Case note of the Calcutta High Court judgment in Principal Commissioner of Income Tax, Central-2, Kolkata v. Zulu Merchandise Private Limited, ITAT No. 88 of 2025, delivered on 01.08.2025:
Case Note
Case Title: Principal Commissioner of Income Tax, Central-2, Kolkata v. Zulu Merchandise Private Limited
Citation: ITAT No. 88 of 2025
Court: High Court of Judicature at Calcutta
Coram: Chief Justice T.S. Sivagnanam and Justice Chaitali Chatterjee (Das)
Date of Judgment: August 1, 2025
Counsel for Revenue: Mr. Vipul Kundalia, Sr. Adv.; Mr. Prithu Dudheria
Counsel for Assessee: Mr. Agnibesh Sengupta; Mr. Dwip Raj Basu; Mr. Avijit Kar
Facts:
- The assessee, Zulu Merchandise Pvt. Ltd., a Non-Banking Financial Company (NBFC), filed its return for AY 2014-15, declaring a total income of ₹1,34,616.
- During assessment, it was found that the assessee had incurred a share trading loss of ₹51,33,870 in Radford Global Ltd. and Shreenath Commercial, which it set off against interest income.
- The AO, after relying on investigation reports and analysis of trading patterns, held the transactions to be sham and pre-arranged and disallowed the loss under Section 68 of the Income Tax Act, 1961.
- The NFAC upheld the disallowance, citing involvement of entities in manipulation and “bogus capital loss” through penny stocks.
- However, the ITAT reversed this and allowed the assessee’s appeal, relying entirely on its earlier decision in Namokar Builders Pvt. Ltd. v. PCIT, holding the transactions to be in the normal course of business.
Issues:
- Whether the ITAT was justified in deleting the disallowance of ₹51,33,870 without independently analyzing the facts of the assessee’s case.
- Whether the ITAT erred in holding that the assessee discharged the burden under Section 68.
- Whether the revenue could pursue the appeal given the tax effect was below the threshold but claimed to fall under the exceptions in CBDT Circular 5/2024.
- Whether principles of natural justice were violated by not providing investigation reports or opportunity to cross-examine witnesses.
Held:
- In Favour of the Revenue. The High Court allowed the appeal, restored the AO’s order, and reversed the ITAT’s decision.
Key Findings:
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On Merits:
- The ITAT failed to analyze the facts independently and merely copied its earlier judgment without justifying the similarity in facts.
- The AO and NFAC conducted detailed scrutiny, including financial analysis, trading patterns, and regulatory orders from SEBI/SAT against entities involved in manipulation.
- The shares were listed among “bogus capital loss” scripts, and the purchase/sale pattern defied market logic or business prudence.
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On Natural Justice:
- The assessee was given full opportunity, including notice and disclosure of the investigation report’s findings.
- Relying on Swati Bajaj (Cal HC), the Court reiterated that cross-examination and furnishing the entire report are not absolute rights when the assessee is not specifically named or prejudiced.
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On Applicability of CBDT Circular 5/2024 Exception (Para 3.1(h)):
- The case involved “organized tax evasion” and accommodation entries via penny stock losses, squarely falling under the exception for low-tax effect appeals.
- Hence, the appeal was maintainable despite the low tax effect.
Legal Principles:
- Burden under Section 68: Merely routing transactions through Demat and banking channels does not establish genuineness if supported by abnormal trade patterns and association with tainted scripts.
- Natural Justice: There is no vested right to cross-examination unless prejudice is demonstrated.
- Tribunal’s Duty: ITAT must apply its mind to facts of each case and cannot blindly rely on earlier orders without factual correlation.
Significance:
This judgment reinforces judicial scrutiny over penny stock losses and limits mechanical reliance on prior ITAT decisions without independent factual examination. It also clarifies the revenue’s right to appeal in organized tax evasion cases under the CBDT’s litigation policy.