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Facts
The assessee's assessment for AY 2012-13 and 2013-14 was reopened under section 147 based on an investigation report alleging that shares of M/s. Wagend Infra Venture Ltd. were used for bogus Long Term Capital Gain (LTCG) accommodation entries. The AO made additions for LTCG and cost of acquisition under section 68, which the CIT(A) sustained and further enhanced by a notional 2% commission for arranging the accommodation entries. The assessee challenged these additions, asserting the genuineness of transactions backed by documentary evidence.
Held
The Tribunal found that the assessee had provided ample documentary evidence (bank statements, contract notes, demat statements, etc.) to prove the genuineness of the share transactions, which were conducted through recognized stock exchanges and banking channels. The AO failed to conduct independent inquiries, did not identify defects in the submitted documents, and erred in denying the assessee's request for cross-examination of persons whose statements were relied upon. The Tribunal, citing High Court judgments, emphasized that additions cannot be based on mere suspicion or uncorroborated investigation reports when transactions are properly documented. Consequently, the Tribunal found merit in the assessee's appeal and deleted the additions made by the AO and confirmed by the CIT(A).
Key Issues
Whether additions for Long Term Capital Gain and notional commission, treated as accommodation entries, were valid when the assessee provided documentary evidence of genuine share transactions through recognized channels and was denied cross-examination; and whether assessment orders issued without independent inquiry and proper approval were legal.
Sections Cited
250, 147, 151, 132, 68, 10(38), 234A, 234B, 234C, 115BBE
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Income Tax Appellate Tribunal, DELHI BENCH ‘G’: NEW DELHI
Before: SHRIPRADIP KUMAR KEDIA & SHRI YOGESH KUMAR U.S.
“1. That on the facts and circumstances of the case and provisions of law, the order passed by the Ld. CIT(A) under section 250 of the Act is bad both in the eyes of law and on facts.
Page 1 of 16 -27 /Del/2022 Shobhit Gupta 2. That on the facts and circumstances of the case and the provisions of the law, the Ld. CIT(A) has failed to appreciate that the assessment order passed u/s 147 is illegal, bad in law and without jurisdiction.
3. That on the facts and circumstances of the case and the provisions of the law, the Ld. CIT(A) has failed to appreciate that the approval u/s 151 is illegal, bad in law and without application of mind and consequently the assessment order passed requires to be quashed.
4. That On the facts and circumstances of the case, the Ld. CIT(A) has failed to appreciate that the assessment order being passed in violation of the principle of natural justice by not providing opportunity for cross examination of persons, whose statements have been relied upon by the AO, in spite of specific request made by the appellant in assessment proceedings as well as before CIT(A) and without giving adequate time and opportunity to the assessee to represent its case.
5. On the facts and circumstances of the case, the learned Ld. CIT (A) New Delhi has erred, both on facts and in law, in sustaining the assessment of the appellant at income of Rs. 1,12,16,378/- as against the income of (Rs. 13,36,590/-) declared by the appellant.
6. That the Ld. CIT(A) has erred, both on facts and in law, in sustaining the addition of Rs.47,07,100/- 147 on account of LTCG on sale of shares without appreciating the facts of the case.
That the Ld. CIT(A) has erred, both on facts and in law, enhancing the income by of Rs. 1,97,595/- on account of alleged notional commission @2% paid for arranging the accommodation entries.
8. That the provisions of sections 234A, 234B and 234C of the Act are not at all applicable.
That the impugned appeal order is arbitrary, illegal, bad in law and in violation of rudimentary principles of contemporary jurisprudence.
Page 2 of 16 -27 /Del/2022 Shobhit Gupta 10. That the appellant craves leave to add, amend, alter, vary and/or withdraw any or all the above grounds of appeal before or at the time of hearing of the appeal.”
