INCOME TAX OFFICER-27(3)(1), MUMBAI vs. SACHIN VELJI SHAH, MUMBAI

The main grievance of the revenue is against the action of the Ld. CIT(A) allowing the claim of the assessee in respect of the Long Term Capital Gain (LTCG) disallowed by the AO in respect of sale of shares M/s. Mahavir Advanced Remedies (Formerly known as M/s. Indo American Advanced Pharmaceuticals Ltd) [hereinafter in short “M/s. Mahavir"] of Rs.3,85,77,543/- which was added by AO u/s 68 of the Income Tax Act, 1961 (hereinafter “the Act”). And thus allowing deduction u/s 10(38) of the Act as well as deleting addition of Rs. 19,28,875/- as commission for arranging the bogus LTCG (5% of commission) u/s 69C of the Act.

Brief facts are that the assessee is an individual and had filed his return of income on 05.09.2015 for AY. 2015-16 declaring total income of Rs.5,32,480/-. Later on, the case of the assessee was selected for scrutiny by issuance of notice u/s 143(2) of the Act; and the AO noted during the assessment proceeding that assessee has received Rs.3,85,77,491/- from sale of shares of M/s. Mahavir and claimed Long Term Capital Gain (LTCG) on sale of shares at Rs.3,71,63,991/- which assessee claimed as exempt u/s 10(38) of the Act. The AO called for the details of the transaction, and pursuant to which the assessee brought to AO's notice that he has been allotted 1,50,000 shares of M/s. Mahavir Advanced Remedies (formerly known as Indo American Advanced Pharmaceutical Ltd) (hereinafter in short “M/s. Mahavir) @ Rs.11/- per share [share face value Rs.10/- per share @ premium of Rs.1/- per share] on 08.03.2013 for a consideration of Rs.16,50,000/-. The assessee thereafter sold 1,28,600 shares of M/s. Mahavir in the Bombay Stock Exchange (BSE) during the year under consideration (AY. 2015-16). The total sale consideration was to the tune of Rs. 3,85,77,543/-; and he claimed LTCG of Rs. 3,71,63,991/-. The assessee produced evidence before AO that allotment/purchase as well as the sale consideration has passed through the banking channel and that the shares were demated and the shares were sold through BSE/recognized stock broker M/s. Swastik Investment Ltd. However, the AO taking note of the report of the Investigation Wing (Kolkata) regarding eighty four (84) penny stocks wherein scrip of M/s. Splash Media was one among it (not that of scrip in question M/s. Mahavir) was used by entry operators for converting unaccounted money of beneficiaries like assessee in the garb of LTCG/loss, disbelieved the genuinity of the transaction. The AO in the assessment order explained (in general) the modus operandi followed by the entry operators for providing accommodation entries to beneficiaries like assessee in the garb of LTCG/loss; and the AO wondered as to how the price of a share of M/s. Mahavir purchased at Rs.11/- would command up to Rs.300/- per share in span of two years and disbelieved the claim of assessee. The AO noted that share price of M/s. Mahavir was Rs.7.77/- which got jacked up to Rs.374.10 in fifteen (15) months on Sept, 2014; and maintained the price of Rs.330- 340 for same time; and the price fell to Rs.150.65 from 06th January, 2015 to 06th January, 2016. The AO noted the financials of M/s. Mahavir and was of the opinion that the price of shares of M/s. Mahavir was rigged from Rs.10 per shares to Rs.374 for giving accommodation entries to beneficiaries in the form of LTCG which amount is exempt u/s 10(38) of the Act. The AO was of the opinion that the assessee's claim of LTCG was a pre-arranged method employed by assessee in connivance with operators to evade tax. Thereafter, he took note of the investigation conducted in the case of operators especially that Shri Anil Agarwal and his group entities. And he noted that Shri Anil Agarwal (director of M/s. Comfort Securities Ltd) was searched and he was a stock broker/company registered with stock exchange, and admitted in his statement on 12.04.2015 recorded u/s 132(4) of the Act that he was manipulating the share prices of various penny stocks through his stock broker firm (M/s. Comfort Securities) and that he colluded with several persons in order to facilitate them accommodation entries in the form of LTCG/STCL and that he dealt with shares of M/s. Mahavir (refer para 8.2 of assessment order). And at para no. 9, AO notes that assessee had sold the shares between July, 2014 to Nov, 2014 through BSE at an average rate of Rs.350/- (but actually it was Rs.299/- average price) and reproduced a chart from page no. 9 to 11 giving Scrip Code, Trade Date, Scrip Name of M/s. Mahavir, Trade ID, Quantity, Rate, Trade Value, PAN of Buyers; which were the exit providers and the AO states at para no. 9.2 that the companies are mainly from Kolkata viz these companies are the clients of various stock brokers/companies wherein on 12.04.2015, Shri Anil Agarwal has stated u/s 132(4) of the Act that he along with others has managed all the transactions with regard to M/s. Mahavir. Thereafter, the AO notes at para 9.4 of assessment order that he had issued notice u/s 133(6) of the Act to purchasers of shares from assessee, and called for details, but it elicited answer from only two and those parties were from Kolkata & Chennai and notes as under:- "Letters u/s 133(6) of the IT Act, 1961, dated 18.10.2017 were issued to the purchasers of the shares, calling for details of share sale/purchase with the assessee during the year, demat account details, period of holding of these shares, source of funds and return of income. Notices u/s 133(6) was issued to all other buyers/exit entry providers but no replies have been received from them. These buyers are either the dummy persons for the purpose of providing entry or the persons who want to take an artificial short term loss. However, in one or two case reply was received that, he had purchased the scrip from the party unknown to him. The replies were from Kolkata & Chennai. To verify the same, commission u/s 131(1)(d) were issued to the ADIT's of the Area to verify and examine the parties. However, in one or two cases reply are received from ADIT-Chennai wherein it is seen that the party has purchased 8500 shares from the assessee at high price of Rs.354/- per share, by taking entry of loan for purchase (seen from Bank A/c from M/s. Ambalal Shoes & Stock Pvt. Ltd. However, from the balance-sheet of the party M/s. Baba Basuki Commercial P. Ltd, no such loan is shown to be taken or outstanding in his ROI and has just kept these shares in the stock. In the other reply received from ADIT New Delhi in the case CNB Finwest Pvt. Ltd. wherein it is seen that, there is no stock of MAHAREM shares in his Demat and has also seen to be claimed long term capital loss in his return. One reply received from ADIT Ahmedabad stating that, the parties Shri Uday Pratap Singh & Shri Manoj S Shah does not exist even after sending their inspectors to locate them. In others, no reply received from the other ADIT's of Kolkata and as the parties are all fake entities but manage to receive the post for the address by other persons who would be at that address."

