MUNJAL MRUGESH JAYKRISHNA,AHMEDABAD vs. THE DY.CIT, CIRCLE-1(1)(1), AHMEDABAD

4. Aggrieved by the order of the Assessing Officer, the assessee filed appeal before the Ld. CIT(A) who dismissed the appeal of the assessee.

5. Aggrieved, the assessee is now in appeal before the Tribunal.

6. Before us, Ld. AR submitted that :-

• The Assessing Officer has not referred to an iota of evidence which can lead to the conclusion that the Long Term Capital Gains earned by the assessee from the sale of the listed shares of NCL Research, which were purchased during the preceding year, through the Stock Exchange and were sold during the year under reference, also through the Stock Exchange, were sham or bogus, the addition made merely on surmise or suspicion can under no circumstances be justified.

• It was also submitted that nowhere under the statements recorded by the Investigation Wing, on the basis of which the reopening of the assessment was initiated, has the name of either the appellant or his broker.

• It was wholly preposterous on the part of the Assessing Officer to have presumed that the sale proceeds received by the assessee were not genuine and were liable to be added as unexplained credit u/s. 68 of the Act.

• While the assessee has fully discharged his onus in explaining the source and genuineness of the credit of the sale proceeds in his bank account, the Assessing Officer has, without leading any cogent evidence against the assessee, mechanically inflicted the addition relying on the provisions of Sec.68, which have no basis or justification for being invoked, as done by the Assessing Officer.

• The Ld. AR argued that the in the list of the persons alleged to be penny stock operators/exit providers/share brokers/ members, whose statements were recorded and the copies of the same was furnished to the assessee in the form of a CD drive, nowhere the assessee’s name or the name of assessee’s broker i.e. Shree Naman Securities & Financial Services Pvt Ltd appear, either directly or indirectly.

Not to left out any arguments of the Ld. AR, the written submissions of the Ld. AR are being reproduced hereunder:-

2. The present assessment is a reopened assessment relating to AY 2013-14. The original return of income declaring total income of Rs. 46,78,369 was processed u/s. 143(1). However, a notice u/s.148 was issued on 26/03/2018, pursuant to which the present assessment came to be framed by making an addition of Rs.59,52,860 u/s. 68 of the Act and determining the total taxable income at Rs.1,06,11,229/-.

d. The payments for the purchase were also made by cheque against the contract note dated 02/09/2011 of the broker Shree Naman Securities & Finance Pvt

Ltd and the shares were duly credited in my Demat account with Kotak Securities Limited. Both these documents are attached herewith marked as Annexures 2 & 3. A copy of my bank account with HDFC Bank is duly attached herewith marked as Annexure-4, which reflects the payment made to the broker by cheque. e. The sale of NCL shares were made in lots during the period September to December 2012 at the listed market price ranging between Rs. 523 to Rs. 922 per share. Here again, the shares were sold in the open market and the payments towards the same consideration were duly received as per contract notes from my broker Shree Naman Securities. Similarly, the payments for the same were also received by me were duly deposited in my HDFC Bank. The relevant documents being the copies of the contract notes and relevant pages of Bank statement are attached herewith marked as Annexure-5 & 6 f. Under para 3 of your show cause Notice, you have referred to the fact that as per the investigation conducted by the Kolkata Directorate, there was a syndicate of operators/exit providers engaged in entry providing business. You have further mentioned that during the course of Departmental investigation the statements of various operators/ share brokers/members were recorded on oath, confirming that certain beneficiaries transacted in this script by way of bogus LTCG and claimed exemption u/s. 10(38). g. I wish to emphatically place on record that in the list of persons alleged to be penny stock operators/exit providers/share brokers/members, whose statements were recorded and the copies of the same was furnished to me in the form of a pen drive, nowhere does my name or the name of my broker

Shree Naman Securities & Financial Services Pvt Ltd appear, either directly or indirectly. h. Under the circumstances, I fail to understand as to how there is any basis of forming reason to believe that I had entered into penny stock transactions and claimed the same as exempt income, thereby not offering the same to tax. As has been held by the Hon’ble Supreme Court, the Jurisdictional High Court and several other High Courts and Tribunals, “Suspicion, howsoever strong, cannot take the character of evidence. Where no specific evidence showing nexus of the assessee with the conversion of any unaccounted money into sale proceeds of shares is brought on record, an addition made merely on the basis of wild guess, surmise or suspicion cannot be sustained." i. I wish to reiterate that in the entire reassessment proceedings until now, I have not been confronted with any tangible or material evidence against me, on the basis of which your proposed action to add the alleged 'income as my unaccounted income can be sustained in law.”

