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Income Tax Appellate Tribunal, MUMBAI BENCH “H”, MUMBAI
Before: Shri G Manjunatha & Shri Ravish Sood
O R D E R Per G Manjunatha, AM : This appeal filed by the assessee is directed against order of the CIT(A)- 33, Mumbai dated 12-03-2018 and it pertains to AY 2014-15. The assessee has raised the following grounds of appeal:-
“1. The order dated 12/03/2018 bearing No. CIT[A]-33/Rg.21/788/2016-17 by the CIT[A]-33, Mumbai is arbitrary, against natural justice, unlawful, against the provisions of Income Tax Act, 1961, invalid and therefore liable to be quashed. 2. On facts and in the circumstances of the case and in law the C.I.T.(Appeals) has erred in confirming addition made u/s.68 of the Income
2 ITA 1937/Mum/2018
Tax Act, 1 961 amounting to Rs.2,29,80,188/- on account of Long Term Capital Gain claimed by the appellant.”
The brief facts of the case are that the assessee is an individual, derived income from house property, capital gains and income from other sources, filed her return of income for AY 2014-15 on 04-10-2014 declaring total income at Rs.6, 03,320, after claiming exemption u/s 10(38) of the Act, in respect of long term capital gain derived from sale of shares of NCL Research & Financial Services Ltd amounting to Rs.2,10,99,063. The case was selected for scrutiny and during the course of assessment proceedings, the AO noticed that the assessee has declared long term capital gain from sale of shares and hence, called upon the assessee to file necessary evidence to justify long term capital gain declared from sale of shares. The AO further observed that investigation carried out by the department at Kolkatta and consequent statement taken on oath from certain persons including Shri Gautam Bose, one of the directors, promoter of NCL Research & Financial Services Ltd indicated that NCL Research & Financial Services Ltd was a pennystock company, whose aim was to provide entry of bogus long term capital gain by various means. The AO further observed that the broker and other directors have also accepted that under the guise of long term capital gain, they have provided accommodation entries to a number of people. The AO further observed that the assessee is one of the beneficiaries of such bogus long term capital gain of NCL Research & Financial
3 ITA 1937/Mum/2018 Services Ltd. Therefore, in the light of assessee’s business activity, came to the conclusion that the assessee was not a regular investor, who is dealing in shares on a regular basis and who could be said to be capable of investing in shares to earn a huge gain. The AO, after analysing the modus operandi of NCL Research & Financial Services Ltd and also the nexus between the assessee and the said company, called upon the assessee to file necessary evidence including broker note, bank statements and other details to justify long term capital gain derived from sale of shares. The AO was also analysed the share price of the scrip in the BSE / NSE to come to the conclusion that it is a pennystock and after considering various judicial precedents including the decision of Hon’ble Supreme Court in the case of Sumati Dayal vs CIT 214 ITR 801 (SC), observed that the receipts shown by the assessee from sale of shares of NCL Research & Financial Services Ltd was treated as unexplained credit u/s 68 of the Act, in view of the fact brought out by the department during investigation carried out at Kolkatta and also on the basis of statement of director of NCL Research & Financial Services Ltd. Accordingly, he made addition of Rs.2,29,80,188 u/s 68 of the Act. The relevant findings of the AO are as under:-
“16. The detailed analysis of evidences available on record and the case laws quoted above provide enough support against the argument of the assessee regarding assessment being based on mere suspicion or presumption. The assessee has introduced/credited capital of Rs.2,10,99,063/- during the year in his books the source of which he explained as proceeds from these share sale transactions. Since the explanation offered by the assessee in respect of the source of this capital introduced being share sale transactions has been held to 4 ITA 1937/Mum/2018 be not satisfactory in view of the elaborate discussion made herein, section 68 is squarely applicable in this case.
In view of all the facts as observed hereinabove and the investigation done by the Department on a large scale to unearth the true nature of the transactions which has clearly proved the manipulative practice which was accepted by the majority involves therein there is no evidence to the contrary in the case of the assessee to certify the transaction to be a genuine sale of asset the income wherefrom would fall under the head "Long Term Capital Gain". Accordingly the receipt shown by the assessee purportedly from sale of shares of M/s. NCL Research & Financial Services Ltd is treated as Unexplained Credits u/s. 68 and the said amount of Rs.2,29,80188/- {including Commission of 8% of transaction value} is brought to tax under the head "Income from Other sources. Penalty proceeding u/s 271(1)(c) read with explanation 1 thereto is separately initiated for furnishing the inaccurate particulars of income.”
