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Additions made of Short Term Capital Loss are invalid where based solely on Investigation Wing’s report & without furnishing a copy of such report to the assessee for verification: ITAT

2019-TIOL-1569-ITAT-KOL

IN THE INCOME TAX APPELLATE TRIBUNAL
BENCH ‘SMC’ KOLKATA

ITA No.2419/Kol/2018
Assessment Year: 2014-15

SHRI POONAM CHAND DUGAR
14/2, BHIKHAN CHAND MARKET
OLD CHINA BAZAR STREET 4TH FLOOR
ROOM NO 418, BURRA BAZAR, KOLKATA – 700001
PAN NO: ACOPD5497J

Vs

INCOME TAX OFFICER
WARD – 35(1), KOLKATA

J Sudhakar Reddy, AM

Date of Hearing: June 10, 2019
Date of Decision: June 21, 2019

Appellant Rep by: Shri Bijaya Kumar Sahoo, FCA
Respondent Rep by: Shri Robin Choudhury, Addl. CIT Sr. D/R

Income Tax – Sections 144 & 250.

Keywords – Best judgment assessment order – Short term capital loss.

THE assessee an Individual, derives income from business and other sources, filed his return of income for relevant AY. The AO passed a best judgment assessment order u/s 144 of the Act. The AO made disallowance of Rs.18,97,566/- claimed as short term capital loss. The AO relied on the order of the investigation wing of the Income Tax Department, statement stated to be taken on oath during the course of survey conducted on certain brokers, investigation said to have been conducted by SEBI, wherein the transactions of the scrip COMFORT FINCAP Ltd. was said to have been suspended. He referred to the SIT report as well as statements of broker and entry operators. As the assessee failed to appear before the AO, the assessment was made u/s 144 of the Act. The AO further disallowed an amount of Rs.3,75,898/-, claimed u/s 57(iii) of the Act, on the ground that there is no income earned by the assessee so as to allow the expenditure in question. On appeal, First Appellate Authority confirmed both the additions.

On appeal, Tribunal held that,

Whether addition of STCL can be made solely relying on report of the investigation wing, which is even not furnished to the assessee for verification – NO : ITAT

++ there is no dispute that the assessee has furnished all the evidences as sought for by the AO. The AO has relied on the report of the investigation wing of the department. The report of the investigation wing of the Income tax Department can be a starting point for investigation into the affairs of the assessee but cannot be the whole and sole basis on which an addition can be made. Copy of the report is neither furnished to the assessee nor is placed before Tribunal for consideration. When a copy of the report is not brought on record, the question of relying on the same to make an addition to the income, does not arise. The assessee has purchased and sold shares through brokers. Copies of Contract notes, copies of payment through banks and other evidences were filed in support of the genuineness of the transactions. The AO relies on the statement of the brokers and that of the entry operators but, none of these statements have been brought on record. The contents of the so called statements are not known. SIT report relied upon by the AO does not help the case of the revenue as it is a general report. A statement has been made that SEBI has suspended the transactions in the scrip but contrary evidence has been brought on record by the assessee to demonstrate that the scrip is being traded even today. Thus, the basis on which the Assessing Officer has made the disallowance, cannot be upheld. Applying the propositions of law, it was decided to delete these additions as the entire additions was made on surmises and conjectures. In the result, appeal of the assessee is allowed.

Assessee’s appeal allowed

ORDER

Per: J Sudhakar Reddy:

This appeal filed by the assessee is directed against the order of the ld. Commissioner of Income Tax (Appeals) – 10, Kolkata, (hereinafter the ‘ld. CIT (A)’), passed u/s 250 of the Income Tax Act, 1961 (the ‘Act’), dt. 28/08/2018, for the Assessment Year 2014-15.

2. At the outset we find that there is a delay of 1 day in filing of this appeal. After perusing the petition for condonation, we are convinced that the assessee was prevented by sufficient cause from filing the appeal on time. Hence the delay is condoned and the appeal is admitted.

