VIKAS MALU,UAE vs. DCIT, CENTRAL CIRCLE-30, NEW DELHI
Facts
The assessee, Vikas Malu, challenged reassessment orders for AY 2014-15 and 2015-16, where Long Term Capital Gains (LTCG) from the sale of Esteem Bio Organic Food Processing Ltd. shares were treated as unexplained cash credit under Section 68. The AO reopened assessments based on information alleging bogus transactions and price rigging due to the 'weak financials' of the shares. The CIT(A) upheld both the jurisdiction for reassessment under Section 147 and the additions made by the AO on merits.
Held
The Tribunal held that the assessee provided sufficient documentary evidence to prove the genuineness of the share transactions, and the Revenue failed to provide evidence of the assessee's involvement in price rigging. Citing various High Court and ITAT judgments, the Tribunal concluded that mere suspicion or 'modus operandi' is not sufficient to deny LTCG exemption. The Tribunal set aside the CIT(A)'s order on merits, directing the AO to delete the additions under Section 68, but upheld the validity of the reassessment jurisdiction under Section 147.
Key Issues
Whether Long Term Capital Gains from the sale of Esteem Bio shares should be treated as bogus/unexplained cash credit under Section 68. The validity of reassessment proceedings initiated under Section 147/148 and the approval granted under Section 151. Whether the principles of natural justice were violated by denying cross-examination.
Sections Cited
10(38), 68, 132, 143(3), 147, 148, 151, 153A, 234A, 234B, 234C
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, DELHI BENCH “H” DELHI
Before: SHRI PRADIP KUMAR KEDIA & SHRI SUDHIR PAREEK
PER PRADIP KUMAR KEDIA - A.M.: The captioned appeals have been filed by the assessee against the orders of the Commissioner of Income Tax (Appeals)-30, New Delhi (‘CIT(A)’ in short) dated 27.01.2023 and 30.01.2023 arising from the assessment orders both dated 22.02.2022 passed by the Assessing Officer (AO) under Section 147 r.w. Section 143(3) of the Income Tax Act, 1961 (the Act) concerning A.Y. 2014-15 and 2015- 16 respectively.
To begin with, we shall first take up ITA No.817/Del/2013 for adjudication purposes.
ITA No.817/Del/2023 Assessment Year 2014-15
The grounds of appeal raised by the assessee read as under:
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“1. On the facts and circumstances of the case, ld. CIT(A) has erred both on facts and in law in upholding the impugned order passed by the respondent illegally, violating the principles of natural justice, without fair and objective application of mind to the facts of the case and the law applicable and without being guided by the binding decisions of courts and tribunals and hence liable to be set aside and quashed and declared non est. in law. 2. 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.5,80,52,040/- as against the income of 74,74,620/- declared by the appellant. 3. 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 that could not have been reopened u/s 147/148 as no valid reasons have been recorded by the Assessing Officer to establish any satisfaction on his part that any income belonging to the appellant has escaped assessment. 4. On the facts and in the circumstances of the case Ld. CIT(A) New Delhi has erred both on facts and in law, in sustaining the action of AO in reopening the assessment u/s 147 as the reasons recorded are based upon wrong facts and ignoring the fact that as assessment has already been completed u/s. 153A, reassessment proceedings are not valid. 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 action of AO in initiation of proceedings u/s.147, of the IT Act, solely on the basis of borrowed satisfaction 6. 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 approval given u/s 151 by the CIT which is illegal, bad in law and without application of mind. 7. That the Ld. CIT(A) has erred, both on facts and in law, in sustaining the addition of Rs.5,05,77,420/- u/s considering the same as unexplained credit without appreciating the facts of the case. 8. That the Ld. CIT(A) has erred, both on facts and in law, in sustaining the action of the Ld AO by treating the LTCG earned by the appellant as bogus. 9. On the facts and in the circumstances of the case Ld. CIT(A) New Delhi has erred both on facts and in, law, in sustaining the action of AO violating 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). 10. That the provisions of Sections 234A, 234B and 234C of the Act are not at all applicable.”
