G.NARENDAR CHORDIA ,CHENNAI vs. ITO NCW 5(2) , CHENNAI

आदेश / O R D E R

These are appeals filed by the assessees who are brothers,

directed against orders dated 30.06.2017 of ld. Commissioner of

Income Tax (Appeals)-5, Chennai.

Grounds taken by both the assessees are similar and assails 2.

the reopening done for the impugned assessment year as well as

merits of the additions done under the head ‘’income from other

sources’’.

working as Plant head manager operation in Medopharm and

assessee Shri. Hastimal Chordia having income from salary and car

lease had filed returns for the impugned assessment year declaring

income of �4,67,380/- and �9,35,700/- respectively. Such returns were

processed u/s.143(1) of the Income Tax Act, 1961 (in short ‘’the

Act’’). Ld. Assessing Officer received information from DDIT

(Investigation), Unit-1, CRU, Chennai that assessees were beneficiaries

of certain transactions done through one Mr. Prakash Kumar Jojodia,

promoter of M/s. Quest Financial Services Limited and M/s. Kwality

Credit and Leasing Limited, Kolkata, which resulted in bogus long

term capital gains to various persons, including the assessees.

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Assessee Shri. G. Narendar Chordia had claimed long term capital

gains of �23,97,500/- and assessee Shri. Hastimal Chordia had

claimed long term capital gains of �23,97,000/- both arising sale of

equity shares, as exempt u/s.10(38) of the Act. Information

regarding these transactions of which Shri. Prakash Kumar Jojodia

was one of the principal players, came to the knowledge of Revenue

when he was subjected to a search operation by the Revenue. Shri.

Prakash Kumar Jojodia was the Managing Director of M/s. Quest

Financial Services Ltd. Revenue it seems was having with them a

statement recorded from Shri. Prakash Kumar Jojodia, which admitted

of transactions undertaken for providing bogus long term capital

gains, on commission basis, through private limited shell companies

owned or controlled by him. Or in other words, what are known as

transactions of penny stock companies.

Notice u/s.148 of the Act was issued to the assessees on 4.

23.02.2015 and 13.02.2015 respectively. Assessees sought reasons

for the reopening and such reasons were furnished to the assessees.

Reasons interalia mentioned about the statement given by Shri.

Prakash Kumar Jojodia. During the course of re-assessment

proceedings, ld. Assessing Officer put the assessees on notice on why

the claim of long term capital gains should not be disallowed and why

ITA Nos.1819 & 1820 /Mds/2017 :- 4 -:

such amounts should not be assessed as income from other sources.

As per the ld. Assessing Officer modus operandi was to buy unlisted

shares of private limited company at a very low book value in cash,

which company at a later stage got amalgamated with a listed penny

stock company with a High Court approval for such scheme for

amalgamation. As per the ld. Assessing Officer prices of the shares of

the penny stock companies were manipulated to 20 to 25 times so that

investors made bogus long term capital gains on sale of its shares. Ld.

Assessing Officer noted that Shri. Prakash Kumar Jojodia had admitted

floating a number of companies through which transactions in cash,

cheques and RTGS credits were carried out and he had also offered a

sum of �1,00,00,000/- as income earned for giving accommodation

entries to various parties like assessees.

that they had purchased three hundred equity shares each of one M/s.

Reward Agencies Private Limited through off market deal, by paying

�500/- per share to one M/s. Sanklap Vincome (P) Ltd. As per the

assessees such equity shares were transferred in their names by. M/s.

Reward Agencies Private Limited as early as 25th January, 2011.

Contention of the assessees were that M/s. Reward Agencies Private

Limited was later converted as a public limited company and

ITA Nos.1819 & 1820 /Mds/2017 :- 5 -:

thereafter amalgamated with one M/s. Quest Financial Services Limited

which had the approval of Hon’ble Calcutta High Court through its order dated 25th August, 2011. As per the assessee through this

amalgamation scheme sanctioned by Hon’ble Calcutta High Court, for

one equity share in M/s. Reward Agencies Private Limited, hundred

equity shares of M/s. Quest Financial Services Limited were allotted.

