DEPUTY COMMISSIONER OF INCOME TAX, JALGAON vs. TARADEVI RATANLAL BAFNA, JALGAON

First we take up ITA No.1561/PUN/2024 for assessment year 2015-16 in the case of Sidharth Ratanlal Bafna as the lead case.

Facts of the case, in brief, are that the assessee is an individual and derives income from business profits being partner in the firms M/s. Bafna Builders and Land Developers, Jalgaon and M/s. United Buildcon, Pune. He also derives salary CO Nos.2 to 5/PUN/2025

Subsequently on the basis of information received from the Investigation Wing, Nashik, the Assessing Officer reopened the assessment as per provisions of section 147 of the Act by recording the following reasons: CO Nos.2 to 5/PUN/2025

He, therefore, issued notice u/s 148 of the Act on 19.03.2020. The assessee in response to the same filed his return of income on 30.04.2020 declaring the income returned originally i.e. Rs.1,23,93,990/-. Subsequently notices u/s 143(2) and 142(1) of the Act were issued and served on the assessee in response to which the assessee appeared before the Assessing Officer and filed the requisite details CO Nos.2 to 5/PUN/2025

The Assessing Officer further noted that during the enforcement operations conducted by the Income tax department in the case of PFLIL, statements of Shri P Amresh Kumar (MD of PFLIL), Shri Abhinandan Jain (Director of PFLIL) and Shri Naresh Jain, a known Hawala Operator were recorded. In the statement, Shri Abhinandan Jain (Director of PFLIL) had accepted that Shri. Naresh Jain was the main hawala operator who had facilitated the beneficiaries to earn LTCG CO Nos.2 to 5/PUN/2025

In appeal the Ld. CIT(A) / NFAC quashed the re-assessment proceedings on the ground that there was violation of principles of natural justice since the CO Nos.2 to 5/PUN/2025

Even on merit also, the Ld. CIT(A) / NFAC allowed the claim of deduction u/s 10(38) of the Act made by the assessee by observing as under: CO Nos.2 to 5/PUN/2025 CO Nos.2 to 5/PUN/2025 CO Nos.2 to 5/PUN/2025 CO Nos.2 to 5/PUN/2025

Since the Ld. CIT(A) / NFAC deleted the addition made u/s 10(38) of the Act, he also deleted the addition made by the Assessing Officer u/s 69C of the Act being the commission @ 3% paid for accommodation entries taken.

Aggrieved with such order of the Ld. CIT(A) / NFAC the Revenue is in appeal before the Tribunal by raising the following grounds: CO Nos.2 to 5/PUN/2025

On the facts and in the circumstances of the case, the decision of Ld. CIT(A), NFAC, New Delhi is not justified as the addition made by the then AO is based on specific information received from Investigation Wing and the thorough inquiry was made by then AO before confirming the addition.

On the facts and in the circumstances of the case and in law, the order of the Ld.CIT(A), NFAC, be cancelled on the above issue and that of the A.O, be restored, as the addition was not made solely on the basis of the statements.

On the facts and in the circumstances of the case and in law, the order of the Ld. CIT(A), NFAC, be cancelled on the above issue and that of the A.O. be restored, as the statements of the accountant was recorded in front of the assessee himself and no question of cross examination arises.

On the facts and in the circumstances of the case and in law, the order of the Ld. CIT(A), NFAC, be cancelled on the above issue as same has failed to consider the detailed & scientific report of Investigation wing treating the PFIL as bogus entry provider.

The appellant craves leave to add, alter, delete, amend any of the ground of appeal, if felt necessary.

The assessee has also filed the Cross Objections by raising the following grounds: 1. On the facts and in the circumstance of case and in law, Ld. CIT(A) has erred in dismissing the appellant ground that, the impugned notice u/s. 148 issued vide DIN No.ITBA/AST/S/148/2019-20/10267987 93(1) on 19/03/2020, is illegal and void ab initio as it is not clearly shows as to whether it is issued for Assess or Reassess. It is therefore requested that notice may please be quashed.

On the facts and in the circumstance of case and in law, Ld. CIT(A) has erred in dismissing the appellant ground that, the assessment proceedings initiated under section 147 r.w.s 148 is bad in law and void ab initio on several counts. Thus, it is requested that proceeding may please be quashed.

On the facts and in the circumstance of case and in law. Ld. CIT(A) has erred in dismissing the appellant ground that, assessment order passed us. 143(3) r.w.s. 147 &144B dt 28/09/2021 is certainly bad in law, being passed on basis of said illegal notice 148 and proceedings u/s.147 of IT Act. Thus, it is requested that assessment order may be quashed.

