BHIKHALAL PRAHALADRAI AGARWAL HUF,GANDHIDHAM vs. ASSISTANT COMMISSIONER OF INCOME TAX, GANDHIDHAM CIRCLE, GANDHIDHAM

Information is received from the O/o the Deputy Director of Income Tax (Investigation) Unit -6(2) Mumbai, vide letter No.DDIT(Inv.)- 6(2)/ Information/Vax/2017-18 dated 23-03-2018 regarding manipulation in market price of shares of company namely Vax Housing Finance Corporation Limited listed on the Bombay Stock Exchange (BSE) in order to provide accommodation entries of Long Page | 2 &780/RJT/2024/AYs.2011-12&2016-17 Bhikhalal Prahladrai Agarwal-HUF Term Capital Gain. From the information it is gathered that a mass enquiry was conducted by the department and during the course of enquiry in certain cases, it had come to light that scale manipulation has been / is being done in market price of shares of certain in this company listed on the Bombay Stock Exchange by a group of persons acting as a syndicate in order to provide entries of tax exempt bogus Long Term Capital Gains to large number of persons (beneficiaries) in lieu of unaccounted cash. The basic objective of this racket is to convert black money into white without payment of Income Tax. The unaccounted cash of such persons (beneficiaries) is utilized to purchase shares of such companies at a very high artificially inflated market price. This practice is generally called Accommodation Entry Scam, as the activities of such persons are carried out with prime objective of accommodating unaccounted cash of beneficiaries into their regular books of accounts without paying tax on same.

The assessee Shri Bhikhalal P Agrawal HUF (PAN: AABHA4638R) has sold the shares of "Vax Housing Finance Corporation Limited" for a total sale consideration of Rs. 27,05,802.74 in FY 2010-11/AY 2011-12. This assessee has shown long term capital gain of Rs.17,33,289/- in return of income of Assessment Year 2011-12. These sale transactions in shares are reportedly bogus transactions to give cheque to the assessee in lieu of cash given by the assessee to the cartel of broker and paper entities by routing the cash of the assessee through the paper entities and stock exchange and convert it into non-taxable long term capital gain on shares of manipulated prices. It is also gathered that these beneficiaries pay about 5%-6% of commission in cash to the cartel for obtaining such long-term capital gain. The assessee has done these sale transactions through Kunvarji Finstock Pvt. Ltd. on verifying the BSE data it is noticed that the following persons are counter parties (also known as exit providers) in the above transactions: &780/RJT/2024/AYs.2011-12&2016-17 Bhikhalal Prahladrai Agarwal-HUF &780/RJT/2024/AYs.2011-12&2016-17 Bhikhalal Prahladrai Agarwal-HUF As noticed from the above table, most of the exit providers have not furnished any return of income, despite having entered into the transactions of purchase and/or sale of shares. Further, those persons who have furnished return of income, disclosed very meagre return of income when compared to the volume/value of share transactions, executed by them. Further, it is also notice from the data provided by BSE that the above exit providers have also provided/purchased shares of above company from other persons through BSE. On comparing the total income and trade value, it is clear that the creditworthiness of above persons are not enough to justify the value of trade, transacted by them. Further, the chart of movement in price of the company Vax Housing Finance Corporation Limited is reproduced as under (downloaded from moneycontrol.com…..” Page | 5 &780/RJT/2024/AYs.2011-12&2016-17 Bhikhalal Prahladrai Agarwal-HUF

During the assessment proceedings, the assessing officer issued notice to the assessee to explain the above transactions with documentary evidences. However, the assessee has not submitted any reply before the assessing officer. Therefore, the assessing officer concluded that M/s Vax Housing Finance Corporation Ltd, is a listed security and sale was made through the stock exchange by paying STT since all listed security has to be dematerialized and since scrips was sold through listed Exchange, STT is to be paid. Besides, the receipt of cheques is also not in question, since it is a fact that cheques was issued to the assessee. The assessing officer noticed that the shares of this penny stock is controlled by a group of people viz promoter/operator/brokers. All purchases of shares were arranged by them on assurance of booking bogus LTCG in favour of the assessee. It is fact and evidence from the statement of several persons recorded u/s 131 that they have not only sale of shares to the assessee but also arranged for sales of shares through their entities and by paying certain amount of commission to them. Therefore, generation of LTCG through the process from purchase to receipt of cheque is totally arranged and actually no capital gain arose, but assessee's own cash has been routed through different entities and ultimately reached to his/her hand by cheque in the disguise of sale proceeds of listed security. Accordingly, the claim of capital gain is denied and assessing officer made addition to the tune of Rs. 27,05,802/- as unexplained cash credit u/s 68 of the Act.

