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Facts
The assessee, a HUF, filed its return declaring total income. Subsequently, proceedings under Section 147 were initiated based on information that an organized racket for generating bogus long-term capital gains in penny stocks was unearthed. The Assessing Officer (AO) added the investment amount under Section 69A and the long-term capital gains under Section 68, treating the share transactions as bogus.
Held
The Tribunal found that the AO, without examining the broker or issuing summons to the stock exchange, relied on investigation reports and price fluctuations. The evidence submitted by the assessee indicated that the transactions were carried out on the stock exchange through a SEBI-registered broker, and the BSE confirmed these transactions. Therefore, the additions made under Sections 68 and 69A were not found to have merit.
Key Issues
Whether the long-term capital gains and investment in shares were genuine transactions or bogus entries intended to evade tax, and whether the AO correctly disallowed the exemption and made additions without proper investigation and consideration of assessee's evidence.
Sections Cited
68, 69A, 147, 148, 143(1), 143(2), 143(3), 10(38)
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Income Tax Appellate Tribunal, “SMC” BENCH, MUMBAI
Before: SHRI SANDEEP SINGH KARHAIL & SMT. RENU JAUHRI
IN THE INCOME TAX APPELLATE TRIBUNAL “SMC” BENCH, MUMBAI BEFORE SHRI SANDEEP SINGH KARHAIL, JUDICIAL MEMBER & SMT. RENU JAUHRI, ACCOUNTANT MEMBER
ITA No.4628/Mum./2023 (Assessment Year : 2012-13) Shah Sandeep Anantkumar HUF, 401/402, Aura Biplex Habitat, S.V.Road, …………………Appellant Borivali West, Mumbai-400092. PAN –AALHS5130C v/s
ITO-32(3)(4), ……………. Respondent Mumbai-400051. Assessee by : Shri Rajesh Kothari Revenue by : Shri R.R.Makwana, Sr.DR Date of Hearing – 29/07/2024 Date of Order – 06/08/2024
O R D E R PER SANDEEP SINGH KARHAIL, J.M. The present appeal has been filed by the assessee challenging the impugned order dated 20/11/2023 passed under section 250 of the Income Tax Act, 1961 (“the Act”) by the learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi, [“learned CIT(A)”], for the assessment year 2012-13.
In this appeal, the assessee has raised the following grounds:- 1. “The Id. CIT(A) erred in passing the appeal order ex-parte without taking into consideration the written submission and evidences submitted physically to the CIT(A)-44 during physical hearing held on 17/03/2020as well as uploaded on the income-tax portal on 23/01/2021 and 14/11/2023 in response to the notices received by the appellant. 2. Without prejudice to above, the Id. CIT(A) erred in confirming the addition of exempted long term capital gain of Rs. 27,38,020 under section 68 of the Act 1 | P a g e
merely based on information from the DDIT (Investigation) Kolkata without having any corroborative evidence. 3. The Id. CIT(A) erred confirming addition of long term capital gain though the Id. ITO had not given the various reports and statements relied for making addition of Rs. 27,38,020 to total income to the assessee for rebuttal or cross examination. 4. The Id. CIT(A) erred in not taking cognizance of confirmation of Bombay Stock Exchange confirming trade details of the assessee, contract notes of the broker, global report, demat account and other evidences submitted/uploaded confirming the genuineness of the share transactions of the assessee. 5. The Id. CIT(A) erred in confirming addition of Rs. 4,17,980 under section 69A being cost of purchase of shares recorded in the books of account on the assumption that the investment in shares is unexplained and unrecorded in the books of account without any corroborative evidence. 6. Without prejudice to above, the learned Commissioner of Income-Tax (A) (Id. CIT(A)) erred in confirming reopening of the assessment under section 147 of the Income tax Act, 1961 (the Act) without having any reasonable belief that income has escaped assessment. 7. The Appellant craves, leave to, add to, amend, alter or withdraw any of the above grounds of appeal before or at the time of hearing of the appeal, if necessary.” 3. The sole grievance raised by the assessee, in the present appeal, pertains to addition made under sections 68 and 69A of the Act by treating the transaction in shares by the assessee as bogus.
