LALIT KUMAR AGGARWAL,DELHI vs. ACIT, CIRCLE-46(1), NEW DELHI

The sole issue involved in this appeal, the CIT(A) erred in confirming the action of the AO in not accepting the claim of the assessee for exemption of Long Term Capital Gain of Rs.23,51,714/- u/s 10(38) of the Income Tax Act, 1961.

The Assessing Officer observed that the assessee has claimed exemption u/s 10(38) of the Act on the following Long Term Capital Gains on sale of shares of M/s Turbojet Engineering Ltd.: S. No. of Sale of Cost of LTCG No. shares Shares Shares Date Sale Price Date Cost Price 1. 5000 15.5.2013 23,61,714/- 23.11.2011 10,000/- 23,51,714/- 5,000 23,61,714/- 10,000 23,51,714/- 2 Lalit Kumar Aggarwal 4. The Assessing Officer observed that Directorate of Investigation, Kolkata carried out a country wide investigation to unearth the organized racket of generating bogus entries of Long Term Capital Gain which is exempt from tax. The modus operandi adopted by the operators was to make the beneficiary buy some shares of a pre-determined Penny stock company controlled by them. The initial transfer of shares in the name of beneficiary can be an ‘off market transaction’ or ‘online transaction’ and thereafter, issue of ‘preferential shares’ at nominal rates or issue of bogus shares even though there is hardly any profit or business activity in these companies. The beneficiary holds the shares for one year, the statuary period after which Long Term Capital Gain is exempt u/s 10(38) of the Act. The operators raise its price many times, often 500 to 1000 times. This is done through low volume transaction indulged in by the dummies of the operator at a pre-determined price. When the price reaches the desired level the beneficiary who bought the shares at a nominal price, is made to sell to a dumpy paper company of the operator. For this unaccounted cash is provided by the beneficiary which is routed through a few layers of paper companies by the operator and finally is parked with the dummy paper company that will buy the shares.

He observed that the assessee furnished a bill dated 26.11.2011 which shows that 5,000 shares were purchased offline from M/s Trusha Mercantile Pvt. Ltd. From the purchase bills, it is seen that 5,000 shares of M/s Turbotech Engineering Ltd. were sold to the assessee at a price of Rs.2/- per share. He observed that the company M/s Turbotech Engineering Ltd. has authorized and paid up share capital of Rs.24 crores in the financial years 2010-11 and 2011-12. In these years itself, it has issued 2,40,00,000/- shares of Rs.10/- face value. The earnings per shares were in minus i.e. Rs.0.01 crore on 31.03.2011 and on 31.03.2012. The company in the past years also showed negative EPS. In spite of this, 3 Lalit Kumar Aggarwal the assessee purchased the shares of M/sTurbotech Engineering Ltd. runs contrary to the share trading principles whereby generally shares of companies showing positive EPS are preferred. This raises doubts about the genuineness of the objectives of the investment. Further he observed that if we go through the balance sheet of the listed penny stocks, it is found that they have no actual financial credentials to support their share movement pattern. Almost all the companies have no fixed assets, no turnover,, no profitability and neither they pay any taxes. This shows that these are made specifically for the purpose of providing bogus Long Term Capital Gain to beneficiaries. He further observed that prices of shares of M/s Turbotech Engineering Pvt. Ltd. was artificially hiked to create non- genuine Long Term Capital Gain to the assessee alongwith other beneficiaries. The normal returns on savings are 10-20% approximately for financial years 2012-13 and 2013-14 for BSE/Sensex. The assessee has earned returns approximately 236 times on his investments without any supporting financial results itself which is an evidence to show that the assessee’s claim for Long Term Capital Gain was not genuine one. Summons u/s 131 of the Act was issued to assessee on 25.11.2016 and his statement was recorded. The Assessing Officer observed that from the statement recorded of the assessee, it is clear that assessee has no knowledge about the investment in share market and no knowledge of the company M/s Turbotech Engineering Ltd. and he relied on his friend circle. The assessee does not remember from whom the physical certificates of the shares were acquired nor does he know the key personnel of M/s Trusha Mercantile Pvt. Ltd. from whom he has apparently purchased physical certificate of shares.

