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Facts
The Revenue filed an appeal against the CIT(A)'s order allowing the assessee's appeal. The appeal concerns the deletion of an addition of Rs. 60,39,795/- made by the Assessing Officer on account of Long Term Capital Gains (LTCG) from the sale of shares in Kailash Auto Finance Limited, which the AO considered to be a dubious arrangement for introducing unaccounted money.
Held
The Tribunal found that while the AO had presented materials suggesting manipulation of share prices and bogus LTCG through penny stocks, the CIT(A) had relied on SEBI's revocation order and other case laws. However, the Tribunal noted that SEBI later confirmed manipulation by certain entities and debarred them from trading. The Tribunal also observed procedural lapses by the AO. Therefore, the matter was restored to the AO for fresh consideration.
Key Issues
Whether the LTCG claimed by the assessee on sale of shares in Kailash Auto Finance Limited is genuine or bogus due to price manipulation, and whether the AO's additions were sustainable given the findings of SEBI and applicable case laws.
Sections Cited
10(38), 143(3), 68, 268A
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, LUCKNOW ‘A’BENCH, LUCKNOW
A.Y.2015-16 Income Tax Officer, vs. Sh. Arvind Kumar Gupta through legal 3(1), Kanpur heir, Smt. Uma Gupta. 41/9, Naya Chowk, Parade, Kanpur PAN:ABKPG5557D (Appellant) (Respondent) Assesseeby: None Revenue by: Sh. Sanjeev Krishna Sharma, Addl CIT (DR) Date of hearing: 24.03.2025 Date of pronouncement: 11.06.2025 O R D E R PER NIKHIL CHOUDHARY, A.M.: This is an appeal filed by the Department against the order of the ld. CIT(A)- 1, Kanpur under section 250 of the Income Tax Act, 1961 dated 27.11.2018, wherein the ld. CIT(A) has allowed the appeal of the assessee.The grounds of appeal are as under:-
1. The Ld. Commissioner of Income Tax (Appeals)-1, Kanpur has erred in law and on facts in deleting the addition of Rs. 60,39,795/-without going into the merits of the case and ignoring the findings recorded by the assessing officer in assessment order that the sale of shares in this case is not anatural phenomenon but an arrangement of dubious design of providing accommodation entry of Long Term Capital Gain to introduce unaccounted own money as exempt income in the form of LTCG on sale of shares and the assessee being fully aware of it is also a part of this manipulation.
2. The Ld. Commissioner of Income Tax (Appeals)-1, Kanpur has erred in law and on facts without appreciating the facts that the issue involved pertains to organized scam/tax evasion activity and unique modus operandi of this embezzlement for which CBDT's Circular No. 23 of 2019 dated 06.09.2019 and subsequent O.M. dated 16.09.2019 mandate that the appeals may be filed on merits in case of the assessee claiming bogus LTCG/STCL through Penny Stocks. 1 Sh. Arvind Kumar Gupta A.Y. 2015-16 3. That the order of the Ld. Commissioner of Income Tax (Appeals) is erroneous, unjust and bad in law be vacated and order dated 26.12.2017 passed u/s 143(3) of I.T. Act of the Assessing Officer be restored.
That the appellant craves leave to modify any of the grounds of appeal mentioned above and/or to add any fresh grounds as and when it is required to do so.”
