NAZ SHAZIA,MORADABAD vs. ITO WARD 1(1), MORADABAD

3. The assessee had challenged the validity of reopening of assessment u/s 147 of the Act in the instant case. The interconnected issue involved therein is as to whether the ld. CIT(A) was justified in confirming the addition made on account of unexplained money u/s 69A of the Act in the facts and circumstances of the case.

“Reasons for re-opening of the assessment u/s. 147 of the Act. The assessee has filed return of income for the year under consideration on 24-12- 2014 declaring total income at Rs.9.34,420/- The same has been processed u/s. 143(1) of the Act.

4. On analysis of information with the return of income filed by the assessee, it is noticed that assessee has claimed exempted LTCG of Rs.38,55,696/- from the transactions on which STT is paid The considering the information as stated above and return of income it is found that assessee has claimed alleged exempted LTCG on sale of aforesaid scrip i.e. KAILASH AUTO (SCRIP CODE 511357)...

Naz Shazia It is pertinent to mention here that in this case the assessee has filed return of income for the year under consideration but no assessment as stipulated u/s 2(40) of the Act was made and the return of income was only processed u/s 143(1) of the Act. In view of the above, of clause (b) of explanation 2 to section 147 are applicable to of this case and the assessment year under consideration is deemed to be a case where income chargeable to tax has escaped assessment. This case is within four years from the end of the assessment year under consideration. Hence, necessary sanction to issue, the notice u/s 148 has been obtained separately from Joint Commissioner of Income Tax as per the provisions of section 151 of the Act.”

5. The assessee filed legal objections to the reasons recorded for reopening the assessment before the ld. AO apart from filing all the facts with documentary evidences in support of the claim of exemption u/s 10(38) of the Act in respect of sale of 100000 shares of KAFL. None of the documentary evidences furnished by the assessee were found to be false or any adverse inference drawn by the ld. AO on the same. It is pertinent to note from the facts of the assessee that assessee had been a regular investor in stock markets and furnished the entire list of investments made by her in earlier and subsequent years including the year under consideration. It was submitted that KAFL was one of the scrip invested by the assessee, among many other scrips. On going through the statements of 3 persons viz. Mr Anil Khemka , Mr Pankaj Agarwal and Mr Anuj Agarwal, alleged to be entry operators by the investigation wing of income tax department, which have been heavily relied upon by the ld. AO to form a belief that income of the assessee had escaped assessment , I find that neither the name of the assessee nor the name of the stock broker through whom the assessee sold the shares in the open market, was mentioned by the alleged entry operators in their respective statements. Hence it could be safely concluded that the assessee and/or his stock broker had not been involved in any of the alleged connived transactions. The following facts are undisputed and indisputable qua the assessee is concerned:-

a) Assessee bought 100000 shares on 23.7.2012 of Re. 1 each in M/s Panchshul Marketing Ltd from Sanskriti Vincom Pvt Ltd. A copy of the Purchase Note evidencing the purchase is placed on record. The payment for the said purchase of shares was made by account payee cheque by the assessee out of sources drawn from her disclosed bank account. These

Naz Shazia shares were duly dematted by the assessee immediately with Multigain Securities Services Pvt Ltd, a Depository Participant of Central Depository Services (I) Ltd on 11.8.2012. b) These shares were shown as investment made in shares as on 31.3.2013. c) Panchshul Marketing Ltd was subsequently merged with Kailash Auto Finance Ltd (KAFL) pursuant to the approval of the Hon‟ble Allahabad High Court and hence assessee was issued 100000 shares of Re. 1 each in KAFL in lieu of her holding 100000 shares in Panchshul Marketing Ltd. Correspondingly, the shares of KAFL stood automatically dematted to the credit of the assessee on 10.7.2013. Accordingly, the shares held by the assessee formed part of overall equity share capital of KAFL of Rs 58,70,60,083/- as on 31.3.2013 comprising of 587060083 equity shares of Re 1 each. d) These shares were held by the assessee for a period of more than one year from the date of its original purchase. e) During the year under consideration, the assessee sold the 100000 shares in various tranches in the secondary market through a registered stock broker at the prevailing market prices for Rs 39,64,750/- in the Bombay Stock Exchange (BSE) Platform. This sale transaction is duly supported by the Contract Note issued by the registered stock broker. f) The said sale transaction had duly suffered Securities Transaction Tax (STT) of Rs 3,966/- ; brokerage of Rs 9,054.36 and other charges of Rs 81. The assessee accordingly received the net amount of sale consideration of Rs 39,51,648/- which was sought to be added by the ld. AO as unexplained money u/s 69A of the Act.

