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Facts
The assessee's total income for AY 2014-15 was assessed at Rs.1,60,57,566/-, with additions of Rs.4,93,599/- for unexplained Long Term Capital Gain (LTCG) under Section 68 related to sale of shares of M/s. Ashikca CR, and Rs.1,31,00,000/- for unexplained unsecured loans from five parties under Section 68. Additionally, interest of Rs.1,50,337/- paid on these loans was disallowed. The CIT(A) dismissed the assessee's appeal, confirming all additions, leading to the present appeal before the ITAT.
Held
The ITAT held that the assessee's claim for LTCG of Rs.4,93,599/- on the sale of shares of M/s. Ashikca CR was bonafide and genuine, directing its deletion as there was no material to prove manipulation or foul play. However, the additions of Rs.1,31,00,000/- for unsecured loans were confirmed, as the assessee failed to establish the financial capacity of the creditors and the genuineness of the transactions, considering the funds were routed through M/s Fair Intermediate Investment Pvt. Ltd. (FIIPL) where the assessee was a director.
Key Issues
Whether the addition of LTCG under Section 68 by treating it as bogus was justified, and whether the addition of unsecured loans and related interest disallowance under Section 68 due to failure to prove creditworthiness and genuineness were justified.
Sections Cited
68, 10(38), 143(3), 131, 142(1), 271(1)(c), 2(22)(e)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, LUCKNOW BENCH “A”, LUCKNOW
PER ANADEE NATH MISSHRA, A.M.: (A). The present appeal has been filed by the assessee against the order passed by the Ld. Commissioner of Income Tax (Appeals), Lucknow-3, dated 02.01.2023 for the assessment year 2014-15. The grounds of appeal of the assessee are as under: -
1. 1. That, on the facts and circumstances of the case and in law, the CIT(A) erred in confirming the order of the A.O. by treating the LTCG earned by the Appellant from the sale of shares of M/s ACCL as bogus, thereby making an addition of Rs. 4,93,068/- as unexplained credit under Section 68 of the Act.
2. That, on the facts and circumstances of the case and in law, the CIT(A) failed to appreciate that the Appellant purchased the shares of M/s ACCL through a recognized stock exchange and not through any off- market deal. That further, the CIT(A) failed to appreciate that since the securities transaction tax was duly paid, Contract notes were available with the Appellant, the payments were made and received through account payee cheques only and that the Appellant had no knowledge of the persons from whom it had purchased the shares and to whom it had sold them, therefore the addition under Section 68 by treating the LTCG as bogus was erroneous and liable to be set aside.
3. That, on the facts and circumstances of the case and in law, the CIT(A) erred in Confirming the order of the A.O. by treating the LTCG earned by the Appellant from the sale of shares of M/s ACCL as bogus without appreciating that the Appellant was Never confronted with the report of the Investigation Wing, Kolkata and accordingly there was express violation of principles of natural justice.
Page 2 of 31 4. That, on the facts and circumstances of the case and in law, the CIT(A) erred in Confirming the order of the A.O. by failing to appreciate that the shares of M/s ACCL Were sold by the Appellant between 30-10- 2013 and 03-02-2014 whereas the report of the Investigation Wing, Kolkata was published only on 27-04-2015. Therefore, the Appellant was completely oblivious of the fact that it had invested in a penny stock company since the report of the Investigation Wing, Kolkata holding M/s ACCL to be a penny stock company came out much later. Reliance in this regard is placed on the decision of the Hon’ble Income Tax Appellate Tribunal, Hyderabad in Shri Kamal Kishore Soni v. ITO, ITA No. 1680/Hyd/2019.
That, on the facts and circumstances of the case and in law, the CIT(A) erred in confirming the order of the A.O. by failing to appreciate that the Appellant/ Assessee is a regular investor in capital market and not a one-time adventurer and as such has done the investments in such penny stocks as a pure investor only. Accordingly, the addition made by the CIT(A) by treating exempt income u/s 10(38) of Rs.4,93,068/- as unexplained credit u/s 68, is wrong and liable to be set-aside.
6. That, on the facts and circumstances of the case and in law, the CIT(A) erred in confirming an addition of Rs. 1,31,00,000.00/- of unsecured loan u/s 68 of the Act as unexplained credit by failing to consider the explanation tendered by the Appellant.
That, on the facts and circumstances of the case and in law, the CIT(A) erred in presuming that these amounts were transferred indirectly from M/s Fair Intermediate Investments Private Limited (in which the Appellant was the director) to the Appellant, without appreciating the fact that since the Appellant was in dire need of money and as the persons through whom such unsecured loans were obtained were good friends of the Appellant, accordingly, such persons sold their shares through their broker M/s Fair Intermediate Investments Private Limited and transferred the Sale proceeds into the bank account of the Appellant.
8. That, on the facts and circumstances of the case and in law, the CIT(A) failed to appreciate that the persons through whom unsecured loan was obtained, sold their shares through M/s Fair Intermediate Investments Private Limited only because they did not have immediate funds. Therefore, the addition made by Commissioner of Income Tax (Appeal) is not justified.
That, on the facts and circumstances of the case and in law, the CIT(A) erred in confirming the order of the A.O. by failing to appreciate that since the Appellant had disclosed loans in returns filed and the accounts of Appellant proved that disclosed loan amount was received through banking channels, the addition under Section 68 of the Act was erroneous in light of a catena of judgements, and liable to be set aside.
10. That, on the facts and circumstances of the case and in law, the CIT(A) erred in making an addition of interest paid on unsecured loan amounting Rs. 1,50,337/- under Section 68 of the Act. 11)That, the Appellant craves leave to alter, amend, add or delete one or all the Grounds of appeals mentioned above.”
Page 3 of 31 (B). In this case, assessment order dated 27.03.2023 was passed by the Assessing Officer u/s 143(3) of the Income Tax Act, 1961 (“Act”, for short) whereby the assessee’s total income was assessed at Rs.1,60,57,566/-. In the aforesaid assessment order, an addition of Rs.4,93,599/- was made treating the claim of the assessee amounting to Rs.4,93,599/- for capital gain amounting to Rs.4,93,068/- as unexplained credit. Further, additions of a total amount of Rs.1,31,00,000/- were made u/s 68 of the Act, treating unsecured loans received from Shri Ravindra Kumar Gupta (HUF) amounting to Rs.25,00,000.00/- from Ms Saraswati Devi amounting to Rs.5,00,000.00/- from Shri Vinod Kumar Gupta (HUF) amounting to Rs.15,00,000.00/- from Ms Manjusha Gupta amounting to Rs.50,00,000.00/- and from Ms Khusboo Gupta amounting to Rs.36,00,000.00/- as unexplained. Moreover, the assessee’s claim for payment of interest of the aforesaid loans amounting to Rs.1,50,337/- paid aforesaid loans amounting to Rs.1,31,00,000/- was also disallowed. The assessee’s appeal in the office of the Ld. CIT(A) was dismissed by the Ld. CIT(A) vide impugned appellate order dated 02.01.2023; the relevant portion of which is reproduced as under: - “4.2 Thereafter various opportunities have been provided to the appellant, however the appellant did not avail the opportunities provided to him for submissions of details, thus, it is clear that sufficient opportunities of being heard was allowed to the appellant, but there was no response. Further, till date of order, no further submission either on email or e-filing portal has been filed. 4.3 In the appellate proceedings, burden of proof lies on the appellant to prove that the facts and the findings of the Assessing Officer are incorrect. If the appellant fails to disprove or rebut with cogent evidence such facts and findings, no interference is required. In this case, the appellant did not choose to avail of the opportunities in the appellate proceedings which lead to the only conclusion that it had no evidence or explanation against the order of the Assessing Officer. The appellant should not be allowed to be enriched or benefited unjustly for act of his own wrongs i.e. non- compliance or non-attendance of hearing. 4.4 The Hon’ble Supreme Court in Titaghur Paper Mills Co. Ltd. Vs. State of Orissa: Pinaki Sengupta Vs. State of Orissa (1983) 142 ITR 663(SC) held that “Merely because the assessing authority refused to grant any further Page 4 of 31 adjournments and proceeded to assess to the best of his judgment, it could not be said that he acted in violation of the rules of Natural justice.” In view of this, it can be said that principles of natural justice have been met when notices were issued on several occasions. The laws aid those who are vigilant, not those who sleep upon their rights. This principle is embodied in well know dictum “VIGILANTIBUS ET NON DORMIENTIBUS JURA SUB VENIUNT.” 4.5 In the case of Vipul Logistic & Warehousing(P) Ltd. Vs. ITO (ITA NO. 5454/Del/10 for A.Y. 2006-07), the Hon'ble Delhi ITAT confirmed the order of the CIT(A), who dismissed the appeal of the taxpayer when there was no response to the notices issued. The observations and decision of the Hon’ble ITAT are as under: “We have heard rival submissions and have gone through the entire material available on record. In the grounds filed before us, assessee has not raised any such ground about the assessment being time barred, Therefore, since the plea raised by the assessee does not arise out of its grounds of appeal
