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Income Tax Appellate Tribunal, KOLKATA ‘A’ BENCH, KOLKATA
Before: SRI SANJAY GARG & DR. MANISH BORAD
order
: February 16th, 2023 ORDER
Per Manish Borad, Accountant Member:
This appeal filed by the assessee pertaining to the Assessment Year (in short “AY”) 2010-11 is directed against the order passed u/s 250 of the Income Tax Act, 1961 (in short the “Act”) by ld. Commissioner of Income-tax (Appeals)-10, Kolkata [in I.T.A. No.: 1917/KOL/2019 Assessment Year: 2010-11 Shri Sunil Kayan. short ld. “CIT(A)”] dated 31.03.2019 arising out of the assessment order framed u/s 147/143(3) of the Act dated 29.12.2017.
The assessee is in appeal before the Tribunal raising the following grounds: “
1. That the order passed by the Ld. CIT (Appeals) - 10, Kolkata u/s 250 confirming the additions and disallowances made by learned assessing officer is wrong in the law and facts of the case.
2. That in view of the fact that the original return filed by the appellant was not processed, the question of escapement of income in the hands of the assessee does not arise. Therefore, the Notice issued u/s 148 is bad in law.
3. That the Ld. CIT (Appeals) - 10, Kolkata erred in law as well as on facts of the case by confirming the addition made by the Ld. A.O. of Rs. 5.05 crores as income of the appellant u/s 69 of the Act
4. That the appellant craves to leave, add, or amend any of the grounds during the course of appellant proceedings.”
3. Brief facts of the case as culled out from the records are that the assessee is an individual and is a registered broker of the Calcutta Stock Exchange. Ld. AO has reason to believe to reopen the case of the assessee for AY 2010-11 on the ground that the assessee has not disclosed the amount of Rs. 3.30 Cr fully and truly in in its accounts and the same has escaped assessment within the meaning of Section 147 of the Act. Necessary approval received from ld. Pr. CIT on 21.03.2017. Notice u/s 148 of the Act dated 23.03.2017 served upon the assessee and in compliance thereto the assessee filed return of income on 25.04.2017 declaring income of Rs. 6,12,130/-. During the course of assessment proceedings, ld. AO referred to an information received from Principal Director of income tax of the investigation wing I.T.A. No.: 1917/KOL/2019 Assessment Year: 2010-11 Shri Sunil Kayan. dated 12.01.2017 and as per the detailed information large amount of cash was found to be deposited in the account of Shakambhari Tradex. Based on such investigation about huge amount of cash deposits and the transactions carried out including movement of cash through the bank account of Shakambhari Tradex, cash trail and ultimate beneficiaries and the statement of Mr. Pranab Kumar Modi it was found that various shell companies are being run which are engaged in providing accommodation entry in the form of bogus share capital and share premium, bogus LTCG/STCL etc. On examination of this cash trail, ld. AO noticed that the beneficiaries also included M/s. Sutanuti Distributors Pvt. Ltd. (renamed as Gitanjali Udyog Ltd.). Further, on examining the transactions carried out by one of the alleged beneficiary paper companies i.e. M/s. Sutanuti Distributors Pvt. Ltd., ld. AO found that the assessee is a beneficiaries of some of the amounts which totalled to Rs. 3.30 Cr received from M/s. Sutanuti Distributors Pvt. Ltd. (Gitanjali Udyog Ltd.). Ld. AO also noticed that the assessee was also beneficiary of a sum of Rs. 1.25 Cr from Raj Laxmi Ornaments & Stone, Rs. 50 lakh from Krisna Infotech. In total, ld. AO noticed that the assessee received Rs. 5.05 Cr from the alleged paper companies which were part of the cash trail