Calcutta HC finds Penny-Stock Trading Loss as Bogus, sets aside ITAT disallowance Order [Read Order]

The Calcutta High Court has set aside the order of the Income Tax Appellate Tribunal, Kolkata (ITAT), which had allowed the set-off of penny-stock trading loss claimed by the assessee under the Income Tax Act, 1961. The Court restored the assessment order and the appellate order confirming the disallowance.

M/s Zulu Merchandise Private Limited, a non-banking financial company engaged in money lending and share trading, filed its return of income for Assessment Year 2014-2015. The Assessing Officer (AO) noted that the assessee incurred a loss of ₹51,33,870 in trading shares of Radford Global Limited and Shreenath Commercial and set it off against interest income.

The case was selected for scrutiny and notices under Section 143(2) and Section 142(1) of the Income Tax Act, 1961 were issued. After investigation-based analysis, including data from the Directorate of Income Tax (Investigation), Kolkata, the AO held that the companies had no business fundamentals and the transactions were sham, carried out through circular trading syndicates to generate bogus losses. The loss was disallowed and added back to the income. The National Faceless Appeal Centre, Delhi upheld the disallowance.

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Appearing through Vipul Kundalia and Prithu Dudheria, the Revenue contended that the Tribunal deleted the disallowance ignoring the assessee’s failure to prove genuineness of the share-trading transactions. It was submitted that the Tribunal failed to consider the principles laid down in judicial precedents regarding unexplained cash credits and penny-stock activities.

It was also argued that the appeal was maintainable in view of the CBDT circular exceptions relating to organised tax evasion through bogus capital gains/loss claims.

Appearing through Agnibesh Sengupta assisted by Dwip Raj Basu and Avijit Kar, the assessee contended that the transactions were carried out in the normal course of business through registered brokers, supported by contract notes and executed through banking channels. It was submitted that the appeal was not maintainable due to low tax effect as per CBDT Circular 9/2024.

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The ITAT allowed the assessee’s appeal, holding that the facts were substantially similar and that the loss on equity shares was eligible to be set off against income. The Tribunal, however, did not independently discuss or evaluate the facts of the present case.

The bench of Chief Justice T.S Sivaganam and Justice Chaitali Chatterjee held that the ITAT committed a serious error in law by allowing the set-off of the assessee’s penny-stock trading loss without examining the factual findings recorded by the AO and the appellate authority. The Court observed that the ITAT merely relied on another decision without verifying how the facts in the present case were “substantially similar,” and failed to give any reasoning while rejecting the detailed conclusions of the lower authorities regarding sham transactions.

The Court also rejected the assessee’s objection on low tax effect, holding that the case fell under the exception relating to organised tax evasion as provided in CBDT Circular No. 5 of 2024.

Accordingly, the Court allowed the Revenue’s appeal.

Consequently, set aside the ITAT’s order, and restored the assessment.

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