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Facts
The assessee claimed Long-Term Capital Gains (LTCG) exemption under Section 10(38) on sale of shares of M/s. Twenty First Century India Ltd. The Assessing Officer (AO) and CIT(A) denied this exemption, adding back the entire sale consideration as bogus LTCG, alleging a scheme of accommodation entries through penny stocks. The assessee contended that the transactions were genuine, supported by contract notes and bank statements.
Held
The Tribunal held that the transactions were part of a larger scheme to route unaccounted money as bogus LTCG, involving penny stocks, manipulation of prices, and no credible business activity. The assessee failed to prove the genuineness and creditworthiness of the companies involved. While the entire sale consideration added by the AO was deemed excessive, the profit element claimed as exempt LTCG was disallowed.
Key Issues
Whether the assessee successfully proved the genuineness of Long-Term Capital Gains claimed under Section 10(38) in the context of alleged accommodation entries and manipulated penny stock transactions.
Sections Cited
10(38), 139(4), 250(6), 37, 69C, 131, 271(1)(c), 143(2), 142(1), 148, 68
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, JAIPUR BENCH “A”, JAIPUR
Before: SHRI GAGAN GOYAL & SHRI NARINDER KUMAR
PER GAGAN GOYAL, A.M: This appeal by assessee is directed against the order of NFAC, Delhi dated 07.01.2025 passed u/s. 250 of the Income Tax Act, 1961 (in short ‘the Act’). The assessee has raised the following grounds of appeal: -
Ground No. 1: Disallowance of Long-Term Capital Gain Exemption under Section 10(38) The Assessing Officer (AO) and CIT (A) wrongly denied the LTCG exemption under Section 10(38) by presuming the share transactions were non-genuine without concrete evidence. The transactions were properly executed, as shown by contract notes, Demat statements, bank transactions, and STT compliance. Courts have consistently ruled that in the absence of definitive evidence of manipulation, valid documentary evidence should uphold the LTCG exemption. Consequently, the Assessee requests that the disallowance be set aside and the disputed additions removed. Ground No. 2: Violation of Principles of Natural Justice in Denial of Cross- Examination The CIT (A) violated natural justice by confirming the Assessing Officer's additions without allowing the Assessee to cross-examine the witnesses or access the underlying evidence. The additions were based on unverified third-party statements and an Investigation Wing report, contrary to Section 250(6) of the Income Tax Act, which mandates proper reasoning and a fair opportunity to challenge evidence. Judicial precedents confirm that denying cross-examination renders the assessment unsustainable. Therefore, the Assessee requests deletion of these unverified additions and a remittal for proper investigation. Ground 3: Lack of Nexus, Validity of Exchange-Traded Transactions, and Predetermined Conclusion The AO failed to establish any link or material evidence implicating the assessee beyond a mere investor, with no recorded statements naming the assessee. Relying solely on the Investigation Wing's report without independent verification, the AO incorrectly added the entire sale amount of Rs. 1, 34, 99,620/- as long-term gain, ignoring the purchase cost. Correct Bifurcation: o Long-Term Capital Gain (LTCG): � Sale: Rs. 86,05,364/- � Purchase: Rs. 2,80,000/- � Profit: Rs. 83,25,364 (exempt under Section 10(38)) o Short-Term Capital Loss (STCL): � Sale: Rs. 48,87,600/- � Purchase: Rs. 48,90,900/- � Loss: Rs. 3,300/- Thus, the net capital gain should be Rs. 83, 22,064/-. Additionally, relying on statements regarding accommodation entries from unrelated persons is inappropriate. The AO's failure to distinguish between LTCG and STCL has led to an unjustified taxable addition. Ground No. 4: Arbitrary Addition of Fictitious Commission without Evidence The AO and CIT (A) arbitrarily added Rs. 2, 69,992/- as commission for alleged accommodation entries without any tangible evidence or specific transaction support. This addition, based solely on assumptions, violates Section 37 (allowable expenses) and Section 69C (unexplained expenditure) of the Income Tax Act since the expense was neither incurred nor claimed by the assessee. ITAT rulings in Parasmal Bhandari, Reena Kumari, Soumitra Choudhury, Kanwarlal Agarwal, and Shri Amandeep Singh Bhatia stress that such additions require direct, credible evidence linking the assessee to the payments. Given the transparency of the assessee's transactions through recognized channels, the burden of proof lies with the Revenue, making the addition of this fictitious commission entirely unjustified and subject to deletion. Your Assessee reserves the right to add, alter or amend any grounds of appeal on or before the date of hearing of appeal.
