ACIT Vs Adihemshree Financial (ITAT Mumbai)
The Income Tax Appellate Tribunal (ITAT) in Mumbai heard appeals filed by the revenue and cross-objections by the assessee, Adihemshree Financial, for the assessment years 2014-15, 2015-16, and 2016-17. All cases involved the same issues and were consolidated for a single ruling, with the assessment year 2014-15 serving as the lead case.
Background
Adihemshree Financial, a partnership firm, is a prolific trader of shares, securities, and derivatives on the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE). The firm reported a significant loss for the assessment year 2014-15. The Assessing Officer initiated scrutiny after receiving information from the Investigation Wing that a cartel was manipulating penny stock prices to launder money. The officer alleged that Adihemshree Financial was one such beneficiary, claiming a business loss of over Rs. 11.77 crore in trades of these manipulated scrips. Consequently, the Assessing Officer disallowed the loss.
The firm appealed to the Commissioner of Income Tax (Appeals), who, relying on the Munish Financials (ITAT Mumbai) precedent, deleted the disallowance. The revenue then appealed to the ITAT.
The Tribunal’s Findings
The ITAT reviewed the original assessment and the subsequent reassessment proceedings. In a previous ruling on the same assessee (and its sister concern, Munish Financials), the Tribunal had already found in favor of the assessee. The key points from the prior decision, which were reiterated and applied to the current case, are as follows:
- Extensive Trading Activity: The Tribunal noted the assessee’s high turnover, which was in the hundreds of crores, indicating extensive involvement in the stock market.
- Nature of Transactions: All the transactions in question were conducted online through recognized stock exchanges, with payments made through banking channels. This was a crucial point, as the transactions were not “off-market” like those in the Pr.CIT v. Swati Bajaj (Calcutta High Court) case, a precedent relied upon by the revenue.
- Involvement in Scam: The assessee’s name and its brokers were not mentioned in any of the Investigation Wing or SEBI reports regarding the alleged price-rigging scam.
- The “Loss” Argument: The Tribunal found the revenue’s argument, that the assessee was a beneficiary of a price-rigging scheme, to be contradictory. Price-rigging is typically done to generate a profit, often a long-term capital gain, to convert black money into white. In this case, the assessee had booked a substantial loss. The Tribunal reasoned that no prudent person would purchase losses to set them off against legitimate income to convert accounted income into black money.
- Judicial Precedents: The Tribunal cited the Supreme Court’s ruling in Padmasundra Rao v. State of Tamil Nadu, which cautioned against applying a precedent blindly without considering factual differences. The Tribunal distinguished the facts from cases like Sumati Dayal v. Commissioner of Income Tax and the aforementioned Swati Bajaj case, where transactions were off-market or brokers had admitted to price manipulation.
Reassessment Proceedings
