NAZ SHAZIA,MORADABAD vs. ITO-17(2)(4), MUMBAI
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Income Tax Appellate Tribunal, “B” BENCH, MUMBAI
Before: SHRI ABY T. VARKEY, JM & SHRI S RIFAUR RAHMAN, AM
PER ABY T. VARKEY, JM: This is an appeal preferred by the assessee against the order of the Ld. Commissioner of Income Tax (Appeals)/(NFAC), Delhi dated 03.05.2023 for the assessment year 2015-16. 2. The main grievance of the assessee is against the action of the Ld. CIT(A)/NFAC confirming the addition of Rs.1,94,05,886/- u/s 68 of the Income Tax Act, 1961 (hereinafter “the Act”) being the amount of Long Term Capital Gain (LTCG) on transfer of shares in M/s. Esteem Bio Organic Food Processing Ltd. (hereinafter “M/s. Esteem Bio”) claimed as exempt income u/s 10(38) of the Act.
The facts in brief are that the assessee filed the return of income on 22.01.2016 declaring an income of Rs.4,48,110/-. The AO observed that assessee had claimed LTCG of Rs.1,94,05,886/- as exempt u/s 2 A.Y. 2015-16 Naz Shazia 10(38) of the Act on sale of equity shares of M/s. Esteem Bio which according to him, was suspicious because he had received information from Kolkata Investigation Wing based on search actions that the assessee is a beneficiary of long term capital gain on sale of penny stocks which are suspicious and bogus. Accordingly, the AO called upon the assessee to furnish the details/documents in respect of claim of LTCG claim of Rs.1,94,05,886/- claimed u/s 10(38) of the Act. Pursuant to which assessee filed the details and AO noted that the assessee purchased 10,000 equity shares of Rs.10 each of M/s. Esteem Bio on 06.10.2012 for a consideration of Rs.1 Lakhs; and on 24.01.2013, the number of shares increased to 30,000/- (since the said company M/s. Esteem Bio declared bonus shares in the ratio of 1:3). And all these shares were thereafter transferred to D-mat account of the assessee on 15.03.2013. Out of these shares 29,900/- shares were sold on various dates commencing from 24.06.2014 to 31.07.2014 and (assessee was left with 100 equity shares. Thereafter, the shares of Rs.10 each were split into 10 shares of face value of Rs.1 each and accordingly, the assessee was allotted 1000 equity shares on 13.02.2015 in lieu of 100 equity shares which was held as investment) and assessee claimed the gain on the sale of shares noted (supra) to the tune of Rs.1,94,05,886/- as exempt u/s 10(38) of the Act. The AO taking note of investigation conducted by Investigation Wing of Kolkata discussed the modus operandi of how beneficiaries like assessee purchased shares of penny stock and hold them for prescribed period, and later sell it to pre-fixed exit providers to claim bogus
3 A.Y. 2015-16 Naz Shazia LTCG. The AO observed that the fundamentals of the said company was very weak and questioned the financial prudence of any person investing on such scrip and finally treated the said gain as bogus. According to AO, the basic aim of assessee to indulge in such transaction of Penny-Stock was to route his unaccounted money back to his account as exempt LTCG. According to AO, five exit providers purchased shares from assessee between 20.06.2017 to 28.07.2017 and spelled out their names at para no. 9 of his order and in order to verify the credentials of these exit providers, he issued commission to ADIT(Inv.) Unit-6(1), New Delhi for recording statement of Principal Officers of the five (5) exit providers. However, according to AO, the ADIT reported back that summons issued to exit providers were returned back and Inspector couldn’t trace them, since no companies were found to exist at the address (AR pointed out that assessee sold the shares in between Jan, 2014 to July, 2014 whereas AO is saying about exit providers which purchased shares from assessee between 20.06.2017 & 28.07.2017). Thus AO was of the opinion that the sale of shares were bogus. However, Ld AR pointed out that AO erred in his conclusion about exit providers because assessee sold the shares in between Jan, 2014 to July, 2014 whereas AO is saying about exit providers which purchased shares from some other person between 20.06.2017 & 28.07.2017. And the assessee produced the following primary evidence before the AO in support of his claim of LTG/exemption u/s 10(38) of the Act on sale of shares: -
1)
4 A.Y. 2015-16 Naz Shazia 2) Evidence of purchase of shares- Application of shares, 3) allotment of shares, share certificates 4) Evidence of payment for purchase of shares made by account payee cheques, 5) copy of bank statements 6) Copy of Demat statement reflecting purchase 7) Copy of Demat statement showing sale of shares 8) Copies of contract note of sales of shares 9) Copy of bank statement reflecting sales receipt