Aggrieved by the assessment order, assessee preferred appeal before the CIT(A). Before the CIT(A), the assessee has filed elaborate written submissions on the issue alongwith certain judicial precedents which has been reproduced at para 6 on pages 5 to 18 of the order of CIT(A). The sum and substance of arguments of the assessee before the Ld.CIT(A) are that long term capital gain declared from sale of shares of NCL Research & Financial Services Ltd is a genuine transaction which is supported by necessary evidences including contract notes, copy of bank statements and demat account. The assessee further submitted that said transaction was subjected to STT and also routed through demat account; therefore, the AO was incorrect in coming to the conclusion that the assessee has routed its undisclosed income by way of bogus long term capital gain of pennystock company. The assessee has also relied upon the decision of Andaman Timber Industries vs Commissioner of Central Excise 62 tamann.com 3(SC) to argue that despite the assessee has 5 ITA 1937/Mum/2018 requested for copies of statement recorded from director of NCL Research & Financial Services Ltd, the AO never furnished such statement and also denied the opportunity of cross examination sought by the assessee in violation of principles of natural justice.
4, The Ld.CIT(A), after considering submissions of the assessee and also by taking note of facts brought out by the AO including modes of acquisition of shares, sale of shares and unusual rise in the price and on analysis of transactions including ignorance of the assessee about shares and pennycompanies, came to the conclusion that these were arranged transactions between parties in order to convert their own unaccounted income in the guise of long term capital gain to claim the benefit of exemption u/s 10(38) of the Act. The Ld.CIT(A) further observed that the facts brought out by the AO clearly suggested that the revenue cannot take or accept ‘make belief’ transactions as presented by the assessee. Truth or genuineness of such transactions must prevail over smoke screen created by way of three meditated series of steps taken by the assessee with a view to imparting a colour of genuineness and character of commercial nature to such share transactions. If one look at the whole transaction of the series of steps taken to accomplish such share transactions in an integrated manner with a view to ascertain the true nature and character of such purchase and sales of shares, it
6 ITA 1937/Mum/2018 is abundantly clear that the assessee has failed to prove the transactions between the parties and accordingly, he opined that there is no error in the findings recorded by the AO while making addition towards amount received from sale of shares of NCL Research & Financial Services Ltd as unexplained income u/s 68 of the Act. The relevant findings of the Ld.CIT(A) are as under:-
“7.4 It is further observed that shares, as in the instant case, in which the appellant has claimed to have made a deal, have been identified as penny shares by the Investigation Wing of the Department because rates of these shares are not based on business results of the companies but same are fluctuated by insider's trading from zero value (negligible price) to very high price and vice versa without any reason or basis to accommodate or generate bogus capital gain or loss. In the instant case, all the above features are present in the transaction of shares made by the appellant. As discussed above, M/s NCL Research & Financial Services Ltd. was caught by the Investigation Wing, Kolkatta in providing accommodation entries. In this respect, it is also pertinent to mention that even appellant has failed to adduce any plausible reason for unexpected escalation in the price of this scrip and the - ' unnatural gain occurred to her through these transactions. As noted by the AO, this was an off market deal. There could be no real value attached to this scrip. In the case of Ratnakar M. Pujari Vs. ITO (ITAT Mumbai) Appeal Number : Date of Judgement/Order : 03.08.2016, Assessment Year 2006-07 the issue of penny stock has been considered by the Hon'ble ITAT in detail and it was held that transactions in such penny stock could not be held as genuine transactions. 7.5 On the basis of above mentioned discussion, I find the reliance of the AO on the following judgments of Hon'ble Supreme Court is in order. (i) McDowell & Co. Ltd. v. CIT [1985] 154 ITR 148/22 Taxman 11. (ii) Union of India & Ors. Vs. Playworld Electronics (P) Ltd. & Anr. (1990) 184 ITR 308 (SC) (iii) Workmen of Associated Rubber Industry Ltd. v. Associated Rubber Industry Ltd. [1986] 157 ITR 77 (SC), (iv) CIT v. Durga Prasad More (1971) 82 ITR 540 7.6 Apart from that in Mid East Port Folio Management Ltd. Vs. CIT (2003) 81 TTJ (Mum)(SB)37, it was held that McDowell is more of an approach to the facts of a particular case than any inviolable rule laid down regarding tax evasion. It is a call to the Courts and Tribunals to expose subterfuges, colourable devices and dubious methods in tax cases. It is a caution administered that lawful dues to the state cannot be withheld under schemes acquired off-the-shelf or through transactions that have no commercial or economic value or by taking certain preordained
