Calcutta HC sets aside Income Tax Order deleting Disallowance on Share Trading citing Failure to prove Genuineness [Read Order]

In a recent case, the Calcutta High Court set aside the Income Tax Order deleting disallowance on share trading, citing the assessee’s failure to prove genuineness.

The appeal filed by the revenue under Section 260A of theIncome Tax Act, 1961 (the Act) is directed against the order dated September 23, 2024 passed by the Income Tax Appellate Tribunal “A” Bench, Kolkata (tribunal) in ITA No. 553/Kol/2024 for the assessment year 2014-2015 which was in favor of respondent assessee, Zulu Merchandise Private Limited.

It was alleged that Income Tax Appellate Tribunal was not justified in law in deleting the disallowance of Rs. 51,33,870/- on account of share trading, without considering the facts that the assessee failed to prove the genuineness of the whole transaction

The assesseee is a non banking financial company (NBFC) engaged in money lending and trading of shares and securities. The assessee filed its return of income for the assessment year under consideration, A.Y. 20142015, on 27.09.2014 disclosing total income of Rs. 1,34,616/-. The case was selected for scrutiny and notice dated 01.09.2015 under Section 143(2) of the Act was issued and thereafter notice under Section 142(1) was issued on 06.04.2016 along with a questionnaire calling upon the assessee to file details/documents relating to the case.

In compliance of the above notices, the assessee company appeared through their authorized representative and furnished details. As the assessee was engaged in trading of shares and securities as well as in money lending as they were called upon to submit particulars of trading in shares. On perusal of the details submitted by the assessee, it was seen that the assessee had incurred a loss of Rs. 51,33,870/- on account of trading in shares of Radford Global Limited and Shreenath Commercial.

Further the assessing officer found that the assessee had earned interest income of Rs. 32,43,618/- which was set off by the assessee with the trading loss of the abovementioned scripts. As the loss is stated to have been incurred by the assessee was substantial, the assessing officer took up the issue for detail scrutiny with all available tools such as through internet and in other search engines and also took note of the investigation report of the Directorate of Income Tax (Investigation), Kolkata and other agencies.

Upon detail scrutiny the assessing officer found that the companies had no worth and they were not engaged in any proper business and therefore it was opined that there are strong reasons to believe that no prudent businessmen will buy such huge number of shares of the aforementioned companies.

The information which the assessing officer was able to ascertain was informed to the assessee more particularly, the details of the investigation report and the allegations made therein. Subsequently, two show cause notices were issued dated 05.10.2016 and 31.10.2016 calling upon the assessee to explain as to why the claim of the abovementioned scripts should not be disallowed and added to the total income.

The assessing officer upon examination of the reply opined it to be usual and a routine type of reply lacking in any cogent reasoning. Further the assessing officer opined that merely stating that the transactions have been made through registered brokers in recognized stock exchanges in listed securities does not justify the rise and fall of stock price in the allegedly tainted shares not does it make this stage manage transactions genuine.

The assessing officer found that the two companies have no business at all and there is no significant indicator to justify the steep escalation in shares price. The assessing officer made a comparative analysis of the balance sheet and negative figures of reserves for the last five years and has reproduced the same in the assessment order dated 26.12.2016.

Upon analysis of the entire data the assessing officer held that there is no genuine business activity in the company, the thin trading volume, the low net profit, the low EPS, and meagre income are some characteristics of these types of stocks and these facts in no way commensurate with the steep rise and fall in the price of stock.

With regard to the stand taken by the assessee that the transactions were made through registered share brokers and are supported by contract notes the shares moved through Demat account and payment was made through proper banking channel etc., the assessing officer found that the investigation report depicts a totally different picture and it was found that everything was pre-arranged and desired goals were achieved through circular trading in which common persons/entities were found to be involved.

Before the appellate authority, the assessee contended that the assessing officer erred in law as well as on facts by not providing the copy of the information to the assessee pertaining to the two companies received from the investigation wing and therefore it is in violation of the principles of natural justice.

The appellate authority examined the reasons set out by the assessing officer for making the addition and dealt with the grounds raised by the assessee. It was pointed out that it is incorrect to state that the information received from the investigation wing was not provided to the assessee as in the assessment order it is clearly stated that information was provided and thereafter show cause notices were issued. Therefore, it was held that there is no violation of principles of natural justice.

Secondly, it was held that assessee could not justify the transaction in such penny stocks and that the assessee has not produce any prove that it sought for cross examination of any person before the assessing officer. Several decisions of the Supreme Court and the High Courts were referred to, to support the conclusion that right to cross-examination is not an absolute right in an income tax proceeding.

The Chief Justice T.S. Sivagnanam and Justice Chaitali Chatterjee (Das) held that the tribunal committed a serious error of law and fact in allowing the asseess’s appeal and setting aside the order passed by the appellate authority and the assessing officer.

The appeal is allowed by setting aside the order passed by the tribunal and the assessment order dated 26.12.2016 as affirmed by the appellate authority by order 23.01.2024 are restored.

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