JT. CIT (OSD) CENTRAL CIRCLE 5(1), MUMBAI vs. M/S NITI NITINKUMAR DIDWANIA, MUMBAI

CIT (A)] dated 25 January 2019. The assessee has filed cross objection in all these appeals. Therefore, these are six appeals of the learned Assessing Officer and six cross objection of the assessee against the same order of the learned CIT (A).

“1.Whether on the facts and in the circumstances of the case and in law, the ld. CIT (A) re of deleting the addition of Rs. 7,01,34,500/-, being accommodation entry obtained in the nature of bogus long term capital gains by the assessee which fact was also concurred in the appellate order by the Id. CIT (A) that the assessee Indulged in accommodation entries?"

2. Whether on the facts and in the circumstances of the case and in law, the Id. CIT(A) erred in deleting the addition of Rs. 35,06,745/-, being unaccounted commission paid for arranging accommodation entry which is in the nature of bogus long term capital gains in patent violation of the infringement of the provisions of the Act?"

3. "Whether on the facts and in the circumstances of the case and in law, the Id. Commissioner of Income Tax (Appeals) erred in deleting the addition made in the assessment order, by merely relying on the submissions of the assessee that the funds generated through accommodation entry were directly indirectly routed to Ms. Hazel Mercantile Ltd., without providing any opportunity of being heard or for verifying the submissions made by the assessee in the course of appellate proceedings, which is arbitrary and against the interests of the principles of natural Justice?"

4. Whether on the facts and in the circumstances of the case and in law, the ld. Commissioner of Income Tax (Appeals) erred in sustaining the protective addition of only 5% of GP on alleged unaccounted sales in the case of the assessee company-"Hazel

Mercantile Ltd white on the other hand according relief of entire addition of Rs. 7,01,34,900/- which is arbitrary and against the interests of the principles of natural justice?"

5. "Whether on the facts and in the circumstances of the case and in law, the Id. Commissioner of Income Tax (Appeals) erred in not appreciating that the accommodation entries undertaken by the assessee represented the final income earned by the assessee company, and no further estimation of 5% profit thereon was called for.?"

6."Whether on the facts and in the circumstances of the case and in law and without prejudice, the Id. CIT(A) erred in facts and in law in not appreciating that the assessee, being a shareholder of the company had enjoyed dividend in the form of utilizing the proceeds of unaccounted cash sales made by the company?"

The appellant prays that the order of Commissioner of Income Tax (Appeal) on the above ground be set aside and that the DC be restored. The appellant craves, leave to amend or alter any grounds or add a new ground, which may be necessary. Last date for filing second appeal is 05.04.2019. However, the appeal should be filed immediately.”

“1. On the facts and circumstances of the case as well as in Law, the Learned CIT (A) has erred in confirming the action of Learned Assessing in making additions in the Assessment Order passed u/s. 153A/C r. w. s. 143(3) of the Act on issues not based on any incriminating material found during the course of search.

2. On the facts and circumstances of the case as well as in Law, the Learned CIT (A) has erred in confirming the action of Learned Assessing in disallowing the claim for exempt Long Term Capital Gains made by the Appellant in the return of income

amounting to Rs. 7,01,34,900/-without appreciating the facts and circumstances of the case and position of law.

3. On the facts and circumstances of the case as well as in Law, the Learned CIT(A) has erred in confirming the action of Learned Assessing in treating the exempt LTCG are allegedly non genuine and adding the same u/s.68 of the Act without appreciating the facts and circumstances of the case and position of law.

4. On the facts and circumstances of the case as well as in Law, the Learned CIT(A) has erred in confirming the action of Learned Assessing in considering the facts and circumstances of the case by not providing an opportunity for cross examinations of third parties whose statements were relied upon.

5. the respondent craves leave to add, amend, alters or deletes the said ground of appeal.”