Thereafter, the AO discussed the analysis of cash trails from para 9.5 which according to AO was an exercise carried out by Directorate of Investigation Kolkata (not by AO). And AO states the general modus-operandi of entry operators and asserts that most of the jamakharchi companies are run & controlled from M/s. Ashok Kayan (proprietary concern) & M/s. Kayan Securities Pvt. Ltd, which are run by Shri Ashok Kayan and Shri Harsh Vardhan Kayan which were confirmed by his staff Mr Mukesh Agarwal, who admitted the cash trails of such operators (general cash trail of such bogus accommodation entry). Thereafter, the AO discussed about SEBI report at para 10 which report indicated the names of entry operator discussed supra and found to be involved in fraudulent practices in active connivance with syndicate of peoples to give accommodation entries to beneficiary. According to AO, SEBI has suspended the scrip of M/s. Mahavir on 07.01.2015 and earlier on 07.09.2001. AO also notes that SEBI in the case of M/s. Comfort Securities Ltd has given detailed analysis of players/entry operator vide their order dated 19.12.2014. Thereafter, the AO reproduced the show cause notice given to the assessee from para no. 11 (page 14 to 21) and reply of the assessee from para no. 12 to page no.

And thereafter, he confronted the assessee as to who had advised him to purchase the scrip of M/s. Mahavir; and the assessee replied that he applied for allotment of shares of this company based on advises from his friends who were businessmen and taking note that it being a Pharmaceutical Company and has a potential to grow in future he invested in it. However, the AO was not satisfied with the reply, since the assessee failed to give the name of his advisors and taking note of the poor fundamentals of the company [M/s. Indo American Advanced Pharmaceuticals Ltd (presently M/s. Mahavir] he was of the view that the whole transaction which resulted in Long Term Capital Gain (LTCG)/exemption claimed u/s 10(38) of the Act was pre-arranged entries for avoiding tax on the gain made out of the sale of shares of M/s. Mahavir. Thereafter, he noted that the share application form does not mention the date; and the dematerialize slip to his broker for entering 55,000 shares of M/s. Indo American Advanced Pharmaceuticals Ltd, in the Demat account of the assessee, there is no mention of date on the acknowledgment slip. Thereafter, he was of the view that the sale/trade timing happened within an hour on 17.07.2014 and 31.07.2014 at a price of Rs.350 to 351. According to him, there is no fluctuation of prices for an hour which is unusual and that fact also raises suspicion Therefore, he concluded that the sale price of M/s. Mahavir was determined and controlled by few set of persons who kept it constant for a specified period throughout the day. According to him, these circumstances corroborates the finding of the Investigation Wing, Kolkata and Mumbai; and then he extracted the findings of the Investigation Wing in respect of scrip of M/s. Mahavir Advanced Remedies Ltd from page 32 to 49 of PB and discussed few case laws and found that the nature of the transaction entered into by the assessee which resulted in LTCG of Rs.3,85,77,491/- [claimed exempt u/s 10(38) of the Act] cannot be allowed and added u/s 68 of the Act; and he also presumed that commission 5% might have been paid to the broker for arranging the accommodation entry, therefore, he added Rs.19,28,875/- (ie. 5% of Rs.3,85,77,491/-) u/s 69C of the Act. Aggrieved, the assessee preferred an appeal before the Ld. CIT(A) who was pleased to allow the same and deleted the additions. Aggrieved, the revenue is before us.