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Briefly stated, a search action under section 132 of the Act was carried on the premises of the assessee on 9.11.2014. The assessment was accordingly framed under s. 153A rws 143(3) of the Act on 29/12/2016 at the returned income of Rs. 74,74,620/-. After completing the search assessment for A.Y. 2014-15 in question, the AO is stated to have received certain information from ADIT(Inv.) Unit-6(3), New Delhi that assessee has received sale consideration of Rs.5,33,37,400/- by selling 1,10,400 equity shares of Esteem Bio Organic Food Processing Ltd. (Esteem Bio) and earned Long Term Capital Gain for which the underlying value of the shares are not justifiable qua the weak financials of the shares sold in question. The AO accordingly reopened the assessment by invoking Section 147 r.w. Section 148 of the Act. Notices under Section 148(1) etc. were issued on 30.03.2021. The reassessment order dated 22/02/2022 was framed at Rs. 5,80,52,040/-.
In the re-assessment order, the AO narrated the abnormal increase in the price of the share sold qua the poor financial health of the company. It was observed by the AO that the Networth and business activity of Esteem Bio are negligible and alleged that the prices have been artificially rigged by the group operators to accommodate beneficiaries seeking Long Term Capital Gains and Losses to derive tax advantage. It was further observed that no prudent businessman and particularly a trader or an investor in stock will invest in such penny scrip which is inoperative and defunct. The AO observed that assessee is one of the beneficiaries of such Long Term Capital Gains of accommodation nature and entered into sham arrangement to legitimize his undisclosed income using stock exchange platform by way of pre-arranged synchronized trading in Esteem Bio. The AO referred to a report of SEBI making reference to the indulgence by the group of operators to artificially rig the prices of the scrip to abnormal level. The AO thus alleged that the assessee had indulged in bogus and dubious share transactions in Esteem Bio and routed its undisclosed income in the garb of Long Term Capital Gains. The AO thus rejected the bona fides of claim towards Long Term Capital Gains earned on sale of Esteem Bio and treated the
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receipts as unexplained cash credit by invoking Section 68 of the Act. The taxable income was accordingly re-assessed at Rs.5,80,52,040/- as against the assessed income at Rs.74,74,620/-.
Aggrieved, the assessee preferred appeal before the CIT(A). Before the CIT(A), the assessee challenged the action of the AO both on lack of jurisdiction assumed under Section 147 r.w. Section 148 of the Act as well as on merits of the impugned additions under Section 68 of the Act. The assessee filed detailed submissions and documentary evidences to re-inforce its stand on bona fides of LTCG reported. A remand report was obtained by the CIT(A) from the AO. The assessee also filed a rejoinder thereof to counter the observations of the AO. The CIT(A) however found the assumption of jurisdiction to be valid and proper under Section 147 and in conformity with the legal position. Simultaneously, the CIT(A) also did not see any force in the plea on merits towards bona fides of LTCG either. The CIT(A) accordingly dismissed the appeal of the assessee on all counts.
Further aggrieved, the assessee knocked the door of the Tribunal.
When the matter was called for hearing, the ld. Counsel submitted that he seeks to assail the action of the CIT(A) on both counts namely lack of jurisdiction wrongly assumed under Section 147 as well as misconstruction of facts and consequent denial of relief on merits.
8.1 As regards Ground No.1 to Ground No.6 attributable to lack of jurisdiction under Section 147 r.w. Section 151, the ld. counsel pointed out that the AO has not fulfilled the pre-requisites provided in law for conferment of jurisdiction under Section 147 of the Act and summary approval under Section 151 of the Act. However, he fairly said that he does not seek to make extensive arguments beyond what was stated before the CIT(A). 8.2 Adverting to merits, the ld. counsel submitted that the assessee is an investor in shares and other financial and non financial assets and the transactions
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of Long Term Capital Gains are backed by the documentary evidences such as Contract Notes, Bank Statement towards payments, Ledger Account of the broker and Demat account showing transfer of shares on sale and purchase. The assessee is not expected to do anything more to establish the authenticity of transactions. The AO has not assigned any cogent reason to disbelieve the documentary evidences. The said 1,10,400 equity shares of Esteem Bio were purchased on 05.02.2013 on an aggregate consideration of Rs.27,60,000/-. These listed shares were sold at the opportune time in March, 2014 as per prevailing market price discovered by exchange resulting in Capital Gains. The shares sold are listed on the platform of the stock exchange and has suffered security transaction tax at the time of sale.