2. The brief facts of the case are that the assessee filed his return of income on 31.03.2013 u/s. 139(4) of the declaring total income at Rs. 10,57,080/-. The assessee has shown income under the heads Salary, House Property, Capital Gains and Other Sources. The assessee also claimed exempted income under the head capital gain amounting to Rs. 5, 79,283/- u/s. 10(38) of the Act. The revenue received a letter from the office of the PDIT (Inv.), Kolkata regarding beneficiaries of bogus LTCG in the case of penny stocks of “M/s. Twenty First Century (India) Ltd. (TFCIL)” for appropriate action. Ultimately, after due deliberations between the assessee and the AO an addition of Rs. 1,34,99,620/- being amount of bogus LTCG claimed u/s. 10(38) of the Act and Rs. 2,69,992/- being amount of commission for arranging bogus LTCG was added back to the total income of the assessee. The assessee being aggrieved with the same preferred an appeal before the Ld. CIT (A), who in turn dismissed the appeal of the assessee on quantum and confirmed the action of the AO. The assessee being further aggrieved with the same preferred the present appeal before us.
3. We have gone through the order of the AO, order of the Ld. CIT (A) and submissions of the assessee alongwith grounds taken before us. As per the report of PDIT(Inv.), Kolkata around 3480 individuals/HUFs have taken accommodation entries of prearranged bogus LTCG/STCL of around 1285 crores in the scrip M/s. TFCIL with the help of syndicate operator, market broker, share broker, entry operators etc. through manipulated merger of paper companies. Some paper companies were amalgamated into M/s. TFCIL and in lieu of one share of such amalgamated companies, 38 shares of M/s. TFCIL were allotted. In such a manner, through ingenious manipulation of the number of shares vide amalgamation around 31 times return was received by the beneficiary allotees. The assessee was one of the beneficiaries amongst the 3480 individuals/HUFs. The assessee had 700 Equity Shares of M/s. Astha Trade Link Ltd. (ATLL), which were later on converted into equity shares of M/s. TFCIL in the proportion of 38 equity shares for each share of M/s. ATLL under the scheme of amalgamation sanctioned by the Hon’ble High Court of Calcutta on 19th of JANUARY 2011. Meaning thereby the assessee received total 26,600 equity shares of M/s. TFCIL in physical form. The assessee had paid total consideration of Rs. 2.8 Lacs in respect of shares and later on these shares were sold for Rs. 86,05,364/-, i.e. Long-Term Capital Gain of Rs. 83,25,364/-. The assessee further, purchased the shares on 11.03.2012 amounting to Rs. 48,90,900/- (15,000 equity shares) and sold the same at Rs. 48,87,600/-, i.e. incurred a short capital loss of Rs. 3,300/- Ultimately, the assessee shown income under the head capital gain amounting to Rs. 83,25,364/- as exempt u/s. 10(38) of the Act.
4. Further, the A/R of the assessee requested for cross-examination of the persons and evidences on which the AO relied upon. Summons u/s. 131 of the Act were issued to the assessee vide dated: 06.12.2019 for examination as requested, but none appeared for the same.A search and seizure operation were carried out at the premises of the M/s. TFCIL and various other groups also by the Investigation Wing, Kolkata and evidences were collected that M/s. TFCIL run and operated by Mr. Anil Khemka engaged in providing accommodation entries through a web of concerns including M/s.
TFCIL. The investigation wing, Kolkata carried a search on some other entry operators also on the basis of information gathered during the search and FIUs. In these search operations, information was gathered that payments to broking houses were made by the companies of Kolkata for purchase of mostly penny stocks from Calcutta Stock Exchange (CSE). As per the information made public by the SEBI, it is discovered that various syndicates have arranged accommodation entry in the form of LTCG/STCL through pre-fixed trading of penny stocks. The modus-operandi as discovered after the investigation is that the beneficiary holds these shares for one year and soand then sale it to one of the shell private limited companies of the same syndicate. These facts were duly confirmed by the operatorsduring the search and survey operations. The investigation further revealed that the buyer companies were merely a paper company operated and managed by the syndicate members. There was a syndicate of operators, who deal majorly in the scrips listed on CSE only.
