CHITRA AVDHESH MEHTA,MUMBAI vs. ITO 33 (1) (3), MUMBAI

Date of Hearing 06.05.2025 Date of Pronouncement 22.07.2025 आदेश / ORDER

PER SANDEEP GOSAIN, JM:

1. The present appeal has been filed by the assessee challenging the impugned order dt. 14.07.2023 passed u/s 250 of the Income Tax Act, 1961 (‘the Act’), by the National Faceless Appeal Centre, Delhi (NFAC) for the assessment year 2014-15.

2. The only effective ground raised in the present appeal relates to challenging the order of Ld. CIT(A) in upholding the additions made by AO u/s 68 of the Act.

3. In this regard Ld.AR appearing on behalf of the assessee reiterated the same arguments as were raised by him before the revenue authorities, and also relied upon his written submissions which is reproduced here in below:

2. During the course of assessment proceedings before the A.O., in compliance to the various queries raised regarding the Long term capital gain income, the following details were furnished.

Bank passbook. Details of Short term capital gain/loss. Details of Long Term Capital Gains. Application for transfer of physical shares to Dmat Account.

Dmat Account statement from BOI shareholding Ltd. from 01.04.2013 to 31.03.2014.

Invoices, reager account etc., ior sale of snares/ponas. (Application for transfer of physical shares to Dmat,)

A sworn affidavit of the share broker.

From the above and the chart referred to in para no.1, it would be clear that the shares were purchased in physical form during the previous year 2011-12, demated and sold through registered Broker M/s. UPS Investments during the previous year relevant to A.Y. 2014-15. Further, it would also be clear that the appellant has furnished all the requisite evidences to prove that the transactions are genuine.

4. On appeal, the learned CIT(A) upheld the A.O.'s order by relying on several decisions but without giving a chance to the appellant to deal with the same. It is this order which is in appeal before the Hon'ble Tribunal.

5. In this regard to the appeal, it has to be submitted that as stated earlier, the shares were purchased in the earlier year from off market sources, demated and thereafter, sold after holding the same for a period of more than a year. A perusal of the assessment order would make it clear that the A.O. has not disputed the nature of assets, cost of acquisition, duration of holding of shares, the fact of sale of shares through the Bombay Stock Exchange, etc. However, the A.O. holds the transactions as non-genuine only for the reason that the price of the scrip has moved up phenomenally and this could not happen unless the movement was meticulously planned and created Needless to mention that the appellant has not and could not have played any part/role to move the price of the scrip.

6. In addition, it may also have to be submitted that the provisions of section 68 are deeming provisions and are applicable only in the circumstances where a sum is found credited in the books maintained by the assessee for any previous year and assessee offers no explanation about the nature and the source thereof or the explanation offered by him is not, in the opinion of the A.Ο., satisfactory, the sum so credited may be charged to income tax. In the instant case, the assesse has explained that the sum was credited in her bank account and was on account of sale of shares on the floor of the Bombay Stock Exchange and the consideration was received from the Share broker Sri.Kamlesh V. Seth Proprietor of UPS Investments (registered with the Bombay Stock Exchange). Thus since the genuineness of the transaction has been established, the provisions of S.68 would not be applicable. Without prejudice, in the present case, the assessee does not maintain any books of accounts and is under no obligation to maintain books of account, the entire sale consideration amount has been credited to her bank account directly and hence, the question of invoking the provisions of section 68 of the act does not arise at all.

In this connection, the Hon'ble Tribunal's attention is invited to the Hon'ble Bombay High Court's decision in the case of Bhaichand N. Gandhi 141 ITR 67 (Bom) wherein it has been held that pass book supplied by the bank could not be regarded as book of the assessee. A copy of the decision is available at page no. 1 to 4 of the case law paper book.

This decision has been followed by the Hon'ble Tribunal in the case of Smt.Babbal Bhatia V. ITO, & 5432/Del/2011. A copy of the decision is available at page no.5 to 18 of the case law paper book.

In addition to the above, the following decisions may also be considered:

Radheshyam Khandelwal & ors. (ITA Nos. 7,8,29,30, & 113/Ind/2019) In these group of cases the Hon'ble Tribunal dealt with the capital gains income arising out of transfer of shares of Turbo Tech aris Engineering Ltd. and held in favour of the assesse A copy of the decision is available at page no. 19 to 50 of the case law paper book.

Farzad Sheriar Jehani V. ITO, Mumbai, (ITA No. 2065/M/2023).

In this case the Hon'ble Tribunal was dealing with the capital gains income arising out of transfer of shares of Kappac Pharma Ltd) and held that "We can only presume that the assessee is one of the beneficiaries in these transactions merely an unsuspecting investor, who has entered in investment fray to make quick profit. While holding so, the Hon'ble Tribunal also brought in a reference to the Hon'ble Bombay High Court's decision rendered in the case of Pr. CIT V. Ziauddin A Siddique I.T. Appeal No. 2012 of 2017 dated 04.03.2022. A copy of both the Tribunal as well as Bombay High Court's decision are available at page No.51 to 82 & 83 to 98, respectively of the case law paper book.

CIT V. Shyam R. Pawar (54 taxmann.com 108) (Bom)

In this case, it has been held that where DMAT account and contract note showed details of share transaction and assessing officer had not proved the said transaction as bogus, capital gains earned on said transaction could not be treated as unaccounted income u/s 68 of the act. A copy of the decision is available at page no.99 to 104 of the case law paper book. iv. The Pr. C.I.T. V. Prem Pal Gandhi 94 taxmann.com156 (P & H) In this case, it was held that though the appreciation of value share sold by assessee was very high, in view of the fact that the same was traded in NSE and the receipt of sales routed through Bank and the company whose shares were sold was not a closely held company, no addition could be made as undisclosed income. A copy of the decision is available at page no. 105 to 108 of the case law paper book. V. Andaman Timber Industries (2015) 281 CTR (SC) 241 Held that not allowing the assesse to cross examine the witness by the adjudicating authority though the statements of those witnesses were made the basis of the impugned order is a serious flaw which makes the order nullity in as much as it amounted to violation of principles of natural justice because of which the assesse was adversely affected. A copy of the decision is available at page no. 109 to 114 of the case law paper book.

4. On the contrary, Ld. DR relied upon the orders passed by the revenue authorities and also submitted the decision of the coordinate benches in the case of Manvi Khandelwal Vs. ITO in 3212/DEL/2018 and ACIT Vs. Arihant Kumar Jain in ITA No. 5342/DEL/2018.

5. I have heard the arguments of both the counsels, perused the material placed on record, judgements cited before me and also the orders passed by the revenue authorities. From the records, I noticed that the assessee is an individual who has earned income from Professional fee receipts, Short term Capital gains and Income from other sources and has filed her return of income on 26.07.2014 declaring her total income at Rs.4,54,940/-. She has also claimed an exemption u/s 10(38) of the Act of Rs.84,79, 100/- being the Long-term capital gains on listed securities. The case was selected for scrutiny by CASS. Consequently, a notice u/s 143(2) was issued on 18.09.2015 and served to the assessee. Subsequently, a notice u/s 142(1) r.w.s 129 was issued on 29.04.2016 calling for details. Also, the quantum of huge Long-term Capital Gains was found suspicious and a detailed investigation of this issue was undertaken. It was observed by the AO that the assessee has sold all the 500 shares of M/s Turbotech Engineering Ltd from 20.06.2013 to 08.07.2013 i.e. when the price trend was increasing and that the assessee has not sold the shares in the downward trend that is from 24.07.2013 and thereon.

