SHAILESH M PATEL-HUF,AHMEDABAD vs. ITO, WARD-3(3)(5), AHMEDDABAD

आदेश/O R D E R PER WASEEM AHMED, ACCOUNTANT MEMBER:

The captioned appeal has been filed at the instance of the Assessee against the order of the Learned Commissioner of Income Tax(Appeals)-3,Ahmedabad, dated 24/01/2019 arising in the matter of assessment order passed under s. 143 of the Income Tax Act, 1961 (here-in-after referred to as "the Act") relevant to the Assessment Year 2015-16.

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3.1 The assessee during the assessment proceedings claimed that such gain as long-term capital gain on the sale of listed securities was after the payment of the securities transaction tax. Thus, as per the assessee such long-term capital gain is exempt from tax under the provision of section 10(38) of the Act.

3.2 However, the AO, based on the report of investigation wing of directorate of Kolkata, found that the scripts of the aforesaid companies were used for providing long-term capital gains to the beneficiaries which was bogus in nature. This fact was also admitted by various brokers who are dealing in the shares of these two companies. The assessee purchased the shares of both the companies in off-line mode from M/s Vijay Bhagwan Das & Co.

3.3 This was also the established fact that the M/s Vijay Bhagwan Das & Co, a stock broker was engaged in the activity of providing bogus/accommodation entry in form of long-term capital gain to the beneficiaries on the purchase and sale of the companies as discussed above.

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3.4 Similarly, the AO also found that SEBI has suspended the trading of the shares of the companies as discussed above on the stock exchange vide order dated 28-04-2015 and 01-01-2015.

3.5 There was no consistency between the price rises of the shares of the aforesaid companies viz a viz financial performance of these companies. Accordingly, the price rise in the shares of these companies in such short period of time does not have any conformity.

3.6 On analyzing the trade data obtained from the stock exchange, the AO found that the trading in the scripts of these companies were very limited in the period beginning from April 2013 to November 2013. Thereafter, there was sudden hike in the trading of the scripts of these companies which suggests that the price was rigged up in the organized manner in order to extend the benefit to the beneficiaries by generating exempted long-term capital gain in their hands.

3.7 Based on the above, the AO proposed to treat the amount of capital gain shown by the assessee as unexplained cash credit under section 68 of the Act by issuing a show cause notice dated 15th December 2017.

3.8 The assessee in response to such show cause notice vide letter dated 21st December 2017 submitted that the fluctuation in the price of the shares is a very normal phenomena. Therefore, based on the price fluctuation and in view of the fact that neither the assessee nor his broker was involved in such price fluctuation, the same cannot be treated as unexplained cash credit under section 68 of the Act. In other words, there was no information available on record suggesting that either the assessee or his broker was involved in such price fluctuation/jacking up the price.

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3.9 The statements which was recorded by the investigation wing of Calcutta of various brokers, the name of the assessee is not appearing therein. Likewise, there was also no information in such statements alleging that the assessee was involved in the price fluctuation of the shares of these companies. Furthermore, the materials which were gathered by the investigation wing of Kolkata and the statement of various brokers recorded, based on which the addition was made were not provided to the assessee for his rebuttal.

3.10 In the event, the revenue is going to make reliance on the statement of the parties which are the 3rd parties, the opportunity of cross-examination is sine qua none. Thus the assessee requested to provide the opportunity of cross-examination. There is no prohibition under the provisions of law, restricting the purchases of the shares in off-line mode. As such, SEBI has authorized to make purchases in off-line mode. The purchases made by the assessee in off-line mode were duly supported based on the contract notes wherein the SEBI No. was also mentioned. Thus all the purchases of shares by the assessee were genuine. Likewise, the shares subsequently were dematerialized and were sold through the stock exchange against the payment received through banking channel.

3.11 However, the AO was not convinced with the submission of the assessee on various reasons. As per the AO, the assessee failed to explain/ justify the purchases made in cash and in off-line mode despite the fact that both the seller and the assessee were holding the Demat account during the relevant time.

3.12 Further, the assessee after making the purchase of the shares has not immediately dematerialized them. Rather the assessee kept the share with himself for a long time in physical form. The shares were dematerialized upon the splitting up of the shares of the company namely M/s Life Line Drugs & Pharma Pvt. Ltd. There was no reason provided by the assessee for holding the shares for such a long time in physical form.

