ITAT upholds trading losses on NMCE platform, rejects revenue's claim of contrived transactions for tax evasion

The ITAT Indore dismissed the revenue's appeal regarding disallowance of trading losses on NMCE platform. The AO alleged the assessee incurred contrived losses through synchronized trades with clustered brokers to offset profits from other exchanges and evade tax. However, the ITAT found no evidence that transactions were bogus or non-genuine. The assessee had proper documentation and similar losses occurred on other exchanges. The tribunal noted SEBI permits high-frequency trading and mere losses on a platform don't establish artificial nature. The CIT(A)'s findings were upheld, with support from Calcutta HC precedent. Additionally, the tribunal dismissed revenue's ground regarding non-inclusion of profits from Victory Tip Up Pvt Ltd, as transactions were properly recorded in books and audit reports.

---

---

Issues Involved:
1. Deletion of disallowance of contrived losses on NMCE.
2. Genuineness of losses incurred through synchronized trades.
3. Requirement for corroborative evidence against the affidavit filed by the assessee.
4. Reliance on SEBI's allowance of algorithmic trading.
5. Reliance on audit carried out by the Forward Market Commission.
6. Deletion of addition of unaccounted profit.

Detailed Analysis:

1. Deletion of Disallowance of Contrived Losses on NMCE:
The Revenue argued that the losses incurred by the assessee on NMCE were contrived and executed through synchronized trades with a cluster of brokers, intended to reduce taxable income by setting off these losses against profits from other exchanges. The CIT(A) deleted the disallowance, noting that the transactions were conducted through a recognized stock exchange and settled via banking channels. The CIT(A) also observed that the assessee incurred losses on other exchanges, indicating that the losses on NMCE were not unique or contrived. The Tribunal upheld the CIT(A)'s decision, emphasizing the lack of concrete evidence from the AO to prove that the losses were artificial or contrived.

2. Genuineness of Losses Incurred Through Synchronized Trades:
The Revenue contended that the execution of trades on a recognized exchange does not guarantee the genuineness of losses if they are managed or contrived. The CIT(A) and the Tribunal found that the transactions were executed on an online platform where the identity of the counterparty is unknown, making synchronization unlikely. The Tribunal also noted that the Forward Market Commission had conducted an audit and found no violations, further supporting the genuineness of the transactions.

3. Requirement for Corroborative Evidence Against the Affidavit Filed by the Assessee:
The AO dismissed the affidavit filed by the assessee's director without providing corroborative evidence. The CIT(A) criticized this approach, stating that the AO failed to conduct independent inquiries or provide evidence to support the disallowance. The Tribunal agreed, noting that the AO did not bring any evidence to counter the affidavit or prove that the transactions were not genuine.

4. Reliance on SEBI's Allowance of Algorithmic Trading:
The AO alleged that the assessee's high-frequency trading within 60 seconds was indicative of contrived losses. The CIT(A) and the Tribunal noted that SEBI regulations allowed for up to 20 transactions per second, and the mere fact of high-frequency trading did not prove that the losses were artificial. The Tribunal emphasized that the AO's allegations were based on presumptions rather than concrete evidence.

5. Reliance on Audit Carried Out by the Forward Market Commission:
The AO dismissed the audit report by the Forward Market Commission, arguing that it was based on information provided by the assessee and NMCE. The CIT(A) and the Tribunal found that the audit report, which found no violations, was a valid piece of evidence supporting the genuineness of the transactions. The Tribunal noted that the AO failed to provide any evidence to contradict the audit findings.

6. Deletion of Addition of Unaccounted Profit:
The AO added an unaccounted profit of Rs. 5,20,237.5, alleging that the assessee failed to demonstrate its accounting. The CIT(A) found that the transactions were recorded in the books of accounts and reflected in the audit report. The Tribunal upheld the CIT(A)'s decision, noting that the AO's addition was baseless and unsupported by evidence.

Judgment Summary:
The Tribunal dismissed the Revenue's appeals for A.Y. 2011-12, 2012-13, and 2013-14, upholding the CIT(A)'s decisions to delete the disallowance of losses and the addition of unaccounted profit. The Tribunal found that the Revenue failed to provide concrete evidence to support its allegations and that the transactions were genuine and conducted through recognized exchanges. The cross-objections filed by the assessee were also dismissed as academic and infructuous.

---