Kundan Rice Mills Limited, Panipat V. ACIT, Panipat Circle, Panipat

ITA 853/DEL/2020

• Counselvise Citation: [2020] 110 COUNSELVISE.COM (IT) 8183 (ITAT-DELHI)
• Duration Of Justice: 4 month(s) 20 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-07-2020
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: D
• Assessment Year: 2015-2016
• Appeal Filed On: 19-02-2020
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Rule of consistency; Earning of tax free income; Avoidance of tax; Rule 8D; Set aside; Bogus
• Section: 143(3); 14A; 133(6); 43; 48; 13; 153; 22; 20

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES D : DELHI BEFORE SHRI BHAVNESH SAINI, JUDICIAL MEMBER AND SHRI N.K. BILLAIYA, ACCOUNTANT MEMBER ITA.NO.853/DEL./2020 ASSESSMENT YEAR 2015-2016 M/S. KUNDAN RICE MILLS LTD., E-4, INDUSTRIAL AREA, PANIPAT. STATE HARYANA. PAN AAACK7098P [ VS. THE ACIT, PANIPAT CIRCLE, PANIPAT. ( APPELLANT ) (RESPONDENT) FOR ASSESSEE : SHRI ASHWANI KUMAR, C.A. SHRI ADITYA KUMAR, C.A. MS. UDITI JAIN, C.A. SHRI RAHUL CHORASIYA, C.A. SHRI BHAVESH JINDAL, C.A. FOR REVENUE : SHRI J.K. MISHRA, D.R. DATE OF HEARING : 30 .0 6 .20 20 DATE OF PRONOUNCEMENT : 09 .0 7 .20 20 ORDER PER BHAVNESH SAINI, J.M. THIS APPEAL BY ASSESSEE HAS BEEN DIRECTED AGAINST THE ORDER OF THE LD. CIT(A), KARNAL, DATED 03.01.2020, FOR THE A.Y. 2015-2016. 2 ITA.NO.853/DEL./2020 M/S. KUNDAN RICE MILLS LTD., PANIPAT. 2. WE HAVE HEARD THE LEARNED REPRESENTATIVES OF BOTH THE PARTIES THROUGH VIDEO CONFERENCING AND PERUSED THE MATERIAL ON RECORD. 3. BRIEFLY THE FACTS OF THE CASE ARE THAT RETURN DECLARING TAXABLE INCOME OF RS.8,71,34,240/- WAS FILED BY ASSESSEE. THE CASE WAS SELECTED FOR SCRUTINY. THE QUESTIONNAIRE AND STATUTORY NOTICES WERE ISSUED. THE ASSESSEE FILED DETAILS TIME TO TIME ON THE REQUISITE INFORMATION REQUIRED BY THE A.O. THE ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF MANUFACTURING AND TRADING OF RICE, IMPORT AND EXPORT OF PRECISE METALS AND STONES, IMPORT OF POLYMERS CHEMICALS ETC., THE A.O. PASSED THE ASSESSMENT ORDER UNDER SECTION 143(3) DATED 28.07.2017 MAKING THE FOLLOWING ADDITIONS. 1. DISALLOWANCE OF LOSS ON SALE OF STOCK OPTION RS.15,28,20,110/-. 2. DISALLOWANCE UNDER SECTION 14A READ WITH RULE 8D(2) RS.4,28,556/-. 3 ITA.NO.853/DEL./2020 M/S. KUNDAN RICE MILLS LTD., PANIPAT. 3.1. THE ASSESSEE CHALLENGED THE ADDITIONS BEFORE THE LD. CIT(A). HOWEVER, BOTH THE GROUNDS OF APPEALS WERE DISMISSED AND APPEAL OF ASSESSEE WAS ULTIMATELY DISMISSED. 3.2. THE ASSESSEE IN THE PRESENT APPEAL HAS CHALLENGED BOTH THE ABOVE ADDITIONS. 4. ON GROUND NO.2 OF THE APPEAL, THE ASSESSEE CHALLENGED THE DISALLOWANCE OF RS.4,28,556/- UNDER SECTION 14A OF THE I.T. ACT, 1961. 4.1. THE A.O. ON PERUSAL OF THE BALANCE-SHEET ENDING ON 31.03.2015 NOTICED THAT UNDER THE HEAD CURRENT INVESTMENTS THE FOLLOWING WERE MENTIONED. 1. SHARE OF AMTEK INDIA RS.1,10,92,321/-. 2. CANARA LIQUIDITY COLLECTION RS.25,22,710/-. ALSO UNDER THE HEAD ADVANCES, ASSESSEE HAS INCLUDED SHARE APPLICATION MONEY KEPL RS.64,80,000/-. SHARE APPLICATION MONEY AFPL RS.23,25,000/-. 4 ITA.NO.853/DEL./2020 M/S. KUNDAN RICE MILLS LTD., PANIPAT. 4.2. THE A.O. HAS MENTIONED THAT FOR EQUITY INVESTMENTS, DIVIDEND INCOME TO THE ASSESSEE IS EXEMPT FROM TAXES UNDER SECTION 10(34) OF THE I.T. ACT, 1961. THE ASSESSEE HAS ALSO RECEIVED DIVIDEND INCOME OF RS.1,80,717/- DURING THE YEAR UNDER CONSIDERATION WHICH THE ASSESSEE CLAIMED AS EXEMPT. THE A.O. FOLLOWING THE PROVISIONS OF SECTION 14A READ WITH RULE 8D(2) OF THE I.T. ACT, 1961, DISALLOWED RS.4,28,556/- AND MADE THE ADDITION ACCORDINGLY. THE LD. CIT(A) CONFIRMED THE ADDITION. 5. LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ADDITION MAY BE RESTRICTED TO THE EARNING OF THE DIVIDEND INCOME ONLY. 6. THE LD. D.R. ON THE OTHER HAND RELIED UPON THE ORDERS OF THE AUTHORITIES BELOW. 7. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. IT IS NOT IN DISPUTE THAT ASSESSEE HAS RECEIVED DIVIDEND INCOME OF RS.1,80,717/- ONLY. THE HONBLE DELHI HIGH COURT IN THE CASE OF JOINT INVESTMENT PVT. LTD., 372 ITR 694 (DEL.) HELD THAT THE DISALLOWANCE UNDER SECTION 14A CANNOT BE MORE 5 ITA.NO.853/DEL./2020 M/S. KUNDAN RICE MILLS LTD., PANIPAT. THAN TO THAT OF THE EXEMPT INCOME. SINCE IN THE PRESENT CASE THE DIVIDEND INCOME EARNED BY ASSESSEE IS OF RS.1,80,717/- WHICH IS CLAIMED EXEMPT UNDER SECTION 10(34) OF THE I.T. ACT, THEREFORE, DISALLOWANCE UNDER SECTION 14A READ WITH RULE 8D SHOULD NOT EXCEED THE EXEMPT INCOME. WE, THEREFORE, SET ASIDE THE ORDERS OF THE AUTHORITIES BELOW AND RESTRICT THE ADDITION TO RS.1,80,717/-. GROUND NO.2 OF THE APPEAL OF ASSESSEE IS PARTLY ALLOWED. 8. ON GROUND NO.1, ASSESSEE CHALLENGED THE DISALLOWANCE OF RS.15,28,20,110/- CLAIMED BY ASSESSEE COMPANY ON ACCOUNT OF LOSS IN TRADING OF STOCK OPTION. 