2025 (7) TMI 1025 - AT - Income Tax

Addition u/s 69A - AO treated the losses as non-genuine characterizing the same as unexplained investments or money - statements recorded during search proceedings in third-party cases - Assessment Year 2014 15 - HELD THAT - Despite voluminous evidence submitted the Assessing Officer merely relied on the general report of the Investigation Wing without conducting any independent enquiry or pointing out specific irregularity in the assessee s transactions. CIT(A) has rightly noted all that the transactions entered into by the assessee were duly backed by documentary evidence. No adverse inference was drawn either with respect to the allotment of shares received through the IPO process or regarding the subsequent sale transactions executed by the assessee. Further there was no material brought on record by the AO to demonstrate the existence of any cash trail unaccounted receipts or financial benefit accruing to the assessee outside its duly recorded books of account. Accordingly we find no infirmity in the order of the CIT(A) in deleting the additions made u/s 69A of the Act. Both the grounds raised by the Revenue are dismissed. Addition made to an alleged fictitious loss and a fictitious gain in respect of trading in the scrip LHSL - AY 2015 16 - HELD THAT - The methodology adopted by the AO for computing the alleged fictitious loss and gain was found to be factually incorrect particularly when the assessee had in fact realized genuine profits from the trading transactions as evident from the books of account and substantiated by primary documentary evidence. The entire issue was also elaborately discussed while disposing of the appeal for A.Y. 2013 14 where the Tribunal had upheld the genuineness of trading transactions in the scrip LHSL. CIT(A) has rightly appreciated the evidentiary material and factual matrix. Since no credible evidence was brought on record by the Assessing Officer to establish that the transactions were fictitious or that they involved accommodation entries we find no justification to interfere with the appellate order. Revenue appeal dismissed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal in these consolidated appeals for Assessment Years 2013-14, 2014-15, and 2015-16 are:

• Whether the reassessment proceedings initiated under section 147 read with section 144B of the Income Tax Act, 1961 ("the Act") were valid and legally sustainable, particularly focusing on the validity of reasons recorded for reopening and compliance with procedural safeguards including approval under section 151.
• Whether the additions made under section 69A of the Act on account of alleged fictitious losses and gains arising from transactions in the scrip Looks Health Services Ltd. (LHSL) were justified and supported by material evidence.
• Whether the assessee's transactions in the scrip LHSL, including alleged short selling and accommodation entries, were genuine business transactions or fictitious manipulations intended to evade tax.
• Whether the Assessing Officer (AO) correctly applied the law in treating the losses as unexplained investments or money under section 69A, and whether the CIT(A) correctly appreciated the facts and evidence in deleting these additions.
• Whether the assessee's claim of being a SEBI-registered Market Maker and the consequent trading activities in LHSL shares were appropriately considered and substantiated in the reassessment proceedings.
• Whether the AO's failure to provide specific show cause notices regarding set-off of brought forward losses and the correctness of the AO's computation of fictitious losses/gains were legally and factually sustainable.

2. ISSUE-WISE DETAILED ANALYSIS

Validity of Reassessment Proceedings under Section 147 r.w.s. 144B

Legal Framework and Precedents: Section 147 empowers the AO to reopen assessments if there is reason to believe that income has escaped assessment. Section 144B mandates recording of reasons for reopening and obtaining prior approval under section 151. Procedural safeguards require that reasons be recorded before issuance of notice and communicated to the assessee to satisfy principles of natural justice.

Court's Interpretation and Reasoning: The CIT(A) upheld the validity of reassessment, holding that the AO had recorded reasons and obtained requisite sanction under section 151, although the communication of reasons was delayed. The Tribunal noted that mere delay in communication of reasons was not fatal to jurisdiction. The assessee challenged the reopening on grounds that reasons were recorded post notice and approval was not furnished despite request.

Key Evidence and Findings: The AO issued notices under section 148 on 31.03.2021; reasons for reopening were communicated later in July 2021. The assessee's requests for copy of PCIT approval were not met. However, the CIT(A) found that the approval was obtained and delay did not invalidate reopening.

Application of Law to Facts: The Tribunal accepted the CIT(A)'s view that procedural requirements were substantially complied with and that the reopening was not invalidated by delayed communication or non-furnishing of approval copy. The assessee did not press these jurisdictional grounds in cross-objection, deferring them for judicial economy.

Treatment of Competing Arguments: The assessee emphasized procedural lapses and incorrect assumptions by the AO in recording reasons. The revenue relied on the CIT(A)'s findings and procedural compliance. The Tribunal sided with the CIT(A) on procedural validity but did not decide on the merits of procedural objections as they were not pressed.

