ITO -24(2)(1), MUMBAI, PIRAMAL CHAMBERS vs. KAILASH CHANDRA GUPTA, HUF, MUMBAI

Per Omkareshwar Chidara (AM) :-

The appellant has filed return of income on 5.6.2012 declaring total income of Rs. 7,13,686/-, and the same was processed under section 143(1) of the Income Tax Act 1961, (‘the Act’ in short) on 5.6.2012.

2 Kailash Chandra Gupta HUF

reopening the assessment, the Learned Authorised Representative (‘Ld. AR’ for short) of assessee Mr. Rajesh Sanghvi, CA of M/s. Rajesh Sanghvi & Co. filed objections for reopening and the same were disposed off by the AO. Subsequently, the assessee was asked to furnish the required information and the AO says that the details were filed.

3 Kailash Chandra Gupta HUF

mentioned by Ld. AO in the assessment order that Kolkata Directorate has disseminated the information relating to modus operandi of claiming false LTCG which involved several operator intermediaries and beneficiaries.

“6.2 The basic aim of this dubious scheme was to route the unaccounted money of LTCG Beneficiaries into their account/books in the garb of 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 LTCG. For implementing this scheme, shares of some penny Stock Companies were used. The same modus is adopted for providing accommodation entry of bogus Loss.

6.3 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 (private placement) and off market transaction. These shares have a lock in period of 1 year as per Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009. Another route to acquire the shares is through Amalgamation or merger, in this route, the beneficiaries of LTCG are allotted shares of a private limited company which is subsequently amalgamated with a listed penny stock and the beneficiaries receive shares of the listed penny stock exchange of the shares of private limited company. The shares in some cases were acquired through stock exchange. These shares were then split and bonus shares were issued to increase the volume.

6.4 Thereafter, the prices of the shares of the penny stock, companies are rigged and are raised through circular trading. This is managed by the "operator" of the scrip. An "Operator" is a person who wish to take entry of bogus LTCG/STCL in their books and arranges the same through the scrip of penny stock companies. The Operator manages many paper/bogus companies and uses them to do circular transactions to rig the price of the shares. The shares of these penny stock companies, although listed on exchange, are always closely held and are controlled by the promoter of the Penny Stock Company and the Operator who is arranging for the bogus LTCG/Loss. This is due to the fact that the general public is not interested in these shares as these companies have no credentials and this helps the operator to keep a control on the price movement of the shares,

6.5 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, A point worth noticing here is that the

4 Kailash Chandra Gupta HUF

purchase of the 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 "Exit Providers'. The unaccounted money of the beneficiaries is routed to these bogus entities “Exit Providers" and the shares held by the beneficiaries are bought by these bogus entitles from the money which is the unaccounted money of the beneficiaries. Sometimes, the shares of the LTCG beneficiaries are purchased by the beneficiaries of Loss who later sell their shares when the price falls and hence book bogus Loss in their books. All these transactions are done on the stock exchange and as the sale of shares are done after a holding of one year they fall into the category of Long Term Capital Gains which is an exempt income as per the 1 T Act, 1961. 6.6 During the investigation, Statements of various operators, entry providers and the stock brokers were recorded where they have admitted of providing the accommodation entries in the form of Long Term Capital Gain/Short Term Capital Loss.”

5 Kailash Chandra Gupta HUF

company is a meagre 0.07. Roughly, the financials of the company are the same for all the 5 years is almost the same. The Ld. AO gave the share price data of this company on the floor of stock exchange at pages 10,11,12. From this table, it can be seen that on June 9th of 2009, the price of scrip jumped to Rs. 429/- on December 09, 2009. Next month, it came down to Rs. 182/-, and again in June 2010, the price went up to Rs. 700/- to Rs. 182, in January 2011 it drastically came down to Rs. 75/-, in December 2011, the price came down to Rs. 20/-, in December 2012 price is Rs. 14/-, in December 2013 the price came down to Rs. 3.32 and in December 2014 the price of share is mere Rs. 1.35/-. Thus, the Ld. AO has concluded that the share price of M/s. Splash Media and Infra company skyrocketed without any awesome profit, earnings before interest, depreciation margin, earnings per share (EPS), bonus dividend etc. It was mentioned by the Ld. AO that these parameters are essential for increase in share price and they were not present in this case. So, the Ld. AO is of the opinion that, in the absence of all these elements, if the share price went up astronomically means, the share price was jacked up artificially by circular trading forming cartel, i.e. the shares would be purchased and sold by few interested persons to give/get intended benefit of non-genuine long term capital gains/long term capital loss. Once the shares are offloaded, the price of scrip nosedives. What is very important to observe here is that the price goes up to Rs. 700/- and comes down to Rs. 1/-, without any change in the fundamentals of company.

6 Kailash Chandra Gupta HUF

report of Investigation Directorate says that the unaccounted income of the beneficiaries was routed into accounts of these shell companies for purchasing and selling the shares of the beneficiaries. The Ld. AO analysed the modus operandi and stated as follows at para 8.2, page 16 of the assessment order :- “8.2 From the trade analysis it is observe that during the phase of price rigging the shares were not in demand by the general investors of the market and saw very low volume on most of the trading days and hence could not have commanded the price as observed. In any market, a sudden supply, if not matched by similar demand, leads to price fall. Considering the same, any rational investor would not have dumped a large number of shares without facing the risk of a significant, price fall until and unless he was sure of the demand side absorbing the supply. In the present case, the exit providers discussed above created the demand against the supply from the sellers (beneficiaries of bogus LTCG/STCG). In the whole process, the principle of price discovery was kept aside and the market lost its purpose. It is evident from the above analysis that the exit providers provided a hugely profitable exit to the sellers. This could be only possible if the sellers and exit providers were hand in glove with each other.”