8.1. THE A.O. ON PERUSAL OF THE FINANCIAL STATEMENTS OF ASSESSEE COMPANY NOTICED THAT UNDER THE HEAD OTHER EXPENSES, ASSESSEE HAD CLAIMED LOSS IN TRADING FROM STOCK OPTION RS.15,28,20,110/- AS ON 31.03.2015. THE ORDER WAS RELEASED BY SEBI DATED 22.08.2015 ON ITS WEBSITE WITH THE HEADING - EX-PARTE AD-INTERIM ORDER UNDER SECTION 11(1)(4) AND SECTION 11(B) OF THE SECURITIES AND EXCHANGE BOARD OF INDIA ACT, 1992 IN THE MATTER OF ILL-LIQUID STOCK OPTIONS . IN THIS ORDER WHICH IS MADE A PART OF THE 6 ITA.NO.853/DEL./2020 M/S. KUNDAN RICE MILLS LTD., PANIPAT. ASSESSMENT ORDER, THE NAME OF THE ASSESSEE COMPANY ALSO FIGURES IN THE LIST OF ENTITIES WHO HAVE ENTERED INTO NON- GENUINE, FRAUDULENT TRADES TO GENERATE FICTITIOUS PROFITS/LOSSES FOR THE PURPOSE OF TAX EVASION/FACILITATING TAX EVASION. IN THE ORDER OF SEBI IT IS ALLEGED THAT SEBI HAS COME ACROSS SEVERAL INSTANCES/INTERNAL ALERTS WHEREIN A SET OF ENTITIES WERE CONSISTENTLY MAKING LOSSES BY THEIR TRADING IN OPTIONS ON INDIVIDUAL STOCKS (STOCK OPTIONS) WHICH ARE LISTED ON BOMBAY STOCK EXCHANGE (BSE). TRADING BY THESE ENTITIES APPEARED ABNORMAL BECAUSE THEY WERE CONSISTENTLY MAKING LOSSES BY THEIR TRADES WHICH WERE REVERSED WITH THE SAME COUNTER-PARTIES. THE SEBI IN ITS ORDER HAS OUTLINED THE MODUS OPERANDI USED BY SUCH ENTITIES. THE A.O. REPRODUCED THE INTERIM EX-PARTE ORDER OF SEBI ABOVE IN THE ASSESSMENT ORDER WHICH HIGHLIGHTED THAT ASSESSEE COMPANY DEALT WITH THREE PARTIES/COUNTER-PARTIES. 8.2. THE A.O. VIDE ORDER SHEET ENTRY DATED 22.03.2017 CONFRONTED THE ORDER OF THE SEBI TO THE ASSESSEE IN WHICH IT WAS ALLEGED THAT ASSESSEE HAD MADE LOSSES IN INDULGING IN SUSPICIOUS TRADES INCLUDING REVERSAL TRADES. THE COUNSEL FOR 7 ITA.NO.853/DEL./2020 M/S. KUNDAN RICE MILLS LTD., PANIPAT. ASSESSEE WAS ASKED TO PROVIDE A REPORT INCLUDING THE FOLLOWING : 1. PAST HISTORY/PRACTICE OF ASSESSEE IN EXECUTING S UCH TRADES. WHETHER THE ASSESSEE AS A BUSINESS INDULGES IN SUCH TRADES. 2. IT HAS BEEN AVERRED IN THE REPORT THAT THE ASSESSEE HAS EVEN SOLD THE PRODUCTS BELOW THEIR INTRINSIC VALUE. REASONS FOR SUCH UNR EAS ONABLENESS & IRRATIONAL FINANCIAL BEHAVIOUR ? 3. DETAILS OF ALL SUCH TRADES ENTERED IN BY THE ASSESSEE AND IDENTIFICATION OF COUNTER PARTY. 4. PROVISIONS OF IT ACT APPLICABLE FOR SUCH LOSSES/TRADES. 8.3. THE ASSESSEE VIDE REPLY DATED 19.04.2017 SUBMITTED REPLY OF INTERIM ORDER OF THE SEBI WHICH IS REPRODUCED IN THE ASSESSMENT ORDER WHICH IS AS UNDER : 1. OUR COMPANY IS MAINLY DEALING IN DIFFERENT TYPES OF COMMODITIES LIKE CHEMICALS, INDUSTRIAL SOLVENTS, POLYMERS, PULSES, RICE, PRECIOUS METALS INCLUDING 8 ITA.NO.853/DEL./2020 M/S. KUNDAN RICE MILLS LTD., PANIPAT. 9 ITA.NO.853/DEL./2020 M/S. KUNDAN RICE MILLS LTD., PANIPAT. 10 ITA.NO.853/DEL./2020 M/S. KUNDAN RICE MILLS LTD., PANIPAT. 11 ITA.NO.853/DEL./2020 M/S. KUNDAN RICE MILLS LTD., PANIPAT. 12 ITA.NO.853/DEL./2020 M/S. KUNDAN RICE MILLS LTD., PANIPAT. 13 ITA.NO.853/DEL./2020 M/S. KUNDAN RICE MILLS LTD., PANIPAT. TAKING IN VIEW TOTALITY OF THE FACTS AND CIRCUMSTANCES OF THE CASE AND PARTICULARS OF OUR SUBMISSIONS AND DENIALS AS AFORESAID, WE SUBMIT THAT NO ADVERSE INFERENCE MAY BE DRAWN IN OUR CASE. 8.4. THE COUNSEL FOR ASSESSEE ALSO SUBMITTED THE LIST OF COUNTER-PARTIES DETAILING THE NAME OF INSTRUMENT, POSITION TAKEN BY ASSESSEE, REVERSAL OF TRADE AND COUNTER PARTY DETAILS AND ALSO EXPLAINED THAT VIDE ORDER DATED 22.08.2016 SEBI FURTHER RELEASED CONFIRMATORY ORDER IN THE CASE OF CONFIRMING THE EARLIER ORDER AND ORDER DATED 22.08.2016 IS ALSO REPRODUCED IN THE ASSESSMENT ORDER IN WHICH INTERIM RELIEF WAS PROVIDED TO THE ASSESSEE LIKE PERMISSION TO BUY/SELL AND DEAL IN COMMODITIES FOR TAKING HEDGING POSITIONS LIQUIDATING SHARES, MUTUAL FUNDS AND LIQUID FUNDS ETC., IN THIS ORDER IN PARA-22 REPRODUCED AT PAGE-67 OF THE ASSESSMENT ORDER IT IS MENTIONED THAT AT THIS JUNCTURE, PENDING INVESTIGATION SEBI IS NOT INCLINED TO TAKE ANY COGNIZANCE OF THEIR SUBMISSION THAT ENTITIES HAVE PAID THE 14 ITA.NO.853/DEL./2020 M/S. KUNDAN RICE MILLS LTD., PANIPAT. TAXES. MORE OVER THIS ISSUE WILL REQUIRE DETAILED VERIFICATION FROM THE INCOME TAX DEPARTMENT. 8.5. THE A.O. VIDE ORDER SHEET DATED 17.07.2017 HAS ALSO ASKED THE ASSESSEE TO GIVE ADDITIONAL REPLY ON THE EVIDENCES AND FACTS COLLECTED DURING THE ASSESSMENT PROCEEDINGS SEBI REPORT, SEBI REPLY TO THE NOTICE UNDER SECTION 133(6) ETC., ON THE ISSUE OF LOSS CLAIMED BY ASSESSEE ON ACCOUNT OF LOSS IN TRADING FROM STOCK OPTION, ASSESSEE FILED REPLY BEFORE A.O, BUT, IT WAS NOT ACCEPTED BY THE A.O. PRECISELY ON THE FOLLOWING REASONS : (I) OUT OF THE 169 UNIQUE CONTACTS TRADED AN OVERWHELMING 168 RESULTED INTO LOSSES WITH ONLY ONE TRADE BEING PROFITABLE. (II) ASSESSEE ALSO ENTERED INTO 239 UNIVERSAL TRADES WHEREIN THE SAME QUANTITY OF STOCK OPTION WAS BOUGHT AND SUBSEQUENTLY SOLD TO THE SAME ENTITY OR VICE VERSA. (III) OUT OF THE TOTAL TURNOVER OF RS.31.8 CRORES, RS.31 CRORES IS IN UNIVERSAL TRADES WITH ACCOUNTS FOR 15 ITA.NO.853/DEL./2020 M/S. KUNDAN RICE MILLS LTD., PANIPAT. 97.5% OF THE TOTAL TURNOVER. AS SUCH, LARGE PORTION OF UNIVERSAL TRADE TURNOVER IS HIGHLY IRRATIONAL, UNREASONABLE, ABNORMAL WITH NO LOGICAL END IN SIGHT. (IV) THERE IS A SIGNIFICANT DIFFERENCE BETWEEN BUY VALUE AND SALE VALUE OF THE CONTRACTS AS ALSO THE INTRINSIC VALUE. BUY PRICE WAS 10.6. SALE PRICE 1.8 THE A.O. DID NOT ACCEPT THE EXPLANATION OF ASSESSEE ON THESE BECAUSE OF DIFFERENCE IN INTRINSIC VALUE OF INSTRUMENT. (V) ALMOST ALL THE TRADES HAVE BEEN EXECUTED BY ASSESSEE WITHIN VERY SHORT TIME AND INVARIABLY ON THE SAME DAY. (VI) ALSO IN THE INSTRUMENTS FOR WHICH ASSESSEE HAS TRADED FOR TOTAL NUMBER OF 169 CONTACTS IN 153 ASSESSEE CONTRIBUTED BETWEEN 70-100% OF THE 16 ITA.NO.853/DEL./2020 M/S. KUNDAN RICE MILLS LTD., PANIPAT. CONTRACTS TURNOVER. THIS HIGHLIGHT THAT IN OVER 90% OF THE CONTRACTS TRADED BY ASSESSEE, IT WAS THE ONLY OR MAIN INVESTOR. IT ALSO SHOWS THE CAPACITY OF ASSESSEE TO INFLUENCE THE MARKET PRICE OF THE TRADE. (VII) THE SEBI IN ITS ORDER HAS IDENTIFIED ENTITIES WHICH THROUGH