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CHINTAN SHAILESH SHAH,MUMBAI vs ITO WARD-30(1)(2), NOW ITO WARD-41(3)(1), MUMBAI | BharatTax

CHINTAN SHAILESH SHAH,MUMBAI vs. ITO WARD-30(1)(2), NOW ITO WARD-41(3)(1), MUMBAI

ITA 2469/MUM/2024Status: DisposedITAT Mumbai17 February 2025AY 2014-15Bench: SHRI SANDEEP GOSAIN (Judicial Member), SHRI PRABHASH SHANKAR (Accountant Member)1 pages

AI SummaryDismissed

Facts

The assessee challenged an order passed by the National Faceless Appeal Centre, Delhi. The assessee failed to appear for multiple hearings. The appeal concerns additions made by the AO under Sections 68 and 69C of the Income Tax Act, 1961, related to alleged bogus long-term capital gains from penny stock transactions.

Held

The tribunal held that the assessee's transactions were not genuine and were part of a modus operandi to generate bogus capital gains. The tribunal noted that the assessee failed to discharge the onus of proving the genuineness of the transactions and dismissed the appeal.

Key Issues

Whether the assessee's transactions in penny stocks were genuine or part of a scheme to create bogus long-term capital gains, and whether the AO's additions were justified. The tribunal also examined the principles of natural justice regarding the right to cross-examination.

Sections Cited

10(38), 68, 69C, 143(2), 142(1)

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, “C” BENCH MUMBAI

Before: HON’BLE SHRI SANDEEP GOSAIN & SHRI PRABHASH SHANKAR

For Respondent: Shri Mahesh Pamnani, Sr. DR

Hearing: 17.02.2025Pronounced: 17.02.2025

Date of Hearing 17.02.2025 Date of Pronouncement 17.02.2025 आदेश / ORDER

PER SANDEEP GOSAIN, JM:

The present appeal has been filed by the assessee challenging the impugned order 14.03.2024 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.

None appeared on behalf of the assessee when the case was called, even no application for seeking adjournment has been filed. From the records, we noticed that today is the 8th opportunity and even on previous 2 Chintan Shailesh Shah, Mumbai occasions dates were being sought by the assessee, and ultimately stopped appearing before the court. In our view, it is the bounded duty of assessee to pursue its appeal but assessee has failed to do so, which goes to show that assessee is not interested in pursuing the present appeal.

On the other hand Ld. DR present in the court is ready with the arguments. Therefore we have decided to proceed with the hearing of the case ex-parte.

We have heard Ld. DR and perused the material placed on record and orders passed by the revenue authorities. The assessee has challenged the additions made by the AO u/s 68 and 69C of the Act, and in this regard, we have meticulously analyzed the orders passed by the Ld. CIT(A) and found that Ld. CIT(A) has dealt with both the grounds in detail while passing the orders and operative portion of the Ld. CIT(A) is contained in para 6 to 7 which are reproduced herein below:

