SOHANRAJ UTTAMCHAND ,CHENNAI vs. DCIT NON CORPORATE CIRCLE 2 , CHENNAI

आदेश / O R D E R

Per A. Mohan Alankamony, AM:-

The appeal by the assessee is directed against the order passed by the learned Commissioner of Income Tax (Appeals)-2, Chennai dated 31.05.2017 in ITA No.201/CIT(A)-2/2016-17 for the assessment year 2014-15 passed U/s.250(6) r.w.s. 143(3) of the Act.

2 ITA No.1787/CHNY/2017 confirming the order of the Ld.AO who had rejected the claim of exemption U/s.10(38) of the Act on the long term capital gains earned by the assessee from the sale of shares.

3 ITA No.1787/CHNY/2017 business premises of the assessee U/s.133A of the Act on 19.07.2016 because of the peculiar nature of transactions, quantum of exempt income, market information about the manipulation of shares of M/s. PFL Infotech Ltd, the timing of purchase and sale and the corresponding timing of “pump and dump” activity in the shares of M/s. PFL Infotech Ltd. From the information gathered from the survey, the Ld.AO made the following findings: (i) The assessee had purchased 17,49,000 shares in the month of July and August 2012 for Rs.3,91,41,485/- at the rate of Rs.22.38 per share. Thereafter, though the financials of the company were minimal the stock prices shot up to Rs.760/- per share in the month of May 2014 without any basis. (ii) At the time of investment of Rs.3.91 crores by the assessee in the purchase of shares of M/s. PFL Infotech Ltd., the company’s share was unworthy for such investment. (iii) At the time of sale of the share the shares were quoted at profit-earning ratio of nearly 21,000 times which is highly improbable in the normal course unless the shares are spiked artificially.

4 ITA No.1787/CHNY/2017 (iv) The company did not possess any credentials worthy of mentioning. (v) The initial name of the company was M/s. Pioneer Farms Ltd and was engaged in the business of poultry farming. Thereafter the name of the company was changed to M/s.PFL Infotech Ltd thereby giving a colour of Software Company in order to take the benefit of booming software industry. (vi) The company for the past four years was disclosing meager income only under the head “income from other sources” and the reserves stood at negative figure of Rs.6,54,536/- as on 31.03.2013, though the share price of the company had jacked up substantially even when there was no development in the company worth mentioning. (vii) The profit disclosed by the assessee company for the four years under the head ‘income from other source’ was consistently around Rs.40 lakhs per annum. (viii) The assessee had no previous expertise or experience in trading in share. (ix) The assessee has been indulging in purchase of illiquid shares which were subsequently spiked artificially.

5 ITA No.1787/CHNY/2017 (x) The assessee had also invested in the shares of M/s. Kochar Group of Companies. (xi) The Ld.AO opined that the investment made by the assessee in M/s. PFL Infotech Ltd was peculiar because it was explained by the assessee that during a function he attended in Mumbai, he had collected an authentic information from one of the participant that shares of M/s. PFL Infotech Ltd is bound to fetch substantial profit in a short span of pre-determined time, which prompted him to acquire those shares. However the assessee has not disclosed the name of the person from whom he had received such tip. (xii) Shri Sohanraj Praveen Kumar, the brother of the assessee, by similar transactions booked bogus long term capital gain and claimed exemption U/s.10(38) of the Act amounting to Rs.38 crores during the assessment year 2014-15 by transfer of another illiquid stock of M/s. Risa International Ltd. (xiii) Shri Sohanraj Praveen Kumar had explained that he had received the information about the future increase in the value of share of M/s. Risa International Ltd from Shri Abhinandan Jain.

6 ITA No.1787/CHNY/2017 (xiv) It was revealed that Shri Abhinandan Jain was Director in both M/s. PFL Infotech Ltd as well as M/s. Risa International Ltd. (xv) Since Shri Abhinandan Jain was Director in both M/s. PFL Infotech Ltd as well as M/s. Risa International Ltd and since the assessee has not disclosed the name of Shri Abhinandan Jain, the Ld.AO opined that there was collusion between the assessee, assessee’s brother and Shri Abhinandan Jain. (xvi) Each and every features as to how penny stocks operates is prevalent in the case of the assessee. (xvii) The entire contract note provided by M/s. B. Lodha Securities Limited, Mumbai related only to the sale of shares of M/s. PFL Infotech Ltd. (xviii) Though many of the notice U/s.131 of the Act sent to the buyers of the shares was returned as un-served, the assessee failed to co-operate with the department to produce the buyers of the shares or to prove that the shares of M/s. PFL Infotech Ltd. are not spiked. (xix) One of the buyer Shri Aspi Bamanji Viarava in his letter dated 12.12.2016 had stated that he had not undertaken to purchase the share of M/s. PFL Infotech Ltd. When

