ABHINAV AGARWAL HUF,DELHI vs. ITO, WARD- 1(1), MEERUT

Per Dr. B. R. R. Kumar, Accountant Member:

2. Since, the issues involved in both the appeals are identical, they were heard together and being adjudicated by a common order.

3. In following grounds have been raised by the assessee:

“1. That order passed by Ld AO dated 30/12/2016 and further order passed by Id CIT A dated 13/02/2018 are bad in law in as much as notice u/s 143(2) is not in accordance with jurisdictional conditions stipulated under the Act.

2. That order passed by Ld AO dated 30/12/2016 and further order passed by Id CIT A dated 13/02/2018 are bad in law in as much as addition of Rs 103,46,835 u/s 68 on a/c of alleged sham Long Term Capital Gains is made violating principles of natural justice and on basis of vague and generalized show cause notice (19/12/2016) without confronting any back material to assessee thus rendering the entire proceedings a nullity in eyes of law as replied to AO vide letter 20/12/2016.

2.1 That order passed by Ld AO dated 30/12/2016and further order passed by Id CIT A dated 13/02/2018 are bad in law in as much as addition of Rs 103,46,835 is made violating principles of natural justice without confronting any investigation wing report relevant extract, material found by investigation wing etc which is sufficient to quash the assessment order and order passed by Ld CIT-A.

3.1 That order passed by Ld AO dated 30/12/2016and further order passed by Id CIT A dated 13/02/2018 are bad in law in as much as addition of Rs 103,46,835 is made inter-alia on basis of statement which have no evidentiary value as cross examination of person recording that statement is also not offered as per law.

3.2 That order passed by Ld AO dated 30/12/2016and further order passed by Id CIT A dated 13/02/2018 are bad in law in as much as addition of Rs 103,46,835 is made inter-alia on basis of statements, which have no evidentiary value as: i) firstly they are recorded primarily during survey operation and u/s 133A/131 which statements are not at par with search statements recorded u/s 132(4) and cannot straightway justify adverse inference even against the statement giving person; ii) secondly these statements are not equivalent to “material” much less “incriminating material” in eyes of law and they are not corroborated by any iota of independent material; iii) thirdly, these statements cannot bind assessee who was not subject matter of any parallel survey operation etc; iv) fourthly these statements are pre-existing as were recorded by investigation wing and no where independently re-examined by Ld AO; v) fifthly, these statements are not put to acid test of cross- examination; vi) sixthly, statements recorded after expiry of extant financial year cannot be extra-polated; vii) seventhly how these statements are procured and reed by Ld AO in present case is not discernible; viii) eighthly assessee never made the transaction through persons whose statements are recorded and relied; ix) lastly it is no body’s case that these general statements talk about assessee’s particular transaction

4. That on the facts and in the circumstances of the case and in law, Id CIT-A erred in sustaining the action of Id AO in making addition of Rs 103,46,835 without appreciating that burden to prove that transaction is bogus/sham has remained un-discharged from side of revenue.

5. That on the facts and in the circumstances of the case and in law, both Id CIT-A and Id AO erred in making subject additions without appreciating that the modus operandi relied extensively in impugned orders is never co-related even remotely to the facts of the present case as there is no iota of evidence brought on record which can display that assessee herein has inducted certain cash at the time of sale to certain indentified broker/middleman/syndicate member who has in turn introduced certain identified artificial paper company for alleged parking of said cash to buy the shares sold by the assessee which theoretical trail has remained inchoate completely nullifying the entire basis of the addition.

6. That on the facts and in the circumstances of the case and in law, Id AO erred in making subject additions without appreciating that law gives discretion to the assessing officer in applying deeming fictions u/s 68 etc which discretion has not been judiciously exercised in facts are present case as assessee has no economic capacity and source to generate given amount of unaccounted income. Further law requires that additions under said deeming fiction cannot be made sans incriminating material brought on record which is completely lacking in present case.

7. That on the facts and in the circumstances of the case and in law, Id CIT-A erred in sustaining the action of Id AO in making addition of Rs 103,46,835 /- without appreciating that basis of findings of the lower authorities is “suspicion” and “human probabilities” only which is never converted to reliable and trustworthy material and entire assessment order is passed on sole basis of “borrowed satisfaction ” and without any independent application of mind (like a rubber stamp order).

8. That on the facts and in the circumstances of the case and in law, Id CIT-A erred in sustaining the action of Id AO in making addition of Rs 103,46,835 /- without appreciating that no opportunity is given to the assessee to be confronted with back material relied extensively in impugned orders like investigation wing report etc and no opportunity to cross examine the revenue’s witness was given despite detailed reply in this regard made to Ld AO/CIT-A.

