TaxTMI 
TaxTMI 
2023 (1) TMI 314
X X X X Extracts X X X X
X X X X Extracts X X X X
....ner of Income Tax (Appeals) has also erred both in law and on facts in making an addition of Rs. 90,69,199/- being sale consideration on sale of shares listed on recognized stock exchange as unexplained credit u/s 68 of the Act. 2.1. That while sustaining the aforesaid addition and denying the exemption learned Commissioner of Income Tax (Appeals) has failed to appreciate that, appellant was owner of equity shares of a listed company which had been held by it for a period exceeding 12 months and the same were sold on recognized stock exchange after payment of STT, resulting into a long term capital gain and therefore the long term capital gain accrued to the assessee on transfer of long term 'capital asset' was not includible in total income of the assessee in view of section 10(38) of the Act. 2.2. That the learned Commissioner of Income Tax (Appeals) has failed to appreciate the evidence tendered by the appellant to support the claim of sale of shares and hence, findings mechanically recorded on borrowed inference in disregard of evidence and based on irrelevant and extraneous considerations are misconceived and, misplaced. 2.3 That the learned ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....there in ITA No. 909/Ind/2018 of the same assessee for earlier assessment year 2014-15, which stands already heard by ITAT, Indore on 18.10.2012. Therefore, the present appeal can also be proceeded with for hearing. We accepted the request of Ld. DR and proceeded accordingly. 3. Briefly stated the facts are such that the assessee-individual filed his return of income on 04.11.2015 declaring a total income of Rs. 35,77,010/- from salary, house-property, business / profession and interest. In the return, the assessee also declared a long-term capital gain of Rs. 90,69,199/- from sale of equity shares of Lifeline Drugs and Pharma Ltd. exempted u/s 10(38) of the act. The assessee claimed to have purchased shares of Lifeline Drugs and Pharma Ltd. for Rs. 34,293/- on 17.08.2012; sold the same for Rs. 91,03,492/- on 11.04.2014 and thereby earned a whopping capital gain of Rs. 90,69,199/-. The case was selected for scrutiny under CASS and the statutory notices u/s 143(2) and 142(1) were issued from time to time. During assessment-proceeding, the Ld. AO asked the assessee to prove the capital gain, in response to which the assessee made a detailed submission. Observing that the assessee ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....w of the above statement it is concluded that assessee is a regular investor and doing regular trading in the stock exchange. He has not knowing to the company i.e. M/s Lifeline Drugs. The assessee has stated that on the tips received from market he has purchased and after some time on the rise of rates he has sold such scripts. It is also observed that assessee was unaware with the company's book results and its financial status. It is also noted that increase in the prices of the share of M/s Lifeline Drugs in just one and half year was approx 19834% is total unrealistic. 3.10 The assessee has been confronted with all the evidence gathered and the issues mentioned in the foregoing paragraphs. The explanation of the assessee is general in nature that as the transaction is through Stock Exchange and the payment is by cheque, the transactions should be treated as genuine. The background of the scheme given in the beginning of the order clearly shows that both the requirements are in built in the scheme and does not ipso facto prove genuineness of transaction. The SEBI after thorough investigation has certified that such transactions are rigged and are carried out to con....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e some recitals made in a document either executed by him or executed in his favour then the door will be left wide open to evade tax. A little probing was sufficient in the present case to show that the apparent was not the real. The taxing authorities were not required to put on blinkers while looking at the documents produced before them. They were entitled to look into the surrounding circumstances to find out the reality of the recitals made in those documents. " That genuineness could validly be tested on the ground or principle of preponderance of human probabilities, which could thus form a valid ground or parameter for determining. the genuineness, stands since settled by the apex court in Sumati Dayal v. CIT (1995) 214 ITR 801 (SC) wherein the apex court, in declaring the transaction as non-genuine, discarded a host of documentary evidences filed or relied upon by the assessee-appellant. That documentary evidences are not by themselves conclusive, and the truth of the matter or the documents could be determined on the basis of or on the anvil of the surrounding facts and circumstances of the case is well settled, and reliance is placed on the decision in the case....