DECEPTIVE, ABNORMAL TRADES HAVE GENERATED LOSSES AS ALSO THE ENTITIES WHICH HAVE GENERATED SUPER NORMAL PROFITS. THIS ORDER PROVIDES LIST OF 25 SUCH PARTIES, OUT OF SUCH 25 PARTIES, THE ASSESSEE HAS ALSO TRADED WITH THREE ENTITIES IN A SUM OF RS.48,91,000/-. (VIII) THE A.O. REPRODUCED THE REPLY OF ASSESSEE IN THIS PARA, IN WHICH, ASSESSEE DENIED TO HAVE ANY CONNECTION OR RELATION WITH ANY OF THE COUNTER- PARTIES TO THE TRADE BECAUSE IT WAS AN INDEPENDENT OF ANY OTHER PARTIES AND TRANSACTIONS WERE CARRIED OUT ON THE FLOOR OF THE STOCK EXCHANGE. ALL THE TRANSACTIONS WERE CARRIED-OUT ONLINE THROUGH SOPHISTICATED ON-LINE 17 ITA.NO.853/DEL./2020 M/S. KUNDAN RICE MILLS LTD., PANIPAT. SURVEILLANCE SOFTWARE AND IN CASE OF SCREEN BASED TRADING, AUTOMATED SYSTEM ITSELF MATCH THE ORDERS ON A PRICE TIME PRIORITY BASIS AND HENCE, IT IS NOT POSSIBLE FOR ANYBODY TO HAVE ACCESS OVER IDENTITY OF THE COUNTER PARTY. SINCE COUNTER PARTY IDENTITY IS NOT DISPLACED ONE CAN NEVER HAVE ANY CHOICE WITH WHOM IT WANTS TO DEAL OR NOT TO DEAL. 8.6. HOWEVER, THE A.O. DID NOT ACCEPT THE ABOVE CONTENTION OF ASSESSEE AND REJECTED THE SAME BY HOLDING AS UNDER : THE ARGUMENT PRESENTED BY THE ASSESSEE IS CONSIDERED BUT NOT FOUND ACCEPTABLE. IT IS TRUE THAT IN SCREEN BASED ELECTRONIC TRADING IDEALLY IT IS NOT POSSIBLE TO CHOOSE THE COUNTERPARTY FOR TRADE. BUT CERTAIN ENTITIES MENTIONED IN THE SEBI ORDER MANIPULATED THE TRADING BY PARTICIPATING IN ILLIQUID STOCK OPTIONS. BY CONTROLLING 70-100% OF THE TURNOVER IN THESE INSTRUMENTS THESE ENTITIES BECAME THE MARKET MAKERS FOR SUCH TRADES. AT SUCH IRRATIONAL, ABNORMAL PRICES THEY HAD THE OPTION TO CHOOSE THEIR TRADING PARTNERS. IN THE CASE OF ASSESSEE FROM THE DATA PROVIDED BY THE SEBI IT CAN BE CLEARLY NOTICED THAT MAJORITY OF TRADES ARE 18 ITA.NO.853/DEL./2020 M/S. KUNDAN RICE MILLS LTD., PANIPAT. BEING EXECUTED WITH COUNTER-PARTIES WITH WHICH ASSESSEE HAS PARTICIPATED IN MORE THAN ONE TRADE. OUT OF LIST OF 315 TRADES PROVIDED BY SEBI ONLY IN 43% TRADES THE COUNTERPARTY IS UNIQUE WHEREAS IN MAJORITY OF 57% CASES THE COUNTER-PARTIES HAD EXECUTED MORE THAN 1 TRADE WITH THE ASSESSEE. THIS ALSO ESTABLISHES THAT ASSESSEE HAD THE OPTION TO CHOOSE ITS TRADING PARTNER SINCE IN MORE THAN 57% CASES IT CHOSE ITS TRADING PARTNER WITH WHOM IT HAD TRANSACTED EARLIER. IN SCREEN BASED ELECTRONIC TRADING ITS A VERY REMOTE AND SMALL POSSIBILITY TO BE ABLE TO TRADE WITH COUNTERPARTY MORE THAN ONCE, BUT ASSESSEE BY MANAGING THE MARKET THROUGH IRRATIONAL, ABNORMAL FINANCIAL BEHAVIOR AND BY CONTROLLING THE TURNOVER IN TRADE OF CERTAIN ILLIQUID STOCK OPTIONS SOMEHOW SUCCEEDED TO AT LEAST CHOOSE ITS PARTNER IN 57% TRADES. 8.7. THE A.O. RELIED UPON JUDGMENT OF HONBLE SUPREME COURT IN THE CASES OF DURGA PRASAD MORE 82 ITR 540 (SC) AND SUMATI DAYAL VS., COMMISSIONER OF INCOME TAX 214 ITR 801 (SC) AND JUDGMENT OF HONBLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF SOMNATH MAINI VS., COMMISSIONER OF INCOME TAX 306 ITR 414 (P&H) FOR CONSIDERING THE ISSUE IN THE LIGHT OF PRINCIPLE OF HUMAN PROBABILITIES AND SURROUNDING CIRCUMSTANCES AND HELD THAT 19 ITA.NO.853/DEL./2020 M/S. KUNDAN RICE MILLS LTD., PANIPAT. THE LOSS ON STOCK OPTION CLAIMED BY ASSESSEE IS TO BE DISALLOWED. THE A.O. ACCORDINGLY MADE THE ADDITION. 9. THE ASSESSEE CHALLENGED THE ADDITION BEFORE THE LD. CIT(A). THE ASSESSEE SUBMITTED BEFORE THE LD. CIT(A) THAT DISALLOWANCE HAVE BEEN MADE SIMPLY RELYING UPON SEBI REPORT WITHOUT CARRYING-OUT ANY INVESTIGATION AND BRINGING ANY EVIDENCE OR MATERIAL ON RECORD AGAINST THE ASSESSEE. THE ASSESSEE EXPLAINED THE FINDINGS OF THE A.O. THAT SAME ARE NOT SUSTAINABLE IN LAW. THE ASSESSEE FILED THE DOCUMENTS AT THE TIME OF ASSESSMENT WITH EXPLANATION ON SELLING OF PRODUCT BELOW INTRINSIC VALUE, EXPLANATION ON THE TRADES ENTERED BY ASSESSEE AND IDENTIFICATION OF COUNTER-PARTIES AND EXPLANATION OF PROVISIONS OF INCOME TAX ACT APPLICABLE FOR LOSSES INCURRED BY ASSESSEE. THE ASSESSEE ALSO MADE DETAILED WRITTEN SUBMISSIONS TAKING THE ARGUMENTS AGAINST THE POSITION TAKEN BY THE A.O. WHICH IS REPRODUCED IN THE APPELLATE ORDER AT PAGES 7 TO 19 WHICH ARE REPRODUCED AS UNDER : 20 ITA.NO.853/DEL./2020 M/S. KUNDAN RICE MILLS LTD., PANIPAT. 21 ITA.NO.853/DEL./2020 M/S. KUNDAN RICE MILLS LTD., PANIPAT. 22 ITA.NO.853/DEL./2020 M/S. KUNDAN RICE MILLS LTD., PANIPAT. 23 ITA.NO.853/DEL./2020 M/S. KUNDAN RICE MILLS LTD., PANIPAT. 24 ITA.NO.853/DEL./2020 M/S. KUNDAN RICE MILLS LTD., PANIPAT. 25 ITA.NO.853/DEL./2020 M/S. KUNDAN RICE MILLS LTD., PANIPAT. 26 ITA.NO.853/DEL./2020 M/S. KUNDAN RICE MILLS LTD., PANIPAT. 27 ITA.NO.853/DEL./2020 M/S. KUNDAN RICE MILLS LTD., PANIPAT. 28 ITA.NO.853/DEL./2020 M/S. KUNDAN RICE MILLS LTD., PANIPAT. 29 ITA.NO.853/DEL./2020 M/S. KUNDAN RICE MILLS LTD., PANIPAT. 30 ITA.NO.853/DEL./2020 M/S. KUNDAN RICE MILLS LTD., PANIPAT. 31 ITA.NO.853/DEL./2020 M/S. KUNDAN RICE MILLS LTD., PANIPAT. 32 ITA.NO.853/DEL./2020 M/S. KUNDAN RICE MILLS LTD., PANIPAT. 