We have heard both the parties and perused the records. The assessee is an individual and had filed his return of income on 05.09.2015 declaring total income of Rs.5,32,480/-. Thereafter, the AO directed the assessee to furnish the details regarding the LTCG/exempt claim u/s 10(38) of the Act of Rs.3,71,63,991/- on sale of shares of M/s. Mahavir. Pursuant to which, the assessee brought to the notice of the AO that he was allotted 1,50,000 shares of M/s. Mahavir @ 11 per shares on 08.03.2013; and for proving such a fact, assessee filed copy of the share allotment advice issued by M/s. Indo American Advanced Pharmaceuticals Ltd (earlier name of M/s. Mahavir) which is found placed at page no. 23 to 28 of the PB, and the assessee filed share certificate which reveals the number of certificate is 0028936 which has been issued by M/s. Indo American Advanced Pharmaceuticals Ltd (presently M/s. Mahavir) a copy of which is found placed at page 32 PB. A perusal of documents dated 08.03.2013 issued by M/s. Indo American Advanced Pharmaceuticals Ltd, reveals that assessee has been allotted equity shares of Rs.10/- at a premium of Rs. 1 per share and has been allotted 1,50,000 shares for consideration of Rs.16,50,000/-. And Share Certificate issued in name of assessee, reveals Register folio No. PRF022 in the name of the assessee, Distinctive number 10534201 10684200. Further, it is noted that purchase consideration has been given by assessee through RTGS/Cheque No.12889 of Bombay Mercantile Co-op Bank Ltd of Rs.16,50,000/- which fact is evident from bank-statement found placed at Page no. 33 to 34 of PB. The 1,50,000 shares of M/s. Indo American Advanced Pharmaceuticals Ltd (presently M/s. Mahavir) has been held in depository/demat of M/s. Swastika Investmart Ltd in the name of assessee from 06.08.2013, wherein other investment on other shares [viz M/s. Confidence, M/s. Surabhi Chem and others], which fact is evident from perusal of Page no. 36 of the PB; and the assessee sold 1,28,600 the shares in different lots in the month of July, 2014 to 27.11,2014 on the electronic platform of BSE for rate ranging approximately Rs.299 per share through the recognized broker M/s. Swastika Investmart Ltd. for total sale consideration of Rs.3,85,77,491/- which fact is discernable from copy of the broker/contract notes found placed from page no. 02 to 13 of PB; and demat statement corroborates the sale/transfer of shares from assessee's account, which statement is found placed at page no. 17 PB, and the sale consideration has passed through bank account which fact is discernable from perusal of bank-statement found placed at page 15 to 16 PB (Janakalyan Sahakari Bank Ltd). It is noted that the assessee had remitted STT on the sale transaction of shares of M/s. Mahavir and claimed LTCG of Rs.3,71,63,991/- and since the condition for claiming the LTCG as exempt u/s 10(38) of the Act has been fulfilled, the assessee made such a claim which was disallowed by AO by mainly taking note of report submitted by investigation wing (Kolkata/Mumbai) as well as he doubted the financial prudence of the assessee to have purchased in the first place the shares of M/s. M/s. Indo American Advanced Pharmaceuticals Ltd (earlier name of M/s. Mahavir) and wondered as to how the price of shares of M/s. Mahavir could have increased manifold in a span of two years, and he also referred to SEBI orders in regard the scrip of M/s. Mahavir and noted that the scrip was suspended on 07.09.2001 and later on 07.02.2015; and also AO noted the action of SEBI in the case of M/s. Comfort Securities Ltd, wherein SEBI found that a syndicate of unscrupulous entry providers were manipulating the market by rigging the share prices to generate bogus exempt income; and the AO relied on the statement of several brokers (Shri Anil Agarwal/M/s. Comfort Securities Ltd and several others brokers/entities/jamakharchi) who all, according to him dealt/facilitated in manipulating the share price of M/s. Mahavir and the AO at para no. 9 gave the details of sale of shares by assessee between 15.07.2014 to 27.11.2014 and took note of sale details of shares of M/s. Mahavir, and the PAN no of purchasers (no name of the purchasers given). According to the AO, the purchasers were made from entities at Kolkata and they were clients of various stock broking companies; and that Shri Anil Agarwal admitted of managing the transaction of M/s. Indo American Advanced Pharmaceutical Ltd (presently known as M/s. Mahavir). According to the AO, he had issued notices u/s 133(6) of the Act dated 18.10.2017 to the purchasers of the shares and only received few response. And the AO noted that one party was situated at Chennai who had purchased 8,500 shares from assessee at a price of Rs.354/- per share by taking entry of loan for purchases from M/s. Ambalal Shoes & Stocks Pvt. Ltd. However, according to the AO, from the balance- sheet of the party M/s. Baba Basuki Commercial Pvt. Ltd, no such loan is shown to be taken or outstanding in its return of income (supra, at para no. 4, we have reproduced AO's finding in this regard, which is vague and self-contradictory).

Thereafter, the AO noted another reply received from ADIT New Delhi in the case of another purported buyer M/s. CNB Finwest Pvt Ltd, who reported that there were no stock of MAHAREM shares in their Demat and that it has claimed loss (Long Term Capital Loss) in its return. And referring to another reply from the ADIT Ahmedabad, the AO noted that two parties (buyers/exit providers) could not be traced and no reply he received from Kolkata ADIT's [the aforesaid facts has been reproduced at para no. 4 (supra)]. However, after perusal of para no. 9.4 of assessment order (supra), wherein AO refers to reports of ADIT's as noted, we must admit that it does not make any sense and the only fact which is discernable is that the AO had issued notices u/s 133(6) of the Act to various exit providers vide notice dated 18.10.2017 as well as commission u/s 131(1)(d) to the ADIT's of Delhi, Ahmedabad, Chennai & Kolkata; and according to the AO, he received reply of exit providers from Chennai & Delhi, but from others, he neither got any reply nor they could be traced. Therefore, AO concluded that assessee by making the claim of LTCG was bringing his un-accounted money back to his regular books by laundering his black money to white; and therefore he held the entire transaction as bogus and made addition of Rs.3,88,75,543/- and commission of Rs.19,28,875/-. However, the AO's enquiry against the purported exit providers cannot be considered as legal evidence/material against the assessee for the following infirmities. Firstly, the AO has not given the names of the purported exit providers. Without confronting the assessee with the names of the purported exit providers, the same cannot be used against the assessee because it is common knowledge that while trading in the electronic platform of a recognized stock exchange, the buyers and sellers of securities are unknown to each other (anonymous). In such a scenario, AO has to give assessee credible material to show who bought the shares sold by assessee and should be able to expose some link/nexus of assessee with those exit providers like cash deposit in exit providers account immediately before that exit provider resorted to buy the shares of assessee etc. Unless some material is brought on record by AO to connect the assessee or his broker with the exit providers, it is not safe to use it against the assessee.

The Ld. DR referred to the SEBI order dated 30.08.2019 wherein SEBI had restrained/prohibited three persons (Ms. Shilpa Gowdanakunta, Mr Mukesh Kanakriya & Mr Vinod Hari Mhatre) from trading/accessing the stock exchange for three (3) years. A copy of the ibid SEBI order was placed before us, which we have carefully perused and find that this order of SEBI was made after conducting investigation into trading/dealing in the scrip of M/s. Mahavir during period of June 26, 2013 to January 6, 2015 (period during which assessee sold his shares of M/s. Mahavir); and SEBI found three persons (supra) to be involved in inter-alia manipulating the scrip prices and for misleading appearance of trading in the scrip. However, we note that SEBI order was against three (3) persons only and not against the M/s. Mahavir, the company or its shares being traded on stock-exchange. Since these three (3) persons were found to be involved in the unscrupulous illegal activities of manipulation of stock exchange and other activities prohibited by law, therefore, SEBI passed the order restraining/prohibiting them from accessing the stock exchange. However, as pointed out by Ld. AR, there is no such order of SEBI against assessee or his broker and Ld. DR could not point out whether the assessee or his broker had any connection with these three (3) persons against whom SEBI had passed prohibitory orders. Therefore, nothing turns on SEBI order dated 30.08.2019. Therefore, the same is rejected.

