Point of Law: Income Tax Officer has no jurisdiction to issue a notice under Section 34 of the Income Tax Act.

JUDGMENT :

1. Heard Dr. Ashok Saraf, learned senior counsel assisted by Mr. A. Goyal, learned counsel for the petitioners and Ms. M. Hazarika, learned senior counsel assisted by Mr. D. Khan, learned counsel for the respondents in the SEBI in WP(C) No. 530/2022, WP(C) No. 765/2022, WP(C) No. 767/2022, WP(C) No. 852/2022, WP(C) No. 1179/2022, WP(C) No. 1427/2022, WP(C) No. 1434/2022, WP(C) No. 1455/2022 and WP(C) No. 1533/2022 and Mr. A. Choudhury, learned senior counsel assisted by Mr. A Mahadevan Sethi learned counsel for the respondents in the SEBI in WP(C) No. 766/2022 and WP(C) No. 764/2022.

2. All the writ petitioners herein are engaged in the activity of purchasing and selling of shares listed under the Securities and Exchange Board of India (for short ‘SEBI’). According to the respondents in the SEBI, the persons engaged in buying and selling of the shares also indulges in buying of a particular share of a listed company and immediately thereafter, sell the purchased share at a price which would be lower than the price at which the shares were purchased, and the time gap between the purchase and sell of the shares at times may also be a fraction of a second. It came to the notice of the authorities of the SEBI that such manner of purchases and sell of shares were prevalent under the SEBI which came to be called by the authorities to be reversal trading.

3. The concept of reversal trading came under the consideration of the Supreme Court in Securities and Exchange Board of India Vs. Rakhi Trading Private Ltd. reported in (2018)13SCC753. In RakhiTrading(Supra), certain decisions of the Adjudicating Officer were assailed before the Securities Appellate Tribunal (for short, SAT), which also included a decision of an Adjudicating Officer in respect of Rakhi Trading Pvt. Ltd. The SAT by its respective orders had set aside the decisions of the Adjudicating Officer. Being aggrieved by the order of the SAT, the SEBI preferred an appeal before the Supreme Court under Section 15Z of the Securities and Exchange Board of India Act, 1992 (hereinafter referred to as ‘SEBI Act-1992’). In respect of Rakhi Trading Pvt. Ltd., a show cause notice dated 05.10.2007 was issued alleging execution of certain non-trading transactions and the Adjudicating Officer analyzed the trade logs and observed that the trades executed by Rakhi Trading matched with the counter-party, namely, Kasam Holding Pvt. Ltd. within a few seconds and that the trade reversals took place in a matter of minutes/hours. The relevant propositions of the Supreme Court in Rakhi Trading (Supra) are extracted as below:

“28. According to SAT, the synchronisation and reversal of trades effected by the parties with a significant price difference, some in a few seconds and majority, in any case, on the same day had no impact on the market and it has not affected the NIFTY index in any manner or induced investors. SAT has held that such trades are illegal only when they manipulate the market in any manner and induce investors. It has also taken a view that there being no physical delivery of any asset, there is no change of beneficial ownership and what is traded in the F&O segment are only contracts and hence, such synchronised and reverse trades in NIFTY options in the F&O segment “can never manipulate the market”. It has also held that the trades being settled in cash through a stock exchange mechanism, are genuine and therefore cannot create a false or misleading appearance of trading in the F&O segment. Further, any trade to be objectionable must result in influencing the market one way or the other. SAT held that these trades were for the purpose of tax planning which is not violative of any regulation. We are not inclined to get into the issue of tax planning as it was not mentioned in the show-cause notices.

29. We find it difficult to appreciate the stand taken by SAT which is endorsed by the learned Senior Counsel appearing for the respondents. Mr Chidambaram, learned Senior Cou