SANGEETA DEVI JHUNJHUNWALA,NEW DELHI vs. ITO, WARD-70(1), NEW DELHI

O R D E R PER ASTHA CHANDRA, JM The appeal filed by the assessee is directed against the order of the Ld. Commissioner of Income Tax (Appeals) - 28, New Delhi (“CIT(A)”) dated 22.03.2022 pertaining to the Assessment Year (“AY”) 2015-16.

2. The assessee has taken the following grounds:- “1. That Ld. CIT(A) has erred in law as well as on facts in confirming the following additions/disallowances. a. Disallowance on claim of exemption u/s. 10(38) of the Act on Long Term Capital Gain of Rs. 1,17,34,753/-. b. Addition of Rs. 2,11,226/- u/s 69C of the Income-tax Act, 1961.”

Ground No. 2 and 3 are only arguments in support of ground No. 1(a) and ground No. 1(b)

3. The facts relating to ground No. 1(a) are that the assessee is an individual and derives income from salary, other sources and capital gain which she claimed exempt under section 10(38) of the Income Tax Act, 1961 (the “Act”). For AY 2015-16, she e-filed her return on 25.08.2015 declaring income of Rs. 7,27,000/- which was processed under section 143(1) of the Act. Her case was selected for complete scrutiny through CASS for the reason “suspicious sale transaction in shares and exempt long term capital gain shown in return (Penny stock tab in ITS)”. Statutory notices were issued and served. In response, details as called for were furnished. The Ld. Assessing Officer (“AO”) examined them. The Ld. AO found that the assessee earned long term capital gain of Rs. 1,17,14,346/- on sale of shares of M/s. HPC Biosciences Limited which the assessee claimed as exempt under section 10(38) of the Act. She had purchased 20,000 shares on 03.01.2013 at the rate Rs. 5/- per share for Rs. 1,00,000/- which she sold during the previous year relevant to AY 2015-16 at the rate Rs. 591.74 per share for Rs. 1,18,34,753/-. From the details of the share transactions the Ld. AO noticed that there was a steep escalation in the value of shares within a short span of time from the date of acquisition of the shares and that the listed company M/s. HPC Biosciences Limited does not justify the price of shares transacted. The Ld. AO also noticed that the sale proceeds have been deposited in her bank account on different dates.

5.1 On the basis of details filed by the assessee and other information gathered from the assessee as also the reply dated 26.12.2017 of the assessee, the Ld. AO recorded the finding that undoubtedly there was a scheme unravelled by the Directorate of Investigation of which the assessee was a beneficiary. The onus shifted to the assessee to prove the contrary that there was no such scheme and that the transaction was genuine. According to the Ld. AO, the assessee failed to discharge the onus cast upon her. He, therefore, concluded that like thousand other individuals, the assessee had also taken entry of bogus long term capital gain by paying unaccounted income.

5.2 The Ld. AO therefore, denied the claim of exemption of the long term capital gain of Rs. 1,17,34,753/- under section 10(38) of the Act and added the same to the income of the assessee under section 68 r.w.s. 115BBE of the Act. He also added Rs. 2,11,226/- to the income of the assessee being commission @ 1.8% of trade value on account of providing accommodation entries under the deeming provisions of section 69C of the Act as expenditure incurred out of books to obtain such entry.

5.3 Accordingly, the Ld. AO completed the assessment on total income of Rs. 1,26,72,979/- on 28.12.2017 under section 143(3) of the Act.

6.1 The submissions of the assessee made during appellate proceedings were also countered by the Ld. CIT(A) by bringing on record the findings and modus operandi of a typical penny stock and its characteristics which squarely applied to the case of M/s. HPC Biosciences Limited.

6.2 The Ld. CIT(A) referred to a number of decisions and concluded his findings in para 5.24 and 5.25 of his appellate order reproduced below:-