The AO, after rejecting the various contentions and submissions of the assessee in a detailed finding recorded in the assessment order, came to the conclusion that the assessee has allegedly obtained LTCG by pre-arranged and well organized circular trading in the shares of M/s. Esteem Bio for converting the un-accounted money in the form of LTCG without giving any tax on it; and accordingly rejected the claim of the assessee u/s 10(38) of the Act, resulting in an addition of Rs.1,94,05,886/- to the income of the assessee in assessment framed u/s 143(3) of the Act dated 29.1.2017. Aggrieved, the assessee preferred an appeal before the Ld. CIT(A) who was of the view that the assessee had purchased shares for Rs.1 Lakh and sold the same at Rs.1.95 crores which sans logic. Since the said company has not shown any extra-ordinary performance to command such increase in value of its shares, he was of the view that the assessee conspired with the aid of brokers/entry providers has rigged the prices of the penny- stock (M/s. Esteem Bio) and thus, artificially inflated the prices to bring back his unaccounted income into the books through route of LTCG claimed as exempt. Therefore, Ld. CIT(A) was pleased to confirm the action of the AO. Aggrieved, the assessee is before us.
5 A.Y. 2015-16 Naz Shazia
Assailing the action of the Lower Authorities, the Ld. AR of the assessee submitted that the assessee is an individual who was a regular investor in shares and drew our attention of page no. 45 to 46 of PB to show that he makes regular investment through registered brokers and had carried out purchase and sale of equity-shares on re-cognized stock-exchange and inter-alia dealt with purchase/sale shares of i.e. Hindalco, ITC, Birla Power, Arihant Technosoft Pvt. Ltd, Reliance Energy, Reliance Capital and Satyam etc. According to him, even though, the assessee was initially restrained by SEBI from dealing with the share trading, assessee has been finally exonerated by SEBI’s final order dated 06.09.2017 (refer page no. 75 to 85 of PB) wherein the SEBI was pleased to drop all actions against the assessee and held that the investigation revealed that the assessee has not floated the provisions of the SEBI Act and didn’t indulge in any unfair trade practices in the security market and therefore, dropped the proceedings against the assessee. Thus, according to Ld. AR, the Interim Order of SEBI debarring the assessee dated 29.06.2015 has been revoked and from that day onwards assessee was continuously trading in the stock exchange.
The Ld. A.R. submitted that all the conditions for claiming exemption u/s 10(38) of the Act are fully satisfied by the assessee while claiming the exemption in the income tax return for the relevant assessment year under appeal. The dates of purchase/allotment of equity shares, mode of payment of purchase being by account payee cheques only, period of holding, dates of sales of equity shares through
6 A.Y. 2015-16 Naz Shazia the online screen based trading on the BOLT platform of stock exchange, identifications and details of SEBI and stock exchange registered reputed brokers and Stock Broker Ltd, transaction related expenses such as brokerage, service tax, STT, stamp duty, exchange and SEBI turnover charges etc are already on records of the revenue and also forms part of assessment order. The Ld AR submits that the AO in the impugned assessment order has rejected the claim of exemption u/s 10(38) of the Act and made additions of the entire sale proceeds of shares as unexplained credit u/s 68 of the Act, alleging that the appellant has arranged bogus LTCG by trading in penny stock companies in his name by erroneously relying on (i) investigation report of directorate of investigation wing, Kolkata; (ii) alleged bogus LTCG resulting from steep movement of share prices etc detailed in the assessment order.; iii) statements recorded by the directorate of investigation wing, Kolkata of various parties. The Ld AR submits that in essence the entire addition is based on surmises and conjectures; assumption, without any relevant material and erroneous application of preponderance of possibilities and not based on justifiable/reason or evidences. According to Ld. AR, AO has erroneously relied on case laws to draw adverse inference against the assessee by making allegation of laundering money without any iota of evidence. According to him, there are several judicial pronouncements of juri ictional ITAT and Hon’ble High Courts wherein it has been categorically held that addition based on general hypothesis cannot be made. The Ld AR also contended that during the course of assessment
