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Facts
The assessee, Om Prakash Gupta, claimed exemption for Long Term Capital Gain (LTCG) of Rs. 46,01,455/- from the sale of shares of Kappac Pharma Ltd. under Section 10(38) of the Income Tax Act for AY 2014-15. The Assessing Officer and CIT(A) treated the transaction as bogus accommodation entries for converting black money, making an addition under Section 68 and taxing it under Section 115BBE. The assessee argued that all conditions for Section 10(38) exemption were met and provided documentation, while the revenue contended that the share purchase was off-market, in physical form, paid in cash, and lacked verifiable source.
Held
The Income Tax Appellate Tribunal (ITAT) dismissed the assessee's appeal, upholding the CIT(A)'s confirmation of the addition. The Tribunal found that the assessee failed to substantiate the genuineness and source of the purchase transactions, aligning with the findings of the lower authorities that the transactions were against human probability and part of a scheme for accommodation entries. The ITAT also noted that the case laws cited by the assessee were distinguishable.
Key Issues
Whether the Long Term Capital Gain claimed as exempt under Section 10(38) from the sale of shares of Kappac Pharma Ltd. was genuine or constituted bogus accommodation entries, and whether the addition made under Section 68 read with Section 115BBE was justified.
Sections Cited
10(38), 143(3), 68, 115BBE, 143(1), 143(2), 142(1)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, DELHI BENCH ‘E’, NEW DELHI
Before: DR. B.R.R. KUMAR & SH. SUDHIR KUMAR
IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH ‘E’, NEW DELHI BEFORE DR. B.R.R. KUMAR, ACCOUNTANT MEMBER AND SH. SUDHIR KUMAR, JUDICIAL MEMBER ITA No.3061/Del/2019 Assessment Year: 2014-15 Om Prakash Gupta Vs. ACIT 25, Surya Niketan, Circle – 64 (1) Delhi-110092 New Delhi PAN No.AIOPG4255H (APPELLANT) (RESPONDENT) Appellant by Sh. Rakesh Sehgal, CA Respondent by Sh. Anshul, Sr. DR Date of hearing: 21/05/2024 Date of Pronouncement: 20/06/2024 ORDER PER SUDHIR KUMAR, JM:
This appeal by the assessee is directed against the order of the Commissioner of Income Tax (Appeals)-28, New Delhi [hereinafter referred to as “CIT(A)] vide order dated 01.02.2019 pertaining to A.Y.2014-15 and arises out of the assessment order dated 26.12.2016 under section 143(3) of the Act [hereinafter referred as ‘the Act’].
Aggrieved by the order of the lower authorities, the assessee is in appeal before us by raising the following grounds:-
The following findings of the Commissioner of Income Tax (Appeals) 28, New Delhi in his order are not based on any material available on record and therefore are pure speculations and constitutionally impermissible assumptions : a) That the appellant is a part of the scheme of providing entries of LTCG for a commission, by unscrupulous operates in the capital market, and
(b) That the appellant is one such beneficiary who has taken entry of LTCG; and
(c) That whoever, (presuming inclusion of the appellant) benefited from transactions in accordance with the Scheme and has admittedly converted his unaccounted money equal to the sale proceeds of share into white in the guise of exemption under section 10(38) of the Income Tax Act, 1961; and
(d) That the onus on the appellant of proving his transaction of purchase and sale as genuine has not been discharged by the appellant; and
(e) That the persons involved in the scheme have categorically stated that they were involved in providing accommodation entries (presumably including the appellant without any such material on record) regarding sale and purchase of shares through their companies and therefore the human probabilities have also to be applied to comprehend the transactions and to see the real intention behind entering in the transaction; and
(f) That through the transaction, the appellant participated in manipulation of rates of shares with the intention to earn Long Term Capital gain exempt u/s 10(38) during the year under consideration and therefore it is necessary to consider the surrounding circumstances and applying the test of human probabilities (without bringing any material whatsoever on record on the appellant participating in manipulation of rates).
