DHARAMENDRA BHANDARI (HUF),GURGAON vs. ASSISTANT COMMISSIONER OF INCOME TAX, DELHI

The following factual points require consideration:-

It is pertinent to note that the ld AO in page 11 of his order had reflected the graph of movement of price of shares of M/s CCL International Ltd for various years starting from 2010 to 2017. It is relevant to note that the assessee had sold the shares in Asst Year 2013-14, during which time, even according to the graphical presentation of the ld AO, the market price of the said scrip had not increased heavily. The assessee had sold the shares at the price ranging from Rs 131 to Rs 145 per share. After the sales made by the assessee, the share price had actually jacked up several times and reached the pinnacle of Rs 3000 per share and even on the date of presentation of graph by the ld AO in page 11 of his order the share price was Rs 1478.50 in the BSE. We find that the said scrip is still listed in the BSE as on the date of passing of this order. At the outset, given the financials of the said company, we hold that the said company cannot be Dharamendra Bhandari (HUF) categorized as a Penny Stock Company and hence the entire allegations of the lower authorities in their orders fall flat as they are absolutely without any basis and devoid of merit. Moreover, the ld AO relies on 3 statements of persons who are claimed as brokers / entry operators. None of them had even mentioned either the name of the assessee or his broker HDFC Securities Ltd. Hence there is absolutely no evidence brought on record by the revenue that either the assessee or his broker had connived with the so called entry operators / brokers for artificial rigging of market prices of shares of M/s CCL International Ltd. Even the request of the assessee to cross examine those persons during the course of assessment proceedings vide letter dated 15.12.2018 was denied by the ld AO. Hence those statements even if found to be correct cannot be used against the assessee as they were not subjected to cross –examination by the assessee. Moreover, we find that even the statements of the persons which were relied upon by the ld AO in his assessment order were not against assessee or adverse to the facts of the case before us. The persons had only stated that they had dealt in CCL shares and had earned a profit of Rs 2,49,536/- in Asst Year 2013-14. There is no evidence brought on record by the revenue that the assessee had given his unaccounted cash and had converted the same in the form of exempt LTCG in an organized manner. The ld. DR has relied upon SEBI’s order dated 29.11.2022 in the case of CCL International Ltd whereby it is noted that price manipulation in scrip of CCL International Ltd was done so as to arrange entry of bogus LTCG to various beneficiaries. But it is pertinent to note that on perusal of the said SEBI order, we find that nowhere even the name of the present assessee or his broker HDFC Securities Ltd were mentioned to part of the larger price manipulation. First of all, we hold that the share prices had increased manifold after the assessee had sold the shares of CCL International Ltd and hence the entire allegation that assessee was part of the price manipulation Dharamendra Bhandari (HUF) itself is devoid of merit. Once the assessee is out of the scenario, the entire allegations leveled by the ld AO becomes very vague and general in nature and cannot be used against the assessee herein. In the said SEBI order dated 29.11.2022, we find that SEBI had mentioned various persons in Pages 18 to 19 of his order mentioning their connection with the promoters of CCL International Ltd and other companies and ultimately decided to levy penalty only on Mr Anil Kumar, Tanvi Fincap Private Limited , Rama Anil Gupta Associates Pvt Ltd and Mr Sayuj Pallithazath Arumugham. The investigation carried out by SEBI on the said scrip CCL International Ltd was for the period prior to the date of even purchase of shares by the assessee. In any event, SEBI final order was subsequently quashed by Securities Appellate Tribunal (SAT) vide its order dated 27.7.2023. Hence practically there is nothing adverse against the assessee or his broker HDFC Securities Ltd in the order of SEBI which was heavily relied upon by the ld DR. Hence in our considered opinion, the reliance placed on SEBI order does not advance the case of the revenue in the facts and circumstances of the instant case.

