THE DCIT, CIRCLE-1(1)(2), AHMEDABAD vs. SHRI SANJAY CHIMANLAL AGRAWAL,, AHMEDABAD

आदेश/ORDER PER : SIDDHARTHA NAUTIYAL, JUDICIAL MEMBER:-

The revenue is in appeal before us against the order of ld. CIT(A)-1, Ahmedabad dated 30/08/2019. The revenue has raised following grounds of appeal:-

“(1) The Id. CIT(A) has erred in law and in facts in deleting the addition of Rs.1,96,04,023/- made u/s 68 of the IT. Act. (2) It is, therefore, prayed that the order of Id. CIT(A) may be set aside and that of the Assessing Officer be restored.”

“1. The Ld. CIT(A) has erred in law and on facts in confirming the action of Ld. A.O in issuing the notice u/s. 148 of the Act and reassessment proceedings u/s. 143(3) r.w.s. 147 of the Act without properly considering the contention of the Respondent various judicial pronouncements relied upon by the Respondent the reassessment proceedings before the A.O as well as in the appellate proceedings before the Ld. CIT(A). 2. The Ld. CIT(A) after taking into consideration the submission of the Respondent and various judicial pronouncements relied upon by the Respondent held that the Respondent has been holding the shares of M/s. Suryanagri Finlease Ltd as promoter since 1994 which is a public listed company on the BSE and the AO has not doubted the purchase of shares. The AO has not brought out any material how the Respondent has brought its own unaccounted fund when the acquisition of shares has not been doubted and shares have been sold on stock exchange through proper banking channel. There is neither any statement of any persons mentioned through whom unaccounted money has been brought in nor has the AO brought any material on record to support his findings that there was collusion / connivance between the broker and the appellant for the introduction of his unaccounted money. In Respondent's case, there is no material to suggest that the purchase and sale of the shares were bogus. The Hon'ble Kolkata Tribunal in the case of DCIT vs. Sunita Khema in ITA No. 714 to 718/KOL/2011 has held that the AO cannot treat transaction as bogus only on the basis of

I.T.A No. 1580/Ahd/2019 & CO No. 19/Ahd/2020 A.Y. 2013-14 Page No. 3 DCIT vs. Shri Sanjay Chimanlal Agrawal

suspicion or surmise. The Ld. CIT(A) further following the judicial pronouncements of the Hon'ble Gujarat High Court in the case of CIT-1 vs. Maheshchand G. Vakil [140 taxmann.com 326 and in the case of CIT-1 vs. Himani M. Vakil 10 taxmann.com 326 held that where assessee duly prove genuineness of share transaction by bringing on record contract notes for sale and purchase, bank statement of broker and DMAT account showing transfer in and out of shares, the AO was not justified in bringing to tax capital gain arising from sale of shares as unexplained cash credit and the Ld. CIT(A) has rightly deleted the addition made by the AO u/s. 68 of the Act of Rs. 1,96,04,023/-. 3. The Respondent craves right to add, amend, alter, modify substitute, delete or modify all or any of the above grounds of cross objection.”

I.T.A No. 1580/Ahd/2019 & CO No. 19/Ahd/2020 A.Y. 2013-14 Page No. 4 DCIT vs. Shri Sanjay Chimanlal Agrawal

3.1 In response, the assessee filed certain objections vide letter dated 27- 06-2018 which were rejected vide order dated 27-08-2018 and the ld. Assessing Officer held that the objection raised by the assessee are found to be untenable both in facts and in law. During the course of assessment proceedings, the Assessing Officer observed that the entire LTCG of Rs. 1,53,04,259/- was on account of sale of only one scrip namely M/s Suryanagari Fin-lease Ltd. The Assessing Officer observed that during F.Y. 2007-08 the assessee purchased 80,539 shares of M/s Suryanagari Fin-lease Ltd. and assessee had acquired 4,27,420/- shares of M/s. Suryanagari Fin- lease Ltd. between 1994 to 2007. The ld. Assessing Officer held that M/s Suryanagri Fin-lease Ltd is a penny stock used as an instrument to claim bogus LTCG and the price of such penny stocks are artificially raised in order to book bogus claim of LTCG. The Assessing Officer observed that during the period March, 2009 to March, 2018, M/s Suryanagari Fin-ease Ltd. had earned almost negligible income and therefore there is no economic rationale in sudden increase in the share price when there were no prospects of its sustainability. The ld. Assessing Officer also noted that during any particular year from March, 2010 to March, 2015 the price of the scrip reached high and by the end of that year it fell on the floor without any economic rationale. The ld. Assessing Officer accordingly held that M/s Suryanagari Finlease Ltd is a penny stock. The assessee was the Managing Director and executive promoter of M/s Suryanagari Finlease Ltd having promoter’s stake in it. The profit on sale of shares of M/s Suryanagari Finlease Ltd. reported by the assessee and claimed as exempt income are not commensurate with the prospects of the company or valuation that the scrip