5.24 All these cases are applicable to the facts and circumstances of the present case in which the various judicial authorities have decided the cases in favour of revenue after going through the entirely of the circumstances and not getting influenced by the picture shown by the appellant which is coloured 4 by the use of sham devices. The case laws relied upon by the AR have been perused. No doubt that the decisions in these cases are in favour of the assessee but it appears that the Hon'ble Tribunals/Courts which have passed these judgements have not been made aware of the entirety of the circumstances. Moreover, the fact that the assessees in these cases fail to clear the test of human probabilities, has not been brought to the knowledge of these judicial authorities. Therefore, these cases are not being found relevant in the present case where the AO has gone to the very root of the transactions after doing deep analysis of the facts and circumstances. AO has independently applied his mind. AO has passed a speaking order and he has dealt with all the contention of appellant. There is no basis in the claim of appellant that since SEBI order dated 25.05.2015 was revoked by SEBI itself and that the statements of third party have not been confronted to him. It is seen that AO has passed his finding after analysing the financials and price amount of appellant company and after examining the same, he has concluded that the transaction of long term capital gain was sham. 5.25 The facts of the present case clearly reveal that the transactions of purchase and sale of shares had been effected with the motive to create bogus profit under the head LTCG. The appellant resorted to a readymade scheme for purchase and sale of shares which was run by some Entry Operators. Such transactions are not genuine and natural transactions, but pre-conceived transactions, resulting in creation of bogus profits which are tax exempt. Such transactions are mutually self-serving to the parties to the transactions. I have come to conclude on the basis of above analysis and investigation by AO, documentary evidences, circumstantial evidences, human conduct and preponderance of probabilities that what is apparent in this case is not real, that these financial transactions were sham ones and that this entire edifice was only a colourful device used to evade tax. Moreover, the impugned transactions of shares are preordained one, not for legitimate purpose in view but for the purpose of creating non-genuine and artificial profits, with a view to reduce valid tax liability. Therefore, I agree with the view of the AO that the said transactions are sham transactions and accordingly, the addition made by the AO is confirmed and the grounds of appeal are dismissed.

6.3 Resultantly, the Ld. CIT(A) dismissed the appeal of the assessee and confirmed the additions made by the Ld. AO.

“1. The core issue before the Hon’ble bench in the above case is ‘whether the Long Term capital Gain earned by the assessee on sale of scrip of M/s HPC Biosciences Ltd during FY2014-15 is genuine and eligible for benefit of section 10(38) of IT Act, 1961? 2. The company M/s HPC Biosciences Ltd, its promoter directors and other entities were investigated by SEBI for market manipulation and fraudulent trading in violation of Prevention of Fraudulent and unfair Trade Practices ( PFUTP) Regulations with other violations of SEBI Act/rules and penalized. Chronology of Inquiries conducted and penal order passed by SEBI in case of M/s HPC Biosciences Ltd. a) SEBI conducted an investigation in the scrip of HPC to ascertain manipulation, if any, in the IPO process of the Company in backdrop of huge rise that was observed in the traded volume and price of scrips of the Company ( HPC BIO) and three other companies during the period from January 01, 2013 to December 31, 2014. b) Based on preliminary findings, the whole time member of Securities and Exchange Board of India , vide an interim order dated June 29, 2015, restrained 254 entities from accessing the securities market and from buying, selling or dealing in securities, either directly or indirectly, in any manner, till further directions were passed in the matter of IPO of certain companies including HPC. c) After the June Interim Order, confirmatory orders were passed with respect to the said matter on February 17, 2016, June 14, 2016, August 25, 2016, October 27, 2016 and June 15, 2017, except for certain specific reliefs provided to certain entities it was prima facie found that the preferential allottees ( assessee in question was also one of preferential allotee), pre IPO transferees along with the funding group entities and trading group entities have used the stock exchange system to artificially increase volume and price of the HPC scrip for making illegal gains and to convert ill-gotten gains into genuine one. d) Subsequently, vide order dated September 06, 2017, the Confirmatory Orders were revoked with respect to 216 entities out of the total 254 entities. M/s HPC Biosciences Ltd was not amongst the 216 entities in whose case confirmatory orders were revoked. e) After the Revocation order, the whole time member passed directions vide order dated December 22, 2020 against eleven entities (including M/s HPC Biosciences Ltd.) where the said company was restrained from; accessing the securities market by issuing prospectus, offer document or advertisement soliciting money from the public in any manner for 8 years. f) Vide further order dated 25.02.2022 SEBI held M/s HPC BioSciences Ltd and other entities guilty of unfair trade practices and penalties were imposed for violation of various provisions of SEBI act and rules (including PFTUP Regulations) for total amount of Rs 25 lakh against M/s HPC Biosciences Ltd. g) SEBI passed another order on 22.04.2022 under section 15-1 of SEBI Act for violation of SEBI ICDR Regulations, 2009 against M/s HPC Biosciences ltd and its directors/key persons particularly in relation to preferential allotment just prior to filing of prospectus for IPO on 13.01.2013 in violation of extant rules and imposed further penalty of Rs 20 lakh in total for such violations. Peculiars facts and surrounding circumstances of assesses investment in scrip of M/s HPC Biosicences Limited.