The above findings are despite the fact that neither the Ld. Assessing Officer nor the Ld Commissioner of Income Tax (Appeals) placing any evidence on record linking the appellant to any "syndicate" or "operator" or even naming any such operator or syndicate.
and therefore the above findings are contrary to facts and law and are therefore liable to be set aside and no adverse inference is liable to be drawn there from against the appellant in respect of his claim of Long Term Capital Gain from sale of shares.
2 That the following findings of the Commissioner of Income Tax (Appeals) 28, New Delhi being contrary to ground realities are of no relevance at all, as per law, in deciding the issue of exemption of Capital Gain claimed by the appellant under section 10(38) of the Income Tax Act, 1961:
(a) That the appellant failed to explain satisfactorily and divulge anything worthwhile about the activities of the company; and
(b) That the company in which the appellant invested had no credibility and no prudent investor would make such an investment; and
(c) The financials of the penny stock M/s Kappac Pharma Ltd. and movement of price is abrupt, unrealistic and not based upon any realistic parameter; and
(d) That the sale of shares, given the high rates for such penny stocks, with no real buyers, are bogus (given the fact that the transaction of sale has taken place at the Recognized Stock Exchange at the Quoted price through a reputed registered broker viz. SBI Capital Securities)
The above findings are despite the fact that
(i) the appellant discharged his burden by filing all the documents in respect of purchase and sale of shares specifically the documents relating to the facts that the shares were sold through SBI Caps on prices prevailing on the stock exchange and STT deducted on such sale and thus fulfilling the requirements of
section 10(38) of the Income Tax Act, 1961 relating to the earning of Capital Gain and exemption thereof from tax under the said provisions and the Assessing Officer or the CIT(A) not pointing out any defect in such documents; and (ii) the shares of Kappac Pharma shares were never traded below Rs 10 a share and so it is a blunder on part of Id. CIT (A) to portray it as a penny stock share and impose penny stock narrative to it without application of mind. (iii) The appellant has dealt in many number of listed securities during the relevant year, as per the statement of SBI Cap available with the authorities and therefore the above findings are liable to be ignored in deciding the issue of earning of long term capital gain on sale of shares, which are exempt under section 10(38) of the Act, being fulfilling the conditions prescribed therein.
3 That the finding of the Commissioner of Income Tax (Appeals) 28, New Delhi that in the share transaction resulting in profit, the motive of the appellant was to bring out his black money as legitimately earned LTCG for which exemption u/s 10(38) of the Act was
available, is without any material on record available about the possession of black money by the appellant and in fact is an abuse on the appellant by the Assessing Officer and CIT(A) and therefore no adverse inference is liable to be drawn on such finding and further no addition is liable to be made on the basis of this finding especially when no material has been placed on record showing that appellant ever had any unaccounted cash money. 4 That the finding of the Commissioner of Income Tax (Appeals) 28, New Delhi of his reliance on the judgments of the Hon'ble Chennai Bench of ITAT in case of Pankaj Agarwal & Sons (HUF) vs ITO and other group cases in ITA No 1413-1420 of 2018, ITAT Delhi in the case of Anip Rastogi, Meerut vs ITO in ITA No.1648 & 1649/PUN/15, deciding the cases of Penny Stock rejecting the claim of the assessee and confirming the addition of Rs 46,01,445/- in the hands of the appellant is an incorrect finding in view of a large number of cases of the Benches of Hon'ble ITAT, New Delhi and others especially a very detailed judgment of SMC Bench of Delhi in ITA No 457/Del/2018 and the therefore the addition is contrary to law and is therefore liable to be deleted.
5 Addition of Rs.46,01,445/- made by Ld. AO and confirmed by Ld. Commissioner of Income Tax (Appeals) is bad in law being in violation of the principles of natural justice since the addition is based on third party documents [such as the said departmental investigation report, SEBI report etc. relied upon by the department and the same were not made available to the appellant for rebuttal in spite of the same being asked for.