7 A.Y. 2015-16 Naz Shazia proceedings and appellate proceedings before CIT(A) that the appellant had filed all documents to establish his bonafide and genuineness of claim of exemption u/s 10(38) of the Act. Therefore, the denial of claim of exemption made by the AO ignoring the relevant and factual documentary evidences filed by the appellant is absolutely improper and against the principle of natural justice and equity. The Ld AR, while referring to the assessment order, submits that none of the descriptions, allegations, observations, findings, statements reproduced etc in the impugned order of AO are relevant for drawing adverse inference against the assessee. The Ld AR submits that the appellant had never transacted with any entry operator or such intermediary in the process of carrying out investments and further that the alleged operators and their records do not in any manner mention any connection with appellant. The Ld AR submits that the shares were duly allotted to the appellant and were recorded in the D-mat account upon such purchase/allotment. Shares were sold on stock exchange through regular registered brokers of assessee under screen based trading where the seller and buyer of shares are wholly unaware of the identity of the other person. STTs were paid at the time of sale of shares and proceeds were received into bank accounts of the assessee only through proper banking channel. The Ld AR submits that based on inquiry and investigation of Wing, the AO has surmised that assessee routed his black money without establishing any money trail. The Ld AR argued that the AO has hopelessly failed to establish that the assessee has paid any unaccounted money to any of the parties
8 A.Y. 2015-16 Naz Shazia referred by the AO in the impugned AO. None of the replies to the questions of such parties indicates that they have received any unaccounted money from the assessee at the time of selling of these equity shares by the assessee. The findings of the Investigation Wing of the Revenue are general in nature and it is basically a study report and not specifically mentioning which cases are investigated. The Ld AR argues that nowhere in the assessment order, the AO has established any linkage between the reports of the investigation wing and assessee's transactions.
The Ld. AR submitted that the AO at para 9 of his assessment order mentioned about the names of the five (5) exit providers who have purchased shares from assessee from 20.06.2017 to 28.07.2017 (i) Shree Ram Enterprises, (ii) Mridul Securities Pvt. Ltd., (iii) M/s. Balisheth Vinmay Trading P. Ltd, (iv) Shri Ganpati Enterprises and (v) Murlidhargiridhar Trading Pvt. Ltd and in order to verify from the five (5) exit providers, the AO noted that he had issued commission to ADIT (Inv.) Unit-6(1), New Delhi for recording the statement of Principal Officer/director of the above five (5) exit providers. Pursuant to which they reported back that summons issued to the exit providers were returned back unserved; and that the Inspector could not locate them. Therefore, according to the AO, these were pre-arranged operation carried out by entry providers. According to the Ld. AR, there is in-built fallacy in the contention of the AO for the simple reason that the assessee had sold the shares between 24.06.2014 to 31.07.2014 whereas the AO is stating about some sale happening
9 A.Y. 2015-16 Naz Shazia between June, 2017 to July, 2017. According to the Ld. AR, the assessee was not aware to who were the buyers of scrips from him, since the transaction happened at the digital platform of Bombay Stock Exchange. Therefore, according to the Ld. AR, the inquiry carried out against the so-called exit provider does not hold good against the assessee. Coming to the observation of the AO that he has considered the statement recorded by the Directorate of Income Tax (Inv) Kolkata, during the search operation of (i) Mr. Soumen Choudhury (employee of Gateway Financial Services Ltd), (ii) Mr. Anil Kedia (Director of Excel Stock Broking Pvt. Ltd.) and (iii) Mr. Anil Kumar Khemka [Director of nine (9) companies] which AO has stated at para no. 13 of his assessment order, the Ld. AR submitted that these statements of the three (3) individuals have not in any manner imputed of any wrong doing on the part of the assessee. Moreover, according to the Ld. AR, these individuals had nothing to do with the transaction of scrip i.e. of purchase/sale of the scrip of M/s. Esteem Bio carried out by assessee. According to the Ld. AR, the AO simply mentioned about these three (3) individual’s statements but has not brought out any statement incriminating the assessee of doing any wrong actions for claiming the LTCG. Apart from the aforesaid facts, the Ld. AR submitted that SEBI had found certain irregularities in the conduct of certain entities/individuals indulging in artificial prices rigging. Therefore, in its Interim report dated 29.06.2015, SEBI restrained several entities including assessee as well as M/s. Esteem Bio from transacting in the stock exchange. But it was pointed out by the Ld.
