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TMI Blog2023 (6) TMI 1309X X X X Extracts X X X X X X X X Extracts X X X X ..... s of Section 14A of the Act and in confirming the addition of Rs. 87,194/- made by the Assessing Officer thereunder. 3. That on the facts and in the circumstances of the Case, the Order passed by the Ld. CIT(Appeals)-15, is bad in law. 4 That the Appellant craves leave to submit further grounds and to amend, alter or otherwise modify the grounds already taken, if necessary, before or at the time of hearing of the Appeal." 3. Ground No.1 - The assessee vide Ground no. 1 has agitated the action of the lower authorities in disallowing and adding back the long-term capital loss suffered by the assessee in trading of shares. 4. The Assessing Officer during the assessment proceedings noted that the assessee had booked loss of Rs. 4.02 crores in trading of shares. He noted that the assessee had traded in following scrips: 1. Rutrint International Limited 2. Comfort fincap Limited 3. Luminaire technologies Limited 4. Unno Industries Limited 5. Global Infratech & Finance Ltd. The Assessing Officer noted that the facts of this case were part of larger scheme, whereby, the price of shares of the certain penny stock companies were rigged and there were bogus long-term capital ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... port of the income tax department and observed that income tax department had searched/surveyed 32 share broking entities and more than 20 entry operators and unearthed and identified some 84 odd companies which were being used for bogus accommodation entry of gain/loss. That the aforesaid mentioned five companies in which the assessee had traded were also identified as penny stock companies from their financials, trading patterns, statement of share brokers, statement of entry operators, statement of promoters of the companies and the post search/survey enquiries. That they all have very common financial and trading patterns. That the market price of shares of these companies firstly rise to very high level and then fall within a short span of time without any genuine reason. The Assessing Officer further observed that the transaction pattern relating to shares of these companies would show that the trading in these shares were made only with the parties to whom accommodation entries were given to them to give benefit of long- term capital gain. Referring to the transactions in the shares of Rutron International Ltd., the Assessing Officer observed that the trading volume of share ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as to how their prices are rigged by manipulation by the promoters/handlers of these companies. He denied the allegations of booking of bogus short term capital loss. Thereafter, he issued summons u/s 131 to the director of the assessee company ShriHemant Kumar Jalan and his statement under oath was recorded during the course of statement, he was confronted with the statement of various share brokers, entry operators and exit providers who have admitted about the rigging of price of shares of the aforesaid companies in which the assessee had traded. However, the director of the assessee company denied any involvement of the assessee company in share price rigging or booking of bogus capital loss and reiterated that the assessee company had bought and sold shares of aforesaid companies online on the platform of Bombay Stock Exchange through registered share broker and that there was no accommodation entries of LTCG and STCL as alleged by the Assessing Officer. However, the Assessing Officer observed as under: "12. The above submission made by the assessee is not acceptable on the reasons that in this case there is Special Investigation Report, detailed investigation by Income tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion or colourable device cannot be part of tax planning. It is wrong to encourage or entertain the belief that it is honourable to avoid the payment to tax or to obtain any advantage or benefit for tax purpose by dubious method. The principle on the matter of tax evasion and tax avoidance as laid down by Hon'ble Supreme Court in a landmark judgment in the case of McDowell and Co. Ltd. v. CTO (1985) 154 ITR 148 (SC). The judgment is applicable where devices though seemingly legal are adopted in collusion or whether devices adopted are not genuine or bona fide but are sham, make believe or camouflaged to escape the liability for the tax or to obtain certain benefit for tax purpose." The Assessing Officer thereafter referred to certain case laws and held that considering the totality of the facts and circumstances of the case, the trading loss on shares booked by the assessee did not look genuine from a commercial point of view but were sham and bogus to book capital loss which may be set off against the business income of the assessee. He therefore denied the claim of the assessee of short-term capital gains booked by the assessee in trading of shares. 