DIPESH RAMESH VARDHAN,MUMBAI vs. DY CIT CC 2 (2), MUMBAI

1. Addition as Unaccounted/Unexplained Income of Rs.2,99,76,550/- by treating the Long Term Capital Gain as Manipulated Transaction and further adding 2% thereon as commission by just relying upon third party statement without establishing any connection of the appellant with the said third party and completely disregarding the direct documentary evidences submitted by the Appellant and even no incriminating documents/materials were found during the course of Search Action/Proceedings. (a) On the facts and the circumstances of the case and in law, the learned Assessing Officer has erred in law and facts in treating the Long-Term Capital Gain as Manipulated Transactions and further adding 2% thereon as commission expenses and added an amount of Rs. 2,99,76,550/- to total income under section 68 of the Income Tax Act 1961 even though no incriminating documents and/or material of alleged cash paid to the alleged accommodation entry provider/share operator were found during the course of search action/proceedings. The learned Assessing Officer has just acted mechanically relying upon third party statement and reference made by the Investigation Wing without taking cognizance of and completely disregarding the direct documentary evidences submitted by the Appellant during the assessment proceeding pertaining which were sufficient enough to establish the genuineness of the transactions. The learned Assessing Officer has erred in relying upon the irrelevant material seized in the case of some person named as Mr. Vipul Bhatt and his statement with whom the Appellant has no connection whatsoever and the learned Assessing Officer did not establish any connection of the appellant with the said Mr. Vipul Bhatt. The learned Assessing Officer rejected the claim of the Appellant just because the Appellant did not produce the party i.e. the Company without appreciating that the Appellant is not obliged under any law to produce any of the Company as the shares were sold at the online platform of the stock exchange and not to the company. (b)The learned CIT (Appeal) has erred in upholding the action of the AO in making addition of Rs. 2,99,76,550/- under section 68 of the Income Tax Act, being the Long Term Capital Gain and further adding 2% thereon as commission expenses on the sale of shares of a listed company through recognized stock exchange even when the identity and nature of the source of the said capital gain were explained and proved. (c) The learned Assessing Officer/CIT (Appeal) erred in law and facts in passing the assessment orders solely on the basis of assumption, presumptions, surmises and conjectures without any cogent material or evidence. The reason given are wrong, contrary to the facts of the case and against the provisions of law, hence it is illegal and contrary to the principal of natural justice. In view of the forgoing laws and facts, the addition made is unwarranted and not justified and it is therefore, prayed that the same be deleted.” As evident, the assessee is aggrieved by confirmation of certain additions as unexplained / unaccounted income and also by confirmation of estimated additions of commission against these transactions. To resolve the controversy, it would be imperative to delve into correct factual matrix of the case as brought on record by Ld. AO in quantum assessment order and as adjudicated by Ld. CIT(A) in the impugned order. 3.2 Briefly stated the assessee being resident individual is stated to be director and partner in the Vardhman Group of Companies and firms which carries on the business as Builders & Developers, granting of loans & advances and investment activities. The assessee earned Salary income in the form of director’s remuneration from group companies and interest income on loans during the year which has duly been reflected in the return of income. The assessee also earned exempt income in the form of Long-Term Capital Gains (LTCG), Share of profit from partnership firms, interest on PPF & dividends etc. The sole subject matter of the appeal is certain addition on account of Long-Term Capital Gains earned by the assessee during the year. The assessee reflected LTCG of Rs.293.88 Lacs on certain shares transactions which were claimed to be exempt u/s 10(38). The Ld. AO as well as Ld. first appellate authority has denied the same and hence, this appeal. 3.3 The record would show that an assessment was framed for year under consideration u/s 143(3) r.w.s. 153A of the Act on 21/12/2016 wherein the income of the assessee was determined at Rs.303.50 Lacs after certain additions of unexplained income as against returned income of Rs.3.74 Lacs filed by the assessee on 25/09/2014. The LTCG earned by the assessee was treated as its unaccounted income and Ld.AO had estimated commission income against these transactions @2%. 