TaxTMI 
TaxTMI 
2023 (5) TMI 876
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.... salary, other sources and capital gain which she claimed exempt under section 10(38) of the Income Tax Act, 1961 (the "Act"). For AY 2015-16, she e-filed her return on 25.08.2015 declaring income of Rs. 7,27,000/- which was processed under section 143(1) of the Act. Her case was selected for complete scrutiny through CASS for the reason "suspicious sale transaction in shares and exempt long term capital gain shown in return (Penny stock tab in ITS)". Statutory notices were issued and served. In response, details as called for were furnished. The Ld. Assessing Officer ("AO") examined them. The Ld. AO found that the assessee earned long term capital gain of Rs. 1,17,14,346/- on sale of shares of M/s. HPC Biosciences Limited which the assessee claimed as exempt under section 10(38) of the Act. She had purchased 20,000 shares on 03.01.2013 at the rate Rs. 5/- per share for Rs. 1,00,000/- which she sold during the previous year relevant to AY 2015-16 at the rate Rs. 591.74 per share for Rs. 1,18,34,753/-. From the details of the share transactions the Ld. AO noticed that there was a steep escalation in the value of shares within a short span of time from the date of acquisition of the ....
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....pital gain by paying unaccounted income. 5.2 The Ld. AO therefore, denied the claim of exemption of the long term capital gain of Rs. 1,17,34,753/- under section 10(38) of the Act and added the same to the income of the assessee under section 68 r.w.s. 115BBE of the Act. He also added Rs. 2,11,226/- to the income of the assessee being commission @ 1.8% of trade value on account of providing accommodation entries under the deeming provisions of section 69C of the Act as expenditure incurred out of books to obtain such entry. 5.3 Accordingly, the Ld. AO completed the assessment on total income of Rs. 1,26,72,979/- on 28.12.2017 under section 143(3) of the Act. 6. The assessee filed appeal before the Ld. CIT(A) challenging the additions. During appellate proceedings, the assessee filed revised grounds and written submissions which the Ld. CIT(A) incorporated in para 4 of his appellate order. The Ld. CIT(A) considered both the additions together. He observed after examining the submissions of the assessee that M/s HPC Biosciences Limited was showing miniscule profit of Rs. 52.61 lakhs as on 31.03.2013. However, the share price of the company increased by about 60 times in a span of ....
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....onted to him. It is seen that AO has passed his finding after analysing the financials and price amount of appellant company and after examining the same, he has concluded that the transaction of long term capital gain was sham. 5.25 The facts of the present case clearly reveal that the transactions of purchase and sale of shares had been effected with the motive to create bogus profit under the head LTCG. The appellant resorted to a readymade scheme for purchase and sale of shares which was run by some Entry Operators. Such transactions are not genuine and natural transactions, but pre-conceived transactions, resulting in creation of bogus profits which are tax exempt. Such transactions are mutually self-serving to the parties to the transactions. I have come to conclude on the basis of above analysis and investigation by AO, documentary evidences, circumstantial evidences, human conduct and preponderance of probabilities that what is apparent in this case is not real, that these financial transactions were sham ones and that this entire edifice was only a colourful device used to evade tax. Moreover, the impugned transactions of shares are preordained one, not for legitimate pu....
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....s were investigated by SEBI for market manipulation and fraudulent trading in violation of Prevention of Fraudulent and unfair Trade Practices ( PFUTP) Regulations with other violations of SEBI Act/rules and penalized. Chronology of Inquiries conducted and penal order passed by SEBI in case of M/s HPC Biosciences Ltd. a) SEBI conducted an investigation in the scrip of HPC to ascertain manipulation, if any, in the IPO process of the Company in backdrop of huge rise that was observed in the traded volume and price of scrips of the Company ( HPC BIO) and three other companies during the period from January 01, 2013 to December 31, 2014. b) Based on preliminary findings, the whole time member of Securities and Exchange Board of India , vide an interim order dated June 29, 2015, restrained 254 entities from accessing the securities market and from buying, selling or dealing in securities, either directly or indirectly, in any manner, till further directions were passed in the matter of IPO of certain companies including HPC. c) After the June Interim Order, confirmatory orders were passed with respect to the said matter on February 17, 2016, June 14, 2016, August 25, 2016, Octob....
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....f initial allotment, the company filed prospectus for with BSE Small and Medium Enterprises (SME) segment on January 13, 2013 and 4. The shares in question were listed on the BSE SME Platform on March 19, 2013. 5. Within 15 months of listing the share prices of this scrip rose many fold reaching around Rs 590/- per share in May-June 2014. 6. Again by grand lucky co-incidence assessee was able to sell his shares acquired @ Rs 5 per share at Rs 590/- per share (growth of almost 118 times) and earn (tax-exempt) stupendous returns of more than 117 times within span of 18 months of initial investment. The extraordinary series of lucky co-incidences in favour of assessee needs to viewed and appreciated in larger context of preponderance of probabilities to arrive at balance judgement. At this juncture, it is relevant to refer to the case of SEBI vs. Kishore Ajmera (Civil Appeal No. 2818 of 2008), dated February 23,2016, wherein the Hon'ble Supreme Court held that: 'It is a fundamental principle of law that proof of an allegation levelled against a person may be in the form of direct substantive evidence or, as in many cases, such proof may to be inferred by a logical proc....