6. Similarly, all the 9000 shares of M/s Kappac Pharma Ltd. from 24.02.2014 to 28.03.2014 i.e. when the price trend was increasing and that the assessee has not sold the sold the shares in the downward trend i.e. from 25.04.2014 and thereon. Therefore, the AO opined that a deeper study was needed to ascertain whether the transactions were genuine investment transactions or sham ones and colourable device only to convert the unaccounted cash into tax exempt income. Also, the AO has observed that the assessee has purchased the scrip Turbo Tech Engg. Ltd. on 12.12.2011 and was sold in the month of June 2013 and the scrip Kappac Pharma Ltd. was purchased on 09.10.2012 and sold in February and March 2014 and that the purchase of both the shares was in cash which was not fool proof. However, the AO has pointed out that the demat request for the scrip Turbotech Engineering Ltd. and the scrip Kappac Pharma Ltd. was sent on 27.05.2013 and 27.12.2013 respectively and that the requisition of demat only on these dates defeat the fact that the shares were purchased way back on 12.12.2011 and 09.10.2012 particularly when the shares were purchased in cash. The AO had made further enquiries and concluded that the price movements and sale, purchase transactions made by the assessee were not genuine and were the result of meticulously planned circular trading and the entities involved in these were part of this exercise in an effort to create documentary evidences for a pre- planned scheme for converting unaccounted money into tax exempt income and therefore passed his assessment order u/s 143(3) assessing the amount of Rs.84,79,100/- which was introduced/credited by the assessee out of the above mentioned purported share sale receipts during the FY 2013-14 (AY 2014-15) in his Capital Account as her income being the unexplained cash credit u/s 68 of the Act and has assessed her total income at Rs.89,34,040/-, the said additions were also upheld by CITA

7. Although it was argued by Ld. AR, that the coordinate bench of ITAT has already dealt with the same scripts and has decided in favour of the assessee in the case of Farzad Sheriar Vs ITO in wherein it was held as under:

16. Considered the rival submissions and material placed on record, we observe that the assessee is not the regular investor and had specifically made the investment in the scrip under consideration. It is fact on record that the financials of the company are not commensurate with the purchase and sale price in the market. The assessee has purchased the shares from open market, D-mated the scrips and subsequently sold the same in the stock exchange. It clearly raises several doubt on the purchase and sales transactions recorded in this case. However, there is no discrepancies in the documents filed by the assessee claiming the deductions u/s 10(38) of the Act. At the same time, even though all the characteristics of the penny stock exists in the present case, still the revenue has not brought on record any materials linking the assessee in any dubious transactions relating to entry, price rigging or exit providers. Even in the SEBI report, there is no mention or reference to the involvement of the assessee. We can only presume that the assessee is one of the beneficiary in this transactions merely as unsuspecting investor, who has entered in investment fray to make quick profit. Even the assessing officer has applied the presumptions and concept of human probabilities to make the additions without their being any material against the assessee. We observe that the Hon'ble Bombay High Court in the case of Pr. CIT v. Ziauddin A Siddique in Income Tax Appeal No. 2012 of 2017 dated 04.03.2022 held as under: - "1. The following question of law is proposed:

Whether on the facts and in the circumstances of the case and in law, the Hon'ble Tribunal was justified in deleting the addition of Rs.1,03,33,925/- made by AO u/s 68 of the I.T. Act, 1961, ignoring the fact that the shares were bought/acquired from off market sources and thereafter the same was demated and registered in stock exchange and increase in share price of Ramkrishna Fincap Ltd. is not supported by the financials and, therefore, the amount of LTCG of Rs. 1,03,33,925/- claimed by the assessee is nothing but unaccounted income which was rightly added u/s 68 of the I. T. Act, 1961?

3. Therefore we find nothing perverse in the order of the Tribunal.

4. Mr. Walve placed reliance on a judgment of the Apex Court in Principal Commissioner of Income-tax (Central)-1 vs. NRA Iron & Steel (P.) Ltd. but that does not help the revenue in as much as the facts in that case were entirely different.

5. In our view, the Tribunal has not committed any perversity or applied incorrect principles to the given facts and when the facts and circumstances are properly analysed and correct test is applied to decide the issue at hand, then, we do not think that question as pressed raises any substantial question of law.

6. The appeal is devoid of merits and it is dismissed with no order as to costs.

7. Further, the Hon'ble Delhi High Court in the case of Pr. CIT v. Smt Krishna Devi in ITA 125/2020 dated 15.01.2021 held as under: - "8. Mr. Hossain argues that in cases relating to LTCG in penny stocks, there may not be any direct evidence in the hands of the Revenue to establish that the investment made in such companies was an accommodation entry. Thus the Court should take the aspect of human probabilities into consideration that no prudent investor would invest in penny scrips. Considering the fact that the financials of these companies do not support the gains made by these companies in the stock exchange, as well as the fact that despite the notices issued by the AO, there was no evidence forthcoming to sustain the credibility of these companies, he argues that it can be safely concluded that the investments made by the present Respondents were not genuine. He submits that the AO made sufficient independent enquiry and analysis to test the veracity of the claims of the Respondent and after objective examination of the facts and documents, the conclusion arrived at by the AO in respect of the transaction in question, ought not to have been interfered with. In support of his submission, Mr. Hossain relies upon the judgment of this Court in Suman Poddar v. ITO, [2020] 423 ITR 480 (Delhi), and of the Supreme Court in Sumati Dayal v. CIT, (1995) Supp. (2) SCC 453.

9. Mr. Hossain further argues that the learned ITAT has erred in holding that the AO did not consider examining the brokers of the Respondent. He asserts that this holding is contrary to the findings of the AO. As a matter of fact, the demat account statement of the Respondent was called for from the broker M/s SMC Global Securities Ltd under Section 133(6) of the Act, on perusal whereof it was found that the Respondent was not a regular investor in penny scrips.

11. On a perusal of the record, it is easily discernible that in the instant case, the AO had proceeded predominantly on the basis of the analysis of the financials of M/s Gold Line International Finvest Limited. His conclusion and findings against the Respondent are chiefly on the strength of the astounding 4849.2% jump in share prices of the aforesaid company within a span of two years, which is not supported by the financials. On an analysis of the data obtained from the websites, the AO observes that the quantum leap in the share price is not justified; the trade pattern of the aforesaid company did not move along with the sensex; and the financials of the company did not show any reason for the extraordinary performance of its stock. We have nothing adverse to comment on the above analysis, but are concerned with the axiomatic conclusion drawn by the AO that the Respondent had entered into an agreement to convert unaccounted money by claiming fictitious LTCG, which is exempt under Section 10(38), in a pre-planned manner to evade taxes. The AO extensively relied upon the search and survey operations conducted by the Investigation Wing of the Income Tax Department in Kolkata, Delhi, Mumbai and Ahmedabad on penny stocks, which sets out the modus operandi adopted in the business of providing entries of bogus LTCG. However, the reliance placed on the report, without further corroboration on the basis of cogent material, does not justify his conclusion that the transaction is bogus, sham and nothing other than a racket of accommodation entries. We do notice that the AO made an attempt to delve into the question of infusion of Respondent's unaccounted money, but he did not dig deeper. Notices issued under Sections 133(6)/131 of the Act were issued to M/s Gold Line International Finvest Limited, but nothing emerged from this effort. The payment for the shares in question was made by Sh. Salasar Trading Company. Notice was issued to this entity as well, but when the notices were returned unserved, the AO did not take the matter any further. He thereafter simply proceeded on the basis of the financials of the company to come to the conclusion that the transactions were accommodation entries, and thus, fictitious. The conclusion drawn by the AO, that there was an agreement to convert unaccounted money by taking fictitious LTCG in a pre-planned manner, is therefore entirely unsupported by any material on record. This finding is thus purely an assumption based on conjecture made by the AO. This flawed approach forms the reason for the learned ITAT to interfere with the findings of the lower tax authorities. The learned ITAT after considering the entire conspectus of case and the evidence brought on record, held that the Respondent had successfully discharged the initial onus cast upon it under the provisions of Section 68 of the Act. It is recorded that "There is no dispute that the shares of the two companies were purchased online, the payments have been made through banking channel, and the shares were dematerialized and the sales have been routed from de-mat account and the consideration has been received through banking channels." The above noted factors, including the deficient enquiry conducted by the AO and the lack of any independent source or evidence to show that there was an agreement between the Respondent and any other party, prevailed upon the ITAT to take a different view. Before us, Mr. Hossain has not been able to point out any evidence whatsoever to allege that money changed hands between the Respondent and the broker or any other person, or further that some person provided the entry to convert unaccounted money for getting benefit of LTCG, as alleged. In the absence of any such material that could support the case put forth by the Appellant, the additions cannot be sustained.

