DY CIT 11 (3)(1), MUMBAI vs. VARESH SECURITIES PVT LTD., MUMBAI

O R D E R

PER AMARJIT SINGH, JM:

ITA. Nos.262 & 263/Mum/2020 A.Ys. 2012-13 & 2010-11

2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in not appreciating that the net worth & business activity of MIs. JMD Telefllms Industries Ltd., the penny stock company, was negligible and the shares prices were artificially rigged by the group of operators to accommodate beneficiaries, including the assessee, seeking long term capital gains and losses".

3. "On the facts and in the circumstances of the case and in law, the IA. CIT(A) erred in not appreciating that the prices of the shares were determined artificially by manipulations and cannot be a product of market factors and commercial principles".

4. "On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in not appreciating that on similar facts in the case of Sanjay Bimalchand Jain, Legal Heir of Shantdevi Bimalchand Jain v/s CIT-1, Nagpur in wherein the Hon'ble Bombay High Court (Nagpur Bench) dated 18.07.20 16 has upheld the & 263/Mum/2020 A.Ys. 2012-13 & 2010-11 decision of Assessing Officer towards bogus Capital Gain which was not considered by the Ld. CIT(A).” 4. The brief facts of the case are that the assessee filed its return of income on 28.07.2010 declaring total loss to the tune of Rs.8,09,014/- for the A.Y. 2010-11 under normal provision of income tax Act and Rs.62,88,090/- under the provision of MAT i.e u/s 115JB of the Act. The detailed investigation report was uploaded on the departmental ITDS system in which it was mentioned that the Kolkata Investigation Directorate had undertaken investigation into 84 penny stocks and given detailed indicating bogus LTCG/STCL entries claimed by large number of beneficiaries. The name of the beneficiaries includes the assessee also. The case of the assessee was reopened u/s 148 of the Act. Necessary notices u/s 143(2) & 142(1) of the Act were issued and served upon the assessee. The assessee claimed long term capital gains of Rs.61,62,693/- and claimed the same exempted income u/s 10(38) with scrips JMD Telefilms. Since the reply was not found satisfactory, therefore, the claim of the LTCG of Rs.61,52,693/- was disallowed and added to the income of the assessee and the total income of the assessee was assessed to the tune of Rs.53,53,680/- and to the tune of Rs.62,88,090/- u/s 115JB of the Act. Thereafter, the assessee filed an appeal before the CIT(A) who allowed the claim of the assessee but the revenue was not satisfied, therefore, the revenue has filed the present appeal before us.

6.2.1 The sole issue raised covering Ground nos. 2 to 4 is concerned, the facts are that that the appellant company previously known as M/s Gatha Holdings Pvt. Ltd before 2001 had purchased 64,600 shares of M/S Avtar Financial Ltd. and Subsequently, shares got split into Rs. 1/- accordingly 64,600, shares got converted to 6,46,000 shares of M/S Avtar Financial Ltd. M/S Avtar Financial Ltd name changed to M/s JMD Telefilms Ind Ltd in the year 2007 and presently known as M/s JMD ventures Ltd since 2015. During the relevant financial year AY 2010-11 appellant has sold 1,64,030 shares and earned exempted Long Term Capital gain of Rs. 61,62,693/u/s 10(38) of the Act. The A.O. disallowed appellant's claim of Long Term Capital Gain u/s 10(38) and held it as bogus Long Term Capital Gain for Rs.61,62,693/-. The A.O. has discussed the facts of the case on Page No. 2 to 10 of his assessment order. The sale was made through broker M/s. Maverick Share Brokers Ltd, a member‟ of the Bombay Stock Exchange and also registered with SEBI as a stock broker. The Demat account was held with M/s Sharekhan Ltd. The A.O. in the meanwhile had received information from DTT(Inv.), Kolkata that they have investigated and identified 84 Penny Stock Companies. Search and Survey were also conducted in the office premises of 32 share brokers who accepted that they were involved in bogus LTCG/STCG Scam. One such penny stock company identified by the DIT(Inv.), Kolkata is M/s. JMD Telefilms Ind. Ltd. Basic trading pattern of all these 84 penny stock scrips represented a bell shaped trading i.e. prices start at a low range and rise rapidly, stays there for & 263/Mum/2020 A.Ys. 2012-13 & 2010-11 a while and then decreases rapidly. This makes a bell shaped pattern. The A.O. on page no.6 of his order has demonstrated this phenomenon by a giving the data of the share price of M/s. JMD Telefilms Ind Limited from FY 2010-2011 to FY 2015-2016. Such movement of share is not supported by actual financial credentials as the company concerned has almost no fixed asset, no actual turnover, no profitability and do not pay taxes. Hence, such companies were designed only for the limited purposes of bogus LTCG/STCG to willing beneficiary. The AO after giving due opportunity to the appellant of being heard held that the sale value of shares increases by almost 19 times of its purchase value within a span of around 2 years is nothing but booking of bogus LTCG. Accordingly, the entire amount of LTCG of Rs.61,62,693/- was added back to the income of the appellant.

