SHRI GANPAT PUKHRAJ JAIN,MUMBAI vs. INCOME TAX OFFICER 19(1)(3), MUMBAI

Briefly stated, the assessee who is a trader in ferrous and non-ferrous metals had e-filed his return of income for A.Y 2014-15 on 16.09.2014, declaring a total income of Rs.5,91,300/-. Subsequently, the case of the assessee was selected for scrutiny assessment under Sec. 143(2) of the Act.

Controversy involved in the present appeal hinges around the declining of the assessee‟s claim for exemption u/s 10(38) of the Act of the Long Term Capital Gain (LTCG) of Rs. 23,23,344/- on sale of shares of M/s Sunrise Asian Ltd. [earlier named as M/s Santoshima Lease Finance And Investments (India) Ltd.]. Shorn of unnecessary details, the assessee had in its return of income claimed to have sold 5000 shares of M/s Sunrise Asian Ltd. (supra) for a consideration of Rs. 24,48,344/- after holding the same for a period of 2¼ years (approx). Long Term Capital Gain (LTCG) of Rs. 23,23,343/- on the aforesaid sale transaction was claimed by the assessee as exempt u/s 10(38) of the Act. After deliberating at length on the facts of Shri. Ganpat Pukhraj Jain Vs. ITO -19(1)(1), Mumbai A.Y 2014-15 2 the case, the A.O dubbed the assessee‟s claim of LTCG as an accommodation entry and added the entire sale consideration of Rs. 24,48,344/- as an unexplained credit u/s 68 of the Act. Also, the A.O made a further addition u/s 69C of Rs. 92,933/- i.e @4% of the amount of LTCG towards unaccounted commission which as per him the assessee would have paid for obtaining the aforesaid accommodation entry. Accordingly, the A.O vide his order u/s 143(3) dated Nil assessed the income at Rs. 31,32,580/-.

Aggrieved, the assessee carried the matter before the CIT(A). Although the CIT(A) principally concurred with the view taken by the A.O, however, he restricted the addition u/s 68 to Rs. 23,23,343/- i.e to the extent of the amount of LTCG. Accordingly, the appeal of the assessee was partly allowed by the CIT(A).

The assessee being aggrieved with the order of the CIT(A) has carried the matter in appeal before us. We have heard the ld. Authorised Representatives for both the parties, perused the orders of the lower authorities and the material available on record, as well as considered the judicial pronouncements that have been pressed into service by them.