Contention of the assessees was that Thirty Thousand equity shares

each were allotted to them in M/s. Quest Financial Services Limited

and these were dematted and sold in Kolkata Stock Exchange through

one M/s. K. Prasad & Co. As per the assessees, M/s. Quest Financial

Services Limited being a listed company long term capital gains arising

to them, on sale of shares of the said company, through Kolkata Stock

Exchange was exempt u/s.10(38) of the Act. Assessee also pointed

out that the sale transaction were carried out through banking

channels.

by the assessee. According to him, Joint Commissioner of Income tax

in a proceeding u/s.144A of the Act had rejected similar contentions of

the assessee. According to him, the statement recorded from Shri.

Prakash Kumar Jojodia, who was a promoter and Director of M/s

Quest Financial Services Limited, clearly proved that he had

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provided accommodation entries to many persons including assessees.

Ld. Assessing Officer also noted that assessees could not furnish any

evidence as to how they came to know about M/s. Reward Agencies P.

Ltd for purchasing their shares. As per the ld. Assessing Officer these

were isolated transactions done by the assessee with the M/s. Sanklap

Vibcom (P) Ltd, Kolkata, who were seller of the shares and assessee

had no means of knowing such company or buying their shares. Ld.

Assessing Officer refused to take into consideration an affidavit dated

22.02.2015 of Shri. Prakash Kumar Jojodia produced by the assessee

wherein he retracted from his earlier statement given to the Revenue

and affirmed that purchase and sale of shares were genuine. Ld.

Assessing Officer observed as under at paras 9.2 to 9.8 of his order.

‘’9.2 The assesseee has stated that he does not know any of the office bearers either the old or the new company and that he is not related to any office bearers of any of the company. Hence, enemity cannot be said to be a cause for mentioning the name of the assessee in the list of the beneficiary. 9.2 The assessee has stated that he does not know Mr. Prakash Jajodia. Letter were sent by this office to M/s.Sanklap Vincom (P) Ltd and K Prasad and Co. but no reply was received till the date of passing assessment order and it is not known how he obtained the affidavit of Mr. Prakash Jajodia. 9.3 On verification of the affidavit, it is found that the details mentioned in the serial number (6), (7), (8), (9) (10) & (11) of the affidavit are false. 9.4 In the sworn statement recorded from Mr. Prakash Jajodia on 07.08.2014 it is mentioned as under:

ITA Nos.1819 & 1820 /Mds/2017 :- 7 -:

9.5 In the sworn statement recorded from Mr. Prakash Jajodia on 26..08.2014 it is mentioned as under: 'I have gone through the above statement and confirm that the same – has seen and exactly ……….…………………. ‘’ 9.6 A brief of the client scrip of Shri Prakash Jajodia is reproduced wherein though the Member broker is K Prasad & Co. through whom the assessee has sold the shares of Quest Financial Services Ltd., it also has various counter party member against each transactions. Further it is seen from the internet in the websites of http://www.guickcompany.inLcompany and corporatedlr.com/cornpanv that one of the directors of the converted company namely, Reward Ltd. Agencies is Shri Rajesh Kurmi who happens to be one of the dummy directors of Jamakarchi compannies of Shri Prakash Jajodia and as per his sworn statement recorded by the investigation wing, Shri Rajesh Kurmi is 10th pass and is an employee of Shri Prakash Jajodia. He also said "I do all kinds of official work in the office of Shri Prakash Jajodia as assigned by him for which 1 am getting salary of Rs.20000 pm. Various kinds of works like collecting and delivering cash from various parties, depositing and withdrawing cash from various accounts. These companies are not doing any real work as these companies are paper companies and doing work of Jamakarchi/accommodation entries." Hence it is clear that the assessee has been provided Bogus Long Term Capital Gain through accommodation entries. 9.6.1 Another point to be noted is that though the assessee in his sworn statement first said NO when asked if any other member of his family have also invested in the same company and made profit out of it. At the same time after the assessee was shown the list of the client in Chennai to whom Bogus Long Term Capital was provided which also had many of his family members, the assessee said that only he had purchased the shares and he didn't know if any of his family members had purchased. 9.7 It can be seen from the client statement of Shri Prakash Jajodia that not only the assessee but the following members of his family have also invested in shares which was eventually amalagamated to Quest Financial Services Ltd.