ii. Search and seizure operation under Section 132(1) of the Income-tax Act, 1961 (the Act) conducted on Veritas Group and Shri Nitin Kumar Dindayal Didwania, promoter of the group along with the family members on 10th September, 2015. iii. Assessee and his family engaged in the business of trading and distribution of chemicals. The assessee is deriving income from salary business and profession and capital gains and income from other sources. iv. Because of the search, the notice under Section 153A of the Act was issued and assessee filed his return of income on 9th December, 2016 declaring total income of ₹19,48,426/-. v. During search, it was found that there is claim of bogus long- term capital gain earned by the assessee, his family members and a company in which assessee is interested. vi. Statement on oath under Section 132(4) was recorded on 10 September 2015 where in assessee confessed to have shown bogus long-term capital gain in several companies in his name as well as his family members and companies. vii. Assessee retracted the above statement on 23 October 2015. viii. Learned Assessing Officer during the course of assessment proceedings found that assessee has entered into the bogus long- term capital gain on share transaction with ten companies and claimed long-term capital gain exempt under Section 10(38) of the Act. ix. Based on the details available, show cause notice was issued on 16th November, 2017 that why the above long term capital gain was not considered as income under Section 68 of the Act. The learned Assessing Officer on verification of trading data of VERITAS Group cases, analyzed all the ten companies pointed out the details such as exit providers with respect to each of the company, statement recorded of the exit providers, financial conditions of the companies in which assessee earned long-term capital gain. x. The learned Assessing Officer also noted that assessee himself has accepted that for obtaining such bogus long term capital gain commission at the rate of 5% in cash was paid to the operators namely Mr. Natwar & Mr. Girish zaveri. xi. Accordingly, the learned Assessing Officer noted that assessee has earned Long Term Capital Gain of ₹7,01,34,900/- for A.Y.

2010-11 should not be treated as unaccounted income of the assessee along with that by cash commission at the rate of 5% should also not be added as unexplained income. xii. Assessee submitted his reply on 16 November 2017. The main claim of the assessee is that all the details of purchase and sales in the form of contract notes etc. have been provided to the learned Assessing Officer. Further, the shares were purchased and sold through the regular banking channel, evidenced by Demat Account and transacted through recognized stock exchange. It was also contended that those shares were held in Demat Account for more than one year. Assessee also stated that the reliance on the statement of Mr. Nitin Didwania that the capital gain earned was not genuine, as it has already been retracted. xiii. Assessee has been examined once again under Section 131 of the Act, wherein he has reiterated that statement given by him under Section 132(4) of the Act is incorrect and all the capital gains are genuine. xiv. Assessee relied upon several judicial precedents wherein the Long Term Capital Gain has been accepted as genuine. Assessee also submitted a note on the Long Term Capital Gain earned by him. Assessee also asked from the learned Assessing Officer several information. xv. Learned Assessing Officer rejected the explanation of the assessee. The learned Assessing Officer for the following reasons made the addition:- a) Mr. Raj kumar Kedia an accommodation entry provider has confirmed in his statement recorded under Section 132(4) of the Act, wherein the companies in which the assessee has traded was stated to be an accommodation entry. The statement on oath of Mr. Manish Arora, employee of Mr. Raj Kumar Kedia also confirmed the modus operandi. b) The survey conducted on M/s Dhanleela Investments & Trading Company in which the members of Veritas Group are one of the beneficiaries was also explained. c) Mere payment of purchase and sales through banking channel and through recognized exchanges cannot be enough to prove the genuineness of the transaction. d) Investment in nondescript company by way of preferential allotment and the financials of the company did not justify the investment and large-scale price fluctuation confirmed by the accommodation entry providers proves that the Long Term Capital Gain earned by the assessee is bogus. e) The statement of Shri Nitin Kumar Dindayal Didwania under Section 132(4) of the Act wherein he was completely unaware about the financial of the companies where he had made investments, complete unawareness about the activities of these companies as well as the address and names of the directors through whom preferential allotments were obtained. Shri Nitin Kumar Dindayal Didwania also confirmed that all share transactions in the group member and his family members are having the same character. f) The preferential allotment was obtained through one Mr. Natwar & Mr. Girish zaveri and marketed the investment of this long-term capital gain are merely entry providers. g) In view of the statement of the assessee u/s 132 (4) corroborated by the statement of several other participant entities in earning of bogus long term capital gain by assessee, retraction was not accepted. h) It is not necessary to establish the cash trail of these accommodation entries. i) The learned Assessing Officer then relied on several judgments and held that the assessee has utilized his unaccounted cash to obtain the above bogus long term capital gain.