7 ITA No.1787/CHNY/2017 confronted with the assessee, he had replied stating that the sale transactions of the shares were made through BSE. However as per the office record of the Revenue the sale transaction was direct between the assessee and Shri Aspi Bamanji Viarava. (xx) Similarly the other purchaser of the shares Shri Pratik Pankaj Kumar Shah and his relatives Shri Pankaj Kumar, Ms. Deepti Pratik and Smt. Bharathi Pankaj vide their letter dated 12.12.2016 had stated that their Demat accounts were operated by Shri Bhupesh Rathod for a small commission. When confronted with the assessee, the assessee simply replied by stating that the purchase and sale of shares were made through BSE. (xxi) It was a well-known fact that the message propagated by “money life” states that the foreign institutions participation in such shares rigging operations. This aspect can be understood through their following links. “https://youtube/Yr_75ar_VNc https://drive.google.com/open?id=0B6IO3X7rk03seHh1Nm JmdVZhM2c” (xxii) On examining the bank account of the buyers of the shares of M/s. PFL Ltd., it was found that the amount paid to the

8 ITA No.1787/CHNY/2017 assessee was not accumulated in those bank accounts. The funds from identical persons were transferred to the buyers’ account which was entirely transferred to the assessee’s account subsequently. It was also observed that the unexplained funds were routed through layering of accounts which was finally deposited in the assessee’s bank account. It was also observed that the relationship managers in most of the banks in order to achieve their target of opening new accounts encourage such activities without following KYC norms. Thus the gross violation in banking practice had helped in large scale tax evasion. (xxiii) Based on the above findings the Ld.AO opined as follows:- a) From the transaction it was evident that the assessee had invested in the shares only to gain profit on its sale. b) The assessee did not have any intention to hold the shares and earn dividend income. c) The assessee had not received any dividend income during the period of his holding of the shares. d) It is not the case of the assessee that the sale of shares in M/s. PFL Infotech Ltd is incidental but it is a

9 ITA No.1787/CHNY/2017 clear case where the purchase of shares was only for the purpose of selling and not to hold it. e) The informant Shri Abhinandan Jain had not stated that the increase in the price of share will be due to the business activity of M/s. PFL Infotech Ltd, therefore it was evident that the intention of the assessee was to decamp with the profit earned by spiking of the shares artificially. f) Since the nature and characteristics of transaction is investment made for earning profit on sale of shares and not for earning dividend income, it was clear that the investment is in the nature of “AFS (available for sale)” as in the case where investments are made by banking institutions. g) On investments made in the nature of “AFS” by the banking institutions CBDT circular No.17 dated 26.11.2008 has instructed to treat the income arising out of sale and purchase of shares as “income from profits and gains of business”. h) Drawing the same analogy the profits earned by the assessee on sale of shares amounting to Rs.34,68,10,572/- has to be treated as income under

10 ITA No.1787/CHNY/2017 the head “profits and gains of business” and not under the head “capital gains”. i) For the above stated reasons the assessee is not eligible to claim the exemption U/s.10(38) of the Act with respect to the gain of Rs.32,90,96,125/- arising out of sale of shares. j) Since M/s. PFL Infotech Ltd., lacks credentials, identity in the market and financially unworthy, it is apparent that the share price of M/s. PFL Infotech Ltd., was pumped and dumped during the period of the shareholding by the assessee company and clearly points out that the transactions are fabricated to suit the assessee. k) The deposition of the assessee that he has been tipped that the stock prices of M/s. PFL Infotech Ltd., is bound to escalate in a short span of time is itself an evidence to establish that the transactions are artificially spiked. l) The above facts have also leads to establish that the assessee had colluded with entry operators to artificially spike the shares.

11 ITA No.1787/CHNY/2017 m) The statement made by Shri Aspi Bamanji Vairava, Shri Pratik Pankaj Kumar Shah, Shri Pankaj Kumar, Ms. Deepti Pratik and Smt. Bharathi Pankaj leads to the fact that the assessee had failed to discharge his duty and thereby adverse inference could be drawn that the transactions are artificially spiked. n) The stand of the assessee that shares are brought by institutions like Royal Bank of Scotland, etc., cannot justify the genuineness of the transactions made by the assessee. o) The bulk trading of shares in M/s.PFL Infotech Ltd., for the period 07.12.2009 to 19.05.2016 shows that the transactions have been systematically jacked up and reduced thereafter to suit the needs of various participants. p) Neither the raise in the price of the shares nor its fall is supported by any sound reasoning. q) The companies from Mumbai, Kolkata and few other places who invested in purchase of shares of M/s. PFL Infotech Ltd., at Rs.450/- per share did not possess the resources to invest. Further the price of the shares nose-dived to Rs.15/- per share within a

