ARAVIND MODI,CHENNAI vs. ITO NON CORPORATE WARD 11(1), CHENNAI

आदेश / O R D E R PER S.JAYARAMAN, ACCOUNTANT MEMBER

No.99/CIT(A)-13/2014-15, dated 27.07.2018 for the assessment year 2014-15.

Therefore, the Assessing Officer re-opened and scrutinized the assessment and found that the assessee purchased 1,00,000 shares of Kailash Auto Finance Limited @ Rs.1 per share through promoters quota, subsequently sold penny stocks on various dates for sale consideration of �.39,17,760/-, through a broker B.Lodha Securities Ltd., disclosed Long Term Capital Gain in his return of income and claimed it as an exempt income U/s.10(38). The Assessing Officer examined the entire set of transactions in the background of the information received from the DIT(Inv), Kolkatta and upon such examination of facts and on detail analysis of the transactions held, inter alia, that the assessee has deliberately entered in to a sham transaction of purchase and sale of bogus shares with full knowledge of such transactions in view of the substantial gains shown on the sale of such penny stocks, within reasonably a short period so as to convert the unaccounted money into accounted money in the guise of exempt capital gains. Therefore, the Assessing Officer treated the entire sale at �.39,04,542/-, in the assessee’s hand as an unexplained credit U/s.68 and completed the assessment. Aggrieved, the assessee filed appeals before the CIT(A). The Ld CIT(A) dismissed the appeal.

Against the order of learned CIT(A) , the assessee preferred an appeal before the Tribunal.

“The AO had information from the Investigation Wing of Kolkatta that there are penny stock companies all over India wise and whose shares price are allowed to rig upon such a way that after a period of one year if such shares are sold then the exemption available under section 10(38) of the claim for such LTCG arising on sale of such shares. The AO has called for detailed information from the assessee regarding such share transactions. The assessee has produced before the AO the contract notes, demat accounts and also the details or bank transactions where sale consideration received from sale of such shares were deposited. The assessee had admitted before the AO that 1,00,000 shares of Kailash Auto Finance Limited at a price of Re.1/- per share were purchased by the assessee through promoters quota in FY 2011-12. On the date of purchase of these shares the same were found listed as M/s.Panchsheel Marketing Limited and it got amalgamated and called as Kailash Auto Finance as it got merged. The assessee has then sold shares on various dates for sale consideration of Rs.39,17,760/- through a broker B. Lodha Securities Limited. The AO has got it confirmed from the Globe Capital Market Limited. In response to letter issued u/s.133(6) of the Act. The AO has narrated detailed modus operandi adopted in the assessment order for accommodation of entry of long term capital gain. In explaining the modus operandi the AO has explained the importance of accommodation entries , penny stock companies, the presence of entry operators, the importance of Jamakharchi companies, the role of beneficiary who will be provided accommodation entries to bring in his unaccounted money in to the books of accounts by way of bringing into the concept of exempted LTCG under section 10(38) of the Act. So initially there will be purchase of shares by beneficiary, such share prices will be rigged up by a modus operandi and once the eligible period of one year had elapsed shares will be sold in the market. The paper companies are utilized for handling such low volume transactions. Normally the syndicate member of the brokers (middlemen) contact the beneficiary for initial booking. The beneficiary will provide the required amount of cash which is routed through various paper companies of the entry operators and finally parked in a paper company which will then by shares from beneficiaries and provide sale consideration in cheques. Para 4.6 of the assessment order and 4.7 gives the flow chart of the process involved. Para 4.8 speaks on one movement and cash trials. Thus from the report of the Investigation Wing it was found out that a scheme was hatched by various players of the penny stock companies to claim long term capital gain as exempt under section 10(38) of the Act from sales of shares of such penny stock companies. At para 7.3.13 of the assessment order the AO has established that purchase and sales of shares of Kailash Auto Finance is actually to create bogus LTCG for the beneficiary. In establishing the AO had also relied on the statement on Sunil Dokania Promoter of Kailsh Auto Finance Limited which was made before the DDIT(lnv), Kolkatta. The relevance is at Para 4.8 of the assessment order. The AO has also relied on the Supreme Court decision in the case of Sumati Dayal Vs CIT,

“It is no doubt true that in all cases in which a receipt is sought to be taxed as income, the burden lies on the Department to prove that it is within the taxing provision and if a receipt is in the nature of income, the burden of proving that it is not taxable because it falls within exemption provided by the Act lies upon the assessee. (See Parimisetti Seetharamamma (supra) at P. 5361. But, in view of Section 68 of the Act, where any sum is found credited in the books of the assessee for any previous year, the same may be charged to income tax as the income of the assessee of that previous year if the explanation offered by the assessee about the nature and source thereof is, in the opinion of the Assessing Officer, not satisfactory. In such case there is prima facie, evidence against the assessee, viz., the receipt of money, and if he fails to rebut, the said evidence being un-rebutted, can be used against him by holding that it was a receipt of an income nature.”