12. Mr. Hossain's submissions relating to the startling spike in the share price and other factors may be enough to show circumstances that might create suspicion; however the Court has to decide an issue on the basis of evidence and proof, and not on suspicion alone. The theory of human behavior and preponderance of probabilities cannot be cited as a basis to turn a blind eye to the evidence produced by the Respondent. With regard to the claim that observations made by the CIT(A) were in conflict with the Impugned Order, we may only note that the said observations are general in nature and later in the order, the CIT(A) itself notes that the broker did not respond to the notices. Be that as it may, the CIT(A) has only approved the order of the AO, following the same reasoning, and relying upon the report of the Investigation Wing. Lastly, reliance placed by the Revenue on Suman Poddar v. ITO (supra) and Sumati Dayal v. CIT (supra) is of no assistance. Upon examining the judgment of Suman Poddar (supra) at length, we find that the decision therein was arrived at in light of the peculiar facts and circumstances demonstrated before the ITAT and the Court, such as, inter alia, lack of evidence produced by the Assessee therein to show actual sale of shares in that case. On such basis, the ITAT had returned the finding of fact against the Assessee, holding that the genuineness of share transaction was not established by him. However, this is quite different from the factual matrix at hand. Similarly, the case of Sumati Dayal v. CIT (supra) too turns ITA 125/2020 and connected matters Page 10 of 10 on its own specific facts. The above-stated cases, thus, are of no assistance to the case sought to be canvassed by the Revenue.

13. The learned ITAT, being the last fact-finding authority, on the basis of the evidence brought on record, has rightly come to the conclusion that the lower tax authorities are not able to sustain the addition without any cogent material on record. We thus find no perversity in the Impugned Order.

14. In this view of the matter, no question of law, much less a substantial question of law arises for our consideration.

15. Accordingly, the present appeals are dismissed."

18. Therefore, we respectfully follow the ratio of the above decisions and inclined to allow the grounds raised by the assessee. Accordingly the ground raised by the assessee is allowed.

19. In the result, appeal filed by the assessee is allowed.

15. We have heard the rival submissions made by the respective parties. We have also perused the relevant materials available on record. It appears from the order passed by the Ld. A.O that he has been guided by the report of the Investigation team in respect of bogus transactions of capital gain. However, nothing has been brought on record to show that the persons investigated, including entry operators or stock brokers, have named that the appellant was in collusion with them. No finding specifically against the appellant has been made in the Investigation team the report whereof is available before us and this cannot be any ground for holding the appellant guilty or linked to the wrong facts of the persons investigated.

16. In the instant case, the appellant is not connected with M/s Turbo Tech Engineering Ltd. or their promoters, directors or any other person who exercised any control over M/s Turbo tech Engineering Ltd or any so-called entry operator. As a matter of fact, no element is available showing that the appellant has indulged in any such questionable activity or has been part of the modus operandi as alleged by the Ld. A.O.

17. It is further apparent from Page 36 of the Paper Book filed before us that the appellant earned Long Term Capital Gain in ICI CI Bank, transactions whereof has not been doubted.

18. No independent Enquiry from concerned parties to transaction has also been made by the Ld. A.O as it appears from the records.

19. We find that this scrips of M/s Turbo Tech Engineering Pvt. Ltd has been held to be any penny stock scrips and particularly on the basis of that scrips the revenue has proceeded against the assessee and ultimately disallowed the claim made u/s 10(38) towards Long Term Capital Gain. However in this aspect we have considered the judgment passed by the Hon'ble ITAT, Delhi Bench in the case of Swati Luthra Vs ITO reported in (2020) 115 taxmann.com 167 (Delhi- Trib) where the scrips of this particular M/s. Turbo Tech Engineering Ltd. was the actual subject matter. The relevant portion thereof is as follows:-

Details of long term capital gain claimed as exempt under section 10(38) on account of sale of scrip of M/s Turbotech Engineering Ltd.

7. Before us, Ld. Counsel for the assessee, Mr. Salil Aggarwal submitted that the assessee has filed before the AO and CIT(A) various documentary evidences in order to substantiate the genuineness of the LTCG so declared during the impugned 9 assessment year and no defect, error or any flaw in these evidences has been pointed by the AO as well the Commissioner of Income Tax (Appeals) and thus, he contended that the entire addition needs to be deleted on the ground of lack of investigation/ enquiry and also due to failure to provide any fallacy in the documentary evidences so submitted by assessee and on the aforesaid proposition reliance was placed on the judgments of jurisdictional High Court in the case of CIT vs Fair Finvest Ltd. reported in 357 ITR 147 and PCIT vs Laxman Industrial Resources Ltd. reported in 397 ITR 106.The said documents so submitted by assessee are tabulated as under:

For scrip of M/s Turbotech Engineering Ltd. Share Purchase Documents Pg 15 to 17 of PB Share Certificate Pg 18 of PB Share Transfer Form Pg 19 to 21 of PB Contract Note issued by DP Pg 24 to 27 of PB Assessee's bank statement Pg 28 to 29 of PB DP statement Pg 30 to 32 of PB For scrip of M/s Esteem Bio Organic Food Processing Ltd. IPO form Pg 33 to 40 of PB Allotment Advice along with share price Pg 41 to 42 of PB Photocopy of Cheque paid Pg 43 of PB 10 Contract Note Pg 45 to 47 of PB Bank statement of assessee Pg 48 to 52 of PB DP statement Pg 53 of PB

(i) KishinchandChellaram vs. CIT. [1980] 125 ITR 713 (SC) (ii) CIT vs Ashwani Gupta. 322 ITR 396 (Del) (iii) Andaman Timber Industries vs CCE (SC) reported in 127 DTR 241.

9. Ld. Counsel further relied on various case laws on the proposition that once the shares are sold through stock exchange and sufficient documentary evidences have been produced in order to support the genuineness of the LTCG claimed as exempt under section 10(38), hence, addition cannot be made in the hands of assessee without rebutting the documentary evidences and without conducting investigation to discard the said documents. The case laws so relied by assessee are tabulated below:

Particulars Copy of judgment of Hon'ble Punjab and Haryana High Court in the case of PCIT vs Prem Pal Gandhi 12 in dated 18.01.2018.

Copy of judgment of Hon'ble Punjab and Haryana High Court in the case of PCIT vs Hitesh Gandhi in dated 16.02.2017.

Copy of judgment of Hon'ble Bombay High Court in the case of CIT v. Shyam R. Pawar reported in 229 Taxman 256 dated 10.12.2014.

Copy of judgment of Hon'ble Bombay High Court in the case of CIT CIT v. Smt. Jamnadevi Agrawal reported in 328 ITR 656 dated 23.09.2010 Copy of judgment of Hon'ble Gujarat High Court in the case of CIT vs. Maheshchandra G. Vakil reported in 220 Taxman 166 (Magz) dated 25.09.2012.

Copy of judgment of Hon'ble Rajasthan High Court in the case of CIT vs. Smt Sumitra Devi reported in 229 Taxman 67 dated 24.02.2014.

Copy of judgment of Hon'ble Allahabad High Court in the case of CIT vs. Anirudh Narayan Agrawal reported in 219 Taxman 126 dated 16.01.2013.

Copy of order of Hon'ble ITAT Raipur in the case of DCIT vs Rakesh Saraogi & Sons (HUF) in to 99/RPR/2014 dated 16.04.2018.

Copy of order of Hon'ble ITAT Mumbai in the case of ITO vs M/s Arvind Kumar Jain (HUF) in dated 18.09.2017.

Copy of order of Hon'ble ITAT Jaipur in the case of Sh. Pramod Jain vs ITO in dated 31.01.2018. Copy of order of Hon'ble ITAT Delhi in the case of Shobhit Goel (HUF) in dated 13 25.09.2018.

Copy of order of Hon'ble ITAT Delhi in the case of Smt. Sunita Khemka vs ACIT in dated 02.08.2018.

Copy of order of Hon'ble ITAT Delhi in the case of Chander Prakash vs ITO in dated 12.03.2018.

Copy of order of Hon'ble ITAT Kolkata in the case of Prakash Chand Bhutoria vs ITO in dated 27.06.2018.

Copy of order of Hon'ble ITAT Delhi in the case of Mukta Gupta vs ITOin dated 26.11.2018.

Copy of order of Hon'ble ITAT Kolkata in the case of Mahavir Jhanwar vs ITO in dated 01.02.2019.

Copy of order of Hon'ble ITAT Delhi in the case of Sh. Rajev Agarwal & sons vs ITO in dated 21.01.2019.

Copy of order of Hon'ble ITAT Delhi in the case of Sanjeev Jain vs ITO in dated 15.01.2019.

Copy of order of Hon'ble ITAT Delhi in the case of Smt. Jyoti Gupta vs ITO in dated 06.11.2018.

Copy of order of Hon'ble ITAT Delhi in the case of Vidhi Malhotra vs ITO in dated 20.12.2018.

Copy of order of Hon'ble ITAT Delhi in the case of Smt. Simi Verma vs ITO in dated 06.11.2018.

