2019 (1) TMI 15 - AT - Income Tax

Tribunal overturns disallowance of trading loss, citing lack of evidence and violation of natural justice

The Tribunal allowed the appeals, overturning the disallowance of the loss claimed by the assessee on trading in bonds. The Tribunal found that the ... Genuineness of transactions - burden of proof on assessee to justify transaction price - off-market / OTC transactions and reporting to exchange - use of third party statements and principles of natural justice (cross examination / production of statement) - disallowance of contrived/booked losses as colorable device - consistency of treatment in assessmentsGenuineness of transactions - disallowance of contrived/booked losses as colorable device - off-market / OTC transactions and reporting to exchange - Whether the loss claimed by the assessee on sale/purchase of bonds was rightly disallowed as non genuine and artificial. - HELD THAT: - The Tribunal examined the material on record and the authorities' reasoning that the bond transactions were pre arranged to create short term capital loss. Though the Assessing Officer relied on timing of funds, circulars on reporting of corporate bond trades and certain third party enquiries to infer non genuineness, the AO did not bring material to demonstrate that the particular transactions of the assessee were bogus. The assessee produced deal confirmations, demat transfer evidence and bank transfers showing settlement through banking channels; earlier assessment years had accepted similar book results. The Tribunal accepted that off market trades are not per se prohibited and that market prices can vary by agreement of parties. On the record the AO had not independently and cogently proved the transactions to be sham or a colorable device in the assessee's case; cumulative doubts raised by the AO were not supported by contemporaneous documentary proof specific to the assessee's dealings. Applying settled principles that authorities may look at surrounding circumstances but must establish non genuineness on relevant material, the Tribunal concluded that AO failed to discharge that positive burden and therefore the disallowance could not be sustained. [Paras 18, 22]Disallowance of the loss was not sustained; appeals allowed on this point.Use of third party statements and principles of natural justice (cross examination / production of statement) - burden of proof on assessee to justify transaction price - Whether the Assessing Officer could rely on statements/inputs from investigation or third parties (e.g., statement attributed to Shri Pratik R. Shah) without supplying copies or affording opportunity of cross examination. - HELD THAT: - The Tribunal noted that the AO referred to an alleged statement implicating other entities as accommodation entry providers but did not place any copy of such statement or material on record showing it related to the assessee. The assessee asserted it was not supplied the purported statement and had sought opportunity for cross examination; the AO did not produce material proving that the statement connected to the assessee's transactions. Absent production of the third party statement or evidence demonstrating its relevance to the assessee, and given that no persons were examined to test those inputs, the Tribunal found that the AO had not established a foundation to rely on those inputs to disprove the genuineness of the assessee's transactions. The Tribunal further observed that summons compliance letters and documentary submissions by the assessee were on record and the AO had not proceeded to prove bogusness by independent enquiries. [Paras 18]Reliance on third party/investigation inputs without producing them or affording cross examination was not a sustainable basis for disallowance.Consistency of treatment in assessments - burden of proof on assessee to justify transaction price - Whether the Revenue could selectively accept profit transactions of similar character while disallowing only the loss transaction. - HELD THAT: - The Tribunal recorded that the AO had accepted three transactions resulting in profit but disallowed the single large loss transaction. The assessee pointed to earlier assessment years where similar book results were accepted. The Tribunal observed that selective treatment requires positive material to distinguish the impugned transaction as non genuine; absent such material and given that the modus operandi (demat transfers, bank settlements) was common across transactions, the AO's pick and choose approach was not justified. The Tribunal emphasised that inconsistency in treatment cannot sustain disallowance where the AO has not demonstrated specific indicia of sham in the particular loss transaction. [Paras 20, 22]Selective acceptance of similar transactions without material distinguishing the loss transaction was not a valid basis for disallowance.Final Conclusion: The Tribunal held that the Assessing Officer failed to establish with relevant material that the bond transactions were non genuine or a colorable device; reliance on extraneous investigative inputs without production or opportunity for cross examination and selective treatment of transactions were inadequate foundations for disallowance. Both appeals for A.Y. 2013 14 and A.Y. 2014 15 were allowed. Issues Involved:1. Disallowance of loss of trading in bonds.2. Non-genuineness of transactions.3. Non-provision of cross-examination.4. Charging of interest under sections 234A, 234B, and 234C.Detailed Analysis:1. Disallowance of Loss of Trading in Bonds:The primary issue was the disallowance of a loss of Rs. 4,57,29,090 claimed by the assessee on trading in bonds. The Assessing Officer (A.O.) disallowed the loss, considering the transactions as non-genuine and aimed at creating artificial losses to offset profits from land sales. The A.O. observed that the transactions were executed off-market and not reported to the stock exchanges, and the sale price was significantly lower than the market price on the date of the transaction. The A.O. also noted that the transactions were settled within a very short duration, raising doubts about their genuineness.2. Non-Genuineness of Transactions:The A.O. concluded that the transactions were not genuine, citing several reasons:- The transactions were not reported to the stock exchanges as required by SEBI regulations.- The sale price of the bonds was significantly lower than the market price.- The transactions were executed within a very short time frame, indicating a lack of commercial purpose.- The funds involved in the transactions were transferred between related parties within minutes, suggesting an artificial arrangement to create losses.- The A.O. relied on the statement of Mr. Pratik R. Shah, who admitted to providing accommodation entries, although the statement did not specifically mention the assessee.3. Non-Provision of Cross-Examination:The assessee argued that the A.O. relied on the statement of Mr. Pratik R. Shah without providing a copy of the statement or an opportunity for cross-examination, violating the principles of natural justice. The assessee contended that the transactions were genuine, conducted through demat accounts, and settled through banking channels. The assessee also pointed out that similar transactions in previous years were accepted by the A.O. without any adverse inference.4. Charging of Interest under Sections 234A, 234B, and 234C:The assessee also challenged the charging of interest under sections 234A, 234B, and 234C, arguing that the disallowance of the loss was incorrect and, therefore, the interest should not be charged.Tribunal's Findings:Disallowance of Loss of Trading in Bonds:The Tribunal observed that the assessee provided all necessary documents and details regarding the transactions, including demat account statements and bank statements. The Tribunal noted that the A.O. accepted the profit from similar transactions but disallowed the loss without substantial evidence. The Tribunal found that the A.O. failed to prove that the transactions were bogus and not genuine.Non-Genuineness of Transactions:The Tribunal concluded that the A.O. did not fully investigate the transactions or bring any material evidence to prove that the transactions were not genuine. The Tribunal noted that the transactions were executed through proper banking channels and demat accounts, and the price of the bonds could vary based on market conditions and the agreement between the buyer and seller.Non-Provision of Cross-Examination:The Tribunal agreed with the assessee that the A.O. violated the principles of natural justice by not providing a copy of Mr. Pratik R. Shah's statement or an opportunity for cross-examination. The Tribunal emphasized that the A.O. should have provided the necessary documents and allowed cross-examination before using the statement against the assessee.Charging of Interest under Sections 234A, 234B, and 234C:Given that the Tribunal found the disallowance of the loss to be unjustified, the charging of interest under sections 234A, 234B, and 234C was also deemed incorrect.Conclusion:The Tribunal allowed the appeals, concluding that the A.O. failed to establish that the transactions were not genuine and that the disallowance of the loss was based on assumptions and presumptions without substantial evidence. The Tribunal also found that the principles of natural justice were violated by not providing the assessee with the necessary documents and an opportunity for cross-examination. Consequently, the disallowance of the loss and the charging of interest were both overturned.