13.1 In Roshan Di Hatti vs. CIT (1977) 107 ITR 938 (SC) the Hon’ble Supreme Court held that the law is well settled that the onus of proving the source of a sum of money found to have been received by an assessee is on him.

13.2 The Hon’ble Supreme Court observed in CIT vs. P. Mohanakala (2007) 161 Taxman 169 (SC) that the expression ‘the assessee offers no explanation’ means where the assessee offers no proper, reasonable and acceptable explanation as regards the sums found credited in the books maintained by the assessee. It is true that the opinion of the Assessing Officer for not accepting the explanation offered by the assessee as not satisfactory is required to be based on proper appreciation of material and other attending circumstances available on record. The opinion of the Assessing Officer is required to be formed objectively with reference to the material available on record. Application of mind is the sine-qua-non for forming the opinion.

13.3 In Sumiti Dayal vs. CIT (1995) 80 Taxman 89 (SC) the Hon’ble Supreme Court held that if the explanation offered by the assessee about the nature and source thereof is, in the opinion of the Assessing Officer, not satisfactory, there is prima facie evidence against the assessee, viz. the receipt of money, and if he fails to rebut the same, the said evidence being unrebutted can be used against him by holding that it is a receipt of an income nature. While considering the explanation of the assessee, the Department cannot, however act unreasonably.

14.1 The Ld. AO had in his records information that the assessee had indulged in ‘suspicious sale transaction in shares’ and claimed exemption of the long term capital gain under section 10(38) of the Act in the return for which reason the assessee’s return was selected for complete scrutiny.

14.2 During assessment proceedings, statutory notice under section 143(2) of the Act was served upon the assessee to produce evidence in support of the return. Again notice under section 142(1) of the Act along with questionnaire was issued, in compliance of which requisite details were furnished. On examining the details, the Ld. AO found that during the previous year relevant to AY 2015-16 the bank account of the assessee was credited by sums on different dates aggregating to Rs. 1,18,34,753/-. He sought explanation because the Ld. AO had information that the investigation made by the Directorate of Investigation, Kolkata had revealed that some unscrupulous operators in the capital market were running a scheme of providing entries of long term capital gain for commission. The methodology adopted involved three legs, namely, purchase of share by the beneficiary offline: to save on STT using the loopholes in section 10(38) of the Act which places restriction of trading by payment of STT on sale of shares and not on purchase; price rigging: after purchase of shares the syndicate members start rigging the price gradually through the brokers; lastly the final sale by the beneficiary after the share was held by him for one year. The beneficiary is contacted either by the syndicate member or the broker (middle man) through whom the initial booking was done. The beneficiary provides the required amount of cash which is routed through some of the paper companies of the entry operator and is finally parked in one company which will buy the share from the beneficiary. The paper company issues cheque to the beneficiary.

14.3 The Ld. AO was of the view that the assessee followed the same methodology.

14.4 The explanation which the assessee gave before the Ld. AO was that the scrips of M/s. HPC Biosciences Limited were not penny stock. All the transactions were done through banking channel or through account payee cheque as a normal prudent person.

14.5 The Ld. AO issued summons under section 131 of the Act to examine the assessee on oath with a view to test the veracity or otherwise of the explanation but the assessee did not turn up on the date fixed. The Ld. AO drew adverse inference.

14.6 The Ld. AO issued final show cause notice under section 142(1) of the Act which forms part of the assessment order at pages 10-16 containing therein inter alia information/details available in the public domain enclosing as Annexure A comparative profit and loss account and balance sheet of the company M/s. HPC Biosciences Limited for various years stating that even an investor with risk appetite on a higher side is highly unlikely to invest in such a scrip.

14.7 Thus opportunity was given by the Ld. AO to the assessee to show cause why the exemption under section 10(38) of the Act for an amount of Rs. 1,17,34,753/- be not denied treating the receipt as unexplained cash credit under section 68 of the Act since the explanation offered by the assessee about the nature and source thereof was not convincing and satisfactory.

