Raigarh Jute & Textile Mills Ltd Vs ACIT (ITAT Kolkata)
Share Trading Loss cannot be treated as bogus in the absence of any direct incriminating evidence against the assessee on the basis of mere distinguishable and weak circumstantial evidence
In the case, Raigarh Jute & Textile Mills Ltd, the appellant, argued against the allegations put forth by the Assessing Officer (AO). The appellant denied their involvement in any long-term capital gains, contended that the purchase of shares was made from their own funds, and disputed any alignment with the case of PCIT vs. Swati Bajaj & Ors. The main point of contention was the AO’s disallowance and adding back of the appellant’s claim for a deduction of loss suffered in its share trading business.
The ld. counsel for the assessee has submitted that all the allegations levelled by the Assessing Officer were general allegations. That the name of the assessee did not feature in the statement of the share brokers as referred to the assessment order. That the assessee was not beneficiaries of any long-term capital gains, rather, it was loss. That the payments for purchase of shares were made out of own funds of the assessee. That the facts of the case of the assessee were different and distinguished from the decision of Hon’ble Jurisdictional High Court in the case of PCIT vs. Swati Bajaj & Ors reported in [2022] 139 taxmann.com 352 (Calcutta), wherein, the Hon’ble Calcutta High Court has confirmed the additions of bogus long-term capital gains.
The tribunal, after careful consideration of the case specifics and comparison with previous cases, including PCIT vs. Swati Bajaj & Ors, ruled in favour of Raigarh Jute & Textile Mills Ltd. The tribunal emphasized the differences in the two cases and noted the absence of direct incriminating evidence against the appellant. The tribunal also noted that circumstantial evidence did not suggest the likelihood of the appellant’s involvement in price rigging or being a pre-determined beneficiary of a dubious scheme.
ITAT held that 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.
FULL TEXT OF THE ORDER OF ITAT KOLKATA
The present appeal has been preferred by the assessee against the order dated 13.03.2019 of the Commissioner of Income Tax (Appeals)-15, Kolkata (hereinafter referred to as the ‘CIT(A)’) passed u/s 250 of the Income Tax Act (hereinafter referred to as the ‘Act’).
2. The assessee in this appeal has taken the following grounds of appeal:
“1 That on the facts and in the circumstances of the Case, the Ld. CIT(A)-15 erred in holding that the Assessing Officer was justified in disallowing and adding back the Appellant’s claim for deduction of loss suffered of Rs.4,02,00,360/- suffered by the Appellant in its Share Trading Business.
2 That on the facts and in the circumstances of the Case, the Ld. CIT(A)-15 erred in confirming the action of the Assessing Officer of invoking the provisions of Section 14A of the Act and in confirming the addition of Rs.87,194/- made by the Assessing Officer thereunder.
3 That on the facts and in the circumstances of the Case, the Order passed by the Ld. CIT(Appeals)-15, is bad in law.
4 That the Appellant craves leave to submit further grounds and to amend, alter or otherwise modify the grounds already taken, if necessary, before or at the time of hearing of the Appeal.”
3. Ground No.1 – The assessee vide Ground no.1 has agitated the action of the lower authorities in disallowing and adding back the longterm capital loss suffered by the assessee in trading of shares.
4. The Assessing Officer during the assessment proceedings noted that the assessee had booked loss of Rs.4.02 crores in trading of shares. He noted that the assessee had traded in following scrips:
