M/S PRECIOUS SECURITIES PRIVATE LIMITED ,BANGALORE vs. INCOME TAX OFFICER WARD-5(1)(3), BANGALORE

This appeal by the assessee is directed against the order of the CIT(Appeals)-5, Bengaluru for the assessment year 2014-15.

The assessee has raised the following grounds:-

In any case and without further prejudice, the learned CIT (Appeals), Bengaluru - 5 has erred in; a) Confirming addition of Rs.60,96,500/- being loss on sale of shares of M/s Shreenath commercials & Financials Ltd. b) Holding without basis that the transactions in shares are fictitious. On proper appreciation of facts and circumstances of the case and the law applicable, the transactions are duly recorded in the books of accounts and the additions as done being totally on erroneous premise is to be deleted.

We have heard both the parties and perused the material on record. In this case, the assessee purchased shares of Shreenath commercials & Financials Ltd. along with other shares and the loss was of Rs.60,96,500 on this count. According to the AR, the transaction was through normal banking channel and Demat account. It was submitted that since the AO had not doubted the genuineness of transaction and has questioned the timing of the transaction and the value at which the transaction was undertaken and the same cannot lead to the conclusion that the loss claimed by the assessee is fictitious. The assessee has taken a business decision in buying the shares and selling the shares due to fall in price of the shares. According to the ld. AR, the AO cannot sit in the chair of businessman so as to maximize its profits. The evidence brought on record by the AO is not enough to hold that the transaction undertaken by the assessee is bogus or fictitious so as to claim the business loss.

The ld. AR submitted that it was not one year’s loss, from AY 2010- 11 to 2013-14, the assessee has been incurring loss in the purchase and sale of shares and this was not an isolated transaction wherein the assessee claimed the loss in dealing in shares.

The contention of the ld. DR is that the evidence brought on record by the AO shows that the transactions by the assessee are against the human probability and are not genuine purchase and sale and those are only accommodation entries. Hence the loss cannot be allowed.

We have carefully gone through the case records. In this case, the shares of Shreenath commercials & Financials Ltd. was quoted at Rs.280 / share in July, 2012 which quickly rose to around Rs.850 / share during Nov. 2012 to Feb. 2013 and the assessee has invested 69 lakh shares in this particular company. Such sudden rise in the rate is not normal. The financial results of the company shows incurring of loss continuously and it was not encouraging to invest such a huge amount on a single scrip. Thus, it shows that the price quoted for the shares was not commensurate with the financial results of this company. The assessee placed only oral arguments that the loss is genuine which is not sufficient to discharge the burden to prove that the purchase and sale transaction of assessee was genuine. The onus was on the assessee to explain the astronomical fall in the price of this scrip purchased by the assessee and that too without any financial rationale. The assessee failed to discharge the onus in this regard. Even if we take into account the argument of the ld. AR that in the capital market the movement in the price of shares is not always connected with the financials, it was not possible that price of these shares purchased by the assessee could go to fall every time. It may be possible that the scrip price may go down, but it is not possible that the price of these shares always go down continuously. This feature of the transaction of the assessee itself is against the human probability. The assessee has not demonstrated the earning of any profit by buying and selling of these shares on any occasion. Normally it was not possible to incur such a huge loss from investment in scrips purchased by the assessee unless it is a make believe story. The contention of the ld. AR is that it is a genuine transaction and no motives could be attributed for incurring of such huge loss. On this point, it is appropriate to mention the investigation conducted by the Investigation Wing of the department.

As per the information made available on ITS by the Investigation Wing of the Department, various syndicates have arranged accommodation entry of bogus Long Term Capital Gains/ bogus Short Term Capital Gain/ Bogus Short Term Capital Loss/Bogus Business Loss through trading of shares of penny stocks. The basic aim of the scheme is to route the unaccounted money of beneficiaries into their accounts/books in the guise of gains/loss. The modus operandi of the scheme is that the shares of the penny stock are acquired by the beneficiary at very low prices either by preferential allotment, off market transaction or through Amalgamation or merger. In case of Amalgamation and merger, the beneficiaries are allotted the shares of a private limited company which is subsequently amalgamated with a penny stock company and the beneficiaries receive shares of the listed penny stock in exchange of the shares of the Pvt. Ltd company. M/s Shreenath Commercials and Financials Ltd. is one such Penny Stock. In view of the Investigationon done by the Investigation wing regarding the penny stocks syndicate and the assessee indulging in trading in penny stocks, the modus operandi is that the share of this penny stock companies although listed on exchange was always closely held and controlled by the promoters of penny stock companies and the operators syndicate arrange these bogus Gain/Loss. This is due to the fact that the general public is not interested in the shares as these companies have no credentials and this helps the operator to keep a control on the price movements of the shares. Once the period of 1 year has been passed and the shares prices have been sufficiently rigged, the beneficiary sell their share at the inflated prices through the stock exchange. Here the purchase is not mode by public but by the bogus entities managed and controlled by the promoters of the penny stock company or the operators who are to be referred to as exit providers. All these are sham transactions. It is therefore, revealed that large scale rigging of prices of the above scrip has taken place and it is on the watch list of the SEBI trade data. In this regard, summons was also issued to Sri Bharath M Jain, director of the assessee company on 14.12.2016, to appear before the undersigned and a sworn statement of Sri Bharath M. Jain was recorded u/s 131 of the Income Tax Act,1961 on 16/12/2016.

The ld. AR also admitted the above fact that such dubious tradings were rampant during the assessment year. However, it cannot lead to the conclusion that that the transactions of the assessee are not genuine. It cannot be accepted in the circumstances of the case that all scrips purchased by the assessee sold at astronomical loss were commensurate to the financials of the company. Thus it shows that it was only accommodation entries which is in operation in the market and the assessee is not a genuine buyer and seller of the shares. In our opinion, the assessee has not justified the genuineness of the transaction. It is appropriate to come to the conclusion that the transactions undertaken by the asse is fictitious transactions so as to take advantage of the sale. Accordingly, the CIT(Appeals) rightly confirmed the addition which requires no intereference and the same is upheld.

In the result, the appeal of the assessee is dismissed.