VASUDHA JAIN ,KOLKATA vs. ITO, WARD - 36(4), KOLKATA , KOLKATA

The sole issue of assessee’s appeal is against the action of Ld. CIT(A) in upholding the addition made by the AO u/s. 68 of the Income-tax Act, 1961 (hereinafter referred to as the “Act”) in respect of sale proceeds of shares of M/s. Sulabh Engineers & Services Ltd. (in short “M/s. SESL”) rejecting the assessee’s claim of Long Term Capital Gains (LTCG) on sale of those shares.

Briefly stated facts are that the assessee is an individual who filed her return of income on 27.07.2015 declaring total income at Rs.3,51,280/-. According to AO, various details/documents furnished on record included details of purchases and sale of share scrips of M/s. SESL which resulted in LTCG of Rs.9,31,615/- which was claimed as exempt u/s. 10(38) of the Act. The AO was of the opinion that huge rise in the shares of M/s. SESL was not real and it is a stage managed, pre-arranged transaction wherein the assessee’s own money has been converted/laundered through the use of a syndicate/racket which sells the scrips of M/s. SESL for a very low price and after twelve months rigs/artificially inflated the price wherein pre-arranged companies with whom assessee’s cash is delivered, purchases the shares of M/s. SESL of a very high price, thus the assessee earns huge LTCG which the assessee later claims to be exempt income. According to AO, the modus operandi as suggested above has been revealed after in depth study by the Investigation Wing of the Department as well as by other agencies like SEBI etc. However, in para 11.3 of the assessment order, the AO clarifies after referring to the cash trail which happened in such modus operandi in earlier paras and AO acknowledges “that the said displayed cash trail does not pertain this particular case” and he also states that it is not an easy task to form the trail of the cash movement in each and every case. Thereafter, even though the assessee filed various details/documents/papers before the AO to show that purchase and sale of share scrips of M/s. SESL which resulted in LTCG of Rs.9,31,615/- and which was not accepted by the AO. According to assessee, the shares purchased and sold were through recognized share broker viz. M/s. Eureka Stock & Share Broking Services Ltd. and through online trading mechanism on which STT was also paid. It was brought to notice of AO that the shares were quoted with Bombay Stock Exchange (BSE). However, the AO did not agree with the claim of the assessee and added the entire sale consideration of Rs.12,37,500/-. Aggrieved, assessee preferred an appeal before the Ld. CIT(A) who was pleased confirm the action of AO. Aggrieved, assessee is before us.

The Ld. AR assailing the action of the Ld. CIT(A) contended that the Ld. CIT(A) arbitrarily brushed aside all the documents produced by the assessee to substantiate the claim and has gone by the test of human probability to nix the claim of assessee, which is not legally sustainable, so he wants us to allow the claim of the assessee in this regard. Further the Ld. AR submits that the assessee has discharged the onus on him to show that the transaction is in the recognized stock exchange through recognized stock broker and on online platform and the shares were held in de mat account and sold through the banking channel. According to Ld. AR, there is no evidence/material to suggest that assessee had indulged in any activity as suggested by the AO to cause a doubt on the claim made by the assessee. According to Ld. AR, in the Investigation Report of the department is a general report and has nowhere indicted the assessee/broker/scrips or any report of SEBI to suggest that the assessee had indulged in any nefarious activity. So without any evidence assessee’s claim cannot be disallowed. Per contra, the Ld. DR supported the order of the Ld. CIT(A) and AO and does not want us to interfere in the order of Ld. CIT(A) and cited the order of Hon’ble Bombay High Court in Bimal Chand Jain in TAX Appeal No. 18/2017, the Ld. DR vehemently opposing the arguments of the Ld. AR completely supported the order of the lower authorities and stated that the assessee’s own money has been laundered through this maze of companies which are pre-arranged, stage managed and, therefore, needs to be dealt with heavy hands.