7. The assessee wishes to rely on the ratio of the following judicial pronouncements which are squarely applicable on the facts and in the circumstances of the assessee ’s case:

(a) Meghraj Singh Shekhawat vs DCIT (2019) 103 taxmann.com 374 (Jaipur ITAT)

“Therefore, when the Assessing Officer has not brought any material on record to show that the assessee has paid over and above the purchase consideration as claimed and evident from the bank account then, in the absence of any evidence it cannot be held that the assessee has introduced his own unaccounted money by way of bogus long term capital gain. The Hon’ble Jurisdiction High Court in case of CIT v. Smt. Pooja Agrawal (supra) has upheld the finding of the Tribunal on this issue in para 12 as under:

"12. However, counsel for the respondent has taken us to the order of CIT(A) and also to the order of Tribunal and contended that in view of the finding reached, which was done through Stock Exchange and taking into consideration the revenue transactions, the addition made was deleted by the Tribunal observing as under:

"Contention of the AR is considered. One of the main reasons for not accepting the genuineness of the transactions declared by the assessee that at the time of survey the assessee in his statement denied having made any transactions in shares. However, subsequently the facts came on record that the assessee had transacted not only in the shares which are disputed but shares of various other companies like Satyam Computers, HCL, IPCL, BPCL and Tata Tea etc. Regarding the transactions in question various details like copy of contract note regarding purchase and sale of shares of Limtex and Konark Commerce & Ind. Ltd., assessee's account with P.K. Agarwal & co. share broker, company's master details from registrar of companies, Kolkata were filed.

Copy of depository a/c or demat account with Alankrit Assignment Ltd., a subsidiary of NSDL was also filed which shows that the transactions were made through demat a/c. When the relevant documents are available the fact of trans actions entered into cannot be denied simply on the ground that in his statement the assessee denied having made any transactions in shares. The payments and receipts are made through a/c payee cheques and the transactions are routed through Kolkata Stock Exchange. There is no evidence that the cash has gone back in assessee s's account. Prima facie the transaction which are supported by documents appear to be genuine transactions. The AO has discussed modus operand! in some sham transactions which were detected in the search case of B.C. Purohit Group. The AO has also stated in the assessment order itself while discussing the modus operand! that accommodation entries of long term capital gain were purchased as long term capital gain either was exempted from tax or was taxable at a lower rate. As the assessee 's case is of short term capital gain, it does not exactly fall under that category of accommodation transactions. Further as per the report of DCIT, Central Circle-3 Sh. P.K. Agarwal was found to be an entry provider as stated by Sh. Pawan Purohit of B.C. Purihit and Co. group. The AR made submission before the AO that the fact was not correct as in the statement of Sh. Pawan Purohit there is no mention of Sh. P. K. Agarwal. It was also submitted that there was no mention of Sh. P. K. Agarwal in the order of Settlement Commission in the case of Sh. Sushil Kumar Purohit. Copy of the order of settlement commission was submitted. The AO has failed to counter the objections raised by the assessee during the assessment proceedings. Simply mentioning that these findings are in the appraisal report and appraisal report is made by the Investing Wing after considering all the material facts available on record does not help much. The AO has failed to prove through any independent inquiry or relying on some material that the transactions made by the assessee through share broker P.K. Agarwal were non-genuine or there was any adverse mention about the transaction in question in statement of Sh. Pawan Purohit. Simply because in the sham transactions bank a/c were opened with HDFC bank and the assessee has also received short term capital gain in his account with HDFC bank does not establish that the transaction made by the assessee were non-genuine. Considering all these facts the share transactions made through Shri P.K. Agarwal cannot be held as non- genuine. Consequently denying the claim of short term capital gain (6 of 6) (ITA- 385/2011) made by the assessee before the AO is not approved. The AO is therefore, directed to accept claim of short term capital gain as shown by the assessee ."

