MINKAL K. DOSHI ,MUMBAI vs. ITO - 18(2)(2) , MUMBAI

This is an appeal preferred by the assessee against the order of the Ld. Commissioner of Income Tax (Appeals)-29, Mumbai dated 25.03.2019 for the assessment year 2015-16.

The main grievance of the assessee is against the action of the Ld. CIT(A) in upholding the addition of Rs.24,66,000/- made by the AO in respect of Long Term Capital Gain (LTCG) claimed of Rs.20,64,793/- being profit on sale of Rs.36,000/- shares of M/s. Greencrest (Earlier known as M/s. Marigold Glass Industries Ltd.) and claimed it as an exempt income u/s 10(38) of the Income Tax Act, 1961 (hereinafter “the Act”). 3. Brief facts are that the AO noted that the assessee had filed on 25.09.2015 return of income declaring total income of Rs.7,01,450/-. The return filed has been processed u/s 143(1) of the Act. Thereafter, Minkal K Doshi the return has been selected for scrutiny through CASS. The reason for selection for scrutiny was “suspicious sale transaction in shares and exempt long term capital gains shown in return (Penny Stock tab in ITS).’ The AO noted that the assessee claimed exemption u/s 10(38) of the Act for LTCG in respect of sale of shares to the extent of Rs.20,64,793/-. And that the share sold were of M/s. Greencrest (scrip code is 531737). On being asked by AO, the assessee replied vide his letter dated 31.08.2017 that he was allotted 1,50,000 shares of M/s. Marigold Glass Industries Ltd., for which the assessee had made payment of Rs.18,00,000/-. Subsequently the companies name got changed from M/s. Marigold Industries Ltd, to M/s. Greencrest Financial Services Ltd. Upon the name change, the shares were also split at Rs.1/- per share and the assessee got 15,00,000/- shares of the same after the split. In the computation of income filed along with the return of income, the assessee has claimed exemption u/s 10(38) of the Act as under: - Name of company Sale price and date of Purchase price and No. of shares sold Exempt 10(38) sale date of purchase M/s. Greencrest 24,58,602/- on 4,32,000/- on 36,000 24,58,602/- (Previously known as 11.12.2014 14.09.2012 M/s. Marigold Industries Ltd.,)

According to the AO, the suspicious rise in the number of shares (by splitting) made him conduct deeper investigating about the un- usual gain made by assessee. Therefore, the AO has recorded the statement of the assessee on 12.12.2017 who stated that he was a Chartered Accountant by profession and (his statement has been reproduced from page no. 9 to 15 of the assessment order) and that he has been an investor for last 10 years and keeps a watch of the companies traded in stock-exchange through media reports; and has subscribed to the preferential issue of shares of M/s Green Crest Minkal K Doshi Financials, formerly known as Meri Gold Glass Industries, because he thought that there was good opportunity of growth for this company and therefore he decided to invest in it. And that he has Demat account with M/s. Ashika Stock Broking Ltd and his client ID number A500M6448 and DP A/c no. is 1203450000656537 (answer to question no. 3 at page no. 9). The assessee also brought to the AO’s noticed that he has been an investor in many companies in the past like M/s Power Grid, M/s Adani Port, M/s Coal India and M/s Reliance Power etc. To question no. 47 as to whether he has to say any thing more, the assessee has submitted that the increase in price cannot be sole criteria for treating a genuine share transactions as penny shares transaction. According to him, the shares purchased and sold were in the regular primary market and secondary live market, through recognized stock exchange only. Shares were received in physical form/certificate, dematerialized and delivered in dematerialized form, from his regular Demat account and applicable STT was also paid on these transactions. And the payments were made and received in regular banking channel through the mode of Cheque, RTGS or NEFT. Hence he asserted that this scrip cannot be termed as penny share transaction and reiterated that the transaction in question are genuine investment transactions. However, the AO did not agree and was of the opinion that since the Investigation Wing has found that this scrip a penny stock and the entry operators Shri Devesh Upadhyaya and Mr. Jagdish Purohit has admitted of providing accommodation entry after receiving cash in the form of LTCG etc, the AO held as under: - Minkal K Doshi “The value of consideration claimed is Rs.24,58,602/- whereas the cost of purchase paid by assessee is Rs. 4,32,000/- which is given by cheque to show the purchases as genuine purchases. The sale price received as accommodation entry is nothing but the return -of amount in lieu of cash that the assessee would have paid to hawala operators over and above Rs. 4,32,000/- paid by assessee by cheque at the time of purchase of penny stock in F.Y 2014-15. Therefore, a sum of Rs.24,58,602/- being difference between cost price and sale price would represent the value of cash which has been laundered in the form of bogus profit on sale of shares. It may also further be noted that as per the Assessee Information Report of the assessee obtained from the ITD system of the department shows that the total consideration of the transaction is Rs.24,66,000/- out of the sale of 36,000 shares. The difference of Rs.7,398/- is nothing but the transfer expenses expended by the assessee. This expense also needs to be added back in view of the modus operandi explained in herein above. Therefore a total sum of Rs.24,66,000/- (Rs.24,58,602/- + Rs.7,398/-) represents the unexplained investment made by assessee in cash to obtain the equivalent amount as bogus profit on sale of shares. Alternatively, it can also be concluded that the sum of Rs.24,66,000/ -represents income from other sources and not the income in the nature of capital gain.”

