AI Drafter 
Generate professional replies, appeals, opinions to Show Cause Notices, assessment orders, audit objections, and other legal communications using TaxTMI's AI Drafter. 
TaxTMI 
TaxTMI 
2019 (7) TMI 1208
X X X X Extracts X X X X
X X X X Extracts X X X X
.... sale of shares of M/s. KAFL to the tune of Rs. 73,69,727/- as exempt from income tax. The AO noted that the assessee had acquired 2,00,000 shares of M/s. Panchshul Marketing Ltd. at a face value of Rs. 1 each for a total consideration of Rs. Rs. 2,00,000/-, which company later got amalgamated with M/s. KAFL by virtue of an order of Hon'ble Allahabad High Court and in pursuance to such amalgamation, the assessee was allotted 2,00,000 shares of M/s. KAFL of the face value of Rs. 1 each. The said shares were later sold on Bombay Stock Exchange [BSE] through a broker named M/s. Kotak Securities on different dates falling within the previous year 2013-14 corresponding to the Asst Year 2014-15 at a price of Rs. 75,69,727/-., which according to assessee, resulted in Long Term Capital Gains and so the assessee claimed exemption u/s 10(38) of the Act of Rs. 73,69,727/-. 4. However, the AO did not agree with the assessee's claim of LTCG and exemption thereof claimed by the assessee. According to AO, it is unbelievable that the assessee can make such a huge gain in a span of 18 months of holding these scrips. According to AO, thus, a deeper study was needed to ascertain whether the transa....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e same to bogus/shell companies, by layering through various accounts, which had ultimately purchased the shares sold by the beneficiaries. The AO has also relied upon statement of Shri Sunil Dokania recorded u/s 131 by the Investigation wing, in the case of Rashmi Group of Kolkata ; Statement of Shri Dipan Jesingbhai Patel recorded on 20.5.2015; Statement of some beneficiaries who had corroborated the modus operandi as revealed by Shri Dokania. The aforesaid statements were referred to in the Assessment Order to come to a conclusion that the assessee was one of the beneficiaries of the transactions in shares of KAFL which resulted in bogus claim of exempt LTCG. 5. The AO, on the basis of movement of price of KAFL quoted in Bombay Stock Exchange during the period of September, 2013 to January, 2014 (the period of sale of shares of KAFL by the assessee), found that the price of shares had increased by 267%. The AO concluded that while Sensex showed almost no progress, price of shares of KAFL moved phenomenally. The AO also referred to the financials of KAFL during the Financial years 2011-12 to 2015-16 and concluded that Earnings per share (EPS) during that period was either nil ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....68 of the Act. 9. On first appeal, the Ld. CIT(A) dismissed the grounds raised by the assessee against his claim of exemption u/s 10(38) of the Act and he also confirmed the additions made by the AO under section 68 of the Act. Aggrieved, the assessee is in appeal before us. 10. We have heard rival submissions and gone through the facts and circumstances of the case. At the time of hearing it was brought to our notice by the Ld. AR that this Tribunal in the following cases have decided that the scrips of M/s KAFL were not bogus and held that the LTCG claim of the assessee need to be allowed: i) Manish Kumar Baid Vs. ACIT, ITA Nos. 1236& 1237/Kol/2017 dated 18.08.2017 ii) Rukmini Devi Manpria Vs. DCIT, ITA No.1724/Kol/2017 dated 24.10.2018 iii) Jagmohan Agarwal Vs. ACIT, ITA No.604/Kol/2018 dated 05.09.2018. 11. Per Contra the Ld. DR for the Revenue vehemently opposed the contentions of the assessee and took us through the AO's order and Ld. CIT(A) order and submitted that scrips of M/s. KAFL was artificially rigged to provide LTCG to the assessee which cannot be allowed and supported the impugned order and relied on the order of Hon'ble Bombay Hi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....on he referred to the following case laws: i) GTC Industries Ltd. Vs. ACIT (1998) 65 ITD 380 (Bom), ii) Sanjay Bimalchand Jain Vs. CIT-1, Nagpur (Three Members Nagpur Bench decision), iii) Smt. M. K. Rajeshwari Vs. ITO, Ward-3, Raichur, ITAT SMC-C Bench, Bangalore, iv) Usha Chandresh Shah Vs. ITO (ITA No. 6858/Mum/2011), v) ITA Nos. 1413 to 1420/CHNY/2018 dated 06.12.2018, vi) Mc. Dowell & Co. Ltd. Vs. CTO (1983) 154 ITR 148, vii)Harsh Win Chaddha Vs. DCIT (ITA No. 3088 to 3038 & 3107/Del/2005, viii)Sumati Dayal Vs. CIT 214 ITR 801, ix) M/s. Durga Prasad More 82 ITR 540 12. He also submitted the alternate ground for addition that purchase of this stock was not an investment decision but an adventure in the nature of trade. He lastly submitted before the bench that assessee's dealing with this stock may be considered as an adventure in the nature of trade and so, profit derives from such activity may kindly be considered as income from business or other sources. 