7 Kailash Chandra Gupta HUF

various paper companies and M/s. Splash Media & Infra is one amongst them. He has also utilised the names of other companies like Fairlink Housing (P) Ltd., Linus Holdings Ltd., Riddhi Vincom Ltd. etc. to provide accommodation entries to beneficiaries who want LTCG and short term capital loss (STCL, for short)

8 Kailash Chandra Gupta HUF

buyer of huge chunk of shares from our assessee under similar circumstances, and hence concluded that the transactions are collusive in nature between buyer and seller.

9 Kailash Chandra Gupta HUF

has stated that all these transactions are make-believe arrangements and truth or genuineness must prevail over the smokescreen created by assessee to impart a colour of genuineness. Hence, the Ld. AO denied the LTCG claim u/s. 10(38) of assessee and held the same as income u/s. 68 of the Act. Apart from this, the AO is of the opinion that such transactions cannot be accommodated without payment of commission of a minimum of 3% to entry operators and hence he has added Rs. 1,55,243/- u/s. 69C of the Act. After making the addition, the AO has initiated penalty proceedings u/s. 271(1)(c) of the Act and completed the assessment u/s. 143(3) of the Act.

d) Broker’s contract notes and other supporting documents were filed in support of sale and purchase of shares.

e) There is nothing specific to assessee incriminating him to deny the benefit of LTCG. The Ld. CIT(A) relied on 3 decisions of Hon'ble ITAT, on the above lines and allowed the appeal of the assessee.

10 Kailash Chandra Gupta HUF

11 Kailash Chandra Gupta HUF

this transaction, nor the Ld. CIT(A) touched various crucial aspects like price rise and dip of share, company fundamentals lack such steep rise in the scrip, buyers of shares have not responded nor filed Return of Income, detailed note on operators, modus operandi to jack up the price of share, exit operators, shell companies, report of Investigation Directorate, usage of shell companies, theory of preponderance of probabilities etc. and hence submitted that the order of the Ld. CIT(A) should be set aside and the order of Ld. AO to be restored.

a) All the share purchases and sales are done through bank accounts. b) The assessee has produced the contract notes of broker in proof of purchase and sale of shares.

c) The transactions were done through registered brokers and through stock exchange. d) The AO’s allegation that unaccounted cash was introduced/routed through is baseless.

e) The assessee was not given opportunity to cross-examine the parties whose statements were mentioned in assessment order and relied upon by AO to make huge addition. f) The assessee is not a party to any manipulation of share price. g) The Kolkata Investigation Directorate has not mentioned the name of assessee anywhere that he is a party to any manipulation of share rice.

h) There is no basis for making addition u/s. 68 as the transaction is accounted for in his books. i) The addition u/s. 69C is uncalled for because he has not paid for any commission to any party and no proof was adduced by the Department to make this addition also.

12 Kailash Chandra Gupta HUF

j) The Ld. AR filed a paper book which contained several cases-law for the proposition that the additions u/s. 68 and 69C cannot be sustained under similar circumstances.

Decision of Bench

a) There was on extensive and exhaustive search by Investigation Wing of Kolkata which unearthed a scam of fictitious claim u/s. 10(38) of I.T. Act relating to LTCG involving several operators, intermediaries who have artificially jacked up the price of certain shares which does not have any fundamental financials. These operators helped various assessees all over the country to claim false LTCG exemption by routing the monies through more than 70 shell companies. The modus operandi of jacking up the prices of penny stocks was mentioned by the AO in his assessment order. b) Statements of all operators were recorded by Investigation Wing of Kolkata who confirmed the scam. c) The SEBI found involvement of this syndicate of operators act as accommodation entry providers have chosen this scrip to rig the prices to provide bogus capital gain and capital loss to various beneficiaries. It was mentioned by Ld. AO that these operators were restrained by SEBI to trade in the market. Securities Appellate Tribunal (SAT) has also confirmed the findings of SEBI. The assessee traded in very few scrips and there the assessee got market related profits/losses whereas only in this scrip, the assessee has got this huge profit which is not the case neither in earlier or subsequent years. d) The assessee could not explain the reason for such steep rise and of share price despite there are no commercial operations in company.

13 Kailash Chandra Gupta HUF

But, the Ld. CIT(A) has missed out several crucial facts mentioned by Ld. AO in his assessment order, mainly the weak financial fundamentals of company and astronomical rise in the price of scrip, statements recorded by Investigation Wing of Kolkata, existence of exit providers and shell companies, collusion between the operators, notices given to buyers of shares returned either unserved or there is no response from them, all India scam of misuse of Section 10(38) of Income Tax Act, collating the circumstantial evidence which leads to manipulation of share price in detail etc. He has not given any decision on all these direct and indirect evidences and based on peripheral documents submitted by assessee decided the issue in favour of the assessee. Thus, the Ld. CIT(A) has committed serious error in not adjudicating above several issues raised by Ld. AO in his assessment order and hence his order is reversed.

14 Kailash Chandra Gupta HUF

The Ld. AR of assessee has filed a paper book containing 26 cases-law during the course of hearing and these cases were decided in favour of assessee mainly on the following grounds :- a) The transactions were made through banking channels. b) The transactions are done on the floor of stock exchange. c) The shares bought and sold are reflected in the demat account. d) The related broker’s contract notes were filed before AO. e) The assessee was not afforded the opportunity to cross-examine the operators of scrips who have stated on oath before the I.T. Department Investigation Wing of Kolkata, that they have manipulated illiquid scrips on stock exchanges with the help of brokers and in the process routed the money and transactions through more than 70 shell companies. f) The assessee is not implicated by the operator of shares. g) The assessee has not participated in the artificial price hike of the shares purchased by him. h) Investigation report of Investigation Directorate was not furnished to him.