It is also seen that in a case, similar to that of appellant, of availing accommodation entry of capital gains in case of Swati Bajaj [2022] 139 taxmann.com 352 (Calcutta), Hon'ble Calcutta High Court has held below “The first argument on behalf of the assessee is that the copy of the investigation report was not furnished to them despite specific written request made on behalf of the assesses to furnish the copy of the report, the statements recorded and provide those persons from whom statements were recorded to be cross examined on behalf of the assessee. There is no dispute to the fact that the copy of the statement said to have been recorded during the course of investigation has not been furnished to the assessees and the request made by some of them for cross examining of those persons was not considered. The question would be as to whether the non-compliance of the above would render the assessments bad in law. The argument of the revenue is that the assessments cannot be held to be illegal merely on the grounds that the copy of the report was not furnished as the respective assessing officers have clearly mentioned as to the nature of investigation done by the department and as the report itself states that the investigation commenced not from the assessees end but the individuals who dealt with these penny stocks who were targeted. It is equally true invariably in all cases, the statement of the stock brokers, the entry operators or the Directors of the various penny stock companies does not directly implicate the assessee. If such being the situation, the assessee cannot be heard to say that the copy of the entire report should have been furnished to him, the person from whom the statements were recorded should have been produced for cross examination as admittedly there is nothing to implicate the assessee Smt. Swati Bajaj of insider trading or rigging of share prices. But the allegation against the assessee is that the claim for LTCG/LTCL is bogus. As pointed out by Mr. Rai, learned senior standing counsel, the investigation report is general in nature not assessee specific. Therefore, we are required to see as to whether non-furnishing of the report which according to the revenue is available in the public domain would vitiate the proceedings on the ground that the assessee was put to prejudice. …………………………… …………………………… 7 Chintan Shailesh Shah, Mumbai the assessees have to specifically point out as to how they were prejudiced on account of non-furnishing of the investigation report in its entirety, failure to produce the persons from whom the statements were recorded for being cross examined would cause prejudice to the assessee as nowhere in the report the names of the assessees feature. The investigation report states that the investigation has not commenced from the individuals but it has commenced who had dealt with the penny stocks, concept of working backwards. This is a very significant factor to be remembered. Therefore, there has been absolute anonymity of the assessee in the process of investigation. The endeavour of the department is to examine the "modus operandi" adopted and in that process now seek to identify the assessees who have benefited on account of such "modus operandi". Therefore, considering the factual scenario no prejudice has been established to the assessee by not furnishing the investigation report in its entirety nor making the persons available for cross examination as admitted by the department in substantial number of cases the assessees have not been specifically indicted by those persons from whom statements have been recorded.

61.

