MAYANK JAIN,DELHI vs. ACIT CIRCLE-46(1), NEW DELHI

O R D E R PER PRASHANT MAHARISHI, A. M. 1. This is an appeal filed by the assessee against the order of the ld. Commissioner of Income Tax (Appeals)-16, New Delhi dated 26.12.2018 for the Assessment Year 2015-16. 2. The assessee has raised the following grounds of appeal:-

“1. That on the facts and in the circumstances of the case, the Learned Commissioner of Income Tax (Appeals) [here-in-after referred to as Ld. CIT (Appeals)] was not justified and grossly erred in confirming the addition made by the Learned AO of Long Term Capital Gain on sale of listed equity share exempt u/s 10(38) of the Act.

3. That on the facts and in the circumstances of the case, the Ld. CIT (Appeals) was not justified and grossly erred in not considering the fact that the appellant purchased shares and made payment by account payee cheque, received the delivery of shares, sold these shares thorough DMAT account, gave the delivery and received the payment in banking mode. Hence the genuine transaction wherein necessary evidence has been duly submitted cannot and should not be treated as ingenuine merely on arbitrary view or suspicion.

4. That on the facts and in the circumstances of the case, the Ld. CIT (Appeals) was not justified and grossly erred in not considering the fact that no opportunity of cross examination was provided and hence the order passed u/s 143(3) is bad in law and hence need to be quashed. 5. That on the facts and in the circumstances of the case, the Ld. CIT (Appeals) was not justified and grossly erred in confirming additions made by the Ld. AO of 7% of commission income on the basis of assumption and presumption and without bringing any concrete evidence and without providing opportunity of being heard. 6. That the appellant craves leave, to add, to amend, modify, rescind, supplement, or alter any of the grounds stated here-in-above, either before or at the time of hearing of this appeal.”

i. Analysis of the price volume movement of the shares of HPC Bio science Ltd. For the period from January 2013 to April 2014. ii. the profit and loss account of the HPC Bio science Ltd. for the period from March,2010 to March 2016. iii. Use and application of the funds collected through IPOs/ allotment of preference shares that were transferred to the various companies of the funding group. iv. Financial wherewithal of the company v. Trend of jacking up of prices. vi. Analysis of Bank statement of entities colluding with the company i.e. (a) Ashvin Verma and (b) Truck link Vinmay Private Limited vii. Verification in regard to exit providers to ascertain identity, genuineness and creditworthiness viii. Statement of the assessee and inferred that the assessee is not at all acquainted with share market. ix. Statements of share brokers and exit entry providers who have categorically stated that shares of HP Bio Sciences (P) Ltd have been used to provide LTCG entries to investors.

i. Prima-Facie Indicators of Dubious Share transaction resulting in LTCG being One-Off Transaction by Appellant & members of his family laundering Rs.50 lakhs or more of black money holding that appellant does not transact in shares on a regular basis. In fact, in the year under consideration, strange as it may seem, the shares of M/s HPC Bio Sciences (P) Ltd were the only shares the appellant transacted in that yielded a huge tax-free LTCG. (other than transaction in a small lot of Indian Overseas Bank shares which yielded a taxable STCG of Rs 18,884/-. In a happy but dubious coincidence, Rajat Jain (HUF) also earned a hefty LTCG during the said period. So, the obvious and human response to this coincidence would be that either the assessee has a sixth sense about making profits in shares or that the LTCG is an accommodation entry used for launder the black money of the assessee and his family members to the tune of Rs 50 lakh or more. ii. Unprecedented Share Price Increase over a period of 252 trading days, the price of the scrip increased 19 times which is 1800% during the period January, 2013 to April-December 31, 2014. The table of Price/volume movement relied upon by AO is pertinent and is reproduced below:

Adjusted Price variation Rs.39.10 to Rs. (based on closing price) 735.90/- Un-adjusted Price variation Rs.39.10 to Rs. (based on closing price) 735.90/- Daily high-low Traded volume 100 to 259200 (no. of shares) iii. Increase in share value not backed by robust financials. An analysis of the financial statements of M/s HPC Bio Sciences (P) Ltd. Showed that Profit After Tax (PAT) and Earning Per Share (EPS) reflected downslide from F.Y. 2010-11 to F.Y. 2013- 14.

