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Income Tax Appellate Tribunal, Hyderabad ‘B‘ Bench, Hyderabad
Before: Shri R.K. Panda, Vice- & Shri Laliet Kumar
Date of hearing: 07/11/2023 Date of pronouncement: 29/11/2023 ORDER Per Bench: These are the connected appeals filed by the respective assessees. 1706/Hyd/2019 filed by the respective assessees are directed against the separate orders dated 27.09.2019 of the learned CIT (A)-7, Hyderabad relating to A.Y.2015-16. filed by the assessee is directed against the order dated 03.04.2019 of the learned CIT (A)-4, Hyderabad relating to A.Y 2015-16. Since common issues are involved in all these appeals, therefore, these were heard together and are being disposed of by this common order for the sake of convenience.
First, we take up Shri Ravindra Kumar Agarwal as the lead case.
The grounds raised
by the assessee reads as under:
1. The order of the Learned Commissioner of Income Tax (Appeals)-7, Hyderabad [Learned CIT (A)] in holding that the Long-Term Capital Gain on sale of 6000 shares of M/s. GCM Securities Limited at Rs. 1,20,000/- were sham transactions and therefore, the appellant was not entitled to exemption U/s. 10(38) at Rs. 40,77,487/- of the Income Tax Act, 1961 (the Act) is wholly unsustainable both on facts and law.
2. The Learned CIT (A) failed to note that the appellant was a regular subscriber of shares of other companies apart from M/s. GCM Securities Limited and full details having been filed before the Ld. CIT (A) who came to a wrong conclusion on a wrong foundation of facts arising out of non-application of mind and therefore, the order of the Ld. CIT (A) in denying the exemption U/s. 10(38) of the Act is wholly unsustainable both on facts and law.
3. The Learned CIT (A) failed to note that the entire subscription on Ms. GCM Securities was on the basis of IPO issued by the company for which applications were made by six family members and out of which only two members viz., Tulsi Devi Agarwal and Ravindra Kumar Agarwal HUF were allotted shares and therefore to hold that the investment by the appellant in M/s. GCM Securities Ltd was sham is totally contrary to the facts and evidence on record.
4. The Learned CIT (A) failed to note that the entire made subscription for shares of Mis. GCM Securities Limited were on the basis of public issue tor cash at Rs. 20/- per equity share including share premium of Rs.10/- per equity share and therefore to hold that the subscription for shares in M/s. GCM Securities Limited and its sale at a later date was a sham transaction arises on wrong appreciation facts and is contrary to the facts and evidence placed on record by the appellant and therefore the learned CIT(A) erred in denying the exemption u/s. 10(38) of the I.T Act, 1961.
5. The Learned CIT (A) failed to note that the investment in shares arising out of a Public Issue was made in the A.Y 2013-14 and the investment in purchase of shares were accepted in the assessment proceedings for the A.Y 2013-14 and the entire sale was through recognized Stock Exchange Page 2 of 30 on payment of STT and therefore to hold that the appellant was not entitled to exemption u/s 10(38) of the Act is totally contrary to the facts and evidence on record and therefore is unsustainable.
6. The Learned CIT (A) failed to note that the entire evidences relating to allotment of M/s. GCM Securities Limited shares on 22/3/2013 which were listed in Stock Exchange and that the transactions were routed through Dmat Account and banking channels and further failed to note that the appellant continues to hold the unsold shares of M/s. GCM Securities as on date and therefore to hold that the entire transactions in the purchase and sale of shares resulting in LTCG was not eligible for exemption U/s. 10(38) of the Act is wholly unsustainable both on facts and in law.
7. The Learned CIT (A) failed to note that the entire assessment was made on the basis of the background details of the Investigation carried out by the Department and has without application of mind merely relied on the thesis prepared by the Directorate of Investigation which is not applicable to the facts of the appellant's case and has just followed the reports of the Investigation Wing and the general observations of the SEBI which were not applicable to the facts of the appellant's case and therefore, the Ld. CIT (A) erred in coming to the conclusion that the appellant was not entitled to exemption U/s. 10(38) of the Act is wholly unsustainable both on facts and in law.
