TaxTMI 
TaxTMI 
2016 (3) TMI 1321
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....iny it was observed that earlier , during January 17, 2013 to June 04, 2013, the price of the scrip had increased from Rs. 11/- to Rs. 36.25/ in 36 trading days and average trading volume during this period was merely 280 shares per day with average number of trade as low as 3 per day. For the purposes of preliminary examination of facts and circumstances prevailing during these periods these periods were taken in three patches i.e., (a) January 17, 2013 to June 04, 2013 (Patch -1) , (b) July 22, 2013 to November 05, 2014 (Patch-2) and (c) November 07, 2014 to December 31, 2015 (Patch -3). The price movement vis-a-vis traded volume in the scrip during this period is illustrated below: 2. During preliminary examination several acts and omissions, in connection with dealing in shares of Kailash Auto having a bearing on the securities market, including layering of funds, circulation of funds and securities, amongst inter -connected parties for acquisition and divestment of securities of connected unlisted private companies and corporate actions including capital reduction, issuance of bonus shares, private placement and merger of such companies with Kailash Auto were also obs....
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....o as "CPAL") and Panchshul Marketing Ltd. (hereinafter referred to as "PML") who had together acquired shares amounting to 69.81% of the total paid-up share capital of the company from Padma Impex Ltd., the erstwhile promoter of Kailash Auto through a share purchase agreement dated May 02, 2012. Consequently, the board of directors of Kailash Auto had approved CPAL and PML as promoters of Kailash Auto. (b). On November 22, 2012, the board of directors of Kailash Auto had agreed for reduction of share capital of Kailash Auto and merger of CPAL and PML with Kailash Auto. The scheme of reduction of share capital of Kailash Auto and amalgamation of CPAL and PML with it were approved by the Hon'ble High Court of Allahabad and the Hon'ble High Court Bombay vide separate orders dated May 9, 2013 and May 10, 2013, respectively. The swap ratio for the amalgamation was approved as follows: (i) The paid up value per share of the transferee company (Kailash Auto) would be of Rs. 1/- each, fully paid up post reduction of capital. (ii) The paid up value per share in the transferor companies (CPAL and PML) would be of Rs. 1/- each, fully paid up. (iii) Accordingly, for every equity....
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....1/03/2011 Timeless Suppliers Pvt. Ltd. 1,48,300 Total 33,01,550 (f). During the Financial Year 2011-12, CPAL had a paid up share capital of Rs. 285,686,800/- consisting of 285,686,800 shares of Rs. 1/- each. CPAL had increased its authorised share capital from Rs. 3,450,000/- to Rs. 290,000,000/- and then its shares were split from Rs. 10/- each to Rs. 1/- each, thereby converting 340,155 equity shares of Rs. 10/- each into 3,401,550 equity shares of Rs. 1/- each. (g). Thereafter, during the same financial year, CPAL had issued 187,085,250 equity shares of Rs. 1/- each as bonus shares in the ratio of 55 shares for 1 share and further issued 95,200,000 equity shares of Rs. 1/- each through private placement. The list of the persons who received bonus shares, and persons who were allotted shares in this private placement amongst others (hereinafter referred to as the "recipients of CPAL shares") is given in the following Table: Table 2- List of recipients of CPAL Shares Date Name of Allottees Corporate Action Shares Allotted 31/07/2011 Sudhir Jain Bonus Issue 2750000 31/07/2011 Rohit Agarwal Bonus Issue 2750000 31/07/2011 Anand Sagar Thakur Bonus....