9. That on the facts and in the circumstances of the case and in law, Id CIT-A erred in sustaining the action of Id AO in making addition of Rs 103,46,835 /- without appreciating that section 68 is not applicable

to sale of shares as mentioned in impugned assessment order.

10. That on the facts and in the circumstances of the case and in law, Id CIT-A erred in sustaining the action of Id AO in making addition of Rs 103,46,835 without appreciating that in identical facts in various orders relief has been granted to assessee accepting LTCG (long term capital gains) as genuine.

11. That on the facts and in the circumstances of the case and in law, Id CIT-A erred in sustaining the action of Id AO in making addition of Rs 103,46,835 without appreciating spirit of law contained in section 10(38) and section 43 (5) (d) where statutory status is provided to evidences generated from stock exchange system treating the same to be impeccable and only from finance act 2017 with prospective effective from AY 2018- 2019, amendment is made in section 10(38), prior to which such gains would remain exempt.

12. That addition of Rs 20,694 made by Ld AO as confirmed by Ld CIT-A on a/c of alleged commission paid to entry provider is not based on any material/evidence barring assumption and presumptions.

13. That the appellant craves leave to add add/alter any/all grounds of appeal before or at the time of hearing of the appeal.

Humble Prayer: i) To delete the addition of Rs.103,46,835 on a/c of alleged bogus LTCG; ii) To quash assessment order and Id CIT-A order for being passed in serious violation of audi altrem partem iii) To hold section 68 elc. does not apply to sale of shares iv) To delete the addition of Rs.20,694 v) To restore returned income vi) Any other appropriate relief

5. The detailed background of the acquisition of shares in consequent sale is as under:

The assessee through stock broker M/s Bonanza Portfolio Ltd. had purchased 1,00,000 shares of M/s Empower Ltd on 07.01.2011 i.e. during the financial year 2010-11 relevant to assessment year 2011-12 for a total consideration of Rs 7,28,211/-. Subsequently on 13.07.2011, aforesaid shares were sold to M/s Anandloke Suppliers & Traders Pvt. Ltd. for a total consideration of Rs. 9,90,000/- and in lieu of the aforesaid consideration, 800 shares of M/s Pinnacle Vintrade Pvt. Ltd. For a total consideration of Rs. 10,00,000 @ 1250/- per shares were purchased, and balance consideration of Rs. 10,000/- was paid in cash. It was said that on 23.02.2012, appellant received the share certificates issued by M/s Pinnacle Vintrade Pvt. Ltd. Further on 20.07.2012, appellant was issued 72000 bonus shares of M/s Pinnacle Vintrade Pvt. Ltd. Later, M/s Pinnacle Vintrade Pvt. Ltd. and M/s Basukinath Realestae Ltd and Baviscon Vincom Ltd got amalgamated with M/s Unno Industries Ltd. and the assessee got shares of M/s Unno Industries Ltd. The said shares of M/s Unno Industries Ltd. were sold from 17.07.2014 to 04.02.2015 through stock broker M/s Zuari Investments Ltd. at a price quoted on the stock exchange and consideration for the same was through banking channels, resulting in long term capital gain (“LTCG”) of Rs 1,03,46,835/- which was claimed exempt u/s 10(38) of the Act.

i) That during the course of the investigation done by the department, the brokers namely Shri. Anil Khemka who was involved in the trading of the penny stocks of “UNNO Industries” and other scripts have admitted in his statement on oath in survey u/s 133A of the Act that they have provided accommodation entries to different beneficiaries. ii) That Shri. Narendra Kumar Balasia, director of M/s SMC Comtrade Private Ltd. has admitted that sub brokers use penny stock companies for providing bogus long term capital gain to their clients, they have provided bogus long term capital gain of M/s Unno Industries to their clients. iii) The financial of the penny stock M/s Unno Industries Ltd. and movement of the price is abrupt, unrealistic and not based upon any realistic parameters. iv) The assessee is unaware about the share market but has earned profit of Rs. 1,03,46,835/- by investing very low amount without having any information or knowledge of stock market. v) That all the activities regarding longterm capital gain were completed by the broker but it is interesting to note that he do not know the name, address and phone number of broker. vi) The shares sold by the assessee were purchased by six companies and out of six, in respect one company M/s Galore Suppliers Pvt. Ltd. one Shri. Navneet Kumar Singhania in his statement has admitted that such company is a paper company and has been used to provide accommodation entry. vii) In respect of providing opportunity of cross examination, it has been stated that in the statement recorded on 19.12.2016 assessee was informed about the enquiries made by the income tax department, Kolkata and he has not made any comment. viii) Assessment proceedings are administrative and AO is entitled to make private enquiries and same cannot be objected.