I have heard rival submissions and gone through the facts and circumstances of the case. I note that the assessee has purchased 5000 shares of M/s. SESL @ Rs.59.75 per share on 21.03.2013 through her broker M/s. Eureka Stock & Share Broking Services Ltd. All these 5000 shares were sold by the assessee on two different dates at lots of 2500 each on 27.05.2014 @ Rs.249/- per share and on 29.05.2014 @ 246/- per share with gross cost of Rs.12,37,500/-. In order to justify the claim the Ld. AR drew my attention to the contract note No. 101690 and settlement no.R-1213248 dated 21.03.2013 which is placed at page 2 of the paper book from where I note that the assessee had purchased 5000 shares @ Rs.59.75 for a total consideration of Rs.2,98,750.00 through M/s. Eureka Stock & Share Broking Services Ltd. Thereafter, I note that the amount has been paid through bank which is revealed on a perusal of the bank statement placed at page 3 of the paper book. I also note from pages 4 to 5 of the paper book the de mat statement showing 5000 shares of M/s. SESL transferred to the National Security Depository Ltd. Page 6 of the paper book reveals the de mat holding statement of 5000 shares in M/s. SESL. Page 7 of the paper book is broker’s ledger showing receipt of the above transaction. Coming to the sales, I note that from perusal of pages 8 and 9 of the paper book the contract note for sale of 5000 shares of M/s. SESL dated 27.03.2014, 2500 shares at gross rate of Rs.249/- received consideration of Rs.6,22,500/- and on 29.03.2014 2500 shares were sold at Rs. 246/- generating sale consideration of Rs.6,15,000/- thus total amount of Rs.12,37,500/-. Page nos. 10 to 11 reflects the sale consideration has been passed through the banking channels and page nos. 12 to 14 reveals the de mat holding statement showing the sale of 5000 shares of M/s. SESL. Page 15 reflects the broker’s ledger showing the payments made. Pages 16 to 19 of the paper book reveals the balance sheet, P&L Account and computation of income for the assessment year under consideration. In the aforesaid back drop, the Ld. AR submits that the assessee has discharged the onus on her to show that the transaction happened in the recognized stock exchange through recognized stock broker and on online platform and the shares were held in de mat account and sold through the banking channel. And, it was pointed out by the Ld. AR, there is no evidence/material to suggest that assessee had indulged in any activity as suggested by the AO to cast a doubt on the claim made by the assessee.

As earlier noted by me that the assessee has filed contract note dated 21.03.2013, bank statement for payment, demat statement, demat holding statement, broker’s ledger showing receipt etc. to support her claim. The AO has heavily relied on the modus operandi which has been brought out by the Investigation Wing of the Department. However, the AO acknowledges that the cash trails etc. which the AO had drawn/depicted as example in his assessment order have nothing to do with the assessee. I find that there is no evidence/material to suggest that the aforesaid documents filed by the assessee are false or fabricated. All the transactions of purchase and sale have happened through stock exchange through online platform and through banking channel. The shares were held in demat account for more than a year, therefore, without any material to suggest that the assessee/broker had indulged in any activity like stage managed and/or pre-arranged as suggested by the AO it cannot be held that the assessee’s LTCG claim is bogus. Therefore, we overturn the decision of the authorities below and direct the AO to allow the claim of LTCG of the assessee.

For taking such a course of action we take note of certain judicial decisions on similar facts:-