There were syndicates of operators who deal in certain identified scrip mostly onCSE. The scrip is of companies which do not do any actual business. They are actually listed paper companies whose shares are known as Penny- stocks in stock market parlance. Often these companies are owned by these operators. One syndicate mostly deal in a fixed set of shares. There are many such syndicates dealing in fixed set of penny stocks. The whole business of providing entries of bogus LTCG over the years have become much more organized and with economy of scale in full operation the stake involved have become huge. Before the actual transaction start taking place there are brokers in different towns who contact prospective clients and take paper booking for entries. The commission to be paid to the operators is decided at this stage however, no money is paid. Once the booking is complete the operators have a reasonably good idea of how much LTCG is to be provided along with the break-up of individual beneficiaries.This data is essential to decide which penny stock or companies to use for the job and which beneficiary to buy how many shares.
Types of Penny stock companies:
Broadly speaking there are two types of companies.
I) an old already listed company, the entire shareholding of which is bought by the syndicate to provide LTCG entries. These are generally dormant company with no business and with accumulated losses. ii) A new company which is floated just for the purpose giving LTCG entries. Such new companies are often floated after the initial booking iscomplete and the capital base is decided keeping in mind the entries to be provided.
Back ground of the Investee company, i.e. M/s Twenty First Century India Ltd.The main source of income of the assessee is income from rent and interest under the head income from house property and income from other sources respectively.During the year, the assessee had shown an exempt income under the head capital gain (STT) u/s. 10(38) amounting to Rs. 5,79,283/- from the sale of shares of M/s. Twenty First Century India Ltd., one of the paper companies floated by Shri Anil Kumar Khemka-operator. As established on the basis of evidences provided by the Investigation Wing that the Long-Term Capital Gain from the said party was bogus.It was imperative to examine this capital gain claimed to be earned by the assessee in his books, pertaining to the A.Y. 2012-13 and representing an income of Rs. 1,34,99,620/- which had, therefore escaped assessment. Since in this case specific verifiable information pointing out tax evasion was given by the DIT (Inv.) Kolkata.
8. On examination of details of tong Term Capital Gain earned, it was found that assessee has shown capital gain from the sale of shares of M/s. Twenty First Century India Ltd or Rs. 1, 34, 99,620/- during the F.Y. 2011-12. Information was received from the investigation Wing of the I. T. Department, Kolkata, forwarding a statement of Shri Anil Kumar Khemka Controlled and Managed M/s. Twenty first Century India Ltd. that was recorded during the search & seizure operation. As per his statement, this company is actually one of the paper companies known as penny stock and does not do any actual business and was only providing bogus Long Term Capital Gain entries.
The relevant portion of the statement of Shri Anil Kumar Khemka dated 14.04.2017 is reproduced below: - Q.18. Please state the nature of business activities of the Twenty First Century (India) Limited and your association with it. Ans. M/s. Twenty First Century (India) Limited is a CSE company controlled and managed by me from 2004. The registered office of the company is my office at 9, Lal Bazar. Mr. Pradeep Kumar Garg MD is my dummy. The other directors are also dummy taken from market. It is an investment company used for providing accommodation entry of unsecured loan, sale of shares etc. The CSE banned this scrip in 2005. That time it was trading on Rs.290. in 2007, suspension was revoked and due to limits on trading, rise in the price of scrip no significant upward movement was there. Later, in 2011, four paper company was merged into M/s. Twenty First Century (India) Limited, before merger clients/beneficiaries of Pre-arranged Bogus LTCG were allotted shares of M/s. Astha Tradelink Limited, M/s. Highland Dealcom Limited, M/s. Dignity Suppliers Limited & M/s. Sarathi Dealers Limited. All these four companies were control and managedby me. By this scheme of merger share holder of these companies got 38 shares of M/s. Twenty First Century (India) Limited in lieu of one share. After passing of one year, the beneficiary was provided exist where counter party on CSE were paper companies either controlled by me or other entry operators. At the time of exist for LTCG, the scrip rate was around 310-30. The source of funds for buying these shares of M/s. Twenty First Century (India) Limited for these papercompanies was unaccounted cash funds of the beneficiaries' which was pumped into the various paper proprietorship concern or through bogus billing into paper company or exist providers. During this whole process where was No significant price in the scrip. As, beneficiary was getting 38 time shares, or to say 38 times of so-called invested amount due to merger.