The main grievance of the ld. AO is that rise in share price of CCL International Ltd is devoid of commercial principle or market factors; that transactions are based on mutual connivance on part of assessee and operators; that assessee resorted to preconceived scheme to procure bogus long term capital gains and hence the transactions are not bonafide; that these are close circuit transactions and are pre-structured; that assessee had failed to discharge his onus cast on her; that net worth of CCL International Ltd is negligible and that its share prices were artificially rigged ; that investigations prove that cash is routed through various accounts to provide these bogus long term capital gain entries. The ld. AO by making these observations proceeded to treat the LTCG portion arising on sale of shares of Rs 14,07,66,123/- alone as unexplained cash credit u/s 68 of the Dharamendra Bhandari (HUF) Act. Meaning thereby, the cost incurred by the assessee on purchase of shares in the sum of Rs 40,00,000/- was accepted as genuine and all the three ingredients of section 68 of the Act were satisfied to the extent of Rs 40 lakhs but the same three ingredients were doubted by the revenue for the LTCG portion alone. If the revenue had doubted the transactions as genuine, then they should have doubted the entire sale consideration itself. Here only LTCG portion is doubted by the revenue out of the entire sale consideration. How can the three ingredients be satisfied partially for cost portion of Rs 40 lakhs and how can the same be not satisfied for LTCG portion? Hence the denial of exemption u/s 10(38) of the Act deserves to be allowed on this count itself.

We find that the documentary evidences submitted by the assessee were found to be genuine and no adverse inferences were drawn by the ld.AO on the same. We find that no enquiries were carried out by the ld. AO either on the broker or with the stock exchange with regard to transactions carried out by the assessee. The ld. AO had merely relied on the investigation report without linking the assessee with the various allegations leveled in the said investigation report. We find that the ld. AO had not proved with any cogent evidence on record that assessee was involved in converting his unaccounted income into exempt long term capital gains by conniving with the so called entry operators and brokers who were involved in artificial price rigging of shares. No evidence is brought on record to prove that assessee was directly involved in price manipulation of the shares dealt by him in connivance with the brokers and entry operators. It is not in dispute that the assessee had made purchase of shares in off-market by making payment for purchase of shares by account payee cheque out of disclosed bank account and out of disclosed sources of income. Now the next issue that arises for our consideration is as to whether an off market purchase of shares could be taken as a ground to declare the entire Dharamendra Bhandari (HUF) transaction as sham. In our considered opinion, the transactions could not be treated as sham merely because they are done in off-market, if the assessee had discharged his onus of proving the fact that shares purchased by him were dematerialized in the Demat account and held by the assessee till the same were sold from the Demat account of the assessee. The transaction of holding the shares are reflected in Demat account and sale of shares are through Demat account. More so, when there is no dispute regarding the purchase price and sale price of shares. Our view is further fortified by the decision of Hon’ble Jurisdictional High Court in the case of CIT vs Jamnadevi Agarwal reported in 328 ITR 656 (Bom) wherein it was held that - “From the documents produced before the Court it was seen that the shares in question were, in fact, purchased by the assessees on the respective dates and the company had confirmed to have handed over the shares purchased by the assessees. Similarly, the sale of the shares of the respective buyer was also established by producing documentary evidence. It is true that some of the transactions were off-market transactions. However, the purchase and sale price of the shares declared by the assessees were in conformity with the market rates prevailing on the respective dates, as was seen from the documents furnished by the assessees. Therefore, the fact that some of the transactions were off-market transactions could not be a ground to treat the transactions as sham transactions. On a perusal of those documentary evidences, the Tribunal had arrived at a finding of fact that the transactions were genuine. Nothing was brought to notice of the Court that the findings recorded by the Tribunal were contrary to the documentary evidences on record. Therefore, no substantial question of law arose from the order of the Tribunal.

Hence it could be safely concluded that the assessee herein is merely a gullible investor, who had resorted to make investment in the shares of CCL International Ltd based on market information and had sold the shares in the secondary market in prevailing market prices. It is not the case of the ld. AO that assessee herein had directly sold the shares in the secondary market with clear knowledge of the name of the person to whom the said shares were sold. In secondary market transactions, the buyer and seller Dharamendra Bhandari (HUF) are not supposed to know each other unless it is a case of ‘block deals’. Same is the case of the assessee herein. Admittedly, the assessee’s case does not fall under the category of ‘block deals’.

