JAYANTILAL BHAGWANCHAND,BENGALURU vs. INCOME TAX OFFICER, WARD-5(2)(4), BANGALORE

Page 3 of 19 the assessee claimed to have purchased 4000 shares of impugned company M/s Comfort Intech Ltd on 14th March 2005 in offline mode through the broker namely Favorite Stocks Pvt Ltd @ 18.07 per share. The purchase consideration was paid through banking channel. The share of impugned company got listed on 21st November 2008 at the stock exchange. Thereafter, the shares of the got split one into 10 shares, accordingly the assessee in lieu of 4000 shares got 40000 shares of impugned company which were sold during May 2010. The adjusted closing price of the shares at the time of splitting was Rs. 3.2 per share and earlier the same was more or less constant around Rs. 1.99 per share. However, the price of the share of impugned company started rising thereafter and within period of 4 months i.e. 23rd November 2009 reached to around Rs. 30 per share which represents an increase of 850%.

Besides the above, the AO was also conscious to the fact that there was no business announcements made by the assessee company which may resulted in phenomenal rise of the price of the scrip of the company neither the financial performance of the company was in commensurate to such a high price rise.

6. The AO also referred to the country wide investigation carried out by DDIT Kolkata highlighting the racket of bogus long term capital run by entry operator and broker or sub-broker to provide accommodation entry in the form of LTCG and STCL etc. The DDIT in the report highlighted the modus operandi of providing bogus long term capital gain and the facts involved in the present case are identical to modus operandi identified by the DDIT. Therefore, the AO in view of the above and after referring to judgment of Hon’ble Supreme Court in the case of Durga Prasad Moore in 82 ITR 540 and Sumati Dayal in 214 ITR 801 where the test of preponderance of human probability and surrounding circumstantial evidence was discussed, treated the LTCG on the script of M/s Comfort Intech Ltd as sham transaction. Thus, the AO disallowed the claim of exempt long-term capital gain on the sale of impugned scripts for Rs. 10,86,720/- and added to the total income of the assessee.

7. Aggrieved, assessee preferred an appeal before the learned CIT(A).

8. The assessee before the learned CIT(A) submitted that transaction of purchase and sale of shares of M/s Comfort Intech Ltd are .

Page 5 of 19 genuine and duly supported by documentary evidence such as share purchase evidence, contract note, demat account etc.

Page 6 of 19 have lost sight of an important fact that when a claim is made for LTCG or STCL, the onus is on the assessee to prove that credit worthiness of the companies whose shares the assessee has dealt with, the genuineness of the price rise which is undoubtedly alarming that to within a short span of time. The Court referred to the decision in Commissioner of Income Tax Versus Nova Promoters Finlease Private Limited wherein it was held that in view of the link between the entry providers and incriminating evidence, mere filing of PAN, acknowledgement of IT Returns of the entry providers, bank account statements etc. where not sufficient to discharge the onus under Section 68 of the Act." Hence the Hon'ble Kolkata High Court has given a clear finding rejecting this contention of the appellant and holds that mere furnishing of these documents does not prove the genuineness of the transaction. Further, the AO has made a detailed discussion on these issues and the Assessee has not been able to discharge the onus placed on him. Accordingly, the addition of Rs. 10,86,720/- made by the Assessing Officer u/s 68 is hereby confirmed.”

11. Being aggrieved by the order of the learned CIT(A), the assessee is in appeal before us.

12. The learned AR before us filed paper book running from pages 1 to 143 and reiterated the contentions made before the authorities below.

