Loss on sale of specified shares allowed to be set off against long-term capital gains from sale of flat

ITAT (Kolkata) allowed the assessee's appeal, setting aside the CIT(A)'s order and directing the AO to permit the loss on sale of shares to be set off against long-term capital gain from sale of a flat. The bench found facts similar to prior coordinate decisions and followed those precedents, distinguishing a HC decision relied upon by Revenue. Consequently the trading loss on specified equities was held allowable against the LTCG, and the assessment was revised accordingly.

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Issues Involved:
1. Legitimacy of the short-term capital loss on the sale of equity shares of M/s. Tuni Textiles Ltd. and M/s. Blue Circle Services Limited.
2. Application of the principles of natural justice in the assessment proceedings.
3. Relevance and applicability of precedents and judicial decisions.

Detailed Analysis:

1. Legitimacy of the Short-Term Capital Loss:
The primary issue raised by the assessee was against the order of the Ld. CIT(A) upholding the assessment order passed under Section 143(3) of the Income Tax Act, 1961, wherein the AO rejected the short-term capital loss of Rs. 1,87,25,176/- on the sale of equity shares of M/s. Tuni Textiles Ltd. and M/s. Blue Circle Services Limited. The AO deemed these transactions as accommodation entries intended to set off against the long-term capital gain from the sale of a flat. The assessee provided details of the transactions, including contract notes, Demat account copies, and payment details, asserting that the transactions were genuine and conducted through a SEBI registered trading member. However, the AO, referencing large-scale manipulations in the stock market and the inclusion of these shares in the list of penny stocks, concluded that the transactions were sham and rejected the loss.

2. Application of the Principles of Natural Justice:
The assessee argued that the issue was covered by the decision of the Coordinate Bench in the case of Nalanda Builders Pvt. Ltd. vs. DCIT, where similar transactions were deemed genuine. The assessee also relied on multiple judicial decisions, emphasizing that the principles of natural justice were violated as the AO did not provide an opportunity for cross-examination of the witnesses whose statements were relied upon. The Tribunal, after hearing the rival contentions, noted that the AO's reliance on statements and investigation reports without providing cross-examination opportunities violated the principles of natural justice. The Tribunal highlighted that the SEBI had revoked its interim orders against the entities involved, indicating no adverse findings against them.

3. Relevance and Applicability of Precedents and Judicial Decisions:
The Tribunal considered various judicial precedents, including the decision in the case of Gateway Financial Services Ltd., where the facts were substantially similar. The Tribunal observed that the decision in the case of Swati Bajaj, relied upon by the revenue authorities, was distinguished in the case of Nalanda Builders Pvt. Ltd. The Tribunal emphasized that the AO's findings were based on preponderance of probabilities rather than direct evidence. The Tribunal also referred to the decision of the Hon'ble Supreme Court in the case of NRA Steel, which laid down the principles for proving the genuineness of transactions, identity, and creditworthiness. The Tribunal concluded that the AO failed to carry out independent investigations and relied on statements recorded long before the assessment proceedings.

Conclusion:
The Tribunal, following the decision of the Coordinate Bench in the case of Nalanda Builders Pvt. Ltd., set aside the order of the Ld. CIT(A) and directed the AO to allow the loss incurred on the sale of shares amounting to Rs. 1,87,25,176/- and permit the set-off against the long-term capital gain. The appeal of the assessee was allowed, emphasizing the need for adherence to the principles of natural justice and proper investigation by the AO.

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