In view of the above facts and circumstances of the case, we are of the considered opinion that the addition made by the AO is based on mere suspicion and surmises without any cogent material to show that the assessee has brought back his unaccounted income in the shape of long term capital gain. On the other hand, the assessee has brought all the relevant material to substantiate its claim that transactions of the purchase and sale of shares are genuine. Even otherwise the holding of the shares by the assessee at the time of allotment subsequent to the amalgamation/merger is not in doubt, therefore, the transaction cannot be held as bogus. Accordingly we delete the addition made by the AO on this account."

(b) Ramprasad Agarwal vs ITO (2018) 100 Taxmann.com 172 (Mum. ITAT)

“The Tribunal in the case of MeghraJ Singh Shekhawat v. Dy. CIT [IT Appeal Nos. 443 & 444 (JP) of 2017] noted that the Assessing Officer has not brought any material on record to show that the assessee has paid over and above purchase consideration as claimed and evident from the bank account and in the absence of any evidence it cannot be held that the assessee has introduced his own unaccounted money by way of bogus long-term capital gain. The assessee had produced the relevant record to show the allotment of shares by the company on payment of consideration by cheque and therefore, it is not a case of payment of consideration in cash and all the entries are part of the bank account of the assessee and the assessee dematerialized the shares in the D-mat account which is also an independent material and evidence which cannot be manipulated. Therefore, the holding of the shares by the assessee cannot be doubted and the finding of the Assessing Officer is based merely on the suspicion and surmises without any cogent material to show that the assessee has introduction his unaccounted income in the shape of long-term capital gain.

The facts of the case of the assessee are identical with the facts in the above case wherein the Tribunal has deleted the addition. Therefore, respectfully following the same, the order of the Commissioner (Appeals) is set aside and, the Assessing Officer is directed not to treat the long-term capital as bogus and delete the consequential addition.”

9. The assessee therefore prays in appeal before your Honour to direct the Assessing Officer to delete the entire addition of Rs.59,32,860/-.

The Ld. AR, therefore, urged that the addition made by the Assessing Officer and confirmed by the Ld. CIT(A) be deleted.

8. Heard both the parties and perused the material available on record.

8.1 On the facts of the case, we find that the assessee has sold shares of ‘NCL Research’ for Rs. 80,09,060/- through Shree Naman Securities and Finance Pvt Ltd, for the year under consideration, on which he had shown LTCG of Rs. 59,32,860/- and claimed as exempt u/s 10(38) of the Act. The Assessing Officer disallowed the same on the ground that the assessee had introduced unaccounted income under the guise of bogus/sham LTCG claim u/s 10(38) of the Act. We have considered the arguments of the Ld. AR that even if it is considered that the scrip prices of ‘NCL Research’ have been manipulated, the assessee has no role and being a passive investor along with number of scrips of other companies. We have also considered the arguments that the assessee has earned profits to the tune of Rs.2,37,10,473/- in the similar fashion as that of the suspected shares of an amount of Rs.59,32,860, the sale of shares of NCL Research cannot be coloured differently. We have given due consideration to the arguments of the Ld. AR that the investigation wing of Income Tax Department Report cannot be taken in to consideration at all as gospel truth. The assessee or his broker is not figuring in report not his share transaction leading to LTCG. Assessee is unaware of dummy and paper company. Statements recorded during course of investigation does not point out towards assessee and his transaction in question. It was argued that the broker of assessee is not implicated in any manner. We have given due consideration to the arguments that the scrip is still listed on the bourses. The assessee being a passive investor cannot be attributed for any change in the value of the shares and the value of the share changes according to the open market economies.

8.2 In the background of these arguments, we have examined the financials and movement of the scrip in the market. The assessee has purchased the shares of NCL Research on 02.09.2011 and sold them on dates from 11.09.2012 to 07.12.2012. The total purchase price was Rs.20,76,200/- and the sale price was Rs.80,09,060/- during the period mentioned. In the backdrop of the investigations carried out by the Income-tax Department, we have examined the movement of the scrip for various periods as mentioned by the Revenue.

