ACIT, CIRCLE-28(1), NEW DELHI vs. ANJU JAIN, NEW DELHI

The captioned appeal has been filed by the Revenue against the order of the Comissioner of Income Tax (Appeals)-X, New Delhi (‘CIT(A)’ in short) dated 28.09.2018 arising from the assessment order passed on 30.12.2017 concerning Assessment Year 2015-16 in question. 2. The grounds of appeal raised by the Revenue reads as under: “1. On the facts and circumstances of the case, the Ld. CIT(A) erred in deleting the addition of Rs.3,52,07,470/- ignoring the fact that the prices of the scripts were artificially inflated and deflated to adjust LTCG for the assessee and Short term capital loss for the entry provider”.

2. On the facts and circumstances of the case, the Ld. CIT(A) erred in not appreciating the fact that the Kolkata Investigation Directorate had undertaken investigation into 84 penny stocks (Effingo Textile & Trading Ltd. being one of it) and has given detailed findings indicating bogus LTCG/STCL entries claimed by large number of beneficiaries”.

3. On the facts and circumstances of the case, the Ld. CIT(A) erred in not appreciating the fact that the SEBI has suspended the activity of Malti Textile Mills Limited before 2012, the suspension has been revoked Vide BSE notice dated 12.10.2012. Further, SEBI has passed an order vide dated 01 January, 2015 whereby SEBI suspended the trading of 22 securities including Effingo Textile & Trading Ltd (earlier known as Malti Textile Mills Limited)”.

4. On the facts and circumstances of the case, the Ld. CIT(A) erred in not appreciating the fact that shares were not governed by market factors prevalent at relevant time in such trade, but same were product of design and mutual connivance on part of assessee and the operators”.

5. On the facts and circumstances of the case, the Ld. CIT(A) erred in not appreciating the fact that the assessee resorted to a preconceived scheme to procure long term capital gains by way of price difference in share transactions not supported by market factors”.

6. The appellant craves leave to add, alter or amend any of the grounds of appeal before or during the course of hearing of the appeal.”

3. Briefly stated, the assessee is an individual deriving income from house property, capital gains and income from other sources. The assessee e-filed return of income for Assessment Year 2015-16 declaring total income at Rs.34,61,310/-. The case was selected for compulsory scrutiny through CPC guidelines/procedure on the ground as stated in the assessment year that suspicious sales transactions in shares and Long Term Capital Gains (penny stock tax in ITS) has occurred and consequently notice under Section 143(2) was issued to enable the AO to complete the scrutiny assessment. The Assessing Officer found that the assessee has declared Long Term Capital Gains (LTCG) of Rs.3,50,95,993/- from sale of shares of listed companies M/s. Effingo Textiles & Trading Ltd (ETTL) and claimed the same as exempt income under Section 10(38) of the Act. The AO completed the assessment by making additions of Rs.3,52,07,470/- under Section 68 of the Act being sale proceed of ETTL. The Assessing Officer alleged that the assessee has indulged in a dubious share transactions with intent to account for the undisclosed income in the garb of Long Term Capital Gains. It was observed that the assessee has not tendered any cogent evidence to explain as to how the shares of an unknown company has given rise to whopping Long Term Capital Gains of Rs.3,50,95,994/- during the year on a meagre investment of Rs.58,660/-. The Assessing Officer inter alia noted that the scrip has been named in Kolkata Investigation report of the I.T. Department titled ‘project bogus LTCG/STCL through BSE listed penny stock’. The Assessing Officer referred to various persons associated in such allegedly contrived transactions namely statement obtained and referred to in the investigation report of Sh. Anil Kedi, Sh. Anil Aggarwal, Sh. Ravi Rai, Sh. Bikas Sureka, Sh. Amit Saraogi, Sh. Anil Khemka, Sh.Suraj Jhunjhunwala and Sh. Nikhil Jain (Director of M/s. Abhinandan Stock Brokiong), M/s. SMC Global Securities and M/s. Anand Rathi Shares and Stock Brokers Ltd. The Assessing Officer also made references to the modus operandi adopted by the market operators to route unaccounted money of LTCG beneficiaries into their accounts/books in the garb of LTCG totally exempt from incidence of taxation in a clandestine manner. The Assessing Officer thus rejected the claim of exempt income earned by way of Long Term Capital Gains disclosed by the assessee in relation to the scrip namely ETTL (previously known as Malti Textiles Ltd.) and invoked Section 68 of the Act to assess the sale consideration arising from sale of shares of ETTL as unexplained income. The income was thus assessed at Rs.3,86,68,780/- as against the returned income of Rs.34,61,310/-.