10. THE LD. CIT(A) CONSIDERED THE ISSUE IN THE LIGHT OF FINDINGS OF THE A.O, SEBI ORDER AND SUBMISSIONS OF THE ASSESSEE. THE LD. CIT(A) REPRODUCED THE FINDINGS OF THE SEBI IN BRIEF IN THE APPELLATE ORDER AND OBJECTIONS TAKEN BY ASSESSEE BEFORE THE AUTHORITIES BELOW. THE LD. CIT(A) ALSO REFERRED TO ORDER OF THE ADJUDICATING AUTHORITY OF SEBI IN THE CASE OF KASI VISHWANATH STEEL PVT. LTD., DATED 10.08.2018 AVAILABLE ON WEBSITE WITH WHOM THE ASSESSEE 33 ITA.NO.853/DEL./2020 M/S. KUNDAN RICE MILLS LTD., PANIPAT. WAS FOUND TO HAVE INDULGED IN NON-GENUINE TRADING. THE ORDER IS REPRODUCED IN THE APPELLATE ORDER. THE LD. CIT(A) NOTED THAT THESE ARE FINDING OF FACT OF SEBI. THE LD. CIT(A) ALSO REFERRED TO JUDGMENT OF THE HONBLE SUPREME COURT IN THE CASE OF SEBI VS., RAKHI TRADING PVT. LTD., KETAN PARIKH VS., SEBI, MC.DOWELL & CO VS., CTO 154 CTR 148, COMMISSIONER OF INCOME TAX VS., DURGA PRASAD MORE (SUPRA) AND SUMATI DAYAL VS., COMMISSIONER OF INCOME TAX (SUPRA) AND HELD THAT WHEN THE PRESENT CASE HAS TO BE CONSIDERED IN THE LIGHT OF HUMAN PROBABILITIES IT IS CLEAR THAT LOSSES CLAIMED IN THESE TRADES OF STOCK OPTION ARE NON- GENUINE TRANSACTION. MOREOVER, SEBI BEING THE AUTHORITY TO PREVENT SUCH MALPRACTICES HAS CARRIED-OUT A DETAILED INVESTIGATION IN WHICH THE PARTIES WERE FOUND GUILTY. NO SEPARATE INVESTIGATION IS REQUIRED TO BE DONE BY THE A.O. TO DISALLOW THE BOGUS LOSSES. THIS GROUND WAS ACCORDINGLY DISMISSED AND APPEAL OF ASSESSEE WAS DISMISSED. 11. THE ASSESSEE IS IN APPEAL CHALLENGING THE ABOVE ADDITION. 34 ITA.NO.853/DEL./2020 M/S. KUNDAN RICE MILLS LTD., PANIPAT. 12. THE LEARNED COUNSEL FOR THE ASSESSEE REITERATED THE SUBMISSIONS MADE BEFORE THE AUTHORITIES BELOW. HE HAS SUBMITTED THAT AUTHORITIES BELOW HAVE HEAVILY RELIED UPON AD-INTERIM ORDER OF SEBI DATED 20/22.08.2015. HOWEVER, VIDE SUBSEQUENT ORDER DATED 05.04.2018 (PB-298) THE SEBI HAS VACATED THE INTERIM ORDER DATED 20/22.08.2015 BECAUSE THE ADJUDICATION PROCEEDINGS HAD BEEN INITIATED AGAINST THE ASSESSEE COMPANY. ALL THE TRANSACTIONS/TRADES ARE CONDUCTED THROUGH BOMBAY STOCK EXCHANGE (BSE) THROUGH BANKING CHANNEL. OUT OF 25 PARTIES, ASSESSEE DEALT WITH 03 PARTIES ONLY AS PER SEBI ORDER. THEREFORE, THERE CANNOT BE A CONCLUSION DRAWN THAT ASSESSEE DEALT IN SIMILAR TRANSACTIONS WITHOUT CONDUCTING ANY INVESTIGATION. THE ASSESSEE PAID SECURITY TRANSACTION TAX (STT) ON ALL THE TRANSACTIONS. ALL THE TRANSACTIONS ARE SUPPORTED BY CONTRACT NOTES IN RESPECT OF THE IMPUGNED AMOUNT OF DERIVATIVE TRADINGS. ALL MARGIN MONEY ARE PAID. COPY OF THE BANK STATEMENTS OF THE ASSESSEE REFLECTING PAYMENT OF REQUISITE MARGIN MONEY TO BROKER ARE FILED BEFORE THE AUTHORITIES BELOW WHICH ARE ALSO REFLECTED IN THE BOOKS OF ACCOUNT. AT 35 ITA.NO.853/DEL./2020 M/S. KUNDAN RICE MILLS LTD., PANIPAT. THE TIME OF TRANSACTIONS/TRADES ASSESSEE WAS NOT AWARE OF THE OTHER PARTY WITH WHOM TRANSACTIONS HAVE BEEN CARRIED OUT. THERE IS NO BUSINESS TRANSACTION WITH OTHER PARTIES. THE ASSESSEE SUBSEQUENTLY FILED LETTER TO SEBI TO SEEK DETAILS OF THE PARTIES, COPIES OF WHICH ARE FILED AT PAGE-140 OF THE PB. PB 150-158 ARE THE DETAILS OF THE ASSESSEE COMPANY PROVIDED BY THE SEBI IN RESPONSE TO THE LETTER OF THE ASSESSEE. PB 159-162 ARE ANALYSIS OF TRADE DATA SUBMITTED BY SEBI TO PROVE THAT ASSESSEE COMPANY HAS ONLY CARRIED- OUT TRANSACTIONS WITH 03 PARTIES OUT OF 25 PARTIES MENTIONED IN THE ORDER OF THE SEBI. THERE IS NO PRIOR ARRANGEMENT KNOWN TO THE ASSESSEE. THEIR FINDINGS ARE SIMPLY BASED ON SURMISES AND CONJECTURES WITHOUT BRINGING ANY EVIDENCE ON RECORD AGAINST THE ASSESSEE. COPY OF THE CIRCULAR OF THE SEBI DATED 23.07.2012 IS FILED AT PAGES 163-164 OF THE PB REVISING THE REFERRING THE ELIGIBILITY CRITERIA FOR STOCKS IN DERIVATES SEGMENT WHICH ASSESSEE HAS FULFILLED. PB 165 IS THE CHART SHOWING THE PROPORTION OF THE TRANSACTIONS CARRIED OUT BY THE ASSESSEE IN VARIOUS SCRIPS VIS-A-VIS TOTAL TRANSACTIONS CARRIED OUT ON THE BSE ON DAY, MONTH AND YEAR 36 ITA.NO.853/DEL./2020 M/S. KUNDAN RICE MILLS LTD., PANIPAT. BASIS. NO INDEPENDENT INVESTIGATION HAVE BEEN CARRIED OUT BY THE A.O. OR THE LD. CIT(A) AND THUS THE DOCUMENTS FILED BY ASSESSEE HAVE NOT BEEN REBUTTED BY THE AUTHORITIES BELOW. LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE REVENUE HAS RELIED UPON JUDGMENT OF THE HONBLE SUPREME COURT IN THE CASE OF SECURITIES AND EXCHANGE BOARD OF INDIA VS., RAKHI TRADING PVT. LTD., (SUPRA), IN WHICH NO FINDINGS HAVE BEEN GIVEN OF AVOIDANCE OF TAX FOR INCOME TAX PURPOSES. PB 24 IS SHOWING NOTE 25 WITH REGARD TO OTHER EXPENSES TO SHOW ASSESSEE SUFFERED LOSS OF RS.18.81 CRORES IN PRECEDING ASSESSMENT YEAR ENDING 31.03.2014 ON THE SAME BASIS WHICH HAVE NOT BEEN DISPUTED BY THE REVENUE AUTHORITIES. THE TRANSACTIONS OF THE ASSESSEE WITH COUNTER- PARTIES HAVE NOT BEEN PROVED TO BE DONE IN CONNIVANCE WITH THOSE PARTIES. THE ASSESSEE SOLD AND THEN PURCHASED THE SAME ITEMS, BUT, ASSESSEE WOULD NOT BE KNOWING NAMES OF THE PARTIES BECAUSE STOCK EXCHANGE WAS CONDUCTING THE TRANSACTIONS THROUGH SCREEN BASED ELECTRONIC TRADING IN WHICH IT IS NOT POSSIBLE TO CHOOSE THE COUNTER-PARTIES FOR TRADES. THUS, NOTHING IS PROVED AGAINST THE ASSESSEE. HE HAS 37 ITA.NO.853/DEL./2020 M/S. KUNDAN RICE MILLS LTD., PANIPAT. SUBMITTED THAT SINCE INTERIM ORDER OF THE SEBI HAVE ALREADY BEEN VACATED AND NO INVESTIGATION HAVE BEEN CARRIED OUT BY THE AUTHORITIES BELOW, THEREFORE, IMPUGNED ORDERS ARE LIABLE TO BE SET ASIDE AND THE BUSINESS LOSS SUFFERED BY THE ASSESSEE SHOULD HAVE BEEN ALLOWED AS DEDUCTION. LEARNED COUNSEL FOR THE ASSESSEE RELIED UPON ORDER OF THE ITAT, MUMBAI, SPECIAL BENCH IN THE CASE OF GTC INDUSTRIES VS., ACIT 164 ITD 1 (SB) WHEREIN THE TRIBUNAL OBSERVED AS UNDER : 46. ULTIMATELY THE ENTIRE CASE OF REVENUE HINGES UPON THE PRESUMPTION THAT ASSESSEE IS BOUND TO HAVE SOME LARGE SHARE IN SO CALLED SECRET MONEY IN THE FORM OF PREMIUM AND ITS