ITO-41(4)(1),MUMBAI, BANDRA (EAST), MUMBAI vs. CHIRANIA TRADING LLP, GOREGAON (EAST),
Facts
The Revenue appealed against the deletion of additions made by the Assessing Officer, concerning long-term capital gains claimed as exempt under Section 10(38) of the Income Tax Act. The Assessing Officer had treated the transactions as bogus, involving penny stocks and artificial price rigging, and made additions under Sections 68 and 69C. The CIT(A) had deleted these additions, holding that the transactions were genuine.
Held
The Tribunal upheld the order of the CIT(A). It found that the Assessing Officer's conclusion was based on presumptions and lacked direct evidence. The Tribunal noted that the appellant had provided substantial documentation to support the genuineness of the transactions, and no adverse findings were made by SEBI or other regulatory bodies against the parties involved. Therefore, the appeal by the Revenue was dismissed.
Key Issues
Whether the long-term capital gains from the sale of shares, claimed as exempt under Section 10(38), were bogus or genuine, and if the additions made by the Assessing Officer under Sections 68 and 69C were justified.
Sections Cited
10(38), 68, 69C, 143(3), 147
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, C BENCH, MUMBAI
Rahul Chaudhary, Judicial Member:
This is a batch of three appeals preferred by the Revenue for the Assessment Years 2012-2013, 2014-2015, and 2015-2016 and a Cross-Objection filed by the Assessee in appeal preferred by the Revenue for the Assessment Year 2012-2013. 2. The appeals pertaining to 2012-2013, 2014-2015, and 2015-2016, arise from three separate orders, dated 14/11/2023, 31/01/2024 and 31/01/2024, respectively, passed by the National Faceless Appeal Centre (NFAC), Delhi [hereinafter referred to as ‘the CIT(A)]. However, since identical issues arising from common factual matrix were raised in the appeals the same were heard together and are, therefore, being disposed by way of a common order.
Facts common to all the three appeals are that in the return of income, the Assessee had claimed exemption under Section 10(38) of the Act in respect of Long Term Capital Gains arising from the transfer of shares of KDJ Holidayscapes & Resorts Ltd Limited [for short ‘KDJH’]. In the assessment/reassessment proceedings, the Assessing Officer rejected the aforesaid exemption claimed by the Assessee under Section 10(38) of the Act holding that KDJH was identified as a ‘penny stock company' in the Investigation Report of Directorate of Income Tax (Investigation), Kolkata in ‘Project Bogus LTCG/STCG through BSE Listed Penny Stock’ (For short ‘the Investigation Report’); there was artificial rise in the quoted price of the shares and that the Assessee had sold the shares at an artificially high price to book bogus Long Term Capital Gains and C.O. No. 39/Mum/2024 Assessment Year: 2012-13, 2014-15 & 2015-16
thereby introduced unaccounted cash into its books of accounts. Thus, the Assessing Officer added the sale consideration received by the Assessee on transfer of shares as income in the hands of the Assessee invoking the provisions contained in Section 68 of the Act. Further, an addition of 5% of the aforesaid sale consideration was also made in the hands of the Assessee as unexplained commission expenses incurred by the Assessee for taking accommodation entry of bogus long term capital gains. Thus, the aggregate additions made in the hands of the Assessee were as under: (a) Assessment Year 2012-13 : INR. 2,72,49,526/- (b) Assessment Year 2014-15 : INR. 15,43,84,188/- (c) Assessment Year 2015-16 : INR. 3,25,02,220/-
In the respective appeal preferred by the Assessee, the above additions made by the Assessing Officer were deleted by the CIT(A) on merits.
Being aggrieved the Revenue has preferred appeal before the Tribunal challenging the above relief granted by the CIT(A).
Appeal by Revenue for the Assessment Year 2014-2015
In view the quantum of addition involved and the date of passing the assessment order, Learned Departmental Representative took up appeal for the Assessment Year 2014-2015 as the lead matter. The said appeal has been preferred by the Revenue challenging the order, dated 31/01/2024, passed by the CIT(A) whereby the CIT(A) had partly allowed the appeal of the Assessee against the Assessment Order, dated 28/12/2016, passed under Section 143(3) of the Act.
