ITO 19(3)(2), MUMBAI vs. KHALIL M BHARWANI, MUMBAI

O R D E R

PER SHAILENDRA KUMAR YADAV, JM

Ms. Khalil M. Bharwani 1. On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in holding that the long term capital gain received by the assessee in the scrip Emerald Commercial Ltd was genuine transaction without appreciating the fact that;- a. The assessee could not prove the source of funds while purchasing the said shares b. No return was filed during the year in which the share were purchased and the same were purchased through cash c. Physical delivery of shares has taken place. d. Calcutta stock Exchange has denied executing purchase transaction and shares were dematted after more than one year of the date of purchase 2. On the facts and in the circumstances of the case and in law the learned CIT(A) has failed to appreciate that the assessee made shares transaction from M/s Badri Prasad and Sons stock broker who has been penalized by the SEBI for indulging in penny stock transaction during the year 2005 which is relevant to the current year under consideration 3. On the facts and in the circumstances of the case and in law the learned CIT(A) erred in holding that the transaction was genuine without appreciating the fact that;- a. The Broker M/s Badri Prasad & Sons through whom the assessee has claimed to have purchased the shares, has clearly denied the execution of any share transaction of M/s Emerald Commercial Ltd. on 06.05.2004, the date on which the assessee has claimed to have purchased 10000 shares.

Ms. Khalil M. Bharwani b. The purchase transactions are out of cash in hand which was on account of gift received by the assessee from his relatives. The purchases of shares are off bolt and such purchases are not reflected in the stock exchange.” 2. Assessee purchased 10,000 shares of M/s Emrald Commercial Ltd. for a total consideration of `2,17,100/- vide Bill No.CK012/ 2005322/6 dated 06.05.2004 of the Broker M/s Badri Prasad & Sons, member, Calcutta Stock Exchange. This transaction of purchase of shares was entered into on 06.05.2004 vide Settlement No. 2005322/3 and the shares of the company were delivered to the appellant physically by way of 20 share certificates of 500 shares each. The physical shares were lodged for transfer in the name of assessee and vide letter dated 17.07.2004 of the company, shares were transferred in the name of assessee which were later on submitted to HSBC Bank vide its acknowledgement No.SL BOM 354400 dated12.08.2005 for dematerialisation. The shares were duly dematerialised and in the demat statement of HSBC bearing Client ID 10561457 for the month ending 31.08.2005, they were Ms. Khalil M. Bharwani accordingly depicted. The 10,000 shares were sold through online trading system of Calcutta Stock Exchange through Ltd., as per details enumerated as under:-

Name of No. of Order Trade Date of Time of Total the Broker shares No. No. Sale Sale Sale through sold Proceeds whom sold (in Rs.) Shivam 4000 61613384 929 20.09.2005 15:43:43 19,57,240 Stock Broking Pvt. Ltd. Murarlilal 3000 32042 1177 25.11.2005 14:02:13 14,07,180 Goenka Muralilal 2000 32042 1187 28.11.2005 14:16:43 9,36,120 Goenka Muralilal 1000 32042 1208 29.11.2005 15:02:46 4,64,470 Goenka Total

“a) The appellant had made payment for purchase of 10,000 shares @of Rs.21.7 aggregating to Rs.2,17,100/- in cash to the Broker M/s Badri

Ms. Khalil M. Bharwani Prasad & Sons. b) The appellant was not registered as the "client" with the broker" which is one of the condition, as per SEBI Rules and the transaction has to be undertaken by the client registered with broker. c) The transaction was carried out off the bolt i.e off market deal and even as per the details furnished by Calcutta Stock Exchange in the physical segment of the shares, this transaction did not appear in such list. d) This is the first return of the appellant because the appellant had become major only on 26.05.2005 and there was no previous records of return filed or Balance Sheet available according to which the appellant was holding 10,000 shares of Emrald Commercial Ltd as on 31.03.2005. The cash on hand shown by the appellant as on 01.05.2004 at Rs.3,45,602/- did not had any antecedent as to how the appellant is in possession of such a huge cash because the appellant was minor prior to 26.05.2005 and the cash has been shown in the hands of the appellant prior to his becoming major. Thus the source of such huge cash remains unexplained. e) The value of the shares which was purchased at Rs.21.7 per share suddenly jumped in about a year to Rs.465 to Rs.489 on the Stock Exchange and the company did not had such fundamental for this share to justify the price. f) The appellant is not investing in shares and know nothing about the shares and therefore it is difficult to believe that he ought to have purchased such a large quantity of shares unless there are different motives for such purchase. g) When the above details of transactions of purchase on Calcutta Stock Exchange was verified Ms. Khalil M. Bharwani by the AO, the Calcutta Stock Exchange refuted that any transactions claimed by the appellant has taken place on the date mentioned by the appellant and when the appellant was confronted with this fact, the appellant failed to reply convincingly. 4) The AO relied upon the Supreme Court Judgment in the case of Mcdowell and Co. Ltd reported in 154 lTR 148 wherein it has been held that the plain avoidance of tax when breaking the law is no longer approval and legal avoidance of tax done, in this way is required to be cured especially in view of the fact that India has attained independence and is now striving towards building a welfare society and could not just simply rely on age-old observation in the cases decided in England. 5) The AO also argued that the decision of the Supreme Court in the case of Azadi Bachao Andolan reported in 263 ITR 706 doe not prevail upon his own judgment in Mcdowell. The AO also relied on the Mumbai ITAT decision in the case o Housing Development and Finance Corp. Ltd given in (ITA No.2913/MUM/1995 dt.12.09.2005 wherein the Mumbai (ITAT has held that the findings of Mcdowell's case is still applicable and has to be respected. The AO has also further relied upon the Apex Court Judgment in the case of Sumati Dayal reported in 214 ITR 801 & Durgaprasad More in 82 ITR 540 where the Apex Court has held that certain matters have to be considered by applying the test of human probabilities.”

