Short-Term Capital Loss Addition Unsustainable: Transaction Not Bogus

Lokendra Khandelwal Vs ITO (ITAT Jaipur)

ITAT Jaipur held that addition towards short term capital loss treating it as bogus unsustainable as transaction of purchase and sale of shares done through banking channel and STT duly paid thereon.

Facts- AO on the basis of the information received from Investigation Wing, Calcutta/Mumbai formed an opinion that the short term capital loss declared by the assessee on shares of Luminaire Technologies for Rs. 3,41,083/- was bogus and hence a show cause notice was issued to the assessee. An explanation was furnished by the assessee but the AO was not convinced and he disallowed such declared short term capital loss and he has also considered a sum of Rs. 6,821/- being assumed commission paid by the assessee for such accommodation, as unexplained expenditure of the assessee.

CIT(A) has confirmed the action of AO.

Conclusion- Held that the assessee had purchased shares through SEBI registered broker namely Hem Securities Ltd and the same were not physical form as it would be in the case of the penny stock companies and also there is not split corporate action. Thus, we note that the assessee had purchased the shares through contract note dated 17-02-2014 and 18-02-2014 (APB 7-8) and sold all the shares through contract note dated 13-03-2014 (APB 9). It is also noteworthy to mention that shares purchased by the assesee were credited in his D Mat account and they were transferred accordingly. It is also noted from the available records that all the transactions for purchase and sale of shares through the broker Hem Securities were settled only via banking channel. There appears no ambiguity in the sale and purchase of shares through the SEBI brokers Hem Securities and all the transactions took place through banking channel and on the transactions of purchase and sale of Shares, STT had been paid having time and date stamp. Hence, taking into consideration of the above facts and circumstances of the case, we do not concur with the findings of the ld. CIT(A) on the issue in question.

FULL TEXT OF THE ORDER OF ITAT JAIPUR

This appeal is filed by the assessee against the order of the ld. CIT(A) National Faceless Appeal center, Delhi [hereinafter referred as “NFAC”] dated 13-01-2023 for the assessment year 2014-15 wherein the assessee has raised the following grounds of appeal.

“ 1. That under the facts and circumstances of the case, the ld. CIT(A) has erred seriously in sustaining the action of the ld. AO in disallowing the short term capital loss of Rs. 3,41,083/- declared by the appellant on shares of luminaire tech considering the same as an accommodation entry.

2. That under the facts and circumstances of the case the ld. CIT(A) has erred seriously in sustaining the action of the ld. AO in making addition of Rs. 6,821/- on account of alleged commission paid by the appellant for arranging accommodation entry in the form of capital loss in the shares of luminaire tech.”

2.1 The brief facts of the case are that the assessee is an individualand earns income from profession, income from house property and certain capital gain etc. The assessee had filed his return of income 16.01.2015 by declaring total income at Rs. 2,35,160/-. The case of the assessee was selected for scrutiny through CASS and notice u/s 143(2) dated 18.09.2015 was issued. Further notices u/s 142(1)along with query letter were issued on 24-05-2016 and duly served upon the assessee fixing the date for hearing on02-06-2016. In compliance thereof, the assessee attended hearing from time to time and furnished the requisite details as desired by the AO. It is noted from the assessment order that the AO on the basis of the information received from Investigation Wing, Calcutta/Mumbai formed an opinion that the short term capital loss declared by the assessee on shares of Luminaire Technologies for Rs. 3,41,083/- was bogus and hence a show cause notice was issued to the assessee. An explanation was furnished by the assessee but the AO was not convinced and he disallowed such declared short term capital loss and he has also considered a sum of Rs. 6,821/- being assumed commission paid by the assessee for such accommodation, as unexplained expenditure of the assessee. The relevant findings of the AO in connection with disallowances of both the grounds are mentioned as under:-

‘’(6) In view of detailed analysis, in foregoing Paras, of the evidences and the judicial pronouncements, it has been established beyond doubt that assessee has booked at short loss on sale of shares of M/s Luminaire Tech during the year under consideration, camouflaged as Short-term Capital loss, which has been proved a bogus entry.

