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Income Tax Appellate Tribunal, Hyderabad ‘ B ‘ Bench, Hyderabad
Before: Shri R.K. Panda, Vice- & Shri Laliet Kumar
ORDER Per Bench: These are the connected appeals filed by the respective assessees. filed by the assessee Shri Govind Kumar Agarwal is directed against the order dated 6.3.2019 of the learned CIT (A)-1 Hyderabad relating to A.Y 2015- 16. There is a delay of 189 days in filing the appeal by the assessee before the Tribunal for which the assessee has filed a condonation application along with an affidavit explaining the reasons for such delay. After considering the contents of the condonation application filed along with the affidavit and after hearing both the sides, the delay in filing of the appeal by the assessee is condoned and the appeal filed by the assessee is admitted for adjudication. filed by the same assessee is directed against the order dated 22.06.2018 of the learned CIT (A)-1 Hyderabad relating to A.Y 2014-15 against the addition of Rs.9,89,664/- u/s 68 r.w.s. 115BBE of the I.T. Act and also penalty proceedings u/s 271(1)(c) of the Act. Shri Naresh Kumar Agarwal is directed against the order dated 17.05.2018 of the learned CIT (A)-6 Hyderabad relating to A.Y 2015-16. filed by the assessee Shri Sumeet Kumar Agarwal against the order dated 17.05.2018 of the learned CIT (A)-6 Hyderabad relating to A.Y 2015-16. ITA No.704/Hyd/2019 filed by the assessee Smt. Saroj Agarwal is directed against the order dated 18.02.2019 of the learned CIT (A)-1 Hyderabad relating to A.Y 2015-16. ITA No.705/Hyd/2019 filed by the assessee Shri Vikas Kumar Agarwal is directed against the order 6.3.2019 of the learned CIT (A)-1 Hyderabad for the A.Y 2015-16. ITA No.89/Hyd/2022 filed by the assessee Shri Nageswara Rao Pinneti is directed against the order dated 25.01.2022 of the learned CIT (A)-1 Hyderabad relating to A.Y 2014-15. ITA 167/Hyd/2018 filed by the assessee Shri Abhishek Agarwal is directed against the order of the learned CIT (A)-4, Hyderabad relating to A.Y 2014-15. Since common issues are involved in all these appeals, therefore, for the sake of convenience, these were heard together and are being disposed of by this common order.
Facts of the case, in brief, are that the assessee an individual is deriving income from textile business and other sources filed his return of income for the ay 2015-16 electronically on 22.08.2015 declaring an income of Rs.3,24,820/- after claiming deduction under chapter VIA at Rs.40,760/- which was processed u/s 143(1) on 24.09.2015. Thereafter, the case was selected for scrutiny under CASS and statutory notices u/s 143(2) and 142(1) were issued and served on the assessee to which the A.R of the assessee appeared before the Assessing Officer and filed the requisite details as called for from time to time.
The Director of Investigation, Kolkata carried out a country-wide investigation to unearth the organized racket of generating bogus entries of Long-Term Capital Gain (LTCG) which is exempt from tax.
The Assessing Officer observed that the modus operandi adopted by the operators was to make the beneficiary buy some shares of a pre-determined Penny Stock Company controlled by them. These shares were transferred to the beneficiary at a very nominal price mostly off-line through preferential allotment or off-line sale to save STT or by share allotment. The beneficiary holds the share for one year, the statutory period after which LTCG is exempt under section 10(38) of the I.T. Act, 1961. In the meantime, the operators rig the price of the stock and gradually raise its price many times, often 500 to 1000 times. This is done through low volume transaction indulged in by the dummies of the operator at a pre-determined price. When the price reached the desired level, the beneficiary who bought the shares at a nominal price, is made to sell it to a dummy paper company of the operator. For this, unaccounted cash is provided by the beneficiary which is routed through a few layers of paper companies by the operator and finally is parked with the dummy paper company that will buy the shares.
