Section 28(i) – Disallowance of loss made merely on ad interim order of SEBI and in absence of any material to prove that assessee entered into dubious transactions deliberately to show business loss, was liable to be deleted

FACTS
The assessee company was engaged inter alia in trading in shares, futures and options. During the year under consideration, it claimed loss on account of trading in stock options. The A.O. found that SEBI had passed an ex parte interim order in the matter of illiquid stock options wherein the name of the assessee company also figured in the list of entities which had entered into non-genuine, fraudulent trades to generate fictitious profits / losses for the purpose of tax evasion / facilitating tax evasion.

However, the assessee explained before the A.O. that (i) it had acted as a bona fide trader as it had been doing in the past and complied with all procedures and requirements of the stock exchange, (ii) at the time of the relevant transactions / trades, the assessee could not have had any idea about any profit or loss in the said transactions, and (iii) the assessee was not connected with the counter-parties in the trade and there was no grievance of any of the investors or BSE. It also claimed that only 4.85% sale transactions allegedly matched with entities named by SEBI. The A.O., however, rejected this submission of the assessee and disallowed loss in trading from stock options. The Commissioner (Appeals) upheld the addition made by the A.O. on the basis that since detailed investigation was carried out by SEBI, no separate investigation was required to be done by the A.O. to disallow the bogus losses.

Aggrieved, the assessee filed an appeal before the ITAT.

HELD
The disallowance of loss made by the A.O. was deleted by the ITAT. In doing so, it observed that:

1. Trading in stock futures and options was done by the assessee regularly since past several years. The transactions were recorded in the books of accounts. The intrinsic value mentioned in the SEBI order was only one of the ways of calculating and there is no set formula / law / rule / circular which defines intrinsic value or prohibits trading below intrinsic value.
2. The A.O., in the assessment order, had observed that in screen-based electronic trading, ideally, it was not possible to choose the counter party for trade. The circuit breaker limits set by SEBI were not applicable to the Futures and Options (F&O) segment.
3. SEBI subsequently directed that there was no need to continue with the directions issued against the assessee company and others (these were the same orders relied upon by the Income-tax authorities). Thus, in principle, the interim order and subsequent orders of the SEBI which were the basis of passing the assessment order in question, were vacated by SEBI itself.
4. The assessee filed complete documentary evidence before the authorities like carrying out transactions through banking channels, fulfilling margin requirements mandated by SEBI, etc. The same were supported by contract notes. There was also no allegation made by BSE against any of the transactions carried out by the assessee company. The A.O. as well
as the Commissioner (Appeals) did not conduct any investigation on the documentary evidences filed by the assessee.
5. Loss on account of similar nature of transactions was incurred in the preceding year, which was not disallowed and hence, the A.O. ought to have followed the principle of consistency.
6. The ad interim order of SEBI was passed without hearing the objections of the assessee and when
those objections were considered, the interim order was diluted by giving permission to the assessee to deal
in the transactions. Since both the orders of SEBI relied upon by the A.O. were vacated by the SEBI, there was no material available with the authorities below so as to conclude that the assessee has entered into any dubious or other transactions deliberately to show business losses.
7. The ad interim order which was passed by SEBI ex parte would not disclose any precedent or ratio which may be binding on the Income-tax Department.

Based on the above observations, the disallowance was finally deleted.