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Facts
The assessee claimed Long Term Capital Gain (LTCG) on the sale of shares of M/s. Sunrise Asian Limited. The Assessing Officer (AO) disallowed the claim, treating the transaction as bogus and added the amount of LTCG and commission. The CIT(A) upheld the AO's order.
Held
The Tribunal held that the documentary evidence submitted by the assessee was genuine and that the transactions were carried out through recognized brokers on the stock exchange. The revenue failed to prove any involvement of the assessee in price rigging or any contrary material.
Key Issues
Whether the LTCG claimed on the sale of shares of M/s. Sunrise Asian Limited is genuine and eligible for exemption under Section 10(38) of the Act, or if the transaction is bogus as alleged by the revenue.
Sections Cited
Section 68 of the Income Tax Act, 1961, Section 10(38) of the Income Tax Act, 1961, Section 69C of the Income Tax Act, 1961
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Income Tax Appellate Tribunal, “E” BENCH, MUMBAI
Before: SHRI ABY T. VARKEY, JM & SHRI S RIFAUR RAHMAN, AM
O R D E R
PER ABY T. VARKEY, JM:
This is an appeal preferred by the assessee against the order of the Ld. Commissioner of Income Tax (Appeals)/NFAC, Delhi dated 30.03.2022 for the assessment year 2014-15.
The main grievance of the assessee is against the action of the Ld. CIT(A) upholding the action of the AO disallowing the Long Term Capital Gain (LTCG) claimed by the assessee in respect of sale of shares M/s. Sunrise Asian Limited (hereafter “M/s. Sunrise”) of Rs.11,89,44,328/- u/s 68 of the Income Tax Act, 1961 (hereinafter “the Act”). And thus denying deduction u/s 10(38) of the Act as well as upholding addition of Rs.59,47,261/- as commission for arranging the bogus LTCG (5% of commission) u/s 69C of the Act.
2 A.Y. 2014-15 Manish Mahipatrai Shah 3. Brief facts are that the assessee is an individual and had filed his return of income on 10.11.2014 for AY. 2014-15 declaring total income of Rs.36,73,690/-. Later on, the case of the assessee was reopened u/s 147 of the Act; and the AO noted during the assessment proceeding that assessee has received Rs.12,39,44,328/- from sale of shares of M/s. Sunrise and claimed long term capital gain (LTCG) on sale of shares at Rs.11,89,44,328/- 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 2,50,000 shares of M/s. Santoshima Trade Links Ltd. (hereinafter “M/s. Santoshima”) @ Rs.20/- per share on 10.10.2011 (w.e.f 29.09.2011) for a consideration of Rs.50,00,000/-. And thereafter, on 22.03.2013, M/s. Santoshima got amalgamated with M/s. Sunrise Asian Ltd. And as per the scheme of amalgamation ordered by the Hon’ble Bombay High Court, the assessee received 2,50,000 shares of M/s. Sunrise, which shares have been sold in the Bombay Stock Exchange (BSE) by assessee during the year under consideration (AY. 2014-15). The total sale consideration was to the tune of Rs.12,39,44,328/-; and he claimed LTCG of Rs.11,89,44,328/-. The assessee produced evidence before AO that 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 stockbroker M/s. Hornic Investment Pvt. Ltd. However, the AO taking note of the report of the Investigation Wing (Kolkata) that the scrip of M/s. Sunrise was one of the eighty four (84) penny stocks that were 3 A.Y. 2014-15 Manish Mahipatrai Shah 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 the modus operandi followed by the entry operators for providing accommodation entries to beneficiaries like assessee in the garb of LTCG/loss; and he wondered as to how the price of a share of M/s. Sunrise purchased at Rs.20/- would command up to Rs.496/- per share in span of two years and disbelieved the claim of assessee making a gain of Rs.11,89,44,328/-. The AO noted that assessee had purchased the shares of M/s. Santoshima which is an entity controlled by one Shri Vipul Vidur Bhatt (through dummy directors), who also controls M/s Sunrise, which fact according to AO has been admitted by him before the department