14.8 In response the assessee vide reply dated 26.12.2017 reiterated the same explanation which was given earlier, held by the Ld. AO as not, in his opinion, satisfactory.

15.1 Nothing has been done by the assessee except filing the details of the transaction and making a bald plea that transaction has been done as a normal prudent person. However, even this plea is contrary to facts brought on record by the Revenue. The assessee did not consider the business activity of the company M/s. HPC Biosciences Limited, its financials and its creditability.

15.2 In CIT vs. Precision Finance Pvt. Ltd. 208 ITR 465 (Cal) the Hon’ble Calcutta High Court has observed that it is for the assessee to prove the identity of the creditor/ his creditworthiness and the genuineness of the transactions. In CIT vs. Nova Promoters Finlease Pvt. Limited (2012) 342 ITR 169 (Del) the Hon’ble Delhi High Court held that it would be incorrect to state that the onus to prove the genuineness of transaction and creditworthiness of the creditor stands discharge in all cases if payment is made through banking channels. Whether or not onus is discharged depends on the facts of each case. Mere furnishing of particulars is not enough. Mere payment by account payee cheque is not sacrosanct nor can it make a non-genuine transaction genuine. In para 17 of his order, the Ld. AO stated that though the transaction undertaken by the assessee may seen to fulfil the legal requirement of section 10(38) of the Act, the same are sham transactions as the share prices of M/s. HPC Biosciences Limited were manipulated to raise the same exponentially. The price rise of the penny stock scrip was abrupt, sudden and unrealistic. No cogent material has been brought by the assessee on record to rebut the above finding of the Ld. AO. We may refer the observations of the Hon’ble Supreme Court in SEBI vs. Kishore Ajmera (supra) that it is the judicial duty to take note of the immediate and proximate facts and circumstances surrounding the events on which the charges/allegations are founded and to reach what would appear to be reasonable conclusion therefrom.

16.1 In Pr. CIT vs. Swati Bajaj (2022) 446 ITR 56(Cal), the AO received information from Investigation Wing that the prices of some shares of penny stock companies which included the company X in which the assessee made investment, were artificially rigged to benefit share holders through bogus claim of long term capital gain. The assessee had purchased shares of the company for Rs. 1 lakh and when the investments in shares became eligible for long term capital gain it was sold for Rs. 29 lakhs during the period when the general market trend was recessive. The AO opined that the shares of the company X matched all the features of the companies which were provided bogus long term capital gain and made addition under section 68 of the Act by treating long term capital gain as unaccounted income on the ground that the assessee invested in shares of company X to convert unaccounted cash under the guise of long term capital gain.

16.1.1 When the matter was taken by the Revenue before the Hon’ble Calcutta High Court it held that it has been established by the Revenue that the rise of prices of the shares was artificially done by adopting manipulative practices. Consequently, whatever resultant profit accrued from out of such manipulative practices, same were also to be treated as tainted. However, the assessee had opportunity to prove that there was no manipulation at the other end and whatever gains the assessee had reaped was not tainted. This has not been proved or established by the assessee. Therefore, the AO was well justified in coming to a conclusion that the so called explanation offered by the assessee was not to his satisfaction. Thus, the assessee having not proved the genuineness of the claim, the creditworthiness of the company in which the assessee had invested and the identity of the person from whom the transactions were done, the assessee had to necessarily fail.

16.1.2 The court went on to observe further that in such a factual scenario, the AO had adopted an inferential process which was found to be a process which would be followed by a reasonable and prudent person. The AO had culled out proximate fact of the case, took into consideration the surrounding circumstances which came to light after investigation, assessed the conduct of the assessee, took note of the proximity of the time between the buy and sale operations and also the sudden and steep rise of the price of the shares of the company when the general market trend was admittedly recessive and thereafter arrived at a conclusion which was a proper conclusion and in the absence of any satisfactory explanation by the assessee, the AO was bound to make addition under section 68 of the Act.

16.2 The decision (supra) applies squarely to the facts of the case under consideration before us.

17.1 When the revenue filed appeal before the Hon’ble Calcutta High Court, the Court held that the assessee had failed to prove genuineness of his share dealing transactions and in view of the fact that the entire transactions were stage manage with object to plough back his unaccounted income in form of fictitious long term capital gain and claimed bogus exemption, the AO was justified in denying exemption under section 10(38) and treating such bogus long term capital gain in penny stock under purview of unexplained cash under section 68 of the Act.