6. The objections to the reasons recorded were disposed by the ld. AO by a separate order dated 29.11.2018 reiterating the stand taken in the reasons recorded without rebutting the assessee‟s factual and legal submissions.

Naz Shazia 7. Later the ld. AO proceeded to frame the re-assessment wherein the net sale consideration of Rs 39,51,648/- was added as unexplained money u/s 69A of the Act in the hands of the assessee as according to the ld. AO , the said consideration was obtained by the assessee from the secondary market out of artificial price rigging of shares of KAFL in connivance with the entry operators. This action of the ld. AO was upheld by the ld. CIT(A).

Naz Shazia could be subject matter of artificial price rigging. But there is no evidence brought on record by the revenue that either the assessee or his stock broker was involved in connived transactions in order to earn the exempt long term capital gains. The entire exercise of reopening and the consequential re-assessment had been made by the ld. AO only out of pure surmise and conjecture.

11. I 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. This fact is also proved by the SEBI Investigation and its final order dated 21.9.2017 listing out the name of the entities and persons who were involved in price manipulation of shares of KAFL. Admittedly, the assessee or his broker was not mentioned in the said list. Further Sanskruti Vincom Pvt Ltd (entity from whom assessee bought the shares in off market) and Panchshul Marketing Ltd (entity whose shares were bought by the assessee) were also discharged by the SEBI in its final order dated 21.9.2017 pursuant to its independent investigation.

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.

Naz Shazia 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. Since Sanskruti Vincom Pvt Ltd and Panchshul Marketing Ltd, among other persons, have been finally discharged in the list of 244 entities in final order of SEBI dated 21.09.2017 after its detailed investigations, the transaction carried out by the assessee cannot be termed as bogus.

14. I hold that the entire addition has been made based on mere surmise, suspicion and conjecture and by making baseless allegations against the assessee herein. Now another issue that arises is as to whether the ld. AO merely on the basis of Kolkata investigation wing report could come to a conclusion that the transactions carried out by the assessee as bogus. In my considered opinion, the ld. AO is expected to conduct independent verification of the matter before reaching to the conclusion that the transactions of the assessee are bogus. More importantly, it is bounden duty of the ld. AO to prove that the evidences furnished by the assessee to support the purchase and sale of shares as bogus. This view of mine is further fortified by the decision of Hon‟ble Delhi High Court in the case of PCIT vs Laxman Industrial Resources Ltd in dated 14.03.2017. It is well settled that the suspicion however strong could not partake the character of legal evidence. Hence the greater onus is casted on the revenue to corroborate the impugned addition by controverting the documentary evidences furnished by the assessee and by bringing on record cogent material to sustain the addition. No evidence has been brought on record to establish any link between the assessee herein with the entry operators who were allegedly involved in price rigging of shares artificially or any other person named in the assessment order being involved in any price rigging and also the exit provider. This onus is admittedly not discharged by the revenue in the instant case.

Naz Shazia 15. Further, I find that the 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.

8. Even the additional question cannot be said to be substantial question of law, because it arises in the context of same transactions, dealings, same investigation and same charge or allegation of accommodation of unaccounted money being converted into accounted or regular as such. The relevant details pertaining to the shares were already on record. This question is also a fall out of the issue or question dealt with by the Tribunal and pertaining to the addition of Rs.25,93,150/-. Barring the figure of loss that is stated to have been taken, no distinguishable feature can be or could be placed on record. For the same reasons, even this additional question cannot be termed as substantial question of law.”