10 A.Y. 2015-16 Naz Shazia AR that the SEBI after conducting thorough inquiry passed its final order dated 06.09.2017 wherein it didn’t find any adverse material against the assessee and dropped the proceedings against the assessee and as such the restrain order passed against them were revoked. Therefore, the Ld. AR submitted that since the AO/Ld. CIT(A) could not find any infirmity in the primary documents filed by the assessee to prove the purchase and sale of shares on which STT was paid could not have disallowed the LTCG claim made by the assessee. According to him, the AO/Ld. CIT(A) erred in relying on the judicial precedents which are distinguishable on the facts of the assessee’s case. And on the other hand, the assessee brought to our notice that the LTCG claim made on sale of scrip of M/s. Esteem Bio had come up before the Delhi Tribunal in the case of Riaz Munshi Vs. ACIT (ITA. No. 3404/Del/2019 for AY. 2015-16), wherein the Delhi Tribunal vide order dated 08.06.2022 was pleased to allow the claim of LTCG regarding sale of scrip of M/s. Esteem Bio. He also drew our attention to the decision of the Tribunal (Delhi) in the case of Smt. Karuna Garg Vs. ITO and ors (ITA. No. 1069/Del/2019) dated 06.08.2019, wherein Tribunal allowed the LTCG on the sale of shares of M/s. Esteem Bio and similar order of Tribunal was upheld by the Hon’ble High Court of Delhi order dated 15.01.2021 in ITA No. 125/2020, 130-131/2020 wherein the Hon’ble High Court was pleased to uphold the action of Tribunal.
The Ld. AR thus pleads that the LTCG claim of the assessee on sale of scrip of M/s. Esteem Bio be allowed.
11 A.Y. 2015-16 Naz Shazia
Per contra, the Ld. DR submitted that assessee had dealt with penny-stock and that no prudent investor would invest in any penny stock scrip. According to him, the financials of M/s. Esteem Bio do not support the gains made by these companies in the stock exchange. According to him, the AO had identified the exit providers who could not be traced and the AO had analyzed the financials as well as looked into the statement recorded by Investigation Wing wherein it was clear that purchase and sale of shares of M/s. Esteem Bio was well orchestrated/pre-planned and was made to route the unaccounted money of the assessee in the guise of LTCG. According to him, the SEBI had found the assessee was indulging in the rigging of the share of M/s. Esteem Bio. And therefore, SEBI had restrained the assessee from participating in the share trading. Therefore, according to the Ld. DR, the action of the AO/Ld. CIT(A) to disallow the claim of LTCG on the sale of scrip M/s. Esteem Bio is justified and does not need any interference from our part.
We have heard both the parties and perused the records. We note that the assessee had purchased on 29.06.2012, 10,000 equity- shares of M/s. Esteem Bio @ Rs.10/- each from M/s. Goldline International Finvest Ltd (refer page 30 PB copy of the invoice issued by M/s. Goldline & share certificate page 34 PB). The total consideration for purchase was paid vide Cheque No. 604580 dated 16.10.2012 of Rs.1 Lakhs drawn on Bank of Baroda (refer copy of bank statement page no. 31 of PB); and at page no. 33 of PB, the assessee has kept the copy of letter dated 30.06.2012 from M/s.