2. It is observed that the appeal is delayed. From the Form 36 filed, it is observed that the said order was received in the office of the ld. PCIT-1, Kanpur on 11.12.2018 and the last date of filing of Departmental appeal was therefore, 9.02.2019. However, the tax effect involved in the matter was only Rs.24,22,590/- and therefore, the ld. PCIT-1, Kanpur had taken a decision not file the appeal on the grounds that the tax effect involved in the said case was below monetary limit prescribed by the Hon’ble CBDT, New Delhi vide Instruction No. 03/2018 dated 11.07.2018. A condonation petition was submitted before us by the ld. ITO-3(1), Kanpur in which it was submitted that subsequently the CBDT vide Circular No. 23/2019 dated 6.09.2019 and the O.M. dated 16.09.2019 had decided that notwithstanding anything contained in any other Circular issued under section 268A specifying monetary limits for filing of departmental appeals before the Hon’ble ITAT, Hon’ble High Courts and the Hon’ble Supreme Court, appeals may be filed on merits as an exception to the said Circular where the Board by way of special order direct filing of appeal on merit in cases involved in organized tax evasion activity. It was submitted that in the O.M. dated 16.09.2019, the Board had ordered that the monetary limits fixed for filing of appealsbefore the ITAT/ Hon’ble High Court and SLP before the Hon’ble Supreme Court would not apply in the cases of assessee’s claiming bogus long term capital gain / short term capital loss through penny stocks and appeals / SLPs in such cases could be filed on merits. It was submitted that the present case was one such case and therefore, the delay in the filing of the appeal within the limitation period was beyond the control of the Department. Accordingly, it was prayed that the delay in the filing of the appeal may kindly be condoned. 2 Sh. Arvind Kumar Gupta A.Y. 2015-16 3. Sh. Jitendra Yadav, ld. counsel for the assessee (hereinafter referred to as the ‘ld. AR’) who appeared before the Bench on 26.09.2023 opposed the condonation of delay by the Bench on the grounds that the ITAT, Lucknow Bench had refused to admit an appeal filed in similar circumstances with similar timelines in the case of Sh. Rishab Jain vs. JCIT, OSD, Circle-3, Kanpur in on the grounds that there was a five months delay between the issue of the Departmental Circular and O.M. and the filing of the appeal of the Department. Accordingly, it was prayed that the appeal may be dismissed. Subsequent to the same, the ld. AR informed us that the assessee had passed away and the Departments sought time to bring the legal heir on record. A revised Form 36 was filed on 15.05.2024 bringing the legal heir on record.
4. We have duly considered the said condonation petition and the objections filed by the ld. AR. We are of the view that the period upto 16.09.2019 ought to be excluded in view of the fact that the Departmental authorities could not have proceeded with the appeal in the absence of express authorization from the CBDT. Thus, the period of limitation would have to count from the date of which the CBDT lifted the embargo on filing of such appeals even they were below the taxable limits as specified in the earlier Circular. It is further observed that as per the statute, both Department and assessee are usually given a period of two months in which to file an appeal before the ITAT after the copy of the order of the ld. CIT(A) is received in the office of the ld. PCIT. Thus, in normal circumstances, considering that the details of the Board’s decision would take some time to be communicated to the ld. AO, the Department could explain a delay of uptil end of November, 2019 for the filing of the said appeal. The ld. AO has submitted that the appeal could not be filed at that time because the ld. AO and the Department was at that time involved in time barring assessments. It is a known fact of the functioning of the Department that many cases Sh. Arvind Kumar Gupta A.Y. 2015-16 are piled up for disposal near the time barring dates and both the counsels and the Departmental officers work overtime to ensure that the cases are disposed offbefore the limitation date. At that point of time with all hands on deck for disposal of time barring cases, the failure to search out the old assessment records and file the appeal after preparation of scrutiny report and obtaining of necessary approvals cannot be ascribed to negligence in view of such surrounding circumstances. Furthermore, retrieving of old records from offsite storage takes time.For these reasons, as we feel that there are sufficient grounds to show that the delay was not caused on account of negligence by the Departmental authorities, we feel the delay is fit to be condoned. We are also guided by the decision of the Hon’ble Supreme Court in the case of Collector of Land Acquisition vs. MST. Katiji (1987) 167 ITR 471 (SC)wherein the Hon’ble Court has held that ordinarily a litigant does not stand to benefit by resorting to delay and there is no presumption that the delay is caused by mala fide or negligence. Furthermore, the Hon’ble Court has held that the worst that can happen by condoning a delay, is that the case will be taken up for hearing on merit and refusing to condone the delay can result in a good matter being thrown out at the outset, thereby defeating the cause of justice. In view of the above, we condone the delay in filing the appeal and admit the same for hearing.
