AMIT KUMAR BAJAJ,MUMBAI vs. DCIT-24(1), MUMBAI, MUMBAI

The Assessing Officer, relying heavily on the investigation report, analysis of price movement of the scrip, financials of the company, statements of certain brokers and entry operators, and applying the test of human probabilities, came to the conclusion that the transaction was a pre-arranged and sham transaction, entered into with a view to convert unaccounted money into exempt Long Term Capital Gain. While doing so the Assessing Officer observed following: i. Income of the assessee does not substantial trading activity or investment in shares of listed companies, therefore the decision to acquire shares of M/s. Nouveau Global Ventures Ltd. was predetermined ii. The decision to purchase the impugned share, that too in large quantity, when the company had no proven financial results was predetermined.

The Assessing Officer examined the persons with whom the assessee traded, described as exit entry providers, in relation to the sale of shares of M/s. Nouveau Global Infra Ltd. The AO identified the following entities as the counterparties who purchased the shares sold by the assessee during the relevant period: i. Pushpanjali Commotrade Pvt. Ltd. ii. Conquest Commodeal Pvt. Ltd. iii. Chaturbhuj Marketing Pvt. Ltd. Amit Kumar Bajaj 7. The AO noted that these entities purchased the shares on 27.01.2011 and 28.01.2011, with specific quantities, trade values, and PAN details recorded in the assessment order.

To verify the genuineness of these counterparties and the transactions, the Assessing Officer issued notices under section 133(6) of the Income-tax Act to all such buyers / alleged exit entry providers. However, no replies were received in response to the said notices. Based on the non-compliance to notices under section 133(6), the AO recorded an adverse inference that these buyers were either dummy persons created for the purpose of providing accommodation entries, or persons who intended to obtain artificial Long Term Capital Gain through such pre- arranged transactions. For the alleged cash trail and role of involved broker, the Assessing Officer relied on the report of Investigation Wing, Kolkata.

The Assessing Officer issued show cause notice to the assessee and in reply to the said notice, the assessee submitted that – - The shares were purchased on the platform of BSE through an approved / SEBI-registered broker, namely M/s. Eureka Stock & Share Broking Services Ltd. - The payments for purchase of shares were made through proper banking channels. - The assessee stated that entire 35,360 shares were purchased in dematerialised form and were duly credited to the Demat account maintained by the assessee.

The Assessing Officer, after considering the reply dated 27.12.2017, recorded a categorical finding that the submission of the assessee was not found to be tenable. The Assessing Officer rebutted the assessee’s explanation on the following grounds: i. Mere filing of contract notes and proof of payment of STT, according to the Assessing Officer, cannot be the sole ground to establish genuineness of the transactions. ii. Though the assessee claimed to have furnished confirmations from the broker M/s. Eureka Stock & Share Broking Services Ltd., the Assessing Officer specifically noted that the broker confirmation was unsigned, thereby diminishing its evidentiary value. iii. The Assessing Officer recorded that despite opportunities, the assessee did not file any cogent reply supported by Amit Kumar Bajaj independent documentary evidence to rebut the findings of the Investigation Wing. iv. Notices under section 133(6) were issued to the purchasers / exit provider companies who had purchased the shares from the assessee. In most cases, no replies were received. v. From verification of available records, the Assessing Officer observed that the financial status of such purchaser companies showed meagre profits, and that funds received by them in the form of share premium or unsecured loans were utilised for investment in penny stock shares. vi. It was further noted that the exit provider companies either sold the shares at a loss or continued to hold them as investments, which, according to the Assessing Officer, indicated that such companies were paper companies formed solely for providing accommodation entries. vii. The Assessing Officer emphasised that the assessee had sold shares at an exorbitant price of approximately Rs. 196/- per share, whereas the same shares were purchased at around Rs. 50/- per share, and that no economic or financial basis was furnished by the assessee to justify such abnormal price rise. viii. The Assessing Officer concluded that the fantastic rise in share price was not supported by commercial principles or market fundamentals, and that the assessee failed to tender any cogent evidence explaining such price movement. ix. Relying upon the findings of the Investigation Wing, SEBI observations, and judicial precedents relating to penny stock cases, the Assessing Officer held that the transactions were not governed by market forces, but were the result of design, mutual connivance, and pre-conceived arrangement. x. The Assessing Officer finally concluded that the assessee had entered into sham and arranged transactions, in consultation with entry operators, to bring unaccounted money into the books in the guise of exempt Long Term Capital Gain.