3. The assessee derives income from business and other sources. He filed his return of income electronically for the Assessment Year 2014-15 on 31/03/2015 declaring net taxable income of Rs.4,37,552/-. The Assessing Officer passed a best judgment assessment order u/s 144 of the Act on 29/12/2016, determining the total income of the assessee at Rs.27,11,020/- interalia making a disallowance of Rs.18,97,566/- claimed as short term capital loss. He further disallowed an amount of Rs.3,75,898/- u/s 57(iii) of the Act. The facts of the issue are brought out at para 4.3. and 4.4. of the order of the Assessing Officer, which is extracted for ready reference:-

“4.3. On perusal of the books of accounts and details filed by the assessee it was observed that the assessee had claimed Short term capital gain on sale of shares of COMFORT FINCAP LTD. for the sum of Rs.18,97,566/-. The said capital gain on sale of shares was claimed to be exempt income. The said long term capital gain of shares was claimed on the sale of shares of Rs.11,00,610/- received through the share broker Global Capital Market. The said sale proceeds were claimed to have been received on the following dates:-

Sl. No.DateAmount(Rs.)
119/03/2014159500
219/03/2014507500
319/03/2014406000
419/03/201429000

4.4. The assessee was requested to furnish the following evidences in support of the transaction in shares on account of which three was a claim of short term capital loss of Rs.18,97,566/-

PURCHASE.

01. Please specify the date of purchase along with quantity

02. Please specify the mode of payment

03. If the payment is made through banking channel, submit the corresponding bank statement reflecting the above transaction

04. Please furnish the document related to allotment of shares if applicable

05. Please furnish the contract notes if applicable

06. Please give complete details (such as name, address, contact no. Etc) of the broker

07. Whether the shares were purchased in physical form or dematerialized form

08. When did you open the DEMAT account and what is the name and address of the DP

09. Please furnish the DEMAT statement since its opening

10. Please specify the date on which these shares were credited into your DEMAT account.

11. What are the other share transactions done by you during this period i.e., between the purchase and sale of this particular share.

SALE

12. Please specify the Stock Exchange in which these shares were listed at the time of sale of these shares.

13. Please furnish complete details (such as name, address, contact no. Etc) of the broker

14. Please furnish the contract notes regarding sale of shares

15. Please furnish the corresponding DEMAT Account statement clearly reflecting the Debit of such shares from the account

16. Please furnish the ledger of the broker

17. Please furnish corresponding bank statement reflecting receipts from such sale consideration

Please specify clearly the utilization of funds so received against sale of shares. Establish it through fund flow

In response the assessee furnish the details on 28.07.2016.”

3.1. Thereafter the Assessing Officer disallowed the loss claimed by observing as follows:-

“4.6. FINCAP LTD., in the past. It was unusual on his part to claim a huge loss a lone offline purchase of a single scrip namely, COMFORT FINCAP LTD. within a short time of half of year (1 and ½ ) year. There was nothing extraordinary in the business plan, performance, and reputation of the company which could have fetched the assessee such huge loss within such short time.”

3.2. Thereafter, the Assessing Officer relied on the order of the investigation wing of the Income Tax Department, statement stated to be taken on oath during the course of survey conducted on certain brokers, investigation said to have been conducted by SEBI, wherein the transactions of the scrip COMFORT FINCAP Ltd. was said to have been suspended. He referred to the SIT report as well as statements of broker and entry operators. As the assessee failed to appear before the Assessing Officer, the assessment was made u/144 of the Act. The Assessing Officer further disallowed an amount of Rs.3,75,898/-, claimed u/s 57(iii) of the Act, on the ground that there is no income earned by the assessee so as to allow the expenditure in question.

