PRAVEEN SITARAM AGARWAL,MUMBAI vs. INCOME TAX OFFICER, WD-24(3)(3), MUMBAI, MUMBAI

The reasons recorded by the Assessing Officer for reopening the assessment read as under: “The assessee filed her original return of Income on 29.03.2015, declaring total income at Rs. 3,92,120/- The return of income was duly processed u/s. 143(1) of the T. Act, Act, 1961. As per the report/information available with this office that the Directorate of Investigation, Kolkata, has undertaken the accommodation entry of Long Term Capital Gain(LTCG) investigation and as result, they have been able to identify a very large number of beneficiaries who have taken a huge amount bogus entries of Long term Capital Gains/Short Term Capital Loss through listed penny stock. The investigation reveals that the trading in the penny stock was a manipulated affair to generate entries of bogus Long term Capital Gains/Short Term Capital Loss facilitating tax evasion by a large number of persons. As per the said information, the assessee has carned Long Term Capital gains through trading in the following pernry stock: FY Scrip Buy Qty Qty Trade Trade name or (Normal count value sell ised) 2013-14 SURAB SELL 280000 280000 392 16390450 H.CHE &I The above mentioned script/share is one of the penny stocks of which price was rigged to gain huge profit through manipulated affairs. The said manipulations are corroburated by the sworn Praveen Sitaram Agarwal statements of various persons recorded during the course of the said investigation. Further, on perusal of the return filed for A.Y, 2014-15 by the assessee it is seen that the assessee has not shown income/receipt of Rs. 1,63,90,450/ earned by the sale of the above mentioned shares. This has resulted in under- assessment of Rs. 1,63,90,450/- for the A.Y. 2014-15 In view of the above facts, I have reason to believe that income chargeable to tax of Rs. 1,63,90,450/-has escaped assessment within the meaning of Section 147 of the 1.T. Act, 1961 for the failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment for the previous year relevant to A.Y. 2014-15. Hence, it is a fit case for initiation of proceedings u/s 147 of the Income Tax Act, 1961 by issuing notice u/s. 148 of the Income tax Act, 1961.”

In response, the assessee filed his return of income under section 148 on 10.10.2016, disclosing the same total income of ₹3,92,120/-, wherein he continued to claim exemption under section 10(38) on account of the long‑term capital gains earned from the sale of the said shares.

The Assessing Officer noted that the computation of long‑term capital gains arising from the sale of shares of M/s. Surabhi Chemicals & Investments Ltd. was as follows:

Sale value of shares ₹1,63,34,328/- Purchase value ₹7,00,000/- Long‑term capital gains ₹1,56,34,228/-

Thereafter, the Assessing Officer made certain observations based on the findings of the Investigation Wing, Kolkata and Delhi, as well as on an analysis of the financial statements of Praveen Sitaram Agarwal the company. He observed that the net worth of M/s. Surabhi Chemicals & Investments Ltd. ranged between ₹15 crores and ₹32 crores during the relevant years, while its turnover was limited to ₹2.22 crores and employee costs were minimal. He also noted that the quoted price of the company’s shares had allegedly risen abnormally from ₹2.52 per share in August 2012 to ₹81 per share in March 2014, within a short span of 18 months. The Assessing Officer then referred to various general findings recorded in the investigation report, most of which were not directly connected with the assessee or this specific scrip. 7.1. He further highlighted that the assessee had purchased 2,800 shares of M/s. Surabhi Chemicals & Investments Ltd. through an off‑market transaction from M/s. Akriti Advisory Services Pvt. Ltd. at a face value of ₹10 per share, and later sold them at an effective rate of ₹250 per share, without providing any satisfactory explanation for the significant escalation in value within such a short period.

The Assessing Officer also noted that the Investigation Wing had issued notices under section 133(6) to fourteen parties who had purchased the shares and found, on enquiry, that these entities were allegedly inter‑connected and lacked independent financial credibility. In response to the show‑cause notice issued during the assessment proceedings, the assessee filed a detailed reply along with supporting documentation, which has been extracted in full at pages 18 to 22 of the assessment order.