The Assessing Officer further observed that statement of stock broker Sh. Sanjay Vora was recorded by DDIT, Kolkata on 08.04.2015 wherein he appeared and confirmed that trading in penny stocks including 4 Lalit Kumar Aggarwal M/s Turbotech Engineering Ltd. for providing bogus Long Term Capital Gain. This is another evidence to show that assessee’s claim of Long Term Capital Gain was not genuine but arranged one. He further observed that details of sale of shares of M/s Turbotech Engineering Ltd. was obtained from the data, list of cross parties who purchased shares from him and provided exit entry was provided, which read as follows: PAN of Buyer Name of entity Return Income A.Y AADCN6251G Natural Housing Pvt. 2012-13 Rs. 8,99,380/- Ltd 2014-15 Rs. 1,46,810/- AADCN6251G Chiranjit Mahanta Rs.3,31,240/- 2013-14 AAICM3232F M/S Ever Bright Trading Pvt. Ltd AAICM3232F Mould Trading Pvt. 2013- 14 Rs.39,740/- Ltd 2014- 15 Rs. 2,11,950/- 7. The Assessing Officer observed that the notice u/s 133(6) of the Act was issued to the above entities but no response was received from them corroborating the fact that these exit providers are paper companies created with a design to create an artificial demand for the shares of penny stock scripts and provide bogus Long Term Capital Gain.

He further observed that statement of Sh. Praveen Kumar Agarwal was recorded on 11.02.2015 wherein in reply to question No. 13, he admitted that the trading for a list of companies shown to him including Natural Housing Pvt. Ltd. has been done by him and stated that the companies were formed by me by appointing different dummy directors for providing accommodation entry to different beneficiaries. The clients are registered for rigging of price of different scripts for providing bogus Long Term Capital Gain.

The Assessing Officer further observed that a final show-cause notice dated 21.12.2016 was issued to the assessee as to why on the 5 Lalit Kumar Aggarwal basis of evidences during the course of assessment proceedings, the Long Term Capital Gain of Rs.23,51,714/- should not be treated as bogus and added to the income of the assessee. The assessee replied vide letter dated 26.12.2016. The Assessing Officer observed that the submission of the assessee for cross examination of the persons who were interrogated by the DDIT(Inv.), Kolkata was not possible for the brokers to be present for oral cross examination in all the cases where the magnitude of the case is not less than a scam. The Assessing Officer observed that it is true that all actions against the party which involve penal or adverse consequences must be in accordance with the principles of natural justice but whether any particular principle of natural justice would be applicable to a particular situation or the question whether there has been any infraction of the application of that principle, has to be judged in the light of facts and circumstances of each particular case. The basic requirement is that there must be fair play in action and the decision must be arrived at in a just and objective manner with regard to the relevance of the materials and reasons. He observed that the rules of natural justice are flexible and cannot be put on any rigid formula. In order to sustain the complaint of violation of principles of natural justice on the ground of absence of opportunity of cross examination, it has to be established that prejudice has been caused to the appellant by the procedure followed. He relied on the decision of the Hon’ble Orissa High Court in the case of Jankinath Sarangi Vs State of Orissa where it was observed that there is no doubt that if the principles of natural justice are violated and there is a gross case this Court would interfere by striking down the order of dismissal; but there are cases we have to look to what actual prejudice has been caused to a person by the denial to him of a particular right. He further relied on the decision in the case of Union of India & Anr. Vs P. K. Roy & Ors. where it is held that a doctrine of natural justice cannot be 6 Lalit Kumar Aggarwal imprisoned within the strait-jacket of a rigid formula and its application depends upon nature of jurisdiction conferred on the administrative authority upon the character of rights of persons affected, the scheme and policy of the statute and other relevant circumstances disclosed in a particular case. In view of the above mentioned decisions, the AO concluded that surrounding circumstantial evidences do not satisfy the test of human probabilities as defined by Hon’ble Supreme Court, Hon’ble High Court and Tribunal in various case laws. Hence, he concluded that the Long Term Capital Gain shown by the assessee was a sham to introduce black money into the books of accounts of the assessee and therefore, held that the same is to be treated as undisclosed income of the assessee.