CIRCULATION. HOWEVER, THIS PRESUMPTION OR SUSPICION HOW STRONG IT MAY APPEAR TO BE TRUE BUT NEEDS TO BE CORROBORATED BY SOME EVIDENCE TO ESTABLISH A LINK THAT GTC ACTUALLY HAD SOME KIND OF A SHARE IN SUCH SECRET MONEY, IT IS QUITE A TRITE LAW THAT SUSPICION HOWSOEVER STRONG MAY BE BUT CANNOT BE THE BASIS OF ADDITION EXCEPT FOR SOME MATERIAL EVIDENCE ON 38 ITA.NO.853/DEL./2020 M/S. KUNDAN RICE MILLS LTD., PANIPAT. RECORD. THE THEORY OF PREPONDERANCE OF PROBABILITY IS APPLIED TO WEIGH THE EVIDENCES OF EITHER SIDE AND DRAW A CONCLUSION IN FAVOUR OF A PARTY WHICH HAS MORE FAVORABLE FACTORS IN HIS SIDE. THE CONCLUSIONS HAVE TO BE DRAWN ON THE BASIS OF CERTAIN ADMITTED FACTS AND MATERIALS AND NOT ON THE BASIS OF PRESUMPTIONS OF FACTS THAT MIGHT GO AGAINST THE ASSESSEE. ONCE NOTHING HAS BEEN PROVED AGAINST THE ASSESSEE WITH AID OF ANY DIRECT MATERIAL ESPECIALLY WHEN VARIOUS ROUNDS OF INVESTIGATIONS HAVE BEEN CARRIED OUT THEN NOTHING CAN BE IMPLICATED AGAINST ASSESSEE. 12.1. HE HAS SUBMITTED THAT SINCE INITIAL BURDEN UPON ASSESSEE HAVE BEEN DISCHARGED BY PRODUCING RELEVANT AND COGENT DOCUMENTARY EVIDENCES, THEREFORE, ONUS IS SHIFTED UPON THE REVENUE TO PROVE THAT ASSESSEE DID NOT SUFFER GENUINE BUSINESS LOSS AND IN THIS CASE THE REVENUE HAS NOT BROUGHT ANY EVIDENCE ON RECORD AGAINST THE ASSESSEE, THEREFORE, DEDUCTION ON ACCOUNT OF BUSINESS LOSS IS ALLOWABLE. IN SUPPORT OF THIS PROPOSITION, HE HAS RELIED UPON 39 ITA.NO.853/DEL./2020 M/S. KUNDAN RICE MILLS LTD., PANIPAT. JUDGMENTS OF HONBLE DELHI HIGH COURT IN THE CASES OF COMMISSIONER OF INCOME TAX VS., GANGESHWAR METALS PVT. LTD., 361 ITR 10 (DEL.), COMMISSIONER OF INCOME TAX VS., KAMDHENU STEEL & ALLOYS LTD., 361 ITR 220 (DEL.) AND COMMISSIONER OF INCOME TAX VS., VALUE CAPITAL SERVICES PVT. LTD., 307 ITR 334 (DEL.). 13. THE LD. D.R. ON THE OTHER HAND RELIED UPON THE ORDERS OF THE AUTHORITIES BELOW. THE LD. D.R. SUBMITTED THAT SEBI IS A STATUTORY AUTHORITY, THEREFORE, THEIR FINDINGS OF FACT ARE BINDING. HE HAS SUBMITTED THAT LD. CIT(A) HAS SUMMARISED THE FINDINGS OF THE INTERIM ORDER OF THE SEBI IN HIS FINDINGS IN WHICH IT IS CLEARLY BORNE-OUT THAT TRANSACTIONS WERE CARRIED OUT AT THE PRICE LESS THAN THEIR INTRINSIC VALUE AND LOSS MAKING ENTITIES HAVE SQUARED-UP THEIR POSITION BY REVERSING THESE FROM SAME COUNTER-PARTIES. PURCHASES WERE MADE AT THE PRICE MUCH HIGHER THAN THE INITIAL PRICE AT WHICH THEY WERE SOLD. THE TRADE REVERSAL WAS DONE IN A MAJORITY OF CONTACTS TRADED BY LOSS MAKING ENTITIES. THE MAJORITY OF PROFIT MAKING ENTITIES HAD OPENED SPECIFIC ACCOUNTS FOR EXCLUSIVELY CARRYING OUT SUSPICION 40 ITA.NO.853/DEL./2020 M/S. KUNDAN RICE MILLS LTD., PANIPAT. TRANSACTIONS IN STOCK OPTION AND MOSTLY THE TRANSACTIONS ARE CARRIED OUT IN LAST QUARTER OF THE FINANCIAL YEAR I.E., MARCH. THE ASSESSEE EXCEPT IN ONE TRANSACTION HAS SUFFERED LOSS. THE LD. D.R. SUBMITTED THAT DIFFERENCE IN REVERSAL TRANSACTIONS WAS OF FEW SECONDS. THE LD. D.R. IN HIS WRITTEN SUBMISSIONS HAS ALSO HEAVILY RELIED UPON THE JUDGMENT OF HONBLE SUPREME COURT IN THE CASE OF SECURITIES AND EXCHANGE BOARD OF INDIA VS., RAKHI TRADING PVT. LTD., (SUPRA) AND REFERRED TO MANY OF THE PARAS FROM THE JUDGMENT. THE LD. D.R. ALSO RELIED UPON JUDGMENT OF THE HONBLE SUPREME COURT IN THE CASE OF MCDOWELL & CO. LTD., 154 ITR 148 (SC), COMMISSIONER OF INCOME TAX VS., DURGA PRASAD MORE 82 ITR 540 (SC) AND SUMATI DAYAL VS., COMMISSIONER OF INCOME TAX 214 ITR 801 (SC) ON THE PROPOSITION THAT IF TEST OF HUMAN PROBABILITY IS APPLIED IN THE CASE OF ASSESSEE, IT WOULD CLEARLY MAKE-OUT A CASE THAT ASSESSEE DID NOT SUFFER GENUINE BUSINESS LOSS. THE LD. D.R, THEREFORE, SUBMITTED THAT NO INTERFERENCE IS REQUIRED IN THE MATTER AND APPEAL OF THE ASSESSEE MAY BE DISMISSED. 41 ITA.NO.853/DEL./2020 M/S. KUNDAN RICE MILLS LTD., PANIPAT. 14. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. THE ASSESSEE PLEADED BEFORE THE AUTHORITIES BELOW THAT IT IS IN THE SAME BUSINESS AND MEMBER OF COMMODITIES EXCHANGE [MCX] AND OTHER COMMODITIES EXCHANGES SINCE MORE THAN 10 YEARS. THE ASSESSEE USED TO DO BUSINESS IN THESE COMMODITY EXCHANGES THROUGH FUTURES SEGMENT AS HEDGING /TRADING TOOLS AS PER REQUIREMENT OF THE BUSINESS. THE ASSESSEE DEALT IN SHARES THROUGH MEMBERS/BROKERS SINCE NUMBER OF YEARS. THE ASSESSEE USED TO DO PHYSICAL TRADING AS WELL AS FUTURE AND OPTION SINCE NUMBER OF YEARS. THEREFORE, IT IS NOT AN ISOLATED YEAR WHERE ASSESSEE HAS DONE THE TRANSACTION IN FUTURE AND OPTION STOCKS. ALL SUCH TRANSACTIONS ARE RECORDED IN THE BOOKS OF ACCOUNT. PROFIT AND LOSS EARNED/INCURRED FROM TRADE IN COMMODITIES EXCHANGE ARE ALSO PART OF THE FINANCIAL STATEMENTS. IT WAS EXPLAINED BEFORE A.O. REGARDING INTRINSIC VALUE AS MENTIONED IN THE ORDER OF THE SEBI THAT SEBI HAS CIRCULATED INTRINSIC VALUE AS DIFFERENCE BETWEEN STRIKE PRICE AND PRICE OF UNDERLYING SCRIP IN CASH MARKET. WHEREAS INTRINSIC VALUE IS 42 ITA.NO.853/DEL./2020 M/S. KUNDAN RICE MILLS LTD., PANIPAT. BASED ON VARIOUS FACTORS LIKE TIME FACTOR, DEMAND AND SUPPLY, VOLATILITY IN THE UNDERLYING SCRIP AND OVERALL MARKET AND MARKET CONDITIONS DOMESTICALLY AS WELL AS GLOBALLY ETC., IN ADDITION TO THE DIFFERENCE BETWEEN STRIKE PRICE, THE PRICE OF UNDERLYING SCRIP IN CASH MARKET. THERE IS NO SET FORMULA/LAW/RULE/CIRCULAR WHICH DEFINES INTRINSIC VALUE OR PROHIBITS TRADING BELOW INTRINSIC VALUE. THE A.O. AT PAGE- 80 OF THE ASSESSMENT ORDER HAS ACCEPTED THAT IN SCREEN BASED ELECTRONIC