I.T.A No. 1580/Ahd/2019 & CO No. 19/Ahd/2020 A.Y. 2013-14 Page No. 5 DCIT vs. Shri Sanjay Chimanlal Agrawal

of such company can command in the market. Therefore, the Assessing Officer held that it is evident that the price of the scrip has been artificially manipulated so as to route the assessee’s unaccounted funds in the garb of LTCG which was claimed as exempt income in the year under consideration. Accordingly, the ld. Assessing Officer added an amount of Rs. 1,96,04,023/- which is the sale consideration of the impugned scrip M/s Suryanagri Fin Lease Ltd. to the income of the assessee u/s. 68 of the Act.

3.2 The ld. CIT(A) in appellate proceedings allowed the assessee’s appeal and deleted the addition of Rs. 1,96,04,023/- made by the Assessing Officer. The ld. CIT(A) observed that the assessee had been holding the shares of M/s Suryanagari Fin-lease Ltd. from 1994 which is public listed company on Bombay Stock Exchange (BSE). The assessee had purchased 80,539 shares of the company between 12-04-2007 to 12-06-2007 from BSE at Rs. 12.29 to Rs. 14.80 per share. The appellant sold 4,00,000 shares of the company through stock exchange in the price range of Rs. 47.45 to 49.95 per share during financial year 2012-13. The ld. CIT(A) noted that the Assessing Officer has not brought out any material how the appellant has brought its own unaccounted fund when the acquisition of shares has not been doubted and the shares have been sold on stock exchange. There is neither any statement of any persons mentioned through whom unaccounted money has been brought in. In the assessee’s case, the acquisition of share is not doubted and assessee has held the shares for 13 years. The addition u/s. 68 of long term capital gain cannot be made merely on suspicion and on account of earning of high quantum of capital gains. In the assessee’s case, there is no material besides the mere allegation that the purchase and sale of

I.T.A No. 1580/Ahd/2019 & CO No. 19/Ahd/2020 A.Y. 2013-14 Page No. 6 DCIT vs. Shri Sanjay Chimanlal Agrawal

the shares were bogus. Accordingly, the ld. CIT(A) held that the Assessing Officer in the instant set of facts was not justified to make addition u/s. 68 of the Act on sale of proceeds of shares of Rs. 1,96,04,023/- held for more than 13 years. The ld. CIT(A) deleted the addition and allowed the assessee’s appeal by observing as below:

4.5. It is seen that appellant has been holding the shares of M/s. Suryanagri Finlease Limited from 1994 which is public listed company on BSE. The Assessing Officer has not doubted the purchase of share. The appellant has last purchased 80,539 shares of the company between 12/04/2007 to 12/06/2007 from the BSE stock exchange @ Rs.12.29 to Rs.14.80 per share. The appellant has sold 4,00,000 shares of the company through stock exchange at the price in the range of Rs. 47.45 to Rs.49.95 per share during Financial Year 2012-13. The Assessing Officer has added entire sale proceeds of Rs.1,96,04,023/- u/s. 68 of the I. T. Act, 1961 holding that appellant has brought its own unaccounted fund to its book. The Assessing Officer has not brought out any material how the appellant has brought out any material how the appellant has brought its own unaccounted fund when the acquisition of shares has not been doubted and shares have been sold on stock exchange. There is neither any statement or any persons mentioned through whom unaccounted money has been brought in. The Honourable Bombay High Court in the case of Sanjay Bimalchand Jain has confirmed long term capital gain on penny stock where assessee has acquired shares of company through dubious means using