6.2.2 During the appellant proceedings a written submission was filed which find place in para 5 of this order. I had considered the contention raised by the AO as well as the submission made by the appellant. In the light of the documents stated, it is found that appellant had purchases the shares in the year 1995. It is also to be noted that the appellant company held above shares for the period nearly 15 years. Also, it is considered that at the time of investment in the above company, income earned as Long term Capital Gain on sell of shares was Taxable. Therefore, no prudent taxpayer will hold as investment for such a long period when the intention is to generate artificial profit through price rigging.

6.2.3 Also, there is absolutely no adverse material to implicate the appellant to have entered gamut of unfounded/unwarranted allegations leveled by the Ld. AO against the appellant, which in my

ITA. Nos.262 & 263/Mum/2020 A.Ys. 2012-13 & 2010-11 considered “opinion has no legs to stand and therefore has to fall. It is noted that in the absence of material/evidence the allegations that the appellant got involved in price rigging/manipulation of shares must therefore also fail. At the cost of repetition, It is noted that the appellant had furnished all relevant evidence in the form of bills, contract notes, demat statement and bank account to prove the genuineness of the transactions relevant to the Purchase and sale of shares resulting in long term capital gain. These evidences were neither found by the Ld. AO to be false or fictitious or bogus. The facts of the case and the evidence in support of the evidence clearly Support the claim of the appellant that the transactions of the appellant were genuine and the Ld. AO was not justified in rejecting the claim of the appellant that income from LTCG is exempted u/s 10(38) of the Act. For coming to such a conclusion I placed reliance on the decision of the Hon'ble Calcutta High Court in the case of M/s. Alipine Investments in of 2008 dated 26th August, 2008 wherein the High Court held as follows :

"It appears that there was loss and the whole transactions were supported by the contract notes, bills and were carried out through recognized stock broker of the Calcutta Stock Exchange and all the bills were received from the share broker through account payee which are also filed in accordance with the assessment. It appears from the facts and materials placed before the Tribunal and after examining the same, the tribunal allowed the appeal by the assessee.

In doing so the tribunal held that the transactions cannot be brushed aside on suspicion and surmises. However it was held that the transactions of the shares are genuine. Therefore we do not find that & 263/Mum/2020 A.Ys. 2012-13 & 2010-11 there is any reason to hold that there is no substantial question of law held in this matter. Hence the appeal being is dismissed”

6.2.4 Further, it is also well settled that evidences collected from third “parties cannot be used against an appellant unless this evidence is put a before him and appellant has been given an opportunity to controvert the "evidence. In this case, the Ld. AO relies only on a report as the basis for the addition. The evidence based on which the DDIT report is prepared is not brought on record by the Ld. AO nor is it put before the appellant. The submission of the appellant that it is just an investor and as it received some tips and it chose to invest based on these market tips and had taken a calculated risk and had gained in the process and that he is not party to the scam etc., has to be controverter by the Ld. AO with evidence. When a person claims that he has done these transactions in a bona fide and genuine manner and was benefitted, one cannot reject this submission based on surmises and conjectures.