4. Aggrieved, the assessee preferred appeal before the CIT(A).

5. Before the CIT(A), the assessee reiterated and pointed out certain sequential facts namely; that the assessee had originally acquired 2,39,040 equity shares of erstwhile Malti Textiles of face value of Rs.10/- each on 16.03.2000 for a total consideration of Rs.1,20,121/-. The name of the company was subsequently changed to ETTL w.e.f. 01.07.2013. The assessee dematerialized the holding of ETTL shares with the depositor participant (DP) namely Abhipra Capital Ltd. on 31.12.2012; that the assessee thereafter sold 2,35,000 equity shares of ETTL on 14.03.2013 out of total Demat share sholding of 239040 and thus left with holding of 4040 (239040 minus 235000)

equity shares as on 31.03.2013 (FY 2012-13) which is reflected in the Demat statement issued by (DP); that remaining 4040 equity of ETTL of Rs.10/- each were converted into equity shares of face value of Rs.1/- on account of corporate adjustment as a result of stock split on 19.11.2013 and in lieu of which the assessee received 40400 equirty shares of ETTL of face value of Rs.1/-; that the assessee also acquired 1,15,520 and 3,00,000 equity shares of ETTL on 17.12.2013 and 11.11.2014 respectively from her son Shri Manish Jain by way of gift. The son Mr. Manish Jain was in turn holding the shares so gifted since 12.06.1989. The factum of gift of 1,15,520 equity shares is evident from Demat statement of Financial Year 2013-14 of the assessee and Shri Manish Jain both issued by DP, namely ACL; similarly the second gift of Rs. 3 lakh equity shares of ETTL is also evident from Demat statement for Financial Year 2014-15 together with copies of gift declaration; that the assessee came to hold a total of 4,55,920 (4040 + 155920 + 300000) equity shares of ETTL of face value of Rs.1/- each in Financial Year 2014-15; that the assessee sold 3,83,400 equity of ETTL out of total holding of 455920/- equity shares of said company and had thus eventually left with 72,520 (455920 minus 383400) equity shares ETTL as on 31.03.2015; that the above ETTL shares in question was sold online through SEBI registered broker M/s. Vivek Financial Focus Ltd. (VFFL in short) through a Screen based mechanism on BSE platform and in multiple tranches during FY 2014-15 relevant to AY 2015-16 in question resulting in the impugned capital gains of Rs.3,50,95,993/- on sale consideration of Rs.3,52,07,470/-. 5.1 The assessee before the CIT(A) asserted pointed out that the holding period of the shares in question is more than 15 to 25 long years based on acquisition of shares of ETTL by the assessee or by the son prior to gift. In the factual backdrop, it was contended that the alleged dubious racketing of price rigging and then wait for more than 15 to 25 years to get any black money converted through ingenuine price rigging cannot be simply perceived and the holding period of 15-25 year ostensibly eliminates any remotest possibilities of the impugned transactions being off shot of alleged modus operandi extensively discussed in the assessment order. 5.2. It was further pointed out that the genuineness of transactions cannot be doubted merely because of a report of investigation wing which hinges on modus operandi and recording of statement of various unidentified promoters, brokers, associated persons, exit providers or intermediaries who are neither shown to be linked to the assessee nor has any allegation made qua the assessee or the transactions carried out by Assessee. Even the SEBI/Exchanges has not found any wrong doing or guilty or violation of any rule or guidelines / SEBI Exchanges by selling shares of promoter quota by the assessee in the year under consideration and no order has been passed against the assessee on the issue of selling of shares in question. Also, the transactions have been carried out on the platform of Exchange through VFFL whereas the modus operandi identified some brokers but not VFFL. The assessee also reiterated the documents to clinch the factual position narrated hereinabove. 5.3 The CIT(A) recorded the detailed written submission made on behalf of the assessee and the judicial precedence extensively relied upon in its appellate order and found palpable merit in the plea of the assessee.