8. The Learned CIT (A) failed to note that the appellant had along with the return of income filed the complete details relating to STCG of listed securities, LTCG on sale of M/s. GCM Securities Limited and details of investment in shares of innumerable Public Limited Companies apart from Ms. GCM Securities Limited and therefore to hold that the appellant was not entitled to exemption U/s. 10(38) of the Act in respect of sale of shares of Ms. GCM Securities Limited while holding that the Short Term Capital Loss/STCG on purchase and sale of other listed securities were genuine and thus the denial of LTCG on the sale of M/s. GCM Securities Limited is unsustainable being contrary to the facts and evidence on record.
9. Any other ground or grounds that may be urged at the time of hearing of the appeal.”
Facts of the case, in brief, are that the assessee, HUF, filed his return of income for the A.Y 2015-16 on 06.08.2015 declaring a total income of Rs.5,21,800/-. The case was selected for scrutiny through CASS. In response to the statutory notices Page 3 of 30 issued to the assessee u/s 143(2) and 142(1), the A.R of the assessee appeared before the Assessing Officer from time to time and furnished the information as called for.
The main issue involved in this case for selection of scrutiny is to examine the suspicious Capital Gains earned by the assessee from transactions in penny stock (inputs given by the Investigation Wing of the Department, Kolkata).
On verification of the information filed by the AR of the assessee, the Assessing Officer observed that the assessee has sold 4000 shares of M/s. GCM Securities Ltd whose face value was Rs.10/- and 19,200 shares whose value was Rs.1/- per share and claimed LTCTG amounting to Rs.40,77,487/- as exempt u/s 10 (38) of the Act. The Assessing Officer observed that the assessee purchased 6000 shares of the company @ Rs.10/- per share with a premium of Rs.10/- per share in public offer on 3rd April, 2013. Subsequently, in the month of October, 2014, the shares of the company were split and the face value of the share now was Rs.1/-. The Assessing Officer further observed that during the year under consideration, the price of the stock of the company has sky rocketed when compared to its financials and was rigged by the operators as per information available.
The brief background details of the Investigation carried out by the Investigation Wing of the Department as observed by the Assessing Officer reads as under:
The Assessing Officer observed that the Securities and Exchange Board of India (SEBI) has in the recent past, passed some orders on the issue of manipulation of Share market for providing accommodation entry of bogus LTCG. SEBI Considering the inputs from the Income Tax Department as well as from its own surveillance system and that of the Stock Exchanges has taken appropriate action in the cases of the suspect scrips/shares. These actions include passing of interim directions, suspending the trade, reducing the price band etc. In a large number of penny stocks, the price band had been reduced to the lowest band of 2 per cent. Out of these scrips, ad- interim orders have also been passed by SEBI in cases of 11 scripts, giving a finding that price in these scrips was rigged. Details of such orders are available on the website of SEBI. Since the shares are under the control of limited persons/entities who hiked/ rigged the price and arranged the buyers for selling the shares of the LTCG claimant (would be claimant). One of the big beneficiaries has also confessed on 4 out of these 11 scrips.
The Assessing Officer observed that the assessee has purchased 6000 shares of the company for a consideration of 1,20,000 through Initial Public Offer (IPO). The price of the said scrip was manipulated by several times, when compared to its financials with the help of several entry operators resulting in deriving exempted capital gains by the assessee.
The Assessing Officer further observed from the economic fundamentals of the company that during the period 1.4.2013 to 31.3.2015, the abnormal increase/decrease in the share value of the company was noticed when compared to the economical fundamentals during the period 1.4.2013 to 31.3.2015.
11. The Assessing Officer also observed on verification that there is a synchronized share trading through Hyderabad Stock Exchange in respect of the shares of the company sold by the assessee during the A.Y 2015-16. In most of the cases, orders were placed within a few minutes difference (or) at the same time with the counter party members. The Assessing Officer observed that all the shares put for sale by the assessee and his family members on different dates were purchased by Jama Kharchi companies/Paper Companies based at Kolkata with no financial credentials which were being controlled and managed by the operators who were engaged in providing the bogus LTCTG for a commission.
