JAYESH KHIMJI KHIMASIYA HUF,JAMNAGAR vs. OFFICE OF PRINCIPAL COMMISSIONER OF INCOME-TAX, JAMNAGAR, JAMNAGAR

Mansukhlal khimji and others v. PCIT AY.2012-13 & 2013-14

(ii) The Ld. PCIT has grossly erred in not appreciating that in order to invoke section 263, two conditions must be fulfilled viz. the impugned assessment order must be erroneous and that error must be prejudicial to the interest of the revenue. In the present case, Ld. assessing officer has passed the reasoned assessment order after analyzing all details and therefore, there was no error in the impugned assessment order so as to justify action u/s 263 of the Act. Under the circumstances, the very assumption of power u/s 263 of the Act is unjustified and bad in law and therefore, order u/s 263 of the Act deserves to be quashed. (iii) The subject order u/s 263 passed by Ld. PCIT is illegal and bad in law in the absence of any finding of the Ld. PCIT as to how the alleged error of the Ld. assessing officer has resulted in loss of revenue particularly when the conditions of section 10(38) of the Act have been fulfilled. (iv) The Ld. PCIT has further erred in law in not coming to any concrete conclusion and without conducting any inquiry or investigating the issue, merely directed the Ld. assessing officer to frame the assessment order afresh. Without there being any positive finding about order being erroneous and prejudicial to the interest of the revenue, the action of Ld. PCIT is without jurisdiction and illegal and hence deserves to be deleted.”

4. The relevant material facts, as culled out from the material on record, are as follows. The assessee has filed original return of income showing, income of Rs.4,05,220/-, on 31/07/2012, for assessment year (AY) 2012-13. The same was processed by the Department. Then assessee`s case was reopened u/s. 147 of the Income-tax Act ('the Act' for short) on the basis of information that the assessee has made transactions in penny stock of Karma Ispat Limited, during the previous year relevant to assessment year (AY) 2012-13 and claimed the long- term capital gain (LTCG) income thereon, as exempt u/s 10(38) of the Act. Accordingly, order u/s 147 of the Act was passed on 07/05/2021, accepting the returned income.

5. Later on, the Learned Principal Commissioner of Income-tax (in short “Ld PCIT”), has exercised his jurisdiction under section 263 of the Income-tax Act, 1961. The ld.PCIT, as per the information, Director of Investigation, Kolkata conducted inquiries which unearthed some big syndicates involved in providing accommodation entries of long term capital gains and a total of 84 BSE listed penny stocks were identified. Thereafter, search and survey actions were Page | 3 Mansukhlal khimji and others v. PCIT AY.2012-13 & 2013-14 undertaken in the office premises of more than 32 share broking entities and such entities accepted that they were actively involved in the bogus long term capital gains and loss scam. It was mentioned in the investigation report that certain scripts which included scrip "Karma Ispat” were used and manipulated to provide bogus accommodation entries to the beneficiaries in the form of bogus long term capital gains (which is exempt u/s 10(38) of the Act or bogus long term /short term capital loss). The assessee has sold 3500 shares of Karma Ispat Ltd, for Rs.9,71,587/-, on 10/06/2011 and 13/06/2011, which was held to be a Penny Stock and hence it was required to be added to the income of the assessee. These shares were purchased by the assessee nearly 13 months back on 29/04/2010 for Rs.80,869/-, at a price of Rs.23/- per share. The long term capital gain of Rs.8,90,894/-, on this transaction was claimed exempt u/s 10(38) of the Act.

6. Accordingly, a show -cause notice for initiation of proceedings u/s 263 of Act, dated 19/10/2023, was issued to the assessee through ITBA, as well as sent through registered post, which is reproduced as under:

"Please refer to the above.