The brief facts of the case pertaining to this issue, as emanating from the record, are: The assessee is a Hindu Undivided Family (“HUF”), and for the year under consideration filed its return of income on 30/07/2012 declaring a total income of Rs.3,74,650. The return filed by the assessee was processed under section 143(1) of the Act. Subsequently, on the basis of the information received from the DDIT(Investigation), Unit 3(2), Kolkata, that an organised racket of generating bogus entries of long term capital gains in penny stock has been unearthed as a result of investigation carried out, and the assessee has sold shares
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of M/s Regency Trust Ltd for a consideration of Rs.31,56,000 during the year under consideration, proceedings under section 147 of the Act were initiated, and notice under section 148 of the Act was issued on 31/03/2018. In response to the aforesaid notice, the assessee filed the submission requesting that the return originally filed on 30/07/2012 be treated as return filed in response to notice issued under section 148 of the Act. In the aforesaid submission, the assessee also asked for the copy of the reasons recorded for reopening the assessment. Upon receipt of the reasons for reopening the assessment, the assessee filed its objections, which were disposed of vide separate order. Thereafter, statutory notice under section 143(2) of the Act was issued and served on the assessee. The Assessing Officer (“AO”) vide order dated 16/12/2019 passed under section 143(3) read with section 147 of the Act took into consideration the findings of the Investigation Wing, wherein it was found that M/s Regency Trust Ltd. is one of the penny stock company which has provided bogus entries to the large no. of beneficiaries. The AO also took into consideration the modus operandi adopted by penny stock companies for rigging the price of the shares though circular trading. Accordingly, the AO came to the conclusion that the shares traded value of Rs.31,56,000 in the scrip of M/s Regency Trust Ltd was a pre-arranged method employed by the assessee in connivance with operators to evade taxes. The AO further alleged that the investigations in the fund flow analysed in the accounts of the entry providers have established that the cash has been routed from various accounts to provide accommodations to the assessee. Accordingly, the AO added the investment amount of Rs.4,17,980 under section 69A of the Act, and added the long term capital gains of Rs.27,28,020, claimed as exempt, under section 68 of the Act.
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The learned CIT(A), vide impugned order, dismissed the appeal filed by the assessee by observing as under:- 5.2. “During the course of appellate proceedings it is submitted by the appellant that he has declared exempted long term capital gain of Rs. 27,38,020/- on transfer of 32000 shares of Regency Trust Ltd. under sec. 10(38) of the Income tax Act. The assessee submitted the evidences to prove the genuineness of the transactions of purchase, sale, demat details, payment and receipt of shares of regency Trust Ltd. 5.2.1 The evidences confirm the genuineness of purchase and sale transaction of Regency Trust Ltd. shares and profit earned thereon. 5.3 I have gone through the grounds of appeal, assessment order and the submissions of the appellant along with the documentary evidences. It is confirmed by the appellant that it had traded in the script of M/s. Regency Trust Ltd. in the A.Y. 2012-13. This traded value was found suspicious and detailed investigation of this issue was undertaken by the DDIT (Inv), Kolkata. Various tools available including ITD data, BSE data, money control website, taxman, court rulings, internet as well as investigation wing report and findings of the SEBI were used to decide the true nature of transactions executed by the assessee. The basic aim of this dubious scheme was to route the unaccounted money earned from explained / undisclosed sourced by the Beneficiaries into their account/ books in the garb of exempt long term capital gain. This entry of LTCG is taken by selling the shares on the stock exchange and registering the proceeds arising out of the sale of shares into the books as exempt LTCG. For implementing this scheme, shares of some penny stock companies were used. The same modus operandi adopted by providing accommodation entry of bogus loss. 5.3.1 It is further seen from the Investigation report that in this scheme, the shares of the penny stock companies are acquired by the beneficiaries of LTCG at very low prices through the route of preferential allotment and off market transactions, then granting the bonus shares and finally splitting face value of the shares so that value of a share was reduced to almost a small fraction of a rupee. These shares have a lock in period of 1 year a per Securities and Exchange Board of India. 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. Once the period of 1 year has passed and the share prices have been sufficiently rigged, the beneficiaries sell their shares at the inflated prices on the stock exchange. The purchase of shares is not made by the public but by the bogus entities managed and controlled by the promoter of the penny stock company or the operator which are referred to as exist providers. The unaccounted money of the beneficiaries is routed to these bogus entities exist providers and the shares held by the beneficiaries are bought by these bogus entities from the money which is the unaccounted money of the beneficiaries. 5.3.2 To understand the nature of transaction, it is imperative to look 'through' the transactions. The documentation arranged by the appellant cannot be substitute for the truth which is emerging clearly from the circumstances surrounding the 4 | P a g e