As is discernible from the assessment order, the A.O had after considering the facts of the case, investigations made by various directorates and the statements recorded during the course of the assessment proceedings, concluded, that the assessee had booked LTCG in his books of accounts on the basis of a pre-arranged method to evade taxes and launder his ill-gotten money. The observations of the A.O as summarised in the assessment order are culled out as under : “a. Mode of acquisition of the shares : The assessee purchased 5000 equity shares of Santoshima Tradelinks Ltd. @25 per share in physical form from P. Saji Textiles Ltd. on 17.11.2011 and later on the assessee submitted the physical certificate to his DP bank of India for dematerialization. Subsequently, the shares of Santoshima were changed to Sunrise Asian Ltd. on 28.06.2013. It is evident from the statements of Vipul Vidhur Bhatt and Shri Kalpesh Jani (one of the directors in Sunrise Asian Ltd.) that they allotted the shares of M/s Santoshima Lease Finance and Investments (India) Ltd. to future beneficiaries, the next step taken by them was to acquire substantial promoter stake in a public limited company. They found M/s Sunrise Asian Ltd. & purchased shares from the promoters. Then they started the process of merging of M/s Santoshima Tradelinks Limited and M/s Conart Traders Limited with M/s Sunrise Asian Ltd. This merger was approved by High Courts having jurisdiction. However the activities of reduction of shares of shareholders of M/s Sunrise Asian Ltd. & giving leverage to the shareholders of M/s Santoshima Tradelinks Limited and M/s Conart Traders Limited on record date is also predetermined move with sole aim to benefit the beneficiaries in the subsequent period. The step of acquiring stake in a Public limited company incurring loss, merger of three entities, substantial increase in share capital of listed company & convenient share allotment at the time of merger are Shri. Ganpat Pukhraj Jain Vs. ITO -19(1)(1), Mumbai A.Y 2014-15 3 the circumstantial evidences that the operators/promoters are determined to benefit the beneficiaries by arranging LTCG. b. Sale of shares and unusual rise in the price: Further the assessee has sold these 5000 shares for a sale consideration of Rs. 24,48,344/- in F.Y 2013-14 which is 19 times the increase of the cost price. It is pertinent to mention here that the normal returns on savings were 7.80% for F.Y 2012-13 and 18.70% for F.Y 2013-14 for BSE/Sensex. Whereas, the assessee has earned 1900% (approx.) of returns on investments in this scrip., that too when sensex, gold returns are far behind the strong performance of M/s Sunrise Asian Ltd. without having any supporting financial itself is a circumstantial evidence to show that the LTCG on sale of shares of M/s Sunrise Asian Ltd. is not genuine one. c. Findings of Investigation wing: The findings of the Directorate of Investigation of Mumbai and Kolkata as discussed above have proved that the assessee had worked out an arrangement in which the shares were acquired by the asessee, the share prices were rigged and then with the help of entry operators by routing the cash, shares were sold at high price to arrive at tax free capital gains. d. Analysis of transactions : Facts revealed that such trading transactions of purchase and sale of shares are not been effected, for commercial purposes but to create artificial gains, with a view to evade taxes – i. Transactions of shares were not governed by market factors prevalent at relevant time in such trade, but same were product of design and mutual connivance on part of assessee and the operators. ii. The assessee resorted to a preconceived scheme to procure long term capital gains by way of price difference in share transactions not supported by market factors. iii. Cumulative events in such transactions of shares revealed that same were devoid of any commercial nature and fell in the realm of not being bonafide and, hence, impugned long term capital gain is not allowable. e. Failure of assessee to discharge his onus : The assessee has not been able to prove the unusual rise and fall of share price to be natural and based on the market forces. It is evident that such share transactions were closed circuit transactions and clearly structured one. f. Financial analysis of the penny stock companies : The networth of the penny stock company is negligible. Even though the networth of the company and the business activity of the company is negligible the share prices have been artificially rigged to unusual high. g. Cash trail in the accounts of the entry providers : The investigations in the fund flow analysed in the accounts of entry providers have established that the cash has been routed from various accounts to provide accommodation entries to the assessee. h. Arranged transactions: The transactions entered by the assessee involve the series of preconceived steps, the performance of each of which is depending on the others being carried out. The true nature of such share transactions lacked commercial contents, being artificially structured transactions, entered into with the sole intent, to evade taxes.” It is in the backdrop of the aforesaid observations of the A.O that we shall hereinafter deal with the contentions advanced by the assessee in rebuttal of the same. We find that the assessee had off-line Shri. Ganpat Pukhraj Jain Vs. ITO -19(1)(1), Mumbai A.Y 2014-15 4 purchased 5000 shares of M/s Santoshima Tradelinks Limited on 17.11.2011 from M/s P. Saji Textiles Limited for a consideration of Rs. 1.25 lac i.e @ Rs. 25/- per share. Thereafter, the shares were sent for demat to his DP account and the same were credited much prior to the date on which the sale transaction was executed. As per the order of the Hon‟ble High Court of Bombay the company i.e M/s Santoshima Tradelinks Limited was amalgamated with M/s Sunrise Asian Limited on 28.06.2013 and the shares of M/s Sunrise Asian Limited were directly credited in the assessee‟s demat account. After holding the shares for a period of about 2 ¼ years (approx.) the assessee sold the same on the floor of BSE through his regular broker i.e M/s Nirmal Bang Securities Limited and received the sale proceeds from the broker on payout. On a perusal of the records, we find that the assessee in order to substantiate the authenticity of the aforesaid transaction of purchase/sale of shares of M/s Sunrise Asian Ltd. [earlier named as M/s Santoshima Lease Finance And Investments (India) Ltd.] had in the course of the assessment proceedings placed on record