ZILE SINGH,FARIDABAD vs. PR. CIT, FARIDABAD

INCOME TAX APPELLATE TRIBUNAL DELHI BENCH “F”: NEW DELHI BEFORE SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER AND SHRI K.N.CHARY, JUDICIAL MEMBER ITA No. 6863/Del/2019 (Assessment Year: 2016-17) Zile Singh, Vs. Pr. CIT, H. No. 263, Sector-8, Faridabad Faridabad, Haryana PAN: AJEPS1883J (Appellant) (Respondent)

Assessee by : Shri Dinesh Agarwal, CA Revenue by: Smt Sushma Singh, CIT DR Date of Hearing 06/08/2020 Date of pronouncement 21/08/2020

O R D E R PER PRASHANT MAHARISHI, A. M. 1. This appeal is filed by the assessee against the order of the ld Pr. CIT, Faridabad dated 31.07.2019 passed u/s 263 of the Income Tax Act, 1961 for Assessment Year 2016-17 holding that the order passed by the ld ACIT, Circle-2(1), Faridabad u/s 143(3) of the Act dated 27.08.2018 is erroneous and prejudicial to the interest of the assessee as the assessment records establishes that there were no enquiries whatsoever and assessment was passed in a stereotype manner without examining the genuineness of the claim of the assessee of long term capital gain shown as exempt income u/s 10 (38) of the act. 2. The assessee has raised following ground of appeal:- “1. The order of Pr. CIT is bad in law and on facts. 2. On the facts and under the circumstances of the case, the Pr. CIT has erred invoking the provisions of section 263 of the Act 3. The Pr CIT has erred in observing that the AO has completed the assessment without proper verification and hence the order of the AO is erroneous and prejudicial to the interest of revenue. 4. The Pr CIT has erred, in ignoring the submissions/ documentary evidence submitted by the assessee during the assessment and Page | 1

revisionary proceedings, and recording factually incorrect finding while holding that the order of the AO is erroneous & prejudicial to the interest of revenue. 5. The Pr CIT has erred in not appreciating that during the course of assessment proceedings the assessee has filed all the details in respect of the issues raised by the AO much before the completion of assessment proceedings and the AO has also made proper and meaningful enquiries before taking a final conclusion vis-a-vis framing final assessment. 6. The Pr CIT has further erred in observing that assessee has not filed any evidence in respect of sale and purchase of shares and claiming exemption of section 10(38) on such transaction on which STT has also been paid. 7. The Pr CIT "has erred in not appreciating that the assessee has not only invested in the shares of M/s Yamini Investment Co Ltd rather invested in other non-listed companies also and hence assessee is a regular investor. 8. The Pr CIT has erred in invoking the provisions of section 263, without discharging his burden, as is evident from the fact that the CIT has neither referred to any investigation report nor referred to any SEBI order and has termed the order of the AO as erroneous and prejudicial to interest of revenue on the basis of surmises and conjectures.”

absence of any verification made by the ld AO in assessment proceedings the order is erroneous and prejudicial to the interest of the revenue. Thus, the assessee is aggrieved with that order and has preferred this appeal before us. 9. The ld AR after submitting the comment during hearing of the case through video conferencing submitted his detailed arguments. He also placed on record the written submission on each ground. He also supported his argument with a paper book containing 259 pages. In the paper book along with the assessment order, revision order and submissions, he also places return of income along with annual accounts, bank statement and various other evidences. He firstly submitted the that assessee has submitted his return of income declaring total income of Rs. 1,69,24,770/- which has been wrongly mentioned by the ld AO of Rs. 5871020/-. He submitted that his opening balance of his capital as on 01.04.2015 was Rs. 9,36,63,253/- and closing balance as on 31.03.2016 was Rs. 11,74,41,790/- wherein, net increase of Rs. 2,37,78,537/- was made. He submitted that the assessee has earned long-term capital gain of Rs. 8748000/- on sale of shares of KCB Engineering Pvt Ltd and Rs. 3960000/- on sale of shares of RQS Engineering Pvt. Ltd. He also earned short-term capital gain of sale shares of Rs. 699930/- and long-term capital gain exempt u/s 10(38) Rs. 54,96,795/-. The assessee has also sold rural agricultural land and earned capital gain of Rs. 1070000/- which is also claimed as exempt as the land was not a capital asset. The assessee submitted that before the ld AO assessee submitted the details of agricultural income. His main arguments were as under:- i. That the case was selected for „limited scrutiny‟, which was not converted into „complete scrutiny‟. Therefore, the ld AO could not have enquired earning of the exempt capital gain of the assessee, therefore, no fault can be found with the AO and thus, the revision jurisdiction assumed by the ld PCIT holding that the ld AO should have verified what is beyond „limited scrutiny‟ is devoid of any merit.