5. The brief facts of the case are that, the assessee filed a return on 30.09.2015 showing total income of Rs. 5,60,840/-. It was observed that he had claimed a deduction under section 10(38) for long term capital gain to the tune of Rs.59,21,368/- arising out of transfer of shares in the scrips of Kailash Auto Finance Limited. The ld. AO noted that a report had been circulated by the Directorate of Income Tax (Inv), Kolkata regarding, “bogus” LTCG arising out of trading in various penny stocks. The ld. AO noted that M/s Kailash Auto Finance Limited was listed as one of such penny stocks against which various assessee’s had booked, “bogus capital Sh. Arvind Kumar Gupta A.Y. 2015-16 gain”. The ld. AO further pointed out that the said company was promoted and controlled by one Sh. Sunil Dokaniya, who was a known entry operator. Sh. Dokaniya’s statement had been recorded by the Directorate of Investigation, Kolkata wherein he had admitted to be an accommodation entry provider and stated that bogus LTCG/ STCG/STCL was provided through the scrips of Kailash Auto Finance which were controlled and managed by him. Sh. Dokaniya also discussed the modus operandi in how this was facilitated and this statement was reproduced in the orders of the ld. AO. The ld. AO also reproduced an analysis of the books of accounts of M/s Kailash Auto Finance, the details of which were recorded in his order,which seem to confirm the statement given by Sh. Sunil Dokaniya. In view of these two pieces of evidence, the ld. AO came to the conclusion that the assessee had failed to prove the genuineness and veracity of the long term capital gain arising out of trading in penny stocks of M/s Kailash Auto Finance. The ld. AO also observed that the Securities and Exchange Board of India had recently passed some orders on the issue of manipulation of share prices for providing accommodation entries of bogus LTCG/STCG after considering the inputs from the Income Tax Department as well as its own surveillance system. The Stock Exchanges had also taken appropriate action in the case of the scrips, including passing interim orders of suspending the trade and reducing the price band etc,.The ld. AO, thereafter proceeded to discuss the modus operandi of these operations and held that the decision of the Constitution Bench of the Hon’ble Supreme Court in the case of McDowell and Co. Limited vs. CTO 154 ITR 148 SC was squarely applicable to the facts of the case as the assessee was indulging in a colourable device and such colourable devices could not be a legitimate part of tax planning. Therefore, he disallowed the exemption claimed by the assessee on account of LTCG under section 10(38) and added a sum of Rs. 59,21,368/- to the income of the assessee. He also observed that in his statement, Sh. Sunil Dokaniya has admitted under oath on different occasion that he has charged a commission of 1-3% of the total LTCG for providing the bogus entries to various persons. Therefore, 5 Sh. Arvind Kumar Gupta A.Y. 2015-16 relying upon such statement, he made a further addition of Rs. 1,18,427/- being 2% of the LTCG booked by the assessee as disallowable expenses for procuring accommodation entries.
6. Aggrieved with this assessment order, the assessee went in appeal before the ld. CIT(A)-1, Kanpur. It was submitted before the ld. CIT(A) that during the assessment proceedings, the assessee had placed on record all such materials and information as was required to be so placed on record such as the purchase bills of shares in M/s Kailash Auto Finance Limited; the demat account in which the shares acquired by the appellant had been held, the contract notes issued by brokers registered with SEBI; the details of the receipt of consideration for the sale of such shares; the payment of STT and other levies that had been paid by the assessee on receipt of consideration. Thus, it was submitted that the assessee had not only fulfilled all the requirements under section 10(38) but also discharged his onus under section 68. It was further submitted that these explanations could not be simply disregarded by the ld. AO simply of presumptions. The assessee submitted that nowhere had the entry operator submitted that they were known to the assessee and no relation had been found between the entry operators and the assessee. The case had been assessed without giving any opportunity to the assessee to give justification and cross verification had not been made despite of a written request by the assessee. The purchase and sale of shares had not been questioned and it had not been proved by the ld. AO to be false. It was further submitted that the assessee’s case for exemption under section 10(38)stood supported by a large number of case laws which were squarely applicable to the facts of the assessee’s case. Some of the decisions which were cited in support of the assessee’s claim were the decisions of the Hon’ble Allahabad High Court in the cases of CIT, Muzaffarnagar vs. Neeraj Kumar Jain [order dt 2.01.2013], CIT vs. Udit Narayan Agarwal (order dt 12.12.2012) and Sh. Arvind Kumar Gupta A.Y. 2015-16 CIT vs. Shyam Sundar Agarwal (order dt. 29.11.2012) The assessee also cited the judgment of the ITAT in the case of Smt. Manju Bansal, wherein it has been held that the evidences brought on record by the assessee in support of the prices on which the shares had been sold could not be ignored when the realizations were through cheques issued by buyers / share brokers and it was submitted that the assessee’s case was on even better footing as the transactions were done for demat account. It was further submitted that the judgment of the Hon’ble ITAT Lucknow Bench in the case of Manju Bansal