Revenue wins against taxpayer using manipulative commodity trades to create artificial losses for tax evasion

ITAT Patna ruled in favor of revenue against taxpayer who engaged in manipulative commodity trading on NMCE platform. Investigation Directorate identified systematic tax evasion through synchronized trades designed to create artificial losses for offsetting genuine profits. Despite taxpayer's argument that transactions were legitimate business activities, ITAT found transactions were colourable and contrived. CIT(A) had earlier granted relief focusing on transaction form rather than substance. ITAT set aside CIT(A) order, confirmed AO's assessment, and allowed revenue's appeal, holding that trading on NMCE platform alone doesn't establish transaction genuineness.

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The core legal questions considered in this appeal pertain to the validity of the reassessment proceedings initiated under section 147 of the Income Tax Act, 1961, and the correctness of the disallowance of commodity trading losses amounting to Rs. 1,04,90,377/-. The issues raised include whether the losses claimed by the assessee were genuine business losses or contrived losses booked through synchronized trading to evade tax, and whether the Commissioner of Income Tax (Appeals) erred in deleting the addition made by the Assessing Officer (AO). Additionally, the Revenue contended whether the case falls under the exceptional clauses of the CBDT Circular for filing further appeal.

The first issue relates to the reopening of assessment under section 147 of the Act. The assessee challenged the reopening on the ground that the assessment for the relevant assessment year (AY) had already been completed under section 143(3), and the AO had verified all relevant facts at that time. The question was whether the reopening was justified based on new information received from the Investigation Directorate, Kolkata, concerning manipulative commodity trading practices.

The second issue concerns the nature of the commodity trading losses claimed by the assessee. The AO, relying on information from the Investigation Directorate and data obtained from the National Multi Commodity Exchange (NMCE), concluded that the assessee had engaged in synchronized trading to book contrived losses to offset genuine profits, thereby evading tax. The question was whether such losses are fictitious and liable to be disallowed, or whether they represent genuine business losses.

The third issue raised by the Revenue was whether the case qualifies as an organized tax evasion under the exceptional clauses of the CBDT Circular, thereby justifying further appeal.

Regarding the reopening under section 147, the legal framework mandates that reopening is permissible only if there is reason to believe that income has escaped assessment. The assessee relied on judicial precedents emphasizing that reopening cannot be based on mere change of opinion or facts already considered. However, the AO's reopening was triggered by fresh information from the Investigation Directorate indicating a modus operandi of tax evasion through synchronized commodity trading. The Commissioner of Income Tax (Appeals) found no merit in the reopening objection, holding that the AO had sufficient reason to reopen the case based on new information and that the reopening was valid.

On the issue of disallowance of losses, the AO conducted a detailed analysis of the assessee's commodity trading transactions. The AO observed that the assessee earned significant commodity profits early in the financial year through one broker, and subsequently booked substantial losses in the last quarter through two other brokers. The AO noted that the transactions were squared off within seconds or minutes on the same day, invariably resulting in losses. The counterparty in each intraday purchase and sale was the same, indicating synchronized trading designed to manufacture losses artificially.

The AO further highlighted that the commodities traded were generally illiquid, facilitating price manipulation. The brokers involved were found to be suspicious, with one declared a defaulter and the other suspended by the Exchange. The AO concluded that the losses were contrived and disallowed them, adding the amount to the assessee's income.

The assessee contested the disallowance before the CIT(A), arguing that all transactions were genuine and executed on the NMCE platform, which is a regulated exchange. The assessee contended that intraday squaring off is a legitimate practice and that the AO's selective disallowance of losses from two brokers while ignoring profits from another was arbitrary and illogical. The CIT(A) agreed with the assessee, holding that the AO's conclusion was based on suspicion and conjecture without sufficient evidence to establish manipulative intent. The CIT(A) emphasized that the AO failed to bring on record any concrete enquiry results or categorical evidence beyond reproducing transaction details.

The Revenue challenged the CIT(A)'s order before the Tribunal. The Tribunal examined the detailed transaction data, including contract notes and trade ledgers from NMCE, which showed multiple instances of buy and sell transactions executed within seconds resulting in losses. The Tribunal held that such rapid, repetitive transactions designed solely to incur losses defy commercial logic and the test of human probability. The Tribunal relied on Supreme Court precedents which establish that taxing authorities are entitled to look into surrounding circumstances and apply the test of human probabilities to determine the genuineness of transactions.

Specifically, the Tribunal cited the Supreme Court ruling in Sumati Dayal, which permits inference against the assessee when the explanation offered is not satisfactory and the transactions appear to be colorable. Similarly, the Tribunal referred to Durga Prasad More, which underscores that the apparent must be considered real unless there is reason to believe otherwise, and that the burden of proof depends on the facts and circumstances.

Applying these principles, the Tribunal concluded that the AO's findings were based on concrete evidence from the NMCE trade ledger and investigation reports, and not mere conjecture. The transactions were not genuine business dealings but manipulative trades to book artificial losses to offset earlier profits. The Tribunal found that the CIT(A) erred in ignoring the substance of the transactions and granting relief merely on the formality that trades were conducted on a recognized exchange platform.

Regarding the Revenue's contention under the CBDT Circular, the Tribunal accepted the Revenue's submission that the case involved organized tax evasion through contrived losses and thus falls within the exceptional clauses permitting further appeal.

In conclusion, the Tribunal set aside the CIT(A) order deleting the addition and restored the AO's order disallowing the commodity trading losses of Rs. 1,04,90,377/-. The reopening under section 147 was upheld as valid. The Tribunal emphasized that transactions carried out within seconds resulting in losses are not consistent with business prudence and are indicative of colorable transactions designed for tax evasion.

Crucial legal reasoning preserved verbatim includes:

"The commodity trading loss incurred through brokers M/s Subh Commodities Pvt. Ltd. & M/s Marina Commotrade Pvt. Ltd. aggregating to Rs. 10490377/- are fictitious & contrived losses booked through synchronized trading which is wholly disallowed and added to the income of the assessee."

"The full squaring off transaction during a day invariably with loss which a prudent businessman would never do is an established indicator of synchronized trading which is very much existed in the assessee's case."

"The transactions carried out within a span of a few seconds and resulting in loss are not genuine transactions."

"The test of human probabilities and of a prudent businessman that despite incurring losses, repetitive transactions were carried out which can be for no other purpose except to incur a loss."

The core principles established include that the genuineness of transactions cannot be presumed solely because they occur on a recognized exchange platform; the tax authorities are entitled to examine the substance over form and apply the test of human probabilities; and that synchronized intraday trades resulting in artificial losses to offset profits are liable to be disallowed as colorable transactions under the Income Tax Act.

Ultimately, the Tribunal allowed the Revenue's appeal, confirming the disallowance of contrived commodity trading losses and validating the reassessment proceedings.

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