detailed discussion the AO has come to the conclusion that the appellant had taken accommodation entry of Rs.3,52,07,470/- in the garb of LTCG. It is also noted that the AO has also relied on the circumstantial evidences also to substantiate that the appellant had entered into a colourable device to evade tax by obtaining accommodation entry in the form of LTCG on sale of penny stocks. The AO has also relied upon various judicial pronouncements in this regard. Accordingly, the AO denied the claim of exemption u/s 10(38) of the Act and treated the alleged sale consideration of shares of Rs. 3,52,07,470/- as bogus and held the said amount as ' .unexplained credit and the same was added to total income u/s 68 of the Act. 6.4 I have gone through the facts of the case and the written submissions made by the AR. On perusal of the assessment order and the submissions made, it is noted that appellant purchased 239040 equity shares of Malti Textiles Mills Ltd on 16.03.2000 for a consideration of Rs. 120121/-. The name of Malti Textiles Ltd. has been changed to Effingo Textiles & Trading Ltd w.e.f. 01.07.2013. The details of such investment in the shares of Malti Textiles Ltd in FY 1999-2000 are reflected in the audited accounts with Schedules as at 31.03.2000 wherein, the date of purchase of shares of Malti Textiles Ltd. is mentioned as 16.03.2000. The appellant was holding these shares in physical mode since 16.03.2000 and the same were dematerialised on 28.08.2012 with Abhipra Capital Ltd. Further, the appellant received 115520 and 300000 equity shares of Effingo Textiles & Trading Ltd from her son, Mr. Manish Jain as a gift on 17.12.2013 and on 11.11.2014, cost of these shares to him was Rs. 17,675/- and Rs. 45,900/- and the same cost has been considered u/s 49 (2) of the Act for arriving Capital gain in the hand of the appellant. The donor son was holding 1195200 equity shares since 12.06.1989 with total cost of Rs. 1,82,865/-. It is submitted that such investment was reflected in the details of investment of Sh. Manish Jain, son of the appellant, in hisaudited accounts with Schedules as at 31.03.2001 wherein the date of investment in the shares of Malti Textiles Ltd has duly been certified as 12.06.1989. The said facts are also 'mentioned in the assessment order. On perusal of details, it is noted that the holding period of the shares of Malti Textiles Ltd./Effingo Textile & Trading Ltd. is more than fifteen and twenty years based on acquisition of the aforesaid shares by the appellant or by her son, who gifted the shares to appellant. It does not appear to be a case in which the investor will wait for more than fifteen and twenty years to get her black money converted through the price rigging. It is a common knowledge that in cases generally coming to the scanner of the department, the holding period of the shares in so called penny stocks ranges generally from 1 to 2 years and that too depending upon the price movement of the stock. In the modus operandi of bogus LTCG in penny stocks discussed by the AO also the holding period of such shares- has been mentioned as 1-2 years. In this case, the holding period is more than fifteen and twenty years. The AO has not been able to substantiate his finding as to how a holding period of more than 15-25 years could fit in the modus operandii extensively discussed in the assessment order. The modus operandii dealt by the AO is based on the inputs from the investigation wing in which purchase of such shares is made at a very low price and mostly in cash and subsequently after one year from the date of purchase of shares, the shares are sold when the prices are artificially jacked up. The time used for such manipulation is normally one to two years. Further, it is noted that the appellant had been in possession of more than 17 scrips of different companies as on 31.03.2013 as a regular investor. The AO has not been able to bring out the fact on record as to how the case of the appellant is at par with the cases cited by the AO in the modus operandi discussed by him in the assessment order. Further, it is noted that the appellant had invested in the above mentioned shares 15 to 25 years back and the capital gains earned by her is to be examined in that context. Considering the above facts, it appears that the case of the appellant is different from the modus operandi of bogus LTCG in penny stocks adopted by the accommodation entry providers. The most distinguishing feature in the case is the period of holding by the appellant for a period of 15-25 years. It does not appear logical to hold that the appellant will invest in the shares 15-25 years back with the motive of earning bogus LTCG subsequently. Considering the above facts, I find that the long term capital gain fund by the appellant cannot be held as bogus. Accordingly, the addition of Rs.3,52,07,470/- made by the AO by treating the sale consideration from sale of shares as unexplained cash credit u/s 68 of the Act is deleted. Thus, the above grounds of appeal are allowed.”

The CIT(A) thus reversed the additions made by the AO in terms of reasoning quoted above.

11.3 We have carefully analyzed the factual matrix and also the observations and findings rendered by the AO and also CIT(A). Few facts would be relevant to determine the correctness of the claim of the assessee. As pointed out on behalf of the assessee, it is an undisputed fact that the shares were purchased by the assessee in Financial Year 1999-00 and sold in the Financial Year 2014-15. Likewise, certain shares were received by way of gift by the assessee from her son which, in turn, were held by the son since Financial Year 1989-90. Thus, the shares were held by the assessee and the previous owner ranging between 15-25 years before such shares were off-loaded in the market through the platform of Stock Exchange.