Being aggrieved by the said order of the Assessing Officer, the assessee carried the matter in appeal before the CIT(A).

The CIT(A) confirmed the action of the AO observing that documents submitted as evidences to prove the genuineness of transaction are themselves found to serve as smoke screen to cover up the true nature of transactions in the facts and circumstances of the case as it is revealed that purchase and sale of shares are arranged transactions to create bogus profit in the garb of tax exempt Long Term Capital Gain by well organized network of entry providers with the sole motive to sell such entries to enable the beneficiary to account for the undisclosed income for a consideration or commission.

Before me, the AR of the assessee submitted that the assessee has filed computation of income which is placed at page nos. 9 & 10 of the paper book where Long Term Capital Gain is shown. At page nos. 12-16 of the paper book, the assessee has filed purchase documents for the shares purchased through M/s Trusha Mercantile Pvt. Ltd. At page no. 13 of the 7 Lalit Kumar Aggarwal paper book details of payment are filed which shows that the shares were purchased by making the payment in cash of Rs.10,000/-. Further at page no. 14 of the paper book, ledger copy in the books M/s Trusha Mercantile Pvt. Ltd. is filed. Further at page no. 15 of the paper book application for transfer of shares is placed. At page no. 16 of the paper book, details of payment of stamp duty for transfer of shares is placed.

At Pages no. 17-21 of the paper book of front and back side of the copies of share certificates filed which shows that transfer of share has been made in favour of the assessee on 29.11.2011. At page no. 22 of the paper book request for Demat account is placed. At pages no. 23-25 of the paper book, Demat statement are placed. At page no. 26 of the paper book, details of sale of 5000 shares aggregating to Rs.23,65,500/- is placed. At page no. 27 of the paper book, copy of account of Marck Securities Pvt. Ltd. is placed. At pages no. 28-29, copy of bank statement is placed. At page no. 30 of the paper book a note from Bombay Stock Exchange dated 01.01.2015 for suspension of trading of shares of M/s Turbotech Engineering Ltd. is placed. It was submitted that shares were sold by the assessee company on 20.05.2013 whereas suspension of trading in shares of the said company was done by the Bombay Stock Exchange on 01.11.2015 which is much after the assessee sold its shares. Therefore, the observation of the AO at page no. 24 in para 12 that the transaction in shares whereby assessee has shown to have earned Long Term Capital Gain is sham to introduce black money is not justified. He further submitted that the CIT(A) at page no. 29 in para 5.1 of his order was not justified in observing that the assessee created a smock screen by purchase and sale of share to convert black money by showing bogus Long Term Capital Gain is not justified. It was also argued that from page no. 21 in para 10, it will be seen that the Assessing Officer has not allowed cross examination of the persons on whose statement he relied on to treat 8 Lalit Kumar Aggarwal the Long Term Capital Gain as sham and therefore, in view of the decision of Hon’ble Supreme Court in the case of Andaman Timber Industries Vs Commissioner of Excise Kolkata-II, no addition can be made relying on the statements of persons whose cross examination has not been allowed to the assessee and that would make the assessment order ab initio void.

He relied on the decision of Ahmadabad Bench of the Tribunal in the case of Ketul Kumar D Jaiswal Vs ITO in order dated 28.09.2017 where it was held that there being no direct or material evidence against the assessee to hold that the share transactions were not genuine, the addition made by the AO u/s 68/69 of the Act are not warranted and the same were deleted. It was submitted that even the payment for acquisition of share made in cash was not disputed but was accepted and the assessee’s appeal was allowed.

He further submitted that the Delhi Bench of the Tribunal in the case of Mohit Hora (HUF) Vs ITO in for the assessment year 2014-15, order dated 12.03.2018 and submitted that the appeal of the assessee was allowed. He further relied on the decision of the Hon’ble Punjab & Haryana High Court in the case of Pr. CIT(Central), Ludhiana Vs Prem Pal Gandhi in ITA No. 95/2017, order dated 18.01.2018 and submitted that the appeal of the department was dismissed. He further relied on the decision of the Hon’ble Punjab & Haryana High Court in the case of Pr. CIT(Central), Ludhiana Vs Sh. Hitesh Gandhi in ITA No. 18/2017 (O&M), order dated 16.02.2017 and submitted that in this case even the purchase of shares in cash was not disputed and the appeal of the department was dismissed.