3. The brief facts of the are that, the Assessee filed return of income declaring total income of Rs. 13,36,590/- for Assessment Year 2012-13 which was processed under section 143(1) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) on 15.01.2014. As per the information received from DCIT, Central Circle,-3(4), Mumbai, that a search and seizure operation was conducted under section 132 of the Act by the Investigating Wing, Mumbai on 09.04.2015 in the case of M/s. Radford Global Group, wherein it was established that shares of M/s. Wagend Infra Venture Ltd. were used as accommodation entries of bogus LTCG. Further, an excel file containing the trade data derails of the LTCG/STCG/STCG beneficiaries list with their PAN and address are also forwarded to the AO and Assessee’s name and PANnumber figured in the list of beneficiaries with the trade value of Rs. 87,56,260/- for Financial Year 2011-12 (A.Y 2012-13) and a sum of Rs. Rs. 2,86,25,434/- for the Financial Year 2012-13 (Assessment Year 2013-14).
4. The assessment has been reopened for Assessment Year 2012- 13against the assessee under section 147 of the Act on the ground that the assessee had earned Long Term Capital Gain of Rs. 80,79,788/- on sale of 42,750/-shares as the shares of M/s. Wagend Infra Venture Ltd. are bogus.
Page 3 of 16 -27 /Del/2022 Shobhit Gupta In so far as the assessment year 2013-14 is concerned, out of total 1,15,000/- shares, Assessee had sold balance shares in financial years 2012-13 relevant to assessment year 2013-14 for a total sale consideration of Rs. 2,86,25,434/- and the same was claimed exemption under section 10(38) of the Act to the tune of Rs. 2,71,88,988/- being STT paid on it.
Based on the Investigation report, the AO considered the said claim of Long Term Capital Gain as part of accommodation entry and made addition of both Long Term Capital Gain income and also added the cost of acquisition under section 68 of the Act for Assessment Year 2012-13 and 2013-14.
5. As against the above assessment orders for Assessment Year 2012-13 & 2013-14, the assessee preferred appeals before the Ld. CIT(A). The Ld. CIT(A) apart from sustaining the addition vide order dated 23/09/2022, also enhanced the income on account of a notional commission at 2% paid for arranging the accommodation entries. Aggrieved by the impugned orders of the Ld. CIT(A), the assessee preferred the captioned appeals on the grounds mentioned above.
Ld. Counsel for the assessee addressing on the grounds of appeal vehemently submitted that the Assessee produced all the relevant documents such as bank statement, contract notes, transaction account statement with the registered broker namely M/s. K.K. securities Ltd. to Page 4 of 16 -27 /Del/2022 Shobhit Gupta prove the legitimacy of the transaction. The Ld. AO only based on some investigation report, chosen to make addition by invoking the provision of Section 68of the Act. The additions have been made merely based on surmises and conjectures without considering that the fact that there is no connection of the alleged entry providers and without conducting any independent inquiry and without bringing on record any evidence against the assessee. Further submitted that the assessee is a regular investor and there is no adverse report of any of the authorities against the assessee or no allegation on the assessee regarding his involvements in any price rigging/ hype in theprice of shares. The assessments have been framed without their being any direct or indirect incriminating materials against the assessee. De-horse the same, no opportunity of cross examination has been given to the assessee on any of the statement which have been relied by the department, though the assessee has pacifically asked for the cross examination. Thus, Ld. Counsel for the Assessee submitted that the Ld. CIT(A) committed error in partly confirming the addition and also making enhancement of the addition of 2% as unaccounted expenditure incurred by the Assessee on procurement of accommodation entry, thus sought for allowing the Appeal.
7. Per contra, the Ld. DR submitted that the assessee has failed to prove the genuineness of the transaction and the transactions are involved in the Page 5 of 16 -27 /Del/2022 Shobhit Gupta unusual rise in prices of the penny stock under consideration is very low in the absence of evidence of any credible material affecting its financial and the said rise was manipulated for the purpose of preconceived arrangements to deceit the revenue by arranging bogus Long Term Capital Gains.
Therefore, the ld. DR relying on the orders of the Ld. CIT(A), sought for confirming the orders of the CIT(A). Further, in so far as the enhancement of addition is concerned, the Ld. DR justified the order of the Ld. CIT(A) contending that the notional commission at 2 % which was paid for arranging the accommodation entries is also reasonable, thus sought for dismissal of the Appeal of the Assessee.