The case of the assessee’s is similar to the decision of Hon’ble Bombay High Court, Nagpur Bench in CIT vs. Smt. Jamnadevi Agrawal & Ors. dated 23rd September, 2010 reported in (2010) 328 ITR 656 wherein it was held that: "The fact that the assessees in the group have purchased and sold shares of similar companies through the same broker cannot be a ground to hold that the transactions are sham and bogus, especially when documentary to 99/RPR/2014 & C.O. Nos. 12 to 18/RPR/2014 . A.Y. 2004-05 10 produced to establish the genuineness of the claim. From the documents produced, it is seen that the shares in question were in fact purchased by the assessees on the respective dates and the company has confirmed to have handed over the shares purchased by the assessees. Similarly, the sale of the shares to the respective buyers is 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 is seen from the documents furnished by the assessees. Therefore, the fact that some of the transactions were off-market transactions cannot be a ground to treat the transactions as sham transactions. The statement of the broker P that the transactions with the H Group were bogus has been demonstrated to be wrong by producing documentary evidence to the effect that the shares sold by the assessees were in consonance with the market price. On perusal of those documentary evidence, the Tribunal has arrived at a finding of fact that the transactions were genuine. Nothing is brought on record to show that the findings recorded by the Tribunal are contrary to the documentary evidence on record. The Tribunal has further recorded a finding of fact that the cash credits in the,bank accounts of some of the buyers of shares cannot be linked to the assessees. Moreover, yn the light of the documentary evidence adduced to show that the shares purchased and sold by the assessees were in conformity with the market price, the Tribunal recorded a finding of fact that the cash credits in the buyers' bank accounts cannot be attributed to the assessees. No fault can be found with the above finding recorded by the Tribunal. Therefore, the decision of the Tribunal is based on finding of facts. No substantial question of law arises from the order of the Tribunal.—Asstt. CIT vs. Kamal Kumar S. Agrawal (Indl.) & Ors. (2010) 41 DTR (Nag) (Trib) 105: (2010) 133 TTJ (Nag) 818 affirmed; Sumati Dayal vs. CIT (1995) 125 CTR (SC) 124: (1995) 80 Taxman 89 (SC) distinguished.” 12. The Hon'ble High Court of Rajasthan in CIT vs. Smt. Pushpa Malpani - reported in (2011) 242 CTR (Raj.) 559; (2011) 49 DTR 312 dismissed the appeal of department observing 'Whether or not there was sale of shares and receipt of consideration thereof on appreciated value is essentially a question of fact. CIT(A) and Tribunal have both given reasons in support of their findings and have found that at the time of transactions, the broker in question was not banned by SEBI and that assessee had produced copies of purchase bills, contract number share certificate, application for transfer of share certificate to demat account along with copies of holding statement in demat account, balance sheet as on 31st March, 2003, sale bill, bank account, demat account and official report and quotations, of Calcutta Stock Exchange Association Ltd. on 23rd July, 2003. Therefore, 'the prese/itdppeal does not raise any question of law, much less any substantial question of law.”

The Hon’ble High Court of Punjab and Haryana in the case of Anupam Kapoor 299 ITR 0179 has held as under:- “The Tribunal on the basis of the material on record, held that purchase contract note, contract note for sates, distinctive numbers of shares purchased and sold, copy of share certificates and the quotation of shares on the date of purchase and sale were sufficient material to show that the transaction was not bogus but a genuine transaction. The purchase of shares was made on 28th April, 1993 i.e.. asst. yr. 1993-94 and that assessment was accepted by the Department and there was no challenge to the purchase of shares in that year. It was also placed before the relevant AO as well as before the Tribunal that the sale proceeds have been accounted for in the accounts of the assessee and were received through account payee cheque. The Tribunal was right in rejecting the appeal of the Revenue by holding that the assessee was simply a shareholder of the company. He had made investment in a company in which he was neither a director nor was he in control of the company. The assessee had taken shares from the market, the shares were listed and the transaction took place through a registered broker of the stock exchange. There was no material before the AO, which could have lead to a conclusion that the transaction was simplicitier a device to camouflage activities, to defraud the Revenue. No such presumption could be drawn by the AO merely on surmises and conjectures. In the absence of any cogent material in this regard, having been placed on record, the AO could not have reopened the assessment. The assessee had made an investment in a company, evidence whereof was with the AO. --Therefore, the AO could not have added income, which was rightly deleted by the CIT(A) as well as the Tribunal. It is settled law that suspicion, howsoever strong cannot take the place of legal proof. Consequently, no question of law, much less a substantial question of law, arises for adjudication.— C. Vasantlal & Co. vs. CIT (1962) 45 ITR 206 (SC), M.O. Thomakutty vs. CIT (.1958) 34 ITR 501 (Ker)) and Mukand Singh vs. Sales Tax Tribunal (1998) 107 STC 300 (Punjab) relied on; Umacharan Shaw &Bros. vs. CIT (1959) 37 ITR 271 (SC) Applied; Jaspal Singh vs. CIT (2006) 205 CTR (P & H) 624 distinguished”

The Co-ordinate Bench of Ahmedabad in & 502/Ahd/2016 had the occasion to consider a similar issue which was wherein the assessment was framed on the strength of the statement of a broker. The relevant part reads as under:-

Accordingly, we direct the A.O. to treat the gains arising out of the sale of shares under the head capital gains- “Short Term” or “Long Term” as the case may be. The other grievance of the assessee becomes infructuous.”