20.1 The Hon’ble Supreme Court observed that the statement of the persons who controlled the business of providing accommodation entry have been corroborated with the material, surrounding circumstances and preponderance of probability and upheld the finding of the CIT(Appeals).

20.2 The Hon’ble Supreme Court noted that the AO after describing the general modus operandi of accommodation entry by way of bogus capital gain/loss highlighted the statement of the persons who claimed to have provided bogus capital gain/loss entry. The assessee was then asked to justify the investment in the relevant shares. The AO has pointed out these companies are not having any significant/real business as seen from the financial statement of those companies. The AO has particularly pointed out that price movement of the shares transacted by the assessee were not matching with movement of share market in general and movement of other scrips in the same line of business. The AO has pointed out that the assessee could not explain why it invested in such scrip without knowing the financial performance of the company.

20.3 The Hon’ble Supreme Court quoted the observation of the Tribunal that with such financials and affaires of business purchase of shares of face value of Rs. 10/- at rate of Rs. 491/- by any person and assessee’s contention that such transaction is genuine and credible and arguing to accept such contention would only make decision of judicial authorities fallacy.

20.4 The Hon’ble Supreme Court observed that the Tribunal placed reliance on the decision of Delhi High Court in the case of Nipun Builders and Developers Pvt. Ltd. in of 2012 dated 07.01.2013 wherein the Delhi High Court held that it is the duty of Tribunal to scratch surface and probe documentary evidence in depth, in the light of conduct of assessee and other surrounding circumstances in order to see whether assessee is liable to provisions of section 68 or not.

20.5 The Tribunal declined to interfere with the order of the Ld. CIT(A) keeping in view overall facts and circumstances of the case that profits earned by the assessee are part of major scheme of accommodation entries.

20.6 The Hon’ble Delhi High Court dismissed the appeal of the assessee as no substantial question of law was involved and the Hon’ble Supreme Court affirmed the decision of the Hon’ble Delhi High Court in its judgment in Suman Poddar’s case (supra).

i. Pr.CIT vs. Smt. Krishna Devi (2021) 431 ITR 361(Del.) ii. Pr.CIT vs. Karuna Garg (ITA No. 477/2022) decided on 23.11.2022 iii. Pr.CIT vs. Smt. Bindu Garg (ITA No. 519/2022) decided on 08.12.2022 22.1 Reliance has also been placed on the following decisions of Coordinate Delhi Benches of the Tribunal: i. ITO vs. Smt. Shivani Gupta (ITA No. 5204/Del/2020) dated 06.04.2021 ii. Shri Mukesh Mittal vs. ITO (ITA No. 761/Del/2020) dated 26.03.2021 iii. Shri Tapas Kumar Mallick vs. ACIT (ITA No. 8142/Del/2018) dated 19.03.2021 iv. Amit Jindal vs. ITO (ITA No. 1547/Del/2019) dated 24.02.2022

24.1 In Smt. Krishna Devi’s case (supra) the assessee had purchased the shares of the company online. The shares were dematerialised and sales were routed through Demat account. But in the case of the assessee before us, the assessee purchased shares of unlisted company offline directly through private preferential allotment, not reported in the stock exchange and on the day of allotment itself, the company issued bonus shares in 1:1 ratio. The shares were listed on BSE platform later on. The facts of the assessee’s case being different from those of Smt. Krishna Devi’s case, the decision of Hon’ble Delhi High Court in Smt. Krishna Devi’s case cannot render any assistance to the assessee. Moreover, the Hon’ble Supreme Court has issued notice in SLP filed by the revenue in Pr. CIT vs. Krishna Devi (2022) 287 Taxman 91 (SC).