14.1 The observation of the AO for holding the impugned capital gain as bogus was that the investment was made by the assessee through offline mode and the price of share of the company M/s Comfort Intech Ltd increased manifolds in a short period of time. In this regard, firstly we note that the offline purchase of share is not prohibited under the statute. Secondly the price of the scripts of a company, having no financial base/business activity/profitability certainly gives rise to doubt about such an increase in the price. However, in the given case, the impugned company was engaged in business activity, and it was regularly showing income from operation. Further in our considered view, the sharp rise in the price of script cannot be a sole criterion for reaching to the conclusion that the price was rigged up to generate the long-term capital gain which is exempted under section 10(38) of the Act. Such observation during the assessment proceedings provides a reason to investigate the matter in detail and the same cannot take the place of the evidence. But in the case in hand, there was no enquiry conducted either by the SEBI or the stock exchange with respect to rigging up of the share price of M/s Comfort Intech Ltd. Similarly, there was no complaint filed by any of the parties either to SEBI or the stock exchange about the assessee or his brokers impleading that they were involved in the activity of rigging up the price of the shares of impugned company. Similarly, the AO has not conducted any enquiry from the SEBI or BSE about the assessee whether he was engaged in frivolous activities as alleged.

14.2 Further, the price of a share listed on the stock exchange is not linked to the financial strength of the company. As such the same is governed by several market driven factors. The assessee has also made . an investment in the scripts of other companies. We also note that the assessee, on investment in other scrip namely M/s Spectacle Industries Ltd., has earned long term capital gain of Rs. 1,42,93,981/- only. It is also important to note that the assessee purchased the share of the impugned company M/s Comfort Intech Ltd in the year 2005 through a broker and consideration of the same was paid through a banking channel. The assessee kept the investment till May 2010 i.e. for almost 5 years. Thus, in our considered view, had the assessee indulged in prearranging transaction for taking accommodation entries, then he should not have waited for such period.

14.3 The AO further alleged that the director of M/s Comfort Intech Ltd Shri Anil Agarwal admitted having provided accommodation entry in the script of M/s Comfort Intech Ltd. Similar, admission was also made by the other parties mainly identified as exit provider during the search and survey proceeding conducted by the Department in the matter of penny stock. However, their statements were not provided to the assessee for the rebuttal and cross examination. It was also not brought on record that any of the person whose statement was recorded has specified the name of the assessee or his broker. We also note that there was no allegation against the broker through whom the assessee sold the impugned scrip. What has been adopted by the AO for making the addition was the modus of operandi highlighted by the investigation wing of Kolkata. To our understanding, the mere modus of operandi cannot be the basis of making the addition or treating the capital gain as bogus until and unless it is supported by the material documents. On analyzing the facts of the present case, we note that the AO on one hand has alleged that the entire transaction was bogus but on the other . hand the AO himself has allowed the cost of acquisition against the sale of shares, meaning thereby, the purchase of the shares has been admitted as genuine. The transactions of purchase and sales go hand in hand. In simple words, a sale is not possible without having the purchases. Thus, once purchases have been admitted as genuine, then corresponding sales cannot be doubted until and unless some adverse materials are brought on record. As such, we note that the AO in the present case has taken contradictory stand. On one hand, the AO is treating the entire transaction as sham transaction and on the other hand he’s allowing the benefit of the cost of acquisition for the shares while determining the bogus long-term capital gain.

14.4 Going ahead, assuming the alleged scam might have taken place on generating LTCG to avoid the payment of tax. But it has to be established in each case, by the party alleging so, that this assessee in question was part of this arrangement. The chain of events and the live link of the assessee’s action that he was involved in such rigging up of share price should be established based on cogent materials. The allegation as discussed above implies that there was cash exchanged for taking exempted income by way of long-term capital gain by way of cheque through banking channels. This allegation that cash had changed hands has to be brought on record by the Revenue, but we find that there is no such whisper in the order of the AO. There was no information brought on record suggesting that there was an exchange of cash against the long-term capital gain shown by the assessee. Here, we feel pertinent to refer the order of the co-ordinate bench of Mumbai Tribunal in case of ITO vs. Indravadan Jain HUF in ITA No. 4861/Mum/2014. In the said case the assessee Indravadan Jain HUF .