, the same is dismissed. We see no infirmity in the order of CIT(A) which is passed exparte due to deliberate non. cooperation of the assessee. Therefore, the assessee’s appeal is dismissed.” 4.6 Hon’ble Delhi High Court has delivered a decision in the case of CIT Vs Gold Leaf Capital Corporation Ltd. on 02.09.2011 (ITA No. 798 of 2009) holding that a negligent appellant should not be given many opportunities just because the quantum of amount involved is high. Necessary course of action is to draw adverse inference, otherwise it would amount to giving premium to the appellant for his negligence. When the appellant is non cooperative, it can safely be concluded that the appellant did not want to adduce evidence as it would expose falsity and non-genuineness of his claim. 4.7 In this regard, the decision of the Hon’ble High Court at Mumbai in the case of M/s Chemipol vs Union of India, Central Excise Appeal No. 62 of 2009 clearly held that every Court, Judicial Body or Authority, which has a duty to decide a case between two parties, inherently possesses the power to dismiss the case in default. Relevant extract of the decision rendered by Hon’ble High Court at Mumbai in the said case is extractet below: “(i).. (ii) While not inclined to depart from the view taken by the High Courts, reference must be made to Sunderlal Nandramdas AIR 1958 MP 260, where it was observed the though the Act does not give any power of dismissal, it! axiomatic that no Court or Tribunal is supposed to continue! proceeding before it when the party who has moved it not appeared nor cared to remain present. The dismissal, therefore, is an inherent power, which every Tribunal possesses. This was approved in Dr. P. Nallla Thampy vs. Shankar (1984 (Supp) SCC63). In New India Assurance vs. Srinivasan (2000)
3. SCC 242, it was held that every Court or Judicial body or authority, which has a duty to decide a lis between two parties, inherently possesses the power to dismiss a case in default. Where a case is called up for hearing and the party is not present, the Court or Judicial or Quasi-judicial Body is under no obligation to keep the matter pending before it or to pursue the matter on behalf of the complainant who had instituted the proceedings. That is not a function of the Court or for that matter of a judicial or quasi-judicial body. In the absence of the complainant, therefore, the Court will be well within the jurisdiction to dismiss the complaint for non-prosecution.
Page 5 of 31 (iii) Accordingly, though the rule conferring power on the Tribunal has been struck down, one cannot altogether lose sight of the rule that every Court or Tribunal has an inherent power to dismiss a proceeding for non- prosecution when the petition/appellant before it does not wish to prosecute the proceeding. In such a situation, unless the statute clearly requires the Court or Tribunal to hear the appeal/proceeding and decide it on merits, it can dismiss the appeal/proceeding for non-prosecution. The power must be exercised judiciously and taking in to consideration all the facts and circumstances of the case.” 4.8 The Hon'ble High Court of M.P. in the case of Tukojirao Holkar vs. CWT (223 ITR 480) had held that, “if the party, at whose instance the reference is made at, fails to appear at hearing....the Court is not bound to answer the reference.” Similarly, their Lordship, in case of CIT vs. B.N. Bhattacharya (118 ITR 461) (pages 477,478) had held that, “appeal does not mean merely filing of appeal but effectively pursuing it.” Hon'ble ITAT, Delhi, in the case of Whirlpool India Ltd. vs. DCIT (ITA No.2006/Del/2011 dated 19.12.2011) has dismissed appeal for non, attending hearing, inferring that the appellant is not effectively pursuing the appeal. 4.9 In the present case it is important to noted that principal of natural justice i.e. appellant has been granted proper opportunity of being heard were allowed or not, has been properly followed. Considering the above facts, no further opportunity is allowed and the appeal is being decided on the material available on records. 5.1 Ground No.1: Ld. AO erred in facts and in law making the, addition of capital gain exempt u/s 10(38) amounting to Rs 4,93,068/-. 5.2 On perusal of detail filed during the assessment proceeding it has been noted that appellant has purchased shares of M/s Ashikca Cr for the amount of Rs. 154,009.75 during the period 09.12.2011 4 05.01.2012 and sold for the consideration of Rs. 647608 during the period 30.10.2013 to 03.02.2014. The appellant also submitted that the shares from recognize a stock exchange has been purchased and ST has also been paid on these shares. It is further submitted that the appellant has made the payment through the account payee cheque received through account payee cheque also. 5.3 However, during the appellate proceedings no justification has be provided for claim of above ground no.
1. In this case the appellant purchased shares of M/s Ashikca Cr for the amount of Rs. 154,009: during the period 09.12.2011 to 05.01.2012 and sold for the consideration of Rs. 647608 during the period 30.10.2013 to 03.02.2014. It has been observed that within a short span of time of 22 months appellant managed to sell the shares with increased value of more than 300% that too when general market trend was recessive. It is fact when any income has been claimed as exempt by the appellant, onus lies upon him to justify the same. However, in this ca, justification has been provided for the same. Therefore, it is held that there is no interference is required in the decision of the Assessing Officer. Therefore, this ground of appeal
is dismissed. 6.1 Ground No.2: Ld. AO erred in facts and in law by disallowing the addition made in unsecured loan amounting to Rs. 1,31,00,000/-. 6.2 (i) The appellant has taken a loan of Rs. 25,00,000/- from Shri Ravindra Kumar HUF. On perusal of reply of the assessee it has been found that M/s Fair Intermediate Investment Pvt. Ltd. In which the assessee is director has given Rs. 100,000/- on 07.03.2014 and Rs. 11,39,000/- on 12.03.2014 to Ravindra Kumar HUF. Subsequently Page 6 of 31. Ravindra Kumar HUF has transferred Rs. 6,00,000/- to assessee on 14.03.2014. Further the M/s Fair intermediate Investment Pvt. Ltd has transferred various amounts on various dates to Ravindra Kumar Gupta and out of these amounts Rs. 19,00,000/- was transferred to Ravindra Kumar HUF on 23.01.2014. M/s Ravindra Kumar HUF has filed his return of income disclosing Rs. 3,16,630/for A.Y. 2014-15, while receipts in bank statement are not matching with the return of income filed by him. Therefore, from entries in bank account. it has been noted that the assessee is routing his own money through his company to Ravindra kumar HUF and received this amount as unsecured loan and given interest on the same. In these circumstances Rs. 25,00,000/- is treated as unexplained credit entry in the books of the assessee and added to its total income u/s 68 of the Act. (ii) During the appellate proceeding no explanation for justification for sources of this loan has been provided by the appellant, therefore the source of loan remains unexplained and therefore no need to interfere in the decision of the Assessing Officer. 6.3 (i) The appellant has taken a loan of Rs. 5,00,000/- from Saraswati Gupta. On perusal of reply of the assessee it has been found that M/s Fair Intermediate Investment Pvt. Ltd. In which the assessee is director has given Rs. 11,46,000/- on 13.03.2014 to Saraswati Gupta. Subsequently Saraswati Gupta has transferred Rs. 5,00,000/- to assessee on 14.03.2014. M/s Saraswati Gupta has filed her return g income disclosing Rs. 1,30,780/- for A.Y. 2014-15, while receipts in bank statement are not matching with the return of income filed by him, Therefore, from entries in bank account it has been noted that the assessee is routing his own money through his company to Saraswat Gupta and received this amount as unsecured loan and given interest on the same. In these circumstances Rs. 5,00,000/- is treated as unexplained credit entry in the books of the assessee and added to its total income u/s 68 of the Act. (ii) During the appellate proceeding no explanation for justification for sources of this loan has been provided by the appellant, therefore the source of loan remains unexplained and therefore no need to interfere; the decision of the Assessing Officer. 6.4 (i) The appellant has taken a loan of Rs. 15,00,000/- from Shri Vina Kumar HUF. On perusal of reply of the assessee it has been found the M/s Fair Intermediate Investment Pvt. Ltd. In which the assessee director has given Rs. 15,00,000/on 14.03.2014 to Vinod Kumar HU Subsequently Vinod Kumar HUF has transferred Rs. 15,00,000/- assessee on 14.03.2014. M/s Vinod Kumar HUF has filed his return income disclosing Rs. 3,96,030/- for A.Y. 2014-15, while receipts in bank statement are not matching with the return of income filed by him Therefore, from entries in bank account it has been noted that ¢ assessee is routing his own money through his company to Vinod kumar HUF and received this amount as unsecured loan and given interest! the same. In these circumstances Rs. 15,00,000/- is treated unexplained credit entry in the books of the assessee and added (total income u/s 68 of the Act. (ii) During the appellate proceeding no explanation for justification sources of this loan has been provided by the appellant, therefore! source of loan remains unexplained and therefore no need to interfere the decision of the Assessing Officer. 