This way, the assessee was in receipt of bogus short term capital loss of Rs. 3,41,083/- for which he failed offer any satisfactory explanation, especially in light of credible evidences gathered by the department. The sum of Rs. 3,41,083/- claimed as the assessee as short term capital loss is being hereby disallowed and added to the total income of the assessee. In light of detailed discussion on the issue, I am satisfied that the assessee has concealed his income and furnished inaccurate particulars of income and therefore, penalty proceedings u/s 271(1)(c) of the Income-tax Act, 1961 are initiated separately.[Addition of Rs. 3,41,083/-]

(7). The reply of the assessee on another issue i.e. commission paid in lieu of bogus entry of short-term Capital Loss, has been considered but not found tenable. The submission of the assessee that he has not entered into any accommodation or bogus transaction hence question of commission on this transaction does not arise is far from truth. The assessee has failed to explain that why any syndicate which includes many members of different cities working in different capacity will take so much pain to arrange bogus entry of STCG for the assessee without any benefit derived from him. In the search/ seizure operation conducted by the department, the whole scam of providing bogus STCG/LTCG was unearthed. These syndicate members which include promoters/ Directors of penny stock company, share brokers etc. have admitted that they have provided bogus LTCG /STCG entry in lieu of commission.

Looking to the facts & circumstance of the case, it is held that the assessee has paid commission @2% of STCL value of shares of M/s UNNO Industries Limited and paid a sum of Rs.6,821/- (2% of 3,41,083/- STCL value) and the assessee has not offered any satisfactory explanation about the source of the same. This sum of Rs. 6,821/- is treated as unexplained expenditure u/s 69C of the Income-tax Act, 1961 and added to the total income of the assessee for the year under consideration. Looking to the nature of issue involved and the evidences with the undersigned, I am satisfied that the assessee has concealed particulars of income and therefore, penalty proceedings u/s 271(1)(c) of the income-tax Act, 1961 are initiated separately on this issue.[Addition of Rs. 6,821/-].”

2.2 In first appeal, the ld.CIT(A) has confirmed the action of the AO as to both the grounds by observing as under:-

‘’5.2 Ground 2 (now as Ground No.1 before ITAT)

‘’5.2.1 It is seen that the appellant has relied upon its documentation maintained with respected to the disputed transactions i.e, transactions through cheque, contract notes etc. and has relied upon certain decisions as quoted above. As has been discussed in paragraphs above, the AO has not merely relied upon the statements but discussed the facts of the instant case as well as the surrounding circumstances in great detail in the assessment order. Further in view of detailed discussion in the assessment order of the claims made by the appellant and rebuttal thereof by the AO, it cannot be said that the AO had not issued any show cause to the appellant before making the impugned addition, which is under dispute. The facts of the decisions cited by the appellant are different from the facts of the instant case

5.2.2 As can be seen based on details filed by the appellant that in the decision of Hon’ble Rajasthan High Court in the case of CIT Vis SmtSumita Devi-268 CTR 351 (2014); the relevant facts were different. In that case, the AO had observed that the companies where shares were allegedly dealt with were not very well known and it was entirely unlikely that there was huge rise in the price in the price as being of manipulation of stock broker. The Hon’ble High Court had highlighted that AO’s findings are based more on presumption rather than on cogent proof. However, in our case the AO has highlighted thee modus operandi with admission of the main person /director of the company Luminaire Technology that the Company was not doing any worthwhile business but was engaged in giving accommodation entries against commission. Sufficient and cogent evidences have been recorded by the appellant. Similarly the facts of the other decisions cited by the appellant are different from the facts of the instant case. As mentioned in Para 5 of the assessment order, the AO has made own analysis and also relied upon the evidences detected based on survey conducted on 03.06.2015 in the business premises of M/s Luminaire Technology Ltd and other evidences highlighted in assessment order The AO has also pointed out that SEBI has suspended this particular scrip from trading in BSE/NSE