12 ITA No.1787/CHNY/2017 short span of time which establishes the fact that the transactions are not genuine and dubious. r) There is no scientific reasoning for the share price to increase substantially and thereafter shrink to a low value to the extent of Rs.15 per share. Therefore the decision of the Hon’ble Apex Court in the case Durgaprasad & More reported in 82 ITR 540 applies to the case of the assessee on the theory of human probabilities. s) The assessee’s relatives were also indulging in such kind of transactions which are bogus and dubious, in the shares of companies M/s. Gujarat Incatel, M/s. Pace Textile, M/.s Steel Exchange, M/s. Gujarat Capital, M/s. S V Electricals, M/s. PFL Infotech Ltd., M/s. Ken Finance, M/s. Clarus Financial Securities Ltd, M/s. Shantanu Sheorey Aquakult Ltd & M/s. Risa International Ltd., wherein all the shares are illiquid and spiked within short span of time, which even a blue chip company cannot normally achieve. t) Though the assessee has made phenomenal gain from purchase and sale of shares of M/s. PFL Infotech Ltd., he has incurred loss only in few

13 ITA No.1787/CHNY/2017 companies such as Danush Technologies, Decolite, Surana Industries etc., which shows that in those transactions the assessee was ditched by operators.

Thereafter the Ld.AO heavily relied in the decision of the Mumbai Benches of the Tribunal in the case ITO vs. Shamim M. Bharwani reported in 69 taxmann.com page 65, wherein it was held that “Held that it was noted that the purchase of shares was off market purchase not reported in the stock exchange. Moreover, the purchase was through a back date contract note in cash and, there was no trial. It was also noted that the shares belonged to a penny stock company, with no credentials, and selling rates were artificially hiked, with no real buyers. On facts, inference of sales being bogus was unmistakable and, consequently, impugned addition was to be confirmed.”

14 ITA No.1787/CHNY/2017 Thereafter the Ld.AO arrived at the final conclusion that the unexplained money of the assessee has been channelized through a layer of banking accounts and was finally deposited in the assessee’s bank account as the sale proceeds of shares of M/s.PFL Infotech Ltd., and claimed exemption with respect to the long term capital gain U/s.10(38) of the Act. Therefore the Ld.AO treated the entire income of the assessee Rs.38,05,28,490/- sic., Rs.32,90,96,125/- (Corrigendum dated 17.01.2017) as the unexplained credit in the hands of the assessee U/s.68 of the Act and in the alternatively as the business profit of the assessee U/s.28 of the Act.

15 ITA No.1787/CHNY/2017 (iii) The Ld.AO had not left any gap or lacuna in the investigation undertaken by him. (iv) The assessee had failed to obtain financials and bank accounts of the buyers of the shares to prove that they are creditworthy. (v) The PE ratio of 11,800 at the time of sale of shares by the appellant is disproportionately high which shows that the shares are spiked artificially by scheming operators. (vi) All the case laws relied by the assessee have been counted by the Ld.AO by placing reliance in the decision of the Mumbai Bench of the Tribunal in the case Shamim M. Bharwani cited supra. (vii) The argument of the assessee that all the financial transactions were undertaken through banking channels and the shares were traded in stock exchanges does not have much water to hold. Reliance was placed in the decision of the Hon’ble Jurisdictional Madras High Court in the case CIT vs. Krishnaveni Ammal reported in 158 ITR 826 wherein it was held that “when there were other documentary evidence of corroborative value and same is within reach of assessee, judicial body cannot act on such interested testimony of assessee alone.” Further reliance

16 ITA No.1787/CHNY/2017 was placed in the decision of the Hon’ble Apex Court in the case CIT vs. P. Mohanakala & others reported in 291 ITR 278, wherein the burden of proof with respect to cash credit U/s.68 of the Act is vested on the assessee by relying in the decision of the Hon’ble Apex Court in the case Mrs. Sumathi Dayal. (viii) The assessee had failed to discharge his duty in proving the fact and substantiating the transactions adhered to natural course of event and human conduct. Reliance was placed in the decision of the Hon’ble Apex court in the case K.Ponnusamy vs. State of TN wherein the importance of proving a fact is elaborated. (ix) Heavily relying in the decision of the Mumbai Benches of the Tribunal in the case ITO vs. Shamim M. Bharwani cited supra it was opined that when all the adverse factors are viewed holistically, there cannot be an iota of doubt in classifying the transactions as manipulations. Therefore the Ld.CIT(A) came to a conclusion that it was well established, the capital gain earned by the assessee is actually his unexplained income reverted through various layering.

