VIPUL MUNOTH,CHENNAI vs. ITO, NCW-10(5), CHENNAI

This appeal of the assessee is directed against the order passed by the Commissioner of Income Tax (Appeals)–12, Chennai dated 31.10.2018 and pertains to the assessment year 2015-16.

Shri R. Padmanabhan, the Ld. Representative for the assessee submitted that the assessee purchased 5000 shares of M/s. Kappac Pharma Ltd through off-market for Rs.75,000/- at the rate of Rs.15/- per share from M/s.Shallbhadra Steel (P) Ltd. The assessee in fact purchased the physical shares on 26.02.2012 and the same was dematerialized on 04.03.2014. The assessee has sold 2500 shares on 21.11.2014 at a price of Rs.260/- per share. Similarly on 21.11.2014, the remaining 2500 shares were sold at a price of Rs.257.10 per share. According to the Ld.AR, the Assessing Officer on the basis of so called investigation made by the Investigation Wing of the Department at Kolkata and Delhi found that there was an organized sub racket of generating bogus entries of Long Term Capital Gain going on in the country. The shares of M/s. Kappac Pharma Ltd., was transacted for Rs.363,96,85,649/- at the abnormal high rate. Therefore on the basis of the investigation done by the Kolkata Investigation Wing of the Department found that M/s. Kappac Pharma Ltd., is a penny stock company. Accordingly the Assessing Officer made addition U/s.68 of the Income Tax Act. The Assessing Officer has also disallowed the claim of the assessee for exemption U/s.10(38) of the Act. The Ld.AR further submitted that the so called investigation report said to be done by the Investigation Wing of the Department at Kolkata and Delhi, was not furnished to the assessee. According to the Ld.AR, the assessee is neither a M/s. Kappac Pharma Ltd. The assessee in no way participated in inflating the shares of M/s. Kappac Pharma Ltd. According to the Ld.AR, the assessee is only an innocent investor. Therefore the assessee is eligible for exemption U/s.10(38) of the Act, in respect of profit earned by the assessee on sale of the shares of M/s. Kappac Pharma Ltd.

On the contrary, Shri AR.V. Sreenivasan, the Ld. Departmental Representative submitted that M/s. Kappac Pharma Ltd., is one of the penny stock company identified by the Department out of 83 companies. The Assessing Officer on the basis of the investigation made by the Department at Kolkata and Delhi found that the assessee has invested in the penny stock company. Therefore, the so called profit on sale of the shares is not eligible for exemption U/s.10(38) of the Act. Accordingly, the corresponding credit to the capital account was found to be unexplained and addition was made under Section 68 of the Act. The Ld.DR further clarified that there was no reference about the furnishing of investigation report to the assessee in the assessment order.

We have considered the rival submissions on either side and perused the material available on record. It is not in dispute that the assessee invested in 5000 shares of M/s. Kappac Pharma Ltd., and also sold the same. The assessee has earned Rs.12,13,875/- on sale of such shares and claimed the same as exempted U/s.10(38) of the Act. The Department claims that M/s. Kappac Pharma Ltd., in which the assessee invested, is a penny stock company on the basis of the investigation said to be done by the Department at Kolkata and Delhi. However the investigation report said to be done by the Investigation Wing of the Department was not furnished to the assessee. This Tribunal is of the considered opinion, whenever an investigation was done and it was found that the company in which the assessee was invested found to be a penny stock company, the Department is expected to furnish a copy of such report to the assessee, so that the assessee may explain in what circumstances the investment was made. The assessee now claims before this Tribunal that he is an innocent investor and he is not a shareholder or a promoter. The assessee also claims that he has not played any role in inflating the prices of the shares in short period. In view of his contention, this Tribunal is of the considered opinion, the matter needs to be re-examined by the Assessing Officer. Accordingly the Assessing Officer. The Assessing Officer shall re- examine the issue afresh in the light of the material available on record, after furnishing the copy of the investigation report said to be done by the Investigation Wing of the Department at Kolkata and Delhi and thereafter decide afresh in accordance with law, after giving reasonable opportunity to the assessee. It is also incumbent on the part of the Assessing Officer to bring on record how the assessee has involved in promotion of the company and whether the assessee is a shareholder or not, the role if any played by the assessee in inflating the shares of the company, after that the Assessing Officer shall decide the issue in accordance with law.

In the result, the appeal filed by the assessee is allowed for statistical purposes.