The Revenue has raised following grounds in the said appeal:
“1. Whether on the facts and in the circumstances of the case and in C.O. No. 39/Mum/2024 Assessment Year: 2012-13, 2014-15 & 2015-16
law, the Hon‟ble ITAT has erred in overlooking the explicit finding of the directorate of Investigation, Kolkata that the share price of script M/s KDJ Holidascapes& Resorts Ltd was manipulated for tax evasion and entry of entire sale proceeds was taken while incurring expenses in nature of commission.”
Whether on the facts and in the circumstances of the case and in law, the Hon‟ble ITAT has erred in not appreciating the fact that the entire sale proceeds which was credited in the books of account, on account of transaction in script M/s KDJ Holidayscapes & Resorts Ltd was manipulated for tax evasion and said transaction itself was not genuine and hence entire proceeds were needed to be brought to tax u/s 68 of the I.T. Act.”
We have heard both the sides on the above grounds of appeal which are taken up together hereinafter.
Placing reliance on the Assessment Order, dated 28/12/2016, passed by the Assessing Officer under Section 143(3) of the Act, the Learned Departmental Representative submitted that CIT(A) had erred in deleting the addition made by the Assessing Officer under Section 68/69C of the Act by allowing the appeal preferred by the Assessee vide order dated 28/12/2016 passed under Section 143(3) of the Act. It was submitted that Assessee had taken bogus long term capital gains entry to introduce its own unaccounted cash in the books of accounts. The sale of shares of the company under consideration was made at an artificially increased price (which did not correspond to the financial strength in the said company). It was submitted that as per the Investigation Report of Directorate of Income Tax (Investigation), Kolkata in the case of ‘Project Bogus LTCG/STCG through BSE Listed Penny Stock’ [hereinafter referred to as the ‘Investigation Report’], KDJH was identified as a penny stock company and that the Appellant was beneficiary of the pre- arranged purchase & sale transactions resulting in artificial long term capital gains income which were claimed to be exempt under C.O. No. 39/Mum/2024 Assessment Year: 2012-13, 2014-15 & 2015-16
Section 10(38) of the Act.
Per Contra, the Learned Authorised Representative for the Assessee placed reliance on the Order, dated 31/01/2024, passed by the CIT(A) and supported the same by submitting that there was no material before the Assessing Officer to arrive at a conclusion that KDJH was in the nature of a penny stock company or that the Assessee had introduced unaccounted cash in the garb to exempt long term capital gains. The Learned Authorised Representative for the Appellant reiterated the submission made before the CIT(A) [as reproduced in paragraph 5.3 of the order impugned]. It was vehemently contended that no statement/material on which reliance was placed by the Assessing Officer to arrive at the conclusion that the Assessee had taken accommodation entry or entered into bogus penny stock purchase/sale transactions was made available to the Assessee. The Revenue has failed to provide any order passed by the Securities Exchange Board of India (SEBI) in support of the contention that KDJH is a penny stock company or to show that the quotes price of shares of KDJH at the BSE was rigged. It was submitted that, to the contrary, the CIT(A) had referred to the inquiry conducted by the Assessing Officer itself which revealed that the Assessee had undertaken genuine transactions. It was also submitted that the contention of the Revenue that the financial of KDJH do not have any strength is also factually incorrect. It was submitted that the CIT(A) had correctly deleted the additions. In support the Learned Authorised Representative for the Assessee relied upon the following judicial precedents: 1606/Mum/2022). iii. Karishma Ajay Agarwal Vs. ITO (ITA No. 2586/Mum/2022). Vikram N. Chandan Vs. ITO (ITA 70/Mum/2024). C.O. No. 39/Mum/2024 Assessment Year: 2012-13, 2014-15 & 2015-16
We have given thoughtful consideration to the rival submission and perused the material on record. The undisputed facts, as emanating from the record, are as under:
The Assessee is a Limited Liability Partnership. During the relevant previous year, the Assessee sold 11,05,512 shares of KDJH. 4,05,502 shares of KDJH were sold between September, 2013 to December 2013 and balance 7,00,010 shares of KDJH were sold in February, 2014 (post split). Since the aforesaid shares of KDJH were held for more than one year, the long term capital gains of INR 14,39,03,336/- earned were claimed to be exempt under Section 10(38) in the return of income filed by the Assessee for the Assessment Year 2014-2015 on 23/09/2014 declaring total income at INR.99,530/-.