Ms. Khalil M. Bharwani that the transaction is genuine and the gains should be assessed as long term capital gain: - i) During the assessment proceedings, the appellant had claimed that the purchase of shares in off market deal and therefore the transaction for purchase of shares ought not to be recorded on the Calcutta Stock Exchange and therefore if the transaction is not found recorded on Calcutta Stock Exchange, then the AO should not take umbrage and there is no provision in law that the purchase transaction should be by way of purchase from the online trading system of the Stock Exchange for the gains to be exempt u/s.10(38) of the Act. ii) The appellant had filed with the AO, the copy of the purchase, Bill of the Broker of M/s Badri Prasad & Sons for purchase of 10,000 shares of Emrald Commercial Ltd. and as per information gathered by the appellant, the Broker Badri Prasad & Sons was examined by the AO and everything was explained by the Broker alongwith evidence. iii) The appellant had further filed during the assessment proceedings, the letter dt.17.07.200/1 issued by the Company M/s Emrald Commercial Ltd transferring 10,000 shares in the name of the appellant alongwith physical share certificates for shares transferred in his name which aspect independently confirmed that the appellant was in possession of share certificates duly transferred in his name proving him to be legal owner of shares. iv) The appellant further filed details of Demat Account with HSBC and the Broker's Note for the sale of shares which it made through the Broker Murarilal Goenka and Shivam Stock Broking

J<hald MobinCda)i flaiwani - A Y 2006-07 Ci 7(A)-3011 r.-: 561I TO- 19(3(4)/09- 10 Ms. Khalil M. Bharwani Pvt.Ltd both Brokers' of Calcutta Stock Exchange through online Trading System on Calcutta Stock Exchange. v) The AR further stated that it has filed during the assessment proceedings, copy of Bank Statement in which the sale proceeds of the shares were deposited and there was no equivalent or any transactions of withdrawal of cash against such deposit of sale proceeds in the banks. vi) The AR further submitted that Calcutta Stock Exchange in its reply to the AO has informed that 100 shares of Emrald Commercial Ltd was transacted on 06.05.2005 at Rs.21.70 and the appellant had purchased 10,000 shares in off market deal at the same price of Rs.21.70, thus establishing that the transactions of purchase by the appellant is at a market price and therefore the transaction is not abnormal or unnatural. vii) The AR further argued that it has paid Security Transaction Tax (STT) on the sale of 10,000 shares amounting to Rs.47,60,462/- and as per provision of sec.10(38) when the gains made by the appellant is Long Term and on the sale of the shares STT is paid, then the gain on sale of said share is "exempt" u/s. 10(38) of Income Tax Act, 1961. viii) Regarding addition u/s.68 of Income Tax Act, 1961 as unexplained cash credit of Rs.47,60,462/- , the AR argued that the credits in the Bank Account are absolutely identified with the sale proceeds on sale of 10,000 shares of Emrald Commercial Ltd and therefore the credits are duly explained and hence there is no reason for the AO to take adverse view that the impugned sale proceeds are unexplained cash credits u/s.68 of the Act.

Ms. Khalil M. Bharwani ix) The AR further argued that the AO in the present case is guided by suspicions, surmises and conjectures and except for doubting the transactions, the AO could not disprove the transactions in any way. The AR further relied upon the following judgments in support of the view carried that gains on the sale of shares is genuine. a) Shri B.P.Nandu & Others vs. ACIT Mumbai ITAT 'E' Bench, and 1723 /M/2006 dt.17.i0.2008. b) Pushpa R.Shah & Others vs. ITO (Mumbai), ITA No.2669 & 2670 /M/2006 dt.29.07.2008. c) CIT vs. Anupam Kapoor 299 ITR 179 (P&H). d) Mukesh R. Marofia vs. Addl. CIT (2006) 6 SOT 247 (Mumbai). e) Kumari Saumya Agarwal vs. lTO 174 Taxmann 60 (Agra). x) The appellant further claimed that the price at which it had sold the shares were duly recorded and reflected on the Calcutta Stock Exchange which is independently proved by price copy of shares dealt on those days on the Calcutta Stock Exchange.”