8.3 The ld. counsel submitted that the Revenue Authorities have blindly relied upon some Investigation Report which primarily narrates general modus operandi. The ld. pointed out that Esteem Bio is a genuine company listed on the stock exchange. The shares of Esteem Bio has neither been delisted nor suspended from trade on BSE at the relevant time. The shares have been sold on the Stock Exchange platform at the prices quoted in public domain at the relevant time and backed by contract note.
8.4 The ld. counsel thereafter referred to judgment delivered by the Hon’ble Jurisdictional High Court in the case of Pr.CIT vs. Karuna Garg in ITA No.477/2022 order dated 23rd November, 2022 and also referred to the decision of the Co-ordinate Bench in the case of Swati Luthra vs. ITO, ITA No.6480/Del/2017, order dated 28.06.2019; Amit Jindal vs. ITO, ITA No.1547/Del/2019, order dated 24.02.2022 in favour of the assessee where the gain on sale of scrip involved namely Esteem Bio itself was subject matter of consideration. It was submitted that in similar fact situation, the Hon’ble High Court and Co-ordinate Benches have taken a benign view and approved the LTCG transactions in the same very scrip.
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8.5 The ld. counsel thereafter referred to the judgment rendered by the Hon’ble Delhi High Court in the case of Pr.CIT vs. Krishna Devi(2021) 126 taxmann.com 80 (Delhi) which judgment was also delivered in favour of the assessee in relation to same scrip, i.e., Esteem Bio Organic Food and Processing Ltd. The ld. Counsel next referred to the judgment rendered by the Hon’ble Bombay High Court in the case of Pr.CIT vs. Ziauddin A. Siddique in Income Tax Appeal No. 2012 of 2017 judgment dated 4th March, 2022 where the Hon’ble High Court adjudicated the issue in favour of the assessee on the ground that the transactions of purchase and sale of shares of the alleged penny stock has been routed through Stock Exchange platform and through SEBI registered stock broker.
8.6 Furthermore, the payment in the instant case has also been made through banking channel and even Security Transaction Tax has already been paid. The AO has not found any deficiency in the documentation involving the sale and purchase of shares. The Revenue has not shown any allegation against the assessee per se by the SEBI that it has participated in any price rigging in the market while deriving such gains. The ld. counsel submitted that the facts in the present case are identical. In similar set of facts, the Hon’ble Bombay High Court in CIT vs. Shyam R. Pawar (2015) 54 taxmann.com 108 (Bom) has also held that the transactions in shares of alleged penny stock cannot be assailed.
8.7 The ld. counsel thereafter submitted that the Department has proceeded on gross misconception of facts. It is neither the case of Revenue that the assessee has not purchased and sold the shares of Esteem Bio giving rise to LTCG nor it could have been. It cannot be the case of the Revenue that assessee has not purchased shares which are reflected in the Demat account of the assessee as on 5th February, 2013, i.e., about the time of purchase. The shares were allotted by the company by Initial Public Offer (IPO) to the assessee. Both allotment and sale transactions have affected through banking channel and reflected in the Demat
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Account. The documentary evidences have been furnished in respect of a acquisition and sale of shares and transfer of shares reflected in Demat statement. Thus, the onus to prove that the transactions are not real, is on the AO which was wrongly shifted to the assessee. The AO has proceeded on conjectures and surmises merely because of astronomical increase happened in the shares price of Esteem Bio which is not an uncommon phenomenon in capital market. A reference was made to the judgment rendered by the Hon’ble Delhi High Court in the case of Krishna Devi (supra) to submit that the startling spike in penny stock share price cannot be regarded as valid ground for denial of LTCG exemption. It was further submitted that the so called SEBI Report was never provided to the Assessee nor does it shown to have implicated the Assessee in any manner. The Stock Market Regulator has not alleged the involvement of Assessee in any manner leading to increase the prices/quotes of shares.
8.8 The ld. counsel thus submitted that there are long line of judicial precedents to support the case of the assessee on first principles and involving the same scrip in some cases. Hence, the action of the Revenue to deny the benefit of LTCG is not justified in law and on facts and thus requires to be reversed.
The ld. CIT-DR for the Revenue, on the other hand, relied upon the order of the lower authorities and also referred to the judgment in the case of Pr.CIT vs. Swati Bajaj (2022) 139 taxmann.com 352 (Cal) to assail the bona fides of LTCG claim.
