ITAT: Loss Incurred through Sale of Shares Cannot be Treated as Inexplicable Cash Credit
The Commissioner of Income Tax (Appeals) had upheld the assessing officer's decision, which contradicted the IT Act provisions
The Kolkata Bench of the Income Tax Appellate Tribunal (ITAT) has held that the assessing officer (AO) erred in treating the loss incurred by the assessee through the sale and purchase of shares as unexplained cash credit. It found that the loss was a debit entry arising from the sale of shares at a lower price than their purchase cost and could not be categorized as unexplained cash credit.
During the assessment proceedings, the AO observed that Kanupriya Commercial Pvt. Ltd (assessee) sold 170,500 equity shares of Luminaire Technologies Limited, incurring a short-term loss of Rs.21,64,926.
On noting the stock exchange's modus operandi, the AO added the loss as unexplained cash credit under Section 68 of the Income Tax Act. Subsequently, the Commissioner of Income Tax (Appeals) affirmed the AO's decision, stating that detailed investigations by the Securities and Exchange Board of India (SEBI) and the Investigation Wing, Kolkata, revealed that Luminaire was engaged in providing accommodation entries through persons/brokers acting in a concerted manner. Thus, the AO rightly rejected the loss.
The Coram of Sonjoy Sarma (judicial member) and Rajesh Kumar (accountant member) noted that the assessee incurred a loss through the sale and purchase of shares from Luminaire. The transaction was substantiated by proper contract notes and payments processed through banking channels.
However, the AO included this loss as part of the assessee's income under the category of unexplained cash credit. Also, CIT(A) upheld the AO's order, which was a misinterpretation and contradicted the IT Act provisions.
The Bench pointed out that the loss incurred by the assessee through the sale and purchase of shares could not be categorized as unexplained cash credit. Unlike an entry credited in the books of account, it pertained to a debit entry arising from the sale of shares at a lower price than their purchase cost. Thus, the AO made a flawed decision.
While reversing the CIT(A) decision, ITAT directed the AO to delete the addition from the income of the assessee.