SARITA DUDHERIA,BANGALORE vs. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE- 1(1)(2), BANGALORE

IN THE INCOME TAX APPELLATE TRIBUNAL ‘B’ BENCH : BANGALORE BEFORE SHRI. CHANDRA POOJARI, ACCOUNTANT MEMBER AND SMT. BEENA PILLAI, JUDICIAL MEMBER ITA Nos. 380 to 382/Bang/2020 Assessment Years : 2013-14 to 2015-16 Ms. Sarita Dudheria, The Assistant 66, Navniketan, Commissioner of K.R. Road, Income Tax, Basavanagudi, Central Circle – 1(2), Bangalore – 560004. Vs. Bangalore. PAN: AFWPD9619P APPELLANT RESPONDENT : Shri K.R. Pradeep & Ms. Girija, Assessee by Advocates : Shri Priyadarshi Mishra, Addl. Revenue by CIT (DR) Date of Hearing : 15-03-2022 Date of Pronouncement : 15-03-2022 ORDER PER BEENA PILLAI, JUDICIAL MEMBER Present appeals have been filed by assessee against three separate orders all dated 06.02.2020 passed by Ld. CIT(A)-11, Bangalore for assessment years 2013-14 to 2015-16. It is submitted by both sides that in all these appeals, the issue alleged related to denial of capital gains earned by assessee under section 10(38) of the Act on sale of shares held in Blue circles services Pvt.Ltd and M/s.Parag Shilp InvestmentsLtd.

Page 2 of 18 ITA Nos. 380 to 382/Bang/2020 2. Brief facts of the case are as under: The Assessee is an individual and filed her return of income for years under consideration declaring total income for years under consideration. The Ld.AO observed that assessee claimed exemption under section 10(38) towards sale of equity shares as under: Asst Yr. ROI filed on Total income Exemption u/s.10(38) declared claimed during the year 2013-14 20/01/2014 6,29,540/- 2,93,54,121 2014-15 29/03/2015 14,11,860/- 3,69,27,070/- 2015-16 22/03/2016 10,80,810/- 2,58,45,625/- Information from investigation wing was received by intimating the organised racket involved in generating bogus entries of long term capital gains which was exempt from capital gains tax. The Ld.AO observed that assessee traded in Blue Circles Services Pvt.Ltd during assessment year2013-14, and for assessment years 2014-15 & 2015-15, assessee traded in Blue Circles Services Pvt.Ltd and M/s. Parag Shilpa Investments Pvt.Ltd. 2.1. The Ld.AO observed that assessee computed LTCG for AY: 2013-14 as under: “Sale value of 4,61,500 shares : Rs.3,01,69,363.74 Less: Purchase value Rs. 6,92,250.00 Long term Capital Gain Rs.2,94,77,113.74 The assessee applied and 400,000 shares of Blue Circle Services of Rs.10/-each was allotted to the assessee on 14.09.2010 at a premium of Rs.5/- each share. The shares were later converted to Rs.1/- each share and the assessee was holding 39,30,000 shares as on 31.03.2012 in his demat account. Thus the purchase price of one share of Blue Circle Services Ltd of Rs.1/- each was Rs.0.15 per share. The price of the scrip kept rising from April 2011 and touched a high of Rs.80/- during Financial Year 2012- 13. The assessee offloaded 4,61,500 shares of Blue Circle