X X X X Extracts X X X X
X X X X Extracts X X X X
....f proving that it is not taxable because it falls within exemption provided by the Act lies upon the assessee. [See. Parimisetti Seetharamamma (supra) at P. 5361. But, in view of Section 68 of the Act, where any sum is found credited in the books of the assessee for any previous year the same may be charged to income tax as the income of the assessee of that previous year if the explanation offered by the assessee about the nature and source thereof is, in the opinion of the Assessing Officer, not satisfactory. In such case there is prima facie, evidence against the assessee, viz. the receipt of money, and if he fails to rebut, the said evidence being un-rebutted, can be used against him by holding that it was a receipt of an income nature. While considering the explanation of the assessee the Department cannot, however, act unreasonably" 6. Further, the transaction is found to be not genuine in in view of the following observations and facts: i) The financials of the penny stock Lifeline Drugs and Pharma and movement of the price is abrupt, unrealistic and not based upon any realistic parameters. ii) In the similar circumstances, the honorable Gauhati Hi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ain Vs. PCIT-1, Nagpur & Another dated 10.04.2017 which is very much similar to the facts and circumstances in the case of present case wherein it was held that "the authorities have recorded a clear finding of the fact that the assessee had indulged in dubious share transaction meant to account for the undisclosed income in the garb of long term capital gain. While so observing, the authorities held that the assessee had not tendered cogent evidence to explain as to how the shares in an unknown company worth Rs. 5/- had jumped to Rs. 485/- in no time. The Income Tax Appellate Tribunal held that the fantastic sale price was not at all possible as there was no economic or financial basis as to how a share worth Rs. 5/- of a little known company would jump from Rs.5/- to Rs. 485/-. The findings recorded by the authorities are pure findings of facts based on a proper application of the material on record. While recording the said finding, the authorities have followed the tests laid down by the Hon'ble Supreme Court and this Court in several decisions. The findings do not give rise to any substantial question of law. 9. In view of the facts and circumstances discussed supra a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....en be justified in trying to ascertain the source of the depositor, assuming he is identified, in order to determine whether that depositor is a mere name-lender or not Be that as it may, it is clear that the Income-tax Officer has jurisdiction to make enquiries with regard to the nature and source of a sum credited in the books of account of an assessee and it would be immaterial as to whether the amount so credited is given the colour of a service charges. The use of the words "any sum found credited in the books" in section 68 indicates that the said section is very widely worded and an Income-tax Officer is not precluded from making an enquiry as to the true nature and source thereof. It is neither necessary nor desirable to give examples to indicate under what circumstance section 68 of the Act can or cannot be invoked. What is clear, however, is that section 68 clearly permits an Income-tax Officer to make enquiries with regard to the nature and source of any or all the sums credited in the books of account of the company irrespective of the nomenclature or the source indicated by the assessee. In other words, the truthfulness of the assertion of the assessee regardi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....an be made on the basis of inference on evidence which in criminal or civil justice may be insufficient. Further, as held by the Supreme Court in the case of Collector of Customs Vs. D. Bhoormal A.R. 1974 SC 859, the department is not required to prove its case with mathematical precision towards demonstrable degree; for, in all human affairs absolute certainty is a myth, and as proof. Fundamental rules of evidence and interpretation in mind relating to proof in all criminal or quasi-criminal proceedings, where there is no statutory provision to the contrary. But in appreciating its scope and the nature of the onus cast by it, we must pay due regard to other kindred principles, no less fundamental of universal application. This principle has been succinctly and felicitously put by Brett - "all exactness is a fake". EI Dorado of absolute proof being unattainable, the law accepts for it, probability as a working substitute in this work-a-day world. The law does not require the prosecution to prove the impossible. All that it requires is the establishment of such a degree of probability that a prudent man may, on its basis believe in the existence of the fact in issue. Thus l....