ITA Nos.1819 & 1820 /Mds/2017 :- 8 -:

Sl. Name Amount Relation to the No assessee 1 Hastimal Chordia 2397000 Assessee 2 G. Narendra Chordia 2399000 Brother 3 Nirmala Kumari 2394000 Mother Chordia 4 Shilpa Jain 2397000 Wife of his brother G. Narendra Chordia 5 Seema Jain 2397000 Wife of the assessee

9.8 It is concluded that it is not a single, genuine transaction but the assessee apart from his family members has been one of the beneficiaries who was provided bogus Long Term Capital Gains through Private Limited Shell companies/listed penny stock companies’’.

He disbelieved the claim of long term capital gains and made an

addition of the equivalent amount under the head income from other

sources for both the assessees.

Aggrieved, the assessees moved in appeal before the ld. 7.

Commissioner of Income Tax (Appeals). Apart from assailing the

validity of the reopening done for the impugned assessment year,

assessees also challenged the merits of the addition. Ld.

Commissioner of Income Tax (Appeals) held the reopening to be valid.

According to him information received from Investigation Wing of the

Department, Kolkata was good enough reason for reopening the

assessment. In so far as, merits were concerned, ld. Commissioner of

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Income Tax (Appeals) held that purchase of the shares were initially

done through off-market deals in cash and the selling rates were

artificially hiked. According to him, financials of M/s. Quest Financial

Services Ltd did not justify the prices at which its shares were sold.

Further, according to the ld. Commissioner of Income Tax (Appeals)

additions made by the ld. Assessing Officer were not solely based on

the statements recorded from Shri. Prakash Kumar Jojodia but for

other reasons as well. Ld. Commissioner of Income Tax (Appeals)

held that ld. Assessing Officer was justified in considering the long

term capital gains as bogus and in making the additions u/s.68 of the

Act.

Now before me, ld. Authorised Representative strongly 8.

assailing the reopening done for the impugned assessment year

submitted that reasons given by ld. Assessing Officer, for such

reopening stated that key person Shri. Prakash Kumar Jojodia, who

was the promoter of M/s. Quest Financial Services Limited and M/s.

Kwality Credit and Leasing Limited, Kolkata, admitted his involvement

in providing bogus long term capital gains to various persons on

commission basis. As per the ld. Authorised Representative this could

not be stated as a reason. According to him, though sufficiency of the

reason could not be questioned, its relevancy could be looked into.

ITA Nos.1819 & 1820 /Mds/2017 :- 10 -:

As per the ld. Authorised Representative, one of the essential

conditions required for reopening of an assessment, as set-out in

Section 147 of the Act, was not satisfied.

Representative submitted that purchase of shares of M/s. Reward

Agencies P. Ltd were proved through share certificates which reflected

transfer of these shares from M/s. Sanklap Vincom (P) Ltd to the

assessees. According to him, amalgamation of M/s. Reward Agencies

P. Ltd with M/s. Quest Financial Service Ltd could not be questioned

since it had the approval of the Hon’ble Calcutta High Court. As for

the sale of the shares in M/s. Quest Financial Service Ltd, capital gains

arising from which was claimed as exempt, contention of the ld.

Authorised Representative was that such sale was done through

Kolkatta Stock Exchange by a recognized stock broker and payments

received through banking channels. According to him, undue reliance

was placed by the Revenue on a statement recorded from Shri.

