Calcutta High Court Upholds ITAT Order Allowing NBFC To Set Off Share Trading Losses Against Interest Income

The Calcutta High Court has dismissed the income tax department's appeal against an ITAT order allowing an NBFC to set off losses described by the department as penny stock trades against its interest and other income. The Court held that the case raised no substantial question of law.

A Division Bench of Justice Rajarshi Bharadwaj and Justice Uday Kumar said the department had failed to produce any direct or substantial evidence to support its case.

It found that the allegation that the penny stock trades were bogus and that the losses were fictitious accommodation entries was based on inference rather than proof.

The dispute covered the assessment years 2013–14 and 2014–15. The taxpayer, Megapode Vyapar Pvt. Ltd., is a non-banking financial company. It had reported losses of about Rs 1.16 crore from trading in shares of Cressanda, Nikki Global, Luminaire Tech, Uno Industries, Dhenu Buildcon, and Shree Shaleen Tex.

The tax department treated these scrips as penny stocks. It alleged that their prices were artificially rigged and that the trades were not genuine. The losses were disallowed by the tax authorities.

The taxpayer challenged this before the Income Tax Appellate Tribunal and succeeded. The tribunal noted that the trades were executed on recognised stock exchanges and were subject to SEBI regulation.

It also recorded that there was no restriction on trading in the shares at the relevant time. The losses, it held, were incurred in the regular course of business and could be set off against interest and other income.

The High Court agreed with this view. It said the department had not placed any material on record to directly show that the penny stock transactions were sham or manipulated. It noted that general investigation inputs were not enough to sustain the charge.

“The allegation labelled against the assessee by the appellant/department does not find any direct substantial evidence or proof regarding the logical process which has been inferred through reasoning from the totality of the attending facts and circumstances surrounding the allegations/charges made and labelled against the assessee, and as such, we find no question of law, much less substantial questions of law arising for consideration in this appeal,” the court said.

In the absence of such evidence, the bench held that no question of law, much less a substantial question of law, arose for consideration. The revenue's appeal, along with its plea for a stay on the ITAT order, was dismissed.

For Petitioner: Aryak Dutt, Amit Sharma

For Respondent: Saurabh Bagaria, Rites Goel