TMI Blog2023 (6) TMI 1309X X X X Extracts X X X X X X X X Extracts X X X X ..... credit- worthiness, then the AO must conduct an inquiry, and call for more details before invoking Section 68. If the Assessee is not able to provide a satisfactory explanation of the nature and source, of the investments made, it is open to the Revenue to hold that it is the income of the assessee, and there would be no further burden on the revenue to show that the income is from any particular source. The facts on the file itself show that there was meeting of minds of the entry operators and the share brokers and exit providers. The price rigging was done by giving benefit to various subscribers with connivance of share brokers and the motive was to convert their unaccounted 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 foolp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Officer was justified in disallowing and adding back the Appellant's claim for deduction of loss suffered of Rs. 4,02,00,360/- suffered by the Appellant in its Share Trading Business. 2 That on the facts and in the circumstances of the Case, the Ld. CIT(A)-15 erred in confirming the action of the Assessing Officer of invoking the provisions 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: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oss booked by the assessee was genuine and that the same cannot be disallowed on mere suspicion. That the transactions carried out by the assessee were duly supported by documentary evidence and were conducted on the recognized stock exchange. The Assessing Officer however did not accept the aforesaid explanation of the assessee and further referred to the investigation wing report 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 ob ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee had purchased shares of this company on 04th and 5th February 2014 and sold the same on 21st to 24th March 2014 and further observed that the average share price of this company rose from Rs. 0.76 on 03.07.2012 to Rs. 81.90 on 12.08.2013 and again fell down to Rs. 10.18 on 29.08.2014. The Assessing Officer thereafter discussed the modus operandi of penny stock companies 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s are not bona fide but are ambiguous, sham or make-believe it is open to question and doubt the transaction. The make-believe transactions, though seemingly legal, are not free from judicial scrutiny. It is true that every person is entitled to arrange his affairs as to avoid taxation but the arrangement must be real, genuine or bona fide. A sham transaction or make believe transaction 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 f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der of the CIT(A), the assessee has come in appeal before us. 6. The ld. counsel for the assessee has submitted that all the allegations levelled by the Assessing Officer were general allegations. That the name of the assessee did not feature in the statement of the share brokers as referred to the assessment order. That the assessee was not beneficiaries of any long-term capital gains, rather, 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 n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... curred were bonafide and genuine and all its transactions were both duly supported by documentary evidences and were conducted on the Bombay Stock Exchange ( BSE ), a recognized stock exchange, in conformity with the applicable regulatory norms, and at the prices which prevailed on the BSE on the relevant transaction dates. A.ii. The trades were properly recorded and duly disclosed by the company in its 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, devo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ersely by the lower authorities are as follows: Sl No. Stock Purchase Sale Loss on Sale Quantity Amount (INR) Quantity Amount (INR) 1 Rutron International Limited 7,69,000 1,30,68,812/- 7,69,000 54,55,698/- 76,13,114/- 2 Comfort Fincap Limited 91,800 2,84,27,925/- 91,800 1,31,77,888/- 1,52,50,037/- 3 Luminaire Technologies Limited 2,61,161 1,00,39,653/- 2,61,161 55,92,176/- 44,47,476/- 4 Unno Industries Limited 2,00,000 60,25,664/- 2,00,000 25,68,418/- 34,57,24 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (c) Tax of Earlier Year - - Profit after tax (94,33,755) 50,37,145 FINANCIAL HIGHLIGTS: Revenue from operations stood at Rs. 22,80,000/- for fiscal 2014 Other income stood at Rs. 1,23,70,570/- for fiscal 2014 Loss for fiscal 2014 is Rs. 94,33,755/- DIVIDEND: Due to loss, your directors do not propose any dividend for the accounting year ended 31.03.2014. 1.3. It is notable that Rutron had reported Total Assets of Rs. 17.88 Crores for the financial year ending ( FYE ) Mar 13 and its turnover and profit had improved substantially from its previous reporting period ( Turnover of Rs. 4.06 Crores in FYE Mar 13 as against Rs. 2.99 Crores in FYE Mar 12; Other Income of Rs. 1.10 Crores in FYE Mar 13 as against Rs. 0.05 Crores in FYE Mar 12; Total Income of Rs. 5.16 Crores in FYE Mar 13 as against Rs. 3.04 Crores in FYE Mar 12 implying an increment of 69.73%; Reported Net Profit of Rs. 0.50 Crores in FYE Mar 13 as against Rs. 0.11 Crores in FYE Mar 12 implying an increment of 354.54% ) and the stock even started decla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 13 v/s. Rs. 0.06 in Mar 12) thereby dashing all hopes of a recovery in prices. It is notable that the company did not enter/exit at the highest/lowest price and the trades in Rutron were entered into basis the trend visible in the then latest financials of the stock available publicly. The dot in blue represents the approximate point of time at which the stock of Rutron was bought and the dot in red represents the point of time at which the stock of Rutron was sold. The company had no control over the market prices as incorrectly implied in the assessment order. 