POOJA MAHENDRA MITTAL,MUMBAI vs. DCIT - CC - 8(1), MUMBAI

The first common issue in these appeals of four different assessee’s is as regards to the order of CIT(A) confirming the action of the AO in treating transactions of sale of shares of listed companies as bogus thereby making addition under section 68 of the Act being sale proceed of such transactions treating the same as unexplained income under section 68 of the Act. Consequently, also on second interconnected issue, the CIT(A) confirmed the action of the AO in making addition on the basis of presumption that the assessee has paid commission for alleged accommodation entries of long term capital gain and added the same under section 69C of the Act. For this, all these assessee’s have raised identical grounds and the facts and circumstances in all the cases are also identical. Both, the learned counsel for the assessee’s as well as leaned CIT DR fairly stated that facts on merits in all these appeals are same. Hence, only one appeal was argued and all will be adjudicate accordingly. The lead appeal on merits is for the AY 2015-16 and the grounds raised

Brief facts of the case are that the assessee filed his return i.e. original return of income on 28.08.2015 [wrongly mentioned by CIT(A) as 17.07.2014], whereas the correct date 8 | P a g e 3427-3429/Mum/2019, 3311-3313/Mum/2019, 3426/Mum/2019, 3264&3265/Mum/2019, 3247&3248/Mum/2019 is written by the AO) for AY 2015-16 declaring the total income of ₹ 45,80,790/-. A search and seizure action under section 132 of the Act was carried out by the Income Tax Department on 03.12.2015 at the resident and office premises of the assessee and its group companies and other associates. Consequent to the search action under section 132 of the Act, a notice under section 153A of the Act was issued by the AO on 16.01.2017. In response to notice under section 153A of the Act, the assessee filed its return of income on 30.02.2017 declaring a total income of ₹ 47,38,420/-. The assessment was framed vide order dated 22.12.2017 under section 143(3) read with section 153A of the Act on a total income of ₹ 15,10,08,650/-. The AO made addition under section 68 of the Act amounting to ₹ 14,19,36,826/- on account of unexplained cash credit under section 68 of the Act being sale proceed of transactions of sale of shares as bogus. Consequently, the AO also made addition of ₹ 42,58,104/- under section 69C of the Act being commission paid on accommodation entries paid by the assessee.

Brief Facts relating to this issue are that the assessee had applied for 1,50,000 equity shares of Rs. 10/- each of Pine Animation Limited (PAL) in the preferential issue of shares. The payment was made to PAL through an account payee cheque vide cheque no. 147952 dated 09.03.2013 of Axis Bank for Rs. 15,00,000/- which was debited in the assessee's bank a/c on 13.03.2013. The assessee before AO and CIT(A) and also now before us filed copies of share application form, relevant bank 9 | P a g e 3427-3429/Mum/2019, 3311-3313/Mum/2019, 3426/Mum/2019, 3264&3265/Mum/2019, 3247&3248/Mum/2019 statements showing payment and shares allotment advice. These are enclosed in Assessee Paper Book (APB) at page 73- 75. The company allotted 1,50,000 equity shares of Rs. 10/ each at par on 15.03.2013 and credited the shares to his demat account. The purchase of shares was duly disclosed in the balance sheet for the year ended 31st March, 2013 and after verification of all documents there is no observation of the AO relating to acquisition of shares of PAL and payment thereof in assessment order u/s 143(3) r.w.s. 153A for AY 2013-14. Subsequently, the shares were split into Re. 1/- per share by PAL on 21.05.2013. Copy of demat statement showing the allotment and split enclosed at page 192 of APB. Further, in FY 2014-15 (AY 2015-16) the assessee sold the above shares of PAL on BSE Platform through his regular broker M/s Geojit, who is registered with BSE and SEBI, the market regulator. The assessee has been dealing in shares through his broker Geojit for last 10 years. The assessee received sale proceeds of shares directly from his broker Geojit by credit to his Axis bank a/c on the date of settlement. Copies of contract notes along with summary and relevant bank statements showing the amount credited are enclosed in APB (Pages 77-186, pages 195-198 & Pages 188-190). Copies of broker's ledger and Form 10DB is also enclosed (pages 199-215). The sale transactions of shares have suffered expenses like brokerage, service tax, STT, stamp duty, exchange and SEBI turnover charges, etc. which are specifically shown in the contract notes issued by the Broker.

The assessee during the year under consideration has earned long term capital gain (LTCG) amounting to ₹14,00,76,815/- on sale of shares of Pine Animation Ltd. (PAL) a company listed on Bombay Stock Exchange. The assessee had 15 lacs equity shares of PAL in earlier years and after holding more than one year sold those shares during the year of consideration for a sum of ₹14,16,80,449/-. The assessee sold these shares on BSE network and paid STT, service tax, stamp duty, etc. The assessee claimed this LTCG as exempt under section 10(38) of the Act. During the course of assessment proceedings, the AO required the assessee to prove his claim of LTCG on sale of shares of PAL vide letter dated 20.11.2017. The assessee filed various details in support of his claim but AO rejected relying on report of investigation wing and held that receipt of sale proceeds from BSE broker or clearing system is unexplained cash credit and made addition under section 68 of the Act. The AO has concluded his finding and which are summarized as under: - “i) The assessee has mainly traded in one script which is suspicious. ii) The assessee traded in single scrip and has made huge profits. iii) To prove genuineness, proof of physical transfer of shares, reasons to trade off-market when options to online market trading through demat account were available, 11 | P a g e 3427-3429/Mum/2019, 3311-3313/Mum/2019, 3426/Mum/2019, 3264&3265/Mum/2019, 3247&3248/Mum/2019 trading pattern of market transactions for the last three years, have not been submitted by the assessee. iv) The assessee earned long term capital gain in the current year and claimed it as exempt u/s 10(38) of the Act. This quantum of huge long term capital gain was found suspicious and detailed investigation of this issue was undertaken. Various tools available were examined including ITD data, BSE data, money control website, taxman, court rulings, internet as well as investigation wing report and findings of the SEBI. v) Long term capital gains booked by assessee in his books were prearranged method to evade taxes and launder money. Following are the findings and the reasons which substantiates the findings. a) Mode of acquisition of the shares & period of holding: Mahendra Mittal was allotted 1,50,000 preference shares of M/s Pine Animation Ltd. at the rate of Rs. 10/- per share on 10.04.2013 vide allotment letter 10.04.2013. This shareholding increased to 15,00,000 number of shares after splitting of shares in the ratio of 1:10 as per the decision of the Board on 20.05.2013. The assessee sold all the shares of PAL between 02.04.2014 to 12.06.2014, thereby earning an exempt bogus LTCG.