Aggrieved by the order of the Assessing Officer, the assessee carried the matter in appeal before the Ld. CIT(A), who has confirmed the action of the Assessing Officer. So far reopening of assessment is concerned, the ld. CIT(A) observed that no any non-compliance with the procedural Page | 6 &780/RJT/2024/AYs.2011-12&2016-17 Bhikhalal Prahladrai Agarwal-HUF aspects of reopening could be seen from the assessment order and therefore the ld. CIT(A) held that the reopening of the assessment was validly done as per law. On merit Ld. CIT(A) confirmed the findings of the assessing officer.

Aggrieved by the order of the Ld. CIT(A), the assessee is in further appeal before us.

Shri Vimal Desai, Ld. Counsel for the assessee, submitted that reopening of assessment in the case of the assessee for assessment year (A.Y.) 2011- 12 is bad in law. The ld. Counsel took us through the reasons recorded by the Assessing Officer which is reproduced in the assessment order and submitted that all the six scrips covered under Long Term Capital Gain (in short “LTCG”) were not subject to reopening and further the Ld. Counsel took through the Paper Book Page No. 15 and submitted that assessee has offered the LTCG for taxation purpose, on these six scrips, therefore, there should not be any escapement of income on the part of the assessee. The ld. Counsel also took us through the computation of total income and transactions covered by the Security Transaction Tax (STT) under Section 10(38) of the Act, which are reproduced below: &780/RJT/2024/AYs.2011-12&2016-17 Bhikhalal Prahladrai Agarwal-HUF

Therefore, Ld. Counsel for the assessee, submitted that reasons recorded by the Assessing Officer are bad in law and therefore, assessment should be quashed on this score only.

On merit, Ld. Counsel for the assessee submitted that assessee has claimed the Long- Term Capital Gain (in short “LTCG”) and entire details Page | 8 &780/RJT/2024/AYs.2011-12&2016-17 Bhikhalal Prahladrai Agarwal-HUF were submitted which are in the Paper Book at Page No. 3, -16. The Ld. Counsel also explained that the transactions were through banking channel, STT was paid and relevant invoices/bills and other explanation were submitted before the assessing officer. The Ld. Counsel stated that based on the facts and circumstances addition made by the Assessing Officer needs to be deleted.

On the other hand, the Ld. DR for the Revenue submitted that so far reopening of assessment is concerned, the assessing officer followed the proper procedure, therefore, reopening of assessment is valid and it is as per the provisions of law.

On merit, the Ld. DR for the Revenue submitted that it is a case of penny stock and dubious devices were adopted by the assessee to evade the payment of tax and therefore, the assessee’s transactions are bogus, as the assessee failed to prove the genuineness of the transactions.The generation of LTCG through the process from purchase to receipt of cheque is totally arranged and actually no capital gain arose, but assessee's own cash has been routed through different entities. The learned DR also relied on the judgements/decisions which were relied on by the assessing officer. Therefore, Ld. DR argued that addition made by the Assessing Officer should be sustained.