1.6. The company has downloaded the relevant order/s of S to Rutron and has found the following list of order/ records which is shared on Pages 566-568 of Paperbook - III. The 22 records on the enclosed list primarily relate to the recovery proceedings initiated in relation to the stock of Rutron In contains records of adjudication orders in relation to penalties imposed u/s 15-I of the SEBI Act in relation to infringement of rules and regulations framed by the regulator in relation to price manipulation undertaken by specified entities. The relevant extracts of some of the records on the list are shared ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) shares, having ISIN INE274M01026,were based on the company s own reading of the financialstatements of Comfort. Comfort continues to be a listed public company and it shares are regularly traded on the BSE. The company drew valuable insights from the audited financial statements of Comfort pertaining to the immediately preceding period of FY 2012-13 which were readily available in the public domain and widely researched by other market participants. 2.2. The company submits that the trade was undertaken based on the following parameters which clearly sets out both the logic and rationale behind the trade and also puts the trading activity in Comfort in the proper perspective. The annual reports of Comfort for the Financial Years 2012-13 to 2013-14 are submitted in Paper Book II Pages 170 to 265. The relevant portion of the Director s Report setting out the financial performance of Comfort for FY2013-14, is set out below: 2.3. The shares of Comfort (still Comfort Fincap Ltd 535267) were purchased in a staggered manner in January 2014 in anticipation of trading profits and the same were sold, again in a staggered manner, in March 2014 when the trade went awry. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hared below, had the company not exited the stock timely in March 2014, the losses would be much larger and would have adversely affected the interests of Revenue even further. Notably, the stock has not attained its erstwhile price level even to this day. The company clearly averted a much larger loss by acting quickly on the information available before it. The dot in blue represents the tentative price/s at which the stock of Comfort was bought and the dot in red represents the tentative price/s at which the stock of Comfort was sold. The company had no control over the market prices as incorrectly implied in the assessment order. 2.6. The company has downloaded the relevant order/s of SEBI pertaining to Comfort and has found the following list of order/ records which is shared on P ages 569 -570 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 Comfort regarding price manipulation. The 9 records on the list referred to above are related to the takeover and adjudication orders in relation to penalty proposed u/s 15-I of the SEBI Act in relation to infringemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. It is notable that the company did not enter/ex at the highest/lowest price and the trades in shares of Luminaire were entered into basis the trend visible in technical charts available at the time. Copies of the contract notes have already been submitted in Paper Book I Page 32-54 . 3.4 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. Even the fundamentals of the stock were not supportive and the eis evident from the financial parameters of Luminaire in the next reporting period. 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. The company exited its position when it became clear to it that the stock would not recover and the losses would only widen from there. This view was mirrored in the continued deterioration in the fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... time. Unno, having ISIN INE142N01023, was last traded on the BSE on 29 th March, 2016. The company drew valuable insights from the audited financial statements of Unno pertaining to the immediately preceding period, viz., FY12-13, which were readily available in the public domain and were widely researched by other market participants. 4.2. The company submits that the trade was undertaken based on the not only the fundamentals but also the technical aspects of the stock. The parameters are discussed below which clearly set out both the logic and rationale behind the trade and also puts the trading activity in Unno in the proper perspective. The annual reports of Unno for the Financial Years 2012-13 to 2013-14are submitted in Paper Book III Pages 334 to 450. The relevant portion of the Director s Report setting out the financial performance of Unno for FY2013-14, is set out below: 4.3 The shares of Unno were purchased on 22 nd January 2014 in anticipation of trading profits and the same were sold on 20 th March 2014 when a clear and pronounced head and shoulders pattern emerged on the technical chart of the stock, which usually mean ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . As can be surmised from the information shared therein, it is submitted that there were no adverse Orders of SEBI in relation to Unno regarding price manipulation. The tworecords on the list referred to above are related to the takeover and illiquid stock options and as such are wholly irrelevant to the present discussion. The relevant extracts of the 2 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 shares of Unno 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 Unno clearly shows that the company had genuinely suffered losses in the trades of the stock of Unno and therefore the same deserves to be allowed in full. 5.0. Global Infratech Finance Ltd. (GBL INFRA 531463) 5.1. Global Infratech Finance Ltd. ( Global ) shares, having ISIN INE377M01035, were traded in by the company on the basis of its reading of the financials of Global. The shares of Global were last traded on the BSE on 29 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eventually fell further despite the robust financials for the period of FY 13-14 in which the gross income from operations increased from Rs. 15.16 Crores in FYE Mar 13 to Rs. 24.87 Crores in FYE Mar 14, viz., a year on year ( YOY ) increment of 64%. Even the Net Profit i ncreased to Rs. 1.61 Crores for FYE Mar 14 in comparison to Rs. 1.05 Crores for FYE Mar 13 implying a YOY increase of more than 50%. This implies that the company s stance, that the stock price performance was not in consonance with its financials, was valid. 