3.4 The said assessment stem from search operations u/s 132 as carried out by the department at various residential and business premises of assessee group on 05/11/2014. During the course of search at the residence of the assessee, excess jewellery worth Rs.3.30 lacs was found which was offered to tax in statement u/s. 132(4). Consequently, notices u/s 153A & 143(2) were issued as per due process of law. 3.5 During assessment proceedings, it transpired that various family members of the group reflected LTCG aggregating in all to Rs.3235.98 Lacs and claimed the same to be exempt u/s 10(38). The assessee-wise detail, in this respect has been tabulated in para 4.1 of the quantum assessment order. Accordingly, the assessee was asked to explain the genuineness of the aforesaid LTCG. The amount of LTCG reflected by the assessee was Rs.293.88 Lacs. 3.6 It transpired that the assessee made investment in the shape of 62,500 Equity Shares of an entity namely Santoshima Tradelink Ltd. (STL) during the month of September, 2011. The face value of the share was Rs.10/- per share with premium of Rs.10/- per share and accordingly, the assessee paid a sum of Rs.12.50 Lacs to acquire the same. The shares were duly allotted in due course and the shares certificates were received in physical form and the shares were ultimately dematerialized in assessee’s account during March, 2012. 3.7 Meanwhile, M/s STL got amalgamated with another entity namely M/s Sunrise Asian Ltd. (SAL) pursuant to a scheme of amalgamation u/s 391 to 394 which was duly approved by Hon’ble Bombay High Court. As per the scheme of amalgamation, share swap ratio was fixed as 1:1 and accordingly, the shares of STL were swapped with the shares of SAL which were credited in assessee’s demat account during the month of June, 2013. M/s SAL was a public limited company and its shares were listed on Bombay Stock Exchange as Group ‘A’ shares signifying that the shares were highly traded having highest degree of liquidity. 3.8 The assessee sold these shares through online platform (BOLT) provided by recognized stock exchange and delivered the shares in demat form to the clearing house and received sale consideration through its stock-broker in the month of March, 2014. The sale consideration was received through banking channels. Since the investment was held for more than 1 year and the sale transactions were undertaken through recognised stock exchange on which Securities Transactions Tax (STT) was paid, the assessee apparently fulfilled the conditions laid down in Sec. 10(38) and accordingly claimed exemption of the gain. The LTCG earned on these transactions was worked out to be Rs.293.88 Lacs. 3.9 However, to verify the transactions, summons u/s 131 were issued at the address of M/s SAL which remained un-responded to. It transpired that a search action was conducted at various places of one Shri Vipul Bhat on 05/02/2016 wherein it was revealed that Shri Vipul Bhat was controlling M/s SAL and was engaged in rigging the share price of M/s SAL. Based on outcome of search proceedings, an opinion was formed that M/s SAL was merely a paper company engaged in providing accommodation entries to various beneficiaries. This search was subsequent to search conducted on the assessee on 05/11/2014. In the said background, the transactions carried out by the assessee was subjected to scrutiny during assessment proceedings. 3.10 In defence of genuineness of stated transactions, the assessee furnished copies of purchase and sales contract notes. The copies of financial statements of M/s STL for FYs 2009-10 & 2010-11, on the basis of which the decision to make the investment was taken by the assessee, was also placed on record. The assessee also submitted month-wise data of trading volume and price range of shares of M/s SAL for more than 2 years i.e. from the month of Jan 2013 to July 2015. During the aforesaid period, the price range was continuously shown to be in the range of Rs.360-600 per share and the trading volumes were shown to be in the range of 5 Lacs to 25 Lacs shares per month. The price range was stated to be in the same range for 15 months after the period of sale of shares by the assessee. Therefore, the allegations of rigging or manipulation of shares were refuted. The assessee denied having known Shri Vipul Bhat and submitted that it had no privy of contract with the buyers of the shares since the shares were sold through recognised stock exchange in online mode. In the above background, the assessee denied the allegations of Ld. AO qua rigging / manipulation of share prices of M/s SAL. 3.11 However, it was noted that there was survey action u/s 133A on 04/02/2016 in case of M/s SAL. During survey, the statement of Shri Kalpesh Manahar Jani (Director of M/s SAL) was recorded wherein the said person denied having any link with M/s SAL but submitted that Shri Vipul Bhat appointed him as a director of M/s SAL. The survey on the premises of M/s SAL revealed that given address was dummy office and