TRADING, IDEALLY IT IS NOT POSSIBLE TO CHOOSE THE COUNTER PARTY FOR TRADE. THIS PARA IS ALSO REPRODUCED ABOVE. THUS, THE IDENTITY OF THE COUNTER-PARTIES ARE NOT DISPLAYED ON THE SCREEN AT THE TIME OF TRADES. IT MAY BE NOTED HERE THAT STOCK MARKET IS A HIGHLY VOLATILE MARKET, AND KEEPING IN MIND THE VOLATILITY, SEBI HAS SET CIRCUIT BREAKER LIMITS AT 10%, 15% AND 20% FOR THE INDICES. IF THE 10% LIMIT IS HIT, TRADING CAN BE HALTED BETWEEN 15-45 MINUTES DEPENDING UPON THE TIME OF BREACH. THE 15% LIMIT LEADS TO A HALT IN TRADING FOR 45-75 MINUTES, WHILE 20% LIMIT LEADS TO CLOSURE OF MARKETS FOR THE REST OF THE DAY. HOWEVER, SUCH CIRCUIT BREAKER LIMITS ARE AT PRESENT NOT APPLICABLE TO F 43 ITA.NO.853/DEL./2020 M/S. KUNDAN RICE MILLS LTD., PANIPAT. & O SEGMENT, WHICH MAKES THE F & O SEGMENT HIGHLY VOLATILE AND A GAMBLING DEN. A REAL EXAMPLE CAN EXPLAIN THE HIGHLY VOLATILE F & O SEGMENT. ON 30.10.2019, MOMENTS BEFORE YES BANKS EXCHANGE ANNOUNCEMENT, OPTIONS OF 60- CALL AND 65-CALL WERE QUOTING AT JUST AROUND 10 PAISE. AFTER ANNOUNCEMENT, THIS OPTION ZOOMED TO RS.18.40P, MAKING JUMP AT A MIND BLOWING PROFIT RATE OF 18,400%. A PERSON WHO HAS SPENT MAXIMUM OF RS. 300/-, WITHIN MINUTES MADE RS. 40,000/-. IT WOULD NOT BE OUT OF PLACE TO MENTION THAT TO CHECK EXCESSIVE PRICE MOVEMENTS, CAPITAL MARKETS REGULATOR SEBI PROPOSED A SLEW OF MEASURES INCLUDING CAPPING THE MAXIMUM DAILY MOVEMENT OF UP-TO 20% FOR ALL STOCKS INCLUDING THAT ARE PART OF THE F & O SEGMENT. IT IS STILL A PROPOSAL AS DERIVATIVES MARKETS OR F & O SEGMENT REFLECT EXPECTATION OF SPOT PRICES IN THE FUTURE AND CURRENTLY PRICE BANDS OR CIRCUIT FILTERS ARE GENERALLY NOT APPLIED ON THEM. 14.1. THE A.O. IN THE ASSESSMENT ORDER HAS STARTED DOUBTING BUSINESS LOSS SUFFERED BY ASSESSEE IN TRADING BECAUSE OF THE AD-INTERIM ORDER OF SEBI DATED 20/22.08.2015. THE A.O. REFERRING TO AND REPRODUCING THE 44 ITA.NO.853/DEL./2020 M/S. KUNDAN RICE MILLS LTD., PANIPAT. SAID ORDER IN THE ASSESSMENT ORDER HAS ASKED FOR THE EXPLANATION OF ASSESSEE AND DIRECTED THE ASSESSEE TO FILE DETAILS OF PAST PRACTICE/PRACTICE OF ASSESSEE IN EXECUTING SUCH TRADES, REASONS FOR SUCH UNREASONABLENESS AND IRRATIONAL FINANCIAL BEHAVIOR, DETAILS OF ALL TRADES ENGAGED IN BY ASSESSEE AND IDENTIFICATION OF COUNTER PARTY AND PROVISIONS OF INCOME TAX ACT APPLICABLE FOR SUCH TRADES. THE REPLY OF ASSESSEE IS NOTED ABOVE. THE ASSESSEE EXPLAINED BEFORE A.O. THAT IT HAS ACTED AS A BONAFIDE TRADER AS HAVE BEEN DOING IN PAST AND COMPLIED WITH ALL PROCEDURES AND REQUIREMENTS OF THE STOCK EXCHANGE. AT THE TIME OF RELEVANT TRANSACTIONS/TRADES ASSESSEE WOULD NOT HAVE ANY IDEA OF ANY PROFIT OR LOSS IN THE SAID TRANSACTION. THE ASSESSEE IS NOT CONNECTED WITH THE COUNTER-PARTIES IN THE TRADE AND THERE IS NO GRIEVANCE OF ANY OF THE INVESTOR OR BSE. THE ASSESSEE IN SUPPORT OF THE EXPLANATION FILED COPIES OF THE CONTRACT NOTES IN RESPECT OF THE TRANSACTIONS IN QUESTION OF DERIVATIVE TRADINGS [PB 69-109], COPIES OF THE BANK STATEMENTS OF THE ASSESSEE COMPANY REFLECTING PAYMENT OF REQUISITE MARGIN MONEY TO BROKERS [PB 110-128], COPIES OF 45 ITA.NO.853/DEL./2020 M/S. KUNDAN RICE MILLS LTD., PANIPAT. THE STATEMENTS OF ACCOUNTS OF BROKERS IN THE BOOKS OF THE ASSESSEE COMPANY [PB 129-139], COPY OF THE LETTER DATED 01.10.2015 FILED BEFORE SEBI SEEKING DETAILS OF TRADES CONDUCTED BY ASSESSEE [PB 140-149], TRADE DETAILS OF ASSESSEE COMPANY AS PROVIDED BY SEBI IN RESPONSE TO SUCH LETTER [PB 150-158], ANALYSIS OF TRADE DATA SUPPLIED BY SEBI TO PROVE THAT ASSESSEE COMPANY HAS ONLY CARRIED OUT TRANSACTIONS WITH THREE PARTIES OUT OF 25 PARTIES MENTIONED IN THE ORDER OF THE SEBI [PB 159-162], COPY OF THE CIRCULAR DATED 23.07.2012 ISSUED BY SEBI ABOUT ELIGIBILITY CRITERIA FOR STOCK IN DERIVATIVES SEGMENTS COMPLIED BY ASSESSEE [PB 163-164], CHART SHOWING THE PROPORTION OF TRANSACTIONS CARRIED OUT BY ASSESSEE COMPANY IN VARIOUS SCRIPS THROUGH BSE [PB165], ANALYSIS OF PRICE ON WHICH TRADES WERE EXECUTED BY THE ASSESSEE COMPANY [PB 166-167] AND COPY OF THE ORDER OF THE SEBI DATED 05.04.2018 DISPOSING OFF THE PROCEEDINGS INITIATED VIDE ORDER DATED 22.08.2015 [PB 298- 306]. THE SUBSEQUENT ORDER OF THE SEBI DATED 05.04.2018 IN PARAS 16 AND 17 HELD AS UNDER : 46 ITA.NO.853/DEL./2020 M/S. KUNDAN RICE MILLS LTD., PANIPAT. 16. BASED ON THE ABOVE, WITHOUT GOING INTO THE MERITS OF THE CASE, I AM OF THE VIEW THAT THERE IS NO NEED TO CONTINUE THE DIRECTIONS ISSUED AGAINST THE ENTITIES MENTIONED AT TABLE-1 ABOVE VIDE INTERIM ORDER DATED AUGUST 20, 2015 AND CONFIRMATORY ORDERS DATED JULY 30, 2016 AND AUGUST 22, 2016, AND THAT THE ADJUDICATION PROCEEDINGS INITIATED BY SEBI WOULD ADEQUATELY MEET THE ENDS OF JUSTICE AND REGULATORY OBJECTIVES. 17. I, THEREFORE, IN EXERCISE OF THE POWERS CONFERRED UPON ME UNDER SECTION 19 OF THE SECURITIES AND EXCHANGE BOARD OF INDIA ACT, 1992 READ WITH SECTIONS 11, 11(4) AND 11B THEREOF, DO HEREBY DISPOSE OF THE PROCEEDINGS INITIATED VIDE INTERIM ORDER DATED AUGUST 20, 2015 AS CONFIRMED VIDE ORDERS DATED JULY 30, 2016, AND AUGUST 22, 2016, AGAINST ALL THE ENTITIES MENTIONED IN TABLE 1, WITH IMMEDIATE EFFECT WITHOUT ANY FURTHER DIRECTIONS. THE ADJUDICATION OFFICER SHALL CONTINUE AND CONCLUDE THE PROCEEDINGS IN ACCORDANCE WITH 47 ITA.NO.853/DEL./2020 M/S. KUNDAN RICE MILLS LTD., PANIPAT. THE SEBI ACT, 1992 AND SEBI (PROCEDURE FOR HOLDING INQUIRY AND IMPOSING PENALTIES BY ADJUDICATING OFFICER) RULES, 1995, AND PASS APPROPRIATE ORDER ON MERITS, AT THE EARLIEST, UNINFLUENCED BY THIS ORDER, SINCE THIS ORDER IS, PASSED WITHOUT EXAMINING THE MERITS, IN CONSONANCE WITH THE REGULATORY OBJECTIVE THAT IMPOSITION OF MONETARY PENALTY AS PER LAW IN LINE WITH SIMILARLY PLACED ENTITIES WOULD MEET THE ENDS OF JUSTICE. 