MANAVI GOEL SHARMA,MUMBAI vs. INCOME TAX OFFICER INT TAX WARD 2(3)(1), MUMBAI

Briefly the facts of the case are that the assessee has filed her original return of income declaring total income of Rs. 7,26,920/- on 10-10-2018. Subsequently, basis information received from Dy. Director of Income Tax (Inv.)-5(1), New Delhi that the assessee is one of the beneficiaries of accommodation entry in the form of bogus capital gains/loss in respect of shares of M/s. Innovative Tech Pack Ltd, the shares of which have been classified as „penny stock‟ and the fact that the assessee has sold shares of the said company for a consideration of Rs.38,11,558/- during the FY.2017-18 resulted in profit of Rs.12,54,141/-, the AO formed reason to believe that income chargeable to tax has escaped assessment and notice u/s. 148 of the Act dt. 17-04-2022 was issued. In response to the notice, the assessee filed her return of income and thereafter notices were issued along with show cause notice and the submissions so filed by the assessee were considered, but not found acceptable to the AO.

As per the AO, the assessee had purchased and sold shares of the company which had no financial standing and the assessee has not given any logic as to why shares of such quantity were purchased. It was further held by the AO that the sale of shares were carried out at an unusual price not in line with any commercial principle and market factor and further referring to the findings of the Investigation Wing, wherein it was proved that associated brokers, entry operators and assessee have chalked out an arrangement in which share of penny stock companies were acquired by the assessee, the share prices were rigged and the shares were sold at high price to book exempt Long Term Capital Gain and at low price to book Short Term Capital Gain or business loss. In such trading, purchase and sale of shares were not affected for commercial purposes, but with an intention to create artificial Long Term Capital Gain and Short Term Capital Loss or business losses with a view to abate payment of taxes and the assessee has not been able to justify the un-usual rise and fall in share prices of the company to be natural and determine market forces which shows that such shares transactions were close circuit transactions and were structured transactions. Therefore, considering the findings of the Investigation Wing in relation to enquiries conducted in the case of the assessee, brokers, operators entry providers and the nature of transactions entered into by the assessee amounting to Rs. 38,11,558/- was held as non-genuine and the same was treated as un-explained cash credit u/s. 68 of the Act and given that the assessee has already disclosed a sum of Rs. 12,15,740/- in the return of income, the balance amount from sale of shares amounting to Rs. 25,95,819/- was brought to tax u/s. 115BBE of the Act. Further, the AO brought to tax a sum of Rs. 1,14,348/- u/s 69C, being 3% commission expenditure which the assessee has paid for taking the accommodation entry and the draft assessment order was passed u/s. 144C(1) of the Act, dt. 23-03-2024.

The assessee thereafter filed objections before the DRP. The objections were disposed off by the DRP vide it‟s order dt. 26-11-2024 and the findings of the AO were confirmed. Thereafter, the AO passed the final assessment order u/s. 147 r.w.s. 144C(13) of the Act, dt. 26-12-2024; wherein the amount of Rs. 25,95,819/- was brought to tax u/s. 115BBE of the Act and an amount of Rs. 1,14,348/- was brought to tax u/s. 69C of the Act. Against the said order, the assessee is in appeal before us.

During the course of hearing, the Ld. AR submitted that the AO erred in treating the said transaction as bogus Long Term Capital Gain/Short Term Capital Loss and submitted that firstly, it needs to be understood and appreciated that whenever any Promoter is manipulating his company's share price, it is only known to him, his brokers and his crony operators. It is not in the knowledge of general investors and traders in the market. The general investors and traders observe whether the price of a particular share is continuously going up or not. In this background, the general traders in the market try to buy the shares at lower price and sell it at a higher price following the technical trend of that particular share. There might be thousands of traders in the market who would trade in such shares, some of them would be making profit in the trading of such shares while others incur heavy losses.

It was submitted that the purpose of showing bogus profit/loss on penny script is to reduce tax liability by showing bogus short-term loss in the trading of penny script so as to reduce net short term capital gain profit. The other method is by showing bogus Long Term Capital Gain on sale of penny script without paying any income tax on Long Term Capital Gain and thereby converting their black money into white money without paying any income tax. There is no other way to benefit by indulging into trading of penny stock. However, in the case of the assessee, she has neither shown any long term capital gain or any short term capital loss. The Assessee has declared short term capital gain of Rs. 12,15,740 /- on which full tax has been paid.

It was further submitted that the AO has simply relied upon the report sent by DDIT(Inv.), New Delhi without application of his own mind and our reference was drawn to findings of the Investigation Wing where it says that “as discussed above have proved that associated brokers, entry operators and the assessees had chalked out an arrangement in which the share of penny stock companies were acquired by the assessees, the share prices were rigged and then shares were sold at high price to book exempt Long Term Capital Gain and at low price to book Short Term Capital Loss or Business loss." In this regard, it was submitted that the assessee had neither declared exempt Long Term Capital Gain nor did the assessee declare Short Term Capital Loss or Business Loss. In this regard, Ld.AR drawn our reference to response submitted during the assessment proceedings wherein it was submitted that “In response to said notice, the Assessee submitted reply on 15.04.2022 stating that she is non-resident and is filling return of income regularly. Her income is basically from transactions of share trading and derivative transactions - Future and options. Further she has submitted that the trade in Innovative Tech Pack Lid as mentioned in the notice has gained short term profit to the Assessee of Rs. 12,15,739/-which has been offered for tax and tax thereon is already been paid along with return. She has attached copy of balance sheet and capital gain reports."