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.... 9,400 31/03/2011 Speedwell Enclave Consultancy Pvt. Ltd. 5,600 31/03/2011 Superdeal Vincom Pvt. Ltd. 7,800 31/03/2011 Timeless Suppliers Pvt. Ltd. 20,000 Total 3,36,900 (j). During the Financial Year 2011-12, PML had a paid up share capital of Rs. 300,224,000/- consisting of 30,02,24,000 shares of Rs. 1/- each. PML had increased its authorised share capital from Rs. 1,00,00,000/- to Rs. 31,00,00,000/-. and then its shares were split from Rs. 10/- each to Rs. 1/- each, thereby converting 3,46,900equity shares of Rs. 10/- each into 34,69,000 equity shares of Rs. 1/- each. (k). Thereafter, during Financial Year 2011-12, PML had issued 225,485,000 equity shares of Rs. 1/- each as bonus shares in the ratio of 65 shares for 1 share and further issued 7,12,70,000 equity shares of Rs. 1/- each through private placement. The list of the persons who received bonus shares and persons who were allotted shares in this private placement (hereinafter referred to as the "recipients of PML shares" is given in the following Table: Table 4- List of recipients of PML shares Date Name of Allottees Corporate Action Shares Allotted 15/09/2011 Binod Kumar Tos....
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.... Ltd. 8. Pushapmala Vinimay Pvt. Ltd. 310, C.R. Avenue, Kolkata-700006 11. Pushpdant Tradelink Pvt. Ltd. 9. Gannayak Sales Pvt. Ltd. 9/12, Lal Bazar Street, 3rd Floor, Kolkata -700001 12. Pushpdhara Dealer Pvt. Ltd. 13. Speedwell Enclave Consultancy Pvt. Ltd. 14. Timeless Suppliers Pvt. Ltd. 10. Speedwell Enclave Consultancy Pvt. Ltd. 11. Timeless Suppliers Pvt. Ltd. 26, W.C. Banerjee Street, Near Girish Park, Kolkata-700006 Table - 6 Common directors of primary allottees of CPAL and PML Common Directors primary allottees of PML primary allottees of CPAL Hanish Toshniwal Confident Vanijya Pvt. Ltd. Heaven Sales Pvt. Ltd. Mrityunjoy Sarkar Pushpdhara Dealer Pvt. Ltd. Needful Projects Advisory Pvt. Ltd. Shivratri Merchants Pvt. Ltd. Pradeep Shaw Dhandevi Merchandise Pvt. Ltd. Dhankuber Dealcomm Pvt. Ltd. Safeline Develoeprs Advisory Pvt.Ltd. Saptrishi Agencies Pvt. Ltd. Sintu Kumar Superdeal Vincom Pvt. Ltd. Solty Dealtrade Pvt. Ltd. Timeless Suppliers Pvt. Ltd Sumanta Banerjee Pushpdhara Dealer Pvt. Ltd. Shivratri Merchants Pvt. Ltd. Timeless Suppliers Pvt. Ltd. Solty Dealtrade Pvt. Ltd. Vijay Lahoti Ranpriya Tradevin Pvt. Ltd. N....
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.... crores. Company has clarified to BSE that this value of 20.41 crores is sales value of securities sold in the market during the FY 13-14. Also the operating administrative expense reported 18.88 crores is the buy value of securities bought from the market during the FY 13-14. (r). Considering the operating performance and net profit of CPAL and PML in the year of incorporation 2010-11 and Financial Year 2011-12, it was noted that despite having weak operating results during the said financial years CPAL and PML had issued bonus shares in an unrealistic and disproportionate ratio (viz., 1:55 and 1: 65, respectively). (s). From the bank statement of the aforesaid primary allottees of CPAL and PML for the period of December 2010 to June 2011 it was observed that same funds were being churned among CPAL, PML and their respective primary allottees. Further, from the Annual Report of 2010-11 of CPAL and PML it was observed that these companies, in concert with their primary allottees had developed a mechanism by virtue of which CPAL, PML and their primary allottees made book entries of purported investment in each others' equity shares. Accordingly, there was no infusion of cash....