transaction. Hence, the principle of 'substance over form' is applicable in the instant case. There are various cases and relevant case laws where the Hon'ble Courts have lifted the corporate veil and look through the transactions thus, highlighting the 'substance over form'. The ratio of the decision in the case CIT vs Nova Promoters and Finlease Pvt. Ltd. 18 taxmann.com (Delhi) is of relevance here. The Hon'ble Delhi High Court made important observation with respect to accommodation entry providers. It is clear from the assessment order that the appellant had adopted a suspect modus operandi which has been described in detail in the assessment order. 5.3.3 There are a plethora of case laws which are relevant in the matter of establishing the settled proposition of law that the income tax liability is ascertained on the basis of materials available on record, the surrounding circumstances, the relevant human conduct and the overall balance of probability. Reliance is placed on: a. Sumati Dayal Vs CIT (1995) 80 Taxmann 89 (SC) "It is no doubt true that in all cases in which a receipt is sought to be taxed as income, the burden lies upon the Department to prove that it is within the taxing provision and if a receipt is in the nature of income, the burden of proving that it is not taxable because it falls within an exemption provided by the act lies upon the assessee. But, in view of section 68 of the Act, where any sum is found credited in the book of the assessee for any previous year, the same may be charged to income-tax as the income of the assessee of that previous year if the explanation offered by the assessee about the nature and source thereof is, in the opinion of the assessing officer, not satisfactory. In such a case there is, prima facie, evidence against the assessee, viz., the receipt of money, and if he rails to rebut it the said evidence being un- rebutted, can be used against him by holding that it was a receipt of an income nature. While considering the explanation of the assessee the Department cannot, however, act unreasonable. …....As laid down by this court 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. …………….Having regard to the conduct of the appellant as disclosed in her sworn statement as well as other material on the record an inference could reasonably be drawn that the winning tickets were purchased by the appellant after the event. We are, therefore, unable to agree with the view of the Chairman in his dissenting opinion. In or opinion, the majority opinion after considering the surrounding circumstances and applying the test of human probabilities has rightly concluded that the appellants claim about the mount being her winnings from races is not genuine. It cannot be said that the explanation offered by the appellant in respect of the said amounts has been rejected unreasonably and that the finding that the said amounts are income of the appellant from other sources is not based on evidence." b. CIT, WB-II Vs Durga Prasad More (1971) 82 ITR 540: "As laid down by this court the apparent must be considered the real until it is shown that there are reason to believe that the apparent is not the real and that the 5 | P a g e
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.... Now we shall proceed to examine the validity of an apparent must be considered real until it is shown that there are reasons to believe that the apparent is not the real. In a case of the present kind a party who relies on a recital in a deed has to establish the truth of those recitals, otherwise it will be very easy to make self- serving statements in documents either executed or taken by a party and rely on those recitals. If all that an assessee who wants to evade tax is to have some recitals made in a document either executed by him or executed in his favour then the door will be left wide open to evade tax. A little probing was sufficient in the present case to show that the apparent was not the real. The taxing authorities were not required to put on blinkers while looking at the documents produced before them. They were entitled to look into the surrounding circumstances to find out the reality of the recitals made in those documents." 5.3.4 Having being put to the test of fact finding, it is observed that the transactions have failed the test, more so when read with the test of probability and human conduct, so essential, to arrive at facts. The confirmation documentation remains mere documents and self serving, and they fail as evidence. In the case of DCIT Vs Smt. Phoolwati Devi (2009) 314 ITR (AT) 1 (Delhi) the Hon'ble judges have observed at page 9 that "In our opinion, despite the documentation supporting the claim of the assessee superficially, the evidence cannot be accepted in view of the surrounding circumstances and human probabilities" Taking a view of the matter, the assessee's claim that the TDS renders the transactions genuine is rejected as being devoid of merit in the light of the surrounding circumstances. 