6.5 (i) The appellant has taken a loan of Rs. 49,75,000/- from Manjusha. On perusal of reply of the assessee it has been found that M/s Fair Intermediate Investment Pvt. Ltd. In which the assessee is director has Page 7 of 31 given Rs. 18,00,000/- on 23.01.2014, Rs. 24,75,000/- on 24.01.2014 and Rs. 7,13,500/on 25.03.2014 to Manjusha. Subsequently Manjusha has transferred Rs. 24,75,000/- to assessee on 14.03.2014, Rs. 18,00,000/- on 23.01.2014 and Rs. 7,00,000/- on 25.03.2014. Manjusha has filed her return of income disclosing Rs. 2,23,500/- for A.Y. 2014-15, while receipts in bank statement are not matching with the return of income filed by him. Therefore, from entries in bank account it has been noted that the assessee is routing his own money through his company to Manjusha and received this amount as unsecured loan and given interest on the same. In these circumstances Rs. 49,75,000/is treated as unexplained credit entry in the books of the assessee and added to its total income u/s 68 of the Act. (ii) During the appellate proceeding no explanation for justification for sources of this loan has been provided by the appellant, therefore the source of loan remains unexplained and therefore no need to interfere in the decision of the Assessing Officer. 6.6 (i) The appellant has taken a loan of Rs. 36,38,813/- from Khusubu Gupta. On perusal of reply of the assessee it has been found that M/s Fair Intermediate Investment Pvt. Ltd. In which the assessee is director has given various amounts to Khusubu Gupta. Subsequently Khusubu Gupta has transferred Rs. 36,38,813/- to the appellant. Khusubu Gupta has filed her return of income disclosing very meager income for A.Y. 2014-15, while receipts in bank statement are not matching with the return of income filed by him. Therefore, from entries in bank account it has been noted that the assessee is routing his own money through his company to Khusubu Gupta and received this amount as unsecured loan and given interest on the same. In these circumstances Rs. 36,38,813/- is treated as unexplained credit entry in the books of the assessee and added to its total income u/s 68 of the Act. (ii) During the appellate proceeding no explanation for justification for sources of this loan has been provided by the appellant, therefore the source of loan remains unexplained and therefore no need to interfere in the decision of the Assessing Officer. 6.7 Therefore this ground of appeal is dismissed. 7.1 Ground No.3: Ld AO erred in facts and in law by making an addition of interest paid on unsecured loan amounting to Rs. 1,50,337/- 7.2 Since loan taken from above five person as per ground no-2 is held as non-genuine loan and routing of his own money, therefore addition u/s 68 has been made. Accordingly, interest paid to M/s Ravinder Kumar Gupta HUF, Manjush Gupta & Khusubu Gupta total amounting to RE 1,50,337/is also added to the total income of the assessee. 7.3 During the appellate proceeding no explanation for justification sources of this loan has been provided by the appellant, therefore the source of loan remains unexplained and thus interest paid on these loans also remains unexplained, therefore no need to interfere in the decision of the Assessing Officer.” (B.1) The present appeal has been filed by the assessee in Income Tax Appellate Tribunal (ITAT) against the aforesaid impugned appellate order dated 02.01.2023 of the Ld. CIT(A).
(B.3) In the course of appellate proceedings in ITAT, a compilation of case laws was filed from the assessee’s side as per the following index: - Page 12 of 31 (B.4) Further, the Ld. Counsel for the assessee placed reliance on the judgment of Hon’ble Allahabad High Court in the case of CIT vs Anant Grade Carpets Ltd (2015) 54 taxmann.com 216 (Alld) and CIT vs Shalimar Buildwell Pvt. Ltd (2013) 40 taxmann.com 285 (Alld).
(B.5) From the Revenue’s side, the written submissions were filed by the office of the Ld. Sr. Departmental Representative of the Revenue. The relevant portion of which is reproduced as under: -
It is very humbly & most respectfully submitted that it is a Penny Stock case wherein the Ld. AO & Ld. CIT (Appeals) have decided the matter in a judicious manner and, as Departmental Representative, I rely upon the judicious observations of Ld. AO & Ld. CIT (A) in their respective orders.
HOLISTIC VIEW: It is further very humbly & most respectfully submitted that, for justice in Penny Stock cases, we have to have a holistic look over various aspects which are being summarized hereunder. A. PENNY STOCK COMPANIES: First of all, it is important to understand the term 'Penny Stock Companies. Some people misunderstand the same as Paper Company/Shell Company/Letter Box Company/Non-Working Company/Unlisted Company etc. only, which is not appropriate. A Penny Stock Company may well be a working company listed on stock exchange and, sometime, it is deliberately done in case of a lesser known company to have an artificial legal cover-up. Penny stocks are generally the comparatively lesser known & lesser traded stocks of small companies listed on stock exchange for a low price but, without any major financial progress of the company, their price has a steady artificial rise over a definite period of time (ranging from few months to few years) in order to bring about the sudden bouts of market volatility which determine the potentially heavy returns to the investors who purchase the shares through stock exchange and make payments through Banking Channels to provide legal cover up to the undesirable practice. For most of the penny stocks, very little information is available in the market (barring a few larger companies that are in penny stock category due to grave under performance e.g. Reliance Power etc.). Penny stocks are generally priced low and such companies have low market capitalization as well. The two main features of penny stocks are "illiquidity" & "Big Return". By "illiquid", it means 'difficult to find'. Penny stocks are Illiquid in nature. This implies that they are comparatively lesser known & lesser traded stocks of small companies listed on stock exchange for a low price. "Big Return" is another prominent feature of such stocks. Without any major financial progress by the company, such stock often prove to be 'multi- bagger for the investors in a span of few years. Penny stocks scams came into prominence in 21" century. Due to tax- exemption u/s 10(38) for long term capital gain for equity shares, some masterminds encourage/convince some assessees to invest in such penny stock which have artificial price-rise in due course of time in order to bring Page 13 of 31 about huge tax-exempt capital gains to certain investors who give commission to these 'masterminds' through backdoors. To put on the legal cover, purchase of such stocks is done through stock- exchange and payments are made through banking channels. Due to the presence of so many middle-men (as happens in most of the organized unethical activities), the gap between 'beneficiary' and 'mastermind' remains too much and, often, they do not even know each other. This is done to avoid any direct evidence against the unethical activity/colourable device. This "unethical practice/colourable device for tax-avoidance" is tried to be justified by some persons who just emphasize upon the completion of technical formalities in such cases. It is worthwhile to mention that the completion of technical formalities do not have much importance in such 'Apparent is not Real cases' where golden principle of 'Preponderance of Human Probabilities' has been held as best tool for justice by none other than Hon'ble Supreme Court in some landmark judgments e.g. Sumati Dayal, Durga Prasad More etc. The use of Colourable Devices for tax planning has also been discouraged by Hon'ble Supreme Court in the landmark judgment in case of "M/s Mcdowell & Co. Such practices (however technically complete they may be) are against the spirit of law. Such practices are not only unethical but also affect the national revenue, national economy and socio-economic set up in an adverse manner. Therefore, the same need to be discouraged and to be taxed properly. B. MODUS OPERANDI OF PROVIDING BOGUS ACCOMODATION ENTRY OF LTCG (LONG TERM CAPITAL GAINS): Accommodation entry is a financial transaction between two parties where one party enters into a financial transaction in its books to accommodate other party, with a view to ultimately reduce tax liability and/or to bring in capital in the form of equity or debt or tax-exempt income or a combination of these. These transactions are mostly in lieu of cash of equal amount (and commission is charged over and above at certain fixed percentage for providing such accommodation entry). These accommodation entries are taken by various beneficiaries for introducing their unaccounted cash into their books of account without paying the due taxes. An entry operator is a person who is in the business of giving accommodation entries in lieu of cash/cheque of equal amount after charging certain percentage as commission in cash. Long Term Capital Gain in shares, is defined by the gains in value of shares of a company listed on a stock exchange that are held by assessee for more than a year. As per the provisions of section 10(38) of the income Tax Act, 1961, any Capital Gain arising out of transfer of Long Term Capital Asset being an equity share in a company or a unit of an equity oriented fund, on which STT is paid, is exempt from taxation point of view. This means that if shares of any company are held for more than a period of 12 months and are then sold on any recognized Stock Exchange (and the STT is paid on the transactions), then the capital gain arising out of this transaction is Long Term Capital Gain (LTCG) and is exempt u/s 10(38).