The CIT(A) also confirmed the action of the AO by observing (the relevant paras are being reproduced) as under: - “Details of the Penny Stock Transaction 12.0 During the year under consideration, the Appellant had claimed LTCG on the shares of PAL, as exempt u/s 10(38) of the Act. As per the details placed on record, the sale consideration of the shares of M/s Pine Animation Ltd. for the year under consideration is amounting to Rs.14,19,36,826.50/- and the same had been added back by the AO, as unexplained cash credit u/s 68 of the Act.

We have heard the rival contentions and gone through the facts and circumstances of the case.

Before us, the learned Counsel for the assessee Shri Madhur Aggarwal stated the fact that assessee purchased the shares of listed company and held them for more than one year. He sold his shares on Bombay stock exchange platform through his broker Geojit and STT was paid on sale transactions. Thus, all the conditions of Sec 10(38) of the Act are fully complied. Hence, assessee being eligible, rightly claimed exemption of Long Term Capital Gains under Section 10(38) of the Act. He stated that the AO nowhere in the assessment order pointed out nor discussed non fulfillment or non-compliance of any conditions of Section 10(38) of the Act. Hence, rejecting the claim under section 10 (38) of the Act without giving reasons is wrong and contrary to the provisions of law. He then stated that the CIT(A) also confirmed the action of the AO just on the basis of conjunctures and surmises. He 43 | P a g e 3427-3429/Mum/2019, 3311-3313/Mum/2019, 3426/Mum/2019, 3264&3265/Mum/2019, 3247&3248/Mum/2019 assailed the orders of the lower authorities. He argued and pointed out that Section 10(38) of the Act was inserted by Finance Act 2 of 2004 providing for exemption to long-term capital gains arising on sale/ transfer or equality shares in listed company, or unit of an equity oriented fund provided such transactions have suffered securities transaction tax under the said Chapter. If shares of listed companies purchased are sold on the exchange platform within one year paying STT then gain or loss is treated as short term capital gain taxable at concessional rate of tax as per the provisions of Income Tax Act and if these shares are sold on stock exchange after holding for exceeding one year paying STT then resultant gain or loss is treated as long term gain/ loss which is exempt from tax u/s 10(38) of the Act.

He referred that to the order of the AO and that of the CIT(A) and stated that both the authorities did not accept the above referred evidences filed by the assessee in support of his claim and by relying on the general study report of the investigating wing rejected the claim and held that the entire transactions undertaken by the assessee were merely an accommodation entries taken for the purpose of securing bogus long term capital gains and to claim exempt income and consequently assessed the sale proceed as an unexplained cash credit under section 68 of the Act. The AO has referred to the findings in the general study report of the Investigation Wing of Kolkata and Mumbai, wherein it laid down the purported modus 44 | P a g e 3427-3429/Mum/2019, 3311-3313/Mum/2019, 3426/Mum/2019, 3264&3265/Mum/2019, 3247&3248/Mum/2019 operandi of converting unaccounted money into exempt LTCG. It is stated that a person acquires shares of penny stocks trading at low price either through private placement or on merger of private limited company of which such person is a shareholder with a penny stock company. Thereafter unaccounted money flows to operator’s / exit providers who artificially raise the prices of penny stocks on stock exchange. Thereafter, the penny stocks are sold to earn huge exempt LTCG.

In regards to the present case the learned Counsel referred to the observations of AO regarding PAL script in his show cause notice: "In the case of M/s Pine Animation Ltd, the Investigation Wing Mumbai has conducted a survey action on M/s Saraf Equity Services Pvt. Ltd. on 03.12.2015, an exit provider in script Pine Animation Ltd. During the course of survey proceedings, statement on oath of Shri. Mandar Dilip Naik, Director of M/s. Saraf Equity Services Pvt. Ltd. was recorded wherein he has stated that M/s. Saraf Equity Services Pvt. Ltd. has indulged in providing exit to the beneficiaries in collusion with operator for making bogus 45 | P a g e 3427-3429/Mum/2019, 3311-3313/Mum/2019, 3426/Mum/2019, 3264&3265/Mum/2019, 3247&3248/Mum/2019 LTCG transactions for a commission of 1%. Further, on verification of the script M/s Pine Animation Ltd. it is seen that the other exit providers i.e. Dhriti Traders Pvt. Ltd, Dream valley Trading Pvt. Ltd., Dwarka purl Constructions P Led, Olympia Sales Agencies P Ltd, Particle Industries P Led, Signet Vinimay P Ltd, Winall Vinimay P Ltd and Spice Merchants P Ltd have purchased shares of M/s Pine Animation Ltd to provide accommodation entry in the terms of LTCG. These entities are operated by entry operators whose statement has been recorded by the Investigation Wing wherein they have stated that they are an entry operator and is into the business of providing accommodation entries by managing and controlling various bogus entities, either directly or through his dummy directors."