ii. There is enough evidence and investigation made in question with respect to the companies to show that those are used to generate non-genuine long-term capital gain. iii. The assessee and his family members did not have any other significant capital gain except of this penny stock cases and nothing to support genuineness of dream windfall earned which was never replicated after research proves that genuineness of the claim is false. iv. Therefore, he confirmed the order of the learned CIT (A) to that extent. v. However, the learned CIT (A) noted that in the other family members such as assessee, his wife and Mrs. Sushma Dindayal Didwania [ Mother of Assessee ] in whose cases, the long term capital gain have been shown do not have source of income from which such huge funds could have been generated. vi. Main source of income is of the assessee is salary from Hazel Mercantile Ltd. vii. Assessee [Mr. Nitin Didwania] has earned the long-term capital gain of about Rs. 74 crores have been found as bogus. viii. On verification of the details about the subsequent use of the funds received as long term capital gain, it was found that this money has been ploughed back largely into one company Hazel Mercantile Ltd. ix. In terms of turnover and volumes, Hazel Mercantile Ltd is the flagship company of group and therefore, he accepted the explanation of ld AR that the funds were sourced from Hazel Mercantile Ltd. x. He asked the assessee to file a statement of closing stock as per the books of account and closing stock after accounting for out of book sale in case of Hazel Mercantile Ltd for A.Y. 2010-11 to 2016-17. xi. He noted that closing stock as per book was Rs. 445 crores in case of Hazel Mercantile Ltd as on 31st March, 2016 and the sale out of book in cash of ₹120 crores is possible. xii. He therefore held that it is reasonable to tax the same in the hands of entity that is the source of the money used for obtaining long-term capital gain. xiii. He therefore, referred to his appellate order of the even date in case of Hazel Mercantile Ltd [those appeals of assessee as well as LD AO in the case are also decided by this order] wherein the protective addition made in that particular case was made on substantive basis in hands of that company. xiv. His finding was that addition made in the hands of Hazel mercantile Limited is enough to cover the addition made in the hands of this assessee and therefore when addition is confirmed in the hands of Hazel mercantile Limited, addition though confirmed on merits in the hands of Mr. Nitin Didwania and Mrs. Nitti Didwania, should not be taxed in their hands, as it will be double addition. xv. Therefore, as a consequent of this, he deleted the addition of long term capital gain of ₹7,01,34,900/- and commission expense of ₹35,06,745/- for AY 2010-11 in the hands of Mr. Nitin Didwania.

b. A.Y. 2012-13, he deleted the addition of ₹23,86,97,745/- and commission expense of ₹ 1,19,34,887/- c. A.Y. 2014-15, the learned CIT (A) deleted the addition of bogus long term capital gain of ₹21,48,94,044/- and commission expense of ₹1,07,44,702/- d. A.Y. 2015-16, he deleted the addition of bogus long term capital gain of ₹16,80,27,919/- and commission expense of ₹84,01,396/-. e. A.Y. 2016-17, the long term capital gain of ₹35,36,720/- and commission expenditure of ₹1,76,836/- was deleted.

ii. On the merits of the addition challenge was made on the addition of long term capital gain along with commission expenditure and iii. Further absence of an opportunity to cross-examine third parties whose statements were relied upon.

ii. Assessee has failed to prove the genuineness of the transactions of long-term capital gain. The brokers are identified namely Mr. Natwar & Mr. Girish Zaveri who have provided the accommodation entries in the form of Long Term Capital Gain to the assessee. iii. Statement made by the assessee is admissible evidence for making addition as it is backed by proper material even during the course of search on the assessee. iv. Learned CIT (A) is correct in holding that the bogus long-term capital gain earned by the assessee is correctly to be taxed. v. There is enough incriminating material found during the course of search which was corroborated by statement of assessee u/s 132 (4) of the Act in his case as well as in case of Veritas Limited. Two statements of assessee u/s 132 (4), where retraction is not backed by any evidence, statement of Assessee u/s 132 (4) should be accepted. vi. When during search assessee accepts all the evidences on the basis of which search is carried out and assessee at first instances confirms the evidence available with the revenue by making statement u/s 132 (4), once again statement u/s 132 (4) in case of VERITAS confirming the same, there cannot be any fault with revenue to search for evidence during search. He submits that it is not necessary that revenue should find some pieces of papers to make the addition when overwhelming evidences based on which search is carried out is immediately confirmed by the assessee as truth. vii. He also referred to provision of section 153A of The Act and submitted that , a. there is books of accounts, b. evidences in the form of statements, c. financials of the companies, d. statement of entry operators, statement of exit providers, e. statement of the persons who arranged bogus long term capital gains for assessee Mr. Natwar and Girish, f. Absence of any knowledge with assessee of anything about the investment and sales of shares g. Unusual, windfall gains earned by the assessee h. confirmed by assessee in his statement u/s 132 (4) in his search i. once again confirmed in case of VERITAS in 132 (4) statement

