TaxTMI 
TaxTMI 
2020 (7) TMI 333
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....n the business of manufacturing and trading of rice, import and export of precise metals and stones, import of polymers chemicals etc., The A.O. passed the assessment order under section 143(3) Dated 28.07.2017 making the following additions. 1. Disallowance of loss on sale of stock option Rs. 15,28,20,110/-. 2. Disallowance under section 14A read with Rule 8D(2) Rs. 4,28,556/-. 3.1. The assessee challenged the additions before the Ld. CIT(A). However, both the grounds of appeals were dismissed and appeal of assessee was ultimately dismissed. 3.2. The assessee in the present appeal has challenged both the above additions. 4. On Ground No.2 of the appeal, the assessee challenged the disallowance of Rs. 4,28,556/- under section 14A of the I.T. Act, 1961. 4.1. The A.O. on perusal of the balance-sheet ending on 31.03.2015 noticed that under the head "Current Investments" the following were mentioned. 1. Share of Amtek India - Rs. 1,10,92,321/-. 2. Canara Liquidity Collection - Rs. 25,22,710/-. Also under the head "Advances", assessee has included share application money - KEPL Rs. 64,80,000/-. Share application money AFPL - Rs. 23,2....
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....across several instances/internal alerts wherein a set of entities were consistently making losses by their trading in options on individual stocks (Stock Options) which are listed on Bombay Stock Exchange (BSE). Trading by these entities appeared abnormal because they were consistently making losses by their trades which were reversed with the same counter-parties. The SEBI in its Order has outlined the modus operandi used by such entities. The A.O. reproduced the interim ex-parte Order of SEBI above in the assessment order which highlighted that assessee company dealt with three parties/counter-parties. 8.2. The A.O. vide order sheet entry dated 22.03.2017 confronted the Order of the SEBI to the assessee in which it was alleged that assessee had made losses in indulging in suspicious trades including reversal trades. The Counsel for Assessee was asked to provide a report including the following : "1. Past history/practice of assessee in executing such trades. Whether the assessee as a business indulges in such trades. 2. It has been averred in the report that the assessee has even sold the products below their intrinsic value. Reasons for such unreasonablenes....
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.... segment ought to be correct price or premium for contract in option segment. However if the same is true, there is nothing for an investor to 'choose' at all and there would be no trading since there would be no variation in perception of market participants which is foundation of trading in option segment. In fact, if said assumption is correct, then trading system ought to permit orders to be placed only at fixed price. Instead, investors are allowed to bid whatever premium they deem fit and that too without any price filters/price bands like cash segment. We submit that Hon'ble SAT has held that price of options do not always move in tandem with underlying scrip's price in cash segment which is clearly indicative of fact that price of options are not just combination of 'intrinsic value' and 'time value'. Therefore, it cannot be considered that premium can only be offered at rate which is difference between strike price/rate and price of underlying scrip in cash market. We further submit that trading done by us in option segment was not outside 'permitted range'. The orders punched outside permitted range are automatically rejected by tra....
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....with which our transaction got match since all our transactions got executed on normal screen based system of stock exchange. Our matching is done by automated online module. It is further submitted that all the transactions done in future & options in stock have been done through members / brokers / sub brokers as we are not direct trading member in any stock exchange. We have paid amount of loss / receive the amount of profit only through broker / sub broker / member who in turn being settled by respective exchange only. All our trades are done in normal course of business. Further, we confirm that we have not received any amount whatsoever from any of the independent and unknown counter parties directly or indirectly in shape of loan/advance/capital etc. We have already submitted reply to SEBI and based on our reply we have been given certain relaxation by SEBI which includes allowing us to take hedging position in commodity exchanges etc. We had traded in options contracts of about 48 different scrips including large number of blue chip companies like JSW Energy Ltd, India Cements, Housing Dev. & Infra, Allahabad Bank, L&T, Power Fin Corp Ltd., Dabur India, Tata Power, Bank of ....
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....not be deemed to be a speculative transaction. [Explanation 1].-For the purposes of [clause (d)], the expressions- (i) "eligible transaction" means any transaction,- (A) carried out electronically on screen-based systems through a stock broker or sub-broker or such other intermediary registered under section 12 of the Securities and Exchange Board of India Act, 1992 (15 of 1992) in accordance with the provisions of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) or the Securities and Exchange Board of India Act, 1992 (15 of 1992) or the Depositories Act, 1996 (22 of 1996) and the rules, regulations or bye-laws made or directions issued under those Acts or by banks or mutual funds on a recognized stock exchange; and (B) which is supported by a time stamped contract note issued by such stock broker or sub-broker or such other intermediary to every client indicating in the contract note the unique client identity number allotted under any Act referred to in sub-clause (A) and permanent account number allotted under this Act; (ii) "recognised stock exchange" means a recognised stock exchange as referred to in clause (f) of secti....
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....t time we had no idea of any profit or loss in said transactions and we traded in option segment taking into account our 'risk and reward' parameters. iv. We state that we had followed and complied with all the procedures and requirements of capital market while dealing through SEBI registered intermediary. v. We are not connected to counterparties of our trade and neither do we have any relation with promoters/ directors/key management person of underlying parties. vi. We believe there has been no grievance by any investor, broker, stock exchange or any other agency concerned in the matter. vii. We have a clean and unblemished track record, this is the first time in our history that proceeding is initiated by any regulatory authority against us for our trading in the stock market. Taking in view totality of the facts and circumstances of the case and particulars of our submissions and denials as aforesaid, we submit that no adverse inference may be drawn in our case." 8.4. The Counsel for Assessee also submitted the list of counter-parties detailing the name of instrument, position taken by assessee, reversal of trade and cou....
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....aded by assessee, it was the only or main investor. It also shows the capacity of assessee to influence the market price of the trade. (vii) The SEBI in its Order has identified entities which through deceptive, abnormal trades have generated losses as also the entities which have generated super normal profits. This order provides list of 25 such parties, out of such 25 parties, the assessee has also traded with three entities in a sum of Rs. 48,91,000/-. (viii) The A.O. reproduced the reply of assessee in this para, in which, assessee denied to have any connection or relation with any of the counterparties to the trade because it was an independent of any other parties and transactions were carried out on the floor of the Stock Exchange. All the transactions were carried-out online through Sophisticated On-line Surveillance Software and in case of Screen based Trading, Automated System itself match the Orders on a price time priority basis and hence, it is not possible for anybody to have access over identity of the counter party. Since counter party identity is not displaced one can never have any choice with whom it wants to deal or not to deal. 8.6. Howeve....
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....assessee explained the findings of the A.O. that same are not sustainable in Law. The assessee filed the documents at the time of assessment with explanation on selling of product below intrinsic value, explanation on the trades entered by assessee and identification of counter-parties and explanation of provisions of Income Tax Act applicable for losses incurred by assessee. The assessee also made detailed written submissions taking the arguments against the position taken by the A.O. which is reproduced in the appellate order at pages 7 to 19 which are reproduced as under : Arguments against the position taken by the learned AO The assessee company is engaged in import and export of precious metals, import and trading of Chemicals, polymers, pulses, dyes, pharma and manufacturing & trading of Rice and also deals in shares, futures and options. The company is maintaining regular books of accounts. The Books of Accounts are being audited under section 44AB of the Income tax Act and the Companies Act 1956. The assessee company has originally filed the return of income on 28.09.2015 vide acknowledgement number 828471411280915 declaring total income of INR 87,134,240....
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....AO neither tried to check for the genuineness of the transactions nor evaluated the transactions as per the provisions of Income Tax Act. He has merely relied on the reports of the SEBI, and accordingly passed an order on the basis of borrowed satisfaction. The assessee wishes to draw your kind attention towards the following points: • Trading in Recognized Stock Exchange and payment of statutory dues: It may please be noted that the assessee has done the trading in Bombay Stock Exchange (BSE) which is a recognized stock exchange and has duly paid the Securities Transaction Tax on ah' the transactions. All the transactions were carried out through registered brokers which were duly supported by contract notes. We are herewith submitting before your goodself the copies of contract notes issued by the brokers as Annexure- 2 in order to prove the genuineness of the transactions. • Payment of Margin amount by assessee: The Ld. AO in his order has alleged that the loss incurred by the assessee was not genuine. In this regard kindly note that, the assessee has duly made the payments of margin to exchange through its broker....
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....ling with any of the counterparties, Accordingly, the allegations are baseless. In addition to above, the assessee, in order to check the allegations of similar set of counterparties, requested the SEBI to provide the data of the transactions entered onto by the assesse alongwith the name of counterparty to the transaction. The letter requesting the details from SEBI is attached as Annexure-5 After this request, the SEBI provided the complete details including date, time, rate, quantity and counterparty of the transaction. The CD was provided on 30' December, 2015 during the course of assessment. Please note that this was the first time where assessee got to know about the names of its counterparties. The assessee does not have any relation with any of the counterparties. The complete sheet depicting the details of transaction alongwith counterparty is attached as Annexure-6. All this information was on record of the Ld. AO. • Out of the list of 179 counterparties given by SEBI, only 3 formed part of the SEBI order: The trade detail provided by SEBI in the CD lists the names of 179 counterparties with which the assessee company bought and....
