LUCKY STOCK BROKING P LTD., MUM V. ITO-10(2)(2), MUM

ITA 72/MUM/2023

AI Insights

The case revolves around an appeal by Lucky Stock Broking Pvt. Ltd. against the order of the CIT(A)/NFAC, Delhi, which confirmed the disallowance of business losses claimed by the assessee on two scrips traded on the Bombay Stock Exchange. The AO had disallowed the losses based on an investigation report suggesting that the scrips were part of a scheme involving penny stocks and bogus entries for tax benefits. The Tribunal, after examining the evidence and arguments presented, concluded that the assessee had engaged in legitimate trading activities and that the losses claimed were genuine business losses.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 300109 (ITAT-MUMBAI)
• Duration Of Justice: 4 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-05-2023
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: SMC
• Next Hearing Date: 01-03-2023
• Assessment Year: 2014-2015
• Appeal Filed On: 09-01-2023
• Other Referred Cases: Sanjay Bimal Chand Jain L/h Shantidevi Bimalchand Jain Vs. Pr. CIT-1, Nagpur & Other, Suman Poddar Vs. ITO
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Business income; Retraction; Penny stocks
• Section: 131; 132; 143(1)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL “SMC” BENCH, MUMBAI BEFORE SHRI ABY T. VARKEY, JM आयकर अपील सं/ I.T.A. No.72/Mum/2023 (निर्धारण वर्ा / Assessment Year: 2014-15) Lucky Stock Broking Pvt. Ltd. A-402 Citiscape CHS, Next to Hotel Kohinoor Continental Andheri Kurla Road, Andheri (E), Mumbai-400059. बिधम/ Vs. ITO-10(2)(2) Room No. 350, Aayakar Bhavan, M. K. Road, Churchgate, Mumbai- 400020. स्थधयी लेखध सं./जीआइआर सं./PAN/GIR No. : AABCL3965D (अपीलार्थी /Appellant) .. (प्रत्यर्थी / Respondent) सुनवाई की तारीख / Date of Hearing: 02/03/2023 घोषणा की तारीख /Date of Pronouncement: 12/05/2023 आदेश / O R D E R PER ABY T. VARKEY, JM: This is an appeal preferred by the assessee against the order of the Ld. CIT(A)/NFAC, Delhi dated 17.11.2022 for AY. 2011-12. 2. The main grievance of the assessee is against the action of the Ld. CIT(A) confirming the disallowance of Business Loss claimed by the assessee on two scrips traded in the Bombay Stock Exchange (BSE) (M/s. Shreenath Commercial & Finance Ltd.) (Now known as Proaim Enterprises Ltd.) and M/s. Asianlac Capital & Finance Ltd (Now known as M/s. Global Infratech & Finance Ltd.). 3. Brief facts are that the AO noted that the assessee had filed return of income on 30.09.2014 declaring total income of Rs.46,768/-. And the return was processed u/s 143(1) of the Income Tax Act, 1961 (hereinafter “the Act”). Later, the case of the assesse was selected for Assessee by: Shri Rakesh Joshi Revenue by: Shri Anil Gupta ITA No.72/Mum/2023 A.Y. 2014-15 Lucky Stock Broking Pvt. Ltd. 2 scrutiny. And the AO noted that the assessee company is engaged in the business of trading in shares and commodity. The AO noted that the assessee company has incurred business loss of Rs.19,94,860/- on sale of scrip M/s. Shreenath Commercial & Finance Ltd. (hereinafter “M/s. Shreenath”) and of Rs.22,45,551/- on sale of script M/s. Global Infratech & Finance Ltd. (hereinafter “M/s. GIFL”) aggregating to total business loss of Rs.42,40,411/-. The AO noted that the assessee had declared very little income against the revenue from operation in the current year and has booked huge business loss in the transaction of the two (2) script named above. Based on the Investigation Report, against the aforesaid two script from Kolkata Wing that these two scripts are penny stocks as well as the investigation report which explained the modus operandi adopted by the unscrupulous entry operators for such activities, the AO noted that the method adopted by these persons are to acquire shares of the penny stocks companies at very low prices through the route of preferential allotment (private placement) i.e. off market transactions. And another route to acquire the shares was through Amalgamation or merger. By these routes, the beneficiaries of Long Term Capital Gain (LTCG) are allotted shares of a private limited company which is subsequently amalgamated with a listed penny stock company and the beneficiaries receive shares of the listed