5.5. As visible from the graph of the stock shared below, had the company not exited the stock in March 2014, the losses would be much larger and would have also affected the interests of Revenue adversely. Notably, the stock has not attained its erstwhile price level even to this day. The company clearly averted a much larger loss by acting quickly on the information available before it. The dot in blue represents the tentative price/s at which the stock of Global was bought and the dot in red represents the tentative price/s at which the stock of Global was sold. The company had no control over the market prices as incorrectly impli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ral lakhsof shares of each of the 5 abovementioned entities were regularly conducted. The information also shows that on each working day of the Stock Exchange during the material time, regular trading took place in the shares of the 5 entities. These facts cumulatively prove that fair and transparent trades took place in the shares of each of the 5 entities. A.viii. Even the SEBI hadremarked, in its order dated 16th July, 2021, that the noticees had submitted that SEBI had not taken any action against other preferential allottees and the buyers who had placed buy orders above LTP and had contributed to positive LTP. As can thus be surmised, the SEBI did not find any evidence against the company for its share trading activities in the 5 entities above-named, since the company was not a noticee in either of the Orders of the SEBI in the case of the 5 entities in whose shares the company had traded during the relevant period. A.ix. From the documents information furnished, your goodself will thus find that in each case where the company purchased sold the shares, each transaction was carried out in conformity with the rules framed by Stock Exchange SEBI. On purchase ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Calcutta High Court in the case of PCIT v/s Swati Bajaj [2022] 139 taxmann.com 352 (Calcutta) was factually distinguishable for the following reasons :- - The order operates on facts peculiar to its own as the sale/purchase was not from the Demat accounts. In most of the cases before the Hon ble High Court, the purchases off the Stock Exchange private placements. This is however not the factual scenario in the facts of the present case. The trades were made on the Stock Exchange. - In the case before the Hon ble High Court, it was noted that there were orders of SEBI suspending the scrip and/or wherein the concerned trader were found guilty of price manipulation. However as 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 and that too for artificially increasing prices to earn unscrupulous gains. The assessee has not been found guilty of any wrong-doing in as much as the aforesaid order further absolves the assessee of the same. - In the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thereby reduced its tax liability. He, therefore, has submitted that the ratio laid down by the Hon ble Calcutta High Court in the case of PCIT vs. Swati Bajaj Ors (supra) should be accordingly applied in the case of the assessee. That the Assessing Officer as per the information/report of the investigation wing has rightly held that the aforesaid five companies in which the assessee has traded were penny stock companies and has rightly disallowed the short-term capital loss claimed by the assessee. He has further submitted that so far as the contention of the ld. DR that the assessee was not given opportunity to cross-examine the concerned persons/share brokers/promoters whose statement was recorded by the investigation wing is concerned, the similar issue was also raised by the concerned assessees before the Hon ble Calcutta High Court in the case of PCIT vs. Swati Bajaj Ors (supra). However, the Hon ble Calcutta High Court has rejected the aforesaid contention while confirming the additions made by the Assessing Officer in those cases on account of bogus long-term capital gains. 9. We have considered the rival contentions and gone through the record. The Hon ble Supreme Cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ged initial burden upon him to furnish the evidences to prove the identity and creditworthiness of the share subscribers and genuineness of the transaction, the burden shifts upon the Assessing Officer to examine the evidences furnished and even make independent inquiries and thereafter to state that on what account he was not satisfied with the details and evidences furnished by the assessee and confronting with the same to the assessee. 9.2 The Hon ble Calcutta High Court, however, in the case of PCIT vs. Swati Bajaj Ors (supra) has observed that to prove the allegations a logical process of reasoning from the totality of the attending facts and circumstances surrounding is to be adopted. That it is the duty of the Court to take note of the immediate and proximate facts and circumstances surrounding the events on which the charges/allegations are founded so as to reach a reasonable conclusion and the test would be what inferential process that a reasonable/prudent man would apply to arrive at a conclusion. Further proximity and time and prior meeting of minds is also a very important factor. A holistic approach is required to be made and the test of preponderance of probabili ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mplying an increment of 354.54%. The stock even started declaring dividends (Equity Dividend of Rs. 0.18 Crores in FYE Mar 13 as against NIL in FYE Mar 12, Mar 11 and Mar 10 implying a trend reversal and a dividend payout of 36%). That having regard to these fundamentals of Rutron, the assessee company had purchased shares in a staggered manner in January 2014 in anticipation of trading profits. The purchase of the stock was motivated not only by the dividend but the anticipated price rise. However, since the stock of Rutron was in a sustained fall and therefore like any prudent trader, the company purchased the stock only when its price fell substantially. However, when it became apparently clear that the financials of Rutorn were not indicative of future financial performance of the stock, the assessee company, being a prudent trader switched gears and immediately cut short its losses by exiting its position in Rutron. The ld. AR, therefore, has demonstrated that the investments in these shares were governed on commercial prudence. 