4. Aggrieved the assessee carried the matter in appeal. The ld. First Appellate Authority confirmed both the additions. On the issue of disallowance of short term capital loss, the ld. CIT(A) relied on circumstantial evidence. The ld. CIT(A) at page 29 para 6.1. and 6.2. concluded as follows:-

“1. I have carefully considered the action of the Ld. AO in making an addition of Rs.18,97,566/-as unexplained credit u/s 68 of the Income Tax Act, 1961. After an exhaustive discussion and elaborating the factual and legal matrix, I find that the Ld. AO has held that the claim of Short Term Capital Loss was to be denied to the assessee individual, and was to be assessed as unexplained cash credit u/s 68 of the I T Act. The Ld. AO has placed on record the entire gamut of findings, and there is, in my considered view no further requirement for elaboration from this forum. In my view of the facts there are elaborate and direct evidence’ to clearly indicate that that the entire transactions undertaken by the appellant were merely accommodation entries taken for the purpose of such bogus Short Term Capital Loss made by the assessee during the previous year. It is apparent that, in the grab of alleged STCG, the assessee “booked” loss of Rs.18,97,566/- and the same was set off against tax-payable incomes in the books of the appellant. The Ld. AO has very carefully analyzed the information received from the Investigation Wing, and has recorded the noteworthy features of the Company whose shares were purchased / sold by the assessee individual. The economic parameters of the said company over the impugned period has also been brought on record, in the analysis. The rise and fall of the prices as recorded had been brought out by the Ld. AO to be artificial and not commensurate with the normal market, as the Company had no business at all. The Ld. AO has also brought forth information that the Regulatory Authority SEBI has also after investigating such abnormal price increases of certain stocks investigated the matter and suspended trading in certain scripts. It is very clear that the prices of these scripts fell sharply after the offloading of these scripts by pre-arranged and manipulated transactions. The entire transactions were carried out on the Stock Exchange to give it a color of real transactions.

2. I also find that all the submissions made by the appellant during the course of the appeal point towards the elaborate documentation, meaning thereby that the appellant has produced papers relating to application for the shares, the allotment of the shares, the share certificates, payments by cheque and the necessary papers filed before the Registrar of companies, where the name of the assessee has been reflected as a shareholder, The appellant has also filed proof of amalgamation of the companies wherein the shareholding has changed hands. It is also the contention of the appellant that it has provided copies of the bank statement, bank contract notes and delivery instructions to the broker by way of proof that all these transactions were genuine. However, in my considered view of the matter, it is precisely this elaborate paperwork that strengthens the matter relating to the bogus benefit of the LTCG, which clearly has been schemed, preplanned and executed with malafide intelligence and precision. Therefore all these papers are mere documents and not any evidence. The whole gamut of transactions are unnatural and highly suspicious, and therefore the rules – of SUSPICIOUS TRANSACTIONS ought to apply in the instant case. There are grave doubts in the story propounded by the assessee before the authorities below. None of the material produced before the Ld. AO by the assessee appellant are ‘enough to justify the humongous gains accruing to the assessee by way of Capital Gains.’ In my considered view the banking documents are mere self serving recitals. The law in the matter of self-serving recitals has been long established by the Hon’ble apex Court. In the case of CIT vs P.Mohankala 291 ITR 278 = 2007-TIOL-88-SC-IT, the Hon’ble Supreme Court held that : “the money came by way of bank cheque and was paid through the process of banking transactions was not by itself of any consequences.” The burden of proof is on the assessee in the matter of justification of receipts which are of suspicious and ‘dubious nature, In the case of CIT vs. Durga Prasad More (1971) 82 ITR 540 (SC) = 2002-TIOL-877-SC-IT, their Lordships laying down the significance ‘of human probabilities held as under: “in a case where a party relied on self serving recitals in documents; it as ”for that ‘party to’ establish the truth of those recitals: the taxing authorities were entitled to took into the surrounding circumstances to find out the reality of such recitals.” Similarly in the case of Sumati Dayal vs. CIT (1995) 214 ITR 801 (SC) = 2002-TIOL-885-SC-IT-LB, their Lordships held as under: “In view of section 68 of the Act, where any sum is found credited in the books of the assessee for any previous year, the same may be charged to income tax as toe income’ of the assesses of that previous year if the explanation offered by the assessee about the nature and source thereof is, in the opinion of the Assessing Officer, not satisfactory. In such a case, there is prima facie, evidence against the assessee viz. the receipt of money, and if he fails -to rebut, the said evidence being un-rebutted, can be used against him by holding that it was a receipt of an income nature. “In the case of Sajjan Das & Sons vs. CIT(2003) 264 ITR 435 (Delhi) = 2003-TIOL-1022-HC-DEL-IT, their Lordships of the High Court of Delhi, while considering a case in which gifts were received by the assessee through banking channels laid importance on the capacity of the donor for making the gift and his identity as well as importance of relationship between the donor and do nee in determination of genuineness of gift held as under: “That a mere identification, of the donor and showing the movement of the gift amount through banking channels ‘was (lot sufficient to prove the genuineness of the gift. Since the claim of the gift was made by the assessee, the onus lay on him not only to establish the identity of the person making’ the gift but also his capacity to make a gift and that it had actually been received as a gift from the donor. “In my considered view wherever documents are relied upon they should pass the test of normal behavior of the assessee in the course of business viz., human conduct, preponderance of probability and surrounding circumstances. In my considered view, even if documentary evidence is produced, the same must pass the test of human probabilities and surrounding circumstances if they do not, then addition justified, Reliance on such matters is placed on the case of Smt Phoolwati Devi 314 ITR (AT) 1 (Del.) = 2008-TIOL-472-ITAT-DEL.”