In rejoinder, the ld. Counsel for the assessee referred to the judgment of the Co-ordinate Bench in the case of ACIT vs. Priyanka Ankit Miglani (ITA No.2530/MUM/2021 and Ors. order dated 21.03.2023 wherein the decision was rendered in favour of the assessee after taking note of the judgment delivered in the case of Swati Bajaj (supra). The Ld. Counsel thus firmly asserted that the revenue authorities have proceeded on skewed understanding of facts and law
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involved in the case.
We have considered the rival submissions and perused the material available on record. The case laws cited in large numbers have also been taken into account. The propriety of LTCG claimed is in controversy. The determination of such issue is essentially a question of fact.
As pointed out on behalf of the assessee, the transactions of allotments of shares on Esteem Bio and sale thereof giving rise to LTCG claimed to be exempt under Section 10(38) of the Act stands fully corroborated by the documentary evidences such as contract notes, bank statement and dmat statement etc. The shares were duly credited and reflected in the Dmat Holding statement at the time of allotment and transferred out of Dmat account at the time of sale. Both purchase / allotment of sale transactions are carried out through banking channel and by transfer of shares. The prima facie bona fides of transactions executed thus cannot per se be doubted. It is not the case of the Revenue that gain arising to the assessee is not in the nature of LTCG. The case of the Revenue is that such transactions are sham and are in the nature of accommodation entry. The primary reasons assigned for holding so, is poor financial health of the scrip under sale. The abnormal increase in prices of such share of the company of beleaguered financial health has lead to suspicion on bona fides of the transactions.
On appraisal of facts, it appears that the impugned additions are driven by stereotyped perceptions rather than actual facts. Needless to say, there is no straight jacket formula to determine the bonafides. The price abuse of some sort must be in evidence while holding against the assessee. In the present case, there is no material on record to attribute any concerted action involving assessee giving rise the steep rise in the price of shares. A peculiar pattern of transaction may, at times, raises a red flag. In the same vain, any such suspicion is mother of enquiry but a mere suspicion however cannot take place of the proof. The AO has
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not made any enquiry with connected parties, broker, Stock Exchange to establish the involvement of the assessee in alleged price rigging in any manner. Balance- sheet test of the company under sale, by itself is not sufficient to disprove the transaction as held in the case of Krishna Devi (supra). It is common knowledge that there are many listed cos. prevalent which attract huge valuations in the market totally disconnected to underlying financial strength. It is also common knowledge that unsuspecting investor do unwittingly invest in penny stocks listed for trading. Thus, the allegations made are required to be seen contextually and with great degree of skepticism and diligence.
The Hon’ble High Court in Krishna Devi’s case upheld the ITAT order deleting addition made under s. 68 for alleged bogus LTCG on sale of penny stock. The Hon’ble High Court observed that the Revenue proceeded predominantly on the basis of the analysis of the financials of M/s Gold Line International Finvest Limited (alleged penny stock company) and arrived at the conclusion that the LTCG was sham and bogus on the strength of the astounding 4849.2% jump in share prices of the aforesaid company within a span of two years. The Hon’ble High Court stated that “We have nothing adverse to comment on the above analysis, but are concerned with the axiomatic conclusion drawn by the AO that the Respondent (assessee) 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…. This finding is thus purely an assumption based on conjecture made by the AO.”; The Hon’ble High Court observed that the Revenue made an attempt to delve into the question of infusion of unaccounted money, but did not ‘dig deeper’. The Hon’ble High Court thus held that the reliance placed on the investigation report, without further corroboration on the basis of cogent material, do not justify the conclusion that the transaction is bogus, sham and nothing other than a racket of accommodation entries; The Hon’ble High referred to findings rendered by the ITAT that the shares were transacted through banking channels and held that in absence of any
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adverse evidence whatsoever to allege that money changed hands between assessee and the broker/ any other person, the additions cannot be sustained. Lastly, with reference to Revenue’s submission relating to the startling spike in the share price and other factors, the Hon’ble High Court observed that these “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 (assessee).”
The co-ordinate bench in the case of Mrs. Neeta Bothra vs. ITO [(2021)92 ITR (AT) 450 (Chennai-Trib), while upholding the propriety of transactions in similar facts, inter alia observed that even though the fact that the financial statements of TTML did not paint a very rosy picture, such fact is not sufficient to draw adverse inference against the assessee.
