Addition u/s 69C merely because assessee dealt with suspected scrips is unsustainable

ACIT Vs Munish Financial (ITAT Mumbai)

ITAT Mumbai held that merely because assessee has dealt with suspected scrips, addition u/s 69C is not justified as purchase and sale of scrips were through recognized stock exchange and payments were through banking channel only.

Facts- During the assessment proceedings, AO observed that assessee has purchased various scrips which are suspected scrips as penny stock. He observed that assessee has claimed long term capital loss in the current year and will setoff short term capital loss against some long term capital gain or set off losses with business profit. This quantum of huge long term capital loss was found suspicious and in this regard detailed investigation was undertaken by the investigation wing.

AO issued show cause notice why the above scrips should not be treated as bogus transactions and the loss claimed by the assessee should not be entertained. In this regard assessee has filed detailed reply stating that the long term capital loss generated was genuine. However, AO rejected the same and made addition of 2% of bogus loss as being commission paid by the assessee in order to facilitate the above transactions u/s. 69C of the Act as unexplained expenditure to the extent of ₹.9,77,134/-.

CIT(A) deleted the said addition. Being aggrieved, revenue has preferred the present appeal.

Conclusion- Held that assessee has submitted all the relevant documents of purchase and sale of these scrips in the recognized stock exchange and all the details were submitted before AO including the payments were made through banking channels only. AO completely overlooked the various documents and supporting evidences submitted by the assessee and he has not analysed these documents and he merely proceeded to make the addition based on the investigation carried on by the investigation agencies and he did not eventually make any investigation on the various documents submitted before him, merely because assessee has dealt with suspected scrips, therefore he has proceeded to make the disallowance.

Observed that assessee is a regular trader in various scrips and particularly in this year assessee has dealt with more than 150 scrips and the transactions of the assessee in trading of shares having turnover of more than ₹.528.9 crores and also having substantial dividend and speculation income during this year. This proves to show that assessee is a regular investor and may be assessee has dealt with suspected scrip merely on the basis of movement of share prices and there is nothing on record to prove that assessee has anywhere involved in any types of irregularities. Therefore, we do not find any reason to interfere with the findings of the Ld.CIT(A). Accordingly, ground raised by the revenue is dismissed.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

1. These appeals are filed by the Revenue against order of the Learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi [hereinafter in short “Ld.CIT(A)”] dated 31.08.2022 for the A.Ys.2014-15 and 2015-16.

 raised in both these appeals are identical, therefore, for the sake of convenience, these appeals are clubbed, heard and disposed off by this consolidated order. We are taking Appeal in ITA.No. 2637/MUM/2022 for Assessment Year 2014-15 as a lead appeal.

3. Brief facts of the case are, assessee filed its return of income A.Y.2014-15 on 27.09.2014 declaring taxable income at ₹.NIL. The return of income was processed u/s. 143(1) of Income-tax Act, 1961 (in short “Act”). The case was selected for scrutiny and notices u/s. 143(2) and 142(1) of the Act were issued and served on the assessee. In response Authorised Representative of the assessee attended and submitted the relevant information as called for.

4. Assessee is a firm engaged in the business of trading in Shares, F&O, Commodity and Derivatives. During the assessment proceedings Assessing Officer observed that assessee has purchased various scrips which are suspected scrips as penny stock and he has listed the details at Page Nos. 2 to 5 of the Assessment Order. He observed that assessee has claimed long term capital loss in the current year and will setoff short term capital loss against some long term capital gain or set off losses with business profit. This quantum of huge long term capital loss was found suspicious and in this regard detailed investigation was undertaken by the investigation wing, Kolkata into 84 penny stocks and has given detailed findings indicating bogus LTCG/STCL entries claimed by large number of beneficiaries. The Assessing Officer heavily relied on the modus operandi involving operators, intermediaries and the beneficiaries has been detailed in the investigation report prepared and disseminated by the Kolkata Directorate. Further, he analysed the investigation wing report in his Assessment Order and relied on other ITD Data, BSE data, money control website and various judicial decisions in his order and he discussed elaborately the modus operandi and characteristics of the penny stock scrips. Since assessee has dealt with buying and selling of suspected scrips as mentioned in his order at Page Nos. 2 to 5 of the Assessment Order and he issued show cause notice why the above scrips should not be treated as bogus transactions and the loss claimed by the assessee should not be entertained. In this regard assessee has filed detailed reply stating that the long term capital loss generated was genuine.