He stated that the statements of Anil Khemka & Sanjay Dey and Mandar Naik relied upon the AO does not establish that the assessee has paid any unaccounted money to these parties. None of the replies to the question posed indicate that they received any unaccounted money from the assessee or that they received or utilized the unaccounted money received from the assessee with reference to shares of PAL. It is also not established that they had any arrangement or dealings or relation with the assessee leave apart the alleged accommodation or exit provided who has not stated any dealing with them against the principles of natural justice. Further, as 48 | P a g e 3427-3429/Mum/2019, 3311-3313/Mum/2019, 3426/Mum/2019, 3264&3265/Mum/2019, 3247&3248/Mum/2019 regards the parties listed by AO in the assessment order (abstract reproduced above) as exit providers and entry operators i.e. Dhriti Traders Pvt. Ltd., Dream valley Trading Pvt. Ltd, Dwarkapuri constructions P Ltd, Olympia Sales Agencies P Ltd, Particle Industries P Ltd, Signet Vinimay P Ltd, Winall Vinimay P Ltd, Spice Merchants P Ltd and Saraf Equity Services Pvt. Ltd., the assessee categorically denied the same and confirmed that, he did not know or had any relation with any of the above said parties and he never dealt with or had any business or personal relations with any of them. He further confirmed that as he did not know them, hence knowing their business or activities is out of question.

He argued that the assessee has neither taken exit nor accommodation entries from any party for purchase or sale of shares of the company, nor has any evidence provided by AO nor statements of such persons revealed any dealing with the assessee. All transactions done by the assessee are through BSE and Bank account in the normal course. Even otherwise also the statement of the persons referred by the AO as exit or accommodation providers (Anil Khemka, Sanjay Dey & Mandar Naik) were not recorded in the presence of assessee nor has he been provided to cross examine them before using these statements against the assessee. Hence reliance on such statements made in back of assessee cannot be admissible as evidence and makes the assessment order invalid. In the present facts, the assessee at first was allotted shares through 49 | P a g e 3427-3429/Mum/2019, 3311-3313/Mum/2019, 3426/Mum/2019, 3264&3265/Mum/2019, 3247&3248/Mum/2019 preferential issue by the Company. The allotment of shares by the Company was made after obtaining prior approval of BSE as per SEBI Issue of Capital and Disclosure Requirements Regulation, 2009. The sale of shares of PAL is through a reputed broker Geojit. All necessary supporting evidence have been submitted to establish the genuineness of the transactions. On investigation, the role of Geojit was not found to be suspicious or questionable. Therefore, reliance on the findings of the Investigation Wing in some other cases which bears no connection with the case of the assessee irrelevant.

It was contended further that there is no evidence that implicate the assessee to have entered into any arrangement with any operators /exit providers or involvement of unaccounted money. The assessee took strong objections to AO linking him or his transactions with so called alleged exit providers and accommodation entry providers without any evidence or involvement mentioned in such investigation reports and statements of such persons. The seamless process of transactions at BSE as explained hereafter does not identify and provide us the identity of persons who have purchased those shares sold by assessee. The assessee has ordered his broker to sell the shares of PAL who in turn sold the shares on BSE platform. The assessee/his broker were not aware about the buyers or their brokers who purchased the shares of PAL sold by the assessee. The allegation of AO in para 7.2 and 7.3 of the Assessment order that that the assessee mainly traded in 50 | P a g e 3427-3429/Mum/2019, 3311-3313/Mum/2019, 3426/Mum/2019, 3264&3265/Mum/2019, 3247&3248/Mum/2019 one script (PAL) which is suspicious is completely incorrect and not supported by facts. During FY 2014-15 (AY 2015-16) the assessee also traded in following scripts:-

Further, the learned Counsel also narrated the fact that the assessee also incurred losses in few scripts out of the above. With regard to the observations of AO in Para 9 relating to suspicion for trading in PAL shares by SEBI vide ad-interim ex-parte order dated 08.05.2015, it was argued that the assessee and his wife along with more than 100 others entities were exonerated of all allegations as detailed in ad-interim ex- parte order for manipulation of price and volume of the script 51 | P a g e 3427-3429/Mum/2019, 3311-3313/Mum/2019, 3426/Mum/2019, 3264&3265/Mum/2019, 3247&3248/Mum/2019 and also any arrangement by the assessee with the company or its promoters, exit providers, or SEBI Regulations etc. vide SEBI in its Final Order dated 19.09.2017.

The learned Counsel further narrated that the allegation of AO in para 11.3 that proof of physical transfer of shares, reasons for off market trading and trading pattern of market transactions for the last three years have not been submitted is also unfounded and contrary to the facts. The assessee during course of assessment submitted complete documents of preferential allotment of shares and trading in shares of seven years vide its reply dated 23.11.17. There was no physical transfer of shares during the year under appeal except one in which company has bought back shares of Sundram investment for Rs. 5,257/-. Therefore, observations regarding off market trading are absolutely wrong and contrary to the facts.

Ld Counsel for the assessee explained the process at Stock Exchange Network, which is filed in the shape of note as under: - “> As per Stock Exchange Regulations, shares or securities of any of the listed companies who has signed listing agreement with SE are dealt on the stock exchange platform through a registered broker only. The purchase and sale transactions on the stock exchange (SE)

Further, the learned Counsel stated that the assessee has sold these shares through his broker Geojit who is registered broker of Bombay Stock Exchange (BSE), National Stock Exchange (NSE) and other exchanges. The broker Geojit is an old and reputed share broker and is in this business for years. The assessee is dealing with it for more than 10 years and sold equity shares of PAL on BSE platform through his regular broker Geojit and delivered the shares from his demat account and received sale proceeds directly in his designated bank account as explained in the facts of the case. STT, brokerage, Stamp duty, SEBI and other charges were duly paid on transactions done on BSE platform. The AO has accepted all the documents filed by the assessee without any doubt on its authenticity or genuineness. The relevant documents and evidence of these transactions are also submitted before us. The broker Geojit also does not know to whom the shares were sold. Only SEBI or stock exchange knows who bought these shares and these authorities do not supply such information unless called by Government Authority. Therefore, the assessee or his broker did not have any record or knowledge of the purchasers at the time of sale. However, during the course of investigation by SEBI, the information was supplied by BSE to the assessee in the form of a CD to offer his reply on the ex-parte order issued by SEBI on 08.05.2015. From the CD, the assessee came to 55 | P a g e 3427-3429/Mum/2019, 3311-3313/Mum/2019, 3426/Mum/2019, 3264&3265/Mum/2019, 3247&3248/Mum/2019 know that his shares of PAL were bought by 50 buyers through multiple brokers. The delivery of shares is given to Geojit by the assessee from his demat account. Copy of demat statement is already filed in assessee paper book before us. The broker in turn transfers the shares to BSE Clearing account. The sale proceeds of sale of shares is settled by exchange settlement system and directly credited to broker's bank accounts by the BSE and the assessee received payment from Geojit i.e. directly into his designated hank account. Copy of bank statement is filed in assessee’s paper book (APB).