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ply to Ld. CIT(A) which is noted by Ld. CIT(A) in his appeal-order. However, the assessee did not find any favour from Ld. CIT(A) who confirmed the entire addition by holding as under: "Ground Nos. 2 & 4:- Both the grounds of appeal have been raised against addition on account of LTCG/total sale consideration of Rs.90,69,199/- claimed exempt u/s 10(38) of the Income Tax Act, 1961. The addition has been found made by Assessing Officer u/s 68 of Income Tax Act, 1961 considering the same as bogus credit entry obtained by paying consideration out of unaccounted cash. 4.1 The appellant during relevant period had sold 37986 shares of M/s. Lifeline Drugs & Pharma Ltd. through M/s Fairwealth Securities Ltd. for total consideration of Rs.90,69,199/- @ Rs.238.75. These shares were out of 1500 shares found purchased by the appellant on 17.08.2012 for total consideration of Rs.67712/- from M/s. Lifeline Drugs & Pharma Ltd. through M/s. Vishal Vijay shah @ Rs.45/- per share converted into 75000 shares through stock split. In this way, the appellant has shown to have earned Long Term Capital Gain of Rs.9069199/- from sale of share of M/s Lifeline Drugs & Pharma ltd. in a short ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....has been voluntarily surrendered by such assessees. iv. As per searches/surveys/inquiries conducted by the Income Tax Department in the case of Penny Stock Companies it has been admitted by several entities like Madhya Pradesh Stock exchange Ltd., Indore, destiny Securities Ltd., New Delhi etc. that Mjs Lifeline Drugs & Pharrna Ltd. was one of the scrip through which Long term Capital Gains was arranged for beneficiaries. The SEBI had also suspended operations of trading of M/s Lifeline Drugs & Pharma Ltd. holding the same to be a penny stock in which manipulations were carried out. 4.3 In view of the above stated details and facts. the appellant during the assessment proceedings as well as appeal proceedings was required to explain as why the LTCG of Rs.90,69,199/- should not be treated as bogus and unexplained credit u/ s 68 of IT Act, 1961. The appellant during assessment proceedings was also given sufficient opportunities by the AO to prove genuineness of transaction, identity of the purchasers of shares and creditworthiness. The appellant has failed to prove three ingredients of section 68 of the IT Act, 1961. 4.4 The fundamentals and financials of t....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... is unable to substantiate as to in which knowledge he has sold the shares on that particular dated. 7. The company whose shares were purchased and sold is not engaged in any active business. It has not turnover or profit earning apparatus to justify abnormal increase in it's market price in the stock market. Hence it can be inferred that the prices were artificially jacked up to enable sellers of the shares to enjoy tax-free LTCG. 8. The above conclusion is fortified from the specific findings in the case of company whose script was traded by the assessee. 9. The S'EBI, in fact suspended trading of the above script with effect from 07- 01-2015 due to surveillance measures. This also shows artificial tinkering with the prices of the shares of the company. 4.7 The issue of penny stock has been dealt with by Hon'ble bench of Chandigarh ITAT 111 the case of Shri Abhimanyu Soin in ITA No.951/Cha/2016 dated 18/04/2018. In that case, appellant purchased 800 shares of M/ s Sharp Transport Ltd. (STL) which subsequently merged with M/s Oasis Cine Communication Ltd. (OCL). The appellant was allotted 27200 shares of merged company pursuant to sa....