Page 3 of 18 ITA Nos. 380 to 382/Bang/2020 Services during Fin Year 2012-13 at an average price of Rs.65.37, the purchase value of which was 15 paise per share.” For assessment Year 2014-15: For Asst Yr 2014-15 the LTCG was earned by assessee on sale of shares held in following alleged companies: Blue Circles Services Pvt.Ltd Parag Shilpa investment “3. In the year under consideration, the assessee had income from business, income from house property, other sources, and long term capital gains. It is seen that the assessee has claimed exemption of long term capital gains amounting to Rs.3,69,27,069/- (after setting off long term capital loss) on sale of shares. Amongst the shares traded by the assessee during the year are two shares which have been identified as stocks which are used to generate bogus long term capital gains. The details of the long term capital gains claimed to have accrued to the assessee in respect of such shares are given below : 1. Blue Circle Services : 2,22,86,551 2. Parag Shilpa Investments : 1,51,66,667 Out of the above, the long term capital gains on account of sale of shares of Parag Shilpa Investments is as under: Sale Value of 28,700 shares 1,54,53,667 Less: Purchase value 2,87,000 Long Term Capital Gains 1,51,66,667 The long term capital gains on account of sale of shares of Blue Circle Services is as under: Sale Value of 34,68,500 shares 2,74,89,301 Less: Purchase value 52,02,750 Long Term Capital Gains 2,22,86,551 4. The details of purchase and sale of shares were called for and examined. It is seen that the assessee had been allotted 400000 shares of the Blue Circle Services through preferential placement on 06-09- 2010. The scrip of Rs. 10 was purchased by the assessee at a premium of Rs. 5 per share. The purchase of shares of Rs. 10 at a premium of Rs.5 per share is inexplicable. The shares were split into 3468500 shares of Rs. 1.50 each. The assessee offloaded the scrip on various days between 10-04- 2013 and 24-07-2013 at varying rates as under:

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Rate No. of Date per Amount shares share 10.4.2013 40000 9.79 3,91,600 11-04-2013 75000 9.98 7,48,500 15-04-2013 45000 10.33 4,64,650 16.04.2013 26406 10.57 3,00,251.42 26.04.2013 229991 11.85 27,25,393.35 28.05.2013 175000 20,94,750 04.06.2013 250000 10.27 25,67,500 05.06.2013 500000 9.76 48,80,000 13.06.2013 600000 7.20 43,20,000 20.06.2013 300502 6.25 18,78,137.50 21.06.2013 132720 6.13 8,13,573.60 24.06.2013 670000 6.01 40,26,700 02.07.2013 400000 21,80,000 24.07.2013 21881 98,245.69 3468500 2,74,89,301.56 6. As far as the other scrip is concerned, the assessee purchased 28700 shares of Parag Shilpa Investments (erstwhile PS IT Infrastructure 86 Services on 18-0720 1 2 @ Rs 10 for Rs. 2,87,000 and sold them on various dates between 26.12.2014 to 28.03.2014 as under

No. of Rate per Date Amount shares share 26.02.2014 4500 23,91,390 04.03.2014 5000 531.87 26,59,350 07.03.2014 4200 533.56 22,40,952 13.03.2014 5000 534.56 26,72,800 28.03.20140 10000 548.92 54,89,175 28700 1,54,53,667

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For assessment year 2015-16 For Asst Yr 2014-15 the LTCG was earned by assessee on sale of shares held in PS IT Infrastructure & Services, formerly known as Parag Shilpa investment “2. The assessee, an individual has declared income from house property, profits 86 gains from business, capital gains and income from other sources. The long term capital gains of Rs. 2,58,45,625 is on account of gains earned on the sale of shares of PS IT Infrastructure Services Ltd. Investments. 3. Long term capital gains on account of PS IT Infrastructure Services Ltd is as under: Sale Value of 2,08,000 shares 2,62,15,625 Less: Purchase value 3,70,000 Long Term Capital Gains 2,58,45,625 4. The assessee purchased 18000 shares of PS IT Infrastructure Services Ltd for Rs. 1,80,000 on 18.07.2012. She also purchased 1,90,000 shares for Rs.1,90,000 on 18.07.2012. It is also seen that the price of the scrip kept rising throughout the period and touched a high of Rs. on 09.03.2015 i.e the last day on which the assessee sold the scrip. It is therefore necessary 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. In short, it has to be ascertained whether the apparent was real.” The assessee raised identical arguments for all the years under consideration as under: Before the Ld.AO the assessee submitted that these shares were in physical form when purchased and later got the same dematerialised and was sold during the year under consideration. The assessee submitted before Ld.AO that transaction of sale was done through recognised stock exchange openly, and he was unaware of the scrip being a penny stock company.