We have heard the parties and perused the material on record. The Assessee purchased Rs. 1,50,000/- shares on 25/11/2010 of M/s Agarwal purchasing Ltd. later known as M/s Wagend Infra Venture Ltd. by investing Rs. 18,00,000/- (at Rs.12 per share) through physical made those shares have been received by the Assessee in physical form with a lock in period of 12 months and those shares were dematerialized later. Out of 1,500 shares the Assessee sold 42,750/- shares in Assessment Year 2012-13 through a broker named M/s K. K. Securitizes Ltd. through online mode and earned Long Term Capital Gain to the tune of Rs. 80,79,788/-. Further out of total 1,15,000/- shares, Assessee sold balance shares in financial years 2012-13 relevant to assessment year 2013-14 for a total sale consideration of Rs.
Page 6 of 16 -27 /Del/2022 Shobhit Gupta 2,86,25,434/- and the same was claimed exemption under section 10(38) of the Act to the tune of Rs. 2,71,88,988/- being STT paid on it.
9. A search u/s 132 of the Act was conducted on M/s Radford on 09/04/2015, wherein as per the A.O, it was alleged that the shares of M/s Wagend Infra Ventures Ltd. were used as accommodation entries, therefore, the assessment of the Assessee has been reopened u/s 147 of the Act alleging that the Assessee has earned Long Term Capital Gain for both the Assessment Year 2012-13 and 2013-14 on the sale of shares of M/s Wagend Infra Ventures Ltd. and the same are bogus, accordingly, the A.O. also disallowed the cost of the acquisition of the sales and made addition u/s 68 of the Act.
During the assessment proceedings for the purpose of substantiating the transaction, the Assessee submitted bank statement, contract notes, transaction account statement with the registered broker namely M/s K. K.
Securities for the purpose of proving the legitimacy of the transaction. The Assessing Officer has not pointed out the defect in any of the documents submitted by the Assessee. It is not in dispute that the payments are received through banking channels and the transactions were done through recognized stock exchange. The inflow of shares are reflected by way of physical share certificate and D-mat account. The shares were transferred
Page 7 of 16 -27 /Del/2022 Shobhit Gupta through D-mat account and the Assessee claim to have not aware of the buyer. It is not the case of Lower Authorities that the Assessee has paid cash in return of receipt through cheque, in other words, there is no evidence that the cash was recycled. The A.O. has not brought anything on record that either the Assessee or his stock brokers were involved in connived transaction in order to earn the exempt Long Term Capital Gain.The Assessee invested in shares which gave rise to capital gains in short period, which does not mean the transactions are bogus without doubting the documents or evidence produced before the A.O., The shares were sold on different dates through recognized stock exchange at coated price.
The Jurisdictional High court in the case of Pr. CIT Vs. Karuna Garg vide order dated 23/11/2022 held that the astronomical increase in share price of the company itself is not justifiable ground for holding that the LTCG to be an accommodation entry in following manners:-
“2. Learned counsel for the appellant states that the ITAT has erred in deleting the additions of Rs.1,60,18,923/- as unexplained credit under Neutral Citation Number: 2022/DHC/005158 ITA 477/2022 Page 2 of 4 Section 68 read with Section 115BBE of the Income Tax Act, 1961 (‘the Act’) on account of bogus Long-Term Capital Gain on sale of penny stock company namely M/s Goldline International Finvest Ltd. on the ground that the assessing officer has not made independent enquiry.
Though Revenue has mentioned in the present appeal that the issue involved is covered by the judgment of this Court in Suman Poddar v. ITO 423 ITR 480, wherein appeal of the Assessee was dismissed taking judicial notice of the fact that there was an astronomical increase in the share price Page 8 of 16 -27 /Del/2022 Shobhit Gupta
of a company which was not commensurate with the financial parameters of the said company, yet this Court finds that a Coordinate Bench of this Court in PCIT vs. Smt. Krishna Devi [ITA 125/2022] & connected ITAs has upheld the ITAT order which is impugned in the present appeal.