10.2 The Ld. Counsel has further demonstrated that the Trades in Comfort Fincap Ltd. ( Comfort ) shares, were also based on the company s own readi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orated further. 10.4 Regarding the decision to trade in the stock of Unno Industries Ltd., the ld. Counsel has explained that the same was based on the company s own reading of the financials of Unno, which was a listed public company at the relevant time. That the trade was undertaken based on the not only the fundamentals but also the technical aspects of the stock. The shares of Unno were purchased on 22nd January 2014 in anticipation of trading profits and the same were sold on 20th March 2014 when there was an indicator for a further decline in the prices of a stock. That the stock of Unno was in a steep fall and the company had purchased the stock only when its price fell substantially. That the company did not enter/exit at the highest/lowest price and the trades in Unno were entered into only after carefully considering both the technical and fundamental aspects of the stock. The trend visible in the then latest financials of the stock available publicly was upbeat. That Unno had reported Total Assets of Rs. 42.55 Crores for FYE Mar 13 and its turnover and profit had remained stable over the years despite the falling prices in the market. Unno had a Turnover of Rs. 0.65 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot implicated of any wrong doing. Any other person, except the aforesaid 14 persons, was not restrained for trading in the shares in the said company. The second company investigated was Global Infratech Finance Ltd, in respect of which, only 46 specific persons/entities were found guilty of price manipulation in shares of the said company after detailed investigation. That some of the entities had inter alia questioned the act of SEBI in not holding all persons/entities who had traded in the shares of Global Infratech and Finance Limited to be artificial or suspicious. However, the SEBI in their Order had specifically observed that only the promoters and/or their connected entities were found to be guilty of price manipulation and that the unrelated entities were not to be made party to these proceedings. It has been further submitted that in respect of other three companies, the SEBI did not choose to make any investigation and there is no action taken by the SEBI against the other three companies namely Comfort Fincap Ltd, Luminaire Technologies Ltd and Unno Industries Ltd. It has been submitted that no adverse orders ever have been passed by the SEBI regarding price manipulatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s/persons guilty of manipulation. The Ld. Counsel has further submitted that in the similar facts and circumstances, the coordinate benches of the Tribunal have opined in favour of the assessees therein. 12. We find force in the contentions raised by the ld. counsel for the assessee. Firstly, in this case, the assessee has not claimed long-term capital gains on account of unrealistic steep rise in the share prices of these scrips traded in as was in the case of PCIT vs. Swati Bajaj Ors (supra). The Hon ble High Court had held, under the circumstances, that the burden was upon the assessee to explain the business prudence of investment in these scrips of the companies having negligible financial worth and thereafter of steep rise in their share price resulting into huge capital gains within a short span of time. The case before us is of business loss in share trading. The assessee, as observed above, has duly explained the factors and considerations which prevailed for making decision by the assessee company of purchasing in the aforesaid five scrips, which included their financial worth, the market position, their income, dividends etc. Further, it was not a case that the share ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is a general investigation report. The Hon ble Calcutta High Court in the case of PCIT vs. Swati Bajaj Ors (supra) has considered the said report and analysed the same vis-a-vis circumstantial evidences like the negligible financial worth of the companies whose shares were traded in, the unrealistic steep hike in the share prices as against the recessive market trend and the failure of the assessee to explain the commercial prudence for making such huge investments. The additions thus have been made on the basis of circumstantial evidences and considering the preponderance of probabilities. Hon'ble Supreme Court in PadmasundraRao v. State of T.N. 255 ITR 147 (SC) has held that circumstantial flexibility, e.g. one additional or different fact, may make a world of difference between conclusions in two cases: Courts should not place reliance on decisions without discussing as to how the factual situation fits in with the fact situation of the decision on which reliance is placed. There is always peril in treating the words of a speech or judgment as though they are words in a legislative enactment, and it is to be remembered that judicial utterances are made in the setting o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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