SILVER STREAM EQUITIES PRIVATE LIMITED,MUMBAI V. COMMISSIONER OF INCOME TAX (APPEAL) , MUMBAI

ITA 3980/MUM/2023

AI Insights

The case involves Silver Stream Equities Private Limited, which appealed against the order of the National Faceless Appeal Centre (NFAC), Delhi, concerning the assessment year 2014-15. The primary issues were the reopening of a completed assessment and the disallowance of a loss claimed from derivative transactions. The NFAC had upheld the Assessing Officer's (AO) decision to reopen the assessment based on allegations of the assessee benefiting from fictitious trades in illiquid options derivatives, and disallowed the claimed loss of Rs. 2,07,67,350. The Tribunal, after reviewing the evidence and arguments, concluded that the reopening was unjustified and the disallowance of the loss was based on unfounded suspicions.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 472723 (ITAT-MUMBAI)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-03-2025
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: G
• Assessment Year: 2014-2015
• Laws Referred To: Income Tax Act
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: BHANGEPATIL PUSHKARAJ RAMESH; DR
• Assessee Lawyers: SATISH KUMAR; AR; SEBI
• Keywords: Corroborative evidences; Onus to prove; Capital Gains; Tangible material; Penny stocks; Bogus
• Section: 147; 148; 143(3); 143(2); 208; 22; 13; 20

Judgement Text

" | आयकर अपीलीय अिधकरण ा यपीठ, मुंबई | IN THE INCOME TAX APPELLATE TRIBUNAL “G” BENCH, MUMBAI BEFORE SHRI SAKTIJIT DEY, HON’BLE VICE PRESIDENT & SHRI NARENDRA KUMAR BILLAIYA, HON’BLE ACCOUNTANT MEMBER I.T.A. No. 3980/Mum/2023 Assessment Year: 2014-15 Silver Stream Equities Private Limited 507, 5th Floor, Western Edge-1 Western Express Highway Off D.P. Road Borivali West Mumbai - 400066 [PAN: AADCK5877H] Vs NFAC, Delhi अपीला थ\u0016/ (Appellant) \u0017\u0018 यथ\u0016/ (Respondent) Assessee by : Shri Satish Kumar, A/R Revenue by : Shri Bhangepatil Pushkaraj Ramesh, Sr. D/R सुनवाई की तारीख/Date of Hearing : 26/03/2025 घोषणा की तारीख /Date of Pronouncement: 28/03/2025 आदेश/O R D E R PER NARENDRA KUMAR BILLAIYA, AM: This appeal by the assessee is preferred against the order dated 06/10/2023 by NFAC, Delhi, [hereinafter ‘the ld. CIT(A)’] pertaining to AY 2014-15. 2. The grievance of the assessee reads as under:- “1. The CIT(A) NFAC erred in law in confirming the reopening of a completed assessment without appreciating that the mechanical reopening of the already assessment is bad in law, invalid and liable to be quashed in as much: a) the impugned reasons recorded for reopening of the assessment at best be considered as reasons to suspect and not reasons to believe of escapement of income; b) the impugned reopening of the completed assessment was purely on the directions of the Investigation Wing of the Income-tax Department without requisite enquiry by the AO himself and therefore, was on simply on the borrowed reasons; c) without any tangible material available with the Ao and without disclosing which material facts were not fully and truly declared by the assessee during the original scrutiny assessment completed vide assessment order passed u/s 143(3) of the Act on 29/08/2016; I.T.A. No. 3980/Mum/2023 2 d) without proper application of mind by the AO as the notice u/s 143(2) of the Act dated 17.06.2021 issued Prior to providing the reasons recorded for reopening the completed assessment own 23/06/2021; e) without disposing off the assessee's objections to the impugned reopening by a speaking order as has been held by the Hon'ble Apex Court; f) without giving reasonable opportunity to respond as the SCN dated 09.03.2022 was to be replied by 13.03.2022; g) without objectively meeting the contentions of the appellant made during the appellate proceedings in his appellate order; Thus, the impugned notice issued u/s 148 of the Act and the consequent assessment order passed u/s 147 of the Act are void ab initio and must be quashed. 