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2.2. It has been submitted that Ld.AO concluded the assessment by holding that the transaction in the share price of alleged companies were not owing to commercial principles and market factors and that assessee resorted to a preconceived scheme to procure long term capital gains by way of price difference in share transactions. Ld.AO also held that assessee did not discharge his onus of proving the rise in share price to be natural and based on market forces, and, in view of order of SEBI finding that company these alleged companies, were involved in providing bogus long term capital gains, claim of exemption of long term capital gains earned by assessee was denied. 3. On appeal before Ld.CIT(A), observations and findings by Ld.AO were upheld. 4. Aggrieved by order of Ld.CIT(A) assessee is in appeal before us. 4.1. It is submitted that, assessment year 2013-14 is reopened under section 147 of the Act, and assessment years 2014-15 & 2015-16 are regular assessments under section 143(3). On legal grounds raised for assessment year 2013-14, the Ld.AR submitted that, the assessee for the above assessment year filed its return of income on 20.01.2014 declaring total income of Rs.6,29,540/- consisting of Income from House Property of Rs.72,996/-, Short term capital gains of Rs.5,32,549/- and Income from Other sources of Rs.33,990/-. The assessee also earned exempt . Long term capital gains of Rs.2,93,54,121/- and dividend of Rs.13,47,615/-. A notice u/s

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148 of the Act dt.31.03.2018 was issued to the appellant. The assessee filed a letter on 07.05.2018 stating that the original return of income filed on 20.01.2014 may be treated as return in response to notice u/s 148 and also requested for reasons recorded for reopening the assessment. The AO issued notices u/s 142(1) of the Act for which the assessee furnished the details called for from time to time during the course of the assessment proceedings. The AO provided the reasons recorded vide letter dt.18.07.2018. The assessee vide reply dt.16.11.2018 objected to the reassessment proceedings and sought for the material relied on to reopen the assessment proceedings. Disregarding the assessee's request, the AO issued a notice dt.16.11.2018 proposing to make addition of Long term capital gains earned from sale of M/s. Blue Circle Services Ltd of Rs.2,94,77,114/- as Cash credit u/s 68 of the Act. The" AO disposed off the assessee's objections on 20.11.2018. The assessee vide reply dt.10.12.2018 objected to the AO's proposal and sought for complete details and thereafter provide ,opportunity for cross examination in case the assessee’s explanation is not reckoned favourably. The Ld.AR submitted that the Revenue has also failed to give copies of the materials based on which the assessment was reopened. The Ld.AR submitted that non of the materials had any reference of assessee and therefore reopening of assessment violates the established principles of natural justice.

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On merits, it was vehemently argued by the Ld.AR that no opportunity to cross examination was given to assessee. Placing reliance on the paperbook, he submitted that the shares were purchased, subsequently demated and sold for which necessary bills have been issued. It was submitted that the shares were sold through demat a/c and against the sale payment has been received by a/c payee cheque etc. He also submitted that shares were sold on recognized stock exchange on which STT have been paid. He thus placed reliance on following decisions on the legal issue submitted for the assessment to be quashed and set aside, as well as on merits.  decision of Hon’ble Supreme Court in case of Dhakeshwari Cotton Mills., vs.CIT reported in 26 ITR 775;  decision of Hon’ble Delhi High Court in case of CIT vs. SMC Share Brokers Ltd. reported in 288 ITR 345;  decision of Hon’ble Delhi High Court in case of Sarthak Seciurities Co.Ltd., vs. ITO reported in 329 ITR 110;  decision of Hon’ble Delhi High Court in case of Oracle Systems Corporation, vs. DCIT reported in (2015)94 CCH 0045;  decision of Hon’ble Delhi High Court in case of ITO vs. Lakhmani Mewal Das reported in 103 ITR 437;  decision of Hon’ble Bombay High Court in case of CIT vs. Shyam R Pawar, reported in 229 Taxman 256;  decision of Hon’ble Madras High Court in case of CIT v M.Chinnaswamy, reported in 350 ITR 694;  decision of Hon’ble Mumbai Tribunal in case of Farrah Marker vs.ITO in ITA no. 3810/Mum/2011decision of Hon’ble Mumbai Tribunal in case of Sunil Prakesh vs.ACIT in ITA no.6494/Mum/2014 4.2. Ld.Sr.DR on the contrary filed written submission stating that assessee’s claim of genuineness is merely confined to the act that the shares were sold through recognised stock exchange and payment/receipt of consideration was through banking channels. He submitted that these transactions are tailor made and when the circumstantial evidence point on an opposite

