, Praveen Agarwal HUF, Pinky Agarwal and Nishit Agarwal Beneficiary Trust of approx. Rs. 2,19,10,234/- through their sellerbroker M/s. Gateway Financial Services Pvt. Ltd resulting in facilitation of pre-arranged accommodation entry of LTCG to them. This evidence was utilised by the Assessing Officer in treating their Long Term Capital Gains from transaction in shares of Radford Global Ltd as bogus and making addition u/s 68 of the Act. 22. Regarding the report of SEBI report dated 19.12.2014 we find that the said order was revoked by SEBI by the final order dated 20.09.2017 in SEBI/WTM/MPB/EFD-1-DRA-III/ 30 /2017 by observing as under: "Considering the fact that there are no adverse findings against the aforementioned 82 entities with respe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n, as the statement of the aforesaid two witnesses was the only basis of issuing the Show Cause Notice." 26. The Hon'ble Supreme Court of India in New India Assurance Company Ltd. v. Nusli Neville Wadia & Anr., AIR 2008 SC 876, while considering a case under the Public Premises (Eviction of Unauthorised Occupants) Act, 1971, held that though the statute may not provide for cross- examination, the same being a part of Principles of Natural Justice should be held to be an indefeasible right. It was held as follows: "If some facts are to be proved by the landlord, indisputably the occupant should get an opportunity to cross-examine. The witness who intends to prove the said fact has the right to cross-examine the witness. This may not be provided by under the statute, but it being a part of the principle of natural justice should be held to be indefeasible right" 27. In the case of Rajiv Arora v. Union of India and Ors. AIR 2009 SC 1100 Hon'ble Supreme Court observed that "effective cross-examination could have been done as regards the correctness or otherwise of the report, if the contents of them were proved. The principles analogous to the provisions of the Indian Evidenc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on this subject has been fairly and rightly stated by the Lahore High Court in the case of Seth Gurmukh Singh where it was stated that while proceeding under sub-section (3) of section 23, the Income-tax Officer, though not bound to rely on evidence produced by the assessee as he considers to be false, yet if he proposes to make an estimate in disregard of that evidence, he should in fairness disclose to the assessee the material on which he is going to find that estimate; and that in case he proposes to use against the assessee the result of any private inquiries made by him, he must communicate to the assessee the substance of the information so proposed to be utilized to such an extent as to put the assessee in possession of full particulars of the case he is expected to meet and that he should further give him ample opportunity to meet it." It was held in that case that "In this case we are of the opinion that the Tribunal violated certain fundamental rules of justice in reaching its conclusions. Firstly, it did not disclose to the assessee what information had been supplied to it by the departmental representative. Next, it did not give any opportunity to the company to rebut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d entry operator' to justify the additions under sections 68 and 69 of the IT Act. These statements were recorded on various dates in some other proceedings not connected with the Assessee. Further, the statements were recorded much before the date of the survey conducted on the Assessee. It was unable to be disputed by the Department that the Assessee did not have an opportunity to challenge such statements and further, no opportunity to cross-examine the so-called entry providers was given to the Assessees. 7. Having heard learned Senior Standing Counsel for the Department (Appellant) and having perused the impugned orders of the AO, CIT(A) and the ITAT, the Court finds that both the grounds viz., the claim for benefit of section 10(38) of the Act and denial of an opportunity to cross examine the entry providers, turned on facts. The ITAT was justified in accepting the plea of the Assessee that the failure to adhere the principles of natural justice went to the root of the matter. Also, the CBDT circular that permitted to the Assessee to file revised returns if he omitted to make a claim was also not noticed by the AO." Therefore the Assessing Officer was bound to supply ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accommodation entries or were having some connection with the alleged transactions. There was no opportunity with the assessee(s) to cross-examine those persons, that why they have referred these transactions as bogus or accommodation in nature. No such exercises have been carried out at any stage by the Revenue authority. Though the assessee has placed material on record to show that on merits also the case of the assessee is strong and the alleged transactions have been carried out through banking channel as well as through recognised stock exchange and demat accounts and also it has been claimed that in one case there is a loss and there is no addition u/s 68 of the Act but without going into the merits of the case even on legal ground itself, we, in view settled judicial procedure referred hereinabove, are inclined to hold that there is a violation of principles of natural justice as opportunity of cross-examination of all those persons whose statements though not directly referred to the alleged transactions but the statements having been used by ld. AO to make additions in the hands of the assessee(s) in appeal before us, was not provided to the assessee(s) even though reques ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ervices Ltd.. Since the AO has only disallowed the claim of bogus loss, it in itself means, that the genuineness of purchases of equity shares of Blue Circle Services Ltd., has not been disputed by the revenue authorities. The assessee in this case has purchased 5232616 equity shares. The ld. AO has also referred to