2. B) Disallowance of part of the F & O Loss - Rs.2,07,67,350/- 2. The CIT(A) NFAC erred in law and on facts by confirming the action of the AO in disallowing the F & O loss of Rs. 2,07,67,350/- solely on the reason that the assessee was a beneficiary of some bogus loss made by entering fictitious trades in illiquid option derivatives on the BSE but without any justified reasons or material to support the allegation. Thus, the disallowance of loss of Rs. 2,07,67,350/- is without any justification and liable to be deleted. 3. The CIT (A) (NFAC) erred in law and on facts by not appreciating that during the original scrutiny assessment, the assessee had fully and truly disclosed all the transactions with supporting evidence including the trades in thinly traded stock options. Thus, the disallowance of loss of Rs. 2,07,67,350/- on the genuinely permissible regulated online transactions is unjustified and is, thus, liable to be deleted. 4. The CIT(A) NFAC erred in law and on facts by relying on the averments of the AO who failed to point out any illegality in the options trades to adjudge 58 transactions fictitious. Thus, the disallowance of loss merely on the basis of general allegations / surmises /conjectures and without bringing any material on record to prove otherwise is unwarranted and liable to be deleted. 5. The appellant craves leave to add, amend, alter or delete all or any of the aforesaid grounds of appeal.” 3. Representatives were heard at length. Case records carefully perused and with the assistance of the Counsels, we have carefully considered the documentary evidence brought on record, in light of Rule 18(6) of the ITAT Rules, 1963. I.T.A. No. 3980/Mum/2023 3 4. Briefly stated the facts of the case are that the assessee filed its return of income on 30/09/2014 showing total income of Rs.1,10,42,140/-. Assessment u/s. 143(3) of the Act was completed on 28/08/2016 by which the returned income of the assessee was assessed as such. 5. As per the information supplied by the JAO, the AO noticed that the assessee is found to be the beneficiary of fictitious trades in illiquid options derivatives. The completed assessment was accordingly reopened by issue of notice u/s 148 of the Act. 6. The AO while framing the assessment observed that after thorough investigation, it is construed that the trades were bogus and have been generated on BSE platform to shift artificial loss and profit with a motive of tax evasion through expired trades in illiquid options with the sole motive of generating losses by letting the option expire rather than engaging in reversal of trade. The AO concluded by observing that in the facts and circumstances of the case and in absence of any details from the assessee, the amount of Rs. 2,07,67,350/- claimed as loss from derivative transactions is hereby disallowed and added to the income of the assessee. 7. The assessee challenged the validity of the reopening of the assessment and also the disallowance made by the AO. On both counts, the ld. CIT(A) confirmed the action of the AO. 8. We have given a thoughtful consideration to the orders of the authorities below. 9. Facts on record show that the assessee itself is a trading member registered with BSE/NSE since 2009, carrying out proprietary trades in all segments strictly adhering to the mandated regulations and took the I.T.A. No. 3980/Mum/2023 4 benefits of incentives by BSE under various incentive schemes for the period 2011 to 2015. 10. The entire quarrel revolves around the allegation that the assessee artificially shifted loss and profit with a motive of tax evasion through expired trades in illiquid options. 11. We find that the BSE introduced incentive scheme on turnover which endeavored to encourage members to augment options trades as the program focused on option contracts on S&P BSE Sensex. Incentives schemes introduced by the BSE were as under:- “ NOTICES Notice No. 20130422-13 Notice Date 22 Apr 2013 Category Trading Segment Derivatives Subject Amendments in LEIPS Scheme for Dealers and Proprietary trading desks/members in Equity and Equity Derivative Segment Content This is with reference to the Exchange Notice no .20130315-25 dated March 15, 2013 regarding LEIPS Scheme for Dealers and Proprietary trading desks/members in Equity and Equity Derivative Segment and Notice no .20130315-25 dated March 22, 2013 regarding Clarification regarding