Production of directors not mandatory to prove genuineness of transaction; Deletes commission addition: ITAT Delhi

ITAT Delhi: Production of directors not mandatory to prove genuineness of transaction; Deletes commission addition

Delhi Bench “A” of the Income Tax Appellate Tribunal (ITAT), in B & B Sharecom Pvt. Ltd. Vs DCIT,  ITA No. 2877/DEL/2024 for AY 2016-17, delivered on 24 September 2025, examined key issues relating to share capital infusion, commission addition, and treatment of trading losses. The assessee, engaged in commodities and securities trading, had received ₹8 crore as share capital from three private companies, supported by confirmations, ITRs, bank statements, and affidavits of directors. The Assessing Officer, doubting genuineness, added the amount under Section 68 and presumed a 2% commission of ₹16 lakh, citing non-production of directors and low financial capacity of investors. The ITAT, however, held that production of directors was not mandatory, especially when two days’ notice was impractical, and that documentary evidence sufficiently established identity, creditworthiness, and genuineness. It further observed that additions cannot be sustained on assumptions, thereby deleting the commission addition as baseless. On the issue of intraday trading loss of ₹3.54 crore, treated as speculative under Section 43(5), the Tribunal noted that successive amendments excluded recognized exchange derivatives from speculative classification, and directed a fresh examination. Similarly, disallowance of ₹4.42 crore loss from CTT-exempt agricultural commodities was found inconsistent since profits from CTT-paid derivatives had been accepted; hence, the matter was remanded for reconsideration. With major additions deleted and remaining issues sent back for fresh adjudication, penalty proceedings under Section 271(1)(c) were held to be consequential. The ruling underscores that documentary evidence outweighs procedural lapses and that presumptive additions without material cannot stand in law.

Facts:

• The assessee filed its return of income for Assessment Year 2016-17 declaring NIL income and carrying forward a loss of Rs. 9,55,53,675. The company was engaged in trading of guar, refined dal, spices and other products, and was also active in securities and derivatives trading, including commodity trading, futures and options, currency trading and intraday transactions.
• The case was selected for scrutiny under Computer Assisted Scrutiny Selection (CASS) owing to certain high-risk indicators such as a substantial increase in share capital, large squared-up loans, high-value securities and derivative transactions, and mismatch in the audited turnover.
• During the year, between 24.02.2016 and 19.03.2016, the assessee issued 80,00,000 equity shares of Rs. 10 each, aggregating to Rs. 8,00,00,000. These were subscribed by three companies, namely M/s JA Infracon Pvt. Ltd. (JAIPL), M/s Adila Traders Pvt. Ltd. (ADPL) and M/s Sonal Styles Pvt. Ltd. (SSPL). No share premium was involved in these transactions.
• In the course of assessment proceedings, notices under sections 143(2) and 142(1) were issued. The assessee filed complete material electronically, including the income-tax returns and audited financial statements of the investor companies, confirmations, bank statements and affidavits of directors to establish identity, creditworthiness and genuineness. However, notices issued by the AO under section 133(6) to the investor companies were returned unserved with the remark “left.” A show-cause notice dated 30.11.2018 was issued to the assessee, and summons were issued to the directors of the investor companies. These directors, being located in Ahmedabad, Mumbai and Thane, could not be produced at such short notice of only two days. A departmental inspector reported that the companies were not traceable at the given addresses.
• The AO concluded that the identity, creditworthiness and genuineness of the share capital had not been proved. According to him, the investor companies had negligible income, low bank balances and funds which were received and transferred immediately by RTGS to the assessee. He also noted that no dividends had been paid. On this basis, the AO treated the share capital of Rs. 8,00,00,000 as unexplained under section 68 and further presumed commission of 2% amounting to Rs. 16,00,000 as unexplained expenditure. Thus, a total addition of Rs. 8,16,00,000 was made.
• With respect to trading transactions, the AO noted that the assessee had entered into trades amounting to about Rs. 1,383.15 crores under different codes. The assessee had reported a loss of Rs. 3,53,89,637 under intraday trades (Code 03). The AO treated this loss as speculative in nature under section 43(5) on the ground that no STT was paid and no delivery was involved, and disallowed the set-off of this loss against business profits. While he accepted the profit of Rs. 6,27,50,102 earned in CTT-paid commodity derivatives as business income, he did not allow the set-off of the loss of Rs. 4,42,20,153 from CTT-exempt agricultural commodities.
• In appeal, the CIT(A)/NFAC upheld the additions on both counts—share capital and commission—as well as the disallowance relating to speculative loss and set-off. Aggrieved by this, the assessee filed an appeal before the ITAT raising multiple grounds challenging the additions under section 68, the presumed commission, the speculative classification of intraday trades under section 43(5), the denial of set-off of losses, and the consequential initiation of penalty proceedings under section 271(1)(c).

Issues:

• Whether the share capital of Rs. 8,00,00,000 received from three subscribing companies is genuine?
• Whether an addition of presumed commission @2% (Rs. 16,00,000) can be made without any evidence?
• Whether intraday losses of Rs. 3,53,89,637 are speculative u/s 43(5) and therefore not allowable/set-off against other business profits?
• Whether losses from commodity derivatives of Rs. 4,42,20,153 can be disallowed from set-off against profits from other derivative segments?
• Whether penalty proceedings u/s 271(1)(c) can be sustained?

Observations:

• The Tribunal noted that the assessee had produced confirmations, income tax returns, audited financial statements, affidavits of directors and bank statements of all three investor companies. All payments were made through proper banking channels by way of RTGS. The companies were existing entities filing regular returns, which established their identity. The fact that they had low income or low bank balances could not, by itself, disprove creditworthiness when funds were routed through banks and supported by audited accounts. It was also observed that the Assessing Officer gave only two days’ notice to produce the directors, which was impractical, and their absence could not negate the genuineness of the documents already on record. Since no share premium was involved, suspicion of sham transactions was unfounded. The Tribunal therefore held that the assessee had proved identity, creditworthiness, and genuineness, and the addition under Section 68 was not justified.
• The Assessing Officer had further presumed a 2% commission on the share capital, amounting to Rs. 16,00,000, without bringing any supporting evidence. No fact or material was placed on record to suggest that such commission had actually been paid. Since additions cannot rest on assumptions or guesswork, the Tribunal held that this addition also had no basis and must be deleted.
• In regard to the intraday loss of Rs. 3,53,89,637, the Assessing Officer treated the same as speculative on the ground that no STT was paid and no delivery was involved. The Tribunal pointed out that section 43(5) had been amended by successive Finance Acts to exclude certain derivative transactions on recognized stock exchanges from the scope of speculative transactions. As intraday trades formed part of the assessee’s regular business, they could not be automatically branded as speculative. It was held that the Assessing Officer had ignored the amended law and the matter required fresh examination in light of the current provisions of section 43(5).
• With respect to losses of Rs. 4,42,20,153 from commodity derivatives, the Tribunal observed that while the Assessing Officer had accepted profits of ₹6.27 crore from CTT-paid transactions as business income, he had disallowed losses from CTT-exempt agricultural commodities. This approach was inconsistent, as profits and losses from similar derivative transactions cannot be treated differently merely because of CTT applicability. The matter was therefore remanded to the Assessing Officer for fresh consideration in accordance with the amended provisions of law.
• As for the penalty under section 271(1)(c), the Tribunal held that since major additions were deleted and the remaining issues remanded for re-examination, the penalty proceedings were purely consequential and did not require adjudication at this stage.