13. We note that similar issue arose in Manish Kumar Baid, (supra) wherein, the Tribunal allowed the claim of assessee in respect of LTCG....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... brokers / entry operators. In the instant case, the shares of CPAL were purchased by the assessee way back on 20.12.2011 and pursuant to merger of CPAL with KAFL, the assessee was allotted equal number of shares in KAFL, which was sold by the assessee by exiting at the most opportune moment by making good profits in roder to have a good return on his investment. We find that the assessee and / or the broker Ashita Stock Broking Ltd was not the primary allottees of shares either in CPAL or in KAFL as could be evident from the SEBI's order. We find that the SEBI order did mention the list of 246 beneficiaries of persons trading in shares of KAFL, wherein, the assessee and / or Ashita Stock Broking Ltd's name is not reflected at all. Hence the allegation that the assessee and / or Ashita Stock Broking Ltd getting involved in price rigging of KAFL shares fails. We also find that even the SEBI's order heavily relied upon by the ld AO clearly states that the company KAFL had performed very well during the year under appeal and the P/E ratio had increased substantially. Thus we hold that the said orders of SEBI is no evidence against the assessee, much less to speak of direct evidence. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....w of this order, shares of M/s. PML got extinguished and shares of M/s. Kailash Auto Finance Limited were allotted and were credited to assessee's account. Copy of their share bill dated 12.07.2011 is seen placed in the paper book page 2. We note that shares of M/s. Kailash Auto Finance were listed at BSE. 15 We note that the assessee had filed the following documents to support his claim of LT CG on sale of shares of M/s. KAFL. 1. Copy of Purchase Bill dated 12.07.2011 reflecting the purchase of shares of M/s. PML through M/s. Brijdhara Mercantile Pvt. Ltd. (paper book page 2). 2. Copy of Bank Statement reflecting the debit transaction of the amount of Rs. 2,00,000/- paid to M/s. Brijdhara Mercantile Pvt. Ltd. for the purchase of shares via RTGS on 07 .07.2011. (Paper book page 4). 3. Copy of allotment of shares on merger (Demat) available at pages 37 - 45 of paper book. 4 Copy of contract note for sale of 2,00,000 shares sold on various dates on BSE through broker Kotak Securities available at pages 46-53 of the paper book 5 Copy of bank statement reflecting the sale receipt available page paper book pages 54 o 58. 6. Copy ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ange. The details of such sale and contract note have been submitted before AO/Ld. CIT(A). We take note that when the transactions happened in the Stock exchange, the seller who sells his shares on the stock exchange does not know who purchases shares. According to our knowledge, the shares are sold and bought in an electronic mode on the computers by the brokers and there is also no direct contact at any level even between the brokers. We note that as and when any shares are offered for sale in the stock exchange platform, any one of the thousands of brokers registered with the stock exchange is at liberty to purchase it. As far as our understanding, the selling broker does not even know who the purchasing broker is. This is how the SEBI keeps a strict control over the transactions taking place in recognized stock exchanges. Unless there is a evidence to show that there is a breach in the aforesaid process which fact has been unearthed by meticulous investigation, we are of the opinion that the unscrupulous actions of few players exploiting the loopholes of the Stock Exchange cannot be the basis to paint the entire sale/purchase of a scrip like that of M/s. KAFL as bogus withou....