X X X X Extracts X X X X
X X X X Extracts X X X X
....explained credit in terms of section 68 of the Income Tax Act, 1961 The matter travelled upto Honble ITAT. D-Bench Channai. It was clearly observed by the bench that the shares of Mj s Surabhi Chemicals & Investments Ltd. was sky rocketed without having any substantial profit, EBIDTA margin, BPS bonus, dividend etc. None of the criteria essential for increase in price was present in this case. The most relevant part of decision is reproduced here under.- "All these trading patterns show that LTCG admitted by the assessee is an arranged one. The payment of Security Transaction Tax was to paint creditworthiness to the transaction and claim exemption u/s 10(38). In view of the information provided by the investigation wing, Kolkata, the recommendation of SIT on black money etc, the AO required the assessee to prove her claim of exemption. After considering her reply etc held, inter alia, that it is clear that the assessee has manipulated the sale of shares Within a short span of time in collusion with the brokers in order to earn tax free exempt long term capital gains on sale of shares u/s 10(38) etc. it is clear from the orders of the lower authorities that the assessee has....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Ld.AR has only come out with the plea that the assessees were not provided with opportunity of cross-examining the Witness, the investigation report was not furnished and proper opportunity was not provided of being heard. However we find that all these arguments raised by the Ld.AR before us was never alleged before the Ld. Revenue Authorities when the matter was before them. In this situation we do not have any other option but to confirm the orders of the Ld. Revenue Authorities in the case of all the assessees because the Ld. AO as well as the Ld,CIT(A) have arrived at their respective decisions after considering the issues in the appeal in detail and there is nothing before us to disturb their findings. Accordingly we hereby confirm the order of the Ld. Revenue Authorities on this issue. Thus the first ground raised by the assessees herein above in all the appeals are held against the assessees." 4.10 Further, reliance can be placed on following decision of various benches of ITAT and High Courts. In the case of shri Sanjay Bimalchand Jain L/H Shantidevi Bimalcahnd Jain vs. PCIT (ITA No. 18/2017 Bombay High court (Nagpur Bench), Hon'ble Court held as under: ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....es was an inqenuine transaction and made addition of alleged sale consideration to assessee's income as income front undisclosed sources - Whether on facts, addition made by Assessing Officer was justified - Held, yes." 4.13 Further, in the case or Ushn Chandresh Shah Vs ITO 12014.TIOL- 1459-ITAT-MUM. It was held that: "Where Hon'ble ITAT Mumbai held that in this case the assessee could not produced the copies of share certificates and copies of share transfer forms. The transaction of purchase oJ shares could not be cross verified. The shares of the company Was declared as "Penny Stock" by SEEI and the broker Sanju Kabra, through whom the shares were sold by the assessee was indicted for manipulating the prices of penny stock shares. The tax authorities have rightly applied the test of human probabilities to examine the claim of purchase and sale of shares made by the assessee. The CIT(A) was justified in confirming the order of the AD by applying the test of human probabilities. " 4.14 In the case of Ratnakar M Pujari Vs ITO /2016-TIOL-1746-ITAT-MUM, Hon'ble ITAT Mumbai held that- "a transaction of 'off market purchase of share'....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rden on other members of the community correspondingly. One of court the provision is found applicable to him, full effect must be given to it. As observed by a constitution Bench of this court in Hansraj Gordhandas Vs. H. H. Dave, 1961 2 SCR 253 that such a notification has to be interpreted in the light of the words employed by it and not on any other basis. This was so held in the context of the principle that in a taxing statue, there is no room for any intendment, that regard must be had to the clear meaning of the words and that the matter should be governed wholly by the language of the notification, i.e. by the plain terms of the exemption.» The Honble Supreme Court, in a recent decision in the case of M/s Dilip Kumar and Company & Others, in appeal No. 3327/2007 dated 30/07/2018, has held in a clear terms that exemption notification should be interpreted strictly. The burden of proving applicability would be on the assessee to show that his case comes within the parameters of exemption clause or exemption notification. 5.1 While laying down the above proposition, Hon'ble Apex Court had not only referred the decisions of that court in Commissione....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... company were also suspended by SEBI. Ld. DR submitted that these facts are clearly evident from "Investigation Report in the case of Project Bogus LTCG / STCL Through BSE Listed Penny Stocks" dated 27.04.2015 released by Directorate of Income-tax (Investigation), Kolkata, the relevant paragraphs of the report being reproduced below: Page No. 2 of the Forwarding-Letter embodied in the Report: "We identified the following BSE listed penny stocks which have been used for generating bogus LTCG: SL No Script Code Script Name Full Name of Penny Stock Amount of Total Value 36 506113 Lifeline Dru Lifeline Drugs Pharma Ltd. 7361135725 Page No. 12 / 14 of the Report "4. Project Basis Enquiry of the scam. Various enquiries have been conducted by the Directorate of Investigation, Kolkata, on a project basis, which has resulted into the unearthing of a huge syndicate of Entry Operators, share brokers and money launderers, involved in providing bogus accommodation of Long Term Capital Gain, Short term capital loss. It has come to light that large scale manipulation has been/is being done In market price of shares of cert....