Having noted the above legal position, it goes without saying there is no vested right for the assessee to cross examine the persons who have not deposed 8 Chintan Shailesh Shah, Mumbai anything against the assessee. The investigation report proceeds on a different perspective commencing from a different point and this has led to the enquiry being conducted by the assessing officer calling upon the assessee to prove the genuineness of the claim of LTCG. …………………………… …………………………… the report submitted by the investigation department cannot be thrown out on the grounds urged on behalf of the assessees. The assesses have not been shown to be prejudiced on account of non- furnishing of the investigation report or non-production of the persons for cross examination as the assessee has not specifically indicated as to how he was prejudiced, coupled with the fact as admitted by the revenue, the statements do not indict the assessee. That apart, we have noted that the investigation has commenced targeting the individuals who dealt with the penny stocks and after examining the modus seeing the cash trail the report has been submitted recommending the same to be placed before the DGIT (investigation) of all the states of the country. It is thereafter the concerned assessing officers have been informed to consider as to the bonafideness and genuineness of the claims of LTCG/LTCL of the respective assessees qua the findings which emanated during the investigation conducted on the individuals who dealt with the penny stocks. Therefore, the assessments have commenced by the assessing officers calling upon the assessee to explain the genuineness of the claim of LTCG/LTCL made by them. in all the assessment orders, substantial portion of the investigation report has been noted in full. A careful reading of the some would show that the assessee has not been named in the report. If such be the case, unless and until the assessee shows and proves that she/he was prejudiced on account of such report/statement mere mentioning that non-furnishing of the report or non-availability of the person for cross examination cannot vitiate the proceedings. The assessees have miserably failed to prove the test of prejudice or that the test of fair hearing has not been satisfied in their individual cases. In all the cases, the assessees have been issued notices under sections 143(2) and 142(1) of the Act they have been directed to furnish the documents, the assessee have complied with the directions, appeared before the assessing officer and in many cases represented by Advocates/Chartered Accountants, elaborate legal submissions have been made both oral and in writing and thereafter the assessments have been completed. Nothing prevented the assessee from mentioning that unless and until the report is furnished and the statements are provided, they would not in a position to take part in the inquiry 9 Chintan Shailesh Shah, Mumbai which is being conducted by the assessing officer in scrutiny assessment under section 143(3) of the Act. The assessee were conscious of the fact that they have not been named in the report, therefore made a vague and bold statement that the non- furnishing of report would vitiate the proceedings. Therefore, merely by mentioning that statements have not been furnished can in no manner advance the case of the assessee. If the report was available in the public domain as has been downloaded and produced before us by the learned standing counsel for the revenue, nothing prevented the assesses who are ably defended by Chartered Accountants and Advocates to download such reports and examine the same and thereafter put up their defence. Therefore, the based on such general statements of violation of principles of natural justice the assessees have not made out any case. …………………………… …………………………… It is equally not in dispute that whatever information which was required to be made known to the assessee has been informed to the assessee by the assessing officer by issuance of a notice to each of the assesses to which they have responded by submitting their replies. Therefore, in the absence of any prejudice caused to the assessee on account of non-furnishing of the entire report, the assessees cannot be a heard to say that there has been violation of principles of natural justice and their right to defend themselves was in any manner affected. At this juncture, it would be of much relevance to refer to the decision in K. R. Ajmera (supra). The question of law which arose for consideration before the Hon'ble Supreme Court was as to what is the degree of proof required to hold brokers/sub-brokers liable for fraudulent/manipulative practices under the SEBI Regulations and for violating the code of conduct of the SEBI (Stocks brokers and Sub-brokers) Regulations. It was pointed out that the code of conduct for stock brokers lays down that they shall maintain high standard of integrity, promptitude and fairness in the conduct of all investment business and shall act with due skill and care and diligence in the conduct of all investment business. The Code also enumerates different shades of duties of stock brokers towards the investor and those duties pertain to high standard of integrity that the stock broker is required to maintain in the conduct of his business. It was further pointed out that it is a fundamental principle of law that prove of an allegation levelled against a person may be in the form of direct substantive evidence or as in many cases such proof may have to be inferred by a logical process of reasoning from the totality of the attending facts and circumstances surrounding the allegations/charges made and levelled. It was further held that direct evidence is a more certain basis to come to a conclusion yet in the absence thereof the courts cannot be helpless. It was further pointed out that it is the judicial duty to take note of the immediate and proximate facts and circumstances surrounding the events on which the charges/allegations are founded and to reach what would appear to the Court to be a reasonable conclusion therefrom. The test would always be that what inferential process that a reasonable/prudent man would adopt to arrive at a conclusion. The above tests laid down by the Hon'ble Supreme Court were applied to the facts of the case in K.R. Ajmera (supra) and it was noted that the scrips in which trading had been done wherefore illiquid scrips meaning thereby that such scrips though listed in the BSE were not a matter of every day buy and sell transactions. Further it was held that trading in such illiquid scrips is not impermissible yet voluminous trading over a period of time in such scrips is a fact that should attract the attention of a vigilant trader engaged in such trades. It was further pointed out that though proximity of time between the buy and sell orders may not be conclusive in an isolated case such an event in a situation where there is a huge volume and trading can reasonable point to some kind of a fraudulent/manipulative exercise with prior meeting of minds. Such meeting of minds so as to attract the liability of the brokers/sub-broker and may be between the brokers/sub-broker and the client or it could be between two brokers/sub-brokers engaged in the buy and sell transactions. Further it was pointed out that when over a period of time such transactions have been made between the same set of brokers or a group of brokers a conclusion can be a reasonable reached that there is a concerted effort on the part of the brokers concerned to indulge in synchronized trade the consequences of which is large volumes of fictitious trading resulting in unnatural rise in hiking the price/value of the scrips. In the said case, it was argued that on a screen-based trading the identity of the second party to be a client or the broker is not known to the first party/client or broker. This argument was rejected as being irrelevant. It was pointed out that the screen-based identity system keeps the identity of the parties anonymous and it will be too naïve to rests the final conclusions on said basis which overlooks a meeting of minds elsewhere. Further it was held that direct proof of such meeting of mind elsewhere would rarely be forth coming and therefore the test is one of the preponderance of probabilities so far as the adjudication of a civil liability arising out of violation of the Act or to the Regulations. Further it was held that the conclusion has to be gathered from various circumstances like that volume of trade effected; the period of persistence in trading in particular scrips; relevant factors.