PAT (IN Rs. Cr.) EPS F. Y. 0.0005 0 2010-11 F. Y. 3.05 4.66 2011-12 F. Y. 2.98 3.46 2012-13 F. Y. 1.25 0.77 2013-14

Balance Sheet as extracted from Annual Report of Company Balance Sheet of M/s HPC Biosciences Limited (Rs. In Crores)

Mar’16 Mar’15 Mar’14 Mar’13 Mar’12 Mar’11 Sources of Funds Total share 15.96 15.96 15.96 15.96 1.75 0.05 capital Equity share 15.96 15.96 15.96 15.96 1.75 0.05 capital Reserves 14.13 13.67 12.96 11.72 3.05 0.00 Net worth 30.09 29.63 28.92 27.68 4.80 0.05 Un-secured 0.00 0.00 0.38 0.10 0.00 0.03 loans Total Debt 0.00 0.00 0.38 0.10 0.00 0.03 Total liabilities 30.09 29.63 29.30 27.78 4.80 0.08 Application of funds Gross Block 12.35 12.35 12.35 12.03 1.23 0.00 Less: Accum. 5.61 4.23 2.82 1.46 0.13 0.00 Depreciation Net Block 6.74 8.12 9.53 10.57 1.10 0.00 Investments 0.30 0.30 2.79 2.49 0.00 0.03 Inventories 1.26 0.67 0.82 1.04 0.78 0.00 Sundry 3.26 1.98 0.00 1.09 0.35 0.00 Debtors Cash and 0.85 0.86 0.45 0.70 0.11 0.01 Bank Balance Total current 5.37 3.51 1.27 2.83 1.24 0.01 assets Loans and 17.78 17.77 15.81 11.94 2.46 0.04 Advances Total CA, 23.15 21.28 17.08 14.77 3.70 0.05 Loans & Advances. Current 0.08 0.05 0.09 0.04 0.00 0.00 Liabilities Provisions 0.02 0.03 0.01 0.00 0.00 0.00

Total CL & 0.10 0.08 0.10 0.04 0.00 0.00 Provisions Net Currents 23.05 21.20 16.98 14.73 3.70 0.05 Assets Total Assets 30.09 29.62 29.30 27.79 4.80 0.08 Book Value 1.89 0.86 18.12 17.35 27.41 9.80 (Rs.)

An analysis of the above shows that share capital in March 2012 was a small 1.75 crore and jumped more than 9 times to 15.96 crore in March 2013 (post-IPO). Similarly, in March 2012 there were no investments but these increased to investments of 2.49. crore in March 2013 and 2.79 in March 2014 but dramatically reduced to 0.30 in the subsequent years. Thus, all the increases are limited to the period straddling March 2013 to March 2014 i.e these increases coincide with the run-up to increase in value of share. P & L Account as extracted from extracted from Annual Report of Company

Profit & Loss account of MK/s HPC Biosciences Limited (Rs. In Crores)

Mar’16 Mar’15 Mar’14 Mar’13 Mar’10 12 12 12 12 12 Months Months Months Months Months Income Revenue from 1.87 3.09 3.46 4.76 0.00 operations (Gross) Revenue from 1.87 3.09 3.46 4.76 0.00 operations (Net) Total Operating 1.87 3.09 3.46 4.76 0.00 Revenues Other Income 0.14 0.17 0.06 0.01 0.00 Total Revenues 2.01 3.26 3.53 4.77 0.00 Expenses Purchase of Stock in 0.00 0.24 0.00 0.00 0.00 Trade Changes in - 0.59 0.15 0.22 - 0.26 0.00 inventories of FG, WIP and Stock in Trade.

Employee Benefit 0.21 0.22 0.20 0.27 0.00 Expenses Depreciation and 1.38 1.41 1.36 1.33 0.00 Amortization Expenses. Other Expenses 0.50 0.48 0.49 0.46 0.00 Total Expenses 1.51 2.51 2.27 1.79 0.00 Mar’16 Mar’15 Mar’14 Mar’13 Mar’10 Profit/Loss Before 0.50 0.76 1.26 2.98 0.00 Tax Profit/Loss from 0.46 0.71 1.24 2.98 0.00 continuing Operations Profit/Loss for the 0.46 0.71 1.24 2.98 0.00 Period. Mar’16 Mar’15 Mar’14 Mar’13 Mar’10 Other Additional Information Earnings per Share Basis EPS (Rs.) 0.03 0.04 0.77 3.45 - 0.00 Diluted EPS (Rs.) 0.03 0.04 0.77 3.45 - 0.00

Thus analysis of the above shows that the income in 2012 was 'nil' and suddenly increased to 4.76 in March 2013 and steadily decreased to 3.46, 3.01 and 1.87 in March 2014, March 2015 and March 2016, EPS which was a negative figure of -0.04 in March 2012, increased dramatically to 3.45 in March 2013 and as dramatically reduced to 0.77, 0.04 and 0.03 in March 2014, March 2015 and March 2016. There is also no purchase of stock in any of the years.

