MOTILAL SALECHA HUF,MUMBAI vs. PRINCIPAL COMMISSIONER OF INCOME TAX - 31, MUMBAI

ORDER PER N.K. PRADHAN, A.M. This is an appeal filed by the assessee. The relevant assessment year is 2013-14. The appeal is directed against the order u/s 263 of the Income Tax Act 1961, (the ‘Act’) passed by the Pr. Commissioner of Income Tax-31 Mumbai [in short ‘Pr. CIT’]. 2. The grounds of appeal filed by the assessee read as under :

1. Under the facts and the circumstance of the case and in law, Ld. Pr. CIT’ erred in passing Order u/s 263 of the Income Tax Act, 1961.

2. The appellant submits that order passed by Ld. Pr. CIT u/s 263 of the Income Tax Act, 1961 is without complying jurisdictional conditions necessary to invoke the power of the said section.

Motilal Salecha HUF Analysis of the brokers bill shows that assessee has sold the shares of M/s Luminaire Technologies Ltd. in various lots during the day. In many cases, it is found that the shares are sold at different time during the day but the rate at which the shares are sold is constant. This is another impossibility that the rates of shares are without any movement during the day. i No genuine investor would invest in a company which is consistently making losses, which has no future prospects and not having any credentials unless he is in contact with the insider/ operator engaged in the price control of the shares. j The investment made was with a malafide intention to get the funds introduced through misuse of the share market mechanism by claiming arranged exempt LTCG.

3. Briefly stated, the facts are that the assessee filed its return of income for the assessment year (AY) 2013-14 on 10.09.2013 declaring total income of Rs.13,64,810/-. The Assessing Officer (AO) completed the assessment u/s 143(3) on 17.12.2015 accepting the above income.

The Pr. CIT on going through the assessment records observed that the assessee has claimed as exempt long term capital gains (LTCG) of Rs.8,94,51,920/- by trading in shares of M/s Luminaire Technologies Ltd. (‘LTL’). As per the report of the Investigation Wing of the Department, the scrip of LTL was included in the list of penny stock and the assessee was one of the beneficiaries. He found that the AO has not made inquiries into the details furnished by the assessee. Therefore, it is observed by him that the order passed by the AO is erroneous and prejudicial to the interest of revenue in view of clause (a) to Explanation 2 of section (1) of section 263 of the Act. In response to a query raised by the Pr. CIT during the course of proceedings u/s Motilal Salecha HUF 263, the assessee filed a reply which has been extracted at para 3 and 4 (page 1-4) of the impugned order. The Pr. CIT was not convinced with the said reply of the assessee for the reason that the AO could not suspect from the documents filed by the assessee during the course of assessment proceedings that there could be a conspiracy in generating any bogus LTCG; the material fact was further detected through search action undertaken by the Investigation Wing of the Department that these types of LTCG were not general/regular transactions but were carried out by a chain of brokers/intermediaries/operators in the share market to convert the money held by various entities into white by way of misuse of provisions of section 10(38) of the Act. Examining the financials of LTL, the Pr. CIT observed that it had no operating income and no profit/dividend was declared since FY 2007-08. Further, he found that the shares of LTL were thinly traded upto June 2012 wherein the price of the shares is rigged upto around Rs.40/- and thereafter, profit booking started and suddenly the volume of trade arose to accommodate the beneficiaries of bogus LTCG. Further, it is noted by him that the funds provided by the beneficiaries are infused through series of bogus entities (exit providers) maintained by the operators and finally brought to the account of the bogus buyer who buys the shares at exorbitant high price, thus realizing gains to the beneficiary in the form of LTCG. Further it is observed by him that as verified from the website of moneycontrol.com, LTL has submitted the last annual report, audit report, annual accounts only upto the year ending March 2014 and this shows that the company has curtailed its affairs after the intervention of BSE/SEBI on penny stock companies.

Motilal Salecha HUF In view of the above fact, the Pr. CIT held that LTL is a shell company. Thus the Pr. CIT set aside the order dated 17.12.2015 passed by the AO and directed him to redo the assessment so that abuse of provision of section 10(38) is prevented and income is brought to tax in light of recent court judgments in penny stock cases.

Motilal Salecha HUF Further, reliance is placed by the Ld. counsels on the decision in Narayan Tatu Rane (2016) 70 taxmann.com 227 (Mumbai-Trib), Nisha Jain v. ITO (ITA No. 368/JP/2017 for AY 2013-14) by ITAT Jaipur; CIT v. Nirav Modi (2017) 390 ITR 0292 (Bom).