5.3.5 It is seen that merely documenting transaction do not render them genuine, more so in the face of overwhelming findings that they have been and are established to be make-believe. A taxing authority has always to give precedence of substance over form, and is not bound to recognize a transaction merely because it may have been routed through a negotiable instrument in a bank. In this case, the substance proves that the transactions were bogus, and the form given to them was a receipt. Reliance is placed on the judicial precedent of Karanpura Development Co. Ltd. Vs CIT (SC) 44 ITR 362. 5.3.6. The Bombay High Court in Income Tax Appeal No.18/2017 dated April, 10th 2017 in the case of Bimalchand Jain L/H Shanti Devi Bimalchand Jain vs. CIT, Nagpur & Another had held as follows: "....... On hearing the learned counsel for the assessee and on a perusal of the orders of the income tax authorities, it appears that there is no scope for interference with the said orders in this appeal. By referring to the aforesaid facts, which are narrated in the earlier part of this order, the authorities found that the assessee had made investment in two unknown companies of which the details were not known to her. It was held that the transaction of sale and purchase of shares of two penny stock companies, the merger of the two companies with another company, viz., Khoobsurat Limited did not qualify an investment and rather it was an adventure in the nature of trade. It was held by all the authorities that the motive of the investment made by the assessee was not to derive income but to earn profit. Both the brokers, i.e., the broker through whom the assessee purchased the shares and the broker through whom the 6 | P a g e
shares were sold, were located at Kolkata and the assessee did not have an inkling as to what was going on in the whole transaction except paying a sum of Rs.65,000/- in cash for the purchase of shares of the two penny stock companies. The authorities found that though the shares were purchased by the assessee at Rs.5.50 Ps. Per share and Rs.4/- per share from the two companies in the year 2003, the assessee was able to sell the shares just within a year's time at Rs.486.55 Ps and Rs.485.65 Ps per share. The broker through whom the shares were sold by the assessee did not respond to the assessing officer's letter seeking the names, addresses and the bank accounts of the persons that had purchased the shares sold by the assessee. The authorities have recorded a clear finding of fact that the assessee had indulged in a dubious shares transaction meant to account for the undisclosed income in the garb of long term capital gain. While so observing, the authorities held that the assessee had not tendered cogent evidence to explain as to how the shares in an unknown company worth Rs.5/- had jumped to Rs.485/- in no time. The Income Tax Appellate Tribunal held that the fantastic sale price was not at all possible as there was no economic or financial basis as to how a share worth Rs.5/- of a little known company would jump from Rs.5/- to Rs.485/-. The findings recorded by the authorities are pure findings of facts based on a proper appreciation of the material on record. While recording the said findings, the authorities have followed the tests laid down by the Hon'ble Supreme Court and this Court in several decisions. The findings do not give rise to any substantial question of law. The judgments reported in (2012) 20 Taxman.com 529 (Bombay) (Cit Versus Jämnadevi Agarwal), (1957) 31 ITR 294 (Bombay) (Puranmal Radhakishan Versus CIT), (1970) 77 ITR 253 (SC) (Raja Bahadur Versus CIT) and (2015) 235 Taxman 1 (Bom) (CIT versus Smt. Datta M. Shah) and relied on by the learned counsel for the assessee are distinguishable on facts and cannot be applied to the case in hand. Since no substantial question of law arises in this appeal, the appeal is dismissed with no order as to costs. The facts and circumstances of the appellant's case is similar to the case of Bimalchand Jain brought out supra. 5.3.7 Further, considering the tax evasion in the instant case, it is pertinent to refer to ratio of the decision of the Hon'ble Supreme Court in case of Rajendran Chingaravelu Vs. R.K. Mishra (320 ITR 1), in which the Hon'ble Apex Court noted with grave concerned the rampant circulation of unaccounted money destroying the economy of our country. Further, the ratio of the decision of the Hon'ble Supreme Court in the case of Mc Dowell Vs CTO (154 ITR 148) is also relied upon. In this land mark decision, the Hon'ble Apex Court noted with concern the colourable devices of tax planning. Considering the gamut of issues dealt with in the assessment order with which the undersigned concurs, the decision of the assessing officer is upheld and Grounds Nos. 2 to 5 in appeal are dismissed.” Being aggrieved, the assessee is in appeal before us.