X X X X Extracts X X X X
X X X X Extracts X X X X
....on material facts so collected. Here in this case the material facts strongly indicate a probability that the wholesale buyers had collected the premium money for spending it on advertisement and other expenses and it was their liability as per their mutual understanding with the aseessee. Another very strong probable factor is that the entire scheme of 'twin branding' and collection of premium was so designed that assessee company need not incur advertisement expenses and the responsibility for sales promotion and advertisement lies wholly upon wholesale buyers who will borne out these expenses from alleged collection of premium. The probable factors could have gone against the assessee only if there would have been some evidence found from several searches either conducted by DRI or by the department that Assessee- Company was beneficiary of any such accounts. At least something would have been unearthed from such global level investigation by two Central Government authorities. In case of certain donations given to a Church, originating through these benami bank accounts on the behest of one of the employees of the assessee company, does not implicate that GTC a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....h Stock Exchange and taking into consideration the revenue transactions, the addition made was deleted by the Tribunal observing as under:- "Contention of the AR is considered. One of the main reasons for not accepting the genuineness of the transactions declared by the appellant that at the time of survey the appellant in his statement denied having made any transactions in shares. However, subsequently the facts came on record that the appellant had transacted not only in the shares which are disputed but shares of various other companies like Satyam Computers, HCL, IPCL, BPCL and Tata Tea etc. Regarding the transactions in question various details like copy of contract note regarding purchase and sale of shares of Limtex and Konark Commerce & Ind. Ltd., assessee's account with P.K. Agarwal & co. share broker, company's master details from registrar of companies, Kolkata were filed. Copy of depository a/c or demat account with Alankrit Assignment Ltd., a subsidiary of NSDL was also filed which shows that the transactions were made through demat a/c. When the relevant documents are available the fact of transactions entered into cannot be denied simply on....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ly denying the claim of short term capital gain (6 of 6) [ ITA-385/2011] made by the appellant before the AO is not approved. The AO is therefore, directed to accept claim of short term capital gain as shown by the appellant." In view of the above facts and circumstances of the case, we are of the considered opinion that the addition made by the AO is based on mere suspicion and surmises without any cogent material to show that the assessee has brought back his unaccounted income in the shape of long term capital gain. On the other hand, the assessee has brought all the relevant material to substantiate its claim that transactions of the purchase and sale of shares are genuine. Even otherwise the holding of the shares by the assessee at the time of allotment subsequent to the amalgamation/merger is not in doubt, therefore, the transaction cannot be held as bogus. Accordingly we delete the addition made by the AO on this account." 21. We note that the sale of shares of M/s. KAFL which was dematerlized in Demat account has taken place through recognized stock exchange and assessee received money through banking channel. So, assessee has explained the nature and source of ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....im. From the documents produced, it is seen that the shares in question were in fact purchased by the assessees on the respective dates and the company has confirmed to have handed over the shares purchased by the assessees. Similarly, the sale of the shares to the respective buyers is also established by producing documentary evidence. It is true that some of the transactions were off-market transactions. However, the purchase and sale price of the shares declared by the assessees were in conformity with the market rates prevailing on the respective dates as is seen from the documents furnished by the assessees. Therefore, the fact that some of the transactions were off-market transactions cannot be a ground to treat the transactions as sham transactions. The statement of the broker P that the transactions with the H Group were bogus has been demonstrated to be wrong by producing documentary evidence to the effect that the shares sold by the assessees were in consonance with the market price. On perusal of those documentary evidence, the Tribunal has arrived at a finding of fact that the transactions were genuine. Nothing is brought on record to show that the findings recorded by ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ne transaction. The purchase of shares was made on 28th April, 1993 i.e.. asst. yr. 1993-94 and that assessment was accepted by the Department and there was no challenge to the purchase of shares in that year. It was also placed before the relevant AO as well as before the Tribunal that the sale proceeds have been accounted for in the accounts of the assessee and were received through account payee cheque. The Tribunal was right in rejecting the appeal of the Revenue by holding that the assessee was simply a shareholder of the company. He had made investment in a company in which he was neither a director nor was he in control of the company. The assessee had taken shares from the market, the shares were listed and the transaction took place through a registered broker of the stock exchange. There was no material before the AO, which could have lead to a conclusion that the transaction was simplicitier a device to camouflage activities, to defraud the Revenue. No such presumption could be drawn by the AO merely on surmises and conjectures. In the absence of any cogent material in this regard, having been placed on record, the AO could not have reopened the assessment. The ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....two witnesses. Even when the assessee disputed the correctness of the statements and wanted to cross-examine, the Adjudicating Authority did not grant this opportunity to the assessee. It would be pertinent to note that in the impugned order passed by the Adjudicating Authority he has specifically mentioned that such an opportunity was sought by the assessee. However, no such opportunity was granted and the aforesaid plea is not even dealt with by the Adjudicating Authority. As far as the Tribunal is concerned, we find that rejection of this plea is totally untenable. The Tribunal has simply stated that cross-examination of the said dealers could not have brought out any material which would not be in possession of the appellant themselves to explain as to why their exfactory prices remain static. It was not for the Tribunal to have guess work as to for what purposes the appellant wanted to cross-examine those dealers and what extraction the appellant wanted from them. As mentioned above, the appellant had contested the truthfulness of the statements of these two witnesses and wanted to discredit their testimony for which purpose it wanted to avail the opportunity....