Ms. Khalil M. Bharwani transferred by its letter dated 17.07.2004, which were later on submitted on 12.08.2005 for demat in the Demat Account of the assessee with HSBC Bank and later on the shares were sold through the online trading system of the Calcutta Stock Exchange through the Broker Murarilal Goenka and M/s. Shivam Stock Broking Pvt. Ltd. and each and every details of sale of shares were duly furnished in assessment proceedings. Hence, in the view of the assessee, the transactions giving rise to LTCG on sale of shares of `45,43,362/- is fully supported by all the necessary evidences mentioned above and therefore Assessing Officer was not justified to tax the entire sale proceeds on sale of shares as unexplained cash credit under section 68 of the Act.

Ms. Khalil M. Bharwani capital gain received by assessee in the scrip Emerald Commercial Ltd. was genuine transaction. CIT(A) should have appreciated the fact that assessee could not prove the source of funds while purchasing the said shares. No return was filed during the year in which the shares were purchased and the same were purchased through cash.

Physical delivery of shares has taken place. Calcutta Stock Exchange had denied execuging purchase. In this background the CIT(A) failed to not that shares of M/s.

Badri Prasad and Sons stock broker who has been penalized by SEBI for indulging in penny stock transaction during the year 2005 which is relevant to the current year under consideration. So the CIT(A) erred in holding that the transaction was genuine without appreciating the fact that broker M/s. Badri Prasad and Sons though whom assessee has claimed to have purchased the shares has clearly denied the executing of any share transaction of M/s. Emerald Commercial Ltd. on 06.05.2004, the date on which assessee has claimed to have purchased 10,000

Ms. Khalil M. Bharwani shares. Purchase transactions are out of cash in hand which was on account of gift received by assessee from his relatives. Purchase of shares was off bolt and such purchases are not reflected in the stock exchange. In this background the learned D.R requested to set aside the order CIT(A) and to restore that of Assessing Officer. On the other hand the learned A.R. for the assessee supported the order of the CIT(A).

Ms. Khalil M. Bharwani and therefore such transaction for purchase of shares by the assessee ought not to have been registered with the Calcutta Stock Exchange. Secondly, the Voucher for shares sold to the assessee issued by M/s Badri Prasad & Sons, broker of the Calcutta Stock Exchange has not been found as bogus or fabricated documents.

Ms. Khalil M. Bharwani 9. The 4000 demated shares were thereafter sold through the Broker Shivam Stock Broking Pvt. Ltd. of the Calcutta Stock Exchange through online trading system and the balance shares numbering 6000 were duly sold through the Broker Murarilal Goenka of Calcutta Stock Exchange through online trading system. The Sales Bills/Contract filed by assessee for sale of the shares has not been disbelieved or disputed by Assessing Officer in any manner. The sale proceeds received on sale of shares have been duly received by "A/c payee cheque' from the Brokers which were duly deposited in the bank account of assessee. This aspect has also not been disputed by Revenue authorities. Hence in this way, the whole transaction of purchase and sale of shares giving rise to long term capital gain has been duly explained step by step and supported by adequate and reliable evidence.

The observations of Assessing Officer have been that since the shares were purchased in cash, the same cannot be verified. Since no return of income was filed by Ms. Khalil M. Bharwani assessee for the A.Y.2005-06, it was not possible to ) verify the cash in hand of `3,45,602/-. According to / Assessing Officer the cash in hand is not substantiated.

In this regard the stand of the assessee has been that assessee was given a gift of `1,01,000/- by his father Shri Mohamed All Bharwani on 26.5.2003 and by his elder brother Shri Munir M. Bharwani of `1,28,000/- on 26.5.2003 being on the occasion of assessee’s birthday.

Assessee has stated that in the returns of income for the A.Y.2004-05, in the case of his father and brother, the gifts in question have been duly reflected. Copies of the relevant returns of income alongwith capital accounts have been furnished before CIT(A) at relevant point of time and in this background it was the stand of the assessee that because of these gifts from the aforesaid two persons that there was so much cash in hand with the assessee. This fact has not been looked into by the Assessing Officer at relevant point of time.

Ms. Khalil M. Bharwani 10. The observation of the Assessing Officer that the transaction is not genuine and is engineered with a sole intention to show long term capital gain which is liable to a lower rate or income tax is because of (i) off market transaction, (ii) the payment for transaction is through cash (iii) physical delivery of shares has been given (iv)

Kolkata Stock Exchange has denied having executed any transaction in the script i.e. Emerald Commercial Ltd. (v) shares were dematted in the month of August 2005 i.e. after more than one year of date of purchase (vi) shares were bought and sold in Kolkata has been duly rebutted and refuted by tendering sufficient evidence and therefore Assessing Officer Assessing Officer can only provoke a suspicion, much less a belief about the transaction. The suspicion of Assessing Officer cannot clinch the transaction against assessee. In view of the above CIT(A) was justified in holding that long term capital gain earned by assessee of `47,60,462/- should be treated as such and not taxed as income from