1. Rutrint International Limited
2. Comfort fincap Limited
3. Luminaire technologies Limited
4. Unno Industries Limited
5. Global Infratech & Finance Ltd.
The Assessing Officer noted that the facts of this case were part of larger scheme, whereby, the price of shares of the certain penny stock companies were rigged and there were bogus long-term capital loss were provided to certain parties acted as exit provider and booked corresponding losses which were set off against other business income of companies/persons. The Assessing Officer noted that some peculiar facts of these penny stock companies were that i) all of such companies were listed on Bombay Stock Exchange (BSE); ii) do not have any business, fixed assets, income and worth; iii) and in cases of quite a few scrips, trading has been suspended by BSE as a result of surveillance measure detecting manipulative price movement. The Assessing Officer further noted that the trading in shares of First Financial Services Ltd. and Rutron International Ltd. are two of those scrips where trading has been suspended by BSE as a result of surveillance measure detecting manipulative price movement. The Assessing Officer further noted that investigation was carried out by the Directorate of Investigation, Kolkata which proved that a scheme was hatched by various players whereby accommodation entry of bogus long-term capital gain/short-term capital loss was booked. These accommodation entries were taken by various beneficiaries. The Assessing Officer having discussed the modus operandi of booking of long-term capital gain/short-term capital loss by way of price rigging of shares of these penny stock companies, further discussed about the report of the Special Investigation Team of the Hon’ble Supreme Court on black money, wherein, the modus operandi of investigation on black money has been discussed. The Assessing Officer thereafter switched to the facts of the present case and observed that the assessee in this case was not a regular investor/trader of shares. He had not claimed such huge profit/loss in shares in past. It was unusual on his part to claim such a huge loss in trading of the scrip as mentioned above. The Assessing Officer accordingly show-caused the assessee as to why the aforesaid loss booked by the assessee be not treated as bogus loss. However, the assessee replied that the loss booked by the assessee was genuine and that the same cannot be disallowed on mere suspicion. That the transactions carried out by the assessee were duly supported by documentary evidence and were conducted on the recognized stock exchange. The Assessing Officer however did not accept the aforesaid explanation of the assessee and further referred to the investigation wing report of the income tax department and observed that income tax department had searched/surveyed 32 share broking entities and more than 20 entry operators and unearthed and identified some 84 odd companies which were being used for bogus accommodation entry of gain/loss. That the aforesaid mentioned five companies in which the assessee had traded were also identified as penny stock companies from their financials, trading patterns, statement of share brokers, statement of entry operators, statement of promoters of the companies and the post search/survey enquiries. That they all have very common financial and trading patterns. That the market price of shares of these companies firstly rise to very high level and then fall within a short span of time without any genuine reason. The Assessing Officer further observed that the transaction pattern relating to shares of these companies would show that the trading in these shares were made only with the parties to whom accommodation entries were given to them to give benefit of longterm capital gain. Referring to the transactions in the shares of Rutron International Ltd., the Assessing Officer observed that the trading volume of shares during the period when the assessee purchased shares was thin and he further noted that the price of shares of this company was on an average of Rs.26/- from April 2013 to October/November 2013. Suddenly the prices fell down to 7.20 on 31.03.2014. That the share brokers, operators and exit providers have stated under oath and identified Comfort Fincap Ltd. as penny stock company who share prices have been manipulated. That the financials of the company M/s Comfort Fincap Ltd. did not justify the abnormal trading pattern of this scrip. The Assessing Officer thereafter referred to the graph to show the abnormal price rise and fall regarding the share of Rutron International Ltd. The Assessing Officer thereafter also referred to the share price pattern of Comfort Fincap Ltd. and observed that the share price of this company fell down from Rs.401/- on 22.05.2013 to Rs.144/- on 31.03.2014 in just 313 days. Similarly, he referred to the graph of share price rise/fall, financials of the company. He also referred to the shares of Luminare Technologies Ltd. and observed that the average price of the share of this company was Rs.53/- from March 2013 to November 2013 and gradually its price started to fall down to Rs.20/- on 05.03.2014 and remains on an average of Rs.20 to 25 in the month of March 2014. Further, the Assessing Officer discussed the financials of some another company namely Strauss Industries and Exports to observe that the same was penny stock company. The Assessing Officer further referred to the share price pattern of Unno Industries Ltd. and observed that the assessee had purchased shares of this company on 22.01.2014 and sold on 20.03.2014. That the share price of this company was on an average of Rs.30 to 40 from March 2013 to January 2014 and its prices started to fall down to Rs.13 to Rs.14 and remains on an average of Rs.20 to Rs.25 in the month of March 2014. In the case of Global Infratech& finance Ltd. (GBL Infra), the Assessing Officer observed that the assessee had purchased shares of this company on 04th and 5th February 2014 and sold the same on 21st to 24th March 2014 and further observed that the average share price of this company rose from Rs.0.76 on 03.07.2012 to Rs.81.90 on 12.08.2013 and again fell down to Rs.10.18 on 29.08.2014. The Assessing Officer thereafter discussed the modus operandi of penny stock companies as to how their prices are rigged by manipulation by the promoters/handlers of these companies. He denied the allegations of booking of bogus short term capital loss. Thereafter, he issued summons u/s 131 to the director of the assessee company ShriHemant Kumar Jalan and his statement under oath was recorded during the course of statement, he was confronted with the statement of various share brokers, entry operators and exit providers who have admitted about the rigging of price of shares of the aforesaid companies in which the assessee had traded. However, the director of the assessee company denied any involvement of the assessee company in share price rigging or booking of bogus capital loss and reiterated that the assessee company had bought and sold shares of aforesaid companies online on the platform of Bombay Stock Exchange through registered share broker and that there was no accommodation entries of LTCG and STCL as alleged by the Assessing Officer. However, the Assessing Officer observed as under:
“12. The above submission made by the assessee is not acceptable on the reasons that in this case there is Special Investigation Report, detailed investigation by Income tax department as stated above which clearly proves that these are accommodation entries with the help of Share Brokers, Entry operator and exit provider. Further the director of the company, on going through the statement of the share broker, entry operator and exit provider simply evaded what they have said,. He simply stated that they have bought and sold shares of aforesaid companies on line on the platform of the Bombay Stock Exchange through registered share broker. In our transactions, I can confirm that there are no accommodation entries of LTCG and STCL stated by you.
