MR.RIPU SUDAN KUNDRA,MUMBAI vs. ITO 3(1)(1), MUMBAI

ORDER PER S. RIFAUR RAHMAN, A.M. The present appeal is filed by the assessee against the order of the Commissioner of Income Tax (Appeals)-57, Mumbai [in short ‘CIT(A)’] for the assessment year 2014-15 dated 07.02.2018 and arises out of assessment completed u/s 143(3) of the Income Tax Act, 1961 (in short the Act).

Mr. Ripu Sudan Kundra 3 c) The assessee has not directly dealt with any broker other than Standard Chartered Securities (India) Ltd. d) Considering the above we request your honor the transaction done by our client are genuine in nature and no sham element is involved. Hence, Short Term Capital Loss from the above is to be allowed for set off against the long term capital against based on the provisions of section 71 of the Act.

10. The discussion above clearly establishes that the shares of the above mentioned companies have been used for providing entry of bogus LTCG. Thus, it can be clearly seen that the shares of the above discussed companies were rigged to provide bogus capital gains/losses to beneficiaries with an express intention to defraud revenue and in turn avoid payment of legitimate taxes to the Government of India. As detailed above, you have purchased/ sold the share of following companies as under: a) Radford Global Ltd. assessee had purchased 11,03,920 shares during the month of August 2013 @Rs. 44.24/- per share average price for a purchase consideration of Rs.4,88,34,407/- and sold these shares during the month of January 2014 @ Rs. 6.65 per shares average price for a total sale consideration of Rs.73,45,284/-, thereby incurring a total loss of Rs. 4,14,88,123/-.

Mr. Ripu Sudan Kundra 5 b) DhenuBuildcon India: assessee had purchased 2,67,000 shares during the month of February 2013 @ ₹150.82/- per share average price for a purchase consideration of ₹4,02,67,735/- and sold these shares during the month of November 2013 (@ Rs, 2.81 per shares average price for a total consideration of R$. 7,50,100/-, thereby incurring a total loss of ₹ 3,95,17,635/-. C) Shri NathCommereial; assessee had purchased 13,35,000 shares during the month of January 2013 @ Rs.80.61 /- per share average price for a purchase consideration of Rs.11,16,46,177/- and sold these shares during the month of September 2013 @Rs. 1.60/- per shares average price for a total consideration of Rs.22,13,91/-, thereby incurring a total loss of Rs. 10,94,32,186/- d) Tuni Textiles Mills; assessce had purchased 4,00,000 shares during the month of January 2013 @Rs.75.05/- per share for a purchase consideration of Rs.3,00,18,583/- and sold these shares during the month of May 2013 @ Rs.20,19/- per shares for a total consideration of R$. 80,75,273/- thereby incurring a total loss of Rs.2,19,43,210/-.

10. As it has been clearly proved from the aforesaid discussion that the trades of above discussed four companies were manipulated to give capital gains/losses to various parties, including the assessee. Thus, the assessee's claim of Short term Capital loss for Rs.21,23,81,154 out of Total Short Term Capital Loss Re. 23,54,71,343/- in respect of sale of shares of the above discussed companies is hereby disallowed and not allowed to be yet off.

“3.5. From the above analysis of the company whose scrips were purchased and sold by the assessee following conclusion was drawn which was rebutted by the appellant. S. No. AO’s Contention Our Reply 1. The financials of the It is pertinent to note here that the companies were very poor investments were made through very during the period of reputed Portfolio Manager, an MC firm, transaction Standard Chartered Securities (India) Ltd. There was no direct interface between the alleged broker and the appellant. Secondly, the portfolio manager takes there call on the basis of market forces and future perception of the company and the industry and not only on the basis of the number crunching.

2. The business profile shows The Appellant had not got any preferential that the companies were not allotment of shares. Hence, this is a baseless engaged into any substantial allegation by the AO and accordingly is not Mr. Ripu Sudan Kundra 6 activity. applicable to the Appellant's case.

6. Ld. CIT(A) considered the submissions of the assessee and dismissed the appeal filed by the assessee with the following observations:

Mr. Ripu Sudan Kundra 7 “3.6. I have analysed the detailed discussions made by the AO in the assessment order. I have also gone through the appellant's submissions. The rebuttal of the AO's contention by the appellant has been produced in the above paras. I have also gone through the judicial pronouncement submitted by the appellant. After going through the above I would like to analyse the AO's order and appellants contention which is discussed below.

1) From the perusal of investigation carried out by the investigation wing of following scrips a) Radford Global Ltd. b) Dhemubuildcon India c) Shreenath Commercial and d) Tuni Textiles Mills which had resulted in loss to the appellant and I find one thing is common. All the four companies financial health is very poor and there is sudden rise of prices of their shares and then there is sleep downward of prices.

2) The investigations carried out and statement recorded of the key persons confirm the nexus that the above companies were manipulating and providing capital gains/losses to various interested parties.