12. Thus, the Assessing Officer observed the following facts:
13. Finally, the Assessing Officer concluded that the transactions were sham transactions in nature and aimed only to bring unaccounted money in the guise of exempted LTCG and paper work has been done merely to give a color of authenticity to the transactions and by creating a façade of legitimate transactions. Thus, the LTCG of Rs.40,77,487/- claimed by the assessee as exemption u/s 10(38) of the Act was denied and the same was brought to tax as per the provisions of section 69 of the Act r.w.s. 115BBE of the Act.
Aggrieved with such order of the Assessing Officer, the assessee preferred an appeal before the learned CIT (A) who dismissed the appeal by observing as under:
Aggrieved with such order of the learned CIT(A), the assessee is in appeal before the Tribunal.
The learned Counsel for the assessee submitted that the assessee purchased the shares of GCM securities Ltd which is listed on the stock exchange on 22.3.2013 and the transactions have been routed through the De-mat account of the assessee. The learned AR further submitted that the shares were purchased through banking channels and the assessee continues to have some unsold shares of GCM Securities Ltd. It was argued that the shares were purchased on 22.3.2013 and for the said year there was no scrutiny on the purchase of shares or the genuineness of the GCM Securities Ltd.
The learned AR submitted that the reliance placed by the Assessing Officer on the statement of Brokers/Promoters/ Operators as mentioned at Para 5 of the assessment order has no legs to stand as the assessee was not given a copy of the statement for rebuttal and the assessee was not aware of any such event until the receipt of the assessment order. It was submitted that all the requisite evidence being the demat account statement from Angel Broking, bank statements, share allotment letter have been duly furnished before the Assessing Officer which were duly examined by the Assessing Officer and the reasons Page 11 of 30 given by the Assessing Officer was that inputs were received from the Investigation Wing.
18. The learned AR relied on the following judgments:
19. Per contra, the learned DR drew the attention of the Bench to the orders of the Assessing Officer and the learned CIT (A) and relied on the following judgments: i. ITAT Delhi in the case of Krishna Devi (ITA No.6356/Del/2019 dated 4.1.2022). ii. Hon'ble Supreme Court in the case of SEBI vs. Rakhi Trading Pvt. Ltd (Civil Appeal No.1969 of 2011 dated 8.2.2018).
The learned DR drew our attention to the consolidated financials of the GCM Securities for the financial year 2012-13 to 2018-19. The birds eye view of the financial summary of GCM securities is as under:
21. On the basis of the above, it was submitted that the GCM Securities Ltd is a paper company and was having no financials and having very weak financials and therefore, it cannot be accepted that the assessee will apply for the allotment of the shares and the said shares within a short span of time resulted into huge LTCG to the assessee. It was submitted that the trail prepared by the assessee is a perfect paper trail and in fact there is nothing on record to show that the said company namely GCM Securities Ltd was into any manufacturing or production activity or having any contracts which yield into profitability of income and the company is having very weak and feeble fundamentals. It was submitted that the company was also a part of SEBI report. Page 14 of 30
The learned DR filed the following written submission in support of the case of the Revenue.
23. We have heard the rival arguments made by both the sides, perused the orders of the AO and the learned CIT (A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us by both sides. We find the AO in the instant case made addition of Rs.40,77,487/- to the total income of the assessee u/s 69 of the I.T. Act r.w.s. 115BBE by disallowing the claim of exemption u/s 10(38). We find the learned CIT (A) confirmed the addition made by the Assessing Officer, the reasons of which have already been reproduced in the preceding paragraph. We do not find any infirmity in the order of the learned CIT (A) on this issue.