penny stock in exchange of the shares of private limited company. According to AO, the shares in some cases were acquired through stock exchange and these shares were then split; and bonus shares were issued to increase the volume. And thereafter, the prices of ITA No.72/Mum/2023 A.Y. 2014-15 Lucky Stock Broking Pvt. Ltd. 3 the shares of the penny stock companies are rigged and are raised through circular trading which are managed by ‘operator’ of the scrip who manages the overall affairs of the scheme and he is the one that beneficiaries like assessee contacts, so as to take entry of bogus LTCG/STCL/Business loss in their books and arranges the same through the scrips of penny stock companies. According to AO, the operator manages many paper/bogus companies and uses them to do circular transactions to rig the price of the shares. The shares of these penny stock companies, although listed on exchange are always closely held and are controlled by the promoter of the penny stock company and the operator arranges for the bogus LTCG/Loss. This according to AO was due to the fact that the general public is not interested in these shares as these companies have no credentials and this helps the operator to keep a control on the price movement of the shares. Thus, according to him, the prices are inflated/deflated on the stock exchange according to the requirement of beneficiaries. And thus, by this action, the unaccounted money of the beneficiaries gets routed through these bogus entities termed as ‘Exit Providers’ and the shares held by the beneficiaries are bought by these bogus entities from the money which is the unaccounted money of the beneficiaries. According to AO, the shares of the LTCG beneficiaries are purchased by the beneficiaries of loss like in the assessee’s case who later sell their shares when the price falls and hence book bogus loss in their books. And the assessee has done the same modus during the year. Thus, according to the AO, the assessee has traded in these two shares ITA No.72/Mum/2023 A.Y. 2014-15 Lucky Stock Broking Pvt. Ltd. 4 only to book the loss of Rs.42,40,411/-. AO after, taking note of the salient features of these two scrips, he noted the name of the exit/entry providers and the fact that some of the exit/entry providers had given statement to the investigation wing that they are indulging in providing bogus LTCG/STCL/Loss, he referred to the statement of Shri Sajjan Kedia, promoter of M/s. GBL Infra recorded on 13.06.2014 u/s 132 of the Act wherein he accepted to be involved in providing accommodation entry through transactions in shares of his companies through Mr. Jagdish Purohit. And also the AO referred to the statement given by Shri Ajit Gupta one of the beneficiary in his statement on 16.10.2014 wherein he admitted that he has obtained bogus LTCG. According to the AO, the directorate of investigation has conducted several inquiries and statements were recorded u/s 131/133A of the Act of operator/exit providers about these bogus LTCG. And the AO also notes that the SEBI has named Shri Sajjan Kedia to be involved in fraudulent practice in its reports, in the case of M/s. First Financial Service Ltd. vide order dated 19.12.2017. In the light of the above, the AO issued show cause notice to the assessee. 4. Pursuant to the show cause notice of AO, the assessee submitted before him that the assessee is into the business of share trading and as part of the business transaction it has purchased both these shares through Bombay Stock Exchange. And both these shares were listed shares and that assessee had purchased them through registered stock broker M/s. Adinath Stock Broking Pvt. Ltd. It was pointed out to AO that no action of SEBI has been taken against the assessee nor the ITA No.72/Mum/2023 A.Y. 2014-15 Lucky Stock Broking Pvt. Ltd. 5 broker through whom the assessee has made the purchase and sale of the shares took place through the Bombay Stock Exchange and that assessee has not been allotted any preferential shares and transactions were through banking channel. The assessee filed the following documents to prove the purchase and thereafter sale of the scrips. In order to prove the purchase transaction, the assessee filed the following documents: - Purchase Transaction(s) Paper Book Purchase bill cum Contract note 81-83 Copy of Ledger of SEBI registered share broker “Adinath Stock Broking Pvt. Ltd 76 Copy of D-mat Transaction statement 84-85 Copy of Bank Statement of assessee 86-87 Copy (Rate Publication) downloaded from Bombay Stock Exchange’s website www.bseindia.com 88 Copy of ledger of share broker Adinath Stock Broking Pvt. Ltd. in the books of assessee company 89-90 5. And in respect of sale transaction, the assessee filed the following documents as under: - Sale Transaction(s) Paper Book Sale bill cum Contract note 74-75 Copy of Ledger of SEBI registered share broker “Adinath Stock Broking Pvt. Ltd 76 Copy of D-mat Transaction statement 77 Copy of Bank Statement of assessee 78 Copy (Rate Publication) downloaded from Bombay Stock Exchange’s website www.bseindia.com 79 Copy of ledger of share broker Adinath Stock Broking Pvt. Ltd. in the books of assessee company 80 6. And also brought to the notice of the AO that his reliance of the statement Shri Sajjan Kedia, promoter of GIFL/GBL is incorrect ITA No.72/Mum/2023 A.Y. 2014-15 Lucky Stock Broking Pvt. Ltd. 6 because he has retracted the statement by filing sworn affidavit wherein he has stated that officers of the Department came to search his house and has recorded his statement but a copy of which was not given to him despite he requested for a copy. According to him, the statements were not correctly recorded by the search team and therefore he wanted to bring the correct facts/retract. Shri Sajjan Kedia alleged that he was harassed and physically threatened when objected to the incorrect recording of statement and they recorded their own version instead of his own reply to questions. And that his signature was obtained without allowing him to go through the contents of the recorded statement. Therefore, since he was intimidated/threatened and forced to sign statement, he has retracted the earlier statement given under threat/ coercion and duress. However, the AO was not impressed by the retraction made by Shri Sajan Kedia and after taking note of the abnormal fluctuation in the share prices, he summoned the director of the assessee company and recorded the statement, which is found placed at page no. 108 to 114 of the PB wherein inter-alia searching questions regarding (i) the business of the assessee, (ii) why she purchased these shares (iii) and on whose advice she purchased the shares etc were asked; And for that she answered that her business was trading of shares/commodity and she purchased these two scrips because the share prices of these shares were doing well in the market, and when she found that the prices were dropping down, she sold it. And she asserted that she did not know the director of these two companies as well as she does not know Shri Jagdish Purohit. ITA No.72/Mum/2023 A.Y. 2014-15 Lucky Stock Broking Pvt. Ltd. 7 However, the AO brushed aside the aforesaid facts and after referring to few case law, disallowed the business loss of Rs.42,40,411/- as well as commission expense @ 3% of the same i.e. Rs.1,21,212/-. Aggrieved, assessee preferred an appeal before the Ld. CIT(A) who was pleased to confirm the same by referring to the decision of the Hon’ble High Court including the decision of Hon’ble Bombay High Court in the case of Sanjay Bimal Chand Jain L/h Shantidevi Bimalchand Jain Vs. Pr. CIT-1, Nagpur & Other in ITA. No.18/2017 and the Hon’ble Delhi High Court in the case of Suman Poddar Vs. ITO (ITA. No. 841/2019). Aggrieved, the assessee is before us. 7. I have heard both the parties and perused the records. It has been brought to my notice that the assessee company is engaged in the business of trading of shares and commodity. And in the course of its business purchased share as stock and trade for trading and the income is shown as business income/loss. In this regard the Ld AR pointed out that assessee has not claimed any capital gain/loss i.e, LTCG/STCG/STCL. The assessee had purchased the share of M/s. Shreenath Commercial & Finance Ltd. on 19.02.2013 (AY. 2013-14), at a price of Rs.20.80 per share and sold the same on 02.01.2014 @ Rs.8.51 per share. And thus suffered loss of Rs.19,94,860/-. And the assessee had also purchased 43,000 shares