LEIPS Scheme for Dealers and Proprietary trading desks/members in Equity and Equity Derivative Segment. Following amendments in LEIPS Scheme for Dealer and Proprietary trading desks/members shall be applicable with effect from May 07, 2013 A) LEIPS Scheme - Dealer 1. Volume in non –STT securities shall be capped @ 10% of the total volumes equities and futures approved under LEIPS scheme in a calendar month. For e.g A Dealer achieves turnover of Rs.4000 Crs distributed as – Non STT Securities Equity, ETF – Rs.1000 Crs; STT Securities Equity, ETF – Rs.1000 Crs; Futures approved under LEIPS – Rs.2000 Crs. In this case volume of Rs.400 Crs shall be considered under Non-STT Securities Equity & ETF.And therefore total volume of Rs.3400 Crs shall be considered for LEIPS Dealer scheme for this Dealer. 2. A minimum of at least 5 trading days participation meeting the daily volume eligibility is mandatory to qualify under the scheme. A dealer to qualify under the LEIPS Dealer I.T.A. No. 3980/Mum/2023 5 incentive for a calendar month has to achieve daily targets specified under the scheme for minimum of 5 trading days in that calendar month. Following are few examples for clarification – Case 1 – If a dealer registers 1 to 4 days before end of calendar month May 2013 i.e between May 28 to 31, 2013 then that dealer shall not be eligible for LEIPS Dealer incentive for May 2013, even if dealer meets daily volume criteria from May 28 to May 31, 2013. Case 2 –A registered dealer does incentive eligible volume in any 5 trading days and does not do any volume for rest of trading days of month May 2013. The dealer qualifies in top 15 dealers based under the region from where dealer has registered. In this case the dealer will not be eligible for LEIPS Dealer incentive of May 2013 even though he has qualified under minimum 5 trading days participation criteria but he has failed in maximum 2 trading days waiver from daily participation criteria. Case 3 – A dealer registers for LEIPS dealer incentive scheme and becomes active under scheme 7 trading days prior to end of calendar month. Dealer does eligible volume as per scheme for 5 trading days and fails to meet eligible volume target for 2 trading days. Dealer also qualifies in top 15 dealers based under the region from where dealer has registered. In this case dealer shall be eligible for LEIPS Dealer incentive as per the scheme. B) LEIPS Scheme – Prop Member/desk Index and Stock Futures volume done in spread contracts, CFS contracts, near and far month contracts on which LEIPS scheme is ruining will not be counted under LEIPS Prop member/desk scheme except 2 days prior to expiry including day of expiry. For the purpose of May 2013 dealer and prop desk/member incentive amendments as per point A and B shall be applicable to current dealer and prop desk/member scheme with effect from May 07,2013 and current terms and conditions shall be applicable from May 01,2013 till May 06,2013. Other terms and conditions of LEIPS scheme for dealers and prop members/desk shall remain same. For further clarification members are requested to contact their relationship manager Devika Shah Sameer Vaze Sr.GM –Trading Operations Manager – Trading Operations ******************************* LEIPS-IX ( Effective from 1st February 2013) Pursuant to SEBI Circular CIR/DNPD/5/2011 dated June 2, 2011 (BSE Notice no- 20110602-18, dated June 02, 2011), permitting stock exchanges to introduce Liquidity Enhancement Schemes (LES) for illiquid securities in their equity derivatives segment, the Exchange has launched a series of Liquidity Enhancement Incentive Programmes (LEIPS) with the goal of creating lasting, self-sustaining liquidity in BSE's Derivative Segment. With effect from February 01, 2013, the Exchange is launching a new programme- LEIPS IX. The pro-gramme focuses on SENSEX Futures Contracts. I.T.A. No. 3980/Mum/2023 6 The programme incentivizes both Market Makers (MMs) and General Market Participants (GMPs) by payment of cash for their participation as per prescribed terms and conditions. Active trading members of Derivative Segment of the Exchange who have already signed up in LEIPS-VI, LEIPS-VII & LEIPS-VIII