11.4 The purchase and sale of share in question is tabulated herein for easy reference:

Date of No. of Particulars Balance acquisition/sale shares shares of shares 16.03.2000 239040 Purchased 239040 14.03.2013 -235000 Sold 4040 19.11.2013 40400 Stock Split [10:1] 404044 17.12.2013 115520 Gift received from 155920 Mr. Manish Jain, Son, holding shares since 12.06.1989 11.11.2014 300000 Gift received from 455920 Mr. Manish Jain, Son, holdig shares since 12.06.1989 Less Shares sold 383400 during F.Y. 2014-15 11.5 At the first blush, these undisputed facts appears self-explanatory and self speaking. The shares have been admittedly acquired decades earlier. It just doesn’t add up to a common sense that a tax payer would be part of dubious racketing of price rigging and wait for eternity [ranging between 15-25 years] to convert his / her black money through some in-genuine price rigging in a very distant future. The genuineness of transaction has been doubted in the instant case merely because of the report of investigation wing and recording of statement of various unidentified promoters/brokers/associated person/ intermediaries etc. who are neither shown to be linked to the assessee herein nor any allegation has been shown to be made qua the assessee or the transactions under consideration. No SEBI report or exchange report is available to implicate the assessee per se with any wrong doing or guilty or violation of any Rules. No cross examination of these operators/intermediaries has been carried out. The Assessing Officer has taken drastic action against the assessee based on the generalized inputs received by him without taking cognizance of such overwhelming fact of staggering holding period and without showing any nexus or live link with the assessee. Coupled with this, the assessee has reportedly entered into transaction through a registered broker who is not named in the investigation report. The Assessing Officer appears to have put blinkers on such obvious facts while questioning the propriety of the LTCG solely on a generic investigation report. To our mind, it is wholly inconceivable to preordain a transaction of purchase and sale involving a gap of 15-25 years to record some unaccounted income. It defies one’s imagination to think so. The Assessing Officer appears to have mechanically applied the findings of investigation report and imputed motive of price abuse in EFTL stock on the assessee in a hawkish manner without taking note of the peculiar fact of acquisition of shares decades ago and continually held thereafter. The CIT(A), on the other hand, has recognized such overwhelming fact of long holding period and rightly cancelled the untenable additions. It is a classic case of assessment framed on impressions and perceptions rather than on glaring facts. Needless to say, the peculiarities and nuances of each case need to be seen in perspective. The overwhelming factor of extra-ordinary period of holding of shares prior to sale transcends all other considerations and exonerates the Assessee from any kind of impropriety. The CIT(A), to our mind, has correctly approached the issue and recognized the difference between transactions which are pretense and the transactions which are real and rightly reversed the unsubstantiated additions. We thus see no reason to interfere with the conclusion drawn by the CIT(A).

12.2 The language employed in Rule 27 is plain and admits of no uncertainty or ambiguity. Rule 27 iterates that the Respondent Assessee may avail the latitude provided in Rule 27 on those ground alone which were raised before the CIT(A) and adjudicated against him while addressing other points in its favour. In such circumstances, the respondent-assessee, not in appeal, may support the order of the CIT(A) on any of the grounds decided against him by the CITA). 12.3 In the instant case, the assessee has neither filed any cross-appeal nor cross-objection before ITAT in the Revenue appeal. The Assessee had not taken such ground earlier before CIT(A) either, to enable him to render its decision such point. In the absence of any ground on the point, the CIT(A) had thus no occasion to adjudicate the issue now raised before ITAT under Rule 27. The objections have been newly raised for the first time before ITAT taking shelter of Rule 27 of ITAT Rules.

12.4 The language of Rule 27 is absolute and measured. Patently, the pre- requisites of Rule 27 are not fulfilled in the instant case. There must exist a ground decided against the assessee by the CITA) to invoke Rule 27 as an adjunct to Revenue appeal. Such vital condition is not found to be met. In the factual matrix, the legislative fiat of Rule 27 does not permit the ITAT to entertain the impugned application moved by respondent assessee to exercise right under Rule 27 to defend the order of CITA). 12.5 Reliance was placed on behalf of the Assessee in the case of Sanjay Sawhney vs. PCIT judgment dated 18.05.2020 to buttress its plea to entertain application moved under Rule 27 of the Rules. The reliance so placed is totally misplaced. In that case, the CIT(A) had also decided the issue raised in Rule 27 albeit against the assessee. In the instant case, the issue raised under Rule 27 was never put before CIT(A) for its adjudication. Hence, the judgment rendered in Sanjay Sawhney is premised upon altogether different facts. Hence, we decline to entertain the altogether new objection raised by the respondent assessee under Rule 27 of the Rules. Consequently, the plea raised on merits by the Assessee fades into insignificance. 12.6 The impugned application filed under Rule 27 is thus rejected.