14.2. THE ABOVE ORDER CLEARLY SHOW THAT SEBI HAS SUBSEQUENTLY DIRECTED THAT THERE IS NO NEED TO CONTINUE WITH THE DIRECTIONS ISSUED AGAINST THE ASSESSEE COMPANY AND OTHERS VIDE ORDERS DATED 20/22.08.2015 AND DATED 22.08.2016 RELIED UPON BY AUTHORITIES BELOW. THUS, IN PRINCIPLE, THE INTERIM ORDER AND SUBSEQUENT ORDERS OF THE SEBI WHICH IS THE BASIS OF PASSING THE ASSESSMENT ORDER IN QUESTION HAVE BEEN VACATED BY THE SEBI ITSELF. THE ASSESSEE FILED COMPLETE DOCUMENTARY EVIDENCES BEFORE THE AUTHORITIES BELOW AND EXPLAINED THAT IN SCREEN BASED ELECTRONIC 48 ITA.NO.853/DEL./2020 M/S. KUNDAN RICE MILLS LTD., PANIPAT. TRADING, IT IS NOT POSSIBLE TO CHOOSE THE COUNTER-PARTY FOR TRADING AND ASSESSEE PAID STT ON THE SAME TRANSACTION AND TRANSACTIONS ARE DONE WITH THE MEMBERS/BROKERS AND SUB- BROKERS WHICH FACT HAVE NOT BEEN DISPUTED BY THE AUTHORITIES BELOW. THE ASSESSEE HAS ALSO PROVED THAT ALL THE TRANSACTIONS ARE CARRIED OUT THROUGH BANKING CHANNEL AND AS PER GUIDELINES ISSUED BY THE SEBI BY MAKING PAYMENT OF MARGIN MONEY AND TRANSACTIONS ARE PROVED BY CONTRACT NOTES. THERE IS ALSO NO ALLEGATION MADE BY BSE AGAINST ANY OF THE TRANSACTIONS CARRIED OUT BY THE ASSESSEE COMPANY. ALL THE TRANSACTIONS ARE CARRIED OUT AND SETTLED THROUGH BANKING CHANNEL THROUGH BSE. NO ACTION HAVE BEEN TAKEN BY BSE AGAINST ANY OF THE PARTY. THE A.O. HAS FURTHER REFERRED TO THE SUBSEQUENT ORDER OF THE SEBI DATED 22.08.2016 IN THE ASSESSMENT ORDER AND IN PARA-22 OF THE AFORESAID ORDER OF THE SEBI, IT IS CLEARLY DIRECTED THAT THEREFORE, AT THIS JUNCTURE, PENDING INVESTIGATION, I AM NOT INCLINE TO TAKE ANY COGNIZANCE OF THEIR SUBMISSIONS THAT THE ENTITIES HAVE PAID THE TAX. MOREOVER, THIS ISSUE WILL REQUIRE DETAILED VERIFICATION FROM THE INCOME TAX DEPARTMENT. 49 ITA.NO.853/DEL./2020 M/S. KUNDAN RICE MILLS LTD., PANIPAT. HOWEVER, THE A.O. AS WELL AS THE LD. CIT(A) HAVE NOT CONDUCTED ANY INVESTIGATION IN ANY ON THE DOCUMENTARY EVIDENCES FILED BY ASSESSEE. THE LD. CIT(A) HAS GONE TO THE EXTENT IN HOLDING THAT NO SEPARATE INVESTIGATION IS REQUIRED TO BE DONE BY THE A.O. TO DISALLOW THE BOGUS LOSS . PB 24 SHOWS NOTES NO.25 WITH REGARD TO OTHER EXPENSES TO SHOW THAT IN PRECEDING A.Y. 2014-2015 ASSESSEE HAS SUFFERED LOSS ON TRADING IN COMMODITY EXCHANGE IN A SUM OF RS.18,81,82,852/- WHICH HAVE NOT BEEN DISALLOWED BY THE AUTHORITIES BELOW AS PER SUBMISSIONS OF THE LEARNED COUNSEL FOR THE ASSESSEE. THUS, FOLLOWING THE PRINCIPLE OF CONSISTENCY, THE A.O. SHOULD NOT HAVE DISALLOWED THE SIMILAR LOSS WHICH IS LESSER AMOUNT IN ASSESSMENT YEAR UNDER APPEAL. WE RELY UPON JUDGMENT OF HONBLE SUPREME COURT IN THE CASE OF RADHASOAMI SATSUNG 193 ITR 321 (SC). THUS WHATEVER QUERY WAS RAISED BY THE A.O. ON THE BASIS OF THE AD-INTERIM ORDER OF THE SEBI, ASSESSEE SUCCESSFULLY EXPLAINED ALL THE ISSUES SUPPORTED BY THE DOCUMENTARY EVIDENCES IN WHICH NO DISCREPANCY HAVE BEEN FOUND OUT BY THE AUTHORITIES BELOW. 50 ITA.NO.853/DEL./2020 M/S. KUNDAN RICE MILLS LTD., PANIPAT. 14.3. THE A.O. HOWEVER RELIED UPON AD-INTERIM ORDER OF THE SEBI DATED 20/22.08.2015 IN WHICH IT WAS FOUND PRIMA FACIE THAT PROFIT MAKING ENTITIES WERE DELIBERATELY MAKING REPEATED LOSSES THROUGH THEIR REVERSAL TRADING IN STOCK OPTION WHICH DO NOT MAKE ECONOMIC SENSE AND FACILITATING THEIR COUNTER-PARTIES, THUS, CONTRAVENING THE PROVISIONS OF SEBI ACT AND RESTRAIN SUCH ENTITIES FROM BUYING OR SELLING OR DEALING IN THE SECURITIES MARKETS AND THEIR OBJECTIONS WERE CALLED FOR. THE A.O. FURTHER REFERRED TO THE ORDER OF THE SEBI DATED 22.08.2016 IN WHICH SEBI RELEASED THE CONFIRMATORY ORDER AND INTERIM ORDER WAS DILUTED WITH PERMISSION TO THE ASSESSEE AND OTHERS FOR DEALING IN THE SCRIPS. IT WAS FURTHER DIRECTED IN THE SAID ORDER THAT THESE DIRECTIONS SHALL CONTINUE TO BE IN FORCE TILL FURTHER DIRECTIONS. THESE FACTS CLEARLY SHOW THAT THE AD-INTERIM ORDER OF THE SEBI WAS PASSED WITHOUT HEARING THE OBJECTIONS OF THE ASSESSEE AND WHEN OBJECTIONS OF THE ASSESSEE WERE CONSIDERED, THE INTERIM ORDER WAS DILUTED BY GIVING PERMISSION TO THE ASSESSEE TO DEAL IN THE TRANSACTIONS. ULTIMATELY, BOTH THE ORDERS OF THE SEBI RELIED UPON BY THE A.O. HAVE BEEN 51 ITA.NO.853/DEL./2020 M/S. KUNDAN RICE MILLS LTD., PANIPAT. VACATED BY THE SEBI VIDE ORDER DATED 05.04.2018. THUS, THERE WERE NO MATERIAL AVAILABLE WITH THE AUTHORITIES BELOW SO AS TO CONCLUDE THAT ASSESSEE HAS ENTERED INTO ANY DUBIOUS OR OTHER TRANSACTIONS DELIBERATELY TO SHOW BUSINESS LOSS. IN SUCH CIRCUMSTANCES, IT WAS IMPERATIVE ON THE PART OF THE AUTHORITIES BELOW TO EXAMINE THE ISSUE ON MERIT AND TO DECIDE WHETHER ASSESSEE HAS SUFFERED GENUINE BUSINESS LOSSES OUT OF THE TRANSACTIONS/TRADES IN QUESTION. HOWEVER, THE AUTHORITIES BELOW DID NOT EXAMINE THE ISSUE ON MERITS AND MERELY RELYING UPON THE AD-INTERIM INTERIM ORDER CONCLUDED THE ISSUE AGAINST THE ASSESSEE. IT IS ALSO CLEAR FROM THESE FACTS THAT THE AD-INTERIM ORDER WHICH WAS PASSED EX-PARTE - WHETHER WOULD DISCLOSE ANY BINDING PRECEDENT OR RATIO WHICH MAY BE BINDING ON THE INCOME TAX DEPARTMENT?. IN OUR HUMBLE VIEW, IT WOULD NOT BE BINDING PRECEDENT. IT MAY CREATE SOME SUSPICION OR DOUBT. IT