During the course of clarification on 18.10.2019, the attention of the Ld. counsel was drawn to the decision in Rampyari Devi Saraogi v. CIT (1968) 67 ITR 84 (SC). The Ld. counsel submits that the following facts in the above case do not exist in the case of the assessee : a. Enquiries made have revealed that assessee neither resided nor carried on any business from the address declared in the returns, whereas in the case of the present appellant, address and the description of the business has been correctly done and there are no discrepancies pointed out by the AO or the PCIT; b. The ITO was not justified in accepting the initial capital, the gift received and sale of jewellery, the income from business etc. without any inquiry or evidence whatsoever, whereas in the case of the present appellant proper inquiry was made by issuing notice u/s 142(1) and adequate evidences were produced where the relevant details in response to the same were submitted during the original assessment proceedings; c. The name of the assessee is Rampyari Devi Saraogi and as the Income Tax Officer, D Ward, Howrah, who has made the assessments, had only jurisdiction over cases of new assessees, whose names began with the alphabetical letters from ‘S’ to ‘Z’, with a view to camouflage the name and make it appear to fall within the jurisdiction of the Income Tax Officer, the name has been given in the reverse order by putting the surname first and her own name afterwards, as will be apparent from the returns filed, whereas in the case of the present appellant no such attempt to camouflage any name has been made; d. No bank account or any proper books of account were maintained by the assessee or produced before the ITO, whereas in the case of the present appellant the bank account has been filed during the original assessment proceedings; further proper Motilal Salecha HUF AO during the original assessment proceedings; e. No evidence whatsoever was produced in respect of the money-lending business done and interest income shown to have been received by the assessee, no names were given as to the parties to whom the loans were advanced, with amounts and rate of interest and as to when the interest income was received, whereas in the case of the present appellant all supporting evidences as required by the AO had been produced during the original assessment proceedings as well as during the proceedings before the PCIT, the only cause for making the addition is due to the alleged information received, however, no cause or reason could be shown for making the addition, due to any incriminating material or inadequacy or material from the end of the appellant. Thus the Ld. counsel submits that the instant case is distinguishable from the decision in Rampyari Devi Saraogi (supra). Explaining further, it is stated by him that in the present case specific information with regard to shares of luminaire Technologies Ltd. has been provided along with chart of share purchase and share after merger, ledger of Indianivesh Securities Pvt. Ltd., share certificate and allotment advice of Paridhi Properties, scheme of arrangement as sanctioned by the High Court.

5. On the other hand, the Ld. Departmental Representative (DR) relies on the decision in CIT v. Rippen Ahuja (2014) 49 taxmann.com 261 (P&H), Anuj Jayendra Shah v. Pr. CIT (2016) 67 taxmann.com 38 (Mumbai-Trib) and Bisakha Sales (P.) Ltd. v. CIT (2014) 52 taxmann.com 305 (Kolkata-Trib).

Referring to page 21, 22 and 23 of the Paper Book, the Ld. DR submits that no inquiry has been done by the AO in the instant case.

Motilal Salecha HUF In the case of Nisha Jain (supra), the assessee is an individual and Director of ARL Infratech Ltd. and filed return of income for AY 2013-14 on 20.09.2013 declaring total income of Rs.1,58,70,180/-. During the course of scrutiny assessment, the AO noticed that the assessee has earned income from long term capital gains (LTCG) from sale of shares of M/s Luminaire Technologies Ltd. and M/s Oasis Cine Communications Ltd. amounting to Rs.2,64,04,191/-. This income from LTCG was claimed as exempt u/s 10(38) of the Act. The AO doubted the genuineness of the transaction in view of the fact that the Investigation Wing of Kolkata had carried out search u/s 132 on some entry providers including one Shri Deepak Patwari. The AO made an addition of Rs.2,64,04,191/- u/s 69 of the Act by treating the LTCG claimed as exempt u/s 10(38). In appeal, the CIT(A) confirmed the above addition. In further appeal by the assessee, the Tribunal observed in the case of M/s Luminaire Technologies Ltd. that the assessee purchased 50,000 shares of M/s Paridhi Properties Ltd. having face value of Rs.10/- each on 26.03.2011. The share application of money of Rs.5,00,000/- was paid and debited in the bank account of the assessee on 28.03.2011. The shares were allotted to the assessee on 31.03.2011 which was subsequently de-materialized and credited in the demat account of the assessee on 21.10.2011. Thereafter, M/s Paridhi Properties Ltd. got merged with M/s Luminaire Technologies Ltd. as per the scheme of merger approved by the Hon’ble Bombay High Court vide order dated 27.07.2012. The assessee was allotted one equity share of Rs.1/- each in the swap ratio of 1:1. Reference was made to the allotment of shares as communicated by M/s Luminaire Technologies Ltd. vide letter dated 04.09.2012. Accordingly, the assessee was allotted 5 lacs equity share of Rs.1/- each of M/s Luminaire Technologies Ltd. which is credit in the demat Motilal Salecha HUF account of the assessee. These shares were sold by the assessee between period 01.11.2012 to 14.12.2012 as per contract notes for a consideration of Rs.2,12,34,671/-. The sale proceeds were credited in the bank account of the assessee. Considering the fact that the assessee had produced all evidence to prove the transactions of purchase of shares, payment of purchase consideration, amalgamation and merger of the companies subsequent to the purchase of shares, allotment of shares of the merged entity, de- materialization of in the demat account and subsequent sale of shares from the demat account of the assessee, the Tribunal allowed the appeal filed by the assessee.