Copy of order of Hon'ble ITAT Delhi in the case of Smt. Shikha Dhawan vs ITO in dated 27.06.2018.

Copy of order of Hon'ble ITAT Delhi in the case of Sh. Amitabh Bansal vs ITO in dated 11.02.2019.

Copy of order of Hon'ble ITAT Kolkata in the case of Ms. Swati Mall vs ITO in Kol/2017 dated 07.12.2018.

10. On the other hand, the DR relied on the orders of the lower authorities and filed a written note dated 14.05.2019, which contained list of case laws to be relied by Revenue, wherein, reliance was placed on judgment of Hon'ble High Court of Delhi in the case of Udit Kalra vs ITO in ITA No. 220/2019.

11. In rejoinder, the ld Counsel submitted his arguments, which can be summarized as below:

(i) That the ld DR has failed to rebut the case laws so cited by appellant and also, the SEBI orders, wherein, the companies M/s Esteem Bio and M/s Turbotech have been absolved and no wrong doings have been found in the working of said companies.

(ii) That further, the reliance placed by ld DR on the order of Udit Kalra vs ITO (Delhi High Court) in is again misplaced, as first of all no question of law was formulated by Hon'ble High Court of Delhi in the said case and thus, the same is nly dismissal in limine and on this proposition reliance is placed on the judgment of Hon'ble 15 Supreme Court in the case of CIT vs Rashtradoot (HUF) reported in 412 ITR 17.

(iii) That further, even on facts, the said order in the case of Udit Kalra vs ITO is distinguishable. As, the interim order of SEBI in the case of both the companies have been cooled down by subsequent orders of SEBI. Thus, the case of Udit Kalra vs ITO relied by ld. DR is clearly distinguishable on facts and is not applicable to the facts of assessee. Rather the case laws so relied by assessee are directly applicable to the facts of assessee which have not been rebutted by ld DR.

According to us, not allowing the assessee to cross-examine the witnesses by the Adjudicating Authority though the statements of those witnesses were made the basis of the impugned order is a serious flaw which makes the order nullity inasmuch as it amounted to violation of principles of natural justice because of which the assessee was adversely affected. It is to be borne in mind that the order of the Commissioner was based upon the statements given by the aforesaid two witnesses. Even when the assessee disputed the correctness of the statements and wanted to cross examine, the Adjudicating Authority did not grant this opportunity to the assessee. It would be pertinent to note that in the impugned order passed by the Adjudicating Authority he has specifically mentioned that such an opportunity was sought by the assessee. However, no such opportunity was granted and the aforesaid plea is not even dealt with by the Adjudicating Authority. As far as the Tribunal is concerned, we find that rejection of this plea is totally untenable. The Tribunal has simply stated that cross-examination of the said dealers could not have brought out any material which would not be in possession of the appellant themselves to explain as to why their ex-factory prices remain static. It was not for the Tribunal to have guess work as to for what purposes the appellant wanted to cross- examine those dealers and what As mentioned above, the appellant had contested the truthfulness of the statements of these two witnesses and 18 wanted to discredit their testimony for which purpose it wanted to avail the opportunity of cross-examination. That apart, the Adjudicating Authority simply relied upon the price list as maintained at the depot to determine the price for the purpose of levy of excise duty. Whether the goods were, in fact, sold to the said dealers/witnesses at the price which is mentioned in the price list itself could be the subject matter of cross- examination. Therefore, it was not for the Adjudicating Authority to presuppose as to what could be the subject matter of the cross-examination and make the remarks as mentioned above. We may also point out that on an earlier occasion when the matter came before this Court in Civil Appeal No. 2216 of 2000, order dated 17.03.2005 was passed remitting the case back to the Tribunal with the directions to decide the appeal on merits giving its reasons for accepting or rejecting the submissions. In view the above, we are of the opinion that if the testimony of these two witnesses is discredited, there was no material with the Department on the basis of which it could justify its action, as the statement of the aforesaid two witnesses was the only basis of issuing the Show Cause Notice We, thus, set aside the impugned order as passed by the Tribunal and allow this appeal.

14. That the ld DR during the course of hearing placed heavy reliance on judgment of Hon'ble High Court of Delhi in the case of Udit Kalra vs ITO in ITA No. 220/2019. Relevant extracts of said judgment are extracted as below:

"The assessee is aggrieved by the concurrent findings of the tax authorities including the lower appellate authorities rejecting its claim for a long term capital gain reported by it, to the tune of Rs. 13,33,956/- and Rs.14,34,501/- in respect of 4,000 shares of M/s Kappac Pharma Ltd. The assessee held those shares for approximately 19 months; the acquisition price was Rs.12/- per share whereas the market price of the shares at the time of their sale, was Rs.720/-. It is contended that the assessee was not granted fair opportunity.

Mr. Rajesh Mahna, learned counsel appearing for the assessee relied upon the orders of the co-ordinate Bench of the tribunal, in respect of the same company i.e. M/s Kappac Pharma Ltd., and pointed out that the tax authority's approach in this case was entirely erroneous and inconsistent.

The main thrust of the assessee's argument is that he was denied the right to cross-examination of the two individuals whose statements led to the inquiry and ultimate disallowance of the long term capital gain claim in the returns which are the subject matter of the present appeal.

This court has considered the submissions of the parties. Aside from the fact that the findings in this case are entirely concurrent - A.O., CIT(A) and the ITAT have all consistently rendered adverse findings what is intriguing is that the company (M/s Kappac Pharma Ltd.) had meagre resources and in fact reported consistent losses. In these circumstances, the astronomical growth of the value of company's shares naturally excited the suspicions of the Revenue. The company was even directed to be delisted from the stock exchange. Having regard to these circumstances and principally on the ground that the findings are entirely of fact, this court is of the opinion that no substantial question of law arises in the present appeal.

This appeal is accordingly dismissed."

16. We further find that Ld. AO has also mentioned about some order of SEBI. This order also was never confronted to the appellant during assessment proceedings. Moreover, the said order seems to be passed in year 2015, whereas the appellant had purchased the shares in year 2011 and 2013 and sold them in year 2014. It was evident from this document only that no action has been taken by the SEBI against the company during the period when the appellant holds the shares. Thus, even otherwise, we find that the order of SEBI so relied by ld. AO and CIT (A) is not applicable for the transactions under consideration.

In any case as stated above, the SEBI in its subsequent decision has absolved most of the companies including the companies whose scrips are under suspicion, as they were nor found to be rigging the price. This fact alone vitiates the case of revenue.

20. We have further considered the judgement passed in the matter of Udit Kalra (Supra) as relied upon by the Ld. DR before us in support of the case made out by the Revenue. It appears that the challenges made in the appeal before the Hon'ble Delhi High Court in that case stood dismissed in limine; no question of law was found to be formulated. Apart from that the said judgment is distinguishable. In that particular case the scrips of the company were delisted on stock exchange, whereas, in the instant case suspension order in trading in securities of M/s Turbo Tech Engineering Ltd has ultimately been lifted by the adjudication order dated 25.11.2014 wherein SEBI has found no irregularities in the trading of such scrips; neither it has found its Directors involved in any price rigging. Such facts has categorically been mentioned in the judgement of Swati Luthra (supra). Therefore, both factually and materially it is distinguishable from the instant case before us. It is relevant to mention that the orders passed by the SEBI are only of the year 2015 and not during that material point of time i.e. the period between 22.11.2011 and 23.05.2013 when the appellant was holding the shares. Moreso, the subsequent orders passed by the SEBI absolving some companies including M/s Turbo Tech Engineering Pvt. Ltd. whose scribes were under suspicion in the absence of any finding of rigging of price diluted the issue.

21. The objection relating to the shares being dematerialised after purchase is also having no consequence. From the series of documents it appears that the prescribed procedure had been followed by the assessee from the stage of purchase till the shares are dematted or until sale of the same. Merely because the shares were dematted at a later stage no adverse inference could be drawn against the assessee. In fact there is hardly any chance to doubt or suspect that the transactions in purchase or sale are not genuine. These identical facts were also available in the case of Swati Luthra (Supra). In the instant case the entire transaction was carried out through the Demat account and banking channel upon which STT has been paid by the assessee before us. In order to hold the transaction is bogus and / or ingenuine, the Assessing Officer is required to bring in cogent/clinching evidence to prove the same. It is pertinent to mention that no observation is forthcoming from the orders passed by the revenue pointing out any material defect in the procedure followed by the assessee in such purchase and sale of the shares in question. Neither any cogent/corroborative evidence is brought on record by the revenue to hold otherwise and therefore, there is no doubt that the Assessing Officer has merely proceeded to arrive at his conclusion that the transaction being bogus based only on mere surmise and conjecture.