5. After considering the submissions of the assessee, Assessing Officer rejected the same and he observed that the scrips purchased by the assessee and subsequent sale by the assessee are suspected scrips and in this regard investigation made by various directorates, statements recorded during the assessment proceedings are considered and the Statement also recorded from the assessee. He further observed that from the discussion in the preceding paras in the Assessment Order clearly indicate that assessee in their books claimed long term capital gain / losses which are pre-arranged method to evade taxes and launder money. Once again Assessing Officer by merely relying on the investigations of other agencies he has disallowed claim made by the assessee as long term capital loss and further, he made addition of 2% of bogus loss as being commission paid by the assessee in order to facilitate the above transactions u/s. 69C of the Act as unexplained expenditure to the extent of ₹.9,77,134/-.

6. Aggrieved assessee preferred an appeal before the Ld.CIT(A) and before the Ld.CIT(A) assessee has made a detailed submission which Ld.CIT(A) has reproduced the same in his order at Page No. 10 to 24 of the appellate order. After considering the detailed submissions, Ld.CIT(A) observed that assessee has contended on two aspects; first aspect is regarding denial of natural justice for not providing copy of statements on which the Assessing Officer intended to rely upon and not provided an opportunity to cross examining the persons who have given these statements. The second aspect is, Assessing Officer has not considered the submissions / documents submitted during the course of the assessment before discharging the order in a very routine manner.

7. Ld.CIT(A) observed in his order that Assessing Officer has heavily relied on the investigation reports of Kolkata wing during their investigations of penny stock. He proceeded to disallow the loss claimed by the assessee merely relying on the above said report and Assessing Officer has not provided any information or any statement based on which he is disallowing the claim of the assessee which in-fact is against the principles of natural justice and further, he observed that assessee has submitted all the relevant information with regard to purchases and sale of the suspected scrips. He observed that assessee has purchased all the shares through regulated market i.e., Bombay Stock Exchange (BSE) and paid all the payments through banking channels only and assessee has submitted all the relevant information in support of the above transaction and further, assessee has sold all the scrips only through recognized stock exchange after complying Indian Contract Act, 1872. All the transactions are duly reflected in DMAT statements and are through authorised brokers who are duly registered with SEBI and BSE. Assessee also made payment of Security transaction tax and requisite details informed in Form 10DB was duly submitted before the Assessing Officer. Ld.CIT(A) relied on various decisions in relation to various above said suspected scrips in which the Coordinate Bench and various ITAT has deleted and decided the issue in favour of the respective assessee’s and he further observed that assessee is regularly dealing in shares and in this year assessee has dealt with 150 scrips and out of these only few of these scrips are suspected scrips. He observed that it is fact on record that assessee has dealt with all these scrips. However, all these transactions only routed through banking channels and nothing was proved against the assessee that assessee has dealt with any suspected transactions. Therefore, he held that the transactions entered by the assessee are genuine transactions. Accordingly, he allowed the appeal filed by the assessee. Further, he deleted the commission on total suspected transactions made by the Assessing Officer u/s. 69C of the Act.

8. Aggrieved revenue is in appeal before us raising following grounds in its appeal: –

1. “Whether on the facts and circumstances of the case and in law the Ld.CIT(A) has erred in deleting addition of Rs. 1,15,88,635/ without appreciating the fact that the assessee has indulged in transactions by way of colourable device to book Long Term Capital Losses which is not permitted by the Income Tax Act as enunciated by Hon’ble Supreme Court in the case of Mc’Dowell & Co. 154 ITR 148.”