it was a paper company. It was also noted that various entities controlled by Shri Vipul Bhat acted as exit providers to the beneficiaries of the scrips. Two of these entities were M/s Sampada Chemicals Ltd. & M/s Shipra Fabrics Pvt. Ltd. The director of M/s Sampada Chemicals Ltd. namely Shri Kaushik Balubhai Madhwani, during survey proceeding, denied having any link with entity M/s Sampada Chemicals Ltd. Similarly, the director of M/s Shipra Fabrics Pvt. Ltd. denied having any knowledge about the said entity and submitted that this entity was being operated by Shri Vipul Vidur Bhatt. Shri Vipul Vidur Bhat accepted under oath that he was involved in providing accommodation entries against commission. He admitted to have manipulated the share prices of M/s SAL for providing accommodation entries of LTCG. 3.12 The survey action led to issuance of search warrant u/s 132 on 05/02/2016 in the name of Shri Vipul Vidur Bhat and his various entities including M/s SAL. During search operations, statement of Shri Vipul Vidur Bhat was recorded u/s 132(4) wherein he admitted to have indulged in providing accommodation entries to beneficiaries against commission. 3.13 To verify the genuineness of the transactions of various assessee of Vardhan Group, trading data was collected from Stock Exchange. The details of buyer who purchased the shares of Vardhan Group were tabulated in para 4.5 of the quantum assessment order. From the said analysis, a conclusion was drawn that the shares were purchased by various concerns of Shri Vipul Bhat only. It was also noted that there was circular trading within the group entities of Shri Vipul Bhat which helped in manipulating the prices of M/s SAL. 3.14 Finally, applying the principle of human probability in terms of decision of Hon’ble Supreme Court in Sumati Dayal 214 ITR 801, these transactions were termed as manipulated transaction done by the assessee in connivance with Shri Vipul Bhat to evade the taxes on unaccounted income. In order to obtain such transactions, a commission would usually be paid. The same was estimated @2%. The action of Ld. AO resulted into an addition of Rs.299.76 Lacs in the hands of the assessee. 3.15 In para-4 of the quantum assessment order, it was noted that the search was conducted on the assessee on 05/11/2014. The return of income for AY 2014-15 was already filed by that date. However, the time limit for issuance of notice u/s 143(2) had not expired. As a matter of fact, the return of income for AY 2014-15 was selected for scrutiny through CASS for the purpose of examination of exempt LTCG. Therefore, the assessee’s contention that there was no incriminating material found during the course of search operations and therefore no addition based on material other than incriminating material would be justified, could not be accepted. Accordingly, the assessment was framed against the assessee. 4.1 Before Ld. CIT(A), the assessee assailed the addition by way of elaborate written submissions which have already been extracted in para-4 of the impugned order. The assessee vehemently controverted the findings of Ld. AO by submitting that in the list of purchase of shares, as tabulated by Ld. AO, there were independent buyers too. The assessee denied having known Shri Vipul Bhat and denied having entered into any transactions with any of his entities. It was reiterated that the shares were sold at the online platform of the stock exchange through share broker. The assessee or the share broker would have no control over the bidder / buyers of the shares in the online platform. The assessee submitted that it had no dealing or control over M/s SAL and therefore, he was not obligated under law to produce any such party. In fact, it was onus of Ld. AO to provide cross-examination of the said party whom he was trying to link assessee with. On the other hand, the assessee discharged his onus to prove the genuineness of the transactions by providing all the relevant direct documentary evidences. The Ld. AO heavily relied upon the findings of investigation wing without carrying out any independent investigation of his own. Nothing was brought on record which would establish that the assessee was beneficiary of alleged accommodation entries provided by the so-called Shri Vipul Bhat. No corroborative evidences to support the findings of Ld. AO were brought on record. The documentary evidences submitted by the assessee were neither verified nor examined. Further, no contrary and conclusive evidences were brought on record to dispute the said documentary evidences furnished by the assessee. 