2025 (8) TMI 1665 - AT - Income Tax

Section 68: Loan treated genuine; short-term capital loss allowed, ad hoc 3% commission disallowance and bogus additions set aside

Jayesh Manshukhlal Palan, Mumbai Versus ACIT-29 (1) Kautilya Bhavan, Mumbai

ITAT (Mumbai) set aside the AO/CIT(A) findings and directed allowance of the claimed short-term capital loss, finding no evidence of price-rigging or ... Disallowance on account of short term capital loss - HELD THAT:-Since the AO has not established that the assessee was involved in price rigging and further the AO did not find fault with any of the documents furnished by the assessee - we set aside the order of the ld. CIT(A) and direct the AO to allow the claim of short term capital loss. Adhoc addition being commission @ 3% of bogus share transactions - Since we have allowed the claim of short term capital loss as the AO has not established with relevant material that assessee has actually obtained bogus entries on short term capital loss, therefore, making disallowance of commission on estimated basis is not justified. Accordingly, this ground of appeal of the assessee is allowed. Addition u/s 68 - During the course of assessment proceedings to prove the genuineness of the loan obtained by the assessee, the assessee has submitted the various document i.e. covering letter submitted by the M/s Grafton Merchant Pvt. Ltd., ITR of M/s Grafton Merchant Pvt. Ltd. for the relevant assessment year; confirmation ledger account of loan provided by the M/s Grafton Merchant Pvt. Ltd. bank statement reflecting the payment made to the assessee along with source of funds for providing loans to the assessee also the financial statement of M/s Grafton Merchant Pvt. Ltd. Assessee also explained that it was a friendly loan obtained from the closely known people but the AO has not brought any contrary material on record to disprove the relevant supporting document furnished in support of the loan transaction in this order. ISSUES PRESENTED AND CONSIDERED 1. Whether short-term capital loss claimed on sale of penny-stock scrips traded on recognized stock exchange, supported by contract notes, demat entries and banking evidence, can be disallowed as bogus where the Assessing Officer relies primarily on an investigation-wing report alleging price manipulation but adduces no specific material connecting the assessee to rigging. 2. Whether an estimated addition of commission (3% of alleged bogus transactions) is sustainable where the underpinning disallowance of short-term capital loss itself is not established by relevant material. 3. Whether an unsecured loan shown in books and supported by lender's confirmation, bank statement, ITRs and financial statements can be treated as unexplained cash credit u/s 68 in absence of any contrary material from the Revenue. ISSUE-WISE DETAILED ANALYSIS Issue 1: Legitimacy of short-term capital loss on sale of penny-stock shares Legal framework: Capital gains/losses on transfer of shares are determined on factual matrix of purchase and sale; genuineness is tested by documentary evidence (contract notes, demat statements, banking trails, STT payment) and, where invoked, by Departmental proof that transactions formed part of manipulated/arranged trading capable of being treated as bogus. Precedent Treatment: Coordinate benches of the Tribunal and the Hon'ble High Court have held that where documentary evidence establishes entry/exit in demat account, trading occurred through registered brokers on recognized exchanges, payments moved through banking channels and SEBI/stock-exchange inquiries do not implicate the assessee, AO cannot simply rely on generalized investigation reports to hold transactions bogus. Decisions cited by the Tribunal were followed. Interpretation and reasoning: The Court examined the documentary matrix: system-generated contract notes, demat credits/debits, trading through registered broker on the BSE, and receipt/payment through banking channels; noted absence of any material identifying the assessee as part of the alleged rigging or connecting specific transactions to the investigation-wing's generalized report. The AO had not made further inquiries to disprove the documentary evidence and had not produced statements, SEBI findings or other linkages to show collusion. The Tribunal emphasized that the mere weakness of a company's fundamentals or extraordinary price movements, without specific evidence tying the assessee to manipulation, are conjectural and insufficient to deem transactions bogus. Ratio vs. Obiter: Ratio - where the assessee furnishes unimpeached documentary evidence of genuine trading through recognized market mechanisms and the Revenue relies only on a generalized investigation report without connecting the assessee to manipulative actors, additions treating gains/losses as bogus are unsustainable. Obiter - observations on the irrelevance of investor rationale for investing in weak-fundamentals companies are ancillary to the primary ratio. Conclusion: Disallowance of short-term capital loss to the extent sustained by lower authorities is set aside; the loss (and its set-off against long-term capital gains) is allowable as the Revenue failed to bring specific material to disprove genuineness. Issue 2: Addition of commission @3% on alleged bogus transactions Legal framework: Additions as deemed commission or estimated percentage require a foundation of established wrongdoing or accommodation entries; ancillary estimated additions cannot stand if the primary fact (that transactions were bogus) is not proved. Precedent Treatment: The Tribunal followed established principle that consequential/ancillary additions predicated on an unsustained primary finding must fall with that primary finding. Interpretation and reasoning: Since the Tribunal set aside the disallowance of the short-term capital loss owing to absence of proof of bogus transactions, the basis for computing and adding an assumed commission evaporates. The AO's basis was an assumed commission for obtaining accommodation entries; without proof of accommodation entries, the estimated commission addition is arbitrary. Ratio vs. Obiter: Ratio - ancillary estimated additions founded on an unproven primary charge cannot be sustained. No obiter material relied upon. Conclusion: The adhoc addition of Rs. 6,48,640 (3% commission) is deleted as unjustified. Issue 3: Addition under Section 68 in respect of unsecured loan Legal framework: Under Section 68, unexplained cash credits/loans can be charged to tax unless the assessee satisfactorily explains the nature and source of the credit; explanation may be supported by lender's confirmation, bank evidence, ITRs and financial statements. The burden of proof lies on the assessee to satisfactorily account for the source; the Revenue must produce contrary material if it disputes genuineness. Precedent Treatment: Judicial precedents indicate that where documentary proof of the loan transaction and the lender's capacity is on record and not rebutted by the Revenue, treating the loan as unexplained is improper. The Tribunal relied on this line of authorities. Interpretation and reasoning: The assessee produced lender's covering letter, ledger confirmation, bank statement showing credit, lender's ITR and financial statements explaining source of funds. The AO issued notice under Section 133(6) to the lender but obtained no contrary information; no material was brought on record to disprove the documents. The AO's solitary inference that 'no company will provide loan without interest and guarantee' is speculative and insufficient to displace documentary evidence. Absent any tangible contradiction or evidence of sham, the explanation stands. Ratio vs. Obiter: Ratio - where the assessee produces contemporaneous documentary evidence of loan transaction and the Revenue fails to produce contrary material after statutory inquiry, addition under Section 68 cannot be sustained. Observations on normal commercial practice (interest/guarantee expectations) are not determinative and are obiter where unsupported by evidence. Conclusion: Addition of Rs. 1,50,00,000 as unexplained credit under Section 68 is deleted; the loan is accepted as explained.