ASST. COMMISSIONER OF INCOME-TAX-CIRCLE-6(1)(2), MUMBAI vs. KAMLESH INDERPAL KUMAR, MUMBAI

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ITA 3851/MUM/2024Status: DisposedITAT Mumbai21 March 2025AY 2012-1311 pages

In favour of the assessee: the Revenue's appeal was dismissed. From the AI summary of this appeal.

AI SummaryDismissed

What did the Tribunal hold?

The Tribunal held that the CIT(A) rightly deleted the additions made by the AO. The AO had not applied his own mind and had merely acted on information received from the DDIT Investigation wing, initiating reopening proceedings under Section 148 and making additions without establishing any evidence that the assessee had traded in the script of VMS Industries Ltd. The quantum specified by the AO was also different from what was shown by the assessee's stockbroker and supported by contract notes. The Tribunal noted that the assessee had provided all required documents, including purchase details, broker information, bank statements, demat account details, and contract notes. The AO's failure to conduct independent verification, examine the assessee's documents, collect evidence from the bank or broker, and his reliance solely on the investigation report, violated the principles of natural justice. The Tribunal also referred to the High Court's decision in PCIT v. Parasben Kasturchand Kochar, which emphasized that the AO should provide an opportunity for cross-examination and furnish material to the assessee. The Tribunal found no cogent evidence brought on record by the Revenue to prove that the transactions were not genuine or that the appellant was a beneficiary of accommodation entries. The AO's conclusion was based on assumptions and presumptions, which are not permissible. The CIT(A)'s deletion of additions was therefore upheld.

What were the facts?

The Revenue is in appeal against the order of the CIT(A) for Assessment Year 2012-13, challenging the deletion of additions made under Section 68 and Section 69C of the Income Tax Act, 1961. The Assessing Officer (AO) reopened the assessment based on information from the DDIT (Investigation) that VMS Industries Ltd. was a penny stock used to introduce unaccounted income as exempt long-term capital gains. The assessee, Kamlesh Inderpal, was identified as a beneficiary. The AO made additions of Rs. 36,14,331/- under Section 68 and Rs. 72,286/- under Section 69C, alleging the assessee traded in this penny stock to facilitate unaccounted income. The assessee contended that all required documents, including purchase details, broker information, bank statements, demat account details, and contract notes, were provided. The AO, however, allegedly relied solely on the investigation wing's report without independent verification or examination of the assessee's documents, violating principles of natural justice.

What were the issues?

1. Whether the CIT(A) erred in law and on facts in deleting the addition of Rs. 36,14,331/- made under Section 68 of the Act, on account of unaccounted claim of exempt income under Section 10(38) arising from the sale of shares of M/s. VSM Industries, identified as a penny stock? 2. Whether the CIT(A) erred in directing the AO to delete the addition of Rs. 72,286/- made under Section 69C of the Act, representing unexplained expenditure incurred by the assessee to obtain accommodation entries in the form of Long Term Capital Gain claimed as exempt under Section 10(38)? Assessee's Contentions: - The AO failed to apply his own mind and blindly followed the information from the DDIT Investigation wing. - No evidence was established by the AO that the assessee traded in the scrip of VMS Industries Ltd. - The quantum specified by the AO differed from what was shown by the assessee's stockbroker, supported by contract notes. - All required documents regarding share purchase, broker, bank, demat account, and contract notes were filed. - The AO did not conduct independent enquiry or examination of documents, nor collected evidence from the bank or broker. - The AO violated principles of natural justice by not examining VMS Industries Ltd.'s financials. Revenue's Contentions: - The CIT(A) erred in deleting the additions made under Section 68 and Section 69C. - The order of the CIT(A) should be set aside and that of the AO restored.

Which sections of the Income-tax Act were involved?

Section 68,Section 69C,Section 10(38),Section 148,Section 250,Section 251

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Cases cited in this judgment(2)Show list

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Income Tax Appellate Tribunal, “SMC” BENCH, MUMBAI

Before: HON’BLE SHRI SANDEEP GOSAIN

For Appellant: Shri Kiran Unavekar, Sr. DR
For Respondent: Shri Dharan Gandhi
Hearing: 11.03.2025Pronounced: 21.03.2025

The present appeal has been filed by the revenue challenging the impugned order 12.06.2024 passed u/s 250 of the Income Tax Act, 1961 (‘the Act’), by the National Faceless Appeal Centre, Delhi / CIT(A) Mumbai, for the A.Y 2012-13. The revenue has raised the following grounds of appeal:

1. On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition of Rs. 36,14,331/- u/s. 68 of the Act, on account of unaccounted claim of exempt Kamlesh Inderpal Kumar, Mumbai. income u/s. 10(38) of the Act on account of gain on sale of shares of M/s. VSM Industries which has been identified as penny stock? 02. The Ld. CIT(A) has erred in directing the AO to delete the addition of Rs. 72,286/- u/s. 69C of the Act being unexplained expenditure incurred by the assessee to obtain such accommodation entries in the form of Long Term Capital Gain which was claimed as exempt u/s. 10(38)? 03. The Appellant prays that the order of the CIT(A) on the above grounds be set aside and that of the Assessing Officer be restored.

