SMT. RESHMIBEN P. KANUGO,VADODARA vs. ITO, WARD-3(1)(3), VADODARA

आदेश/O R D E R PER WASEEM AHMED, ACCOUNTANT MEMBER:

The captioned appeals have been filed at the instance of different Assessee against the separate orders of the Learned Commissioner of Income Tax (Appeals) Ahmedabad arising in the matter of assessment order passed under s. 143(3) of the Income Tax Act, 1961 (here-in-after referred to as "the Act") relevant to the Assessment Year 2014-2015.

First, we take up ITA No. 2131/Ahd/2018 for A.Y. 2014-15 in the case of Smt Reshmiben P. Kanugo

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transferred in the name of assessee by the company on 31-03-2012. The shares were then dematerlized with Jhaveri Securities Ltd. which was processed in the month of April, 2012 and finally dematerlized in May, 2012. The shares were sub- divided into 50 thousand shares on 3rd August, 2013 and were sold on various dates by the assessee between 09-04-2013 to 25-09-2013 for a total consideration of Rs. 31,60,046/- as per the below table:- Particulars Sale date Sale Purchase Purchas Index Exp Gain/loss Sr. considerati date e Cost Cost No. on 1. Shree Shaleen 09.04.2013 16551 16.09.2011 211 0 0 Textiles Ltd. 2 Do 10.04.2013 32574 16.09.2011 396 0 0 3 Do 25.09.2013 3110921 16.09.2011 25762 31,60,046 26,369 0 31,33,677

(i) From the modus operandi adopted by the assessee, it is seen that purchase transaction has been done off market in physical form which is not supported by any genuine contract note. This has been carried in a planned manner to capitalize the black money taking exemption as long term capital gain.

(ii) The transaction of purchase of shares in physical form and thereafter converting the same into electronic mode is not in conformity with the SEBI guidelines.

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(iii) The assessee is not a regular investor in shares and it is surprising that the assessee has managed to earn a phenomenal return of 78 to 180 times within a short period of time. The assessee has entered into a sham transaction to convert unaccounted money into accounted form.

(iv) The shares have been identified as penny shares by investigation wing of the department because rates on these shares are not based on business results of the company but the same is fluctuated by insider trading.

(v) Statements of brokers, operators, directors of paper companies who has bought these shares, directors of Penny stock companies, all confess to such a scheme with detailed modus operandi which tallies with actual transactions. The assessee is one such beneficiary who has taken entry of LTCG.

vi) Exactly similar entries have been taken by other family members of the assessee in the form of Exempted Long Term Capital Gain and the total bogus LTCG so claimed by assessee, and his family members comes to Rs. 1,55,93,391/- from actual investment of Rs.1,32,401/-. A quick analysis of the above figure shows abnormal return from a very small investment within a span of one to two years, which is quite impossible in normal share trading.

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produced hereunder for better understanding of the case as well as to make nexus with the case: "In this scheme, the shares of the penny stock companies are acquired by the beneficiaries of LTCG at very low prices generally through the route of preferential allotment (private placement) or off market transaction. These shares have a lock-in period of 1 year as per Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009. Another route to acquire the shares is through Amalgamation or merger. In this route, the beneficiaries of LTCG are allotted shares of a private limited company which is subsequently amalgamated with a listed penny stock and the beneficiaries receive shares of the listed penny stock in exchange of the shares of private limited company. Thereafter, the prices of the shares of the penny stock companies are rigged and are raised through circular trading. This is managed by the "operator" of the scrip. An "Operator" is a person who is managing the overall affairs of the scheme and he is the one who contacts the entities who wish to take entry of bogus LTCG/STCL in their books and arranges the same through the scripts of penny stock companies. The Operator manages many paper/bogus companies and uses them to do circular transactions to rig the price of the shares. The shares of these penny stock companies, although listed on exchange, are always closely held and are controlled by the promoter of the Penny Stock Company and the Operator who is arranging for the bogus LTCG/Loss. This is due for the fact that the general public is not interested in these shares as these companies have no credentials and this helps the operator to keep a control on the price movement of the shares. 8. On the basis of statements recorded and findings of the investigation huge amount of beneficiaries were detected and reported for the Assessment wing.In continuation of the above, search and survey operation were carried by the Investigation Wing of Kolkata and New Delhi at about 32 share broking entities and more than 20 Entry operators. Out of the Investigation of such high magnitude, the investigation wing have unearthed and identified some 84 odd companies which are listed on Bombay Stock Exchange and are being used for providing bogus accommodation entry of Long Term Capital Gain/Short Term Capital Loss. List of such company identified by the Department includes the following scrip in which you have traded and shown Long Term Capital Gain as per the details below:- Script Script Full name of penny Amount of total SEBI Action Code Name stock trade value

50551 3 SHRSHA Shree Shaleen 502. 16CRORE Suspended TEX Textiles Ltd

In view of the above, the AO treated the long term capital gain declared by the assessee as unexplained cash credit under section 68 of the Act.