The case of the Assessee was selected for regular scrutiny. The Assessing Officer noted that in the Investigation Report the Kolkata Investigation Directorate has, after investigation, identified 84 scripts (including KDJH) as penny stocks used by the script operators to providers provide bogus long term capital gains accommodation entry to beneficiaries. The Investigation Report described the modus operandi of the penny stock script operators, intermediaries and the beneficiaries and stated that the aforesaid scheme was aimed at routing unaccounted money into the books of accounts of the beneficiaries in the garb of exempt long term capital gains. Therefore, the Assessee was asked to explain the genuineness of the transaction involving purchase/sale of shares of KDJH.
The Assessee provided following explanation to the Assessing Officer:
(a) The Assessee (i.e. Chirania Trading LLP) came into existence C.O. No. 39/Mum/2024 Assessment Year: 2012-13, 2014-15 & 2015-16
on 28/11/2011 after conversion of Chirania Trading Private Limited (a company incorporated & registered under the provisions of the Companies Act on 24/08/2010), into a limited liability partnership.
(b) KDJH was originally known as Gomti Finlease India Limited (for short ‘Gomti Finlease’). The shares of Gomti Finlease were listed on the Bombay Stock Exchange (BSE).
(c) 22,51,000 shares of shares of Gomti Finlease were originally purchased by Chirania Trading Private Limited (at the purchase price of INR 5/- per shares) in an off-market transaction through Share Purchase Agreement, dated 18/11/2010, entered into by the Chirania Trading Private Limited with the promoters of the Gomti Finlease. Copy of the Share Purchase Agreement, dated 18/11/2010, was filed to substantiate the purchase transaction.
(d) Since 75% of the shares of Gomti Finlease listed on BSE were acquired, the provisions of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 were triggered and the Chirania Trading Private Limited was mandated to make open offer to the public. As a result, Chirania Trading Private Limited came out with open offer and acquired another 1000 shares of Gomti Finlease at the purchase price of INR 5 per share. In support the Assessee filed a copy of letter dated 19/11/2010 filed with BSE, a copy of Public Announcement made regarding Open Offer, and post offer announcement dated 07/04/2011. (e) In the year 2011, name of Gomti Finlease was changed Two- up Financial Services Ltd. and Chirania Trading Private Limited got converted into Chirania Trading LLP (i.e. the C.O. No. 39/Mum/2024 Assessment Year: 2012-13, 2014-15 & 2015-16
Assessee in the present case).
(f) Subsequent thereto, somewhere in the year 2012, scheme of merger of another company (i.e. KDJ HolidayScapes & Resorts Limited) with Two-up Financial Services Ltd was approved. As per the aforesaid scheme the Assessee was allotted 16% shares of the resulting company on account of holding 75% shares in Two-up Financial Services.
(g) In the year 2013, the name of Two-up Financial Services (formerly known as Gomti Finlease) was changed to KDJ HolidayScapes & Resorts Ltd [referred to as ‘KDJH’]. Thus, on account of the change of the name of the resulting company, Gomti Finlease which was subsequently known as Two-up Financial Services Ltd came to be known as KDJH.
(h) During the relevant precious year, the Assessee sold listed share of KDJH, which were held for more than 12 months, through stock exchange at the quoted share price after paying applicable securities transaction tax. The sale transaction was undertaken through a SEBI Registered broker and entire purchase consideration was received through banking channel. The capital gains arising from the same were claimed to be exempt from tax under Section 10(38) of the Act in the return of income filed by the Assessee for the Assessment Year 2014-15. In support the Assessee filed copy of the D-mat account statement, copy of invoices/contract notes, certificate of holding, ledger of broker, and bank statements.
The Assessing Officer rejected the above explanation offered by the Assessee observing as under: C.O. No. 39/Mum/2024 Assessment Year: 2012-13, 2014-15 & 2015-16
(a) The Directorate of Investigation of Kolkata had carried out investigation that prove that brokers, entry operators and the beneficiaries (such as the Assessee) had worked out a scheme under which the shares were acquired at low prices from entry providers, thereafter the share prices were rigged to reach unusual highs and then the shares purchased were sold by the beneficiaries to exit providers at unusual high price to book exempt long term capital gains in a pre- arranged manner. The routing the cash used to take place through person operating the script and providing bogus long term capital gains entries.
(b) The Assessee had purchased shares of KDJH through off market transaction.
(c) There was unusual rise in the quoted price of shares of KDJH that was not supported by any commercial principles or market factors.
(d) The net worth of KDJH was negligible and the share prices have been artificially rigged to reach an unusual high.