We have heard both the parties and perused the material available on record. We note that assessee is a Hindu Undivided Family deriving income from House Property. It also invested in the share market and earned capital gain during the year under consideration. The assessee filed its return of income on 31.12.2011, declaring total income of Rs. 20,65,320/-. A copy of the return of income and computation of income for Page | 9 &780/RJT/2024/AYs.2011-12&2016-17 Bhikhalal Prahladrai Agarwal-HUF the year under appeal, were filed along with return of income. On the basis of information received from Investigation Wing Mumbai, the A.O. recorded reasons that the assessee earned long-term capital gain of Rs. 17,33,289/- from sale of shares of Vax Housing Finance Corporation Ltd, which was claimed as exempt u/s 10(38) of the Act, and that the same was an accommodation entry. Accordingly, the A.O. reopened the case of the assessee u/s. 147 of the Act. The assessee placed on records, undisputed third-party documentary evidences such as copy of bills/contract notes, Demat account showing the movement of shares, proofs to show that the transaction was recorded in books of accounts, proofs to show that the transactions were carried out through banking channels etc, to prove the genuineness of the share transactions. It was also clarified that the assessee had neither booked any long-term capital gain from the share of Vax Housing Finance Corporation Ltd, nor claimed any exemption u/s 10(38) of the Act, in respect of the said scrip. In fact, the assessee earned a short- term capital gain and intra-day gain from the sale of shares of Vax Housing Finance Corporation Ltd, which was taxable and the assessee also paid the due taxes thereon. However, the A.O., without making any inquiries and without even refuting the documentary evidence placed on records by the assessee, doubted the genuineness of share transactions simply on the basis of inquiries/investigations carried out by the Department in case of some of the entry operators and deposition made by them to have indulged in providing accommodation entries in the several penny stocks. The A.O. also raised doubts regarding the financials of the said company. On these contentions, the A.O. issued a show-cause notice on 17.12.2018 proposing the addition of the sale proceeds on sale of shares of above-mentioned company, as unexplained cash credit u/s. 68 of the Act. In response, the assessee submitted a detailed reply on 17.12.2018 before the A.O. Page | 10 &780/RJT/2024/AYs.2011-12&2016-17 Bhikhalal Prahladrai Agarwal-HUF However, the AO did not accept the reply of the assessee and made the addition of Rs. 27,05,803/- u/s. 68, as alleged unexplained cash credit on account of sale of shares.

We note that the assessee contests the validity of reopening as well as the validity of the reassessment order passed by the A.O. under the provisions of section 147 of the Act. The reasons of reopening are reproduced by the AO on Page No. 1 to 8 of the reassessment order, which we have gone through. On perusal of the reasons recorded for reopening, it may be observed that the reopening u/s 147 of the Act has been initiated in the case of the assessee, for the reasons that as per the information received from DDIT Mumbai, M/s. Vax Housing Finance Corporation Ltd. was a penny stock used for getting bogus long-term capital gain, exempt u/s 10(38) and the assessee was one of the beneficiaries who allegedly received Rs.27,05,802/-, on the sale of shares of the said penny stock. Since the assessee had shown a long-term capital gain of 17,33,289/- in their return of income, the A.O. formed an opinion that the said LTCG was claimed, as exempt in the scrip Vax Housing Finance Corporation Ltd, and the same was an accommodation entry.

Having gone through the reasons recorded by the assessing officer, we noticed that the reasons recorded by the AO were factually incorrect. The sale consideration of Rs. 27,05,802/- and the LTCG of Rs. 17,33,289/-, did not pertain to the scrip of Vax Housing Finance Corporation Ltd. In fact, the AO received information only to the extent that Vax Housing Finance Corporation Ltd which was a penny stock and the assessee was allegedly one of the beneficiaries of the accommodation entry in the form of LTCG, claimed u/s 10(38) of the Act. The above said Page | 11 &780/RJT/2024/AYs.2011-12&2016-17 Bhikhalal Prahladrai Agarwal-HUF information was vague and incomplete. Further, the information was received by the AO most probably at the fag end of the time-barring date for issuance of notice u/s 148 of the Act. Hence, without any further verification or application of mind, the AO took up the figures of LTCG from the return of income of the assessee and formed reasons and reopened the case of the assessee. Thus, A.O. did not even bother to verify whether the assessee, in fact had claimed LTCG from the scrip of Vax Housing Finance Corporation Ltd and whether the same was claimed exempt u/s 10(38) of the Act. Hence, it is a complete non- application of mind on the part of the assessing officer while recording the reasons for reopening.

We find that and as submitted by the learned Counsel for the assessee that, the reality was that the LTCG of Rs. 17,33,289/-, shown by the assessee, in the return of income, pertained to the following scrips:

We further find that the assessee had actually carried out transactions of short term capital gain (STCG) and intra-day in the scrip of Vax Housing Page | 12 &780/RJT/2024/AYs.2011-12&2016-17 Bhikhalal Prahladrai Agarwal-HUF Finance Corporation Ltd and not the long-term capital gain ( LTCG). Thus, the assessee had neither booked any LTCG in the scrip of Vax Housing Finance Corporation Ltd, nor claimed any exemption u/s 10(38) of the Act in respect of Vax Housing Finance Corporation Ltd, as alleged by the assessing officer in the reasons recorded. Hence, the reasons recorded by the AO were factually incorrect, and does not have any leg to stand.

