TaxTMI 
TaxTMI 
TaxTMI 
2011 (10) TMI 704
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..... 2. In ITA No.247/Kol/2011 the following grounds have been raised by the Revenue.: "1. That in facts and circumstances of the case and in law the Ld.CIT(A) has erred in deleting the addition of Rs. 67,04,678/- made on account of rejection of assessee's claim of long term capital gain exempt from tax u/s 10(38) of the Act without proper appreciation of the evidences brought on record by the department that it was assesses own unaccounted money introduced as long term capital gain arranged accommodation entries in the books of accounts of brokers which the brokers had confessed to the Income Tax authorities in statement given u/s 132(4) of the Act. 2. That the Department craves leave to add. Modify or alter any of the ground(s) of appeal and/or adduce additional evidence at the time of hearing of the case." In respect of other ITA Nos. the figures are varying from each other. 3. The brief facts of this issue as observed by ld. CIT(A) in the impugned order at para 11 is as under :- "11. It is the AO's case that LTCG income of Rs. 67,04,678/- disclosed in the return, in reality represented introduction of assessee's unaccounted money. According to AO the assessee's alleged tr....
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....l statements and retraction affidavits. i) The statement on oath recorded before the ADIT(Inv) carried greater evidentiary value in view of the judgement of Supreme Court in the case of Surjit Singh Chabra (AIR 1997 SC 2560) and therefore retraction affidavits could not be given credence. j) After 2004 few stock brokers had resorted to money laundering activities by using "penny stocks". Share prices of the penny stocks were artificially inflated by the stock brokers so that capital gain could be introduced in the books by converting black money into white. The modus operandi generally followed in such transactions was followed by the assessee's stock broker as well enabling the assessee to introduce his unaccounted money in his books in the form of long term capital gains on sale of shares & claim exemption u/s 10(38). k) The stock broker through whom the assessee conducted his share transactions were indicated by SEBI on the charges of price manipulation. The order of SEBI proved the dubious character of assessee's stock brokers. l) CSE had banned trading of shares of Khoobsurat Ltd and Emrald Commercial Ltd effective from 23.11.2005 which established that assessee'....
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....umbers of shares, folio no. etc. which proved the valid issuance of shares in assessee's name by the amalgamated companies. The shares received form the amalgamated companies were listed on CSE and the stock exchange had permitted dealing in these shares which was possible only when the amalgamated companies had complied with statutory formalities concerning valid issuance and allotment of shares. The shares allotted by the Khoobsurat Ltd and Emrald Commercial Ltd in physical form were thereafter surrendered for holding them in dematerialized form. For this purposes the assessee had surrendered the share certificates to M/s. Eureka Stock & share Broking Services Ltd., a recognized depository participant of National Security Depository Limited (NSDL). On receipt of physical share scripts the assessee's demat account with NSDL was given credit for the shares of Khoobsurat Ltd & Emrald Commercial Ltd. All these documentary evidences substantiated assessee's purchases of shares. Although the AO has doubted genuineness of the purchases he did not bring on record any material to show any specific infirmity or falsity in the documents produced by the assessee in support of purchases. Had ....
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....onclusion that there was considerable time gap between the date of purchase and date of payment was factually untrue. 15. The shares in question were purchased from stock broker and the sale was complete only after delivery of shares in physical form along with signed share transfer forms was made. It was not a case where shares were transacted in demat form and delivery could be made through electronic exchange. Since delivery of shares involved compliance with elaborate procedure; time taken by the broker and the transferors for compelting formalities was sufficient to explain the gap between the dates of contract notes and dates of payments. Having regard to the fact that the payments for purchase of shares were completed within 20 days, the itme taken coujld not be considered to be inordinately long. For this reason the assessee's share purchase could not be held to be bogus or antedated. Moreover even with reference to dates of payments, period of share holding exceeded 12 months and therefore AO's hypothesis that the back dating of purchases was made with an intention to show period of holding to be more than 12 months was not on sound footings. 16. The purchase of shares....
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....tatements of Shri Khemka; Shri Sunil Kedia and the stock broker were however recorded in assessee's absence. No opportunity of cross examination was provided to the assessee either by ADIT(Inv) who recorded the statements or by the AO who used the statements in evidence against the assessee. In fact I find that even though serious allegation of money laundering were made against the assessee, the assessee was never confronted with these statements by the investigating authority nor assessee's statement was recorded with reference to the statements of Shri Khemka and others by any of the authorities. It was also very surprising to note that even though the statements from Shri Khemka and the stock broker were recorded as far back in December 2006 & January 2007, the assessee was made aware of these statements for the first time only in November 2008 when the assessment was getting barred by limitation in December 2008. during the long intervening period neither the investigating authority nor the AO confronted the assessee with recorded statements of Shri Khemka or Shr Dedia. The long silence on the part of the AO in this regard was quite inexplicable. 18. Considering these omissi....