Therefore, it is a penny stock and its main purpose was providing pre-arranged Bogus LTCG entry. Q.21. Do you know the directors personally? It yes, then how many times you have metthem? Ans. All the directors of Twenty First Century (India) Limited are dummy directorsappointed by me. They act as per my instructions. Q.23. Please state what do you know about the shareholders who got shares of M/s. Twenty First Century (India) Limited vide the merger/amalgamation process as shareholder of Astha Tradelink Limited Ans. The above entities/individuals/HUF was booked by me for providing them accommodation entries in the form of pre-arranged bogus LTCG. The same is true for other three companies. Q-24. Please explain as to how these HUF/Individuals/Entities invested in the shares M/s. Twenty First Century (India) Limited. How were these entities/HUFs /Individuals approached and where did you meet them. Ans. The booking has been done thorough the network of market brokers. Thereafter they controlled and managed entire process of allotting shares to providing exists to beneficiaries. Q.25. Please state whether M/s. Twenty First Century (India) Limited declared dividendto the shareholders till date in last six years. Ans. No, M/s. Twenty First Century (India) Limited has not provided any dividend till dated to the shareholders. Q.32. Kindly go through the exit provider paper companies along with entry operator list of M/s Twenty First Century (India) Limited as given in annexure "x" and explain. Ans. Yes, I confirm and affirm that these paper companies has been used for providing exist to beneficiaries of Pre-arranged Bogus LTCG. The unaccounted cash ofbeneficiaries was channeled through a web of concerns to these concerns for the counter payment on CBE platform for the purchase of shares of M/s Twenty FirstCentury (India) Limited 033. How the order was managed on CSE platform through share brokers explain. Ans. They open the new accounts of out beneficiaries with these brokers for this purpose like in this case with Kailash Prasad Dhywala and Sajendra Mookim. Similarly, there was accounts of exist provider paper companies with these brokers. So, it was kind of synchronized trading of the shares.
Relevant portion of the statement of ShriPradeep Kr. Garg, MD & dummy directors of M/s. Twenty First Century (India) Limited is being reproduced below:
Q.
Please explain the nature of business done by you. Ans. I work as dummy director in jamma-Kharchi/Shell companies of Shri Anil Kumar Khemkaand for this work I got a lump sum amount of Rs. 4,000/- per month including my salary. He is an accommodation entry operator and gets commission for this work. I am doing miscellaneous work as per directions of Anil Khemka and put my signature on cheques miscellaneous documents as and when given to me. Q.
Please mention the companies/ firm/ concerns in which you are associated with as director/partner/ proprietor. Ans. I am one of the dummy directors of the following companies as given below: - 1) M/s. Shyama Infosys Ltd, 2) M/s. Twenty First Century (India) Limited 3) M/s. Vasudev Commerce Pvt. Ltd 4) M/s. Twinkle Commerce Pvt Ltd. Further, I would like to mention that beside the above concerns I am director of my companies as per MCA data which are all paper/shell companies being used for jamma- Kharchi/ accommodation entries.
