Addition u/s 69C cannot be Imposed on Trading in Scrips on Account of Share Price Movement: ITAT [Read Order]

The Income Tax Appellate Tribunal (ITAT), Mumbai Bench, has recently, in an appeal filed before it, held that an addition under Section 69C of the Income Tax Act cannot be imposed on trading in scrips, on account of share price movement.

The aforesaid observation was made by the Mumbai ITAT, when, an appeal was preferred before it by the Revenue, as against the order of the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi [CIT(A)], dated 31.08.2022, for the A.Ys.2014-15 and 2015-16.

The ground of the Revenue’s appeal being as to whether on the facts and circumstances of the case and in law the CIT(A) has erred in deleting addition of Rs. 1,15,88,635/, without appreciating the fact that the assessee had indulged in transactions by way of colourable device, to book Long Term Capital Losses, which is not permitted by the Income Tax Act as enunciated by the Supreme Court in the case of Mc'Dowell& Co., the brief facts of the case were that the assessee was a firm engaged in the business of trading in Shares, F&O, Commodity and Derivatives.

During the assessment proceedings, it was observed by the Assessing Officer that assessee had purchased various scrips which were suspected scrips as penny stock, and further that assessee had claimed long term capital loss in the current year and the he will setoff short term capital loss against some long-term capital gain or set off losses with business profit.

This quantum of huge long term capital loss was found suspicious and, in this regard, a detailed investigation was undertaken by the investigation wing, Kolkata, into 84 penny stocks. A detailed finding was also given indicating bogus LTCG/STCL entries claimed by large number of beneficiaries.

 The Assessing Officer heavily relied on the modus operandi involving operators, intermediaries and the beneficiaries, as had been detailed in the investigation report prepared and disseminated by the Kolkata Directorate. Further, he analysed the investigation wing report in his Assessment Order, other ITD Data, BSE data, money control website as well as various judicial decisions and elaborately discussed he modus operandi and characteristics of the penny stock scrips. And, since the assessee had dealt with buying and selling of suspected scrips, as mentioned in his order at Page Nos. 2 to 5 of the Assessment Order, he issued a show cause notice, asking as to why the above scrips should not be treated as bogus transactions and the loss claimed by the assessee should not be entertained.

 In this regard, the assessee filed a detailed reply stating that the long-term capital loss generated was genuine. However, after considering the submissions of the assessee, the Assessing Officer rejected the same and observed that the scrips purchased by the assessee as well as the subsequent sale by the assessee are suspected scrips.

He once again relied on the investigations of other agencies and thus,disallowed claim made by the assessee as long term capital loss ,and further made an addition of 2% of bogus loss, as being commission paid by the assessee in order to facilitate the above transactions under Section 69C of the Income Tax Act, as unexplained expenditure to the extent of ₹.9,77,134/-.

Aggrieved by this, the assessee preferred an appeal before the CIT(A), who observed in his order that the Assessing Officer had heavily relied on the investigation reports of Kolkata wing during their investigations of penny stock.

He observed that the assessee had purchased all the shares through regulated market i.e., Bombay Stock Exchange (BSE) and paid all the payments through banking channels only, and also that the assessee had submitted all the relevant information in support of the above transaction.

He added that the assessee had sold all the scrips only through recognized stock exchange, after complying Indian Contract Act, 1872, that all the transactions were duly reflected in DMAT statements, and that they were through authorised brokers who were duly registered with SEBI and BSE.

The CIT(A) further observed that it is fact on record that the assessee had dealt with all these scrips, however that, all these transactions only routed through banking channels and nothing was proved against the assessee to show that the assessee had dealt with any suspected transactions. Therefore, he held that the transactions entered by the assessee are genuine transactions, and accordingly, allowed the appeal filed by the assessee.

Further, the Commissioner deleted the commission on total suspected transactions made by the Assessing Officer under Section 69C, and it is being aggrieved by the same, that the revenue is presently in appeal before the Tribunal.

Hearing the opposing contentions of both sides as presented by Shri Suchek Anchaliya& Shri Tushar Nagori, on behalf of the assessee, and by Smt Mahita Nair, on behalf of the Revenue, and perusing the materials available on record, the Bangalore ITAT observed:

“We observe from the record that assessee has purchased and sold these shares through recognized stock exchange and authorised brokers and nowhere it is brought on record that assessee is one of the parties involved in the entry provider or involved in manipulating the prices or it is proved that assessee is one of the exit providers. It is fact on record that all the scrips in which assessee has dealt with were already proved to be a non-penny stock based on the various decisions of the various Hon'ble High Courts and Tribunal benches. Apart from that, we observe that assessee is a regular trader in various scrips and particularly in this year assessee has dealt with more than 150 scrips and the transactions of the assessee in trading of shares having turnover of more than ₹.528.9 crores and also having substantial dividend and speculation income during this year.”

“This proves to show that assessee is a regular investor and may be assessee has dealt with suspected scrip merely on the basis of movement of share prices and there is nothing on record to prove that assessee has anywhere involved in any types of irregularities. Therefore, we do not find any reason to interfere with the findings of the Ld.CIT(A)”, the coram of Kavitha Rajagopal, the Judicial Member and S. Rifaur Rahman added.

Thus, the ITAT finally held:

“In the result, appeals filed by the Revenue are dismissed.”

To Read the full text of the Order CLICK HERE

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