Page 14 of 31 C. BOGUS LONG TERM CAPITAL GAIN The provision of Income Tax Act as mentioned in Para above, is misused by the tax evaders by using and manipulating the stock market. The scheme starts with an entry operator gaining the control of some penny stock, issuing the shares of these penny stocks to some individuals (beneficiaries of LTCG) and rigging the shares and increasing the price of the shares and finally helping the beneficiaries to sell their shares. Let us suppose that there is a person "B" (Beneficiary) who is in possession of unaccounted money and who wants to bring this unaccounted money into his books. At the same time this person also desires to avoid paying any tax whatsoever, when this money is brought into the books. Now this person "B" approaches the Entry operators "O". An entry operator is the person who is in the business of giving accommodation entries in lieu of cash/cheque of equal amount after charging a certain percentage as commission in cash and he manages the overall scheme of the scam. An operator maintains a complex nexus of various paper/bogus entities and is also in control of some companies, whose shares are listed on one or the other Stock Exchanges. He maintains a close nexus with share broker. When approached by "B", the operator "O" asks "B" to buy some specific number of shares of a specific listed company (usually a Penny Stock). These shares can be bought by the Beneficiary either on the exchange itself or the operator may arrange for the issue of these shares to the beneficiary through the preferential allotment route le through private placement (which is an off-market transaction). These shares are typically allotted to the beneficiaries at very low price. Thereafter, the Operator starts rigging the price of the shares through circular trading and increases the price of the shares, with the help of share brokers and bogus clients. The prices are rigged to an optimum amount over a period of time. Once a period of 1 year (for claim of exemption on LTCG u/s 10 (38) of Income Tax Act, 1961) is over, the operator asks the beneficiary to deliver the unaccounted cash. Once the unaccounted cash has been delivered by the beneficiary, the same is then routed by the operator to the books of various Paper/Bogus Companies which ultimately buy the shares belonging to the beneficiary at high prices. The cash is routed to the books of bogus companies through a maze of various other paper companies so as to avoid leaving any direct cash trail. Once the cash has been routed to the books of paper/bogus companies, which are registered as clients to the brokers, the operator instructs the Beneficiary to place a sell option for the shares belonging to the beneficiary, in a particular lot size on a particular date and time. At the same time, the operator Instructs the paper/bogus companies maintained by him to buy the shares of the beneficiary on the exchange at the predetermined particular date and time. This way, the shares of the beneficiaries are bought by the paper/bogus companies and the unaccounted money of the beneficiary is routed to the books of the beneficiary as a bogus entry of LTCG. D. PICTORAL DEPICTION OF THE SCHEME (BELL SHAPED PATTERN) The entities of the syndicate involved in the scheme of price manipulation of shares of penny stock companies and consequential entry of bogus LTCG and bogus STCL are as follows: The operator of the Scrip.
Page 15 of 31 Directors/promoters of the listed company (Penny Stock Companies), whose price is manipulated. The beneficiaries of Long Term Capital Gain. The beneficiaries of STCL. Bogus/paper entities maintained by the operator which are involved in price manipulation and in providing exit to the beneficiaries from the exchange. The share brokers who provide the access of stock market to these bogus/paper entities, in lieu of high brokerage and cash commissions. E. ROLE OF OPERATOR The operator (entry operator) is a person, who manages the overall scheme of the scam. He is in control of numerous paper/bogus companies which are utilized for routing of cash. The beneficiaries desiring bogus LTCG/STCL approach the operator. The operator is also in control of some penny stock companies whose shares are listed on a recognized stock exchange. Penny Stock is a stock that trades at a relatively low price and market capitalization and very often, there is no real business being carried on by such companies. These types of stocks are generally considered to be highly speculative and high risk because of their lack of liquidity, targe bid- ask spreads, small capitalization and limited following and disclosure. Sometimes, there are a number of intermediaries who work for the operator. These intermediaries introduce the beneficiaries to the operator or in many cases these intermediaries become sub agents of the operator and deal with the beneficiaries on their own. F. ROLE OF PROMOTERS OF THE PENNY STOCK COMPANIES As stated in Para above, a penny stock is a stock which is usually traded at very low price and has very low market capitalization The shares of the penny stock are closely held and general public is usually not interested in these stocks due to the poor financials of the listed companies, The operator chooses one of such penny stocks for the implementation of the scheme. The promoters/directors of the penny stock company are paid some cash commission and in return, they allow the operator to manage the affairs of the company. The operator then issues shares of these penny stock companies to the beneficiaries through the route of Preferential Allotment (Private Placement). As per the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009, the shares that are allotted through private placement, have a lock-in period of 1 year. Therefore, these shares can be sold by the allottees only after a period of one year from the date of allotment. This holding period qualifies them for the benefit of claim of exempt Income as LTCG. As already mentioned, these penny stock companies have no actual business or establishment. They have no financial credentials also. Thus, the fact that beneficiaries subscribe for their shares through private placement is in itself raises suspicion. No person in the right state of mind would Invest in these penny stock companies. As there is no real possibility of any real growth in these, the shares are subscribed only for the purpose of claiming LTCG/STCL at a later stage. The promoters/directors of the companies work hand in glove with the operator to implement thi scheme of availing bogus LTCG.
ASSESSEE'S PROFILE & COMPANY'S PROFILE:
Page 16 of 31 In this regard, it is important to have a look upon the important observations of AO & Ld. CIT (A) who have observed as under: AO's Observations: ".........On perusal of stock price movement of ASHIKCA CR it was found that these shares have gained its maximum high only during the A.Y.2014-15. Previous movement record of this share shows that public is not substantially interest in this share neither this company had done some exceptional work or exceptional announcement. On perusal of the statement given by assessee it is quite clear that in spite of being a director of a share broking company Fair Intermediate Pvt. Ltd. Assessee had invested in this share without any research or study but made this investment only on the basis of high low, which is not understandable. Further in his statement assessee had stated that he had not recommended any of his family members for purchase of this share but during the assessment proceedings, this office came to know that assessee's mother who is very old and his wife's case, who is also director in the same company Fair Intermediate Pvt. Ltd, are also under scrutiny in different offices for the same reason. Therefore, it is clearly evident from the statement given by the assessee and record available that assessee is trying to hide the reason for investment in this shares........" CIT (A)'s Observations: "...in the appellate proceedings, burden of proof lies on the appellant to prove that the facts and the findings of the Assessing Officer are incorrect. If the appellant fails to disprove or rebut with cogent evidence such facts and findings, no interference is required. In this case, the appellant did not choose to avail of the opportunities in the appellate proceedings which lead to the only conclusion that it had no evidence or explanation against the order of the Assessing Officer........" during the appellate proceedings no justification has been provided for claim of above ground no.
It has been observed that within a short span of time.... the appellant managed to sell the shares with increased value of more than 300% that too when general market trend was recessive. It is fact that when any income has been claimed as exempt by the appellant, the onus lies upon him to justify the same. However, in this case no justification has been provided for the same............ From the above, it is clear that the financials of Penny Stock M/s Ashika Credit Corp. Ltd. (ACCL) and movement of the price is abrupt & unrealistic and not based upon any realistic parameters. The value of Penny Stock had an abrupt & unrealistic jump, without any comparable Increase in financial growth of the company and against the general market trend which was recessive. 5. "APPARENT IS NOT REAL" As regards, claim of exemption u/s 10(38) of the I. T. Act, 1961, it is not important "whether purchase did actually took place or shares were sold on the exchange at the prevalent market rates after paying STT or not". What comes to conclusion that, on the basis of above analysis, documentary evidences, circumstantial evidences, human conduct and preponderance of probabilities, is that "What is apparent in this case is Not Real", that these Page 17 of 31 financial transactions were sham ones and that this entire arrangement was only a colourable device used to evade tax. From the above detailed observations, it was evident that assessee had been one of the beneficiaries of such bogus Penny Stocks scheme for converting his black money into white [without the payment of taxes in the garb of bogus claim of exemption u/s 10(38) of the Act]. After putting all the evidences on record, strong surrounding circumstantial evidences [supported by the Principle of Human Probabilities, as considered by Hon'ble Supreme Court in landmark judgments of in cases of Sumati Dayal & Durga Prasad More] revealed that the claim of exemption u/s 10(38) by the assessee was nothing but a sham transaction.