I.T.A No. 1580/Ahd/2019 & CO No. 19/Ahd/2020 A.Y. 2013-14 Page No. 7 DCIT vs. Shri Sanjay Chimanlal Agrawal

accommodation entry provider and sold on stock exchange. In the above case, there was a clear modus operandi of Kolkata based brokers to provide long term entry of bogus long term capital gain. The appellant's case is on a different footing where acquisition of shares is not doubted and appellant has held the Share of 13 years. The addition u/s. 68 of long term capital gain cannotbe made merely on suspicion and on high capital gain. In appellant'scase, there is no material to suggest that the purchase and sale of the shares were bogus. The Honourable Kolkata Tribunal in the case of DCITVs. SunitaKhema in ITA No.714 to 718/KOL/2011 has held that the AO cannot treat transaction as a bogus only on the basis of suspicion or surmise. He has to bring material on record to support his findings that has been collusion / connivance between the broker and the assessee for the introduction of its unaccounted money. A transaction of purchase and sale of shares supported by contract notes, DMAT accounts and account payee cheque cannot be treated as bogus. The Honourable Gujarat High Court in the case of Commissioner of Income Tax-1 Vs. MaheshchandraG. Vakil [40 Taxmann.com 326] has held that where assessee prove genuineness of share transactions by contract notes for sales and purchase, bank statement of broker, DMAT accounts showing transfer in and out of shares as also abstract of transactions furnished by stock exchange, AO is not justified in treating capital gain arising from sale of shares as unexplained cash credit. In the similar case, Honourable Gujarat High Court in the case of Commissioner of Income Tax-1 Vs. Himani M. Vakil [41 Taxmann.com 425] has held that where assessee duly

I.T.A No. 1580/Ahd/2019 & CO No. 19/Ahd/2020 A.Y. 2013-14 Page No. 8 DCIT vs. Shri Sanjay Chimanlal Agrawal

prove genuineness of share transaction by bringing on record contract notes for sale and purchase, bank statement of broker and DMAT accounts showing transfer in and out of shares, AO was not justified in bringing to tax capital gain arising from sale of shares as unexplained cash credit. In view of the above facts, AO was not justified to make the addition u/s. 68 of the I. T. Act, 1961 of sale proceeds of shares of Rs.1,96,04,023/- held for more than ten years. The addition made by the AO is accordingly deleted. The ground of appeal is accordingly allowed.

3.3 In the appeal before us, the Department drew our attention to observations made by the ld. Assessing Officer at page numbers 2, 11 and 12 (Para 5.4) of the assessment order wherein the ld. Assessing Officer has established that the assessee is engaged in the sale of penny stock and has made substantial capital gains using the medium of stock exchange. The ld. Departmental Representative placed reliance on the observations made in the assessment order to argue that ld. CIT(A) has erred in deleting the disallowance. Ld. DR asserted that it is beyond doubt that LTCG of Rs. 1,53,04, 249/- which is claimed as exempt by the assessee is nothing but the assessee’s own unaccounted fund of Rs. 1,96,04,238/- (total sale consideration) brought back to its book using the scheme of accommodation entries. The Ld. AR of the assessee in response to drew our attention to page 37 of the paper book where in the reasons for reopening, it has been mentioned by the Department that it is M/s. Surabhi Chemicals & Investments which is a penny stock and not M/s Suryanagari Fin-Lease Ltd. and during the year under consideration, the assessee has sold shares of M/s

I.T.A No. 1580/Ahd/2019 & CO No. 19/Ahd/2020 A.Y. 2013-14 Page No. 9 DCIT vs. Shri Sanjay Chimanlal Agrawal

Suryanagari Fin-Lease Ltd. which has not been identified as a penny stock company even in the reasons for reopening the assessment. The assessee also produced a list of companies before us which have been identified as penny stock companies and M/s Suryanagri Fin-Lease Ltd.’s name is not appearing in such list of companies as penny stock company. The assessee argued that addition has been made purely on the basis of assumptions and there is no evidence or material to prove that the assessee’s own unaccounted money has been brought in to purchase alleged penny stock and on which exempt LTCG has been claimed. The assessee placed reliance on the observation made by the ld. CIT(A) in his order.

I.T.A No. 1580/Ahd/2019 & CO No. 19/Ahd/2020 A.Y. 2013-14 Page No. 10 DCIT vs. Shri Sanjay Chimanlal Agrawal

Assessing Officer has not brought on record statement of any persons through whom assessee’s own unaccounted money has been brought in. As stated above, the appellant has held the shares for over 13 years and it would be incorrect to treat sale of shares as bogus merely on the basis of suspicion and on account of fact that a substantial quantum of capital gains has been made by the assessee. In the present case, no material has been brought on record to suggest that purchase and sale of shares were bogus. The ld. Assessing Officer has not brought any material to support his finding that there has been collusion or connivance between the broker and the assessee for the introduction of his own unaccounted money. In the present case, the transaction of purchase and sale of shares were duly supported by contract note, demat account and payments were made through banking channel. It would be useful at this stage to refer to some judgments which have dealt with the issue before us:

(i) In the case of PCIT vs. Smt. Krishna Devi, ITA No.125/2020, the Delhi High Court vide order dated January 27, 2021 held that the fact that there was an astounding jump in the share price within two years, which is not supported by the financials, does not justify the AO's conclusion that the assessee converted unaccounted money into fictitious exempt LTCG to evade taxes. The finding is unsupported by material on record & is purely an assumption based on conjecture. The relevant extract of the judgment is reproduced for ready reference:

I.T.A No. 1580/Ahd/2019 & CO No. 19/Ahd/2020 A.Y. 2013-14 Page No. 11 DCIT vs. Shri Sanjay Chimanlal Agrawal

(ii) The Lucknow ITAT in the case of Achal Gupta vs. ITO (ITAT Lucknow) I.T.A. No.501/Lkw/2019 held that the documents demonstrates that the assessee had purchased shares through Brokers for which the payment was made through banking channels. The assessee had sold shares through an authorized stock broker and payment was received through banking channels after deduction of STT. The AO has not doubted any of the documents. The only objection raised is that the scrip from which the assessee had earned Long Term Capital Gain has been held by the Investigation Wing of the Revenue to be a paper entity and that this scrip was being used

I.T.A No. 1580/Ahd/2019 & CO No. 19/Ahd/2020 A.Y. 2013-14 Page No. 12 DCIT vs. Shri Sanjay Chimanlal Agrawal

for creating artificial capital gain. The objection was not found to be acceptable.

(iii) The Mumbai ITAT in the case of Dipesh Ramesh Vardhan vs. DCIT (ITAT Mumbai) I.T.A. No.7648/Mum/2019 held that the AO has not discharged the onus of controverting the documentary evidences furnished by the assessee and by bringing on record any cogent material to sustain the addition. The allegation of price rigging / manipulation has been levied without establishing the vital link between the assessee and other entities. The whole basis of making additions is third party statement and no opportunity of cross-examination has been provided to the assessee to confront the said party. As against this, the assessee's position that the transactions were genuine and duly supported by various documentary evidences, could not be disturbed by the revenue.

(iv) The Delhi ITAT in the case of Suresh Kumar Agarwal vs. ACIT, ITA No 8703/Del/2019 held that the assessee has produced contract notes, demat statements etc & discharged the onus of proving that he bought & sold the shares. The AO has only relied upon the report of the investigation wing alleging the transaction to be bogus. The ITAT held that the AO ought to have examined a number of issues (which are enumerated in the order) and shown that the transaction is bogus. The capital gains are genuine and exempt from tax.

I.T.A No. 1580/Ahd/2019 & CO No. 19/Ahd/2020 A.Y. 2013-14 Page No. 13 DCIT vs. Shri Sanjay Chimanlal Agrawal

(v) The Mumbai ITAT in the case of Vijayrattan Balkrishan Mittal vs. DCIT, ITA No.3311/Mum/2019 held that the fact that a scam has taken place in some penny stocks does not mean that all transactions in penny stocks can be regarded as bogus. In deciding whether the claim is genuine or not, the authorities have to be guided by the legal evidence and not on general observations based on statements, probabilities, human behavior, modus operandi etc. The AO has to show with evidence the chain of events and live link of the assessee's involvement in the scam including that he paid cash and in return received exempt LTCG gains.

In view of the above judicial as applied to the assessee’s set of facts which we have discussed above, in our view, the ld. CIT(A) has not erred in facts or in law in deleting the addition u/s. 68 of the I.T. Act.

Order pronounced in the open court on 30-03-2022

Sd/- Sd/- (ANNAPURNA GUPTA) (SIDDHARTHA NAUTIYAL) ACCOUNTANT MEMBER JUDICIAL MEMBER Ahmedabad : Dated 30/03/2022

I.T.A No. 1580/Ahd/2019 & CO No. 19/Ahd/2020 A.Y. 2013-14 Page No. 14 DCIT vs. Shri Sanjay Chimanlal Agrawal

आदेश क� ��त�ल�प अ�े�षत / Copy of Order Forwarded to:- 1. Assessee 2. Revenue 3. Concerned CIT 4. CIT (A) 5. DR, ITAT, Ahmedabad 6. Guard file. By order/आदेश से,

उप/सहायक पंजीकार आयकर अपील�य अ�धकरण, अहमदाबाद