SH.GAURAV AGGARWAL,GURDAS PUR vs. DY.COMMISSIONER OF INCOME TAX, AMRITSAR

A batch of 4 appeals of the different assessees were filed against the order of the ld. Commissioner of Income-tax (Appeals)-5Ludhiana, (in brevity ‘the CIT(A)’) order passed u/s 250 (6) of the Income-tax Act, 1961 (in brevity the Act) for assessment years 2014-15 & 2015-16. The impugned order was emanated from the order of the DCIT, Central Circle, Amritsar, (in brevity the ld. AO) order passed u/s 153A r.w.s. 143(3)of the Act.

4. The assessee has taken the following grounds: to 35/Asr/2019 3 A.Ys. 2014-15 & 2015-16

“1 That the ld.CIT(A)-5, Ludhiana has erred in law and on facts in upholding the addition of Rs. 1,18,79,150 made by the AO by treating the long term capital gain on sale of shares as assessee’s own unaccounted funds and denying the exemption u/s 10(38) of the Act.

2 That the ld.CIT(A)-5, Ludhiana has erred in law and on facts in confirming the findings of the AO that the transactions of purchase and sale of shares by appellant are not genuine but bogus, stage managed and manipulated.

3 That the ld.CIT(A)-5, Ludhiana has erred in law and on facts while confirming the findings of the AO conveniently ignoring that the findings are contrary to the documentary evidence on record and are purely based on mere suspicion, surmises and conjectures, without any supporting evidence.

4 That the ld.CIT(A)-5, Ludhiana has erred in lawwhile confirming the aboveaddition in spite of the fact that the appellant was not confronted with the evidence / statement and other evidences on the basis of which the AO formed his belief that the transactions of purchase and sale of shares were bogus without affording any opportunity to the appellant to cross examine the third parties which is against the principal of natural justice.

5 That the order is bad in law and on facts. to 35/Asr/2019 4 A.Ys. 2014-15 & 2015-16

6 That the appellant craves leave to add or amend the grounds of appeal before the appeal is heard and disposed off.”

5. Brief fact of the case is that in the impugned assessment years, the assessee claimed exemption u/s 10(38) Long Term Capital Gain (in short ‘LTCG’) amount to Rs.1,18,79,150/-. The search was conducted in the firm M/s R. D. Enterprise and M/s Agrotech Pvt. Ltd, Company, where the assessee isa partner. The notice u/s 153A was issued and assessment was completed u/s 153A r.w.s. 143(3) of the Act. As per the revenue, the assessee sold the share of M/s Kappac Pharma Ltd. during impugned assessment year amount to Rs. 1,18,79,150/-. The revenue has declared the entire transaction as the sham transaction and bogus during search. The revenue identified various company stock i.e. a stock having very low price,which provide through root of preferential allotment after some time the large scale manipulation in price of this shares is done to artificially inflated through market price in order to provide entry of tax exempt bogus LTCG. The shares Mr. Kappac Pharma Ltd. resemble the character of penny stock which was identified and discussed by the investigation wing Kolkata and the entire share of the said company was listed in BSE Kolkata was taken as bogus and sham transaction. Aggrieved assessee filed an appeal before the ld. CIT(A). The ld. CIT(A) upheld the order of the ld. AO. Being aggrieved assessee filed an appeal before us. to 35/Asr/2019 5 A.Ys. 2014-15 & 2015-16

6. The ld. AR for the assessee vehemently argued and first invited our attention in appeal order page 3 where the assessee submitted their submission before the ld. CIT(A). The relevant para of this submission is reproduced as below: to 35/Asr/2019 6 A.Ys. 2014-15 & 2015-16 to 35/Asr/2019 7 A.Ys. 2014-15 & 2015-16 to 35/Asr/2019 8 A.Ys. 2014-15 & 2015-16 to 35/Asr/2019 9 A.Ys. 2014-15 & 2015-16 to 35/Asr/2019 10 A.Ys. 2014-15 & 2015-16 to 35/Asr/2019 11 A.Ys. 2014-15 & 2015-16 to 35/Asr/2019 12 A.Ys. 2014-15 & 2015-16 to 35/Asr/2019 13 A.Ys. 2014-15 & 2015-16

7. The ld. DR vehemently argued and relied on the order of the revenue authorities. The ld. DR invited our attention in AO’s order pages 25 to 27, the relevant parts of the order are reproduced as below:

“From the appreciation of the facts of the case, the material evidence on record and in light of discussion of the facts discussed in above paras, the following facts emerges regarding artificial gain claimed through LTCG:

A) NO GENUINE BUSINESS ACTIVITY CARRIED BY M/S KAPPAC PHARMA LTD. AND M/S PRESHA METALLURGICAL LTD.,: As already discussed in the show cause given to assessee reproduced in above paras both these concerns both these concerns have Nil/very less Gross Receipts for F.Y. 2012-13 i.e. Rs.Nil, Nil/Very less expenses for F.Y. 2012-13, loss of Rs.8 lacs for M/s Kappac Pharma Ltd. and loss of Rs.4 lacs for M/s Presha Metallurgical Ltd., and Nil stocks. The business concern does not become alive until any genuine activity is carried out.