On the other hand, the Departmental Representative argued that CIT(A) has decided the appeal against the assessee. He submitted that 9 Lalit Kumar Aggarwal since the AO has not allowed cross examination to the assessee of the persons whose statement was relied upon in making addition, the matter may be remanded back to the file of the AO to allow opportunity of cross examination of the assessee and for the rest, he relied on the order of the AO and CIT(A).

In the rejoinder of the AR of the assessee submitted that the matter should not be remanded back to the file of the AO and it was better if it was decided by the Tribunal.

I have heard the rival submissions and perused the orders of the lower authorities and the material available on record. The undisputed facts of the case are that during the year under consideration, assessee claimed exemption for Long Term Capital Gain of Rs.23,51,714/- on sale of 5,000 shares of M/s Turbotech Engineering Ltd. which were purchased by the assessee on 26.11.2011 in an offline transaction from M/s Trusha Mercantile Pvt. Ltd. at the rate of Rs.2/- per share payment for which was made in cash. The said shares were sold by the assessee at the rate of Rs.475/- per share on 15.05.2013 aggregating to Rs.23,51,714/- after making the payment of STT. The Assessing Officer observed that the increase in the price of share was 236 times the purchase price of share. He also observed that investigation was carried out by the Directorate of Investigation, Kolkata countrywide to unearth the organized racket of generating bogus entries of Long Term Capital Gain, which was exempt from tax. After discussing the modus of such racket of generating of bogus entries, the Assessing Officer pointed out that the statement of stock broker Sh. Sanjay Vora was recorded by DDIT, Kolkata on 08.04.2015 where he confirmed that trading in Penny stock included shares of M/s Turbotech Engineering Ltd. for providing Long Term Capital Gain. The Assessing Officer also observed that the trading in shares of M/s Turbotech 10 Lalit Kumar Aggarwal Engineering Ltd. was suspended by the Bombay Stock Exchange vide notice dated 01.01.2015. It was also observed by the Assessing Officer in his order that statement of Sh. Praveen Kumar Agarwal was recorded on 11.02.2015 wherein in reply to question no. 13 he stated that companies were formed by him by appointing different dummy directors for providing accommodation entries to different beneficiaries. The clients were registered for rigging of price of different scripts for providing bogus Long Germ Capital Gain. In respect of denial of opportunity of cross examination of Sh. Sanjay Vora and Sh. Praveen Kumar Agarwal whose statements were referred by the AO but opportunity of cross examination of them was not allowed to the assessee, the AO observed that the principles of natural justice can be said to be violated only when a prejudice is caused to the assessee because of the same. In the instant case, as the abnormal increase in value of shares itself shows that the Capital Gain derived by the assessee was not genuine. In these facts of the case, the Assessing Officer held that the Long Term Capital Gain of Rs.23,51,714/- shown by the assessee and claimed as exempt u/s 10(38) of the Income Tax Act was bogus and earned out of purchase and sale transaction of shares in a sham transactions. Therefore, he added Rs.23,51,714/- to the income of the assessee by disallowing the claim for exemption of Long Term Capital Gain u/s 10(38) of the Act by invoking provisions of Section 68 of the Act.

On appeal, the CIT(A) confirmed the action of the AO.

I find that the purchase of 5,000 shares of M/s Turbotech Engineering Ltd. on 23.11.2011 from M/s Trusha Mercantile Pvt. Ltd. is supported by bills, money receipt, issued by M/s Trusha Mercantile Pvt. Ltd. Further, it is also not in dispute that the sale of said shares were transacted in a recognized Stock Exchange through an authorized share broker and are supported by contract note. Further, it is also not in 11 Lalit Kumar Aggarwal dispute that the sale proceeds of the shares were received through proper banking channel from the said share broker and on sale of shares, the share were gone out of the Demat account of the assessee. Thus, the entire transaction of purchase and sale of shares were supported by documentary evidences which were placed before both the lower authorities.