4.1. Thereafter he relied on a number of case-law and at para 7 onwards and held that the so-called Rules of suspicion transactions will apply in the case. He relied on circumstantial evidence and confirmed the addition.

5. On the issue of interest deduction u/s 57(iii) of the Act, he held that the assessee has a good case and had the transactions leading to short term capital loss were genuine, then he would have allowed this claim. He held that, as he had taken a view that the claim of short term capital loss is not genuine, the disallowance was upheld.

6. Aggrieved the assessee is before me.

7. The ld. Counsel for the assessee submits that, the assessee has produced all the evidence within its command in support of the genuineness and correctness of the transactions. He submitted that the share transactions were done through recognized share broker firms on the stock exchange and that STT was paid on all transactions. He pointed out that the Assessing Officer has recorded at para 4.4. of his order that the assessee has furnished all the details that are sought by him. He contended that the entire disallowance of the claim of the assessee was made based on suspicion. He argued that the Assessing Officer has relied on the report of the DIT (Inv.), which does not contain the name of the assessee. He pointed out that the so-called statements recorded from the brokers and entry operators were retracted and this fact was recorded by the Tribunal in various orders. He also submitted that even in these statements from brokers and entry operators, the name of the assessee does not figure. He pointed out that a copy of the statement was not given to the assessee nor an opportunity was given to the assessee to cross-examine these persons. Referring to the report of the SIT, he argued that this assessee has nothing to do with that report and that based on such general reports an addition cannot be made in the case of the assessee wherein overwhelming evidence has been produced in support of the transactions.

7.1. The ld. D/R, on the other hand submitted that there is no direct evidence against the assessee but the circumstantial evidence and the manner in which the transaction was done and the ultimate benefit derived by the assessee points out that the transaction is a bogus transactions and was created just to reduce the tax liability of the assessee. He pointed out that the assessee had earned long term capital gains (LTCG) on sale of land and submitted that with a view to reduce the tax liability on LTCG this bogus loss was booked. He relied on the order of the Assessing Officer as well as the ld. CIT(A) and submitted that the circumstantial evidence can be relied upon to bring an amount to tax. On the issue of disallowance of interest u/s 57(iii) of the Act, he submitted that the same may be restored to the file of the Assessing Officer for fresh adjudication, in accordance with law.

7.1.1. In reply, the ld. Counsel for the assessee submitted that the transactions on the scrip COMFORT FINCAPT Ltd., are being carried on in the stock exchange even today and he filed evidence of the same at page 35 & 36 of his paper book. He further submitted that the Assessing Officer has not rejected or controverted any of the evidences filed by the assessee nor has he come out with any evidence in support of his conclusions. He relied on a number of case-law, which we would be discussing as and when required.