3) The appellant's submissions to rebut assessing officer's observation is that investments were made through very reputed portfolio manager, an MNC firm, Standard Chartered Securities (India) Ltd. It was further submitted that portfolio manager takes their call on the basis of market forces and future perceptions of the company and the industry and not only on the basis of the number crunching.

4) This is the most clinching issue. If the portfolio manager takes a call on future perception of the company, the portfolio manager does some research of the financial of the company. From the perusal of the history of the above companies one can very well see that it is bad. So why will any prudent man will invest in the shares of such companies. So it proves that one will invest to buy bogus short term capital gain or loss. This is what the appellant has done by purchasing and selling the shares of these companies. The appellant cannot take the plea that he is not involved in the contract Mr. Ripu Sudan Kundra 8 between the buyer and the seller. The recent judgment of Nagpur Branch of Bombay High Court in the case of Sanjay Bimal Chand Jain L/H ShatideviBimalChand Jain vs The Pr. Commissioner of Income Tax-1 Nagpur & Another (Income Tax Appeal No. 18/2017].

Though the above case is of S'TCG their Lordship held that the authorities have recorded a clearfinding of fact that the assessee had indulged in a dubious share transaction meant to account forthe undisclosed income in the grab of long term capital gain. While so observing, the authoritiesheld that the assessee had not tendered cogent evidence to explain as to how the shares in anunknown company worth Rs. 5/- had jumped to Rs. 485/- in no time. The Income Tax AppellateTribunal held that the fantastic sale price was not at all possible as there was no economic orfinancial basis as to how a share worth Rs. 5/- of a little known company would jump from Rs. 5/-to Rs. 485/-. The findings recorded by the authorities are pure findings of facts based on a properappreciation of the material on record. While recording the said findings, the authorities havefollowed the tests laid down by the Hon'ble Supreme Court and this Court in several decisions.

5) The appellant has submitted that the appellant has made the investment in share which werepurchased in the floor of stock exchange and not from the broker or parties named in theinvestigation proceedings. I find the submissions of appellant baseless. Once the appellant hasdealt in shares of those companies which have been proved to be rigged and who have beenproviding bogus entries the plea that he had not purchased from those brokers holds no good. Thecompanies modus operandi is watched by all big players who deal in this trade. Hence theportfolio manager M/s Standard Chartered Securities (India) cannot be also absolved. However, since the portfolio manager works for the client and the client's interest is watched by thePortfolio Manager, the appellant wanted to have capital loss to set off against the capital gains andthe same was arranged.

6) Hence the appellant could not give any cogent and convening reply to the observation made by the AO. The AO has dealt in detail about the companies and the Mr. Ripu Sudan Kundra 9 modus operandi adopted by it. So in the light of above discussion I find the action of the AO correct and confirm the disallowance made by the AO on the assessee's claim of STCL of Rs. 21,28,81,154/- out of total short term capital loss of Rs. 23,54,71,343/- in respect of sale of shares of the above discussed companies. The set off is disallowed and disallowance made by AO is confirmed. Hence Appeal is dismissed.”

7. Aggrieved, the assessee is in appeal before us raising following grounds of appeal:

1. On the facts and circumstances of the case the Ld. AO has erred in passing order u/s 143(3) dated 29.12.2016 of the Income Tax Act, 1961.

2. On the facts and circumstances of the case the Ld. AO has erred in disallowing short capital loss of ₹21,23,81,154/-. 3. On the facts and in the circumstances of the case the Ld. AO have erroneously relied on some of the stock transactions of sale of shares of companies considered as dealing in penny stock and having absolutely no relevance direct or indirect to the genuine transactions of the sale of shares by the Appellant. 4. On the facts and in the circumstances of the case the AO has erred in making this addition based on notional and imaginary situation and totally unsubstantiated. 8. Before us Ld. AR submitted that assessee is regularly dealing in purchase and sale of shares and this assessment year, assessee has incurred short term capital loss due to steep fall in share prices and she submitted that assessee has purchased and sold the scripts online platform based on the prevailing market rate. The assessee has purchased shares directly from reputed share brokers and is no involvement of any preferred allotment or has not dealt in any off-line transactions. She submitted that all the relevant information relating to claim of actual loss was submitted before Assessing Officer and Ld. CIT(A). She submitted that Assessing Officer has relied on investigation carried on by the investigation wing, Kolkata. However, assessee Mr. Ripu Sudan Kundra 10 has only bought through portfolio manager and it has no control over management of the scripts. The assessee has incurred actual loss however revenue authorities treated the same under penny stock category and rejected the contention of the assessee. She brought to our notice relevant findings of tax authorities in para 8 of assessment order and para 3.6 of first appellate authority.

9. On the other hand, Ld. DR relied on the findings of Ld. CIT(A) and submitted that it is apparent bogus penny stock transactions.