(e) The purchase/sale transactions lacked commercial substance, being artificially structured transactions, entered into with the sole purpose of evading taxes and introducing unaccounted cash into books.
In view of the above, vide Assessment Order, dated 28/12/2016, passed under Section 143(3) of the Act, the Assessing Officer rejected the claim for exemption made by the Assessee under Section 10(38) of the Act in the return of income relying upon the findings of the Investigation wing and the theory of probability [as propounded in the case of Sumati Dayal (214 ITR 801) (SC) and the C.O. No. 39/Mum/2024 Assessment Year: 2012-13, 2014-15 & 2015-16
case of Durga Prasad More (82 ITR 540) (SC)]. The Assessing Officer, thus, made addition of INR 14,71,89,021/- under Section 68 of the Act holding the entire the proceeds raising from sale of shares of KDJH as unexplained cash credit. The Assessing Officer also made addition of INR 71,95,167/- (computed at the rate of 5% of INR 14,71,89,021/-) under Section 69C of the Act holding the same to be unexplained expenditure incurred by the Assessee for the taking bogus long term accommodation entry.
In appeal filed by the Assessee before the CIT(A), detailed submission were made on behalf of the Appellant which have been reproduced in paragraph 5.2 of the order impugned and the relevant extract of the same reads as under:
“2. 14. From the above, your honour will appreciate that the appellant purchased shares of KDJ Holidayscapes through share purchase agreement, payment made through banking channels, necessary SEBI compliances being made, received the delivery of the said shares in its Demat Account, the said shares were held in the Demat Account for more than one year, the same were sold on stock exchange through registered broker and the payment in respect of the same was settled immediately through account payee cheques. Thus, your honour will appreciate that the above share transaction is genuine and the Long TermCapital Gain earned thereon is exempt u/s 10(38) of the Income Tax Act, 1961. 2. 15. The ld Assessing Officer has made observation that the net worth of the script KDJ Holidayscapes was negligible the share prices increased drastically.In this regard the appellant submits as under: 2.15. 1. M/s KDJ Holiday & Resorts Ltd is a company engaged in hospitality business. The company is a part of the KDJ Group, which is owned by three business houses of Mr Surendra K Kedia, Mr Ashok Deora and Mr Dinesh K Jalan. The company owns two resorts at Jodhpur and Khandala .The appellant has enclosed at page 173-179 of the compilation a valuation report of an analyst which values the assets of the company at Rs325 Crores. The company is developing a 60 room resort in Goa.KDJ Holiday & Resorts Ltd owns 51% stake in KDJ Hospitals Ltd, which is in the process of setting up a 160 bed multi super specialty hospital in Jodhpur, India. As per the C.O. No. 39/Mum/2024 Assessment Year: 2012-13, 2014-15 & 2015-16
valuation report, the valuation of KDJ Holiday Resorts Ltd is Rs 120 Crores, half of which is owned by KDJ Holiday & Resorts Ltd. The company operates in the Vacation Ownership Service business which basically sells future vacations for a specified number of years at today‟s price. The company has a member base of 1,300 members. The appellant has enclosed one more CRISIL report at page 180-183 of the compilation dated 31.03.2016.As per the report, the company has acquired land bank in Goa which it plans to invest around Rs 20 Crores. It is affiliated with Resort Condominiums International (RCI) which has a network of over 6,000 resorts in 93 countries. 2.15. 2. The company‟s subsidiary M/s KDJ Hospitals Ltd has obtained term loan of Rs 60 Crores from a consortium of banks including Rs 20 Crores from State Bank of India. Copy of Sanction Letter with State Bank of India dated 14.03.2014 is enclosed herewith at page 188-197 of the compilation. M/s KDJ Holidayscapes & Reports Ltd has given corporate guarantee for the said term loan along with personal guarantee of Mr Surendra K Kedia, Mr Ashok Deora and Mr Dinesh K Jalan. M/s Hospihealth Consultants India Pvt Ltd has prepared techno economic vetting report for the proposed term loan, copy of which is enclosed herewith at page 198-203 of the compilation. A copy of photographs of the under-construction hospital building is enclosed herewith at page 204- 207 of the compilation. 2.15. 3. The appellant has enclosed the stand-alone financial statements of M/s KDJ Holidayscapes and Resorts Ltd for financial year 2012-13 to financial year 2014-15 at page 208- 255 of the compilation.As per the Balance Sheet of the company as on 31.03.2015, the net worth was Rs 24.32 Crores.The sales of the company were Rs 5.77 Crores.The company has investment in M/s KDJ Hospital Ltd and M/s KDJ Hospitality Pvt Ltd of Rs 8.92 Crores.The company has given loans and advances of Rs 13.88 Crores.The Balance Sheet and Auditors Report is signed by Chartered Accountant M/s ASL & Co. 2.15. 4. The company is still in existence and is regularly filing tax returns. A summary of the past results is as follows: Financial Year Sales Net Profit Provision before tax for tax 2011-12 7,00,300/- 11,98,788/- 64,000/- 2012-13 4,05,46,614/- 10,16,303/- 1,36,493/- 2013-14 2,45,64,629/- -8,35,507/- - 2014-15 5,77,73,302/- 9,80,194/- 1,88,000/- C.O. No. 39/Mum/2024 Assessment Year: 2012-13, 2014-15 & 2015-16
2015-16 52,70,000/- -1,97,20,000/- -
5. A perusal of the company master data from ROC website, copy of which is enclosed herewith at page 256 of the compilation, shows that the company has filed annual returns regularly. The immovable property of the company worth Rs3.25 Crores has been charged. This shows that the company has significant net worth.