12 A.Y. 2015-16 Naz Shazia Esteem Bio transferring the shares in the name of the assessee. On 16th Oct, 2012, M/s. Esteem Bio issued bonus shares at 1:3 ratio by virtue of its assessee received 30,000 shares (refer page no. 36 of PB). And accordingly, shares were issued in the name of assessee (refer page no. 37 of PB), 30,000 shares which were transferred to Demat account on 15.03.2013 (refer page no. 39 to 44 PB). Thereafter, the assessee sold the shares of M/s. Esteem Bio on the platform of Bombay Stock Exchange through broker M/s. Multigain Securities on various dates as follows (i) 12900 shares on 24.06.2014, (ii) 5,400 shares on 03.07.2014, (iii) 6000 shares on 09.07.2014, (iv) 2100 shares on 16.07.2014, (v) 4800 shares on 17.07.2014, (vi) 3300 shares on 18.07.2014, (vii) 2400 shares on 28.07.2014 and (viii) 3000 shares on 31.07.2014. Thus, the assessee had sold 29,900 shares of M/s. Esteem Bio and shown the balance shares as investment and from sale of shares of M/s. Esteem Bio assessee claimed LTCG of Rs.1,94,05,886/. The assessee in order to prove the sales of these scrips assessee has filed the contract notes issued by broker M/s. Multigain Securities Services Pvt. Ltd. which is found placed at page no. 52 to 59 of PB. Further, it is noted that SEBI vide Interim Order dated 29.06.2015 restrained the assessee from accessing the security market and thus assessee couldn’t appear/sell directly/indirectly the shares till further orders were passed by SEBI. Meanwhile, SEBI conducted detailed investigation and found nothing adverse against the assessee and held that assessee was not involved in any activities which could be said to violate provisions of SEBI Act, 1992 and SEBI (Prohibition of 13 A.Y. 2015-16 Naz Shazia Fraudulent & Unfair Trade Practices relating to Securities Market) Regulation 2003 (PFUTP Regulation) and thus assessee was exonerated from any wrong doing (Page no. 7 of SEBI order dated 06th sept, 2017 placed at Page 75-85 of PB). And thus SEBI dropped the assessee’s name from the list of debarred entities and revoked the restraining order and assessee was allowed access to Security Market. Thus, we find that the SEBI did not find assessee being involved in any wrongdoing while transacting with scrip of M/s. Esteem Bio.
We note that the assessee had filed primary documents to prove the genuineness of the purchase transactions and consideration has passed through banking channel which is supported by bank statement and got the shares transferred in her name and the assessee had filed the shares certificate. The shares were dematerialized and later sold through stock exchange and placed on record copy of contract of sale of the shares on which the assessee had remitted STT. In the light of the aforesaid primary evidence filed by assessee, she discharged the burden to prove the purchase of shares, dematerialization and sale of shares of M/s. Esteem Bio. But the AO disallowed the claim of LTCG without finding any deficiency/infirmity in the documents filed by assessee as noted by us (supra). There is no material to disprove the LTCG claim of the assessee. Other than the statement of three (3) individuals referred to in the assessment order, no other relevant material has been referred by AO to disallow the claim of the assessee. After careful perusal of the statements of three (3) individuals mentioned by AO at para no. 13 of his order, we find that there was no 14 A.Y. 2015-16 Naz Shazia incriminating statement accusing the assessee of being part of any wrongful act in the transaction or part of modus-operandi as stated in the investigation report. The AO has failed to bring on record any evidence to suggest that assessee had any link or connection with the three (3) individuals whose statements were recorded by Investigation Wing. Since there is no material [oral/documentary] against the assessee having indulged in any illegal activities or in the modus- operandi in respect of the claim of LTCG on sale of scrip of M/s. Esteem Bio, the action of the Lower Authorities in disallowing the LTCG claim of the assessee cannot be countenanced. Moreover, we note that the issue regarding LTCG claim in respect of sale of shares of M/s. Esteem Bio had come up for adjudication before the Co-ordinate Bench of this Tribunal in Delhi in the case of Smt. Karuna Garg v ITO & Ors. (ITA. No.1069/Del/2019 & Ors dated 06.08.2019) and the Tribunal allowed such a claim by observing as under: -
“19. We have carefully considered the orders of the authorities below and the relevant documentary evidences brought on record in the form of paper book in the light of Rule 18 (6) of ITAT Rules. Whether or not a person has discharged the burden cast upon him by the provisions of section 68 of the IT Act is always a question of fact. All that has to be seen by us is whether the appellant has discharged the initial onus cast upon him by the provisions of section 68 of the IT Act.
