Bogus loss and purchase additions need cogent evidence, not suspicion or general investigation reports

Additions for alleged bogus losses in illiquid option trades were deleted because they rested mainly on an investigation report and suspicion, not on independent enquiry or concrete evidence that the specific transactions were sham or that any unaccounted commission was paid. The article notes that screen-based trading did not identify counterparties and that other derivative transactions were accepted, undermining a blanket inference of non-genuineness. Ad hoc commission additions on alleged non-genuine purchases were also deleted because the purchases were supported by invoices, warehouse receipts, delivery orders, bank records and GST returns, while the department's general allegations about supplier inactivity and non-response to summons were not independently verified or shown to establish any colourable transaction.

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Issues: (i) whether additions for alleged non-genuine losses in illiquid option trades and the related estimated commission could be sustained; (ii) whether ad hoc commission additions on alleged non-genuine purchases from identified parties could be sustained.

Issue (i): whether additions for alleged non-genuine losses in illiquid option trades and the related estimated commission could be sustained.

Analysis: The additions were founded substantially on an investigation report and a general allegation of manipulative reversal trades, without independent enquiry into the assessee's own transactions. The impugned trades were only a small part of the assessee's overall derivative activity, while other similar transactions yielding profit were accepted. The trades were executed on screen-based electronic platforms where counterparty identity was not visible, and there was no concrete material to show that the specific loss-making transactions were sham or that any unaccounted commission had in fact been paid. The estimate of commission was likewise unsupported by any direct evidence and was based on presumption.

Conclusion: The additions for alleged non-genuine losses and the related commission were deleted.

Issue (ii): whether ad hoc commission additions on alleged non-genuine purchases from identified parties could be sustained.

Analysis: The purchases were recorded in the books and were supported by invoices, warehouse receipts, delivery orders, bank statements, and GST returns. The assessment proceeded on generalised allegations about the suppliers' financial strength, email handling, IP addresses, non-response to summons, and alleged absence of business activity, but the assessee's specific rebuttals were not effectively dealt with. The material relied upon by the Department was not independently verified in the assessment and did not establish that the assessee had earned any commission or that the purchases were colourable. In the absence of cogent evidence, an ad hoc estimate of commission could not be upheld.

Conclusion: The ad hoc commission additions on alleged non-genuine purchases were deleted.

Final Conclusion: The common reasoning led to deletion of all disputed additions, and the appeals were allowed.

Ratio Decidendi: An addition based on alleged bogus trading or bogus purchases cannot be sustained merely on a general investigation report or suspicion; the revenue must establish the specific transaction as non-genuine by independent enquiry and cogent evidence, and an estimated commission cannot be imposed without proof of actual unaccounted expenditure or receipt.

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