We are unable to persuade ourselves to accept to the contentions of the ld. DR that Kolkata Investigation Wing had conducted a detailed enquiry with regard to the scrip dealt by the assessee herein and hence whomsoever had dealt in this scrip, would only result in bogus claim of long term capital gain exemption or bogus claim of short term capital loss. 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. First of all, from the financials of CCL International Ltd, it is very much evident that the said scrip cannot be categorized as a Penny stock per se. Even if it be so, 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 (read penny stocks) 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 the instant case, SEBI had not passed any adverse order on the assessee or his broker HDFC Securities Ltd and had not even named both of them in their order. There is absolutely no whisper as to the fact whether the assessee or his broker HDFC Securities Ltd were subjected to any investigation or enquiry by SEBI. Hence the transaction carried out by the assessee cannot be termed as bogus.

We find that the Co-ordinate Bench of Mumbai Tribunal in the case of Mukesh Ratilal Marolia vs Additional CIT reported in 6 SOT 247 (Mum ITAT) dated 15.12.2005 had held that personal knowledge and excitement on events should not lead the ld. AO to a state of affairs where salient evidences are overlooked. It was held that when every transaction has been accounted, documented and supported, it would be very difficult to brush aside the contentions of the assessee that he had purchased shares and had Dharamendra Bhandari (HUF) sold shares and ultimately purchased a flat utilizing the sale proceeds of those shares and therefore, the co-ordinate bench chose to delete the impugned additions. We find that this tribunal decision was approved by the Hon’ble Jurisdictional High Court in of 2007 dated 07.09.2011. It is pertinent to note that the Special Leave Petition preferred by the Revenue against this decision before the Hon’ble Supreme Court has been dismissed vide SLP No. 20146 of 2012 dated 27.01.2014.

Further we find that in the decision rendered by Hon’ble Bombay High Court in the case of CIT vs Shyam S Pawar reported in 54 taxmann.com 108 (Bom), it was held that where Demat account and contract note showed details of share transaction and the ld.AO had not proved the said transaction as bogus, the long term capital gain earned on said transaction could not be treated as unaccounted income u/s 68 of the Act. The relevant operative portion of the said judgement is reproduced below:- “5. We have perused the concurrent findings and on which heavy reliance is placed by Mr.Sureshkumar. While it is true that the Commissioner extensively referred to the correspondence and the contents of the report of the Investigation carried out in paras 20, 20.1, 20.2 and 21 of his order, what was important and vital for the purpose of the present case was whether the transactions in shares were genuine or sham and bogus. If the purchase and sale of shares are reflected in the Assessee's DMAT account, yet they are termed as arranged transactions and projected to be real, then, such conclusion which has been reached by the Commissioner and the Assessing Officer required a deeper scrutiny. It was also revealed during the course of inquiry by the Assessing Officer that the Calcutta Stock Exchange records showed that the shares were purchased for code numbers S003 and R121 of Sagar Trade Pvt Ltd. and Rockey Marketing Pvt. Ltd. respectively. Out of these two, only Rockey Marketing Pvt.Ltd. is listed in the appraisal report and it is stated to be involved in the modus-operandi. It is on this material that he holds that the transactions in sale and purchase of shares are doubtful and not genuine. In relation to Assessee's role in all this, all that the Commissioner observed is that the Assessee transacted through brokers at Calcutta, which itself raises doubt about the genuineness of the transactions and the financial result and performance of the Company was not such as would justify the increase in the share prices. Therefore, he reached the conclusion that certain operators and brokers devised the scheme to convert the unaccounted money of the Assessee to the accounted income and the present Assessee utilized the scheme.