17 ITA No.1787/CHNY/2017 6. The Ld.AR submitted before us that the assessee had purchased the shares from open market based on rational reasons and thereafter off-loaded the same in the open market when the time was ripe for making gains. He further submitted that the entire transaction of purchase and sale of shares were routed through banking channels. He further argued by stating that the assumption of the Ld.Revenue Authorities that the assessee (black money holder) approached operators to convert his black money into white money is totally baseless because no evidence was produced for establishing the same. Further, allegation of the Department that the operator forms listed companies in order to issue preferential allotment of shares to black money holder (assessee) also does not have merit because the assessee had acquired the shares from the stock exchange after payment of STT. It was further submitted that the presumption of the Ld.Revenue Authorities that the operator identifies dummy buyers is also baseless because no evidence has been produced by the Department in support of the same. Further there was no evidence to show that the assessee had paid black money in cash to the operators. The Ld.AR further argued stating that the Revenue had not brought out any materials to establish that the share prices of the company was

18 ITA No.1787/CHNY/2017 rigged. The Ld.AR thereafter argued vehemently stating that the shares of M/s. PFL Infotech Ltd., was traded regularly in the stock market till date and the appropriate government regulatory authorities has not pointed out any irregularities in those shares. Therefore the Ld.AR pleaded that the allegation made by the Department is based on presumptions and assumptions and therefore cannot be sustained in law. Hence it was requested that the addition made by the Ld.Revenue Authorities may be deleted.

19 ITA No.1787/CHNY/2017 (iii) M/s. PFL Infotech Ltd. was only earning income from other source of approximately Rs.40 lakhs per annum for the past four years and also had negative reserves when the assessee sold the shares at an exorbitant price amounting to Rs.760 per share. (iv) The profit-earning ratio of shares was merely 21,000 times which is improbable in the normal course unless shares are spiked artificially. (v) The assessee did not have any previous experience in trading of shares. (vi) M/s. Lodha Securities Ltd., Mumbai had only traded in the shares of M/s. PFL Infotech Ltd. (vii) There were adverse reports from “money life” in such share price rigging operations. (viii) The assessee and his relatives were in the habit of dealing with illiquid shares which was spiked artificially during the past. (ix) The investment made by the assessee in M/s. PFL Infotech Ltd., based on a tip received from third party appears to be peculiar and such similar transactions was made by the brother of the assessee by purchasing shares of M/s. Risa International.

20 ITA No.1787/CHNY/2017 (x) The intention of the assessee for purchasing the share was only to gain profit from sale of the same and had no intention to hold the shares for earning dividend income. (xi) The stock of M/s. PFL Infotech Ltd. was in the nature of penny stock linked with scam.

8.1 From the above, we find that the Ld.AO’s finding with respect to the turn-over, profit and the other limitations of M/s. PFL Infotech Ltd., was only based upon the Balance Sheet and profit & loss accounts of M/s. PFL Infotech Ltd. The change in the name of the company to M/s. PFL Infotech Ltd. was also noticed by the Ld.AO from the Memorandum and Articles of Association of M/s. PFL Infotech Ltd. The Ld.Revenue Authorities though have made remarks with respect to spiking of the shares of M/s. PFL Infotech Ltd., the modus-operandi and the manner in which the prices are spiked has not been examined and brought out in their respective Orders. Further the Ld.AO has relied in the statements of few persons such as Shri Aspi Bamanji Vairava, Shri Pankaj Kumar K Shah, Shri Dipti P Shah, in order to arrive at the conclusion that the assessee was dealing with penny stock company. However from the letter written by those persons to the Revenue, it is evident that they have stated, neither they have met

21 ITA No.1787/CHNY/2017 the assessee nor they know him and reference was made to another person Shri Bhupesh Rathod. However there is nothing on record to show that Shri Bhupesh Rathod was examined by the Revenue for gathering any adverse inference. The total extent of shares issued by M/s. PFL Infotech Ltd., and what is the nature of the share transactions that are not dealt by the assessee and who are those persons who dealt with those shares are not coming out from the orders of the Ld.Revenue Authorities. The entire extent of shares issued by M/s. PFL Infotech Ltd. is also not before us on record. It is pertinent to mention that the other persons who dealt with the shares of M/s. PFL Infotech Ltd will also stand in the same footing as that of the assessee and the details of those cases are also not before us. It appears that well-known institutions like Royal Bank of Scotland, etc., have also purchased and sold the shares of M/s. PFL Infotech Ltd. However the extent of shares dealt by them is not on record before us to examine and compare the scope of transactions with that of the assessee. Further we find from the order of the Ld.AO in Annexure ‘E’, that nearly 355 individuals had made bulk deals in shares of M/s. PFL Infotech Ltd., through NSE and BSE. However neither the Ld.AO has made detailed investigations with respect to all these individuals in order to pin them also along with the assessee for

