SMT. SHEELA AGRAWAL,INDORE vs. ITO-5(5), INDORE

That on the facts and in the circumstances of the case and in law the Ld. CIT has erred in maintaining the disallowance of Rs. 31,641/- on account of alleged bogus brokerage expense.

Before the Tribunal the Ld. AR of the assessee has submitted that the assessee is regularly making purchase and sales of the shares and purchased 500 shares of M/s. Surabhi Chemicals & Investments Ltd on 20.03.2012 for consideration of Rs.62,500/- @ 125 per share. He has referred to the bill dated 20.03.2012 of M/s Aakrati Advisory Services Pvt. Ltd. at page no.56 & 57 of the paper book as well as the bank account statement of the assessee at page no.58 of the paper book and submitted that the purchase consideration was paid through banking channels vide cheque no.767734 reflected in the bank account statement of the assessee. Thus, the Ld. AR has submitted that the assessee made the payment of purchase consideration through cheque and is not in dispute which established the date of purchase by the assessee thereafter the company M/s. Surabhi Chemicals & Investments Ltd. announced bonus issued in the ratio of 9:1 and consequently assessee received 4500 shares as bonus shares and total holding of the assessee comes 5000 shares. He has referred to the shares certificate in the name of the assessee at page no.44 to 55 of the paper book, thereafter assessee got these shares converted in demat form on 14th August 2012 which is evident from page no.43 to 54 of the paper book. The said company announced a stock split from 1 shares to 10 shares on 12th April 2013 resulting the number of shares held by the assessee increased from 5000 to 50000. These shares were credited in the Demat Account of the assessee placed at page 66 to 73 of the paper book vide entry dated 14th August 2012. Out of these 50000 shares held by the assessee, 31100 shares were sold by the assessee during the year under consideration for a consideration of Rs. 16,44,557/-. These shares were sold through stock exchange and from the & others Ind/2019 Sheela Agarwal and Ankur Agarwal Page 4 of 17 Demat account of the assessee. The sale transactions are duly reflected in the Demat account of the assessee. He has further submitted that the Transactions of Sale of shares suffered Security Transaction Tax(STT).

The AO doubted the genuineness of the transactions and propose to treat these transactions are bogus and long term capital gain declared by the assessee as income from undisclosed sources. In response to the assessee filed all relevant 3rd party evidence such as contract note, bills from the brokers, demat account and assessee’s ledger with the broker. The Assessing Officer has nowhere disputed the evidence produced by the assessee but referred some search operations conducted by the department on 3rd party wherein the department taken a view that some people are engaged in the manipulation of share market and/or providing bogus entries from the shares. He has further submitted that the assessee was never confronted with these documents nor it was the case of the AO that these documents are related to the assessee. Thus, the Ld. AR has submitted that when the assessee has discharged its onus by producing all the relevant records that transactions of purchase and sale of shares in question are genuine as per the facts supported by the documentary evidences and in the absence of any contrary facts brought on record by the AO disproving the claim of the assessee and conclusion reached by the AO merely on the basis of suspicion is not valid and justified. He has relied upon the decision of Hon’ble Bombay High Court in case of CIT vs. Shayam R. Pawar 54 taxmann.com 108 and submitted that Hon’ble High Court has held that primary onus of proof that the transaction is sham or bogus is on the department. The department in the case of the assessee has not discharged its primary onus and has merely alleged on the preponderance of probabilities that all the shares transactions related to the M/s. Surabhi Chemicals & Investments Ltd. are bogus in nature. The AO in his order has stated that the company is not having any growth potential and is not having any business, therefore, the rise in the share prices is not real. The Ld. AR has submitted that prices of shares are depending on demand and supply of the shares between the market & others Ind/2019 Sheela Agarwal and Ankur Agarwal Page 5 of 17 participants. The share price of this company increased because of a market information that the company is expecting a huge turnaround and is expected to get a huge government contract. Past information is not a basis of estimating the share prices but the future earning potential of the company is relevant. The AO has passed the assessment order without considering the evidence filed by the assessee. The ld. CIT(A) has confirmed the order of the AO without appreciating the fact as well as evidence on record. The AO has not brought on record any material or record to disprove these evidences filed by the assessee. In fact the So called material relied upon by the AO at page no.3 of the assessment order pertains to the transaction of share purchased in cash and the mode of acquisition was byway of allotment and amalgamation/merger of companies which is not the case in the hands. He has also relied upon the Hon’ble Supreme Court in case of Shreelekha Benerjee & others vs. CIT 49 ITR 112 and submitted that before rejected evidence filed by the assessee, the department must either show an inherent weakness in the explanation or rebut it by putting to the assessee some information or evidence which it has in its possession. The department cannot be merely rejecting unreasonably a good explanation and converted good proof into no proof.

