VIDYA REDDY ,CHENNAI vs. ITO INL. TAXATION WARD 1(2) , CHENNAI

PER S. JAYARAMAN, ACCOUNTANT MEMBER:

Aggrieved against the order of the Ld. CIT (A), the assessee filed this appeal.

The A O assessed the impugned sum as an income and the Ld.CIT (A) confirmed such assessment in appeal. The AR reiterated the same submissions made before the Ld. CIT(A) on the two aspects pointed out supra.

“The modus operandi adopted by the operators was to make the beneficiary buy some shares, which are transferred to the beneficiary at a very nominal price mostly off-line through preferential allotment or off-line sale The beneficiary (an individual) holds the shares for one year, the statutory period after which LTCG is exempt u/s.10(38) of the Income Tax Act, 1961. In the meantime the operators rig the price of the stock and gradually raise its price may times, often 500 to 1000 times. This is done through low volume transaction indulged in by the dummies of the operator at predetermined price. When the price reaches the desired level the beneficiary who bought the shares at nominal price, is made to sell it to a dummy paper company of the operator. For this, unaccounted cash is provided by the beneficiary, which is routed through a few layers of paper companies by the operator and finally is parked with the dummy paper company that will buy the shares. Further, it may be mentioned here that the price of the shares of penny stock companies are rigged and raised through circular trading. This is managed by the “operator” of the scrip. An “Operator” is a person who is managing the overall affairs of the scheme and he is the one who contacts the entities who wish to take entry of bogus LTCG/STCG in their books and arranges the same through the scrip of penny stock companies. The operator manages many paper/bogus companies and uses them to do circular transactions to rig the price of the shares. The shares of these penny stock companies, although listed on exchange, are always closely held and are controlled by the promoter of the penny Stock company and the operator who is arranging for the bogus LTCG/loss. This is due to the fact that the general public is not interested in these shares as these companies have no credentials and this helps the operator to keep a control on the price movement of the shares.”

“Various syndicates have arranged accommodation entry of bogus Long TermCapital Gain, bogus Short Term Capital Gains and bogus Short Term Capital Loss/bogus business loss through trading of shares of penny stocks.

7. Accommodation entry is a financial transaction between the two parties where one party enters the financial transaction. in its books to accommodate the other party. These transactions are accommodated entries mostly in lieu of cash of equal amount and commission charged over and above at certain fixed percentage for providing such accommodation entry. These accommodation entries are taken by various beneficiaries for introducing their unaccounted cash into their books of accounts without paying the due taxes. (ii) Penny stocks are those stocks which trade at very low price and whose market capitalization is very low. The low price of the penny stocks makes manipulation of the share price very easy.”

“SEBI has recently barred more than 250 entities, including individuals and companies, from the securities market for suspected tax evasion and laundering of black money through stock market platforms. In one such instance price of a scrip rose from Rs. 10.20 to Rs. 489 in 150 trading days — a rise of 4694%. The SIT obtained the background details of these cases and studied them. A typical pattern is observed to be followed in such cases.

• A company with very poor financial fundamentals in terms of past income or turnover is able to raise huge capital by allotment of Preferential allotment of shares is made to various entities.

• There is a sharp rise in price of scrip once the preferential allotment is done. This is normally achieved through circular trading of shares among a select group of companies. These groups of companies often have common promoters/directors.

• The scrips with thus artificially inflated price are offloaded through companies whose funding is provided by the same set of people who want to convert black money into white.”

5.1 Thereafter, the DR taking us through various portions of the orders of the Lower authorities in respect of the facts and circumstances supported their orders. Further, she relied on the decision of the High Court of Judicature at Bombay, Nagpur Bench in the case of Sanjay Bimalchand Jain L/H Shantidevi Bimalchand Jain Versus. The PR. CIT-1, Nagpur & Another in dated 10.04.2017.

In spite of this, if the share price is increased multi folded, then it is definitely due to artificial increase. The table in the assessment order clearly indicates that there is manipulation in trading of M/s. Surabhi Chemicals & Investments Limited, which clearly establishes that the share of the said company is a penny stock only. Further, the assessee had sold 60,000 shares of M/s.