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..... In my opinion this was a lame excuse which cannot be accepted at its face value because remand proceedings enable an appellate authority to get the enquiry conducted through the AO. Moreover, the AO's suggestion in the remand report that the appellate authority may examine the witness u/s 131 was not judicially or administratively proper. The appellate authority cannot conduct the primary investigation and fill in the void caused by the AO's acts of omission. Since the AO had omitted to personally examine the departmental witness, who had retracted their earlier statements; opportunity was given to AO, to make good the omission. Principles of natural justice also demanded that the assessee be allowed opportunity of cross examination of the persons whose statements were used in evidence. Despite giving the opportunity to overcome the omissions the AO chose not to conduct any enquiry as suggested. In my opinion the course adopted by the AO in the assessment as also in the remand proceedings was completely contrary to the principles of natural justice because the assessee was not given effective and proper opportunity of testing the veracity of the statements originally recorded by ....
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....ucted by few stock brokers who were all members of CSE. From investigation of the transactions conducted by some of these CSE members, SEBI and Stock Exchange found that the brokers had indulged in circular trading because of which prices of shares of few companies, having low market capitalization got artificially inflated within short time. After an in depth investigation, SEBI found evidence against Ashish Stock Broking Pvt. Ltd and Shri Sunil Kedia only in respect of their transactions in the shares of only one company i.e. Goenka Business & Finance Ltd. The order of the SEBI showed that investigation was conducted by regulatory authority in respect of all the transactions of the assessee's broker but found evidence of price manipulation only in respect of shares of one company. No evidence was however found which showed that share prices of Khoobsurat Ltd & Emrald Commercial Ltd were also artificially inflated by Ashish Stock Broking Pvt. Ltd or Shri Sunil Kedia. Had any evidence been found by SEBI which showed that Ashish Stock Broking Pvt. Ltd. manipulated shares prices of Khoobsurat Ltd & Emrald Commercial Ltd, then SEBI would have certainly indicted the brokers for that de....
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....onducted purchase & sale of shares of the 2 companies at the same price at which the assessee conducted his sale. It was therefore not a case that the assessee alone realized very high price for his shares and other persons transacted the same shares at much lower values. The A/R for the assessee also placed on record published quotation of CSE dated 19.02.2009 i.e. almost three and half years after the date of sale; from which it appeared that in February 2009 also the prevailing market price of Emrald Commercial Ltd's share was Rs. 464.50 and that of Khoobsurat Ltd was Rs. 477.20 per share. The published CSE quotation therefore established that even after 4 years after sale by the assessee, shares of both the companies were actively traded on CSE and their share prices had not recorded any decrease. Although this information was brought to the AO's attention he did not point out any infirmity or established that transactions in shares of these companies conducted by other investors were also false or bogus or fabricated. If the AO did not have any material which proved transactions in shares of these 2 companies carried out by other person were also manipulated or were bogus then....
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....sessee opportunity of cross examination. In view of above facts and circumstances the only conclusion that can possibly be drawn is that the AO did not have in his possession any material except the so called sworn statement u/s 132(4) to corroborate or substantiate his finding that the assessee had availed accommodation entries and that purchase & sale of share was bogus. 26. The assessee's reliance on the decisions of the Kolkata Benches of ITAT is found relevant because facts in the decided cases were more or less similar with assessee's casde e.g. in the case of Rajkumar Agarwal (ITA 1330/Kol/2007 dated 10.08.2007) the assessee had purchased 8500 shares of Nageshwar Investments Ltd from Bubna Stock Brokings Services Pvt. Ltd. on CSE at cost of Rs. 17,170. Purchase consideration was paid after a gap of 1 month 3 day. Delivery of shares was taken in assessee's demat account and the purchase was supported by contract notes in the form prescribed by CSE. 4000 shares were sold on 17.09.2003 @ Rs. 87.06 per share and 4500 shares were sold on 19.09.2003 @ Rs. 85.36 per share. Transactions were conducted through the same stock broker. The delivery of shares was given through assessee....
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....t shares of Nageshwar Investment Pvt. Ltd did not exit or that the purchase & sales of shares recorded and routed through the bank account and demat account were fictitious. The tribunal therefore upheld the order of the CIT(A) and held that income disclosed by the assessee was assessable as LTCG. 27. The decisions of the Calcutta High Court in the case of CIT vs Cargo Industrial Holding Ltd (244 ITR 422) and CIT vs Emrald Commercial Ltd (250 ITR 549) are relevant in this case wherein the High Court had held as under : "..........Payment by account payee cheque had not been disputed. Payment on purchase and sale and payment received by account payee cheque was on two different dates. If the share broker, even after issue of summons, does not appear, for that reasons, the claim of the assessee should not be denied specially in case when the existence of the broker is not in dispute nor the payment is in dispute. Merely because some broker failed to appear, the assessee should not be punished for the default of a broker and we are in full agreement with the Tribunal that on mere suspicion the claim of the assessee should not be denied." 28. Decision of the Calcutta High Court i....