Further, the assessee has no connection or nexus with the buyers as also the activities of the buyers. Even if the buyers are doubtful or of suspicious character that does not affect the transactions of sale of shares by the assessee through proper channel i.e. on the recognized stock exchange through the registered broker and payments were received. He argued that during search itself and in the course of investigation the department had made exhaustive survey and enquiry for these transactions from Geojit and other brokers and nothing incriminating was found against the assessee. The details, documents and third party evidences supporting the sale transactions and payments received have been filed by the assessee. The transactions were done at prices prevailing on the date of transaction and STT was paid on such transactions cleared through exchange clearance system.

The learned Counsel further referred to SEBI Investigation in case of PAL. It was argued that in case of PAL, the whole time member of SEBI the market regulator, on a preliminary report of its surveillance department has passed ad interim ex- parte order no. WTM/RKA/ISD/36/2015 dated 08.05.2015 against PAL and 177 entities including assessee. However, despite no charge against the assessee, the whole time member of the SEBI confirmed the ex-parte order vide passing Confirmatory order no. WTM/RKA/ISD/61/2016 dated 02.06.2016. The assessee went in appeal before the Securities Appellate Tribunal against the confirmatory order of the SEBI. While the assessee's appeal with SAT was at hearing stage, the investigation department of the SEBI completed investigation in PAL and passed final order vide order no. SEBI/WTM/MPB/EFD- I-DRA-III/28/09/2017 dated 19.09.2017. Relevant para no.9, 10, and 11 of SEBI order are reproduced herein below: “9) "Upon completion of investigation by SEBI, the following are noted as regards 14 entities who were identified as Preferential Allottees, Exit providers and LTP Contributors vide the interim order:

Thus, the SEBI's final order dated 19.09.2017 clearly came to the conclusion that SEBI's investigation did not find any adverse evidence against the 114 entities including the assessee and given finding that the assessee has no connection/nexus with PAL or its promoters/directors or promoters related entities nor any role in price manipulation, volume manipulation in the script of PAL. No violation of provisions of SEBI Act, SCRA, PFUTP regulation’s, etc. were observed in respect of 114 entities (including the assessee). The list of 114 entities referred in the SEBI Order also includes following alleged exit providers discussed in show cause notice and referred to in the assessment order as under: - Sr. No. Name of Exit Provider 121 Dhriti Traders PL 127 Dreamvalley Trading FL 162 Signet Vinimay PL 165 Spice Merchants FL 172 Winall Vinimay P L 22. These alleged exit providers were also exonerated by the SEBI Order and the remaining alleged exit providers viz. 1) Dwarkapuri Constructions P Ltd., 2) Olympia Sales Agencies P Ltd. and 3) Particle Industries P Ltd. were neither referred in 59 | P a g e 3427-3429/Mum/2019, 3311-3313/Mum/2019, 3426/Mum/2019, 3264&3265/Mum/2019, 3247&3248/Mum/2019 the SEBI ex-parte order dated 08.05.201 5 nor in the final order dated 19.09.2017 which goes to prove that neither the assessee nor the exit providers alleged by the AO were involved in any arrangement or accommodation and hence , allegations of AO are wrong and without any evidence. Copies of SEBI ad-interim ex-parte order dated 08.05.2015, confirmatory order dated 02.06.2016 and final order dated 19.09.2017 are enclosed at pages 217-277 of APB. Subsequently, the SAT disposed-off the appeal of the assessee as infructuous and passed order accordingly vide order no. nil dated 26.09.2017. Copy enclosed at pages 278-283 of APB.

In view of the above the assessee has been exonerated by SEBI in the case of PAL stating that he had no nexus/ connection or collusion with the company, its directors, or promoters and was not involved in price manipulation & volume manipulation, etc. Further, the alleged exit providers for the script have not played any role in assessee's transactions in the script as he has neither taken any accommodation nor entry or exit from any of the alleged parties.

On the other hand, the learned CIT DR Shri Manjunatha Swami, argued that the entire transaction is bogus. He stated that he is relying on the elaborate order written by the AO and that of the CIT(A).

We have noted that PAL made a preferential allotment of equity shares in the year 2013. The assessee on application for 60 | P a g e 3427-3429/Mum/2019, 3311-3313/Mum/2019, 3426/Mum/2019, 3264&3265/Mum/2019, 3247&3248/Mum/2019 shares was allotted the same at Rs. 10 per share. The company had split the face value of its shares in 2013. Due to this, assessee received 15,00,000 shares against 1,50,000 shares allotted earlier. The assessee acquired the shares on the basis of guidance from his father and friends. The purchase and sale of shares was neither pre-planned nor under any arrangement with the company or any party related to it. The allotment of shares by PAL was made after obtaining prior approval of BSE as per SEBI Issue of Capital and Disclosure Requirements Regulation, 2009. We noted from the facts that as per the financials provided in the assessment order, it can be seen that the company had incurred a loss in FY 11-12 of Rs. 7 lakhs and has earned profit of 16 lakhs in FY 12-13. The fact that PAL was turned from loss making to profit earning itself demonstrates the fact that there was potential in PAL due to which the assessee purchased the shares. Further, the turnover, in the FY 2013-14 increased by 10 times as compared to the preceding previous FY and increase in the net profit after tax was almost around 4 times than that of the net profit recorded in the year of purchase. Moreover, the prices of the company were almost constant for a year. When the assessee thought that the prices had reached its peak, he slowly sold all the shares in a time span of 3 months. To prove the genuineness of the transactions, the assessee provided all the supporting evidences like, share application form, bank statement highlighting the 61 | P a g e 3427-3429/Mum/2019, 3311-3313/Mum/2019, 3426/Mum/2019, 3264&3265/Mum/2019, 3247&3248/Mum/2019 transactions, contract notes, broker's ledger, demat statement Form 10DB, SEBI's final order, SAT Order, etc.