Aggrieved by the reassessment order, the assessee preferred an appeal before the CIT(A). The CIT(A) issued several notices under section 250 during the appellate proceedings. As recorded in the appellate order, despite issuance of multiple notices, there was no effective appearance or further explanation from the assessee during the appellate proceedings. The CIT(A), therefore, proceeded to decide the appeal on the basis of material available on record. The CIT(A) took note of the assessment proceedings, the investigation wing report, the modus operandi alleged in penny stock cases, the abnormal price rise of the scrip of M/s. Nouveau Global Ventures Ltd., and the findings recorded by the Assessing Officer. The CIT(A) observed that the assessee failed to substantiate the genuineness of the transaction beyond producing routine documents, failed to explain the unusual rise in the price of the shares with reference to financial fundamentals of the company, and failed to discharge the onus cast upon him.

Aggrieved by the order of CIT(A), the assessee is in appeal before us raising following grounds of appeal:

The appellant craves leave to add to, alter, amend, modify and /or delete all or any of the foregoing grounds of appeal

In support of the above contention, the learned AR further drew our attention to a compilation of judicial precedents placed in the Legal Paper Book, forming part of the record of the lower authorities, wherein relief has been granted to assessees in similar penny stock cases on analogous facts.

It was submitted that the consistent judicial view emerging from the aforesaid decisions is that additions under section 68 cannot be sustained merely on the basis of suspicion, human probabilities, or generalised investigation reports, when the assessee has discharged the initial onus by producing primary evidences and the Revenue has failed to rebut the same by cogent material. It was, therefore, contended that in the absence of any distinguishing feature or contrary binding precedent brought on record by the Revenue, the additions sustained by the authorities Amit Kumar Bajaj below deserve to be deleted by following the principle of judicial discipline and consistency.

Per contra, the learned Departmental Representative supported the orders of the Assessing Officer and the CIT(A).

We have considered the rival submissions, perused the orders of the lower authorities and examined the material available on record. The addition has been made by the Assessing Officer by treating the Long-Term Capital Gain arising from sale of shares of M/s. Nouveau Global Ventures Ltd. as non- genuine, mainly on the basis of investigation wing reports, abnormal price rise, alleged role of exit providers and application of human probabilities.

At the outset, it is not in dispute that the assessee: i. purchased the shares through a recognised stock exchange through a SEBI-registered broker; ii. held the shares in Demat account for more than twelve months; iii. sold the shares through the stock exchange mechanism; iv. paid Securities Transaction Tax; and v. received the sale consideration through banking channels. These foundational facts stand admitted and are supported by contract notes, Demat statements and bank statements.

The Assessing Officer has drawn an adverse inference on the ground that the assessee was not regularly trading in shares and, therefore, the decision to invest in the impugned scrip was pre- Amit Kumar Bajaj determined. In our considered view, this reasoning is legally untenable. An assessee is not required to be a habitual investor in shares in order to make a lawful investment. The Act does not prescribe that only persons engaged in frequent share trading can earn capital gains. An inference of pre-determination merely from the absence of past share trading activity is speculative and does not constitute evidence of a sham transaction.

The Assessing Officer has rejected the transaction mainly on the premise that the rise in share price was “fantastic” and not supported by financial fundamentals of the company. It is well settled that the Income-tax Authorities cannot sit in judgment over commercial wisdom of an investor or substitute market behaviour with their own perception of what the share price ought to be. Market prices are determined by multiple factors beyond financial statements. Unless it is shown by cogent material that the assessee himself was a participant in price manipulation, abnormal price movement by itself cannot lead to the conclusion that the transaction is bogus.

The Assessing Officer has heavily relied upon the report of the Investigation Wing, Kolkata, and general modus operandi of penny stock cases. However, no material has been brought on record to establish any direct nexus between the assessee and the alleged entry operators or price riggers. The statements of third parties relied upon by the Assessing Officer were neither confronted to the assessee nor subjected to cross-examination. Such statements, recorded in proceedings relating to other Amit Kumar Bajaj persons, cannot be used against the assessee without affording opportunity of cross-examination, particularly when the assessee has denied any connection with such persons.

The Assessing Officer has drawn adverse inference from the fact that the alleged exit provider companies did not respond to notices issued under section 133(6). This circumstance, by itself, cannot discredit the assessee’s transaction. The trades were executed through the stock exchange mechanism and not by way of direct off-market transfers. Once the transaction is routed through recognised stock exchange and supported by Demat trail and bank trail, non-response by counter-parties cannot shift the burden back on the assessee to prove the source of funds of the buyers.