Page 10 of 19 purchased share of M/s Ramakrishna Fincap Ltd in the year 2003 for Rs. 3.12 per share at the floor of Kolkata stock exchange through the broker namely M/s Basant Periwal & Co. The assessee Indrvadan Jain HUF sold the impugned share in the year 2005 at Rs. 155.04 per share at the floor of Kolkata stock exchange through the broker namely M/s Basant Periwal & Co and claimed exempted long-term capital as per the provision of section 10(38) of the Act. Subsequently the AO received an information that an investigation carried out by the SEBI wherein it was found that broker namely M/s Basant Periwal & Co was indulged in price manipulation through synchronized and cross deal in scrip of Ramkrishna Fincap Ltd. The assessee sold his holding in Ramkrishna Fincap Ltd during the same period when the broker namely M/s Basant Periwal & Co. was found to be indulged in manipulation of the price of script of Ramkrishna Fincap Ltd. Thus, the case of the assessee was reopened and finally the exempted long-term capital claimed by the assessee was held as bogus by the AO and added to total income in accordance with provision of section 68 of the Act. In this backdrop the coordinate bench adjudicated the issue in the favor of the assessee by observing as under: "8. We have considered rival contentions and carefully gone through the orders of authorities below and found from the record that the AO has treated the share transaction as bogus on the plea that SEBI has initiated investigation in respect of Ramkrishna Fincap Pvt. Ltd. The AO further stated that investigation revealed that transaction through M/s Basant Periwal and Co. on the floor of stock exchange was more than 83%. We found that as far as initiation of investigation of broker is concerned, the assessee is no way concerned with the activity of the broker. Detailed finding has been recorded by CIT(A) to the effect that assessee has made investment in shares which was purchased on the floor of stock exchange and not from M/s Basant Periwal and Co. Against purchases payment has been made by account payee cheque, delivery of shares were taken, contract of sale was also complete as per the Contract Act, therefore, the assessee is not concerned with any way of the broker. Nowhere the AO has alleged that the transaction by the assessee with these particular broker or share was bogus, merely because the investigation was done by SEBI against broker or his activity, assessee cannot be said to have entered into ingenuine transaction, insofar as assessee is not concerned with the activity of the broker and have no control over the same. We found that M/s Basant .

Periwal and Co. never stated any of the authority that transaction in M/s Ramkrishna Fincap Pvt. Ltd. on the floor of the stock exchange are ingenuine or mere accommodation entries. The CIT(A) after relying on the various decision of the coordinate bench, wherein on similar facts and circumstances, issue was decided in favour of the assessee, came to the conclusion that transaction entered by the assessee was genuine. Detailed finding recorded by CIT(A) at para 3 to 5 has not been controverted by the department by brining any positive material on record. Accordingly, we do not find any reason to interfere in the findings of CIT(A). Moreover, issue is also covered by the decision of jurisdictional High Court in the case of Shyam R. Pawar (supra), wherein under similar facts and circumstances, transactions in shares were held to be genuine and addition made by AO was deleted. Respectfully following the same vis-à-vis findings recorded by CIT(A) which are as per material on record, we do not find any reason to interfere in the order of CIT(A).

14.5 The above finding of the Mumbai Tribunal came to affirmed by the Hon’ble Bombay High Court vide order dated 12th July 2023 on instance of further appeal preferred by the Revenue in Income Tax Appeal No. 454 of 2018. Considering the facts involved in above mentioned case viz-a-viz facts involved in the case of the present assessee, we find that the case of the present assessee is better placed.

14.6 Likewise, we also note that the assessee has discharged the onus imposed under section 68 of the Act by furnishing the necessary documentary evidence in support of the nature of transaction and sources thereof. The necessary details furnished by the assessee stand as under:

1. 1. Purchase consideration of shares was paid through cheque.

2. Share was duly dematerialized in demat account.

3. Shares were sold through the stock exchange after the payment of STT. The transactions have been confirmed by brokers.

4. The payments are received through ECS through demat account.

5. Inflow of shares are reflected in demat account. Shares are transferred through demat account and buyer are not known to the assessee.

7. The assessee has no nexus or any relation with the company, its director or entry operator. 8. The assessee may have got only incidental benefit of price rise. 9. The opportunity of cross examination has not been extended to the assessee despite having the request from the assessee.