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During the hearing, the learned Authorised Representative (“learned AR”) submitted that the assessee purchased and sold the shares of M/s Regency Trust Ltd on the Bombay Stock Exchange (“BSE”). The learned AR submitted that unlike various cases of claim of bogus long term capital gains, in the present case there is no preferential allotment, issue of bonus shares, or split up of shares, and the entire transaction of purchase and sale of shares was on the floor of the stock exchange. The learned AR further submitted that the assessee furnished various evidences to prove the genuineness of the transaction. However, there is no adverse remark against them by the lower authorities. It was further submitted that no cash was paid by the assessee for the purchase of shares of M/s Regency Trust Ltd. The learned AR also submitted that the AO neither examined the broker of the assessee nor issue any summons to the stock exchange, despite specific request of the assessee.
On the other hand, the learned Departmental Representative vehemently relied upon the orders passed by the lower authorities.
We have considered the submissions of both sides and perused the material available on record. In the present case, on the basis of the information received from Investigation Unit, Kolkata that the assessee is a beneficiary of bogus entries of long term capital gain proceedings under section 147 of the Act were initiated in the case of the assessee. On verification of the information, it was noticed by the AO that the assessee has invested in the shares of M/s Regency Trust Ltd and sold the same at the sale value of Rs.31,56,000. By taking into consideration the information received from the Investigation Wing, the AO alleged that the trading in scrip of M/s Regency Trust Ltd by the assessee was manipulated affair to generate entries of 8 | P a g e
bogus long term capital gain facilitating tax evasion. The AO also alleged that during the course of search action in the penny stock companies, sworn statements of key persons were recorded, modus operandi was revealed, and it was admitted that they were in the business of providing accommodation entries only. It was further alleged that the assessee is one such person who has availed accommodation entries of bogus capital gain on sale of shares of M/s Regency Trust Ltd. The AO also analysed the variation in price of shares of M/s Regency Trust Ltd over the years. It was also alleged that the cash has been routed from various accounts to provide accommodation entry to the assessee of bogus long term capital gains. Accordingly, the AO not only disallowed the investment of Rs.4,17,980 under section 69A of the Act but also denied the exemption of long term capital gains of Rs.27,28,020 and added the same under section 68 of the Act.
As per the assessee, it purchased 17,000 shares of M/s Regency Trust Ltd on 01/12/2009 through its broker, Latin Manharlal Securities Private Limited, on the stock exchange for a total consideration of Rs.1,99,909.05. Further on 07/12/2009, the assessee purchased 15,000 shares of M/s Regency Trust Ltd through its broker on the stock exchange for a total consideration of Rs.2,13,941.80. The assessee has furnished the copy of the contract note/bill for purchase of shares of M/s Regency Trust Ltd, which forms part of the paper book on page 17. Thus, the assessee in total purchased 32,000 shares of M/s Regency Trust Ltd. We find that on 04/12/2009 and 11/12/2009, the 17,000 and 15,000 shares, respectively, of M/s Regency Trust Ltd were DEMAT by the assessee, as is evident from the DEMAT transaction statement on pages 20-22 of the paper book. From the brokers confirmation of assessee’s ledger account for the financial year 2009-10, forming 9 | P a g e
part of the paper book on pages 40-41, we find that the amount credited into its account were used for purchase of shares of M/s Regency Trust Ltd. We also find that the aforesaid amount credited in its account arose from the sale of shares of Sesa Goa and Balarpur Chinni Mill held by the assessee. From the copy of ITR for the assessment year 2010-11, we find that the assessee also declared the aforesaid purchase transaction of shares of M/s Regency Trust Ltd while filing its return of income. From the copy of DEMAT holding statement of the assessee for the year ending 31/03/2010 and 31/03/2011, forming part of the paper book on pages 35 and 36, we find that the assessee’s shareholding in M/s Regency Trust Ltd was retained at 32,000. We further find that on 05/04/2011, the assessee sold 20,000 shares and on 06/04/2011, the assessee sold remaining 12,000 shares of M/s Regency Trust Ltd., for a total consideration of Rs.31,56,000, after payment of the STT. The aforesaid sales transaction was duly reflected in the DEMAT transaction statement for the year ending 31/03/2012 as well as in assessee’s ledger account maintained with the broker for the year under consideration.