ii. The case was selected for substantial increase in capital verification. The assessee submitted the complete details, which was examined by the ld AO and accepted. He submitted that the ld PCIT has held that the order is erroneous only because of the reason that the ld AO has not examined information in relation to Yamini Investment Company Ltd because such information was not with the ld AO during the assessment proceedings. The argument of the ld AR is by this, the ld PCIT has accepted that the ld AO has verified all other things. He therefore submitted that because merely one-step of the earning of the long-term capital gain exempt from tax was not examined cannot make the order of the AO erroneous and prejudicial to the interest of the revenue. iii. He further submitted that if the ld AO has not made any enquiry according to the ld PCIT then the ld PCIT should have made certain enquiry before initiating the proceedings u/s 263 of the Act to hold that the order of the ld AO is erroneous and prejudicial to the interest of revenue. He submitted that in this case the ld CIT has not made any enquiry. iv. He further submitted that the assessee has produced complete details about the sale of shares on which long-term capital gain has been earned. The shares of the above company were neither suspended nor delisted by the SEBI. The company is active at present and shares are being traded, the company is also having substantial worth, no allegations of any wrongdoing and it is a taxpayer. Therefore, even otherwise the transactions cannot be said to be bogus requiring further enquiry. v. The ld PCIT has not disclosed the information available with him in the show cause notice so that the assessee could have met with those reasons. The ld PCIT did not disclose the same and therefore, the order passed u/s 263 is invalid. In view of the above submission, he submitted that assumption of jurisdiction u/s 263 of the Act by ld PCIT is void ab initio.

and circumstances of the case and therefore, the issue is squarely covered in favour of the revenue. She submitted that the assessment order passed by the ld AO was cryptic, short, devoid of any reference to any enquiry and AO has merely accepted the submission of the assessee. Therefore, the order passed by the ld PCIT cannot be found fault with and is perfectly in order. 11. We have carefully considered the rival contentions and perused the orders of the lower authorities. We have also considered in detail the written submission filed by the learned authorised representative and the learned departmental representative presenting the rival cases. In this case the assessment order was passed on 27.08.2018 at the return of income filed by the assessee showing total income of Rs. 16924770/-. The ld AO has incorrectly mentioned that the assessee has shown income of Rs. 5871020/- as the return of income. The reason for limited scrutiny was that there was a substantial increase in the capital at Part „A‟ of the balance sheet of ITR. According to the assessee, the opening capital was Rs 9.36 crores and the closing capital of the assessee was Rs. 11.74 crores. Before the ld AO, the assessee has submitted the copy of ITR filed along with computation of income tax and annual accounts. The assessee also submitted the details of its capital along with items which resulted into increase and decrease of the capital. A sum of Rs. 2.56 crores were shown to have added to the capital during the year and Rs. 18.54 lakhs were miscellaneous drawing and other expenses, which decrease the capital. Therefore, there was a net increase in the capital of Rs. 2,37,78,537/-. Due to this opening capital of Rs. 9,36,63,253/- became Rs. 11,74,41,790/- as per the various items which increase the capital. Assessee has earned a long-term capital gain from sale of shares of a private limited company of Rs. 87.48 lakhs and another private limited company of Rs. 39.60 lakhs. He has also earned short-term capital gain on sale of shares of private limited company of Rs. 6.99 lakhs. He also earned gain on sale of agricultural land of Rs. 10.70 lakhs. However, he also earned long-term capital gain exempt u/s 10(38) of the Act of Rs. 54,96,795/- . Vide letter dated 13.08.2018, assessee submitted the Page | 7