4. The appellant craves leave to amend, or alter any grounds or add a new grounds, which may be necessary.

2. The only ground raised by the revenue relates to challenging the order of Ld. CIT(A) in deleting the additions u/s 68 & 69C of the income tax Act, therefore I have decided to take up both the grounds together and adjudicate the same through the present consolidated order.

3. I have heard the counsels for both the parties, perused the material placed on record, judgements cited before me and the orders passed by the revenue authorities. As per the facts of the present case the assessee had not filed the return of income for the year under consideration. However, on the basis of information from DDIT, investigation, Mumbai, the AO reopened the assessment on the ground that VMS industries Limited is a penny stock listed on BSE and used to facilitate introduction of unaccounted income of members of beneficiaries in the form of exempt, long-term capital gains or Short-term capital loss in the books of accounts.

Kamlesh Inderpal Kumar, Mumbai. 4. The assessee was considered as one of the beneficiaries who had traded in the script of VMS industries Ltd. Therefore, after serving statutory notices and providing opportunity of hearing the additions were made u/s 68 / 68C of the Act while passing the order of assessment.

5.

However, Ld. CIT(A) considering the facts of the case in detail and after appreciating the documents filed by the assessee deleted the addition.

6.

I noticed that during the assessment proceedings assessee had filed all the required documents with regard to purchase of shares, the details of broker through whom shares were purchased, bank, details, demat account, contract notes, etc. The AO instead of carrying out verifications upon the documents filed by the assessee had acted merely on the information received from DDIT Mumbai. No independent enquiry or examination of the documents submitted by the assessee were carried out. Even AO had not bothered to collect evidence from the bank or the broker and mechanically relied upon the report of investigation wing and passed the assessment order in the arbitrary manner by violating the principles of natural justice. It is strange that AO being the investigator as well as adjudicator had not even bothered to examine the financials of VMS industries Limited.

7. The Ld. CIT(A) after thorough verification had passed well reasoned order, the operative portion of the order is the produced here in below.

In the present case the appellant had not filed its return of income for A/Y 2012-13. Subsequently, the appellant filed his return of income in response to the notice u/s 148 of the Income Tax Act, 1961 declaring total income at Rs. 1,16,540/-. Later the AO completed the assessment by assessing the total income at Rs. 38,03,160/- by adding an amount of Rs. 36,14,331/- u/s 68 of the Income Tax Act, 1961, and an amount of Rs. 72,286/- u/s 69C of the Income Tax Act, 1961 to the total income of the appellant. Being aggrieved by the same the appellant has preferred the instant appeal.

The AO stated that information was received by DDIT (Inv.) 7.1, Mumbai that VMS Industries Ltd. is a penny stock listed on BSE and used to facilitate introduction of unaccounted income of members of beneficiaries in the form of exempt Long Term capital gain or Short Term Capital Loss in their books of Accounts. Upon receipt of such information, the DDIT (Inv.), Unit-7(1)), Mumbal, had carried out an investigation in the scrip namely M/s. VMS Industries Ltd. (SCRIPT CODE 533427) and analysed the data collected from BSE to identify the beneficiaries who had traded in the script namely M/s. VMS Industries Ltd. (SCRIPT CODE 533427) On analysis of such data, the DDIT (Inv.), Unit-7(1)), Mumbai found that appellant is one and he has transacted total amount of Rs. 59,08,861/- 1168 Rs. 59,10,029/. To ascertain the genuineness of the transactions, share price pattern of M/s VMS Industries Ltd. which is listed on Bombay Stock Exchange (BSE)), was analyzed. It was noticed that the share price of the share moved from Rs. 10.96 on 22nd August 2011 to Rs 132.65 on 25April 2012 and then fell to Rs 16.85 on the 13th September 2012. This is typical pattern of a penny scrip company where the per unit share price of the compony are artificially rigged so as to derive bogus long term capital gain /short term capital loss in the hands of the beneficiaries. Further financials of the company were analyzed and it was found that the financials of the company do not indicate any substantial change in the performance of the company which would substantiate the price movement of the scrip thus indicating that the price of the per unit shares of the company were artificially rigged so as to Intend a few beneficiaries. From trade data it is seen that most Kamlesh Inderpal Kumar, Mumbai. of the purchases was done by companies and individuals controlled by Naresh Jain, Bhavesh Pabri, Revikant" Chaudhary which has already been proved bogus by Mumbai Investigation wing. These companies are involved in providing bogus capital gain through accommodation entries. Analysis of the sale data shows that bogus Long Term Capital Gains has been claimed by group of individuals who were allotted shares on preferential basis-The list of purchasers was analyzed. it is seen that most of the purchasers are entities which-file-either-no retum or almost nil return. These are Exit Providers who are employed by the operator to provide exit to the beneficiaries of bogus Long Term Capital Gains.