The assessee has furnished all evidences in support of the claim of the assessee that it earned LTCG on transactions of his investment in shares. The purchase of shares had been accepted by the AO in the year of its acquisition and thereafter until the same were sold. The off market transaction for purchase of shares is not illegal as was held by the decision of Co-ordinate Bench of this Tribunal in the case of Dolarrai Hemani vs. ITO in dated 2.12.2016 and the decision by Hon’ble Calcutta High court in PCIT Vs. BLB Cables & Conductors Pvt. Ltd. in ITAT No. 78 of 2017 dated 19.06.2018 wherein all the transactions took place off market and the loss on commodity exchange was allowed in favour of assessee. The transactions were all through account payee cheques and reflected in the books of accounts. The purchase of shares and the sale of shares were also reflected in Demat account statements. The sale of shares suffered STT, brokerage etc. In the facts and circumstances of the case, it cannot be held that the transactions were bogus. The following judgments of Hon’ble Jurisdictional High Court:-

We note that since the purchase and sale transactions are supported and evidenced by Bills, Contract Notes, Demat statements and bank statements etc., and when the transactions of purchase of shares were accepted by the ld AO in earlier years, the same could not be treated as bogus simply on the basis of some reports of the Investigation Wing and/or the orders of SEBI and/or the statements of third parties. In support of the aforesaid submissions, the ld AR, in addition to the aforesaid judgements, has referred to and relied on the following cases:-

The ld AR also brought to our notice that once the assessee has furnished all evidences in support of the genuineness of the transactions, the onus to disprove the same is on revenue. He referred to the judgement of Hon’ble Supreme Court in the case of Krishnanand Agnihotri vs. The State of Madhya Pradesh [1977] 1 SCC 816 (SC). In this case the Hon’ble Apex Court held that the burden of showing that a particular transaction is benami and the appellant owner is not the real owner always rests on the person asserting it to be so and the burden has to be strictly discharged by adducing evidence of a definite character which would directly prove the fact of benami or establish circumstances unerringly and reasonably raising inference of that fact. The Hon’ble Apex Court further held that it is not enough to show circumstances which might create suspicion because the court cannot decide on the basis of suspicion. It has to act on legal grounds established by evidence. The ld AR submitted that similar view has been taken in the following judgments while deciding the issue relating to exemption claimed by the assessee on LTCG on alleged Penny Socks.

Moreover it was submitted before us by ld AR that the AO was not justified in taking an adverse view against the assessee on the ground of abnormal price rise of the shares and alleging price rigging. It was submitted that there is no allegation in orders of SEBI and/or the enquiry report of the Investigation Wing to the effect that the assessee, the Companies dealt in and/or his broker was a party to the price rigging or manipulation of price in CSE. The ld AR referred to the following judgments in support of this contention wherein under similar facts of the case it was held that the AO was not justified in refusing to allow the benefit under section 10(38) of the Act and to assess the sale proceeds of shares as undisclosed income of the assessee under section 68 of the Act :- (i) ITO vs. Ashok Kumar Bansal – (Agra ITAT)

We note that the ld. D.R. had heavily relied upon the decision of the Hon’ble Bombay High Court in the case of Bimalchand Jain in Tax Appeal No. 18 of 2017. We note that in the case relied upon by the ld. D.R, we find that the facts are different from the facts of the case in hand. Firstly, in that case, the purchases were made by the assessee in cash for acquisition of shares of companies and the purchase of shares of the companies was done through the broker and the address of the broker was incidentally the address of the company. The profit earned by the assessee was shown as capital gains which was not accepted by the A.O. and the gains were treated as business profit of the assessee by treating the sales of the shares within the ambit of adventure in nature of trade. Thus, it can be seen that in the decision relied upon by the ld. DR, the dispute was whether the profit earned on sale of shares was capital gains or business profit.

It is clear from the above that the facts of the case of the assessee are similar with the facts in the cases wherein the co-ordinate bench of the Tribunal has deleted the addition and allowed the claim of LTCG on such sale of shares Therefore, respectfully following the same ratio, I am inclined to set aside the order of Ld. CIT(A) and direct the AO not to treat the long term capital as bogus and order to allow the claim of LTCG on sale of share of M/s. SESL and delete the consequential addition.

In the result, the appeal of assessee is partly allowed.