15 Kailash Chandra Gupta HUF

not totally depend only on the report of Kolkata Investigation Directorate while making addition. b) The Ld. AO, brought lot of evidences –direct and indirect-in our impugned case. He has culled out the details of exit providers details, names of more than 70 shell companies utilised to route through the unaccounted money etc. which is absent in all these cases relied on by assessee. c) The Ld. AO, has demonstrated in the assessment order about price movement of scrip, the financial fundamentals of the company which shows that there is hardly any business and EPS is close to “Zeor” and the price claimed by the assessee cannot command such huge price in the normal course of share market. This aspect was not the subject matter of any of these 26 cases relied on by assessee. d) One of the case relied on by assessee, Shree Dilip B. Jiwarajka where Hon'ble ITAT passed order in favour of the assessee because the SEBI has revoked the orders passed against the operator of that scrip. But, in our impugned case, not only SEBI, even the Securities Appellate Tribunal (SAT) confirmed the order to demonstrate that the price of scrip was rigged, as mentioned by Ld. AO in the assessment order. e) In the case of PCIT Vs. Ziauddin A. Siddique, Hon'ble Bombay High Court (relied on by assessee) passed an order in favour of the assessee, in the case of penny stock, because the Ld. AO did not disbelieve the documentation involving sale and purchase of shares. In our impugned case, the Ld. AO, has conducted enquiries with alleged buyers of shares by issuing notices u/s. 133(6) of the Act and found that the buyers have not responded to the notices. He further enquired with the AO of one of the alleged buyer of shares of huge chunk and paid more than Rs. 11 lakhs did not even file a Return of Income. Thus, the AO disbelieved the version of sale of

16 Kailash Chandra Gupta HUF

shares and made addition in our case. In fact, the Ld. AO extensively mentioned the role of brokers, operators, exit providers, shell companies etc. So, the facts are distinguishable. f) In none of the 26 cases relied on by Ld. AR, the SEBI has barred and penalised the operators and SAT has confirmed the manipulation tactics, unlike in our case, as mentioned in assessment order. g) With respect to the arguments that transactions done through banking system, through stock exchange etc, it is pertinent to note that these make-believe arrangements should not be taken on the face value. In the case of Kachwala Gems, Hon'ble Supreme Court has held that payment by cheque is not conclusive. Similarly, if the argument of assessee that the shares bought through stock exchange, is to be considered as genuine, there is no need of watchdog organisation like SEBI and Appellate Authority like SAT, where they confirmed the penal action on manipulation tactic of some of brokers/operators involved in penny stocks. h) In the case of Rajesh Babulal Vardhan, (case relied on by Ld. AR of assessee), the share price of the penny stock was in the range of Rs. 360/- to 600/- per share for a period of 15 months, and it appears for this reason, the Hon'ble ITAT gave relief to assessee unlike in our assessee’s case-the high price was reflected in stock exchange for a very short span and then the share price became less than Rs. 2/- for a long time, and stayed there. Thus, this case is also distinguishable on facts. i) As far as the contention of not providing cross-examination of entry operators to the assessee, it was held by Hon'ble Supreme Court that right to cross-examination is not part of principles of natural justice and this will not vitiate the proceedings of assessment and the cases are discussed elsewhere in this order.

17 Kailash Chandra Gupta HUF

j) The case of PCIT Vs. Kuntala Mahapatra, relied on by Ld. AR of assessee which was decided by Hon'ble Supreme Court, is not applicable here as in that case, only the SLP of Revenue was dismissed. But, in similar circumstances, Hon'ble Supreme Court dismissed SLP of assessee in Suman Poddar’s case. k) In this case of Indravadan Jain, Hon'ble Bombay High Court, the assessee relied on the issue of penny stock u/s. 10(38) because no opportunity was provided to the assessee and assessee was not directly involved in price rigging of share price. In our case on hand, the Ld. AO gave several details in the assessment order regarding structured deals and pre-conceived orders in these shares, synchronized timings while buying on the floor of stock exchange, buying shares by same person from assessee, buyers of shares from our assessee were not responding to assessee etc. shows active involvement of assessee in artificially increasing the price of shares. Moreover, the Ld. AO did not make addition only based on the statements of operators of shares. He made the addition taking into all circumstances mentioned in the assessment order and thus the case is distinguishable on facts. We would place our reliance on Sanjay Bimalchand Jain, 89 Taxman.com 196(Bom), where Hon'ble Jurisdictional High Court upheld the addition of Ld. AO regarding the penny stock and denied the long term capital gain exemption claim u/s. 10(38) because the penny stock appreciated multi-fold without fundamentals of company and the facts are similar to our impugned case and hence the addition is upheld.

a) There is no denial of assessee’s contention that the transactions are done through bank, contract note of brokers were submitted, transaction took place through stock exchange, cross examination

18 Kailash Chandra Gupta HUF

of operators was not afforded to the assessee before making the addition, assessee’s name was not implicated by the operators etc.

b) On the same analogy, there is no denial of the facts that an extensive search and seizure operations were conducted by the Investigation Directorate of Kolkata, the operators have confirmed that they artificially jacked up the prices of penny stocks and allowed these assessees to sell at higher prices with a malafide intention of getting undue benefit by claiming exemption u/s. 10(38) of the Act. Similarly, there is no denial by the assessee that more than 70 shell companies were utilised to route through the unaccounted money as mentioned by Ld. AO in the assessment order. There is also no denial that all purchase and sale of shares are pre-conceived and pre-structured ones in the stock exchanges as demonstrated by Ld. AO, because no prudent investor would buy the shares at such exorbitant rates when our impugned assessee sells the shares especially when there are virtually no commercial operations in the company for almost 5 years and there are no profits.

