Calcutta High Court Upholds Tax Addition In Bogus Capital Loss Case | Says Banking And Stock Channels Can’t Shield Sham Transactions
Sanchayita Lahkar
The High Court of Calcutta Division Bench of Chief Justice T.S. Sivagnanam and Justice Chaitali Chatterjee (Das) allowed a revenue appeal and restored the assessment order disallowing a claimed trading loss, finding the transactions to be sham and the loss claim bogus. The court held that the Income Tax Appellate Tribunal erred in relying on a prior decision without examining the facts of the case and directed restoration of the original assessment order that had disallowed the loss under Section 68 of the Income Tax Act. The bench concluded that "the transactions were sham and were done through stock exchanges to provide a proper veil" and that "the claim of long-term capital loss was a bogus claim."
The court rejected the assessee's contention of a violation of natural justice and held that the revenue's appeal was maintainable despite a low tax effect, as the matter fell under the exception clause of Circular No. 5 of 2024 concerning organized tax evasion. The judgment directs the restoration of the Commissioner (Appeals) and Assessing Officer's orders, setting aside the tribunal's decision that had earlier ruled in favour of the assessee.
The matter arose from an appeal filed by the revenue under Section 260A of the Income Tax Act, 1961, challenging the order of the Income Tax Appellate Tribunal (ITAT), "A" Bench, Kolkata, in ITA No. 553/Kol/2024, dated September 23, 2024, for the assessment year 2014-2015.
The assessee is a non-banking financial company (NBFC) engaged in money lending and trading of shares and securities. It filed its return of income for AY 2014-15 on September 27, 2014, disclosing a total income of Rs. 1,34,616. The case was selected for scrutiny, and notices under Sections 143(2) and 142(1) were issued on September 1, 2015, and April 6, 2016, respectively.
In the course of scrutiny, the Assessing Officer (AO) found that the assessee incurred a loss of Rs. 51,33,870 on trading in shares of Radford Global Limited and Shreenath Commercial. The assessee had set off this trading loss against interest income of Rs. 32,43,618. Observing the magnitude of the loss, the AO scrutinised the transactions using digital tools and relied upon the investigation report of the Directorate of Income Tax (Investigation), Kolkata.
The AO concluded that both companies lacked real business operations and were listed among “bogus capital loss claims.” Based on this, two show cause notices were issued to the assessee on October 5 and 31, 2016, detailing the findings and asking for justification of the transactions.
The assessee replied that it had traded shares through recognised brokers in demat form and paid via banking channels. It claimed the transactions were made in the normal course of business and justified the loss as part of market risk. The AO, however, considered this reply routine and lacking substance.
According to the AO, the trades were circular in nature, with matching sale and purchase of shares at consistent prices, showing none of the volatility expected in a real market. The AO further noted that “contracts to buy and sell were being offered at or about the same time by a fixed cartel of brokers involving in a circular manner.”
The investigation report revealed that operators rigged the price of the shares using fake entities and created a facade of genuine transactions. As many as 84 listed companies, 5000 paper companies, and 25 entry operators were involved. Entry operators allegedly received commissions of 50 paisa to Rs. 1 per Rs. 100 to carry out these manipulations.
The AO concluded that the loss claimed was not genuine, based on the companies’ poor financials, low EPS, negligible profits, and lack of trading volume. He disallowed the entire amount of Rs. 51,33,870 and added it back to the total income in his assessment order dated December 26, 2016.
The assessee appealed before the National Faceless Appeal Centre (NFAC), arguing that they were not provided a copy of the investigation report or statements recorded by the department. The NFAC rejected these arguments, noting that the show cause notices clearly referred to the investigation material and were followed by an opportunity to respond.
The NFAC held that the assessee failed to prove any prejudice or seek cross-examination. It referred to multiple judicial precedents and concluded that “right to cross-examination is not an absolute right in income tax proceedings.”
On the merits, NFAC examined SEBI’s findings and the financials of the two companies. Runicha Merchants Pvt. Ltd., one of the parties involved, was penalised for manipulations in Radford Global’s share prices. Shreenath Commercial’s financials showed sharp declines in turnover, profits, and reserves, with negative earnings per share.
The NFAC upheld the AO’s order, holding the loss was not substantiated.
The assessee then appealed to the ITAT, which allowed the appeal relying entirely on its previous decision in Namokar Builders Pvt. Ltd. The tribunal concluded in one paragraph that the facts were “substantially similar” and allowed the loss to be set off. It did not analyse the merits of the assessee’s case or the findings of the lower authorities.