It was further submitted that all the share trading transactions are made through recognized stock exchange and through reputed stock brokers, namely, ICICI Securities Ltd, BP Equities Ltd and Vijan Shares and Securities. The Assessee has also paid STT and other taxes through brokers by way of settlement at the time of purchase and sale of shares. It was further submitted that in the investigation Wing's Findings, it is stated that Mr. Hemant Gupta started working on this script from 27th June, 2017 to 22nd September, 2017 whereas the assessee had purchased the shares in January and February, 2017 which were sold between July to January, 2017. Thus, it can be concluded that the shares were lying in the demat account for a maximum period of eight months. Also, the shares held by the assessee were not sold together, but it was sold in intervals and held that the assessee had no intention and has not indulged in any bogus/ fictitious transactions. It was also submitted that there was no justification to make any addition on account of trading in the shares of Innovative Tech Pack Ltd. The Income Tax Department has relied on the information received by the Investigation Wing and has not conducted own examination. However, in the present case even the Investigation Wing has mentioned clearly in its report that only those cases have to be viewed negatively where the intention is to create Long Term Capital Gain or Short Term Capital Loss or Business Loss. However, it can be clearly viewed that the assessee had no such intention since the assessee had Short Term Capital Gain and has paid taxes on the same. Therefore, by no stretch of imagination, it can be presumed that the assessee is a beneficiary where manipulation in trade by way of complex web of transaction was carried out to book bogus Long Term Capital Gain or Short Term Capital Loss.

It was accordingly submitted that all the transactions of 'Innovative Tech Pack Ltd., were carried out in the normal course of business and there was no undisclosed income. It was submitted that the assessee is aggrieved by the action of AO since the assessee has disclosed its income and has not carried any bogus transactions to avoid tax payment. Therefore, the addition of Rs. 25,95,819/- is strongly objected by the assessee, since no transactions were carried out by the assessee to book bogus Long Term Capital Gain or Short Term Capital Loss.

As far as the addition of Rs. 1,14,348/-, u/s 69C of the Act on account of expenditure of penny scrips, the Ld.AR submitted that the AO has erred in adding back an amount of Rs. 1,14,348/- on account of 3% expenditure on the sale of 39,451 shares of Rs. 38,11,558/-. The assessee has not incurred any expenditure on such sale. No evidence was provided by the AO regarding the expenditure incurred by the assessee on the sale of shares. It was merely based on assumption of AO and the AO has not independently conducted any investigation to prove such expenditure has been incurred by the Assessee.

It was further submitted that the AO has erred by charging Rs. 27,10,170/- as income taxable at special rate @60% u/s. 115BBE of the Act. From the perusal of section 115BBE of the Act, it is noted that the said section applies only when total income of the assessee includes any income referred to in section 68, 69, 69A to 69D. There is no sufficient and appropriate evidence to prove that such amount was unexplained by the assessee since all the supporting such as trade register, details of purchase and sale of shares along with summary were already provided to the AO.

It was further submitted that the AO has added Rs. 38,11,558.8/- being received on sale of Innovative Tech Pack shares u/s 68 of the Act, which deals with unexplained cash credit. However, nothing has been brought on record to suggest that Rs. 38,11,558.8/- has been received in cash. It was further submitted that there is no question of any cash transaction in stock market. All the transactions have been conducted through her bank account and the assessee has not performed a single transaction in monetary terms. Thus, the Ld.AR concluded by submitting that the assessee has not indulged in bogus/ fictitious transactions and has paid the tax liability as per the tax rates prescribed under the Act.

Per contra, the Ld.DR relied on the findings of the AO and has also drawn our reference to the observations/findings of the ld DRP, which are contained at para 5.3.3. and 5.4 of its order, which reads as under:

We have heard the rival contentions and perused the material available on record. Firstly, before going into the merits of the arguments advanced before us, we find that the AO in the draft order has referred to share purchase and sale transaction undertaken by the assessee in a scrip by name of Innovative Tech Pack Ltd in respect of which the assessee has raised objections before the Ld.DRP. However, we find that the findings and directions of the Ld.DRP as can be seen from Para 5.4 of the DRP order (supra) are in the context of another scrip by name of Kushal Ltd. and the said directions have since been followed by the AO in passing the final assessment order. There is thus a clear disconnect between the findings of the AO and that of the Ld.DRP and effectively, the objections raised by the assessee against the draft assessment order have not been disposed off by the Ld.DRP. Further, the AO has passed the final assessment order following the directions of the Ld.DRP which were not arising from the subject matter of draft assessment order and the objections so raised by the assessee bringing further complexity in the matter. In light of the same, we are constrained to remand the matter to the file of the AO to decide the same afresh as per law after providing reasonable opportunity to the assessee. All the contentions so raised before us are thus left open and not been adjudicated upon.

In the result, the appeal of the assessee is allowed for statistical purposes.