9. Relevant extracts of the AO’s findings are reproduced herein below as under:
“Thus, the information received from investigation wing and statement of Shri Anil Kumar Khemka clearly explains the modus operandi of these bogus transactions. In light of latest Hon'ble Supreme Court decision on SLP filed by the assessee Suman Poddar vide SLP(C) no. 26864/2019 challenging the addition made on account of Bogus LTCG soon penny stock (in the case of Cresanda Solutions) against Hon'ble High Court of Delhi order dated 17/09/2019 has been dismissed by the Hon'ble Apex Court on 22/11/2019 and the various judicial pronouncements such as 1) Sanjay Bimal Chand Jain/H Shantidevi Bimalchand Jain Vs PCIT(ITA No. 18/2017 Bombay High court (Nagpur Bench) 2) Balbir Chand Maini Vs CIT(2011) 12 taxmann. Com 276 (Punjab &Haryana) (2011)) 201 Taxman 94 (Punjab & Haryana) (MAG.) (2012) 340 ITR 161 (Punjab & Haryana)/ (2012) 247 CTR 468(Punjab & Haryana) and in other cases and from the above discussions it is to be seen whether the assessee was able to establish the genuineness of the claim of exempt income. In view of the above discussed facts that it is evident that the assessee completely failed the "Human Probability Test" as the assessee is only trying to distract from the facts of case by making adjustment of unaccounted cash in the garb of tax exemption u/s. 10(38) of the Act. The "Human Probability Test" could be applied when the Assessee makes the Officer to believe his/her story as a valid event. The false claims of the Assessee cannot sustain before the test of "Human Probabilities". The "Human Probability Tests" were laid down by the Hon'ble Supreme Court of India for the first time in the case of CIT Vs. Durga Prasad More (1971) 82 ITR 540 (SC) and followed in the case of Sumati Dayal Vs. CIT (1995) 214 ITR 801 (SC). The information received from investigation wing and statement of Shri Anil Kumar Khemka supplied to the assessee clearly explains the modus operandi of this bogus transaction. The case laws cited by the assessee in his defense also do not help him being distinguishable on the facts of this case. In the present case, the assessee had claimed LTCG of Rs. 5, 79,283/- from Twenty First Century (India) Limited, and this is only providing accommodation entries for the reasons given in detail in the above paras. In this regard assessee further filed submission on 09/12/2019 which is as under: - "1. Assessee had paid total consideration of Rs. 2, 80,000/- in respect of allotment of shares and later on these were sold on respective (dates can be evident from contract notes, enclosed) for Rs. 86, 05,364/-, earning total Long Term Capital gain of Rs. 83, 25,364/- which is exempt under section 10(38) of Income Tax Act, 1961, hereby enclosing working and contract note for your reference. 2. you are not right in taking the Turnover for Rs. 1, 34, 92,964/-, however out of it Rs. 86, 05,364/- a LTCG turnover. Its profit is Rs. 83, 25,364/- (Rs. 86, 05,364/-minus Rs. 2, 80,000/-). Rest turnover of Rs. 48, 87,600/-belongs to short term. Its profit is Rs. (-) 3,300/- (Rs. 48, 87,600/- minus Rs. 48, 90,900/-) 3. The assessee purchase 15,000 shares on 19/03/2012 amounting to Rs. 48,90,900/- and then directly sold these shares for Rs. 48,87,600/- on 21/03/2012(dates can be evident from contact notes, enclosed) incurring total short-term loss of Rs. 3,300/-, hereby enclosing working and contract note for your reference. All the payments and receipts regarding these transactions were made through banking channel, hereby enclosing share ledger or your convenience.
Thus, it was wrong on learned ITO part to add whole of Sale consideration amount of Rs. 1, 34, 99,620/- without considering purchase cost of shares. Actually, the net Capital Gains of Rs. 8322064/- (LTCG of Rs. 83, 25,364/- & STCL of Rs. 3,300/-) for which we are here by enclosing capital gain working.
5) We have file Income Tax Return u/s. 148 earlier but now due to some technical reason we are unable to file it again. We have filed modified return in respect of return filed earlier, but that is not been considered by the department, hereby enclosing hardcopy for your reference. We have shown actual gain of Rs. 83, 22,064/- in our Income tax Return hereby enclosing computation and ITR for A.Y. 2012-13 for your consideration.
