Tax tribunal allows set off of BSE F&O and currency derivative losses, SEBI ex parte order held inapplicable

ITAT Kolkata allowed the assessee's appeal and deleted the addition disallowing BSE F&O and currency derivative losses. The AO and CIT(A) had relied on an ex parte ad-interim SEBI order, which stood set aside and thus had no binding force, demolishing the foundation of the addition. The subsequent SEBI final order pertained to National Spot Exchange Limited and was held inapplicable to transactions on the Bombay Stock Exchange platform. The Tribunal noted that the assessee had produced complete documentary evidence (contract notes, bank statements, broker accounts) and that there is no legal bar on executing trades through another broker. The losses were directed to be allowed/set off.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether the loss claimed from BSE F&O (shares) transactions and BSE currency derivatives, executed through another broker, could be treated as bogus and disallowed.

1.2 Whether reliance by the tax authorities on an ex-parte interim SEBI order, subsequently set aside or vacated, could constitute a valid basis for disallowing derivative losses.

1.3 Whether the fact that the assessee, being itself a registered broker, executed the impugned transactions through another broker, could, by itself, justify treating the transactions as non-genuine.

1.4 Whether a subsequent SEBI final order relating to National Spot Exchange Limited had any bearing on the genuineness of transactions carried out on the Bombay Stock Exchange platform.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1 & 2: Disallowance of BSE F&O and currency derivative loss based on SEBI ex-parte interim order

Legal framework (as discussed)

2.1 The assessment was framed under section 143(3) of the Income-tax Act, 1961, with the disallowance founded primarily on an ex-parte interim SEBI order referencing alleged fictitious profit/loss generation through stock options.

Interpretation and reasoning

2.2 The Tribunal noted that the Assessing Officer and the appellate authority had placed their main reliance on the SEBI ex-parte interim order dated 20.08.2015, in which the assessee was mentioned as a beneficiary of alleged loss.

2.3 It was found that this interim SEBI order had been set aside / vacated; hence, as on the date of decision, it had no binding force and could not validly support the disallowance of the impugned losses.

2.4 The Tribunal examined that the assessee had placed on record complete documentary evidence for the impugned derivative transactions on the Bombay Stock Exchange platform, and no specific defect in such evidence had been pointed out by the tax authorities.

2.5 The Tribunal relied on a co-ordinate bench decision involving similar facts, where: (i) the assessee was a regular bona fide derivative trader; (ii) all contract notes, bank statements, and broker accounts were furnished; (iii) no incriminating material was found in surveys; (iv) no collusion with counterparties was demonstrated; (v) trades were executed on screen-based exchange systems with payment of STT; and (vi) the SEBI ad-interim order, being the sole foundation of disallowance, had been vacated.

2.6 Applying the same reasoning, the Tribunal held that once the interim SEBI order stood negated, the entire basis for treating the losses as bogus collapsed, and no independent material had been brought by the Assessing Officer to show that the transactions were sham.

Conclusions

2.7 The losses from BSE F&O (shares) and BSE currency derivatives could not be treated as bogus solely on the basis of an ex-parte SEBI interim order that had subsequently been set aside or vacated.

2.8 The disallowance/addition made on account of such derivative losses was unsustainable and liable to be deleted.

Issue 3: Effect of executing trades through another broker when assessee is itself a broker

Interpretation and reasoning

3.1 The Tribunal observed that the only surviving allegation of the authorities was that the assessee executed derivative trades through M/s Goodluck Securities despite being itself a registered broker.

3.2 The Tribunal held that there is no legal bar against an assessee, even if a broker, carrying out its own trades through any other stock broker.

3.3 As no defect in the actual execution or documentation of the transactions on the Bombay Stock Exchange platform was identified, the mere choice of broker could not be a ground to treat the transactions as non-genuine.

Conclusions

3.4 The fact that the assessee, being a stock broker, executed trades through another broker did not render the transactions ingenuine and could not justify disallowance of the derivative losses.

Issue 4: Relevance of SEBI's final order concerning National Spot Exchange Limited

Interpretation and reasoning

4.1 The Department relied on a subsequent SEBI final order dated 20.02.2023, wherein the assessee's certificate of registration with National Spot Exchange Limited was cancelled.

4.2 The Tribunal found that this SEBI order pertained specifically to National Spot Exchange Limited and not to transactions on the Bombay Stock Exchange platform.

4.3 It was held that such order, being contextually confined to a different exchange and regulatory framework, had no application to, or bearing on, the genuineness of the assessee's BSE F&O and currency derivative transactions.

Conclusions

4.4 The SEBI final order relating to National Spot Exchange Limited could not be relied upon to disallow or question derivative losses arising from transactions executed on the Bombay Stock Exchange.

Overall conclusion

5.1 Following the binding co-ordinate bench precedent on identical facts and holding that the SEBI interim order foundation had been demolished, the Tribunal set aside the appellate order and directed deletion of the addition, allowing set-off of the impugned BSE F&O and currency derivative losses.

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