KARUNA JAIN,JAIPUR vs. ITO WD 2(1), JPR, JAIPUR

ITA 190/JPR/2025Status: DisposedITAT Jaipur30 April 2025AY 2015-16Bench: SHRI GAGAN GOYAL (Accountant Member), SHRI NARINDER KUMAR (Judicial Member)1 pages

AI SummaryDismissed

Facts

The assessee claimed Long Term Capital Gains (LTCG) exemption on sale of shares of M/s. HPC Bio Sciences Ltd. acquired through IPO. The Assessing Officer (AO) added back the claimed LTCG and a commission amount, considering the transactions to be bogus and manipulative. The CIT(A) upheld the AO's order.

Held

The Tribunal held that the assessee failed to prove the genuineness of the share transactions, the creditworthiness of the companies, and the identity of the persons involved. The entire scheme was found to be a colourable device to route unaccounted money as tax-exempt LTCG, orchestrated through a modus operandi involving penny stocks and price rigging.

Key Issues

Whether the LTCG claimed by the assessee from the sale of shares of a penny stock company is genuine and supported by evidence, or if it is a result of a manipulative scheme to convert unaccounted income into tax-exempt gains.

Sections Cited

10(38), 250, 133A, 37, 69C, 139(4), 143(2), 142(1), 68, 263

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, JAIPUR BENCH “B”, JAIPUR

Before: SHRI GAGAN GOYAL & SHRI NARINDER KUMAR

For Appellant: Mr. Amit Kumar Jain, CA, Ld. AR

For Respondent: Mr. Anup Singh, Addl. CIT, Ld. DR

Hearing: 17/04/2025

This appeal by assessee is directed against the order of NFAC, Delhi dated 27.07.2023 passed u/s. 250 of the Income Tax Act, 1961 (in short ‘the Act’). The assessee has raised the following grounds of appeal: -

1. Erroneous Disallowance of LTCG Exemption (Section 10(38))

The CIT (A) improperly disallowed the Assessee's LTCG exemption despite genuine, well-documented share transactions (supported by contract notes, Demat statements, and bank records) executed on recognized stock exchanges and subject to STT. The Assessing Officer's reliance on generic assumptions and unsubstantiated allegations, rather than concrete evidence, is contrary to established precedents (e.g., Parasmal Bhandari and Reena Kumari). Hence, the denial of the exemption is legally unsustainable.

2. Violation of Natural Justice by Denying Cross-Examination

The Assessing Officer failed to provide the Assessee an opportunity to cross- examine witnesses or review the material evidence underlying the assessment. By relying on third-party statements and investigation reports without affording a fair hearing, the procedure violated principles of natural justice and relevant provisions under Section 250(6) of the Income Tax Act. This approach is inconsistent with judicial mandates, as seen in Parasmal Bhandari and Reena Kumari, warranting the deletion of the contested additions.

Arbitrary Addition of Fictitious Commission

The addition of Rs. 4, 01,680/- as commission for accommodation entries is unsupported by any documentary evidence or identification of a specific transaction. This presumption-based addition violates the requirements under Sections 37 and 69C, as the burden to prove such expenditure lies with the Revenue. Precedents such as Parasmal Bhandari and Reena Kumari confirm that unsupported presumptions cannot justify such an addition.