We find the Coordinate Bench of the Tribunal in the case of Govind Kumar Agarwal & Others in and others vide order dated 21.11.2023 in Paras 17 to 23, under similar set of facts, dismissed the appeals filed by the assessees by observing as under: “17. We have heard the rival arguments made by both the sides, perused the orders of the AO and the learned CIT (A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us by both sides. We find the AO in the instant case at page No.8 and 9 of its order have reproduced the financial statements of Kailash Auto Finance Ltd for the financial year 2010-11 to 2013-14 in ITA No.1940/Hyd/2018 in the case of the assessee for the A.Y 2014-15 and had mentioned as under:
In fact, the evidence filed before us is only supporting the findings recorded by the Assessing Officer at pages 8 and 9. In view of the above, we are of the considered opinion that the evidence filed by the Revenue is not required to be admitted being superfluous and repetitive in nature as concise statements were already recorded by the Assessing Officer at pages 8 & 9 of the order.
Now coming to the merits of the case, it appears that the assessee has provided all the details of purchase and sale of shares and had also provided the details of the STT paid by the assessee while selling the shares. However, we cannot be oblivious to the fact that there is a huge difference in sale and purchase of the shares within a short span of time. In the present case, the assessee had purchased 25000 shares of M/s. Careful Project Advisory Ltd on 28.12.2011 for a meagre consideration of Rs.25000/- and subsequently the said M/s. Careful Project Advisory Ltd got merged into Kailash Auto Finance Ltd which happens to be the penny stock company and as a result thereof, the assessee got 50,000 shares and the same were credited into the Demat account maintained by M/s. HSE Securities Ltd. After the said 50000 shares of M/s. Kailash Auto Finance Ltd, the assessee sold 25000 shares through HSE Securities Ltd in the A.Y 2015-16 for a consideration of Rs.8,66,446/- and has claimed LTCG for Rs.8,41,556/-. Thus, within a short span of time with an investment of meagre Rs.25,000/- the assessee gained Rs.8,41,446/-.The amount of Rs.8,41,446/- is dis- proportionate, exorbitant and beyond human probabilities. No business on earth would yield a return of Rs.8,41,446/- within a short span of less than 3 years with an investment of Rs.25,000. Though the assessee was able to maintain perfect paper trail, however, the astronomical profit and windfall is not expected for the small amount from a company which has no financial establishment, commercial establishment and industrial establishment and was merely a paper company. In fact, the net worth of the company as captured by the Assessing Officer reproduced herein above was negative and no commercial/industrial activities were undertaken by the said company for the financial year 2010-11 to 2013-14. In our view, if a company has a strong financial fundamental, then it must be carrying on some activity which must result into earning profits and payment of dividend to the shareholders. The company must be having some tangible and intangible asset, workforce, paying electricity charges, excise duty, employee cost etc. In fact the operating income and the employee expenses for the financial year 2013-14, 2012-13, 2011-12 and 2010-11 of Kailash Auto Finance Ltd are as under: Year F.Y 2013-14 F.Y 2012-13 FY 2011-12 F.Y 2010-11 (Rs. in crore) (Rs. in crore) (Rs. in crore) (Rs. in crore) Operating 20.41 0.34 0.13 0.35 Income Operating & Adm. 18.88 0.3 0.1 0.12 Page 24 of 30
Expenses Employee 0.05 0.02 0.05 0.1 Expense 20. A perusal of the above clearly shows that hardly any amounts were spent by the said Kailash Auto Finance Ltd towards employee’s expenses. In our view for a company to run it is essential for the company to spend money on the employees and establishments. In the present case the expenses of Kailash Auto Finance Ltd towards these heads are conspicuously missing. In our view it is highly improbable and against the human probability for a business person/investor like the assessee before us to invest in such a paper company which is not doing any tangible activity but for the obvious reason of converting the cash into LTCG In absence of any such expenditure, it is not expected for a company to flourish and grow. In our view, if the company does not have strong financial fundamental, it is not expected of any individual investor (like the assessee before us) to invest in the company which is lacking strong financial fundamentals. In fact, the above said exercise of investing in a paper company seems to be undertaken by the assessee just to convert the ill-gotten money with the help of perfect paper trail. To demonstrate how the assessee and other persons are working in tandem with the operators, we would like to reproduce one of the submissions in the case of Abhishek Agarwal, wherein the assessee in response to the notice given by the Assessing Officer had submitted as under:
The assessee in the present case also was not a regular investor and was working on some advice of the broker/friends/ operators and was involved into the above said activity and had used colourable device to convert cash into LTCG. We cannot subscribe to the same. Though the assessee was able to create flawless paper trail, however flawless paper trail is to be tested on the touchstone of human probabilities, prevailing financial market and the fiscal fundamentals of the company in which the assessee has traded. On examination of the fiscal fundamental of Kailash Auto Finance and background of the assessee, we found that the company Kailash Auto Finance Ltd has meagre/no
financial fundamental strength and therefore, no prudent person would invest in such a company which does not have any strong fundamentals. This is against the human probabilities and conduct. Further, we are of the opinion that the Assessing Officer cannot be expected to do impossible act of bringing on record the evidence that the assessee has given the cash in lieu of claiming the LTCG. In our view and as per the fact, the manipulation of scrips/rigging of the share price have been done with the help of complex web of transaction/circular transaction which were undertaken by operators in connivence and collusion with various unscrupulous persons placed in various jurisdiction namely Kolkata, Mumbai, Delhi, Hyderabad etc., Further, in the present case, the SEBI which is a regulatory and adjudicating authority has examined the trading in the scripts of Kailash Auto Finance Ltd after issuing the notices to various beneficiaries of price hike, brokers/operators and the company and thereafter had held that the increase in price of Kailash Auto Finance Ltd were artificially increased with the connivence of operators and other stakeholders just to gain LTCG/Long Term Capital loss. We cannot brush aside the report of SEBI which has evidentiary value and binding in nature. In the present case, the Assessing Officer has relied and referred to the report. Further, we can apply the salutary principles of resjudicata as mentioned in Section 11 of the Civil Procedure Code and also section 33 r.w.s. 56 of the Evidence Act. In view of the above, we do not find any merit in the appeal of the assessee and accordingly the appeal of the assessee is liable to be dismissed. 21.1 Though both the parties relied upon various decisions, however, the decision of the Coordinate Bench of the Delhi Tribunal in the case of M/s. Anandtex International (P) Ltd vs. ACIT in dated 24.02.2022 is squarely applicable to the facts of the present case wherein the Coordinate Bench at paras 10 to 16 have decided similar issue as under: “10. We have gone through the record in the light of the submissions made by the Ld. DR. In PCIT vs. NRA Iron and Steel (P) Ltd (supra) and NR Portfolio Private Limited (supra) it is held that it is legitimate for the learned Assessing Officer to look into the issues like - whether the two parties are related or known to each other, or mode by which parties approached each other? whether the transaction is entered into through written documentation to protect investment? whether the investor was an angel investor? what is the quantum of money invested? how the party believed the credit-worthiness of the recipient? what is the object and purpose of payment/investment? whether the share applicant is in existence and an independent entity? how the financial capacity of the share applicant to invest funds is proved? how the source of funds from which the high share premium was invested is dealt with by the assessee? why the investor companies had applied for shares of the Assessee Company at a high premium? in case the field enquiry conducted by the AO revealed that the investor companies were found to be non-existent, and the onus to establish the identity of the investor companies, was not Page 27 of 30 discharged by the assessee? whether the assessee discharged their legal obligation to prove the receipt of share capital/premium to the satisfaction of the AO? whether the assessee discharged the onus to establish the credit worthiness of the investor companies? did the assessee do anything more than mere mention of the income tax file number of an investor to discharge the onus under Section 68 of the Act? did the assessee do anything more than mere filing all the primary evidence in discharge of their onus to prove the identity of the investee? etc.
When the learned Assessing Officer felt it necessary to verify the things beyond the pale of papers, it is incumbent upon the assessee to cooperate with the learned Assessing Officer in dispelling the doubts, which the circumstances raised in the mind of the learned Assessing Officer. It is not open for the assessee to say that the learned Assessing Officer shall not enquire into anything beyond the papers that were submitted by the assessee.