22 ITA No.1787/CHNY/2017 having dealt with the shares of the alleged penny stock company M/s. PFL Infotech Ltd nor the facts pertaining to those persons are brought to our knowledge. Further from the facts of the case, it is evident that the entire transactions are transacted through recognized stock exchange and all the financial transactions are made through banking channels and the same is not in dispute. The Ld.AR had also affirmed that though SEBI had debarred the trading of shares of M/s. PFL Infotech Ltd., for a short-while due to technical reasons, the bar was lifted subsequently and the shares are being traded in the recognized stock exchange till date. This fact is also not disputed by the Ld.DR either. The finding of the Ld.AO that the company M/s. PFL Infotech Ltd., did not have any credentials worthy of mentioning only leads to a suspicion that the transactions are bogus. But it should be kept in mind that in commercial scenario various economic factors affect the price of shares which may not be physically visible. Therefore one cannot arrive at a conclusion only based on such suspicion. There are occasions where blue chip companies also manipulate the price of shares for various reasons which may be illegal but to initiate penal action there should be concrete finding with evidence on such illegal activities. Predominantly in the case of the assessee though various aspects points out that there may be some

23 ITA No.1787/CHNY/2017 superfluous activities conducted by various persons in order to influence the price of shares of M/s. PFL Infotech Ltd., no concrete evidence is brought out to establish any illegality. On query, the Ld.DR informed us that there is no criminal case, investigations by enforcement directorate or by CBI pending as on date with respect to the assessee or M/s. PFL Infotech Ltd. Moreover no irregularities are brought out by SEBI or any recognized stock exchange with respect to the trading in shares of M/s. PFL Infotech Ltd., as affirmed by the Ld.AR as well as the Ld.DR before us. Further there is no finding by the Department as to how the assessee might have possessed/acquired such huge black money for conversion. The bank account trial with respect to the source of amount invested by the so called dubious purchasers of shares from the assessee through stock exchange has not been thoroughly investigated by the Revenue to establish that those buyers are not genuine and they did not have sufficient source to invest in the shares of M/s. PFL Infotech Ltd., purchased from the assessee. Only a passing remark is made by the Revenue on that regard that the buyers of the shares from the assessee were men of meager means but no evidence is brought on record. In fact the need for such finding was dispensed with by the Revenue by merely stating that the funds were routed through

24 ITA No.1787/CHNY/2017 layering of accounts and flouting of rules by the bankers not following KYC norms. Though the Ld.AO has explained how the penny stock works, he has not made any finding with corroborative evidence to establish that the assessee’s case falls under dealing with penny stock. The Ld.AO had also observed in his order that the assessee had failed to obtain financials and bank accounts of the buyers of the shares from the assessee to prove that they are credit worthy. We do not understand as to how the assessee will be able to get such particulars from strangers who had purchased shares from the assessee through recognized stock exchange. In fact the Revenue had all the opportunity to summon them and obtain the requisite particulars which they had grossly fails to exercise. The Ld.AO has also relied on the message propagated by “money life” but he has not made a finding as to how it is applicable in the case of the assessee. The Ld.AO has also pointed out about the bank accounts being opened by various individuals without following KYC norms. However the Ld.AO has not examined those individuals in order to establish his adverse finding on the assessee. It is also pertinent to mention that no detailed Paper Book is filed by the Revenue before us with respect to M/s. PFL Infotech Ltd., or the assessee to establish that the assessee has indulged trading in penny stock

25 ITA No.1787/CHNY/2017 company for converting his unaccounted money. The reference made by the Ld.AO with respect to asset classification by banking institutions viz., “available for sale (AFS)” and the relevant CBDT Circular No.17 dated 26.11.2008 is not applicable to the case of the assessee because the assessee is not a banking institution. The Ld.AO has also remarked that there is no scientific reasoning for the share price of M/s. PFL Infotech Ltd., to rise as high as Rs.760 per share and shrink to Rs.15 per share. The stand of the Ld.AO that bulk trading of shares in M/s. PFL Infotech Ltd. between the period 07.12.2009 to 19.05.2016 shows that the transactions have been systematically jacked up and reduced thereafter to suit the needs of various participants has not been proved by thorough investigation with respect to all the participants who traded in those shares and no such adverse report on the spiking of the price of the shares artificially is brought out on record by the Revenue. Moreover the Ld.AO has not made any finding with respect to the modus operandi as to how such manipulations were made possible. He has only made a presumption that the transactions are dubious. It is pertinent to mention that the assessee would not be able to explain the entire activities of M/s. PFL Infotech Ltd., or gather internal documents/information because M/s. PFL Infotech Ltd., is a third