6.2.5 In my view, just the modus operandi, generalization, preponderance of human probabilities cannot be the only basis for rejecting the claim of the appellant. Unless specific evidence is brought on record to controvert the validity and correctness of the documentary evidences produced, the same Cannot be rejected by the appellant. The Hon'ble Supreme Court in the case of Omar Salav Mohamed Sait v CIT reported in (1959) 37 ITR 151 (SC) had held that no addition can be made on the basis of surmises, suspicion and conjectures. In the case of CIT{(Central), Kolkata vs. Daulat Ram Rawatmull reported in 87 ITR 349, the Hon'ble Supreme Court heid that, the onus to prove that the apparent is not the real is on the party who claims it to be so. The burden of proving a transaction to be & 263/Mum/2020 A.Ys. 2012-13 & 2010-11 bogus has to be strictly discharged by adducing legal evidences, which would directly prove the fact of bogusness or establish circumstance unerringly and reasonably raising interference to that effect. Also, the Hon'ble Supreme Court in the case of Umacharan Shah & Bros. Vs. CIT 37 ITR 271 held that suspicion however strong, cannot take the place of evidence.

6.2.6 Further, reliance can be placed on below mention judgments: - (i)The Hon‟ble CALCUTTA HIGH COURT in the case of BLB CABLES & ONDUCTORS [ITA No. 78 of 2017] dated 19.06.2018. The High Court Id vide Para 4.1:

…..we find that all the transactions through the broker were duly recorded in the books of the assessee. The broker has also declared in its books of accounts and offered for taxation. In our view to hold a transaction as bogus, there has to be some concrete evidence where the transactions cannot be proved with the supportive evidence. Here in the case the transactions of the “ we find that all the transactions through the broker were So commodity exchanged have not only been explained oud | substantiated from the confirmation of the party. Both the parties are confirming the transactions which have been duly supported with the books of accounts and bank transactions. The Id. AR has also submitted the board resolution for the trading of commodity transaction. The broker was expelled from the commodity exchange cannot be the criteria to hold the transaction as bogus. In view of above, we reverse the order of the lower authorities and allow the common grounds of assessee's appeal.

[quoted verbatim] This is essentially a finding of the Tribunal on fact. No material has been shown to us who would negate the Tribunal's finding that off market & 263/Mum/2020 A.Ys. 2012-13 & 2010-11 regards veracity of the transactions are not prohibited. As transactions, the Tribunal has come to its conclusion on analysis of relevant materials. That being the position, Tribunal having analysed the set off acts in coming to its finding, we do not think there is any scope of interference with the order of the Tribunal in exercise of our jurisdiction under Section 260A of the Income Tax Act, 1961. No substantial question of law is involved in this appeal. The appeal and the stay petition, accordingly, shall stand dismissed” ii) The Hon‟ble BENCH "H" OF MUMBAI ITAT in the case of ARVIND KUMAR JAIN HUF [ITA No.4682/Mum/2014] order dated 18.09.2017 held as under vide Page 6 Para 8:

We found that as far as initiation of investigation of broker is concerned, the assessee is no way concerned with the activity of the broker. Detailed finding has been recorded by CIT (A) to the effect that assessee has made investment in shares which was purchased on the floor of stock exchange and not from M/s Basant Periwal and Co. Against purchases payment has been made by account payee cheque, delivery of shares were taken, contract of sale was also complete as per the Contract Act, therefore, the assessee is not concerned with any way of the broker. Nowhere the AO has alleged that the transaction by the assessee with these particular broker or the investigation said to have is not share was bogus, merely because be SEBI against broker or his activity, assesseé cannot assesseé entered into in genuine transaction, insofar 4S the er concerned with the activity of the broker and have no control same. We found that M/s Basant Periwal and Co. never stated any Put. Ltd., of the authority that transactions in M/s Ramkrishna Fincap On the floor of the stock exchange are in genuine or mere accommodation entries. The CIT (A) & 263/Mum/2020 A.Ys. 2012-13 & 2010-11 after relying on the various decision of the coordinate bench, wherein on similar facts and circumstances, issue was decided in favour of the assessee, came to the conclusion that transaction entered by the assessee was genuine.