The addition of Rs.46,01,445/-, the sale proceeds of shares on account of unexplained cash deposit u/s 68 and confirmation of the same by the Commissioner of Income Tax (Appeals)-28, New Delhi, without contradicting any of the document placed by the appellant on record in respect of sale of shares of Kappac Pharma Ltd. or pointing out any defect therein and appellant being fulfilling all the conditions for claim of exemption u/s 10(38) of the Income Tax Act, 1961, is contrary to facts and law and therefore, the addition is liable to be deleted.
The appellant craves leave to add or amend any of the grounds of appeal.
Whether there is any delay in filing of appeal (if yes, please attach application seeking condonation of delay).
The assessee has raised the following additional grounds of appeal :- Ground No 1:
Addition of Rs 46,01,445/- made by Ld. AO and confirmed by Ld. Commissioner of Income Tax (Appeals) is bad in law being in violation of the principles of natural justice since the addition is based on third party documents such as the departmental investigation report, SEBI report etc, relied upon by the department and the same were not made available to the appellant for rebuttal in spite of the same being asked for and therefore the addition of Rs 46,01,445/- is liable to be deleted.
Ground No 2:
Addition of Rs.46,01,445/- made by Ld. AO and confirmed by Ld. Commissioner of Income Tax (Appeals) is bad in
law being in violation of the principles of natural justice since the addition is based on the presumption of the assessing officer that the appellant is in league with an operator, who has not even been named in the assessment order and is without any material on record evidencing such linkage between the appellant and that un-named operator and therefore the addition of Rs 46,01,445/- is liable to be deleted.
Ground No 3:
The addition of Rs.46,01,445/-, made by the Assessing officer on account of treating the sale proceeds of shares as an unexplained cash deposit u/s 68 and confirmation of the same by the Commissioner of Income Tax (Appeals)- 28, New Delhi, is entirely based on mere suspicions & speculations and on the basis of General Preface given in the assessment order without contradicting or pointing out any defect in any of the document placed by the appellant on record to prove his transactions of purchase and sale of shares and the appellant being fulfilling all the conditions for claim of exemption u/s 10(38) of the Income Tax Act, 1961 and therefore the addition made of Rs 46,01,445/- is contrary to facts and law and hence is liable to be deleted.
Ground No. 4:
The appellant craves leave to add or amend any of the Grounds of appeal.
The brief fact of the case is that the assessee filed its return of income on 05.08.2015 declaring taxable income of Rs.14,54,760/-and the same was processed u/s.143 (1) of the IT Act, 1961. Subsequently the case was selected for scrutiny assessment through CASS and notice u/s. 143 (2) of the Act 30.08.2016 was issued and duly served upon the assessee. Thereafter, statutory notices u/s. 142(1) of the Act along with questionnaire was issued during the assessment proceedings and relevant details and documents were also called for.
During the assessment proceedings, it was found that the assessee had claimed exempt income of Rs.45,10,445/- on account of Long Term Capital Gain from transactions on which STT is paid. As per information available on record, the assessee sold 7000 shares of Penny Stock “Kappac Pharma during the relevant F.Y. 2013-14. The sale value of the entire shares was Rs 4617600/-. The assessee had purchased these shares from Vishal Realty Management Limited on 26-09-2012 for Rs 91000/-. During the year under consideration, the assessee has declared income earned from long Term Capital Gain of Rs. 4601455/- on the sale of shares which has been
claimed exempt u/s 10(38) of the Act. The AO held that the transaction was bogus or sham and nothing but a racket of accommodation entries, by way of long term capital gain exempt from tax, the amount of capital gain of Rs.4610455/- claimed as LTCG exempt from tax was held to be not genuine and addition as made of the total cash credit of Rs.4601455/- to the returned income of the assessee as per the provision of section 68 of the Act and provision of section 115BBE of the Act are also applied and this amount is taxed @ 30% and accordingly, the AO made the additions Rs.4601455 and Rs.173924/- in the income of assessee vide order dated 26-12-2016 passed u/s 143(3) of the Act. Against the assessment order, the Assessee appealed before the Ld CIT(A). The Ld CIT(A) dismissed the appeal of the assessee by impugned order dated 01-02-2019. Aggrieved by the order of the Ld CIT(A), assessee appealed before the Tribunal.