Thus, the legal principle which can be culled out from the above decision is that to prove the allegations, against the assessee, can be inferred by a logical process of reasoning from the totality of the attending facts and circumstances surrounding the allegations/charges made and levelled and when direct evidence is not available, it is the duty of the Court to take note of the immediate and proximate facts and circumstances surrounding the events on which the charges/allegations are founded so as to reach a reasonable conclusion and the test would be what inferential process that a reasonable/prudent man would apply to arrive at a conclusion. Further proximity and time and prior meeting of minds is also a very important factor especially when the income tax department has been able to point out that there has been a unnatural rise in the price of the scrips of very little known companies. Furthermore, in all the cases, there were minimum of two brokers who have been involved in the transaction It would be very difficult to gather direct proof of the meeting of minds of those brokers or sub-brokers or middlemen or entry operators and therefore, the test to be applied is the test of preponderance of probabilities to ascertain as to whether there has been violation of the provisions of the Income-tax Act. In such a circumstance, the conclusion has to be gathered from various circumstances like the volume from trade, period of persistence in trading in the particular scrips, particulars of buy and sell orders and the volume thereof and proximity of time between the two which are relevant factors. Therefore, in our considered view the methodology adopted by the department cannot be faulted. …………………………… …………………………… It is very rare and difficult to get direct information or evidence with regard to the prior meeting of minds of the persons involved in the manipulative activities of price rigging and insider trading. We can draw a parallel in cases of adulteration of food stuff, more than often action is initiated under the relevant Act after the adulteration takes place, the users of adulterated products get affected etc. Therefore, a holistic approach is required to be made and the test of preponderance of probabilities have to be applied and while doing so, we cannot loose sight of the fact that the shares of very little known companies with in-significant business had a steep rise in the share prices within the period of little over a year. The Income-tax department was not privy to such peculiar claim for a LTCG/STCL, the investigation commenced. As pointed out the investigation did not commence from the assessee but had commenced from the companies and the persons who were involved in the trading of the shares of these companies which are all classified as penny stocks companies. Therefore, the argument of the assessee that the copy of the investigation report has not been furnished, the persons from whom statements have been recorded have not been produced for cross examination are all contention which has to necessarily fail for several reasons which we have set out in the proceedings paragraphs. To reiterate, the assessee was not named in the report and when the assessee makes the claim for exemption the onus of proof is on the assessee to prove the genuinity. Unfortunately, the assessees have been harping upon the transactions done by them and by relying upon the documents in their hands to contend that the transactions done were genuine. Unfortunately, the test of genuinity needs to be established otherwise, the assessees are lawfully bound to prove the huge LTCG claims to be genuine. In other words, if there is information and data available of unreasonable rise in the price of the shares of these penny stock companies over a short period of time of little more than one year, the genuinity of such steep rise in the prices of shares needs to be established and the onus is on the assessee to do so as mandated in Section 68 of the Act. Thus, the assessees cannot be permitted to contend that the assessments were based on surmises and conjectures or presumptions or assumptions. The assessee does not and cannot dispute the fact that the shares of the companies which they have dealt with were insignificant in value prior to their trading. If such is the situation, it is the assessee who has to establish that the price rise was genuine and consequently they are entitled to claim LTCG on their transaction. Until and unless the initial burden cast upon the assessee is discharged, the onus does not shift to the revenue to prove otherwise. It is incorrect to argue that the assessees have been called upon to prove the negative in fact, it is the assessees duty to establish that the rise of the price of shares within a short period of time was a genuine move that those penny stocks companies had credit worthiness and coupled with genuinity and identity. The assesses cannot be heard to say that their claim has to be examined only based upon the documents produced by them namely bank details, the purchase/sell documents, the details of the D-Mat Account etc. The assesses have lost sight of an important fact that when a claim is made for LTCG or STCL, the onus is on the assessee to prove that credit worthiness of the to within a short span of time. …………………………… …………………………… It was argued that unless there are foundational facts, circumstantial evidence cannot be relied on. This argument does not merit acceptance as wealth of information and facts were on record which is the outcome of the investigation on the companies, stock brokers, entry operators etc. Based on those foundational facts the department has adopted the concept of "working backward" leading to the assessees. While at that relevant stage the sounding circumstances, the normal human conduct of a prudent investor, the probabilities that may spill over, were all taken into consideration to negative the claim for exception made by the assessee. Therefore, the department was fully justified in taking note of the prevailing circumstances to decide against the assessees.”