The above analysis shows that the entire growth of the company is limited to the period from March 2013 and March 2014.The financials before and after this period are extremely weak. iv. Manipulation in the run-up to the IPO

The above analysis also indicates an apparent manipulation in the run up to the IPO. Other indicators of manipulation in the run up to IPO are:

It was observed that during the period when the pre -IPO shares were under lock-in, the volume in the scrips was very low, but the price of all the scrips increased manifold. It was also observed that after the release of lock-in, there was substantial increase in traded volume and price of the scrips.

Prior to release of Period 03.04.2013 – share from lock in 14.03.2014 Average 5628 Volume Post release of share Period 18.03.2014 – from lock in 13.12.2014 Average 49,495 Volume Price rise in the scrip Period 03.04.2013 – 31.12.2014 Price variation Rs.45.25/- to (based on Rs. 757.50/- closing price)

Further the company had not made any announcement regarding their business or any other corporate action, which could impact the market sentiment and trigger increase in share price. Thus, the sharp rise in the price of these scrips during the examination period was not supported by fundamentals or any other genuine factor. v. Current Status of share and financials of a company

The current share price of the scrip (as retrieved on 17.11.2018) continues to be low and less than the manipulated price of Rs 564.5 and Rs 444 in July 2014. A screenshot of the closing share price on 16.11.2018 as retrieved from website of ET markets (.https://economictimes.indiatimes.com/hpc-biosciences- td/stocks/companyid-44679.cms) is reproduced below. At Rs 31.45 this value is incidentally less than even issue price of Rs 35 of the IPO and nowhere near the stratospheric highs it touched in April-July 2014. The trading volume is 1,08,000 as against the manipulated trade- volume of 2,59,200 in 2014. This clearly shows that July 2014 increase was manipulated and not based on the economic and financial health of the company. Thus he further noted that static figures of share capital, revenue, reserves etc. clearly indicate that the company has not shown any financial growth in the last 8 years. The share price, which in ideal conditions is reflective of the financial health of the company, has also languished at Rs. 30. Yet, the price miraculously hit the 500 / 400 mark in 2014 but never before and never after. vi. IPO subscription money transferred to promoters.