24.2 It is noticed from the Tribunal’s consolidated order dated 31.07.2019 copy at pages 86-100 of Paper Book that appeals of the assessees, namely Smt. Karuna Garg, Bindu Garg and Krishna Devi were heard together and the representative of both the sides had agreed that the underlying facts are identical in the case of all the above assessees and the Tribunal took the case of Bindu Garg as the lead case. The Tribunal stated the facts that the assessees had purchased shares of two company online through two brokers stationed at New Delhi. Shares of one company were dematerialised on the date of purchase. The shares of another company were kept in common pool account of the broker on the day of purchase and purchase consideration was paid after 2-3 days. The sale transactions were done through Demat account via online trading. In these cases the Tribunal recorded the finding that the assessees discharged the onus cast upon them under section 68 of the Act. Thus the Tribunal had decided the appeals of the assessees in their favour. On appeals filed by the Revenue, the Hon’ble Delhi High Court dismissed them holding that no substantial question of law arose in those appeals. Nonetheless the fact remains that on facts all these cases are distinguishable. As stated earlier, in the case of the assessee at hand, the assessee had not purchased the shares online through brokers but the shares were purchased by the assessee directly from an unlisted company offline through private preferential allotment and on the day of allotment itself the company issued bonus shares in 1:1 ratio. The shares were listed on BSE platform later on. Hence the decisions of the Delhi High Court in Karuna Garg’s case and Bindu Garg’s case do not in any way help the assessee. Moreover as observed earlier the assessee has utterly failed to discharge the onus cast upon her to prove the genuineness of the share transactions entered into by her which has been held to be sham.

24.3 In Smt. Shivani Gupta’s case (supra) the Tribunal followed the decision of co-ordinate Bench in Tapas Kumar Mallick’s case (supra) which was decided in the light of the decision of the Hon’ble Delhi High Court in the case of Smt. Krishna Devi (supra). We have observed in para 24.1 above that the case of the assessee before us is distinguishable on facts from the case of Smt. Krishna Devi (supra) in which the investment in shares was made online by making payment through banking channels whereas the assessee under consideration before us had purchased shares of unlisted entity directly offline through private preferential allotment and on the day of allotment itself the said company had issued bonus shares in 1:1 ratio. Therefore, in our opinion, reliance on the decision of the Tribunal in Smt. Shivani Gupta’s case (supra) is misplaced.

24.4 In Mukesh Mittal’s case (supra) the CIT(Appeals) had followed the rule of preponderance of probability. The Tribunal, however followed the decision of Hon’ble Delhi High Court in Krishna Devi (supra) among others and held that the assessee has successfully discharged onus cast upon him by provisions of section 68 and such discharge is purely a question of fact. Even at the risk of repetition, we state that the facts in Krishna Devi’s case were altogether different from the facts of the assessee’s case at hand in which the assessee had purchased shares in question off market whereas in Krishna Devi’s case the shares were purchased online which were reported to the Stock Exchange. The assessee before us has not been able to discharge the onus of proving the genuineness of the transaction which has been held to be sham.

24.5 In Shri Tapas Kumar Mallick’s case (supra), the assessee had purchased equity shares through initial public offer (IPO) of HPC Biosciences Limited on 15.03.2013 whereas the assessee before us had purchased the shares offline directly through private preferential allotment not reported in the stock exchange and on the day of allotment itself the company issued bonus shares in 1:1 ratio. The facts are therefore different from the facts of Shri Tapas Kumar Mallick’s case and therefore reliance on this case by the assessee is of no help to her.

24.6 In Amit Jindal’s case (supra), the shares were purchased through offline trading with a view to earn huge profit as admitted by the assessee in his statement recorded by the AO under section 131of the Act. The Tribunal followed the decision of the Co-ordinate Bench in the case of Smt. Karuna Garg (supra). However, in Smt. Karuna Garg’s case, the shares were purchased online through broker. It is, therefore, obvious that the facts of the assessee’s case are not identical with the facts of Smt. Karuna Garg’s case.

25.1 DCIT vs. Pawan Kumar Malhotra (2010) 2 ITR (Trib) 250 (Del): in this case the Delhi Tribunal held that cash credit may be inferred even in respect of amount recorded as sale price of shares held by the assessee at an abnormal rate at 70 times the cost, so that the inference that it is sham has to be upheld as an instance of disguise cash credit.

25.2 ITO vs. Shamim M Bharwani (2015) 170 TTJ (Mumbai) 238: in this case the assessee earned income from sale of shares of ECL. The assessee claimed said amount as exempt under section 10(38). The AO took the view that share transactions were not genuine. He added sale proceeds of shares to the income of the assessee under section 68 of the Act. The CIT(Appeals) decided in favour of the assessee. The Revenue appealed before the Tribunal which noted that the purchase of shares was off market purchase not reported to the stock exchange and that the shares belonged to a penny stock company, with no credentials, and selling rates were artificially hiked, with no real buyers. On facts, the Tribunal held that inference of sales being bogus was unmistakable and consequently the impugned addition was confirmed.