The above reply of the assessee is not tenable as in the return filed dated 31.03.2013 for the A.Y. 2012-13 assessee has claimed LTCG exemption of Rs. 5,79,283/- u/s. 10(38) and after reopening of the case and as per above submission now the assessee is showing LTCG income of Rs. 83,25,364/- from sale of 26,600 shares and STCG loss of Rs. 3,300/-from sale of 15000 shares and hence also claiming LTCG exemption of Rs. 83,22,064/- u/s. 10(38) of the I.T.Act, 1961. Thus, it is evident that assessee is only trying to distract from the facts of the case by making adjustment of unaccounted cash in the garb of tax exemption u/s. 10(38) of the Act. Even, in compliance of notice issued u/s. 148 of the I.T. Act, 1961, assessee has not disclosed his true and fair income for the year under consideration. As A/R of the assessee has also shown disagreement for notice issued u/s 142(1) and also filed application dated 25/11/2019 for cross examination of evidences. In this regard a summon u/s 131 of the I.T. Act, 1961cross examination of evidences. In this regard a summon us 131 of the I.T. Act, 1961 was issued on 06.12.2019 through ITBA portal to the assessee to personally attend on 09.12.2019 for cross examination of evidence. In response to the same assessee did not attend for cross examination on 09.12.2019. In this regard an air ticket of the assessee of departure to Dubai on 03.12.2019 and arrival at Jaipur on 30.12.2019 was submitted by the assessee on 09/12/2019 through ITBA portal. This shows that after making application for cross examination assessee knowingly departed abroad till 30.12.2019 for whole month without availing himself opportunity of being heard and cross examining the evidence as the case is getting time barred on 31.12.2019. In view of the facts mentioned above it seems that assessee has nothing to say in this regard. Consequently, the transaction of Long-Term Capital Gain and Short-Term Capital gain as manipulated by the assessee and earned from the shares of Twenty First Century (India) Limited amounting to Rs. 1, 34, 99,620/- is treated as bogus Long Term Capital Gain and is being disallowed and added back to the total income of the assessee treating the same as income from other sources. Since assessee has furnished inaccurate particulars of income separately it is a fit case for initiating penalty proceedings u/s 271(1) (c) of the IT Act, 1961 which is being done separately.
It is observed by us that the net worth of the company negligible and the price of the script jumped exponentially i.e., in a short span of time. The investee company declared negligible profits and never declared any dividend during the last 5 years It is further pertinent to mention that its EPS was almost negligible during the relevant period. A company with negligible investor base, negligible net worth, negligible net profits and almost 0 EPS, but price rise is exponential is not digestible from a ley man point of view. As there is no stamp duty involved on exchange of shares on amalgamation/merger of shares, but operator get higher nos. of shares to operate with. This observation is against such type of transactions notwithstanding the further facts as we will discuss in this order later on. A bare reading of list of investors also demonstrates a specific pattern of buying the shares by lead investor and then his/her family members also in huge quantity. As in this case amalgamation is a common practice being adopted by the investors and operators to avoid various costs like stock exchange charges, brokerage and STT applicable on purchase and then merger of 3 or 4 companies of the same nature in one listed company. Nowhere in the submissions of the assessee it is transpired that why initially assessee purchased shares of M/s. ATLL and then its merger, and then rocketing in the price of shares. All these are abnormal phenomena not to be seen in case of genuine investment activities.
While completing the assessment, the AO held that the assessee did not purchase these shares on the floor of the stock exchange i.e. through normal channels for purchase of shares and therefore, we found the purchase transaction was suspicious. The AO has further observed that subsequent to purchase, the prices of this scrip were rigged to a large scale, through a network of operators, stock brokers and exit providers. The AO in this regard had referred to the detailed investigation carried out by DGIT (Inv.) Kolkata, which also includes the investee company and its group companies. The company, on sale of which the assessee has received windfall gains and it has been concluded by them that these transactions were manipulated and were done with a view to earn tax exempted income. Accordingly, the AO treated the long-term capital gains as bogus and added the same in the hands of the assessee. The assessee raised various objections about this addition, but the same are not tenable in view of the facts and modus operandi discussed above.
The basic aim of this was to route the unaccounted money of long-term capital gain beneficiaries into their account books in the garb of long-term capital gain. This nature of long-term capital gain was taken by selling the shares on the stock exchange and registering the process arising out of the sale of shares into the books of accounts for implementing this scheme shares of some penny stock companies were used. In this scheme the shares of the penny stock companies were acquired by the beneficiaries at very low price through the route of preferential allotment. These shares had lock in period of one year as per SEBI guidelines. In very few cases the shares were acquired through stock exchange. Thereafter the price of the shares of the penny stock companies were rigged' systematically and rose through circular trading this is managed by the operator of the scrip. The shares of these penny stock companies although registered on stock exchange but were always closely hold and are controlled by the promoters of the penny stock company and the operator who were arranging bogus Long Term Capital Gains. This is due to the fact that general public is never interested in such shares as the companies had no credentials. Once the period of one year has passed and the shares prices have been sufficiently rigged, the beneficiaries sell these shares at the unarranged price in the stock market. It is further worth mentioning that purchase of the shares of these companies is not made by public but by the bogus entities which are referred to as exit providers. So firstly, the unaccounted money of the beneficiaries is routed to the bogus entities normally exit providers and the shares held by the beneficiaries are bought by these bogus entities and thus long-term capital gain are earned which are substantially claimed as tax exempted.