supporting documentary evidences, viz. (i). debit note, dated 17.11.2011 of M/s P. Saji Textiles Limited w.r.t 5000 shares of M/s Santoshima Tradelinks Limited purchased by him; (ii). bank statement evidencing payment of the purchase consideration to M/s P. Saji Textiles Limited; (iii). demat statement with Bank of India and M/s Nirmal Bang Securities Private Limited, a depository participant (DP) reflecting receipt of shares of M/s Santoshima Tradelinks Limited (before merger) and shares of M/s Sunrise Asian Limited (after merger); (iv). extract of amalgamation order of the Hon‟ble High Court of Bombay for merger of M/s Santoshima Tradelinks Limited with M/s Sunrise Asian Limited; (v). contract notes of M/s Nirmal Bang Securities Pvt. Ltd., share broker, through whom the assessee had sold the shares of M/s Sunrise Asian Limited during the year under consideration; (vi). bank statement of the assessee reflecting the receipt of sale proceeds of the shares from M/s Nirmal Bang Securities Pvt. Ltd by account payee cheques; and (vii). demat statement of M/s Nirmal Bang Securities Pvt. Ltd.(supra) reflecting delivery of shares of M/s Sunrise Asian Limited. On a perusal of the assessment order, we find that genuineness of the aforesaid documentary evidence had not been dislodged by the lower authorities on the basis of any irrefutable material. As stated by the ld. A.R, and rightly so, the observations of the A.O are found to be more or less backed by information received by him from the Investigation wing and the unsubstantiated statements of third parties who are not connected with the assessee. Also, the A.O instead of disproving the contents of the aforesaid documentary evidence that were filed by the assessee in support of his claim of having made genuine purchase/sale of shares in question, had rather in disregard of the same chosen to remain guided by assumptions, presumptions, surmises and principles of preponderance of human probabilities. As is discernible from the assessment order, one of the major Shri. Ganpat Pukhraj Jain Vs. ITO -19(1)(1), Mumbai A.Y 2014-15 5 aspect that had weighed in the mind of the A.O for stamping the transaction of purchase/sale of shares of M/s Sunrise Asian Limited by the assessee as a structured transaction with a purpose of facilitating tax evasion in the garb of a bogus claim of tax exempt capital gain u/s 10(38) of the Act and laundering of his ill-gotten money; was the fact that within a short span there was a steep rise in the price of shares of M/s Sunrise Asian Limited i.e by 19 times, which trade pattern of the aforesaid company as per the A.O did not move along with the sensex wherein the normal returns were 7.80% for F.Y 2012-13 and 18.70% for F.Y 2013-14 for BSE/Sensex; and the financials of the company also did not show any reason for the extraordinary performance of its stock. In our considered view, though the aforesaid data gathered by the A.O being based on the facts cannot be faulted on our part, but we are unable to persuade ourselves to concur with him that for the said reason the assessee is to be held to have evaded taxes and laundered his unaccounted money by booking a bogus claim of LTCG that is exempt u/s 10(38) of the Act. Although, the A.O had at length discussed in his order the information that was shared with him by the Investigation wing of Mumbai and Kolkata i.e the modus operandi adopted by beneficiaries with the help of entry operators to obtain tax free capital gains, however, we are afraid that nothing concrete has been brought on record which would prove to the hilt the falsity of the assessee‟s claim of having carried out genuine transactions of purchase/sale of shares under consideration, and therein prove that he in the garb of a bogus transaction had only procured an accommodation entry of capital gain. On the contrary, we find that the assessee had duly substantiated the purchase of shares under consideration on the basis of supporting documentary evidence. Admittedly, the assessee had paid for the purchase consideration of the shares to the seller, viz. M/s P. Saji Textiles Limited through account payee cheque, and the said fact had duly been substantiated by him by placing on record the copy of his bank account reflecting the said transaction. In fact, the assessment in the case of the assessee for A.Y 2011-12 i.e the year in which the aforesaid shares were purchased by him was framed u/s 143(3) of the Act and the said transaction of purchase of shares was not held to be bogus. Further, we find that the aforesaid shares of M/s Santoshima Tradelinks Limited (before merger) were sent by the assessee for demat to his DP account with Bank of India and were credited in the said account much prior to their sale. After M/s Santoshima Tradelinks Limited got merged with M/s Sunrise Asian Limted on 28.06.2013, the shares of M/s Sunrise Asian Limited were directly credited in the assessee‟s demat account. Also, as observed by us hereinabove, the assessee had after holding the shares for a period of 2 ¼ years (approx.) sold the same on the floor of BSE through his regular broker, viz. M/s Nirmal Bang Securities Private Limited and had received the sale proceeds from the said broker on payout. Copy of the demat account of the broker reflecting the receipt of shares from the Shri. Ganpat Pukhraj Jain Vs. ITO -19(1)(1), Mumbai A.Y 2014-15 6 assessee had also been filed by the assessee to support the authenticity of his aforesaid transaction of sale of shares. Backed by the aforesaid substantial documentary evidence filed by the assessee which beyond doubt substantiates the genuineness of the transaction of purchase and sale of shares of M/s Sunrise Asian Limited by him, we are afraid that the unsubstantiated claim of the A.O that the assessee had converted his unaccounted money by taking fictitious LTCG in a pre-planned manner cannot be accepted. Our aforesaid view that in the absence of any evidence, whatsoever, to allege that money had changed hands between the assessee and the broker or any other person, or that some person provided the entry to convert unaccounted money for getting benefit of LTCG, the unsubstantiated claim of the department that the assesseee had taken recourse to a structured transaction for evading his taxes and laundering his unaccounted money in the garb of exempt LTCG u/s 10(38) of the Act is supported by the judgment of the Hon‟ble High Court of Delhi in the case of Pr. CIT & Ors. Vs. Krishna Devi & Ors. (2021) 110 CCH 9 (Del). In its aforesaid order it was observed by the Hon‟ble High Court, as under :