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....ading volume generated; (c). contribution to price rise. 7. During the analysis it was noticed that certain entities related/connected to Kailash Auto were found to be the net buyers to the beneficiaries and thereby created artificial demand for the supply of shares from beneficiaries. From the Know Your Client (KYC) details, their bank statements, off-market transactions amongst them and the information available on the website of the MCA it was observed that these entities were connected to each other. Two such interconnected groups were identified (hereinafter referred to as "Kailash Auto Group I" and "Kailash Auto Group II"). The particulars of the entities consisting Kailash Auto Group I and Kailash Auto Group II and the basis of relationship/connection amongst them are provided in the Annexure A and Annexure B, respectively. For the purpose of this order these entities were shortlisted on the basis of following parameters: (a). Top 300 entities based on gross buy/trade quantity; (b). Any entity who has traded in the scrip of Kailash Auto and is directly or indirectly connected to the company/its directors/or to entities mentioned in point above. 8. The entities of Kai....
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....aba Suppliers Pvt. Ltd. (an entity from Kailash Auto Group I). The scrip was an illiquid one at that point of time and there was negligible trading therein at that time. Considering this fact and that the connected entities of Kailash Auto were counter parties to the trades of these two entities it was prima facie observed that these two entities alongwith PML , Overall Vincom Pvt. Ltd and Bholebaba Suppliers Pvt. Ltd. manipulated the price of the scrip during Patch -1 under a premeditated plan. The details of contribution to price rise by these two entities during Patch -1 are as shown in the following Table: Table 9 - Contribution to price rise in Patch -1 by top two entities Name Positive Contribution (in %) Total Positive Contribution (in Rs. ) Positive LTP Contribution of the Client as a buyer Count of LTP Shyam Kanheyalal Vyas 44.08 25.75 11.35 09 Bharat Bagri (HUF) 12.50 25.75 3.22 04 Total 56.58 25.75 14.57 13 10. During Patch -2, the price of the scrip of Kailash Auto opened at Rs. 37.00/- on July 22, 2013 and closed at Rs. 28.45/- on November 05, 2014. The scrip touched a high of Rs. 48/- on November 29, 2013. During t....
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.... below 1 lakh 2005 8,94,82,608 19.22 3,04,24,08,672 Total 3592 465690392 100 15,83,34,73,328 13. At this stage, it was observed that 118 beneficiaries had sold 5 lakh shares or more during the Patch - 2. The list of these 118 beneficiaries along with their sell trading volume is given in Annexure C. 14. From the bank statements of top 5 entities of Kailash Auto Group I and Kailash Auto Group II, it was observed that these entities had huge inflow of funds from different sources and from promoter/promoter related entities of Kailash Auto. Fund flow to these entities of Kailash Auto Group I and Kailash Auto Group II is given in the following Table: Table 12 - Fund flow from promoter/promoter related entities of Kailash Auto to top 5 entities of Kailash Auto Group I and Kailash Auto Group II 15. The above Table depicts the transfer of funds amounting to Rs. 9,58,77,000/- from some of the promoter/promoter related entities of Kailash Auto to the entities of Kailash Auto Group I and Kailash Auto Group II. Further, top entities (in terms of buy trading volume) of Kailash Auto Group I and Kailash Auto Group II were majorly funded by Sri Karani Exports Pvt. Ltd.,....
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....iciaries who are also connected /related, directly or indirectly, with CPAL and PML as discussed hereinafter. 17. From the bank statements of few beneficiaries (considering the volume of transfer of equity shares of CPAL and PML from recipients of CPAL shares and recipients of PML shares to beneficiaries), recipients of CPAL shares and recipients of PML shares, movements of funds through layering of fund were observed. It was noted that funds received by recipients of CPAL shares and recipients of PML shares from the beneficiaries were transferred to various entities including CPAL and /or PML and via multiple layering; fund was finally transferred to the entities belonging to Kailash Auto Group I and II. A typical flow chart of movement of funds for one of the top beneficiaries is given below: 18. In the above example, it can be seen that funds have been transferred by Mr. Om Prakash Agarwal and Om Prakash Agarwal HUF (a beneficiary) to Shivling Mercantile Pvt. Ltd. (recipients of PML shares) as a consideration for the purchase of equity shares of PML. After receiving funds from Mr. Om Prakash Agarwal and Om Prakash Agarwal HUF, Shivling Mercantile Pvt. Ltd. transferred funds on....