Before we proceed on the appeal filed by the assessee, it is brought to our knowledge that the appeal of the assessee is time barred by 500 days and it’s a huge delay and not a normal one. On this issue, the counsel of the assessee filed an application for condonation of delay alongwith a photo copy of affidavit. It is observed that the affidavit filed before us is not in original and the same is merely a photocopy and this fact was duly conveyed to the counsel of the assessee during the hearing after an assurance that the same will be placed on record of the bench. But, till date this deficiency has not been removed and still the photocopy only is there on our record, which demonstrates the casual and unprofessional approach of the counsel of the assessee and bench has taken note of this with our finding on the same in the later part of this para. It is brought to our notice that the assessee’s appeal before the Ld. CIT (A) was disposed of by an order dated: 27.07.2023 and the same was due for filing on 26.09.2023. But the same was filed before us on 04.02.2025, i.e. with a delay of 500 days. The assessee further submitted that she has not received order of the Ld. CIT (A) in physical form and the e-mail address furnished on the form no. 35 was not checked by the assessee/counsel. The e-mail address as furnished on the Form No. 35 was amitkjainbaid@gmail.com on the top front of the form as well as at column no. 17 of the same. This e-mail id pertains to the counsel of the assessee, who appeared/participated before the AO, Ld. CIT (A) and before us also. The age of the assessee is 60 plus, i.e. senior citizen with claiming several illness/diseases, which affected her ability to function and respond in a timely manner (although no evidence of illness and consequential claim made by her has furnished before us with this application). In view of above facts, it can be said that a lenient view is to be taken and the appellant can’t be punished for her illness and casual approach of her counsel. In the result, the application for condonation of delay filed by the assessee is allowed and delay is condoned with a cost of Rs. 10,000/- imposed on the counsel of the assessee to be deposited in the Prime Minister Relief Fund within 15 days of receiving this order and file a copy of the same before the registry. On failure to do so, the registry is directed to bring this fact to our knowledge for appropriate direction.

Conclusion: On the basis of all these facts discussed above it is clear that the huge capital gains earned by the assessee within a very short period of time by investing in a penny stock i.e. M/s. HPC BIOSCIENCES LTD. whose fundamentals, had no support for the premium it commanded, was neither the result of a coincidence not of a genuine investment activity but were created through well planned and executed scheme in which the company, the brokers and the buyers and sellers of the scrip worked in tandem to achieve the predetermined objectives. 3.6. The modus operandi which was followed in this case and is followed in such type of cases, in brief was as follows: There is a person "B" (Beneficiary) who is in possession of unaccounted money and who wants to bring this unaccounted money into his books and at the same time this person also desires to avoid paying any tax whatsoever when this money is brought into the books. [In this case all those persons including the assessee, who were allotted shares were the Beneficiaries] Now this person "B" then approaches the Entry operators "O". Operator is a person who 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 penny stock companies whose shares are listed on one or the other Stock Exchanges and mostly on smaller exchanges like BSE or regional exchanges. [The company M/s. HPC BIOSCIENCES LTD. and various brokers, sub brokers and other entities as discussed above were the entry operators in the instant case.) When approached by "B", operator proposes the scheme to the beneficiary. The beneficiary is required to purchase the shares of penny stock companies. This arrangement is made by the operator by arranging for the issue of these shares to the beneficiary through allotment i.e. through private placement in physical form (this is an off-market transaction). [In this case also same thing happened. The assessee invested a huge sum in a company he had no knowledge about and in an off market transaction.) Thereafter, the Operator rigs the price of the shares through circular trading and increases the price of the shares. The prices are rigged to an optimum amount over a period of one year from the issue of shares to the beneficiaries. As done in this case, the prices were increased from June 2013 to August, 2014 to an optimum level, required for exit.] Once a period of 1 year (for claim of exemption on LTCG u/s. 10 (38)) 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/Persons "Exit Providers" 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 the direct cash trail.