22. Thus, taking into consideration the entire aspect of the matter in the absence of any independent enquiry made by the Ld. A.O as already observed by us respectfully relying upon the judgment passed by Hon'ble Delhi Bench in the case of Swati Luthra Vs ITO, Ward 51(5), Delhi (Supra) on the identical facts keeping in view of the orders passed by SEBI, we do not hesitate to observe that holding the said M/s Turbo Tech Engineering Ltd as a penny stock company by the authorities below without any corroborative evidence is uncalled for and unjustified. Such action is erroneous arbitrary whimsical and suffers from the principle of surmise and conjecture. Thus, the disallowance of the claim made by the assessee towards the Long Term Capital Gain to the tune of Rs.23,25,000/- in our humble opinion is bad in law and liable to be quashed. We order accordingly. Consequentially the addition of 3% of brokerage to the tune of Rs.69,750/-is also of no basis. The said addition made by the Learned AO is only on the basis of presumption. Thus, the said addition on the alleged payment of commission @3% is also without any merit and thus deleted. Assessee's appeal is, therefore, allowed. 8. Whereas on the contrary Ld.DR while placing reliance upon the orders of the revenue authorities also relied upon the decision in the case of Manvi Khandelwal and Arihant Kumar Jain, (supra).

10. The AO while passing the order of assessment has mentioned that assessment order had clearly brought out the rise and fall in the prices of the impugned stock are artificial and does not commensurate with the normal market. The AO had also summoned the assessee and had taken her statement on oath. From the statement it is clear that the assessee takes shelter by saying that she has taken the advice of the expert/ broker. However, it will not come to the aid of the assessee, since it is not the experts who has indulged in the transaction but it is the assessee. The papers submitted by the assessee in pursuance of the notice issued, cannot be construed as an evidence to establish the genuinity of the transaction. The transactions are unnatural, suspicious and the banking documents are self-serving. Besides, nearly because the transactions were done through the banking channels cannot validate the same and the burden of the proof is with the assessee to prove the genuinity of the claim. The documents relied on by the assessee should pass the test of normal behaviour of the assessee in the course of business, preponderance of probability and surrounding circumstances and if they do not, then the addition is justified. Further, as per the principle laid down in the Sumati Dayal vs. CIT 1995, 80 taxmann 89 (SC), the true nature of the transaction can be ascertained from the surrounding circumstances and proof beyond reasonable doubt has no applicability in determination of matters under taxing statues. Further, the payment through banks, transactions through stock exchanges and other features are only apparent features and the real factors are manipulated. Hence, the transactions form under the realm of suspicious and dubious transactions, more particularly, when the assessee has not furnished cogent evidences to explain how the shares in an unknown company jumped up in no time and such fantastic price was not possible when there was no economic or financial basis to justify the price rise.

12. The decisions relied upon by the assessee are not applicable as in none of the cases the financial health of the companies, whose shares have been sold by the assessee have been analyzed in depth, whereas in the decisions of the coordinate bench of ITAT in the case of Manvi Khandelwal (supra) the same script of same assessment year has been dealt in detail and the operative portion of the order of the coordinate bench of ITAT is contained in para 14 to 27 and the same is reproduced here in below:

14. We have gone through the record in the light of the submissions made on either side. It is an undisputed fact that the assessee purchased the shares of M/s Kappac Pharma Ltd on 25.6.2012 off-line and by making cash payment at the rate of Rs. 11 per-share through one M/s Vishal Reality Management Ltd by making a total payment of Rs.1,32,000/-for acquiring 12,000 equity shares. It is also not in dispute that the assessee sold these 12,000 shares of M/s Kappac Pharma Ltd at Rs.750/-for a consideration of Rs.83,06,907/-through Bombay stock exchange within a period just over 12 months to realise a return of approximately 6300%. It is only this transaction of realising long term capital gains that triggered the selection of case for scrutiny under CASS for the reason of, suspicious Long Term Capital Gain (LTCG) on sale of 9 shares (inputs from investigation wing)”. On this event, being triggered, learned Assessing Officer looked into the facts involved in this matter.

15. Learned Assessing Officer verified the trading activity or investment in shares of the assessee in the shares of listed companies and also the financials of M/s Kappac Pharma Ltd and also the trading history of the shares of M/s Kappac Pharma Ltd. Learned Assessing Officer also verified the trade data pertaining to the exit providers in respect of the M/s Kappac Pharma Ltd to the assessee. On a careful analysis of all this material, then the assessing officer proceeded to call out the modus operandi adopted by the assessee which is akin to the modus operandi of bogus LTCG shares as is indicated by the Director of Investigations, Kolkata who carried out a countrywide investigation to under the organised racket of generating bogus entries of Long Term Capital Gain (LTCG) which is exempt from tax. On a comparison of the facts and circumstances involved in these matters, learned Assessing Officer reached the conclusion that the modus operandi adopted by the operators was to make the beneficiaries by some shares of predetermined penny stock company controlled by them and the modus operandi adopted by the assessee is fitting in the order of the things. Learned Assessing Officer therefore reached a conclusion that the transaction of deriving Long Term Capital Gain (LTCG)’s by the assessee is a bogus one.

16. It is pertinent to note that the assessee does not dispute any of the facts stated in the immediately preceding paragraph. It remains an admitted fact that having purchased 12,000 shares of M/s Kappac Pharma Ltd at Rs. 11/-share, the assessee sold the same at Rs.750/-per 10 share within a span of 12 months and realised the capital gains to the tune of Rs.83,06,907/-and precisely this event triggered the suspicion to the Revenue authorities prompting them to conduct a deeper scrutiny of the transaction. It is not as though the learned Assessing Officer jumped to any conclusion merely by referring to some report of the investigation wing of income tax Department at Kolkata which carried out a countrywide investigation to under the organised racket of generating bogus entries of Long Term Capital Gain (LTCG) which is exempt from tax.

17. Assessment order clearly shows that the learned Assessing Officer examined the return of income and found that it does not show substantial trading activity or investment in shares of listed shares and the purchase of shares in a huge quantity was made when the company had no proven financial results which were an indicator to the future events. As a matter of fact, learned Assessing Officer found that the assessee, though a novice in share market without any substantial trade transaction in the earlier years or in the subsequent years, that too without finding the financial results of M/s Kappac Pharma Ltd are so splendid to inspire the assessee to believe that there is a chance of lucrative gains at the stage of purchase of such shares, invested the money to the tune of Rs.1,32,000/-. Naturally this fact triggered suspicion in the mind of the learned Assessing Officer, causing him to enquire into the financials of M/s Kappac Pharma Ltd.

18. Assessment order further clearly indicates that the learned Assessing Officer delved deeper into the financials of M/s Kappac Pharma Ltd for the financial years 2009-10 to 2013-14 and found that this company had constantly been incurring losses. From the annual reports 11 of this company, learned Assessing Officer deduced that the assessee had purchased the shares of M/s Kappac Pharma Ltd, even though M/s Kappac Pharma Ltd had incurred losses consistently, and, therefore, strongly indicating that the purchase of these shares is a predetermined action leading to subsequent pat to acquire bogus LTCG. The findings of the learned Assessing Officer are amply corroborated by the figures in respect of the increase of share and trading volumes of M/s Kappac Pharma Ltd also Balance Sheet figures for all these years.

19. Learned Assessing Officer further take note of the fact that the trading in the shares of M/s Kappac Pharma Ltd was suspended w.e.f. 07/01/2015 by BSE as a surveillance measure pursuant to the directions issued by SEBI. It is also important to note that the learned Assessing Officer verified the trade data pertaining to the sellers of shares of M/s Kappac Pharma Ltd and found that there were three parties, namely, Abhinna Vyapar Private limited, Eash Vyapaar Private limited, and Prerna Vyapaar Private limited who purchased the shares from the assessee and provided her the exit entries. Further, on verification of the annual income and return filing details of these three entities, by obtaining the inputs from the investigation wing of the income tax Department, it was found that these three entities were non-taxpayers with the income below the taxable limits; that the financial capacity of these three entities is not at all commensurate with the huge investment made by them in purchase of this particular scrip; and, therefore, based on the inputs from the investigation wing, it was evident that these buyers were mere accommodation entry providers who indulged in these transactions on behalf of the scheme operators for exchange of commission.