details of shares of private limited company. The assessee also submitted that he has purchased 15 lakhs shares of Fidelo Power and Infrastructure Ltd of Rs. 15 lakhs @ 1/- share in FY 2013-14 on 27.03.2014 from M/s. Surya Build Co. Pvt. Ltd. After that Fidelo Power and Infrastructure merged with Yamini Investment Co. Ltd and the assessee was allotted Rs. 12 lakhs shares in exchange of shares of Fidelo. The assessee purchased the above shares by issue of cheque from HDFC Bank dated 24.03.2014 in AY 2015-16 out of 12 lakhs shares. Assessee sold 97000 shares for RS. 55,93,795/- through a broker and earned a long term capital gain of Rs. 54,76,795/- which was claimed as exempt u/s 10(38) of the Act. The assessee submitted relevant documentary evidence. The documentary evidence shows that there is a letter of the assessee to Mr. Bishnu Kumar Bansal, director of Surya Build Co Pvt. Ltd. According to that letter written by the assessee, he is forwarding a cheque of Rs. 15 lakhs asking that party to transfer the shares to his demat account with a depository Elite f Wealth Advisors Ltd, this is placed at page No. 242 of the paper book. The another evidence at page 243 is the copy of the cheque of HDFC Bank of Rs. 15 lakhs issued by the assessee in the name of Surya Build Co. Pvt. Ltd. At page No. 244 is a copy of Demat statement in the name of assessee with Elite Wealth Advisors Pvt. Ltd from 01.04.2014 to 31.03.2015. In that demat statement of 11.04.2014 assessee showed receipt 15 lakhs shares of Fidelo Power and Infrastructure Pvt. Ltd were transferred through off market receipt. Page No. 245 is a holding statement as on 10.05.2015 of the above shares. Page No. 246 is a sale bill dated 27.03.2014 of Surya Build Co. Pvt. Ltd issued to the assessee for the cost of 15 lakhs equity shares of that company @ 1/- amounting to Rs. 15 lakhs. Page NO. 247 is the details of holding in the demat account as on 31.03.2015 wherein, the shares of 15 lakhs shares of Fidelo were converted into 12 lakhs shares of Yamini Investment Ltd having at market price of share of Rs. 63.05 at face value and also purchase cost shown of Rs. 1/- per share. Therefore, as on 31.05.2015 the market value of the holding of 15 lakhs shares of Fidelo reached to Rs. 7,56,60,000/-. On 06.05.2015, the amalgamation of Fidelo India with Page | 8

Yamini Investments ltd happened and 12 lakhs shares were credited into demat account of the assessee. During the FY 2015-16, out of that holding, 97000 shares in seven different transactions on different dates of 17000, 85000, 15000, 7000, 16500, 16500 and 16500 shares were sold. For these transactions assessee submitted transactions ledger of Elite Wealth Advisors Ltd, broker of the assessee and the various bills of that broker. These details are available from page Nos. 250 to 259 of the paper Book. On the basis of above information submitted by the assessee, the ld AO accepted the claim of exemption and passed the order u/s 143(3) of the Act. The ld AO did not make any enquiry as to how the shares purchased by the assessee of a company @ Rs. 1 /- per share, suddenly within three years, shoot up by more than 57 times. Thus, ld AO did not enquire about increase in price of shares. The AO also did not enquire about the acquisition of those shares and merger of the company. Therefore, the ld PCIT on examination of record found that claim of exempt of Rs. 54,96,796/- u/s 10(38) of the Act was allowed to the assessee without any enquiry. The main contention of the assessee is that the transaction entered into by him are genuine, supported by proper documentary evidence carried out by account payee cheque and in absence of any allegation otherwise, the ld PCIT could not have assumed jurisdiction under that section. The ld PCIT found that acceptance by the ld AO of the claim of exemption by assessee lacked the necessary enquiry on the genuineness of the capital gain and therefore, the order passed by the ld AO is erroneous, as it had resulted into escapement of income and hence prejudicial to the interest of the revenue. The ld PCIT also held that the order passed is stereotype order and simply accepted what the assessee has submitted in his written submission. Ld AO failed to make requisite enquiry about the genuineness of the transaction in the circumstances of the case. Therefore, he directed the ld AO to make necessary enquiry to verify the issue and then pass the order after giving proper opportunity to the assessee. On careful examination of the whole issue it is apparent that the ld AO did not carry out any enquiry with respect to the long term capital gain claimed by the assessee u/s 10(38) Page | 9

of the Act. On careful examination of the order passed by the learned principal Commissioner of income tax, we found that, necessary enquiries were made by PCIT on the issue, therefore, on this account no fault could be found with the order u/s 263 of the income tax act. Further, when no inquiries have been made by the learned assessing officer, for the reason for which the case of the assessee was selected in scrutiny, the order is erroneous and prejudicial to the interest of the revenue. This issue is squarely covered in favour of the revenue wherein identical facts and circumstances of the case the action of the ld PCIT in absence of revisionary order u/s 263 of the Act was upheld in 2019 (1) TMI 1630 - ITAT DELHI POOJA GUPTA VERSUS PR. CIT, NEW DELHI. The findings of that decision are as under:-