We have heard the parties and perused the material available on record. 6. Ld. Counsel for the assessee has submitted that the addition in dispute was made and confirmed purely on presumptions, conjecture and surmise and therefore, deserve to be deleted. He has further submitted that authorities below have failed in disallowing deduction claimed by the assessee
u/s 10(38) of the Act for Rs.4601455/-. He further submitted that the lower authorities also failed to appreciate that for claiming the benefit of exemption u/s.10(38) of the Act, three requirement needs to be fulfilled i.e first the share should be held for more than one year, secondly it should be listed and sold on recognized stock exchange and thirdly on the said sale necessary security transaction, tax has been paid. He has further submitted that in the case in hand a perusal of the bills of purchase and sale shows that the shares have been held for more than one year, the same has been sold on the recognized stock exchange and necessary STT has been paid to Government treasury and therefore the exemption u/s 10(38) of the Act cannot be denied in the circumstances of the case. He further submitted that the appellant discharged his burden by filing all the documents in respect of purchase and sale of shares. In support of his contention, he has filed a Paper book containing pages 1 to 101 in which he has attached the copy of debit note of Vishal Reality Management Ltd etc. with physical share certificate, copy of demat account with SBICAP and copy of statement copy of volume of shares of Kappac Pharma, copy of bank account opened by assessee, copy of the written argument submitted before CIT(A), decision of ITAT in appeal no 457/Del/2018, copy of judgment of Hon’ble Delhi High Court in ITA 125/2020 and others. The Ld. Counsel relied
the decision of Hon’ble ITAT Mumbai passed in ITA no 2065/MUM/2023, in this case ITAT Mumbai deleted the addition made by AO and appeal was allowed of the assessee.
Ld DR has submitted that purchase transaction has been done off market in physical form by paying cash and assessee has purchased the shares M/s Kappac Pharma Ltd in physical form and therefore, the same have been converted into electronic mode and SEBI guidelines have been not adopted. It has further submitted that the purchase payments were made in cash and not through the normal banking channel, therefore, the same were non verifiable from the authentic supporting details, such as bank accounts/documents. Assessee has failed to furnish the proof of source for the purchase transactions. Thus the entire transactions are against human probability. Therefore, he further submitted that the order of CIT(A) be upheld. He relied the following authorities.
Ms Manvi Khandelwal ns ITO WARD -46(4) New Delhi the ITAT Delhi Bench held that;
“-Para 24- The findings of the Tribunal are favoured by the Hon’ble Jurisdictional and are confirmed in ITA no 220/2019 on the file of the Hon’ble Delhi High Court by order dated 8/3/2019 ,wherein the Hon’ble High Court
held that the company (M/S Kappac Pharma Ltd .which was even directed to be delisted from the stock exchange) had meagre resources and in fact reported consistent losses and in the circumstances ,the astronomical growth of the value of company’s share naturally excited the suspicion of the Revenue, Hon’ble High court declined to interfere with the findings of the Tribunal and dismissed the appeal.