Once the cash has been routed to the books of paper/bogus companies, the operator instructs the Beneficiary to place a sell option, for the shares belonging to the beneficiary, in a particular lot size on s particular date and time. [Self-explanatory and as evidenced by BSE data in this case). At the same time the operator instructs the paper/bogus companies/persons maintained by him to buy the shares of the beneficiary on the exchange at the predetermined particular date and time. [Self explanatory and as evidenced by BSE data in this case] In this way the shares of the beneficiaries are bought by the paper/bogus companies/persons and the unaccounted money of the beneficiary is routed to the books of the beneficiary as a bogus entry of LTCG. [As evident from the tax exempt capital gain introduced by the assessee as capital during the year.] 3.6.1 The modus operandi mentioned above is based on facts and has been deduced by various investigation wings of the income tax department, SEBI and other government agencies. SEBI in its orders in the case of M/s First Financial Services Ltd. (WTM/RKA/ISD/162/2014 dated 19/12/2014), M/s Moryo Industries Ltd. (WTM/RKA/140/150/2014 dated 04/12/2014), M/s Pine Animation Ltd. (WTM/RKA/ ISD/36/2015 dated 08/05/2015), M/s Redford Global Lad (WTM/KKA/ISD/143/2015 dated 09/11/2015), M/s. HPC BIOSCIENCES LTD.(WIM/RKA ISD/30/2015 dated 17/04/2015) etc. has spelt out this modus operandi and successfully established that entities involved in such schemes ate manipulating the markets to generate tax exempt LTCG The common finding of SEBI in all these cases was as follows: “It can reasonably be inferred that the allotees acting in concert with XYZ group have misused the stock exchange system to generate fictitious LTCG so as to context their unaccounted income into accounted one with no payment of taxes as LTCG is tax exempt. I prima facie find that the above modus operandi helped the concerned entities to avoid payment of taxes and to show the source of this income to be from legitimate source, i.e., investment in stock market. I am of the view that the allotment was used as a tool for implementation of the dubious plan, device and artifice of XYZ group and allotees. One could argue that in the order to make LTCG, the allotees in question could have bought in secondly market and waited for a year before selling the shares. In the instant case, probably the allotment route was preferred over secondly market rout because the share capital of XYZ company prior to allotment was very small i.e. n equity shares (Face value Rs. 10) to accommodate the required fictitious LTCG of Rs. m crore approximately. As such the capital expansion through allotment provided much bigger source to the persons involved in terms of volume and price manipulation to facilities the whole operation. Since prior to the trading in is script during the Examination Period XYZ company did not have any business or financial standing in the securities market, in my view, the only way it could have increased its share value is by way of market manipulation.”

