Case Law Details
PCIT Vs R.C. Suppliers Private Limited (Calcutta High Court)
Calcutta High Court has dismissed an appeal filed by the Principal Commissioner of Income Tax (PCIT) against R.C. Suppliers Private Limited, upholding an Income Tax Appellate Tribunal (ITAT) decision that found no evidence of price rigging by the assessee in a Rs. 71.38 lakh penny stock loss case. The revenue’s appeal, challenging the ITAT’s order dated November 29, 2023, for the assessment year 2014-15, was rejected on the grounds that it raised no substantial questions of law.
The case revolved around the disallowance made by the Assessing Officer (AO) regarding a loss of Rs. 71,38,200 claimed by R.C. Suppliers Private Limited from transactions involving shares of “First Financial Services Ltd.” The AO had concluded that the transaction was “manufactured, managed and fabricated” to create a bogus loss, citing the company’s presence on a list of entities involved in suspicious penny stock transactions.
The revenue presented two main questions of law before the High Court. Firstly, whether the Tribunal erred in failing to appreciate that the disallowance was justified given that “First Financial Services Ltd.” was on a suspicious transaction list and the assessee, specialized in share dealing, had no justifiable reason to engage with such scrips. Secondly, whether these cumulative facts inescapably led to the conclusion that the transaction was fabricated to claim a bogus loss.
During the proceedings, Mr. Soumen Bhattacharjee, learned standing counsel, represented the appellant/revenue. Despite notice being served, no one appeared for the respondent/assessee. The High Court also addressed a delay of 307 days in filing the appeal. While acknowledging the explanation offered for the delay was not entirely satisfactory, the court exercised its discretion under Section 260A of the Income Tax Act, 1961, and condoned the delay, allowing the application IA No: GA/1/2025.
The core of the dispute lay in the findings of the Income Tax Appellate Tribunal. The Tribunal had meticulously examined the factual matrix of the case. It noted that while the share price of M/s. First Financial Services Ltd. was indeed rigged by certain individuals, there was no evidence to suggest the assessee’s awareness or involvement in such activities.
Crucially, the Tribunal’s decision was significantly influenced by an investigation conducted by the Securities and Exchange Board of India (SEBI). SEBI, after examining the role of the assessee, issued an order dated April 2, 2014, explicitly finding that R.C. Suppliers Private Limited was not involved in the price rigging of shares of First Financial Services Ltd. This finding by a specialized regulatory body played a pivotal role in the Tribunal’s conclusion that the addition made by the Assessing Officer was not justified.
Judicial Precedent Cited:
The Tribunal also referred to a similar case, Sunita Chaudhry vs. ITO (ITA No.143/Mum/2022, dated 13.10.2022), decided by the Mumbai Tribunal. This precedent also concerned the scrips of M/s. First Financial Services Ltd., and in that instance, the Tribunal had similarly taken note of the SEBI report and found the assessee not involved in share price rigging. This citation underscored the consistency in judicial approach when presented with SEBI’s findings on the assessee’s non-involvement in price manipulation.
Based on its examination of the admitted factual position and considering the SEBI investigation report, the learned Tribunal had granted relief to the assessee. The Calcutta High Court, upon reviewing these facts, concurred with the Tribunal’s assessment. The court stated that it found “no questions of law, much less substantial question of law, arising for consideration in this appeal.”
Consequently, the High Court dismissed the revenue’s appeal, concluding that it failed on its merits. The stay application, GA/2/2025, filed by the revenue, was also dismissed. This judgment reinforces the principle that disallowances based on suspicion alone, without concrete evidence of the assessee’s involvement in illicit activities, may not stand legal scrutiny, especially when regulatory bodies like SEBI have cleared the assessee of such charges.
FULL TEXT OF THE JUDGMENT/ORDER OF CALCUTTA HIGH COURT
This appeal has been preferred by the revenue under Section 260A of the Income Tax Act, 1961 (the Act) challenging the order dated 29.11.2023 passed by the Income Tax Appellate Tribunal “B” Bench, Kolkata (Tribunal) in ITA No. 64/Kol/2023 for the assessment year 2014-15.
The revenue has raised the following substantial questions of law for consideration :
a) Whether the Learned Tribunal has committed substantial error in law, by failing to appreciate that the disallowance made by the Assessing Officer on account of Bogus Loss from share transaction amounting to Rs.71,38,200/- from the scrip of “First Financial Services Ltd.” was justified in view of the fact that the said company was in the list of entities involved in doing suspicious transaction in penny stocks and that the assessee, who was specialized in dealing in shares, would have no justifiable reason to deal in such scrips ?
b) Whether the Learned Tribunal has committed substantial error in law, by failing to appreciate that the very facts that the share transaction amounting to Rs. 71,38,200/- was done in respect of scrips of “First Financial Services Ltd.” which was in the list of entities involved in doing suspicious transaction in penny stocks and that the assessee, who was specialized in dealing in shares, would have no justifiable reason to deal in such scrips taken cumulatively lead to the inescapable conclusion that the transaction of purchase of the said scrip by the assessee was managed and fabricated to claim bogus loss ?
We have heard Mr. Soumen Bhattacharjee, learned standing counsel appearing for the appellant/revenue.
Though notice has been served on the respondent/assessee, none appears for the respondent.
There is a delay of 307 days in filing the appeal. Though the explanation offered is not fully satisfactory, since this is an appeal filed under Section 260A of the Income tax Act wherein the Court is to consider whether any substantial question of appeal is involved, we are persuaded to exercise our discretion in the matter and condone the delay. The application IA No: GA/1/2025 is allowed.
The assessee approached the learned Tribunal challenging the order passed by the Appellate authority dated 1st December, 2023 by which the appeal filed by the assessee challenging the assessment order dated 20th December, 2016 was affirmed. The Assessing Officer while completing the assessment held that the loss from M/s. First Financial Services Ltd. as claimed by the assessee is not treated as genuine business transaction made with an intention to create profit as the transaction was manufactured, managed and fabricated. Accordingly, the loss claimed by the assessee arising out of the said transaction amounting to Rs.71,38,200/- was disallowed and added to the income of the assessee.
The learned Tribunal examined the factual aspects and noted that the share price of M/s. First Financial Services Ltd. was rigged by some persons but the assessee was not aware of that and the assessee was not involved in share price rigging. Further, the learned Tribunal noted that SEBI had conducted an investigation and also examined the role of the assessee and by order dated 2nd April, 2014 SEBI found that the assessee was not involved in price rigging of shares of First Financial Services Ltd. Therefore, the Tribunal came to the conclusion that the addition made by the Assessing Officer was not justified. The learned Tribunal also referred to a similar case of the Mumbai Tribunal in the case of Sunita Chaudhry vs. ITO in ITA No.143/Mum/2022, dated 13.10.2022, which was also concerning the scrips of M/s. First Financial Services Ltd. and the Tribunal took note of the report drawn by SEBI pursuant to the investigation and found the assessee was not involved in the share price rigging. Therefore, the learned Tribunal on examination of the admitted factual position granted relief to the assessee.
Thus, we find no questions of law, much less substantial question of law, arising for consideration in this appeal.
Accordingly, the appeal fails and is dismissed.
The stay application, GA/2/2025, also stands dismissed.
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