20. It is at this juncture, learned Assessing Officer referred to the details of the modus operandi of bogus LTCG schemes, in the background of investigation carried out by the investigation wing of the income tax Department, Kolkata who carried out a countrywide investigation to under the organised racket of generating bogus entries of Long Term Capital Gain (LTCG), which is exempt from tax, and found that the modus operandi adopted by the operators was to make the beneficiary buy some shares of predetermined penny stock company shares controlled by them with the initial transfer of shares in the name of the beneficiary on off market transaction basis or online transaction basis and thereafter, issue preferential shares at a nominal rates or issue of bonus shares even though there is hardly any profit or business activity in these companies; that the beneficiary, usually an individual, holds the shares for one year, the statutory period after which LTCG is exempt under section 10(38) of the Act; in the meantime, the operator register the prices of the stock and gradually rise its prise many times, offered 500 to 1000 times; that this is done through low-volume transaction indulged in by the dummies of the operator at a predetermined price; that when the price reaches the desired level the beneficiary who bought the shares at a nominal price, is made to sell it to a dummy Company of the operator; and that for this, unaccounted cash is provided by the beneficiary which is routed through in a few layers of paper companies by the operator and finally is parked with the dummy paper company that will buy the shares. Having gone through this, learned Assessing Officer thought that his findings on the verification of the assessee’s transaction are well corroborated and, therefore, reached a different conclusion as to the nature of the transaction done by the assessee.

21. Though the assessee raised so many questions in the letter dated 22/12/2016, it remains unanswered as to what inspired the assessee to invest so much amount in a company whose financial results are not so splendid awe-inspiring and there are no chances of lucrative gains at the time when such shares were purchased. It is not open for the assessee to raise such questions which are exclusively in her personal knowledge, and it is not possible for the learned Assessing Officer to know what transpired in the mind of the assessee to make such an investment. What the assessee did was something improbable for novice investor without any substantial share transaction in earlier subsequent years. Generally the investment takes place with the motive of profit earning, and what was the hope of the assessee is exclusively known to her and to none else. When the transaction created a reasonable doubt, it is for the assessee to clarify the circumstances which prompted her to make such an investment. The satisfaction of the assessee in respect of the prospects of earning profits by such an investment is a psychological fact and within her exclusive and personal knowledge. Unless and until, the assessee comes out with an explanation that there was reason for her to make such an investment and the circumstances under which such an investment was made, out of her personal knowledge, learned Assessing Officer has no reason not to pursue the reasonable doubt he had in respect of the transaction which he analysed in the light of the attendant circumstances like the financials of the company and the transaction data of the exit providers. Without doing so, she cannot shift the burden to the learned Assessing Officer. As rightly observed by the learned Assessing Officer, law does not put the onus of collecting the reasons which are in the personal knowledge of the assessee, for the investment 14 of the assessee without much experience in investment in such companies as that of M/s Kappac Pharma Ltd, that too in the circumstances which do not inspire her confidence of deriving any benefits from such investment. It is an impossible burden which the assessee seeks to put on the learned Assessing Officer.

22. On a careful scrutiny of the assessment order and the impugned order passed by the Ld. CIT(A), as a matter of fact, we find that the share transaction done by the assessee is surrounded by a thick cloud of suspicion which the assessee failed to dispel. Since the learned Assessing Officer did not rely on the investigation report of the Kolkata wing of income tax Department to reach the conclusion as to the nature of transaction, and on the other hand, his findings are firmly entrenched into the facts he culled out during the assessment proceedings and derived from the analysis of the financials of M/s Kappac Pharma Ltd and also other circumstances, we are of the considered opinion that the assessee cannot place reliance on the decision of the Hon’ble Apex Court in the case of Andaman Timber Industries (supra).

24. The findings of the Tribunal are favoured by the Hon’ble jurisdictional and are confirmed in on the file of the Hon’ble Delhi High Court by order dated 8/3/2019, wherein the Hon’ble High Court held that the company (M/s Kappac Pharma Ltd, which was even directed to be delisted from the stock exchange) had meagre resources and in fact reported consistent losses and in the circumstances, the astronomical growth of the value of company’s share naturally excited the suspicion of the Revenue. Hon’ble High Court declined to interfere with the findings of the Tribunal and dismissed the appeal.

25. In the case of Sanat Kumar (supra), a coordinate Bench of this Tribunal dealt with a similar situation, and made an observation that though the assessee meticulously completed the paperwork by routing his entire investments through banking channel, when the result of an altogether beyond human properties, what is apparent in making 16 investment is not really and the examination of the entire transaction falsifies the same.

26. Having regard to all these facts and circumstances of the case in this matter, we are of the considered opinion that the conduct of the assessee who is a novice, in investing in the stocks of a company whose financial results are not brilliant and where there is no apparent chance of lucrative gains at the time when such an investment was made - raises reasonable doubt to suspect the bona fides of the transaction and in the absence of any satisfactory explanation offered by the assessee on the vital points raised by the learned Assessing Officer, it is not possible to brush aside the orders of the authorities below. Both the authorities below have the cogent reasons for reaching the conclusions and we find it difficult to interfere with the same. With this view of the matter, we dismiss the grounds of.

13. And in the case of ACIT Vs Arihant Kumar Jain (supra), it has been held as under:

13. From the undisputed facts, arguments addressed by the ld. Authorized Representatives to the parties, order passed by the lower authorities and case laws relied upon, the sole question arises for determination in this case is :-

as to whether ld. CIT (A) has erred in facts and in law in deleing the disallowance of Long Term Capital Gain (LTCG) made by the AO, claimed by the assessee as exempt u/s 10(38) of the Act on the ground that the entire process of purchasing and selling of 40,000 shares of M/s. Kappac Pharma Limited is a colourable device to convert unaccounted money into fictitious exempt LTCG to evade tax?

14. Before proceeding further, we would examine the overall financial health and credibility of M/s. Kappac Pharma Limited, a company whose 40,000 shares were purchased by the assessee through undisclosed cash. Gross income and net income declared by M/s. Kappac Pharma Limited from AYs 2012 to 2016, which is in the pubic domain, is tabulated as under :-

(inCr.) 2016 2015 201 2013 2012 4 Income Statement Revenue - - - - - Other Income - - - - Total Income - - - - - Expenditure -0.02 -0.08 - -0.08 -0.06 0.08 PBIT -0.02 -0.08 - -0.08 -0.06 0.08 Depreciation - - - - - PBT -0.02 -0.08 - -0.08 -0.06 0.08 Tax - - - - - NetProfit -0.02 -0.08 - -0.08 -0.06 0.08 Equity 30.2 30.27 30.2 23.7 23.77 7 7 7 EPS -0.01 -0.03 - -0.04 -0.03 0.03 CEPS - - - - - OPM% - - - - - NPM% - - - - -

15. When we examine the arguments addressed by ld. DR for the Revenue challenging the impugned order passed by the ld. CIT (A) in the light of the financials of M/s. Kappac Pharma Limited, it leads to the irresistible conclusion that no man of ordinary prudence would ever invest in its share except for dubious reasons to convert the unaccounted money into white money.

16. Coordinate Bench of the Tribunal examined the penny stock business of M/s. Kappac Pharma Limited in numerous cases and found the same to be an instrumentality to legalize the unaccounted money through dubious method into white money. Three such cases are Puja Ajmani, Udit Kalra and Manvi Khandelwal (supra).