The report submitted by the Investigation department could not be thrown out on the grounds urged on behalf of the assessees. The assessees have not been shown to be prejudiced on account of non-furnishing of the investigation report or non-production of the persons for cross examination as the assessee has not specifically indicated as to how he was prejudiced, coupled with the fact as admitted by the revenue, the statements do not indict the assessee. That apart, the investigation has commenced targeting the individuals who dealt with the penny stocks and after examining the modus seeing the cash trail the report has been submitted recommending the same to be placed before the DGIT (Investigation) of all the States of the country. It is thereafter the concerned Assessing Officers have been informed to consider as to the bonafideness and genuineness of the claims of LTCG/LTCL of the respective assessees qua the findings which emanated during the investigation conducted on the individuals who dealt with the penny stocks. Therefore, the assessments have commenced by the Assessing Officers calling upon the assessee to explain the genuineness of the claim of LTCG/LTCL made by them. In all the assessment orders, substantial portion of the investigation report has been noted in full. A careful reading of the same would show that the assessee has not been named in the report. If such be the case, unless and until the assessee shows and proves that she/he was prejudiced on account of such report/statement mere mentioning that non-furnishing of the report or non-availability of the person for cross examination cannot vitiate the proceedings. The assessees have miserably failed to prove the test of prejudice or that the test of fair hearing has not been satisfied in their individual cases. In all the cases, the assessees have been issued notices under sections 143(2) and 142(1) they have been directed to furnish the documents, the assessee have complied with the directions, appeared before the Assessing Officer and in many cases represented by Advocates/Chartered Accountants, elaborate legal submissions have been made both oral and in writing and thereafter the assessments have been completed. Nothing prevented the assessee from mentioning that unless and until the report is furnished and the statements are provided, they would not in a position to take part in the inquiry which is being conducted by the Assessing Officer in scrutiny assessment under section 143(3). The assessee were conscious of the fact that they have not been named in the report, therefore made a vague and bold statement that the non-furnishing of report would vitiate the proceedings. Therefore, merely by mentioning that statements have not been furnished can in no manner advance the case of the assessee. If the report was available in the public domain as has been downloaded and produced by the revenue, nothing prevented the assessees who are ably defended by the Chartered Accountants and Advocates to download such reports and examine the same and thereafter put up their defense. Therefore, the based on such general statements of violation of principles of natural justice the assessees have not made out any case. [Para 65] To prove the allegations, against the assessee, can be inferred by a logical process of reasoning from the totality of the attending facts and circumstances surrounding the allegations/charges made and leveled and when direct evidence is not available, it is the duty of the Court to take note of the immediate and proximate facts and circumstances surrounding the events on which the charges/allegations are founded so as to reach a reasonable conclusion and the test would be what inferential process that a reasonable/prudent man would apply to arrive at a conclusion. Further proximity and time and prior meeting of minds is also a very important factor especially when the income tax department has been able to point out that there has been a unnatural rise in the price of the scrips of very little known companies. Furthermore, in all the cases, there were minimum of two brokers who have been involved in the transaction. It would be very difficult to gather direct proof of the meeting of minds of those brokers or sub- brokers or middlemen or entry operators and therefore, the test to be applied is the test of preponderance of probabilities to ascertain as to whether there has been violation of the provisions of the Income-tax Act. In such a circumstance, the conclusion has to be gathered from various circumstances like the volume from trade, period of persistence in trading in the particular scrips, particulars of buy and sell orders and the volume thereof and proximity of time between the two which are relevant factors. Therefore, the methodology adopted by the revenue cannot be faulted. [Para 69] A holistic approach is required to be made and the test of preponderance of probabilities have to be applied and while doing so, the court cannot lose sight of the fact that the shares of very little known companies with in-significant business had a steep rise in the share prices within the period of little over a year. The revenue was not privy to such peculiar trading activities as they appear to have been done through the various stock exchanges and it is only when the assessees made claim for a LTCG/STCL, the investigation commenced. As pointed out the investigation did not commence from the assessee but had commenced from the companies and the persons who were involved in the trading of the shares of these companies which are all classified as penny stocks companies. Therefore, the argument of the assessee that the copy of the investigation report has not been furnished, the persons from whom statements have been recorded have not been produced for cross examination are all contention which has to necessarily fail. To reiterate, the assessee was not named in the report and when the assessee makes the claim for exemption the onus of proof is on the assessee to prove the genuinity. Unfortunately, the assessees have been harping upon the transactions done by them and by relying upon the documents in their hands to contend that the transactions done were genuine. Unfortunately, the test of genuinity needs to be established otherwise, the assessees are lawfully bound to prove the huge LTCG claims to be genuine. In other words if there is information and data available of unreasonable rise in the price of the shares of these penny stock companies over a short period of time of little more than one year, the genuinity of such steep rise in the prices of shares needs to be established and the onus is on the assessee to do so as mandated in section 68. Thus, the assessees cannot be permitted to contend that the assessments were based on surmises and conjectures or presumptions or assumptions. The assessee does not and cannot dispute the fact that the shares of the companies which they have dealt with were insignificant in value prior to their trading. If such is the situation, it is the assessee who has to establish that the price rise was genuine and consequently they are entitled to claim LTCG on their transaction. Until and unless the initial burden cast upon the assessee is discharged, the onus does not shift to the revenue to prove otherwise. It is incorrect to argue that the assessees have been called upon to prove the negative in fact, it is the assessees duty to establish that the rise of the price of shares within a short period of time was a genuine move that those penny stocks companies had credit worthiness and coupled with genuinity and identity. The assessees 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 assessees 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 