However, the AO made addition under section 68 of the Act and CIT(A) confirmed the addition by ignoring all the facts and evidences and without providing any proof of assessee's involvement in the manipulation of price or volume of the shares of the company or pointing out any defect or deficiency in the process of transactions or its eligibility to deduction u/s 10(38) of the Act. We noted that the AO in his Assessment Order in para 7 and 8 has exhaustively mentioned in detail the financials of PAL, preferential allotment of shares, price of PAL, Exit providers, etc. Following paras have been ditto /copied from SEBI ad-interim ex-parte order dated 08.05.2015. Although after Investigation, SEBI in its final order exonerated the assessee and the alleged exit providers but the AO failed to consider the SEBI final order in the assessment order. It means that the AO and CIT(A) also relied on the order of SEBI dated 08.05.2015 mainly for drawing inferences and deciding the issue on the basis of conjunctures and surmises and not on evidences.

In view of the above, we noted that it is SEBI who monitors and regulates the stock exchanges & stock market and when their investigation did not reveal any price or volume manipulation by the assessee and these transactions are in the normal course through proper & legal channels. Then the 62 | P a g e 3427-3429/Mum/2019, 3311-3313/Mum/2019, 3426/Mum/2019, 3264&3265/Mum/2019, 3247&3248/Mum/2019 allegations of the IT Department fall flat and denial of deduction u/s 10(38) of the Act is arbitrary and addition of sale proceeds of shares of PAL u/s 68 is against the provisions of Act. The assessee in his reply dated 20.11.2017 submitted to the AO that the allegations mentioned in paras of show cause notice are based entirely on SEBI ad-interim ex-parte order dated 08.05.2015 which was reversed after detailed investigation wherein SEBI has exonerated the assessee of all the allegations without any qualification. A copy of SEBI Final order dated 19.09.2017 was also enclosed with the APB. But the AO has failed to refer to assessee's submissions and SEBI's final order dated 19.09.2017 in the assessment order inspite of the fact that assessee's submissions and SEBIs final order were already on its record thereby contravening the principles of natural justice.

We also noted that as per provisions of section 68 of the Act, where any sum is found credited in the books in any previous year and assessee offers no explanation about the nature and source thereof or the explanation offered is not satisfactory to the AO, the sum credited may be charged to tax under Sec. 68 of the Act. The assessee is required to prove: (i) the identity of the creditor (ii) Source of the credit and (iii) genuineness of the transaction to the satisfaction of the AO. To prove the identity of the creditor, the nature of transactions, source of payments and the genuineness of the transactions of 63 | P a g e 3427-3429/Mum/2019, 3311-3313/Mum/2019, 3426/Mum/2019, 3264&3265/Mum/2019, 3247&3248/Mum/2019 sale of shares of PAL, the assessee has submitted following documents/ evidences: - a) To prove the identity of creditor and nature of transaction the assessee submitted copy of Contract note on sale by Geojit on BSE platform. The contract notes shows the quantity, rate, time stamp, value, taxes and charges viz. STT, brokerage, SEBI and exchange turnover charges, service tax and stamp duty incurred on all the transactions done on BSE platform, a stock exchange recognized by the market regulator SEBI. The documents have been accepted by the AO. b) Bank statement showing sale proceeds credited by the broker Geojit. Demat account of the assessee showing sold shares debited / transferred to broker. c) The sale consideration is received by assessee from Geojit, a registered broker of SEBI/BSE, with who has been dealing with Geojit for more than 10 years as per contract note directly in the bank account after shares are delivered from demat account and received by the assessee. Copy of demat account and bank statements where sale proceeds are received are submitted as discussed above. Geojit has also been examined and interrogated by the Investigation Department during search proceedings. Geojit's source is BSE settlement system. This explains identity of the creditor and source of 64 | P a g e 3427-3429/Mum/2019, 3311-3313/Mum/2019, 3426/Mum/2019, 3264&3265/Mum/2019, 3247&3248/Mum/2019 money paid by assessee for genuine transaction of sale of shares. d) Sale is done at prevailing price quoted on the BSE. (BSE published quotations daily and rate list of the relevant dates can be produced if required) e) The shares are sold by assessee's broker on BSE platform and not off market to any buyer hence source is BSE's clearing system and broker. The transactions on the BSE platform and settlement system who are responsible for the transactions of the demat account and prevailing price on public domain prove the genuineness of the transactions.

f) SEBI's final order dt. 19.09.2017 relating to PAL is enclosed. SEBI after detailed investigation into the transactions in the shares of these companies held that the parties to the investigation including assessee and alleged exit providers are having no nexus or connection with the company, their directors, promoters etc. and there is no price or volume manipulation in these scripts. This also explains the genuineness of the transactions and discards the theory of manipulation or accommodation to take tax advantage illegally.