on 09.02.2016, 22.02.2016 & 12.05.2016. According to AO, the exit providers who bought back the shares from the assessee [through different companies/concerns as shown by the AO from page no. 83 to 88 (chart)] were also controlled by Shri Vipul Bhatt. The AO noted the financials of M/s. Sunrise and was of the opinion that the price of shares of M/s. Sunrise was rigged from Rs.20 per shares to Rs.500 for giving accommodation entries to beneficiaries in the form of LTCG which amount is exempt u/s 10(38) of the Act. Thereafter, he took note of the investigation report of the investigation wing of the Department wherein the statement of Shri Vipul Bhatt was recorded on 09.02.2016 u/s 132(4) of the Act (and confirmed on 22.02.2016 & 12.05.2016) wherein he accepted that he was an entry operator and was providing bogus accommodation entry to various 4 A.Y. 2014-15 Manish Mahipatrai Shah persons/beneficiaries in lieu of commission. According to the AO, Shri Vipul Bhatt has explained the modus operandi adopted by him wherein shares of entities controlled by him were sold through synchronized trading in stock exchange in active collusion by his own other entities/exit providers. The AO took note of the financial of M/s Sunrise and the Investigation report to opine that M/s. Sunrise was a penny stock, which was used by unscrupulous entry operators for providing bogus LTCG to beneficiaries like assessee. The AO noted that M/s. Santoshima was incorporated on 03.03.21992 and its name got changed from M/s Santoshima Lease Finance & Investment (India) Ltd to M/s. Santoshima Tradelinks Ltd on 16.09.2011. And that M/s. Sunrise got incorporated in the year 1981 and it got its present name in the year 1999 and due to non-compliance of clause 41 of listing agreement, the trading in equity shares was suspended by BSE on Feb 17, 2003; which was revoked on 28th Mar, 2011; and thereafter AO discussed about the Financials of M/s. Sunrise from para 9.3 to 9.5 and noted the price-movements of the shares from Rs.20 to Rs.50 on 17th Aug, 2011 & Rs.60/- on 09.09.2011; and thereafter on 16.10.2012 at Rs.63/- and systematically with in four (4) months went up to Rs.455/- per share, and finally reached Rs.615/- per share in March, 2015. Then, the AO discussed about the investigation carried out in the case of entry operators who were searched viz of Shri Anil Agarwal (director of M/s. Comfort Securities Ltd) who was a stock broker/company registered with stock exchange, and admitted to be manipulating the share prices of various penny stocks through his 5 A.Y. 2014-15 Manish Mahipatrai Shah stock broker firm (M/s. Comfort Securities) and that he helped several persons obtain accommodation entries in the form of LTCG/STCL and that he dealt with shares of M/s. Sunrise, First Financials Service Ltd etc (refer para 11.2 of assessment order). The AO at para 11.3 of his order referred to Calcutta Stock Exchange and broker/sub-broker names like Bikas Sureka, Anil Khemka, Amit Saraogi, Sauraj Jhunjhunwala, D. B & Co. and Sajendra Mookim, who all admitted of providing accommodation entries of LTCG and dealt with scrips of M/s. Sunrise. The AO also referred to sub-broker M/s. SMC Global Securities Ltd and sub-broker Shri Pawan Kumar Kayan who also accepted that they were entry providers; likewise, AO discussed about M/s. Comfort Securities Ltd, Mr Rajesh Kedia of Baba Bhoothnath Trade & Commence Pvt. Ltd, and Shri Anuj Agarwal of Korp Securities Ltd who all admitted of dealing with scrips of M/s. Sunrise to provide LTCG for beneficiaries. Thereafter, AO discussed about the findings of the Investigation Wing of Mumbai prepared after conducting search on Gurnani Group on 04.02.2016 and survey conducted on M/s. Sunrise and exit providers (i) M/s. Sampada Chemicals (ii) M/s. Shipra Fabrics Pvt. Ltd. (iii) M/s. Bhagwati Corporation (iv) M/s. SVJ Fabrics Pvt. Ltd (v) M/s. Eager Corporation (vi) M/s. Elegant Stationers (vii) M/s. Lunkad Textiles Pvt. Ltd. According to AO, the investigation revealed that the directors of