“7. We have carefully considered the rival contention and also perused the orders of the lower authorities. During the year the assessee has earned the long-term capital gain of INR 95 lakhs from Trinity Trade Link Limited company where assessee allegedly purchased 10,000 shares on 12/2/2012 for ₹ 1,00,000/- of Trinity Trade Link for which cheque no 619395 on 22/2/2012 through DCB Bank Limited. Those shares were transferred in demat account of the assessee with Depository Parasram Holdings P Ltd with NSDL. Subsequently, Trinity Holdings Limited Got amalgamated with Omnichem Petroleum Limited and assessee got 10000 shares of amalgamating company in amalgamated company. Subsequently name of Omnichem Petroleum Limited was changed to Sharp Trading and finance Limited. On 26/2/2014 assessee sold these 10000 shares @ 963.54 per share. Therefore assessee has shown that she has sold the shares of the company which has been bought by her on 22/2/2102 @ ₹ 10/-per share has been sold by her on 26/2/2014 within a span of almost two years at the astronomical price of ₹ 963.54 per share resulting in to a gain of almost 96 times of the original investment. On these facts in case of the assessee, case was selected for scrutiny for the reason that suspicious transactions relating to long-term capital gain on shares is required to be verified. 8. During the course of assessment proceedings the assessee submitted following details :- a. bank statements showing payment of INR 100,000 to Trinity trade Link through cheque numbers 619395 for allotment of 10,000 shares b. Demat account transaction statement for a period from 01/04/2012 2 31/03/2012 issued by the Parasram Holdings private limited to show that shares of the Trinity trade Link private limited transferred in the demat account of the assessee c. financial statement and the detailed transaction Ledger issued by Parasram Holdings private limited ( broker) showing that the gross sale consideration of 10,000 shares of INR 9 635400/– has been credited to the account of the assessee and there from the payment has been made by the broker of INR 9 622913 to the assessee after deduction of the transaction charges securities transaction tax and service tax

d. Assessee also explained that Trinity trade Link private limited was amalgamated with Omnichem petroleum private limited and the name of that company letter on changed to Sharp trading and Finance Co Ltd. 9. On the basis of the above information submitted by the assessee, learned assessing officer has accepted the above long-term capital gain as genuine though for the purpose of the scrutiny the case of the assessee was selected stating that it is a suspicious transaction relating to long-term capital gain on shares. The assessment order was passed on 1/4/2016. The learned CIT has passed an order under section 263 of the income tax act stating that AO Should have enquired the above claim of exempt long- term capital gain earned by the assessee on the basis of suspicious transaction. The learned principal Commissioner has revised the order on the following counts holding it to be erroneous and prejudicial to the interest of the revenue:- i. The learned assessing officer has not drawn any conclusion about the steep rise in the price of the share in which assessee has earned long-term capital gain. ii. The learned AO has not investigated the issue from the angle that it is a colourable device to evade taxes iii. AO has not taken note of information received from Calcutta investigation wing (Directorate ) regarding the investment in penny stock iv. The company in which the assessee has earned long-term capital gain is part of stock investigated by the revenue and AO has not made any inquiries regarding that. 10. It is interesting to note that central board of direct taxes has issued instruction vide letter dated 16/03/2016 containing detailed instruction to the assessing officer to enquire such kind of transactions. The letter issued is as under :- LETTER F.NO.287/30/2014-IT (INV.II)-VOL-III, DATED 16-3-2016 REF : EFS Instruction No.53 of Directorate of Systems dated 08.03.2016 Kind attention is invited to the above referred EFS Instruction issued by the System Directorate regarding handling cases of Penny Stocks (suspect Long Term Capital Gains/Short Term Capital Loss etc). 2. It is informed that the said instruction is in the context of investigation conducted by Kolkata Investigation Directorate in respect of large number of penny stock companies, whose share prices were artificially raised on the Stock Exchanges in order to book bogus claims of Long Term Capital Gains or Short Term Capital Loss by various beneficiaries. Extensive investigation, including search and seizure/survey action on entry providers, riggers, beneficiaries etc. was conducted by the Investigation Directorate in such cases. Based upon outcome of such investigation and analysis of the data, the Systems Directorate has now uploaded details of such information in respect of individual assessees who have made transactions in such penny stocks. 3. Vide EFS Instruction under reference a new button 'Penny Stock' has been added on Individual Transaction Screen (ITS) to display information related to penny stock, now enabled on the screen of the Assessing Officers (AOs). Available information regarding the manipulative transactions has been captured in the functionality, including the investigation report of the Kolkaia Investigation Directorate. The functionality also contains a guidance note for the Assessing Officers. Such details are visible to the AOs Page | 11