In the light of the above discussion, we note that the main plea of the assessee is that impugned additions are not legally sustainable since assessee has discharged the burden of proving the genuineness of his claim regarding LTCG on sale of shares of M/s. Mahavir by submitting primary documents to substantiate the claim of LTCG. The assessee in order to prove the transaction which led him to claim the LTCG/exemption u/s 10(38) of the Act, had proved the events of allotment of shares, dematerialization of the shares, and the sale happening through Bombay Stock Exchange Electronic platform after remitting STT. Therefore, according to Ld. AR, the AO could not have drawn adverse view against the LTCG claim made by assessee without first finding any infirmity in the primary documents filed by the assessee, which in this case has been undisputed by AO and the AO have not leveled any allegation/infirmity about the veracity of the relevant documents. In such a scenario, according to Ld. AR, the AO was duty bound to show from the incriminating evidences which he relies upon in the assessment order (like report of investigation wing of Kolkata & Mumbai, SEBI order, statement of Shri Anil Agarwal, Ashok Kayan, Harsh Vardhan Kayan, Mukes Agarwal and others/entry providers, etc) that assessee or his broker was participant in the modus operandi to convert his purported black money in active connivance with these statement-makers (Shri Anil Agarwal Ashok Kayan, Harsh Vardhan Kayan, Mukes Agarwal and other entity operator etc). According to Ld. AR, unless AO is able to point out from the report/statement of the so called entry operators and spell out the role of assessee/broker as a wrong doer or participant in the modus- operandi (as stated in the report of the investigation wing), the impugned action of AO/Ld CIT(A), in the light of un-impeached primary documents has to fail.

We find that AO during assessment proceedings had asked the assessee to prove the claim of LTCG of Rs.3,71,63,991/- from sale of shares of M/s. Mahavir. And pursuant to such a direction, the assessee had filed the primary documents as discussed (supra) to prove the claim, which documents have not been found by AO to suffer from any infirmity. As noted the assessee has placed evidence to prove the allotment of shares of M/s. Indo American Advanced Pharmaceuticals Ltd share certificate no. 0028936 and distinctive numbers 10534201 10684200, register Folio No. PRF022 [refer copy of share certificate in name of assessee at page 32 PB and allotment advice given by M/s M/s. Indo American Advanced Pharmaceuticals Ltd dated 08.03.2013 is seen at Page no. 23 - 31 of PB]. Further, AO has not even disputed the existence of D-mat/Depository account of assessee maintained with M/s. Swastika Investmart Ltd, which shows that shares allotted were credited in the Depository/D-mat account of the assessee. Therefore, once the holding of shares in D-mat account cannot be disputed, then the allotment & holding of shares cannot be held as bogus. Moreover, the fact [allotment of shares to assessee in year 2013] according to Ld. AR, has been duly disclosed to the ROC in the year of allotment. (i.e. in year 2013) itself as statutorily required by Companies Act. In this regard, we note that the shares of M/s. Indo American Advanced Pharmaceuticals Ltd had been allotted to assessee in the year 2013, and this fact had been duly disclosed to the ROC in the year of allotment. And the assessee had duly shown in his balance- sheets drawn on 31.03.2013 and 31.03.2014, the fact of investment in shares of M/s. Indo American Advanced Pharmaceutical Ltd., now known as M/s. Mahavir and later sold in lots between 15.07.2014 to 27.11.2014 in Bombay Stock Exchange through broker M/s. Swastika Investmart Ltd and consideration have passed through banking channel (refer page no. 15 & 16 of PB) and STT paid on the sale transaction (refer contract notes placed at page no. 2 to 13 PB); the assessee's claim of LTCG/Exemption u/s 10(38) of the Act has been rightly allowed by the Ld. CIT(A), which action we uphold.

Further, the Ld. AR brought to our notice that similar issue of LTCG on sale of shares of M/s. Mahavir (MARL) was considered by Co-ordinate Bench of Tribunal in several cases, wherein it was held in favour of assessee by allowing the claim of LTCG/Exemption u/s 10(38) of the Act in following cases as under: - “(i) Anoop Kumar Gupta Vs. ACIT (ITA. No. 454/Del/2020 (Del-ITAT) (ii) Shailesh M. Patel HUF Vs. ITO (ITA. No.280/AHD/2019 (Ahmedabad- ITAT) (iii) DCIT Vs. M/s. Jainam Investments (ITA. No.4286 & 4474/Mum/2019 (Mum-ITAT) (iv) M. Kiran Kumar Vs. ACIT (ITA. No.3374/Chny/2019 (Chennai-ITAT) 12. allowed similar claim of assessee (M/s. Mahavir/MARL) by holding as under: - “32. The main grievance of the ld. AO is that rise in share price of MARL is devoid of commercial principle or market factors ; that transactions are based on mutual connivance on part of assessee and operators ; that assessee resorted to preconceived scheme to procure bogus long term capital gains and hence the transactions are not bonafide; that SEBI also passed an interim order in the case of MARL holding that share prices were determined artificially by manipulations ; that these are close circuit transactions and are pre-structured; that assessee had failed to discharge the onus cast on him ; that net worth of MARL is negligible and that its share prices were artificially rigged; that investigations prove that cash is routed through various accounts to provide these bogus long term capital gain entries. The ld. AO by making these observations proceeded to treat the sale proceeds of the shares as unexplained cash credit u/s 68 of the Act. Since the receipt of sale proceeds was treated as bogus, the ld. AO also proceeded to add estimated commission @ 6% on LTCG amount for arranging the said bogus transaction as estimated expenditure.

It would be not out of place to mention here that in none of the statements of various persons relied upon by the ld. AO, the name of the assessee or the share broker through whom the shares were sold by the assessee, was mentioned. Further no money trail was proved by the revenue in the instant case despite searching the assessee u/s 132 of the Act.

We find that the ld. AO had not proved with any cogent evidence on record that assessee was involved in converting his unaccounted income into exempt long term capital gains by conniving with the so called entry operators and brokers who were involved in artificial price rigging of shares. No evidence is brought on record to prove that assessee was directly involved in price manipulation of the shares dealt by him in connivance with the brokers and entry operators. It is not in dispute that the assessee herein was merely receiving salary income and interest income apart from earning exempt income from partnership firm on a routine basis. As stated in earlier part of this order, the assessee has been making investments in shares of various listed and unlisted companies. During the year under consideration, he had earned exempt LTCG on sale of listed company shares.

