TaxTMI 
TaxTMI 
2011 (10) TMI 704
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....r 2005-06 in the case of Rakesh Agarwal. 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 asses....
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....e accepted because these were never filed before the ADIT(Inv) and there was considerable gap between the dates of original 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 broker....
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.... in the approved ratio in assesee's favour. The letters of allotment issued by the amalgamated companies contained details of share certificate numbers, distinctive numbers 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 t....
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..... The entire payment was completed within 15 days of purchase but according to AO the time gap was 38, 42 & 45 days respectively. The above empirical data proved that AO's conclusion 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....
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....d provided accommodation entries to the family members of Shri R.S.Agarwal. The alleged modus operandi adopted by them in providing accommodation entries was explained in their statements. The statements 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....
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....tements originally recorded at the assessee's back were retracted by the parties. In the remand report the AO has stated that he was unable to examine the witnesses u/s 131 because no proceedings were pending. 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 reman....
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.... Kedia were debarred form operating on any stock exchange on the charge of share manipulation activities. From perusal of said order it appeared that SEBI had conducted detailed investigation of the share transactions conducted 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 Ke....
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....hares of these 2 companies were much higher than the break up value of the shares and this fact indicated the market price of the shares was artificially inflated. I however find that apart from the assessee several other persons also conducted 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 comp....
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....nquiry during the assessment nor in the remand proceedings in relation to alleged chain of transactions leading to ultimate destination of the cash which proved his conclusions nor the AO examined either Shri Khemka or stockbroker, nor allowed the assessee 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 ....
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....r stock broker were fabricated or false. The brokers was registered with CSE and had confirmed transaction by quoting registration number, contract number, settlement number etc. it was not the Revenue's case that the broker did not exit or that the relevant 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. ....
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....the assessee. In doing so, the tribunal held that the transaction fully supported by the documentary evidences could not be brushed aside on suspicion and surmises. However, it was held that the transaction of share are genuine. Therefore we do not find that there is any reason to hold that 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 s....
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....ck Exchange on payment of Security Transaction Tax; after allegedly holding the same for more than 12 months. Accordingly, all the 6 assessees claimed capital gains to be exempt u/s 10(38) of the Act. 4.1. Simultaneously with the search conducted in the case of R. S. Agarwal Group, search & seizure proceedings 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, t....
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.... that in the assessment order; besides relying on the confessional statements of Sri Khemka and the Stock Brokers the AO also brought on record cogent; relevant and circumstantial evidences & facts which clearly proved that in reality there was in fact no purchase & sale of shares of Khoobsurat Ltd & Emarald Commercial 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 ....
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....pulation of shares and having regard to their tainted character the AO was well justified in holding the assessee's share sale transactions through these Brokers to be sham. 4.6. The ld.DR further submitted that both M/s. Khoobsurat Ltd & Emarald Commercial Ltd were Companies having no established track record 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 Nov....
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....itted the retraction affidavits of the brokers but also furnished before the AO all the cogent and relevant documentary evidences which substantiated both purchase & sale of shares. Even though these documentary evidences were furnished; the AO did not bring on record any material or evidence to prove any infirmity 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 in....
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....le of shares was received by the assessee through Calcutta Stock Exchange. This fact proved that the payment for sale of shares was made from independent source and the transaction was fully verifiable from the Exchange. Referring to order of SEBI, the A/R pointed out that after conducting in depth investigation, SEBI had 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 t....
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....ith reference to income element only. We therefore find that even in the impugned order in making addition u/s 68 the AO himself allowed deduction for purchase cost of shares. These facts therefore indicated neither the cost of purchase was doubted nor addition in respect thereof was made either in the year of purchase or in the 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 l....
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....depository participant of NSDL. Before us the assessee filed copy of the application made with the depository participant for surrender of share scrips from which we find that the distinctive number of shares , share certificate numbers etc exactly tallied with the information mentioned in the letters of allotment issued in favour 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 overwhelmi....
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....e showed that sale of shares was full verifiable with reference to credible third party evidences. Before the AO as well as before us the assessee was able to substantiate his purchase & sale of shares by producing documents and evidences which ordinarily an investor maintains in relation to his transactions in shares. On these facts therefore 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 th....