Praveen Sitaram Agarwal 9. The assessee’s contentions, as summarised by the Assessing Officer in paragraph 7.2 of the assessment order, read as under:- “7.2 The contention of the assessee has been thoroughly perused. The gist of the contentions of the assessee is produced below for simplicity:

Thereafter, ld. AO has rebutted and rejected all the contentions of the assessee and has given his detailed finding Findings and conclusion The submissions made by the assessee and reply to show cause is considered. The facts of the case, investigations made by various directorates, statements recorded during the assessment proceedings are considered. From the discussion in the preceding paras it is concluded that long term capital gains booked by assessee in his books were pre-arranged method to evade taxes and launder money. Following are the findings and the reasons which substantiates the findings. n. Sale of shares and unusual rise in the price: The Increase of the cost price, and as discussed and the rise in share prices is not holding to any commercial principles and market factors. b. Findings of Investigation wing: The findings of the Directorate of Investigation of Mumbai and Kolkata as discussed above has proved that Shri Anil Agarwal and associated brokers, entry operators and the assessee had worked out an arrangement in which the shares were acquired by the assessee, the share prices were rigged and then with the help of entry operators by routing the cash, shares were sold at high price to arrive at tax free capital gains. C. Analysis of transactions: Facts revealed that such trading transactions of purchase and sale of shares are not been effected, for commercial purpose but to create artificial gains, with a view to evade taxes- i. Transactions of shares were not governed by market factors prevalent at relevant time in such trade, but same were product of design and mutual connivance on part of assessee and the operators.

The learned CIT(A), however, observed that the Assessing Officer had relied extensively on the findings of the Directorate of Investigation, Kolkata, and the report revealing a large-scale modus operandi involving manipulation of prices of certain “penny stocks” to provide beneficiaries with bogus long-term capital gains. The scrip of M/s. Surabhi Chemicals & Investments Ltd. was specifically identified in this report as one of the counters used for providing accommodation entries. The learned CIT(A) further recorded that the price movement of the scrip demonstrated a sharp and unexplained rise, from approximately ₹2.52 per share in August 2012 to about ₹81 per share in March 2014, representing an increase of more than 3,000% within a short period, without any commensurate improvement in the company’s financial fundamentals.

It was also noted by the learned CIT(A) that several of the entities which purchased the shares from the assessee were found to be non-existent at their registered addresses when notices under section 133(6) were issued, and in many cases, these purchasers lacked any independent creditworthiness or financial capacity to justify such high- value transactions. The learned CIT(A) concluded that these facts corroborated the Assessing Officer’s view that the Praveen Sitaram Agarwal transactions were pre-arranged and lacked commercial substance.

The assessee also raised the contention before the learned CIT(A) that cross-examination of the persons whose statements were relied upon by the Investigation Wing was denied, thereby violating the principles of natural justice. The learned CIT(A), however, held that the denial of cross- examination was not fatal to the assessment proceedings in the present case, as the addition was not based solely on third-party statements but on a comprehensive analysis of the price movements, financial data, and other circumstantial evidence indicating manipulation.

After considering the totality of facts and circumstances, the learned CIT(A) upheld the findings of the Assessing Officer and confirmed the addition of ₹1,63,34,228/- made under section 68, treating the claimed long-term capital gains as unexplained cash credits.

Similarly, with respect to the addition of ₹4,90,026/- made under section 69C towards alleged commission expenses, the learned CIT(A) concurred with the Assessing Officer’s view that, given the nature of the transactions and the findings of the Investigation Wing, it was reasonable to infer that some unaccounted commission would have been paid for arranging such accommodation entries. Accordingly, the addition under section 69C was also confirmed.

The relevant findings of the learned CIT(A), which form the basis of the decision, read as under:-

Further, the learned CIT(A) has also confirmed the addition of ₹4,90,026/- made under section 69C towards the alleged payment of commission, holding that such expenditure was reasonably inferred from the nature of the transactions and the findings of the Investigation Wing.

Before us, the learned Counsel for the assessee submitted that an identical issue involving the very same scrip, viz., M/s. Surabhi Chemicals & Investments Ltd., for the same assessment year, has already been adjudicated by this Tribunal in the case of the assessee’s brother, Shri Manoj Kumar Agrawal, in order dated 03.12.2014. It was contended that in that case, the Tribunal had dealt comprehensively with all the allegations made by the Assessing Officer and, after considering the relevant facts and material on record, had deleted the addition in its Praveen Sitaram Agarwal entirety. Relying on the said decision, it was urged that the present case, being on identical facts, deserves similar relief.

Per contra, the learned Departmental Representative (DR) strongly supported the orders of the Assessing Officer and the learned CIT(A), submitting that in the present case, thorough investigation and extensive enquiries were carried out by the Investigation Wing, which unearthed a larger accommodation entry racket involving penny stock scrips, including that of M/s. Surabhi Chemicals & Investments Ltd. It was pointed out that the findings revealed that the scrip was used specifically for providing accommodation entries of bogus long-term capital gains, and even enquiries conducted with the exit providers confirmed that these transactions were orchestrated in a pre-arranged manner to facilitate artificial gains. Accordingly, it was submitted that the material on record clearly established that the transactions undertaken by the assessee lacked genuineness and were bogus.