which was discovered by the investigation wing to have started from depositing of cash in Shakambhari Tradex. When the assessee was confronted for the alleged receipt, it was stated that the assessee being a share broker has received the said amount for purchase of equity shares. The assessee filed complete details including the client account opening form, ledger account, contract notes as well as Demat accounts to show that Page 3 of 16 I.T.A. No.: 1917/KOL/2019 Assessment Year: 2010-11 Shri Sunil Kayan. the alleged companies who gave the money to the assessee were the clients of the assessee broker and they gave the said sum for purchase of equity shares. The assessee on behalf of these parties purchased equity shares, transferred them to the Demat accounts and charged its brokerage. However, ld. AO was not convinced with these submissions and placing reliance on judicial pronouncements as well as considering the report of the investigation wing as well as the order of Securities and Exchange Board of India dated 20.08.2003 prohibiting the assessee from share broking made an addition u/s 68 of the Act alleging that the assessee failed to explain the receipt of the said sum of Rs. 5.05 Cr from the above stated three entities observing as follows: “Natural law of probability which is time and again considered by tire highest court of law as guiding principal for testing the genuineness of situation/circumstances in any transaction. Any deviation from such law being it unnatural and unbelievable in normal sense and liable to be considered as doubtful and bogus. Every situation revolves around us following this theory of probability. On consideration of the circumstantial evidences, natural human conduct and preponderance of probabilities, that what is apparent in this case is not real, and that these financial transactions were no real but sham ones and that this entire edifice was only a colorable device used to evade tax. The assessee clearly received these amounts totalling Rs. 5.05 cores by way of bogus transactions and accommodation entries with various entities through arranged nexus with shell companies whereby assessee is the final beneficiary of the sum of Rs. 5.05. Crores. The information received from the Investigation Wing is hence proved and it can be seen that the income went into the hands of the assessee only and as such should be treated as his income since the assessee failed to explain otherwise. Thus, in conclusion, it can be seen that all the amounts received by the assessee amounting to Rs. 5.05 crore, were received by way of bogus transactions with bogus shell companies whereby the assessee was the final beneficiary. Therefore, the total sum I.T.A. No.: 1917/KOL/2019 Assessment Year: 2010-11 Shri Sunil Kayan. amounting to Rs.5,05,00,000/- (Rs.3,30,00,000/- + Rs.1,25,00,000/- + Rs.50,00,000/-) is disallowed u/s 68 of the LT. Act 1961 and added back to the total income of tire assessee for the Financial Year 2009- 10 relevant to Assessment Year 2010-11.”
4. Aggrieved, the assessee preferred appeal before ld. CIT(A). The assessee again filed all the submissions to show that it has in its regular course of business, purchased the shares for its clients and all documentary evidences are available to show that the alleged companies are assessee’s clients and contract notes have been signed for purchase of equity shares. However, ld. CIT(A) confirmed the action of ld. AO by merely reproducing the assessment order as well as the submissions made by the assessee and finally in the finding stated that the appeal filed by the appellant is treated as dismissed. There is no specific finding on the issues raised by the assessee.