Detailed finding recorded by CIT (A) at para 3 to 5 has not been controverted by the department by bringing any positive material on record. Accordingly, we do not find any reason to interfere in the findings of CIT (A). iii) The Hon‟ble CALCUTTA HIGH COURT in the case of M/s Classic Growers Ltd. vs. CIT [ITA No. 129 of 2012] (Cal HC) - In this case the Id AO found that the formal evidences produced by the assessee to support huge losses claimed in the transactions of purchase and sale of shares were stage managed. The Hon'ble High Court held that the opinion of the AO that the assessee generated a sizeable amount of loss out of prearranged transactions so as to reduce the quantum of income liable for tax might have been the view expressed by the Id AO but he miserably Se failed to substantiate that. The High Court held that the transactions were no -.at the prevailing price and therefore the suspicion of the AO was misplaced AB and not substantiated.

Iv The Hon‟ble CALCUTTA HIGH COURT in the case of M/s CIT V. Lakshmangarh Estate & Trading Co. Limited [2013] 40 taxmann.com 439 (Cal). In this case the Hon'ble Calcutta High Court held that on the basis of a suspicion howsoever strong it is not possible to record any finding of fact. As a matter of fact suspicion can never take the place of proof. It was further held that in absence of any evidence on record, it is difficult if not impossible, to hold that the transactions of & 263/Mum/2020 A.Ys. 2012-13 & 2010-11 buying or selling of shares were colourable transactions or were resorted to with ulterior motive.

(v) The Hon‟ble CALCUTTA HIGH COURT in the case of CIT Vs, Shreyashi Ganguli [ITA No. 196 of 2012] (Cal HC) - In this case the Hon'ble Calcutta High Court held that the Assessing Officer doubted the transactions since the selling broker was subjected to SEBI's action. However, the transactions were as per norms and suffered STT, brokerage, service tax, and cess. There is no iota of evidence over the transactions as it were reflected in demat account. The appeal filed by the revenue was dismissed.

(vi) The Hon‟ble CALCUTTA HIGH COURT in the case of CIT V. Rungta Properties Private Limited [ITA No. 105 of 2016] (Cal HC) - In this case the Hon'ble Calcutta High Court affirmed the decision of this tribunal, wherein, the tribunal allowed the appeal of the assessee where the AO did not accept the explanation of the assessee in respect of his transactions in alleged penny stocks. The Tribunal found that the AO disallowed the loss on trading of penny stock on the basis of some information received by him. However, it was also found that the AO did not doubt the genuineness of the documents submitted by the assessee. The Tribunal held that the AO‟s conclusions are merely based on the information received by him. The appeal filed by the revenue was dismissed.”

(vii) The Hon‟ble CALCUTTA HIGH COURT in the case of CIT V. Andaman Timbers Industries Limited [ITA No. 721 of 2008} (Cal HC) - In this case the Hon'ble Calcutta High Court affirmed the decision of this Tribunal wherein the loss suffered by the assessee was allowed & 263/Mum/2020 A.Ys. 2012-13 & 2010-11 since the AO failed to bring on record any evidence to suggest that the sale of shares by the assessee were not genuine.

(viii) The Hon‟ble CALCUTTA HIGH COURT in the case of CIT Vv, Bhagwati Prasad Agarwal [2009TMI-34738 (Cal HC) in of 2009 dated 29.4.2009] - In this case the Assessee claimed exemption of income from Long Term Capital Gains. However, the AO, based on the information received by ITA No.256/Kol/2019 & 2421/Kol/2018 A.Ys 1213 & 15-16 Soumitra Choudhury Vs. ACIT, Cir-22, Kol Purushottam Das Agarwal Vs. ITO Wd-35(1) Kol. Page 16 him from Calcutta Stock Exchange found that the transactions were not recorded thereat. He therefore held that the transactions were bogus. The Hon'ble Jurisdictional High Court, affirmed the decision of the Tribunal wherein it was found that the chain of transactions entered into by the assessee have been proved, accounted for, documented and supported by evidence. It was also found that the assessee produced the contract notes, details of demat accounts and produced documents showing all payments were received by the assessee through banks. On these facts, the appeal of the revenue was summarily dismissed by High Court. ix) The Hon'ble Punjab and Haryana High Court in the case of VIVEK MEHTA v. CIT [ITA No. 894 OF2010] order dated 14.11.2011 vide Page 2 Para 3 held as under:

On the basis of the documents produced by the assessee in appeal, the Commissioner of Income Tax (Appeal) recorded a finding of fact that there was a genuine transaction of purchase of shares by the assessee on 16.3.2001 and sale thereof on 21.3.2002. The transactions of sale and purchase were as per the valuation prevalent & 263/Mum/2020 A.Ys. 2012-13 & 2010-11 in the Stocks Exchange. Such finding of fact has been recorded on the basis of evidence produced on record. The Tribunal has affirmed such finding. Such finding of fact is sought to be disputed in the present appeal. We do not find that the finding of fact NI «recorded by the Commissioner of Income Tax in appeal, gives give rise to any question(s) of law as sought to be raised in the present appeal. Hence, the present appeal is dismissed. i) The Hon'ble Jurisdictional Calcutta High Court in the case of CIT vs. Bhagwati Prasad Agarwal in LT.A. No. 22/Kol/2009 dated 29.04.2009 at para 2 held as follows:

The tribunal found that the chain of transaction entered into by the assessee have been proved, accounted for, documented and supported by evidence. The assessee produced before the Commissioner of Income Tax (Appeal) the contract notes, details of high Demat account and, also, produced documents showing that payments were received by the assessee through bank. j) The Hon'ble Supreme Court in the case of PCIT vs. Teju Rohit kumay Kapadia order dated 04.05.2018 upheld the following proposition of law laid down by the Hon'ble Gujarat High Court as under:

It can thus be seen that the appellate authority as well as the Tribunal came to concurrent conclusion that the purchases already made by the assessee from Raj Impex were duly supported by bills and payments were made by Account Payee cheque. Raj Impacts also confirmed the transactions. There was no evidence to show that the amount was recycled back to the assessee. Particularly, when it was found that the assessee the trader had also shown sales out of & 263/Mum/2020 A.Ys. 2012-13 & 2010-11 purchases made from Raj Impex which were also accepted by the Revenue, no question of law arises.

6.2.7 I find that the Ld. AO has been guided by the report of the investigation wing prepared with respect to bogus capital gains transactions. However, it is observed that the Ld. AO have not brought out any part of the investigation wing report in which the appellant has been investigated and /or found to be a part of any arrangement for the purpose of generating bogus long term capital gains. Nothing has been brought on record to show that the persons investigated, including entry operators or stock brokers, have named that the appellant was in collusion with them. In absence of such finding how is it possible to link their wrong doings with the appellant. In fact, the investigation wing is a separate department which has not been assigned assessment work and has been delegated the work of only making investigation. The Act has vested widest powers on this wing. It is the duty of the investigation wing to conduct proper and detailed inquiry in any matter where there ie allegation of tax evasion and after making proper inquiry and collecting proper evidences the matter should be sent to the assessment wing to assess the income as per law. It found that no such action executed by investigation wing against the appellant. In absence of any finding specifically against the appellant in the investigation wing report, the appellant cannot be held to be guilty or linked to the wrong acts of the persons investigated. In this case, in our view, the Ld. AO at best could have considered the investigation report as a starting power of investigation. The report only informed the Ld. AO that some person may have misused the script for the purpose of collusive transaction. The Ld. AO was duty bound to make inquiry from all concerned & 263/Mum/2020 A.Ys. 2012-13 & 2010-11 parties relating to the transaction and then to collect evidences that the transaction entered into by the appellant was also a collusive transaction. Further, is find that the Ld. AO has not brought on record any evidence to prove that the transactions entered by the appellant which are otherwise supported by proper third party documents are collusive transactions.