c) Let us analyse the company of M/s. Splash Media and Infra Company shares claimed to have been purchased by our assessee at Rs. 4/- and claimed to have sold @ approximately Rs. 100/- (after adjusting bonus and split of shares). The total shareholding sold by assessee is 1,80,000 after considering the bonus and split. The Ld. AO in his tabular form has analysed the financials of company for 5 years which shows the total turnover is Rs. 8 crores for 5 years, net profit is Rs. 2 crores, no raw material was purchased, no power and fuel expenses were mentioned, the EPS ranges between 0.07 to 0.01, gross block of assets between Rs. 4 lakhs to Rs. 44 lakhs, no opening and closing stock, no work-in- progress, no sundry debtors and creditors in the profit and loss

19 Kailash Chandra Gupta HUF

account and Balance-Sheet. With such weak fundamentals no share can command a price of Rs. 100/- (after adjusting bonus and split shares) in stock exchange, i.e. an appreciation of almost 2500% within a short span of less than 2 years. These facts amply prove that the share prices were manipulated to the advantage of assessee to claim false LTCG. When seeing from this background coupled with statements of operators, existence of more than 70 shell companies found during search and seizure operations, picture becomes clear that the transactions are tainted and a fraudulent claim u/s. 10(38) was made by the assessee.

d) The Ld. AR of assessee did not controvert the findings of AO that the transactions are pre-conceived and structured, i.e. the purchasers and sellers have colluded to see that desired price is shown on the platform of stock exchange. Otherwise, it is impossible that such huge share holding was liquidated within very short span. The fact of collusion and existence of exit providers are hand in glove with buyers also were also not controverted.

e) The Ld. AO has conducted enquiries with the AO of alleged buyer of shares and found that the buyer who bought 45600 shares for Rs. 11,60,250/-was not even filing the Return of Income. The Ld. AO has issued notices u/s. 133(6) of the Act to all buyers of shares from our assessee and none of them have responded when they were asked to come to I.T. Office with copy of Return of Income, bank statement etc. In such circumstances, the addition u/s. 68 as unexplained cash credit is squarely applicable.

f) A very significant point, as noted by Ld. AO, is that not only Investigation Wing of Kolkata Income Tax Department, but also the watchdog of share market- Securities, and Exchange Board of India, (SEBI) has classified M/s. Splash Media and Infra Ltd. as penny

20 Kailash Chandra Gupta HUF

stock, found this syndicate of people acts as accommodation/ entry/exit providers where they chose certain scrips and jack up the share price to provide fictitious capital gain/loss to various parties. At page 25 of assessment order, Ld. AO has mentioned that SEBI has restrained these persons from share market for a considerable period. The Securities Appellate Tribunal (SAT) has also upheld the findings of SEBI in this regard. None of these facts mentioned by Ld. AO were controverted by Ld. AR at any point of time. Hence, all these transactions of issuing and getting cheques, obtaining brokers contract notes, transaction through stock exchange and demat account done by our impugned assessee are nothing but make- believe arrangements and colourable devices to bring their unaccounted money into their books of account as exempt income.

g) The menace of obtaining bogus LTCG through penny stocks was recognised by Central Board of Direct Taxes which works under Ministry of Finance, and it has directed the Department to contest the decision of CIT(A)/ITAT/HC on merits by filing appeals in penny stock cases, even if the tax effect is less than the threshold fixed for filing appeals.

h) Thus, from the cases relied on in this order, it can be seen that the scam of penny stocks had spread its wings from Delhi to Chennai and Gujarat to Gauhati, i.e., all over country, the Tribunals/ courts held the decisions in favour of Department, in some cases, SEBI/SAT have penalised the operators, thousands of assessees have opted for Vivad Se Vishwas Scheme by withdrawing the claims of penny stock, pending in appeal at that time. Subsequent to this scam, the period of holding the share to claim long term capital gain and taxing the same were introduced in the Income Tax Act with suitable amendments. Central Board of Direct Tax has amended its circular and directed all Assessing Officers to file further appeals

21 Kailash Chandra Gupta HUF

and contest the matter in ITAT and Courts, irrespective of monitory limits involved in the claims of assessee.

Following judicial decisions are relied upon to confirm the addition made by Ld. AO in the similar circumstances :-

(1) Principal CIT Vs. Swati Bajaj 139 Taxman.com 352(Kol)(2022) : Almost all the objections/grounds raised by the assessee against the addition made by Ld. AO are answered by the Kolkata High Court in this case. Heavy reliance is placed on this decision because it is the culmination of collective wisdom of 22 Advocates who argued this case on behalf assessees, 7 Advocates on behalf of the Revenue and more than 100 decisions of various Courts/Tribunals were cited by both parties – assessee and Revenue to forward their arguments for and against the additions made by the Income Tax Department as almost 90 appeals of various assessees were clubbed and heard as the issue is common in all these appeals – various penny stocks were used to manipulate the share price and claim exemption u/s. 10(38) of the Act. Several arguments were made and heard by Hon'ble High Court of Kolkata in this batch of cases. The Hon'ble High Court of Kolkata gave lot of importance to this case because it may create precedent to various other cases in the country as the report of DGIT(Inv) Kolkata found accommodation entries relating to claim of LTCG relating to 64,811 beneficiaries and the amount involved is above Rs. 38,000 crores. This scam is only by Kolkata operators and similar manipulations done were found by Delhi and Mumbai Investigation Directorates of Income Tax. The reports indicated the involvement of 22 Brokers who were covered in the investigation, purchase and sale of price was rigged in 84 company shares. The report further stated that several big brokers like Anand Rathi, Religare and SMC were also involved and all manipulations were done through stock exchanges and several dummy/shell companies bank accounts were utilised and the

22 Kailash Chandra Gupta HUF

Department was able to establish full trail of cash to the extent of Rs. 1575 crores. (Para 53 of Hon'ble Kolkata High Court decision).