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3.13 The assessee has also not justified the reason for the rise in the price of the share in such a short span of time despite there was no information on record about any future plan/project of the company. Similarly, the financials of the companies were also not suggesting such price rise in the scripts.

3.14 The party who sold the shares to the assessee was registered broker. But the assessee did not use his services to dematerialize the shares of the aforesaid companies. As such the assessee, after a long gap has dematerialized the shares with the assistance of another broker namely M/s Monarch Research and Brokerage Pvt Ltd.

3.15 There were summons issued to the seller of the scripts to the assessee being M/s Bhagwandas & Co. and the broker of the assessee under section 131(1)/133(6) of the Act. But none of them appeared/comply the notices issued to them.

3.16 Indeed, the opportunity of cross-examination is essential to meet the requirement of the principle of natural justice. However in the present case the investigation wing of Calcutta has recorded the statement of various brokers who are located at different places. In such facts and circumstances, it is not viable to provide the opportunity of cross-examination to the assessee. Furthermore, the primary onus lies upon the assessee to establish the genuineness of the transactions based on the documentary evidence.

3.17 Considering all the surrounding circumstances as discussed above, the long- term capital gain which was claimed as exempted shown by the assessee is not free from the doubts. Thus the AO treated the impugned amount of long-term capital gain as unexplained cash credit under section 68 of the Act and added to the total income of the assessee.

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4.1 The assessee before the learned CIT (A) made similar submission that there was no any evidence brought on record that it was indulged in in dubious transaction or manipulated the price of share. All the materials gathered and statement recorded by the investigation wing do not contain any evidence against assesse. All the statement are of third party which were recorded behind the back of the assessee. Hence, the same does not carry any evidentiary value. Further, no opportunity of cross verification was provided.

4.2 Besides the above, the assessee also submitted that the AO only acted upon the materials or information provided by the directorate of investigation wing of Kolkata Income department. As such no independent enquiry or investigation was carried out by the AO. There cannot be any adverse inference against the assessee based on investigation carried out in case of third party without bringing any evidences against assessee. Further, if large number of people have done something wrong or employed particular modus operandi to evade taxes, but that cannot be the basis to draw any adverse inference against assessee without bringing any evidences of wrong doing by the particular assessee. Accordingly the Assessee prayed to the learned CIT (A) to delete the addition made by the AO.

4.3 The learned CIT(A) observed that modus operandi and circumstantial evidence are very much important in holding the genuineness of these type of transaction. As such the analysis of trading data of share of both the companies, it emerged that these are penny stock. The assessee by using the modus operandi of penny stock i.e. invested in unknown script in offline transaction at very nominal amount and generated huge exempted income in short span of time after price of the share increased in organized manner. Accordingly the learned CIT(A) after placing reliance on various case law confirmed the order of the AO.

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8.1 Indeed, the price of the share of LLDP was increased from ₹18 to ₹ 242 and share price of MARL was increased from Rs. 7.77/- to 348.7/- within just a period of 12 months which was not believed by the authorities below on the principles of preponderance of human probabilities in the given facts and circumstances. The rise in the price of the scripts of a company, having no financial base/business activity/profitability certainly gives rise to the doubt about such increase in the price. But in our considered view, this cannot be sole criteria for reaching to the conclusion

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that the price were rigged up to generate the long-term capital gain which is exempted under section 10(38) of the Act. Such observation during the assessment proceedings provides reasons to investigate the matter in details and the same cannot take the place of the evidence. But in the case on hand there was no enquiry conducted by AO independently to establish that the assessee was involved in rigging of share price of the above scripts or assessee exchanged the cash for availing accommodation entry. Similarly, there was no complaint filed by any of the party either by the SEBI or the stock exchange about the assessee or brokers of the assessee that they were involved in the activity of rigging up the price of the shares. Similarly, the AO has not conducted an enquiry from the SEBI or BSE about the assessee whether he was engaged in the frivolous activities as alleged.