I find that on examining the same and after making inquiries, no defect in the said documentary evidences could be brought on record by the revenue. The addition in question was made merely on the basis of suspicion and surmises. No material has been brought on record to show that the assessee was involved in the racket which was unearthed by the Investigation Wing of the department. The revenue could not point out that in anywhere in the statement of Sh. Sanjay Vora and/or Sh. Praveen Kumar Agarwal, the name of the assessee was stated by them. Therefore, simply because some persons were involved in generation of bogus Long Term Capital Gain cannot lead to conclusion that the assessee was also involved in it without cogent material.

Further, after making inquiries from the person, from whom, the assessee purchased the shares in question and/or from the share broker through whom the assessee sold the shares, no material could be brought on record by the Assessing Officer to show that the transaction of the assessee was not genuine and the assessee actually paid any amount in cash to any person in consideration of cheque received by him from the authorized share broker. In absence of such a material being brought on record by the revenue, in my considered opinion, the transaction of the assessee which is supported by overwhelming documentary evidences cannot be impeached merely because share prices rose abnormally or other persons were involved in generation of bogus Long Term Capital Gain.

12 Lalit Kumar Aggarwal Thus, in my considered opinion, the addition made u/s 68 of the Act of Rs.23,51,714/- by the revenue is unsustainable. My above view finds support from the decision of Delhi “SMC” Bench of the Tribunal in the case of Smt. Sikha Dhawan Vs ITO in in assessment year 2014-15 wherein vide order dated 27.06.2018 where shares of the same company was involved and the similar documents were furnished by the assessee, the Tribunal has held as under: “8. I have heard the rival submissions and perused the material available on record. The assessee placed sufficient documentary evidences before the AO which are copy of the shares certificates with transfer form, copy of debit note issued by Shreeji Broking (P) Ltd., copy of cash receipt of Shreeji Broking (P) Ltd., copy of the account statement of the assessee in the books of the broker, copy of ledger account of Indus Portfolio (P) Ltd., copy of evidence for payment of securities transaction tax and copy of the bank statement of the assessee to show that the assessee had entered into genuine transaction of purchase of share which were later on sold through the broker on recognized stock exchange after payment of STT. The claim of the assessee for sale of shares has been supported by the documentary evidences which have not been rebutted by the authorities below. Whatever inquiry was conducted in the cases of other parties and statement recorded of several persons namely Sh. Anil Khemka, Sh. Sanjay Vohra and Sh. Bidyoot Sarkar as referred in the assessment order and the report of the Investigation Wing were not confronted to the assessee and above statements were also not subject to cross-examination on behalf of the assessee. Therefore, such evidences cannot be read in evidence against the assessee. The order of the SEBI was also not confronted to the assessee. AO did not mention any such fact in assessment order. More so in those reports and statements, the name of the assessee has not been referred to. Ld. Counsel for the assessee, therefore, rightly contended that the twin conditions of section 10(38) of the Act have been satisfied in the case of the assessee. The assessee has been able to prove that she has entered into the genuine transaction of purchase and sale of shares and the sale consideration is received from broker through banking channel. The brokers have not denied the transaction with the assessee. The 13 Lalit Kumar Aggarwal assessee rooted the transaction of sale of shares through recognized stock exchange after making payment of STT. In similar circumstances, ITAT SMC Bench, Delhi in the case of Meenu Goel vs ITO (supra) following the decision of Jurisdictional Hon’ble P&H High Court in the case of Pr.CIT vs Prem Pal Gandhi (supra) deleted the similar addition. Therefore, the issue is covered in favour of the assessee by the order of ITAT, Delhi Bench in the case of Meenu Goel vs ITO (supra) followed by judgement of Jurisdictional P&H High Court which is binding. There is no other material available on record to rebut the claim of the assessee of exemption claimed u/s 10(38) of the Act.

For the above stated reasons, I set aside the orders of the lower authorities and delete the addition of Rs.23.51,714/- and allow the grounds of appeal of the assessee.

In the result, the appeal of the assessee is allowed. (Order Pronounced in the Court on 24/01/2019).