We have also noted the facts further that the assessee has received total amount of Rs. 14,16,80,449/- on account of sale 65 | P a g e 3427-3429/Mum/2019, 3311-3313/Mum/2019, 3426/Mum/2019, 3264&3265/Mum/2019, 3247&3248/Mum/2019 of shares of PAL during the year, in the account with Axis Bank from Geojit, registered broker of BSE with whom the assessee is dealing from last more than 10 years. The assessee has been regular investor in shares & securities and his portfolio comprises of various shares and the aggregate value of investments for 5 years have been as under: - AY ( as on date) Total investment in shares – Amount (in Rs.) 31.03.2011 3,77,21,394 31.03.2012 3,33,40,018 31.03.2013 2,66,87,649 31.03.2014 2,91,24,876 31.03.2015 2,58,84,431 Copies of Balance Sheet of the assessee for the above mentioned years showing the investments made in shares were submitted to the AO vide submission dated 15.03.17 as well as before CIT(A) and even now before us. This adds to the bonafide of the assessee’s transactions. In view of the above facts and circumstances of the case, we have to go through the expression of "nature and source" and has to understand the requirement of identification of the source and its genuineness. Sec. 68 of the Act places the burden of proof on the tax payer, to explain the nature of source of any credit but not the source of the source. Hence when an assessee gives evidences of identity of the payer, source of the credit, evidences of the transactions to prove the genuineness, the assessee is said to have discharged his initial burden. In view of the above, we are 66 | P a g e 3427-3429/Mum/2019, 3311-3313/Mum/2019, 3426/Mum/2019, 3264&3265/Mum/2019, 3247&3248/Mum/2019 of the view that the assessee has explained and submitted evidences to prove identity, nature and source of the cash credit on account of sale proceeds credited / received in the bank account of the assessee and also furnished all evidences comprising contract notes, brokers, banking details in support of the genuineness of the transactions. The AO has not pointed out any deficiency in the documents or inherent weakness in the explanation or doubted genuineness of the transactions for want of any evidence. The AO did not produce any evidence whatsoever to prove the allegation that unaccounted money changed hands between the assessee and the broker or any other person including the alleged exit provider nor proved that the assessee has taken any type of accommodation from any person or so called exit providers to introduce unaccounted money into books by way of LTCG. With the purchase and sale transactions of shares of PAL are proved genuine by third parry evidences - bank, broker; DP-demat account, and in the absence of any material to prove cash changing hands in the transaction, the addition made by the AO under section 68 of the Act, by treating the sale consideration as unexplained, sham, non-genuine is baseless. The addition under section 68 of the Act made merely of the basis of suspicion, presumptions and probability of preponderance without any direct evidence to prove the transactions as non-genuine or sham or demonstrating appellant's involvement in any kind of manipulation is illegal and cannot sustain. The findings of 67 | P a g e 3427-3429/Mum/2019, 3311-3313/Mum/2019, 3426/Mum/2019, 3264&3265/Mum/2019, 3247&3248/Mum/2019 investigation & modus operandi in other cases narrated by the AO and also CIT(A) nowhere prove any connection with the assessee nor the assessee's involvement or connection or collusion with the brokers, exit providers, accommodation providers or companies or directions etc. For making the addition, it is necessary to bring on record evidence to establish ingenuity in transactions or any connection of the assessee or its transaction with any of the alleged parties. The assessee has discharged his onus by establishing the identity of the payer, source of the credit and genuineness of the transactions.

We noted that the learned CIT Departmental Representative also relied on the decision of the Hon’ble Bombay High Court, Nagpur Bench in the case of Sanjay Bimalchand Jain vs. Pr. CIT (2018) 89 taxmann.com 196 (Bom), wherein the decision on the impugned issue was discussed. Hon’ble High Court has considered the facts of Sanjay Bimaichand Jain supra from where we find that (i) in that case, the broker company through which the shares were sold did not respond to AO's letter regarding the names and address and bank account of the person who purchased the shares sold by the assessee (ii) Moreover, at the time of acquisition of shares of both the companies by the assessee, the payments were made in cash (iii) The address of both the companies were interestingly the same (iv) The authorized signatory at both the companies were also the same person (v) The purchase of shares of both the companies was done by that 68 | P a g e 3427-3429/Mum/2019, 3311-3313/Mum/2019, 3426/Mum/2019, 3264&3265/Mum/2019, 3247&3248/Mum/2019 assessee through broker, GSSL and the address of the said broker was incidentally the address of the two companies. Based on these crucial facts, the Hon'ble Bombay High Court rendered the decision in favour of the revenue. None of these factors were present in the facts of the assessee before us. Hence it could be safely concluded that the decision of Hon’ble Bombay High Court supra is factually distinguishable.

Now we will discuss the modus operandi, preponderance of probability and human behavior. We noted that the AO as well as CIT(A) have rejected all evidences filed by the assessee by referring to 'Modus Operandi" of persons for earning long term capital gains which is exempt from Income tax under section 10(38) of the Act. All these observations are general in nature and are applied across the board to all including the assessee. Specific evidences produced by the assessee are not controverted by the revenue authorities. No evidence collected by the AO from third parties is confronted to assessee. No opportunity of cross-examination of persons, on whose statements the revenue relies to make the addition, it provided to the assessee. The addition is made based on a general report from the investigation wing.

The issue for consideration before us is whether in such cases, the legal evidence produced by the assessee has to guide our decision in the matter or the general observations based on statements, probabilities, human behavior and discovery of the 69 | P a g e 3427-3429/Mum/2019, 3311-3313/Mum/2019, 3426/Mum/2019, 3264&3265/Mum/2019, 3247&3248/Mum/2019 modus operandi adopted in earning alleged bogus LTCG and STCG, that have surfaced during investigations, should guide the authorities in arriving at a conclusion as to whether the claim is genuine or not. An alleged scam might have taken place on LTCG etc. But it has to be established in each case, by the parry alleging so, that this assessee in question was part of this scam. The chain of events and the live link of the assessee's action giving his involvement in the scam should be established. The allegation implies that cash was paid by the assessee and in return the assessee received LTCG, which is exempt from income tax, by way of cheque through banking channels. This allegation that cash had changed hands has to be proved with evidence, by the revenue. Evidence gathered by the Director Investigation's office by way of statements recorded etc. has to also be brought on recording each case, when such a statement, evidence etc. is relied upon by the revenue to make any additions. Opportunity of cross examination has to be provided to the assessee, if the AO relies on any statements or third party as evidence to make an addition. If any material or evidence is sought to be relied upon by the AO, he has to confront the assessee with such material. The claim of the assessee cannot be rejected based on mere conjectures unverified by evidence under the pretentious garb of preponderance of human probabilities and theory of human behavior by the department.