17. Coordinate Bench of the Tribunal in case cited as Pooja Ajmani (supra) in the identical facts of cases where assessee had purchased 4,000 shares of M/s. Kappac Pharma Limited at the price of Rs.13.09 per share in physical form and subsequently sold 3,000 shares @ Rs.677/- per share on 04.02.2014 and another 500 shares were sold on 18.02.2014 @ Rs.691/- per share, held that M/s. Kappac Pharma Limited is one of such company whose scrips have been manipulated to provide bogus LTCG by returning following findings :-

5. I have heard both the parties and perused the records especially the impugned order. I find that AO after a detailed analysis of the investigation report with the materials available on record in the case of the assessee and on further examination of the financials of Kappac Pharma Ltd., price & volume of the scrip of Kappac Pharma Ltd., concluded that the modus operandi adopted by the assessee followed the pattern discovered by the Investigation wing during various search and survey operations. It was held that that the transactions showing long term capital gain, which had been claimed by the assessee as exempt under section 10(38), were sham transactions. It was held that it was a case of bogus long-term capital gain obtained through brokers and that the assessee had used colourable device for avoidance of tax. The receipt of Rs.23,68,313/- was deemed to be income under section 69A. The assessee has contended that 4,000 shares of Kappac Pharma Ltd. purchased from Corporate Stock Broking (P) Ltd. at a price of Rs.13.09 per share in physical form. It has also been submitted that out of the 4,000 shares, 3000 shared were sold on 04/02/2014 for @Rs.677 per share and another 500 were sold on 18/02/2014 for a sum of @Rs.691 per share. It has also been submitted that the assessee did not indulge in any manipulation which may have been done by some broker and that the appellant was not given opportunity for cross examination. It has also been submitted that the Assessing Officer has made the addition without considering the facts of the case and only on the basis of presumption and presuppositions. It is noticed that prima facie, copies of all documents have been submitted to substantiate the genuineness of transactions related to purchase and subsequent sale of shares leading to long-term capital gain claim by the appellant. I find that these documents were also placed before the Assessing Officer who, after detailed examination and discussion and going beyond the said documents has established that the said documents were a mere mask to hide the real nature of transactions. By analysing the Balance Sheet, Profit &Loss account and the trade pattern of Kappac Pharma Ltd. during the period March, 2010 to March 2014, the Assessing Officer has pointed out that the share price of this company was neither affected by the movement of sensex nor the financials of the company justified such extraordinary jump in the price of its shares. It is noticed that apart from being based on evidences gathered during search and survey operations, analysis of the material on record and analysis of information from various sources, the findings of the Assessing Officer are also based on strong surrounding circumstances, preponderance of probability and human conduct in the light of detailed analysis of the modus operandi adopted by brokers and operators engaged in the business of providing entries of long term capital gains to the interested beneficiaries which has come to surface as a result of deep and wide investigation. Initial investment in a company of unknown credentials and subsequent jump in the share price of such a company cannot be an accident or windfall but was possible, as clearly brought on record by the Assessing Officer, because of the manipulations in the price of shares in a pre-planned manner by the interested broker and entry operators. The insistence of the assessee that the transactions leading to long- term capital gains are supported by documents such as sale and purchase invoices, bank statements etc. cannot be accepted in view of the fact and circumstances of the case brought on record by the Assessing Officer after proper per examination of the material facts and after taking into account the findings of SEBI and corroborating evidences gathered by the Directorate of Investigation, Kolkata against a network of brokers and operators engaged in manipulation of market price of shares of certain companies controlled and managed by such persons with a purpose to provide accommodation entries in the form of long term capital gains. Further, the contention of the assessee that long term capital gains cannot be treated as bogus merely because some investigation with regard to certain company and broker or investigation has been carried out by the Directorate of Investigation, Kolkata only proves that the appellant wants to take shelter under such documentary evidences which themselves have been created as masks to cover up the true nature of transaction. A genuine transaction must be proved to be genuine in all respect. The onus was on the appellant to prove that the transaction leading to claim of long term capital gains was distinctly genuine transaction and not bogus, premeditated transaction arranged with a view to evade taxes. The onus was on the assessee to contradict the findings that Kappac Pharma Ltd. was a company whose scrip was capable of being traded at high price as it was the appellant who had traded in the shares of the this company which resulted into claim of long term capital gains which is exempt under section 10(38). Once the assessee was made aware of the result of the investigation which proved that trading of shares leading to long term capital gains was not genuine, as per section 101 of the Indian Evidence Act, 1972, the onus was on the assessee to prove that she had earned genuine long term capital gains as it was the assessee who has made a claim that she was engaged in genuine share transactions. I find that in the case of Shri Charan Singh vs. Chandra Bhan Singh (AIR 1988 SC 6370), the Hon'ble Supreme Court have clarified that the burden of proof lies on the party who substantially asserts the affirmative of the issue and not upon the party who denies it. It has been further held that the party cannot, on failure to establish a prima facie case, take advantage of the weakness of his adversary's case. The party must succeed by the strength of his own right and the clearness of his own proof. He cannot be heard to say that it was too difficult or virtually impossible to prove the matter in question. In the case under consideration, since it is the appellant who had made the claim that she had earned genuine long term capital gain, all the facts were especially within her knowledge. Section 102 of Indian Evidence Act makes it clear that initial onus is on person who substantially asserts a claim. If the onus is discharged by him and a case is made out, the onus shifts on to deponent. It is pertinent to mention here that the phrase burden of proof" is used in two distinct meanings in the law of evidence viz, 'the burden of establishing a case', and 'the burden of introducing evidence'. The burden of establishing a case remains throughout trial where it was originally placed, it never shifts. The burden of evidence may shift constantly as evidence is introduced by one side or the others. In this case, once the evidence that assessee has claimed bogus long term capital gain was introduced by the Assessing Officer, the burden of evidence shifted to the assessee. During the assessment proceeding and even during the assessee proceeding, the assessee has failed to produce any evidence to prove that the long term capital gain claimed by her was genuine. In the present case, it is seen that the assessee has failed to discharge her burden of proof and the Assessing Officer, on the other hand, has proved that the claim of the appellant was incorrect. The enquiry conducted by SEBI was further corroborated by the investigation carried out by the Directorate of Investigation, has been thoroughly analysed by the Assessing Officer to prove that the assessee has introduced bogus long term capital gains in her books of account by routing her unaccounted income through a tax evasion scheme. The statement of brokers engaged in providing bogus long term capital gains clearly proves that Kappac Pharma Ltd. is one of such companies whose scrips have been manipulated to provide bogus long term capital gains. It is noted that on similar facts and circumstances, Hon'ble ITAT A-Bench, Chandigarh in the case of Shri Abhimanyu Soin VS ACIT, Circle-7, Ludhiana in ITA No.951/Chd./2016 vide order dated 18/04/2018, have expressed the view that the undisclosed income in the garb of long term capital gain has to be assessed as unexplained. The Hon'ble ITAT have held as under:-

"14. The ratio laid down by the Hon'ble Supreme Court in the case of Sumati Dayal Vs. CIT [1995] 214 1TR 801 = 2002- TIOL- 885-SC-IT-LB is squarely applicable in this case. Though the assessee has received the amounts by the way of account payee cheques, the assessee could nowhere prove the purchase of shares as claimed to have been made on 02/72/2008 in cash and it urns also not proved about the availability of the funds with the assessee as on the date of purchase of shares. The assessee was not in India as per the passport details available as per the record. This, coupled with the fact that the transfer of money in cash from Ludhiana to Delhi and a person representing the broker operating at Kolkata has collected the money at Delhi cannot be accepted. The tax authorities are entitled to look into the surrounding circumstances to find out the realities and the matter has to be considered by applying test of human probabilities as enunciated by the Hon'ble Supreme Court. The fact that inspite of earning 3072% of profits, the assessee never ventured to involve himself in any other transactions with the broker which gave him even much lower profits during the period which cannot be a mere coincidence or lack of interest or absence of advice from the financial institutions as done earlier.

15. In view of the detailed discussion above, and keeping in view the entirety of the facts and circumstances and specific peculiarity of the instant case and the judgments quoted above, we decline to interfere in the order of the Ld. CIT (A).

5.1 On the issue of circumstantial evidence and in the matters related to the discharge of 'onus of proof' and the relevance of surrounding circumstances of the case, the Hon'ble Supreme Court in the case of CIT Vs. Durga Prasad More [(1972) 82 ITR540], have observed as under:

...that though an appellant's statement must be considered real until it was shown that there were reasons to believe that the appellant was not the real, in a case where the party relied on self-sewing recitals in the documents, it was for the party to establish the transfer of those recitals, the taxing authorities were entitled to look into the surrounding circumstances to find out the reality of such recitals. Science has not yet invented any instrument to test the reliability of the evidence placed before a Court or Tribunal. Therefore, the Courts and the Tribunals have to judge the evidence before them by applying the test of human probability. Human minds may differ as to the reliability of piece of evidence, but, in the sphere, the decision of the final fact finding authority is made conclusive by law.

5.2 I further find that the above ratio as laid down by the Hon'ble Supreme Court has been reiterated and applied by the Hon'ble Apex Court in the case of Sumati Dayal vs. CIT (214 ITR 801). It is essential on the part of the Assessing Officer to look into the real nature of transaction and what happens in the real word and contextualize the same to such transactions in the real market situation. Further, in the case of McDowell &: Co. Ltd.[(1985) 154 ITR 148 (SC)], the Hon'ble Supreme Court have observed as under:

Tax planning may be legitimate provided it is within the framework of law. Colourable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by resorting to dubious methods. It is the obligation of every citizen to pay the taxes honestly without resorting to subterfuges.