5.2.3 Further reliance is placed on the recent decision of Hon’ble Calcutta High Court in the case Swati Bajaj and others (IA no. GA/2/2022 dated 14/6/2022)wherein the Hon’ble Court has taken together a group of cases and have noted the prevalence of entry operators and brokers providing accommodation entries and action taken by the Income Tax department against such entry operators and shell companies/ penny stock companies which are engaged in providing accommodation entries and have allowed/ partly allowed the appeals of the Revenue. Further the decision of the Hon’ble High Court of Delhi in Suman Poddar Versus Income Tax Officer (ITO) which was affirmed by the Hon’ble Supreme Court in (2019) 112 taxman.com 330 is applicable to the facts of the instant case. The facts of the instant case are on similar footing.

5.2.4 Based on the above discussion, Ground No 2 raised by the appellant is dismissed.”

5.3 Ground 3 (now as Ground No.2 before ITAT)

5.3.1 It is seen that in this ground the appellant has disputed the addition of Rs 6,621 being alleged commission spent for arranging the accommodation entry in the form of STCL. It is seen that the payment of commission is a natural corollary of the finding of obtaining accommodation entry through the stated modus operandi, which has been discussed. In the earlier grounds of appeal, the stand of the AO in holding that the assessee has obtained accommodation entry has already been found correct. As discussed earlier, the decision of Hon’ble Calcutta High Court in the case Swati Bajaj and others (IA no. GA/2/2022 dated 14/6/2022) is relevant here wherein the Hon’ble Court has taken together a group of cases and have noted the prevalence of entry operators and brokers providing accommodation entries against commission has been highlighted and action taken by the Income Tax department against such entr operators and shell companies/ penny stock companies which are engaged in providing accommodation entries and have allowed/ partly allowed the appeals of the Revenue.

5.3.2 Based on the above discussion, Ground No 3 raised by the appellant dismissed.”

2.3 During the course of hearing, the ld. AR prayed that the ld.CIT(A) has erred in confirming the additions as made by the AO for which the ld. AR filed the following written submissions in connection with both the grounds and also relied upon the case laws.

‘’The appellant wishes to submit as under :-

1. In para 5(e) at page 39 of the assessment order the ld. AO states that the entire scheme gets revealed after the above analysis that the huge capital gain earned by the assessee within a very short period of time by investing in a penny stock  i.e. Luminnaire Technologies Ltd. whose fundamentals had no support for the premium it commanded, was neither the result of a coincidence nor of a genuine investment activity but were carried through well planned and executed scheme in which the company, the bankers and buyers and sellers of the scrip worked in tandem to achieve the predetermined objectives. This shows that the ld. AO merely used cut and paste for framing the order without verifying the relevance of the above said para which had been framed for assessing a case of bogus capital gain and not capital loss.

2. The ld. AO has acted merely on the basis of information in his possession without linking the same with the appellant and hence his action was with pre conceived notion of making disallowance.

3. No material, statements of parties were shares with the appellant and hence reliance put thereon without allowing opportunity to appellant to examine the same is nor sustainable.

4. The appellant was not allowed opportunity to cross examine the persons on whose statements reliance was placed by the ld. AO.

5. Considering the facts that the appellant is a regular investor in shares and securities and he had invested in shares of Luminnaire Technology for earning a but immediately within a short span of time after realizing about wrong decision he sold all such shares and incurred some loss. Under such circumstances no presumption can be formed for taking transactions in this share as accommodation entry. Further for a small loss (and not profit) no ulterior motive can be assumed with the appellant.

6. The appellant had purchased shares through SEBI registered broker namely Hem Securities Ltd. and also sold the same through it within a span of less than a month. He had purchased shares through contract note dated 17.02.2014 and 18.02.2014 (APB 7­8) and sold all the shares through contract note dated 13.03.2014 (APB 9).