It is well settled that evidence collected from third parties cannot be used against an assessee unless this evidence is put before him and he is given an opportunity to controvert the evidence. In this case, the AO relies only on a report as the basis for the addition. The evidence based on which the DDIT report is prepared is not brought on record by the AO nor is it put before the assessee. The submissions of the assessee that he is just an investor and as he received some tips and he chose to invest based on these market tips and had taken a calculated risk and had gained in the process and that he is not party to the scam etc., has to be controverted by the revenue with evidence when a person claims that he has done these transactions in a bona fide manner, one cannot reject this submission based on surmises and conjectures. As the report of investigation wing suggests, there are many beneficiaries of LTCG. Each case has to be assessed based on principles of legal import laid down by the Courts of law.

In our view, just the modus operandi, generalisation, preponderance of human probabilities cannot be the only basis for rejecting the claim of the assessee. Unless specific evidence is brought on record to controvert the validity and correctness of the documentary evidences produced, the same cannot be rejected by the assessee. The Hon'ble Supreme Court in the case of Omar Salay Mohamed Sait v. CIT [1959] 37 ITR 151 (SC) had held that no addition can be made on the basis of surmises, suspicion and conjectures. In the case of CIT v.

But in the present case, we noted that the assessing officer has been guided by the report of the investigation wing prepared with respect to bogus capital gains transactions. The assessing officer has not brought out any part of the investigation wing report in which the assessee has been investigated and /or found to be a pan of any arrangement for the purpose of generating bogus long term capital gains. Nothing has been brought on record to show that the persons 72 | P a g e 3427-3429/Mum/2019, 3311-3313/Mum/2019, 3426/Mum/2019, 3264&3265/Mum/2019, 3247&3248/Mum/2019 investigated, including entry operators or stock brokers, have named that the assessee was in collusion with them. In absence of such findings how is it possible to link their wrong doings with the assessee. In fact, the investigation wing is a separate department which has not been assigned assessment work and has been delegated the work of only making Investigation. The Act has vested widest powers on this wing. It is the duty of the investigation wing to conduct proper and detailed inquiry in any matter where there is allegation of tax evasion and after making proper inquiry and collecting proper evidences the matter would be sent to the assessment wing to assess the income as per law. We find no such action executed by investigation wing against the assessee. In absence of any findings specifically against the assessee in the investigation wing report, the assessee cannot be held to be guilty or linked to the wrong acts of the persons investigated. In this case, the AO at best could have considered the investigation report as a starting point of Investigation. The report only Informed the AO that some persons may have misused the scrip: for the purpose of collusive transactions. The AO was duty bound to make inquiry from all concerned parties relating to the transactions and then to collect evidences that the transaction entered into by the assessee was also a collusive transaction. However, the AO has not brought on record any evidence to prove that the transactions entered by the assessee which are otherwise 73 | P a g e 3427-3429/Mum/2019, 3311-3313/Mum/2019, 3426/Mum/2019, 3264&3265/Mum/2019, 3247&3248/Mum/2019 supported by proper third party documents are collusive transactions.

The Hon'ble Supreme Court way back in the case of Lalchand Bhagat Ambica Ram v. CIT [1959] 37 ITR 288 (SC) held that assessment could not be based on background of suspicion and in absence of any evidence to support the same. The Hon'ble Court held:

The observations of the Hon'ble Apex Court are equally applicable to the case of the assessee. The AO and CIT(A) both, having failed to bring on record any material to prove that the transactions of the assessee were collusive transactions could not have rejected the evidences submitted by the assessee. In fact, in this case nothing has been found against the assessee with aid of any direct evidences or material against the assessee despite the matter being investigated by various wings of the Income Tax Department and hence under these circumstances nothing can be implicated against the assessee. In view of the above, the findings / allegations of the AO and CIT(A) are baseless, without any evidence, contrary to the facts 76 | P a g e 3427-3429/Mum/2019, 3311-3313/Mum/2019, 3426/Mum/2019, 3264&3265/Mum/2019, 3247&3248/Mum/2019 and circumstances of the case and provisions of the Act. Hence, we delete the addition made by the AO by setting aside the order of ld. CIT(A) based upon such findings. This common issue as regards to addition under section 68 of surplus arising out of sale of shares of listed companies and consequent addition under section 69C on the presumption that commission at the rate of 3% was paid is hereby deleted. Accordingly, this common and interconnected issue of the four assessee’s appeals is allowed.

Similarly, common and inter-connected issues in the cases of Vijay Ratan Balkrishan Mittal in 3429/Mum/2019 for AYs 2012-13 to 2014-15, Mahendra B Mittal (HUF) in ITA No. 3426/Mum/2019 for AY 2013-14, Pooja Mahendra Mittal in ITA Nos. 3311-3314/Mum/2019 for AYs 2012-13 to 2015-16 & Mahendra B Mittal in ITA Nos. 3264 & 3265/Mum/2019, 3247/Mum/2019 AY 2012-13, 2014-15 & 2013-14 respectively, hence, taking consistent view in these appeals also, we allow the same.

The next common issue in these appeals, in the cases of Vijay Ratan Balkrishan Mittal in ITA Nos. 3427-3429/Mum/2019 for AYs 2012-13 to 2014-15, Mahendra B Mittal (HUF) in ITA No. 3426/Mum/2019 for AY 2013-14, Pooja Mahendra Mittal in ITA Nos. 3311-3313/Mum/2019 for AYs 2012-13 to 2014-15 & Mahendra B Mittal in ITA Nos. 3264 & 3265/Mum/2019, 3247/Mum/2019 AY 2012-13, 2014-15 & 2013-14 respectively, 77 | P a g e 3427-3429/Mum/2019, 3311-3313/Mum/2019, 3426/Mum/2019, 3264&3265/Mum/2019, 3247&3248/Mum/2019 is as regards to the assumption of jurisdiction by the AO despite the fact that no incriminating material was found during the course of search qua these assessor’s on 03.12.2015. According to the learned Counsel, this issue is squarely covered by the decision of Hon’ble Bombay High Court in the case of continental CIT vs Continental Warehousing Corporation (Nhava Sheva) Ltd. (2015) 374 ITR 645 (Bom) The learned Counsel for the assessee stated that this is common issue in all these 9 appeals. For the sake of brevity and better understanding ,the issue raised in the case of Mahendra B Mittal in ITA No. 3264/Mum/2019 for AY 2012-13 taking this as lead case so far as this issue is concerned reads as under: - “1. The Commissioner of Income Tax (appeals) [hereinafter referred to as “the CIT(A) / Assessing Officer [hereinafter referred to as “the AO] failed to appreciate that the assessment order under section 143(3) read with section 153A framed in the absence of any unaccounted cash, jewellery or any incrementing material found in the course of search was bad in law;”