It is not in dispute that the assessee had made purchase of shares in off market through preferential allotment of shares by the concerned company. Now the next issue that arises for our consideration is as to whether an off market purchase of shares could be taken as a ground to declare the entire transaction as sham. In our considered opinion, the transactions could not be treated as sham merely because they are done in off-market, if the assessee had discharged his onus of proving the fact that shares purchased by him were dematerialized in the Demat account and held by the assessee till the same were sold from the Demat account of the assessee. The transaction of holding the shares are reflected in Demat account and sale of shares are through Demat account. More so, when there is no dispute regarding the purchase price and sale price of shares. Our view is further fortified by the decision of Hon'ble Bombay High ITR 656 (Bom) wherein it was held that – From the documents produced before the Court it was seen that the shares in question were, in fact, purchased by the assessees on the respective dates and the company had confirmed to have handed over the shares purchased by the assessees. Similarly, the sale of the shares of the respective buyer was also established by producing documentary evidence. It is true that some of the transactions were off-market transactions. However, the purchase and sale price of the shares declared by the assessees were in conformity with the market rates prevailing on the respective dates, as was seen from the documents furnished by the assessees. Therefore, the fact that some of the transactions were off-market transactions could not be a ground to treat the transactions as sham transactions. On a perusal of those documentary evidences, the Tribunal had arrived at a finding of fact that the transactions were genuine. Nothing was brought to notice of the Court that the findings recorded by the Tribunal were contrary to the documentary evidences on record. Therefore, no substantial question of law arose from the order of the Tribunal.

We find that independent enquiries were conducted by SEBI for the relevant period from 26.6.2013 to 6.1.2015 and SEBI had passed an order dated 30.8.2019 in the case of MARL after its final investigation, wherein only three persons viz. Ms Shilpa Gowdanakunta (PAN-AOFPS5937R) ; Mr Mukesh Kanakriya (PAN- AAIPM5576B) and Mr Vinod Hari Mhatre (PAN ANQPM0834M) were held to be involved in artificial rigging of share prices of MARL and hence they were prohibited from accessing the securities market for a period of 3 years. This SEBI order dated 30.8.2019 in the case of MARL did not even mention the name of the assessee or his broker through whom the shares were sold by the assessee in the open market. Hence this goes to prove that the assessee or his broker were not involved in artificial rigging of price of shares of MARL in connivance with any person. When even SEBI does not allege any involvement of the assessee herein with the manipulation of share prices, how can the revenue herein state that long term capital gains derived by the assessee is merely an accommodation entry and is bogus.

We are unable to persuade ourselves to accept to the contentions of the ld. DR that Kolkata Investigation Wing had conducted a detailed enquiry with regard to the scrip dealt by the assessee herein and hence whomsoever had dealt in this scrip, would only result in bogus claim of long term capital gain exemption or bogus claim of short term capital loss. Merely because a particular scrip is identified as a penny stock by the income tax department, it does not mean all the transactions carried out in that scrip would be bogus in the hands of all the investors. So many investors enter the capital market just to make it a chance by investing their surplus monies. They also end up with making investment in certain scrips (read penny stocks) based on market information and try to exit at an appropriate time the moment they make their profits. In this process, they also burn their fingers by incurring huge losses without knowing the fact that the particular scrip invested is operated by certain interested parties with an ulterior motive and once their motives are achieved, the price falls like pack of cards and eventually make the gullible investors incur huge losses. In this background, the only logical recourse would be to place reliance on the orders passed by SEBI pointing out the malpractices by certain parties and taking action against them. Since assessee's name does not even figure in the list of parties who were involved in manipulation of shares prices of MARL in the order of SEBI dated 30.8.2019 after its detailed investigations, the transaction carried out by the assessee cannot be termed as bogus.

We find that the Hon'ble Calcutta High Court in the case of that in that case, the Hon'ble Calcutta High Court held that the Assessing Officer doubted the transactions since the selling broker was subjected to SEBI's action. However the transactions were as per norms and suffered STT, brokerage, service tax, and cess. There is no iota of evidence over the transactions as it were reflected in demat account. The appeal filed by the revenue was dismissed. We find that the assessee's case before us is in a much stronger footing as no action has been initiated on the Broker or on the assessee by SEBI. Even though the trading of the scrip was suspended from 07.01.2015 in view of the fact that SEBI carried out the investigation for the movement of share prices of MARL during the period 26.6.2013 to 6.1.2015 (i.e. the period during which assessee herein also sold the shares in the open market), still the SEBI in its final order dated 30.8.2019 after carrying out detailed investigations, did not implead either the assessee or his broker for any manipulation of share prices. Infact this is also evident and this fact gets further strengthened from the statements recorded from various entry operators who had also never mentioned the name of the assessee or his broker.

In any case, we find that the assessee had duly proved the nature and source of credit representing sale proceeds of shares of MARL within the meaning of section 68 of the Act. The sale proceeds have been received by the assessee from the stock exchange through the SEBI registered share broker by account payee cheques through regular banking channels. We find that the three ingredients of section 68 of the Act are duly fulfilled by the assessee in the instant case. Hence there is no question of making any addition as unexplained cash credit u/s 68 of the Act in the instant case.

In view of the aforesaid observations and respectfully following the various judicial precedents relied upon hereinabove, we hold that there is no case for the revenue to deny the claim of exemption u/s 10(38) of the Act and to sustain the disallowance of estimated commission expenditure thereon in the proceedings framed u/s 153A of the Act on the assessee. Accordingly, the additional grounds raised by the assessee are allowed and original grounds 2 to 3 and 5 to 11 are hereby allowed.

The Ground No. 4 raised by the assessee is challenging the limitation of framing the assessment. Though exhaustive arguments were indeed made by the ld. AR at the time of hearing, the ld. AR on hearing the arguments of ld. DR, fairly conceded that the said ground is not pressed. Accordingly, we do not deem it fit to even address the arguments advanced therein for Ground No. 4 and the same is hereby dismissed as not pressed.