The appellant submits that in the stock market, there is no correlation between net worth and share price. Merely if a script has a high net worth does not mean that it has a high share price and vice versa.In the share bazaar, certain shares such as Bank of India are traded 1/5 th of their book value where certain shares are traded many more times of their book value. For example, in the case of Advaned Enzymes Technologies Ltd, the book value per share is Rs 70/- but the share price is Rs 1,904/- ie 27 times its book value. Medicamen Biotech Ltd Book Value of Rs19.19, made a 52 week high of 367.10 from alow of Rs 38.65 in February 2016, i.e near 20 times Bookvalue and a pe of 91.86.There are Numerous Instances of High PE and Multiple times BV.
The AO has alleged that the Kolkata Investigation Directorate has come to the conclusion that KDJ Holidayscapes and Resorts Limitedis a penny stock.The ld Assessing Officer has not provided the appellant with the relevant report of the Kolkata Investigation Directorate and hence the same cannot be used against the appellant on ground of natural justice.The appellant submits that there is nobar in the law that Long Term Capital Gains cannot be earned on penny stock or such Long Term Capital Gain is illegal unless it is proved that such Long Term Capital Gain is against the exchange of cash. The appellant submits that just because KDJ Holidayscapes and Resorts Limited is a penny stock does not mean that the appellant has exchanged cash against its exempt LTCG.
The AO has alleged that the appellant does not have significant substantial trading/investment activity but has mainly interest income. The appellant submits that it has regularly earned capital gains. In Assessment Year 2012-13, the Appellant earned long term capital gain on sale of shares of Rs 2,27,51,223/-. In Assessment Year 2014-15,the Appellant earned long term capital gain on sale of shares of Rs 14,71,89,021/-. In Assessment Year 2015-16, the appellant earned long term capital gain on sale of shares of Rs 3,00,32,342/-.
19 The AO has reproduced a chart of share price of KDJ Holidayscapes for last 5years. As can be seen from the share C.O. No. 39/Mum/2024 Assessment Year: 2012-13, 2014-15 & 2015-16
price chart for last five years, the stock does not have a bell shaped curve that is traditionally associated with penny stocks.It peaks in December 2013, then falls again in March 2014 and peaks again in July 2014. Normally, a penny stock peaks only once but in this case there are two peaks which shows that it is not a regular penny stock.
The AO has stated that from the statement of brokers, it is observed that the appellant was a beneficiary of bogus LTCG.The appellant submits that the Assessing Officer has not given the appellant a single statement of any third party on which the Assessing Officer is relying upon. SEBI have not passed any adverse order against KDJ Holidayscapes. The AO has not named a single person in the entire Assessment Order on whose evidence lead him that the appellant was involved in bogus LTCG. The AO has not granted the appellant right of cross examination. 2.20.2 xx xx 2.20.3 xx xx
The ld Assessing Officer has recorded the statement of Mr Mahesh Saraf, partner of the appellant LLP. The statement was recorded u/s 131 of the Income Tax Act 1961 on 21.09.2016. At Question 10 of the statement, Mr Saraf states that the appellant acquired 75% stake of KDJ Holidayscapes in November 2010 and thereafter did various open offer compliances such as appointment of merchant banker, appointment of