5. Aggrieved, the assessee is now in appeal before this Tribunal. Ld. Counsel for the assessee vehemently argued referring to the following written submissions: “1. The assessee is registered broker of the Calcutta Stock Exchange (Registration certificate vide paper book Sl. No. 3) 2. The income of the assessee is from share broking and other source income. There is no self-trading of shares. (Vide profit and loss account Paper book sl. 2) 3. The modus operandi of conducting brokerage business is as per the SEBI rules. The same is as under: (i) The broker is to maintain three bank accounts. The first bank account is client account. In this account when the client wants to purchase shares, he must deposit more or less equivalent amount in client account maintained by the broker. From this account the money cannot be withdrawn but must be disbursed as per SEBI rules. (Sebi rules for client account receipts and payments at page 24 and 26 of I.T.A. No.: 1917/KOL/2019 Assessment Year: 2010-11 Shri Sunil Kayan. the paper book). The money from this account goes to or received in the settlement account maintained for Stock Exchange in respect of the balance payment to be made or received for all the clients for the days trading at the portal of stock exchange. The balance money is paid to the clients whose shares are sold. (ii) The second bank account is settlement account which is exclusively maintained for the stock exchange. The days balance amount payable or receivable from stock exchange is done through this bank account. The balance in this account will be zero since the amount transferred to client account is immediately transferred to stock exchange. The settlement account is at page 149 to 184. (iii) The assessee during the whole day purchases the shares on behalf of the clients so also sales the shares on behalf of clients. The stock exchange portal maintains full details of the purchase and sale of shares. An automatic statement is generated giving net position on account of total intraday trading by the broker and the net balance is either paid to the exchange or is received form the exchange. This payment is received or paid automatically through a separate bank maintained and named as settlement account stated above for receipt and payment to exchange only. The fund is automatically transferred to /from settlement bank account to stock exchange or paid to the customer who has sold the shares. From client account the fund payable to the sellers of the shares through the broker shall be paid. This is because the exchange pays or receives the intra-day balance and naturally the excess is to be paid only to the seller of the shares. The assessee cannot withdraw any money from the client account or settlement account except to the extent of brokerage element in the transactions or his own investment if any made in client account. The client account and the pool account are subject to deep and random audit by the SEBI. In case of violation, the registration as broker will be cancelled. The settlement account and client account of the appellant was also subjected to audit by the SEBI and such audit was in fact done in the case of assessee vide paper book page 28 to 36 of the paper book. All transfers to and from the client account is only in the settlement account or payment to sellers of the shares except very nominal amount which related to brokerage earned by the assessee. Therefore, for receipts in this account is assessee is only as trustee for sending the funds immediately on purchase to the stock exchange.
I.T.A. No.: 1917/KOL/2019 Assessment Year: 2010-11 Shri Sunil Kayan. (iv) In case of sale of shares by any client, the client transfers the shares to the demat account of the broker and the assessee broker transfer the shares to the stock exchange. On such transfer the stock exchange pays the money as per settlement to the broker which goes to client bank account and from that only payment is made to the customer. (v) A third account is maintained for assessee's own affairs. In this account all other transactions are maintained which do not relate to the receipts and payments to and from clients on account of purchase and sale of shares. (vi) On making payment to the stock exchange if the amount is payable and on delivery of sold shares to the portal of stock exchange, the stock exchange transfers the purchased shares to the demat account of the broker. If the net balance is payable by exchange the exchange transfer the amount to the client account of the broker. (vii) Now fund has come to the client account of the broker. The broker has to disburse the amount to its sellers only from the client account.
The assessee received the sum of Rs. 2,00,00,000/- (Two crores) only from Sutanati Distributors P Ltd. (explained in letter dated 26lh December 2017(Paper book page 294-295 and summary attached herewith) and in letter dated 27th December 2017 (paper book 296- 297). Further this amount was received in bank account maintained for client account vide page 56-66 of paper book (date wise description attached) for purchase of shares of Vindus Holdings (vide paper book page 55). These shares were purchased at the portal of stock exchange (vide details attached herewith) and amount was paid from client account in accordance with SEBI rules hereinbefore stated. The details are attached vide annexure A. No amount was transferred to assessee's own bank account. The assessee received payment of on the dates immediately before the purchase (vide