The relevant portion of the order in PCIT vs. Smt. Krishna Devi (supra) is reproduced herein below:-
“11. On a perusal of the record, it is easily discernible that in the instant case, the AO had proceeded predominantly on the basis of the analysis of the financials of M/s Gold Line International Finvest Limited. His conclusion and findings against the Respondent are chiefly on the strength of the astounding 4849.2% jump in share prices of the aforesaid company within a span of two years, which is not supported by the financials. On an analysis of the data obtained from the websites, the AO observes that the quantum leap in the share price is not justified; the trade pattern of the aforesaid company did not move along with the sensex; and the financials of the company did not show any reason for the extraordinary performance of its stock. We have nothing adverse to comment on the above analysis, but are concerned with the axiomatic conclusion drawn by the AO that the Respondent had entered into an agreement to convert unaccounted money by claiming fictitious LTCG, which is exempt under Section 10(38), in a pre-planned manner to evade taxes. The AO extensively relied upon the search and survey operations conducted by the Investigation Wing of the Income Tax Department in Kolkata, Delhi, Mumbai and Ahmedabad on penny stocks, which sets out the modus operandi adopted in the business of providing entries of bogus LTCG. However, the reliance placed on the report, without further corroboration on the basis of cogent material, does not justify his conclusion that the Neutral Citation Number: 2022/DHC/005158 ITA 477/2022 transaction is bogus, sham and nothing other than a racket of accommodation entries. We do notice that the AO made an attempt to delve into the question of infusion of Respondent’s unaccounted money, but he did not dig deeper. Notices issued under Sections 133(6)/131 of the Act were issued to M/s Gold Line International Finvest Limited, but nothing emerged from this effort. The payment for the shares in question was made by Sh. Salasar Trading Company. Notice was issued to this entity as well, but when the notices were returned unserved, the AO did not take the matter any further. He thereafter simply proceeded on the basis of the financials of the company to come to the conclusion that the transactions were accommodation entries, and thus, fictitious. The conclusion drawn by the AO, that there was an agreement to convert unaccounted money by taking Page 9 of 16 -27 /Del/2022 Shobhit Gupta fictitious LTCG in a pre-planned manner, is therefore entirely unsupported by any material on record. This finding is thus purely an assumption based on conjecture made by the AO. This flawed approach forms the reason for the learned ITAT to interfere with the findings of the lower tax authorities. The learned ITAT after considering the entire conspectus of case and the evidence brought on record, held that the Respondent had successfully discharged the initial onus cast upon it under the provisions of Section 68 of the Act. It is recorded that “There is no dispute that the shares of the two companies were purchased online, the payments have been made through banking channel, and the shares were dematerialized and the sales have been routed from demat account and the consideration has been received through banking channels.”
The above noted factors, including the deficient enquiry conducted by the AO and the lack of any independent source or evidence to show that there was an agreement between the Respondent and any other party, prevailed upon the ITAT to take a different view. Before us, Mr. Hossain has not been able to point out any evidence whatsoever to allege that money changed hands between the Respondent and the broker or any other person, or further that some person provided the entry to convert unaccounted money for getting benefit of LTCG, as alleged. In the absence of any such material that could support the case put forth by the Appellant, the additions cannot be sustained.
12. Mr. Hossain’s submissions relating to the startling spike in the share price and other factors may be enough to show circumstances that might create suspicion; however the Court has to decide an issue on the basis of evidence and proof, and not on suspicion alone. The theory of human behavior and preponderance of probabilities cannot be cited as a basis to turn a blind eye to the evidence produced by the Respondent. With regard to the claim that observations made by the CIT(A) were in conflict with the Impugned Order, we may only note that the said observations are general in nature and later in the order, the CIT(A) itself notes that the broker did not respond to the notices. Be that as it may, the CIT(A) has only approved the order of the AO, following the same reasoning, and relying upon the report of Neutral Citation Number: 2022/DHC/005158 ITA 477/2022 the Investigation Wing. Lastly, reliance placed by the Revenue on Suman Poddar v. ITO (supra) and Sumati Dayal v. CIT (supra) is of no assistance. Upon examining the judgment of Suman Poddar (supra) at length, we find that the decision therein was arrived at in light of the peculiar facts and Page 10 of 16 -27 /Del/2022 Shobhit Gupta
circumstances demonstrated before the ITAT and the Court, such as, inter alia, lack of evidence produced by the Assessee therein to show actual sale of shares in that case. On such basis, the ITAT had returned the finding of fact against the Assessee, holding that the genuineness of share transaction was not established by him. However, this is quite different from the factual matrix at hand. Similarly, the case of Sumati Dayal v. CIT (supra) too turns on its own specific facts. The above-stated cases, thus, are of no assistance to the case sought to be canvassed by the Revenue.