He noted that that M/s. HPC Biosciences, received Rs. 15,75,00,000/- on March 19, 2013 and Rs. 21,00,000/- on March 22, 2013 in its Oriental bank Of commerce Account No.10481010067720. However, from the analysis of these bank statements, it is observed that the company had immediately after receipt of subscription monies transferred substantial amount from the IPO proceeds to various entities detailed in the SEBI order. It was noticed that the companies covered in the SEBI order collectively raised Rs 46.53 crore from their IPOs out of which t;otal Rs 30.06 crore (64.60% of total IPO proceeds) were transferred back to entities belonging to Funding Group either directly or through layering. Thus, it was prima facie observed that same funds were circulated by the Funding Group to finance these IPOs. These prima facie parameters are strong indicators of manipulation of share price in the period March 2013 to March 2014. However, now they can be regarded only as indicators. They cannot by themselves be treated as proof of manipulation. Therefore, the next step is to examine if evidences and reports support and corroborate the prima facie indication of manipulation of shares to create a conduit for Tax- free LTCG. vii. He further referred to investigation carried out in this Penny Stock scam, one by the Investigation wing of the Income Tax department and one by Securities & Exchange Regulator SEBI. viii. He also considered the summons issued to the assessee u/s 131 of the Income tax act was issued to record the statement of the assessee. The statement was recorded on 18.12.2017 wherein the appellant submitted that he had-purchased the shares on a tip from a maternal uncle, who by was not produced to substantiate claim. ix. He thereafter proceeded to conclude his order holding that it is clear that based on certain prima facie indicators that the LTCG from the sale of the share of M/s HPS Bio sciences (P) Ltd were not what they apparently seemed, evidences were gathered by the Securities and exchange regulator as well as the Investigation wing and Assessing officer of the Income Tax department. The Regulator's interim report as well as the order of the Securities & Exchange Board has established without an iota of doubt that promoters /Directors of M/s HPC Bio Sciences (P) Ltd in collusion with preferential share allottees/pre-IPO allottees/LTCG entry seekers jacked-up the price of the share through a pre- meditated devise that would benefit the preferential allottees as well as other investors who were seeking LTCG entries to reduce tax and launder black money. The Board in it 2017 order as reproduced in the foregoing paras categorically holds the company as well as its preferential allottees, pre-IPO purchasers and LTCG entry seekers colluded to evade tax, launder black money and defraud the securities market through manipulation of share price. x. He also dealt with the issue whether addition u/s 68 is proper or not the assessee has claimed that provisions of Section 68 were wrongly invoked. He held that in the instant case, the books of the appellant reflect sale proceeds because of sale of the scrips of HP Bio Sciences (P) Ltd. The explanation offered by the assessee to explain this entry was not found to be satisfactory by the AO based on evidences in his possession. The AO thus treated this credit entry as an unexplained credit under section 68. Since the pre-requisites required under section 68 stand satisfied, clearly section 68 is applicable to the facts of the case, xi. He also dealt with the issue of applicability and following the same by the ld AO. He noted that A perusal of the assessment order shows that the assessee was confronted with all the information being used against him, be it statements of brokers or the findings of the Investigation wing (an indispensable enforcement arm of the Income Tax Department) Kolkata or the findings of the Securities & Exchange Regulator. This was despite the fact that the interim order of SEBI and the report of Investigation wing Kolkata received widespread coverage and was in the public domain. He noted that All the information used against the assessee was confronted to the assessee through a show cause notice issued by the AO as recorded on page 16 of the order of the AO, The submissions of the assessee made vide letter dated 22.12.2017 and was specifically addressed as is clear from Page 16-17 of order of AO, All evidences were confronted during course of statement recorded on 18.12.2017 and Opportunity was given to the assessee to respond to show cause notice issued. Therefore he held that From the above enumeration of facts, it is clear that all evidences used against the appellant were disclosed to the appellant and he was allowed more than adequate opportunity to rebut such evidences. Assessee has raised the bogey of violation of natural justice to divert attention of the appellate forums from the facts /evidences that are strongly stacked against the assessee. He found that assessee's ground on the issue of violation of natural justice has no legal legs to stand on. xii. On the issue of cross-examination, The ld CIT (A) held that claim of the appellant is that the AO did not allow cross examination of the persons whose statements were used against him. He referred to several judicial precedents and held that the reference to those judgments and principles enunciated therein clearly reflects the stance of the Courts towards cross-examination. Although, cross- examination is important, formal cross-examination is not mandatory especially if adequate opportunity to rebut the case has been allowed to the assessee. In the instant case, an examination of the assessment records was made by him and it was noted that all evidences/information used against the assessee and available with AO was confronted to the assessee. Several opportunities were accorded in the interest of justice and the claim that the addition was illegal or void as no cross- examination was allowed has no locus standi. He therefore held that as adequate opportunity was accorded to assessee concern, no grievance has been caused to the appellant. He therefore held that there is no violation of natural justice as the addition has been made after due opportunity was accorded to appellant. All documents in the possession of the Department were also confronted to the appellant. xiii. With respect to the claim of the assessee that AO has not disproved the evidences filed and that the AO has erred in using the findings of other investigation agencies also rings hollow. This is a case where the assessee has used a sophisticated 'colorable device' in collusion with brokers, entry operators, directors and preferential allottees of HPC Bio Sciences (P) Ltd. to circumvent law and escape the keen eye of enforcement agencies. The case of the Revenue is not that no documents to substantiate the claim of LTCG were filed but that the laundering of black money entailed creation of false documents to authenticate an LTCG entry. xiv. After that he referred to surrounding circumstances and princles of preponderance of probabilities, discussed plethora of judicial precedents and confirmed the addition.

following the decision of the honourable Delhi High Court, we do not find any merit in the appeal of the assessee and all six grounds of appeal challenging the same addition on different pretext are dismissed.

Order pronounced in the open court on: 23.01.2020