All the conditions are satisfied for making addition. A ground of assessee in his cross objection of ' no incriminating Material' is not sustainable. viii. He further stated that the learned CIT (A) is incorrect in holding that the addition is confirmed by him in the hands of Hazel Mercantile Ltd, the addition is deleted in the hands of the assessee. He further referred to the provisions of section 68 of the Act and submitted that assessee has failed to prove the correct 'nature and sources' of the sum credited in the books of account in the form of bogus long term capital gain and therefore, the addition is required to be made in the hands of this assessee irrespective of the addition made in the hands of Hazel Mercantile Ltd. ix. He submitted that when Assessing Officer has not made addition on protective basis vs. substantive basis, the learned CIT (A) has fallen into an error in deleting the addition in the hands of the assessee holding that it deserves to be telescoped with the addition made in the hands of Hazel Mercantile Ltd. x. He submitted that even otherwise telescoping of the income in the hands of one assessee could not be granted for the income of another assessee. Therefore, to that extent the order of the learned CIT (A) is sustainable. xi. He extensively read the grounds of appeal and stated the learned CIT (A) has held so merely relying on the submission of the assessee that the funds generated through the accommodation entries were directly or indirectly routed through M/s Hazel Mercantile Ltd. xii. He submitted that there is no material available to hold so. He further stated that the learned CIT (A) has upheld the protective addition of gross profit of only 5% of unaccounted sales in the case of Hazel

Mercantile Ltd whereas the entire relief of 7.1 crores was granted to the assessee.

those companies, their business, their whereabouts, their financials, etc. Thus, he did not know anything about these companies. He also did not attend any of the meetings of those companies and never received any dividend. All the statements of entry operators and other intermediaries were confronted to the assessee but he expressed his ignorance. The assessee was also shown the various statements of the companies and their directors and in question no.38; he simply stated that he was acting on the advice of Mr. Girish Zaveri, who was an employee of the group. He also confessed that Mr. Girish Zaveri, introduced a person named Mr. Natwar and the whole unaccounted income was converted into capital gain through these persons. He, in the end, admitted that the Long Term Capital Gain earned by him, his family members is not genuine and is out of manipulation of the transactions carried out with the help of operators and its bogus Long Term Capital Gain shown in pre arranged manner. Further, in the proceedings of search in the case of VERITAS India Ltd, the statement of the assessee was recorded under Section 132(4) of the Act on 14 October 2015, wherein once again he confirmed the bogus Long Term Capital Gain earned by his family members and various companies. He also confirmed that 4 to 5% was the commission paid to Mr. Girish Zaveri for obtaining of these accommodation entries of long-term capital gain. Based on this, assessee was confronted by the learned Assessing Officer and reply of the assessee was considered but in the end, addition was made in the hands of the assessee of long-term capital gain earned as well as unexplained expenditure of 5% thereon.

AY Long term Long term Long term Gross profit capital gain capital gain capital gain addition earned by Mr. earned by earned by upheld in case

Nitin Mrs. Nitti Hazel of Hazel Didwania Didwania mercantile Mercantile Limited Limited

(1) (2) (3) (4) (5) 2010-11 7,01,34,900 5,59,17,609 2,02,05,648 77,92,092 2011-12 5,77,49,901 2,98,13,063 2,89,39,693 67,63,037 2012-13 23,86,97,745 64,52,967 1,58,20,785 1,40,21,741 2013-14 Nil Nil 3,57,55,020 28,80,000 2014-15 21,48,94,044 1,00,91,369 2,97,47,206 1,67,64,049 2015-16 16,80,27,919 2,19,72,700 2,99,64,323 1,20,60,372 Total 74,95,04,509 12,42,47,438 16,04,32,675 6,02,81,291

32. Now, we come to the cross objection filed by the assessee. Ground no.2 to 4 of the CO, are relating to the addition on the merits, which we have already held in the appeal of the learned Assessing Officer therefore, the same are dismissed.

33. The ground no.1 of the CO challenged the facts that there is no incriminating material found during the course of search and therefore, no addition can be made in the hands of the assessee. The fact clearly shows that there was a search on 10 September 2015 on the assessee and all the group concerns. The main allegation of the search was that the assessee and his family members along with group entities have earned bogus long term capital gain of ₹115 crores. We are fully convinced that there are enough incriminating material found prior to research as well as during the course of search based on which the addition on account of bogus long-term capital gain on by the assessee on penny stock is based. Firstly there was an information prior to the search that the assessee and his family members along with the companies controlled by him have earned bogus long-term capital gain accommodation entries by selling the sale of various non-descript companies through a fraudulent scheme of tax evasion and money-laundering in a very large scale over the years and unaccounted money generated has been colored as exempt long- term capital gain introduced into the books of accounts of the family members in a pre-arranged manner of hundreds of crores of rupees. This has led to search on 10/9/2015. During the course of search, the long-term capital gain earned by the assessee claimed as exempt under section 10 (38) of the act was found recorded in the books of account of these non-genuine