Therefore, we note that there is no whisper in the reasons recorded, of any tangible material which came to the possession of the assessing officer. It reflects an arbitrary exercise of the power conferred under section 147 of the Act. We find that in the reasons supplied to the assessee, there is no whisper, what to speak of any allegation, that the assessee had failed to disclose fully and truly all material facts necessary for assessment and that because of this failure there has been an escapement of income chargeable to tax. We also find that the AO was not having any material information to form "a reason to believe" that there was an escapement of income, in the assessee`s case under consideration. It is a settled position of law that the factually incorrect reasons do not confer any valid jurisdiction upon the AO u/s 147 of the Act. In this regard, we rely upon the following Direct Judgments of Jurisdictional Gujarat High Court in the case of Sunrise Education Trust Vs. ITO – 92 Taxmann.Com 74, wherein, it was held that Assessing Officer in the reasons recorded, proceeded on the erroneous footing that the assessee had not filed return at all. The first premise for issuing the notice was thus factually incorrect. It is now not disputed by the Revenue that the assessee did file return of income for the year under consideration which was duly acknowledged by the Department. The entire reasoning thus proceeded on the wrong premise that the assessee had never &780/RJT/2024/AYs.2011-12&2016-17 Bhikhalal Prahladrai Agarwal-HUF filed the return. This itself would be sufficient to annul the notice of reopening the assessment.

In the result, appeal filed by the assessee ( in is allowed.

Now, we shall take assessee’s appeal in (A.Y.) 2016-17, wherein the assessee has raised following grounds of appeal:

Considering the above provisions of the Act, the assessing officer noticed that the company should pay the buyback tax on amount of Rs.50,04,000/-(Rs.54,21,000- Rs.4,17,000), as per provisions of section 115QA of the Act, r.w.r. 40BB of the Rules, but the company has violated the provision and has not paid tax as per rule 40BB and hence the amount cannot be claimed as exempt by the assessee u/s 10(34A) of the Act and since the condition are not satisfied and therefore is to be taxed as long term capital gains u/s.46A of the Act. &780/RJT/2024/AYs.2011-12&2016-17 Bhikhalal Prahladrai Agarwal-HUF 25. During the assessment proceedings, the Assessing Officer issued the show-cause notice to the assessee, to explain the above transaction. In response to the notice of the Assessing Officer, the assessee submitted it’s written submission before the A.O. stating that as per section 10(34A) of the Income Tax Act, 1961, any income arising to an assessee, being a shareholder, on account of buy-back of shares (other than shares listed on a recognized stock exchange), by the company referred to in section 115QA, shall be exempt from tax in the hands of the shareholder. During the year, the assessee has received a total consideration of Rs. 54,21,000/- on account of buy back of 2,08,500 shares of Garg Logistics Pvt. Ltd and as per section 10(34A), the same is claimed as exempt in the hands of assessee. The Copy of resolution of company, audited accounts and account of shares in the books of assessee were submitted before the A.O. In the Balance sheet for the year ended 31.03.2016, the balance number of shares shown in the Balance sheet as on 31.03.2016, there seems a typing error in the schedule attached with the Balance sheet but the total number of shares as whole are correctly shown and further individually the same has been correctly shown in the Balance sheet for year ended 31.03.2017, as previous year's figures for 31.03.2016. The MCA returns filed with the Registrar of Companies also shows the correct figures for each shareholder. The copy of Balance sheet for the year ended 31.03.2017 with corresponding figures of previous year as well as Board Report and Annual Return for 31.03.2016 were submitted before the A.O. The calculation sheet of tax, along with copy of challan of tax paid in respect of buy back of shares were also submitted before the A.O.