term capital gains of Rs.8,90,894/-, on this transaction was claimed exempt u/s.10(38) of the Act. The assessing officer has accepted the submission and no addition was made on this account and assessment finalized u/s. 147 of the Act vide order dated 07/05/2021. 3.3. On further verification, as per information from ITO (CIB)-1, Mumbai, it is noticed that out of nine assessees, who had taken bogus long term capital gains from penny stock Karma Ispat, addition was made in six cases. No addition was made in three cases, out of which one case pertains to the assesses Smt. Mansukhlal Khimji Khimashiya (HUF) for AY 2012-13. The details of the same are as under: Name of the assesses PAN AY Date of Addition made towards Assessment penny stock for Karma Ispat Ltd Bhanuben assessing 2012-13 26/06/21 Nil Khimji Khimasia officerZPS9722C (HUF) Dhirajlal Khimji AADHS2921R 2012-13 27/09/21 9,82,440 Khimasia (HUF) Dhirajlal Khimji AADHS2921R 2014-15 27/09/21 8,95,550 Khimasia (HUF) Jayesh Khimji AADHS2584L 2012-13 12/05/21 Nil Khimasiya (HUF) Jigna Jayesh Khimasiya AOZPS9723D 2012-13 17/09/21 8,15,580 Mansukhlal AADHS2920Q 2012-13 07/05/21 Nil Khimji Khimashiya (HUF) Narmadaben AFNPS7414L 2012-13 14/05/21 7,74,541 Pravinchandra Khimashia Pravinchandra AADHS2922N 2012-13 07/05/21 9,34,490 Khimji Khimashia (HUF) Rekha Dhirajlal assessing 2012-13 09/09/21 7,99,530 Khimasia officerZPS9724E The assessing officer has required to make an addition of Rs.8,90,894/- on account of bogus LTCG, to your total for the following reasons as the additions were made in six cases after discussing the facts in the assessment orders. (i) The SEBI as well as investigation wing Kolkata and Mumbai has already confirmed that the transactions of sale of shares of Karma Ispat were same in nature. (ii) Assessee had purchased shares of Karma Inspat Ltd through broker Vijay Bhagvandas & Co. in physical form. (iii) Assessee had purchased shares of Karma Inspat Ltd on 29.04.2010, when the share price was mere 23 per unit. The same sharply rose to about Rs.275/-per share on 02/07/11, at the time of sale of the share. This is 1195% increase in the shares price in short span of about 14 months. (iv) The shares were sold within 14 months i.e. in June 2011, just after the assessee became eligible for exemption u/s.10(38) of the Act.

Mansukhlal khimji and others v. PCIT AY.2012-13 & 2013-14 Hence, the modus operandi adopted by the assessee matches with modus operandi mentioned in the SOP issued by CBDT to decide any LTCG as bogus capital gain through penny stock.

(i) The SEBI as well as Investigation Wing of Kolkata has already confirmed that the transaction of sale of shares of Karma Ispat Limited was same in nature as penny stock. (ii) The assessing officer has to verify the mode of transactions (Physical / online through stock exchange) made by the assessee at the time of purchase and sale of shares of Karma Ispat Limited. (iii) Dematerialization of the share purchased by the assessee. (iv) Debit and credit of shares in the Demat account of the assessee with reference to date of purchase and sale made. (v) The assessing officer has to verify about the fact that whether the assessee is a regular investor in shares or not. Page | 7 Mansukhlal khimji and others v. PCIT AY.2012-13 & 2013-14 However, learned PCIT noticed that the assessing officer has failed to examine, above, various aspects of penny stock cases, as per the SOP issued by CBDT to decide any LTCG as bogus capital gain through penny stock even though the modus operandi adopted by the assessee matches with modus operandi mentioned in the said SOP.

The ld.PCIT noticed that as per the above Explanation (2) of section 263 of the Act, the order passed by the Assessing Officer shall be deemed to be erroneous in so far as it is prejudicial to the interest of the revenue, if the order is passed Page | 8 Mansukhlal khimji and others v. PCIT AY.2012-13 & 2013-14 without making inquiries or verification of the information available on record. In view of the above facts and on perusal of reasons recorded for reopening vis- a-vis the order passed by the assessing officer u/s 147 of the Act dated 07/05/2021, it clearly appears that the assessing officer has altogether not considered the issue under discussion and has not made any enquiries as regards the issues raised in the Investigation report. Therefore, in the facts and circumstances of the case, it clearly appears that the assessing officer has failed to make enquiry / verification while finalizing the assessment and such failure on the part of the Assessing Officer to allow the claim of the assessee u/s 10(38) of the Act of Rs.8,90,894/- has rendered the order passed by the assessing officer u/s 147 of the Act, dated 07/05/2021, as erroneous and prejudicial to the interest of the revenue within the meaning of section 263 of the Act to that extent, it is also to be mentioned that Assessing Officer is duty bound to assess the correct income of the assessee. Since this income remained to be added / disallowed, therefore, action u/s. 263 of the Act is justified. The ld.PCIT also relied on may judgements which are mentioned in the revision order, including the case reported in (2022)139 taxmann.com 352 (Calcutta), Pr. / Commissioner of Income tax Vs. Swati Bajaj.

“Notice u/s 148 was issued in this case on 28.03.2019 after recording reason and obtaining necessary approval. The assessee has made sale transaction of shares of Karma Ispat Ltd. Trade quantity 3600 Share for Rs. 9,77,265/-.

Mansukhlal khimji and others v. PCIT AY.2012-13 & 2013-14

The return in this case was filed on 19.04.2019 declaring an income of Rs. 4,05,220/- Notice u/s 143(2) dated 21.05.2019 was issued to the assessee and served electronically. Subsequently, under faceless assessment scheme notice u/s 142(1) dated 25.03.2021 & 29.04.2021 were issued seeking clarification on certain issue. In response to the notices issued from time to time, the assessee submitted its submissions/ information/documents online. After considering the reply given, the return income in this case is accepted. Assessed u/s 143(3) r.w.s. 147 r.w.s. 144B of the Income Tax Act, 1961 on a total income of Rs. 4,05,220/-.”