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(i) In the course of assessment proceedings, the assessee filed various documents of purchase and sale which prove that the purchase and sale was done in a legal manner. The Assessing Officer had proceeded only on the basis of the report of the Investigation Wing and the alleged statements of the Director of Adarsh Tele Pvt. Ltd. and the alleged operators have not told in the statements that the assessee was also a beneficiary.

(ii) The assessee was not allowed cross examination of said alleged bogus operators. The assessee relied on the case of Dhwani Mahendra Shah and others (1008-09/922/Ahd/2015) wherein it was held that no adverse decision can be taken against the assessee without giving the opportunity of cross examination. In this decision, it was held that claim of the appellant cannot be denied on the basis of presumption and surmises in respect of penny stock by disregarding the direct evidence on record relating to sale/purchase transaction supported by brokers contract note.

(iii) The Assessing Officer has not found any fault in the documents relating to purchase and sale of shares including contract notes etc. The payments were received through account payee cheques and the

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transaction was done through recognized stock exchange. The inflow of shares is reflected by way of physical share certificate and demat account. There is no evidence that cash was re-cycled and the assessee has nexus with the company, its Directors or Operators engaged in price rigging. The assessee invested in stocks which gave rise to huge capital gain but this does not mean that the transaction is bogus since all the documents and evidences have been produced. The shares were sold in piecemeal on different dates through recognized stock exchange at quoted price.

(iv) The assessee submitted that decisions of Sumati Dayal vs. CIT 214 ITR 80TT (SC) is not applicable to the assessee as it has successfully demonstrated with the help of evidence on record to have made the transaction of purchase and sale of alleged shares. No certain material was brought on record indicating name of any of the entry provider taking assessee’s name or share broker name.

(v) Various decisions quoted by ld. CIT(A) are not applicable in the appellant’s case, since the appellant has proved that the purchase/sale is genuine and the department did not provide any opportunity of cross examination but only proceeded on the statement of Akash Agrawal and other operators to prove the case of the department.

(vi) The assessee has proved that the purchases and sales are genuine and, therefore, in view of the Hon’ble Gujarat High Court decision in the case of CIT vs. Mahesh Chandra G. Vakil (2013) 40 taxmann.com 326 (Guj) capital gain on sale of shares should not be taxed u/s 68 of the I.T. Act. Reliance was also placed on the latest decision of Nishant Kantilal Patel(2013-14/5/SRT/2019) vide order dated 07.01.2021 of Surat Bench

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of ITAT on the same facts. It was requested that based on facts of the case, appeal may kindly be allowed. The assessee submitted that the Assessing Officer has not been able to prove the existence of modus operandi as discussed by him in the assessment order. Since the Assessing Officer has not been able to prove that the cash was actually deposited in those accounts before the issue of the cheque for the sale price, it cannot be said that assessee has followed the modus operandi discussed by the Assessing Officer or CIT(A). Moreover, the Assessing Officer or CIT(A) have not allowed the opportunity of cross examination of Shri Akash Agrawal or Sawan Kumar Jaju. Therefore, this statement cannot be relied upon.

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The ITO ward-3(1)(3) in ITA No. 2130/Ahd/2014 corresponding to the year under consideration i.e. A.Y. 2014-15, where it was held as under: 11. We have heard the rival contentions and perused the materials available on record. In the instant case, the assessee has declared long term capital gain of Rs.62,13,945/- which was treated by the ld. AO as bogus long term capital gain. The view taken by the ld. AO was subsequently confirmed by the Ld. CIT(A). 12. In a recent 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 4849.2% 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 theory of human behavior and preponderance of probabilities, based on Sumati Dayal v. CIT, 214 ITR 801 (SC), cannot be cited as a basis to turn a blind eye to the evidence. The relevant extract of the judgment is reproduced for ready reference: 12. Mr. Hossain’s submissions relating to the startling spike in the share price and other factors may be enough to show circumstances that might create suspicion; however the Court has to decide an issue on the basis of evidence and proof, and not on suspicion alone. The theory of human behavior and preponderance of probabilities cannot be cited as a basis to turn a blind eye to the evidence produced by the Respondent. With regard to the claim that observations made by the CIT(A) were in conflict with the Impugned Order, we may only note that the said observations are general in nature and later in the order, the CIT(A) itself notes that the broker did not respond to the notices. Be that as it may, the CIT(A) has only approved the order of the AO, following the same reasoning, and relying upon the report of the Investigation Wing. Lastly, reliance placed by the Revenue on Suman Poddar v. ITO (supra) and Sumati Dayal v. CIT (supra) is of no assistance. Upon examining the judgment of Suman Poddar (supra) at length, we find that the decision therein was arrived at in light of the peculiar facts and circumstances demonstrated before the ITAT and the Court, such as, inter alia, lack of evidence produced by the Assessee therein to show actual sale of shares in that case. On such basis, the ITAT had returned the finding of fact against the Assessee, holding that the genuineness of share transaction was not established by him. However, this is quite different from the factual matrix at hand. Similarly, the case of Sumati Dayal v. CIT (supra) too turns on its own specific facts. The above-stated cases, thus, are of no assistance to the case sought to be canvassed by the Revenue. 13. The learned ITAT, being the last fact-finding authority, on the basis of the evidence brought on record, has rightly come to the conclusion that the lower tax authorities are not able to sustain the addition without any cogent material on record. We thus find no perversity in the Impugned Order. 13. It may be noteworthy to refer to the Mumbai ITAT in the recent case of Mrs. Pratibha S. Mhatre, Mumbai vs. Income Tax Officer in ITA No.695/Mum./2018 on