5. Being aggrieved by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r, it was loss. That the payments for purchase of shares were made out of own funds of the assessee. That the facts of the case of the assessee were different and distinguished from the decision of Hon'ble Jurisdictional High Court in the case of PCIT vs. Swati Bajaj & Ors reported in [2022] 139 taxmann.com 352 (Calcutta), wherein, the Hon'ble Calcutta High Court has confirmed the additions of bogus long-term capital gains. The ld. counsel has submitted that even the statement of director of the assessee company was also recorded but the Assessing Officer could extract any incriminating fact from those statements. That even none of the statements referred to by the Assessing Officer in his assessment order pertained to the broker of the assessee company and that the Assessing Officer could not prove even from Investigation Wing report that the broker of the assessee company had ever indulged in manipulating share price or for booking bogus long-term capital gain/loss. That these companies were still existent companies and their shares were being traded upon the stock exchange. That even the financials of these companies did not suggest that these were penny stock companies. That th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s books of accounts for the relevant period. Your attention is invited to peruse the company's auditor's note in its report dated 22.08.2014, which is shared on Page 6 of Paper Book - I. The relevant extract is given below: "the company is dealing and trading in shares and other investments and proper record(s) have been maintained of the transactions and contracts and timely entries have been made therein." A.iii. During the relevant year, the company actively traded in shares. To understand the company's motive, timing and rationale for entering into these trades, it is important to first step into the shoes of the company and think like a trader. When certain trades do not turn out as envisaged, it is exceedingly easy to assume that the trade seemed frivolous, devoid of merit, and callous from the get-go. Such presumptions are only possible in hindsight. However, a trading entity does not have the luxury of such hindsight and rather has to develop a keen sense of foresight to predict reasonable future outcomes and take positions accordingly. Trading in the securities markets is a game of luck predominantly but the effort and preparation undertaken by a market participant to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 161 55,92,176/- 44,47,476/- 4 Unno Industries Limited 2,00,000 60,25,664/- 2,00,000 25,68,418/- 34,57,246/- 5 Global Infratech & Finance Ltd 2,10,000 1,78,55,093/- 2,10,000 84,23,197/- 34,57,246/- Total 7,54,17,748/- 3,52,17,379/- 4,02,00,360/- A.vi. In the following paragraphs, the company has explained the rationale for undertaking trades in these scrips, the timing of entry and exit from the scrip, the genuineness of the transaction, etc.: 1.0. Rutron International Ltd. (RUTRINT 504335) 1.1. The trades taken by the company in the stock of Rutron International Ltd. ('Rutron'), having ISIN INE040N01029, were based on the company's own reading of the financials of Rutron. Rutron was a listed public company at the relevant time. The company drew valuable insights from the audited financial statements of Rutron, now known as Pazel International Ltd., pertaining to the immediately preceding period which were readily available in the public domain and widely researched by other market participants. 1.2. The company submits that the trade was undertaken based on the following parameters which clearly sets out both the logic and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as in a sustained fall and therefore like any prudent trader, the company purchased the stock only when its price fell substantially. Copies of the contract notes have already been submitted in Paper Book - I Page 32-54. 1.4. However, the financials which showed promise were not met with an equivalent displacement in the momentum of the stock. The company, being a prudent trader switched gears and immediately cut short its losses by exiting its position in Rutron when it became apparently clear that the financials of FYE Mar'13 were not indicative of future financial performance of the stock. This view was confirmed with the stark and steep deterioration in the financial parameters of the stock (Turnover of Rs. 0.23 Crores in FYE Mar'14 as against Rs. 4.03 Crores in FYE Mar'13; Total Income of Rs. 2.72 Crores in FYE Mar'14 as against Rs. 5.16 Crores in FYE Mar'13 implying an reduction of 47.28%; Reported Net Profit/(Loss) of (Rs. 0.94) Crores in FYE Mar'14 as against Rs. 0.50 Crores in FYE Mar'13 implying an reduction of 288%). Accordingly the shares were sold in March 2014 when the expectations for making these trades did not pan out as planned. 1.5. As visible from the graph ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Rutron International Limited based on its findings. The verdict inter alia restrained only the 14 noticees named in the Order from accessing the securities market for a period of 6 months. Thus, it is evident that the Order was detailed and comprehensively covere the specific entities named therein. However, nowhere has the name of the company been averred therein to imply that it was implicated in the Order nor has any reference been made to it in the operative parts of the Order where multipl have indulged in the price manipulation of the stock. Accordingly, when the company was never implicated of any wrong wholly unjustified to treat the company at par with the persons who were found guilty of wrong authorities. The loss incurred on making the trade is simply circumstantial and not deliberate as has been attempted to be made out in the notice. This stands fortified by the above rationale be trades taken in Rutron. Further, in the backdrop of the thorough investigation conducted by SEBI in the price manipulation of the stock of Rutron by specific entities, in the stark absence of any proof or evidence of price manipulation done by the company cannot be held guilty of price m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r'12 implying an increment of 67.79% ) and the stock even started declaring dividends whose trend showed a marked upward trajectory (Equity Dividend of Rs. 0.54 Crores in FYE Mar'13 as against Rs. 0.22 Crore in FYE Mar'12 and NIL inFYE Mar'11 and Mar'10 implying a trend reversal and a dividend payout of 59.60%). The purchase of the stock was timed in anticipation of the expected price action that usually follows in such stocks showing a reversal in dividend payout trend. Copies of the contract notes have already been submitted in Paper Book - I Page 32-54. 