7 ITA 1937/Mum/2018 steps which are calculated to cancel out each other. The approach in such cases must be to take the entire transaction or arrangement as a whole and see if it makes any economic or commercial sense without attaching weight to the steps that go to make up the scheme, each of which may be legally valid. The genuineness of the arrangement has to be viewed not in relation to every step taken. McDowell therefore, did not depart from what-has already been laid down by the Supreme Court earlier except that the law regarding tax evasion was restated in much stronger expressions such as "dubious device", subterfuge, colourable transaction" .The judgment did not permit the Income Tax Authorities to rewrite or make a new contract for the parties nor did it say that they could not go behind the / documentation in an attempt to find out the real intention of the parties. If the real intention of the parties is discovered to be something different from the intention professed in the document, the Income Tax Authorities are at liberty to brand the same as a subterfuge or a dubious device or a colourable transaction. An identical issue arose in the case of ICICI Ltd. in respect of boiler purchased from and leased back to Gujarat Electricity Board (GEB) and therefore the same was also referred to the Special Bench and the ICICI Ltd., was added as an appellant.while discussing the judgment of the Supreme Court, in the case of McDowell and Co. Ltd. (supra), the Tribunal (SB) had, inter alia, noted that the Courts and Tribunals had to expose subterfuges, colourable device, and dubious methods in tax cases, that the lawful dues to the State cannot be withheld through schemes of subterfuge, a colourable device, and a dubious method, that the approach in such cases must be to take the entire arrangement as a whole and see if it makes any attaching weight to the steps4hat go to make-up the arrangement or the scheme, each of which may be legally valid, that the genuineness of the arrangement has to be viewed not in relation to every step taken to achieve the result but in relation to the final result, that one has to look at the truth of the transaction (and if permissible) by going behind the facade of documentation or the series of steps taken, that the Courts (and Tribunals) always have the freedom to 'go behind1 the documents to find out the real intention of the party, that the rule presupposes that in a given case the real intention of the parties to a document/transaction/arrangement could be different from what it appears from it ex facie, that the Court must normally proceed on the basis of the professed intention, but if that is under doubt or is disputed or is challenged, then its power to find out the real intention of the parties by ignoring the apparent has to be and has always been conceded, that in cases of make believe arrangement or a subterfuge or a dubious or a colourable device adopted, the Court will be merely removing the facade to expose the real intention of the parties cleverly cloaked and if that intention is discovered to be the evasion of taxes, it cannot be given effect to merely because all the steps taken as component parts of the arrangements are legally correct or valid, that the right of the parties to enter into transactions according to their free will and choice has always been protected, the only rider being that both the professed intention and the real intention should be the same,
8 ITA 1937/Mum/2018 that all commercial arrangements and documents or transactions have to be given effect to even though they result in a deduction of the tax liability, provided that they are genuine, bonafide and not colourable transaction. 7.7 At the same time, it is observed that the judicial pronouncements relied upon by the appellant does not help the case of the appellant in view of aforesaid views and observations of the Hon'ble Supreme Court and Jurisdictional High Court, which is binding in nature. 7.8 In view of the discussion made in the preceding paragraphs, I am of the considered opinion that if viewed in the light of observations made by Hon'ble Courts in the above case and the facts and circumstances as discussed above, the dealing in shares by the appellant in above scrip has to be taken as dealing in penny stocks which was in the form of accommodation entries. Hence, the action of the AO in treating entire sale consideration of the scrip of M/s NCL Research and Financial Services Ltd. , including commission of 8%.of transaction value, as unexplained cash credit within the meaning of section 68 of the Act is in order and needs no interference. The order of the Id. AO is accordingly upheld and the addition of Rs. 2,29,80,188/- is confirmed. Thus the grounds of appeal no. 1 and 2 raised by appellant are dismissed.”