6.2.8 The same situation is considered in the judgment of Hon'ble Supreme Court way back in the case of Lalchand Bhagat Ambica Ram vs. CIT [1 959] 37 ITR 288 (SC) held that assessment could not be based on background of suspicion and in absence of any evidence to support the same. The Hon'ble Court held:

„Adverting to the various probabilities which weighed with the Income-tax Officer we may observe that the notoriety for smuggling Oy pack “food grains and other commodities to Bengal by country boats acquired by Sahibgunj and the notoriety achieved by Dhulian as a great receiving centre for such commodities were merely a background of suspicion and the appellant could not be tarred with the same brush as every arhatdar and grain merchant who might have been indulging in smuggling operations, without an iota of evidence in that behalf. The cancellation of the food grain licence at Nawgachia and the prosecution of the appellant under the Defence of India Rules was also of no consequence inasmuch as the appellant was acquitted of the offence with which it had been charged and its licence also was restored. The mere possibility of the appellant earning considerable amounts in the year under consideration was a pure conjecture on the part of the Income-tax Officer and the fact that the appellant indulged in speculation (in Kalai account) could not legitimately lead to the inference that the profit in a single transaction & 263/Mum/2020 A.Ys. 2012-13 & 2010-11 or in a chain of transactions could exceed the amounts, involved in the high denomination notes....”

6.2.9 The observations of the Hon'ble Apex Court are equally applicable to the case of the appellant. In my view, the Ld. AO having failed to bring on record any material to prove that the transaction of the appellant was a collusive transaction could not have rejected the evidences submitted by the appellant. In fact, in this case nothing has been found against the appellant with aid of any direct evidences or material against the appellant despite the matter being investigated by various wings of the Income Tax Department hence in my view under these circumstances nothing can be implicated against the appellant.

6.2.10 Applying the proposition of law as laid down in the above mentioned judgments to the facts of this case. Appellant Authority bound to consider and rely on the evidence produced by the appellant in support of its claim and base our decision on such evidence and not on suspicion or preponderance of probabilities. No material was brought on record by the Ld. AO to controvert the evidence furnished by the appellant. Under these circumstances, I am accepting the evidence filed by the appellant and allow the claim that the income in question is a bona fide Long Term Capital Gain arising from the sale of shares and hence exempt from income tax. Thus, the ground of the appellant is allowed.”

ITA. Nos.262 & 263/Mum/2020 A.Ys. 2012-13 & 2010-11 wanted to gain the artificial profit then no doubt there was no need to hold the share of 15 years. The assessee submitted the evidence such as bills, contract notes, demat statement and bank account to prove the genuineness of the transactions relevant to the purchase of the share resulting to long term capital gain. The AO while deciding the issue nowhere discussed the evidence adduced by the assessee if any. It was also noticed by CIT(A) that the evidence collected by third party was not required to be used against the assessee unless the evidence was put before him. The DDIT report was not brought on record nor put before the assessee. The claim of the assessee was that he was bonafide purchaser of the share and benefited and did transaction genuine manner so the same was not liable to be denied unless sufficient evidence should be on record. On seeing the peculiar facts and circumstances of the case and by relying upon the decision of Hon’ble Calcutta High Court in the case of M/s. Alipine Investments in of 2008 dated 26.08.2008 and BLB Cables & Conductors (ITA. No.78 of 2017) dated 19.06.2018 and Arvind Kumar Jain (HUF) (ITA. No.4682/Mum/2014) dated 18.09.2017 and M/s. Classic Growers Ltd. Vs. CIT (ITA. No.129 of 2012) and other decisions which have been mentioned in the order reproduced above relied by the CIT(A) to decide the matter of controversy nowhere seems unjustifiable. The evidence adduced by assessee nowhere controverted on record. The CIT(A) has relied upon the evidence adduced by assessee. We nowhere found any plausible reason to interfere with the finding of the CIT(A) on record, therefore, we uphold the finding of the CIT(A) on these issues and decide these issues in favour of the assessee against the revenue.

ITA. Nos.262 & 263/Mum/2020 A.Ys. 2012-13 & 2010-11 7. The facts of the present case are quite similar to the facts of the case as narrated above while deciding the appeal bearing therefore, there is no need to repeat the same. However, the figure is different. The finding given above while deciding the ITA. No.263/Mum/2020 is quite applicable to the facts of the present case also as mutatis and mutandis. Accordingly, we dismiss the appeal of the revenue bearing also.