IS WELL SETTLED LAW THAT SUSPICION HOWSOEVER STRONG MAY BE BUT IT CANNOT TAKE PLACE OF LEGAL PROOF. THE LD. D.R. SUBMITTED THAT IF THE TEST OF HUMAN PROBABILITY IS APPLIED TO THE FACTS AND CIRCUMSTANCES OF THE CASE, IT WOULD PROVE THAT ASSESSEE 52 ITA.NO.853/DEL./2020 M/S. KUNDAN RICE MILLS LTD., PANIPAT. HAS NOT SUFFERED GENUINE BUSINESS LOSS. HOWEVER, SUCH A PRINCIPLE IS TO BE APPLIED TO WEIGH THE EVIDENCES OF EITHER SIDE AND DRAW A CONCLUSION IN FAVOUR OF THE PARTY WHICH HAS MORE FAVOURABLE FACTORS IN HIS SIDE. FURTHER IN THE PRESENT CASE THE FINDINGS OF THE A.O./LD. CIT(A) ARE MERELY BASED UPON THE FINDINGS GIVEN BY THE SEBI IN AD-INTERIM ORDER AND SUBSEQUENT ORDER WHICH HAVE BEEN VACATED SUBSEQUENTLY BY THE SEBI. EVEN SUCH ORDERS CANNOT BE RELIED UPON AT THIS STAGE AS THERE WERE NOTHING AGAINST THE ASSESSEE SO AS TO CONCLUDE THAT ASSESSEE HAS NOT SUFFERED GENUINE BUSINESS LOSS BECAUSE THE SEBI ITSELF HAVE MENTIONED IN ITS ORDERS THAT THE ISSUE WILL REQUIRE DETAILED VERIFICATION FROM THE INCOME TAX DEPARTMENT. THE ISSUE BEFORE THE SEBI AUTHORITIES WERE IN FACT VIOLATION OF SEBI PROVISIONS AND RULES AND THEY HAVE NOT ADJUDICATED UPON IF THERE WERE ANY VIOLATION OF THE INCOME TAX PROVISIONS WHICH THEY ALSO WERE NOT COMPETENT TO DEAL WITH IT. THEREFORE, RELIANCE PLACED BY THE A.O. OF SUCH ORDERS WHICH ARE ULTIMATELY VACATED WAS TOTALLY MISPLACED AND CANNOT BE READ AGAINST THE ASSESSEE. 53 ITA.NO.853/DEL./2020 M/S. KUNDAN RICE MILLS LTD., PANIPAT. 14.4. THE LD. D.R. ALSO RELIED UPON THE JUDGMENT OF THE HONBLE SUPREME COURT IN THE CASE OF RAKHI TRADING PVT. LTD., (SUPRA). IN THIS CASE THE ISSUE WAS AGAINST THE TRADERS AND BROKERS FOR VIOLATION OF REGULATION OF SEBI ACT AND RELATING TO SYNCHRONIZED TRADING IN WHICH THE PENALTY WAS IMPOSED UNDER SECTION 15HA OF THE SEBI ACT AGAINST THE RESPONDENT COMPANY WHICH WAS SET ASIDE BY THE SECURITIES APPELLATE TRIBUNAL (SAT) AND SEBI HAS PREFERRED AN APPEAL BEFORE THE HONBLE SUPREME COURT. IT IS A CONCURRENT JUDGMENT OF THE HONBLE JUDGES OF THE HONBLE SUPREME COURT DATED 08.02.2018. THE APPEAL AGAINST THE TRADERS WERE ALLOWED AND ORDERS OF THE SAT ARE SET ASIDE AND THE ORDER OF THE SEBI WAS RESTORED. HOWEVER, THE APPEALS FILED AGAINST THE BROKERS WERE DISMISSED. IN PARAS 20 OF THE SUBSEQUENT CONCURRENT ORDER, THE HONBLE SUPREME COURT HELD AS UNDER : 20. THE QUESTION WHETHER THERE WAS FICTITIOUS TRANSACTIONS CREATING ILLEGAL SYNCHRONIZATION HAS TO BE GATHERED FROM THE FACTS AND CIRCUMSTANCES AND INTENTION OF THE PARTIES. ACTING IN CONCERT IS SOMETHING 54 ITA.NO.853/DEL./2020 M/S. KUNDAN RICE MILLS LTD., PANIPAT. ABOUT WHICH IT IS DIFFICULT TO OBTAIN DIRECT EVIDENCE. PROOF OF MANIPULATION MIGHT DEPEND UPON INFERENCES DRAWN FROM FACTUAL DETAILS. SUCH INFERENCES COULD BE GATHERED FROM PATTERN OF TRADING DATA AND THE NATURE OF THE TRANSACTIONS ETC. 14.5. IN PARA-45 THE HONBLE SUPREME COURT FURTHER HELD AS UNDER : 45. NO GROUNDS HAVE BEEN RAISED IN THE SHOW CAUSE NOTICE ALLEGING THAT THE IMPUGNED FICTITIOUS TRANSACTIONS HAVE BEEN ENTERED INTO WITH A VIEW TO AVOID PAYMENT OF TAX AND WAS AN ACT OF TAX PLANNING. ADJUDICATING OFFICER ALSO HAS NOT GONE INTO THIS ASPECT. HENCE, I AM NOT INCLINED TO GO INTO THIS ASPECT, WHETHER THE IMPUGNED TRANSACTIONS WERE INTENDED TO REDUCE THE BRUNT OF TAXATION AND AN ACT OF TAX PLANNING. THE CORRECTNESS OF FINDINGS OF SAT IN THE CASE OF VIRAM INVESTMENT PVT. LTD. IS LEFT OPEN. 14.6. THE ISSUE IN APPEAL REGARDING VIOLATION OF PROVISIONS OF SEBI RULE WAS DECIDED BASED ON THE FACTS AND 55 ITA.NO.853/DEL./2020 M/S. KUNDAN RICE MILLS LTD., PANIPAT. CIRCUMSTANCES AVAILABLE ON RECORD AND INTENTION OF THE PARTIES AND ULTIMATELY THE ISSUE WITH REGARD TO AVOIDANCE OF PAYMENT OF TAX AND ACT OF TAX PLANNING WAS NOT ADJUDICATED BECAUSE THE ADJUDICATING OFFICER HAS NOT GONE INTO THIS ASPECT. HOWEVER, IN THE PRESENT CASE, THE A.O. / LD. CIT(A) HAVE NOT GONE INTO THE FACTS AND MATERIAL EVIDENCE ON RECORD AND MERELY REFERRING TO THE INTERIM ORDER OF THE SEBI AND SUBSEQUENT ORDER HAVE DECIDED THE ISSUE AGAINST THE ASSESSEE. SINCE IN THE CASE OF RAKHI TRADING PVT. LTD., (SUPRA), THE ISSUE UNDER INCOME TAX ACT WAS ALSO NOT ADJUDICATED UPON, THEREFORE, IN OUR HUMBLE OPINION THE DECISION IN THE CASE OF RAKHI TRADING PVT. LTD., (SUPRA), WOULD NOT SUPPORT THE CASE OF REVENUE. 14.7. CONSIDERING THE TOTALITY OF THE FACTS AND CIRCUMSTANCES OF THE CASE IN THE LIGHT OF MATERIAL/EVIDENCES AVAILABLE ON RECORD AND IN THE ABSENCE OF ANY INVESTIGATION CARRIED-OUT BY THE AUTHORITIES BELOW, WE ARE OF THE VIEW THAT ASSESSEE HAS BEEN ABLE TO ESTABLISH THAT ASSESSEE COMPANY HAS SUFFERED GENUINE BUSINESS LOSS AS HAD ALSO BEEN SUFFERED IN EARLIER YEARS, THEREFORE, AUTHORITIES BELOW SHOULD 56 ITA.NO.853/DEL./2020 M/S. KUNDAN RICE MILLS LTD., PANIPAT. NOT HAVE DISALLOWED THE SAME AGAINST THE ASSESSEE. IN VIEW OF THE ABOVE FINDINGS, WE SET ASIDE THE ORDERS OF THE AUTHORITIES BELOW AND DELETE THE ENTIRE ADDITION. IN THE RESULT, GROUND NO.1 OF THE APPEAL OF ASSESSEE IS ALLOWED. 15. IN THE RESULT, APPEAL OF THE ASSESSEE PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT. SD/- SD/- (N.K. BILLAIYA) (BHAVNESH SAINI) ACCOUNTANT MEMBER JUDICIAL MEMBER DELHI, DATED 09 TH JULY, 2020 VBP/- COPY TO 1. THE APPELLANT 2. THE RESPONDENT 3. CIT(A) CONCERNED 4. CIT CONCERNED 5. D.R. ITAT D BENCH, DELHI 6. GUARD FILE. // BY ORDER // ASSISTANT REGISTRAR : ITAT DELHI BENCHES : DELHI.