The Ld.AR for the assessee referring to ground No.1 of appeal, insofar as the issue of principles of natural justice submitted that the AO has passed assessment order by heavily relying upon statement recorded from third party without confronting those statements to the assessee for her comments and also cross examination of the person, who gave the statement despite repeated requests have been made during assessment proceedings by filing a specific letter on 14-12-2016. The Ld.AR further submitted that the AO has not even once mentioned / putforth questions about those statements when the assessee appeared before him in response to summons issued u/s 131 of the Act. Further, even in his show cause notice dated 05-12-2016, there is no mention of those statements on which he heavily relied upon in the 9 ITA 1937/Mum/2018 assessment order. In absence of specific statements in her possession or non furnishing of such statements to the assessee when the same was specifically requested, it is the duty of the AO to furnish such statements and also provide the opportunity of cross examinations to the assessee. Unless, the AO complied with the requirement of furnishing of statements and also provided the opportunity of cross examination, if he or she completes the assessment on the basis of third party information, the whole proceedings including the assessment order suffers from violation of natural justice. Consequently, the whole proceedings is liable to be quashed. The Ld.AR further submitted that the AO has not taken the enquiry into its logical conclusion inasmuch as the AO did not examine the nephew of the assessee when the assessee repeatedly stated that she has invested in the shares of company on the advice of her nephew. Further, the persons from whom statements were recorded and also relied upon by the AO or the witness in the present proceedings and such being the case it is the duty of the AO to provide an opportunity to cross examine those persons. In this case, inspite of repeated requests, the AO has failed to do so. Therefore, the assessment order passed by the AO suffers from violation of principles of natural justice. Consequently, the addition made by the AO cannot be sustained. In this regard, he relied upon the decision of Hon’ble Supreme Court in the case of Kisinchand Chellaram vs CIT (1980) 125
10 ITA 1937/Mum/2018 ITR 713 (SC). The assessee also relied upon the decision of Hon’ble Supreme Court in the case of Andaman Timber Industries vs Commissioner of Central Excise (supra) and also the decision of Hon’ble Supreme Court in the case of CIT vs Sunita Dhadda, judgement dated March 28, 2018.
The Ld.DR, on the other hand, strongly supporting the order of the CIT(A), submitted that the AO as well as the CIT(A) has brought out clear facts to the effect that it is a clear case of conversion of unaccounted income in the guise of long term capital gain to get the benefit of exemption u/s 10(38) of the Act, which is clearly evidenced from the facts brought out during assessment proceedings that the assessee is a beneficiary of accommodation entry of long term capital gain provided by NCL Research & Financial Services Ltd, a Kolkata based company. This is further strengthened by the investigation carried out by the department, Investigation Wing at Kolkata where the director of the company in his statement recorded u/s 132(4) categorically admitted that they were involved in rigging share price in the market so as to benefit certain persons to claim the benefit of exemption u/s 10(38) of the Act. The Ld.DR further submitted that when all these facts are brought out in the assessment order, the assessee, instead of arguing its case on merits, raised a technical issue of violation of natural justice in the light of certain judicial precedents including the decision of Hon’ble Supreme Court in the case of Andaman
11 ITA 1937/Mum/2018 Timber Industries vs Commissioner of Central Excise (supra). Although there is no dispute with regard to the ratio laid down by the Hon’ble Supreme Court in the case of Andaman Timber Industries vs Commissioner of Central Excise (supra), but when it comes to facts of this case, it is abundantly clear that the assessee, in order to escape from taxability of unexplained cash credit on account of amount received from sale of shares of NCL Research & Financial Services Ltd, taken shelter under the principles of natural justice, which cannot be allowed.
We have heard both the parties, perused the materials available on record and gone through the orders of authorities below. We have also carefully considered the case laws relied upon by the Ld.AR for the assessee. It is an undisputed fact that the AO has heavily relied upon information received from investigation wing of Kolkata, where the investigation carried out by the department revealed that NCL Research & Financial Services Ltd is a shell company involved in rigging of share price in the stock exchanges to benefit certain individuals in the form of long term capital gain, because such long term capital gain derived from sale of shares of NCL Research & Financial Services Ltd is exempt from tax u/s 10(38) of the Act. It is also an admitted fact that the AO has taken support from the report of investigation wing of Kolkata and also the statement of Shri Gautam Bose, one of the directors and promoter of NCL
12 ITA 1937/Mum/2018 Research & Financial Services Ltd. In the said statement, he had categorically admitted that NCL Research & Financial Services Ltd was a penny stock company, whose main aim was to provide entry of bogus capital gain by various means. The AO has made addition on the basis of statement of director of the company, coupled with his own analysis of share price of said company in the stock exchange and also the purchase price paid by the assessee and sale of such shares during the year under consideration. Except this, the AO has not brought out any other contrary facts to come to the conclusion that the assessee is the beneficiary of accommodation entry of long term capital gain provided by director of NCL Research & Financial Services Ltd. On the other hand, the assessee has filed complete set of documents including broker note, bank statements, copy of demat account and other details to prove that the share transaction has been made through proper channel with registered stock brokers and payment for such transaction has been made through proper banking channel. The assessee has also explained the nature of transactions and also stated that even though she was not aware of share transactions, but, on the advice of her nephew, she has invested in shares of that company. All these evidences are part of assessment proceedings. The AO never disputed the fact that the assessee has filed these documents in order to prove the transactions. Although the assessee has filed evidence to 13 ITA 1937/Mum/2018 prove the transactions, the AO disregarded all evidences filed by the assessee mainly for the reason that the director of the company in his statement recorded u/s 132(4) had admitted the fact of issuing accommodation entries of long term capital gain by way of purchase and sale of shares of his company.