• From January, 2011 to September, 2013, the share price increased from Rs. 1.56 to Rs. 80, a rise of 5128%. This is the period in which the assessee has purchased the shares in September 2011 and sold upto December 2012, and made a profit of Rs.59,32,860/-.

• It is interesting to note that from October, 2013 the share price fell from a high of Rs. 80 to a price of Rs. 12, a fall of 666% in Six months.

8.3 We have also considered the fact that in the instant case, the assessee has bought 10,000 shares on 02.09.2011 and sold 10,000 shares in packs of 2500 shares on 11.09.2012, 1500 shares on 23.11.2012, 500 shares on 26.11.2012, 2250 shares on 27.11.2012 and 3250 shares in three days of the first week of Dec. 2012. Buying and selling of shares in a concerted way shows a direct connivance between operators and the assessee and proves the entire process is predetermined and synchronized. The company’s financials, profit, dividend, earning per share etc. if not sole basis for increase in share price but at least is a paramount fact and in the instant case it is clear that all the criteria has given a go-away. Keeping in view the financials, we have no hesitation to say the scrawny financial parameters cannot command such a high rise of shares in such a small period. Mysterious are ways. In enigmatic ride the assessee has made 400% profit in a span of fat 13 months. This coupled with the investigation conducted by the Income Tax Department with the backing of the statements of the brokers, it can be said that the assessee cannot claim ignorance of the unfair trade practices took place in the Security Market with respect to this scrip. Submitting that the assessee is a passive beneficiary of the operation cannot absolve the accountability of the assessee to claim LTCG as exempt. The said scrip has been in dormant and suddenly sprouted to yield profits of the highest order and then went into oblivion. Further, coupled with the inquires conducted by the SEBI with regard to the scrip do not instil any confidence about the genuineness of the earning of long- term capital gains. Hence, we have no hesitation to hold that NCL Research scrip was a penny stock and used by the assessee to book LTCG. The transactions being ungenuine, this will disentitle the assessee the claim of exemption u/s 10(38) of the Act. The production of contract notes, bills, invoices, payment of STT, banking channel evidences per se does not explain and demonstrate genuineness of the share transactions unless and until assessee prima-facie shows to the authorities particularly so when LTCG is claimed in return that rise in prices of scrip was a usual market phenomenon which was driven by market force.

8.4 Further, we have gone through the ratio given by the Ld. CIT(A) while confirming the addition. For the sake of ready reference, the relevant part of the said order is reproduced as under:-

“5. DECISION: - The observations of the AO, submissions of the appellant and the material on record have been considered. Briefly the facts are that the appellant was found to have sold shares of NCL Research for Rs. 80,09,060/- on which he had shown LTCG of Rs. 59,32,860/- which was claimed as exempt u/s 10(38) of the Act. The A.O. while disallowing the claim has made the following points: a) The assessee is a Joint Director in two well-known listed companies dealing in chemicals but invested in NCL Research, a company with no significant credentials. b) NCL Research was named in the Kolkata Investigation Report, which investigated 84 penny stocks and found many bogus Long

Term (Capital Gains (LTCG) or Short Term Capital Losses (STCL) entries, benefiting many parties. c) Price of shares of NCL Research was inflated/rigged abnormally without either any economic rationale or in consistency with movement of stock index. d) SEBI took action against market manipulation involving bogus LTCG entries, with NCL Research being one of the suspect scrips. e) Statements from promoters, brokers, and associated persons confirmed involvement in manipulating NCL Research's stock prices. Copy of such statements were supplied in pen-drive to the appellant. f) The appellant invested in NCL Research, which lacked financial credentials, and claimed LTCG exemption by selling the shares. g) The appellant sold all 10,000 shares immediately after the 12- month holding period to claim the exemption under section 10(38). h) The trades executed by the appellant were part of synchronized trading, indicating coordinated efforts to create bogus LTCG or LTCL. Specifically, the appellant made 14 trades between September and December 2C12, with one buyer party purchasing 888 shares in 6 trades, indicating pre-s rranged/pre- meditated transactions to book fake/look-genuine profits to claim exemption in the guise of LTCG u/s 10(38). i) An in-depth analysis has been made by the AO and elaborately discussed in the assessment order.