2. “The appellant prays that the order of the Ld.CIT(A) on the above grounds be set aside and that of the AO be restored.”

9. At the time of hearing, Ld.DR brought to our notice Page No. 33 of the Assessment Order and submitted that it is no doubt that assessee has dealt with various scrips which are proved to be penny stock scrips by the various agencies. In this regard she brought to our notice Page No. 7 of the Assessment Order in which Assessing Officer has relied on the annexure of the various scrips in which assessee has dealt clearly indicates that all the scrips which are dealt by the assessee are penny stock owing to the characteristics of not having proper financials and without having fundamentals the prices of the shares were jacked up in short period of time. Further, she submitted that various scrips were purchased by the parties through off market and he brought to our notice Page No. 5 of the Assessment Order in which Assessing Officer has analysed the same in detail. Further, she brought to our notice Page No. 32 of the Ld.CIT(A) order and he submitted that Ld.CIT(A) has merely accepted the various submissions made by the assessee and relied on the various decisions of the Hon’ble ITAT Mumbai bench and other ITAT benches and came to the conclusion that the loss claimed by the assessee from sale of these scrips as genuine transaction. She submitted that it is fact on record that assessee has dealt with penny stock. Therefore, assessee is one of the beneficiaries and taken advantages, in this regard she relied on the decision of the Hon’ble Calcutta High Court in the case of Pr.CIT v. Swati Bajaj dated 14.06.2022, Hon’ble Bombay High Court order in the case of Sanjay Bimalchang Jain L/H of Shantidevi Bimalchand Jain v. Pr.CIT dated 10.04.2017. Ld.DR also submitted a SEBI report on the various scrips dealt by the assessee, copy of the same are placed on record.

10. On the other hand, Ld. AR submitted as under: –

“1. The Respondent is a partnership firm, carrying on business of trading in shares, securities and derivatives, commodities and currency market. All transactions are carried out on the platform of recognised Stock Exchanges through recognised Brokers, who are monitored by Stock Exchanges and by SEBI.

2. During AY 2014-15, the assessee has entered into delivery trading in shares and securities in more than 65 scripts with turnover of more than Rs. 47.50 crores. Further assessee has earned income from Dividend and speculation income amounting to Rs. 41.35 Lacs and Rs. 13.38 Lacs, respectively.

3. Further during AY 2015-16, the assessee has entered into delivery trading in shares of more than 150 scripts with turnover o f more than Rs. 528,9 crores. Further assessee has also earned income from Dividend and speculation income amounting to Rs. 1.12 Crores and Rs. 89.17 Crores respectively.

4. The Ld. AO received information from investigation wing, Kolkata, that penny stock companies acquired by the beneficiaries of LTCG at very low prices through the route of preferential allotment and off market transaction. It was alleged that the assessee has transacted in the penny stock companies for the purpose of claiming bogus LTCG/ STCG in AY 2014-15 & 2015-16.

5. The very basis of assessment by the Ld. AO right from the formation of allegation to analysis of case to conclusion of case was purely on the basis of the following major allegations w.r.t share transactions of the assessee in the alleged bogus companies.

• • Claimed LTCG/STCG
  • Shares purchased through Preferential allotment.
  • Shares purchased through off market transactions
  • Shares received through amalgamation/ merger.
  • Rigging of share prices and jacked up, to earn LTCG.
  • Holding the shares for minimum 1 year.

6. However, the assessee submits that none of the above facts are applicable in case of the assessee. The assessee HAS NOT:

• • Purchased any of the alleged shares through Preferential Allotment/ off Market/ amalgamation & merger.
  • Claimed any LTCG/STCG/STCL/LTCL in its Return of Income.
  • necessarily held the shares for more than 1 year.

7. A major portion of the impugned assessment order passed under section 143(3) of the Act is a mere reiteration of information received by Investigation Wing, Kolkata regarding investigation conducted in 84 alleged penny stock without any specific allegation on the assessee.