companies. The statement recorded of the assessee under section 132 (4), assessee himself has explained whole modus operandi of the scheme and admitted that long-term capital gain claimed by the assessee and his family members and the companies is bogus, nongenuine and all out of many political and fraudulent transactions. Further statement recorded on 14 October 2015 in case of VERITAS India Ltd, assessee confirmed that long-term capital gain earned by him, his family member and the companies is bogus. He also mentioned the name of the person Mr. Girish Zaveri, giving his telephone numbers, giving the name of the companies in which the long-term capital gain is shown, corroborating that he has claimed bogus long-term capital gain. He also gave Person wise, script -wise, assessment year wise, minutely to the extent of each and every rupee of such bogus long-term capital gain earned and also explained from which companies such gain are obtained. He also confirmed that how the above scheme was explained to him by the accommodation entry provider and how he obtained such bogus gains. He also confirmed how the cash was paid to the brokers. He also confirmed that he has taken all the responsibility of obtaining such bogus gain in the hands of the assessee, his family members and companies operated by him. He also admitted that he has paid commission to Mr. Girish Jhaveri and Mr. Natwar for obtaining these accommodation entries. He also explained that unaccounted income is generated out of Hazel mercantile Limited. However, he did not stated how much income he earned out of unaccounted sales. He admitted to have made the sales of ₹ 120 crores out of the books of Hazel Mercantile Ltd (5% of which is added as income of the assessee being gross profit of Rs. 120 crores amounting to ₹ 6 crores). The books of accounts of Hazel Mercantile Ltd Hazel Mercantile Ltd was not produced, the reconciliation or systematic records of the cash generation in that company used for obtaining accommodation entries was also not mentioned. Further, the reason of the search was capital gain claimed as exempt income shown by the assessee, which was contrary to the investigation of the various agencies including securities and exchange board of India. The inquiries were also confirmed by statements of accommodation entry providers, the directors of the companies shares of those companies were sold to obtained bogus long- term capital gain, statement of exit providers, statement of and identification of persons who acted on behalf of the assessee at the insistence of the assessee such as Mr. Girish and Mr. Natwar, data of stock exchange showing trading data of group companies of the assessee and assessee and his relatives, ignorance of the assessee about the companies in which assessee has invested to earn unaccounted income, the operators operating on behalf of the exit providers having their permanent account number is and matching stock exchange trading data, unfamiliarity of the assessee with respect to trading of shares, ignorance of the assessee how he came to know about preferential shares allotment of the invested companies, despite investing heavily in preferential sale allotment of the companies ignorance about even the business of those companies and directors of those companies, no explanation provided by the assessee despite confronting assessee with all those statements of persons involved in scheme of conversion of unaccounted income in bogus long-term capital gain, authorization of obtaining long-term capital gain scheme shown to the assessee by Mr. Girish and Mr. Natwar, Mr. Girish being an employee of the assessee, explaining the scheme in answer to question number 42, explaining the source of money given for obtaining unaccounted income in question number 43, explaining how the unaccounted payments were made in answer to question number 44, confirming in answer to question number 45 that he has entered into a scheme for conversion of unaccounted income, non- attendance in any of the company's annual general meeting confirmed by him wide answer to question number 46, non-receipt of any dividend from these companies clearly shows that authorities who conducted search, show all the documents in their possession which are confirmed by the assessee and admitted the unaccounted income. Therefore, thereafter nothing is required to be unearthed during the course of search as more than enough incriminating material was already available with the search party confronted to the assessee were admitted having the unaccounted income. It is always not necessary that there have to be some paper trail, which should have been found during the course of search for making an addition. The statement made by the assessee confirming the information, admitting the unaccounted income, explaining the modus operandi of earning such income, naming the parties involved in such activity shows clear-cut evidences of earning unaccounted income. Therefore, we do not find any infirmity in the order of the learned CIT – A the extent holding that that the addition of unaccounted long-term capital gain which is proved to be bogus is based on material found during the course of search and satisfies all the conditions prescribed under section 153A of the.

Nitinkumar Didwania, we also allow the appeals of the learned assessing officer in case of Mrs. Nitti Nitinkumar Didwania for statistical purposes with similar direction and dismiss the cross objections of the assessee for all these years.

20,205,648 on account of bogus long-term capital gain and commission expenditure of ₹ 1,010,282.

Order pronounced in open court on 23 January 2023.