We may refer to the decision rendered by Hon'ble Bombay High Court in the case of PCIT v. Ziauddin A Siddique (Income tax Appeal No. 2012 of 2017 dated 4th March, 2022), wherein the Hon'ble Bombay High Court has observed as under:- "2. We have considered the impugned order with the assistance of 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 shares of the alleged penny stock of shares of Ramkrishna 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 the assessee that it has participated in any price rigging in the market on the shares of RFL. 3. Therefore we find nothing perverse in the order of the Tribunal.”
Thus, in the absence of involvement of the assessee shown in price rigging and
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other manipulations, no adverse inference can be drawn against the assessee.
Similarly, the Hon’ble Delhi High Court in the case of Karuna Garg (supra) has also held that an astronomical increase in the share prices of the company, in itself, is not a justifiable ground for holding the LTCG to be an accommodation entry.
As pointed out on behalf of the assessee, large number of decision pronounced by the Co-ordinate Benches hold the field in favour of the assessee in respect of same scrip of Esteem Bio Organic Food Processing Ltd. The Co- ordinate Bench in the case of Swati Luthra (supra) has examined the issue in great length involving same scrip and in similar facts found the LTCG declared to be bona fide and genuine. The Co-ordinate Bench in the case of Amit Jindal (supra) yet again examined the issue and found force in the plea of the assessee. The same scrip was thus under scanner of the ITAT in many other cases. The financial health of the scrip on which heavy impetus has been laid by revenue, has impliedly been accounted for in all such decisions involving the same scrip.
Significantly, the involvement of assessee in any kind of alleged manipulation on the platform of NSE / BSE is not brought on record despite search under section 132 or other independent report by SEBI etc.
In the similarity of backdrop, we are of the view that imputations made based on conjectures and surmises, are not justified. The assessee has discharged primary onus which lay upon it by producing corroborative evidences. The Revenue, on the other hand, could not dislodge the perception that apparent is not real.
In the light of the factual matrix and the case laws cited , we see potency in the plea of the assessee that such capital gains arising on sale of shares cannot be
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regarded as sham profit and consequently additions made under Section 68 of the Act is not justified. The modus operandi spelt for alleged manipulation of share prices in general terms, by itself, is not an adequate ground to impeach all transactions in a tainted scrip and ordinary investors cannot made to suffer. Hence, in the light of the delineations, we set aside the order of the CIT(A) on merits and direct the AO to delete the additions in question.
The grievances raised on merits as per Grounds No. 7 to 9 are thus allowed.
We also advert to challenge towards assumption of jurisdiction under Section 147 of the Act. No serious rebuttal has been placed to the process of reasoning adopted by the CIT(A) in confirming the assumption of jurisdiction. The assessee has not brought any cogent material on record to show as to how the pre-requisites for assumption of jurisdiction under Section 147 are not met. In the absence of any cogent plea on lack of jurisdiction, we adopt the view expressed by the CIT(A) in this regard and decline to interfere therewith.
Grounds No.2 to 6 relating to jurisdictional aspects are thus dismissed in limine.
In the result, the appeal of the assessee in ITA 817/Del/2023 is partly allowed.
The facts and issue involved in ITA No.818/Del/2023 relating to A.Y. 2015-16 are identical and involves the same scrip namely Esteem Bio. The AO has identically adopted the process of reasoning applied in A.Y. 2014-15 and rejected the claim of Long Term Capital Gains on sale of shares as accommodation entry and invoked Section 68 of the Act. In consonance with the
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view taken in A.Y. 2014-15, the Long Term Capital arising on sale of Esteem Bio in A.Y. 2015-16 is also found to be eligible for exemption under Section 10(38) of the Act on merits. The challenge to Jurisdiction under Section 147 in relation to A.Y. 2015-16 is however rejected for the similar reasons assigned in A.Y. 2014-15.
Consequently, the appeal of the assessee in A.Y. 2015-16 is partly allowed.
In combined result, both the appeals of the assessee are partly allowed.
Order pronounced in the open Court on 13th September, 2024.
Sd/- Sd/- [SUDHIR PAREEK] [PRADIP KUMAR KEDIA] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 13th September, 2024 Priti Yadav, Sr. PS* Copy forwarded to: 1. Appellant 2. Respondent 3. CIT(A) 4. CIT 5. DR Assistant Registrar
