AO Must Verify Documents Before Disallowing Business Loss: ITAT Ahmedabad

Suprinit Tradinvest Pvt. Ltd. Vs ITO (ITAT Ahmedabad)

Introduction: The Income Tax Appellate Tribunal (ITAT) Ahmedabad addressed the case of Suprinit Tradinvest Pvt. Ltd. Vs Income Tax Officer (ITO) concerning the disallowance of business loss in share transactions. The ITAT emphasized that Assessing Officers (AO) should not disallow business loss without proper verification of documents. This article delves into the details of the case, the grounds of appeal, and the ITAT’s directive for thorough document scrutiny.

Detailed Analysis: Suprinit Tradinvest Pvt. Ltd., engaged in trading shares, filed an appeal against the order of the CIT(A), National Faceless Appeal Centre, for the Assessment Year 2014-15. The AO disallowed a business loss of Rs. 1,53,890, alleging sham transactions in certain scrips. The AO’s decision was based on the belief that these transactions were pre-arranged and controlled by entry providers.

During the assessment proceedings, the chartered accountant of the assessee provided necessary details and responses. However, the AO, in paragraph 4.8 of the assessment order, referred to statements of entry providers, exit providers, and brokers, alleging the transactions were sham. The AO concluded that the claimed loss on trading in specific shares was bogus and, consequently, disallowed.

The CIT(A) upheld the AO’s decision, leading the assessee to file an appeal before the ITAT. The appellant argued that the AO failed to discharge the onus of proving the transactions were non-genuine and based the disallowance on suspicion rather than concrete evidence. The appellant submitted investors’ reports, contract notes, and evidence of genuine transactions through SEBI registered intermediaries.

The ITAT noted that the AO did not adequately address the documentary evidence presented by the assessee. Despite fluctuations and data increases mentioned by the AO, the tribunal emphasized that such reasons were insufficient for disallowing the business loss. The ITAT held that the AO’s decision lacked justification, and the appeal of the assessee was allowed.

Conclusion: The ITAT Ahmedabad, in the case of Suprinit Tradinvest Pvt. Ltd. Vs ITO, highlighted the importance of thorough document verification before disallowing business losses in share transactions. The tribunal emphasized that suspicions alone were insufficient grounds for such disallowances. This decision reiterates the significance of concrete evidence in tax assessments, ensuring fairness and justice in the taxation process.

FULL TEXT OF THE ORDER OF ITAT AHMEDABAD

This appeal is filed by the Assessee against order dated 08.06.2023 passed by the CIT(A), National Faceless Appeal Centre (NFAC), Delhi for the Assessment Year 2014-15.

2. The Assessee has raised the following grounds of appeal :-

“1. That the Ld. CIT(A) erred in law and in the facts of the case in confirming the order of the AO in disallowing business loss of Rs. 1,53,890/-.

2. That the Ld. CIT(A) erred in law and in the facts of the case in confirming the order of the AO in not granting opportunity of cross examination of persons as demanded by the appellant.”

3. The assessee company is engaged in the business of trading in shares and Return of income for the Assessment Year 2014-15 was filed on 30.09.2014 declaring total income at Rs.5,08,113/-. The return of income was processed under Section 143(1) of the Income Tax Act, 1961. The case was selected for scrutiny under CASS and statutory notice under Section 143(2) of the Act was issued on 28.08.2015 which was duly served upon the assessee. Notice under Section 142(1) of the Act dated 16.08.2016 alongwith questionnaire was issued to the assessee and served on the assessee. In response to the notices, the Chartered Accountant of the assessee attended the assessment proceedings from time to time and furnished the details called for. After verification of the books of account, the Assessing Officer observed that the among other few shares the assessee has also carried out share transactions in following scrips which were admittedly used by the entry providers for providing accommodation entry of Long Term Capital Gain/Short Term Capital Gain/Business Loss etc :-

4. The assessee was issued show cause notice to that extent for which the assessee furnished written submission dated 15.12.2016. The Assessing Officer observed that the explanation offered by the assessee is general in nature. The Assessing Officer further observed in paragraph no.4.8 various statements recorded of the entry providers/exit providers/brokers which was provided to the assessee but the same was not responded except making general comments. Thus, paragraph no.4.8 of the Assessment Order alongwith paragraph no.4.9 describes the various unusual movements in price and volume of scrips wherein the assessee dealt with. The Assessing Officer has also given his remarks regarding statement wherein admission of share brokers was recorded and offered his observation. The Assessing Officer, therefore, concluded that the transaction of purchase and sale of shares of Comfort Fincap Limited, Radford Global Limited, SMIL, Turbo Tech Engineering Limited and Dhenu Buildcon Infra Limited were sham transactions and the amount of Rs.1 ,53,890/- claimed as loss on trading in these shares were treated as bogus and the same was disallowed.