had been accepted by the Revenue as no appeal had been filed under section 260A of the Income Tax Act. The assessee also submitted that on 21st September 2017, the SEBI had passed a revocation order in the matter of Kailash Auto Finance Limited and while the ld. AO in his assessment order had indicated several suspicious circumstances, he had not been able to show that the material documents placed on record by the assessee were fabricated or fictitious. Therefore, the submissions made by the assessee could not be rejected. It was further submitted that simply because the stock was thinly traded and there was unusually high gain was not sufficient to treat the long term capital gains as bogus, when all the papers submitted were in order. The ld. AO had to bring material on record to support his finding that there had been collusion / connivance between the broker and the assessee for the introduction of its unaccounted money. It was submitted that the Hon’ble Punjab and Haryana High Court in the case of PCIT vs. Prem Pal Gandhi in vide its order dated 18.01.2018 had held that if the shares were traded on the stock exchange, if the payments and receipts were routed through the bank, if there was no evidence to indicate that it was a closely held company and that the trading on the stock exchange was manipulated in any manner, the addition was not justified only on the grounds that the appreciation and value of shares was high. The assessee also cited a number of decisions of the Tribunal and pointed out that the assessee had been dragged into this without any relationship being established between him and the entry operators and in spite of all documentation furnished by 7
The ld. CIT(A) has considered the submissions of the assessee in the light of the assessment order and observed that the ld. AO had not made any enquiry from the share brokers seeking specificinformation pertaining to these transactions undertaken by the assessee. He had merely perused the information uploaded on the system by the DIT(Inv) and made the assessment. The ld. CIT(A) observed that there was no mentioning of the share broker M/s India Infoline Limited in the report of the Investigation Wing. He acknowledged that there was a reference in the report to the scrip of M/s Kailash Auto Finance Limited but there was no evidence available against the assessee to come to the conclusion that the assessee had been involved in the manipulation of share prices of the concerned company. He also noted that there was no general or specific statement either by M/s Infoline Limited or M/s Kailash Auto Finance Limited against the assessee or with relation to the transactions made by the assessee. Thus, the ld. AO had quoted facts pertaining to various unrelated persons and made additions in the hands of the assessee. One of the materials that had been used by the ld. AO was the suspension order in the trading of scrips of M/s Kailash Auto Finance. However, the ld. CIT(A) pointed out that the said interim order dated 29.03.2016 had been revoked by the SEBI on 21.09.2017 vide Order No. SEBI/WTN/NPB/EFD-DRA-I/31/2017. He quoted from the order and concluded that the SEBI prima facie not found involvement of the concerned company in any unfair trade practices and had allowed trading of the said scrip on the public portal once again. Hence, the only material that existed with the ld. AO had now ceased to exist. Therefore, only because the same scrip had been utilized by certain manipulators leading to some bogus transactions, the same could not be held against the assessee in the absence of specific information with regard to the assessee and in the absence Sh. Arvind Kumar Gupta A.Y. 2015-16 of any evidence against the brokers of the assessee. The ld. CIT(A) held that there was no effort made by the ld. AO to understand the factual position in the case of the assessee by examining anyone who admitted before the Investigation Wing that they were manipulating LTCG transactions. He had not made any effort to verify the documents placed by the assessee and since specific adverse material had not been brought on record, he held that the said addition was not sustainable. He further quoted from the Tribunal’s decision in the case of Smt. Manju Bansal vs. ITO-1(1), Lucknow in dated 12.03.2015 that where overwhelming documentary evidences had been produced by the assessee, the burden shifts upon the ld. AO to explain them away and only the report of the Investigation Wing cannot be relied upon by the ld. AO to make the addition. He further held that the ld. AO had not invoked any particular section to tax the amount of LTCG but treated the same as the assessee’s own money introduced by routing it through various channels. Hehad also presumed that the assessee would have paid commission and made the addition on that basis. The ld. CIT(A) quoted from the judgments of the Hon’ble Allahabad High Court in the case of CIT vs. Udit Narayan Agarwal in dated 12.12.2012 and the judgment of Hon’ble Supreme Court in the case of Krishnanand Agnihotri vs. State of Madhya Pradesh (1977) 1 SCC 816 (SC),to hold that the assessee had discharged its burden of proof and there was no material with the ld. AO to show that the share prices of M/s Kailash Auto Finance were rigged in the case of the assessee or that the assessee had participated in any scheme of procuring bogus entry of share sales to show bogus capital gains. Finally, since neither the Investigation Wing nor the SEBI had specifically investigated the assessee and found him to be part of any arrangement for the purposes of generating bogus LTCG, he decline to sustain the additions made by the ld. AO and he deleted the same.