The Ground No. 12 is challenging the initiation of penalty proceedings u/s 271(1)(c ) of the Act, which would be premature for adjudication at this stage. Hence dismissed.

The Ground No. 13 is consequential in nature and does not require any specific adjudication.

The Ground Nos. 1 and 14 are general in nature and does not require any specific adjudication.

In the result, the appeal of the assessee is partly allowed.”

The Ld. AR had rightly relied upon the judgment of the Hon'ble juri ictional Bombay High Court in the case of Shyam R. Pawar (229 Taxman 256). In the decided case also, the assessee was purchasing and selling the shares through a broker in Mumbai, for purchase of shares of (i) M/s. Bolton Properties Ltd., (ii) M/s Prime Capital and (iii) M/s. Mantra; and he has transacted through the broker at Calcutta and two operators namely Mr. Sushil Purohit and Shri Jagdish Purohit, and one of them was the Director of M/s. Bolton Properties Ltd. who had purportedly admitted to have manipulated the share price of M/s. Bolton Properties Ltd. Mr. Jagdish also reportedly floated several investment companies which were aggressively used in the entire deal with the broker M/s. Prakash Nahata & Co. According to AO, the shares offloaded by the beneficiaries through M/s. Prakash Nahata & Co., were ultimately purchased by the investment companies controlled by Shri Purohit. The name of the assessee figured during the course of the investigation. The AO noted that these entities/ companies, whose shares were traded by the assessee, were not having sufficient business activities justifying the increase in their shares prices. Therefore, the AO concluded that certain operators and brokers devised a scheme to accommodate the unaccounted monies of the assessee in guise of capital gains. The AO accordingly added the capital gains derived by the assessee under Section 68 of the Act. On appeal, the Hon'ble juri ictional High Court upheld the Tribunal order deleting the addition, by observing as under: "..It was also revealed during the course of inquiry by the Assessing Officer that the Calcutta Stock Exchange records showed that the shares were purchased for code numbers S003 and R121 of Sagar Trade Pvt Ltd. and Rockey Marketing Pvt. Ltd. respectively. Out of these two, only Rockey Marketing Pvt.Ltd. is listed in the appraisal report and it is stated to be involved in the modus-operandi. It is on this material that he holds that the transactions in sale and purchase of shares are doubtful and not genuine. In relation to Assessee's role in all this, all that the Commissioner observed is that the Assessee transacted through brokers at Calcutta, which itself raises doubt about the genuineness of the transactions and the financial result and performance of the Company was not such as would justify the increase in the share prices. Therefore, he reached the conclusion that certain operators and brokers devised the scheme to convert the unaccounted money of the Assessee to the accounted income and the present Assessee utilized the scheme.

It is in that regard that we find that Mr.Gopal's contentions are well founded. The Tribunal concluded that there was something more which was required, which would connect the present Assessee to the transactions and which are attributed to the Promoters/Directors of the two companies. The Tribunal referred to the entire material and found that the investigation stopped at a particular point and was not carried forward by the Revenue. There are 1,30,000 shares of Bolton Properties Ltd. purchased by the Assessee during the month of January 2003 and he continued to hold them till 31 March 2003. The present case related to 20,000 shares of Mantra Online Ltd for the total consideration of Rs.25,93,150/-. These shares were sold and how they were sold, on what dates and for what consideration and the sums received by cheques have been referred extensively by the Tribunal in para 10. A copy of the DMAT account, placed at pages 36 & 37 of the Appeal Paper Book before the Tribunal showed the credit of share transaction. The contract notes in Form-A with two brokers were available and which gave details of the transactions. The contract note is a system generated and prescribed by the Stock Exchange. From this material, in para 11 the Tribunal concluded that this was not mere accommodation of cash and enabling it to be converted into accounted or regular payment. The discrepancy pointed out by the Calcutta Stock Exchange regarding client Code has been referred to. But the Tribunal concluded that itself, is not enough to prove that the transactions in the impugned shares were bogus/sham. The details received from Stock Exchange have been relied upon and for the purposes of faulting the Revenue in failing to discharge the basic onus. If the Tribunal proceeds on this line and concluded that inquiry was not carried forward and with a view to discharge the initial or basic onus, then such conclusion of the Tribunal cannot be termed as perverse. The conclusions as recorded in para 12 of the Tribunal's order are not vitiated by any error of law apparent on the face of the record either.

As a result of the above discussion, we do not find any substance in the contention of Mr. Sureshkumar that the Tribunal mi irected itself and in law. We hold that the Appeals do not raise any substantial question of law. They are accordingly dismissed. There would no order as to costs.”

AO on account of purported bogus LTCG derived on purchase/sale of shares (off-market) was deleted by observing as under:

We heard both sides in detail and perused rival contentions in the light of the records of the case and the paper book filed by the assessee. In the return of income filed by the assessee for the year under appeal, the purchase of flat at Colaba for a consideration of Rs. 2,06,72,904 was reflected. The assessee's contribution in the purchase of the flat was @ 70 per cent for which the investment amounted to Rs. 1,44,71,033. The source of investment was, among other things, the sale proceeds of shares of Rs. 1,41,08,484. This amount has been questioned by the revenue authorities.

1 The assessee has purchased the shares of four companies viz., Allan Industrial Gases Ltd., Mobile Telecom, Rashee Agrotech and Centil Agrotech, during the previous years relevant to the assessment years 1999- 2000 and 2000-01. The books of account maintained by the assessee for both the years clearly reflected the purchase of those shares. The shares are reflected in the balance sheets filed by the assessee along with the returns of income for the assessment years 1999-2000 and 2000-01. Therefore, it is seen that as a prima facie evidence, the purchases of shares have been contemporaneously entered into the books of account of the assessee.