details attached). The assessee also made net payment (after adjustment of intraday trade for all the clients) to Stock exchange by balancing intraday trade of purchase and sale of the assessee as broker at the stock exchange portal. The details of such receipts and payment are enclosed herewith. The shares so purchased were also transferred by the exchange to assessee's Pool demat) account vide pages of the paper book mentioned in the details attached. It is evident that the shares were transferred to demat pool account by the stock exchange immediately on the next working day and in turn transferred by the I.T.A. No.: 1917/KOL/2019 Assessment Year: 2010-11 Shri Sunil Kayan. assessee from the said account to the client Sutanati which is also stated in the pool demat account. This is also verifiable from demant (pool) account with regard to the receipt of shares and transfer to Sutanati. The purchase of all the shares so transferred on respective dates and value thereof is also verifiable from the contract notes placed at page 73-78,85, 89, 93,98, 103, & 107 of the paper book The brokerage received by the assessee on such purchase for Sutanati is also verifiable from the above contract notes as well as from page 75, 80, 83, 87, 91, 95/96, 101, 105 and 108 of the paper book. No amount from the said Sutanati was received in assessee's own bank account. The ledger account of Sutanati is enclosed vide paper book page 55 which shows the receipt of money and the shares debited to his account. To the query of the AO about the receipt of Rs. 3,30,00,000/- from this party the assessee duly submitted to AO that he received only Rs. 2 crores and there was no other receipt vide letter dated 2-6.12.2017 paper book page 294 and again on 27th December 2017 vide paper book page 296 and produced all bank accounts to show that the only the amount of Rs. 2 crores were received. The AO has just ignored the said submissions without any adverse comment. If an explanation is not rejected the same is deemed to have been accepted (Ref:: judgement of Hon'ble Supreme Court in Marico Ltd. dated 1.6.2020 in diary no. 7367/2020.). It was duly shown and proved that some entries are double entries as is evident from paper book page 70. The AO impliedly accepted the same by ignoring the said submissions (and by not rejecting the same) just relying on the borrowed information of investigation wing (there are complaints against such information and Hon'ble Allahabad High Court in S R Cold Storage has reprimanded the department on this issue) It may be noted that no entry of the sum of Rs. 1,30,00,000/- was found in the books or in the bank account on those dates or even during the whole year. The AO has not brought on record any evidence to show such receipt. Full details of business with this party are attached in the paper book pages 55-197 5. Similarly, the assessee received the sum of Rs. 1,25,00,000/- (One crore twenty-five lakhs) only from Rajlasmi Ornaments & Stones (explained in letter dated 26th December 2017 (Paper book page 292.) and in letter dated 19th December 2017. Furtherthis amount was received in bank account maintained as client account on the dates stated in the attached sheet for purchase of shares of Oasiscin. These shares were purchased at the portal of stock exchange and amount was paid from client account in accordance with SEBI rules I.T.A. No.: 1917/KOL/2019 Assessment Year: 2010-11 Shri Sunil Kayan. hereinbefore stated. The details are attached vide annexure A. No amount was transferred to assessee's own bank account. The shares were transferred by the exchange to assessee's demat account vide paper book pages stated in the attached sheet and these shares were transferred to the demat account of the purchaser vide paper book pages stated in the attached sheet. The brokerage was also credited as appears from contract notes. The relevant pages of the contract nots and the brokerage receipts are show in in the attached sheet. No amount from the said Rajlaxmi was received in assessee's own bank account. Full details of business with this party are attached in the paper book pages 198-255 6. Again, the assessee received the sum of Rs.50,00,000/- (Fifty lakhs ) only from Krishna Infotech (explained in letter dated 19th December 2017(Paper book page 292-293. Further this amount was received in bank account maintained as client account on the dates stated in the pages of the bank statement mentioned in the attached sheet which was also received for purchase of shares of Oasiscin. These shares were purchased at the portal of stock exchange and amount was paid from client account in accordance with SEBI rules hereinbefore stated. The page wise details of paper book are stated in the attached sheet. No amount was transferred to assessee's own bank account. The shares were transferred by the exchange to assessee's demat account vide paper book pages stated in the attached sheet and these shares were transferred to the demat account of the purchaser vide paper book pages stated in the attached sheet. The brokerage of the assessee is also stated in the contract notes and brokerage account for which page nos of the paper book are stated in the attached sheet. Full details of business with this party are attached in the paper book pages 256-291.
7. The assessee during the year earned more than 34 lakhs as brokerage which is evident from Profit and Loss account at page 11 of the paper book. The balance sheet separately shows the client account with HDFC bank.