5.1 During the appellate proceedings the appellant reiterated the facts which were submitted before the A.O. The points raised by the appellant are summarized below: a) The Assessing Officer (AO) did not provide any evidence to suggest that the Long Term Capital Gains (LTCG) from the sale of NCL Research shares were sham or bogus. b) The shares were purchased in the previous year and sold through the Stock Exchange in the current year, with no indication that these transactions were suspicious. c) The addition made by the AO was based solely on surmise or suspicion, which is unjustifiable. d) The appellant's or his broker's name did not appear in any statements recorded by the Investigation Wing, which formed the basis for reopening the assessment. e) The AO's presumption that the sale proceeds were not genuine, leading to their addition as unexplained credit under section 68 of the IT Act, was unfounded. f) The appellant fully explained the source and genuineness of the sale proceeds credited to his bank account, but the AO made the addition without any solid evidence, relying unjustifiably on section 68.

The appellant has also sought Video Conference during appellate proceedings which was granted. Shri Mukesh Patel, Advocate & AR of the appellant attended the Video Conference. In the Video Conference the appellant reiterated his earlier stand of having done the transactions through stock exchange of listed shares and there is no evidence direct or indirect against him either though statement or by his broking agency. The appellant in support relied on judgment of Hon’ble Jaipur Tribunal in Meghraj Singh Shekhawat vs DCIT (2019) 103 taxmann.com 374 and Hon’ble Mumbai Tribunal in Ramprasad Agarwal vs ITO (2018) 1 DO Taxmann.com 172.

5.2 I have considered the arguments of the A.O. and that of the appellant. The only issue that needs to be addressed here whether transaction made through stock exchange of listed shares can be sham? The crux of the appellant’s contention boils down to this simple argument that transactions made though recognized stock exchange through listed broker using banking channel cannot be considered sham. The appellant contended that it was a pure business transaction through recognized entities and . whatever the findings related to price increase of shares or involvement of other entities in share price manipulation be, the appellant had nothing to do with it. If the appellant’s argument is considered correct then it appears that the appellant was at the right place at the right time and the exorbitant gain was his sheer luck. In these arguments, the appellant claimed ignorance of share price manipulation or remained silent regarding the synchronized sale pointed out by the A.O. in detail in the assessment order. The important point that cannot be missed here was income or the capacity of the persons involved who had purchased the shares which were sold by the appellant. For the sake of clarity, the same as listed by the A.O. is reproduced below:

Name of Sale Pan of Income as per ITR 2012-13 2013-14 company date BUYERS 2011-12 NCL Research 1 1.09.2012 AAECR2957A 9864 15447 125068 NCL Research 11.09.2012 AADCM5866 150211 0 - NCL Research 23.1 1.2012 AARHS2082R NA. . NA NA NCL Research 23.11.2012 AARHS2082R -do- -do- -do- NCL Research 26.11.2012 AAECK0200H 10810 14000 9625 NCL Research 27.11.2012 AAECG6112A Return not filed 3473 7485 NCL Research 27.11.2012 AAECG6112A -do- -do- -do- NCL Research 27.11.2012 AAECG6112A -do- - -do- NCL Research 04.12.2012 AACCJ1455B 4911 15921 10621 NCL Research 04.12.2012 AALCS9387E 12063 13572 2620 NCL Research 06.12.2012 AAECG6112A Return not filed 3473 7485 NCL Research 06.12.2012 AAECG6112A -do- -do- -do- NCL Research 06.12.2012 AAECK0200H 10810 14000 9625 NCL Research 07.12.2012 AAECG6112A Return not filed 3473 7485 The appellant can claim innocence or ignorance of who had purchased the shares, the fact of the matter is when share price was so exorbitantly high and was traded in specified quantity and price, it would not be out of place to consider the wherewithal of the persons who was purchasing these shares. The above table depicts that these purchasers simply did not have the money or income to enter into such high value transactions which is contrary to the financial of the appellant. If the appellant's argument of transaction being made through stock exchange is the parameter for genuineness then every transaction made through banking channel should also be considered as genuine by the same analogy. It is true that there was no direct statement connecting the appellant or his broker, but the buck stop with the appellant as he is the direct beneficiary or recipient of money in the form of sale proceeds of share when the persons paying did not simply had the wherewithal to make such transactions. Since, the claim of exemption u/s 10(38) in respect of said LTCG has been claim by the appellant, the onus lies on the appellant to substantiate the same as observed by Hon’ble Supreme Court in the case of Roshan Di Hatti vs CIT, [1992] 2 SCC 378/107 ITR 938 wherein it was held “if the assessee fails to discharge the onus by producing cogent evidence and explanation, the AO would be justified in making the addition back into the income of the assessee.” Further, in this respect it is pertinent to refer to the judgments of the Hon’ble Supreme Court in the case of Sumati Dayal Vs. CIT (214 ITR 801) (SC)in which the Hon’ble Apex Court held that the true nature of transaction have to be ascertained in the light of surrounding circumstances. It needs to be emphasized that standard of proof beyond reasonable doubt has no applicability in determination of matters under taxing statutes. It is also well settled that tax authorities are entitled to look into surrounding circumstances to find out the reality of the transaction by applying the test of human probability. It fails the test of human probability when a person, with PAN AAECG6112A whose income is merely around Rs. 3000 to 7500 in past three years indulges in 6 trades even if we don’t consider the economic sense of buying such shares at such a high price.