The Ld. DR strongly objected to the order of the Ld. CIT(A) / NFAC deleting the addition made by the Assessing Officer. He submitted that the case of the assessee was reopened on the basis of information which was received from the Investigation Wing according to which the assessee claimed bogus long term capital gain from sale of shares of a penny stock company namely M/s. PFL Infotech Ltd. Hyderabad. He submitted that this information was backed by statements of various persons involved in the stock market manipulation to rig the prices of PFLIL and converting unaccounted money of the beneficiaries into long term capital gain which is exempt u/s 10(38).

Referring to the decision of Hon’ble Calcutta High Court in the case of PCIT vs. Swati Bajaj reported in (2022) 446 ITR 56 (Calcutta), he submitted that the Hon’ble High Court in the said decision has discussed in detail one such action taken by Directorate of Income Tax (Investigation) at Kolkatta which identified 84 BSE listed companies which were used for tax evasion using the penny stock rigging modus operandi. The Hon’ble High Court has noted that as per the report total 84 BSE listed penny stocks were identified after which several search and survey operations were conducted in office premises of more than 32 share broking entities who have accepted that they were actively involved in bogus long term capital gain / short term capital gain scam. He submitted that one such action was carried out in the case of M/s PFLIL, a Hyderabad based company on which survey u/s 133A was carried out by the department and subsequent actions revealed that the shares of the company were manipulated to generate bogus long CO Nos.2 to 5/PUN/2025

Referring to the copy of SEBI order dated 28.11.2022, copy of which is placed at Annexure-2 of the paper book-2, he submitted that as per the said report the prices of PFLIL were rigged through manipulative and fraudulent trades during the period July 1, 2013 to May 19, 2014. SEBI also indicted Shri. P Amresh Kumar, MD of PFLIL and Shri Abhinandan Jain, Director of PFLIL in its order for violation of Section 15HA of the SEBI Act, 1992 for violation of PFUTP Regulations 2003 and section 15A(b) of the SEBI Act, 1992 for non-disclosures under PIT Regulations, 1992. He submitted that the SEBI has also noted that price manipulation in the scrip of M/s PFIL was orchestrated by two connected entities and facilitated by their connected broker. The manipulation involved in these two entities repeatedly placing buy orders at prices substantially higher than the prevailing Last Traded Price (LTP). These orders were often for minuscule quantities, such as 1 to 50 shares. This abnormal trading pattern aimed to artificially inflate the share price, as a rational investor would typically seek to buy at the lowest possible price. Together, these two entities significantly impacted the market, contributing 8.09% to the market's positive LTP during the manipulation period, a considerable deviation from market equilibrium. CO Nos.2 to 5/PUN/2025

Referring to the decision of the Mumbai Bench of the Tribunal in the case of PCIT vs. Shri Naresh Jain vide ITA Nos.1945 & 1946 of 2023, dated 31.08.2023, he drew the attention of the Bench to the following observations of the Tribunal: “The facts stated in Assessment orders, several statements extracted by ld AO, extracted statement of assessee, and modus operandi explained in those statements by assessee and others, clearly shows how blatantly and to the extent of several hundred of crores, all these persons have used sock exchange platform through exit providers, connivance with the brokers, directors of suspicious companies, price rigging through synchronized trade a money laundering exercise involving serious violation of Income tax, Securities law, Corporate Laws, banking laws and several other economic law.”

He submitted that the facts of this case should be appreciated in this background. He submitted that the assessee in financial year 2014-15 has sold 1,11,926 shares of M/s PFLIL for a total consideration of Rs.8,21,96,621/- earning Long Term capital gain of Rs.7,68,24,174/-. This is an extraordinary profit earned in a short span of 2-3 years. On being questioned by the Assessing Officer, the assessee has merely stated that he was doing this on the advice of broker and market sentiment.

Referring to the movement of shares price of M/s PFIL, he submitted that the price of this company rose from Rs.14.28 in April 2010 to Rs.825/- in May, 2014 and this meteoric rise in the prices of shares is not matched by the financials of the company. He submitted that the analysis of trade data obtained from BSE shows that the total trade volume between 01.04.2010 to 31.03.2017 is Rs.972/- crores. It has further been found that out of total trade 50 sellers sale volume is 41% and 52% of the sale volume involves only 100 sellers. Similarly, large CO Nos.2 to 5/PUN/2025

Referring to the decision of Hon’ble Supreme Court in the case of Sumati Dayal vs. CIT reported in (1995) 80 Taxmann 89 (SC) and the decision of the Delhi Bench of the Tribunal in the case of Suman Poddar vs. ITO reported in (2019) taxmann.com 329 (Delhi) and various other decisions, he submitted that the order of the Ld. CIT(A) / NFAC should be reversed and that of the Assessing Officer be restored.