2.4. However, the financials of the next reporting period indicating performance during the material time, viz., FY13-14, were contrary to the upward trend predicted by the financials of FY12 -13. The company, being a prudent trader, did not waste any further time and cut short its losses in the face of uncertainty regarding the falling prices of the stock of Comfort. The company exited its position in Comfort when it became clear that the financials of FYE Mar'13 were not indicative of future financial performance of the stock. This view was confirmed with the sharp and steep deterioration in the financial parameters of the st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stock of Luminaire Technologies Ltd. ('Luminaire'), having ISIN INE682C01021.Luminaire was later also known as Straus Industries and Exports Limited. Its stock was last traded on the BSE on 29th August, 2016.Based on the company's own reading of the financials and technical charts of Luminaire, which was public company at the relevant time, the company decided to trade in its stock. The company drew valuable insights from its reading of the technical charts of Luminaire which were readily available in the public domain and widely used by other market participants also. 3.2 The company submits that the trade was undertaken based solely on the pattern oftrend reversal visible on the technical charts of Luminaire and the company anticipated a quick profit on the stock in the short term. However, the company was forced to recede its holding in Luminaire when the stock performance did not follow the company's ambitious expectations. This clearly sets out both the logic and rationale behind the trade andalso puts the trading activity in the stock of Luminaire in the proper perspective. The annual reports of Luminaire submitted in Paper Book - III Pages 266 to 333. The relevant portion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... old. The company was never in control of the market price of the stock as has been incorrectly implied in the assessment order. 3.6. The company has downloaded the relevant order/s of SEBI pertaining to Luminaire and has found the following list of order/ records which is shared on Page 571 of Paperbook III. As can be surmised from the information shared therein, it is submitted that there were no adverse Orders of SEBI in relation to Luminaire regarding price manipulation. The 6 records on the list referred to above are related to the takeover and rights issues of Luminaire and as such are wholly irrelevant to the present discussion. The relevant extracts of some of the records on the list are shared below: In the absence of any price manipulation investigation by SEBI, it follows that the company cannot be held guilty of price manipulation in respect of the trades conducted in the shares of Luminaire and in that view of the matter the loss incurred therein by the company was genuine. This coupled with the rationale of the trades taken in Luminaire clearly shows that the company had genuinely suffered losses in the trades of the stock of Luminaire and therefore the same deserv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... performance in the recent years. Copies of the contract notes have already been submitted in Paper Book - I Page 32-54. 4.4. However, the stable financials did nothing to assuage the concerns of the company. The head and shoulders pattern on the stock charts implied an oncoming decline in the stock prices. In hindsight it seems that the company was falsely alarmed by the chart pattern since the stock rose in price for a brief period before again nosediving due to poor financial strength. The company as a trader is geared to respond to all stimuli in the markets to make gains from trading. The choice to respond to the market factors is not a simple one and the company did not have the luxury of time on its hands to delay its decisions in a dynamic market. 4.5. As visible from the graph of the stock shared below, the company exited the stock in March 2014. The dot in blue represents the tentative price at which the stock of Unno was bought and the dot in red represents the price at which the stock of Unno was sold. As can be surmised from the above, the company had no control over the market prices contrary to what has been implied in the assessment order. 4.6. The company h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the price fall was sustained over a period of time. It is notable that the company did not enter/exit at the highest/lowest price and the trades in shares of Global were entered into basis the trend visible in the then latest financials of the stock available publicly. It is notable that the stock parameters had improved from its previous reporting period (Total Assets of Rs. 56.62 Crores in FYE Mar'13 as against Rs. 20.90 Crores in FYE Mar'12; Operating Profit of Rs. 1.49 Crores in FYE Mar'13 as against Rs. 0.01 Crore in FYE Mar'12; Reported Net Profit of Rs. 1.05 Crore in FYE Mar'13 as against Rs. 0.08 Crore in FYE Mar'12 implying an increment of 1,212.50% and trend reversal). The company, being a prudent trader, did not only rely on the financials of Global to make its decisions in the market. It was also prone to keep tabs on the technical aspects of the stock to pre-empt market movements in it. Copies of the contract notes have already been submitted in Paper Book - I Page 32-54. 