Aggrieved by the action of AO the assessee preferred an appeal before the Ld. CIT(A) who was pleased to dismiss the appeal of the assessee and aggrieved by the action of the Ld. CIT(A), the assessee is before this Tribunal.

In an identical case, the addition on account of long term capital gain on sale of shares was deleted by holding it to be a genuine transaction in the case of Mukesh Marolia v. Addl. CIT-6 SOT 247 (Mum). Even in the said case, the AO had held that the long term capital gain shown by the assessee was unexplained since in the said case broker had confirmed in a statement before the AO that he never sold any shares to the assessee. However, taking note of the evidence as available on record, the Tribunal held that the AO had not disproved the genuineness of the transactions. The said decision of the Tribunal was later upheld by the Hon’ble Bombay High Court in the case of CIT v. Mukesh Marolia - ITA 456 of 2007 dated 07.09.2011. And the SLP against the said decision filed by the Department has also been Minkal K Doshi dismissed by the Hon’ble Supreme Court in SLP (Civil) No. 20146/2012 dated 27.01.2014.

Reliance was also placed on the decision of this Mumbai Tribunal in the case of ITO v. Indravadan Jain (HUF) (ITA No, 4861/Mum/2014) dated 27.05.2016 wherein an identical issue was involved, and in the said case, the long term capital gains claimed by the assessee was denied by the AO and treated as unexplained cash credit u/s 68 of the Act on the basis of action taken by SEBI against the broker through whom the assessee had sold shares. The Tribunal after taking into consideration the facts involved held that action taken against the broker by SEBI cannot be a ground to treat the transaction of the assessee as non-genuine and upheld the action’ of Ld. CIT(A) in deleting the addition made by the AO. The relevant extract of the order is reproduced as under: “8. We have considered rival contentions and carefully gone through the orders of authorities below and found form the record that the AO has treated the share ' transaction as bogus on the plea that SEBI ins initiated investigation in respect of Ramkrishna Fincap Put. Ltd. The AO further stated that investigation revealed that transaction through M/s Basant Periwal and Co. on the floor of stock exchange was more than 83%. We found that as far as initiation of investigation of broker is concerned, the assessee is no way concerned with the activity of the broker. Detailed finding has been recorded by CIT(A) to the effect that assessee has made investment in shares which was purchased on the floor of stock exchange and not form M/s Basant Periwal and Co. Against purchases payment has been made by account payee cheque, Minkal K Doshi delivery of shares were taken, contract of sale was also complete as per the Contract Act, therefore, the assessee is not concerned with any way of the broker. Nowhere the AO has alleged that the transaction by the assessee with these particular broker or share was bogus, merely because the investigation was done by SEBI against broker or his activity, assessee cannot be said to have entered into ingenuine transaction, insofar as assessee is not concerned with the activity of the broker and have no control over the same. We found that M/s Basant Periwal and Co. never stated any of the authority that transaction in M/s Ramkrishna Fincap Pvt. Ltd. on the floor of the stock exchange are ingenuine or mere accommodation entries. The CIT(A) after relying on the various decision of the coordinate bench wherein on similar facts and circumstances issue was decided in favour of the assessee came to the conclusion that transaction entered by the assessee was genuine. Detailed finding recorded by CIT (A) at para 3 to 5 has not been controverted by the department by bringing any positive material on record. Accordingly, we do not find any reason to interfere in the findings of CIT(A). Moreover, issue is also covered by the decision of jurisdictional High Court in the case of Shyam R. Pawar (supra), wherein under similar facts and circumstances, transactions in shares were held to be genuine and addition made by AO was deleted. Respectfully following the same vis-a-vis findings recorded by CIT(A) which are as per material on record, we do not find any reason to interfere in the order of CIT(A).”