Here, the witnesses personally appeared before the IT Authorities and their sworn statements were recorded under oath. Subsequently they even did not retract their sworn statements before any other judicial authority. This means that their statements have not lost their legal sanctity. Hence, the authenticity of the evidences once authorized by one IT Authority need not be cross examined by the same IT Authority. In view of the facts of the case onus was on the assessee to prove the bona fide of the transactions which he has failed to do and the assessee now cannot claim to shift his burden on the department by asking for the opportunity to cross examine the 52 witnesses who have confirmed that the transactions are not genuine and these connected parties have grossly misused the stock exchange system to generate STCL to aid and help beneficiaries to adjust their business profit from share trading loss with no payment of taxes on business income.
13. So such trading of penny shares of the assessee can be treated as colourable transactions, which are seemingly valid, but a feigned or counterfeit transaction entered into for some ulterior purposes. Motive alone cannot make unlawful what the law allows but at the same time if it is found that there is a presence of bad faith or fraud or non-bona fide in the transactions, then legal effect of the transactions are not to be considered. If the assessee’s acts are not bona fide but are ambiguous, sham or make-believe it is open to question and doubt the transaction. The make-believe transactions, though seemingly legal, are not free from judicial scrutiny.
It is true that every person is entitled to arrange his affairs as to avoid taxation but the arrangement must be real, genuine or bona fide. A sham transaction or make believe transaction or colourable device cannot be part of tax planning. It is wrong to encourage or entertain the belief that it is honourable to avoid the payment to tax or to obtain any advantage or benefit for tax purpose by dubious method. The principle on the matter of tax evasion and tax avoidance as laid down by Hon’ble Supreme Court in a landmark judgment in the case of McDowell and Co. Ltd. v. CTO (1985) 154 ITR 148 (SC). The judgment is applicable where devices though seemingly legal are adopted in collusion or whether devices adopted are not genuine or bona fide but are sham, make believe or camouflaged to escape the liability for the tax or to obtain certain benefit for tax purpose.”
The Assessing Officer thereafter referred to certain case laws and held that considering the totality of the facts and circumstances of the case, the trading loss on shares booked by the assessee did not look genuine from a commercial point of view but were sham and bogus to book capital loss which may be set off against the business income of the assessee. He therefore denied the claim of the assessee of short-term capital gains booked by the assessee in trading of shares.
5. Being aggrieved by the aforesaid order of the Assessing Officer, the assessee preferred appeal before the CIT(A). It was submitted before the CIT(A) that the trading/transaction carried out by the assessee in the aforesaid five scrips were genuine and were duly supported with the evidences of sale and purchase together with copies of contract notes issued by the broker as well as copy of the demat account. Payments for purchase of shares were made through banking channel and the sale proceeds were also credited through bank account. The transactions were carried out at prevailing market prices and generated through bank channels. That all the evidences were duly furnished before the Assessing Officer and were scrutinised and the Assessing Officer could not point out any defect in the same. That the Assessing Officer has simply relied upon the observation of the Investigation Wing and held that the shares of these companies were being stock. However, the assessee had obtained a write up of the above companies including their audited accounts and contractors’ report from the Bombay Stock Exchange. The same were furnished before the CIT(A) and it was submitted that all these companies were existing, functioning and carrying on business in normal manner. Thereafter, the assessee relied upon various case laws and that the Assessing Officer was not justified by way of disallowing the claim of capital loss on general observation, whereas, the specific data proving the genuineness of the transaction was furnished before the Assessing Officer. However, the ld. CIT(A) dismissed the appeal of the assessee by way of a cryptic order observing that the Assessing Officer has passed a detailed order and has established beyond doubt that the entire transaction was sham. That he fully agreed with the Assessing Officer that the entire process has been adopted to get the accommodation entry. The ld. CIT(A) referred to certain case laws and decided this issue against the assessee. Being aggrieved by the said order of the CIT(A), the assessee has come in appeal before us.