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t is the duty of the Court to take note of the immediate and proximate facts and circumstances surrounding the events on which the charges/allegations are founded so as to reach a reasonable conclusion and the test would be what inferential process that a reasonable/prudent man would apply to arrive at a conclusion. Further proximity and time and prior meeting of minds is also a very important factor especially when the income tax department has been able to point out that there has been a unnatural rise in the price of the scrips of very little known companies. Furthermore, in all the cases, there were minimum of two brokers who have been involved in the transaction. It would be very difficult to gather direct proof of the meeting of minds of those brokers or sub-brokers or middlemen or entry operators and therefore, the test to be applied is the test of preponderance of probabilities to ascertain as to whether there has been violation of the provisions of the Income Tax Act. In such a circumstance, the conclusion has to be gathered from various circumstances like the volume from trade, period of persistence in trading in the particular scrips, particulars of buy and sell orders a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ounding circumstances which had been elaborated upon in K.R. Ajmera. 73. It is very rare and difficult to get direct information or evidence with regard to the prior meeting of minds of the persons involved in the manipulative activities of price rigging and insider trading. We can draw a parallel in cases of adulteration of food stuff, more than often action is initiated under the relevant Act after the adulteration takes place, the users of adulterated products get affected etc. Therefore, a holistic approach is required to be made and the test of preponderance of probabilities have to be applied and while doing so, we cannot loose sight of the fact that the shares of very little known companies with in-significant business had a steep rise in the share prices within the period of little over a year. The Income Tax department was not privy to such peculiar trading activities as they appear to have been done through the various stock exchanges and it is only when the assessees made claim for a LTCG/STCL, the investigation commenced. As pointed out the investigation did not commence from the assessee but had commenced from the companies and the persons who were involved in....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he assesses have lost sight of an important fact that when a claim is made for LTCG or STCL, the onus is on the assessee to prove that credit worthiness of the companies whose shares the assessee has dealt with, the genuineness of the price rise which is undoubtedly alarming that to within a short span of time. The revenue had placed heavy reliance on the decision in McDowell to show that the claim of the assessee is not case of tax planning to be one of the tax avoidance by indulging in dubious methods. Mr. Bagaria had argued the rule in McDowell was considered in Azadi Bachao Andolan and Vodafone International and it is in the manner explained in these decisions the rule in McDowell needs to be applied. From paragraph 138 onwards the Hon'ble Supreme Court considered in detail as to why McDowell and what it says and what it does not say. The argument of Mr. Bagaria would primarily rests on as to what would mean by a sham transaction as a legal one and it is pointed out that all the parties thereto must have a common intention that the acts or documents are not to create the legal rights and obligations which they give the appearance of creating. Further by referring to the dec....
X X X X Extracts X X X X
X X X X Extracts X X X X
....TCL. Therefore, unless and until the assessee discharges such burden of proof, the addition made by the assessing officer cannot be faulted. 76. It was argued that unless there are foundational facts, circumstantial evidence cannot be relied on. This argument does not merit acceptance as wealth of information and facts were on record which is the outcome of the investigation on the companies, stock brokers, entry operators etc. Based on those foundational facts the department has adopted the concept of "working backward" leading to the assessees. While at that relevant stage the sounding circumstances, the normal human conduct of a prudent investor, the probabilities that may spill over, were all taken into consideration to negative the claim for exception made by the assessee. Therefore, the department was fully justified in taking note of the prevailing circumstances to decide against the assessees." 10. Thereafter, Ld. DR submitted that the ITAT, Indore Bench has already decided Shri Abhishek Gupta Vs. ITO, Ward-5(5), ITA No. 74/Ind/2019, order dated 17.08.2022 wherein the identical issue of exempted capital gain from shares of Turbotech Engineering Ltd. was examined....