MAMTA MEHTA,MUMBAI vs. ITO , MUMBAI

Since, some of the issues are common in the appeals, these appeals are taken up together for adjudication and are decided by this composite order.

Shri Bhupendra Shah appearing on behalf of the assessee narrating the facts of the case submitted that assessee is engaged in the business of investment in shares. For assessment year 2011-12 case of the assessee was reopened on the ground that the assessee is one of the beneficiaries of accommodation entries provided by Shirish C. Shah. The assessee had claimed exemption amounting to Rs.1,39,11,000/- u/s. 10(38) of the Income Tax Act, 1961 [in short 'the Act'] on long term capital gains on sale of shares of M/s. Prraneta Industries Ltd. According to the Assessing Officer the said long term capital gain is a result of bogus entities.

The ld. Authorized Representative of the assessee submitted that the assessee had purchased 3,00,000 shares of M/s. Prraneta Industries Ltd. (now known as Aadhaar Ventures India Ltd.) (in short “Prraneta”) in the year 2009. The shares were purchased through broker B.R.Mehta & Sons, Share Stockist and Finance Brokers Pvt. Ltd. The contract-cum-bill dated 21/07/2005, vide which the shares were purchased are at pages 38 to 44 of the paper book. The said shares were purchased @ Rs.8.92 per share for an aggregate amount of Rs.26,80,600.98. The payment for purchase of shares was made to the broker vide two cheques for Rs.17,50,000/- and Rs.9,50,000/-. The ld. Authorized Representative of the assessee referred to the bank statement of the assessee

The ld. Authorized Representative of the assessee submitted that the Assessing Officer issued show cause notice dated 10/12/2018, wherein apart from raising suspicion on exemption claimed by the assessee u/s. 10(38), raised query regarding maintenance of audited books of account as according to him the turnover in respect of derivative trading exceeded the limit

The ld. Authorized Representative of the assessee submitted that a perusal of the assessment order would show that the entire basis of addition treating the transaction of sale of shares as sale of penny stock is based on investigation carried out by the Director Investigation, Ahmedabad. The Assessing Officer explained modus operandi of the operators and the promoters of the penny stock company. However, in the instant case the assessee through documentary evidence has discharged her onus in proving that the transactions were genuine and delivery based, carried out at Stock

Per contra, Shri Prakash Choughule representing the Department vehemently defended the impugned order and prayed for dismissing the appeal of assessee. The Ld. Departmental Representative submitted that assessee is one of the beneficiary of accommodation entry providers. The scrip of “Prraneta” is one of the many penny stocks that were investigated by Director Investigation, Ahmedabad. The ld. Departmental Representative emphasized on the findings given in para 8.3 of the assessment order. He submitted that an analysis of the penny stock companies showed that the net worth of such companies is negligible. In fact they are all paper companies with no actual business. The share prices have been artificially rigged with the help of entry operators. The cash is routed and the shares were sold at high price to reap the benefit of tax free capital gains. The ld. Departmental Representative vehemently supporting the assessment order submitted that addition made is perfectly in order, hence, the appeal of assessee is liable to be dismissed. To support his submissions reliance is placed on the decision in the case of Sanjay Bimalchand Jain vs. PCIT, 89 taxmann.com 196 (Bom) . In respect of ground No.4 of appeal, the ld. Departmental Representative

We have heard the submissions made by rival sides and have examined the orders of authorities below. We have also considered the documents and the case laws cited by the respective sides in support of their submissions.

The assessee in appeal has raised seven grounds. In ground No.1 and 2 of appeal, the assessee has assailed validity of reopening proceedings.. The ld. Authorized Representative of the assessee stated at Bar that he is not pressing ground No.1 & 2. In view of the statement made by ld. Authorized Representative of the assessee, ground No.1 & 2 of appeal are dismissed as not pressed.

In ground No.3 of appeal, the assessee has assailed addition of Rs.1,38,15,648/- made u/s. 68 of the Act in respect of long term capital gain earned on sale of shares. In so far as the facts narrated by the assessee as regards time line of purchase and sale of shares, the same is not disputed. The stand of the Revenue is that the shares of “Prraneta” are penny stock as there is no actual business of the company, the said company is merely a paper company. The net worth of company is negligible as is in the case of a typical penny stock. The share price of the said company have been rigged to generate artificial capital gain to take the advantage of exemption

The assessee from documentary evidences placed on record has substantiated that the assessee purchased 3,00,000 shares of “Prraneta” in a transaction at the Stock Exchange through a broker for which the payment was made from assessee’s bank account in July, 2009. The purchase of shares was delivery based. The said shares were sold in August, 2010 at a Stock Exchange through a broker. The sale proceeds of the shares were directly transferred into the bank account of the assessee. No doubt, in the process the assessee has earned substantial long term capital gain aggregating to Rs.1,38,15,648/-, nevertheless conditions for invoking provisions of section 68 are not satisfied in the instant case. The assessee has been able to explain the source of credit in the books. In so far as the satisfaction of the Assessing Officer is concerned on the explanation furnished by the assessee, as we have observed earlier, the Assessing Officer has solely placed reliance on the report by Investigation Wing, Ahmedabad. The said report gives a general picture and modus operandi carried out by the dubious brokers to generate artificial capital gains/losses. There is no specific finding given by the Assessing Officer on the transactions carried out by the assessee.