In this factual background, if you examine legal position of law, no doubt, there is a statement recorded from the director of NCL Research & Financial Services Ltd, as per which, the director of the company had admitted in the statement that the company is a penny stock company which is involved in providing accommodation entries of long term capital gain. But, when the assessee has requested for copies of statement, which were being used against her and also to provide opportunity of cross examination of the person, who gave such statement, the AO, neither furnished copies of statement nor allowed cross examination to the assessee. It is a trite law that when information received from third party information has been relied upon to draw an adverse inference against the assessee, the person, who relied upon that information is duty bound to provide the information to the assessee and also to allow him to cross examine the person, who gave such statement or to rebut the information available with the AO. Unless the AO do so, then it is a gross violation of principles of natural justice, and hence, the whole proceedings including assessment proceedings becomes null and void. This 14 ITA 1937/Mum/2018 legal principle has been laid down by the Hon’ble Supreme Court in the case of Kisinchand Chellaram vs CIT (supra) where the Hon’ble Supreme Court categorically held that burden of proof was on the department to prove that the amount belonging to the assessee on the basis of letter of manager. In the absence of same being supplied to the assessee, the same cannot be used against the assessee. The Hon’ble Court further observed that no reliance could be placed on any information unless, the assessee was given such information for his rebuttal and also to cross examine the person, who gave said statements. This legal proposition is further supported by the decision of Hon’ble Supreme Court in the case of Andaman Timber Industries vs Commissioner of Central Excise (supra), where the court observed that not allowing assessee to cross examine witness by adjudicating authority though statements of those witnesses were made as basis of impugned order, amounted in serious flaw which makes the impugned order nullity as it amounted to violation of principles of natural justice. The same principle has been reiterated by Hon’ble Supreme Court in the case of CIT vs Sunita Dhadda in SLP No.9342/2018 dated 28-03-2018, where the Court categorically affirmed its earlier finding in the case of Andaman Timber Industries vs Commissioner of Central Excise (supra) and held that when the assessee disputed the correctness of the statements and wanted to cross examine, the adjudicating
15 ITA 1937/Mum/2018 authority did not grant that opportunity to the assessee in absence of not satisfying the principles of natural justice for providing evidence used against the assessee and also not providing an opportunity of cross examination of the persons, who gave the statement makes the order null and void.
In this case, on perusal of facts available on record, it is abundantly clear that the AO has heavily relied upon the statement recorded from the director of NCL Research & Financial Services Ltd during the course of search and the investigation wing of income-tax department, Kolkatta. It is also an admitted fact that the AO has relied upon said information in the show cause notice issued to the assessee dated 05-12-2016. The assessee has sought for information relied upon by the assessee in the form of statement of director of the company and also requested for cross examination of the person, who gave the statement vide letter dated 14-12-2016. All these are part of paper book filed by the assessee. When the assessee has specifically asked for statements, which are used against the assessee to draw an adverse inference and also requested for cross examination of the person, who gave the statement, it is the duty of the AO to provide such statements to the assessee and also to provide the opportunity of cross examination. In this case, inspite of repeated requests, the AO has failed to do so. Therefore, we are of the considered view that the assessment order passed by the AO suffers from jurisdiction and is in 16 ITA 1937/Mum/2018 violation of principles of natural justice, consequently, liable to be quashed.
Hence, considering the facts and circumstances of this case and also by following the decision of Hon’ble Supreme Court in the case of Andaman Timber Industries vs Commissioner of Central Excise (supra) and other decisions, we quash the assessment order passed by the AO and deleted addition towards unexplained credit u/s 68 of the Act.
The assessee has challenged additions on merits. Since, we have quashed assessment order on legal ground, the ground taken on merits become academic in nature and does not require specific adjudication. Hence, other grounds taken on merits are dismissed as infructuous.
In the result, appeal filed by the assessee is allowed. Order pronounced in the open court on 10 -07-2019.