Orders of the authorities below reveal that the assessee has not complied with the requirements of the learned Assessing Officer in the exercise of forming satisfaction as to the creditworthiness of the share applicants or the genuineness of the transaction. Mere paperwork by the assessee does not take the authorities anywhere, when the learned Assessing Officer suspected the existence of the entities in question and insisted that a higher degree of proof is required in that respect.
In view of the decisions of the Hon'ble jurisdictional High Court and Hon'ble Supreme Court in the case of NDR Promotors Pvt. Ltd. (supra) and the decision of the Apex Court in the case of NRA Iron and Steel (P) Ltd (supra) we are of the considered opinion that the action of the learned Assessing Officer was legal and non-production of the persons summoned had rightly led to the inference that the assessee had routed their own money in the books of accounts through the conduit of investor companies. On this premise, we agree with the authorities below and uphold the addition made under section 68 of the Act. Grounds No. 1 to 3 of the assessee's appeal are accordingly dismissed.
14. Coming to the addition of Rs. 6 Lacs covered by grounds No. 4 and 5, it was made by the learned Assessing Officer by making certain portion of the labour charges, loading and unloading expenses and missionary repair and maintenance charges, according to the learned Assessing Officer such payments were made in cash and bills were not properly vouched and therefore such expenses remained unverifiable. Precisely for this reason, Ld. CIT(A) also confirmed the same. No reasons are forthcoming before us to take a different view. We, therefore, do not find any reason to interfere with the findings of the Ld. CIT(A) and therefore dismiss grounds No. 4 and 5.
15. The next addition challenged under grounds No. 6 and 7, is in respect of Rs. 1 19, 29, 050/-towards the disallowance of 1/8thportion of the expenditure met further car expenses, conveyance, Festival expenses, telephone expense, travelling expense and sales promotion expenses. On this aspect learned Assessing Officer recorded that the log books of car and complete details of telephone calls were not produced by the assessee and according to the assessee is not feasible to produce the same because the vehicles are almost under the direct control of the management. Ld. Page 28 of 30 CIT(A) recorded that the explanation offered by the assessee was only superficial and log books are maintained mandated really in any concern of whatever the size. On this aspect also, no submissions are forthcoming from the side of the assessee to take a different view. We therefore, do not propose to interfere with the findings of Ld. CIT(A) in the impugned order.
16. Lastly addition of Rs. 7, 94, 315/-covered by grounds No. 8 and 9, it represents the disallowance of a part of the expense under the head repair and maintenance on the ground that the bills in respect of the amounts paid in cash were not properly vouched. Ld. CIT(A) recorded that the assessee sought to take shelter under the fact that certain vendors do not maintain printed bills and expenses are internally vouched. According to the Ld. CIT(A) in the absence of any non-availability of the expense disallowance of a portion of the same is justifiable. In the absence of any material or reason before us to take a contrary view. We decline to interfere with the same. Grounds No. 7 and 8 are accordingly dismissed.”
22. In view of the above, we do not find any reason to interfere with the order passed by the learned CIT (A).
With respect to the judgments relied upon by the assessee in the case of R.K. Mittal, Aarsh Mittal and others, we are of the opinion that no straight jacket formula/guidelines were laid down by the Hon'ble High Court for deciding the issue pertaining to the LTCG claimed by the assessee for selling the penny stock. On the facts of the case, we are satisfied that Kailash Auto Finance Ltd was a penny stock company having feeble fundamentals and the assessee has traded in this company with a view to gain LTCG and thereby converting the cash. In view of the above discussions, we do not find any merit in the submissions of the assessee that the decisions relied upon by the assessee are applicable to the facts of the case and accordingly the appeal of the assessee is dismissed and the order passed by the learned CIT (A) is upheld.
Since the facts of the instant case are identical to the facts in the case of Govind Kumar Agarwal & Others (cited Supra), therefore, respectfully following the same the appeals filed by the respective assessees in 901/Hyd/2019 and 1706/Hyd/2019 for the A.Y 2015-16 are dismissed.
In the result, all the appeals filed by the respective assessees are dismissed.