We are conscious of the decision of Hon’ble Jurisdictional High Court in the case of Suman Poddar vs ITO reported in 112 taxmann.com 329 (Del HC) dated 17.09.2019 where the decision was rendered in favour of the revenue. The Special Leave Petition filed by the assessee before the Hon’ble Supreme Court in this case was dismissed by the Hon’ble Apex Dharamendra Bhandari (HUF) Court vide its order dated 22/11/2019. But we find that there is yet another decision of Hon’ble Jurisdictional High Court in the case of PCIT vs Krishna Devi and others in ITA 125/2020 ; 130 & 131/2020 dated 15.01.2021 reported in 126 taxmann.com 80 (Delhi HC) wherein similar issue of penny stock vis a vis long term capital gain exemption u/s 10(38) of the Act was subject matter of adjudication, in favour of the assessee. This decision rendered in the case of Smt Krishna Devi considers all the propositions laid out hereinabove and are squarely applicable to the facts before us. Infact the Hon’ble Jurisdictional High Court duly endorses the elaborate findings given by the Delhi Tribunal on various facets of the issue. Moreover, in this decision, the Hon’ble Jurisdictional High Court duly considered the decision of Suman Poddar (earlier Hon’ble Delhi High Court decision referred to supra) and also the decision of Hon’ble Supreme Court in the case of Sumati Dayal which was heavily relied upon by the ld. DR before us also herein. The relevant operative portion of the decision of Hon’ble Jurisdictional High Court in the case of Smt Krishna Devi is reproduced hereunder:- “10. We have heard Mr. Hossain at length and given our thoughtful consideration to his contentions, but are not convinced with the same for the reasons stated hereinafter.

Accordingly, the present appeals are dismissed. (emphasis supplied by us)”

We find that all the observations, conclusions and findings of the ld. AO are based on suspicion, surmises and hearsay. It is trite law that the suspicion howsoever strong cannot partake the character of legal evidence. We find that the entire case of the revenue hinges upon the presumption Page | 16 Dharamendra Bhandari (HUF) that the assessee has ploughed back his own unaccounted money in the form of bogus LTCG. However, this presumption or suspicion how strong it may appear to be true, but needs to be corroborated by some evidence to establish a link that the assessee had brought back her unaccounted income in the form of LTCG. Reliance in this regard is placed on the decision of Special Bench of Mumbai Tribunal in the case of GTC Industries Ltd. vs. ACIT reported in 80 taxmann.com 284 (Mumbai-Trib.)(SB). The Tribunal observed as under:

We find that the Hon’ble Jurisdictional High Court in the recent case of PCIT vs Ziauddin A Siddique in Income Tax Appeal No. 2012 of 2017 dated 04.03.2022 had held as under:- “2. We have considered the impugned order with the assistance of the learned Counsels and we have no reason to interfere. There is a finding of fact by the Tribunal that the transaction of purchase and sale of the shares of the alleged penny stock of shares of Ramakrishna Fincap Ltd (“RFL”) is done through stock exchange and through the registered Stock Brokers. The payments have been made through banking channels and even Security Transaction Tax (“STT”) has also been paid. The Assessing Officer also has not criticized the documentation involving the sale and purchase of shares. The Tribunal has also come to a finding that there is no allegation against assessee that it has participated in any price rigging in the market on the shares of RFL.

In our view, the Tribunal has not committed any perversity or applied incorrect principles to the given facts and when the facts and circumstances are properly analysed and correct test is applied to decide the issue at hand, then, we do not think that question as pressed raises any substantial question of law.

We find that the Hon’ble Calcutta High Court in the case of M/s Classic Growers Ltd. vs. CIT in of 2012 had observed that in that case, the ld. AO found that the formal evidences produced by the assessee to support huge losses claimed in the transactions of purchase and sale of shares were stage managed. The Hon’ble High Court held that the opinion of the ld. AO that the assessee generated a sizeable amount of loss out of prearranged transactions so as to reduce the quantum of income liable for tax might have been the view expressed by the ld. AO but he miserably failed to substantiate that. The Hon’ble High Court held that the transactions were at the prevailing price and therefore the suspicion of the ld. AO was misplaced and not substantiated.