The assessee’s contention that investigation report of DGIT(Inv) Kolkata was not furnished to her and cross-examination opportunity was not provided to her was dealt by Hon'ble Kolkata High Court and it was held that these issues will not vitiate proceedings of Revenue nor they are required to be given to assessee because the respective AOs have clearly mentioned the nature of investigation done states that the investigation was commenced not from assessee’s end but the individuals who dealt with these penny stocks were targeted. It is equally true that the assessee could not establish the prejudice caused to them for not giving opportunity to cross-examine them. (Paras 55 to 67 of Hon'ble High Court decision).

Thus, not giving cross-examination opportunity did not and would not vitiate the proceedings as whatever information to be given to each assessee, was already given and necessary notices u/s. 143(2)/142(1) mentioned required particulars by the concerned Assessing Officers. Thus, full opportunity was afforded to the assessee, held by Hon'ble Kolkata High Court. The next argument of the assessee is that they were not implicated in the Investigation report also does not hold much water, it was held in the following words :-

To reiterate, the assessee were not named in the report and when the assessee makes the claim of exemption, the onus of proof is on assessee to prove the genuineness. Unfortunately, the assessees are harping on the transactions done by them and by relying on the documents in their hands to contend that Department should prove the steep rise in the scrip is not genuine, which is incorrect.

Another argument forwarded by the assessee is that section 68 is not applicable to them because of the fact that transactions are done through

23 Kailash Chandra Gupta HUF

bank, stock exchange, broker and reflected in books of account etc. The Hon'ble Kolkata High Court rebutted these arguments by saying that one of the key element to be satisfied for non-applicability of section 68 is “genuineness of transactions”. Here the genuineness of transaction was attacked by Revenue on many counts – eg., statements of operators, astronomical rise of share price despite weak fundamentals of company, utilising 77 shell companies to route the transactions etc.

It was further held by Hon'ble Kolkata High Court in this regard as follows :-

“The assessee cannot escape from the burden cast upon him and unfortunately in these cases, the burden is heavy as facts establish that the shares which were traded had phenomenal and fanciful rise and short fall in price in short span, which led to LTCG/STCL. Therefore, until the assessee discharges his burden of proof, the addition made by the AO cannot be faulted.”

The Hon'ble Kolkata High Court has dealt with this issue of section 68 by relying on various decisions like N.R. Portfolio Pvt. Ltd., A Govindarajulu Mudaliar Vs. CIT 205 ITR 802 (SC), Full Bench decision of Sophia Finance Ltd. 205 ITR 98 (Del), Nova Promoters Finlease (P) Ltd. 342 ITR 169 (Del), CIT Vs. Nipun Builders Ltd. 350 ITR 407 and held that mere issuance of cheque and providing bank detail would not be sufficient to discharge the liability of assessee in view of the link between entry providers and incriminating evidence.

In this case of Swati Bajaj, Hon'ble Kolkata High Court has mentioned that several assessees who were involved in this penny stock scam all over the country availed Vivad Se Vishwas Scheme, paid taxes and withdrew their appeals pending at various stages at that time.

In this case of Swati Bajaj, the Ld. CIT(A) has confirmed the addition made by AO by holding that payments were made through bank, transactions were done through stock exchange and other features are only

24 Kailash Chandra Gupta HUF

apparent features and the real feature were manipulated with abnormal price upwards and sudden dip thereafter and held that the transactions would fall within the realm of suspicious and dubious transaction. Thus, the Ld. CIT(A) concludes by holding that considering the facts of the assessee’s case and the preponderance of probabilities against the assessee, the entire capital gains demand has to be treated as fictitious and bogus more particularly when the assessee has not furnished cogent evidence to explain how the shares in an unknown company jumped up so fast and such fantastic sale price was not at all possible when there was no economic or financial basis to justify the price rise and therefore affirmed the order passed by the AO. Aggrieved by the order of the Ld. CIT(A), the assessee filed appeal to ITAT, and then the matter travelled to High Court and Hon'ble Kolkata High Court delivered a landmark judgement on the lines mentioned above. As the contentions and issues are similar to that of our impugned assessee, reliance is placed on this decision.

(2) In the case of Sanjay Bimalchand Jain, 89 Taxman.com 196 (Bom), Hon'ble Bombay High Court held as follows :-

“In this case, the assessee had purchased shares from the penny stock companies for a lower amount and within a year, sold such shares at higher amount and the assessee has not tendered cogent evidence to explain as to why shares in unknown company jumped to such a higher amount in no time and also failed to provide details of persons, who purchased the said shares, the transaction was held to be an attempt to hedge the undisclosed income as LTCG. It was also held that the assessee had indulged in a dubious share transaction meant to account for undisclosed income in the garb of long term capital gains and thus, exemption u/s. 10(38) could not be granted to the assessee”. In this Hon'ble Jurisdictional High Court’s case, the broker did not respond to the notices issued by the AO, whereas in our impugned case, the alleged buyers of shares did not respond to notices issued by Ld. AO. As the circumstances are similar, addition made by the AO had to be confirmed. In this case of Mr. Sanjay Jain also, assessee was not afforded any right to cross-examination, and assessee claimed that the transactions were done through bank and stock exchange, but Hon'ble Bombay High Court still confirmed the addition made by the AO.

25 Kailash Chandra Gupta HUF

(3) Similarly, Hon'ble Delhi High Court in the case of NDR Promoters (P) Ltd. held that where the assessee created lot of paper work to camouflage the transactions of bogus nature to look like genuine, there is no need of cross- examination.

(4) Reliance is placed on Hon'ble Delhi High Court’s decision of Suman Poddar Vs. PCIT, where it was held that the share transactions were bogus because the company whose shares allegedly purchased were of penny stock and this decision was affirmed by Hon'ble Supreme Court vide 112 taxman.com 330 (SC)(2019). The Hon'ble court has opined that in this type of cases, cross-examination opportunity is not required because statements and other material found in the course of investigation were used as a corroborative material to strengthen the findings of AO. The AO made the addition based on several factors and analysis to prove that there is no genuineness in the transaction and utilised the statements of operators as corroborative evidence only.