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direction the claim is proven to be illegitimate. The Ld.Sr.DR submitted that the assessing officer was made aware by the investigation wing regarding these companies are fictitious companies of shell companies. He submitted that the alleged long term capital gain was disallowed by the Ld.AO as assessee did not discharge the onus to establish the source of investment in the alleged scripts. 4.2.1. The Ld.Sr.DR submitted that the assessee provided various documents to establish alleged sale of shares of these companies, which was carried out through brokers registered with stock exchange and also with SEBI, contract notes, payments made through proper banking channels etc. However these alone cannot lead to establish genuineness of purchase and value ascertained for sale of shares of alleged companies, though they might have been through stock exchange and brokers registered with SEBI, NSE/BSE, as observed by various Hon’ble High Court. 4.2.2. It is submitted by the Ld.Sr.DR that the shares of alleged companies were transferred to assessee, through off market transaction, and that the assessee could not satisfactorily explain, as to how, she was informed regarding shares of these companies available for purchase. She failed to establish business connection with such company personnel. It has been alleged by Ld.AO that these companies were hardly having any profit or business activity so as to attract purchasers. 4.2.3. The Ld.Sr.DR submitted that the revenue has provided all details that was received from the investigation wing to establish

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that the alleged companies in which assessee invested huge amounts were bogus and were used for converting the unaccounted monies. He submitted that in the present facts assessee did not establish the source of monies invested in the alleged companies. He submitted that for all these reasons the decisions relied by the Ld.AR are factually distinguishable. He thus supported the order passed by the Ld.CIT(A). 5. We have perused submissions advanced by both sides in light of records placed before us. Assessment year 2013-14: 5.1. The Ld.AR challenged the issuance of notice under section 147 of the Act, on the ground that the reasons do not mention about any new/tangible material/information against the assessee based on which the Ld.AO had reason to believe to reopen the concluded assessment. It is argued that the materials based on which the assessment has been reopened does not contain the name of assessee and hence irrelevant. 5.2. We note that no assessment under section 143(3) was passed in the case of assessee for assessment year 2013-14. Hence the argument of the Ld.AR that the issue of notice under section148 amounts to change of opinion cannot be accepted. Explanation 2 to Section 147 clarifies that, following shall be deemed to be cases where income chargeable to tax has escaped assessment namely: a. where no return of income has been furnished by the assessee and no assessment has been made although: i. his total income; or

Page 11 of 18 ITA Nos. 380 to 382/Bang/2020 ii. the total income of any other person in respect of which he is assessable under this Act during the previous year exceeded the maximum amount which is not chargeable to income tax; b. where a return of income has been furnished by the assessee but no assessment (scrutiny/best judgment assessment) has been made and it is noticed by the Assessing Officer that the assessee: i. has understated the income; or ii. has claimed excessive loss, deduction, allowance or relief in the return; 5.3. In the present facts of the case assessee falls under situation (b) above. We also place reliance on the decision of Hon’ble Supreme Court in case of ACIT vs.Rajesh Jhaveri Stock Brokers reported in (2007) 291 ITR 500, wherein Hon’ble court held that Section 147 authorises and permits the Ld.AO to assessee or reassess income chargeable to tax if he has reason to believe that income for assessment year has escaped assessment. The word ‘reason’ in the phrase, ‘reason to believe’, would mean cause or justification. If the Ld.AO has cause or justification to know or support that income had escaped assessment, it can be said to have reasons to believe that income had escaped assessment. The expression cannot be read to mean that the Ld.AO should have finally ascertained the fact by legal evidence or conclusion. The function of the Ld.AO is to administer the statute with solicitude for the public exchequer with an inbuilt idea of fairness to taxpayer. Hon’ble Delhi High Court in case of Central Manganese Ore Co.Ltd. Vs.ITO reported in (1991) 191 ITR 662, observed that, for initiation of action under section 147(a){as it stood at the relevant time}, fulfillment of two requisite conditions in that regard is essential as at that stage the final outcome of the proceedings is not relevant.