The facts of the case have been given hereinabove; however, the relevant facts are being reiterated for the sake of convenience. The assessee filed the return of income for the instant year on 17.07.2013 which was processed under section 143(1) of the Act. The search and seizure action under section 132 of the Act was conducted 03.12.2015. The notice under section 153A was issued on 16.01.2017 and the return was filed in response thereto on 20.02.2017. Now, the assessee has raised issue that the additions as made by the AO in the assessment as framed under section 143(3) read with section 153A of the Act dated 22.12.2017 without referring to incriminating material found during the course of search are without legal jurisdiction and have to be deleted.

The CIT(A) dismissed the ground raised by the assessee on this legal issue by holding that material obtained by issuing notice under section 133(6) of the Act to Bombay Stock Exchange (BSE) and on the basis of information filed by the BSE sale transactions of shares of M/s BML & M/s RGL were synchronised trades and prearranged for obtaining bogus LTCG. The learned CIT(A) further observed that BSE data and material on record had proved beyond doubt that counter parties to whom the shares of M/S BML and M/s RGL were sold were all Exit Provider/ Entry Provider/ Shell companies and constituted incriminating materials and were rightly used by AO in framing assessment under section 143(3) r.w.s 153A of the Act.

The learned AR vehemently argued that additions as made by the AO in the assessment framed under section 143(3) r.w.s 153 of the Act dated 22.12.2017 were without jurisdiction as the assessment has not abated on the date of search. The learned AR submitted that in case of unabated assessment on the date of search, the addition has to be made with reference to incriminating material seized during the course of search and if no such material is seized, the addition to the income of the assessee in unabated assessment is beyond the authority of the AO. The learned AR while drawing our attention to provision of section submitted that there where search is conducted under section 132 of the Act, the notice under section 153A of the Act is to be issued in respect of six assessment years falling prior to the date of search. The learned AR submitted that so far as the unabated assessment years are concerned , the AO has very limited jurisdiction so far as the scope of the assessment of the assessee’s income is concerned. In other word, the addition can only be made in case of unabated assessment on the basis of incriminating material, if any, seized during the course of search whereas the power of the AO to make addition in the case of abated assessment is co-terminus to the powers of the AO under the normal assessment proceedings under section 143(3) of the Act. The learned AR therefore submitted that the order of CIT(A) upholding the order of AO by holding that information gather from BSE by issuing notice under section 133(6) of the Act qua the share transactions of M/s BML and 80 | P a g e 3427-3429/Mum/2019, 3311-3313/Mum/2019, 3426/Mum/2019, 3264&3265/Mum/2019, 3247&3248/Mum/2019 M/s RGL scripts constituted incriminating materials is against the spirit of law as the section envisages the incriminating material during the course of search and not during the course of assessment or appellant proceegings. In defense of argument, the learned relied on the decisuion of Bombay High Court in the case of continental CIT vs Continental Warehousing Corporation (Nhava Sheva) Ltd. (2015) 374 ITR 645 (Bom).

The learned DR on the other hand relied heavily on the order of learned CIT(A) by submitting that the evidences were gathered after issuing notice under section 133(6) of the Act that the assessee was carrying on a systematic activity in the shares of BML and RGL to secure bogus long term capital gain and the learned CIT(A) clearly held that such a material constituted incriminating material and rightly used in making the addition in the order passed under section 143(3) r.w.s 153 of the Act. The DR prayed before the bench to uphold the order of ld CIT(A) on this issue.

After hearing both the parties and perusing the facts on record, we observed that undisputably the assessment in the instant year has not abated on the date of search. We further find that the evidences were gathered after issuing notice under section 133(6) that assessee has carried out synchronized trades for obtaining bogus LTCG. In our opinion, the said information / data is collected after the date of search and does not constitute incriminating material found and seized during the course of search. Keeping in view the said facts and 81 | P a g e 3427-3429/Mum/2019, 3311-3313/Mum/2019, 3426/Mum/2019, 3264&3265/Mum/2019, 3247&3248/Mum/2019 circumstances, we are of the considered view that addition to the income of the assessee can only be made on the basis of incriminating record found during the course of search . In the present case, there is no such incriminating material and therefore, the AO has no jurisdiction to make addition in the unabated assessment . The case of the assessee is squarely covered by the decision of Hon’ble Bombay High Court decision in the case of Continental Warehousing Corporation (Nhava Sheva) Ltd. (supra), wherein the Hon’ble Bombay High Court held as under: - “a) Whether on the facts and in the circumstances of the case and in law, the ld. CIT(A) was justified in deleting the addition of ₹ 3,91,55,000/- under section 68 of the Act in respect of share application money and addition of ₹ 11,24,964/- under section 14A made by the Assessing Officer, as it was not based on incriminating material found during the course of search. d) Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) was justified in deleting the addition of ₹ 3,91,55,000/- under section 68 of the Act in respect of share application money and addition of ₹ 11,24,964/- under section 14A made by the assessing officer without appreciating the fact that the decision of continental warehousing 82 | P a g e 3427-3429/Mum/2019, 3311-3313/Mum/2019, 3426/Mum/2019, 3264&3265/Mum/2019, 3247&3248/Mum/2019