(5) Reliance is placed on the decision of Hon'ble Supreme Court in the case of SEBI Vs. Kishore R. Ajmera (2016) 66 taxman.com 288 for the proposition that direct evidence is not material, and it was held as follows:-

“Court has pointed as to the important aspect with regard to the proximity of time between the buy and sell orders, prior meeting of minds, unnatural rise in the prices of the scrips and how the conclusion can be gathered from various circumstances coupled with preponderance of probabilities. At para 26, Hon'ble Supreme Court held “According to us, knowledge of who the 2nd party/client or the broker is not relevant at all. While the screen based trading system keeps the identity of parties anonymous, it will be too naïve to rest the final conclusions on said basis which overlooks a meeting of minds elsewhere. Direct proof of such meeting of minds elsewhere wound rarely forthcoming. The test would be is one of preponderance of probabilities............ In this case, Hon'ble Supreme Court dealt with the circumstances of synchronous trade of illiquid scrips (as mentioned by the AO in the assessment order in our case on hand also) and confirmed the order of Securities Appellate Tribunal w.r.t imposition of monetary penalties on brokers. The ratio laid down by Hon'ble Apex Court in this case is that, in

26 Kailash Chandra Gupta HUF

similar circumstances, circumstantial evidence can be taken into account.”

(6) In the case of CIT Vs. Pushpa Malpani, Hon'ble Gujarat High Court, dismissed the Revenue’s appeal in the case of Penny stock on the ground that the broker in question was not banned by SEBI. Conversely, in our case on hand, the AO, in the impugned assessment order has mentioned that the operators were banned from trading for a particular period. Hence, the addition made by the AO on this ground, is confirmed.

(7) Similarly, in the case of SEBI Vs. Mega Corporation Ltd. 136 taxman.com 333, while dealing with a case of income earned through price manipulations of share, held that right to cross-examination of a person who gave a complaint, was rejected by Hon'ble Supreme Court.

In the case of PCIT Vs. NRA Iron and Steel (P) Ltd., 110 taxman.com (8) 491, Hon'ble Supreme Court has held that the creditworthiness of the buyer has to be established even though transaction is by cheque, as one of the tests regarding applicability to section 68 of the Act. The accommodation entries were held to be bogus by Hon'ble Supreme Court. In the case on hand, the Ld. AO has issued notices to the alleged buyers of shares claimed by assessee, but it was mentioned in the assessment order that none of these buyers have responded to the notices. The Ld. AO even went to the extent of finding out the assessment details of buyers with the concerned AO and found that one of them is non-filer even though he bought shares worth Rs. 11.5 lakhs at one go from our assessee. On this count also, the addition made by the AO is confirmed.

(9) In the case of Smt. Thara Kumari Vs. PCIT, Hon'ble Madras High Court upheld the addition made by the AO by disallowing the exemption claimed by assessee u/s. 10(38) because the price of scrip M/s. Luminaries Technologies Ltd., was artificially jacked up after referring to the report of Investigation Directorate of Kolkata. Similar is the scrip “Splash Media & Infra Ltd.” in the

27 Kailash Chandra Gupta HUF

case on hand and accordingly reliance is placed on this decision to uphold the addition made by AO.

(10) In the case of CIT Vs. Nova Promoters Finlease (P) Ltd. 18 taxman.com 217 (Del) and Kachwala Gems Vs. CIT (SC), the Hon'ble Courts have held that payment by cheque is not conclusive proof. In our case, the Ld. AR of assessee claimed that the transactions were done through cheque. But, the “test of genuineness” still comes into play. When Ld. AO issued notices u/s. 133(6) of the Act, none of so-called buyers of shares from our assessee have responded nor did they file returns of income even though the sale consideration claimed to have been exceeded Rs. 10 lakhs.

(11) In the case of Udit Kalra ITA No. 220/2009, Hon'ble Delhi High Court held that the company had meagre resources at disposal, negligible profit, but there was unusual and very high growth in the share price which does not support the same, the transaction was held to be sham.

(12) In the case of NR Portfolio (P) Ltd. Vs. CIT ITA No. 1018/2011 dated 22.11.2013, Hon'ble Delhi High Court has held that even though the money was received through cheques, it was observed that the same did not reflect actual genuine business activity. The subscribers did not have their own profit making apparatus. It was held that the bank accounts did not reflect the creditworthiness and genuineness. In our case too, the buyers of shares did not respond to the notices issued by Ld. AO, not to speak of confirming the transaction. So, the contention of Ld. AR of the assessee that the transaction is through cheque, banking channels come to the rescue of assessee in terms of addition by AO. Moreover, the existence of Exit Providers and shell companies give rise to the thought of sham transaction.

(13) In the case of Sanat Kumar Vs. ACIT Delhi, Circle 36(1), Hon'ble ITAT Delhi Bench has held that the so-called sale proceed of shares received and claimed as exempt u/s. 10(38) was held to be sham transaction because of

28 Kailash Chandra Gupta HUF

huge price rise of shares at the time of sale despite the fact that company’s profits are negligible and did not support such price rise.

(14) In the case of Satish Kishore Vs. ITO Delhi, ITA No. 1704 of 2019 dated 6.8.2019, Hon'ble ITAT Delhi has held that the transactions of penny stock are manipulated ones to get arranged benefits to claim false exemption u/s. 10(38) because there is a cartel of brokers involved in jacking up the scrip without corresponding profit/prospects of company. All the contentions of assessee that he was not given cross-examination opportunity, transactions were done through stock exchange and money received through banking channels were considered and then only the exemption u/s. 10(38) was denied because these affairs are all pre-conceived and arranged affairs which lack genuineness. The same decision was rendered in the case of Sandeep Bhargava Vs. ACIT Delhi, 109 taxman.com 174 (Delh-Trib).