“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.

11. On a perusal of the record, it is easily discernible that in the instant case, the AO had proceeded predominantly on the basis of the analysis of the financials of M/s Gold Line International Finvest Limited. His conclusion and findings against the Respondent are chiefly on the strength of the astounding 4849.2% jump in share prices of the aforesaid company within a span of two years, which is not supported by the financials. On an analysis of the data obtained from the websites, the AO observes that the quantum leap in the share price is not justified; the trade pattern of the aforesaid company did not move along with the sensex; and the financials of the company did not show any reason for the extraordinary performance of its stock. We have nothing adverse to comment on the above analysis, but are concerned with the axiomatic conclusion drawn by the AO that the Respondent had entered into an agreement to convert unaccounted money by claiming fictitious LTCG, which is exempt under section 10(38), in a preplanned manner to evade taxes. The AO extensively relied upon the search and survey operations conducted by the Investigation Wing of the Income-tax Department in Kolkata, Delhi, Mumbai and Ahmedabad on penny stocks, which sets out the modus operandi adopted in the business of providing entries of bogus LTCG. However, the reliance placed on the report, without further corroboration on the basis of cogent material, does not justify his conclusion that the transaction is bogus, sham and nothing other than a racket of accommodation entries. We do notice that the AO made an attempt to delve into the question of infusion of Respondent's unaccounted money, but he did not dig deeper. Notices issued under sections 133(6)/131 of the Act were issued to M/s Gold Line International Finvest Limited, but nothing emerged from this effort. The payment for the shares in question was made by Sh. Salasar Trading Company. Notice was issued to this entity as well, but when the notices were returned unserved, the AO did not take the matter any further. He thereafter simply proceeded on the basis of the financials of the company to come to the conclusion that the transactions were accommodation entries, and thus, fictitious. The conclusion drawn by the AO, that there was an agreement to convert unaccounted money by taking fictitious LTCG in a pre-planned manner, is therefore entirely unsupported by any material on record. This finding is thus purely an assumption based on conjecture made by the AO. This flawed approach forms the reason for the learned ITAT to interfere with the findings of the lower tax authorities. The learned ITAT after considering the entire conspectus of case and the evidence brought on record, held that the Respondent had successfully discharged the initial onus cast upon it under the provisions of Section 68 of the Act. It is Page | 12 Naz Shazia recorded that "There is no dispute that the shares of the two companies were purchased online, the payments have been made through banking channel, and the shares were dematerialized and the sales have been routed from de-mat account and the consideration has been received through banking channels." The above noted factors, including the deficient enquiry conducted by the AO and the lack of any independent source or evidence to show that there was an agreement between the Respondent and any other party, prevailed upon the ITAT to take a different view. Before us, Mr. Hossain has not been able to point out any evidence whatsoever to allege that money changed hands between the Respondent and the broker or any other person, or further that some person provided the entry to convert unaccounted money for getting benefit of LTCG, as alleged. In the absence of any such material that could support the case put forth by the Appellant, the additions cannot be sustained.

12. Mr. Hossain's submissions relating to the startling spike in the share price and other factors 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. With regard to the claim that observations made by the CIT(A) were in conflict with the Impugned Order, we may only note that the said observations are general in nature and later in the order, the CIT(A) itself notes that the broker did not respond to the notices. Be that as it may, the CIT(A) has only approved the order of the AO, following the same reasoning, and relying upon the report of the Investigation Wing. Lastly, reliance placed by the Revenue on Suman Poddar case (supra) and Sumati Dayal case (supra) is of no assistance. Upon examining the judgment of Suman Poddar case (supra) at length, we find that the decision therein was arrived at in light of the peculiar facts and circumstances demonstrated before the ITAT and the Court, such as, inter alia, lack of evidence produced by the Assessee therein to show actual sale of shares in that case. On such basis, the ITAT had returned the finding of fact against the Assessee, holding that the genuineness of share transaction was not established by him. However, this is quite different from the factual matrix at hand. Similarly, the case of Sumati Dayal (supra) too turns on its own specific facts. The above- stated cases, thus, are of no assistance to the case sought to be canvassed by the Revenue.