programme as GMPs shall be treated as GMPs in LEIPS-IX programme as well. Trading members who wish to opt out of the LEIPS-IX programme as GMPs shall be required to intimate the Exchange of the same. Registered Market Makers of LEIPS-VI, LEIPS-VII & LEIPS-VIII programme shall have to register themselves as a Market Maker in LEIPS-IX programme & expressly indicate their interest to do Market Making in the underlying securities eligible under LEIPS-IX programme. Other active trading members of Derivative Segment of the Exchange can register themselves as a Market Maker (MM) or a General Market Participant (GMP) for this programme as well. Under the programme, the MMs have a continuous quoting obligation with specified size and spread in SENSEX Futures con-tracts. The programme offers 3 types of incentives to market participants – 1. Trading volume based daily cash incentives to MMs and GMPs 2. Open Interest (OI) based cash incentives paid on daily basis for average daily OI to MMs and GMPs 3. Lower transaction fees for all active trading members. The Exchange monitors performance of the programme including presence of MMs and their compliance with the quote obligations through a mix of online and offline monitoring tools. The Exchange also publishes information on the programme from time to time as applicable vide SEBI Circular CIR/DNPD/5/2011 dated June 2, 2011. LEIPS-IX programme shall remain in force till July 31, 2013 i.e. 6 months. In accordance with the aforesaid SEBI circular the Exchange may amend / discontinue the programme at any time with an advance notice of 15 days. Also, the programme shall be discontinued as soon as the average trading volume on the Exchange, during the last 60 trading days, reaches 1% of market capitalization of the underlying, or six months from introduction of the scheme, whichever is earlier. For any further clarifications, please contact your designated Relationship Managers.” 11.1. The aforementioned incentive schemes were discontinued effective from 13/02/2014 as the per the notice as under:- \" NOTICES Notice No. 20140128-18 Notice Date 28 Jan 2014 Category Trading Segment Derivatives I.T.A. No. 3980/Mum/2023 7 Subject Discontinuation of LEIPS XIII programme. Content SEBI vide Circular CIR/DNPD/5/2011 dated June 2, 2011 (BSE Notice no-20110602-18, dated June 02, 2011), permitting stock exchanges to introduce Liquidity Enhancement Schemes (LES) for illiquid securities in their equity derivatives segment. The Circular states that the Exchange may amend / discontinue the Scheme at any time with an advance notice of 15 days. The thirteenth programme in the series LEIPS-XIII was launched on September 04, 2013 vide notice no. 20130820-31 dated August 20, 2013. The Programme focused on Options Contracts on S&P BSE Sensex. Trading members are hereby informed that Exchange has decided to discontinue the aforesaid LEIPS XIII programme with effect from February 13, 2014. The Scheme would be effective till February 12, 2014. For any further clarifications, please contact your designated Relationship Managers. Devika Shah Sameer Vaze Sr. General Manager – Trading Operations Manager – Trading Operations” 11.2. At this stage it would pertinent to refer to the findings of the ld. CIT(A) dismissing the grievance of the assessee, which is extracted for ready reference:- “I have carefully considered the facts of the case as well as submissions filed by the appellant. In find no force in the arguments of the Appellant. The Assesses is obviously a seasoned player in the stock market and how could such make believe transactions of sustained losses could be undertaken, is beyond comprehension. The Appellant has given basically three arguments in support of the claims that these are genuine transactions and these are discussed in table below :- Sr. No. Assessee’s contention Result 1. The transactions are done through the online platform of the BSE. The Assessee perhaps aims to claim that all the transactions effected through the online platform are genuine transactions. However, in realty this is not so. So many investigations, including the operation falcon, have unearthed huge scams where manipulative transaction undertaken through the online platforms have been unearthed. Hence this contention does not advance the cause of the Assessee. I.T.A. No. 3980/Mum/2023 8 2. No cautionary warning or action was taken against the Assessee by SEBI This is factually incorrect as noted above. A penalty of Rs. 6,00,000/- was imposed on the Assessee due to it’s malpractices on the very same online platform of the SEBI/NSE for the activities in the very same period. 