5.4. Envisaging a further fall in the stock prices owing to its interpretation of the deteriorating technical parameters of Global even in the face of robust fundamentals, the company sought to exi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were not to be made party to these proceedings. The relevant extracts of the order is as follows: From the above it shall therefore be observed that the SEBI had admitted that only the promoters of Global Infratech and Finance Limited and/or their connected entities were guilty of price manipulation and that the unrelated entities were not involved in any wrongdoing. Accordingly, the company cannot be held guilty of price manipulation in respect of the trades conducted in shares of Global and in that view of the matter the loss incurred therein by the company was genuine. This coupled with the rationale of the trades taken in Global clearly shows that the company had genuinely suffered losses in the trades of the stock of Global and therefore the same deserves to be allowed in full. A.vii. The company thus submits that, in fact it was a victim of price fluctuation /manipulation undertaken by unscrupulous persons and not the perpetrator thereof, contrary to what has been insinuated. The company had unwittingly been caught in this imbroglio without any role in it and for no fault on its part. The data available from BSE clearly shows that in each month, thousands of transactions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... statements, bank statements which not only prove that the purchase & sale was conducted as per stock exchange regulations, but it also proves that pursuant to purchase/sale transactions, the deliveries were taken and given through demat A/c. and payments were made and received through proper banking channels. Besides paying or receiving the price of shares, the company had paid various charges & statutory levies such as brokerage, service tax, STT, turnover charges, etc. and these were duly acknowledged by the authorities. No falsity or infirmity in these documents has been established. In the circumstances, when the company's transactions were conducted on the BSE at the prices prevailing on the said Exchange on the respective dates, then merely on surmise & conjecture, the lower authorities have erred in treating the loss as not genuine or bogus and for that reason alone the loss cannot be disallowed. It is therefore prayed that the impugned disallowance be deleted. B. Distinction between facts of the present case and PCIT v/s Swati Bajaj [2022] 139 taxmann.com 352 (Calcutta) B.i. The Bench had also required the undersigned to explain as to how the decision of the Hon'ble Cal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 2637 & 2638/Mum/2022) [ITAT Mumbai] ii) ACIT vs M/s Maverick Commodity Broker Pvt Ltd (ITA No. 27/JP/2020) [ITATJaipur] iii) ITO vs Smt. Bimala Devi Singhania (146 taxmann.com 449) [ITAT Cuttack] iv) Trivikram Singh Toorvs PCIT (142 taxmann.com 493) [ITAT Chandigarh] v) Nishith Rameshchandra Shah vs ITO (ITA No. 1116/Mum/2022) [ITAT Mumbai] 8. The ld. DR however has submitted that the facts of this case are squarely covered by the decision of the Hon'ble Calcutta High Court in the case of PCIT vs. Swati Bajaj &Ors (supra). He has submitted that though the issue before the Hon'ble Calcutta High Court was relating to bogus long-term capital gains on account of investments in penny stock companies. The assessees is those cases had claimed the aforesaid bogus long-term capital gains as exempt from taxation u/s 10(38) of the Act. However, in this case, the issue is relating to the bogus short-term capital loss. That the assessee in this case has acted as exit provider to the beneficiaries of bogus long-term capital gains and thereby purchased the share at loss and set off the said short-term capital loss against business income of the assessee and thereby reduced its tax liab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a legal obligation to prove the genuineness of the transaction, the identity of the creditors, and credit- worthiness of the investors who should have the financial capacity to make the investment in question, to the satisfaction of the AO, so as to discharge the primary onus. ii. The Assessing Officer is duty bound to investigate the credit-worthiness of the creditor/subscriber, verify the identity of the subscribers, and ascertain whether the transaction is genuine, or these are bogus entries of name-lenders. iii. If the enquiries and investigations reveal that the identity of the creditors to be dubious or doubtful, or lack credit-worthiness, then the genuineness of the transaction would not be established. In such a case, the assessee would not have discharged the primary onus contemplated by Section 68 of the Act." 9.1 The Hon'ble Supreme court, thus, has held that once the assessee has submitted the documents relating to identity, genuineness of the transaction, and credit-worthiness of the subscribers, then the AO is duty bound conduct to conduct an independent enquiry to verify the same. Once the assessee having discharged initial burden upon him to furnish the evid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee in the light of the ratio of law laid down by the hon'ble Supreme Court in the case of "NRA steels" ( Supra ) and by the Calcutta High Court in the case of "Swati Bajaj"(supra). 