of those assessees whose particulars have emanated out of the investigation report of Kolkata Investigation Directorate and whose cases have been considered actionable, at this stage. The details are also visible to supervisory officers of such AOs. 4. In case of any difficulty in viewing the information on ITS, Shri Vipul Agarwal, JDIT (Sys) 2(1) could be contacted on 0120-2770052 or email at vipul.agarwal@nic.in 5. The undersigned is directed to request that necessary directions may kindly be issued to the officers working under your jurisdiction to access this functionality and ensure that information available in the 'Penny Stock' functionality which may be useful for the purpose of cases presently under scrutiny, is examined and considered while finalizing assessments and considering reopening of cases under section 148 of the IT Act, 1961. 6. This issues with the approval of Member (Inv), CBDT. Page | 9 11. Along with this the central board of direct taxes has also issued a detailed standard operating procedure (SOP) for investigation of the penny stock issues. There are several action points listed for the assessing officer and what need to be proved by the assessing officer when a. assessee is purchasing share of a company which is devoid of any fundamental of investment and earning long-term capital gain in such listed company which does not have any business as seen from its last profit and loss account and do not have any fixed assets or plant and machinery. b. When the price movement of the scrip is bell shaped that means huge rise in price over a short span of time and in sharp decline in price of those shares and it does not match with the overall movement of the share market in general and movement of other scrip in the same line of business. c. Price movement of the scrip upwards and downwards done mainly through thin volume. d. Mostly the long-term capital gain is resulting only from few scripts in most cases 1 or 2 and the long-term capital gain as many times the purchase value. e. Typically holding period shown is just more than one year in case of long-term capital gain matching with the period of crystallization of extraordinary income. 12. Further there are certain parameters also specified to identify the bogus long-term capital gain. According to the instructions there are several information to be collected from the assessee such as the copy of the Demat account, history of assessee in share transaction in earlier years, crystallization of extraordinary income and try to match the same with the purchase of shares, normal business of the assessee or family or firm in which the assessee is a major stake holder to trace the source of unaccounted cash in case of long-term capital gain or use of unaccounted cash generated from long-term capital gain, statement of assessee which can be taken at any stage by pointing out his inefficiency for dealing in shares and questioning his wisdom about investment in penny stocks as companies are devoid of any financial worth, and the source of purported initial investment shown whether in cash or cheque and the date of transfer of money from bank account of the assessee to the bank account of the broker. The assessing officers are further directed to gather certain information from other sources such as copy of contract notes and how the order was placed , share transactions from the broker of the assessee and copy of the demat account, documents given for Know your customer identification, copy of contract notes, trading account ledger etc. The sample letters are also provided for the purpose of making enquiry. Further the information is Page | 12

required to be obtained from the stock exchanges such as Bombay stock exchange and National stock exchange about all the trades done of specified scripts for all purchases and sales including broker detail, purchase and sale party wise and for which also the simple letters are provided. The AO must also check for any punitive action on any of such brokers by SEBI. In short after making all such enquiry the assessing officer must collect all the information and then summon assessee about knowledge about share market in general, knowledge about the script in specific, why and how investment was made, how brokers were instructed, how well the assessee knows the brokers its office and its employees, how his decision to purchase shares of scripts is devoid of financial wisdom, statement of entities specific if any, laying all the facts before him which proves that the transaction is not normal. After that the learned assessing officer is directed by that instruction to issue a show cause notice. In the present case before us the learned assessing officer has merely accepted what is submitted before him without making any enquiry or obtaining the statement of the assessee about all these parameters. As the assessing officer has neither carried out any enquiry with the 3rd parties such as the broker, stock exchanges, and most importantly the learned AO has not examined the assessee about the share transactions as directed by the CBDT. 13. It is rather surprising that despite the case of the assessee was selected for verification of the suspicious transaction entered into by the assessee the learned AO has not carried out any enquiry and merely believed on the documents submitted by the assessee. There is complete lack of inquiry with the perspective for which case is selected for scrutiny. The ld PCIT in his order has also given the issues on which ld AO has not made any inquiry. Further according to Explanation 2 to section 263 of The Act, any order passed without making due inquiries which should have been made is an order erroneous and prejudicial to the interest of revenue. Therefore we do not find any infirmity in the order of the learned PCIT in assuming jurisdiction under section 263 of the income tax act and directing the assessing officer to make the necessary enquiry. Hence, we do not find any merit in the appeal of the assessee and the order passed by the learned CIT under section 263 of the income tax act is upheld.”