Sh. Arvind Kumar Gupta A.Y. 2015-16 8. The Department is aggrieved at this order passed by the ld. CIT(A) and is accordingly in appeal before us. Sh. Sanjeev Krishna Sharma, Addl CIT DR, representing the Revenue placed reliance on the orders of the ld. AO and submitted that the ld. CIT(A) was unjustified in seeking specific investigation of and evidence in respect of the assessee by the Investigation Wing and the SEBI, as a tool for determining whether the transaction was manipulated or not. It was submitted that the investigation wing of the Dept. had brought sufficient material on record to show that the Capital gains arising on account of the appreciation in the price of Ms Kailash Auto was due to the result of rigging of the price of Ms Kailash Auto and submitted that once the fact of scrip being manipulated was brought on record and it had been established that the volatility in the price of the scrip happened not due to any intrinsic market forces but due to circular trading by some brokers and accommodation entry providers, then the capital gain generated from the said scrip could not be treated to be genuine, as it was the result of price manipulation. The ld. Addl CIT DR also argued that the ld. CIT(A) was completely unjustified in relying upon the revocation order of the SEBI against various entities.Therefore,the ld. CIT(A) was unjustified in taking the decision that he had and he prayed that the order of the ld. CIT(A) be set aside and the orders of the ld. AO be restored. No one was present for the assessee during the course of hearing. It was seen that prior to this, the assessee had filed two requests for adjourning the case and the same had been granted. However, despite this, neither was any request made for adjournment in this matter on the appointed date nor did anybody appear to argue the case of the assessee. Therefore, it was decided to proceed with the matter on the basis of the materials available on record.
We have duly considered the facts and circumstances of the case. We find from the assessment order that the ld. AO has brought considerable materials on record to Sh. Arvind Kumar Gupta A.Y. 2015-16 show that the LTCG generated by the assessee out of trading of the scrip of Ms Kailash Auto Finance Limited may not be genuine but due to the manipulation of the prices by Sh. Sunil Dokaniya and his associates. The Statement of Shri Sunil Dokaniya and the verification of that statement by analysis of the books of accounts of M/s Kailash Auto Finance by the Investigation wing, which shows the modus operandi of how the capital gains and losses were generated out of the scrip of Ms Kailash Auto are reproduced in his assessment order. The Ld CIT(A) has deleted the addition by placing reliance of the decisions of the Hon Allahabad High Court in the cases of CIT vs Udit Narain Agarwal(supra) and CIT Vs Ms Amita Bansal (400ITR 324-All). In the case of Udit Narain Agarwal,the Hon High Court had ruled that the where the assessee had placed substantial material on record and made the transaction through demat account, which evidenced its genuineness, while the AO had brought no material on record to justify his stand that these transactions were bogus, the additions were not justified. In the case of Amita Bansal the Hon High Court had held that where the assessee had brought significant material on record, then such material could not be brushed aside and addition could not be made only on account of late recording of purchase transaction in demat account. A perusal of both these judgments reveal that the detailed investigation of the concerned scrips which revealed manipulation of share prices by a cartel of traders and promoters was not an issue in examination in either of these two cases. We are of the view that once such evidence has been brought on record to show that the assessee was a beneficiary of a scheme to artificially create capital gains, then the assessee has to discharge a far greater burden than what would be required in a normal case, where such evidence was not there on record. In view of the scheme of manipulation that had been spelt out by the ld. AO in his assessment order, we do not feel that the mere filing of purchase bills, demat account, contract notes and details of share consideration and STT paid are sufficient to explain the genuineness of the transaction. The