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the long-term capital gains on sale of shares of Shree Shaleen Textiles Limited (same entity in which shares were held by the assessee) allowed the claim of exemption under section 10(38) of the Act. In this case also, as in the present case, the assessment was opened on the basis the report of the Directorate of Investigation(Wing), Kolkata and the AO disallowed the claim on the basis of the statements on oath of the Chairman and Managing Director of company to the effect that they have provided and accommodated bogus Long Term Capital Gains. The ITAT had allowed the claim of the assessee on similar facts. 14. 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 on any of the documents. The only objection raised is that the script 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 for creating artificial capital gain. The objection was not found to be acceptable. 15. 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 addition is a 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 that the transactions were genuine and duly supported by various documentary evidences, could not be disturbed by the revenue. 16. 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. He 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. 17. 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.

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Commissioner was based upon the statements given by the aforesaid two witnesses. Even when the assessee disputed the correctness of the statements and wanted to cross-examine, the Adjudicating Authority did not grant this opportunity to the assessee. It would be pertinent to note that in the impugned order passed by the Adjudicating Authority he has specifically mentioned that such an opportunity was sought by the assessee. However, no such opportunity was granted and the aforesaid plea is not even dealt with by the Adjudicating Authority, As far as the Tribunal is concerned, we find that rejection of this plea is totally untenable. The Tribunal has simply stated that cross- examination of the said dealers could not have brought out any material which would not be in possession of the appellant themselves to explain as to why their ex-factory prices remain static. It was not for the Tribunal to have guess work as to for what purposes the appellant wanted to cross-examine those dealers and what extraction the appellant wanted from them. As mentioned above, the appellant had contested the truthfulness of the statements of these two witnesses and wanted to discredit their testimony for which purpose it wanted to avail the opportunity of cross- examination. That apart, the Adjudicating Authority simply relied upon the price list as maintained at the depot to determine the price for the purpose of levy of excise duty. Whether the goods were, in fact, sold to the said dealers/witnesses at the price which is mentioned in the price list itself could be the subject matter of cross-examination. Therefore, it was not for the Adjudicating Authority to presuppose as to what could be the subject mailer of the cross-examination and make the remarks as mentioned above. We may also point out that on an earlier occasion when the matter came before this Court in Civil Appeal No. 2216 of 2000, order dated 17.03.2005 was passed remitting the case back to the Tribunal with the directions to decide the appeal on merits giving its reasons for accepting or rejecting the submissions. In view the above, we are of the opinion that if the testimony of these two witnesses is discredited, there was no material with the Department on basis of which it could justify its action, as the statement of the aforesaid two witnesses was the only basis of issuing the Show Cause We, thus, set aside the impugned order as passed In/ the Tribunal and allow this appeal." 16. On the strength of the aforementioned decision of the Hon'ble Supreme Court, the assessment order has to be quashed. 19. For the sake of the completeness of the adjudication, even on facts of the case, the orders of the authorities below cannot be accepted. There is no denying that consideration was paid when the shares were purchased. The shares were thereafter sent to the company for the transfer in the name. The company transferred the shares in the name of the assessee. There is nothing on record which could suggest that the