Moreover SIT on black money has also given his observations and recommendations on black money by observing misuse of claim of exemption of LTCG for money laundering. In a report submitted it is observed as under: “Investments are made in the secondary share markets with a view to capturing gains. In this market, out of nearly 8,000 listed companies, several scrips are not traded regularly. With the collusion of promoters, some brokers arrange for price(s) with purchase of such scrips at nominal costs, and sales at exorbitant prices, with a view to receiving money on sale as ‘capital gain’ when the long term gain is subjected to a ‘nil’ or nominal rate of tax. The advantage for manipulative taxpayer is that he can launder such sale receipts through payment of no tax.” SEBI has barred about 250 such entities. SEBI has found that price of KAFL was rigged by way of manipulation made by the promoters/brokers/operators. SEBI has analyzed trading frequency, trading volume generated and contribution to price rise. Following is the analysis which SEBI has noticed in its order: “7. During the analysis it was noticed that certain entities related/connected to Kailash Auto were found to be the net buyers to the beneficiaries and thereby created artificial demand for the supply of shares from beneficiaries. From the Know Your Client (KYC) details, their bank statements, off-market transactions amongst them and the information available on the website of the MCA it was observed that those entities were connected to each other. Two such interconnected groups were identified (hereinafter referred to as ‘Kailash Auto Group I” and “Kailash Auto Group II’). The particulars of the entities consisting Kailash Auto Group I and Kailash Auto Group II and the basis of relationship/connection amongst them are provided in the Annexure A and Annexure B, respectively. For the purpose of this order these entities were shortlisted on the basis of following parameters: (a). Top 300 entities based on gross buy/trade quantity; (b). Any entity who has traded in the scrip of Kailash Auto and is directly or indirectly connected to the company/its directors/or to entities mentioned in point above. Vjde the ad iterim ex-parte order dated 29.3.2016 subsequently confirmed, in exercise of the powers conferred upon under section 19 of the SEBI Act, read with Sections 11(1), 11(4) and 1 1B, recipients of CPAL/PML shares and kailash Auto Group I, of which M/s Sanskriti Vincom(p) ltd is listed as sl.no. 111, to quote the order, “have acted in connivance for implementation of dubious plan, device and artifice that has led to the misuse of stock exchange mechanism to artificially increase price and volume of the scrips to provide illegitimate gains to the beneficiaries in order to claim LTCG benefits that has not only eroded the market integrity” In its order dated 26/10/2016 SEBI has observed in para 35 as follows: 35. It is intriguing to note that, in spite of the tarnished track record, prior to amalgamation, price of the scrip of Kailash Auto had increased from Rs. 11/- to Rs.36.25/ in 36 trading days with average trading volume of 280 shares per day. Thereafter, beneficiaries including the notices were able to offload their shares at high price, continuously for a period of around 15-16 months. In any normal market, a sudden supply if not matched by similar demand leads to price fall. However, in this case, the beneficiaries were able to offload shares at higher price because of the presence of Kailash Auto Group I and Kailash Auto Group II who had acted as buyers when the beneficiaries were selling their shares. The circumstances prima facie shows that in the whole process, artificial demand was created by the entities of the Kailash Auto Group I and Kailsh Auto Group II so as to absorb the supply from the beneficiaries. Thus as a result of the trading between beneficiaries and entities of Kailash Auto Group I and Kailash Auto Group II in Patch - 2, the average trading volume in the scrip had increased by 5,57,752. 10%, i.e., (5577 times) as compared to Patch-I. Such increase in volume was mainly on account of matched trading amongst Kailash Auto Group I and Kailash Auto Group II entities and beneficiaries. This artificial volume in the scrip created by the beneficiaries including the Notices and the entities of Kailash Auto Group I and Kailash Auto Group II had the potential to induce any genuine investor to invest in the scrip without knowing the scheme of operations deployed, as in the instant case. Such facts and circumstances reinforces the finding in the interim order that that beneficiaries and entities of the Kailash Auto Group I and Kailash Auto Group II had used the securities market system to artificially increase volume for making illegal gains arid to convert ill-gotten gains into genuine one. This is a direct evidence that share of M/s Kailash Auto Finance Ltd. was artificially hiked to create non-genuine LTCG to you along with other beneficiaries. This is the reason why SEBI has passed order under Section. 11(1), 11(4) & 11(e) of SEBI Act, 1992. A statement of Sri Harshvardhan Kayan was recorded on 27.01.20 15 by DDIT (Inv), Kolkata. In his statement, he has narrated entire modus operandi and confirmed role of Sri Sunil Dokania as an operator for scrip KAILASH — 511357 pertaining to M/s Kailash Auto Finance Ltd. In reply to Q.No.8, he has confirmed that M/s Daruka Trading Pvt. Ltd. is a ‘Jamakharchi’ company who is engaged in bogus accommodation entry through his broking house M/s Ashok Kumar Kayan & M/s Kayan Securities Pvt. Ltd. in response to Q.No. 11 he has narrated the details of manager / controller of different clients utilized for providing LTCG to beneficiaries. In response to Q.No.14 he has explained how bogus LTCG is arranged by Sri Sachin Badani, Sri Sunil Dokania etc. Sri Sunil Dokania is one of the major key personnel to control the share movement of M/s Kailash Auto Finance Ltd. A statement of Sri Narendra Balasja has been recorded on 08.04.2015 in the case of M/s SMC Global Securities Ltd. Similar statements were also recorded by the Investigation Wing in other cases (Ex: Statement of Sri Alok Harlalka recorded on 24.04.2015 who is sub broker of M/s SMC Global Securities Ltd.). Most of the persons have admitted that the scrip KAILASH — 511357 pertaining to M/s Kailash Auto Finance Ltd. (also other scrips like CCL-53 1900, TUNI TEXTILE-53141 1, NCL RESEARCH-530557, SURABHI-5 12311, UNNO-5 19273, KAPPAC-506938) was used for arranged LTCG & they have relaxed the KYC norms required for opening of account & they have also admitted that their clients are paper companies which in some cases not found as existent given on their address. Thus it is found that there is a group of persons working in tandem to provide arranged capital gain by receiving cash in lieu of it. It is seen that some exit providers / cross purchasers have helped for sale of shares of the beneficiaries. M/s Camellia Vinimay Pvt. Ltd. is one of such party. A sample cash trial of this concern with other party is also mentioned above. Several brokers/operators/promoters who were indulged in this malpractice were searched/surveyed and their statement was recorded. Persons interrogated were also found mentioned in the assessment order who have admitted on oath u/s. 131 of the IT Act that bogus entry for LTCG was given for various penny stocks by way of arranged purchases and sales through the entities/persons under their control. The modus operandi of the tiansaction was to accept cash and arrange for issuing cheques after charging certain commission. The confession given on oath u/s 131 by the brokers/promoters/ operators is also a circumstantial evidence against the assessee that the so called LTCG is arranged one. Together such evidences form a chain of circumstances leading to an inference or presumption of the principal fact for which the AO has relied on the decision of ITAT New Delhi in the case of Harsh Win Chadha Vs DCIT (I.T.A.Nos.3088 to 3098 & 3107/Del/2005), held that “The tax liability in the cases of suspicious transactions, is to be assessed on the basis of the material available on record, surrounding circumstances, human conduct, preponderance of probabilities and nature of incriminating information/evidence available with AO.” It explained the circumstantial evidences as “Circumstantial evidence is evidence of the circumstances, a’s opposed to direct evidence. Considering all this it is found that:

The shares of this ‘penny stock’ company, MIs. KAILASH AUTO FINANCE LIMITED is controlled by a group of people viz, promoter / operator! brokers. All purchases of shares were arranged by them on assurance of booking bogus LTCG in favour of the assessee. Purchase of shares of M/s.KAILASH AUTO FINANCE LIMITED was through off- line. It is a fact and evidence from the statement of several persons recorded u/s 131 of the Income Tax Act, 1961 that they have not only sale of shares to the assessee but also arranged for sales of shares through their entities and by paying certain amount of commission to them. The entity from whom shares were purchased is a entry operator and controlled by a group of entry operator. Therefore, generation of LTCG through the process from purchase to receipt of cheque is totally arranged and actually no capital gain arose, but assessee’s own cash has been routed through different entities and ultimately reached to its hand by cheque in the disguise of sale proceeds of listed security. The share price increased multi fold even without any semblance of any positive factor, which clearly shows that there was artificial rigging by circular trading of shares forming cartel. There is no such increase in share price of the other companies in which The assessee has traded in compared to M/s.KAILASH AUTO FINANCE LIMITED. Letters were addressed to the purchasers of these 45,000 shares viz. M/s.Keshavah Mercantile Private Limited, M/s.Keshavah Dealtrade Private Limited, M/s.Overgrow Promoters Private Limited. All these companies are based at Kolkata and the letters sent to these companies were returned unserved. In view of the above discussion, I upheld the action of the AO that relying on the circumstantial evidences it is proved beyond doubt that the appellant has entered into an engineered transaction to generate non-genuine long term capital gain thereby rightly held sale consideration received on account of sale of penny stocks for Rs,39,04,542/- as unexplained cash credit under section 68 of the Act and rightly rejected the claim of exemption under section 10(38) of the Act for Rs.37,84,924/-. In light of this discussion, commission of Rs.1,17,136/- being charged @ 3% of Rs.37,84,924/-. For providing arranged LTCG is also held as unexplained expenditure u/s.69C of the Act. Accordingly, the additi9n made by the AO for sum of Rs.39,04,542/- u/s.68 of the Act and for sum of Rs.1,17,136/- u/s.69C of the Act is confirmed and the appellant ground of appeal on the issue is therefore dismissed. In result, the appeal of the assessee is dismissed.”