6. The ld. counsel for the assessee has submitted that all the allegations levelled by the Assessing Officer were general allegations. That the name of the assessee did not feature in the statement of the share brokers as referred to the assessment order. That the assessee was not beneficiaries of any long-term capital gains, rather, it was loss. That the payments for purchase of shares were made out of own funds of the assessee. That the facts of the case of the assessee were different and distinguished from the decision of Hon’ble Jurisdictional High Court in the case of PCIT vs. Swati Bajaj &Ors reported in [2022] 139 taxmann.com 352 (Calcutta), wherein, the Hon’ble Calcutta High Court has confirmed the additions of bogus long-term capital gains. The ld. counsel has submitted that even the statement of director of the assessee company was also recorded but the Assessing Officer could extract any incriminating fact from those statements. That even none of the statements referred to by the Assessing Officer in his assessment order pertained to the broker of the assessee company and that the Assessing Officer could not prove even from Investigation Wing report that the broker of the assessee company had ever indulged in manipulating share price or for booking bogus long-term capital gain/loss. That these companies were still existent companies and their shares were being traded upon the stock exchange. That even the financials of these companies did not suggest that these were penny stock companies. That though certain investigations were carried on by Security Exchange Board of India and during investigation, the trading by 14 noticees, who were suspected to be involved in price rigging in scrip of Ruotron were restrained. However, there was no restrain against any other person from trading in the said scrip. That neither the assessee nor his broker were named in the list of said 14 noticees. That, even, no inquiry was conducted in case of next three companies. That even in respect of 5th company namely Global Infratech, only the promoters of the said company were found to have indulged in price rigging of shares, however, no action was initiated or recommended against the purchasers of the shares. That the assessee company being an unrelated party was not involved in any manner in price manipulation of shares of the said company. The assessee, at the most, can be said to be victim of the price fluctuation undertaken by unscrupulous persons. That the assessee, along with other four scrips, has traded in shares of this scrip also in normal course, without being any idea of any price manipulation. That the assessee was not even provided any opportunity to cross-examine the persons whose statements have been referred to by the Assessing Officer in the assessment order; nevertheless none of the persons as listed by the Assessing Officer ever made any statement either against the assessee or his broker. The ld. counsel has further submitted that though some persons may be involved in price rigging but there were also other persons who have carried bona fide transactions without any knowledge of any price rigging. That the assessee cannot be punished on the basis of generalized observations of the investigation wing. The ld. counsel has further furnished the written submissions, which, for the sake of ready reference, are reproduced as under:
A. “Study of the scrips
A. i. In the following paragraphs, it shall be demonstrably clear that the loss which the Company incurred were bonafide and genuine and all its transactions were both duly supported by documentary evidences and were conducted on the Bombay Stock Exchange (“BSE”), a recognized stock exchange, in conformity with the applicable regulatory norms, and at the prices which prevailed on the BSE on the relevant transaction dates.
A.ii. The trades were properly recorded and duly disclosed by the company in its books of accounts for the relevant period. Your attention is invited to peruse the company’s auditor’s note in its report dated 22.08.2014, which is shared on Page 6 of Paper Book – I. The relevant extract is given below:
“the company is dealing and trading in shares and other investments and proper record(s) have been maintained of the transactions and contracts and timely entries have been made therein.”
A.iii. During the relevant year, the company actively traded in shares. To understand the company’s motive, timing and rationale for entering into these trades, it is important to first step into the shoes of the company and think like a trader. When certain trades do not turn out as envisaged, it is exceedingly easy to assume that the trade seemed frivolous, devoid of merit, and callous from the get-go. Such presumptions are only possible in hindsight. However, a trading entity does not have the luxury of such hindsight and rather has to develop a keen sense of foresight to predict reasonable future outcomes and take positions accordingly. Trading in the securities markets is a game of luck predominantly but the effort and preparation undertaken by a market participant to pick and choose the securities and the timing to enter or exit therefrom usually lead to more favourable odds.
A.iv. Accordingly, a quick but nuanced study is carried out by the trading entity to profit from the securities markets. Notably, it is not possible to take trades based solely on perfect information. Not only is perfect information ephemeral and not available all the times, it is also prohibitively expensive and cannot make economic sense in the long run. This forces traders to develop a keen sense of market movements, known colloquially as a trader’s hunch. Catching hold of the ‘pulse’ of the market is a known skill of many successful traders. Such premonitions of future outcomes are not unheard of and even traders with a moderate risk appetite regularly take calls based on their understanding of the fresh information available in the markets, which by their very nature are dynamic. It is pertinent to state that unlike investors, who are prone to an analysis paralysis, a trader moves fast and seldom acts upon stale information. A trader’s mindset is typically oriented towards short-term profits and a typical trader is very quick to exit both from its positions of profits and losses. A successful trading entity is always ready to cut apparent losses and does not wait patiently for the awry position in an instrument to turn around. This makes fundamental and technical analysis all the more relevant to understand the trades – which comprises particulars of trends, price movement, trade volumes, position sizes, timing of trades and trade outlook, and to make sense of the same. The insights developed based on this analysis of information related to the stock, its industry, its sector and its segment of the market forms the bedrock of the decision-making process regarding the quantum, pricing and timing chosen to undertake the trade.
A.v. A brief summary of the losses incurred in the trades of scrips/shares which has been viewed adversely by the lower authorities are as follows:
