The New Delhi Income Tax Appellate Tribunal (ITAT) has clarified that where listed share transactions are supported by contemporaneous documentary evidence such as demat records, contract notes, broker documents, bank trail and stock exchange routing, the Revenue cannot treat the resulting loss as bogus merely on the basis of a general investigation report or suspicion about certain scrips.
The Tribunal clarified that Section 68 cannot be invoked in respect of an alleged bogus trading loss because such loss is not an unexplained credit in the books but a depletion of funds arising from recorded transactions. It further held that Section 69B also cannot be used unless there is clear material showing unrecorded or excess investment beyond the books.
The Tribunal also laid down that once the Revenue accepts the purchase, demat holding, banking trail, and part disposal of a composite transaction, it cannot selectively reject only some scrips from the same basket in the absence of fresh, cogent and independent evidence. Further, reliance on third-party statements without supply of material and cross-examination violates natural justice.
The Division Bench comprising Sudhir Kumar (Judicial Member) and S. Rifaur Rahman (Accountant Member) observed that the Revenue had examined only three scrips in isolation while ignoring the larger and undisputed commercial background in which the shares were acquired. The Tribunal found that the impugned shares formed part of a composite en-bloc acquisition of thirteen companies and could not be viewed as disconnected or independent transactions.
The Tribunal noted that the basket of thirteen companies’ shares was acquired on March 15, 2013 at about a 10% discount to the prevailing BSE market price under a commercially negotiated arrangement arising from the financial distress of Transparent Shares & Securities Pvt Ltd. The transfer was documented, accounting entries were passed by all concerned parties, intimation was given to BSE, and the shares were credited to the assessee’s demat account.
The Tribunal found it significant that neither the AO nor the CIT(A) had disputed the purchase of shares, their transfer, dematerialisation, source of investment, banking trail, or part sales already accepted in the earlier year. It held that, once the entire basket transaction and parts of its sale were accepted, the Revenue could not selectively pick only three companies and disregard the resulting loss without cogent independent evidence.
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The ITAT also emphasised that the assessee had placed complete documentary evidence on record, including contract notes, settlement bills, broker ledgers, demat statements and bank statements, and that these records had not been shown to be false or fabricated. Since the shares were actually held in demat form and sold through recognised stock exchanges on payment of STT, the transactions could not be called bogus merely because the scrips were viewed with suspicion in a general investigation report.
The Tribunal observed that the AO had not conducted any meaningful independent enquiry from brokers, stock exchanges, depository participants, SMC Global Securities Ltd. or Transparent Shares & Securities Pvt Ltd., despite all of them being identifiable and available. It held that information from the Investigation Wing may trigger enquiry, but cannot by itself become substantive evidence unless a live nexus with the assessee is established.
The Tribunal further held that Section 68 was wrongly invoked because there was no unexplained cash credit in the books. The entries represented recorded share transactions, and the sale proceeds were fully explained by actual sale of shares held in demat account and sold through stock exchanges. A trading loss causing depletion of funds could not be treated as unexplained cash credit.
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The ITAT also rejected the CIT(A)’s attempt to sustain the addition under Section 69B. It held that Section 69B applies only where there is evidence that the assessee made investment beyond what was recorded in the books. Here, there was no allegation or finding of unrecorded investment, excess payment, on-money or suppressed purchase consideration. The issue was only about genuineness of loss on sale, not unexplained investment.
The Tribunal additionally noted that part of the same basket transaction had already been accepted in AY 2013–14, and therefore the Revenue could not, in the later year, reject the balance sale without fresh and specific material. It also observed that to the extent loss of Rs. 70.49 lakh related to AY 2013–14 and had already been allowed there, it could not be added again in the year under consideration.
Briefly, Pulin Investments (P) Ltd., a company engaged in investment in shares and securities, filed its return for AY 2014–15 declaring a loss of Rs. 50.68 lakh. During the relevant period, it sold listed shares through recognised stock exchanges, with the transactions routed through banking channels and supported by audited books, contract notes, demat statements, broker ledgers and bank records.
The Assessing Officer treated the assessee’s claim of loss from certain share transactions as non-genuine on the basis of an Investigation Wing report alleging accommodation entries in listed shares. On that basis, the AO made an addition of Rs. 2.43 crore under Section 68 of the Income-tax Act in the assessment order dated Dec 29, 2016. The CIT(A) upheld the action against the assessee. However, while the AO had made the addition under Section 68, the CIT(A) proceeded to sustain it under Section 69B while dealing with the appeal.