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....ash Auto Group II cumulatively accounted for 35.47% of gross buy volume, however in Patch -3 beneficiaries accounted for only 24.21% of gross sell volume and Kailash Auto Group I and Kailash Auto Group II cumulatively accounted for 25.37% of gross buy volume. Thus, the downward trend of traded volume and price of the scrip of Kailash Auto in Patch -3 was on account of the lower trading concentration by beneficiaries and entities of Kailash Auto Group I and Kailash Auto Group II and indicates more involvement of gullible and genuine investors in trading in the scrip of Kailash Auto. 20. From the preliminary examination it is observed that the scheme of reduction of share capital and amalgamation were the mechanism adopted by the Kailash Auto to dubiously increase its value of market capital significantly. From the prima facie findings of preliminary examination it is inter alia noted that:- (a). During the financial year 2010-11, CPAL and PML were incorporated with a dubious plan and premeditated arrangement and artifice to increase number of equity shares therein through sham and non-genuine transactions with regard to issuance of their shares which resulted in fetching exorbita....
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....igure/ratio of Kailash Auto was unfavourable and well below the industry standards. The company operating revenue and operating expenditure depicts that very poor or no operating performance is being carried out by Kailash Auto. Kailash Auto has continuously reported negative or no profit. Further, earning per share (EPS) of Kailash Auto was nil or negative and value of scrip was highly inflated with respect to its book value. Considering the financial and operating figures of Kailash Auto, such huge market capital of Kailash Auto and price/traded volumes in its scrip during relevant periods are found to be inflated and unrealistic. 21. From the above facts and circumstances it is noted that shortly after their incorporation CPAL and PML made private placement to the primary allottees. In their private placements CPAL and PML issued equity shares for value of Rs. 19.80 crores and Rs. 23.58 crores, respectively by circulating back and forth smaller amounts of funds amongst the primary alllottees and themselves. Thus, on account of the repeated circulation of funds between different primary allottees and the companies, the receipt of allotment money for total equity shares issued in....
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....nts of PML shares as conduit to facilitate the transfer of their shares to the beneficiaries. The beneficiaries who received the shares of CPAL and PML swapped those shares with the shares of Kailash Auto as per the scheme of amalgamation on June 08, 2013. The facts and circumstances brought out in preliminary examination prima facie indicate that CPAL and PML were incorporated with a dubious plan and premeditated arrangement to increase number of equity shares therein through such sham and non-genuine transactions which resulted in fetching exorbitant and unrealistic consideration for their shares in the scheme of amalgamation. 23. From the observations of preliminary inquiry it is noted that Kailash Auto did not have any business operations during the relevant period. It had very poor fundamentals during the relevant period i.e., the financial years 2010-11, 2011-12, 2012-13 and 2013-14. The adjusted net profits and earnings per share (EPS) of Kailash Auto for these periods were always nil or negligible as reported by it. Prior to Patch -1, there was no trading at all in the scrip of Kailash Auto and there was no market discovered price for the scrip during this period. Thus, th....
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....ts and circumstances, I, prima facie, find that these connected entities, namely, the LTP contributors and connected counterparties to their traders, beneficiaries and entities of Kailash Auto Group I and Kailash Auto Group II indulged in price and volume manipulation in the scrip. 25. It is also relevant to mention that as per the provision of Explanation 1 to section 2(42A) of the Income Tax Act, 1961 - "In determining the period for which any capital asset is held by the assessee in the case of a capital asset being a share or shares in an Indian company, which becomes the property of the assessee in consideration of a transfer, there shall be included the period for which the share or shares in the amalgamating company were held by the assessee". Thus, though the beneficiaries had received the shares of Kailash Auto on June 08, 2013, the holding period of 12 months for the purpose of exemption from tax on LTCG, the gains made by beneficiaries on account of sale of shares of Kailash Auto would be eligible for LTCG exemption under Income Tax Act, 1961 since they were holding shares of CPAL and PML prior to swap under the scheme of amalgamation. In the entire process, the benefic....