8.2 We also note that the AO has referred to the investigation carried out by the directorate of investigation wing of Kolkata wherein it was unearthed that the various broker have used the script of impugned companies for generating bogus long-term capital gain, eligible for exemption under section 10(38) of the Act. However, there was no information available on record whether the name of the assessee was appearing in the investigation carried out by the investigation wing of Kolkata or any other investigation carried out by the Income Tax Department.

8.3 The alleged scam might have taken place on generating LTCG to avoid the payment of tax. But it has to be established in each case, by the party alleging so, that the assessee in question was part of this scam. The chain of events and the live link of the assessee’s action that he was involved in the scam should be established based on cogent materials. The allegation as discussed above implies that cash was paid by the assessee and in return the assessee received LTCG, which is an income exempted from tax, by way of cheque through banking channels. This allegation that cash had changed hands, has to be proved with evidence, by the Revenue.

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8.4 There is no dispute raised by the Revenue with respect to the following facts:

(i) All the evidence of sale and purchase of shares, including contract notes were submitted. No fault with these documents has been found. (ii) The payments are received through account payee cheques on the sale of scripts. (iii) Transaction of sale is done through stock exchange after the payment of STT. The transactions have been confirmed by brokers. (iv) Inflow of shares is reflected in Demat account. Shares are transferred through Demat account. The assessee does not know the buyer. (v) There is no evidence that assessee has paid cash to purchase LTCG. (vi) The assessee is not a party in the alleged rigging up the prices of the shares. He has no nexus with the company, its directors or operators. He is not concerned with the activity of broker and has no control over the same. (vii) It may have got only incidental benefit of price rise. (viii) The purchase and sale of shares have been duly recognized by the concerned company. They are also reflected in the balance sheet of the assessee. (ix) The assessee invested in penny stocks which gave rise to huge capital gains in a short period, does not mean that the transaction is bogus as all the documents and evidences have been produced.

(x) Opportunity of cross examination was not given which was essential for deciding the issue on hand.

8.5 In our view, just the modus operandi, generalisation, preponderance of human probabilities cannot be the only basis for rejecting the claim of the assessee. Unless specific evidence is brought on record to prove that the assessee was

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involved in the collusion with the entry operator/ stock brokers for such a scheme. In absence of such finding how it is possible to link others wrong doings with the assessee. Further the case laws relied by the AO are with regard to test of human probabilities which may be of greater impact but the same cannot used blindly to dispose of the evidence forwarded by the assessee especially without bringing any evidences from independent enquiry to corroborate the allegation. In holding so we draw support and guidance from the judgment of Hon’ble Delhi High court in case of Pr. CIT vs. Smt. Krishna Devi reported in 126 taxmann.com 80 where it was held as under: 11. On a perusal of the record, it is easily discernible that in the instant case, the AO had proceeded predominantly on the basis of the analysis of the financials of M/s Gold Line International Finvest Limited. His conclusion and findings against the Respondent are chiefly on the strength of the astounding 4849.2% jump in share prices of the aforesaid company within a span of two years, which is not supported by the financials. On an analysis of the data obtained from the websites, the AO observes that the quantum leap in the share price is not justified; the trade pattern of the aforesaid company did not move along with the sensex; and the financials of the company did not show any reason for the extraordinary performance of its stock. We have nothing adverse to comment on the above analysis, but are concerned with the axiomatic conclusion drawn by the AO that the Respondent had entered into an agreement to convert unaccounted money by claiming fictitious LTCG, which is exempt under section 10(38), in a preplanned manner to evade taxes. The AO extensively relied upon the search and survey operations conducted by the Investigation Wing of the Income-tax Department in Kolkata, Delhi, Mumbai and Ahmedabad on penny stocks, which sets out the modus operandi adopted in the business of providing entries of bogus LTCG. However, the reliance placed on the report, without further corroboration on the basis of cogent material, does not justify his conclusion that the transaction is bogus, sham and nothing other than a racket of accommodation entries. We do notice that the AO made an attempt to delve into the question of infusion of Respondent's unaccounted money, but he did not dig deeper. Notices issued under sections 133(6)/131 of the Act were issued to M/s Gold Line International Finvest Limited, but nothing emerged from this effort. The payment for the shares in question was made by Sh. Salasar Trading Company. Notice was issued to this entity as well, but when the notices were returned unserved, the AO did not take the matter any further. He thereafter simply proceeded on the basis of the financials of the company to come to the conclusion that the transactions were accommodation entries, and thus, fictitious. The conclusion drawn by the AO, that there was an agreement to convert unaccounted money by taking fictitious LTCG in a pre-planned manner, is therefore entirely unsupported by any material on record. This finding is thus purely an assumption based on conjecture made by the AO. This flawed approach forms the reason for the learned ITAT to interfere with the findings of the lower tax authorities. The learned ITAT after considering the entire conspectus of case and the evidence brought on record, held that the Respondent had successfully discharged the initial onus cast upon it under the provisions of Section 68 of the Act. It is recorded that "There is no dispute that the shares of the two companies were purchased online, the payments have been made through banking channel, and the shares were dematerialized and the sales have been routed from de-mat account and the consideration has been received through banking channels." The above noted factors, including the deficient enquiry conducted by the AO and the lack of any independent source