Further, the Assessing Officer observed that the prices of the shares of the penny stock companies are rigged and are raised through circular trading which is managed by the "operator" of the scrip. An "operator" is a person who is managing the overall affairs of the scheme and he is the one who contacts the entities who wish to take entry of bogus LTCG/STCL in their books and arranges the same through the scripts of penny stock companies. The operator manages many paper/bogus companies and uses them to do circular transactions to rig the price of the shares. The shares of these penny stock companies, although listed on exchange, are always closely held and are controlled by Page 4 of 28 the promoter of the Penny Stock Company and the operator who is arranging for the bogus LTCG/loss. This is due to the fact that the general public is not interested in these shares as these companies have no credentials and this helps the operator to keep a control on the price movement of the shares.
According to the Assessing Officer, if the beneficiary say, "B" bought 10,000 shares of company "p" @ Re.1/ per share and sold it @ Rs.1,000/- per share, he would make on paper capital Rs.49,90,000/-. In his bank account, there would be a cheque deposit of Rs.50,00,000/- paid by the paper company that buys the shares. The receipt is prima-facie exempt from tax under section 10(38) of the I.T. Act, 1961. The Directorate of Investigation, Kolkata investigated transactions in 84 such penny stock shares quoted in BSE and examined on oath a large number of brokers, directors of companies that finally purchased the shares, the promoters of Penny Stock Companies, the entry operators who managed the dummy companies involved in price rigging. The money trail of the transactions was also examined and, in a large number of transactions trail right from cash deposit account to the beneficiaries' account was unearthed. As a result of investigation, individuals who have taken such entry of bogus LTCG amounting to several crores have been identified. The result of the investigation in brief is as under : i. Individuals throughout the country identified who have taken such bogus entries of LTCG amounting to several crores from 2010 to 2014. ii. The result of the enquiry was also shared with SEBI and the SEBI after investigating 11 cases have found
the allegation to be correct and the balance cases are still being investigated by SEBI. iii. The TOP 25 groups under each investigation directorate of the country were confronted in course of further investigation. Almost all of them barring a few have accepted having taken the entries for a commission. A sum of crores has been voluntarily surrendered by such assessees. iv. In Kolkata, where this investigation was started, some of the beneficiaries who had taken entries of nearly Rs.40 crores have voluntarily surrendered it for taxation without any further enquiry. v. Several assessees have filed revised returns since the enquiries have taken back their claim of exemption.
The Assessing Officer observed that on verification of computation of income filed for the A.Y.2015-16, it was noted that the assessee has claimed Long Term Capital Gains of Rs.8,41,446/- comprising of Rs. 8,40,506/- from Capital Gains on which STT is paid of Rs.940/- and claimed the same as Income exempt U/s. 10(38). During the course of hearing, the AR of the assessee was asked to furnish the details of share transactions made during the F. Y. 2014-15 relevant to the A.Y.2015-16 along with documentary evidence.
In response to the same, the AR of the assessee furnished the details of purchases/sales of shares, and copy of bank statements, contract notes for the relevant period in which purchases and sales were made. The same have been verified. On verification of the same, it was found that the assessee had purchased 25000 shares of M/s. CAREFUL PROJECTS ADVISORY Limited off market from Jatadhari Marketing Pvt. Ltd., Kolkata on 28/12/2011 for a total consideration or Rs.25000/-. Subsequently, the company M/s. Careful Projects Advisory Ltd, was merged with M/s. Kailash Auto Finance Limited as a result of which the assessee got 50000 shares and the same was credited into his D-MAT Account maintained with M/s. HSE Securities Limited. Later on, the assessee sold 25000 shares of M/s. Kailash Auto Finance Limited through M/s. HSE Securities Limited during the previous year 2014-15 relevant to the A.Y.2015-16 for total consideration of Rs.8,66,446/- and arisen LTCG of Rs.8,41,446/-. The SEBI after thorough investigation has certified that such transactions are rigged and are carried out to convert unaccounted money into account vide interim order dated 29/03/2016.