We have carefully considered the rival submissions and perused the relevant observations and findings of the Assessing Officer as well as the learned CIT(A). The undisputed facts emerging from the record are that the assessee has been engaged in regular investment in equity shares and, in the return of income, disclosed exempt long- term capital gains of ₹1,56,34,228/- arising from the sale of listed, STT-paid shares of M/s. Surabhi Chemicals & Investments Ltd. The details of the computation are summarised below:

In support of the genuineness of the above transactions, the assessee had furnished before the authorities below a complete set of documentary evidence, including contract notes-cum-bills, confirmation from the stockbroker M/s. Shilpa Stock Broker Pvt. Ltd., bank statements, dematerialisation statements, rate publications of the Bombay Stock Exchange, purchase bills, money receipts, share certificates, and letters of allotment of bonus shares. The record shows that the assessee had purchased 2,800 shares of M/s. Surabhi Chemicals & Investments Ltd. from M/s. Akriti Advisory Services Pvt. Ltd. on 26.06.2012 for a consideration of ₹7,00,000/-, payment for which was duly made through normal banking channels on the same date. The shares were transferred in the assessee’s name on 29.06.2012 and were subsequently converted into demat form on 02.08.2012. Thereafter, on 14.08.2012, the assessee was allotted 25,200 bonus shares, resulting in a total holding of 28,000 shares, which were later sub-divided into 2,80,000 shares.

These shares were held in the assessee’s own demat account for a period of approximately 14 to 15 months before being sold on the floor of the Bombay Stock Exchange Praveen Sitaram Agarwal through a SEBI-registered broker, M/s. Shilpa Stock Broker Pvt. Ltd., for a total consideration of ₹1,63,34,228/-. The delivery of shares was effected directly from the assessee’s demat account, and the sale proceeds were received entirely through RTGS transfers under the recognised online clearing mechanism of the BSE. Importantly, neither the Assessing Officer nor the learned CIT(A) has brought on record any material to dispute the authenticity of these documents, nor has any contrary evidence been produced to demonstrate manipulation of share prices by the assessee. The additions were made primarily on the basis of general observations contained in the Investigation Wing’s report, without establishing any direct nexus between the assessee and the alleged operators or accommodation entry providers.

For the sake of clarity, the gist of the assessee’s purchase and sale transactions, along with the supporting documents furnished, is summarised in the following tabular form: 1) Name of the share : M/s. Surabhi Chemicals & Investments Ltd 2) Purchase Cost 2,800 Shares purchased on 26/06/2012 at Rs. : 7,00,0007- {@ Rs.250/-} 25,200 Bonus shares were issued on 14/08/2012 and thereafter, shares were splitted into 2,80,000 shares 3) Mode of payment : Purchase cost paid by A/c payee cheque on 26/06/2012 4) Sale Consideration : 2,80,000 shares sold on 10/10/2013 to 18/1 1/2013 at Rs.1,63,34,228/- {@ Rs.58/-} on floor of BSE * 5) Average cost price : Rs,2.80 per share Average sale price : Rs.58 per share 6) 7) Mode of Receipt : Sale consideration received by RTGS through online mechanism of BSE from 17/10/2013 to 20/1 1/2013 from M/s Shilpa Stock Broker Pvt Ltd. 8) Period of Holding : 14 to 15 months in D-mat Account 9) Mode of Delivery : Through D-mat account On Purchase - 02/08/2012 (Bonus - 18/09/2012) On Sales- 09/10/2013 to 07/11/2013 10) Documents filed on sales : Contract note-cum-Sale bills, Confirmation of stock broker, Bank statement, D-mat statement, Rate publication of BSE. 11) Documents filed on : Purchase Bill, Money receipt, Bank statement, purchase Share Certificates, Letter of Allotment of bonus shares, D-mat statement and Balance sheet of earlier year 12) Assessee's statement u/s : Assessee's statement was recorded u/s 131 wherein the genuineness of transactions with 131 documentary evidences is confirmed. 13) SEBI's Allegation : No allegation framed by the SEBI against the assessee

All the documents relating to the purchase and sale of shares have been placed before us in the paper book. Upon perusal of the broker’s account, it is evident that the shares held by the assessee in the earlier years were sold during the relevant financial year at various dates and times on the Bombay Stock Exchange. The details of the broker’s statement reflecting these sales appear in the paper book at Praveen Sitaram Agarwal pages 18 to 29. The corresponding sale proceeds were duly credited to the assessee’s bank account, which is also corroborated by the demat statements placed on record. Similarly, the purchases were executed entirely through recognised banking channels, supported by requisite documents such as purchase bills, bank statements, allotment letters, dematerialisation statements, and bonus allotment confirmations. 26.1. We further note that the Assessing Officer, instead of examining these documents or conducting any independent enquiry to verify the genuineness of the transactions, has merely relied upon the general findings recorded by the Investigation Wing. Notably, there is no material in the Investigation Report linking the assessee by name, nor any reference to the stockbroker through whom these transactions were routed. The shares in question continued to remain listed on the Bombay Stock Exchange throughout the period under consideration, and there is no evidence on record of any ban, suspension, or adverse inference drawn by SEBI regarding this scrip. 26.2. During the course of hearing, we specifically called upon both the assessee and the Revenue to clarify whether any regulatory action had been initiated by SEBI in respect of alleged price rigging or manipulation of the shares of M/s. Surabhi Chemicals & Investments Ltd., either during the relevant period or thereafter. It has been fairly submitted by both sides that no such adverse action has ever been taken by SEBI against the company or in relation to its listed scrip.