It is not the case here that the entire claim of exemption u/s 10(38) on LTCG was disallowed by the AO. It is pertinent to mention that the appellant has claimed exemption on LTCG of Rs. 2.37 Cr arising out of transactions in 8 scrips during the year. The AO on the basis of specific information in this regard and in-depth analysis based on reports and materials available before him, has only disallowed such exemptions on LTCG arising out of transactions in shares of NCL Research. Accordingly, such disallowance can’t be attributed to any incorrect facts or misleading conclusions as alleged by the appellant.

5.3 To sum up: Is there price manipulation of shares of NCL Research? Answer to this question is yes as per report of DGIT (investigation), Kolkata and SEBI order. Is the promoters of NCL Research was involved in price manipulation? The answer is also yes as per their statement which includes the statement of Shri Vijay Jaydeo Poddar, Promoter & MD of M/s NCL Research. Does SEBI passed order on manipulation of share price of NCL Research? The answer is again yes, for a reference it is placed on record that one such order no. WTM/MPB/EFD1-DRA4/04/2019 dated 10.01-2Ql9uwas passed by SEBI u/s 11(1), 11(4) & 11B of SEBI Act with respect to the irregularities in the trading in NCL Research and consequent rigging in its prices during the period from April, 2012 to September, 2014 which coincides with the period of transactions undertaken by the appellant. The copy of order is available in public domain and therefore it is not reproduced here for the sake of brevity. Does the appellant immediate offloaded the shares after completion of one year and booked LTCG? The answer is yes. Does the gain on such investments made by the appellant is in line with the gain on investments made in other shares? The answer is no. Does the entities who purchased the shares from the appellant had any economic sense or have shown any economic activity or had the financial capability in past years to justify the trade? The answer is no. The appellant have bought 10000 shares on 02.09.2011 in one shot and sold 10,000 shares in packs of 2500 shares on 11.09.2012, 1500 shares on 23.11.2012, 500 shares on 26.11.2012, 2250 shares on 27.11.2012 and 3250 shares in three days of the first week of Dec. 2012 this goes to show that volumes are managed and the same cannot be construed as fair and open market transactions as claimed by the appellant.

Therefore, in the light of judgment of Hon’ble Supreme Court as discussed supra and also the case laws discussed by the AO in Para 13.3 & 13.4 of the assessment order which are not repeated here for the sake of brevity, the case laws relied upon by the appellant cannot come to his rescue. The transactions made through stock exchange and banking channel are neither sacrosanct nor can it make a non-genuine transaction into genuine one when the facts speak otherwise. Accordingly, I am in agreement with the conclusions drawn by the AO which are based on the findings & reports of investigation directorates of the department, the financials of the company the scrips of which were traded i.e. NCL Research, the capability of the buyers as evidenced by analyzing their ITR for 3 years, the price movement of the scrip (i.e. NCL Research), the trade pattern and statements of various operators/entry providers/stock brokers. In light of these facts, I find no merit in the contention raised by the appellant. The addition made by the A.O. is accordingly upheld.”