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 15 A.Y. 2015-16 Naz Shazia sales have been routed from de-mat account and the consideration has been received through banking channels.
A perusal of the assessment order clearly shows that the Assessing Officer was carried away by the report of the Investigation Wing Kolkata. It can be seen that the entire assessment has been framed by the Assessing Officer without conducting any enquiry from the relevant parties or independent source or evidence but has merely relied upon the statements recorded by the Investigation Wing as well as information received from the Investigation Wing. It is apparent from the Assessment Order that the Assessing Officer has not conducted any independent and separate enquiry in the case of the assessee. Even, the statement recorded by the Investigation Wing has not been got confirmed or corroborated by the person during the assessment proceedings.
Section 142 of the Act contains the provisions relating to enquiry before assessment.
It is provided u/s. 142 (2) of the Act that for the purpose of obtaining full information in respect of income or loss of any person, the Assessing Officer may make such enquiry as he considers necessary. In our considered view the Assessing Officer ought to have conducted a separate and independent enquiry and any information received from the Investigation Wing is required to be corroborated and reaffirm during the assessment by the Assessing Officer by examining the concerned persons who can affirm the statements already recorded by any other authority of the department. Facts narrated above clearly show that the Assessing Officer has not 16 A.Y. 2015-16 Naz Shazia made any enquiry and the entire assessment order and the order of the first Appellate Authority are devoid of any such enquiry.
The report from the Directorate Income Tax Investigation Wing, Kolkata is dated 27.04.2015 whereas the impugned sales transactions took place in the month of March, 2014. The exparte ad interim order of SEBI is dated 29.06.2015 wherein at page 34 under para 50 (a) M/s. Esteem Bio Organic Food Processing Ltd was restrained from accessing the securities market and buying selling and dealing in securities either directly or indirectly in any manner till further directions. A list of 239 persons is also mentioned in SEBI order which are at pages 34 to 42 of the order the names of the appellants do not find place in the said list. At pages 58 and 59 the names of pre IPO transferee in the scrip of M/s. Esteem Bio Organic Food Processing Ltd is given and in the said list also the names of the appellants do not find any place. At page 63 of the SEBI order- trading by trading in M/s. Esteem Bio Organic Food Processing Ltd - a further list of 25 persons is mentioned and once again the names of the appellants do not find place in this list also.
As mentioned elsewhere the brokers of the assessee namely ISG Securities Limited and SMC Global Securities Limited are stationed at New Delhi and their names also do not find place in the list mentioned here in above in the SEBI order. There is nothing on record to show that the brokers were suspended by the SEBI nor there anything on record to show that the two brokers of the appellants mentioned here in above were involved in the alleged scam. The Assessing Officer has not even considered examining the brokers of the appellants. It is a matter
17 A.Y. 2015-16 Naz Shazia of fact that SEBI looks into irregular movements in share prices on range and warn investor against any such unusual increase in shares prices. No such warnings were issued by the SEBI.
There is no dispute that the statements which were relied by the Assessing Officer were not recorded by the Assessing Officer in the assessment proceedings but they were pre-existing statements recorded by the Investigation Wing and the same cannot be the sole basis of assessment without conducting proper enquiry and examination during the assessment proceedings itself. In our humble opinion, neither the Assessing Officer conducted any enquiry nor has brought any clinching evidences to disprove the evidences produced by the assessee. The report of Investigation Wing is much later than the dates of purchase / sale of shares and the order of the SEBI is also much later than the date of transactions transacted and nowhere SEBI has declared the transaction transacted at earlier dates as void.
Our above view is fortified by the decision of the Hon'ble Delhi High Court in the case of Fair Invest Limited reported in 357 ITR 146. The relevant findings of the Hon'ble Juri ictional High court of Delhi read as under:-
"
This Court has considered the submissions of the parties. In this case the discussion by the CIT(/4ppeals) would reveal that the assessee has filed documents including certified copies issued by the