26 ITA No.1787/CHNY/2017 party as far as the assessee is concerned and he has no control over the company. Further he himself confessed that he indulged in such trading activity based on tips received from reliable sources. Though it appears that such quantum of raise and fall in the price of shares is not normally possible as in the case of M/s. PFL Infotech Ltd., it is essential to bring out some evidence to establish that there is some illegality in the transaction. Conclusions cannot be made merely on the basis of conjectures and surmises. The Ld.AO’s grievance that the assessee had failed to obtain financials and bank accounts of the buyers of shares to prove they are credit-worthy is not appreciable, because it is obvious that the assessee cannot get such documents from unknown individuals who have purchased shares through recognized stock exchange. The Ld.AO himself had admitted that the assessee had also made investment in companies such as Danush Technologies, Delolites, Surana Industries, etc., however he has blindly stated in his order without evidence that the operators had ditched the assessee for conducting similar operations while dealing with those shares. It also establishes the fact that the observations of the Ld.AO regarding previous experience of the assessee in trading of shares does not seems to be appropriate. The mere statement of the Ld.AO that the

27 ITA No.1787/CHNY/2017 assessee and his relatives were in the habit of dealing with illiquid shares which are spiked artificially will not hold water unless all those instances are proved with substantive evidence. The observation of the Ld.AO that the assessee had purchased the shares only to obtain profit from sale of those shares and had no intention for earning dividend income also does not seem to be appropriate because any investors is at liberty to exploit gain from dealing with their investment in the best possible manner. In the case of the assessee though there is a strong needle of suspicion arising due to the unnatural fluctuation of the price of the shares of M/s. PFL Infotech Ltd., no clear cut evidence is brought forth by the Revenue in order to nail the assessee for penal consequence. In these circumstances we do not find any merit in the Order of Ld.AO for making addition in the hands of the assessee U/s.68 of the Act with respect to the Long Term Capital Gain earned by him from the sale of shares of M/s. PFL Infotech Ltd., or treating the Long Term Capital Gain earned by the assessee as income from business or denying the benefit of Section 10(38) of the Act, and as well as with the Order of the Ld.CIT(A) who had sustained the addition made by the Ld.AO.

28 ITA No.1787/CHNY/2017 8.2 Further on examining the decisions relied by the Ld. Revenue Authorities we do not find much strength in the same. They are briefly discussed herein below for reference:- a) The Ld.AO has relied in the case Sumati Dayal vs. CIT reported in 214 ITR 801. In that case it was with respect to introduction of capital by consistently winning from horse races. Horse race is a game of chance and consistent winning from such game of chance, particularly winning by jackpots etc., is against the theory of human probabilities. However the case of the assessee it is with respect to purchase and sale of shares through recognized and regulated stock exchange. Hence the ratio laid down in the case cannot apply to the case of the assessee. b) The Ld.AO has heavily relied in the decision of the Mumbai Benches of the Tribunal in the case ITO vs. Shamim Bharwani reported in 69 Taxman.com 65 and has extracted the entire order. However it is pertinent to mention that in that case the shares were purchased off the market which was not reported in the recognized stock exchange. The purchase was through back dated contract note and paid by cash. The shares belong to penny stock company and there were no real buyers. The operators were acting in benami

29 ITA No.1787/CHNY/2017 names or name lenders. The shares traded were of paper companies. The purchases were in physical form, and demated subsequently long after the purchase date, back dated close to the date of sale. From the above, it is evident that facts are not identical to case of the assessee. In the case of the assessee shares are traded through regulated stock exchanges, financial transactions were made through banking channels, there were prominent institutions involved in the purchase and sale of shares, identity of the persons who traded in shares were known etc. Therefore the case relied by the Revenue is not applicable to the case of the assessee. c) The decision of the Hon’ble Apex Court relied by the Revenue in the case CIT vs. Durga Prasad More reported in 82 ITR 540 neither deal with share market transactions or identical to the facts in the case of the assessee. d) Further the decision in the case CIT vs. Mohanakala by the Hon’ble Apex Court reported in 291 ITR 278 is not applicable to the case of the assessee because in that case the issue was with respect to addition made under the head cash credit U/s. 68 of the Act towards foreign gifts received from one common donor and the evidence indicated that