13. The learned ITAT, being the last fact-finding authority, on the basis of the evidence brought on record, has rightly come to the conclusion that the lower tax authorities are not able to sustain the addition without any cogent material on record. We thus find no perversity in the Impugned Order.

Naz Shazia 17. The transactions of sale of shares were done in online platform of BSE through the registered share broker from whom the received the sale consideration. The broker also receives payments for all his transactions from Stock Exchange. The seller and the buyer cannot know the names of each other as well as their respective brokers, who were involved in the trading transactions in the secondary platform. In such a situation, it cannot be presumed that there could be any transfer of cash between the buyers and sellers to convert the unaccounted money of the beneficiaries as alleged by the ld AO. There is absolutely no evidence brought on record whatsoever to allege that money changed hands between the assessee and the broker or any other person including the alleged exit provider whatsoever to convert unaccounted money for getting benefit of LTCG as alleged. Hence I hold that in the absence of any material to show that huge cash was transferred from one side to another , addition cannot be sustained.

“46. ......... Ultimately the entire case of Revenue hinges upon the presumption that assessee is bound to have some large share in so called secret money in the form of premium and its circulation. 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 GTC actually had some kind of a share in such secret money. It is quite a trite law that suspicion howsoever strong may be but cannot be the basis of addition except for some material evidence on record. The theory of „preponderance Naz Shazia of probability‟ is applied to weigh the evidences of either side and draw a conclusion in favour of a party which has more favourable factors in his side. The conclusions have to be drawn on the basis of certain admitted facts and materials and not on the basis of presumptions of facts that might go against the assessee. Once nothing has been proved against the assessee with aid of any direct material especially when various rounds of investigations have been carried out, then nothing can be implicated against the assessee.”

“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.

3. Therefore we find nothing perverse in the order of the Tribunal.

4. Mr. Walve placed reliance on a judgement of the Apex Court in Principal Commissioner of Income Tax (Central)- 1 vs. NRA Iron & Steel (P) Ltd (2019) 103 taxmann.com 48 (SC) but that does not help the revenue in as much as the facts in that case were entirely different.

5. 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.

6. The appeal is devoid of merits and it is dismissed with no order as to costs.”

Naz Shazia 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.

“10. We have considered the submissions of the learned counsel for the parties and we are of the considered opinion that the learned Assessing Officer was much influenced by the enqiury report which may has been brought on record by the efforts of the Assessing Officer and that enquiry report was prepared by the SEBI and from the observations made by the Assessing Officer himself, it is clear that after getting that enquiry report, the SEBI prima facie found involvement of some of the share brokers in unfair trade practices. Even in a case where the share broker was found involved in unfair trade practice and was involved in lowering and rising of the share price, and any person, who himself is not involved in that type of transaction, if purchased the share from that broker innocently and bonafidely and if he show his bonafide in transaction by showing relevant material, facts and circumstances and documents, then merely on the basis of the reason that share broker was involved in dealing in the share of a particular company in collusion with others or in the manner of unfair trade practices against the norms of S.E.B.I and Stock Exchange, then merely because of that fact a person who bonafidely entered into share transaction of that company through such broker then only by mere assumption such transactions cannot be held to be a shame transaction. Fact of tinted broker may be relevant for suspicion but it alone necessarily does lead to conclusion of all transaction of that broker as tinted. In such circumstances, further enquiry is needed and that is for individual case. Such further enquiry was not conducted in that case.

12. Hence, these Appeals are dismissed.”

Naz Shazia income of the assessee had escaped assessment within the meaning of section 147 of the Act. Hence I hold that the assumption of Jurisdiction u/s 147 of the Act is void abinitio in the instant case. Even on merits, I find that there is no case for making any addition u/s 69A of the Act in the hands of the assessee. Hence I hold that assessee would be entitled for relief by way of exemption for long term capital gains u/s 10(38) of the Act in the facts and circumstances of the instant case. Accordingly, the grounds raised by the assessee are allowed.