He has relied upon the judgment of Hon’ble Calcutta High Court. Commissioner Of Income-Tax vs Carbo Industrial Holdings Ltd. 244 ITR 422 and submitted that the Hon’ble High Court has held that where the payments are made through account payee cheque and identity of broker is not in dispute then the transactions cannot be held to be bogus. The assessee made payment through account payee cheque and the AO in his order has nowhere disputed the identity of the broker and therefore, the judgment of Hon’lbe Calcutta High Court in case of CIT vs. Carbo Industrial Holdings Ltd (supra) is applicable to the facts of the present case. He has also relied upon the decision of Hon’ble Calcutta High Court in the case of CIT vs Emerald Commercial Ltd 120 Taxman 282. & others Ind/2019 Sheela Agarwal and Ankur Agarwal Page 6 of 17 6. The assessee is a regular investor in shares for last 15 to 20 years and this fact is also evident from the statement of the assessee recorded by the AO. It is not necessary that the assessee must have the knowledge of each and every company where the assessee has purchased the shares. The Ld. AR has pointed out that the AO in the order stated that some buyers of these shares have not responded to the notice send by him however, when the transactions of sale was carried out through stock exchange then it is irrelevant that who is buyer of shares sold by the assessee. Therefore, the AO merely acts on suspicion not on any evidence. He has relied upon the judgment of Hon’ble Supreme Court in case Umarchand Shaw & Bros. vs Commissioner Of Income-Tax 37 ITR 271 wherein it has been held that suspicion which cannot take the place of proof in these matters.

On the other hand, Ld. DR has submitted that the shares of M/s Surabhi Chemicals & Investments Ltd. were purchased by the assessee in physical form. In various investigation carried out by the department it was found that the shares of M/s Surabhi Chemicals & Investments Ltd. have been used for providing accommodation bogus entries of capital gain by various brokers and other individuals. The SEBI conducted investigation in this regard and vide order date 30th September 2021 found that the broker M/s Aakrati Advisory Services Pvt. Ltd. was involved in rigging the share price of M/s Surabhi Chemicals & Investments Ltd. Therefore, all these facts clearly show that the shares alleged purchased through M/s Aakrati Advisory Services Pvt. Ltd of M/s Surabhi Chemicals & Investments Ltd. and subsequently, sale at a very unreasonable and high prices resulting a claim of huge long term capital gain exempt u/s 10(38) of the Act is not genuine transaction. The SEBI has discussed the modus oprendi of these persons of rigging share price of particular scrip from Rs.2.54 in august 2012 to Rs.59.35 in April 9, 2013. He has relied upon the order of the AO as well as impugned order of the Ld. CIT(A) and submitted that the AO as well as CIT(A) has considered all the relevant facts of this case and relied upon various judgment on this issue. Ld. DR has relied upon the following judgments : & others Ind/2019 Sheela Agarwal and Ankur Agarwal Page 7 of 17 1. Pr. CIT vs. Swati Bajaj 446 ITR 56 (Calcutta) 2. Shyam Sunder Bajaj vs. ITO 145 taxmann.com 315 (Kolkata-Trib) 3. Suman Poddar vs. ITO 112 taxmann.com 330 (SC) 4. Sandeep Bhargava vs. ACIT 109 taxmann.com 174 (Delhi –Trib) 5.Pooja Ajmani vs. ITO 177 ITD 127 (Delhi –Trib)

He has submitted that in the above decisions when the investment was made in the Penny stock companies and assessee failed to establish the genuineness of rise of price of the shares within a short period of time then the AO has reached a reasonable conclusion in treating the transactions as bogus and capital gain is as a result of accommodation entry and raging of price of the shares. He has submitted that Hon’ble Calcutta High Court in case of Pr. CIT vs. Swati Bajaj held that when the report of the investigation division was available in the public domain then nothing prevented the assesses to download such reports and examine the same and thereafter put up their defence. The Hon’ble High Court has held that the violation of principles of natural justice for want of the supply of the said report has not made out any case. The Hon’ble High Court has passed the judgment after considering all the decisions on this point. He has then referred to the judgment of Hon’ble Delhi High Court in the case of Suman Poddar vs. ITO and SLP filed by the assessee has been dismissed by the Hon’ble Supreme Court.