On the basis of human probabilities & conducts, the picking of shares of a company by the appellant and subsequent sale of such shares leading to astronomical gains is highly coincidental and well-nigh impossible without there being any insider information or prearranged trading. Thus, "What is apparent in this case is not real", and that these financial transactions were SHAM ones and that this entire arrangement was only a colouable device used to evade tax. According to Oxford English dictionary SHAM means "A thing that is not what it is purported to be". In this instant case even though prima facie it appears that the assessee received the aforementioned proceeds out of sale of shares of the scrip, in reality it was his own cash which he received back through some clandestine deals. The detailed analysis and the modus operandi discussed above in some of the scrips. Now the question is whether to prove some transaction as sham, does the assessing authority needs to expose all the four corners of the scheme and establish its findings through foolproof documentary evidences only at par as required in a criminal proceeding and further, whether the surrounding circumstances, human conduct and preponderance of probabilities along with related documentary evidences are not sufficient to establish a transaction as such. In this regard here it is pertinent to mention the findings of the Hon'ble ITAT Delhi in the case of Win Chadha Vs DCIT (I.T.A.Nos.3088 to 3098 & 3107/Del/2005). The ITAT held that "The admissibility of documents, evidence or material differs greatly in income tax proceedings and criminal proceedings respectively. In criminal proceedings, the charge is to be proved by the State against the accused, establishing it beyond doubt, whereas as per the settled proposition of law, the income tax liability is ascertained on the basis of the material available on record, the surrounding circumstances, human conduct and preponderance of probabilities." Hon'ble ITAT Delhi quoted several Supreme Court decisions establishing this proposition: 7. "HON'BLE APEX COURT JUDGEMENTS IN APPARENT IS NOT REAL CASES" As discussed above, it is a clear case of "Apparent is not Real" and, therefore, is in line with the spirit of following Landmark Judgments of Hon'ble Supreme Court of wherein following important observations have been made by Hon'ble Apex Court: Sumati Dayal vs. CIT, 214 ITR, 801 (SC), "......This, in our opinion, is a superficial approach to the problem. The matter has to be considered in the light of human probabilities. In our opinion, the majority opinion after considering surrounding circumstances and applying the test of human probabilities has rightly concluded that the Page 18 of 31 appellant's claim above the amount being her winning from races in not genuine......" CIT vs. Durga Prasad More, 82 ITR, 540: ".....It is true that an apparent must be considered real until it is shown that there are reasons to believe that the apparent is not the real... If all that an assessee who wants to evade tax is to have some recitals made in a document either executed by him or executed in his favour then the door will be left wide open to evade tax. A little probing was sufficient in the present case to show that the apparent was not the real. The taxing authorities were not required to put on blinkers while looking at the documents produced before them.........
LEGAL POSITION: 8.1 The ratio laid down by Hon'ble Delhi High Court in the case of M/s. NDR Promoters Pvt. Ltd. Vs. PCIT dated 17.01.2019 is very relevant. Para-13 & 14 of the said judgment are being reproduced hereunder: ".....The primary requirements, which should be satisfied in such cases is identification of the creditors/shareholder, creditworthiness of creditors/shareholder and genuineness of the transaction. These three requirements have to be tested not superficially but in depth having regard to the human probabilities and normal course of human conduct.
Certificate of incorporation, PAN number etc. are relevant for purchase of identification, but have their limitation when there is evidence and material to show that the subscriber was a paper company and not a genuine investor. It is in this context, the Supreme Court in CIT Vs Durga Prasad More [1971] 82 ITR 540 (SC) had observed: "Now we shall proceed to examine the validity of those grounds that appealed to the learned Judges. It is true that the apparent must be considered real until it is shown that there are reasons to believe that the apparent is not the real. In a case of the present kind a party who relies on a recital in a deed has to establish the truth of those recitals, otherwise it will be very easy to make self statements in documents either executed or taken by a party and rely on those recitals. If all that an assessee who wants to evade tax is to have some recitals made in a document either executed by him or executed in his favour then the door will be left wide open evade tax. A little probing was sufficient in the present case to show that the apparent was not the real the taxing authorities were not required to put on blinkers while looking or the documents produced before them They were entitled to look into the surrounding circumstances to find out the reality of the recitals made in those documents" 8.2 Hon'ble Supreme Court in its landmark judgment in the case of PCIT (Central)-1 Vs. NRA Iron Steel Pvt. Ltd. SLP (Civil) No. 29855 of 2018) dated 05.03.2019 has held the similar view. The relevant observations in para 11 to 14 are as under: "If the enquiries and investigations reveal that the identity of the creditors to be dublous or doubtful, or lack credit-worthiness, then the genuineness of the transaction would not be established........ In such a case, the assessee would not have discharged the primary onus contemplated by Section 68 of the Act.
Page 19 of 31 8.3 In the instant facts of the case, ratios laid down by Hon'ble Supreme Court in its landmark judgment in the case of PCIT (Central)-1 Vs. NRA Iron Steel Pvt. Ltd. SLP (Civil) No. 29855 of 2018 dated 05.03.2019 and Hon'ble Delhi High Court in the case of M/s.NDR Promoters Pvt. Ltd. Vs. PCIT (as mentioned above) are squarely applicable. 8.4 Further, Hon'ble Supreme Court in the case of Sumati Dayal Vs, CIT 82 ITR 543 has observed that if the human probability of preponderance of the transaction is in favour of the revenue then the credits can be treated as unexplained. 8.5 Further, on identical facts & circumstances, the Nagpur bench of the ITAT in the case of Sanjay Bimalchand Jain Vs ITO In has dismissed the assessee's appeal while observing as under: ".....In the present case I find that there is no justification whatsoever that the shares of an unknown company of Rs.5/- can be sold within two years' time at Rs.485/- without there being any reason on record. This unexplained spurt in the value of unknown company shares is beyond preponderance of probability..... Section 68 of the I.T. Act provides that where any sum is found credited in the books of the assessee maintained for any previous year and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not in the opinion of the AO satisfactory, the sum so credited may be charged to income tax as income of the assessee of that year. In the present case the assessee's explanation that the said receipt is on account of investment in shares whereby share of Rs.5/- of unknown company has jumped to Rs.485/- in no time has been totally rejected by the authorities below. The assessee has not at all been able to adduce cogent evidences in this regard. There is no economic or financial justification for the sale price of these shares......" It is noteworthy to mention that the above referred decision has since been affirmed by the Hon'ble Nagpur bench of the Bombay High Court. 8.6 Further, in a judgment of Hon'ble High Court Delhi, published on 04.04.2019 In itatonline.com in the case of Udit Kalra vs. ITO, it was held that "...........the astronomical growth of the value of the company share naturally excited the suspicion of revenue. The assesses's argument that he was denied the right to the cross examine the individuals whose statement laid to the enquiry and ultimate disallowance of long term capital gain claims is not relevant in the wake of finding of facts. The appeal of the assessee is accordingly dismissed.........." 8.7 Further, in a judgment of Hon'ble ITAT Chandigarh published on 11.08.2005 in the case of ACIT vs. Som Nath Maini, following was observed by Hon'ble Bench: ....... It is true that when transactions are through cheques, it looks like real transaction but authorities are permitted to look behind the 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 and receipt by cheque does not. render a transaction genuine......."