The AO further stated that the appellant had entered into a sale transaction in the above mentioned penny stock script and had derived long term capital gain during the year under consideration. The appellant was one of the beneficiaries of bogus long term capital gain by trading in the script of M/s VMS Industries Ltd. and other above mentioned penny stocks thereby facilitating the entry of unaccounted income in its books of accounts. Commission @ 2% of the total sale consideration of Rs. 36,14,331/- that amounted to Rs.72,286/- was added to the total income of the appellant.

The appellant in his submissions stated that he is an individual, aged 77 years. During the relevant previous year relevant to A/Y 2012-13, the appellant had income of Rs. 1,16,540/- below exemption limit, hence he did not file the return of income u/s 139(1) of the Income Tax Act, 1961 for the assessment year 2012-2013. She iterated that the AO has not applied his own mind and simply on the information received from DDIT Investigation, he blindly followed for issuance of notice under Section 148 of the Income Tax Act, 1961 and ultimately addition was made on the basis of such material. Not even an iota of evidence/proof was established by the AO that the appellant has traded in the scrip of M/s. VMS Industries Ltd. over. Further, the AO had not given or furnished statement of account of VMS Industries Limited that the appellant has traded in such a stock /script. The quantum specified by the AO was different as to what was shown by the appellant's stock broker which was supported by the contract note etc. However, the AO without any evidence and merely on the basis of information has sustained the addition. No independent Kamlesh Inderpal Kumar, Mumbai. investigation was carried out pointing out as to how the appellant was involved in the process of taking advantage of the trading of the alleged stock, besides there is factual mistake, in the recording of reasons by the AO The total transaction values itself does not exceed Rs. 1 lakh. Therefore, the re-opening notice itself is bad in law. The AO did not examine VMS Industries Ltd. and persons who were alleged to be involved in issuing hawalas. Thus, there is no independent application of mind for investigation of the case. It is settled law that the AO is required to form prima facie opinion based on tangible material which provides the nexus or the link having reason to believe that income has escaped assessment. He has not carried out any other transaction other than the trading business carried out through the Broker HDFC Code no.11094 and 393. Thus, the order has been passed mechanically without applying mind, without examination of broker, without examination of persons who are involved with VMS and identifying who are the beneficiaries, who are alleged to have traded in the securities.

The Hon'ble High Court of Gujarat in the case of Commissioner of Income-tax- I Vs. Himani M Vakil [2013]10 taxmann.com 326 (Gujarat) held that where assessee duly proved genuineness of share transactions by bringing on record contract notes for sale and purchase, bank statement of broker and demat account showing transfer in and out of shares, Assessing Officer was not Justified in bringing to tax capital gain arising from sale of shares as unexplained cash credit. ING In case of DCIT vs Sunita Khema in to 718/ kol/2011 Hon'ble ITAT Kolkata has held that :-

The AO cannot treat a transaction as bogus only on the basis of suspicion or surmise. He has to bring material on record to support his finding that there has been collusion/connivance between the broker and the assessee for the introduction of its unaccounted money. A transaction of purchase and sale of shares, supported by Contract Notes and demat statements and Account Payee Cheques cannot be treated as bogus.

The Hon'ble Delhi High Court in the case of I.T. A.125/2020, Ι.Τ.Α. 130/2020 and I.T.A.131/2020 has dismissed the appeal of ITAT stating that, Court has to decide an issue on the basis of evidence and proof and not on suspicion alone. The theory of Kamlesh Inderpal Kumar, Mumbai. human behavior and preponderance of probabilities cannot be cited as a basis to turn a blind eye to the evidence produced by the respondent. It was further held by Court that, reliance placed on SumanPoddar vs. ITO and SumatiDayal vs. CIT is of no assistance and held that this case is quite different from the factual matrix at hand. Similarly, the case of SumanDayal vs. CIT [Supra] too turns on its specific facts. It was held that there cannot be addition without any cogent material on record. Statements relied by the Assessing Officer in the assessment proceedings were not recorded by the Assessing Officer but they were preexisting statements recorded by the Investigation Wing and the same cannot be sole basis of assessment without conducting proper enquiry and examination during the assessment proceedings itself. In our humble opinion, neither the Assessing Officer conducted any enquiry nor has brought any clinching evidence to disprove the evidences produced by the assessee. The report of the Investigation Wing is much later than the dates of purchase / sale of shares and the order of the SEBI is also much later than the date of transactions transacted and nowhere SEBI has declared the transaction at earlier dates as void.