25.3 Sanjay Kaul vs. ITO (2020) 181 ITD 146/82 ITR (Trib) 441(Delhi): in this case the assessee claimed short term capital loss on sale of shares. The AO received an information from Dy. Director (Inv.) wherein he referred to general practice followed by certain companies, brokers and operators for providing bogus long term/short term capital loss and the assessee was also one of the beneficiary. The AO had pointed out that the assessee could not explain why he invested in such scrip without knowing financial performance of the company. The assessee could not rebut those adverse findings by the AO and therefore, he made addition under section 68 of the Act. The CIT(Appeals) endorsed the findings of the AO. On appeal by the assessee, the Tribunal held that on facts, short term capital loss claimed by the assessee was not genuine and therefore, the AO was justified in treating the same as unexplained under section 68 and in making the impugned addition.

25.4 Sannat Kumar vs. ACIT (2020) 122 taxmann.com 75 (Delhi- Trib): in this case the assessee purchased shares of CSL @ Rs. 10/- per share and 23 after one year sold the same at Rs. 476/- to Rs. 503/- per share. The AO found that CSL had been duly investigated by the Department of Revenue Intelligence (DRI) and found that the same was a bogus company engaged in arranging for bogus long term capital gain. Accordingly, the AO denied exemption under section 10(38) and brought alleged long term capital gain to tax under section 68. The Ld. CIT(A) decided against the assessee who brought the matter before the Tribunal. The Co-ordinate Bench of Delhi Tribunal held that when the assessee sold shares, working of CSL was not above board and it was only providing accommodation entry in the form of long term capital gain and short term capital gain to evade tax. The assessee also failed to explain the business of CSL and failed to produce balance sheet of CSL. The assessee also failed to prove genuineness of transactions. Therefore, impugned addition was to be sustained.

26.1 In Swati Bajaj’s case (supra) the Hon’ble Calcutta High Court observed in the context of the report of the Pr. DGIT (Inv.)Calcutta that large number of NRIs and well known FIIs are buying and selling penny stocks and this appears to be a case where the black money stashed abroad is coming back to India (purchase) or money being sent out of the country (sale). The report points out that while only Rs. 27.57 crores have gone out of the country, an amount of above Rs. 114.97 crores has come in. The report has been communicated to the DGIT (Inv.) of all the states. In the opinion of the Hon’ble Calcutta High Court the methodology of the investigation by the department is quite different from the normal method of investigation which commences from the investor or the assessee as the case may be. On account of huge sums of money being claimed as long term capital gain/long term capital loss, a different approach/methodology was adopted 24 by the department by commencing the investigation not from the individuals who traded with penny stocks but investigation has started targeting the individuals who dealt with those penny stocks. This concept can be mentioned to be one of “working backward’”. This is one of the modes of causing an investigation, considering its magnitude. The approach of the department cannot therefore be faulted.

26.2 The Hon’ble Calcutta High Court observed further that the court sit in judgment over the methodology adopted by the department as no taxpayer is entitled to any benefit which shall not accrue to him under the provisions of the Act. If any dubious methodology has been adopted for the purpose of availing certain benefit not admissible under law, the same will not come within the ambit of tax planning, but shall be a case of tax avoidance by adopting illegal methods. Therefore, the department was justified in proceeding to take up the cases, not only within the jurisdiction of the state of West Bengal but other state as well.

26.3 The Hon’ble Calcutta High Court observed that the assessee is lawfully bound to prove the huge long term capital gain claims to be genuine. If there is information and data available of unreasonable rise in the price of shares of penny stock companies over a short period of time, the genuinity of such steep rise in the prices of shares needs to be established and the onus is on the assessee to do so. The assessee cannot escape from the burden cast upon him and unfortunately the burden is heavy as the facts establish that the shares which were traded by the assessee had phenomenal and fanciful rise in a short span of time and more importantly after a period of 17 to 22 months, thereafter has been a steep fall which has led to huge claims of short term capital loss. Therefore, unless and until the assessee discharges such burden of proof, the addition made by the AO cannot be faulted.

unexplained expenditure, etc. 69C. Where in any financial year an assessee has incurred any expenditure and he offers no explanation about the source of expenditure or part thereof, or the explanation, if any, offered by him is not, in the opinion of the Assessing Officer, satisfactory, the amount covered by such expenditure or part thereof, as the case may be, may be deemed to be the income of the assessee for such financial year.