5. Being aggrieved by the Assessment Order, the assessee filed appeal before the CIT(A). The CIT(A) dismissed the appeal of the assessee.

6. The Ld. AR submitted that the Investors’ Report from 01.04.2013 to 31 .03.2014 relating to share transactions in the regular exchange i.e. BSE and NSE wherein the assessee has shown various shares/scrips. The assessee has also submitted Contract Note of the assessee’s broker while dealing with the above mentioned scrips. The Ld. AR submitted that the Assessing Officer failed in his duty in discharging the onus while making erroneous observations about the transaction in trading of shares on the floor of stock exchange resulting into aggregate loss of Rs.1,53,890/- to be non-genuine except merely on suspicion and not specific basis. The Ld. AR submitted that the statement of persons provided by the Assessing Officer were of no relevance since there were no transactions of trading by the assessee with those persons. The assessee’s explanation was never rebutted by the Assessing Officer while disallowing loss genuinely incurred on transactions done on platform of BSE through SEBI registered intermediatory. The Assessing Officer observed that the beneficiaries were voluminous and name of few big exempted LTCG beneficiaries were only mentioned in such statements. The Ld. AR submitted that this establishes the case of the assessee that the assessee has not claimed any exemption of LTCG and name of assessee is not mentioned in any of the statements. The Ld. AR further submitted that the assessee has already submitted documentary evidences regarding genuine transaction being carried out and discharged the onus to prove the actual loss incurred and, therefore, these evidence are to be taken into account by the Assessing Officer and merely observing that the statements are general in nature cannot suffice the Revenue’s case. The admission mentioned in paragraph no.4.8 of the Assessment Order has nothing to do with the transaction of the assessee as nowhere the said persons have any connection with the assessee regarding transactions carried out and nowhere there is any mention of assessee having been the beneficiary of any such loss. The Ld. AR further submitted that the disallowance of loss was merely on irrelevant ground and without taking into account copies of the Ledger Account, invoices and account of recognised brokers account through whom the shares were traded by the assessee which was thereon record before the Assessing Officer. Thus, the Ld. AR submitted that the disallowance made by the Assessing Officer and confirmed by the CIT(A) is not justified.

7. The Ld. DR submitted that the assessee has not dealt with the admission of the various parties related to the transactions as stated in paragraph no.4.8. The Ld. DR further submitted that the shares involved were admittedly controlled by the entry providers during the relevant period and considering the modus operandi followed by the entry providers ait can be easily concluded that all the trades during such period are pre-arranged trades wherein the buyers and sellers are pre-decided through the trades are executed on recognised stock exchange though depository participants at different locations. The Ld. DR relied upon the Assessment Order and the order of the CIT(A).

8. Heard both the parties and perused all the relevant material available on The Assessing Officer has not contradicted these scrips as to how far the assessee’s involvement was there, except in paragraph no. 4.12 of the Assessment Order thereby observing that the shares involved were admittedly controlled by the entry providers. The Assessing Officer related to this scrip has not given observation as to how the entry providers and the assessee as well as the share broker i.e. ASE Capital Markets Limited has involved in the entire transactions except that the assessee through ASE Capital Markets Limited has purchased and sold the shares. The same is related to scrips of Comfincap, Radford Global Limited, SIMIL, Turbo Tech Engineering Limited and Dhenu Buildcon Infra Limited. The documents such as contract notes, investor’s report and client-wise sauda summary were before the Assessing Officer but the Assessing Officer has not taken cognisance of these documents thereby stating that the assessee was directly involved in sham and bogus transactions of entry providers. Though the Assessing Officer has given the chart of fluctuation as well as increase of the data during the said period, the same cannot be the sufficient reason for disallowing the business loss of the assessee. Thus, the Assessing Officer was not right in disallowing the claim of business loss of the assessee. Appeal of the assessee is thus allowed.

9. In the result, appeal of the assessee is allowed

Order pronounced in the open Court on this 15 November, 2023.