The ld. Departmental Representative has placed reliance on the decision in the case of Sanjay Bimalchand Jain vs. PCIT (supra). At the outset it is observed that no substantial question of law arose for adjudication before the Hon’ble Court in the said case. Hence, appeal of the assessee was dismissed. Even otherwise, said case is distinguishable on facts i.e.:

We find that in the instant case the Assessing Officer has not carried out his independent investigation nor has appreciated the documentary evidences furnished by the assessee. The sole basis for rejecting assessee’s claim of exemption u/s.10(38) of the Act is, report from Director Investigation, Ahmadabad. We find merit in ground No.3 of appeal, hence, assessee succeeds on the same. The findings of CIT(A) on this issue are set-aside.

In ground No.4 of appeal, the assessee has assailed addition of business income amounting to Rs.10,52,726/- being net profit estimated at 8% of the turnover disallowing losses in Future and Options segment of equities. The Assessing Officer has treated loss in F& O segment as speculative loss. The speculative transaction has been defined in section 43(5) of the Act. In a proviso to said sub-section certain exclusions have been provided, where the transactions are not deemed to be speculative transaction. Clause (d) has been inserted in the exclusion proviso by the Finance Act 2005 w.e.f. 01/04/2006. As per clause(d), transaction in respect of trading in derivatives referred to in Securities Contract Regulation Act, 1956, section 2(ac) the trading carried out at the recognized Stock Exchange do not fall within the definition of speculative transaction. Thus, the contention of the assessee is that the assessee has suffered losses under this segment, hence, the Assessing Officer has wrongly categorized the loss as speculative loss. Another plank of argument by the assessee is that the assessee has not claimed carry forward of the losses, therefore, the Assessing Officer has erred in making addition by estimating turnover at 8%. Taking into consideration the entire facts, we deem it appropriate to restore this issue back to the file of Assessing Officer for denovo examination after affording reasonable opportunity to the assessee to make submissions, in accordance with law. Thus, ground No.4 of the appeal is allowed for statistical purpose.

In ground No.5 of appeal, the assessee has assailed that the additions have been made without verification u/s. 133(6) of the Act or issuing summons u/s. 131 of the Act . On merits, the additions have already been decided, therefore, no separate adjudication is required on this ground.

In ground No.6 of appeal, the assessee has assailed levy of interest u/s 234 and initiation of penalty u/s. 271(1)(c) and 271B of the Act. We find that the challenge to interest u/s 234 of the Act is misconceived. The provisions of section 234 deals with tax paid by deduction or advance payment. The said section was omitted by the Direct Tax Laws (Amendment) Act, 1987. In so far as ; challenge to initiation of penalty u/s. 271(1)(c) and 271B of the Act is concerned, the same is premature at this stage. The ground No.6 of appeal is dismissed, accordingly.

The ground No.7 of the appeal is general in nature, hence, require no separate adjudication.

In the result, appeal of assessee is partly allowed.

This appeal is time barred by 221 days. The impugned order was passed on 31/08/2021 i.e. during the COVID-19 Pandemic period. The Hon'ble Apex Court taking into consideration the hardship faced by the litigants excluded the period from 15/03/2020 to 28/02/2022 for the purpose of computing limitation for filing of the appeal(Re. Cognizance of Extension of Limitation, 134 taxmann.com 307) The assessee filed appeal on 08/06/2022. The assessee has filed an application citing reasons for delay in filing of appeal beyond limitation period. Taking into consideration entire facts and in light of the principle laid down by Hon'ble Apex Court, in accepting the reasons explaining delay in filing of the appeal as a rule and refusal an exception, we accept the explanation furnished by the assessee and condone the delay in (A.Y.2011-12) ITA NO.1534/MUM/2022(A.Y.2016-17)

The solitary issue raised by the assessee in appeal before the CIT(A) was with respect to addition of business income by estimating profit @8% of the total turnover in respect of Future and Option transaction. The assessee remained unsuccessful before the CIT(A), hence, the present appeal. We find that the facts germane to the issue in appeal are similar to the Assessment Year 2011-12. The findings given by us while adjudicating ground No.4 in Assessment Year 2011-12 would mutatis mutandis apply to the present appeal as well. Accordingly, the solitary issue raised by the assessee is restored to the Assessing Officer with similar directions.

In the result, appeal of assessee is allowed for statistical purpose.

To sum up, appeal for Assessment Year 2011-12 is partly allowed and appeal for Assessment Year 2016-17 is allowed for statistical purpose.