X X X X Extracts X X X X
X X X X Extracts X X X X
....hat the transactions were genuine and therefore, no adverse inference should be drawn. 18. In the light of the decisions of the Hon'ble Supreme Court in the case of Andaman Timber Industries (supra) and considering the facts in totality, the claim of the assessee cannot be denied on the basis of presumption and surmises in respect of penny stock by disregarding the direct evidences on record relating to the sale/purchase transactions in shares supported by broker's contract notes, confirmation of receipt of sale proceeds through regular banking channels and the demat account. 19. Accordingly, we direct the A.O. to treat the gains arising out of the sale of shares under the head capital gains- "Short Term" or "Long Term" as the case may be. The other grievance of the assessee becomes infructuous." 28. The assessee has furnished all evidences in support of the claim of the assessee that it earned LTCG on transactions of his investment in shares. The purchase of shares had been accepted by the AO in the year of its acquisition and thereafter until the same were sold. The off market transaction for purchase of shares is not illegal as was held by the decision of....
X X X X Extracts X X X X
X X X X Extracts X X X X
....lso confirmed by the ld. CIT(A). However we find that all the transactions through the broker were duly recorded in the books of the assessee. The broker has also declared in its books of accounts and offered for taxation. In our view to hold a transaction as bogus, there has to be some concrete evidence where the transactions cannot be proved with the supportive evidence." ii) M/s Classic Growers Ltd. vs. CIT [ITA No. 129 of 2012] (Cal HC) - In this case the ld AO found that the formal evidences produced by the assessee to support huge losses claimed in the transactions of purchase and sale of shares were stage managed. The Hon'ble High Court held that the opinion of the AO that the assessee generated a sizeable amount of loss out of prearranged transactions so as to reduce the quantum of income liable for tax might have been the view expressed by the ld AO but he miserably failed to substantiate that. The High Court held that the transactions were at the prevailing price and therefore the suspicion of the AO was misplaced and not substantiated. iii)CIT V. Lakshmangarh Estate & Trading Co. Limited [2013] 40 taxmann.com 439 (Cal) - In this case the Hon'ble Calcutt....
X X X X Extracts X X X X
X X X X Extracts X X X X
....firmed the decision of the Tribunal wherein it was found that the chain of transactions entered into by the assessee have been proved, accounted for, documented and supported by evidence. It was also found that the assessee produced the contract notes, details of demat accounts and produced documents showing all payments were received by the assessee through banks. On these facts, the appeal of the revenue was summarily dismissed by High Court. 29. We note that since the purchase and sale transactions are supported and evidenced by Bills, Contract Notes, Demat statements and bank statements etc., and when the transactions of purchase of shares were accepted by the ld AO in earlier years, the same could not be treated as bogus simply on the basis of some reports of the Investigation Wing and/or the orders of SEBI and/or the statements of third parties. In support of the aforesaid submissions, the ld AR, in addition to the aforesaid judgements, has referred to and relied on the following cases:- (i) Baijnath Agarwal vs. ACIT - [2010] 40 SOT 475 (Agra (TM) (ii) ITO vs. Bibi Rani Bansal - [2011] 44 SOT 500 (Agra) (TM) (iii) ITO vs. Ashok Kumar Bansal - ITA....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ents while deciding the issue relating to exemption claimed by the assessee on LTCG on alleged Penny Socks. (i) ITO vs. Ashok Kumar Bansal - ITA No. 289/Agr/2009 (Agra ITAT) (ii) ACIT vs. J. C. Agarwal HUF - ITYA No. 32/Agr/2007 (Agra ITAT) 31. Moreover it was submitted before us by ld AR that the AO was not justified in taking an adverse view against the assessee on the ground of abnormal price rise of the shares and alleging price rigging. It was submitted that there is no allegation in orders of SEBI and/or the enquiry report of the Investigation Wing to the effect that the assessee, the Companies dealt in and/or his broker was a party to the price rigging or manipulation of price in CSE. The ld AR referred to the following judgments in support of this contention wherein under similar facts of the case it was held that the AO was not justified in refusing to allow the benefit under section 10(38) of the Act and to assess the sale proceeds of shares as undisclosed income of the assessee under section 68 of the Act :- (i) ITO vs. Ashok Kumar Bansal - ITA No. 289/Agr/2009 (Agra ITAT) (ii) ACIT vs. Amita Agarwal & Others - ITA Nos. 247/(Kol)....