to within a short span of time. [Para 73] While it may be true that assessees could have been regular investors, investors could or could not have been privy to the information or modus adopted. What is important is that it is the assessee who has to prove the claim to be genuine in terms of section 68. Therefore, the assessee cannot escape from the burden cast upon him and unfortunately in these cases the burden is heavy as the facts establish that the shares which were traded by the assessees had phenomenal and fanciful rise in price in a short span of time and more importantly after a period of 17 to 22 months, thereafter has been a steep fall which has led to huge claims of STCL. Therefore, unless and until the assessee discharges such burden of proof, the addition made by the Assessing Officer cannot be faulted. [Para 75] While proposing to invoke the power under section 263, the question as to whether the Commissioner was justified in invoking the power under section 263 has to be decided based on facts of each case. The assessee cannot be allowed to contend that the language employed in the orders passed by the Commissioner under section 263 does not mention about how the assessments order was erroneous in so far as it is prejudicial to the interest of the revenue. These words or phrases are contained in section 263. Merely because the Commissioner has not used these words or phrases occurring in section 263 will not vitiate the assumption of jurisdiction. What is required to be seen is the content of the order and the discussion and findings rendered by the Commissioner. This is because the cardinal principle is that substance over form has to be preferred. The Commissioner while issuing the show cause notice had come to the prima facie conclusion that the Assessing Officer did not conduct an enquiry as required to justify such prima facie opinion. The Commissioner was required to set out as to why in his opinion the enquiry by the Assessing Officer was not proper or insufficient. On reading of the orders passed by the Commissioner under section 263, it is seen that the Commissioner has disclosed to the assessee as to why in his case the power under section 263 has to be invoked. The assessments orders which are subject matter of section 263 action shows that an enquiry has not been conducted by the Assessing Officer in the manner it ought to have been conducted. The Assessing Officers of the income tax department were fully aware of the investigation which was done and the report been circulated and therefore at that stage that the officer had to take note of such report to put the assessee on notice and commenced an enquiry by calling upon the assessee to justify the genuineness of the claim of LTCG/STCL. The Assessing Officer turned a blind eye to the project investigation which was carried out by the revenue. The Assessing Officer lost sight of the fact that the enquiry did not commence from that of the assessee and more particularly the name of the assessee did not feature in the investigation report. Therefore the Assessing Officer was bound to cause an enquiry by calling upon the assessee to explain and justify the genuineness of the claim for exemption made by them. If the assessee has not established the genuinity at the 'other end' the Assessing Officer would have no other operation except making the addition under section 68. In these cases the Assessing Officers missed an important point as to what is the nature of enquiry which he is required to do. The Assessing Officer merely went by the submission that the stock broker is a public sector company. Unfortunately this is not the manner in which the enquiry should have been conducted. The entire case before the revenue was the genuinity of the claim for LTCG/STCL and the basis was unhealthy and steep rise of the price of the shares of mostly the paper companies though listed before the stock exchanges their shares were very rarely traded and in the background of these facts the enquiry should have been conducted by the Assessing Officer. Therefore the assumption of jurisdiction under section 263 by the respective Commissioners was fully justified and is shown to be proper exercise of power. The Tribunal while interfering with the orders of the Commissioner once again posed a wrong question to it and failed to approach the matter in the proper perspective considering the backgrounds in which the power was invoked. The Tribunal brushed aside the surrounding circumstances which have led to such assessments or orders under section 263. The manipulative practice adopted by the stock brokers and entry operators was not even adverted to by the Tribunal and the entire matter was dealt within a very superficial manner without dwelling deep into the core of the issue. The Tribunal being the last fact finding authority was required to go deeper into the issue as the matter has manifested large scale scam. Thus, the orders of the Tribunal are not only perfunctory but perverse as well. The exercise that was required to be done by the Tribunal is to consider the totality of the circumstances because the transactions are shown to be very complex, the meeting of minds of the 'players' can never be established by direct evidence and therefore the surrounding circumstances was required to be taken note of by the Tribunal which exercise has not been done. [Para 99] None of the assessees have been shown to be big time investor. This is evident from the income details of the assessee which has been culled out by the respective Assessing Officers. Assuming that the assessee is a regular investor as was submitted by the assessees that in any manner cannot improve the situation as the claim for LTCG has been only restricted to the shares which were purchased and sold by the assessees in penny stocks companies. Therefore merely because the assessee had invested in other blue chip companies had earned profit or incurred loss cannot validate the tainted transactions. It has been established by the revenue that the rise of the prices of the shares was artificially done by the adopting manipulative practices. Consequently whatever resultant benefits which accrue from out of such manipulative practices are also to be treated as tainted. However, the assessee had opportunity to prove that there was no manipulation at the other end and whatever gains the assessee has reaped was not tainted. This has not been proved or established by any of the assessee. Therefore, the Assessing Officers were well justified in coming to a conclusion that the so called explanation offered by the assessee was not to their satisfaction. Thus, the assessee having not proved the genuineness of the claim, the creditworthiness of the companies in which they had invested and the identity of the persons to whom the transactions were done, have to necessarily fail. In such factual scenario, the Assessing Officers as well as the Commissioner (Appeals) have adopted an inferential process which is found to be a process which would be followed by a reasonable and prudent person. The Assessing Officers and the Commissioner (Appeals) have culled out proximate facts in each of the cases, took into consideration the surrounding circumstances which came to light after the investigation, assessed the conduct of the assessee, took note of the proximity of the time between the buy and sale operations and also the sudden and steep rise of the price of the shares of the companies when the general market trend was admittedly recessive and thereafter arrived at a conclusion which is a proper conclusion and in the absence of any satisfactory explanation by the assessee, the Assessing Officers were bound to make addition under section 68. [Para 99]