The Hon'ble High Court of India in the case of PCIT v. Parasben Kasturchand Kochar[130 taxmann.com 176 of 2020] held that : -

1.

This appeal under Section 260A of the Income Tax Act, 1961 (for short 'the Act 1961") is at the instance of the Revenue and is directed against the order passed by the Income Tax Appellate Tribunal, Ahmedabad Bench dated 20-2-2020 in the for the A.Y. 2014- 15. The Revenue has proposed the following question of law for the consideration of this Court: "Whether the Appellate Tribunal was right in law and on facts in deleting the addition of Rs.9,70,468/- made on account of LTCG claimed as exempt u/s. 10(38) of the Act without appreciating the fact that the transaction was pre- arranged as well as sham and was carried out through penny scripts companies / paper companies?"

2.

We take notice of the fact that the issue in the present appeal is whether the assessee earned long term capital gain through transactions with bogus companies. In this regard, the finding "9. In our considered opinion, in such case assessee cannot be held that he earned Long Term Capital gain through bogus company when he has discharged his onus by placing all the relevant details and some of the shares also remained in the account of the appellant after earning of the long term capital gain.

10. Learned A.R. contention is that no statement of the Investigation Wing was given to the assessee which has any reference against the assessee.

11.

In support of its contention, learned A.R. also cited an order of Coordinate Bench in in the matter of Mohan Polyfab Pvt. Ltd. Vs. ITO wherein ITAT has held that A.O. should have granted an opportunity to cross examine the person on whose statement notice was issued to the assessee for bogus long term capital gain. But in this case, neither statement was supplying to the assessee nor cross examination was allowed by the learned A.O. Therefore, in our considered opinion, assessee has discharged his onus and no addition can be sustained in the hands of the assessee."

3.

Thus, the Tribunal has recorded the finding of fact that the assessee discharged his onus of establishing that the transactions were fair and transparent and further, all the relevant details with regard to such transactions were furnished before the Income Tax authorities and the Tribunal also took notice of the fact that some of the shares also remained in the account of the appellant.

4.

We take notice of the fact that the assessee has a Demat Account maintained with the ICICI Securities Ltd. and has also furnished the details of such bank transactions with regard to the purchase of the shares. In the last, the Tribunal took notice of the fact that the statements recorded by the investigation wing of the Revenue with regard to the Tax entry provided were informed to the assessee despite giving him opportunity to meet such an allegation. In the overall view of the matter, we believe that the proposed question cannot be termed as a substantial question of law for the purpose of maintaining the appeal under Section 260-A of the Act, 1961.

The appellant should have been allowed to cross-examine the various persons but the AO has neither granted cross examination nor has he provided any material to the appellant on the basis of which such conclusion was reached and instead made the impugned addition. The appellant has duly discharged the onus that lies on him by establishing the identity, creditworthiness and genuineness of the transactions, by way of submissions made by him during the assessment proceedings and that being so, it is for the revenue to disprove the claim of the appellant, by bringing on record the evidence to the contrary.

The AO has not brought any cogent evidence on record to prove that transactions were not genuine and that the appellant is a beneficiary of accommodation entry. AO has proceeded to arrive at his conclusion that the appellant has obtained accommodation entry solely based on assumptions and presumptions, which Courts have held have no place in framing an assessment under the Income-tax Act. The AO has brushed aside all the positive evidences filed by the appellant to prove the genuineness of transactions.

In view of the above, these grounds of appeal are, accordingly, allowed and the addition made by the AO on this account is, hereby, deleted.

6. In the result, the appeal is allowed. In the result, the appeal is decided as above.

7.

This order has been passed under Section 250 read with Section 251 of the Income Tax Act, 1961.

8.

After hearing the parties at length and evaluating the orders passed by Ld. CIT(A), I am of the view that under the facts of the present case, the AO had not applied his own mind and simply on the basis of information received from DDIT investigation, started proceedings for reopening u/s 148 of the act and ultimately made additions on the basis of such statement. Not even an iota of evidence was Kamlesh Inderpal Kumar, Mumbai. established by the AO that the assessee had traded in the script of VMS industries Ltd. The quantum specified by the AO was different as to what was shown by the assessee stock broker and supported by contract notes. The total transaction value itself does not exceed even one lakh, therefore, Ld. CIT(A) rightly deleted the additions.

9.

No new facts or circumstances/documents have been placed on record by Ld. DR to controvert or rebut the lawful findings so recorded by Ld. CIT(A). Therefore, I see no reasons to interfere into or to deviate from the orders passed by Ld. CIT(A). Therefore, grounds raised by the department stands dismissed.

10.

In the result, the appeal filed by the revenue stands dismissed.

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