From the above assessment order, which is written in 10 lines, it is clear that assessing officer has not conducted any enquiry during the assessment proceedings.

“The PCIT has passed a speaking order u/s 263 after considering the submission of the assessee made during 263 proceedings. In the order he has given elaborate findings regarding the failure made on the part of assessing officer leading to an erroneous and prejudicial order, the inquiries and verification which should have been made by the assessing officer; failure on the part of the assessing officer to examine various aspects of penny stock as per the SOP issued by the CBDT on verification of penny stock cases even though the modus operandi adopted by the assessee matches with modus operandi mentioned in the said SOP; the judicial decisions in favour of the Department. Finally, it was correctly held by him "that the assessment order passed by the assessing officer is erroneous in so far as it is prejudicial to the interest of revenue within the meaning of section 263 of the Act." ii. On April 28, 2011, the assessee acquired shares of Kyra Landscapes Limited (formerly known as Aricent Infra Limited) via an off-market transaction facilitated by a brokerage firm. No monetary payment was rendered by the assessee towards the acquisition of the shares as the purchase was financed through the credit balance maintained/created with the broker. There is no proof or underlying evidence in the form of third-party documents to show that the broker has in fact entered into genuine transactions of buy/sell of shares on behalf of the assessee. The aforementioned shares remained under the custody of the broker until April, 2012 i.e. for almost a year after the alleged purchase by way of an off-market deal. The shares were subsequently transferred to the assessee's d-mat account immediately prior to their sale through stock exchange. All these facts clearly indicate that the transaction was not genuine. They could do back-dating of most of the transactions but could not manage the banking transactions and demat of the shares. At this juncture, it is critical to consider that the assessee has not provided any evidence substantiating the source of the credit balance accrued into broker's account which was subsequently Page | 11 Mansukhlal khimji and others v. PCIT AY.2012-13 & 2013-14 used to acquire the shares. The outlined scenario raises significant doubts regarding the authenticity of the transaction executed by the assessee. It is highly irregular and raises suspicion regarding the genuineness on purchase the shares. It appears that the assessee has claimed bogus Long-Term Capital Gains, and the purchase narrative is merely an afterthought intended to legitimize the transaction for which all the paper work was done by the assessee in collusion with the broker. iii. The PCIT relied upon the judgement of ITAT Pune in the case of Rajkumar B Aggarwal [ITA Nos. 1648/1649/Pun/15-AY 2015-16 and 2007-08] wherein reliance was placed on the Hon'ble SC judgement in the case of CIT Vs. Durgaprasad More [1971] 82 ITR 540(SC) andSumati Dayal Vs CIT[1995) 214 ITR BO1(SC) and it was held that the so called evidence,in the form of mere paper work cannot vitlate the decision made on the attending circumstances and human probabilities and accordingly the ITAT disallowed the claim of capital gains on a penny stock company. IV. The PCIT also relied upon the ITAT Delhi bench in the case of Anip Rastogi [ITA No. 3809/DEL/2018 AV 2015-16 and ITAT Nagpur in the case of Shri Sanjay Bimalchand Jain dated 18/07/2016 | appeal of the assessee dismissed in Bombay High Court) where in the similar circumstances the LTCG claimed by the assessee was held as bogus. V. The most important case which is on the identical facts and on which reliance was also placed by the PCIT is that of PCIT Vs. Swati Bajaj (2022) 139 taxmann.com 352(Calcutta) where the Hon'ble HC has upheld the jurisdiction of PCIT u/s 263 where the assessing officer being fully aware of the investigation which was being done in penny stock companies failed to take note of such report and make enquiry by calling upon the assessee to justify the genuineness of claim of LTCG and the reason for such abnormal rise in price of shares within a short period of time. This decision of the Hon'ble HC is very relevant for the case under consideration. In the succeeding para it has been proved beyond doubt that despite having information about penny stock in this case, the assessing officer failed to conduct enquiry and verification which he should have done. Therefore, the PCIT has rightly exercised his jurisdiction u/s 263 of the Act. VI. The assessee contended that the assessing officer made proper inquiries regarding the issue under consideration, But the case records nothings shows that no such enquiries or verification were made by the assessing officer at any stage of assessment proceedings. Even the notices including show cause notice issued during assessment proceedings show that neither the assessing officer had asked any relevant questions for enquiring about the genuineness of the claim of LTCG nor analysed the data available in public domain which he should have done. He simply asked general questions in his notices on which the assessee is wrongly placing reliance in his submission and contending that the assessing officer has made enquiry in the matter. For e.g. Financial Statements of the company were not examined: - As per the financial statement of Aricent Infra Limited for the year ended 31" March, 2013: the Earning Per Share (EPS) was Rs. 0.30 only and the Price Earnings Ratio(P/E) at the price of Rs. 153 at which assessee sold her shares was an astronomical and unimaginable figure of 510 which is unthinkable for any genuine company in the Indian stock market; there were fixed assets of Rs. 12,617 only; negligible employee cost of Rs. 2.23 lakh suggest that there are hardly any skilled manpower in the company. All these facts clearly shows that the prices of the shares Page | 12 Mansukhlal khimji and others v. PCIT AY.2012-13 & 2013-14 were artificially raised by 76 times in a year with a PE ratio of 510 to provide accommodation entry to assessee and others. assessing officer should have asked the assessee to produce an example of any one case of a genuine company having genuine business and having PE greater than 500 or any one case of a genuine company having genuine business and whose prices have increased by 76 times in a year, a most relevant enquiry which assessing officer failed to do so. Had the assessing officer examined these financials or raised these pertinentquestions, he would have clearly concluded the LTCG to be an accommodation entry. Further, neither the assessee has given the source of purchase nor the assessing officer has enquired about the source of purchase le, with which bank account the payment for purchases was made by the assessee. There is no proof available on record to show that purchase of shares have been made through the banking channel though this is specifically mentioned at para 5.3 of the SOP. Similarly, many such enquiries were never made by the assessing officer like why the shares were not transferred in demat account even after one year of the purchase, what was the source of funding of the purchase of shares and whether any third party evidence exists to prove the genuineness of purchase transaction, etc. VII. Further, in the most recent judgement the Hon'ble Supreme Court dismissed the SLP filed by the assessee in the case of Manoj Jain HUF Vs ITO[TS-707-SC-2024] dated 20.09.2024 against Calcutta High Court ruling relating to issue of dealing in penny stock transactions. In the instant case, High Court affirmed ITAT ruling wherein the Tribunal upheld CIT(A)'s addition u/s 68 in respect of share sale receipts from a penny stock treating the same as Income from Other Sources and thereby rejecting assessee's claim of LTCG. Tribunal observed that the assessee had made huge gain due to price increase, in comparison to purchase price, but the increase in price is not commensurate to the financials of the company. VIII.Ld. AR has submitted various judgements during the court proceedings, which are distinguishable as under; Mansukhlal khimji and others v. PCIT AY.2012-13 & 2013-14