We have considered the rival submissions as well as relevant material on record. During the financial year relevant to assessment year 2014-15 the assesse has inter alia purchased shares of M/s Surabhi Chemicals & Investments Ltd. the details of the purchase and sales and holding period is given by the AO in para 4 as under:

The AO has also recorded the fact that the assessee initially purchased 500 share of M/s Surabhi Chemicals & Investments Ltd. on 30.03.2012 for a consideration of Rs.62,500/- @ 125 per share. The entire case of the assessing officer is based on the information that the department in the various investigations found that various brokers and other persons are involved in providing bogus accommodation entries of long term capital gain arising from purchase and sale of shares of certain penny stock companies. Though the term “penny stock” has not been defined either in the SEBI Act or any other statute however, as it is apparent from the term penny, where the price of shares is not more than a penny is called penny stock and in the Indian context as the term used in the stock market, the penny stock is considered where the market price of the shares is less than Rs.10. In the case in hand the assessee has purchased the shares @ 125 per share and therefore, at the time of purchase these were not penny stock. Due to subsequent corporate Page 8 of 17 & others Ind/2019 Sheela Agarwal and Ankur Agarwal Page 9 of 17 announcement and development/events the even 500 shares have increased to 50000 shares as a result of bonus in the ratio of 9:1 thereafter split in the ratio of 10:1. The acquisition cost in the hands of the assessee has been reduced drastically due to these subsequent corporate announcements of bonus issue and split of shares though intriguing value of the share remains same. The assessee has produced before the AO the evidence regarding purchase of shares and payment of purchase consideration through account payee cheque in shape of contract note of broker, bank account statement shown payment of Rs. 62,500/- against which the broker has issued a receipt giving the details of the purchase consideration received vide cheque No. 767734 dated 20.03.2012. Thereafter these shares were dematerialized in the demat account of the assessee in the month of September 2012 against dematerialization request dated 9th August 2012 made to the IDBI Bank. The assesse has also filed the shares certificate wherein the transfer of shares in the name of the assessee has been duly endorsed by the company vide entries dated 30th June 2012. The assessee has also shown these shares in the balance sheet as on 31.03.2012 and the return of income for the assessment year 2012-13 was filed on 22nd June 2012. Therefore, the holding of the shares by the assessee as on 31.03.2012 and at least on 22nd June 2012 when the assessee filed the return of income cannot be dispute as evident from the record being return of income for the A.Y.2012-13 and balance sheet. Further the assessee has made purchase consideration through account payee cheque which is duly reflected from the bank account statement of the assessee as well as the receipt issued by the broker giving the particulars of cheque no. amount and consideration against sale of shares. Similarly, the sale of shares are not in dispute as these are sold on the stock exchange and from the Demat account of the assessee. For the year under consideration the assessee has sold 31100 shares from 17th September 2013 to 23rd December 2013 after a holding period of 17 months to 20 months. The AO has considered the financial statements of the M/s Surabhi Chemicals & Investments Ltd. and held that the profit and loss account of the company Page 9 of 17 & others Ind/2019 Sheela Agarwal and Ankur Agarwal Page 10 of 17 shown that this company has no business during the last five years and therefore, the market value of shares of the company at the stock exchange is unrealistic. It is pertinent to note that the market price at the stock exchange is not determined by net worth of the company but it is determined by the market forces of demand and supply. The AO has recorded the statement of the assessee wherein the assessee has explained that she is making the investment in shares for last so many years and accepted the transaction of purchase and sales of the shares of M/s Surabhi Chemicals & Investments Ltd. The assesse has explained correct details of the shares and sale price and also explained the broker through which the transactions were carried out. The AO then referred to the report of the investigation carried out by the department in various cases and then held that the assessee has not received long term capital gain as claim but it is income from undisclosed source which is claimed as exempt u/s 10(38) of the Act which is not acceptable. Accordingly, the AO treated the capital gain of Rs. 16,12,698/- as income from undisclosed source and also disallowed the claim of brokerage of Rs.31,641/-.