2 The assessee has been declaring agricultural income in his returns of income for the assessment years from 1990-91 to 2001-02. The total agricultural income returned by the assessee up to the assessment year 1999- 2000 was at Rs. 7,57,883. The amount invested in the purchase of shares as on 31-3-1999 was Rs. 4,48,160. The cash available with the assessee by way of agricultural income was much higher than the investment made by the assessee in the purchase of shares as on 31-3-1999. After making the investments in the shares, the assessee had a surplus cash balance of Rs. 3,09,000 as on 1-4-1999. Thereafter, the assessee has further returned an agricultural income of Rs. 66,000 for the assessment year 2000-01. The amount invested in the purchase of shares in the year ending on 31-3-2000 was Rs. 2,57,020. Again the assessee had a cash balance thereof of Rs. 1,18,771. Therefore, it is, very clear that the investment made by the assessee in shares during the previous periods relevant to the assessment years 1999- 2000 and 2000-01 was supported by cash generated out of agricultural income. The above agricultural income have been considered in the respective assessments. Therefore, the contention of the assessing authority that the assessee had no sufficient resourcefulness to make investments in the shares is unfounded.

3 Purchase and sale of shares outside the floor of Stock Exchange is not an unlawful activity. Off-market transactions are not illegal. It is always possible for the parties to enter into transactions even without the help of brokers. Therefore, it is not possible to hold that the transactions reported by the assessee were quite sham on the legal proposition arrived at by the CIT(A) that off-market transactions are not permissible. The assessee has stated that the transactions were made with the help of professional mediators who are experts in off-market transactions.

4 When the transactions were off-market transactions, there is no relevance in seeking details of share transactions from Stock Exchanges. Such attempts would be futile. Stock Exchanges cannot give details of transactions entered into between the parties outside their floor. Therefore, the reliance placed by the assessing authority on the communications received from the Stock Exchanges that the particulars of share transactions entered into by the assessee were not available in their records, is out of place. There is no evidential value for such reliance placed by the assessing authority. The assessee had made it very clear that the transactions were not concluded on the floor of the Stock Exchange. The matter being so, there is no probative value for the negative replies solicited by the assessing authority from the respective Stock Exchanges. We are of the considered view that the materials collected by the assessing authority from the Stock Exchanges are not valid to dispel or disbelieve the contentions of the assessee.

5 The next set of evidences relied on by the assessing authority are the statements obtained from various parties. When certain persons like Radha Ashok and Sandeep D. Shah made negative statements against the assessee, persons like Satish Mandovara and Mangesh Chokshi had given positive statements in support of the contention of the assessee. But, the assessing authority sought to pick and choose the statements given by various parties. While accepting and rejecting such statements given by the parties, the Assessing Officer has made a mistake of accepting irrelevant statements and rejecting relevant statements. During the relevant period in which the assessee transacted in shares, persons like Radha Ashok and Sandeep D. Shah were not carrying on their business of brokers as in the manner they carried on the business in the past. Even their Stock Exchange Memberships were cancelled. It was Shri Satish Mandovara who was carrying on the business mainly for and on behalf of Shri Mangesh Chokshi, Director of M/s. Richmond Securities Pvt. Ltd. Those two persons have categorically admitted before the assessing authority that they had dealings with the assessee in respect of the share transactions. They have confirmed the transactions stated by the assessee that he had with them. These positive statements made before the assessing authority supported the case of the assessee. There is no force in the action of the assessing authority in relying on the negative statements of the other parties whose role during the relevant period was either irrelevant or insignificant. Therefore, in the facts and circumstances of the case, it is, our considered view that certain statements relied on by the assessing authority do not dilute the probative value of the statements given by other persons in favour of the assessee confirming the share transactions entered into by the assessee.

6 The above circumstances have made out a clear case in support of the book entries reflecting the purchase and sale of shares and ultimately supporting the money received on sale of shares and finally investing the same in the purchase of flat. The chain of transactions entered into by the assessee have been properly accounted, documented and supported by evidences.

7 Therefore, we find that the explanations of the assessee seems to have been rejected by the assessing authority more on the ground of presumption than on factual ground. The presumption is so compelling that comparatively a small amount of investment made by the assessee during the previous year period relevant to the assessment years 1999-2000 and 2000-01 have grown into a very sizable amount ultimately yielding a fabulous sum of Rs. 1,41,08,484 which was used by the assessee for the purchase of the flat at Colaba. The sequence of the events and ultimate realization of money is quite amazing. That itself is a provocation for the Assessing Officer to jump into a conclusion that the transactions were bogus. But, whatever it may be, an assessment has to be completed on the basis of records and materials available before the assessing authority. Personal knowledge and excitement on events, should not lead the Assessing Officer to a state of affairs where salient evidences are over-looked. In the present case, howsoever unbelievable it might be, every transaction of the assessee has been accounted, documented and supported. Even the evidences collected from the concerned parties have been ultimately turned in favour of the assessee. Therefore, it is, very difficult to brush aside the contentions of the assessee that he had purchased shares and he had sold shares and ultimately he had purchased a flat utilizing the sale proceeds of those shares.

8 For a moment, even if all the above evidences are ignored, one cannot overlook the pressure of the evidence coming out of the survey carried out by the department in the business premises of the assessee. There was a survey carried out by the department in the business premises of the assessee. In the course of survey, contract notes for sale of shares, copies of bills thereof, photocopies of share certificates etc., were found. The purchase and sale of shares were also found recorded in the books of account. The department has no case that the survey was a staged enactment. A survey is always unexpected. So, it is not possible to presume that the assessee had collected certain fabricated documents and kept at his business premises so as to hoodwink the survey party to lead them to believe that the assessee had entered into share transactions. Atleast such an inference is not possible in law. The department has no defence against the forcible argument of the learned counsel that the survey conducted by the department has out and out upheld the contention of the assessee that he had purchased and sold shares. We find that this solitary evidence collected in the course of survey is sufficient to endorse the bona fides of the share transactions made by the assessee.

On further appeal, it is noted that the Hon'ble Bombay High Court in their order in ITA No. 456 of 2007 dated 07-09-2011 has affirmed the order of this Tribunal.