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5.4. In other words, at the initiation stage, what is required is ‘reason to believe’, but not the established fact of escapement of income. We also rely on the decisions of Hon’ble Supreme Court in case of ITO vs. Selected Dalutband Co.Pvt.Ltd., reported in (1996) 217 ITR 597 and Raymond Wollen Mills Ltd. vs. ITO reported in (1999) 236 ITR 34. Hon’ble Supreme Court in these cases held that, so long as the ingredients of section 147 are fulfilled, the Ld.AO is free to initiate proceeding under section 147 and failure to take steps under 143(3) will not render the Ld.AO powerless to initiate reassessment proceedings even when intimidation under section 143(1) had been issued. 5.5. In present facts of the case we note that, the Ld.AO received information from investigation wing regarding the company Blue Circles Services Ltd being penny stock. And it is an admitted fact that assessee had sold the shares in Blue Circles Services Ltd and had earned LTCG. Therefore in order to investigate regarding the purchase/sale of shares in Blue Circles Services Ltd., by assessee, the assessment was reopened by the Ld.AO. The decisions by Ld.AR by Honble Courts on challenge of the validity of reopening in the paper book are distinguishable on facts based on the above discussions. We therefore do find any infirmity in the reopening of the assessment. Accordingly grounds 3-10 on legal issue stands dismissed.

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On Merits: 6. Both sides submit that the arguments advanced by both sides are common for all the assessment years under consideration. 6.1. Perusal of assessment order it is observed that Ld.AO carried out detailed investigation/verification in respect of scrips of alleged companies sold by assessee during the year under consideration and found them to be lacking sound financials. Various queries raised by Ld.AO has not been answered with supporting cogent and uncontrovertable documents by assessee. Enquiries carried out by Ld.AO revael these companies to be mere paper companies, without having any activities/business. View taken by Ld.AO was upheld by Ld.CIT(A) against which assessee filed present appeal. 6.2. It is the submission of the Ld.AR that the LTCG earned by assessee on sale of shares in the alleged companies were through recoganised stock exchange and banking channels. It is also submitted that both receipt and payments are done through account payee cheques. He thus submitted that the statement of third parties has been relied on for making addition in the hands of assessee. 6.3. Whereas the Ld.Sr.DR submits that the statements and materials are only circumstantial regarding the alleged companies to be shell companies and that these companies were used in providing accommodation entries and that they were managed by the persons whose statements were recorded by the investigating wing.

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6.4. In present facts of the case, the statements recorded of third parties only reveal that the alleged companies involved in providing bogus LTCG/STCG or LTCL/STCL and provide accommodation entries by beneficiaries. We note that the Ld.AO in para 7.11 for AY 2013-14 raised serious doubts on capacity of assessee to purchase shares of these companies in such huge volumes, which has not been satisfactorily/reasonably established by assessee to be genuine. Assessee thus did not establish genuineness of purchase and source of investment of this company during the relevant period. 6.5. Ld.AO upon verifying credentials of these companies and other attending circumstances, observed that alleged companies were included in list of penny stock companies, in enquiries conducted by SEBI/BSE, as well as in Investigation Report issued by Investigation Wing, Kolkata. The Assessee having purchased shares of this company in huge volumes, should have possessed all required documents, as a prudent investor. The Assessee thus did not establish activities/business of companies, financial statements, annual income tax returns etc., in respect of alleged companies.

6.6. In the above list of decisions, relied by the Ld.AR, we note that the Hon’ble Mumbai Tribunal deleted the addition on the basis that the assessee therein established the sale of shares to be genuine and therefore the disallowance of LTCG is unwarranted for. However in the present facts of the case, the Ld.AO has doubted the capacity of assessee in making such