5.3 Every person is entitled to so arrange his affairs as to avoid taxation but the arrangement must be real and genuine and not a sham or make believe.

5.4 Keeping in view of the aforesaid discussions, I am of the view that documents submitted as evidences to prove the genuineness of transaction are themselves found to serve as smoke screen to cover up the true nature of the transactions in the facts and circumstances of the case as it is revealed that purchase and sale of shares are arranged transactions to create bogus profit in the garb of tax exempt long terra capital gain by well organised network of entry providers with the sole motive to sell such entries to enable the beneficiary to account for the undisclosed income for a consideration or commission. I further find that the share transactions leading to long term capital gains by the assessee are sham transaction entered into for the purpose of evading tax. I note that the landmark decision of the Hon'ble Supreme Court in the case of McDowell and Company Limited, 154 ITR 148 is squarely applicable in this case wherein it has been held that tax planning may be legitimate provided it is within the framework of the law and any colourable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by dubious methods. However, the case laws cited by the Ld. counsel for the assessee are on distinguished facts, hence, not applicable in the instant case. The assessee has not raised any legal ground and argued only on merit for which assessee has failed to substantiate his claim before the lower revenue authorities as well as before this Bench. In view of above discussions, I am of the considered opinion that Ld. CIT(A) has rightly confirmed the addition in dispute, which does not need any interference on my part, therefore, I uphold the action of the Ld. CIT(A) on the issue in dispute and reject the grounds raised by the Assessee."

18. Similarly, coordinate Bench of the Tribunal in case cited as Udit Kalra (supra) dismissed the appeal filed by the assessee who has claimed deduction u/s 10(38) of the Act qua shares of M/s. Kappac Pharma Limited to the tune of Rs.27,20,457/- in the identical facts and circumstances, which has further been confirmed by Hon'ble Delhi High Court in ITA 220/2019 order dated 08.03.2019 by returning following findings :-

"This court has considered the submissions of the parties. Aside from the fact that the findings in this case are entirely concurrent - A.O., CIT(A) and the ITAT have all consistently rendered adverse findings - what is intriguing is that the company (M/s Kappac Pharma Ltd.) had meagre resources and in fact reported consistent losses. In these circumstances, the astronomical growth of the value of company's shares naturally excited the suspicions of the Revenue. The company was even directed to be delisted from the stock exchange. Having regard to these circumstances and principally on the ground that the findings are entirely of fact, this court is of the opinion that no substantial question of law arises in the present appeal.'

19. Coordinate Bench of the Tribunal in case of Manvi Khandelwal (supra) also decided the issue as to claiming LTCG exemption u/s 10(38) of the Act on the basis of scrips of M/s. Kappac Pharma Limited on the basis of which assessee has earned a return of 6,300% over a period of 12 months and reached the conclusion that the entire transaction is a colourable device to avoid payment of taxes and upheld the addition made by the AO as well as ld. CIT (A) u/s 68 of the Act by disallowing the LTCG claim made by the assessee u/s 10(38) of the Act.

"28) How had you paid the amount of Rs.4.52 lakhs?

Ans. I had purchased these shares with cash of Rs.4.52 lakhs that was lying with me during FY 2012-13 because the person wanted cash before handing over physical papers. I have declared this cash under IDS Scheme 2016. I also want to mention that I had attempted to receive back my cash and replace it with a cheque immediately thereafter but it was only several months later that I could successfully issue and clear a cheque from my bank and receive back this cash from the seller. I have filed this information in Form 1 of IDS Scheme and received the acceptance in Form 2.

29) Please state the name of the seller for shares of Kappac Pharma Limited?

Ans. I do not particularly know the parties from whom or to whom I buy or sell shares. My records show that the shares were sold to me by some company named Girish Metals Pvt. Ltd."

23. Perusal of the aforesaid statement of the assessee recorded during investigation leads to the irresistible conclusion that the assessee has not discharged his onus to prove that the entire transaction was genuine because it is incomprehensible that a person, assessee in this case, who is constantly in touch with the person since 25.06.2012 when he has purchased the scrips by making payment through undisclosed cash, then got the scrips dematerialized on 30.12.2013 only after legalizing amount of Rs.4,52,000/- through IDS, 2016, thereafter he got the amount of Rs.4,52,000/- returned and paid him the amount through cheque on 31.12.2013, but strangely stated that, “I do not particularly know the parties from whom or to whom he bought and sold the shares". Evasive reply coupled with undisputed fact narrated in the preceding para shows that the entire transactions as to purchasing and selling the shares of M/s. Kappac Pharma Limited by the assessee was not a genuine share trading transaction but has been given colour of share trading.

27. Hon'ble Apex Court in CIT vs. Durga Prasad More 82 ITR 540 while deciding the identical issue whether apparent was not real and in those circumstances, taxing authorities were held entitled to look into the surrounding circumstances to find out the reality of such recitals/transactions by returning following findings:-

Held, reversing the decision of the High Court, (i) that it could not be said that the finding of the Tribunal as to the unreality of the trust put forward was not based on evidence or was otherwise vitiated; (ii) that the Tribunal did not interpret the two deeds but merely found itself unable to accept the correctness of the recitals in those documents: to accept those recitals or not was within the province of the Tribunal and the High Court could not interfere with its conclusion unless it was perverse or not supported by evidence or was based on irrelevant evidence; (iii) that though an apparent statement mast be considered real until it was shown that there were reasons to believe that the apparent was not the real, in a case where a party relied on self-serving recitals in documents, it was for that party to establish the truth of those recitals: the taxing authorities were entitled to look into the surrounding circumstances to find out the reality of such recitals."

(i) that right from the purchase of 40,000 shares of M/s. Kappac Pharma Limited by the assessee with undisclosed money of Rs.4,52,000/- from unknown persons; then subsequently declaring the said unaccounted money of Rs.4,52,000/- under IDS, 2016 scheme; then getting the same legalized from Principal CIT; then getting the unaccounted cash refunded and making payment of Rs.4,52,000/- by way of cheque on 31.12.2013; then got the shares dematerialized and sold the same in the market at the whopping price of Rs.2,77,37,500/- purchased a year before for Rs.4,52,000/- makes the entire transaction appears antedated and colourable; (ii) that the transaction in question at the very outset fails to satisfy the test of human probabilities lay down by Hon'ble Supreme Court in case of Sumati Dayal vs. CIT 214 ITR 801 (SC) that, in such circumstances, tax authorities are entitled to look into the surrounding circumstances to find out the reality and matter has to be considered by applying the test of human probabilities". Because no man of ordinary prudence would invest huge amount of Rs.4,52,000/- in a consistently loss making company, namely, M/s. Kappac Pharma Limited, particularly when assessee is a novice being not into the share trading prior or after the transaction under consideration; (iii) that the assessee has failed to dispel all the suspicion raised by the AO to establish the genuineness of the transaction in question which apparently does not satisfy the test of human probabilities rather suppressed the correct facts and withheld the name of real seller of shares in question during recording of his statement u/s 131 of the Act; (iv) that business model of M/s. Kappac Pharma Limited, consistently a loss making company, has been examined and held to be a provider of bogus exempt LTCG by using colourable device in order to convert unaccounted money into fictitious exempt LTCG by the coordinate Benches of the Tribunal in numerous cases; and (v) that a genuine transaction needs to be proved to be genuine by the person who substantially asserts the same and not by the Revenue as contended by the Id. AR for the assessee because once the assessee has been called upon to prove the genuineness of the trading of the shares leading to LTCG gain, the onus lies upon him which he fails to discharge.

15. It is an undisputed fact that the shares were purchased by the assessee in cash and in physical form and the part shares were sold when the price trend was increasing and had not sold when the downward trend started.

16. The price movement of share market behavior of the entities involved in the trade of the script as the share price movement and the profit earned by the beneficiaries were beyond human probabilities, which has already been discussed in detail in the order of assessment

17. And thus it is a clear case of huge capital gain earned by the assessee within a very short period of time by investing in a penny stock whose fundamentals had no support for the premium. It commanded was neither the result of a coincidence nor of a genuine investment activity, but was created through well-planned and executed scheme in which company, brokers and the buyers and sellers of the script worked in tandem to achieve the predetermined objectives

Order pronounced in the open court on 22.07.2025.