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....there is any substantial question of law involved in this matter. Hence, the appeal being ITA No.6f30 of 2008 is dismissed." 29. The above decisions squarely support the appellant's case. In the case of Rajkumar Agarwal the assessee had purchased and sold shares of Nageshwar Investments Pvt. Ltd. this company is one of the 5 companies, in whose case SEBI found evidence of price manipulation by some of the CSE brokers though Bubna Stock Brokering Services Pvt. Ltd. was not one of them. The Tribunal having found that purchase and sale transactions were conducted through recognized stock broker and the transaction was properly supported by proper documentary evidences it did not agree with AO's conclusion that the assessee in collusion with his tock broker introduced his unaccounted money in the form of LTCG. In the assessee's case also his transactions in purchase and sale of shares are supported by proper documentary evidences. The shares received from the amalgamated companies were converted in dematerialized form for which the credit was given to assessee's demat account by NSDL over whom neither the assessee nor his broker had any control. The AO did not doubt the genuineness o....
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....oceedings were also conducted at the Office Premises of Sri Arun Kumar Khemka at 8, Ganesh Chandra Avenue, Kolkata, during which, statement u/s 132(4) was recorded by the ADIT (Inv.). In his statement, Sri Khemka confessed that he had arranged accommodation entries for the family members of Sri R. S. Agarwal; whereby cash paid was returned in the form of Cheques against ostensible sale of shares of Khoobsurat Ltd & Emarald Commercial Ltd both of which were his controlled entities. Shri Khemka admitted that in fact no shares were actually purchased and sold by the assessees and he only arranged entries in support of purchase and sale of shares. The cash received from the individual members of R. S. Agarwal family were later on returned after deducting his 2% commission for providing accommodation entries. Sri Khemka further submitted that he had incurred expenses such as brokerage, transaction charges, STT, etc. and after deducting these expenses his net earning from providing accommodation entries was only 1%. 4.2. Subsequent to recording of statement u/s 132(4) on 9th December 2006, M/s. Ashis Stock Broking Pvt. Ltd and Sri Sunil Kumar Kedia Stock Brokers through whom assessee ha....
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....ommercial Ltd. Referring to the Assessment Order, he submitted that the assessee had allegedly purchased shares of 5 Companies through M/s. Globe Securities & Services Ltd. The purchase consideration was however not paid by account Payee Cheque but it was allegedly paid in cash. Since it was a cash transaction the same was not amenable for verification from independent source. This fact raised serious question on actual purchase of shares. Further there was considerable time gap between the alleged date of purchases and the alleged dates of payments. The considerable time difference between the 2 dates clearly gave an impression that the purchases were anti-dated to enable the assessee to claim holding period to be more than 12 months. Referring to chart of share purchase and payments therefore in the assessment order, he stated that the time gap between the dates of contract and dates of payments ranged up to 45 days which clearly proved the inordinate delay in making payments and this fact raised serious question about genuineness of the shares purchase. The ld.DR further argued that the shares of 5 companies were allegedly purchased during the pendency of amalgamation proceeding....
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....and did not conduct any substantial business so as to justify high market price for their shares. Referring to the assessment order, he submitted that the break-up value of shares of Khoobsurat Ltd was Rs. 52.45 per share and that of Emarald Commercial Ltd was Rs. 37.87; only. In view of such low break-up value of shares there was apparently no justification for these companies to have share price exceeding Rs. 450/- i.e. the price at which the shares were sold by the assessee. According to him, shares of both the companies were "penny stock" whose prices were artificially inflated by few brokers to enable some persons to launder their black money through dubious modus operandi. Considering the dubious nature of trading and artificially high share prices of these 2 Companies, trading in shares of these Companies was banned by Calcutta Stock Exchange effective from 23rd November 2005. The ld.DR submitted that all the facts and evidences considered cumulatively not only supported the confessional statement of Sri Khemka made before the ADIT (Inv.) u/s 132 but also proved that the amount received by the assessee in the garb of sale of shares was nothing but undisclosed income of the a....
