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September 24, 2022

Losses from penny stocks are not disallowed if no manipulative activities take place

by CA Shivam Jaiswal in Income Tax, Legal Court Judgement

Losses from penny stocks are not disallowed if no manipulative activities take place

Facts and Issue of the Case

The facts of the case shows that the assessee company is a statutory authority in the state of Ohio, USA, registered with the Securities and Exchange Board of India as a foreign portfolio investor for carrying out investment in India Market in equity shares and debt securities. It filed its return of income on 27th August, 2015 declaring total income of ₹11,74,65,700/–. The case of the assessee was selected for scrutiny for the reason that suspicious sale transaction in shares and exempt long term capital gain shown in the return in penny stock Tab in ITS. Statutory notices were issued.

The learned Assessing Officer found that assessee has incurred a loss under the head Short Term Capital Gain of ₹6,66,454/– in purchase and sale of shares of M/s Kailash Auto Finance Limited. The assessee provided the confirmation of the brokers note. However, the learned Assessing Officer found that one of the reason for selection of scrutiny is suspicious sale transaction in shares and exempt Long Term Capital Gain in penny stock, he disallowed the short term capital loss of Rs.6,66,454/-. Accordingly, the assessment order under Section 143(3) r.w.s. 144C(1) of the Act was passed on 20th November, 2017. As the assessee did not prefer any objection before the learned DRP but decided to go before the learned CIT(A), assessment order u/s 143(3) r.w.s. 144C(3) of the Act was passed on 26th December, 2017 taking the status of the assessee as foreign company determining the total income at ₹11,74,65,700/-.

Assessee aggrieved with the same preferred the appeal before the learned CIT(A) contesting the disallowance of carry forward of short term capital loss of ₹6,66,454/-. The learned CIT(A) passed an order on 10th March, 2022. The learned CIT(A) found that the assessee has furnished the complete details of the capital gain and there is no evidence against the assessee that the above loss is fraudulent, he allowed the appeal of the assessee. Thus, learned Assessing Officer is aggrieved with the deletion of disallowance of carry forward of short term capital loss and preferred this appeal before us.

The learned DR supported the order of the learned Assessing Officer, whereas learned AR supported the order of the learned CIT(A).

Observation by the Court

The court had carefully considered the rival contentions and perused the orders of the lower authorities. The assessee is a statutory authority in the state of Ohio, United States of America and is a tax resident of USA. It is engaged in providing retirement benefit to certain public employees of that state. It is also registered with SEBI as a foreign portfolio investor and is regularly investing in Indian market earning capital gain, dividend and interest income. During the year, the assessee incurred a loss of ₹6,66,454/- in the shares of Kailash Auto Finance Limited which is flagged as penny stock by the Revenue authorities and therefore, the above loss was disallowed.

Assessee submitted all the details of purchases and sales in the above script, such as the purchase and sale bills of the registered brokers as well as the demat statement of National Securities and Depository Limited. The transactions in the above shares were made through stock exchange and further, the learned Assessing Officer made the addition only because of the reason that assessee traded in the shares of Kailash Auto Finance Limited which has been classified as a penny stock. Neither the information is available that assessee has engaged into any manipulative activities with respect to the purchase and sale of above shares and further the complete details was filed before the learned Assessing Officer was not at all doubted. Therefore, the court  do not find any reason to state that the short term capital loss by the assessee is not genuine. Accordingly, the court confirm the order of the learned CIT(A) and dismiss the appeal of the ld AO.

Conclusion

The appeal filed by the learned Assessing Officer is dismissed by the court.

JCIT-Vs-Public-Employees-Retirement-System-of-Ohio-ITAT-Mumbai

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