B) PAYMENT FOR PURCHASE MADE IN CASH: The purchase payments were made in cash and not through the normal banking channel therefore the same were non-verifiable from the authentic supporting details such as bank accounts/documents. On one side, assessee is claiming that money is received through banking channel and so transaction is genuine, but what the assessee is not considering that, the starting point, i.e. payments for shares purchased ‘is made through cash and any other mode which is not banking channel, even though assessee was having bank account why the purchases were not made by making payment through to 35/Asr/2019 14 A.Ys. 2014-15 & 2015-16 bank. Hence when the starting point itself is not genuine, how the whole transactions can be considered as genuine.

C) ASSESSEE NOT A REGULAR INVESTOR IN SHARES: The assessee is not a regular investor in shares. Hence, it is quite surprising as to how he earned a phenomenal return of 140-150 times within a short span of period which is extremely unusual. The past records of the assessee for the preceding years show that the assessee has been hardly active in the stock market. This being the case, the assessee has entered into a sham transaction with the full knowledge of it, so as to convert unaccounted money into accounted money in the guise of capital gains.

D) NATURE OF TRANSACTION: The nature of transaction itself looks suspicious from the manner it has been conducted i.e. the abnormal appreciation in the value of shares, the mode of payment for purchase of shares not doing the transaction through the normal share dealing procedures. The assessee has shown to have received sale proceeds through cheque whereas purchases were consciously made in cash in the aforesaid manner to facilitate manipulation of the purchase for assessee's benefit.

E) PENNY STOCKS: The shares in which the assessee has claimed to have made a deal, can be termed as Penny Shares in the similar lines as identified by the Investigation Wing, Kolkata, because rates of these shares are not based on business results of the companies but same are fluctuated by insider's trading from zero value (negligible price) to very high price and vice versa without any reason or basis to accommodate or generate bogus capital gain or loss. These share of M/s Kappac Pharma Ltd. resembled to 35/Asr/2019 15 A.Ys. 2014-15 & 2015-16 the character of Penny Stocks which has been discussed and investigated at length by Investigation Wing, Kolkata. The Kappac Pharma Ltd. even figures in the Appraisal report of the Investigation Wing, Kolkata giving detail of Bogus LTCG through BSE Listed Penny Stocks.

F) ROUTING OF UNACCOUNTED INCOME THROUGH BOGUS LTCG:

During the course of search and subsequent proceedings, assessee himself admitted to the fact that there is generation of unaccounted income on account of unaccounted sales which is evident of disclosure made in statement of Sh. Raman Kumar Aggarwal in his statement recorded u/s 132(4) of the I.T. Act, 1961 of Rs. 14 Cr. on account of discrepancy in stocks. This unaccounted income is ploughed back to regular books by claiming bogus LTCG. This tax evasion is not incidental but assessee has organized its affairs in such a way that unaccounted income is brought back to regular books without paying any taxes on it.

Hence, the reply of assessee is devoid of any merit w.r.t. his claim of LTCG in case of M/s Kappac Pharma Ltd. The assessee’s claim of LTCG w.r.t. trading of shares in case of M/s Kappac Pharma Ltd amounting to Rs. 118.79 lakhs in A.Y. 2014-15 is bogus and added to total income of the assesses treating the same as unexplained cash credits u/s 68 of the Income Tax Act, 1961.”

Ludhiana) vs Prem Lal Gandhi, 401 ITR 253 (P&H). The observation is reproduced as below.

“4. The issue in short is this: The assessee purchased shares of a company during the assessment year 2006-2007 at Rs. 11/- and sold the same in the assessment year 2008-2009 at Rs. 400/- per share. In the above case, namely, Hitesh Gandhi (supra) also the assessee had purchased and sold the shares in the same assessment years. The Assessing Officer in both the cases added the appreciation to the assessees' income on the suspicion that these were fictitious transactions, and that the appreciation actually represented the assessees' income from undisclosed sources. In Hitesh Gandhi's case (supra) also the CIT (Appeals) and the Tribunal held that the Assessing Officer had not produced any evidence whatsoever in support of the suspicion. On the other hand, although the appreciation is very high, the shares were traded on the National Stock Exchange and the payments and receipts were routed through the bank. There was no evidence to indicate for instance that this was a closely held company and that the trading on the National Stock Exchange was manipulated in any manner. to 35/Asr/2019 17 A.Ys. 2014-15 & 2015-16

5. In these circumstances, following the judgement in Hitesh Gandhi's case (supra), it must be held that there is no substantial question of law in the present appeal.