8. Even otherwise, It is submitted that when the amount is received in trading account from the customers and sale is actually made. The issue is covered by the judgement of Hon'ble Chandigarh Bench of ITAT in in the case of Sh. Jawahar I.al Jain (HUF). Vs. The DCIT. Central Circle-1. Dated loth November 2017 and also by the judgement of Hon'ble Rajasthan High Court in the case of Smt. Harshila Chordia vs ITO 298 ITR 349 in which it was held that I.T.A. No.: 1917/KOL/2019 Assessment Year: 2010-11 Shri Sunil Kayan. "Addition uls 68 could not be made in respect of the amount which was found to be cash receipts from the customers against which delivery of goods was made to them". The decision of Hon'ble ITAT, Nagpur Bench in the case of M/s Heera Steel Limited vs ITO (2005) 4 ITJ 437 may also be referred in which it was held that "Both the lower authorities failed to appreciate the case of the assessee that these were the trade advances and not cash credits and against such advance, the assessee has supplied the material in due time as per details available on record. Finally reference is also made to the decision of ITAT Kolkata in the case of Sanjay Agarwal ITA No. 8 dated 7.6.2019 where in the ITAT has relied on the judgement of jurisdictional High Court in Crystal Networks (P) Limited -vs.- CIT (ITA No. 158 of 2002 dated 29.07.2010) 9. Hence the addition is not maintainable.”
On the other hand, ld. D/R supported the order of ld. AO and also submitted that the companies who have given the alleged sum to the assessee are established Jama-Kharchi/Paper/shell companies and they are all engaged in the racket of purchase and sale of penny stocks and the assessee is also engaged in this type of business and therefore, the alleged sum has rightly been added as unexplained cash credit.
We have heard rival contentions and perused the records placed before us.
As regards ground nos. 1 & 2 challenging the assumption of jurisdiction u/s 147/148 of the Act we fail to find any merit since ld. AO has reopened the proceedings after validly recording the reasons based on the information received from the investigation wing and had reason to believe for reopening of the case regarding the transactions of the sum received by the assessee from the alleged accommodation entry provider. We, thus, dismiss the legal ground raised by the assessee in ground nos. 1 & 2.
I.T.A. No.: 1917/KOL/2019 Assessment Year: 2010-11 Shri Sunil Kayan.
As regards ground no. 3, the addition u/s 68 of the Act of Rs. 5.05 Cr is in dispute before us. We notice that the assessee is a broker registered with Calcutta Stock Exchange and he carries out the transactions of purchase and sale on behalf of the its customers/clients. As evident from the profit and loss account the assessee is only showing income from share brokerage and income from other sources and there is no self-trading of shares. Ld. AO based on the investigation report referring to various shell companies had an information that some of the shell companies which are part of the cash trail and layering of funds is made from one company to another for the purpose of providing accommodation entries/bogus LTCG/share capital etc. Such investigation report contains the names of M/s. Sutanuti Distributors Pvt. Ltd. (renamed as Gitanjali Udyog Ltd.), Raj Laxmi Ornaments & Stone and Krishna Infotech. As per ld. AO, the assessee has received 3.30 Cr from M/s. Sutanuti Distributors Pvt. Ltd., 1.25 Cr from Raj Laxmi Ornaments & Stone and Rs. 50 Lakh from Krishna Infotech. While examining the details of the assessee, ld. AO noticed that such sum has been utilized by the assessee for the purchase of penny stocks and therefore, since the assessee in involved in this type of accommodation entry providing business, the sum received by the assessee remained to unexplained therefore, deserves to be added u/s 68 of the Act. The view taken by ld. AO confirmed by ld. CIT(A).