of M/s. Global Infratech & Finance Ltd., shares on 20.12.2013 @ Rs.92.04 at Rs.39,58,550/- and sold the same on 26.03.2014 at average price of Rs.39.83 per share at total price of Rs.17,12,999/-. Thus, suffered loss of Rs.22,45,551/-. Thus, the assessee suffered in this relevant assessment year total ITA No.72/Mum/2023 A.Y. 2014-15 Lucky Stock Broking Pvt. Ltd. 8 business loss of Rs.42,40,411/- and claimed it, which was rejected by the AO on the ground that the aforesaid two scrips were penny stocks. According to the AO, the promoter of the assessee company Shri Sajjan Kedia (promoter of GIFL) had made statement to the search party that he was involved in providing accommodation entry by allotment of preferential/shares of his company through Shri Jagdish Purohit. And the AO took note of the investigation wing (Kolkata report) and also the modus operandi adopted by these entities/entry operators/exist providers/operators and confronted the assessee as to why the claim of business loss should not be allowed. The assessee brought to the notice of the AO that the assessee has not received any preferential shares and the assessee has purchased the shares through the Bombay Stock Exchange through broker M/s. Adinath Stock Broking Pvt. Ltd which is a registered stock broker of the SEBI and has sold the same also through the Bombay Stock Exchange; and has paid and received payments through banking channels. In order to prove the genuineness of the transactions. The assessee had filed the following documents: - Purchase Transaction(s) Paper Book Purchase bill cum Contract note 81-83 Copy of Ledger of SEBI registered share broker “Adinath Stock Broking Pvt. Ltd 76 Copy of D-mat Transaction statement 84-85 Copy of Bank Statement of assessee 86-87 Copy (Rate Publication) downloaded from Bombay Stock Exchange’s website www.bseindia.com 88 Copy of ledger of share broker Adinath Stock Broking Pvt. Ltd. in the books of assessee company 89-90 ITA No.72/Mum/2023 A.Y. 2014-15 Lucky Stock Broking Pvt. Ltd. 9 8. And in respect of sale transaction, the assessee filed the following documents as under: - Sale Transaction(s) Paper Book Sale bill cum Contract note 74-75 Copy of Ledger of SEBI registered share broker “Adinath Stock Broking Pvt. Ltd 76 Copy of D-mat Transaction statement 77 Copy of Bank Statement of assessee 78 Copy (Rate Publication) downloaded from Bombay Stock Exchange’s website www.bseindia.com 79 Copy of ledger of share broker Adinath Stock Broking Pvt. Ltd. in the books of assessee company 80 9. During assessment proceedings, the AO even summoned the director of the assessee company Chandrakala Sanklecha on 16.12.2016 u/s 131 of the Act and recorded her statement which is found placed at page no. 108 to 114 of the PB wherein relevant questions were asked about purchase and sale of the scrips in question wherein she informed that the scrips were purchased in open market through stock exchange through registered stock broker; and that shares were Demated and disclosed her Demat account details as well as the fact of sale of shares through the stock exchange through the same broker; and about receipt of payment via the stock exchange and the fact of debit made in Demat account accordingly. It was also brought to the notice of the AO to question no. 18 that the assessee company has traded in other shares of M/s.JRI Infra Ltd, Kridhan Infra Ltd. etc. She has answered to the questions of AO that she was not seeking any professional advice from anybody about buy/sale of scrips, but she keenly watches the news, reads economics times etc; ITA No.72/Mum/2023 A.Y. 2014-15 Lucky Stock Broking Pvt. Ltd. 10 and taking note that these two shares were doing well in the stock market, she purchased the same but unfortunately after she purchased the shares, it started dropping i.e, in the case of M/s. GIFL from Rs.92 to Rs. 39, when she sold it. Likewise, in the case of M/s. Shreenath, she purchased the same for Rs.20 and sold it for Rs.8. And she asserted to AO that she neither know Shri Jagdish Purohit nor the promoter of the GIFL Shri Sajjan Kedia. Assessee asked the AO to furnish a copy of the statements relied by him on the strength of which AO is drawing adverse view against the two (2) scrips. It