14.7 From the above, the conduct of the assessee suggests that he was not involved in rigging or any wrongdoing. The case laws relied by the authorities below are distinguishable from the present facts of the case in so far there was SEBI enquiry conducted and found guilty of wrong practices, but it is not so in the case on hand.

14.8 In our view, the income generated by the assessee cannot be held bogus only based on the modus operandi, generalisation, and preponderance of human probabilities. To hold income earned by the assessee as bogus, specific evidence has to be brought on record by the Revenue to prove that the assessee was involved in the collusion with the entry operator/ stockbrokers for such an arrangement. In absence of such finding, it is not justifiable to link the fact with the finding unearthed in case of some third party or parties with the transactions carried out by the assessee. Further the case laws relied by the AO are regarding the test of human probabilities which may be of greater .

Page 13 of 19 impact but the same cannot used blindly without disposing off the evidence forwarded by the assessee. In simple words, there were not brought any evidence from independent enquiry to corroborate the allegation. As such, the AO has highlighted various suspicious circumstances, but no addition can be made merely on the basis of suspicious circumstances or presumption unless some cogent material evidence brought on record. In this regard, we draw support and guidance from the judgment of Hon’ble Rajasthan High Court in the case of CIT vs. Sumitra Devi reported 49 taxmann.com 37 wherein it was held as under:

7. True it is that several suspicious circumstances were indicated by the AO but then, the findings as ultimately recorded by him had been based more on presumptions rather than on cogent proof. As found concurrently by the CIT(A) and the Tribunal, the AO had failed to show that the material documents placed on record by the assessee like broker's note, contract note, relevant extract of cash book, copies of share certificate, de-mat statement etc. were false, fabricated or fictitious. The appellate authorities have rightly observed that the facts as noticed by the AO, like the notice under s, 133(6) to the company having been returned unserved, delayed payment to the brokers, and dematerialisation of shares just before the sale would lead to suspicion and call for detailed examination and verification but then, for these facts alone, the transaction could not be rejected altogether, particularly in absence of any cogent evidence to the contrary.

14.9 We also draw support and guidance from the judgment of Hon’ble Delhi High court in case of Pr. CIT vs. Smt. Krishna Devi reported in 126 taxmann.com 80 where it was held as under:

Page 14 of 19 adverse to comment on the above analysis, but are concerned with the axiomatic conclusion drawn by the AO that the Respondent had entered into an agreement to convert unaccounted money by claiming fictitious LTCG, which is exempt under section 10(38), in a preplanned manner to evade taxes. The AO extensively relied upon the search and survey operations conducted by the Investigation Wing of the Income-tax Department in Kolkata, Delhi, Mumbai and Ahmedabad on penny stocks, which sets out the modus operandi adopted in the business of providing entries of bogus LTCG. However, the reliance placed on the report, without further corroboration on the basis of cogent material, does not justify his conclusion that the transaction is bogus, sham and nothing other than a racket of accommodation entries. We do notice that the AO made an attempt to delve into the question of infusion of Respondent's unaccounted money, but he did not dig deeper. Notices issued under sections 133(6)/131 of the Act were issued to M/s Gold Line International Finvest Limited, but nothing emerged from this effort. The payment for the shares in question was made by Sh. Salasar Trading Company. Notice was issued to this entity as well, but when the notices were returned unserved, the AO did not take the matter any further. He thereafter simply proceeded on the basis of the financials of the company to come to the conclusion that the transactions were accommodation entries, and thus, fictitious. The conclusion drawn by the AO, that there was an agreement to convert unaccounted money by taking fictitious LTCG in a pre-planned manner, is therefore entirely unsupported by any material on record. This finding is thus purely an assumption based on conjecture made by the AO. This flawed approach forms the reason for the learned ITAT to interfere with the findings of the lower tax authorities. The learned ITAT after considering the entire conspectus of case and the evidence brought on record, held that the Respondent had successfully discharged the initial onus cast upon it under the provisions of Section 68 of the Act. It is recorded that "There is no dispute that the shares of the two companies were purchased online, the payments have been made through banking channel, and the shares were dematerialized and the sales have been routed from de- mat account and the consideration has been received through banking channels." The above noted factors, including the deficient enquiry conducted by the AO and the lack of any independent source or evidence to show that there was an agreement between the Respondent and any other party, prevailed upon the ITAT to take a different view. Before us, Mr. Hossain has not been able to point out any evidence whatsoever to allege that money changed hands between the Respondent and the broker or any other person, or further that some person provided the entry to convert unaccounted money for getting benefit of LTCG, as alleged. In the absence of any such material that could support the case put forth by the Appellant, the additions cannot be sustained.