3. The expiry of the options is justified by the Assessee. * The Assessee is a professional company, and to state that the premium reduces or the discount deepens hear the expiry, and it would make no sense for the reversal, and there would not be much difference, is not comprehensible. 'Not much difference’ has led to a loss of Rs. 2.07 crores, thereby reducing the profit declared by the Assessee by as much as 72%. Hence, this ‘not much difference’ theory of the Assessee is rejected in The burden of proof regarding genuineness of the loss incurred in such dubious transactions is on the Assessee, and no cogent arguments have been advanced by the Appellant Accordingly, the disallowance of loss of Rs. 2,07,67,350/- made by the AO is upheld and the ground of appeal no. 2 is thus dismissed.” 11.3. We find that each of the alleged 58 transactions were carried out from the online trading system of BSE. Each transaction has time and transaction number generated by the Trading system. The option trades in these scrips were carried out to support BSE initiative to enhance option volume in illiquid scrips and linked to BSE incentive scheme extracted elsewhere. Full details of BSE options are exhibited at pages 223 to 305 of the paper book and the AO has not pointed out any error or defect in these details. In fact, the AO has not found any discrepancy in this regard and suspected malafide. All the trades were executed on the floor of the exchange system without knowledge of counter party and within the price range allowed by Exchange and SEBI. In all these transactions, BSE has collected stamp duty and transaction charges, SEBI has collected the turnover fees. All Government taxes, exchange transaction charges and SEBI fees has been paid for both leg of transactions. The settlement obligation arising out of it has been settled I.T.A. No. 3980/Mum/2023 9 through clearing mechanism of the Exchange. Therefore, in our understanding of the facts, trades were genuine and fair and it has never been termed by SEBI or BSE as fraudulent and misleading in any manner whatsoever. 11.4. The interim order of the SEBI dated 12/08/2016 exhibited at pages 208 to 222 of the paper book did not mention the name of the assessee. Though the order was in the matter of illiquid stock options in respect of Trading Members. We are of the considered view that the allegation of the revenue that by indulging in such transactions, the assessee has caused loss to revenue, unlike trade in penny stocks in cash segment which is aimed at claiming exemption u/s 10(38) of the Act as long term capital gains, is baseless. 12. It would be very pertinent to refer to the two order-sheet entries dated 06/02/2025 & 04/03/2025, which read as under:- “06/02/2025 In the course of hearing, the Bench posed a query whether the Department has identified the beneficiary who might have benefited from corresponding transaction. In response. Id. DR sought two weeks time to ascertain the factual position from A.O. Considering the request of Id. DR, the appeal is kept as part heard and will be taken up on 04.03.2024 at 2.30 p.m. दोन\u0005 प\u0007\u0005 को खुले यायालय म\u0011 सू\u0014चत \u0017कया गया | Both parties are informed in the open court.” ********* “04/03/2025 Ld DR seeks some more time to obtain requisite information from the AO. Adjourned to 26.03.2025.” 