30 ITA No.1787/CHNY/2017 the donor was to receive suitable compensation from the assessee though the money came by way of bank cheques and was paid through the process of banking transactions which was by itself of no consequence. But in the case of the assessee before us the issue is with respect to purchase and sale of shares through regulated market such as stock exchange and the watch full eye of SEBI. e) In the case CIT vs. Krishnaveni Ammal reported in 158 ITR 826, the Hon’ble Jurisdictional Madras High Court held that when there was information to effect that Multani Bankers had only indulging in hawala transactions by merely lending their names, the credit entries in the name of the various Multani Bankers appearing in the books of the assessee did not represent genuine transaction because though the assessee had stated that crossed checks are available they were not produced before the Revenue. In the case of the assessee the issue is totally different. f) In the case Somnath Maini vs. CIT reported in 306 ITR 414, the Hon’ble High Court of Punjab & Haryana had held that “The burden of proving that income is subject to tax is on the Revenue but on the facts, to show that the transaction is genuine, the burden is primarily on the assessee. The Assessing Officer is to apply the test of human probabilities for deciding the

31 ITA No.1787/CHNY/2017 genuineness or otherwise of a particular transaction. Mere leading of evidence that the transaction was genuine, cannot be conclusive. Such evidence is required to be assessed by the Assessing Officer in a reasonable way. The genuineness of the transaction can be rejected even if the assessee leads evidence which is not trustworthy, even if the Department does not lead any evidence on such an issue.”

However in the case of the assessee the genuineness of the company M/s. PFL Infotech Ltd. which is a third party and not under the control of the assessee and whose shares assessee had purchased and sold is the issue. Moreover the purchase and sales of shares were made through recognized stock exchange in the open market from unknown and unconnected persons. Therefore the ratio laid down by the Hon’ble High Court would not be strictly applicable in the case of the assessee.

8.3 The assessee has relied in the following decisions which apparently support the case of the assessee:-  Bombay High Court in the case of Jamna Devi Aggarwal 236 CTR 32 (2010)  Bombay High Court in the case of Mukesh Ratilal Marolia (2012) 80 CCH 0407

32 ITA No.1787/CHNY/2017  Gujarat High Court in the case of Maheshchandra G Vakil (2013) 40 Taxman 326  Ahmedabad ITAT in the case of Mahesh G Vakil ITA No.3104/Ahd./2009  Kolkata High Court in the case of Emerald Commercial Ltd (2002) 120 Taxman 282  Kolkata ITAT in the case of Sunita Khemka ITA No.714 to 718/Kol./2011  Kolkata ITAT in the case of Anil Khemka ITA No.901 to 905/Kol./2009 dated 28/01/2010.

In all the above mentioned cases, it has been uniformly held that when the transactions are routed through banking channels and the identity of the seller and the purchasers are established and when the transactions are covered through contract notes, demat accounts which shows transfer in and out of shares then there is no necessity to doubt the genuineness of the transactions.

8.4 From the above it is apparent that the decisions relied by the Ld. Revenue Authorities will not be strictly applicable to the case of the assessee and the decisions cited by the assessee are in support of the claim of the assessee.

33 ITA No.1787/CHNY/2017

8.5 We do understand the genuine anxiety of the Revenue to tax the assessee due to the various unnatural happening of events, but as a Judicial body our hands are tied due to the lack of material evidence against the activities of the assessee and we cannot step into the shoes of the Revenue by making further investigations and enquiries to tie up the loose ends left out by the Revenue. From the materials produced before us there is nothing on record to establish that the transactions of purchase and sale of shares made by the assessee are dubious other than the fact that the share prices of M/s. PFL Infotech Ltd., rose substantially without sound backing and the statements of few persons such as Shri Aspi Bamanji Vairava, Shri Pankaj Kumar K Shah & Shri Dipti P Shah. At the same time it should be kept in mind that stock prices may raise due to certain hidden factors which may be not known to the public at large even with respect to blue chip companies. Hence conclusion cannot be bluntly made on the basis of surmises and conjectures in the case of any assessee when certain other material factors are in favour of the assessee.