11. In this regard, all the information forwarded by the DIT(Investigation), Kolkata wherein it is clearly mentioned that this company is a bogus company i.e. paper Company which is not holding any worth in the market and the same was confirmed in the statements recorded from the operators in which scrip of M/s. Kailash Auto Finance Limited was treated as penny stock, were shown to the assessee's AR and asked to explain as to why the LTCG of Rs.8,41,446/- claimed as exempt income u/s.10(38) of the I.T. Act, should not be treated as arranged one or accommodation/bogus entry and be added back to the total Income from other sources/unexplained cash credit. Accordingly, a show cause letter was issued to the assessee on 8.12.2017 and served on the assessee. The Assessing Officer relied upon the SEBI order passed on 29.03.2016 and rejected the arguments advanced by the assessee and concluded that the transactions were bogus transactions and aimed only to bring unaccounted money in the guise of exempted long term capital gain and paper work has been done merely to give a colour of authenticity to the transaction and by creating a façade of legitimate transactions. Thus, the transactions made with these paper companies were treated as fictitious and the amount of Rs.8,41,446/- involved in the transactions were treated as unexplained cash credit and added back to the total income from other sources.
12. Before the learned CIT (A), the assessee reiterated the submissions made before the Assessing Officer. However, the learned CIT (A) rejected the explanations given by the assessee and upheld the addition made by the Assessing Officer.
Aggrieved with such order of the learned CIT (A) the assessee is in appeal before the Tribunal by raising the following grounds: a) The order of the First Appellate Authority is not correct either in law or on facts and in both. b) The learned First Appellate Authority is not justified in confirming the addition of Rs.8,41,446/- as unexplained cash credit u/s 68 of the I.T. Act. c) The learned First Appellate Authority failed to appreciate the fact that all ingredients/conditions laid down for claiming exemption u/s 10(38) of the I.T. Act were fulfilled. Hene the denial of exemption u/s 10(38) is not justified. d) The appellant craves leave to add or alter or amend any of the grounds at the time of hearing of the appeal”.
The learned Counsel for the assessee reiterated the submission made before the learned Assessing Officer and the learned CIT (A). It was submitted by the learned Counsel for the assessee that the assessee had paid STT at the time of sale of shares, in fact, the purchase of the assessee shares have not been disputed by the Assessing Officer and the LTCG claimed by the assessee have been denied by the Assessing Officer and the learned CIT (A). Further, it was submitted that the SEBI report on the basis of which the assessment order was passed by the Assessing Officer was not provided to the assessee at the time of assessment proceedings. It was submitted that the assessee has provided all the documents of purchase and sale of scrips namely Kailash Auto Finance Ltd and therefore, the assessee was able to discharge its onus for providing the identity, creditworthiness and the genuineness of the transactions in the hands of the assessee. The assessee also relied upon the following decisions:
Per contra, the learned DR strongly relied on the orders of the Assessing Officer and the learned CIT (A) and also the SEBI report in the case of Kailash Auto Finance Ltd. The learned DR also drew our attention to the additional financials filed before us on 17.08.2021 whereby the consolidated financial statements of Kailash Auto Finance Ltd for the financial year 2010-11 to 2016-17 have been placed before us and it was submitted before us that the same may be accepted as additional evidence. The learned DR further relied upon the following written submissions and supporting the case of the Revenue:
18. ITAT Delhi in the case of Krishna Devi (ITA 6356/Del/2019) datred 4.1.2022 Page 10 of 28
19. Hon'ble Supreme Court in the case of SEBI vs. Rakhi Trading (P) Ltd (Civil Appeal No.1969 of 2011 dated 8.2.2018) 20. Hon'ble Supreme Court in the case of Suman Poddar (SLP No.26864/2019) dated 22.11.2019 21. Hon'ble Delhi High Court in the case of Suman Poddar (ITA No.841/2019, dated 17.09.2019) 22. ITAT Delhi in the case of Suman Poddar (ITA No.1006/Del/2019) 23. ITAT Delhi in the case of M/s. Anandtex International (P) Ltd (ITA No.2476/Del/2018 dated 24.02.2022). Written Submission submitted by the learned DR:
The learned Counsel for the assessee, on the other hand, opposed the admission of the said financials which was available with the Assessing Officer even at the time of appeal proceedings and therefore, the Revenue cannot be permitted to submit the financial statements now before us.
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 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 disproportionate, 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 (Rs. F.Y FY 2011- F.Y 2010-11 in crore) 2012-13 12 (Rs. in (Rs. in crore) (Rs. in crore) crore) Operating 20.41 0.34 0.13 0.35 Income Operating & Adm. 18.88 0.3 0.1 0.12 Expenses Employee 0.05 0.02 0.05 0.1 Expense
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 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.
13. 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. 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.”
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.