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....ction with issue or dealing in securities which are listed or proposed to be listed on a recognised stock exchange; (c) engage in any act, practice, course of business which operates or would operate as fraud or deceit upon any person, in connection with the issue, dealing in securities which are listed or proposed to be listed on a recognised stock exchange, in contravention of the provisions of this Act or the rules or the regulations made thereunder;" PFUTP Regulations "3. Prohibition of certain dealings in securities No person shall directly or indirectly- (a) buy, sell or otherwise deal in securities in a fraudulent manner; (b) use or employ, in connection with issue, purchase or sale of any security listed or proposed to be listed in a recognized stock exchange, any manipulative or deceptive device or contrivance in contravention of the provisions of the Act or the rules or the regulations made there under; (c) employ any device, scheme or artifice to defraud in connection with dealing in or issue of securities which are listed or proposed to be listed on a recognized stock exchange; (d) engage in any act, practice, course of business which operates or would ope....
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....on inferences drawn from a mass of factual details. Findings in this regard can also be gleaned from patterns of transactions/dealings, conduct and behaviour of connected parties viz; incorporation of unlisted companies, apparent irregular transfers of funds and securities, corporate actions and other machinations, whether legal or otherwise, employed to achieve the designed purpose. In the instant case, I , prima facie, find that the entire gamut of events commencing from the typical gambit of allotment of shares by CPAL and PML to a select coterie, running through the maze of funds/shares transfers and retransfers amongst chosen interconnected parties, unrealistic increase of liquidity in shares of Kailsah Auto held by shareholders of CPAL and PML pursuant to scheme of amalgamation is a classic example of touch-me-not distancing through intermediations and culminating in the final denouement wherein connected parties with all their manipulative assemblage came to the fore setting a seal on their machinations of fraudulent, manipulative and deceptive dealings to the detriment of unsuspecting investors. 29. The whole picture on the canvass suggests tell- tale strands of how each o....
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....involved in such fraudulent, unfair and manipulative transactions to continue to operate in the market would shake the confidence of the investors in the securities market. Further, the fraudulent, manipulative and deceptive device, plan and artifice employed by connected parties in this case, not only endanger the interests of investors in securities but also the integrity of securities market as a whole. If left unchecked and perpetrators thereof are dealt with leniency on procedure and substance, it will give wrong signals in the system. I am of also of the view, the fraudulent, manipulative and deceptive acts, device, plan and artifice employed by the connected parties acting in league in this case have wider impact on the securities market and should be dealt with sternly and post- decisional hearing will be sufficient compliance of procedure, in the facts and circumstances of this case. Considering the facts and circumstances of this case and the indulgence of a listed company in such fraudulent, manipulative and deceptive plan, device and artifice as prima facie found in this case, I am convinced that this is a fit case where, pending investigation, effective preventive and ....
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....apure AVRPM3683K 37 KrishnaAgrawal ACHPA6428P 38 Nand Kishore Agarwal ACJPA2410P 39 Kuldeep Jaiswal ACVPJ4561C 40 Amit Jain AEFPJ8100B 41 Sajjan Kumar Patwari AEYPP3705K 42 Pratap Uttam Purohit AFZPP9994A 43 Chandadevi Ramswarup Sarda AHAPS4924L 44 Kanchan Jain AAHPJ9207D 45 Sunil Kumar Patwari AFVPP3401L 46 Nitin Jain AEFPJ8101A 47 A K Jain HUF AADHA7322L 48 Adar Kumar Jain ADSPJ5280G 49 Gobinda Chandra Pattanaik AJEPP2669K 50 Ashok Kejriwal HUF AAFHA5405E 51 Gurcharn Singh Baweja AAOPB3690D 52 Mahesh Kumar Khetan AAWPK2620E 53 Sangita Ketriwal ABTPK2380B 54 Ashok Kumar Kejriwal ADHPK4175C 55 Sweety Manglani AGAPM6677R 56 Praveen Goud Adhikam ACOPA7454Q 57 Sapna Goud Adhikam ADAPA1398J 58 Ashish Singhania BFWPS0721Q 59 Poonam Makin AEVPM9256K 60 Ramesh Kumar Kedia HUF AAEHR9181H 61 Saurabh Mittal ADDPM5232A 62 Kapil Mittal ADDPM5233B 63 Rekha Ajaykumar Agrawal AASPA2993A 64 Jyot....