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or evidence to show that there was an agreement between the Respondent and any other party, prevailed upon the ITAT to take a different view. Before us, Mr. Hossain has not been able to point out any evidence whatsoever to allege that money changed hands between the Respondent and the broker or any other person, or further that some person provided the entry to convert unaccounted money for getting benefit of LTCG, as alleged. In the absence of any such material that could support the case put forth by the Appellant, the additions cannot be sustained. 12. Mr. Hossain's submissions relating to the startling spike in the share price and other factors may be enough to show circumstances that might create suspicion; however the Court has to decide an issue on the basis of evidence and proof, and not on suspicion alone. The theory of human behavior and preponderance of probabilities cannot be cited as a basis to turn a blind eye to the evidence produced by the Respondent.

8.6 Respectfully following the judgment of Hon’ble Delhi High Court (Supra), we hold that in absence of any specific finding against the assessee in the investigation wing report, the assessee cannot be held to be guilty or linked to the wrong acts of the persons investigated as far as long term capital gain earned on sale of share of both companies is concern. 8.7 We also draw support and guidance from the judgment of Hon’ble Punjab and Haryana High Court in the case of PCIT Vs. Prem pal Gandhi reported in 94 Taxmann.com 156 wherein it was held as under: “the documents on which the Assessing Officer relied upon in the appeal were not put to the assessee during the assessment proceedings. The CIT (Appeals) nevertheless considered them in detail and found that there was no co-relation between the amounts sought to be added and the entries in those documents. This was on an appreciation of facts. There is nothing to indicate that the same was perverse or irrational. Accordingly, no question of law arises.”

8.8 We also note that the co-ordinate bench Mumbai Tribunal in case of DCIT vs. M/s Jiana Investments bearing ITA No. 4286 to 4474/Mumbai/2019 where the assessee has loss on sale of Share of M/s MARL which was disallowed by the AO by holding the such script was penny stock and assessee employed operandi of penny stock and incurred losses to provide accommodation LTCG to beneficiaries. The AO in holding so relied upon the information received from the directorate of investigation wing. However the learned CIT(A) deleted the addition by observing that information received from investigation only a general modus operandi employed by the various entry operators but no evidences available that the

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particular assessee was involved in such scam. Without bringing cogent material establishing the assessee earned or incurred bogus gain or losses the AO cannot made addition merely on the basis of suspicion or assumption. The view taken by the learned CIT was confirmed by the Hon’ble bench of Mumbai ITAT. It is pertinent to mentioned that the script involve in the above case is also in the present case. Thus we also find support and guidance from the finding given in aforesaid case.

8.9 In view of the above discussion we hold that the capital gain earned by the assessee cannot held bogus merely on the basis of some report which was unearthed in case of third party/parties unless cogent material brought against particular assessee. Therefore we set aside the finding of the learned CIT(A) and direct the AO to delete the addition made by him. Hence the grounds of assessee appeal is allowed

Order pronounced in the Court on 29/10/2021 at Ahmedabad.

Sd/- Sd/- (RAJPAL YADAV) (WASEEM AHMED) VICE PRESIDENT ACCOUNTANT MEMBER (True Copy) Ahmedabad; Dated 29/10/2021 Manish