The Kolkata bench of the Income Tax Appellate Tribunal ( ITAT ) has observed that the magnitude of profit is not decisive factor about genuineness of existence of an investee company.
The assessee has filed his return of income on 12.09.2015 declaring total income of Rs.9, 77,350/-. The case of the assessee was selected for scrutiny assessment and a notice under section 143(2) was issued and served upon the assessee.
The Assessing Officer ( AO ) disallowed this claim and held that Sulabh Engineers & Services Ltd. was a paper entity and its stocks were manipulated by the experts for granting undue benefits to certain investors.
The Counsel for the assessee Mr. S.S. Gupta, was that since the assessee has earned a very normal profit on this investment. His investment should be considered as an innocent investment.
The two-member bench, comprising Girish Agarwal ( Accountant member ) and Rajpal Yadav ( Vice President ), referenced the High Court’s scrutiny of companies, like in the case of Swati Bajaj, where share brokers manipulated shares to benefit investors. Consequently, the reliability of the company in which the investment was made was called into question.
The Tribunal emphasized that the genuineness of an investee company should not be gauged solely by the magnitude of profit earned. Even if the assessee made the investment when the shares were already managed to a particular level and subsequently sold early, the nominal profit earned would not automatically validate the transaction.
It was reiterated that the legitimacy of the assessee’s investment could not be established based solely on the modest profit earned. Therefore, the Tribunal, led by Girish Agrwal ( Accountant member ) and Rajpal Yadav ( Vice President ), upheld the decision of the CIT(Appeals), dismissing the appeal.
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