PCIT (Central) Vs Affluence Commodities Pvt. Ltd (Gujarat High Court)
Gujarat High Court held that When the purchase of the same shares by the counterparty has been held to be genuine, the sale by the assessee cannot be treated as bogus
Ahmedabad: The Gujarat High Court has upheld the decision of income tax authorities to allow losses claimed by Affluence Commodities Pvt. Ltd. from transactions in certain shares, rejecting the Revenue’s contention that these were bogus transactions designed to evade tax. The court’s ruling reinforces the principle that if the corresponding purchase of shares by the counterparty is found to be genuine, the sale by the assessee should similarly be treated as authentic.
The case, PCIT (Central) vs Affluence Commodities Pvt. Ltd., came before the High Court following an appeal by the Principal Commissioner of Income Tax against an order of the Income Tax Appellate Tribunal (ITAT) for the Assessment Year 2015-16. The core of the dispute revolved around the assessee company’s claim of losses amounting to Rs. 73,12,905/- arising from dealing in shares of two companies, namely “Kappac Pharma” and “Alang Industries Gases Ltd.”
The Assessing Officer (AO) had initially disallowed these losses, suspecting the transactions to be non-genuine or “bogus” within the context of dealing in “penny stocks.” The AO’s suspicion was based on significant price fluctuations in these shares and general information from the Income Tax Department’s Investigation Wing in Kolkata and SEBI regarding the manipulation of penny stock prices for tax evasion purposes, including booking of bogus long-term capital gains or short-term capital losses.
Specifically, the AO noted that Affluence Commodities Pvt. Ltd. had purchased shares of Alang Industries Gases Ltd. at a high rate and sold them at a significantly lower rate, booking a loss. Similarly, in the case of Kappac Pharma Ltd., the assessee had valued its closing stock at a substantially lower market price compared to its purchase price, claiming a business loss on account of this valuation. The AO was of the view that the assessee failed to provide sufficient evidence to prove the genuineness of these transactions beyond the fact that they were conducted through recognized stock exchanges.
Aggrieved by the AO’s order, the assessee company approached the Commissioner of Income Tax (Appeals) [CIT(A)]. The CIT(A), after examining the details, found that the assessee had provided evidence such as contract notes, ledger accounts, and bank transactions through brokers, which substantiated the genuineness of the transactions conducted on online trading platforms. The CIT(A) accepted the assessee’s contention that it had no control over the share prices and therefore incurred losses. The CIT(A) also noted that the assessee had only sold a part of the shares in Alang Industries Gases Ltd., holding the remaining in subsequent years, and that the loss in Kappac Pharma Ltd. was due to the valuation of closing stock at the prevailing market rate as per accounting standards.
The Revenue then challenged the CIT(A)’s decision before the ITAT. The Tribunal, concurring with the CIT(A)’s findings, further emphasized that the assessee had demonstrably proved the genuineness of the transactions with supporting documentation. The ITAT highlighted that the AO’s disallowance was based on general information and suspicion rather than specific material evidence against the assessee’s transactions. Relying on previous judgments of the jurisdictional High Court (though not specifically named in the text of the order), the ITAT upheld the deletion of the disallowance. Regarding Kappac Pharma Ltd., the Tribunal agreed that the claimed loss was a legitimate business loss arising from the valuation of stock-in-trade at the lower market rate.
The matter then reached the Gujarat High Court. The High Court, after considering the submissions from both sides and reviewing the orders of the CIT(A) and the ITAT, found itself in complete agreement with the concurrent findings of fact reached by the lower appellate authorities.
The court observed that the genuineness of the transactions in Alang Industries Gases Ltd. shares was established through evidence of online trading and the fact that the assessee had no control over the share prices. The court also noted that the assessee continued to hold a portion of these shares. Concerning Kappac Pharma Ltd., the High Court accepted that the loss arose from the legitimate accounting practice of valuing closing stock at market rate when it was lower than the cost price.
Crucially, while not explicitly detailing a specific precedent by name in this part of the judgment, the court’s affirmation of the lower authorities’ stance implicitly supports the principle often applied in such cases: if the purchase of the same shares by the counterparty has been accepted as genuine by the tax authorities, the corresponding sale by the assessee in the same transaction cannot ordinarily be treated as bogus. The genuineness is inherent in the matching nature of the transaction on a recognized exchange.
Given these concurrent findings of fact by the CIT(A) and the ITAT, which the High Court found no reason to interfere with, the court concluded that no question of law, much less a substantial question of law, arose from the Tribunal’s order regarding the disallowance of losses in penny stocks.
The High Court also noted that questions raised by the Revenue regarding disallowance under Section 14A of the Income Tax Act (related to expenditure incurred to earn exempt income) were already covered by questions admitted in other appeals filed by the Revenue in the respondent’s case. The court admitted a specific question on whether the disallowance under Section 14A can exceed the exempt income earned by the assessee.
However, on the matter of the alleged bogus penny stock losses, the High Court dismissed the Revenue’s appeal, upholding the deletion of the addition made by the AO. The judgment reinforces the need for the Revenue to base disallowances on specific evidence of non-genuineness rather than general suspicions or information about market manipulation, especially when the assessee provides documentation proving transactions on recognized platforms.
FULL TEXT OF THE JUDGMENT/ORDER OF GUJARAT HIGH COURT