the equity shares price chart of Blue Circle Services Ltd., wherein there is a steep upward trend from 2011-12 onwards then a downward trend which goes up to the end of 2013 and again there is an increase in trend during 2013-14 but not to that extent of the past trend of steep increase. The claim of the assessee is that, looking at the trend of equity share, in the anticipation of earning good profits it made the investment in equity shares of Blue Circle Services Ltd., and there was some increase in the price but subsequently it started decreasing and since the assessee did not want to lose all its capital it sold the equity shares as and when it got the opportunity. Even though, the transactions have been carried out on the recognised stock exchange and well within the rules and regulations provided by the SEBI, we note that in all the alleged statements of the alleg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the transaction, and credit-worthiness, then the AO must conduct an inquiry, and call for more details before invoking Section 68. If the Assessee is not able to provide a satisfactory explanation of the nature and source, of the investments made, it is open to the Revenue to hold that it is the income of the assessee, and there would be no further burden on the revenue to show that the income is from any particular source. Thereafter the hon'ble Supreme court summed up the principles, which emerged after deliberating upon various case laws, as under: i. The assessee is under a legal obligation to prove the genuineness of the transaction, the identity of the creditors, and credit-worthiness of the investors who should have the financial capacity to make the investment in question, to the satisfaction of the AO, so as to discharge the primary onus. ii. The Assessing Officer is duty bound to investigate the credit-worthiness of the creditor/subscriber, verify the identity of the subscribers, and ascertain whether the transaction is genuine, or these are bogus entries of name-lenders. iii. If the enquiries and investigations reveal that the identity of the creditors to be dubiou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imple and straight case of tax planning to gain benefit of long term capital gains earnings @ 491% over period of 5 months which is beyond human probability and defies business logic of any business enterprises dealing with share transactions. Even brokers who coordinated transactions were also unknown to assessee. All these facts give credence to unreliability of entire transaction of shares giving rise to such capital gains ratio. That the Assessing officer was justified in making the additions on the basis of the material available on record, the surrounding circumstances, the human conduct and preponderance of probabilities. 10. Now, we have to examine the contentions of the assessee in the light of the ratio of law laid down by the hon'ble Supreme Court in the case of "NRA steels" (Supra) and by the Calcutta High Court in the case of "Swati Bajaj"(supra). 10.1 The plea of the assessee in this case is that the assessee was bona fide purchaser of the shares in question. That the assessee had duly taken note of the financials and share price movement of the companies before purchasing the shares. The ld. counsel in this respect has referred to the financials of the said compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Mar'13 as against Rs. 0.22 Crore in FYE Mar'12 and NIL in FYE Mar'11 and Mar'10 implying a trend reversal and a dividend payout of 59.60%). The purchase of the stock was timed in anticipation of the expected price action that usually follows in such stocks showing a reversal in dividend payout trend. That the shares of Comfort (still Comfort Fincap Ltd 535267) were purchased in a staggered manner in January 2014 in anticipation of trading profits and the same were sold, again in a staggered manner, in March 2014 when the trade went awry. The stock of Comfort was also in a steep fall when the company purchased it. However, the company purchased the stocks only when the price fall was sustained over a period of time. It is notable that the company did not enter/exit at the highest/lowest price and the trades in shares of Comfort were entered into on the basis of the trend visible in the then latest financials of the stock available publicly. 10.3 Regarding the third company, it has been demonstrated that Luminaire Technologies Ltd. ('Luminaire'), was a listed public company at the relevant time. That the shares of Luminaire were purchased in a staggered manner in January and Febru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e was undertaken based on the parameters which clearly set out both the logic and rationale behind the trades. The stock of Global was also in a steep fall when the company purchased it. The shares of Global were purchased in a staggered manner in February 2014 in anticipation of trading profits and the same were sold, again in a staggered manner, in March 2014. However, the company purchased the stock only when the price fall was sustained over a period of time. That the stock parameters had improved from its previous reporting period (Total Assets of Rs. 56.62 Crores in FYE Mar'13 as against Rs. 20.90 Crores in FYE Mar'12; Operating Profit of Rs. 1.49 Crores in FYE Mar'13 as against Rs. 0.01 Crore in FYE Mar'12; Reported Net Profit of Rs. 1.05 Crore in FYE Mar'13 as against Rs. 0.08 Crore in FYE Mar'12 implying an increment of 1,212.50% and trend reversal). The company, being a prudent trader, did not only rely on the financials of Global to make its decisions in the market. It was also prone to keep tabs on the technical aspects of the stock to pre-empt market movements in it. Envisaging a further fall in the stock prices owing to its interpretation of the deteriorating technica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee was involved in price rigging or otherwise instrumental to book bogus short term capital loss. 11. The Ld. Counsel has further submitted that the facts of the case of the assessee were