Prakash Kumar Jojodia who was never known to the assessee.

According to him, assessee had never purchased shares from Shri.

Prakash Kumar Jojodia. As per the ld. Authorised Representative the

so called statement recorded from Shri. Prakash Kumar Jojodia was

never put to the assessee. Further, as per the ld. Authorised

ITA Nos.1819 & 1820 /Mds/2017 :- 11 -:

Representative, assessee was never given an opportunity to cross-

examine the said person. Ld. Authorised Representative submitted

that assessee had filed an affidavit of Shri. Prakash Kumar Jojodia

retracting his earlier statements. Contention of ld. Authorised

Representative was that Shri. Prakash Kumar Jojodia had affirmed the

transactions of shares of M/s. Quest Financial Services Ltd as genuine.

According to him, similar transactions where capital gains were

considered as bogus had come up before Bangalore Bench of the

Tribunal in the case of Vimala Devi Chhajer and others vs. DCIT (ITA

Nos.513 to 518/Bang/2010, 519 to 526/Bang/2010, 946 to 949, 955,

956, 970/Bang/2010, 1000 to 1005/Bang/2010 and 1071/Bang/2010,

vide order dated 23.03.2011), and the Tribunal had held the capital

gains claimed to be not bogus. Reliance was also placed on the

decision of Kolkata Bench of the Tribunal in the case of Manish Kumar

Baid and Mahendra Kumar Baid vs. AICT,( ITA Nos.1236 &

1237/Kol/2017, dated 18.08.2017) and that of Mumbai Bench of the

Tribunal in the case of ITO vs. Arvind Kumar Jain, ITA

No.4862/Mum/2014, dated 18.09.2017. As per the ld. Authorised

Representative in the case decided by Kolkata Bench also the company

in which concerned assessee had invested was merged with another

listed company and the claim of long term capital gains was on sale

of equity shares of such listed company. As per the ld. Authorised

ITA Nos.1819 & 1820 /Mds/2017 :- 12 -:

Representative, Kolkata Bench had held that transactions relating to

the long term capital gains could not be disbelieved since the sale of

the shares were effected through registered stock brokers. Further,

as per the ld. Authorised Representative, equity shares of M/s. Quest

Financial Service Ltd held by the assessee were dematerialized or

dematted and such dematting clearly proved the holding of shares by

the assessee in the said company. Thus, according to him, lower

authorities fell in error in disbelieving the long term capital gains and

making an addition u/s.68 of the Act for the amounts which were

received through a recognized stock exchange and source of which

was clearly explained.

Per contra, ld. Departmental Representative strongly 10.

supporting the orders of the lower authorities submitted that Shri.

Prakash Kumar Jojodia was the promoter of M/s. Quest Financial

Services Ltd. According to him, assessees were mentioned in the

statement recorded from the said person, as one among many to

whom he had provided accommodation entries. As per the ld.

Departmental Representative, share price of M/s. Quest Financial

Service Ltd were artificially jacked up without any credible financials

for the said company. According to him, assessee could not say he

was not aware of the statement given by Shri. Prakash Kumar Jojodia

ITA Nos.1819 & 1820 /Mds/2017 :- 13 -:

since assessee had filed an affidavit from the very same person

retracting what he earlier said. According to him, additions were

rightly made disbelieving the series of transactions, which were

manufactured only for illegal evasion of tax.

On the aspect of reopening, the contention of the ld. 11.

Departmental Representative was that reasons clearly indicated

escapement of income from assessment.

I have considered the rival contentions and perused the 12.

orders of the authorities below. First taking up the question whether

the reopening was valid or not, admittedly, the original returns were

only subjected to a processing u/s.143(1) of the Act. When the original

returns were only processed u/s.143(1) of the Act, I cannot say that

an assessment was been done after application of mind by the ld.

Assessing Officer. Such processing in my opinion is a ministerial act.