M/s. Sunrise were dummy directors and actually M/s. Sunrise was controlled by Mr Vipul Vidur Bhatt, who also controlled M/s. Sampada Chemicals. Shri Vipul Vidur Bhatt also admitted that he was 6 A.Y. 2014-15 Manish Mahipatrai Shah an entry operator and therefore, he was searched and his statement recorded on 09.02.2016; 22.02.2016 & 12.05.2016 wherein he admitted to be an entry operator and that he controlled 347 bogus entities and he provided (i) Unsecured loan entries (ii) One time entry in the form of share capital/premium (iii) Turnover entries (iv) Bogus LTCG/STCG/Loss for a commission on 1% to 4% in cash. According to AO, the prices of shares were artificially rigged-up in BSE and when the prices reached the desired level, shares of beneficiaries would be sold. According to AO, Shri Vipul Bhatt accepted that he controlled M/s. Santoshima as well as M/s. Sunrise and that after amalgamation, shareholder of M/s. Santoshima was allotted shares of M/s. Sunrise at a swap ratio 1:1. The AO reproduced the statement of 348 persons/entities/HUF from page 23-71 of his assessment order. And discussed about 34 exit providers from page 83 to page 88 and assessee’s statement was reproduced at page no. 89 -92 of his order. The AO noted that assessee and his relatives had claimed about Rs.50 cr on LTCG from sale of M/s. Sunrise. Thus AO concluded that the claim of LTCG was nothing but colorable device to launder the black money of assessee to white through systematic, synchronized transaction of purchase/sale of penny-stock of M/s. Sunrise. The AO has discussed (in general) i.e. modus operandi carried out by entry- operators for the benefit of beneficiaries who wants to get their unaccounted money laundered as white and that too without paying tax. Thereafter, he noted that the SEBI has passed an order wherein one of the main operator Shri Anil Aggarwal & M/s. Comfort Fincorp 7 A.Y. 2014-15 Manish Mahipatrai Shah and many other broking/Trading firms were said to be indulging in share manipulation; and that many such brokers had accepted that they were providing accommodation entries in the scrip of M/s. Sunrise; and that trading in the share of M/s. Sunrise was banned by SEBI as well as BSE (refer page 97) of the assessment order. And thereafter, he was of the opinion that entire purchase/sale transaction of shares of M/s. Sunrise was not for commercial purpose but to create artificial gain by manipulating the share market which was pre-planned and pre- fixed through syndicate of un-scrupulous entry providers discussed (supra). Thereafter, he disallowed the assessee’s claim of LTCG as well as exemption claimed on it u/s 10(38) of the Act to the tune of Rs.11,89,44,328/- u/s 68 of the Act; and further, he was of the opinion that assessee in order to arrange the aforesaid accommodation entry, would have spent commission @ 5% to the broker/entry providers which he computed at Rs.59,47,216/-, which was also added as unexplained expenditure u/s 69C of the Act. And thus AO made an addition of Rs.12,48,91,544/-. Aggrieved, the assessee preferred an appeal before the Ld. CIT(A) who was pleased to dismiss the appeal of the assessee. Aggrieved, the assessee 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 10.11.2014 declaring total income of Rs.36,73,690/-. Thereafter, the assessment was reopened u/s 147 of the Act; and AO directed the assessee to furnish the details regarding the LTCG claim of Rs.11,89,44,328/- on sale of shares of M/s. Sunrise. Pursuant to which, 8 A.Y. 2014-15 Manish Mahipatrai Shah the assessee brought to the notice of the AO that he has been allotted 2,50,000 shares of M/s. Santoshima Trade Links Ltd @ 20 per shares on 10.10.2011 (w.e.f 29.09.2011) for which assessee filed copy of the share allotment advice issued by C found placed at page no. 40 of the PB and share certificate number 167 issued by M/s Santoshima Lease Finance & Investment (India) Ltd placed at page 104 PB [name changed on 16.09.2011 to M/s. Santoshima Trade Links Ltd]. From a perusal of these documents