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shares were never transferred in the name of the assessee. There is also nothing on record to suggest that the shares were never with the assessee. On the contrary, the shares were thereafter transferred to demat account. The demat account was in the name of the assessee, from where the shares were sold. In our understanding of the facts, if the shares were of some fictitious company which was not listed in the Bombay Stock Exchange/National Stock Exchange, the shares could never have been transferred to demat account. Shri Akash Agarwal may have been providing accommodation entries to various persons but so far as the facts of the case in hand suggest that the transactions were genuine and therefore, no adverse inference should be drawn.Further, the alleged operators have not named the assessee as a beneficiary in their statements. 20. In the light of the decisions of the Hon'ble Supreme Court in the case of Andaman Timber Industries (supra) and considering the facts in totality, the claim of the assessee cannot be denied on the basis of presumption and surmises in respect of penny stock by disregarding the direct evidences on record relating to the sale/purchase transactions in shares supported by broker's contract notes, confirmation of receipt of sale proceeds through regular banking channels and the demat account. 21. We also note that the view taken by the ITAT Ahmedabad Bench in the case as discussed above was also upheld by the Hon'ble Gujarat High Court in the case of PCIT vs. Bharti Somchad Shah in Tax Appeal No.1023 of 2017, wherein it was held as under: “1. The appellant-revenue in this appeal under section 260A of the Income Tax Act, 1961 (hereinafter referred to as the Act) has challenged the order dated 21.10,2016 made by the Income Tax Appellate Tribunal, Ahmedabad Bench B in ITA No.926/And/2015 for assessment year 2008-09, by proposing the following questions stated to be substantial questions of law: [A] Whether the Appellate Tribunal Is correct in law and on facts in not considering the statement of Shri Mukesh M. Chokshi taken on oath u/s.132(4) of the Act and is binding as evidence or not? [B] Whether the Appellate Tribunal is correct in law and on facts in deleting the additions without appreciating the fact that the assessee had not carried out share transactions through stock exchange and those transactions were carried out off market, thus should be treated as illegal and fraudulent or not? 2. Heard Mrs. Mauna Bhatt, learned senior standing counsel for the appellant and Mr. O.K. Puj, learned advocate for the respondent in the appeal. 3. The learned advocate for the respondent has drawn the attention of the court to the order dated 12.09.2017 passed by this court in the case of Principal Commissioner of Income Tax-5 v. Dhwani Mahendra Shah, rendered in Tax Appeal No.674 of 2017, to submit that in an appeal arising out of the common order of the Tribunal, raising identical questions, this

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court has dismissed the appeal and upheld the order passed by the Tribunal. It was submitted that therefore, for the same reasons, this appeal also deserves to be dismissed. 4. Mrs. Mauna Bhatt, learned senior standing counsel for the revenue, is not in a position to dispute the aforesaid position of law. 5. Having regard to the fact that the controversy involved in the present case stands concluded by the above referred decision of this court, it is not necessary to set out the facts and contentions in detail. For the reasons recorded in the order dated 12.9.2017 passed by this court in Tax Appeal No.674 of 2017, it cannot be said that the impugned order passed by the Tribunal suffers from any legal infirmity so as to give rise any question of law, much less, a substantial question of law as proposed or otherwise. The appeal, therefore, fails and is, accordingly, summarily dismissed.” 22. The facts of the case on hand are exactly identical to the facts as discussed above. Therefore, the principles laid down by the Tribunal which were subsequently confirmed by the Hon'ble Gujarat High Court are squarely applicable to the facts in the case on hand. Hence, in view of various decisions cited above, and on appreciation of facts on record, the appeal filed by the assessee is allowed.

Coming to ITA No. 2132/Ahd/2018 an appeal by the assessee Shri Alpesh P Kanugo (HUF) 13. The assessee has raised following grounds of appeal 1. On the facts and circumstances of the case as well as law on the subject, the learned Commissioner of Income Tax (Appeals) has erred in confirming the action of the Assessing Officer of making an addition, being disallowance of claim of exempted long term capital gain on sale of shares of Ms. Shree Shaleen Textiles Ltd. (SHRSH TEX) and treating it as unexplained credits u/s. 68 of the Act. On the facts and circumstances of the case as well as law on the subject, the learned Commissioner of Income Tax (Appeals) has erred in sustaining the addition of ? 31,49,128/- on account of disallowance of the claim of exempted long term capital gain on sale of shares of M/s. Shree Shaleen Textiles Ltd. (SHRSHTA TEX) and treating it as unexplained credits u/s. 68 of the Act.

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Coming to ITA No. 2133/Ahd/2018 an appeal by the assessee Shri Parasmal B. Kanugo (HUF)

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Order pronounced in the Court on 28/02/2022 at Ahmedabad.

Sd/- Sd/- (MADHUMITA ROY) (WASEEM AHMED) JUDICIAL MEMBER ACCOUNTANT MEMBER (True Copy) (True Copy) Ahmedabad; Dated 28/02/2022 Manish