2025 (6) TMI 1621 - AT - Income Tax

Survey action - Addition on account of certain ledgers recorded in the two diaries found in the survey action - Addition in the hands of Shri Jatin Shah on substantive basis - HELD THAT - When the substantive addition arising out of separate ledgers made in the hands of Shri Vinay Shah and Shri Ketan Shah have been included in the peak calculation of income in the hands of the Shri Jatin Shah then the reverse protective addition of such amount in the hands of the assessee has no legs to stand because ledger account which have both debit and credit entries but appeared to bear the names of family members viz. VRS KRS Kunal etc. now cannot be substantially taxed in the hands of Shri Vinay Shah or Shri Ketan Shah. Because when on entire entries peak has been worked out and taxed in the hands of Jatin Shah then everything gets subsumed in the peak calculated in the case of Shri Jatin Shah. It is a matter of fact that peak balance of income has already been taxed by the ld. AO in the hands of Shri Jatin Shah on substantive basis. Quantum of peak credit which is liable to be taxed in the hands of Jatin Shah we will discuss this issue while dealing in the appeal of Shri Jatin Shah. Accordingly we uphold the order of the ld. CIT (A) holding that the entire entries made in the diary both with regard to debit and credit even which bear the names of family members of Shri Vinay Shah cannot be taxed in the hand of the assessee as they have been substantively taxed in the hands of Shri Jatin Shah. Accordingly the order of the CIT (A) is upheld and this issue raised by the department i.e. ground No.1 in A.Y.2015-16 and ground No. 1 2 in A.Y.2019-20 are dismissed. Disallowance of loss in derivative option alleged to be non-genuine - AO has heavily relied upon the ad interim order of the SEBI and rejected the various explanation of the assessee holding that the loss incurred on trading in options are not genuine and disallowed the same - CIT(A) deleted addition - HELD THAT - CIT (A) from the basis of facts and material on record and after considering the reasoning given by the ld. AO has noted that assessee has been a regular trader in option / currency derivatives and has worked through various brokers in the past as well as during the year and assessee had shown profits from transaction with some brokers while losses in other transactions. The consolidated income / loss declared in the return of income have not been doubted nor AO has carried out any enquiry to dislodge the authenticity of the trades done through any broker. In such facts it cannot be stated that only one isolated transaction was pre-meditated only to incur loss. One very important fact which has been noted by the CIT (A) are that there are 17 counter parties to the assessee s transaction which has been reproduced by the ld. AO in his order however in the ad-interim of SEBI none of these parties have even been mentioned or there is any whisper that they were indulged in synchronized trading. As regards to the statement of the assessee during the survey wherein assessee has offered to withdraw the loss in light of the statement of the property of Goodluck Securities and ad-interim SEBI order the same was given on the presumption that Ad-interim SEBI order was in force and the statement of Goodluck Securities was correct. However nowhere assessee had finally offered any such loss or offered to disallow such loss. For SEBI ad-interim order the same was passed exparte and it is also a matter of fact vide subsequent order dated 22/08/2016 SEBI has provided interim relief to the assessee giving permission to buy and sale commodities for taking position liquidity shares mutual funds etc. Later even Ad-interim was vacated by the subsequent order of SEBI vide order dated 05/04/2018. Thus the very basis on which ld. AO has disallowed the loss i.e. Ad-interim order of the SEBI itself stands vacated. Thus his entire premise of the AO falters. Thus addition made by the AO cannot be sustained and accordingly the finding of the ld. CI T(A) is upheld and the grounds raised by the Revenue are dismissed. Disallowance made u/s 14A - contention of assessee is that the assessee has not incurred any expenditure for earning of any exempt income and ld. AO has failed to establish as to how assessee has incurred expenditure in respect of the exempt income - HELD THAT - We find that assessee has earned exempt income on investments made and once there is exempt income then the first onus is on the assessee to show whether assessee has incurred any expenditure for earning of the exempt income then it needs to be quantified; or if no such expenditure is attributable out of expenditure debited to the profit and loss account then having regard to the nature of expenses debited and accounts assessee has to show that no expenditure can be attributed. Onus then shifts to the Ld. AO to record his satisfaction having regard to the nature of of account once the claim of the assessee has been made and after recording his satisfaction he can proceed to disallow u/s. 14A r.w.r. 8D. Accordingly we do not agree with the contention of the ld. Counsel that no disallowance can be made because no where assessee has given any working as to why no expenditure can be attributed. However we agree with the alternate contention of the assessee that disallowance u/s.14A should be confined only after considering those investments which have yielded exempt income during the year under consideration. Accordingly AO is directed to verify the working and the disallowance u/s.14A should be restricted only after considering those investments which have yielded exempt income during the year as per the working given above in the above mentioned assessment years. Accordingly the grounds raised by the assessee are partly allowed. Addition u/s.69A and 69C - Addition of peal credit - Contention of the assessee has been that it has earned commission/brokerage income to arrange such transactions - same has been rejected by ld. AO on the ground that assessee has not provided the identity of the parties and has himself offered income on peak credit basis - HELD THAT - Addition on account of peak credit is justified on the facts of the case because ostensibly there are clear cut entries and cash transaction of loan which assessee could not explain the nature and source of party wise entries. Thus the admission of the assessee before the Investigation Wing and before the ld. AO that addition should be confined to peak credit cannot be rescinded. Accordingly in principle we uphold the addition made on account of peak credit. The total peak credit in various years was worked out to Rs. 39, 07, 73, 526/- which working is not in dispute by both the parties as same has been meticulously worked out by the CIT(A) and no defect has been pointed out in such working of peak credit. We also agree with the Ld. CIT (A) that thereafter net addition made u/s.69C has to be telescoped against the peak addition. The reason being that income as well as expenditure have been noted in the same books and as part of the same activity carried out by the assessee and therefore benefit of telescoping while determining the quantum of unaccounted expenditure should be allowed and only the net income after reducing the corresponding expenditure shall be taxed in the respective years. CIT (A) has tabulated unexplained income and expenditure and thereafter the net addition u/s.69A and 69C has been telescoped against the peak addition. Accordingly the net peak is confirmed. Seperate addition u/s.69A and aggregate addition u/s.69C the same is also confirmed because we agree with the reasoning given by the ld. CIT(A) that these are the separate ledgers on which income and expenditure has been accounted for and after benefit of telescoping the net income as well as expenditure has arrived in various years needs to be confirmed. Accordingly the order of the ld. CIT (A) is upheld. Disallowance u/s. 14A - assessee is a regular trader and investors in shares and Securities and has earned exempt income from investments held - AO himself has made disallowance u/s.14A r.w.s. 8D on the ground that no disallowance has been offered by the assessee or any expenditure has been earmarked for the purpose of earning exempt income. The assessee has earned disallowance. However the case of the assessee is that disallowance should be computed only on those investments which has yielded exempt income and as per the working given the disallowance comes to Rs. 3, 20, 215/- accordingly we direct the ld. AO to verify the working and restrict the disallowance u/s.14A to the extent of those investment which has yielded exempt income. In the result this issue is partly allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal in these consolidated appeals arising from assessments for the years 2015-16 to 2019-20 include:

• Whether additions on account of undisclosed income based on entries in diaries seized during survey proceedings can be sustained against the assessee when ownership and contents of diaries have been disputed.
• Whether losses claimed on derivative option trading are genuine or liable to be disallowed as non-genuine losses under the Income Tax Act.
• The correctness and quantum of disallowance under section 14A read with Rule 8D of the Act for expenditure incurred in relation to exempt income.
• Whether additions under sections 69A and 69C of the Act on account of unexplained income and expenditure respectively, based on ledger accounts in the diaries, are justified and how such additions should be computed, including the principle of telescoping of income and expenditure.
• The applicability and extent of protective additions in the hands of the assessee when similar additions have been made in the hands of a third party related to the diaries.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Addition of Undisclosed Income Based on Diaries

Legal Framework and Precedents: The Income Tax Act provisions for taxing undisclosed income under sections 69A (unexplained money) and 69C (unexplained expenditure) are relevant. The principle that income must be attributed to the correct person based on ownership and control of records is well-established. The Tribunal also considered the evidentiary value of statements and corroborative material in attributing income.

Court's Interpretation and Reasoning: The diaries were found in possession of Shri Jatin Shah, an employee of the Shah Coal group. Initially, Jatin Shah stated the diaries were maintained on instructions of Shri Vinay Shah; however, he later retracted and admitted sole ownership and that transactions related solely to his financing activities. Shri Vinay Shah consistently denied any knowledge or connection with the diaries and contents.

The AO accepted the diaries belonged to Jatin Shah but held that certain ledger entries bearing abbreviations linked to Vinay Shah and family members indicated personal expenses and income attributable to them, thus bifurcating the additions between Jatin Shah and Vinay Shah. Protective additions were also made in Vinay Shah's hands for income offered by Jatin Shah but not declared by Vinay Shah.