13. The learned ITAT, being the last fact-finding authority, on the basis of the evidence brought on record, has rightly come to the conclusion that the lower tax authorities are not able to sustain the addition without any cogent material on record. We thus find no perversity in the Impugned Order.”
Consequently, this Court is of the view that no substantial question of law arises for consideration in the present appeal. Accordingly, the same is dismissed.”
Further Hon’ble Gujrat High Court in the case of Pr. CIT Vs. Sandip Kumar Parsottambhai Patel (2023) 150 Taxman.com 192 (Guj) held as under:
“25. We note that assessee submitted before lower authorities the share brokers contract note in dicating name of the scrip which was traded on the stock exchange; quantity of equity shares sold; date and time on which such shares had been sold, rate at which sale was executed; stock exchange at which such share had been dealt with; amount of brokerage charged; amount of service tax charged; amount of Securities Transaction Tax charged; amount of BSE transaction charges paid; amount of stamp duty paid. Therefore, evidence with regard to source and purpose for which amount had been received and credited in the books has been submitted and which has not been found false, forged and fabricated. The Identity of the party is established from the contract note itself wherein it has been prominently stated that name of the Share Broker is Mrs. Tradebulls Securities Pvt Ltd and that they are member of the Bombay Stock Exchange Ltd. The Decial Account statement evidencing holding of equity shares of Company of which shares have been dealt with at Bombay Stock Exchange and also the quantity which has been sold and the date on which such Page 11 of 16 -27 /Del/2022 Shobhit Gupta quantity was sold. The demat account statement, contains BSE settlement number which is very much matching with settlement number appearing in the contract note issued by the share broker. The Bank statement evidencing receipt of funds from the Share Broker has already been furnished in the course of assessment proceedings. The AO have not brought any material indicating that said amount proposed to be taxed has not been received from the Share Broker or the sum received is from the sources other than the sale consideration claimed against sale of shares. In view of these facts, we are of the view that addition should not be made under section 68 of the Act.
In the light of the documents and evidences submitted by the assessee, we find that there is absolutely no adverse material to implicate the assessee to the entire gamut of unfounded/unwarranted allegations leveled by the AO against the assessee, which in our considered opinion has no legs to stand and therefore has to fall. We take note that Id. DR could not controvert the facts which are supported with material evidences furnished by the assessee. We note that the allegations that the assessee/brokers got involved in price rigging/manipulation of shares must therefore consequently fail. At the cost of repetition, NEUTRAL CITATION C/TAXAP/520/2022 ORDER DATED: 07/03/2023 undefined we note that the assessee had furnished all relevant evidences in the form of bills, contract notes, demat statement and bank account to prove the genuineness of the transactions relevant to the purchase and sale of shares resulting in long term capital gain. Neither these evidences were found by the AO nor by the Id. CIT(A) to be false or fictitious or bogus. The facts of the case and the evidences clearly support the claim of the assessee that the transactions of the assessee were genuine and the authorities below was not justified in rejecting the claim of the assessee exempted u/s 10(38) of the Act on the basis of suspicion, surmises and conjectures. It is to be kept in mind that suspicion how so ever strong, cannot partake the character of legal evidence. In the aforesaid facts and circumstance, for allowing the appeal we rely on the decision of the Hon'ble Calcutta High Court in the case of M/s Alipine Investments in of 2008 dated 26 th August, 2008 where in the High Court held as follows:
"It appears that there was loss and the whole transactions were supported by the contract notes, bills and were carried out through recognized stock broker of the Calcutta Stock Exchange and all the bills were received from the share broker through account payee which are also filed in accordance with the assessment. It appears from the facts and materials placed before the Tribunal and after examining the same, the tribunal allowed the appeal by the assessee. In doing so the tribunal held that the transactions cannot be brushed a side on suspicion and surmises. However, it was held that the transactions of the shares are Page 12 of 16 -27 /Del/2022 Shobhit Gupta genuine. Therefore, we do not find that there is any reason to hold that there is no substantial question of law held in this matter. Hence the appeal being is dismissed."