is noted that the AO despite being asked, did not furnish any copy of the statements nor the investigation report to the assessee. The assessee even requested for cross-examination of the persons who has given statement against these two scrips but it was not provided to it. In the light of the aforesaid omission the assessee contest the action of the AO/Ld. CIT(A) to have disallowed the business loss suffered by the assessee as well as made notional addition of commission which assessee has not paid. According to the Ld. AR, the AO erred in relying upon the decision of the Hon’ble Bombay High Court Nagpur Bench since is not applicable to the facts of assessee’s case because in that case purchases of shares were made off-market and transactions were in cash. Whereas, the assessee has purchased both shares through on-line from Bombay Stock Exchange and payments took place through banking channel. So the case law as such is distinguishable. As noted despite assessee asking for statements as well as investigation report which has been relied by the AO to draw adverse ITA No.72/Mum/2023 A.Y. 2014-15 Lucky Stock Broking Pvt. Ltd. 11 view against the assessee, the same has not been given to assessee and its request for cross-examination of the person especially Shri Sajjan Kedia has not been provided. It is trite law, that AO can make his own investigation about an issue, which emerges during the assessment proceedings. And AO is not bound by Indian Evidence Act. The limit of enquiry and the kind of materials or evidence he can act upon cannot be specified and the Statute has not attempted it. Wide though his power be, he must act in consonance with the rule of Natural Justice. One such rule is that he shall not use any material against the assessee without giving him an opportunity to meet it. In short, the AO cannot assess by keeping the assessee in the desk as to the material against him. Therefore, the statements of persons referred to by AO cannot be relied for drawing adverse inference against assessee, unless copy of the same is furnished to the assessee and an opportunity is given to meet it. Moreover, it was brought to my notice that Shri Sajjan Kedia, promoters of GIFL has retracted the statement and has alleged that his statement was obtained under duress/coercion. So once the investigation report and the statements relied upon by AO are removed, there is nothing against the two scrips. Further it was brought to my notice that the SEBI report has neither indicted assessee nor the broker through whom assessee has traded in the Bombay Stock Exchange of engaging in any wrongful/unlawful activities while dealing with regarding these two shares/scrips. And the Ld. AR fairly brought to our notice that SEBI had in fact drawn adverse remarks against the persons to whom preferential shares has been allotted by ITA No.72/Mum/2023 A.Y. 2014-15 Lucky Stock Broking Pvt. Ltd. 12 M/s. GIFL. However, those remarks would not in any way affect the assessee because the assessee had purchased the shares through open/electronic platform of Bombay Stock Exchange. Thus, I find that in the over-all facts and circumstances of the case, the preponderance of probability lies in favour of the assessee and taking into consideration the fact that the assessee is into the business of trading in shares having suffered loss during business need to be allowed as business loss. And therefore AO is directed to allow loss incurred by the assessee. Having said so the notional commission income added in the hands of the assessee should also be deleted. It is ordered accordingly. 10. In the result, appeal of the assessee is allowed. Order pronounced in the open court on this 12/05/2023. Sd/- (ABY T. VARKEY) JUDICIAL MEMBER मुंबई Mumbai; दिनांक Dated : 12/05/2023. Vijay Pal Singh, (Sr. PS) ITA No.72/Mum/2023 A.Y. 2014-15 Lucky Stock Broking Pvt. Ltd. 13 आदेश की प्रनिनलनि अग्रेनर्ि/Copy of the Order forwarded to : आदेशधिुसधर/ BY ORDER, सत्यादपत प्रदत //True Copy// उि/सहधयक िंजीकधर /(Dy./Asstt. Registrar) आयकर अिीलीय अनर्करण, मुंबई / ITAT, Mumbai 1. अपीलार्थी / The Appellant 2. प्रत्यर्थी / The Respondent. 4. आयकर आयुक्त / CIT 5. दवभागीय प्रदतदनदि, आयकर अपीलीय अदिकरण, मुंबई / DR, ITAT, Mumbai 6. गार्ड फाईल / Guard file.