The CIT(A) disagreed with AO's bifurcation, holding that once ownership of diaries and transactions was accepted as belonging to Jatin Shah, it was impermissible to attribute parts of the transactions to Vinay Shah without compelling evidence. No corroborative evidence linking Vinay Shah or family members to the diary entries was found. The CIT(A) noted that AO relied only on Jatin Shah's initial statement, which was retracted and accepted by the Investigation Wing. Vinay Shah's denial of knowledge was undisputed. Accordingly, the CIT(A) deleted additions made in Vinay Shah's hands on this basis.

Key Evidence and Findings: Statements of Jatin Shah (initial and retracted), Vinay Shah's consistent denial, lack of corroborative evidence linking Vinay Shah to diary entries, and acceptance of diaries' ownership by Investigation Wing.

Application of Law to Facts: The Tribunal upheld the CIT(A)'s approach, emphasizing that income must be taxed in the hands of the person who owns or controls the source of income. Absent evidence linking diary entries to Vinay Shah, additions could not be sustained in his hands. Protective additions were also held unsustainable once substantive additions were confirmed in Jatin Shah's hands.

Treatment of Competing Arguments: The Revenue relied on initial statements and ledger abbreviations to attribute income to Vinay Shah; the assessee relied on retracted statements and lack of corroborative evidence. The Tribunal found the assessee's position more credible and consistent with principles of attribution.

Conclusion: Additions based on diaries were upheld only in the hands of Jatin Shah; corresponding additions in Vinay Shah's hands were deleted.

Issue 2: Disallowance of Losses on Derivative Option Trading

Legal Framework and Precedents: The genuineness of losses claimed in speculative or derivative trading is scrutinized under provisions related to income from business or profession. Reliance was placed on SEBI's ad interim orders and judicial precedents on synchronization and manipulation in trading.

Court's Interpretation and Reasoning: The AO disallowed losses incurred through transactions with certain brokers, particularly Trinay Securities and Goodluck Securities, alleging artificial and synchronized trading based on SEBI's ad interim order and statements of third parties. The AO contended that reversal trades with same counterparties at manipulated prices indicated non-genuine losses.

The CIT(A) reversed the AO's findings. It was held that the assessee was a regular trader in derivatives through multiple brokers, showing profits and losses across brokers. No incriminating documents or evidence of collusion were found during extensive investigations, including the Falcon Project and survey proceedings. The SEBI ad interim order was an ex-parte order without opportunity to parties and was subsequently vacated. The CIT(A) also noted that none of the counterparties involved in the assessee's transactions were named in the SEBI order. The assessee had furnished contract notes, bank statements, and broker account statements supporting genuineness.

Key Evidence and Findings: Documentary evidence of trades, absence of incriminating material, vacated SEBI order, lack of evidence linking assessee to manipulative trading.

Application of Law to Facts: Given the absence of evidence of collusion or manipulation, and the vacated SEBI order, the AO's disallowance was held to be unsustainable. The CIT(A)'s reliance on judicial precedents affirming the need for substantive evidence was endorsed.

Treatment of Competing Arguments: The Revenue's reliance on SEBI order and third-party statements was countered by the assessee's documentary proof and the vacated status of the order. The Tribunal sided with the CIT(A) in requiring cogent evidence beyond prima facie observations.

Conclusion: Losses claimed on derivative trading were held to be genuine and disallowance was deleted.

Issue 3: Disallowance under Section 14A read with Rule 8D

Legal Framework and Precedents: Section 14A disallows expenditure incurred in relation to exempt income. Rule 8D prescribes methodology for computation of such disallowance. Judicial precedents clarify that disallowance should be restricted to investments yielding exempt income.

Court's Interpretation and Reasoning: The AO computed disallowance on total investments without segregating those yielding exempt income. The assessee contended that disallowance should be confined only to investments that earned exempt income during the relevant year, supported by judicial decisions.

The CIT(A) accepted the assessee's contention in principle and directed the AO to verify and restrict disallowance accordingly. The Tribunal upheld this approach, emphasizing the need for nexus between expenditure and exempt income and that only investments yielding exempt income should be considered for disallowance computation.

Key Evidence and Findings: Assessee's working showing reduced disallowance, judicial pronouncements supporting limited scope.

Application of Law to Facts: The Tribunal found that the AO failed to record satisfaction on nexus and considered all investments indiscriminately. The assessee's approach was consistent with settled law.