From all the above evidences forming part of the paper book, it is evident that no cash was paid by the assessee for purchase of 32,000 shares of M/s Regency Trust Ltd, and the entire purchases and sales transaction was carried out on the floor of the stock exchange through a SEBI registered stock-broker. We further find that the BSE vide email dated 06/11/2023 confirmed the aforesaid purchase and sales transaction by the assessee in the shares of M/s Regency Trust Ltd. We find that all the above evidences were furnished by the assessee to prove the genuineness of the share transaction before the AO. However, the AO without commenting on any of the evidence submitted by the assessee placed reliance upon 10 | P a g e
the report of the Investigation Wing, Kolkata, and the price fluctuation of shares of the entities in which the assessee has transacted. The findings of the Investigation Wing, as noted on pages 3-4 of the assessment order, appears to be mere general findings of the investigation without any adverse observation regarding the assessee or the scripts in which the assessee has transacted. Further, the Revenue has failed to prove as to how the said findings have any relevance to the present case in view of the facts and circumstances as noted in the foregoing paragraph. There is also no reference to the any portion of sworn statements, wherein any adverse observation against the assessee has been noted by the Investigation Wing. The price fluctuation of shares of the entities in which the assessee has transacted also does not support the case of the Revenue, as no material has been brought on record to show that the assessee was involved in such price manipulation even after purchasing and selling the shares on the stock exchange through a SEBI registered stock-broker. Therefore, in the present case, it is sufficiently evident that the AO without finding any fault with the evidence submitted by the assessee proceeded to treat the transaction as non-genuine and the long-term capital gains earned by the assessee as bogus. We also find that the AO did not issue any summons to the BSE or examine the broker of the assessee, i.e. Latin Manharlal Securities Private Limited, despite specific request by the assessee vide its letters dated 24/10/2018 and 19/11/2018, forming part of the paper book on pages 81-89.
Therefore, in view of the facts and evidence placed on the record by the assessee, we find no merits in the impugned order upholding the addition made under section 68 of the Act and disallowing the exemption of long-term capital gains claimed by the assessee. Similarly, we also do not find any merit in the disallowance 11 | P a g e
of the investment of Rs.4,17,980 made by the AO under section 69A of the Act. Accordingly, the grounds no.3-6 raised in assessee’s appeal are allowed.
Since the relief has been granted to the assessee on merits, ground no. 7 raised in assessee’s appeal challenging the initiation of jurisdiction under section 147 of the Act is left open.
In view of our aforesaid findings, ground no. 2 raised in assessee’s appeal need no separate adjudication.
In the result, the appeal by the assessee is allowed. Order pronounced in the open Court on 06.08.2024.
Sd/- Sd/- Sd/- Sd/- [RENU JAUHRI] [SANDEEP SINGH KARHAIL] ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATED: 06.08.2024 Amit Kumar (Sr. PS on Tour) Copy of the order forwarded to: (1) The Assessee; (2) The Revenue; (3) The PCIT / CIT (Judicial); (4) The DR, ITAT, Mumbai; and (5) Guard file. True Copy By Order
Assistant Registrar ITAT, Mumbai
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