Hon Kolkata High Court in dealing with a similar case in PCIT vs Swati Bajaj (2022) 139 11 Sh. Arvind Kumar Gupta A.Y. 2015-16 taxmann.com 352 (Calcutta)held, that it was very rare and difficult to get direct information or evidence with regard to meeting of minds of persons involved in the manipulative activities of price rigging and insider trading. Therefore, a wholistic approach is needed and the test of preponderance of probabilities has to be applied. The High Court further held that even if the assessees were not named in the report of the investigation wing , once they made a claim for exemption , they had to prove the genuineness of the transaction and the genuineness could not be proved only with reference to documents submitted by them but with reference to the fact that the steep rise in prices of penny stock companies , which had no intrinsic value when the scrips were purchased by them, were genuine and consequently they were entitled to claim LTCG on their transactions. The Court held that the onus upon the assessee under section 68 would not be discharged unless they had furnished this information. In this back ground the court held,”The assesses cannot be heard to say that their claim has to be examined only based upon the documents produced by them namely bank details, the purchase/sell documents, the details of the D-Mat Account etc. The assesses have lost sight of an important fact that when a claim is made for LTCG or STCL, the onus is on the assessee to prove that credit worthiness of the companies whose shares the assessee has dealt with, the genuineness of the price rise which is undoubtedly alarming that too within a short span of time” .Thus, we are of the opinion that , in view of the assessee having been found to be trading in a scrip , the price of which was manipulated by operators to give false gains to parties, the assessee needs to justify the genuineness of the long term capital gain claimed by him by showing that the purchase of the scrip was a bonafide decision, that it was not a one off foray to take advantage of a scam and that his transactions did not fall in the pattern associated with the scam.
Sh. Arvind Kumar Gupta A.Y. 2015-16 10. The CIT(Appeals) has also placed reliance on the revocation order passed by SEBI on 21.09.2017 wherein 244 entities have been exonerated of the charge of manipulating the price of Ms Kailash Auto Ltd in violation of PFUTP rules to contend that SEBI has not found involvement of the concerned company in any unfair trade practices and allowed the trading of the same again on public portal. It is not clear from his order as to whether before relying on such order to arrive at the conclusions that he has, he solicited any comments of the Assessing officer. Be that as it may, we observe that the CIT(A) has failed to note that in the said order the SEBI has confirmed that the price of the said scrip was rigged by 5 entities against whom investigations would continue. Furthermore, it emerges that, subsequent to the passing of his appeal order on 27.11.2018, the SEBI, on 5.12.2018 passed the final order in the case of Ms Kailash Auto Finance Limited, where it confirmed that the price of Ms Kailash Auto Finance Limited had been manipulated by seven entities trading amongst themselves and it consequently debarred these seven entities from trading on any stock exchange for period of four years. The SEBI also observed that these seven entities shared email addresses, addresses and directors with several other entities (some of whom figured in the revocation order) and their address with Ms Kailash Auto Finance Limited also. These findings of SEBI, are to our mind as important, as the revocation order against 244 entities, in the matter of assessees claiming Capital Gains out of purchase and sale of Shares of Ms Kailash Auto Finance Limited, which the Ld CIT(A) has relied upon.Since the same has not been taken into account by the Ld CIT(Appeals) before coming to his findings and since the Revocation order has not been considered by the Ld AO, we feel the matter ought to be considered in the light of these findings of the market regulator in both its orders dated 21.09.2017 and 5.12.2018.
We also observe that before the CIT(A), the Assessee has submitted that the AO has made the addition without giving any opportunity to the assessee and 13