12.1. Today, on the date of hearing, the ld. D/R expressed his inability to submit such report in spite of reminders to the AO. 13. After considering the facts on record, we are of the considered view that the assessee’s genuine trades during the period 01/04/2013 to 31/03/2014 have been wrongly alleged to be fictitious prima facie by I.T.A. No. 3980/Mum/2023 10 extrapolating the outcome of enquiry carried out for transactions during the period 01/04/2014 onwards. We are of the considered view that there is nothing unusual to trade in thinly traded/illiquid stock options. Moreover, when the BSE has introduced incentive schemes (extracted elsewhere). A perusal of the incentive schemes shows that that the stock exchanges itself encourages brokers to augment trades in such low volume stocks and awarded incentives, which the assessee received. The same can be understood from the following chart:- “SILVER STREAM EQUITIES PRIVATE LIMITED Incentive Report from 01.04.2013 to 31.03.20214 Sr.No. Period Invoice Type Service Tax Service Tax Invoice Number 11 APR 2013-14 APR 2013 DAILY 97942.7 12105.72 SSEPL_40 2 15 APR 2013-30 APR 2013 DAILY 249747.3 30868.77 SSEPL_41 3 1 MAY 2013-14 MAY 2013 DAILY 255267.7 31551.08 SSEPL_42 4 15 MAY 2013-31 MAY 2013 DAILY 386180.8 47731.94 SSEPL_43 5 1 JUN 2013-14 JUN 2013 DAILY 257662.4 31847.07 SSEPL_44 6 15 JUN 2013-30 JUN 2013 DAILY 174656.7 21587.57 SSEPL_45 7 1 JUL 2013-14 JUL 2013 DAILY 200791.1 24817.78 SSEPL_46 8 15 JUL 2013-31 JUL 2013 DAILY 250521 30964.39 SSEPL_47 9 1AUG 2013-14 AUG 2013 DAILY 151011.9 18665.07 SSEPL_48 10 15 AUG 2013-31 AUG DAILY 251048.2 31029.56 SSEPL_49 111SEP 2013-14 SEP 2013 DAILY 241386.5 29835.37 SSEPL_51 12 15 SEP 2013-30 SEP 2013 DAILY 238460.9 29473.76 SSEPL_52 13 1 OCT 2013-14 OCT 2013 DAILY 140765.2 17398.58 SSEPL_53 14 15 OCT 2013-31 OCT 2013 DAILY 167599.1 20715.25 SSEPL_54 15 1 NOV 2013-14 NOV 2013 DAILY 138790.1 17154.46 SSEPL_55 16 15 NOV 2013-30 NOV DAILY 113418.7 14018.55 SSEPL_56 17 1 DEC 2013-14 DEC 2013 DAILY 100458.2 12416.63 SSEPL_57 18 15 DEC 2013-31 DEC 2013 DAILY 128534.5 15886.87 SSEPL_58 19 1 JAN 2014-14 JAN 2014 DAILY 134238.3 16591.85 SSEPL_59 20 15 JAN 2014-31 JAN 2014 DAILY 346997.7 42888.92 SSEPL_60 211 FEB 2014-14 FEB 2014 DAILY 157184.5 19428 SSEPL_61 22 15 FEB 2014-28 FEB 2014 DAILY 200454.7 24776.2 SSEPL_62 23 1 MAR 2014-14 MAR 2014 DAILY 28325.75 3501.06 SSEPL_63 24 15 MAR 2014-31 MAR 2014 DAILY 296970 36705.49 SEPL_64 4708414 581959.9 ” I.T.A. No. 3980/Mum/2023 11 14. The benefit can be understood from the notes annexed to and forming part of the financial statement which is as under:- “ SILVER STREAM EQUITIES PRIVATE LIMITED Notes annexed to and forming part of Financial Statements Particulars As at 31.03.2014 Amount As at 31.03.2013 Amount NOTE-16 Revenue from operations: Arbitrage Income & Incentive deceived Brokerage Received ’ NOTE-17 Other Income: Interest Income (in case of a company other than a finance company) Dividend Income Net gain/loss on sale of investments ’ Other non-operating income (net of expenses directly attributable to such income) NOTE-18 Employee Benefits Expense: i] Salaries and incentives ii] Staff welfare expenses NOTE-19 Finance Costs: Interest expense Other Borrowing Cost 20,726,309.37 290,628.32 24,336,717.76 175,737.47 21,016,937.69 24,512,455.23 6,284,106.75 0.00 0.00 0.00 5,025,969.62 0.00 0.00 0.00 6,284,106.75 4,326,261.00 74,180.00 5,025,969.62 6,598,639.00 469,410.00 4,400,441.00 7,068,049.00 805,966.85 6,080,930.00 466,666.57 4,516,497.17 6,886,896.85 4383,163.74 “ I.T.A. No. 3980/Mum/2023 12 15. Considering the afore-discussed facts, we are of the considered view that the loss of Rs. 2,07,67,350/- has been disallowed on suspicion without bringing any adverse evidence on record and the same is directed to be deleted. Since we have allowed the appeal of the assessee on facts of the case, other issues raised by the assessee are left open. 16. In the result, appeal of the assessee is allowed. Order pronounced in the Court on 28th March, 2025 at Mumbai. Sd/- Sd/- (SAKTIJIT DEY) (NARENDRA KUMAR BILLAIYA) VICE-PRESIDENT ACCOUNTANT MEMBER Mumbai, Dated 28/03/2025 *SC SrPs *SC SrPs *SC SrPs *SC SrPs आदेश की \u0014ितिलिप अ\u0019ेिषत /Copy of the Order forwarded to : 1. अपीलाथ\u001b / The Appellant 2. \u0014 थ\u001b / The Respondent 3. संबंिधत आयकर आयु! / Concerned Pr. CIT 4. आयकर आयु! ) अपील ( / The CIT(A)- 5. िवभागीय \u0014ितिनिध ,आयकर अपीलीय अिधकरण, मुंबई /DR,ITAT, Mumbai, 6. गाड% फाई/ Guard file. आदेशानुसार/ BY ORDER TRUE COPY Assistant Registrar आयकर अपीलीय अिधकरण ITAT, Mumbai "