ASHOK BATUKLAL MAKWANA,CHENNAI vs. ITO NON CORPORATE WARD 9(1), CHENNAI

आदेश / O R D E R

PER S. JAYARAMAN, ACCOUNTANT MEMBER :

5.3.5 It is the claim of the appellant that once the genuineness of the transactions in the form of DEMAT statements, Contract Notes and Bank statements are proved then the AO is not justified in disallowing the claim.

5.3.6 In this regard, it is seen that the initial purchase of shares of EIL were not made through BSE or NSE but were effected through off market route in paper form. No satisfactory explanation has been furnished with regard to the identity of the persons / broker / operators from whom the appellant has purchased these shares. The appellant is not in a position to substantiate that he has made any other purchases through this route and from these parties/broker in a regular manner. That is to say that except for the purchase of these shares, the appellant is unable to prove that he has made similar such purchases through the same preferential route. The appellant was also unable to provide convincing reasons as to how it has identified a company/shareholder based at Kolkata for purchasing these shares when the appellant is based at Chennai. The appellant had also not substantiated as to how and why the shares of these particular companies were selected at random for investing off market without even knowing the financial credentials etc. to justify the investment say, on the basis of the level of risk involved or the level of return or on the degree of liquidity involved etc.

5.3.7 Since the shares of the said company have been specifically held by the investigation to be one of the penny stocks traded in, it is for the appellant to discharge his onus to establish the genuineness of purchases with respect to such scrip on the aspects as discussed above which he has failed to do so even during the course of appellate proceedings.

5.3.8 Further, the jurisdictional tribunal in the case of Heera Chand Kanunga Vs ITO in & 2787/Chny/2017 vide its order dated 3-5-2018 has held that the assessee shall prove the transaction by providing all such evidence to substantiate the claim of exemption u/ s 10(38) by producing the persons through whom the assessee has purchased and sold the shares, sub-brokers and the others in the chain who introduced the parties to assessee, whereas the appellant in the instant case has failed to substantiate his claim by not being able to establish the identities of the parties through whom purchased.

Sale of shares:

5.3.9 It is the claim of the appellant that the transactions are genuine since the sales were effected through recognized stock exchange at prices listed on the Exchange and that the STT has also been suffered on the transactions and also for the reason that the payments were done through banking channels. The appellant however, failed to file the relevant documentary evidences in this regard.

5.3.10 From the submissions made, it is noticed that the appellant had disposed 4,000 shares of EIL at an average rate of approx. Rs. 227/- per share in the FY 2011-12 for a sum of Rs. 9,08,000/-. The stocks at the time of sale by the appellant were quoted at prices recording almost 22600% growth rate as compared with the purchase value of the share which is highly improbable in the normal course. Such abnormal movement of prices especially of companies whose volumes of business are unworthy of mention, establishes that the share prices have been artificially spiked and are not normal transactions. In fact the appellant was asked to prove with respect to any other shares traded by him as to whether he had offloaded such shares with such abnormal hike in price within a reasonably short span of time which the appellant was unable to prove/ establish. This clearly establishes that the probability of the appellant trading in these shares without colluding with any of the persons involved in the operations of jacking up the share price is either Nil or very remote.

5.3.11 Further, as regards the offloading of the same on the stock exchange is concerned also it is inexplicable as to how a rational person would buy these shares at an average rate of Rs. 227/- per share whose face value was only Re. 1/-, without the comfort of good published and researched financials of the companies unless the sale as well as the buyers are predetermined. These companies have not been established by the appellant to have a good financial standing in the market at the time of investment by the appellant. It is also noticed that the key financial figures/ratios of the companies were unfavourable and well below the industry standards.

5.3.12 It is to state m this regard that the Operating Revenue and Operating Expenditure of EIL depicts very poor operations being carried out by EIL. The value of the scrip was highly inflated with respect to its book value. It is thus concluded against these facts that considering the financial and operating figures of EIL, the huge market capital of EIL and price/traded volumes in the scrip during the relevant periods was inflated and unrealistic.