On a perusal of the record, it is easily discernible that in the instant case, the AO had proceeded predominantly on the basis of the analysis of the financials of M/s Gold Line International Finvest Limited. His conclusion and findings against the Respondent are chiefly on the strength of the astounding 4849.2% jump in share prices of the aforesaid company within a span of two years, which is not supported by the financials. On an analysis of the data obtained from the websites, the AO observes that the quantum leap in the share price is not justified; the trade pattern of the aforesaid company did not move along with the sensex; and the financials of the company did not show any reason for the extraordinary performance of its stock. We have nothing adverse to comment on the above analysis, but are concerned with the axiomatic conclusion drawn by the AO that the Respondent had entered into an agreement to convert unaccounted money by claiming fictitious LTCG, which is exempt under Section 10(38), in a pre-planned manner to evade taxes. The AO extensively relied upon the search and survey operations conducted by the Investigation Wing of the Income Tax Department in Kolkata, Delhi, Mumbai and Ahmedabad on penny stocks, which sets out the modus operandi adopted in the business of providing entries of bogus LTCG. However, the reliance placed on the report, without further corroboration on the basis of cogent material, does not justify his conclusion that the transaction is bogus, sham and nothing other than a racket of accommodation entries. We do notice that the AO made an attempt to delve into the question of infusion of Respondent's unaccounted money, but he did not dig deeper. Notices issued under Sections 133(6)/131 of the Act were issued to M/s Gold Line International Finvest Limited, but nothing emerged from this effort. The payment for the shares in question was made by Sh. Salasar Trading Company. Notice was issued to this entity as well, but when the notices were returned unserved, the AO did not take the matter any further. He thereafter simply proceeded on the basis of the financials of the company to come to the conclusion that the transactions were accommodation entries, and thus, fictitious. The conclusion drawn by the AO, that there was an agreement to convert unaccounted money by taking fictitious LTCG in a pre-planned manner, is therefore entirely unsupported by any material on record. This finding is thus purely an assumption based on conjecture made by the AO. This flawed approach forms the reason for the learned ITAT to interfere with the findings of the lower tax authorities. The learned ITAT after considering the entire conspectus of case and the evidence brought on record, held that the Respondent had successfully discharged the initial onus cast upon it under the provisions of Section 68 of the Act. It is recorded that "There is no dispute that the shares of the two companies were purchased online, the payments have been made through banking channel, and the shares were dematerialized and the sales have been routed from de-mat account and the Shri. Ganpat Pukhraj Jain Vs. ITO -19(1)(1), Mumbai A.Y 2014-15 7 thereafter simply proceeded on the basis of the financials of the company to come to the conclusion that the transactions were accommodation entries, and thus, fictitious. The conclusion drawn by the AO, that there was an agreement to convert unaccounted money by taking fictitious LTCG in a pre-planned manner, is therefore entirely unsupported by any material on record. This finding is thus purely an assumption based on conjectures made by the AO. This flawed approach forms the reason for the learned ITAT to interfere with the findings of the lower tax authorities. The learned ITAT after considering the entire conspectus of case and the evidence brought on record, held that the Respondent had successfully discharged the initial onus cast upon it under the provision of Section 68 of the Act. It is recorded that “There is no dispute that the shares of the two companies were purchased online, the payments have been made through banking channel, and the shares were dematerialized and the sales have been routed from de-mat account and the consideration has been received through banking channels." The above noted factors, including the deficient enquiry conducted by the AO and the lack of any independent source or evidence to show that there was an agreement between the Respondent and any other party, prevailed upon the ITAT to take a different view. Before us, Mr. Hossain has not been able to point out any evidence whatsoever to allege that money changed hands between the Respondent and the broker or any other person, or further that some person provided the entry to convert unaccounted money for getting benefit of LTCG, as alleged. In the absence of any such material that could support the case put forth by the Appellant, the additions cannot be sustained.

The assessee has earned speculation profit in the immediately preceding year through M/s Eden Financial Services also and the said profit has been used to purchase the shares of M/s Sunrise Asian Ltd. The assessee has offered the speculation profit for income tax purposes in the immediately preceding year and it has been accepted. Further the assessee has shown the purchase of impugned shares as investment in the Balance Sheet. Hence the purchase of shares has been accepted. Further the shares have been received in the D-mat account of the assessee and they have been sold through the D-mat account only. Hence the delivery of shares also stand proved. The AO has not brought any material on record to show that the assessee was part of fraudulent price rigging. Accordingly, in the absence of any evidence to implicate the assessee or to prove that the transactions are bogus, I am of the view that the capital gains declared by the assessee cannot be doubted with. In that view of the matter, the addition made towards expenses is not also sustainable.”

Resultantly, the appeal of the assessee is allowed in terms of our aforesaid observations.