However, the Assessing Officer rejected the above submission of the assessee and observed that the assessee has purchased 2,08,500 shares for Page | 17 &780/RJT/2024/AYs.2011-12&2016-17 Bhikhalal Prahladrai Agarwal-HUF a consideration of Rs.4,17,000/-, which is very clear from the balance sheet of the assessee, which is reflected in the balance sheet of the assessee, for the year ending 31.03.2009 and hence the purchase consideration paid by the assessee is only Rs.4,17,000/-. The company has to pay the buyback tax on the difference between purchase consideration and the buyback amount paid, that is, ( 54,21,000 - 4,17,000) = Rs.50,04,000/-, however, the company has not paid the buyback tax on Rs.50,04,000/- but paid only on Rs.2,08,500/-, which is not as per provisions of section 115QA of the Act and since the company has not followed the rule 40BB of the Income Tax Rules, the assessee cannot claim the same as exempt under the section 10(34A) of the Income Tax Act, 1961.The difference amount of net gain received by the assessee, being Rs.50,04,000/-, should be taxed, as per the provisions of section 46A of the Income Tax Act, under long term capital gains. The assessing officer, then referred the provisions of section 46A of the Act, which states as follows: "Where a shareholder or a holder of other specified securities receives any consideration from any company for purchase of its own shares or other specified securities held by such shareholder or holder of other specified securities, then, subject to the provisions of section 48, the difference between the cost of acquisition and the value of consideration received by the shareholder or the holder of other specified securities, as the case may be, shall be deemed to be the capital gains arising to such shareholder or the holder of other specified securities, as the case may be in the year which such shares or other specified securities were purchased by the company."

Aggrieved by the order of the Assessing Officer, the assessee, carried the matter in appeal before the Ld. CIT(A), who has confirmed the action of the Assessing Officer. The Ld. CIT(A) noticed that as per the working of the ld.AO (noted above), the LTCG on sale of these shares to the company as buy-back is Rs.46,46,469/-. The Ld. CIT(A) also noticed that assessee submitted contradictory and self-conflicting information in its statement of facts (SoF) filed before the first appellate authority (FAA), which is very baffling. In para 5 of SoF, the assessee says purchase cost per share is Rs.2 in the hands of the assessee and in para 6 of SoF the purchase cost per share is Rs.25 in the hands of the assessee. Therefore, Ld. CIT(A) noticed that the assessee is adopting two different costs, viz., (i) cost of Rs.2 per share for claiming LTCG exemption and (ii) cost of Rs.25 per share for payment of tax by the company on payment of tax. Therefore, the Ld. CIT(A) was of the view that with such conflicting information, the ground of appeal of the assessee, cannot be adjudicated and hence, grounds of appeal of the assessee were dismissed by the ld. CIT(A).

The Ld. Counsel for the assessee submitted that the company from whom the assessee has purchased the shares, has enter into the buy back of share transaction and in the course of buy back of share transaction, the assessee got the money, which is exempted under Section 10(34A) of the Act. For this purpose, the Ld. Counsel for the assessee took us through the provisions of section 10(34A) of the Act, which are reproduced below: &780/RJT/2024/AYs.2011-12&2016-17 Bhikhalal Prahladrai Agarwal-HUF “(34A) any income arising to an assessee, being a shareholder, on account of buy back of shares by the company as referred to in section 115QA.”

Then after, the Ld. Counsel took us through the provisions of section 115QA of the Act, which are reproduced below:

On the other hand, Ld. D.R. for the Revenue submitted that the assessee under consideration is not the original shareholder. The shares were transferred from original share holder to assessee, under consideration, therefore and it is not exempted in the hands of the assessee (being subsequent shareholder). Therefore, assessee under consideration is liable to pay the income tax, as computed by the assessing officer.

We have heard both the parties and perused the material available on record. The assessee is a Hindu Undivided Family, deriving income from Page | 21 &780/RJT/2024/AYs.2011-12&2016-17 Bhikhalal Prahladrai Agarwal-HUF the business of transportation. The assessee filed its return of income for A.Y. 2016-17 on 30.05.2016, declaring total income at Rs. 42,53,750/-. The case of the assessee was selected for complete scrutiny and the assessment proceedings were initiated by issuing notice u/s 143(2) of the Act, on 03.07.2017. During the assessment proceedings, the AO inquired about the assessee's claim for exemption under section 10(34A) of the Act in the return of income. The assessee submitted that the said exempt income is on account of the buyback of shares of Garg Logistics Pvt. Ltd, and explained that, according to Section 10(34A) of the Income Tax Act, 1961, any income derived by a shareholder from the buyback of shares by a company is covered under Section 115QA of the Act, hence, assessee is eligible for exemption from taxation in the hands of the shareholder and the company is required to pay tax on such buyback under the provisions of section 115QA of the Act.