The Ld. AR of the appellant has rightly relied on another judgment of the Hon'ble Bombay High Court in the case of CIT Vs Jamna Devi Agarwal (328 ITR 656). In the decided case, also the Revenue had disputed the genuineness of the long-term capital gains derived by the assessee on sale of shares of listed companies for similar reasons as cited in the present case. On appeal, the Hon'ble High Court upheld the decision of this Tribunal deleting the additions by observing as under:

From the documents produced before us, which were also in the possession of the Assessing Officer, it is seen that the shares in question were in fact purchased by the assessees on the respective dates and the company has confirmed to have handed over the shares purchased by the assessees. Similarly, the sale of the shares to the respective buyers is also established by producing documentary evidence. It is true that some of the transactions were off-market transactions. However, the purchase and sale price of the shares declared by the assessees were in conformity with the market rates prevailing on the respective dates as is seen from the documents furnished by the assessees. Therefore, the fact that some of the transactions were off-market transactions cannot be a ground to treat the transactions as sham transactions.

The statement of Pradeep Kumar Daga that the transactions with the Haldiram group were bogus has been demonstrated to be wrong by producing documentary evidence to the effect that the shares sold by the assessees were in consonance with the market price. On a perusal of those documentary evidence, the Tribunal has arrived at a finding of fact that the transactions were genuine. Nothing is brought to our notice that the findings recorded by the Tribunal are contrary to the documentary evidence on record.

The Tribunal has further recorded a finding of fact that the cash credits in the bank accounts of some of the buyers of shares cannot be linked to the assessees. Moreover, in the light of the documentary evidence adduced to show that the shares purchased and sold by the assessees were in conformity with the market price, the Tribunal recorded a finding of fact that the cash credits in the buyers' bank accounts cannot be attributed to the assessee's. No fault can be found with the above finding recorded by the Tribunal.

Reliance placed by the counsel for the Revenue on the decision of the apex court in the case of Sumati Dayal [1995] 214 ITR 801 is wholly misplaced. In that case, the assessee therein had claimed income from horse races and the finding of fact recorded was that the assessee therein had not participated in races, but purchased winning tickets after the race with the unaccounted money. In the present case, the documentary evidence clearly shows that the transactions were at the rate prevailing in the stock market and there was no question of introducing unaccounted money by the assessees. Thus, the decision relied upon by the counsel for the Revenue is wholly distinguishable on the facts.

For all the aforesaid reasons, we hold that the decision of the Tribunal is based on findings of fact. No substantial question of law arises from the order of the Tribunal. Accordingly, all these appeals are dismissed. No order as to costs."

The Ld. AR also brought to our notice the recent judgment rendered by the Hon'ble juri ictional Bombay High Court in the case of PCIT v. Ziauddin A Siddique (ITA No. 2012 of 2017) dated 04.03.2022 which is found to be relevant in the facts involved in the present case. In the decided case, the issue before the Hon'ble High Court was whether this Tribunal was right in law in deleting the addition made u/s 68 of the ACT in relation to LTCG derived on sale of shares, ignoring the fact that the shares were purchased from off- market sources and that the sharp rise in prices were not supported by financials. Answering the question raised by the Revenue in the negative, the Hon'ble High Court held that there was a finding of fact that the purchase & sale of shares occured on the platform of stock exchang, upon payment of STT and were supported by documentary ecidences and therefore there was no perversity in the order of this Tribunal. The Court further noted that there was no allegation against the assessee that he had participated in price rigging in the market and therefore dismissed the appeal of the Revenue. The relevant findings of the Hon'ble High Court which is binding upon us, are as follows :- "

We have considered the impugned order with the assistance of the learned Counsels and we have no reason to interfere. There is a finding of fact by the Tribunal that the transaction of purchase and sale of the shares of the alleged penny stock of shares of Ramkrishna Fincap Ltd. ("RFL") is done through stock exchange and through the registered Stock Brokers. The payments have been made through banking channels and even Security Transaction Tax (“STT”) has also been paid. The Assessing Officer also has not criticized the documentation involving the sale and purchase of shares. The Tribunal has also come to a finding that there is no allegation against assessee that it has participated in any price rigging in the market on the shares of RFL.

Therefore we find nothing perverse in the order of the Tribunal.

Mr. Walve placed reliance on a judgment of the Apex Court in Principal Commissioner of Income-tax (Central)-1 vs. NRA Iron & Steel (P.) Ltd.1 but that does not help the revenue in as much as the facts in that case were entirely different.

In our view, the Tribunal has not committed any perversity or applied incorrect principles to the given facts and when the facts and circumstances are properly analysed and correct test is applied to decide the issue at hand, then, we do not think that question as pressed raises any substantial question of law."

For the various reasons discussed in the foregoing and following the judgments cited above, more particularly of the binding juri ictional High Court in the cases of Shyam Pawar (supra), Ziauddin A Siddique (supra), Mukesh R Marolia (supra) & Jamna Devi Agarwal (supra), we uphold the impugned action of Ld. CIT(A) deleting the addition u/s 68 of the Act, in relation to the proceeds derived on sale of shares of M/s Mahavir Advanced Pharmaceuticals Ltd., alleging it to be bogus. We therefore confirm the action of Ld CIT(A) to delete the addition of Rs 3,85,77,543/- made u/s 68 of the Act and delete the addition made of Rs 19,28,875/- as commission. The AO to allow LTCG/Exemption claimed u/s 10(38) of the Act on sale of shares of M/s Mahavir.

In the result, the appeal of the revenue stands dismissed. Order pronounced in the open court on this 22/03/2024. (BR BASKARAN) ACCOUNTANT MEMBER (ABY T. VARKEY) JUDICIAL MEMBER मुंबई Mumbai; दिनांक Dated : 22/03/2024. Vijay Pal Singh, (Sr. PS) आदेश की प्रतिलिपि अग्रेषित/Copy of the Order forwarded to : 1. 2. 3. 4. 5. अपीलार्थी / The Appellant प्रत्यर्थी / The Respondent. आयकर आयुक्त / CIT विभागीय प्रतिनिधि, आयकर अपीलीय अधिकरण, मुंबई / DR, ITAT, Mumbai गार्ड फाईल / Guard file. सत्यापित प्रति //// आदेशानुसार/ BY ORDER, उप/सहायक पंजीकार /(Dy./Asstt.