8. The assessee submits that each and every share transaction is supported by a contract note. Each contract cum bill has a unique contract number, settlement number, trade date, pay in date and pay out date. Further each trade of the Assessee has a unique order number, order time, trade number, and trade time. STT, Stamp Duty, Service Tax and other charges in respect of each transaction is paid and is reflected in all the contracts cum bills.

9. All these details prove that no pre dated contract notes were issued by the brokers to the Assessee and there were no manipulations in the share transactions entered into by the Assessee.

10. The Ld. A.O. alleged that the assessee has earned LTCG from sale of the alleged shares and proceeded to make the assessment on that very assumption itself. However, as mentioned above, assessee being a trader does not have any capital gains income during the year. In the Return of Income of the assessee, there is no capital gains taxation. The assessee only has income from business and profession. All profits and losses from sale of shares are offered for taxes under the head business and profession. Therefore, the primary contention of the Ld. AO that assessee has earned LTCG is itself incorrect.

11. The Ld. AO has also provided various lists of alleged beneficiaries/ activities banned by SEBI list of preferential allotees/ promoter related entities and list of exit provides in his assessment order. However, the name of the assessee or of any of the partners of the assessee firm does not appear in any of the list provided by the Ld. AO in his order.

12. The Ld. AO purely relied on forwarded information and proceeded to make the addition. The assessee specifically requested for statement copies & cross objection of parties on whose statement the Ld. AO relied to make the assessment order, but no opportunity to cross examine was given by the Ld. AO. Reliance is placed on the Hon’ble Supreme Court in the case of Kishinchand Chellaram v CIT (1980) 125 ITR 713 (SC), wherein it was held that “though the proceedings under the Income-tax Act are not governed by the strict rules of evidence, the department is bound to afford an opportunity to controvert and cross examine the evidence on which the department places its reliance Opportunity of cross examination must be given. The consequence of breach of natural justice is that either the addition is void.”

13. During the course of the assessment proceedings, the statement of partner of assessee firm Mr. Hemal Jhaveri was also recorded in response to summons u/s 131 of the Act. Mr. Jhaver i explained the entire business activities of the firm and reiterated that all trades are genuine and done on the platform of the recognized stock exchanges. The Ld. AO accepted the explanation given by the partner and made no adverse comment on the statement given by the partner of the assessee firm.

14. Without prejudice, assessee has incurred business loss in more than 16 companies in AY 2014-15 & 34 companies in AY 2015­16. Merely the fact that the assessee has incurred losses could not sacrosanct to its being non genuine. Being a trader, the fundamentals of the stocks are not the only benchmark to trade in a scrip. The trader executes the trades in the stock by seeing the technical indicators, global factors and market sentiments prevailing at that time, and may take the position of the scrips considering the short term period also.

15. Further, the assessee submitted all the documentary to substantiate the genuineness of the transactions of purchases, and sales of shares before the Ld. AO & CIT(A).

a) Copies of contract notes for sale and purchase of the all the above scripts evidencing that all buying & selling transactions in the all the scripts are carried out on a recognised stock exchange through authorised brokers who are duly registered with SEBI & BSE

b) Details of Sales & Purchase of the above script with source of payments made for purchase of the above script.

c) Copies of Ledger A/c of the Assessee in the books of the share broker wherein entries for purchase and sales of the above scripts are duly reflected.

d) Copies of Demat transaction statement reflecting trades in the above scripts.

e) Copies of Bank Statements duly marking payment made and received from the brokers for purchase and sales of the above scripts respectively.

The same were neither considered nor controverted by the Ld. AO. The assessee had duly discharged its onus by submitting overwhelming evidences to substantiate the genuineness of its transactions, but the Ld. A.O. conveniently chose to ignore the same.

16. Further, various courts, on similar facts as that of the present case, deciding on the alleged scrips in which the assessee has traded, have held the transactions to be genuine. The list of cases in which the alleged companies have been dealt with is provided as under.