6. In view of tshe above, it is earnestly requested to the Hon'ble Bench that the appeal of the assessee must be dismissed and the PCIT's order must be sustained.”

18. We note that there is a discrimination on the part of the assessing officer that as per the information from ITO (CIB)-1, Mumbai, it is noticed that out of nine assessees, ( where same scrip/share in involved) who had taken bogus long term capital gains from penny stock, Karma Ispat, addition was made in six cases, however, no addition was made in three cases, out of which one case pertains to assessee, under consideration, that is, Mansukhlal Khimji Khimashiya (HUF) for assessment year (AY) 2012-13. Considering these facts and discrimination on the part of the assessing officer, ld DR for the revenue, has rightly pointed out that assessing officer, cannot take a plausible view which can be sustainable in the eye of law, as the orders passed by the assessing officer in these four cases, are based on arbitrariness. Therefore, order passed by the assessing officer is erroneous and prejudicial to the interest of the revenue.

“4.6 Conclusion drawn-As the assessee has claimed income from capital gain to the tune of Rs. 8,90,894/-, from Karma Ispat Ltd. (Now the name of the company has changed to Karma Industries Ltd from the year 2011) which was nothing but bogus transaction and has also claimed deduction u/s 10(38) of the Act. This was also held by the Ld. CIT during the course of proceedings u/s. 263 of the IT Act dated 06.11.2023. In view of the above fact circumstances and after examining the submissions made by the assessee, the amount of Rs 8,90,894/- claimed as deduction u/s 10(38) of the Act, is treated as bogus long term capital gain u/s 45 of the Act and Page | 15 Mansukhlal khimji and others v. PCIT AY.2012-13 & 2013-14 is added back to the total income kor the year consideration. Penalty proceedings u/s. 270A(9)(a) r.w.s. 270A(8) for underreporting in consequence of misreporting of income of the Act are initiated separately.” We note that assessing officer framed the appeal effect order under section 143(3) r.w.s. 263 of the Act, in case of other assessees` on the same line. From the above appeal effect order, it is vivid that assessee was not able to prove his stand in the appeal effect proceedings, under section 143(3) r.w.s 263 of the Act, as the assessing officer made the addition in the hands of the assessee, in appeal effect proceedings also, as noted above.

"An incorrect assumption of facts or an incorrect application of (aw will satisfy the requirement of the order being erroneous. In the same category fall orders passed without applying the principles of natural justice or without application of mind."