Page 15 of 18 ITA Nos. 380 to 382/Bang/2020 huge investment in the alleged comapnies during the year in which they were purchased. 6.7. The decision of Hon’ble Delhi, Bombay and Madras High Courts is also on distinguishing facts. In those cases, the statements of third person recorded were direct evidence against the assessed person and cross examination was denied by the revenue. Under such circumstances, Honble Courts held that there was violation of natural justice. 6.8 Therefore in our view, none of the decisions are of any help to assessee on merits in the present facts of the case. The Ld.AR relied heavily on the decision of coordinate bench of this Tribunal in Shri.Lxmipat Dudheria Vs.ACIT in ITA no.2373 to 2376/Bang/2018 by order dated 09/04/2019, wherein investment in Bule circles Services Ltd by the assessee therein and the there assessment was reopened which was struck down by this Tribunal. We note that in the decision by this Tribunal nothing is decised on merits but the entire decision was on the validity of reopening where there the assessment order was passed under section144 of the Act. We therefore are of the opinion that the decision is of no rescue to assessee. 6.9. We are conscious of principle laid down by Hon’ble Supreme Court in case of M/s Andaman Timber Industries vs CCE, Kolkata-II, reported in (2015) 127 DTR 241, in support of his contention as well as decision of Hon’ble High Courts relied by the Ld.AR. All these decisions lay down that, without opportunity of cross-examination, statements cannot be relied upon against any asessee. However, such right, as held in

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various decisions by Hon’ble Supreme Court, is not an absolute right and depends on circumstances of the case and the statute concerned, as held in State of J&K Vs. Bakshi Gulam Mohd. AIR 1967 (SC) 122, and Nath International Sales Vs. UOI reported in AIR 1992 Del 295. Similar is the view taken by Hon’ble Allahabad High Court in case of In case of Prem Castings Pvt.Ltd. Vs.CIT (Supra). 6.10. At this juncture we referred to decision of T.Devasahaya Nadar V. CIT reported in (1964) 51 ITR 20 (Mad), wherein, it has been held that; "We are of opinion that it cannot be said as a general proposition of law that any evidence upon which the department might rely should have been subjected to cross-examination. The procedure for assessment is indicated in section 23 (3) of the Act.” 6.11. Further Hon’ble Mumbai Tribunal in case of GTC Industries Ltd. V. Asstt. CIT reported in (1998) 60 TTJ 308 , held that, where statement and report of third parties are only secondary and subordinate material which were used to buttress the main matter connected with the quantum of addition, denial of opportunity to cross examine third parties did not amount to violation of natural justice. 6.12. Therefore, each case has to be decided on facts and circumstances of that case. In our considered opinion, relevant factors to be considered are surrounding circumstances, objective facts, evidence adduced, presumption of facts based on common human experience in life and reasonable conclusions. 6.13. Under such circumstances, the assessee was liable to discharge its onus regarding purchase of shares by way of cogent documentary evidences. We note that assessee has not placed

Page 17 of 18 ITA Nos. 380 to 382/Bang/2020 anything on record regarding the source of investments and capacity to invest such huge monies during the year in which the investments were made. Be that as it may, we also note that, the assessee having invested huge monies in these alleged companies, has not been able to provide any documents to establish sound financial of these companies and that, the fluctuation in price was market driven. Assessee is therefore directed to provide all relevant documents to establish source of investment and capacity to invest in the alleged companies in the year of investment. Ld.AO shall take all evidences into consideration and then decide the issue as per law. 6.14. At the outset we also hold that the statements recorded are secondary and subordinate evidence, and therefore cross examination is not relevant. Ld.AO is directed to re-examine the case of assessee in the light of aforestated direction in accordance with law. Needless to say that proper opportunity shall be granted to assessee to represent its case as per. Accordingly we allow grounds on merits raised by assessee for statistical purposes for all the years under consideration. In the result, all the three appeals filed by assessee stands partly allowed for statistical purposes for all the years under consideration. Order pronounced in the open court on 15th March, 2022.

Sd/- Sd/- (CHANDRA POOJARI) (BEENA PILLAI) Accountant Member Judicial Member Bangalore, Dated, the 15th March, 2022. /MS /

Page 18 of 18 ITA Nos. 380 to 382/Bang/2020 Copy to: 1. Appellant 4. CIT(A) 2. Respondent 5. DR, ITAT, Bangalore 3. CIT 6. Guard file

By order

Assistant Registrar, ITAT, Bangalore