In similar case, the issue was decided in favour of the assessee in the case of Commissioner of Income-tax, Jamshedpur vs. Arun Kumar Agarwal (HUF) 210 Taxman 205 (Jharkhand High Court). In this case, the AO on the basis of finding in the SEBI enquiry, Minkal K Doshi consequent to which eleven stock brokers & their trading were suspended by the Kolkata Stock Exchange from buying & selling the securities ii) investigation by the CIT (Inv.) in the case where modus operandi adopted by the brokers of the assessee was also identical with one adopted by M/s Ahilya Commecial Pvt. Ltd., held that transaction of the purchase of the share and sale thereof is not genuine and is a sham transaction. Hon’ble Jharkhand High Court while dismissing the appeal of revenue held as under: “Even in a case where the share broker was found involved in unfair trade practice and was involved in lowering an rising of share price, and any person, who himself is not involved in that type of transaction, if purchased the share from that broker innocently and bonafidely and if he shows his bona fide in the transaction by showing relevant material, facts and circumstances & documents, then merely on the basis of the reason that share broker was involved in dealing in share of a particular company in collusion with other or in the manner of unfair trade practice against the norms of SEBI and stock exchange, then merely because of that fact a person who bonafidely entered into share transaction of that company through such broker then only by assumption such a transaction cannot be held to be a sham transaction.”

Hon'ble Jharkhand High Court further held as under: “It is not disputed by the revenue before us that the share of these assessee were already shown in the balance sheet submitted by the assessee, and therefore, in that situation, how the revenue condemning the transaction even on the ground of steep rise in the shares. If within a period of one year, the share Minkal K Doshi price had risen from Rs.5 to 55 and from 9 to 160 and one person was holding the shares much prior to that start of rise of the share price, then how can it be inferred that such a transaction entered into a sham transaction few years ago and prepared for getting the benefit after few years when share will start rising steeply. In the present case even there was no reason for such suspicion when the shares purchased years before the unusual fluctuation in the share price. Hence, the appeal of department dismissed CIT(A) and ITAT while allowing the appeal held as under; It is also not in dispute that assessee disclosed the shares in their possession in earlier return and statement of accounts and they are duly entered into the books of the accounts of the assessee which was duly proved by the bank statement.”

I find that in the case at hand before me, relevant evidence were produced to suggest that the transactions (purchase and sale of shares) were undertaken and thereafter the same was reflected in the Demat Account; and the transactions have taken place through banking channel and through registered broker of Stock Exchange; and there is no evidence to disprove these relevant documents which support the claim of assessee (LTCG). Therefore, the claim of LTCG on the scrip under question cannot be disallowed based on general enquiry conducted by department unless the involvement of assessee is shown in the illegal activities, without which, the impugned action to disallow the claim of assessee cannot be sustained.

Further, I agree with the submission of the assessee that the assessee’’s case is distinguishable from the case of Sanjay Bimalchand Minkal K Doshi Jain L/h Shantidevi B Jain v CIT of Mumbai High Court, Nagpur Bench in Income tax Appeal No. 18/2017.

Therefore, in view of the decisions of the jurisdictional High Court and other decisions of Tribunal, and in the factual back ground discussed (supra), I find that the addition of Rs.24,66,000/- under section 68 of the Act made by the AO is unsustainable and therefore direct the AO to delete the same and allow the LTCG income of Rs.24,58,602/- as exempt under section 10(38) of the Act. Assessee gets relief as afore-stated. And consequently the brokerage charge added of Rs 12,730/- is also deleted. Ground nos.1is allowed.

In the result, the appeal of the assessee is partly allowed. Order pronounced in the open court on this 24/02/2023.