7. Aggrieved the assessee filed appeal before the ld. CIT(A). The ld. CIT(A) confirmed the order of the Assessing Officer mainly reiterating the points of view of the Assessing Officer.

8. Aggrieved with the order of the ld. CIT(A), the assessee filed appeal before us. During the hearing, the ld. AR submitted that, • The assessee has purchased shares through stock broker Bonanza Portfolio Ltd. of M/s Empower Ltd. • The shares were sold to Anandlok Suppliers and Traders and exchanged with shares of M/s Pinnacle Vintrade Pvt. Ltd. and the balance consideration has been paid in cash. • M/s Pinnacle Vintrade Ltd. amalgamated with M/s Unno Industries Ltd. • The shares of M/s Unno Industries were sold through the broker Zuari Investment Ltd. • The ld. AR has appraised through the documents submitted before the revenue authorities which are as under:

6. Copy of the letter in respect of issuance of share certificate in the name of the appellant of M/s Pinnacle Vintrade Pvt. Ltd.

Vs. ITO, Ward-29(1), Kolkata and argued that the SEBI has exonerated and the final enquiry about the trade of the shares. At this juncture, we would like to clarify that the order of SEBI dealt with the shares of M/s Kailash Auto Finance Ltd. but not with the shares of M/s Unno Industries Ltd. which are involved in this case. Hence the arguments of the Ld.AR cannot be held to be valid in these scrips. • The ld. AR argued that the contentions of the revenue were general in nature and none of the statement nor specific material gathered by the revenue was pertaining to the case of the assessee. The reliance placed by the report of the Investigation Wing, Kolkata is misplaced and much reliance has been placed by the revenue authorities in this report rather than the specifics of the case. • The ld. AR reiterated the arguments and the judgments quoted at page nos. 6 to 20 of the order of ld. CIT(A) which have been duly perused.

Q.2 Please state whether you are well aware of the implications of giving or furnishing false or wrong statements/misleading information that has just been explained to you?

Ans. Yes, I have fully understood. I may be prosecuted as per law for giving false statement under oath.

Q.17 Please provide modus operandi of providing accommodation of Long Term Capital Gain.

Ans. Generally, there are few companies engaged in providing accommodation entries in the form of long term capital gains who used to allot preferential shares of these listed companies to beneficiaries, to whom entry of long term capital gain has to be provided. After holding these shares for one year, clients used to sell such shares on very higher, rates. Such shares are bought from beneficiary clients by our companies mentioned at question no.

14. When party/beneficiary, come to us for having accommodation entry, we used to get cash from them, get it deposited in various bank accounts and then finally, we used to transfer it to party/beneficiary’s bank account. For doing so, we used to get a commission income in cash from party @ 0.10 paisa per 100 rupees of cheque amount. Our companies buy the shares after the prices of a scrips are raised through artificial synchronized trading.

15.1 The aforesaid statement of the assessee himself corroborates the information and material available with the Assessing Officer that shares of M/s Unno Industries Ltd. was used for accommodation entries. The key points of his statement are as under: a. In reply to various questions asked by the AO, he admitted that he doesn’t remember that how long he has kept the shares and doesn’t have any experience of the share market. b. Despite having no exposure of share market, he was dependent upon advice of the broker who he has found from internet. The broker advised him only for shares of M/s Unno Industries Ltd. without even knowing the credentials of the said company or prospectus of the company that this company had huge credentials for multiplying the investments in shares more than five times in less than year. c. He could not even recollect the name and details of the broker through whom he had sold the shares. d. He could not even recollect on what price he has purchased the shares and had sold them nor he was aware of any transaction as to which company’s share he has bought and how he got the merged shares of M/s Unno Industries Ltd.

15.2 Thus, the assessee was compete oblivion of the share market or the credentials of the shares he purchased nor he appears to be any regular investor in shares. Thus, the statement of the assessee itself negates the so called documentary evidences and the arguments put forth by the ld. Counsel for the assessee.

i) An old already listed company, the entire shareholding of which is bought by the syndicate to provide LTCG entries.