The revenue challenged the ITAT’s order before the High Court, contending that the tribunal failed to examine facts and had erroneously relied on a non-binding precedent. The revenue also invoked para 3.1(h) of CBDT Circular No. 5/2024 dated March 15, 2024, asserting the appeal fell under the exception clause for organized tax evasion, and therefore the low tax effect of Rs. 16,27,963 was irrelevant.
The assessee argued that since the tax effect was below the monetary threshold, the appeal was not maintainable.
The court observed that "the transactions were sham and were done through stock exchanges to provide a proper veil and the genuineness could validly be tested on the ground of principle of pre-ponderance of human probabilities." The bench noted that "the facts clearly show that the transactions were sham" and added that the claim was *"a bogus claim."
Addressing the maintainability of the appeal, the court stated: "the facts of the case on hand would clearly reveal that it is those two companies in whose shares were traded by the assessee are in the list of bogus capital loss claim companies and it is undoubtedly the case involving organized tax evasion."
On the tribunal’s failure to analyse the assessee’s facts, the court remarked: "the learned tribunal did not examine the merits of the matter, did not go into the facts of the case, did not touch upon the correctness of the reasoning given by the CIT(A) or that of the assessing officer but referred to the decision of the Coordinate Bench... and in the last paragraph, the tribunal states that the facts of the case of the assessee are also 'substantially' similar."
The court questioned this approach, stating: "There is nothing to indicate as to how the tribunal found that the facts of the assessee’s case were identical to the facts in Namokar Builders Private Limited."
On the issue of natural justice, the bench recorded: "the entire information contained in the investigation report was apprised to the assessee by the assessing officer and thereafter the show cause notices... were issued... and in the reply they did not raise any issue that they were unaware about the investigation report."
Regarding cross-examination, the court applied the principle in Swati Bajaj, stating: "there is no vested right for the assessee to cross examine the persons who have not deposed anything against the assessee."
It further held: "the assessee has not been shown to be prejudiced on account of non-furnishing of the investigation report or non-production of the persons for cross examination as the assessee has not specifically indicated as to how he was prejudiced."
Citing the test of human probabilities from Sumati Dayal, the court said: "to prove the allegations... can be inferred by a logical process of reasoning from the totality of the attending facts and circumstances... and when direct evidence is not available, it is the duty of the Court to take note of the immediate and proximate facts."
Analysing the transactions, the court stated: "the trades were executed among parties connected to each other directly or indirectly which resulted in manipulations of the price of the scripts of Radford Global and these entities contributed significantly to the market volume by trading among themselves and created false and misleading appearance."
Regarding Shreenath Commercial, the court noted: *"upon analysis... there is no justification for the assessee for having purchased the shares... in 2013" and stated that the purchase was made despite the company's negative reserves, inconsistent turnover, and poor financial ratios.
The court distinguished the decisions relied upon by the assessee, stating that Krishna Devi, Dipansu Mohapatra, and Nilesh Jain (HUF) were not applicable, either due to different facts or absence of Swati Bajaj being cited.
The court directed: "the appeal is allowed the order passed by the learned tribunal is set aside and the assessment order dated 26.12.2016 as affirmed by the appellate authority by order 23.01.2024 are restored."
It further held: "Accordingly, the substantial questions of law are answered in favour of the appellant revenue."
The court clarified that the appeal was maintainable despite the low tax effect: "the revenue are entitled to maintain this appeal by referring to the exception as provided in para 3.1(h) of the Circular No. 5 of 2024 dated 15.03.2024."
It held that the tribunal’s reliance on Namokar Builders was misplaced: "This court has to take a decision independent of the finding rendered by the tribunal in Namokar Builders Private Limited by taking note of the facts and circumstances."
The bench concluded that the reasoning of the Commissioner (Appeals) and Assessing Officer was sound: "the appellate authority has exhaustively examined the factual details and has demonstrated as to how the price of the scripts were rigged and who were involved in the matter."
It found no procedural infirmity: "Therefore, the appellate authority was fully right in holding that there is no violation of principles of natural justice."
Advocates Representing the Parties:
For the Appellant: Mr. Vipul Kundalia, Senior Advocate; Mr. Prithu Dudheria, Senior Standing Counsel
For the Respondent: Mr. Agnibesh Sengupta, Advocate; Mr. Dwip Raj Basu, Advocate; Mr. Avijit Kar, Advocate
Case Title: Principal Commissioner of Income Tax Central-2, Kolkata v. M/s. Zulu Merchandise Pvt. Ltd.
Neutral Citation: 2025: CHC-OS:137-DB
Case Number: ITAT/88/2025
Bench: Chief Justice T.S. Sivagnanam; Justice Chaitali Chatterjee (Das)