From a perusal of the order of the lower authorities it is apparent that the disallowance as made by the AO and sustained by the Ld.CIT (A) is based on the enquiries conducted by Investigation Directorates of Kolkata & Ahmedabad on certain stock-brokers and entry providers and the statements recorded from them during the course of search. The analysis made by the Investigation Directorates on the financials/business profile of the impugned companies forms the base for rejecting the claim of loss. The lower authorities have referred to investigation carried out by the Directorates of Investigation on Radford Global to come to a conclusion that entities that have purchased shares of Radford Global are bogus/paper entities. Further, based on the findings in the Investigation Reports, the lower authorities have observed that a common pattern is seen in respect of all the impugned companies in that the financial health of all such impugned entities are poor, there is sudden rise of prices in their shares followed by a steep fall, statements recorded of key persons confirms manipulation in prices of stock to provide capital gains/loss to interested parties. Borrowing from the findings of the Investigation Reports, the lower authorities have held the claim as non-genuine, rejecting Mr. Ripu Sudan Kundra 12 the submission of the assessee that the investments were made through reputed portfolio manager who takes the call on the basis of market price, future perception of the company and that assessee is thus not directly involved in any transaction of purchase/sale between buyer and seller. The assessee had also placed documentary evidence before the AO in support of the impugned transaction.

It is the finding of the Ld.CIT (A) that assessee has not provided any cogent evidence to explain how shares of an unknown company jumps manifold in no time. According to the Ld.CIT (A), the assessee could not give any cogent and convincing reply to the observations of the AO. On the other hand, the assessee is aggrieved in that the AO has erroneously relied on some of the stock transactions of sale of shares of companies considered as dealing in penny stock and that have no relevance to the transaction of sale of shares carried out by the assessee to deny the claim of loss incurred by the assessee and that the findings of the AO as confirmed by the First Appellate Authority are on the basis of unsubstantiated / imaginary charges and allegations.

We have given our anxious thought and consideration to the matter in hand. The AO has disallowed the claim of the assessee based on analysis of the information received from Directorate of Investigation as a result of enquires undertaken by the officers of the Directorate. Based on the said information received, the AO has observed a pattern in the trading in scripts of those companies that has resulted in the claim of short-term capital loss to the assessee. Such companies were seen to have little financial credentials, no profitability, and no apparent explanation for abrupt rise in prices followed by Mr. Ripu Sudan Kundra 13 a steep fall in price of shares. Besides, there are statements of brokers/ entry providers who have accepted that they were involved in the scam of price rigging to facilitate accommodation entries to beneficiaries who have routed their unaccounted cash into the books through circuitous means. However, at the same time the assessee has produced documents to substantiate the genuineness of the transactions carried out through banking channels, through the medium of portfolio management whereby there is no contact between the buyer and the seller. The fact remains that there is direct evidence placed on record by the assessee to support the genuineness of the impugned transactions such as contract notes, share certificates, corroborative evidence indicating purchase/ sale through registered broker as juxtaposed against the findings of the AO based on the general report from Investigation and the modus operandi adopted by unscrupulous entry providers. There is no denying that there is no assessee-specific material on record of the AO to pin-point that the assessee has entered into an unholy nexus with entry providers so as to stage manage accommodation entry of STCL. The statements relied on by the AO in the nature of admissions are bereft of corroborative material to implicate the assessee herein in such scam. At the same time the material furnished by assessee to substantiate its claim remains unchallenged and uncontroverted. The purchases were neither off- market nor through preferential allotment. Besides, no copy of any report of information received was supplied to the assessee. The assessee was not confronted with any statement or material allegedly detrimental to the assessee arising or culled out of the Investigation report. Thus, the fact remains that the findings of the lower authorities are not based on evidence but on generalizations and probabilities. The AO could not place anything on Mr. Ripu Sudan Kundra 14 record, maybe through a process of his own enquiry, to decisively prove that assessee has obtained bogus STCL through his connivance with entry operators / exit providers. No such enquiry or investigation is seen carried by the AO other than borrowing information to be used against the assessee from the general report of Investigation Directorate. The claim of the assessee appears to have been rejected more on the basis of presumption rather than evidence. The fact also remains that copies of statements used against the assessee were not provided to the assessee. It certainly has incapacitated the assessee from effectively rebutting the same and also from seeking an opportunity for cross examination. When copies of statements relied upon were not provided, when there was no opportunity to cross examine those witnesses whose statements were relied upon by the AO to conclude that the transaction in question was part of penny scam, we have no hesitation in holding that the lower authorities erred in disallowing the claim stating that the assessee failed to provide cogent and convincing reply to the allegations raised. We observe from the record that in identical situation the Coordinate Bench of ITAT in ITA Nos. 4843 & 1228/Mum/2018 for Assessment Year 2013-14 & 2014-15 in the case of Ramprasad Agrawal Vrs. ITO (reported in [2018] 100 taxman.com 172 – Mum Trib) and Kamla Devi S. Doshi vrs. ITO reported in 88 taxmann.com 773 (Mum-Trib) decided the issue in favour of the assessee on merits. From the above decision, it is trite that denial of such crucial rights is a fatal flaw that renders the assessment order a nullity. An assessment purely based on suspicion, surmises and conjectures without any tangible evidence on record against the assessee of any connivance or collusion is unsustainable in law.

Mr. Ripu Sudan Kundra 15