Page 20 of 31 8.8 Further, the Hon'ble Supreme Court, in the well-known Daksheshwari Cotton Mills case (26 ITR 775 at 782), ruled that the Evidence Act may have no application to tax assessment proceedings. However, the court also clarified later, in Chuharmal vs CIT (172 ITR 250 at 255 SC) that when the taxing authorities are desirous of invoking the principles of the Evidence Act in proceedings before them, they are not prevented from doing so, All that is required is that whatever material they collect will have to be placed before the tax-paying assessee if adverse inference is going to be drawn - audi alteram partem is a well-known principle of natural justice. 8.9 Further, Jurisdictional Hon'ble Allahabad High Court in the case of Motilal Padampat Udyog Ltd. Vs. CIT 293 ITR 656 has laid down the correct preposition of law of cross examination and held as follows: "...Right of cross-examination of persons from whom the Assessing Officer has collected the evidence is not required by law. The requirement of the statute for a valid assessment would be met if all the evidence collected which is to be used against the assessee while framing the assessment order is placed before the assessee and he is given opportunity to rebut the evidence..." It is worthwhile to mention that the evidences received from Investigation Wing were put in to the knowledge of the assessee. Thus, AO followed the principles of natural justice. 8.10In the case of Commissioner of Income Tax Vs. P. Mohanakala (SC), it has been held by the Hon'ble Apex Court that - "....The doubtful nature of the transaction and the manner in which the sums were found credited in the books of accounts maintained by the assessee has been duly taken into consideration by the authorities below. The transactions though apparent were held to be not real one. May be the money came by way of bank cheques and paid through the process of banking transaction but that itself is of no consequence....." 8.11 it is a well-settled principle of law as declared by Hon'ble Supreme Court in the case of Sumati Dayal Vs CIT 214 ITR 801 (SC) that the true nature of transaction has to be ascertained in the light of surrounding circumstances. It needs to be emphasised that even though the standard of proof consisting of proving beyond reasonable doubt has no applicability in determination of matters under taxing statutes, yet it is also a well settled principle that taxing authorities are entitled to look into the surrounding circumstances to find out the reality of the transactions by applying the test of human probabilities. This was also the principle laid down by Hon'ble Supreme Court in the case of CIT versus Durgaprasad More 82 ITR 540(SC) wherein The Hon'ble Court held 'It is true that the apparent must be considered to be real until it is shown that there are reasons to believe that the appellant is not the real. 8.12 The issue has finally been sealed by the Hon'ble Apex Court Judgement in the case of Suman Poddar Vs Income Tax Officer. The Hon'ble Apex Court, in the case of Suman Poddar Vs Income Tax Officer, in Petition (S) for Special Leave to Appeal (C) NO. 26864 OF 2019 vide order dated November 22, 2019 [2019] 112 taxmann.com 330 (SC) dismissed the special leave petition. Facts of case of Suman Poddar are similar with the facts of present case. In the Case of Suman Poddar, the Hon'ble Court has held that: "....This cannot be a case of intelligent investment or a simple and straight case of tax planning to gain benefit of long-term capital gains. The earnings Page 21 of 31 @ 491% over a period of 5 months is beyond human probability and defies business logic of any business enterprise dealing with share transactions. The net worth of the company is not known to the assessee. Even the brokers who coordinated the transactions were also unknown to the assessee. All these facts give credence to the unreliability of the entire transaction of shares giving rise to such capital gains. The ratio laid down by the Hon'ble Supreme Court in the case of Sumati Dayal v. CIT, 214 ITR 801 is squarely applicable to the case. Though the assessee has received the amounts by way of account payee cheques, the transactions cannot be treated as genuine in the presence of the overwhelming evidences put forward by the Revenue. The fact that in spite of earning such steep profits, the assessee never ventured to involve himself in any other transaction with the broker cannot be a mere coincidence of lack of interest....." 8.13 PCIT Vs Swati Bajaj [2022] 139 taxmann.com 352 (Calcutta) In this case the assessee earned LTCG on sale of shares and AO denied said claim and made additions under section 68 on ground that assessee invested in shares of penny stock companies which provided bogus LTCG, since assessee failed to establish genuineness of rise of price of shares within a short period of time that too when general market trend was recessive, additions made under section 68 were justified. The following question of law was put to the learned High Court Calcutta:- -Whether if there is information and data available of unreasonable rise in price of shares of penny stock companies over a short period of time of little more than one year, genuinity of such steep rise in prices of shares needs to be established and onus is on assessee to do so as mandated in Section 68-Held, yes -Whether since assessee failed to establish credit worthiness of companies and that rise of price of shares within a short period of time that too when market trend was recessive was genuine, genuineness could not be established merely on basis of documents like bank details, purchase/sell documents and detail of d-mat account-Held, yes -Whether thus, in absence of satisfactory explanation by assessee, Assessing Officer was bound to make additions under section 68- Held, yes [in favour of revenue] 8.14 Reliance is also placed on judgment of Hon'ble Delhi High Court in NDR Promoters Ltd. reported in 410 ITR 379 (Del) where it was held "we have no hesitation in holding that transactions in question were clearly sham and make believe with excellent paper work to camouflage their bogus nature...... The reasoning given s contrary to human probabilities for in the normal course of conduct, no one will take Investment of such huge amounts without being concerned about the return and safety of such investment". 8.15 Reliance is also placed on judgment of Hon'ble ITAT Pune in case of Raj Kumar B Agarwal vs. DCIT for AY 2004-05 to AY 2006-07 vide order dated 02.02.2019. It was held that "the assessee completed paper trail by producing contract notes for purchase and sale of shares of PIL. Mere furnishing of contract notes etc does not inspire any confidence in light of facts. Test of Human Probability should be applied and apparent should be ignored to unearth the harsh reality". Hon'ble Apex Court's judgment in case of Sumati Dayal 214 ITR 801 (SC) and Durga Prasad More 82 ITR 540 (SC) were applied.
Page 22 of 31 9. IRRELEVANCE OF THE SPECIFIC MENTION OF THE ASSESSEE'S NAME - WHEN PROVEN TO BE PART OF BIG SCAM Penny stocks scams came into prominence in 21" century. Due to tax- exemption u/s 10(38) for long term capital gain for equity shares, some masterminds encourage/convince some assessees to invest in such penny stock which have artificial price-rise in due course of time in order to bring about huge tax-exempt capital gains to certain investors who give commission to these 'masterminds' through backdoors. To put on the legal cover, purchase of such stocks is done through stock- exchange and payments are made through banking channels. Due to the presence of so many middle-men (as happens in most of the organized unethical activities), the gap between 'beneficiary' and 'mastermind' remains too much and, often, they do not even know each other. This is done to avoid any direct evidence against the unethical activity/colourable device. Therefore, when proven being a part of a big scam, specific mention of name of any particular cutting-edge investor lose relevance. Because if the whole exercise is proven to be a sham, the activities of participants/beneficiaries can not be held as genuine. For example, if 'X' is running a totally fake business, with 'A', 'B', 'C', 'D', 'E', 'F', 'G', 'H', 'T', 'T' etc. are having artificial stakes in that. On investigation, it is proven that business of 'X' was totally fake and 'X' admits the same while accepting that all the stakeholders are having artificial stakes. Then, it is not essential that whether 'X' has particularly mentioned the name of 'A' or 'B' or 'C'. If a business is totally fake, it is proven about all stakeholders, irrespective of the mention of any particular stakeholder in the investigation.
OBOBSERVATION OF HON'BLE SUPREME COURT ON THE USE OF COLOURABLE DEVICES FOR TAX EVASION From the above, it is clear that the assessee has used colourable device for the purpose of tax avoidance and, on such proposition, the Hon'ble Apex Court in the landmark case of Mc Dowell & Co., has observed as under: Tax planning may be legitimate provided it is within the framework of law. Colourable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by resorting to dublous methods. It is the obligation of every citizen to pay the taxes honestly without resorting to subterfuges.........."
RECENT JUDGEMENT OF HON'BLE MEMBERS, A BENCH, ITAT, LUCKNOW It is also worthwhile to mention that in a case with similar facts for the same period i.e. FY 2014-15 (AY 2015-16)] in case of Shri Arsalan Ahmed, Kanpur for A.Y. 2015-16 (ITA No. 471/LKW/2019), Hon'ble Members, 'A' Bench, ITAT, Lucknow have delivered a very judicious judgment dated 21.08.2023 wherein they have dismissed the assessee's appeal after considering the above mentioned legal & factual position on record while observing the following: The aforesaid impugned appellate order dated 19.06.2019 of learned CIT(A) has been perused by us carefully. We find that the learned CIT(A) has passed a detailed order giving due consideration to facts and circumstances, applicable law and relevant case laws....... Therefore, we decline to interfere with the impugned appellate order dated 19/06/2019 of Page 23 of 31 learned CIT(A), and accordingly, we dismiss this appeal filed by the assessee.........." Copy of the above judgment of Hon'ble ITAT Lucknow is enclosed herewith.