As we have already discussed the facts of the present case the assessee initially purchase the shares @ 125 per share and due to the bonus issue and split the quantity. of shares initially held by the assessee multiplied from 500 to 5000 and consequently the cost of acquisition was reduced from Rs.125 per share to Rs.2 but this cost of acquisition is of the share of face value of Rs.1 as against initial rate of purchase of Rs.125 per share of face value of Rs.10. The assessee sold the shares during the year @ Rs.58.10, Rs.43.30 , Rs.46.90, Rs.56.95, Rs.58.55 and Rs.58.10 per share. The orders for sale were executed at the Bombay Stock Exchange. Since the sale price is more than 20 times the cost of acquisition of these shares therefore, the AO doubted the genuineness of the transactions. However, once the cost of acquisition is the real amount the assessee has paid for purchase of these shares and the sale price was actual prevailing price at the stock exchange then in the absence of any material or fact to show that the assessee had played any role or was involved in alleged & others Ind/2019 Sheela Agarwal and Ankur Agarwal Page 11 of 17 rigging of price of this scrip at the stock exchange the transactions cannot be held as bogus. The price prevailing at the stock exchange on the date of sale is beyond the control of the assessee and it might have been manipulated by the alleged brokers or the other interested persons who were in position to manipulate price by create an artificial demand and shortage of supply. Ld. DR has referred to the order of the SEBI dated 30th September 2021 wherein certain brokers were suspended from the trading at the stock exchange because of their involvements in rigging the price of certain shares for the purpose of providing accommodation entries however, the transactions and fraudulent acts funds which were examined by the SEBI were for the period from 1st August 2012 to January 6, 2015 whereas in the case of the assessee the shares were purchased on 20.03.2012 which was prior to the said period which was investigated by the SEBI. Further there was neither any order against the broker through whom the assessee has purchased the shares as that relevant point of time nor any indictment by any of the agency. Thus, the assessee cannot be expected to be aware about the malpractice. When neither any material nor the facts and circumstances of the case remotely indicate or suggest that the assessee has any role or involvement in the alleged rigging of the price of the shares in question at stock exchange then the mere abnormal rise in the shares price in comparison to the cost of acquisition would not lead to the conclusion that the transactions of purchase and sale of shares by the assessee, which is otherwise established by the evidence as real transactionss can be held as bogus.

As per the provision of section 10(38) the only requirement for claiming exemption is that the transaction of sale undertaken and subjected to STT in respect of the shares of a company listed in the recognized stock exchange and holding period is more than 1 year. In the case in hand the AO has not disputed the date of acquisition of the share and date of sales and even otherwise the assessee has produced all the evidences to prove the time of acquisition of the shares as well as sale. The relevant evidence in this regard is purchased consideration was paid by & others Ind/2019 Sheela Agarwal and Ankur Agarwal Page 12 of 17 the assessee through account payee cheque which is not disputed by the AO contract note of the broker and receipt of purchase consideration made by the assessee. Further these shares were then demonetarized and share shown in the balance sheet as on 31.03.2012 and the return of income for assessment year 2012-13 was filed on 22nd June 2012. Therefore, the assessee was holding these shares on 31.03.2012 and this record was already available with the department and hence there cannot be any manipulation so far as time of acquisition of shares are concerned. Moreover, once the shares are dematerialized the factum of holding these shares in the demat account cannot be question. When the transaction of acquisition of shares and sale of the shares cannot be disputed then the rigging of the shares price at the stock exchange by some body having vested interest cannot render each and every transactions carried out at the stock exchange as bogus. The report of the investigation giving the modus operandi or the transactions of bogus capital gain entry provided by certain persons including brokers is a good reason to doubt the transactions of the assessee however, this report of the investigation wing carried out in the case of 3rd person cannot be the sole basis for holding the transaction of the assessee as bogus when the fact of purchase and sales and holding of these shares by the assessee are not disputed. Therefore, the report of the investigation wing can be a reason to conduct a proper inquiry by the AO to verify the genuineness of the claim and transactions carried out by the assessee in respect of these shares but the said report cannot be the sole basis of holding the transactions as bogus. The AO has recorded the statement of the assessee and nothing incriminating is detected or resulted as per the outcome to the inquiry conducted by the AO. The assessee has recorded these transactions in the books of account and as per balance sheet as on 31.03.2012 these shares have been duly held by the assessee. The assessee produced each and every documentary evidence relating to the transaction of purchase and sale of these shares and the AO has not given even a remote remark about the genuineness of the documentary evidence filed by the assessee. Once the assessee has discharged its onus to show that the transaction of Page 12 of 17 & others Ind/2019 Sheela Agarwal and Ankur Agarwal Page 13 of 17 purchase and sale is a real and genuine transaction then the burden is shifted to AO to disprove the claim of the assessee by some tangible material brought on record. The AO has held these transactions as bogus only on the basis of suspicion and not on the basis of conclusive evidence whereas the assessee has produced all the relevant evidence to establish that the transaction is genuine and assessee is eligible for claim u/s 10(38) of the Act. In the case of Suman Poddar vs. ITO (supra) the Hon’ble High Court has upheld the finding of the Tribunal as under:

Thus, it is clear that in that case the said company was identified by the Bombay Stock Exchange as penny stock being used obtaining bogus long term capital gain and consequently no evidence of actual sale except contract note issued by the share brokers were produced by the assessee. In the case in hand the assessee has produced all the evidences to prove the purchase of the shares as well as sale of the shares and holding all these shares in the Demat account and also recorded in the books of account. The purchase consideration was paid through banking channel by account payee cheque and the sale transaction is carried out through stock Exchange from the Demat account of the assessee. Therefore, the said judgment will not help the case of the revenue. Even otherwise the issue involved in the present appeal is factual in nature and the factual finding given by the Tribunal not found to be perverse attains finality. Therefore, the factual finding of one case cannot be strictly regarded as precedent for other case. The finding of the Tribunal is in the nature laying down any principle of law. There are divergent decision in respect of the penny stock transaction but each case has been decided on the basis of its own facts. Therefore, the judgments on this issue are not in the nature of interpretation of the provisions of the Act or declaration of law in & others Ind/2019 Sheela Agarwal and Ankur Agarwal Page 14 of 17 respect of the provisions of the Act. There is no dispute or issue before us about violation of principle of natural justice due to non-supply of the investigation report relied upon by the AO therefore, the decision in case of Swati Bajaj (supra) shall have not applicable on the facts of the case.

Therefore, in the facts and circumstance of the case we hold that the assessee has successfully proved the genuineness of the transaction of purchase and sale as well as holding of the shares which is also not disputed by the AO and therefore, in absence of any material brought on record to controvert these facts substantiated by the evidence produced by the assessee the claim of the assessee cannot be held as bogus. Accordingly, we set aside the orders of the authorities below on this issue and addition made by the AO on account of long term capital gain claimed as exempt u/s 10(38) of the Act and consequently, the disallowance of brokerage expenses is deleted.

As it is clear from the grounds of appeal that the issue is common and identical except the fact that the balance quantity of share were sold by the assessee in the subsequent year i.e. A.Y. 2015-16 and thereby the long term capital gain arising from sale of the shares is claimed for A.Y.2015-16 . The Assessing Officer has given the details of purchase and sales of the shares are as under:

There is only one transaction of sale of the remaining shares of 18900 which has resulted the long term capital gain of Rs.17,76,008/-. The assessing officer has passed an identical verbatim order as it was for the assessment year 2014-15. The CIT(A) has also upheld the order of the AO on similar reasoning while passing an identical order.

We have heard the Ld. AR as well as Ld. DR. Both the Ld. AR as well as Ld. DR has stated at bar that the issue for A.Y.2015-16 is identical and based on the identical fact as for the A.Y.2014-15. Accordingly, in view of our finding on this issue for A.Y.2014-15 this issue is decided in favour of the assessee and against the revenue.

As it is clear from the grounds of appeals that an identical issue has been raised in the appeal filed by smt. Sheela Agrawal mother of the assessee which has been decided by us in the foregoing part of this order.

We have heard Ld. AR as well as Ld. DR who have stated at bar that the issue as well as facts are common and identical as in the case of Sheela Agrawal. The assessing officer has given details of the purchase and sale of the shares as under:

Thus, it is clear that the shares were purchased on 20.03.2012 and the same were sold on 16th May 2014. The other facts regarding mode of purchase dematerialization of the share, payments through account payee & others Ind/2019 Sheela Agarwal and Ankur Agarwal Page 17 of 17 cheque, sale from the Demat account and through Stock Exchange are common. Accordingly in view of our finding on this identical issue in ITANo.215/Ind/2019 in case of Sheela Agrawal mother of the assessee, this issue involved in this appeal is decided in favour of the assessee and against the revenue.

In the result, all three appeals of two assessee are allowed.