Surabhi Chemicals &. Investments Limited. The trades have been executed with mutual understanding by placing simultaneous synchronized orders. This is also evident from the chart extracted in the assessment order. Successive bidding of order placed for large volume of shares like 18000 on 28-01-2014, 18000 on 03-02- 2014, 7000 on 10-02-2014 & 9000 in Feb., 2014 indicate that buyers are in collusion. Otherwise, execution of order placed is not possible particularly when trade price is static for various trades executed. All the trades have been executed at fraction of second. All these trading patterns show that LTCG admitted by the assessee is an arranged one.

The payment of Security Transaction Tax was to paint creditworthiness to the transaction and claim exemption u/s. 10(38). In view of the information provided by the Investigation Wing, Kolkatta, the recommendations of SIT on Black money etc, the AO required the assessee to prove her claim of exemption. After considering her reply etc held, inter alia, that it is clear that the assessee has manipulated the sale of shares within a short span of time in collusion with the brokers in order to earn tax free exempt long term capital gains on sale of shares u/s. 10(38) etc. It is clear from the orders of the Lower authorities that the assessee has not placed any material to prove that her transactions are genuine . She has also not placed any material to prove that her claim of exemption u/s 10 (38) is genuine and valid. Since, the right to exemption must be established by those who seek it, the onus therefore, lies on them. In order to claim the exemption from payment of income tax, the assessee had to put before the Income Tax authorities proper materials which would enable them to come to a conclusion. (35 ITR 312 (SC)). No part of the concurrent findings recorded by the AO and the Ld. CIT(A), is disputed by the assessee. Further, she has not placed any material before us to dislodge the findings recorded by the Lower authorities. Thus, the above actions of the assessee are nothing, but a premeditated, contumacious conduct, surreptitiously done for specific reasons for converting unaccounted money of the assessee under the guise of long term share transactions, that too without paying the requisite tax on the same. This is clearly in the realm of tax evasion. Hence, we do not find any reason to interfere with the order of the Ld. CIT(A). On the other hand, from the above facts and surrounding circumstances, human conduct , preponderance of probabilities etc, the AO has clearly established that the impugned transaction is not made for an investment, ie the motive is not to derive income but to earn a profit that too by an arrangement one and it is manipulated transaction in collusion with the brokers to paint creditworthiness to the transaction and claim exemption u/s. 10(38). This is in accordance with the ratio laid by the Hon’ble Apex Court in Sumati Dayal Vs Commissioner Of Income-Tax, 214 ITR 801(SC), that “ the apparent must be considered the real until it is shown that there are reasons to believe that the apparent is not the real and that the taxing authorities are entitled to look into the surrounding circumstances to find out the reality and the matter has to be considered by applying the test of human probabilities. (See : CIT v. Durga Prasad More [1971] 82 ITR 540 SC (at pages 545, 547). Further, the Hon’ble Apex Court in Kale Khan Mohammad Hanif.

Vs Commissioner of Income-Tax, M. P. And Bhopal in 50 ITR 1 (SC) held that “ it is well established that the Onus of proving the source of a sum of money found to have been received by the assessee is on him. If he disputes liability for tax, it is for him to show either that the receipt was not income or that if it was, it was exempt from taxation under the provisions of the Act. In the absence of such proof, the Income-tax Officer is entitled to treat it as taxable income see A. Govindarajulu Mudaliar v. Commissioner of Income-tax 34 ITR 807 SC. On the above facts and circumstances, it is clear that the assessee has not established her case . Though it did cross in our minds, that the assessee could be granted another opportunity to produce evidences in the form of producing the books involved in the transactions, their contemporary records, share transfer forms, the records of the company whose shares has been dealt with etc., for examination before the A.O, we are not inclined to restore this issue to the A.O as the asessee has not produced any convincing evidence to justify such re-adjudication by the A.O. In the circumstances, the assessment made by the AO and confirmed by the Ld. CIT(A) is in accordance with the ratios of the Hon’ble Apex Court (supra) and hence we dismiss all the grounds of the assessee’s appeal.

Order pronounced in the Open Court on May 15 , 2018, at Chennai.