quiet distinguishable from that of the cases of "Swati Bajaj & others"(supra). He has submitted that in most of the cases before the Hon'ble High Court, the purchases were off the Stock Exchange/private placements. That there were orders of SEBI suspending the scrip and/or wherein the concerned trader were found guilty of price manipulation. Further, that there were statements recorded from the brokers of the assessees, who had admitted to have indulged in price manipulation and therefore adverse view was taken. That in the specific facts before the hon'ble High Court, it was noted that the price of the scrips showed steep increase during recessive trends and therefore the movement in prices was held to be ingenuine. That the Hon'ble High Court had observed that the onus was on the assessee to establish that the price rise was genuine in light of the fundamentals of the scrip. However, in case of the assessee, the trades were made on the Stock Exchange. There was no adverse statement of assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... does not seem any probability of meeting minds of the assessee and/or his share broker and the promoters of the companies. A very peculiar fact which is noted from the assessment order/investigation wing report is that in the list of the persons whose statement was allegedly recorded and who in their statement have admitted of price rigging, the names of share brokers, entry operators and exit providers have been mentioned. The facts on the file itself show that there was meeting of minds of the entry operators and the share brokers and exit providers. The price rigging was done by giving benefit to various subscribers with connivance of share brokers and the motive was to convert their unaccounted money into tax exempt long-term capital gains and for that purpose, there were certain persons chosen as exit providers who would buy shares when the share prices would be at its peak and those exit providers thereafter would suffer losses on account of fall in the price of the shares. This specific fact on the file shows that the exit providers were already chosen to execute the plan. The motive was to give the benefit of bogus long-term capital gains to various beneficiaries and to mak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opined that a judgment should not be read as a provision of law. A judgment is confined to the facts and circumstances of its own case. It is only when the facts and circumstances in two cases are similar that the ratio of the former case becomes applicable to the latter case. As discussed above, in the absence of any direct incriminating evidence against the assessee, the distinguishable and weak circumstantial evidence, in our view, do not suggest the preponderance of probability of the assessee being involved in price rigging of the scrips or being the predetermined and pre planned beneficiary of the devised scheme, therefore, the impugned additions are not warranted in this case, and the same are accordingly ordered to be deleted." 38. Respectfully following the above decision of this Tribunal in the case of Raigarh Jute & Textile Mills Ltd. vs. ACIT (supra), which is squarely applicable on the facts of the instant case of assessee i.e., M/s. Gateway Financial Services Ltd., we find that the alleged loss has been incurred by the assessee in the regular course of its business. We also note that the statement of various persons recorded by the AO/investigation wing/search tea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stigation on the facts of the assessee(s) along with other persons as referred in the order of the SEBI (extracted supra), and after a detailed investigation and examination of records exonerated, the assessee(s) from the charges levelled in the show cause notice issued to them. Therefore, when the assessee(s) have been exonerated and the charges against them have been waived and the transactions of purchase and sale of equity shares carried out by them have been found to be genuine, the theory of preponderance of probabilities is ruled out in the case of the present assessee(s). Thus, when the transactions giving rise to the long term capital gain have been found to be genuine, and as per rules and regulation of SEBI, the finding of the ld. CIT(A) deserves to be set aside and the impugned additions in case of assessee(s) in appeal before us are uncalled for. 13.1. In the case of Pr. CIT Vs. Renu Aggarwal (Supra), the Hon'ble Apex Court has dismissed the special leave petition filed by the revenue affirming the decision the Hon'ble High court of Allahabad in ITA No. 44 of 2022 which in turn has upheld the decision of the tribunal in ITA No. 204/Lkw/2020 A.Y. 2014-15 & anothers. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the instant case. 13.3. We note that the Hon'ble High Court of Orissa in the case of PCIT vs Dipansu Mohapatra(supra), has held that tribunal was justified in allowing assessee's claim u/s 10(38) of the Act where the assessee has filed the details of purchase and sales of shares along with contract notes for purchase and sale, D-mat A/C and bank statement and furthermore no incriminating materials were found against the assessee in the survey conducted in the premises of the assessee and therefore the AO could not deny the claim u/s 10(38) of the Act merely by relying on the statements of accommodation entry providers which were recorded much before the date of survey. In the present case before us the facts of the assessee are on better footing even as there is no survey on the assessee's premises and AO relied on the statements of entry providers which were recorded long ago. Besides there was no incriminating materials against the assessee found even in the premises of entry operators/stock brokers. Therefore this case also squarely applies to the facts of the case. 14. In view of the above discussion and in the given facts and circumstances of case, we are inclined to h ..... X X X X Extracts X X X X X X X X Extracts X X X X
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