(15) In the case of Hitendra Ghadia Vs. DCIT, Hon'ble ITAT Mumbai, it was held that issuance of bonus shares and splitting of shares happens only when there is huge demand for shares and there is high profitability and liquidity in shares. In these cases, to make share available to every interested investor and to unleash the maximum possible value of shares, giant companies of respective industries carry such type of practice. A company with negligible investor base, negligible networth and profit and alomost ‘Zero’ EPS, adopting such type of splitting shares is not digestible from layman point of view and all these are abnormal phenomena, especially when the Kolkata Investigation Wing of Income Tax Department held such transactions as sham only to get fraudulent benefit u/s. 10(38) of the Act. The scrip which skyrocketed was classified by SEBI as “Penny Stock” like that of our case. After taking into consideration all the contentions of transactions through banking channel, stock market cross-examination opportunity was not given were considered and it was held to be sham transaction. Similar decisions were rendered by the Coordinate Benches of Mumbai in the following cases too :-

29 Kailash Chandra Gupta HUF • Shri Bhadresh Mansukhlal Dodhia Vs. ACIT Kalyan, ITA No. 5544/Mum/2018 dated 6.1.2021. • ITO-24(3)(1), Mumbai Vs. Arvind Kumar Jain HUF, Mumbai ITA No. 4862/Mum/2014 dated 18.9.2017 • Vijayrathan Balkishan Mittal Mumbai Vs. DCIT ITA No. 3428/Mum/2019 • Ratnakar M. Pujari Vs. ITO, Ward 25(3)(3), Mumbai • Dinesh Kumar Tulsiyan Vs. ITO ITA No. 813/Pune.

(16) Hon'ble Supreme Court in the case of Pavan Kumar Vs. ITO (2018) 97 taxman.com 398(SC) has held that the credits introduced by assessee through banking channels were held to be sham because the assessee failed to produce the lenders before I.T. Department for verification. In the impugned case, the buyers of shares from our assessee have not responded to the notices issued by Ld. AO.

(17) Shamim M. Bharwani Mumbai Vs. ITO-19(3)(4), Mumbai ITA No. 4906/Mum/2011 (A.Y. 2006-07), Hon'ble Mumbai ITAT : In this case, Hon'ble ITAT referred to the case of Ziauddin A. Siddique ITA No. 4699 and 4700/Mum, where the findings of the CIT(A) were reversed and held that, a penny stock company, Eltrol Ltd., exposing the modus operandi adopted by assessee, in the case of such stocks, the price, de-horse any fundamentals or other factor, of paper companies being raked up on the exchange, so as to yield “gain” and then again, equally, without basis, grounded to yield “loss”, both of which, i.e., “gain” and “loss” find ready customers or takers. The purpose is to evade tax. The Ld. CIT(A) wrongly dismissed the Revenue’s case by glossing over the many attendant facts and incidents, the most vital, and on which we observe complete silence or absence of any explanation, is the absence of any credentials of investor-company. It was further held that the documentary evidence in the face of unusual events, as prevailing in the instant case, and without any corroborative evidence, cannot be regarded as conclusive. For the scrip to trade 50 times its face value, in the absence of trail blazing performance or great business prospects in future, by all counts, it is a paper company and reverse the findings of first appellate authority and confirm the impugned sum u/s. 68 of the I.T. Act.

30 Kailash Chandra Gupta HUF

(18) In the case of M.K. Rajeshwari Vs. ITO, the coordinate bench of the Tribunal has held that while dealing the issue of long-term capital gain accrued to the assessee, one has to examine the financials of the company whose shares were inflated within a short period and after the sharp rise in the price of shares, it again comes down. It was held as follows :-

“In the light of the ratio decidendi of the cases cited above, the contention of the assessee that the transaction leading to long-term capital gains are supported by documents such as sale and purchase invoices, bank statement etc., cannot be accepted. In view of the facts and circumstances of the case brought on record by the Assessing Officer after proper examination of the material facts and taking into account corroborating evidences gathered by the Directorate of Income-tax (Investigation), Kolkata, involving a network of brokers and operators engaged in manipulation of market price of the shares of the HBC bioscience controlled and managed by such person with a purpose to provide accommodation entries in the form of long- term capital gains. The onus was on the assessee to prove the transaction leading to claim of long-term capital gain was a genuine transaction. The assessee failed to justify manifold increase in the prices of the share of 'HBC bioscience' despite weak financials of the company. Initial investment in the company of unknown credential and subsequent jump in the share prices of such a company, cannot be an accident or windfall but could be possible, because of manipulation in the share prices in a preplanned manner, as brought on record by the Assessing Officer. In view of the failure on the part of the assessee to discharge his burden of proof and explain nature and source of the transaction, in our opinion, the Ld. CIT(A) has rightly confirmed the addition in dispute, which does not require any interference on our part. We accordingly, uphold the action of the Ld. CIT(A) on the issue in dispute and dismiss the grounds raised by the assessee on this issue.”

(19) In the case of Rajkumar B. Agarwal vs. DCIT (ITAT Pune), Bench “B” ITA Nos. 1648 & 1649/PUN/15, it was held as follows :- “The assessee completed paper-trail by producing contract notes for purchase and sale of shares of PIL. Mere furnishing of contract notes etc. does not inspire any confidence in the light of facts. Test of human probability should be applied and apparent should be ignored to unearth the harsh reality (Sumati Dayal 214 ITR 801 (SC) & Durga Prasad More 82 ITR 540 (SC) applied)”.

(20) In the case of Pooja Ajmani Vs. ITO (ITAT Delhi) April 25, 2019 ITA No. 5714/Del/2018, it was held as follows :-

31 Kailash Chandra Gupta HUF

“10(38) Bogus Capital Gains From Penny Stocks : u/s. 101 of Evidence Act, 1972, the onus is on the assessee to prove that the LTCG is genuine. The assessee cannot on failure to establish a prima facie case, take advantage of the weakness in the AO’s case. The jump in the share price of a company of unknown credentials cannot be an accident or windfall but is possible because of manipulations in a pre-planned manner by interested broker and entry operators. The LTCG transactions are a sham”.