7. There is nothing to prove that any unaccounted cash changed the hands.

8. The shares purchased by the appellant were credited in his D Mat account and same were transferred there from (APB 10-11).

9. All the transactions for purchase and sale of shares through above named broker were settled only through banking channel.

10. No opportunity was provided to the appellant to verify whether his name appears in the statements of the persons relied upon by the ld. AO as well as CIT (A). Under such circumstances the action of the ld. AO as well as ld. CIT (A) is required to be quashed.

Reliance is placed on following judicial pronouncements of this Hon`ble Bench :-

1. Nilesh Agarwal HUF v/s ITO (ITA Nos. 222-223/JP/2020 vide order dated 09.02.2021)

2. Meghraj Singh Shekhawat v/s DCIT (ITA No. 444/JP/2017 vide order dated 07.03.2018)

3. DCIT v/s Saurabh Mittal (ITA No. 16/JP/2018 vide order dated 29.08.2018)

4. ITO v/s Lalit Kumar BIyani (ITA No. 1153/JP/2019 vide order dated .02.2020)

Reliance is also placed on the judgements of the Hon`ble Rajasthan High Court in following cases :-

1. PCIT – 1, Jaipur v/s Pramod Jain and Others (DB IT Appeal no. 209/2018 vide order dated 24.07.2018)

2. CIT v/s Pooja Agarwal (ITA No. 385/2011 vide order dated 11.09.2017)

Therefore, the treatment of the Short Term Capital Loss as done by the ld. AO and sustained by the ld. CIT (A) is liable to be quashed both in law and as per facts of the case.

This Ground No2 is consequential ground which is dependent on the judgement of this Hon`ble Bench on ground no. 1. Further to that it is submitted that the ld. AO made this addition merely on his presumptions without having any material in his hand about incurring of such cost by the appellant. It is therefore sincerely submitted that the orders of the ld. AO as well ld. CIT (A) may kindly be quashed and oblige.”

2.4 On the other hand, the ld. DR has relied upon the order of the ld. CIT(A) 2.4.1 The details regarding the transaction of D Mat account relating to Luminaire

Technologies Ltd. has been explained by the ld. AR of the assessee as under:-

Shares purchased on

17-02-2014 & 18-02-2014 (APB 7 & 8)

During the course of hearing, the Bench further raised query as to why there was time gap between the date of purchase of shares and credit of such shares in the D Mat account of the assessee as the shares were purchased on 17-02-2014 & 18-02­2014 (APB 7 & 8) and were credited in D Mat Account on 11-03-2014 (APB 11)i.e. after around 1 month from date of purchase. In response to the same, the ld. AR submitted that the assessee is a regular client of the Broker namely Hem Securities Ltd. and for such regular clients, the Broker provides a facility that their purchased shares are received in Pool Account of the Broker and on immediate sale of the shares, same are transferred from Pool Account. This facility is provided to save exit charges levied by CDSL and due to this reason, the purchased shares of the assessee of Luminaire Technologies Ltd. were received in Pool Account of the Broker and were transferred in the D Mat account of the assessee on 11-03-2014 from Pool Account. This fact stands proved from the narration mentioned against entry dated 11-03-2014 in account of Luminaire Technologies Ltd. in the D Mat account of the assessee (APB 11) as under:-

‘’TXN WITHIN SAME CDSL DP (BO TO BO) trade Id 286917 Tm id 566296 Counter.”

The above narration shows that shares of Luminaire Technologies Ltd. were received in D Mat account of the assessee from some other account maintained with same CDSL DP. Hence, it is proved that the shares of Luminaire Technologies Ltd. were routed through D Mat Account of the assessee only

2.5 We have heard both the parties and perused the materials available on record including the case laws cited by the assessee with written submission.It is verified from the records of the case that as per ledger account of the assessee in the books of the broker namely Hem Securities Ltd. (APB-13) following cheques were given by the assessee against purchase of shares of Luminnaire Technologies Ltd. :-

