2020 (8) TMI 153 - HC - Income Tax

High Court upholds disallowance of Short-Term Capital Loss

Sanjay Kaul Versus Principal Commissioner Of Income Tax Delhi-8, New Delhi

Sanjay Kaul Versus Principal Commissioner Of Income Tax Delhi-8, New Delhi - [2020] 427 ITR 63 (Del) Issues Involved:1. Legitimacy of Short-Term Capital Loss (STCL) claimed by the assessee.2. Application of Section 68 and Section 69C of the Income Tax Act.3. Admissibility of evidence and opportunity for cross-examination.4. Assessment of transactions involving penny stocks and accommodation entries.5. Jurisdiction and procedural aspects of the assessing officer’s actions.Detailed Analysis:1. Legitimacy of Short-Term Capital Loss (STCL) Claimed by the Assessee:The assessee filed its income-tax return declaring a total income of Rs. 3,12,59,350 for AY 2015-16 and claimed STCL of Rs. 1,22,76,352 from the sale of shares in three listed companies. The Assessing Officer (AO) disallowed this STCL, deeming it bogus and part of an accommodation entry business. The AO relied on a report from the Deputy Director of Income-tax (Investigation), which explained the modus operandi of providing bogus capital gains/losses. The AO concluded that the assessee's transactions were sham, aimed at converting unaccounted money into accounted money through capital loss.2. Application of Section 68 and Section 69C of the Income Tax Act:The AO made additions of Rs. 1,22,76,352 under Section 68 and Rs. 3,06,908 under Section 69C, disallowing the STCL claimed. The CIT(A) upheld these additions. However, the ITAT observed that Section 68 was not applicable since it was a case of cash debit, not cash credit. Despite this, the ITAT sustained the additions, noting that the transactions were bogus and the AO had correctly acquired jurisdiction over the case.3. Admissibility of Evidence and Opportunity for Cross-Examination:The assessee argued that the AO did not provide an opportunity for cross-examination of the parties whose statements were relied upon. The ITAT and CIT(A) noted that the addition was not solely based on these statements but also on independent analysis and corroborative material. The Tribunal referenced various judgments, concluding that the right to cross-examine is not an invariable requirement of natural justice and that the AO's findings were based on material, surrounding circumstances, and preponderance of probabilities.4. Assessment of Transactions Involving Penny Stocks and Accommodation Entries:The AO highlighted that the companies involved were obscure with no significant business activities, identified as 'Penny Stocks'. The AO pointed out the unrealistic price movements and low trading volumes of these stocks, concluding that the transactions were pre-arranged to claim bogus STCL. The Tribunal referenced the case of Suman Poddar v. Income Tax Officer, where similar issues with penny stocks were discussed, and the transactions were deemed bogus. The Tribunal upheld the AO's findings, emphasizing that the transactions lacked financial logic and were part of a scheme to obtain accommodation entries.5. Jurisdiction and Procedural Aspects of the Assessing Officer’s Actions:The ITAT noted that the AO had correctly acquired jurisdiction and that mentioning the wrong section did not render the assessment null and void. The Tribunal and CIT(A) found that the AO's actions were supported by substantial evidence and independent analysis. The Tribunal also referenced multiple judgments to support the view that procedural irregularities, such as not providing cross-examination, do not invalidate the assessment if the findings are corroborated by other evidence.Conclusion:The High Court dismissed the appeal, concluding that no substantial question of law arose for consideration. The concurrent factual findings by the income-tax authorities were based on substantial evidence, and the assessee failed to provide tenable evidence to the contrary. The court upheld the disallowance of the STCL and the additions made by the AO, affirming that the transactions were part of a scheme involving bogus accommodation entries.