In the aforesaid facts and circumstances of the case, we hold that the Id.CIT(A) was not justified in upholding the addition of sale proceeds of the shares as undisclosed income of the assessee u/s 68 of the Act. We therefore delete the addition of Rs.33,15,263.
Since, we have deleted the main addition of Rs.33,15,263/-, therefore, the addition on account of commission payment of Rs.3,29,188, which is consequential in nature, and hence the same is here by deleted."
During the assessment proceedings, the Assessee stated that he is a regular investor and making investments in the shares and the said fact has not been denied by the A.O. while passing the assessment order. Merely because alleged script to be a penny stock does not mean that actually that script is a penny stock as it is not the case where the Assessee had invested only in the said script. In the present case, the Assessee has produced the document to show that he has made a genuine transactions of the aforesaid script and sold the same when the prices are high and there is no allegation from the Department that there is any adverse report from SEBI or any other authorities against the said script. A perusal of the assessment order shows that the A.O. has relied on the report of the Investigating Wing during the assessment proceedings. The A.O. has not made any enquiry from relevant parties or independent source or evidence, but the A.O.
heavily relied upon the statement recorded by the Investigating Wing as well as information received from the Investigating Wing. Even the statement Page 13 of 16 -27 /Del/2022 Shobhit Gupta recorded by the Investigating Wing has not been confirmed or corroborated by the person during the assessment proceedings. In our opinion, the A.O. ought to have conducted a separate and independent enquiry and any information received from the Investigating Wing is required to be corroborated and confirmed during the assessment by the Assessing Officer by examining the concerned persons who can affirm the statement already recorded by any other authority or the Department. Further there is no allegation in the assessment order or the order of the CIT(A) that the Assessee was involved in any price rigging or price increase. Merely because a particular scrip is identified as a penny stock by the income tax department, it does not mean all the transactions carried out in that scrip would be bogus. So many investors enter the capital market just to make it a chance by investing their surplus monies. They also end up with making investment in certain scrips based on market information and try to exit at an appropriate time the moment they make their profits. In this process, they also burn their fingers by incurring huge losses without knowing the fact that the particular scrip invested is operated by certain interested parties with an ulterior motive and once their motives are achieved, the price falls like pack of cards and eventually make the gullible investors incur huge losses. In this background, the only logical recourse would be to place reliance on the orders passed by SEBI pointing out the malpractices by certain parties and taking action against them. In this case, no adverse Page 14 of 16 -27 /Del/2022 Shobhit Gupta inference in regard to the scrip of M/s Wagend Infra Venture Ltd in context of SEBI report etc, finds place in the reassessment order or the CIT (A) order and thus the transaction carried out by the assessee cannot be termed as bogus.
Further it is a trite law that any document or any statement relied by the Department has to be confronted to the Assessee and the opportunity of cross examination of such person whose statement has been recorded is required to be given to the Assessee. In the present case, the Assessee has specifically asked for cross examination of the person who alleged that he has provided accommodation entries through Long Term Capital Gain, but the said request has been turned down by the A.O. stating that in “these type cases, the spread of the network of the entry operators and the number of persons taking accommodation entries are large and therefore, it is not possible for every A.O. to summon every entry operator/broker and record his statement. The entry operator in this case before the Investigation wing.
Income tax department has accepted oath that M/s Wagend Infra Venture Ltd. was being used for the purpose of providing bogus entries of LTCG.”Thus, the Ld. A.O. committed grave error in denying the opportunity of cross examination by the Assessee. In view of the above discussions and the reasons, finding merit in the Grounds of appeal of the Assessee for Assessment Year 2012-13 and 2013-14, we allow the Grounds of Appeals of Page 15 of 16 -27 /Del/2022 Shobhit Gupta the Assessee and delete the additions made by the A.O. which has been confirmed by the Ld. CIT(A).
In the result, the appeals filed by the Assessee in and 2627/Del/2022 are allowed.