Thereafter, the Ld. DR submitted that the assessee filed the impugned appeal before this Tribunal. Since the findings recorded by the lower authorities are not challenged with relevant material by the assessee, the Ld. DR pleaded to dismiss the appeal.

The Assessing Officer received a report from the investigation wing of Kolkata, in which, inter alia, the assessee was specified as one of the parties who indulged in bogus / non-genuine long term capital gain from the transactions of alleged purchase and sale of shares of M/s. Kailash Auto Finance Ltd., which was found by them as penny stock company and a scheme was hatched by various players to obtain / provide accommodation of entry of bogus LTCG through manipulation of stock market for generating bogus LTCG . Therefore, the Assessing Officer re-opened and scrutinized the assessment and found that the assessee purchased off market 1,00,000/- shares of a unlisted company like M/s.Careful Projects Advosory Ltd.(merged with M/s. Kailash Auto Finance Ltd., afterwards) @ Rs.1 per share, as

per purchase bill dated 10/02/2012 from one closely held company named, M/s.Sanskriti Vincom Pvt. Ltyd., of Kolkata 700 005, subsequently sold shares on various dates for sale consideration of ₹.39,17,760/- through a single broker named M/s.Globe Capital Market Ltd.,(Member:Bombay Stock Exchange), the rate of sale stated to be ₹.38.10 to ₹.41.90 per share approx., disclosed Long Term Capital Gain in his return and claimed it as an exempt income U/s.10(38). The Assessing Officer examined the entire set of transactions and held, inter alia, that the assessee has deliberately entered into a sham transaction of purchase and sale of bogus shares with full knowledge of such transactions in view of the substantial gains shown on the sale of such penny stocks, within reasonably a short period so as to convert the unaccounted money into accounted money in the guise of exempt capital gains. Therefore, the Assessing Officer treated the entire sale at ₹.39,04,542/- as an unexplained credit U/s.68 and completed the assessment. Aggrieved, the assessee filed the appeal before the CIT(A). Since, the right to exemption must be established by those who seek it, the onus therefore lies on the assessee. In order to claim the exemption from payment of income tax, the assessee had to put before the Income Tax Authorities proper materials which would enable them to arrive at a conclusion (35 ITR 312 (SC)). However, in this case, it is seen from the order of the Ld.CIT(A), supra, that the assessee has not placed relevant material and proved the genuineness of the impugned transactions. Although, an appeal against the above order has been filed before this tribunal, even before us also, the assessee has not challenged the findings recorded by the lower authorities with relevant material and hence we dismiss the appeal.

Order pronounced on 22nd May, 2020 at Chennai.