RESHMI SUDHAKARAN,CHENNAI vs. ITO, NON CORPORATE WARD-3(2), CHENNAI

This appeal by the assessee is arising out of the order of Learned Commissioner of Income Tax (Appeals)-4, Chennai in ITA No.264/2016-17/A.Y.2014-15/CIT(A)-4 dated 19.10.2017. The assessment was framed by the Income Tax Officer, Non-Corporate Ward 3(2), Chennai for the assessment year 2014-15 u/s. 143(3) of 2 the Income Tax Act, 1961 (hereinafter ‘the Act’) vide order dated 29.12.2016.

The only issue in this appeal of assessee is as regards to the order of CIT(A) confirming the action of AO in making addition of unexplained profit on sale of shares of NCL Research & Financial Services Ltd., as unexplained credit u/s.68 of the Act and rejected the claim of exemption u/s.10(38) of the Act by holding the sale of shares as penny stocks. For this, assessee has raised various grounds, which we need not to reproduce.

Brief facts are that the assessee purchased 11000 shares of NCL Research & Financial Services Ltd., for a sum of Rs.16,10,046/- (Rs.146.36 per share) and sold the same for a sum of Rs.1,77,56,565/- within one year and claimed profit of Rs.1,61,46,519/- as exempt u/s.10(38) of the Act. The AO based on report of Investigation Wing of Kolkata and Delhi & SEBI report, treated the capital gain declared by assessee of Rs.1,61,46,519/- from sale of shares of NCL Research & Financial Services Ltd., as unexplained credit u/s.68 of the Act and exemption claimed u/s.10(38) of the Act was disallowed. Aggrieved, assessee preferred 3 appeal before CIT(A). The CIT(A) also confirmed the action of AO vide para 23 to 26 as under:- I have perused the above documents and papers but fail to agree 23. with the contentions of the appellant that the impugned transaction was genuine and bonafide. On going through the facts and circumstances of the case, as discussed in detail in the impugned assessment order and also incorporated in the investigation report of the investigation Wing of the Department and the report submitted by SEBI, it is evidently proved that the entire series of transaction was arranged and manipulated by the assessee in such a manner that it prima facie appeared to be a genuine transaction. However, the substance of the transaction was totally different from its form. In fact, the appellant, in connivance with the brokers and the entry operators, had created and arranged all possible documentary evidences to give the transaction a colour of genuineness. The question whether or not a transaction is a sham is primarily a factual one, on which the taxpayer bears the burden of proof in the abatement process. In the instant case, the relevant facts and circumstantial evidences clearly proved that the impugned transaction was sham in nature. The appellant had also failed to discharge the subsequent onus cast on her to substantiate the genuineness of the transaction.

The appellant cannot escape the consequences of law merely by relying on the documents and papers so prepared and arranged to manipulate the transaction to suit her vested interest. In this regard, the reliance can be placed on the decision of the Hon’ble Supreme Court in the case of CIT vs. Panipat Woollen & Gen Mills Co Ltd, 103 ITR 66. It is also pertinent to mention here that the manner in which entries are made in the books of accounts is not determinative of the question that the assessee had earned genuine profit. What is necessary to be considered is the true nature of the transaction. The Hon'ble Apex Court has held so in the case of Satluj Cotton Mills vs. CIT, 44 ITR 362.

In the present case of the appellant, SEBI which is the watchdog of all security -related transactions conducted on the floor of the stock exchanges in the country as well as the transactions conducted off market, has also established the nature of transaction carried out by the appellant was sham transaction which was further strengthened by the 4 findings of the Investigation Wing of the Income Tax Department. The documents, papers and the other evidences maintained and created by the appellant to substantiate her claim was a well thought and predetermined attempt to give a colour of genuineness to the impugned transaction.

Therefore, in view of the above discussed facts and circumstances of the case and considering the finding arrived at by the AO, I do hold that the impugned transaction was sham transaction. The ratio of the decisions in the case of Sumati Dayal vs. CIT, 214 ITR 801; Durga Prasad More vs. CIT, 182 ITR 540 and CIT vs. P. Mohanakala (2007), 161 Taxman 169, further strengthens the conclusion that the entire series of transaction was a colourable device to account for the unaccounted money in the form of Long Term Capital Gain claimed as exempt u/s 10 (38) of the Act. Accordingly, I do not find any infirmity in the finding of the AO. Hence, the addition made by the AO is confirmed.”

At the outset, it is noticed that in the case of penny stock, we are consistently taking a view, where the SEBI report and the report of the Investigation Wing of Kolkata & Delhi or any other report was not confronted to the assessee, the matter is being restored back to the file of the AO for confronting the material gathered and used against the assessee. Similar view in the cases of Smt. Vandana Jain in & 1904/Chny/2019, Shri Raj Kumar Jain in ITA Nos.1905 & 1906/Chny/2019 & Raj Kumar Jain HUF in ITA Nos.1907/Chny/2019, Smt. Mithu Kumari Ranka in ITA No.1970/Chny/2018 vide common order dated 31.03.2022 wherein (one of us Mahavir Singh, VP is a party) directed as under:-

Per contra, the Ld. Counsel referred to another decision of Co-ordinate Bench, ITAT Bangalore in for A.Y. 2015-16 in the case of Shri Suresh J. Kothari (HUF) v. ITO, Ward 2(2)(1), Bengaluru, dated 31.07.2019 which in turn has followed the directions issued in the case of Chandra Devi Kothari (supra) by Hon’ble High Court of Karnataka. Relevant portion of the said order of co-ordiante Bench of ITAT Bangalore is reproduced herein below for the sake of clarity and ease of reference:

In the result, appeal of the assessee is treated as allowed for statistical purposes.”

Considering the uncontroverted factual position accepted by the Ld. Sr. DR on the material made available to the assessee vis-à- vis provisions of section 142(3) of the Act which casts a mandatory statutory procedural compliance requirement on the Ld. AO in completing the assessment proceedings which otherwise may vitiate the assessment itself, it necessitates us to remand back the present case to the Assessing Officer for its appropriate adjudication by respectfully considering the observation made by the Hon’ble Madras High Court in Para 27 in the case of Mrs. Manish D. Jain (HUF) (supra) on the availability of material to the assessee. Further, respectfully following the directions given in Para 8 in the judgment of Hon’ble Karnataka High Court in the case of Chandra Devi Kothari (supra) and the order of co-ordinate bench of ITAT, Bangalore in the case of Shri Suresh J. Kothari (HUF) (supra), we set aside the impugned order passed by Ld. CIT(A) and Ld. AO and restore the matter back to the file of the Ld. AO with the direction to comply with the mandatory statutory requirements of section 142(3) of the Act failing which may vitiate the assessment itself. We are of the considered view that the Ld. AO has to reconsider the issue afresh after furnishing to the assessee all the material relied upon by him/her while passing the assessment order. Since the matter is restored to the file of Ld. AO for fresh adjudication in terms of finding and observations made hereinabove, we are not expressing any 8 views on the merits of the case so as to limit the assessment procedure before the Ld. AO. The observations herein made by us in remanding the matter back to the file of Ld. AO will not impair or injure the case of the Revenue nor will it cause any prejudice to the defense/explanation of the assessee. Needless to say that assessee be given reasonable opportunity of being heard, who shall also cooperate by making all the required compliances for the completion of assessment proceedings. Accordingly, in terms of above, the appeal of the assessee is allowed for statistical purpose.

In the result, the appeal filed by the assessee is allowed for statistical purposes.