“The evidences put forth by the Revenue regarding the entry operation fairly leads to a conclusion that the assessee is one of the beneficiaries of the accommodation entry receipts in the form of long-term capital gains. The assessee has failed to prove that the share transactions are genuine and could not furnish evidences regarding the sale of shares except the copies of the contract notes, cheques received against the overwhelming evidences collected by the Revenue regarding the operation of the entire affairs of the assessee. 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 @ 491% over a period of 5 months are beyond human probability and defy 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 lay 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. Reliance is placed on the judgment in the case of Nipun Builders and Developers Pvt. Ltd. (supra), where it was held that it is the duty of the Tribunal to scratch the surface and probe the documentary evidence in depth, in the light of the conduct of assessee and other surrounding circumstances in order to see whether the assessee is liable to the provisions of section 68 or not. In the case of NR Portfolio, it was held that the genuineness and credibility are deeper and obtrusive. Similarly, the bank statements provided by the assessee to prove the genuineness of the transactions cannot be considered in view of the judgment of Hon'ble court in the case of Pratham Telecom India Pvt. Ltd., wherein, it was stated that bank statement is not sufficient enough to discharge the burden. Regarding the failure to accord the opportunity of cross examination, we rely on the judgment of Prem Castings Pvt. Ltd. Similarly, the Tribunal in the case of Udit Kalra, for the assessment year 2014-15 has categorically held that when there was specific confirmation with the Revenue that the assessee has indulged in non-genuine and bogus capital gains obtained from the transactions of purchase and sale of shares, it can be a good reason to treat the transactions as bogus. The differences of the case of Udit kalra attempted by the Ld. AR do not add any credence to justify the transactions. The Investigation Wing has also conducted enquiries which proved that the assessee is also one of the beneficiaries of the transactions entered by the Companies through multiple layering of transactions and entries provided. Even the BSE listed this company as being used for generating bogus LTCG On the facts of the case and judicial pronouncements will give rise to only conclusion that the entire activities of the assessee is a colourable device to obtain bogus capital gains. The Hon'ble High Court of Delhi in the case of Udit Kalra, held that the company had meagre resources and astronomical growth of the value of the company's shares only excited the suspicion of the Revenue and hence, treated the receipts of the sale of shares to be bogus. Hon'ble High Court has also dealt with the arguments of the assessee that he was denied the right of cross examination of the individuals whose statements led to the enquiry. The ld. AR argument that no question of law has been framed in the case of Udit Kalra also does not make any tangible difference to the decision of this case. Since the additions have been confirmed based on the enquiries by the Revenue, taking into consideration ratio laid down by the various High Courts and Hon'ble Supreme Court, our decision is equally applicable to the receipts obtained from all the three entities. Further, reliance is also placed on the orders of various Courts and Tribunals listed below.