In taking this view, I am fortified by the judgment of Apex Court in

the case of ACIT vs. Rajesh Jhaveri Stock Brokers P. Ltd 291 ITR 500.

Reasons recorded by the ld. Assessing Officer for reopening the

assessment has been placed before me at paper book page no.81 and

this reads as under:-

‘’This office is in receipt of information, that there was a search operation in the case of Mls Quest Financial Services and Kwality Credit and Leasing Limited ,Key

ITA Nos.1819 & 1820 /Mds/2017 :- 14 -:

person Mr. Prakash Jajodia revealed the fact that he and his group involved in providing bogus Long Term Capital Gains to various persons on commission basis through a number of Private Limited shell companies owned or controlled by him as well as some listed penny stock companies. Sri Hastimal Chordia is one of the beneficiaries. The transaction amount during the period is RS.23,97,000/-, the whole of which is bogus.

Therefore. I have reason to believe that income chargeable to tax relevant for' the A Y 2012-13 has escaped assessment due to failure on the part of assessee to disclose fully and truly all material facts relevant for the purpose of assessment. Reasons are similar for both the assessee. Considering the fact that

original return was subject only to a processing u/s.143(1) of the Act,

I am of the opinion that reason above given was relevant enough for

resorting to a reopening. Presence of a relevant reason is enough in

such cases, and it is not necessary that escapement of income has to

be established. Rules for reopening are much more liberal where

original returns are only subject to processing u/s.143(1) of the Act.

I therefore uphold the order of ld. Commissioner of Income Tax

(Appeals) in so far as the reopening of assessment is concerned.

Coming to the merits of the additions what I find is that 13.

lower authorities had relied on a statement from one Shri. Prakash

Kumar Jojodia who was the promoter and Director of M/s. Reward

Agencies Pvt. Ltd which was amalgamated with M/s. Quest Financial

Service Ltd, pursuant to a scheme sanctioned by Hon’ble Calcutta

ITA Nos.1819 & 1820 /Mds/2017 :- 15 -:

High Court. Once the scheme is sanctioned by Hon’ble Calcutta High

Court, I cannot consider the amalgamation as a sham one. Ratio of

allotment of shares in M/s. Quest Financial Service Ltd which was 1:

100, viz; hundred shares of M/s. Quest Financial Service Ltd for one

share of M/s. Reward Agencies Pvt. Ltd. This ratio was as per the

approved scheme. This is clearly mentioned at para 3 to Schedule A

of the said scheme, which read as under:-

‘’(a) The Transferee Company shall, without further act, deed, shall allot to every share-holders of M/s Dristi Buppliers Limited, 90 :Ninety) Equity share; of Rs. 10/ - each credited is fully paid up for 1 (One) equity shares of Rs. 10/- each fully paid up and held by such share-holders in M/S Drisu Suppliers Limited, and shall allot to every share holder of M/s Pran [eevan Distributors limited, 90 (Ninety: Equity shares of Rs 10/- each credited as fully pad up for :. (One) equity shares of ₹10/- each fully paid up and held by such share-holders in M/s. Prun ]eevan Distributors Limited .and shall allot to every share-holders of M/5 Reward Agencies Limited 100 (Hundred) Equity share; of Rs. 10l- each credited as fully paid up for 1 (One) equity shares of Rs. 10/ - each fully paid up and held by such share-holders in Ms Reward Agencies Limited’’.

Though ld. Assessing Office considered the prices of shares of M/s.

Quest Financial Service Ltd, to have been jacked up artificially,

nothing is available on record which could show what were the

financials of M/s. Quest Financial Service Ltd. ld. Assessing Officer

ought to have analysised the financials of the said company before

coming to a conclusion that such financials were not at all in rhyme

with the share prices. It may be true that assessee had acquired

ITA Nos.1819 & 1820 /Mds/2017 :- 16 -:

original shares in M/s. Reward Agencies P. Ltd in off-market

transactions by paying cash. However, backside of the share

certificates of M/s. Reward Agencies P. Ltd placed at paper book pages

110, 111, 112, 113, 114 & 115 clearly show that the equity shares

were transferred to the assessee on 25.01.2011. Original owner of

these shares were one M/s. Dristi Suppliers Private Limited and they

had transferred such shares to M/s. Sanklap Vincom Private Limited

on 25.10.2010. The seller of the shares to the assessee was M/s.