Treatment of Competing Arguments: The Revenue argued for full disallowance; the assessee argued for restricted disallowance. The Tribunal agreed with the assessee.

Conclusion: Disallowance under section 14A was to be restricted to investments yielding exempt income; grounds partly allowed.

Issue 4: Additions under Sections 69A and 69C on Unexplained Income and Expenditure

Legal Framework and Precedents: Sections 69A and 69C empower the AO to make additions on account of unexplained money and expenditure. The principle of telescoping (adjusting unexplained expenditure against unexplained income) is recognized to avoid double taxation.

Court's Interpretation and Reasoning: AO made additions on unexplained receipts (69A) and unexplained expenditure (69C) separately, including ledgers attributed to the assessee and family members. The CIT(A) accepted the AO's approach in principle but allowed telescoping benefit, holding that since income and expenditure arose from the same pool of funds, net addition after adjusting expenditure against income should be taxed.

The Tribunal upheld the CIT(A)'s approach, confirming the net peak addition after telescoping and also confirming additions under sections 69A and 69C separately where justified. The Tribunal emphasized that peak credit addition was justified based on entries and the assessee's admission of involvement in cash loan transactions. The quantum of peak credit was not disputed.

Key Evidence and Findings: Ledger accounts segregated into receipts and payments, admitted involvement of assessee in financing activities, detailed computations by CIT(A).

Application of Law to Facts: The Tribunal applied the principle of telescoping to avoid double taxation and confirmed net additions. It rejected the assessee's contention that only commission income should be taxed, holding that the peak credit addition includes both principal and income elements.

Treatment of Competing Arguments: Assessee argued for taxing only commission income and no separate additions on unexplained income/expenditure; Revenue argued for full additions. The Tribunal found the Revenue's approach justified but tempered by telescoping.

Conclusion: Additions under sections 69A and 69C confirmed after allowing telescoping; peak credit addition upheld in principle.

Issue 5: Protective Additions in the Hands of Assessee

Legal Framework and Precedents: Protective additions are made to safeguard revenue when similar income is added in the hands of related parties but not offered by the assessee.

Court's Interpretation and Reasoning: AO made protective additions in assessee's hands for diary entries owned by Jatin Shah but not declared by assessee. CIT(A) held that once substantive additions were confirmed in Jatin Shah's hands, protective additions in assessee's hands had no legs to stand and were deleted.

Key Evidence and Findings: Confirmation of substantive additions in Jatin Shah's hands, lack of evidence for separate additions in assessee's hands.

Application of Law to Facts: Protective additions cannot survive if substantive additions are made in related party's hands for the same income.

Treatment of Competing Arguments: Revenue sought to maintain protective additions; assessee opposed. Tribunal upheld CIT(A)'s deletion of protective additions.

Conclusion: Protective additions in assessee's hands deleted once substantive additions confirmed in Jatin Shah's hands.

3. SIGNIFICANT HOLDINGS

"Once the AO has accepted the appellant's submission that the ledgers in the diary have been maintained by him in his personal capacity, the funds utilised for making the transactions belong to the appellant and that all the transactions noted within the diary related to his financial business, it was not open to him to split the transactions and attribute part of such transaction to another third party unless there were compelling reasons for the same."

"No corroborating evidence has been found in the possession of Vinay Shah and other family members with respect to these transactions. AO has not mentioned any other evidence which could provide live link between the diaries and family members of Shri Vinay Shah."

"The losses claimed on derivative trading cannot be disallowed solely on the basis of an ex-parte ad interim SEBI order which has been subsequently vacated and in absence of any incriminating evidence against the assessee."

"Disallowance under section 14A read with Rule 8D should be confined only to those investments which have yielded exempt income during the relevant year."

"The principle of telescoping is applicable while computing additions under sections 69A and 69C, whereby unexplained expenditure is adjusted against unexplained income arising from the same pool of funds."

"Protective additions made in the hands of the assessee cannot be sustained once substantive additions have been confirmed in the hands of the related party."

Final determinations:

• Additions based on diary entries sustained only in hands of Jatin Shah; deleted in Vinay Shah's hands.
• Losses on derivative trading held genuine; disallowance deleted.
• Disallowance under section 14A restricted to investments yielding exempt income.
• Additions under sections 69A and 69C confirmed after allowing telescoping benefit.
• Protective additions in assessee's hands deleted once substantive additions confirmed in Jatin Shah's hands.
• Appeals of Revenue dismissed; appeals of assessees partly allowed as per above findings.