Now, on examination of the details filed by the assessee, we observe that the assessee being a stock broker is required to maintain three bank accounts, first bank account is client account I.T.A. No.: 1917/KOL/2019 Assessment Year: 2010-11 Shri Sunil Kayan. wherein the client who wants to deal in shares, needs to deposit more or less equivalent amount. From this first bank account any disbursement can only be made as per the SEBI Rules for client account receipts and payments. The money from this account goes to the settlement account maintained for stock exchange. Second bank account is settlement account which is exclusively maintained for the stock exchange and the day’s balance amounts payable or receivable from stock exchange is done through this bank account. The balance in this account becomes ‘zero’ since the amount transferred to client account is immediately transferred to stock exchange. The third account is maintained by the assessee for his own affairs and all other transactions are maintained which do not relate to the receipt and payment to and from clients on account of purchase and sale of shares. Sufficient documentary evidences have been placed to show that all the alleged three cash creditors have opened the client account with the assessee and all necessary documents required for opening a client account were furnished to the assessee and they have subsequently been sent to the stock exchange as required mandatorily by the share brokers.
So far as the alleged amount is concerned it has been claimed by the assessee that from M/s. Sutanuti Distributors Pvt. Ltd. the assessee has only received Rs. 2 Cr and there is no entry of Rs. 1.30 Cr in his bank account. Even before us, ld. D/R failed to controvert this fact that the assessee has received Rs. 1.30 Cr from M/s. Sutanuti Distributors Pvt. Ltd. So, for the purpose of adjudication, we will consider the three figures i.e. Rs. 2 Cr from I.T.A. No.: 1917/KOL/2019 Assessment Year: 2010-11 Shri Sunil Kayan. M/s. Sutanuti Distributors Pvt. Ltd., Rs. 1.25 Cr from Raj Laxmi Ornaments & Stone and Rs. 0.50 Cr from Krishna Infotech.
Now, the pattern of utilization of the amount is similar for all the three parties. The alleged sum has been received in part on various dates. In case of amount received from M/s. Sutanuti Distributors Pvt. Ltd. during the period 08.06.2009 to 06.07.2009, the assessee broker purchased the shares of the scrips namely Vindusho and Emralcom of different quantities during the period from 08.06.2009 to 06.07.2009. The details of contract note and Sauda book have been provided. Delivery of shares were taken by the broker and the same have subsequently been transferred to the Demat account of the client. For carrying out these transactions the assessee has charged the brokerage. Similarly, in the case of Raj Laxmi Ornaments & Stone against the sum received during the period from 13.01.2010 to 04.03.2010 the assessee purchased shares of the scrip namely Oasiscin and after taking the delivery transferred it to the client’s Demat account. The same is the case in Krishna Infotech wherein also the scrip namely Oasiscin were purchased and after taking delivery transferred to the client’s Demat account. The flow of all these transactions clearly shows that these have been carried out by the assessee in the capacity of share broker and the flow of funds has been routed through the bank accounts statutorily required to be maintained to receive the funds from client as per the SEBI Rules. No amount has been transferred to assessee’s own bank account. All the shares purchased on behalf of the said three cash creditors who actually are the clients of the assessee have been transferred by I.T.A. No.: 1917/KOL/2019 Assessment Year: 2010-11 Shri Sunil Kayan. the stock exchange to assessee’s Demat account and thereafter transferred to the Demat account of the purchasers. The brokerage appearing in the contract notes have been included by the assessee in the brokerage income offered to tax in the income tax return and books of accounts are duly audited.
There is no evidence put forth by the Revenue authorities which could show that the assessee has been benefitted by the alleged cash credit. We are not commenting upon the fact that the cash creditors are accommodation entry providers or not or that the scrips purchased by the assessee are penny stock companies or not but we only confine our adjudication with respect to the assessee in question before us and that whether the alleged sum received by the assessee broker can be taxed in its hand as unexplained cash credit.
In our considered view firstly, the alleged sum is not unsecured loan taken by the assessee nor is the money taken for on credit for its own business purpose by the assessee it is purely a transaction between a share broker and its clients. The client is duly registered under the SEBI Rules. The assessee is dealing with many other clients and the alleged three parties are only one of them. The assessee broker after opening the client’s account has been approached by the above referred three clients for purchase of shares. For making the said purchase amounts have been transferred to the client’s bank account which is specifically used for purchasing the shares and the disbursement from such account has to go either to the stock exchange or is returned back to the client. There is no authority with the broker to utilize such