Thus, on the basis of human probabilities and conducts, the picking of shares of a company by the appellant and subsequent sale of such shares leading to astronomical gains is highly coincidental and well-nigh impossible without there being any insider information or prearranged trading. From the facts on record, it is clear that it is a case of "What is Apparent is NOT Real", and the relevant financial transactions were "Sham" and that this entire arrangement was a colorable device used to evade tax. Such practices (however technically complete they may be) are against the spirit of law. Such practices are not only unethical but also affect the national revenue, national economy and socio-economic set up in an adverse manner. Therefore, the same need to be discouraged and to be taxed properly.
The kind attention of your honours is also drawn towards the important observations made by Ld. CIT (A) regarding other additions made u/s 68 in this case: ".........The appellant has taken a loan of Rs. 25,00,000/- from Shri Ravindra Kumar HUF. On perusal of reply of the assessee it has been found that M/s Fair Intermediate Investment Pvt. Ltd. In which the assessee is director has given Rs. 100,000/- on 07.03.2014 and Rs. 11,39,000/- on 12.03.2014 to Ravindra Kumar HUF. Subsequently Ravindra Kumar HUF has transferred Rs. 6,00,000/- to assessee on 14.03.2014. Further the M/s Fair Intermediate Investment Pvt. Ltd has transferred various amounts on various dates to Ravindra Kumar Gupta and out of these amounts Rs. 19,00,000/- was transferred to Ravindra Kumar HUF on 23.01.2014. M/s Ravindra Kumar HUF has filed his return of income disclosing Rs. 3,16,630/- for A.Y. 2014-15, while receipts in bank statement are not matching with the return of income filed by him. Therefore, from entries in bank account it has been noted that the assessee is routing his own money through his company to Ravindra kumar HUF and received this amount as unsecured loan and given interest on the same. In these circumstances Rs. 25,00,000/- is treated as unexplained credit entry in the books of the assessee and added to its total income u/s 68 During the appellate proceeding no explanation for justification for sources of this loan has been provided by the appellant, therefore the source of loan remains unexplained and therefore no need to interfere in the decision of the Assessing Officer "The appellant has taken a loan of Rs. 5,00,000/- from Saraswati Gupta. On perusal of reply of the assessee it has been found that M/s Fair Intermediate Investment Pvt. Ltd. In which the assessee is director has given Rs. 11,46,000/- on 13.03.2014 to Saraswati Gupta. Subsequently Saraswati Gupta has transferred Rs. 5,00,000/- to assessee on 14.03.2014. M/s Saraswati Gupta has filed her return of income disclosing Rs. 1,30,780/- for A.Y. 2014-15, while receipts in bank statement are not matching with the return of income filed by him. Therefore, from entries in bank account it has been noted that the assessee is routing his own money through his company to Saraswati Gupta and received this amount as unsecured loan and given interest on the same. In these circumstances Rs. 5,00,000/- is treated as unexplained credit entry in the books of the assessee and added to its total income u/s 68. During the appellate Page 24 of 31 proceeding no explanation for justification for sources of this loan has been provided by the appellant, therefore the source of loan remains unexplained and therefore no need to interfere in the decision of the Assessing Officer" *.......The appellant has taken a loan of Rs. 15,00,000/- from Shri Vinod Kumar HUF. On perusal of reply of the assessee it has been found that M/s Fair Intermediate Investment Pvt. Ltd. In which the assessee is director has given Rs. 15,00,000/-on 14.03.2014 to Vinod Kumar HUF. Subsequently Vinod Kumar HUF has transferred Rs. 15,00,000/- to assessee on 14.03.2014. M/s Vinod Kumar HUF has filed his return of income disclosing Rs. 3,96,030/- for A.Y. 2014-15, while receipts in bank statement are not matching with the return of income filed by him. Therefore, from entries in bank account it has been noted that the assessee is routing his own money through his company to Vinod kumar HUF and received this amount as unsecured loan and given interest on the same. In these circumstances Rs. 15,00,000/- is treated as unexplained credit entry in the books of the assessee and added to its total income u/s 68.........During the appellate proceeding no explanation for justification for sources of this loan has been provided by the appellant, therefore the source of loan remains unexplained and therefore no need to interfere in the decision of the Assessing Officer......" ".... The appellant has taken a loan of Rs. 49,75,000/- from Manjusha. On perusal of reply of the assessee it has been found that M/s Fair Intermediate Investment Pvt. Ltd. In which the assessee is director has given Rs. 18,00,000/- on 23.01.2014, Rs. 24,75,000/- on 24.01.2014 and Rs. 7,13,500/- on 25.03.2014 to Manjusha. Subsequently Manjusha has transferred Rs. 24,75,000/- to assessee on 14.03.2014, Rs. 18,00,000/-on 23.01.2014 and Rs. 7,00,000/- on 25.03.2014. Manjusha has filed her return of income disclosing Rs. 2,23,500/- for A.Y. 2014-15, while receipts in bank statement are not matching with the return of income filed...... Therefore, from entries in bank account it has been noted that the assessee is routing his own money through his company to Manjusha and received this amount as unsecured loan and given interest on the same. In these circumstances Rs. 49,75,000/- is treated as unexplained credit entry in the books of the assessee and added to its total income u/s 68......... During the appellate proceeding no explanation for justification for sources of this loan has been provided by the appellant, therefore the source of loan remains unexplained and therefore no need to interfere in the decision of the Assessing Officer......" "The appellant has taken a loan of Rs. 36,38,813/- from Khusubu Gupta. On perusal of reply of the assessee it has been found that M/s Fair Intermediate Investment Pvt. Ltd. In which the assessee is director has given various amounts to Khusubu Gupta. Subsequently Khusubu Gupta has transferred Rs. 36,38,813/- to the appellant. Khusubu Gupta has filed her return of income disclosing very meager income for A.Y. 2014-15, while receipts in bank statement are not matching with the return of income filed by him. Therefore, from entries in bank account it has been noted that the assessee is routing his own money through his company to Khusubu Gupta and received this amount as unsecured loan and given interest on the same. In these circumstances Rs. 36,38,813/-is treated as unexplained credit entry in the books of the assessee and added to its total income u/s 68 ...... During the appellate proceeding no explanation for justification for sources of this loan has been provided by the appellant, therefore the source of loan remains unexplained and therefore no need to interfere in the decision of the Assessing Officer........" Since loan taken from above five person as per ground no-2 is held as non- genuine loan and routing of his own money, therefore addition u/s 68 has Page 25 of 31 been made. Accordingly interest paid to M/s Ravinder Kumar Gupta HUF, Manjusha Gupta & Khushbu Gupta total amounting to Rs. 1,50,337/- is also added to the total income of the assessee........... During the appellate proceeding no explanation for justification for sources of this loan has been provided by the appellant, therefore the source of loan remains unexplained and thus interest paid on these loans also remains unexplained, therefore no need to interfere in the decision of the Assessing Officer.........
14. From the above, it is clear that the assessee has Not been able to substantiate his claims at all, neither during the assessment proceedings nor during the appellate proceedings. Therefore, in view of the above factual & legal position, it is very humbly & most respectfully requested that, in the interest of justice, the judicious orders of AO & Ld. CIT (A) may kindly be upheld.” (B.5.1) At the time of hearing, the Ld. Counsel for the assessee submitted that the aforesaid addition of Rs.4,93,599/-, disallowing the assessee’s claim of exemption u/s 10(38) of the Act, amounting to Rs.4,93,599/- towards Long Term Capital Gain was wrong in the facts and circumstances of the case. He submitted that the assessee purchased the stock of M/s. Ashikca CR during the period of 09.12.2011 to 05.01.2012, for a total amount of Rs.1,54,009.75/-, which were sold during the period i.e. 30.10.2013 to 03.02.2014 for a total sale consideration of Rs.4,93,598.75/-, resulting in capital gain in A.Y. 2014-15. He pointed out that the purchase of the shares of M/s. Ashikca CR and also the sales were spread over prolonged periods as aforementioned. He further submitted that both purchase and sale of the shares were made through broker in stock exchange. He also submitted that the consideration for purchase and sale of shares was routed through bank account of the assessee and the stock broker. He also submitted that the assessee sold shares after holding it for substantial period of time. He contended that quantum of purchase and sale is very moderate having regard to the nature of assessee’s business (dealing in shares) and the issues and financial standing of the assessee. He also submitted that it is common in stock market for the share price of some companies to rise substantially especially if the rise is over an Page 26 of 31 extended period of time. He also drew our attention to the fact that during the current financial year (during the period 01.04.2025 to 04.04.2025, the share price of M/s. Ashikca CR has risen to well beyond Rs.500/- on Bombay Stock Exchange (which is substantially much higher than price at which shares were sold by the assessee). In view of the aforesaid, the Ld. Counsel for the assessee contended that the transactions of the assessee in share of M/s. Ashikca CR was bonafide and genuine and the assessee’s claim of LTCG amounting to Rs.4,93,599/- should be accepted. The Ld. Departmental Representative placed reliance on the orders of the Assessing Officer and the Ld. CIT(A). He placed further reliance on the aforesaid written submission in the office of the Ld. Sr. DR [already referred to in the foregoing paragraph no. (B.5) of this order].