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....JEPS8536L 120 Sushila Tiwari AJEPT8702F 121 Uma Sarda AKBPS4386G 122 Niranjan Rajendra Shete BOTPS0314D KAILASH AUTO GROUP I 123 Bholebaba Suppliers Pvt. Ltd. AADCB8132G 124 Keshavah Dealtrade Pvt. Ltd. AAECK7236R 125 Keshavah Mercantile Pvt. Ltd. AAECK7235N 126 Realstep Tradecom Pvt. Ltd. AAGCR4447R 127 Jai Dada Steel Pvt. Ltd. AACCJ3125C 128 Depandable Consultancy Business Kanti Ltd. AADCD1443J 129 Fortright Consultants Pvt. Ltd. AACCF2203K 130 Deekay Engineers & Dealers Ltd. AAACD8823B 131 Pragyan Realty Pvt. Ltd. AAHCP1157B 132 Huk Wealth Consultants Pvt. Ltd. AADCH1933R 133 Panchmadhu Projects Pvt. Ltd. AAHCP0443J 134 Mdbp Marketing Service Pvt. Ltd. AAGCM0694K 135 Malakar & Das Broking Services Pvt. Ltd. AAICM6326L 136 Proficient Managerial Solutions Pvt. Ltd. AAHCP1962C 137 Roselife Residency Pvt. Ltd. AAGCR4027D 138 Aryanraj Properties Pvt. Ltd. AALCA5298E 139 Dream Heights Pvt. Ltd. AACCD9717E 140 Sanket Merchandise Pvt. Ltd. AARCS3191G....
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....2503Q 190 Goldensight Management Pvt. Ltd. AAFCG0066N 191 Mahamani Tradelink Pvt. Ltd. AAHCM8752F 192 Shallot Tie-Up Pvt. Ltd. AARCS5133J 193 Rajgharana Agencies Pvt. Ltd. AAFCR2462P 194 Mobixa Distributors Pvt. Ltd. AAICM4750C 195 AriseDealcom Pvt. Ltd. AAJCA5108R 196 Rangan Vincom Pvt. Ltd. AAGCR1715E 197 Signet Vinimay Pvt. Ltd. AAMCS1712Q 198 Kapeeshwar Vintrade Pvt. Ltd. AAECK7329P 199 Touchwin Commercial Pvt. Ltd. AAECT1846Q 200 Ladios Trading Pvt. Ltd. AACCL3868N 201 Katyani Commodities Pvt. Ltd. AAECK6244R 202 Runicha Merchants Pvt. Ltd. AAECR0580M 203 Spice Merchants Pvt. Ltd. AAPCS7492G 204 Core Commodities Pvt. Ltd. AAECC2931M PRIMARY ALLOTTEES OF CPAL AND PML 205 Confident Vanijya Pvt. Ltd. AADCC5930D 206 Dhandevi Merchandise Pvt. Ltd. AADCD6493J 207 Fairlink Realtors Consultants Pvt. Ltd. AABCF6890P 208 Intecity Complex Consultants Pvt. Ltd. AACCI4596G 209 Luckydhan Dealtrade Pvt. Ltd. AABCL9100E 210 Mahadhan Vincom Pvt. Ltd. AAGCM8231Q 211 Pushpdant Tradelink Pvt. Ltd. AAFCP7632P 212 Pushpdhara Dealer Pvt. Ltd. AAFCP7061C 213 Pushpmala Vinimay Pvt. Ltd. AAFCP7062B 214 Ranpriya Tradevin....