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....or falsity in the documents. In fact the AO did not deal with any of the documents on merits but simply by making general observations and allegations made the addition of capital gains. 5.1. The A/R further submitted that the decision of the Supreme Court in the case of Surjeet Singh Chhabra (supra) was not applicable in as much as in the assessee's case statement of the third party was used by the AO as sole evidence for justifying the addition. The A/R submitted that principles of natural justice demanded that before statement of Sri Khemka was used in or as evidence, the assessee was given opportunity of cross examining the witness on whose statement addition was sought to be justified. No such opportunity was allowed either in the course of assessment or in remand proceedings even though the CIT (A) had expressly directed AO to examine the Stock Brokers and to investigate the alleged trail of cash. 5.2. Relying on the decision of the Supreme Court in the case of Vinod Kumar Solanki Vs Union of India, he submitted that in the later decision the Supreme Court had held that the alleged confessional statement of the accused before FERA Authorities could not be used as sole evide....
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.... found no evidence to suggest that the assessee's brokers were guilty of manipulating shares prices of Khoobsurat Ltd or Emarald Commercial Ltd. Since no evidence was found by SEBI to establish that prices of Khoobsurat Ltd & Emarald Commercial Ltd were also manipulated, no adverse inference could be drawn against the assessee merely because the assessee's brokers were found guilty of price manipulation of shares of some other companies. The A/R submitted that at the relevant time when the shares were sold; Brokers were active members of CSE and till then were not barred by SEBI from operating on CSE on the charges of price manipulation of shares. 5.4. Referring to the price quotations published by Calcutta Stock Exchange; the A/R submitted that the dates on which the assessee had sold shares of Khoobsurat Ltd & Emarald Commercial Ltd, there were several other transactions in shares of these 2 companies. The transaction in shares of these 2 Companies were also carried out by several other persons at the similar prices at which the assessee had sold his shares. It was not a case where only the assessee traded in shares of the 2 companies. Referring to CSE Publications for the year ....
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....e year of sale. On these facts therefore we find that the purchase cost of shares per se was not disputed by the AO at any stage. In the circumstances the question is whether the AO could draw adverse inference against the assessee only with regard to capital gains which was claimed exempt u/s 10(38) of the Act. 6.2. In the impugned order the AO discussed numerous facts which led him to suspect that sale of shares and consequent earning of capital gains was not genuine. The principal reason for the addition was the statement of Shri Arun Kumar Khemka recorded by ADIT(Inv) u/s 132(4) of the Act wherein he had allegedly admitted that he had provided accommodation entries in the form of purchase & sale of shares. We find that the entire edifice of the assessment order was based on this statement of Shri Arun Khemka and which was later on corroborated in the letters dated 15.01.2007 given by M/s. Ashish Stock Broking Pvt. Ltd and Shri Sunil Kedia, stock brokers through whom the shares were sold. Before us, the Ld. CIT (D/R) placed strong reliance on the confessions of Shri Khemka and the Stock Brokers. He also strongly relied on the facts narrated in the assessment which indicated dub....
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....of the assessee by the amalgamated companies. On surrender of physical share scrips to the depository participant; assessee's demat account was given credit by NSDL. Meaning thereby the physical custody of these shares now rest with NSDL. It is not the case of AO nor any evidence was brought on record which in any way suggested that the depository participant or NSDL were acting under the influence of Shri Khemka or the stock brokers. Admittedly NSDL is an independent body. Had there been no genuine purchase of shares by the assessee then it would not have been possible for the assessee to deliver shares of these companies to NSDL for holding in dematerialized form. With reference to the dates of acquisition and dates of payments, we find that the AO's finding that share purchase was antedated was not a correct finding of fact. Having regard to overwhelming documentary evidences brought on record by the assessee and considering the fact that even the AO himself accepted and allowed the deduction for cost of purchase of shares, we do not find any justification in AO's conclusion that the purchase of shares by the assessee remained unverifiable. 6.4. The shares of Khoobsurat Ltd & E....
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....herefore we find that the assessee had discharged onus of substantiating his transactions of purchase & sale of shares. 6.6. We also do not find force in the submissions of the Ld. DR that assessee's share transactions should be considered to be bogus because the brokers through whom assessee sold shares were found guilty of price manipulation of shares by SEBI. From the copy of SEBI's order we note that SEBI conducted investigation in unusual price movements of shares traded on CSE. On in depth enquiry SEBI found creditble evidence of price manipulation of shares of 11 companies. Khoobsurat Ltd & Emald Commercial Ltd were not amongst the list of companies in whose case SEBI found evidence of price manipulation. Although assessee's brokers were found guilty of manipulating prices of shares of 2 companies but no evidence was found by SEBI to show that the brokers were involved in manipulating share prices of Khoobsurat Ltd & Emrald Commercial Ltd. At the relevant time both the brokers were carrying on broking business and therefore merely because at a later date SEBI found evidence against these brokers regarding price manipulation of shares of some other companies, no adverse infe....