8.5 Reliance is being placed on the following judgments based on which we could conveniently arrive at a decision that the transactions entered by the assessee are not genuine so as to make him eligible for claim u/s 10(38) of the Income-tax Act, 1961.

(i) Sumati Dayal v. CIT - (1995) 214 ITR 801 (SC) (ii) Durga Parsad More - 82 ITR 540 (SC) (iii) Mc. Dowell & Co. Ltd. - 154 ITR 148 (SC) (iv) Govinda Rajulu Mudaliar v. (1958) 34 ITR 807 (SC) (v) Sreelekha Banerjee & othrs. V. CIT (1963) 49 ITR 112 (SC) (vi) Kalekhan Mohammed Hanif v. CIT (1963) 50 ITR 1 (SC) (vii) CIT v. Biju Patnaik (1986) 160 ITR 674 (SC)

8.6 Further reference is also being made to the judgment of Hon'ble Calcutta High court in case of PCIT Vs. Swati Bajaj 139 Taxmann.com 352 (Kol)(2022) wherein it was held as under:-

“55. The first argument on behalf of the assessee is that the copy of the investigation report was not furnished to them despite specific written request made on behalf of the assesses to furnish the copy of the report, the statements recorded and provide those persons from whom statements were recorded to be cross examined on behalf of the assessee. There is no dispute to the fact that the copy of the statement said to have been recorded during the course of investigation has not been furnished to the assessees and the request made by some of them for cross examining of those persons was not considered. The question would be as to whether the non-compliance of the above would render the assessments bad in law. The argument of the revenue is that the assessments cannot be held to be illegal merely on the grounds that the copy of the report was not furnished as the respective assessing officers have clearly mentioned as to the nature of investigation done by the department and as the report itself states that the investigation commenced not from the assessees end but the individuals who dealt with these penny stocks who were targeted. It is equally true invariably in all cases, the statement of the stock brokers, the entry operators or the Directors of the various penny stock companies does not directly implicate the assessee. If such being the situation, the assessee cannot be heard to say that the copy of the entire report should have been furnished to him, the person from whom the statements were recorded should have been produced for cross examination as admittedly there is nothing to implicate the assessee Smt. Swati Bajaj of insider trading or rigging of share prices. But the allegation against the assessee is that the claim for LTCG/LTCL is bogus. As pointed out by Mr. Rai, learned senior standing counsel, the investigation report is general in nature not assessee specific. Therefore, we are required to see as to whether non-furnishing of the report which according to the revenue is available in the public domain would vitiate the proceedings on the ground that the assessee was put to prejudice.

A company with very poor financial fundaments in terms of past income or terms of past income or turnover is able t raise huge capital allotment of Preferential allotment of shares is made to various entities.

There is a shop rise in price of scrip once the preferential allotment is done. This is normally achieved through circuading shares of shares among a select group of companies. These groups of companies often have common promoters/directors. The scrips with thus artificially inflated price rise are offloaded through companies whose funding is provided by the same set people who want to convert black money into while.

There is an urgent need for having an effective preventive and punitive action is such matters to prevent recurrence of such instances.

We recommend the following measures in this regard: SEBI needs to have an effective monitoring mechanism to study unusual rise of stocks prices of Companies while such a rise is taking place. We understand that SEBI has a strong IT infrastructure which can generate red flag for such instances. Such red flags could be built upon trading volumes, entities which contribute to trading volume financial background of firms through their annual returns and any other indicators SEBI may develop. We believe that with effective and timely monitoring by SEBI a significant number of such instances can be checked in time. Once such instances are detected, SEBI should invariably share this information with CBDT and FIU.

Barring such entities from securities market would not be of strong deterrence in itself. In case it is established, the stock platforms have been misused for taking LTCG benefits, prosecution should invariably be launched and relevant sections of SEBI Act. Section 12A read with section 24 of the Securities Exchange Board of India Act 1992 are predicate offences. Enforcement Directorate should then be informed to take action under Prevention of Money Laundering Act for the predicate offences.

….. …..

8.7 Hon'ble Delhi High Court in the case of NDR Promoters (P) Ltd, 102 taxmann.com 182, held that where the assessee created lot of paper work to camouflage the transactions of bogus nature to look like genuine, there is no need of cross examination.