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....1,625 (14,99,79,225) Quantity and Value of trade with the 3 entities identified by SEB/ allegation as involved in manipulation 8,67,250 71,65,050 10,87,250 40,70,950 (30,94,100) Quantity and Value of trade with the 22 entities identified by SEBI allegation as involved in manipulation NIL NIL NIL NIL NIL On the basis of trade data available with the assessee in CD as provided by SEBI, it is submitted that out of total buy value of Rs. 23,39,30,850 merely 71,65,050 (consisting 3.06% of total buy value) is allegedly matched with the entities mentioned/alleged to be undertaking reversal trades as per the Interim order of SEBI. Further, out of total sales value of Rs. 8,39,51,625/- merely 40,70,950 (consisting 4.85% of total sell value) is allegedly matched with the entities mentioned/alleged to be undertaking reversal trades as per the Interim order of SEBI. Accordingly, the loss of only INR 3,094,100 should have been in dispute as even SEBI is questioning only these trades. But the AO without even noticing the same went ahead and disallowed the complete loss of Rs. 15,28,20,110/-. It is inappropriate to allege ....
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.... The Ld. AO has alleged that the assessee has dealt in illiquid stocks. In this regard, please note that the as per the guidelines of SEBI, not all stock are eligible for derivative trading. The top stocks in terms of liquidity and volume are eligible for derivative trading. SEBI has issued a circular dated 23rd July, 2012 which prescribes the eligibility criteria for stocks to be covered in Derivative segment. It is pertinent to note that illiquid stocks do not qualify to be traded in derivative segment. The circular of SEBI is enclosed as Annexure-8 to this submission. Accordingly, the allegations that the stocks in which assessee dealt were illiquid is false. It is pertinent to note that the stocks in which assessee traded were mostly of blue chip companies which were frequently traded in market. All these stocks makes up the index of Bombay Stock Exchange. This is prevalent from the trade detail sheet of the assessee company. It was further allegated by the Assessing officer that out of the 169 scrips traded by the assessee, the assessee was the only or the main investor in over 90% of contracts traded by the assessee. For this....
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....sing Officer is baseless. • Allegation that trades are done below the Intrinsic Value The Ld. AO has alleged that the assessee is trading at significant difference from the intrinsic value of instruments. In this regard, please note that SEBI has calculated Intrinsic value as difference between strike price and price of underlying scrip in cash market. Whereas Intrinsic value is based on various factors like time, demand and supply, volatility in the underlying scrip and overall market and market conditions, etc. in addition to difference between strike price and price of underlying scrip in cash market. It is pertinent to note that if orders are only allowed to be placed at intrinsic value, then it is inexplicable as to why trading system permits orders to be placed at prices other than the intrinsic value. As per Interim order of SEBI, difference between underlying scrip in cash market and strike price in derivative segment ought to be the correct price or premium for contract in option segment. However, if the same is true, there is nothing for an investor to choose at all and there would be no trading since there would be no variation in perceptio....
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....ies below. He has submitted that authorities below have heavily relied upon ad-interim Order of SEBI dated 20/22.08.2015. However, vide subsequent Order dated 05.04.2018 (PB-298) the SEBI has vacated the interim Order dated 20/22.08.2015 because the adjudication proceedings had been initiated against the assessee company. All the transactions/trades are conducted through Bombay Stock Exchange (BSE) through banking channel. Out of 25 parties, assessee dealt with 03 parties only as per SEBI Order. Therefore, there cannot be a conclusion drawn that assessee dealt in similar transactions without conducting any investigation. The assessee paid Security Transaction Tax (STT) on all the transactions. All the transactions are supported by contract notes in respect of the impugned amount of derivative tradings. All margin money are paid. Copy of the bank statements of the assessee reflecting payment of requisite margin money to broker are filed before the authorities below which are also reflected in the books of account. At the time of transactions/trades assessee was not aware of the other party with whom transactions have been carried out. There is no business transaction with other part....
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....d as deduction. Learned Counsel for the Assessee relied upon Order of the ITAT, Mumbai, Special Bench in the case of GTC Industries vs., ACIT 164 ITD 1 (SB) wherein the Tribunal observed as under : "46. "Ultimately the entire case of Revenue hinges upon the presumption that assessee is bound to have some large share in so called secret money in the form of premium and its circulation. However, this presumption or suspicion how strong it may appear to be true but needs to be corroborated by some evidence to establish a link that GTC actually had some kind of a share in such secret money, It is quite a trite law that suspicion howsoever strong may be but cannot be the basis of addition except for some material evidence on record. The theory of preponderance of probability is applied to weigh the evidences of either side and draw a conclusion in favour of a party which has more favorable factors in his side. The conclusions have to be drawn on the basis of certain admitted facts and materials and not on the basis of presumptions of facts that might go against the assessee. Once nothing has been proved against the assessee with aid of any direct material especially when variou....
