Trading loss from sale of equity shares of alleged penny stock allowed as set off against interest income.

Issue concerns recognition of loss from purchase and sale of equity shares alleged to be penny stock and its entitlement to set off against other income. Tribunal treated the loss as genuine where the assessee, holding an RBI licence and regularly trading in securities, incurred trading losses in ordinary course; reliance on earlier tribunal decisions supported genuineness. Operative effect: such trading loss is eligible for set off against interest income for the relevant assessment year, and the appellate authority's contrary finding was set aside.

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Issues: Whether the trading losses claimed by the assessee for A.Y. 2013-14 and A.Y. 2014-15 arising from sale of specified equity shares (alleged penny-stock scrips) are bogus and liable to be disallowed, or are genuine business losses eligible for set-off against other income.

Analysis: The Tribunal examined evidence that the assessee is an NBFC regularly trading on recognized stock exchanges, that purchases and sales were supported by contract notes and routed through banking channels, and that Security Transaction Tax was paid. The Tribunal considered the Assessing Officer's reliance on investigation/survey reports and third-party statements which were not supplied to the assessee for cross-examination. Applying the principles developed by higher courts and coordinate Benches, the Tribunal analysed (a) the duty of the AO to allow effective opportunity for cross-examination where adverse third-party statements are used, (b) the allocation of burden under Section 68 to prove genuineness and creditworthiness and the AO's obligation to make independent inquiries once initial evidence is furnished, and (c) whether the material amounted to direct incriminating evidence or merely circumstantial preponderance of probabilities. The Tribunal found no direct evidence tying the assessee or its brokers to any rigging or accommodation arrangement, noted that some coordinate decisions distinguished the Calcutta High Court's Swati Bajaj decision on facts, and held that reliance on undisclosed investigation statements violated principles of natural justice and was insufficient to displace the assessee's evidence of genuine trading.

Conclusion: The disallowance of the claimed trading losses is set aside and the losses are held to be genuine for the purposes of set-off. The appeals for A.Y. 2013-14 and A.Y. 2014-15 are allowed and the Assessing Officer is directed to grant the claimed set-off against interest/other income.

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