We note that assessing officer, during the assessment proceedings, contended that income from the buyback of shares is exempt in the hands of the shareholder only when the company complies with the provisions of section 115QA of the Act. The A.O. was of the view that the company has violated the provisions of section 115QA and has not paid tax accordingly. Hence, the A.O. denied the exemption u/s. 10(34A) of the Act, and made the addition of long-term capital gain u/s. 46A of the Act.

We note that assessee had purchased 2,08,500 shares of Garg Logistics Pvt. Ltd. at the rate of Rs. 2/- per share from other shareholders. The shares were bought back by the company at the rate of Rs. 26/- per share on the buyback scheme of such shares. Hence, the assessee earned an income of Rs. 50,04,000/-, which was claimed as exempt u/s 10(34A) of the Act. The Page | 22 &780/RJT/2024/AYs.2011-12&2016-17 Bhikhalal Prahladrai Agarwal-HUF Garg Logistics Pvt. Ltd. has bought back the shares at the rate of Rs. 26/- per share which were originally issued by the company at Rs. 25/- per share (Face value of Rs. 10/- and Share premium of Rs. 15/-). Hence, the company has correctly paid tax on Rs. 1/- per share (Rs. 26/- less Rs. 25/-) being the difference between the buyback price and the amount which was received by the company for issue of such shares. Therefore, the company has duly complied with the provisions of section 115QA of the Act. The assessee placed on records sufficient documentary evidences in this regard to substantiate its claim. However, the A.O., without appreciating the submissions of the assessee and in gross violation of the explicit provisions of section 115QA, contended that the company has to pay the tax on Rs. 50,04,000/- being the difference between the purchase cost of the assessee and the buyback amount paid but the company had paid tax only on Rs. 2,08,500/- which was not as per the provisions of section 115QA of the Act and accordingly made the addition of Rs. 46,46,469/- on account of long- term capital gain after giving the benefit of index cost, in the hands of the assessee.

Considering the above facts and circumstances, we note that the addition made by the AO is in complete violation of the provisions of section 115QA of the Act, as noted above. The manner of calculation has been prescribed in Rule 40BB of the Rules which, inter alia, prescribes that where the shares were issued at premium, such premium shall also be reduced while calculating the distributed income. The relevant part of the Rule 40BB, is reproduced below for ready reference:

From the above provision, it is crystal clear that the company is required to pay tax on the buyback of shares in the following manner:

Since the company is liable for making payment of tax on buyback of shares, the shareholder gets exemption from capital gain under section 10(34A) of the Act. The said provision is reproduced below again for ready reference: “any income arising to an assessee, being a shareholder, on account of buyback of shares by the company as referred to in section 115QA”

We also note that the sole contention of the AO is that the company M/s. Garg Logistics Pvt. Ltd has incorrectly paid the taxes due on buyback of shares and therefore, he withdrew the exemption u/s 10(34A) claimed by the assessee. We find that there is no provision either in section 115QA or in section 10(34A), empowering the AO to withdraw the exemption u/s 10(34A), of the shareholder on the ground of improper tax payment by the company buying back the shares. Even if it is assumed for the sake of argument for a moment that the company M/s. Garg Logistics Pvt. Ltd did not pay proper tax on buyback u/s 115QA of the Act, then in such case, recovery proceedings can be initiated against the principal officer of the company or against the company as per section 115QC of the Act. For ready reference, the provisions of section 115QC of the Act are reproduced hereunder: Page | 25 &780/RJT/2024/AYs.2011-12&2016-17 Bhikhalal Prahladrai Agarwal-HUF “If any principal officer of a domestic company and the company does not pay tax on distributed income in accordance with the provisions of section 115QA, then, he or it shall be deemed to be an assessee in default in respect of the amount of tax payable by him or it and all the provisions of this Act for the collection and recovery of income-tax shall apply.”

In the combined result, both appeals filed by the assessee, are allowed.