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....f Income Tax 214 ITR 801 (SC) on the proposition that "if test of human probability is applied in the case of assessee, it would clearly make-out a case that assessee did not suffer genuine business loss." The Ld. D.R, therefore, submitted that no interference is required in the matter and appeal of the assessee may be dismissed. 14. We have considered the rival submissions and perused the material available on record. The assessee pleaded before the authorities below that it is in the same business and Member of Commodities Exchange ["MCX"] and other Commodities Exchanges since more than 10 years. The assessee used to do business in these Commodity Exchanges through futures segment as hedging /trading tools as per requirement of the business. The assessee dealt in shares through Members/Brokers since number of years. The assessee used to do physical trading as well as future and option since number of years. Therefore, it is not an isolated year where assessee has done the transaction in future and option stocks. All such transactions are recorded in the books of account. Profit and Loss earned/incurred from trade in Commodities Exchange are also part of the financial statement....
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.... loss suffered by assessee in trading because of the ad-interim order of SEBI dated 20/22.08.2015. The A.O. referring to and reproducing the said order in the assessment order has asked for the explanation of assessee and directed the assessee to file details of past practice/practice of assessee in executing such trades, reasons for such unreasonableness and irrational financial behavior, details of all trades engaged in by assessee and identification of counter party and provisions of Income Tax Act applicable for such trades. The reply of assessee is noted above. The assessee explained before A.O. that it has acted as a bonafide trader as have been doing in past and complied with all procedures and requirements of the stock exchange. At the time of relevant transactions/trades assessee would not have any idea of any profit or loss in the said transaction. The assessee is not connected with the counter-parties in the trade and there is no grievance of any of the investor or BSE. The assessee in support of the explanation filed copies of the contract notes in respect of the transactions in question of derivative tradings [PB 69-109], copies of the bank statements of the assessee c....
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....tory objective that imposition of monetary penalty as per law in line with similarly placed entities would meet the ends of justice." 14.2. The above Order clearly show that SEBI has subsequently directed that there is no need to continue with the directions issued against the assessee company and others vide Orders dated 20/22.08.2015 and dated 22.08.2016 relied upon by authorities below. Thus, in principle, the interim order and subsequent orders of the SEBI which is the basis of passing the assessment order in question have been vacated by the SEBI itself. The assessee filed complete documentary evidences before the authorities below and explained that in Screen based Electronic Trading, it is not possible to choose the counter-party for trading and assessee paid STT on the same transaction and transactions are done with the Members/Brokers and sub-brokers which fact have not been disputed by the authorities below. The assessee has also proved that all the transactions are carried out through banking channel and as per guidelines issued by the SEBI by making payment of margin money and transactions are proved by contract notes. There is also no allegation made by BSE against ....
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.... the scrips. It was further directed in the said order that these directions shall continue to be in force till further directions. These facts clearly show that the ad-interim order of the SEBI was passed without hearing the objections of the assessee and when objections of the assessee were considered, the interim order was diluted by giving permission to the assessee to deal in the transactions. Ultimately, both the orders of the SEBI relied upon by the A.O. have been vacated by the SEBI vide order dated 05.04.2018. Thus, there were no material available with the authorities below so as to conclude that assessee has entered into any dubious or other transactions deliberately to show business loss. In such circumstances, it was imperative on the part of the authorities below to examine the issue on merit and to decide whether assessee has suffered genuine business losses out of the transactions/trades in question. However, the authorities below did not examine the issue on merits and merely relying upon the ad-interim interim order concluded the issue against the assessee. It is also clear from these facts that the ad-interim order which was passed ex-parte - Whether would disclo....
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.... "20. The question whether there was fictitious transactions creating illegal synchronization has to be gathered from the facts and circumstances and intention of the parties. Acting in concert is something about which it is difficult to obtain direct evidence. Proof of manipulation might depend upon inferences drawn from factual details. Such inferences could be gathered from pattern of trading data and the nature of the transactions etc. 14.5. In para-45 the Hon'ble Supreme Court further held as under : "45. No grounds have been raised in the show cause notice alleging that the impugned fictitious transactions have been entered into with a view to avoid payment of tax and was an act of tax planning. Adjudicating officer also has not gone into this aspect. Hence, I am not inclined to go into this aspect, whether the impugned transactions were intended to reduce the brunt of taxation and an act of tax planning. The correctness of findings of SAT in the case of Viram Investment Pvt. Ltd. is left open." 14.6. The issue in appeal regarding violation of provisions of SEBI Rule was decided based on the facts and circumstances available on record and intention of ....