So far as the observation of the Ld. CIT(A) / NFAC that the Assessing Officer has made the addition on surmises and conjunctures is concerned, he submitted that the Ld. CIT(A) / NFAC has failed to consider the overwhelming evidence in form of income tax and SEBI investigation carried out in the case of the assessee. CO Nos.2 to 5/PUN/2025

Referring to the decision of the Delhi Bench of the Tribunal in the case of Hersh W. Chadha vs. DCIT reported in (2011) 9 taxmann.com 1 (Delhi), he submitted that the Ld. CIT(A) / NFAC has failed to consider the overwhelming circumstantial evidence which is against the assessee.

Referring to the decision of Hon’ble Calcutta High Court in the case of Swati Bajaj (supra), he submitted that the Hon’ble High Court in the said decision has held that where the assessee earned long term capital gain on sale of shares and the Assessing Officer denied said claim and made additions under section 68 on the ground that the assessee invested in shares of penny stock companies which provided bogus long term capital gain, since the assessee failed to establish the genuineness of rise of price of shares within a short period of time that too when general market trend was recessive, additions made under section 68 were justified.

Referring to the decision of the Pune Bench of the Tribunal in the case of Narendra Shrikishan Agarwal Vs. ACIT vide ITA No.257/PUN/2019 order dated 05.11.2019, he submitted that the Tribunal in the said decision has rejected the assessee’s long term capital gain exemption claim on sale of penny stock of a pharma company (Lifeline Drugs & Pharma Limited -LD&PL) during assessment year 2015-16. The Tribunal in the said decision has held that it is a predetermined action with a specific intention to derive Long Term Capital Gain by dubious method. It also noted that in spite of having no revenue from operations, having no major corporate announcements, the assessee made huge investment of Rs.15 lakhs CO Nos.2 to 5/PUN/2025

Referring to the decision of the Mumbai Bench of the Tribunal in the case of Hitendra C. Ghadia Vs. DCIT reported in TS-189-ITAT-2023 (Mumbai), he submitted that the Tribunal in the said decision has held that where the assessee failed to prove the genuineness of his share dealing transactions and in view of fact that entire transactions were stage managed with object to plough back his unaccounted income in form of fictitious long term capital gain and claim bogus exemption, the Revenue was justified in denying exemption under Section 10(38) and treating such long term capital gain as bogus.

Referring to the decision of Hon’ble AP High Court in the case of M/s. Manidhari Stainless Wire (P.) Ltd. vs. Union of India vide W.P. No.5917 of 2017, order dated 31.10.2017, copy of which is placed in the paper book, he submitted that the Hon’ble High Court in the said decision has held that right to cross- examine is not absolute. If there are factual grounds to show that the denial of cross-examination was based upon sound logic, then the order of adjudication cannot be inferred with. He submitted that the SLP filed against the decision of Hon’ble High Court has been dismissed by the Hon’ble Supreme Court. Therefore, the Ld. CIT(A) / NFAC should not have deleted the addition made by CO Nos.2 to 5/PUN/2025

Referring to various other decision filed in the paper book compilation, he submitted that since the Ld. CIT(A) / NFAC in the instant case has failed to grasp the factual and legal matrix of the case and erred in allowing the long term capital gain on sale of shares of penny stock company and deleted the consequential addition being the commission paid for acquiring such accommodation entries, therefore, the order of the Ld. CIT(A) / NFAC being not in accordance with law should be set aside and that the order of the Assessing Officer be restored.

The Ld. Counsel for the assessee on the other hand heavily relied on the order of the Ld. CIT(A) / NFAC deleting the addition made by the Assessing Officer both on merit as well as on account of violation of principles of natural justice by not granting the right to cross examine. He submitted that during the course of assessment proceedings the assessee has submitted all the details of purchase and sale of shares of PFL Infotec Ltd. such as D-Mat account statement, copy of bank statement reflecting the sale and purchase transactions, relevant contract / broker notes showing the on-line transactions relating to the sale and purchase of scrip, details of STT paid, details of trade order, trade name, security quantity etc. The shares were purchased through authorized broker namely SMC Global Security Ltd., who is a member of Bombay Stock Exchange. All the transactions were routed through proper banking channel and the authorized stock CO Nos.2 to 5/PUN/2025