1. 19-02-2014 Cheque No. 14 of HDFC Bank Rs.2,00,000/-

2. 20-02-2014 Cheque No. 16 of HDFC Bank Rs. 73,387/-

3. 20-02-2014 Cheque No. 15 of HDFC Bank Rs. 6,00,000/-

It is also noted that same details alongwith bank statements were submitted by the assessee before the AO as mentioned on in para 4© and 4(e) at page 21 of the assessment order and this fact has not been disputed by the AO. We also noted that the broker had paid a sum of Rs.5,13,940/- to the assessee on18-03-2014 through online bank transfer against sale consideration of shares of Luminnaire Technologies Ltd. which is evident from APB 13. The assessee had submitted all relevant bank statements to the AO as mentioned at 21 of the assessment order. Hence, it is undisputed fact that the transaction of purchase and sale of shares of Luminnaire Technologies Ltd. were undertaken through banking channel. We have also verified that on purchase and sale of shares ofLuminnaire Technologies Ltd., the assessee had paid Securities Transaction Tax (for short ‘STT’) which is evident at APB 7 & 8 and these are the purchase bills issued by the Broker and APB-9 denotes the sale bill.It is noted from the assessment order that the assessee had purchased 25000 shares of Luminnaire Technologies and sold the same after a month for which the assessee had to incurred a short term capital loss of Rs.3,41,083/-. The AO based on information about transactions in this company to be bogus determined such claim of Short Term Capital Loss as bogus and thus a show cause notice was issued to the assessee. However, the assessee submitted the plausible explanation before the AO but he was not convinced with the submissions of the assessee and disallowed such declared short capital loss and he has also considered a sum of Rs.6,821/- as assumed commission paid by the assessee for such accommodation as unexplained expenditure of the assessee. In first appeal, the ld.CIT(A) has confirmed the action of the AO. We have also gone through para 5 (3) page 39 of the assessment order wherein the AO observed that… Thus the entire scheme gets revealed after the above analysis that the huge capital gain earned by the assessee within a very short period of time by investing in a penny stock i.e. Luminnaire Technologies Ltd. whose fundamentals had no support for the premium it commanded, was neither the result of a coincidence nor of a genuine investment activity but were carried through well planned and executed scheme in which the company, the bankers and buyers and sellers of the scrip worked in tandem to achieve the predetermined objectives.We observed that in this case there is no capital but it is a loss incurred by the assessee. Therefore, we note that one prudent men will indulge in the purchase and sale of securities where the ulterior motive is not to earn the capital gain. Thus, the blame of the lower authorities considering the assessee as Coterie of the person calming the exempt capital gain is not correct based on the facts. It is also noted from the available record that the assessee had purchased shares through SEBI registered broker namely Hem Securities Ltd and the same were not physical form as it would be in the case of the penny stock companies and also there is not split corporate action. Thus, we note that the assessee had purchased the shares through contract note dated 17-02-2014 and 18-02-2014 (APB 7-8) and sold all the shares through contract note dated 13-03-2014 (APB 9 ). It is also noteworthy to mention that shares purchased by the assesee were credited in his D Mat account and they were transferred accordingly. It is also noted from the available records that all the transactions for purchase and sale of shares through the broker Hem Securities were settled only via banking channel. There appears no ambiguity in the sale and purchase of shares through the SEBI brokers Hem Securities and all the transactions took place through banking channel and on the transactions of purchase and sale of Shares, STT had been paid having time and date stamp. Hence, taking into consideration of the above facts and circumstances of the case, we do not concur with the findings of the ld. CIT(A) on the issue in question. Thus Ground No. 1 of the assessee is allowed.

3.1 As regards the Ground No. 2 of the assessee, it is consequential ground as we have not considered the purchase and sale of shares as bogus transactions then there is no question arises as to making addition by the AO amounting to Rs.6,821/- on account of commission paid by the assessee. Hence, the Ground No. 2 of the assessee is allowed.

4.0 In the result, the appeal of the assessee is allowed

Order pronounced in the open Court on 30 /06/2023.