5,3.13 This proves that such artificial increase in prices were stage managed through predetermined transactions amongst the members of the syndicate, The prices of the shares were thus clearly manipulated apparently to 227 times the purchase value only to provide bogus gains to the beneficiaries who approached such members, like the appellant In the instant case.

5,3,14 Further, the genuineness of sale of this company's scrip at such atypical price is also questionable from the timing of exit by the appellant. The decision to exit at a particular time when the price was at a particular level is not a natural event as is made out to be but comes across as a pre-determined event decided by the entry operators based on the amount of gains the appellant desired and his capacity to provide necessary financial resources to the extent.

5,3.15 Against this background, the appellant's attempts to establish The sale with abnormal increase in share price as a normal transaction and that too after a relatively shorter holding period is highly absurd and against human nature and the concept of human probabilities. It is thus a clear attempt and strategy by the appellant to make believe on the surface that the offloading of shares was based on the natural demand envisaged in the Stock exchange and that he was not manipulated.

5.3.16 Therefore, as against these wholesome facts, when such a large machinery is involved in accommodating the needs of the appellant, merely because the monies are paid and received through banking channels and that the shares were traded through stock exchanges through a broker does not lend any authenticity to the transactions more particularly when the modus operandi narrated by the key persons during enquiries conducted by the Investigation Wing, Kolkata matched with the execution of the scheme of purchase and sale of the bogus penny stocks by the appellant in the instant case. In fact, it is noticed during the appellate proceedings that such bogus transactions were not confined to the appellant alone but has also been implemented by his other family members too who have also booked exempt profits of similar nature through the very same manipulative penny stocks modus operandi and interestingly for similar amounts.

5.3.17 Attention is drawn to the decision of the Hon'ble Madras High Court in the case of CIT vs. Krishnaveni Ammal reported in [1986] 158 ITR 826 (MAD.), wherein it was held that: when, there are other documentary evidence of corroborative value .... judicial body cannot act on such interested testimony of assessee alone ...

5.3.18 Based on the discussion as above, these facts when viewed against the whole background of events as unfolded, apparently reinforce the modus operandi detailed by the AO that the appellant had made investment in these shares only with an intention to off load them at a later date for a substantial predetermined gain to be introduced into his books in the form of exempt LTCG. The modus operandi involved clearly proves that the penny stocks traded in by the appellant are manipulated to convert unexplained money into tax free profits.

4.1 Thereafter, the Ld. DR submitted that after considering the facts and circumstances, supra, the Ld. CIT(A) relying on various Tribunal / High Court decisions viz., a) CIT vs. Krishnaveni Ammal, [1986] 158 ITR 826 (Mad) b) ITO vs. Ratnakar M. Pujari in dated 03.08.2016 c) ITO vs. Shamim M. Bharwani in ITA No.4906/MUM/2011, [2016] 69 taxmann.com 65 (Mumbai – Trib) d) Arvind Bakrishna Goregonkar vs. ITO 21(2)(1), in ITA No.6717/Mum/2016 dated 03.01.2018 e) Sanjay Bimalchan Jain, [2017] 5 TMI 983 dated 10.04.2017, Mumbai High Court f) Vidya Reddy, Chennai vs. ITO International Taxation, Ward 1(2) in ITA No.2016/CHNY/2017 dated 16.05.2018 held that the transactions involving purchase and sale of shares of Essar India Ltd., have been manipulated and the LTCG stated to have been earned from them are clearly bogus in nature and accordingly upheld the action of the Assessing Officer in the respective cases. Thereafter, the above assessees filed the impugned appeals before this tribunal. Since the findings recorded by the lower authorities are not challenged with relevant material by the respective assessee, the Ld. DR pleaded to dismiss these appeals.

Orders pronounced in the court on the 16th August, 2019 at Chennai.