dated 10.10.2011 issued by M/s. Santoshima Trade Links Ltd, reveals that assessee has been allotted equity shares of Rs.10/- each for a premium of Rs.10/- each (i.e, Rs.20/- per share) and has been allotted 2,50,000 shares for an amount of Rs.50 Lakhs (Register folio No. 128 in the name of the assessee, Distintive number 6077371-6327370). Further, it is noted that purchase consideration has been given by assessee through Cheque No.210738 of Standard Chartered Bank, of Rs.50,00,000/- which fact is evident from bank-statement found placed at Page no. 46 of PB and application form found placed at page no. 16 of PB. The 2,50,000 shares of M/s. Santoshima has been held in depository/demat of M/s. Stock Holding Corporation of India in the name of assessee from Jan, 2012 onwards, [along with twenty eight (28) other shares, which included shares of blue-chip companies] which fact is evident from perusal of Page no. 42 & 43 of the PB and shows that assessee is a regular investor in scrips. It is further noted (demat statement) from 02.05.2013, pursuant to amalgamation shares of M/s. Sunrise was credited in place of share of M/s. Santoshima i.e. after M/s.
9 A.Y. 2014-15 Manish Mahipatrai Shah Santoshima got amalgamated with M/s. Sunrise, and as per the scheme of amalgamation as ordered by Hon’ble High Court, the assessee received 2,50,000 shares of M/s. Sunrise as per the swap ratio of 1:1 of shares of M/s. Santoshima. And thus, assessee received 2,50,000 shares of M/s. Sunrise in lieu of shares of M/s. Santoshima. Thereafter, the shares were transferred to the Demat Account/depository services of M/s. Stock Holding Corporation of India which fact is evident from perusal of statement of depository services of M/s. Stock Holding Corporation of India for period between 1st May, 2013 to 30.06.2013 (Refer page no. 44 PB); and the assessee sold the shares in lots in the month of September 2013 to March, 2014 on the electronic platform of BSE for rate ranging between Rs.488 to Rs.508 per share through the recognized broker M/s. Hornic Investments Pvt. Ltd. for total sale consideration of Rs.12,39,44,328/- which fact is discernable from copy of the broker/contract notes found placed from page no. 69 to 87 of PB; and demat statement corroborating sale/transfer of shares from assessee’s account is found placed at page no. 93A-103 PB, and the sale consideration has passed through bank account which fact is discernable from perusal of bank-statement found placed at page 88-93 PB. It is noted that the assessee had remitted STT on the sale transaction of shares of M/s. Sunrise and claimed LTCG of Rs.11,89,44,328/- which according to the assessee was exempt u/s 10(38) of the Act. The AO has disallowed the LTCG claim of assessee by mainly taking note of report submitted by investigation wing (Kolkata/Mumbai) as well as he doubted the financial prudence of the 10 A.Y. 2014-15 Manish Mahipatrai Shah assessee to have purchased in the first place the shares of M/s. Santoshima; and wondered as to how the price of shares of M/s. Sunrise could have increased manifold/20 times in a span of two years, and he also referred to SEBI orders in regard to other scrips, wherein SEBI found that a syndicate of unscrupulous entry providers are manipulating the market by rigging the share prices to generate exempt income; and AO relied on the statement of Shri Vipul Bhatt director of M/s. Sunrise; and several brokers (Shri Anil Agarwal/M/s. Comfort Securities Ltd and several others brokers and names of 348 persons/entities of Mr Vipul Vidhur Bhatt and 34 names of exit providers of Mr Vipul Vidhur Bhatt) who all, according to him dealt/facilitated in manipulating the share price of M/s. Sunrise and the AO concluded that assessee by making claim of LTCG/exempt income was bringing his unaccounted money back to his regular books by laundering his black money to white, and therefore, he held the transaction as bogus and added Rs.11,89,44,328/- u/s 68 of the Act and commission @ 5% for facilitating such transaction.