…………………………… …………………………… The financials and its credibility have been discussed in detail by the SEBI in its order. This factor definitely creates suspicion about the entire transaction In such cases, it is not necessary that there statement or any document. What needs to be seen that immediate and proximate facts and circumstances surrounding the whole event which has been found during the course of investigation by the agencies and specially here in this case SEBI. Here, it is not the case that simply based on some investigation and some statement of a broker that he has dealt in particular scrip for providing accommodation entry is the basis for making the addition. Albeit, the main concerned person who was hand in gloves for manipulating the price of the shares has also stated that he was an entry provider for bogus long term capital gain in M/s. Sunrise Asian Ltd Even though he has reiterated or he has not been subjected to cross examine but later on when SEBI gave opportunity of these entities including Shri Vipul Vidur Bhatt and they were unable to substantiate or explain the case that they had not done any fraud or manipulation for manipulating the price in the stock market. The SEBI has categorically noted that how in various patches prices were rigged and who were entities involved during those periods and all these persons/noticees were directly or indirectly involved in purchase and sale of shares acting as exit providers were also rigging all the prices. Thus, without there any cross examination also it cannot be held that Shri Vipul Vidur Bhatt was not involved or his conduct later on found by agencies should be ignored simply because assessee was not allowed cross examination. As stated above, his statement alone is not the entire basis for the addition but there are other catena of factors and circumstances as discussed above including abnormal rise of the price and later on subject to ban by SEBI on this scrip and also later no trading of the shares took place as the price failed to such a low, that post 2017 there has been no trading at all.

Even though SEBI has adjudicated this issue post passing of the id. CIT (A) order, however, now it has been brought on record that the entire trading of the shares in the stock market was only a fraud to provide accommodation entries by these persons to the parties who had approach them to provide accommodation entry. This factor is crucial to induct the assessee also that it is not a simple purchase and sale of shares in a bonafide manner in the open market. Even though, there cannot be any direct evidence against the assessee, but all these factors do cast a shadow on test of genuineness of the transaction which requires juridical frown and condemnation. The assessee cannot act bonafide merely relying upon the documents in their hands to contend that transactions were genuine. The test of genuinety has to be seen on principles of 'preponderance of probabilities' and here all the factors show that there is nothing genuine about this transaction. The company which does not have any significant value before such high rise in stock exchange and later on it vanishes from trading, ostensibly goes to show that it was nothing but a paper/sham company as trading was among selected few with predetermined exit providers to provide accommodation entry to few beneficiaries, which was revealed from the inquiry and adjudication order of SEBI and this fact was also found by the income tax department in the course of the search conducted on the key entry operator of these shares. At this point it would be relevant to refer and rely upon the ratio and the Hon'ble Calcutta high Court in the case of PCIT vs. Swati Bajaj ……………………………… ……………………………… We are not going into details of various judgments wherein additions have been deleted on this scrip of M/s. Sunrise Asian Ltd and statement of Shri Vipul Vidur Bhatt has been discarded on the ground assessee was not given cross examination. We have given our finding based on various other factors and the most crucial one, the order of the SEBI brought on record before us wherein there is detailed investigation and enquiry and finding in the case of M/s Sunrise Asian Ltd. and how various other entities and persons connected with the manipulation and rigging of the prices in the stock exchange recommend to provide, accommodation entry. Thus, the addition of Rs. 2,70,01,771/- made u/s 68 is confirmed (Emphasis provided)