Page 15 of 19 14.10 Respectfully following the judgment of Hon’ble Delhi High Court (Supra), we hold that in absence of any specific finding against the assessee in the investigation wing report, the assessee cannot be held to be guilty or linked to the wrong acts of the persons investigated as far as long-term capital gain earned on sale of share of M/s Comfort Intech Ltd is concern.

14.11 We also note that this Tribunal in the case of Parasben Kasturchand Kochar Mehta Lodha & Co. Chartered Accountant vs. ITO bearing involving identical facts and circumstances has held as under:

9. In our considered opinion, in such case assessee cannot be held that he earned Long Term Capital gain through bogus company when he has discharged his onus by placing all the relevant details and some of the shares also remained in the account of the appellant after earning of the long term capital gain. 10.Ld. A.R. contention is that no statement of the Investigation Wing was given to the assessee which has any reference against the assessee. 11. In support of its contention, ld. A.R. also cited an order of Co-ordinate Bench in in the matter of Mohan Polyfab Pvt. Ltd. vs. ITO wherein ITAT has held that A.O. should have granted an opportunity to cross examine the person on whose statement notice was issued to the assessee for bogus long term capital gain. But in this case, neither statement was supplying to the assessee nor cross examination was allowed by the ld. A.O. Therefore, in our considered opinion, assessee has discharged his onus and no addition can be sustained in the hands of the assessee.

Page 16 of 19 14.12 At this juncture, we also feel pertinent to refer the order of coordinate bench of Indore Tribunal in case of Shivnarayan Sharma & Ors bearing 474,206,60,987/Ind/2019, where in identical fact and circumstances held as under:

Page 18 of 19 material to the assessee for rebuttable. The relevant observation of the Hon’ble Apex Court is extracted as under:

It is true that the proceedings under the income-tax law are not governed by the strict rules of evidence and, therefore, it might be said that even without calling the manager of the bank in evidence to prove this letter, it could be taken into account as evidence. But before the income-tax authorities could rely upon it, they were bound to produce it before the assessee so that the assessee could controvert the statements contained in it by asking for an opportunity to cross examine the manager of the bank with reference to the tatements made by him.

14.14 In the case on hand, the revenue authorities to hold the transaction carried out by the assessee as sham transaction referred and relied on material and statements of various entry operator who are identified as exit provider. However, any material/ statement was neither provided to the assessee for his rebuttable nor any independent cogent material brought on record suggesting any live link between the material received from the DDIT and transaction caried out by the assessee on hand. Therefore, no adverse inference can be drawn against the present assessee based on such material which do not constitute admissible evidence in the light of judgment of Hon’ble Apex court.

14.15 It is also important to highlight that it is not the case that the assessee has entered into sole transaction of sale and purchase of shares in the impugned scrip of M/s Comfort Intech Ltd only and earned exempted long-term capital. As such the assessee has made investment in shares of other public company which has been stated somewhere in preceding paragraph of this order. Thus, in view of the above discussion, we hold that the capital gain earned by the assessee cannot be held bogus merely based on some report finding unearthed in case of third party/parties in the given facts and circumstances unless cogent material . is brought against particular assessee on record. Therefore, we hereby set aside the finding of the learned CIT(A) and direct the AO to delete the addition made by him. Hence the grounds of assessee’s appeal are allowed.