4. The main plea of the assessee is that impugned additions are not legally sustainable in the light of the fact that assessee has discharged the burden of proving the genuineness of his claim regarding LTCG on sale of shares of M/s. Sunrise 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, merger of entities ordered by the 11 A.Y. 2014-15 Manish Mahipatrai Shah Hon’ble High Courts order; and thereafter, allotment of shares of M/s. Sunrise and transfer of shares to demat account, 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/Ld. CIT(A) and they 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 Vipul Vidhur Bhatt/entry providers, etc) that assessee was participant in the modus operandi to convert his purported black money in active connivance with these statement-makers (Shri Vipul Vidur Bhatt, Shri Anul Agarwal 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.11,89,44,328/- from sale of shares of M/s. Sunrise. And pursuant to such a direction, the assessee had filed the primary documents as discussed (supra) to prove the 12 A.Y. 2014-15 Manish Mahipatrai Shah 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. Santoshima share certificate no. 167 and distinctive numbers 6077371-6327370, register Folio No. 128 [refer copy of share certificate in name of assessee at page 104 PB and allotment advice given by M/s Santhoshima Trade Links Ltd dated 10.10.2011 is seen at Page no. 40 of PB]. Further, AO has not even disputed the existence of D-mat/Depository account of assessee maintained with M/s. Stock Holding Corporation of India, 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. And further, we note that assessee has applied for the shares of M/s. Santoshima by filing share application form of M/s. Santoshima Lease Finance & Investment (India) Ltd on 29.09.2011, wherein the company has acknowledged of receiving cheque no. 210738 of Standard Chartered Bank dated 29.09.2011 of Rs.50 Lakhs for 2,50,000/- shares. In this context, it is noted that the AO observed that on 16.09.2011, M/s. Santoshima Lease Finance & Investment Ltd had changed its name to M/s Santoshima Trade Links Ltd. Therefore, AO wondered as to how assessee applied for shares in the printed form of M/s. Santoshima Lease Finance & Investment Ltd on 29.09.2011. In this regard, the Ld. AR pointed out that on 16.09.2011, the name of company was changed to M/s. Sanntoshima Trade Links Ltd, but the assessee had collected the share application 13 A.Y. 2014-15 Manish Mahipatrai Shah form of M/s. Santoshima Lease & Investment few weeks before the name got changed, and filled it up, and realized only before presenting the application form and therefore, assessee issued cheque of Rs.50 Lakhs in name of M/s. Santoshima Trade Links Ltd, which fact AO himself agrees at page 15.2 of his order. This fact that assessee on 29.09.2011 had given cheque of Standard Chartered Bank of Rs.50 Lakhs in the name of M/s. Santoshima Trade Links Ltd itself shows the bonafide action of assessee. The AO further noted that assessee was allotted share certificates on 10.10.2011 but the share certificate bore the name of M/s. Santoshima Lease Finance & Investment Ltd. (refer page 104 PB) which according to AO no standard company would do. In this regard the Ld. AR pointed out that on the share certificate allotted in the name of assessee, distinctive number 6077371-6327370 as well as Folio No.128 is clearly visible along with tamper proof seal of the new company name i.e. M/s. Santoshima Trade Links, which fact AO accepts at clause (iii) of para 15.2 of assessment order. In the light of the explanation given by assessee, nothing turns on the observations of AO because we note that M/s. Sunrise had under gone survey & search; and Investigation Wing Mumbai has not found any material to suggest that the share certificates issued to assessee by amalgamating company was fake or bogus. And it is not the case of AO that Rs.50 Lakhs cheque issued by assessee for allotment of shares never had gone into the bank account of M/s. Santoshima Trade Links (amalgamating entity). Moreover, the Ld. AR pointed out that the scheme of arrangement of the 14 A.Y. 2014-15 Manish Mahipatrai Shah amalgamation was presented before the Hon’ble Bombay High Court wherein the details of share holding of M/s. Santoshima Trade Links (amalgamating company) was put to the notice of