In Nirav Modi (supra), it is held :

12. In the present facts, the Assessing Officer was satisfied, consequent to making an enquiry and examining the evidence produced by the Assessing Officer, establishing the identity and creditworthiness of the donor as also the genuineness of the gift. The CIT in his order of revision, does not indicate any doubts in respect of the genuineness of the evidence produced by the Assessee. The satisfaction of the Assessing Officer on the basis of the documents produced is not shown to be erroneous in the absence of making a further enquiry. It is made clear that our above observations should not be inferred to mean that it is open to the Assessing Officer to enquire into the source of source for the purpose of the present facts. This is a case where a view has been taken by the Assessing Officer on enquiry. Even if this view, in the opinion of the CIT is not correct, it would not permit him to exercise power under Section 263 of the Act. In fact, the Apex Court in Amitabh Bachchan (supra) has observed that there can be no doubt that where the view taken by the Assessing Officer is a possible view, interference under Section 263 of the Act, is not permissible.

Motilal Salecha HUF In the instant case, the AO has completed the assessment in undue haste or without inquiry. Thus the instant case is distinguishable from the above decisions relied on by the Ld. counsels. 6.1 Then we turn to the case laws relied on by the Ld. DR. In the case of Rippen Ahuja (supra), the assessee filed return of income for the AY 2000-01 on 05.01.2001 declaring a total income of Rs.4,24,100/-. The AO completed the assessment on 28.11.2003 after making an addition of Rs.54,688/-. Subsequently, the CIT issued notice u/s 263 to the assessee, calling for his explanation in respect of gifts of Rs.21,00,000/-. on the reason that the assessment order was found prejudicial to the interest of revenue. Thereafter, the CIT passed an order u/s 263. In appeal, the Tribunal set aside the order of the CIT passed u/s 263. In appeal filed by the Revenue, the Hon’ble Punjab & Haryana High Court held that where claim of gift is made by the assessee, onus lies on him not only to establish the identity of person making gift but also his capacity to make a gift and that it has actually been received as a gift ; mere identification of donor and showing movement of gift amount through banking channels is not enough to prove the genuineness of gift and where assessee, except averring in his reply that donors were his family friends and had abundant source of income did not produce any evidence to prove genuineness of gift, commissioner had rightly set aside the assessment. In the case of Anuj Jayendra Shah (supra), assessee had made investment in mutual funds which was stated to be made out of gift received from maternal uncle. Assessee filed an affidavit executed by his maternal uncle stating that he had made such gift to the assessee out of natural law. The AO accepted said gift and completed assessment without making an addition.

Motilal Salecha HUF Thereafter, the Commissioner initiated proceedings u/s 263 on the ground that the AO had not examined gift with regard to identity, genuineness or creditworthiness of donor. The Tribunal held that as the Assessing Officer had not made an inquiry or verification before accepting gift received by the assessee and merely accepted submission of assessee, Commissioner had rightly invoked provisions of section 263 of the Act. In the case of Bisakha Sales (P.) Ltd. (supra), during the AY 2008-09, the assessee-company received share application money with huge and unjustified share premium from corporate entities. The AO passed an assessment order accepting the genuineness of deposits received by the assessee. The Commissioner, however, passed a revisional order setting aside the assessment order. In appeal, the Tribunal held that where the assessee- company received share application money with huge and unjustified share premium from corporate entities, merely because said amount was received through banking channel, the AO was not justified in accepting said transactions as genuine without making proper inquiries and, therefore, impugned a revisional order passed by the Commissioner setting aside the assessment order was to be upheld. 6.2 As mentioned earlier, the AO has passed an order u/s 143(3) dated 27.12.2015 accepting the return income of Rs.13,64,810/-. The assessment order speaks of itself. The said assessment order is produced below : “1. The Return of income for A.Y. 2013-14 has been filed by the assessee on 10.09.2013 declaring total income of Rs.13,64,810/-. The return was processed u/s 143(1) of the Act. Subsequently, the case was selected for scrutiny under CASS accordingly statutory notice u/s 143(2) was issued on 02.09.2014 which was duly Motilal Salecha HUF served on the assessee. Further, notice u/s 142(1) was issued on 16.09.2015 and served on the assessee.

3. During the financial year relevant to A.Y. 2013-14, the assessee has derived income from Business and Income from Other Sources being Bank interest & Dividend.

4. The relevant details in respect of AIR data have been called for and examined.