8. I have heard rival contentions. On careful consideration of the facts and circumstances of the case, perusal of the papers on record, orders of the authorities below as well as case law cited, I hold as follows:-

9. There is no dispute that the assessee has furnished all the evidences as sought for by the Assessing Officer. The Assessing Officer has also at para 4.4. of his order acknowledged that all evidences as desired by him were furnished. The Assessing Officer has relied on the report of the investigation wing of the department. As held by us, in various other decisions, the report of the investigation wing of the Income tax Department can be a starting point for investigation into the affairs of the assessee but cannot be the whole and sole basis on which an addition can be made. Copy of the report is neither furnished to the assessee nor is placed before us for my consideration. When a copy of the report is not brought on record, the question of relying on the same to make an addition to the income, does not arise.

9.1. The assessee has purchased and sold shares through brokers. Copies of Contract notes, copies of payment through banks and other evidences were filed in support of the genuineness of the transactions. The Assessing Officer relies on the statement of the brokers and that of the entry operators but, none of these statements have been brought on record. The contents of the so called statements are not known. SIT report relied upon by the Assessing Officer does not help the case of the revenue as it is a general report. None of the above referred reports can be the basis of additions. A statement has been made that SEBI has suspended the transactions in the scrip but contrary evidence has been brought on record by the assessee to demonstrate that the scrip is being traded even today. Thus, the basis on which the Assessing Officer has made the disallowance, cannot be upheld.

9.2. Coming to the order of the ld. CIT(A), we find that he has misdirected himself as he was referring to a case of the application for shares. The ld. CIT(A) records that the assessee, during the course of assessment has produced elaborate documentation relating to, (a) application of shares (b) share certificates (c) payments by cheques and (d) the necessary papers filed before the Registrar of Companies. This is clear from para 6.2. of his order at page 30, wherein he held as follows:-

“I also find that all the submissions made by the appellant during the course of the appeal point towards the elaborate documentation, meaning thereby that the appellant has produced papers relating to application for the shares, the allotment of the shares, the share certificates, payments by cheque and the necessary papers filed before the Registrar of companies, where the name of the assessee has been reflected as a shareholder, The appellant has also filed proof of amalgamation of the companies wherein the shareholding has changed hands.”

9.2.1. The above proves that the ld. CIT(A) has mistaken the facts of the case. The ld. CIT(A) relied on the so-called rules of suspicious transactions and confirmed the order of the Assessing Officer. In my view, such disallowance cannot be sustained. This Bench of the Tribunal in the case of Navneet Agarwal vs. ITO [2018] 97 taxmann.com 76 (Kolkata – Trib.) held as follows:-

“Section 68 of the Income-tax Act, 1961 – Cash credit (Bogus sales) – Assessment year 2014-15 – During year, assessee had earned long-term capital gain from sale of shares of one, CSL and claimed same as exempt – In investigation carried out by DIT (Investigation), it was found that CSL was a scrip which was identified to be involved in scheme of bogus LTCG/STCG to more than 60,000 beneficiaries and that assessee was also part of list of such beneficiaries – On basis of said information, sale consideration received by assessee on sale of shares was added to his income as unexplained cash credit – It was noted that observations of Investigation wing were general in nature and were applied across board to all 60,000 assessees who fell in this category – There was no specific evidences produced against assessee – Submission of assessee that she was not party to scam etc., was not controverted by revenue authorities – Nothing was brought on record to show that persons investigated, including entry operators or stock brokers, had named that assessee was in collusion with them – Whether in absence of any finding specifically against assessee in investigation wing report, impugned addition made under section 68 to income of assessee was unjustified.”

10. Applying the propositions of law laid does in this case-law to the facts of the case on hand, we delete these additions as the entire additions was made on surmises and conjectures. Regarding the disallowance u/s 57(iii) of the Act, the claim of he assessee is upheld for the simple reason that the ld. CIT(A) agreed with the contentions of the assessee and the only ground on which he upheld the disallowance was that the loss claimed as short term capital loss was suspicious and bogus. As we have held that the assessee’s claim on the short term capital loss has to be allowed, this objection of the ld. CIT(A) cannot be sustained. Hence we allow this ground of the assessee.

11. In the result, appeal of the assessee is allowed.

(Kolkata 21.06.2019)

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