4.2 The attention was drawn to the fact that sale transactions took place through recognized stock exchange and statutory Securities Transaction Tax (STT) was paid on sale transactions. In the online platform, the identity of the seller as well as purchaser would not be known. The shares were delivered in demat form though clearing mechanism of the stock exchange. Therefore, unless any link is established, the assessee could not be held to be part of the group indulging into rigging shares prices of the scrips. The sale proceeds were realised through banking channels. There was no evidence of any cash exchange. The findings as well as conclusion of Ld.AO were based on mere suspicion, surmises and hearsay as against settled proposition of law that suspicion howsoever strong could not partake the character of legal evidence. The entire case of Ld.AO was based on mere presumption that the assessee ploughed back its own unaccounted money in the form of bogus LTCG. The presumption needs to be corroborated by some evidence to establish the same. For the said proposition, reliance was placed on catena of judicial pronouncements of Hon’ble High Courts as well Tribunal which has already been enumerated in the impugned order. 4.3 The assessee also raised a plea of violation of principle of natural justice by submitting that the statement of Shri Vipul Bhat was never confronted to the assessee and no opportunity to cross-examine the said person was ever provided to the assessee. More so, Shri Vipul Bhat did not state as to how he was connected with the assessee. In the absence of any such admission, the statement would have no evidentiary value. For aforesaid submissions, reliance was placed, inter-alia, on the decision of Hon’ble Supreme Court in Andaman Timer Industries Ltd. (Civil Appeal No. 4228 of 2006) & the decision of Kishanchand Chellaram V/s CIT (125 ITR 713).

4.4 The assessee also raised a plea that in the absence of any incriminating material found during the course of search operations, the additions would not be sustainable. However, this plea was rejected by Ld.CIT(A) which has already been enumerated by us in preceding para 3.15. Similar plea has been raised before us by Ld. AR. However, we are completely in agreement with the stand of Ld. CIT(A) in this regard and therefore, reject this plea. 4.5 The Ld. CIT(A), in the background of judicial decision on circumstantial surrounding evidences, noted that entire network of documents was manipulated and created by Shri Vipul Bhat and his associates with the sole purpose of providing bogus LTCG to various beneficiaries including the assessee and his family members. The same would be evident from statement of Shri Vipul Bhat u/s 132(4) on 04/02/2016 & 09/02/2016 during the course of search proceedings. The relevant portion of the same has been extracted in the impugned order. Based on said statement, it was concluded that director of M/s SAL was a dummy director and Shri Vipul Bhat was the actual controller of said entity. The steep rise in the prices of shares were manipulated and controlled / managed by Shri Vipul Bhat and his associates. The exit providers to the assessee were manipulated and controlled by Shri Vipul Bhat and his associates. The statement of concerned persons of exit provider entities was also noted in para-7 of the impugned order whereupon a conclusion was drawn that the persons controlling these entities were invariably persons of very small means. Their identity was used by Shri Vipul Bhat to create bogus companies. These persons were not aware about the share transactions. As per the statement of Shri Vipul Bhat, one Shri Sandeep Maroo was the intermediary who introduced Vardhan family to him and the said group is a beneficiary of Long-Term Capital Gains. 4.6 The family members of Vardhan group, during search proceedings on the group, stated that entire dealings were done by Shri Ramesh Vardhan whose statement was recorded on 12/05/2016. Shri Ramesh Vardhan, in reply to question no. 64, submitted that trading in Shares of M/s SAL was genuine transactions thorough stock exchange following all process and legal procedures. The statement of Shri Vipul Bhat was confronted to the assessee in question no.65. However, Shri Ramesh Vardhan denied being aware of the facts stated therein and reiterated that shares were sold through brokers and payments were received through banking channels. 4.7 The Ld. CIT(A), at para-9.2 of the impugned order, observed that the shares were acquired offline and large number of shares were allotted as bonus / preferential shares. Such offline purchase of shares on which abnormal LTCGs from the penny stock companies has been declared, would be a strong indicator of bogus nature of entire transactions. 4.8 Finally, the plethora of documentary evidences submitted by the assessee in support of the transactions were termed as self-serving documents and the action of Ld.AO, in making the additions, was confirmed. Aggrieved, the assessee is under further appeal before us.

, to that extent, stand allowed.

14. The grounds relating to levy of interest as well as initiation of penalty, being consequential in nature, would not require any specific adjudication on our part. Finally, the appeal stands partly allowed in terms of our above order.