It is further seen that assessee is not engaged in substantial share trading activities or investment in shares. Therefore, the intention of the assessee to acquire the shares of M/s. ATLL is the pre-determined move with the sole aim to earn bogus long term capital gains which are tax exempted. In the instant case the shares were acquired by the assessee of a paper company and then that merged into a listed entity and the most interesting part is that the assessee got 38 shares of a listed company against each share of a non- listed company and then all the beneficiaries had exited. It is further gathered that even SEBI has carried out detailed investigation in respect of suspicious transactions in the scrip of Investee Company and they shared a detailed report with relevant authorities. The SEBI has clearly held that movement in the scrip was unusual and rigged.
14. The Ld. CIT (A) rightly relied upon the decisions of the Hon’ble Calcutta High Court in the case of [2022] 139 taxmann.com 352 (Cal.) PCIT vs. Swati Bajaj, Where the Hon’ble court held as under:
“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 chit 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]”
In this case also the assessee does not have any history of investment in previous years and succeeding years. Despite of having opportunity to cross- examine the evidences/person, he relinquished the same for the reasons best known to him. A person first time enters into a transaction with large quantity of shares, and made a huge profit in that, despite the fact that never before that and after that he entered into any transaction of shares. Views of the revenue further fortified by the Hon’ble Apex Court in the matter of [2019] 112 taxmann.com 330 (SC) Suman Poddar vs. Income Tax Officer, wherein the Hon’ble Court held as under: “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 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. 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.
♦ MK. Rajeshwari v. ITO in order dated 12.10.2018. ♦ Abhimanyu Soin v. ACIT in order dated 18.04.2018. ♦ Sanjay Bimalchand Jain v. ITO. 89 taxmann.com 196 ♦ Dinesh Kumar Khandelwal, HUF v. ITO in ITA No. 58 & 591 Nagl 2015, order dated 24.08.2016. ♦ Ratnakar M Pujari v. ITO in ITA No. 9951Muml2012, order dated 03.08.2016. ♦ Disha N Lalwani v. ITO in ITA No. 6398 I Mum I2012, order dated 22.03.2017.
♦ ITO v. Shamim. M Bharwoni [2016] 69 taxmann.com 65. ♦ Usha Chandresh Shah v. ITO in I Mum I 2011, order dated 26.09.2014. ♦ CIT v. Smt. Jasvinder Kaur 357 ITR 638.
12. The facts as well as rationale given by the Hon'ble High Court are squarely applicable to the case before us. Hence, keeping in view the overall facts and circumstances of the case that the profits earned by the assessee are a part of major scheme of the accommodation entries and keeping in view the ratio of the judgments quoted above, we, hereby decline to interfere in the order of the Ld. CIT(A)." (Emphasis supplied) 8. from the above extract, it would be seen that the Cressanda Solutions Ltd. was in fact identified by the Bombay Stock Exchange as a penny stock being used for obtaining bogus Long Term Capital Gain. NO evidence of actual sale except the contract notes issued by the share broker was produced by the assessee. No question of law therefore arises in the present case and the consistent finding of fact returned against the Appellant are based on evidence on record.”
In view of the above analysis of the facts and discussion of law respectfully considering the law pronounced by the Hon’ble Apex Court and Calcutta High Court, without any hesitation, we confirm the order of the Ld. CIT (A) and the AO with a deviation that the whole amount of Rs. 1,34,99,620/- received as sales consideration can’t be taxed. Rather addition of Rs. 83, 25,364/- only can be made, i.e. amount claimed exempt u/s. 10(38) of the Act by the assessee. In the result, ground raised by the assessee is partly allowed.
In the result, appeal of the assessee is partly allowed.
Order is pronounced in the open court on the 13th Day of March 2025.