10.1 The plea of the assessee in this case is that the assessee was bona fide purchaser of the shares in question. That the assessee had duly taken note of the financials and share price movement of the companies before purchasing the shares.The ld. counsel in this respect has referred to the financials of the said companies, the market trend and the reasons to exit as mentioned in the written submissions as reproduced above. firstly referred to the financial details and share price movement of Rutron International Ltd. It has been submitted that Rutron International Ltd. was a listed public company. The assessee company took note of the annual reports. The said company had reported total assets of 17.88 for F.Y 2012-13 and its turnover and proceeds had improved substantially from its previous years. Its income has also increased substantially. It reported net profit of Rs. 0.50 Crores in FY 2012-13 as against Rs. 0.11 Crores in FY 2011-12 implying an increment of 354.54%. The stock even start ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l was sustained over a period of time. It is notable that the company did not enter/exit at the highest/lowest price and the trades in shares of Comfort were entered into on the basis of the trend visible in the then latest financials of the stock available publicly. 10.3 Regarding the third company, it has been demonstrated that Luminaire Technologies Ltd. ('Luminaire'), was a listed public company at the relevant time. That the shares of Luminaire were purchased in a staggered manner in January and February 2014 in anticipation of trading profits and the same were sold on the 5th of March 2014. The stock of Luminaire was also in a steep fall when the company purchased it. However, the company purchased the stocks only when the price fall was arrested and a trend reversal was visible. However, the favourable technical analysis of the stock, which prompted the company to purchase the stock, did not lead to the anticipated price rise owing to the weak market outlook regarding the stock. The company, having entered the trade to profit in the immediate short term, immediately chose to cut short its losses as the stock price deteriorated further. 10.4 Regarding the decision to trade i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t Rs. 0.01 Crore in FYE Mar'12; Reported Net Profit of Rs. 1.05 Crore in FYE Mar'13 as against Rs. 0.08 Crore in FYE Mar'12 implying an increment of 1,212.50% and trend reversal). The company, being a prudent trader, did not only rely on the financials of Global to make its decisions in the market. It was also prone to keep tabs on the technical aspects of the stock to pre-empt market movements in it. Envisaging a further fall in the stock prices owing to its interpretation of the deteriorating technical parameters of Global even in the face of robust fundamentals, the company sought to exit its position in the stock completely for the time being. 10.6 It has been further explained that the SEBI has also investigated regarding the allegation of share trading in respect of two companies out of the above mentioned 5 companies. In the case of Rutron, only 14 persons were suspected to be involved in price rigging who were restrained from accessing the security market for a period of 6 months. Neither the assessee nor his share brokers were ever named for restrain from trading in the said scrip. Even, the company itself was not implicated of any wrong doing. Any other person, except th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ew was taken. That in the specific facts before the hon'ble High Court, it was noted that the price of the scrips showed steep increase during recessive trends and therefore the movement in prices was held to be ingenuine. That the Hon'ble High Court had observed that the onus was on the assessee to establish that the price rise was genuine in light of the fundamentals of the scrip. However, in case of the assessee, the trades were made on the Stock Exchange. There was no adverse statement of assessee's broker. Moreover the Director of the assessee was examined and confronted with the allegations u/s 131 of the Act and he had specifically denied the same. That the assessee has sufficiently demonstrated that the financial results and the fundamentals of the scripswas mirrored in their price movements and therefore it was not a case that the movement in prices was not explained.Evenas demonstrated above, in three (3) out of the five (5) scrips, there were no adverse orders of SEBI regarding any kind of price manipulation. Further in the remaining two scrips, the SEBI upon completion of investigation found specific entities/persons guilty of manipulation. The Ld. Counsel has further s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ounted money into tax exempt long-term capital gains and for that purpose, there were certain persons chosen as exit providers who would buy shares when the share prices would be at its peak and those exit providers thereafter would suffer losses on account of fall in the price of the shares. This specific fact on the file shows that the exit providers were already chosen to execute the plan. The motive was to give the benefit of bogus long-term capital gains to various beneficiaries and to make that plan foolproof, the exit providers were already chosen with a pre-determined planning as to at what stage the beneficiaries of bogus long-term capital gains would be given exit. That perhaps was not dependent upon chance exit providers willing to book bogus short-term capital loss. Neither the name of the assessee nor of his share broker is mentioned in the list of exit providers. The circumstances of this case do not suggest of unnatural and unrealistic human conduct. The Assessing Officer in this case has not pointed out any adverse evidence against the assessee. He has simply relied upon the investigation report which is a general investigation report. The Hon'ble Calcutta High Cour ..... X X X X Extracts X X X X X X X X Extracts X X X X
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