(B.6) We have heard both sides. We have perused the materials on record. The relevant facts are not in dispute. The written submissions from the office of the Sr. Departmental Representative [referred to foregoing paragraph no. (B.5) of this order] are general in nature and have no relation to the specific facts and circumstances of the present case, as far as the aforesaid addition of Rs.4,93,599/- is concerned. Relevant facts are not in dispute. The shares of M/s. Ashika CR were purchased and sold by the assessee through a broker on Stock Exchange. In the absence of any material to the contrary, the logical inference is that the purchases and sales have been made at market driven rates. Further, the shares were sold after holding it for a substantial period of time. The share price of the company rose to well above Rs.500/- in Bombay Stock Exchange at the beginning of current financial year; substantially higher than the price at which the assessee sold the shares, which suggests that Page 27 of 31 the price at which shares were sold by the assessee was not unusual. There is no material to show that the assessee had any role in manipulation of purchase price/sale price of the shares. In fact, there is no material on record to show that purchase price/sale price of share was manipulated by anyone at all. The share has been actively traded on the Stock Exchange even during the current financial year. The assessee’s claim of Long Term Capital Gain (“LTCG”, for short) was rejected by the Assessing Officer merely on the basis of suspicion, doubt and surmise, without any relevant material to make a good case for rejecting the claim of Long Term Capital Gain. It is common in stock market that the price of some shares may rise high. An adverse view against an assessee cannot be taken merely because the price of a share in which the assessee invested, showed extraordinary price rise; unless there are materials to show that there was foul play behind the rise in price of the share. In view of the foregoing, we are of the view that the assessee’s claim for LTCG amounting to Rs.4,93,599/-, on sale of share of M/s. Ashikca CA is bonafide and genuine. The Assessing Officer is directed to delete this addition of Rs.4,93,599/-.
(C) As regards the aforesaid addition of Rs.1,31,00,000/-, the Ld. Counsel for the assessee submitted that the amounts were received by the assessee as unsecured loan from five parties, namely (i) Shri Ravindra Kumar Gupta (HUF) (ii) Ms Saraswati Devi (iii) Shri Vinod Kumar Gupta (HUF) (iv) Ms Manjusha Gupta and (v) Ms Khusboo Gupta. He submitted that the amounts given to the assessee as loan by the aforesaid persons were received by the respective persons from stock broker namely M/s. Fair Intermediate Investment Pvt. Ltd in which the assessee is a Director, towards sale consideration for shares sold by the Page 28 of 31 aforesaid five persons. He further submitted that the source of funds in the hands of the aforesaid persons from whom the assessee has received loan, is thus fully explained, funds having been received by them from M/s. Fair Intermediate Investment Pvt Ltd. The Ld. Departmental Representative relied on the impugned order of the Ld. CIT(A) and the Assessing Officer. He placed further reliance on the aforesaid written submissions filed by the office of the Departmental Representative (already referred to in the foregoing paragraph no. B.5 of this order).
(C.1) We have heard both sides. We have considered the materials on record. It is not in dispute that the amounts received by the assessee from the aforesaid five persons were received by them from M/s. Fair Intermediate Investment Pvt Ltd (“FIIPL”, for short). The claim of the Ld. Counsel for the assessee that the funds were received by the aforesaid five (5) parties from FIIPL as sale consideration for shares sold by the aforesaid five (5) persons is not supported by materials on record. During the assessment proceedings, during the appellate proceedings in the office of the Ld. CIT(A) and during the appellate proceedings in ITAT, no material has been placed for consideration to show that the funds received by the aforesaid five (5) persons from FIIPL were sale consideration for shares sold by the aforesaid five (5) persons. In fact, no material has been placed on record to even suggest that the aforesaid five (5) persons actually owned shares or even that they had financial capacity for ownership of shares that would yield, on sale, huge amounts i.e. Rs.25,00,000.00/- in the case of Shri Ravindra Kumar Gupta (HUF); Rs.5,00,000/- in the case of Ms. Saraswati Devi; Rs.15,00,000/- in the case of Shri Vinod Kuar Gupta (HUF); Rs.50,00,000/- in the case of Ms Manjusha Gupta and Rs.36,00,000/- in the case of Ms Khusboo Page 29 of 31 Gupta. Therefore, this contention of the Ld. Counsel for the assessee that the amounts were received by the aforesaid five (5) persons as sale consideration for the shares sold by the aforesaid five (5) persons deserves to be rejected in the absence of any material to support this claim. Further, it is not in dispute that the aforesaid total amount of Rs.1,31,00,000/- received by the assessee from the aforesaid five (5) persons from FIIPL were transferred to the assessee within a short time. It is obvious, therefore, that the funds were meant for the use of the assessee and not for the use of the aforesaid five (5) persons. It is also not in dispute that the assessee is a director in FIIPL. Thus, instead of routing the funds directly to the assessee, the director of the FIIPL, funds were routed by FIIPL to the assessee through the aforesaid five (5) persons. This very fact that the transaction between FIIPL and the assessee (a Director of FIIPL) was effected using an additional layer consisting of the aforesaid five persons; in itself raises question about the genuineness of the transaction. We are expressing no opinion on whether this additional layer was an artificial device aimed at bypassing/evading the provisions regarding deemed dividend under section 2(22)(e) of I.T. Act. However, in the absence of any Explanation from the assessee’s side as to why the aforesaid funds, amounting to a total of a total amount of Rs.1,34,00,000/- were not taken directly from FIIPL and were instead taken by routing the funds through the aforesaid five (5) persons leads to the conclusion that the transactions were not genuine.
(C.2) Further, perusal of the assessment order shows that the aforesaid five persons had filed return of income for the first time for the A.Y. 2014-15. The returned income of the aforesaid Shri Ravindra Kumar Gupta (HUF) was Rs.3,16,630/-; the returned Page 30 of 31 income of the aforesaid Ms Saraswati Gupta was Rs.1,30,780/-; the returned income of the aforesaid Shri Vinod Kumar HUF was Rs.3,96,030/-; the returned income of the aforesaid Ms. Manjusha Gupta was Rs.2,23,500/-; and the returned income of the aforesaid Ms Khusbhu Gupta was Rs.4,08,960/-. In comparison, as against income returned by the aforesaid five (5) persons, funds received by the assessee by way of loan from the aforesaid five (5) persons are Rs.25,00,000/, Rs.5,00,000/-, Rs.15,00,000/-, Rs.50,00,000/- and 36,00,000/- respectively. There is nothing on record to show that the aforesaid five (5) persons had the financial capacity to own shares valued at such high amount as aforesaid or had the financial capacity to own funds as aforesaid in any other form. Therefore, irrespective of whether the contention of the Ld. Counsel for the assessee is accepted or not [that the funds were received by the aforesaid five (5) persons from FIIPL towards sale consideration for shares of sold by the aforesaid five persons] the financial capacity of the aforesaid five persons is not established.
(C.2.1) As regards provisions of Section 68 of the Act as applicable in the present case, it is well settled that the assessee is required to cumulatively establish identity of the creditor, financial capacity of the creditor and genuineness of transaction. As discussed in foregoing paragraphs (C.1) and (C.2) of this order; out of the three essential ingredients that the assessee is required to establish; the assessee has failed to establish two ingredients i.e. financial capacity and genuineness of the transactions. In view of the foregoing, the explanation furnished by the assessee deserves to be rejected. Accordingly, the aforesaid additions of Rs.1,31,00,000/- is confirmed.
Order pronounced in the open Court on 14/08/2025.