These are generally dormant company with no business and with accumulated losses. ii) A new company which is floated just for the purpose giving LTCG entries. Such new companies are often floated after the initial booking is complete and the capital base is decided keeping in mind the entries to be provided. The entities involved in the transactions.

i) Syndicate Members: They are the promoters of the Penny Stock companies who own the initial shareholding mostly in the name of paper companies either in a fresh IPO or purchased from the shareholders of a dormant company. They are usually a group of 4-5 individuals who also referred to as Syndicate Members and are sometimes also referred to as Operators. Their nominees are directors of the Penny Stock companies which is indirectly controlled by them through such dummy directors. The whole operation is managed by them. They get the net commission income from the transactions. Their name however, seldom appears in the actual transactions. ii) The Brokers: They are registered brokers through whom shares are traded both online and off-line. They are fully aware of the nature of transactions and get paid a commission over and above their normal brokerage. Some of the big broking houses are also indulging in such transactions mostly through sub-brokers. Even Calcutta Stock Exchange has registered itself as a broker with BSE and has given a large number of terminals to sub-brokers who are dealing into this type of transactions. iii) The Entry Operators: They are individuals who control a large number of paper/shell companies which are used for routing cash for the transactions as well as buying and selling shares during the process of price rigging. They work for commission to be paid by the Syndicate Members. To cut cost sometimes in smaller operations, the same group performs more than one function.

i) Purchase of share by the beneficiary: In this the beneficiary is sold a fixed number of shares at a nominal rate. The price and the number of shares to be purchased are decided on the basis of the booking taken and the value up to which price would be rigged. This leg of the transaction mostly is off-line. ii) Price rigging: After the shares have been purchased by the beneficiaries, the syndicate members starts rigging the price gradually through the brokers. In these transactions the volume is almost negligible. Two fixed brokers who are in league with the Syndicate buy shares at a fixed time and at a fixed price. These low volume transactions are managed through paper companies of entry operators. iii) Final sale by the beneficiary: This is done after the beneficiary has already held the share for one year. The period of holding may be a little more to match the amount of booking with the final rate. The paper company issues cheque to the beneficiary.

Merger method : In this method the operators first form a Private Limited Company and the shares at par are allotted to beneficiary individuals. This private limited company is then amalgamated / merged with a listed penny stock company by a High court order. Depending on the capital of the amalgamating and amalgamated companies, the investors are allotted stock of the listed companies in the same proportion. The prices of shares are thus manipulated at 20 to 25 times the face value. The investors hold these shares the penny stock listed company which it got as a result of merger for one year (statutory lock-in period for exemption under IT Act) and then sell it to one of the shell private limited companies of the operator. The investor thus makes a LTCG of 25 are more times its original investment. A typical chart of share price verses date and the volume of a ‘Penny stock’ would see the bell curve peak as one shown on the left.

Snapshot of Basic modus of providing bogus LTCG

This is the most preferred option for the persons willing to operate for the purpose of doing Long Term capital Gains. In case of the mergers with listed companies, the merger petition has to be filed with concerned stock exchange under clause 24F of the Listing Agreement, which gives its permission to go ahead with the merger scheme in consultation with SEBI. Here the main catch is valuation of shares of the companies. Since the Act provides for the valuation of shares at book value and the same has been approved by the Supreme Court in various decisions which has been discussed below after this para. Since, the Stock Exchange and SEBI keep close watch on price movement of shares, these people adopted the route of merger of private limited companies having huge premium thereby increasing their book value whereas the book value of the shares of listed companies were still Rs. 10/ despite the fact that they were trading at considerably higher price.

Listed company trading at 250/- per share (having book value of Rs. 10/- per share) in Unlisted companies allotted shares at a premium of 240/- per share thereby the increasing the book value of Rs. 250/- per share. Now the swap ratio will be 1:25 i.e. holder of one share of unlisted company will get 25 shares of listed company according to scheme of amalgamation.

• Step 1 – The assessee initially purchased 1,00,000 shares of Empower Ltd. @ Rs.7.28. • Step 2 – 800 shares were sold to M/s Anandlok Suppliers and Traders Pvt. Ltd. situated at Nasik. • Step 3 - In lieu of these 800 shares the assessee gets shares of M/s Pinnacle Vintrade Ltd. • Step 4 – Along with 800 shares of M/s Pinnacle Vintrade Ltd. the assessee was issued 72000 bonus shares taking the total to 80000 shares. • Step 5 – M/s Pinnacle Vintrade Ltd. merges with M/s Unno Industries Ltd. The shares of M/s Unno Industries Ltd. were sold at the rate ranging from Rs.31.00, Rs.34.96, Rs.35.95, Rs. 36.95

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1. From the sales of shares to M/s Anandlok Suppliers and Traders Pvt. Ltd. to sale of shares of M/s Unno Industries Ltd., the assessee could not discharge his onus against the overwhelming evidences that have been brought about by the revenue authorities.

6. Failure of the assessee to prove the genuinenity of the transactions at Akola based entities.

7. The order of the SEBI indicated the manipulation in trading of the scrips.