8.6 The Hon’ble Punjab & Haryana High Court in the case CIT vs. Anupam Kapoor reported in 299 ITR 179 in a somewhat

34 ITA No.1787/CHNY/2017 similar situation has categorically stated that no presumption could be drawn by the Assessing Officer merely on surmises and conjectures. The gist of the decision and case is extracted herein below for reference:- “The assessee’s case was reopened on receipt of an intimation from the Deputy Director of Income-tax (Investigation) stating that the long-term capital gain declared by the assessee was false and the transaction was not genuine. In response to a notice under section 148 of the Income-tax Act, 1961, the assessee submitted his reply and furnished evidence in support of his claim of long-term capital gain. The Assessing Officer held that the assessee failed to lead evidence to support his claim of long-term capital gain and considered the amount of Rs.1,74,552 as unexplained credit and it was added in the income of the assessee. The Commissioner (Appeals) deleted the addition holding that the Assessing Officer had not discharged his onus and there was no material or evidence with the Assessing Officer to come to the conclusion that the transaction shown by the assessee was a bogus transaction. The Commissioner (Appeals) took the view that if a company was not available at the given address, it could not conclusively prove that the company was non-existent. The Tribunal took into consideration that the Assessing Officer had not dealt with all the documents placed before him and had simply presumed that the transaction was bogus and held that the purchase contract note, contract note for sales, distinctive numbers of shares purchased and sold, copy of the share certificates and the quotation of shares on the date of purchase and sale were sufficient material to show that the transaction was not bogus but a genuine transaction. On appeal: Held, dismissing the appeal, that there was no material before the Assessing Officer, which could have led to a conclusion that the transaction was a device to camouflage activities to defraud the Revenue. No such presumption could

35 ITA No.1787/CHNY/2017 be drawn by the Assessing Officer merely on surmises and conjectures. The Tribunal took into consideration that it was only on the basis of a presumption that the Assessing Officer concluded that the assessee had paid cash and purchased the cheque. In the absence of any cogent material in this regard, having been placed on record, the Assessing Officer could not have reopened the assessment. The assessee had made an investment in a company, evidence whereof was with the Assessing Officer. Therefore, the Assessing Officer could not have added the income, which was rightly deleted by the Commissioner (Appeals) as well as the Tribunal.”

8.7 In the case Omar Salay Mohamed Sait vs. CIT reported in 37 ITR 151, the Hon’ble Apex Court categorically held that “on no account whatever should the Tribunal base its findings on suspicions, conjectures or surmises: nor should it act on no evidence at all or on improper rejection of material and relevant evidence or partly on evidence and partly on suspicions, conjectures or surmises and if it does anything of the sort, its findings even though on questions of fact will be liable to be set aside by the court.”

8.8 In the case Umacharan Shaw & Brothers vs. CIT reported in 37 ITR 271, the Hon’ble Apex Court held that where conclusion arrived at was due to suspicion which could not take the place of proof but based on many surmises and conjectures reliance cannot be placed.

36 ITA No.1787/CHNY/2017 8.9 Similar ratio was laid down by the Hon’ble Apex Court in the case Lalchand Bhagat Ambica Ram vs. CIT reported in 37 ITR 288. 8.10 In the case CIT vs. Carbo Industrial Holdings Ltd., reported in 224 ITR 422, the Hon’ble Calcutta High Court has held that when purchase and sale of shares are effected through share brokers, their particulars are furnished and the payment is made by account payee cheque the transaction cannot be doubted just because the brokers fail to appear before the Revenue even after issue of summons. Similar view was upheld by the Hon’ble Calcutta High Court in the case CIT vs. Emerald Commercial Ltd. & another reported in 250 ITR 539.

8.11 In the case CIT vs. Prem Pal Gandhi, the Hon’ble Punjab & Haryana High Court held vide its recent order dated 18.01.2018 has held that:- “the fact that the appreciation in the value of the shares is high does not justify the transactions being treated as fictitious and the capital gains being assessed as undisclosed income if (a) the shares are traded on the Stock Exchange, (b) the payments and receipts are routed through the bank, (c) there is no evidence to indicate it is a closely held company and (d) the trading on the Stock Exchange was manipulated in any manner.”

37 ITA No.1787/CHNY/2017 8.12 Based on the above referred cases decided by the higher judiciary and discussions we hereby direct the Ld.AO to delete the addition made by invoking Section 68 of the Act and also to grant deduction U/s.10(38) of the Act by treating the gain arising out of the sale of shares as Long Term Capital Gain.

8.13 We also make it clear that we have arrived at this decision in the case of the assessee alone based on the materials and facts presented before us and therefore it does not have any binding precedent value in similar other cases. We also make it clear that we have not arrived at any conclusion with respect to the standing/activities etc., of M/s. PFL Infotech Ltd., because we do not have sufficient materials to comment on the same.

Order pronounced on the 28th February, 2018 at Chennai.

Sd/- Sd/- (धु�वु� आर.एल रे�ी) (ए. मोहन अलंकामणी) ( Duvvuru RL Reddy ) ( A. Mohan Alankamony ) �याियक सद�य /Judicial Member लेखा सद�य / Accountant Member चे�ई/Chennai, �दनांक/Dated 28th February, 2018 RSR

38 ITA No.1787/CHNY/2017

आदेश क� �ितिलिप अ�ेिषत/Copy to: 1. अपीलाथ�/Appellant 2. ��यथ�/Respondent 3. आयकर आयु� (अपील)/CIT(A) 4. आयकर आयु�/CIT 5. िवभागीय �ितिनिध/DR 6. गाड� फाईल/GF