Sanklap Vincom Private Limited. What relation Shri. Prakash Kumar

Jojodia had with M/s. Sanklap Vincom Private Limited is not available

on record. Assessees have mainly relied on the orders of the

Bangalore Bench of the Tribunal in the case of Vimala Devi Chhajer

and others (supra) that of Kolkata Bench of the Tribunal in the case of

Manish Kumar Baid (supra) and that of Mumbai Bench of the Tribunal

in the case of Arvind Kumar Jain (supra). However in all these cases

relied on by the assessee what I find is that statement relied on by

the Revenue for disbelieving long term capital gains, did not mention

the names of the concerned assessees clearly. As against this, the case

of the Revenue here is that assessees name were mentioned by Shri

Prakash Kumar Jojodia in the statement recorded from him. Thus the

statement of Shri. Praksh Kumar Jojodia was the crucial link for

disbelieving the long term capital gains claimed by the assessee. Rules

ITA Nos.1819 & 1820 /Mds/2017 :- 17 -:

of nature justice, in my opinion required such statement to be given to

the assessee. Neither was it given nor assessee given an

opportunity to cross examine Shri. Prakash Kumar Jojodia. No doubt

assessee had filed an affidavit from Shri. Prakash Kumar Jojodia

retracting his earlier statement. This will not in my opinion absolve

the Revenue from its duty to place before the assessee the statement

of Shri. Prakash Kumar Jojodia relied on by them for disbelieving the

long term capital gains claimed by the assessee. The entire addition

emanated from the statement given Shri. Prakash Kumar Jojodia and a

finding that prices of the shares of M/s. Quest Financial Service Ltd

were artificially jacked up. In my opinion sale of the shares, having

been done recognized stock exchange and sale consideration having

been received through banking channels, the sale as such ought not

have been disbelieved unless there were strong reasons for

disbelieving the claim. In the circumstances, I am of the opinion that

the issue requires a fresh look by the ld. Assessing Officer. Ld.

Assessing Officer has to give a copy of the statement of Shri. Prakash

Kumar Jojodia to the assessee so that they can place their objections.

Ld. Assessing Officer has to consider the merits of the objections if any

filed by the assessee, and if required the assessees shall be given an

opportunity to cross examine Shri. Prakash Kumar Jojodia. Ld.

Assessing Officer also needs to verify the financials of M/s. Quest

ITA Nos.1819 & 1820 /Mds/2017 :- 18 -:

Financial Services Ltd before coming to a conclusion that its share

prices were jacked up. Needless to mention if the name of the

assessees are not appearing in the statement of Shri. Prakash Kumar

Jojodia, transactions giving rise to the long term capital gains cannot

be disbelieved, unless there are other very strong reasons for doing

so. With these directions, I set aside the orders of the lower

authorities and remit the issue back to the file of the ld. Assessing

Officer for consideration afresh in accordance with law.

In the result, appeals of the assessee are partly allowed for 14. statistical purposes.

Order pronounced on Thursday, the 21st day of December, 2017, at Chennai.

Sd/- (अ�ाहम पी. जॉज�) (ABRAHAM P. GEORGE) लेखा सद�य/ACCOUNTANT MEMBER चे�नई/Chennai �दनांक/Dated:21st December, 2017 KV आदेश क� ��त�ल�प अ�े�षत/Copy to: 1. अपीलाथ�/Appellant 3. आयकर आयु�त (अपील)/CIT(A) 5. �वभागीय ��त�न�ध/DR 2. ��यथ�/Respondent 4. आयकर आयु�त/CIT 6. गाड� फाईल/GF