We find that the Hon’ble Calcutta High Court in the case of CIT vs Shreyashi Ganguli in of 2012 had observed that in that case, the Hon’ble Calcutta High Court held that the Assessing Officer doubted the transactions since the selling broker was subjected to SEBI’s action. However the transactions were as per norms and suffered STT, brokerage, service tax, and cess. There is no iota of evidence over the transactions as it were reflected in demat account. The appeal filed by the revenue was dismissed. We find that the assessee’s case before us is in a much stronger footing as no action has been initiated on the Broker by SEBI on the assessee or his broker.

We find that the Hon’ble Punjab & Haryana High Court in the case of PCIT (Central), Ludhiana vs Prem Pal Gandhi reported in 401 ITR 253 (P&H) in Para 4 & 5 of its order and the PCIT (Central), Ludhiana vs Hitesh Gandhi in of 2017 dated 16.02.2017 (P&H) in Para 5 & 6 of its order had rendered the similar decisions in favour of the assessee on identical facts and circumstances.

We find that the Hon’ble Jharkhand High Court in the case of CIT vs Arun Kumar Agarwal HUF reported in 210 taxman 405 (Jharkhand) had rendered the similar decision on identical facts and circumstances as under:-

At this juncture, it would be relevant to mention here that it is not disputed by the Revenue before us that the shares of these assessees were already shown in the earlier Balance Sheet submitted by the assessees, and therefore, in that situation, how the revenue condemned the transaction even on the ground of steep rise in the shares. If within a period of one year, the share price has risen from Rs.5 to 55 and from 9 to 160 and one person was holding the shares much prior to that start of rise of the share, then how it can be inferred that such person entered into sham transaction few years ago and prepared for getting the benefit after few years when the share will start rising steeply. In present case even there was no reason for such suspicion when the shares were purchased years before the unusual fluctuation in the share price. Here in this case, we have given example of one of the Tax Appeal wherein the shares were purchased in the year 2004 and were sold in the year 2006, which is said to be one of the case wherein the gap in the purchase and sale of the shares was narrowest. In other cases as we have noticed from the various orders of the C.I.T(Appeals) that, the shares of some of the companies were purchased by the assessees even five years ago from the time of sale and those purchasers were already disclosed in the Balance Sheet of the assessee, then from any angle, it is proved that the assessees had held the shares much prior to 12 months of the sale of the shares.

We find that scrip of CCL International Ltd was subject matter of consideration by the Co-ordinate Bench of this Tribunal in the case of Sarika Bindal vs ITO in for Asst Year 2015-16 dated Dharamendra Bhandari (HUF) 13.12.2023 wherein it was categorically held that CCL International Ltd is engaged in substantial business with significant turnover and fixed assets base. Hence the LTCG arising on sale of such shares cannot be construed as penny stock and exemption u/s 10(38) of the Act cannot be denied. Similar was the view taken in yet another Delhi Tribunal decision in the case of Reeshu Goel vs ITO in for Asst Year 2013-14 dated 7.10.2019 wherein after analysing all the aspects of price rise in detail with specific reference to various dates thereon, the Tribunal held that CCL International Ltd cannot be considered as a Penny stock scrip and LTCG on sale of such share cannot be considered as bogus. It is pertinent to note that this decision of Delhi Tribunal had been approved by the Hon’ble Jurisdictional High Court in the case of PCIT vs Reeshu Goel in ITA 173/2021 dated 14.12.2021.

In any case, we find that the assessee had duly proved the nature and source of credit representing sale proceeds of shares of CCL International Ltd within the meaning of section 68 of the Act. The sale proceeds have been received by the assessee from the stock exchange through the SEBI registered share broker by account payee cheques through regular banking channels. We find that the three ingredients of section 68 of the Act are duly fulfilled by the assessee in the instant case. Hence there is no question of making any addition as unexplained cash credit u/s 68 of the Act in the instant case.

Considering the totality of the facts and circumstances of the instant case and respectfully following the various judicial precedents relied upon hereinabove, we hold that both the lower authorities grossly erred in denying exemption for long term capital gains u/s 10(38) of the Act and Dharamendra Bhandari (HUF) further erred in making an estimated commission @ 3% against the same. Accordingly, the grounds raised