We notice that the Ld.CIT(A) has deleted the addition with the following observations:- "7.5 I have carefully gone through the above evidence as well as the information filed before me; which was also submitted before the assessing officer. From a careful consideration of the facts on record, I of the considered opinion that the assessing officer has not properly examined the above evidence submitted by the appellant at the assessment stage. Based on the facts of the case, I am convinced that the AO has simply relied on the information received from the Investigation Wing and has not done any further enquiry to confirm the information. Further, the appellate has sold the said shares on real time basis through a SEBI approved broker. The contract note cum bill issued by the broker is on record. The appellant does not have any dealings with Exit providers. The modus operandi mentioned by the AO at Para number 7 of his order is general in nature and doesn't bring out any specific conduct of the appellant which warrants addition in his case. In view of Praveen Sitaram Agarwal this, I am in agreement with the allegation of the appellant that the addition in question was made based on suspicion, assumptions and surmises. 7.6 As held by Hon‟ble ITAT, Kolkata in the case of Shri Navneet Agarwal, legal heir of late Kiran Agarwal vs. ITO in 2017 dated 27 2018, even if an alleged scam has taken place, it has to be established in each case by the party alleging so (Revenue in this case). It has to be established whether this assessee in question was part of this scam. The chain of events and the live link of the assessee’s action giving his involvement in the scam should be established. No such attempt has been made by the AO in this case. Hon’ble ITAT in the above case, further held that just the modus operandi, generalizations, preponderance of human probabilities cannot be the only basis for rejecting the claim of the assessee. Unless the specific evidence is brought on record to counteract the validity and correctness of the documentary evidences produced, the same cannot be rejected by the department. Hon’ble Supreme Court in the case of Omar Salav Mohammad Sait reported in (1959) 37 ITR. 151 (SC) held that no addition can be made on the basis of surmises, suspicion and conjunctures. The appellant has quoted several decisions in its favour to put forth the above proposition. 7.7 In addition, the following judgments advocate the above proposition, where exactly identical issue regarding allowability of long term capital gain on sale of shares of same listed company, M/s. Surabhi Chemicals & investments Ltd. had been decided by the Hon‟ble Tribunals in favour of the respective assessees : (i) Chirag Tejprakash Dangi vs. ITO (ITA No. 3256/Mum/2022) (ii) M/s. Anusmriti Sarkar vs. ITO (ITA No. 390/M/2020 dated 07-06-2021) (iii) Shri Udit Agarwal vs. DCIT (ITA NO. 1839/KOL/2017 dated 26-12-2018) (iv) Shashi Bala Bajaj vs. ITO (ITA No. 1457/KOL/2018 dated 16-11-2018) The Hon‟ble Tribunals, in above four cases, had carefully analysed the facts of the case and judicial decisions of various Courts and Tribunals and held that the Long term Praveen Sitaram Agarwal capital gain earned on sale of M/s. Surabhi Chemicals & investments Ltd. is genuine in nature. 7.8 Applying the proposition of law as laid down in the above mentioned judgements, to the facts of this case, I am of the considered opinion that the evidences produced by the appellant in support of its claim before the assessing officer outweigh the suspicion or preponderance of probabilities. No material has been brought on record by the assessing officer to counteract the evidence furnished by the appellant. Under these circumstances, I hold that the assessing officer is not justified in taxing the LTCG of Rs. 2,23,81,175 as „‟Unexplained cash credit" under section 68 of the Act. Based on the facts, circumstances and legal issues brought out in the foregoing paragraphs, I allow the claim that the income in question as a bona fide LTCG arising from the sale of M/s. Surabhi Chemicals & investment Ltd. Accordingly, I delete the above addition of Rs. 2,23,81,175 made under section 68 of the Act. Therefore, Grounds No. 2 and 3 succeed."

In view of the foregoing discussions, we confirm the order passed by the Ld.CIT(A) on this issue.

In the result, the appeal filed by the Revenue is dismissed.

In the result, the appeal of the assessee stands allowed in full, with all the additions made by the Assessing Officer being deleted and the relief claimed by the assessee being granted in entirety.

In the result, appeal of the assessee stands allowed.