8.8 Reliance is being placed on Hon'ble Delhi High Court's decision of Suman Poddar Vs. PCIT 112 taxmann.com 329 where it was held that the share transactions were bogus because the company whose shares allegedly purchased were of penny stock and this decision was affirmed by Hon'ble Supreme Court, 112 taxman.com 330. The Hon'ble court has opined that in this type of cases, cross-examination opportunity is not required because statements and other material found in the course of investigation were used as a corroborative material to strengthen the findings of Assessing Officer. The Assessing Officer made the addition based on several factors and analysis to prove that there is no genuineness in the transaction and utilised the statements of operators as corroborative evidence only.

8.9 In the case of Udit Kalra Hon'ble Delhi High Court held that the company had meagre resources at disposal, negligible profit, but there was unusual and very high growth in the share price which does not support the same, the transaction was held to be sham.

8.10 In the case of Sanat Kumar Vs. ACIT Delhi, Circle 36(1), Hon'ble ITAT Delhi Bench has held that the so-called sale proceeds of shares received and claimed as exempt u/s. 10(38) was held to be sham transaction because of huge price rise of shares at the time of sale despite the fact that company's profits are negligible and did not support such price rise.

8.11 In the case of Abhimanyu Soin Vs. Asst, CIT, Circle VII, Ludhiana, ITAT, Chandigarh, Bench A, in the Tribunal held as under:-

On consideration of the facts of the case as a whole it cannot be accepted that the assessee can have long term capital gains of Rs. 80,25,291/- within 17 months of buying of shares at Rs.2,72,000/- a non- descript company incorporated in 2007 which got merged in 2009. This cannot be a case of intelligent investment or a simple tax planning to gain benefit of long term capital gains 8.12 In the case of Somnath Maini Vs. CIT 306 ITR 414, the Hon'ble Punjab & Haryana High Court, held that claim of genuineness of transactions can be rejected even if the assessee backs the same with evidence which is not trustworthy. Hon'ble Income Tax Appellate Tribunal - Chandigarh, in the case of Assistant Commissioner of Income Tax Vs. Som Nath Maini by placing reliance on the decision of Hon'ble Supreme Court in the case of Durga Prasad More (2002) 3 BOMLR 747, 2003 (1) MhLj 420 has observed as under :-

"It is true that when transactions are through cheques, it looks like real transaction but authorities are permitted to look behind transactions and find out the motive behind transactions. Generally, it is expected that apparent is real but it is not sacrosanct. If facts and circumstances so warrant that it does not accord with the test of human probabilities, transactions have been held to be non-genuine, it is highly improbable that share price of a worthless company can go from Rs. 3 to Rs. 55 in a short span of time. Mere payment by cheque does not render a transaction genuine. Capital gain tax was created to operate in a real world and not that of make belief. …..

We accordingly set aside the order of the CIT(A)and restore that of the AO."

8.13 Further reliance is being placed on the orders of the Co-ordinate benches of the ITAT. To mention a few :- a) Usha Chandresh Shah Mumbai b) Zakrullah Chaudhary Pune c) Chandan Gupta ITA No. 7024/Mum/2010, Mumbai e) Napar Drugs Ltd. 98 ITD 265, Delhi 8.14 The Co-ordinate Bench of ITAT Chennai in the case of Rajnish Agarwal in I.T.A.No.1419/CHNY/2018has held that the penny stock not having any financial strength of its own and the sale and purchase of these shares were held to be sham and LTCG u/s. 10(38) was denied to the assessee.

8.15 We, therefore, hold that the facts and circumstances of the present case are very tightly knit case where the Revenue has gone behind the transaction of capital gains to know the factual operation of sudden volatility in the prices of the scrip. The present case is therefore required to be adjudicated on the given set of facts and evidence.

8.16 As rightly observed by the Ld. CIT(A) in his order, it is relevant to note that price maneuvering occurred in assesee’s case as confirmed by the DGIT, SEBI, statements of the involved persons recorded. In view of the above, we find that the assessee’s transactions are not genuine and therefore we affirm the well- reasoned order of the Ld. CIT(A).