SARALADEVI BETALA,CHENNAI vs. ITO NON CORPORATE WARD 6(3), CHENNAI

In this appeal filed by the assessee, which is directed against an order dated 13.02.2018 of Commissioner of Income-tax (Appeals)-5, Chennai, it has taken altogether twelve grounds of which grounds 1 & 12 are general, needing no specific adjudication.

Grievance raised by the assessee through its grounds 2 to 11 is on a disallowance of its claim of exemption u/s.10(38) of the Income Tax Act (in short “the Act”) on long term capital gains arising out of sale of 5500 equity shares of one M/s.Lifeline Drugs & Pharma Ltd., and treating the consideration of Rs.13,56,420/- received on such sale under the head ‘’income from other sources’’.

Per contra, ld. Departmental Representative submitted that there were sufficient and more reason for lower authorities to disbelieve the transactions claimed in the shares of M/s.Lifeline Drugs & Pharma Ltd. As per the ld. Departmental Representative, assessee could not produce any evidence to show, how he identified the shares of M/s.Lifeline Drugs & Pharma Ltd., for making an off market purchase. Ld. Departmental Representative also placed reliance on the decision of the Co-ordinate Bench in the case of Shri Heerachand Kanunga vs. ITO (ITA Nos.2786 & 2787/Chny/2017, dated 03.05.2018).

I have considered the rival contentions and perused the orders of the authorities below. It is not disputed that long term capital gains claimed by the assessee as exempt u/s.10(38) of the Act arose on account of sale of equity shares of M/s.Lifeline Drugs & Pharma Ltd. It appears that assessee could not produce any evidence as to how it identified equity shares of M/s.Lifeline Drugs & Pharma Ltd., for making an off market purchase. In the case of Shri Heerachand Kanunga (supra) relied on by the ld. Departmental Representative what was held by the Co-ordinate Bench is reproduced hereunder:-

Admittedly, the assessee has claimed to have purchased 15000 shares from M/s.BPL @ Rs.20/- per share totaling into Rs.3,00,000/-. The assessee claims to have paid cash for the purchase of these shares. The primary question would be as to where the purchase was done? If the purchase has been done in Kolkata, how was the cash transferred? When did the assessee received the share certificates and the share transfer forms? How did the assessee overcome the provisions of Sec.40A(3)? Was there adequate cash availability in the books of the assessee on 24.04.2008? Did the assessee travelled to Kolkata? How was the transaction done? Who applied for the demating of the shares? When were they demated? When were the shares transferred to the demat account of the assessee? To whom were the shares sold during the Assessment Years 2010-11 & 2011-12? When were the cheques received by the assessee? From whom did the assessee received the cheques? Was there any cash deposit immediately prior to the issuing of the cheque from the bank account of the purchaser of the shares of the assessee? 11. A perusal of the Assessment Order at Para No.7.1 shows that in the Written Submissions, the assessee states that he has purchased 15000 shares of M/s.BPL from M/s.ABPL, Kolkata. However, in Para No.8.3, it is mentioned that the assessee in good faith has purchased the shares of M/s.BPL from a sub-broker in his friends circle. What is the true nature of the transaction? From whom did the assessee actually purchase the shares? Did the assessee take possession of the shares in its physical form? In Para No.8.1 of the Assessment Order, it is mentioned that the assessee is an investor and has been regularly trading in shares. If this is so, does the demat account show such transactions being done by the assessee or is this the only one of transaction. Thus, clearly the facts required for adjudicating the appeals are not forthcoming. There is no evidence whatsoever to show that the assessee has held the shares for more than 12 months. This is because assuming that the demat has been done and the shares of M/s.BPL has come into the assessee’s demat account and has immediately flown out. Then the factum of the possession of the shares for more than 12 months have to be proved by the assessee. This is also not forthcoming. In reply to a specific query, as the date of the demat of shares, it was submitted by the Ld.AR that the demat was done on various dates. Then the question rises as to why there is so much of difference in the dates of demating when 15000 shares have been purchased together on 24.04.2008. No details in respect of M/s.BPL company is known, what is the product of the company which had lead to the share value of the company to go up from Rs.20/- to Rs.352/- in a period of two years. This would clearly be a case where the share value of the company was hitting the circuit breaker of the stock exchange on a daily basis and obviously it would have drawn attention. This being so, as the facts are not coming out of the Assessment Order nor the order of the Ld.CIT(A) nor from the side of the assessee, we are of the view that the issues in this appeal must be restored to the file of the AO for re-adjudication after granting the assessee adequate opportunity to substantiate its case and we do so.

Fact situation in the case before me in my opinion is similar to the one decided by the Co-ordinate Bench. The question is whether transactions claimed by the assessee were real or sham. Ld. Assessing Officer predominately relied on the reports of Directorate of Income Tax (Investigation) Kolkata and Delhi, and the statement of one Shri Pravin Agrawal and one Shri Pawan Kalyan for coming to a conclusion that M/s.Lifeline Drugs & Pharma Ltd., was a penny stock company and the transactions were entered only for claiming exemption u/s.10(38) of the Act on long term capital gains which were bogus.

In the result, appeal of the assessee is partly allowed for statistical purposes.