(21) Abhimanyu Soin Vs. Asst, Cit, Circle VII, Ludhiana, ITAT, Chandigarh, Bench A, ITA No. 951/chd/2016

“On consideration of the facts of the case as a whole it cannot be accepted that the assessee can have long term capital gains of Rs. 80,25,291/- within 17 months of buying of shares at Rs.2,72,000/- a non-descript company incorporated in 2007 which got merged in 2009. This cannot be a case of intelligent investment or a simple tax planning to gain benefit of long term capital gains”.

(22) Mrs Vidya Reddy Vs. ITO International Taxation, Ward-1(2), Chennai ITAT, D Bench, Chennai

“All these trading patterns show that LTCG admitted by the assessee is arranged one. The payment of Security Transaction Tax was to paint credit worthiness to the transaction and claim exemption u/s. 10(38). In view of the information provided by the Investigation wing, Kolkata, the recommendations of SIT on Black money etc, the AO required the assessee to prove her claim of exemption. After considering her reply etc. held inter alia that it is clear that the assessee has manipulated the sale of shares within a span of time in collusion with the brokers in order to earn tax free exempt Long term capital gain on sale of shares u/s 10(38) etc”.

(23) In the case of Somnath Maini Vs. CIT 306 ITR 414, the Hon'ble Punjab & Haryana High Court, held that claim of genuineness of transactions can be rejected even if the assessee backs the same with evidence which is not trustworthy. Hon’ble Income Tax Appellate Tribunal – Chandigarh, in the case of Assistant Commissioner of Income Tax Vs. Som Nath Maini by placing reliance on the decision of Hon’ble Supreme Court in the case of Durga Prasad More (2002) 3 BOMLR 747, 2003 (1) MhLj 420 has observed as under :- "It is true that when transactions are through cheques, it looks like real transaction but authorities are permitted to look behind transactions and find out the motive behind transactions. Generally, it is expected that

32 Kailash Chandra Gupta HUF

apparent is real but it is not sacrosanct. If facts and circumstances so warrant that it does not accord with the test of human probabilities, transactions have been held to be non-genuine, it is highly improbable that share price of a worthless company can go from Rs. 3 to Rs. 55 in a short span of time. Mere payment by cheque does not render a transaction genuine. Capital gain tax was created to operate in a real world and not that of make belief. Facts of the case only lead to the inference that these transactions are not genuine and make believe only to offset the loss incurred on the sale of jewellery declared under VDIS. In the totality of facts and circumstances of this case and material on record, we are of the considered view that the CIT(A) was not justified in deleting the impugned addition We accordingly set aside the order of the CIT(A)and restore that of the AO.”

(24) Chennai ITAT in the case of Rajnish Agarwal Vs. ACIT has held that the penny stock of SRK Industries Ltd. is not having any financial strength of its own and the sale and purchase of these shares were held to be sham and LTCG u/s. 10(38) was denied to the assessee.

(25) Similarly, in the cases decided by various Tribunals of the country as mentioned below also, have held that the penny stocks without financial fundaments to support the astronomical price rise of hundreds of times within short span of one to two years, are sham transactions and LTCG claim u/s. 10(38) was denied to them :

a) Usha Chandresh Shah ITA No. 6858/Mum/2011, Mumbai b) Zakrullah Chaudhary ITA No. 669/PN/2012, Pune c) Chandan Gupta ITA No. 7024/Mum/2010, Mumbai d) Chandan Gupta ITA No. 550/Chd/2008 dated 26.9.2013 Chandigarh e) Napar Drugs Ltd. 98 ITD 265, Delhi f) Dinesh Kumar Khandelwal HUF Vs. ITO ITA No. 58/Nag/2015 dated 24.8.2016 h) Ratnakar M. Pujari Vs. ITO 9951/Mum/2012 dted 3.8.2016

(26) In the case of CIT(A) Vs. Jasvinder Kaur 357 ITR 638 also, Hon'ble Gauhati High Court has held that price manipulations of penny stocks analysed by AO was on correct footing and held that assessee was not eligible for LTCG u/s. 10(38) of the Act.

33 Kailash Chandra Gupta HUF

a) various cases-law mentioned in this Appellate Order b) facts and circumstances narrated by Ld. AO in the assessment order like weak financial fundamentals of company, virtually no business was conducted for 5 years by M/s. Splash Media and Infra.

c) artificially jacking up the price of shares without financial back- up.

d) structured and pre-conceived trades on stock exchange. e) buyers of shares are not responding to notices issued by Ld. AO.

f) existence of exit providers, extensive investigation done by Kolkata Investigation Wing done after search and seizure operations by Income Tax Department.

g) ban order on the operators of this scrip by SEBI/SAT. h) circumstantial evidence like the assessee did not get such huge profit in any other scrip over a period of 5 years.

i) involvement of more than 70 shell companies in the scam. j) the Ld. AO made the addition based on all the above factors, facts and circumstances cumulatively narrated in assessment order and statements of operators is only one of the factor and supplementary to the main arguments of Ld. AO.

34 Kailash Chandra Gupta HUF

Order pronounced in the open court on 26th July, 2024.

Sd/- Sd/- (Kavitha Rajagopal) (Omkareshwar Chidara) Judicial Member Accountant Member

Mumbai : 26.07.2024 Copy of the Order forwarded to : 1. The Appellant 2. The Respondent 3. The CIT(A) 4. CIT 5. DR, ITAT, Mumbai. 6. Guard File. BY ORDER, //True Copy//

(Assistant Registrar) PS ITAT, Mumbai