Udit Kalra vs ITO ward 50(1) Delhi ITA no 6717/Del /2017/ITAT Delhi in this case the Tribunal held ;
“5. I have heard both the parties and perused the records especially the impugned order. I find that the assessee is an individual and the amount of cash credit Rs.27,68,457/-. However, on perusing the assessment order, I find that there was a specific information that assessee has Indulged in non-genuine and bogus capital gain obtained from the transactions of purchase and sale of shares of M/s Kappac Pharma Ltd., a Mumbai based company. It is noticed that the purchase transaction has been done off market in physical form by paying cash. The assessee has purchased the share M/s Kappac Pharma Ltd. in
physical form and thereafter, the same have been converted into electronic mode. The purchase payments were made in cash and not through the normal banking channel therefore the same were non- verifiable from the authentic supporting details such as bank account documents. Assessee is not a regular investor in shares. The assessee has failed to furnish the proof of source for the purchase transactions. Thus, the entire transactions are against human probability. considering the findings of the Investigation Wing, Inquiries conducted in Also the case of assessee, brokers, operators and the entry providers and the nature of transaction entered into by the assessee the LTCG of Rs. 27,20,457/- claimed exempt u/s. 10(38) of the Act by the assessee cannot be allowed and the amount of Rs. 27,68,457/- received back as sales proceeds on sale of shares was required to be added back towards his taxable income under section 68 of the Act. The above amount of Rs. 27,68,457/- was deemed as income of the assessee u/s. 68 of the Act, over and above, the income already declared in ITR during AY 2014-15. In view of above discussions, the landmark decision of the Hon'ble Supreme Court in the case of McDowell and Company
Limited, 154 ITR 148 is squarely applicable in this case wherein it has been held that tax planning may be legitimate provided it is within the framework of the law and any colourable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by dubious methods. However, the case laws cited by the Ld. Counsel for the assessee are on distinguished facts, hence, not applicable in the instant case. The assessee has not raised any legal ground and argued only on merit for which assessee has failed to substantiate his claim before the lower revenue authorities as well as before this Bench. In view of above discussions, I am of the considered opinion that Ld. CIT(A) has rightly confirmed the addition in dispute, which does not need any interference on my part, therefore, I uphold the action of the Ld.CIT(A) on the issue in dispute and reject the grounds by the Assessee.”
Udit Kalra vs ITO ward 50(1) Delhi ITA no 220/Del /2019/ Delhi, Hon'ble High Court held that ;
“This court has considered the submissions of the parties. Aside from the fact that the findings in this case are entirely concurrent – A.O., CIT()A and the ITAT have all consistently rendered adverse findings- what is intriguing is that the company (M/s. Kappac Pharma Ltd.) had meager resources and in fact reported consistent losses. In these circumstances, the astronomical growth of the value of company’s shares naturally excited the suspicions of the Revenue. The company was even directed to be delisted from the stock exchange. Having heard to these circumstances and principally on the ground that the findings are entirely of fact, this court is of the opinion that no substantial question of law arises in the present appeal. This appeal is accordingly dismissed.”
Perusal of the order Ld CIT(A) reveals that assessee is an individual and he purchased the share M/s. Kappa Pharma Ltd in physical form and thereafter the same have been converted into electronic mode. The purchase payments were made in cash and not through the normal banking channel, therefore the same were not verifiable the authentic supporting details such as bank account /documents. The assessee is not a
regular investor in shares. The assessee has failed to furnish the proof of source for the purchase transactions. The entire transactions are against human probability. The decision of the ITA 220/2019 & CM no 10774/2019 Udit Kalra vs ITO Ward - 50 (1) is squarely applicable in this case.
However, the case laws cited by the Ld. counsel for the assessee are on distinguished facts hence, not applicable in the instant case. In the above discussion, we are of the considered opinion that the Ld CIT(A) has rightly confirmed the addition in dispute, which does not need any interference on our part. Therefore we do not find any reason to interfere the order of the Ld CIT(A) the appeal of the assessee is liable to be dismissed and dismissed accordingly.
In the result, the appeal of the assessee is dismissed.
Order pronounced in the open court on 20.06.2024.
Sd/- Sd/- (DR. B R R KUMAR) (SUDHIR KUMAR) ACCOUNTANT MEMBER JUDICIAL MEMBER *NEHA, Sr. PS* Date:- .06.2024