8.1 We respectfully consider the order of Hon’ble Jurisdictional High Court.

The ld. AR agitated that the documents which are relied by the ld. AO was not served to assessee for cross-examination. In the order of Prem Lal Gandhi(supra) the Hon’ble Court has dealt the issue in favour of the assessee.

The ld. AR respectfully relied on the order of the Hon’ble Gujrat High in the case of Pr. CIT vs. Parasben Kasturchand Kochar, [2021] 130 taxmann.com 176 (Gujarat), the observation is reproduced as below.

“3. Thus, the Tribunal has recorded the finding of fact that the assessee discharged his onus of establishing that the transactions were fair and transparent and further, all the relevant details with regard to such transactions were furnished before the Income-tax to 35/Asr/2019 18 A.Ys. 2014-15 & 2015-16 authorities and the Tribunal also took notice of the fact that some of the shares also remained in the account of the appellant.

The SLP was filed against this order and was dismissed by the Hon’ble Apex Court [2021] 130 taxmann.com 177 (SC).

Alternatively, the ld. DR argued and specifically raised the voice against the share script M/s Kappac Pharma Ltd. The ld. DR mentioned that it is a sham transaction. The ld. DR respectfully relied on the order of Hon’ble High Court of Delhi in the case of Udit Kalra vs ITO Wd. 50(1), ITA 220/2019 & CM No. 10774/2019order dated 08/03/2019. The observation is reproduced as below.

“The main thrust of the assessee’s argument is that he was denied- the right to cross-examination of the two individuals whose statements led to the inquiry and ultimate disallowance to 35/Asr/2019 19 A.Ys. 2014-15 & 2015-16 of the long-term capital gain claim in the returns which are the subject matter of the present appeal.

This court has considered the submissions of the parties. Aside from the fact that the findings in this case are entirely concurrent –A.O., CIT(A) and the ITAT have all consistently rendered adverse findings – what is intriguing is that the company (M/s Kappac Pharma Ltd.) had meagre resources and in fact reported consistent losses. In these circumstances, the astronomical growth of the value of company’s shares naturally excited the suspicions of the Revenue.

The company was even directed to be delisted from the stock exchange. Having regard to these circumstances and principally on the ground that the findings are entirely of fact, this court is of the opinion that no substantial question of law arises in the present appeal.

This appeal is accordingly dismissed.”

8.2 We respectfully considered the catena of order, relied by the rival parties.

The assessee was not able to show any document to bench related claim of relied upon documents of revenue related to addition. But the ld. AR separately agitated the issue before the bench. The ld. DR was remained silent against the assessee’s submission and was not able to produce any contrary fact. The order of Udit Kalra (supra) is specifically considered with the share which the assessee delt during impugned assessment year. The only issue is that the to 35/Asr/2019 20 A.Ys. 2014-15 & 2015-16 assessee was denied the cross verification of documents which are relied by the revenue during assessment proceeding.

8.3 We find it fit to remit the matter back to the file of the ld. AO for allowing the assessee for cross verification. Needless to say, the assessee be given reasonable opportunity of being heard and the assessee shall also be cooperating for the effective disposal of the set aside assessment proceeding and will be at liberty to make further submissions as deem fit. Since the matter is restored to the file of ld. AO for meritorious adjudication by passing a speaking order in terms of our observations made hereinabove, we are not expressing any views on the merits of the case so as to limit the assessment procedure before the ld. AO. The observations herein made by us in remanding the matter back to the file of ld. AO will not impair or injure the case of the Revenue nor will it cause any prejudice to the defence/explanation of the assessee. Accordingly, we set aside the impugned order of the Ld. CIT(A) and restore the matter back to the file of the ld. AO to decide afresh after affording reasonable opportunity of being heard to the assessee and the assessee is directed to be diligent in the appellate proceedings.

by the assessee. to 35/Asr/2019

21. A.Ys. 2014-15 & 2015-16 Hence, the bench feels that the decision taken by us in shall apply mutatis mutandis in ITA Nos.32/Asr/2019, 33/Asr/2019and 35/Asr/2019 are follows accordingly.

Order pronounced in the open court on 13.09.2023