ITAT Upholds Rs 33.59 Lakh Bogus Derivative Loss Addition, Remands Reassessment Validity Issue:

The Delhi Bench (SMC) of the Income Tax Appellate Tribunal (ITAT) has partly allowed the appeal of Superior Projects LLP for Assessment Year 2016-17. While the Tribunal upheld the addition of Rs. 33,59,750 made by the AO on account of alleged bogus derivative trading losses, it sent the legal challenge relating to the validity of the reassessment proceedings back to the CIT(A) for fresh examination.

The appeal was filed with a delay of 16 days. The assessee explained that the delay occurred because it took time to arrange a tax consultant for preparing the appeal. The Tribunal condoned the delay, observing that substantial justice should prevail over technicalities, particularly when there was no evidence of negligence or mala fide conduct.

The case arose after the Income Tax Department reopened the assessee's assessment under Sections 147 and 148 of the Income-tax Act based on information received from the Investigation Wing under "Project Falcon." According to the Revenue, the assessee had claimed losses of Rs. 33,59,750 through derivative options trading that formed part of a coordinated arrangement involving brokers and traders to create artificial losses for tax purposes.

The Department said the transactions involved buying options right before they expired and letting them expire, rather than exercising or reversing the trades. The investigation had been based on statements recorded from the brokers who allegedly admitted that such transactions were done only to create artificial losses to reduce tax liability.

The assessee contended that all derivative transactions were genuine and carried out through a SEBI-registered broker on the stock exchange and there were contract notes and banking records to support the same. It also alleged that the Department had not furnished the material of the investigation or copies of the statements of the brokers and refused the opportunity to cross-examine the persons whose statements were relied upon.

But the Tribunal observed that in view of the detailed investigation carried out by the Revenue, merely producing contract notes and proof of payment through banking channels was not enough to prove the genuineness of the transactions. It observed that the assessee had suffered losses in almost all the derivative transactions save one, lending credence to the Revenue's allegation that the transactions were pre-planned to create tax losses. The Tribunal also observed that the assessee had not produced any evidence from the broker or any material to rebut the findings of the investigation.

Relying on several Supreme Court decisions including SEBI v. Rakhi Trading Pvt. Ltd., Sumati Dayal v. CIT, CIT v. P. Mohankala, McDowell & Co. Ltd. v. CTO and C. Vasantlal & Co. v. CIT, the Tribunal held that the derivative losses were not genuine and upheld the addition of Rs. 33.59 lakh (Rs. 33,59,750). It further observed that the right to cross-examination is not absolute in every tax proceeding.

Regarding the legal issues, the assessee submitted that the reassessment was bad in law as the approval for reopening was obtained from the Principal Commissioner of Income Tax (PCIT) instead of the Principal Chief Commissioner of Income Tax (PCCIT), which the assessee contended was required under the amended provisions of Section 151. It also said that the reassessment was barred by limitation.

The Tribunal observed that these specific jurisdictional grounds, which were raised for the first time before the Tribunal, were subject to factual verification and had not been properly examined by the CIT(A), who had disposed of the legal challenge in a cryptic and brief manner. Accordingly, it admitted these legal grounds and restored them to the CIT(A) for a detailed decision after proper examination.

The Tribunal treated the ground relating to interest under Section 234B as consequential and dismissed the general ground raised by the assessee. Hence, the appeal was partly allowed for statistical purposes, merits of the addition upheld and the legal validity of the reassessment remanded to the CIT(A) for fresh adjudication.