The assessee would also like to rely on the following judicia l precedents where cases on similar facts have been decided by various Benches/Courts:

• • Nishith Rameshchandra Shah vs ITO (ITA No. 1116/Mum/2022 (ITAT Mum))
  • Lalita Guatamkumar Rathod vs ITO (ITA No. 283/Mum/2022 (ITAT Mum))
  • Swati Luthra and Others vs ITO (ITA No. 6480/Del/2017 (ITAT Delhi))
  • CIT vs Shyam R Pawar (ITA.1568 to 1571 of 2012 (Bom HC))
  • CIT vs Smt Jamnadevi Agarwal (ITA Nos 40 to 42 of 2010 (Bombay HC))
  • PCIT vs Parasben Kasturchand Kochar (SLP 6782 of 2021 (Supreme Court) R/Tax Appeal No. 204 of 2020 (Gujarat HC))
  • CIT vs Sumitra Devi (229 Taxman 67 (Rajasthan High Court))
  • ITO vs Shri Jimeet Vipul Modi (ITA No. 4297/Mum/2018 (ITAT Mum))

Therefore, on the basis of the facts of the case, the submission of the respondent and the judicial precedents stated above, it is our humble submission to uphold the order of Ld. CIT(A) and dismiss the appeal of the appellant. ”

11. Considered the rival submissions and material placed on record, we observe that assessee has dealt with various scrips particularly, Global Infratech Limited (GBL), Luminaire Technologies Limited, UNNO Industries Limited and Shree Shalin Textiles Ltd which are suspected to be penny stock and it is also fact on record that these scrips are categorized as penny stock as per the investigation wing, Kolkata reports and Assessing Officer has heavily relied on these reports and report of SEBI to come to the conclusion that the various scrips dealt with by the assessee are penny stock and he discussed various analysis made by the investigation wing of Kolkata and other agencies and relied on various submissions of various dealers in these scrips and proceeded to disallow the claim made by the assessee on the long term capital loss. We also notice from the record that assessee has submitted all the relevant documents of purchase and sale of these scrips in the recognized stock exchange and all the details were submitted before the Assessing Officer including the payments were made through banking channels only. The Assessing Officer completely overlooked the various documents and supporting evidences submitted by the assessee and he has not analysed these documents and he merely proceeded to make the addition based on the investigation carried on by the investigation agencies and he did not eventually make any investigation on the various documents submitted before him, merely because assessee has dealt with suspected scrips, therefore he has proceeded to make the disallowance. We observe from the record that assessee has purchased and sold these shares through recognized stock exchange and authorised brokers and nowhere it is brought on record that assessee is one of the party involved in the entry provider or involved in manipulating the prices or it is proved that assessee is one of the exit provider. It is fact on record that all the scrips in which assessee has dealt with were already proved to be a non penny stock based on the various decisions of the various Hon’ble High Courts and Tribunal benches. Apart from that, we observe that assessee is a regular trader in various scrips and particularly in this year assessee has dealt with more than 150 scrips and the transactions of the assessee in trading of shares having turnover of more than ₹.528.9 crores and also having substantial dividend and speculation income during this year. This proves to show that assessee is a regular investor and may be assessee has dealt with suspected scrip merely on the basis of movement of share prices and there is nothing on record to prove that assessee has anywhere involved in any types of irregularities. Therefore, we do not find any reason to interfere with the findings of the Ld.CIT(A). Accordingly, ground raised by the revenue is dismissed.

12. In the result, appeal filed by the Revenue is dismissed.

ITA.NO. 2638/MUM/2022 (A.Y. 2015-16)

13. Coming to the appeal relating to A.Y. 2015-16, since facts in this case are mutatis mutandis, therefore the decision taken in A.Y. 2014-15 is applicable to this assessment year Years also. Accordingly, this appeal is dismissed.

In the result, appeals filed by the Revenue are dismissed. Order pronounced in the open court on 31^st March, 2023