The Assessing Officer has noted that the broker confirmation was unsigned and therefore unreliable. However, the genuineness of the transaction is not founded solely on broker confirmation but is independently supported by contract notes, Demat statements and bank records. These contemporaneous documents emanate from independent third-party systems such as depositories and banks and carry higher evidentiary value than a broker’s letter.

The Assessing Officer has observed that the assessee did not rebut the findings of the Investigation Wing by “independent evidence”. In our view, the assessee discharged the primary onus by producing primary documentary evidence of purchase and Amit Kumar Bajaj sale through stock exchange mechanism. Once such primary evidences are placed on record, the burden shifts on the Revenue to disprove them by bringing transaction-specific material. Generalised reports and modus operandi cannot override direct documentary evidence.

The Assessing Officer has analysed the financial statements of purchaser companies and concluded that they were paper entities. However, in stock exchange transactions, the assessee does not choose the counter-party. The identity and creditworthiness of the ultimate buyer is not within the control of the seller in screen-based trading. Therefore, alleged weakness in financials of such companies cannot be used to invalidate the assessee’s transaction.

The Assessing Officer has alleged existence of a cash trail and role of broker based on investigation wing inputs. However, no evidence has been brought on record to show that any cash was paid by the assessee or received by any broker on his behalf. No bank account of the assessee reflecting such cash movement has been identified. In the absence of any demonstrable cash trail linked to the assessee, such allegation remains unsubstantiated.

The Assessing Officer has applied the test of human probabilities to hold the transaction to be pre-arranged. While the doctrine of human probability is a valid tool of appreciation of evidence, it cannot be applied in isolation ignoring direct documentary evidence. When documentary evidence of stock Amit Kumar Bajaj exchange-based transactions exists and remains uncontroverted, the theory of human probabilities cannot be invoked merely because the transaction has resulted in high gains.

Thus, the entire edifice of the addition rests on suspicion, general investigation reports and assumptions about market behaviour, without establishing any live link between the assessee and the alleged accommodation entry mechanism.

The above view is fortified by the consistent judicial position laid down in similar fact situations. The co-ordinate Benchin the case of Suresh Kumar Agarwal v. ACIT [2020] 117 taxmann.com 678 / 183 ITD 463 (Delhi – Trib.), dealing with the very same scrip, namely, shares of M/s. Nouveau Global Ventures Ltd., held that merely on the basis of investigation wing reports and abnormal price movement, the Long Term Capital Gain could not be treated as bogus when the transactions were supported by Demat records, contract notes and banking channels. The principle laid down by the co-ordinate Bench squarely applies to the facts of the present case, as the assessee herein has also transacted in the same scrip through recognised stock exchange mechanism and no material has been brought on record to establish his involvement in any manipulation or entry-providing arrangement. Further, the Hon’ble Supreme Court in Principal Commissioner of Income-tax v. Kuntala Mohapatra [2024] 160 taxmann.com 608 (SC), while affirming the decision of the Hon’ble High Court and the Tribunal, has approved the approach that where the assessee establishes the purchase and sale of Amit Kumar Bajaj shares through recognised stock exchange, holding in Demat account and receipt of sale consideration through banking channels, the addition cannot be sustained merely on the basis of statements of entry operators and general investigation reports.

It is further noted that the Revenue has not been able to point out any distinguishing feature or bring on record any contradictory factual or legal position so as to differentiate the present case from the judicial precedents relied upon by the assessee. No material variation in facts has been demonstrated by the Revenue to warrant a departure from the ratio laid down in the decisions cited.

In view of the foregoing factual and legal position, and respectfully following the decision of the co-ordinate Bench in Suresh Kumar Agarwal v. ACIT [2020] 117 taxmann.com 678 (Delhi – Trib.) and the principle affirmed by the Hon’ble Supreme Court in Principal Commissioner of Income-tax v. Kuntala Mohapatra [2024] 160 taxmann.com 608 (SC), and in the absence of any distinguishing feature brought on record by the Revenue, we hold that the Long-Term Capital Gain declared by the assessee on sale of shares of M/s. Nouveau Global Ventures Ltd. cannot be treated as non-genuine. Accordingly, the addition made by the Assessing Officer under section 68 of the Act, is directed to be deleted. Consequentially, the addition made under section 69C on account of alleged commission is also deleted.