Conclusion: The reassessment proceedings were held validly initiated and maintainable.

Genuineness of Transactions and Additions under Section 69A

Legal Framework and Precedents: Section 69A applies to unexplained investments or money, allowing the AO to add amounts to income if the assessee fails to satisfactorily explain the source. The burden lies on the AO to establish that transactions are fictitious or accommodation entries. Precedents require that additions under section 69A be based on cogent evidence, not mere suspicion or third-party reports.

Court's Interpretation and Reasoning: The CIT(A) found that the AO's reliance on third-party investigation reports and statements without independent verification was insufficient. The CIT(A) emphasized the assessee's status as a SEBI-registered Market Maker, the genuineness of IPO allotments, and the detailed documentary evidence supporting the trading transactions. The CIT(A) held that the AO failed to demonstrate any cash trail, falsification, or financial benefit accruing outside recorded books.

Key Evidence and Findings: The assessee submitted IPO prospectus, Market Making Agreements, SEBI guidelines, DEMAT statements, ledger accounts segregating speculative and delivery-based transactions, and reconciliation statements showing actual profits and losses. The CIT(A) noted specific trading examples consistent with market-making activity. The AO's computations of fictitious losses were found to be factually incorrect and unsupported by material evidence.

Application of Law to Facts: The Tribunal upheld the CIT(A)'s findings that the transactions were genuine business transactions, and the additions under section 69A were unjustified. The AO's failure to provide specific computations or evidence of manipulation undermined the case for additions.

Treatment of Competing Arguments: The revenue argued that the share price manipulation and accommodation entries justified additions. They contended that the IPO allotment claim was new and required verification. The assessee rebutted by pointing to prior disclosure during reassessment and voluminous documentary evidence. The Tribunal found the assessee's submissions credible and the revenue's contentions unsubstantiated.

Conclusion: Additions under section 69A for fictitious losses and gains were rightly deleted by the CIT(A) and upheld by the Tribunal for all three assessment years.

Assessment Year-wise Specific Findings

AY 2013-14: The AO alleged short selling and fictitious losses amounting to Rs. 1,45,15,798 and Rs. 22,26,798 respectively. The CIT(A) found that the assessee was allotted shares as a Market Maker and realized genuine trading profits of Rs. 16,25,331 after expenses. The Tribunal accepted the reconciliation and documentary evidence, dismissing revenue's grounds.

AY 2014-15: The AO computed a fictitious loss of Rs. 1,40,65,890 based on incorrect assumptions about share purchases and sales. The CIT(A) found actual trading involved fewer shares with net profits of Rs. 4,20,522. The AO's failure to account for inventory and carry-forward shares invalidated the fictitious loss claim. The Tribunal upheld the deletion of addition.

AY 2015-16: The AO alleged fictitious loss of Rs. 49,84,585 and gain of Rs. 13,34,300 without providing computations. CIT(A) found genuine trading profits of Rs. 5,28,940 and no discrepancies. The Tribunal agreed with CIT(A) and dismissed revenue's appeals.

3. SIGNIFICANT HOLDINGS

The Tribunal preserved the following crucial legal reasoning verbatim from the CIT(A)'s order:

"The Assessing Officer failed to carry out any independent investigation or verification to corroborate the claim that the assessee's transactions were non-genuine. The assessee had shown actual business income from trading in LHSL and had incurred losses/gains in the ordinary course of its business as a market intermediary. No falsification of records or evidence of cash trails or financial benefit accruing to the assessee was demonstrated by the AO."

Core principles established include:

• Reopening of assessment under section 147 must be supported by valid reasons recorded prior to notice issuance and approved under section 151, but delayed communication is not fatal if approval is obtained.
• Additions under section 69A require concrete evidence of unexplained investment or money; reliance solely on third-party reports or general suspicion is insufficient.
• Genuine business transactions, particularly by SEBI-registered Market Makers operating under regulatory frameworks, are entitled to be recognized and protected against arbitrary additions.
• The AO must conduct independent verification and provide specific computations when alleging fictitious losses or accommodation entries.

Final determinations on each issue are:

• The reassessment proceedings were validly initiated and maintainable.
• The additions under section 69A for alleged fictitious losses and gains in all three years were not supported by evidence and rightly deleted.
• The assessee's trading in LHSL shares as a Market Maker was genuine, and the AO's allegations of manipulation and short selling were unfounded.
• The cross-objections challenging reassessment validity were not pressed and thus dismissed.
• All appeals filed by the revenue were dismissed, affirming the CIT(A)'s order in favor of the assessee on merits.