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....e notice dated 21.12.2017, the Ld. AO required the assessee to prove the genuineness of the claim of long term capital gain. The reply dated 26.12.2017 submitted by the assessee was not acceptable to the Ld. AO being not satisfactory. Before the Ld. CIT(A), the assessee submitted that all the transactions have been done through banking channel or through account payee cheque ruling out the possibility of 'transaction being accommodated in lieu of cash of equal amount'. The existence of an entry operator was also denied. It was also submitted that the shares of M/s. HPC Biosciences Limited cannot be termed as penny stock. The Ld. AO merely relied upon the information of Kolkata Investigation Wing and did not apply his mind. It was the contention of the assessee that the transactions of purchase and sale of the scrip of M/s. HPC Biosciences Limited entered into by the assessee were of normal prudent person. 12. The explanation of the assessee did not convince the Ld. CIT(A) who observed inter alia in para 5.8 of the appellate order that only the form of the transactions is existing which has been done by creating the necessary documents. However, the financial result of M/s. HPC Bio....
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....e onus of proving the source of a sum of money found to have been received by an assessee is on him. 13.2 The Hon'ble Supreme Court observed in CIT vs. P. Mohanakala (2007) 161 Taxman 169 (SC) that the expression 'the assessee offers no explanation' means where the assessee offers no proper, reasonable and acceptable explanation as regards the sums found credited in the books maintained by the assessee. It is true that the opinion of the Assessing Officer for not accepting the explanation offered by the assessee as not satisfactory is required to be based on proper appreciation of material and other attending circumstances available on record. The opinion of the Assessing Officer is required to be formed objectively with reference to the material available on record. Application of mind is the sine-qua-non for forming the opinion. 13.3 In Sumiti Dayal vs. CIT (1995) 80 Taxman 89 (SC) the Hon'ble Supreme Court held that if the explanation offered by the assessee about the nature and source thereof is, in the opinion of the Assessing Officer, not satisfactory, there is prima facie evidence against the assessee, viz. the receipt of money, and if he fails to rebut the same, the said ....
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....h the assessee gave before the Ld. AO was that the scrips of M/s. HPC Biosciences Limited were not penny stock. All the transactions were done through banking channel or through account payee cheque as a normal prudent person. 14.5 The Ld. AO issued summons under section 131 of the Act to examine the assessee on oath with a view to test the veracity or otherwise of the explanation but the assessee did not turn up on the date fixed. The Ld. AO drew adverse inference. 14.6 The Ld. AO issued final show cause notice under section 142(1) of the Act which forms part of the assessment order at pages 10-16 containing therein inter alia information/details available in the public domain enclosing as Annexure A comparative profit and loss account and balance sheet of the company M/s. HPC Biosciences Limited for various years stating that even an investor with risk appetite on a higher side is highly unlikely to invest in such a scrip. 14.7 Thus opportunity was given by the Ld. AO to the assessee to show cause why the exemption under section 10(38) of the Act for an amount of Rs. 1,17,34,753/- be not denied treating the receipt as unexplained cash credit under section 68 of the Act since t....
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....tially. The price rise of the penny stock scrip was abrupt, sudden and unrealistic. No cogent material has been brought by the assessee on record to rebut the above finding of the Ld. AO. We may refer the observations of the Hon'ble Supreme Court in SEBI vs. Kishore Ajmera (supra) that it is the judicial duty to take note of the immediate and proximate facts and circumstances surrounding the events on which the charges/allegations are founded and to reach what would appear to be reasonable conclusion therefrom. 16. Let us now peep into the precedents. 16.1 In Pr. CIT vs. Swati Bajaj (2022) 446 ITR 56(Cal), the AO received information from Investigation Wing that the prices of some shares of penny stock companies which included the company X in which the assessee made investment, were artificially rigged to benefit share holders through bogus claim of long term capital gain. The assessee had purchased shares of the company for Rs. 1 lakh and when the investments in shares became eligible for long term capital gain it was sold for Rs. 29 lakhs during the period when the general market trend was recessive. The AO opined that the shares of the company X matched all the features of th....
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....apital gain under section 68 and held that suspicious transactions in shares could not be exempted under section 10(38) of the Act. 17.1 When the revenue filed appeal before the Hon'ble Calcutta High Court, the Court held that the assessee had failed to prove genuineness of his share dealing transactions and in view of the fact that the entire transactions were stage manage with object to plough back his unaccounted income in form of fictitious long term capital gain and claimed bogus exemption, the AO was justified in denying exemption under section 10(38) and treating such bogus long term capital gain in penny stock under purview of unexplained cash under section 68 of the Act. 18. Sanjay Kaul vs. PCIT (2020) 199 taxmann.com 470(Delhi): In this case the Hon'ble Delhi High Court held that where the assessee was not regular investor in shares and had only invested in high risk stocks of obscure companies with no business activities or assets, which were identified as the penny stocks, the AO had correctly concluded that the assessee entered into a prearranged sham transaction so as to convert unaccounted money into accounted money in guise of capital loss and therefore the allege....
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.... of those companies. The AO has particularly pointed out that price movement of the shares transacted by the assessee were not matching with movement of share market in general and movement of other scrips in the same line of business. The AO has pointed out that the assessee could not explain why it invested in such scrip without knowing the financial performance of the company. 20.3 The Hon'ble Supreme Court quoted the observation of the Tribunal that with such financials and affaires of business purchase of shares of face value of Rs. 10/- at rate of Rs. 491/- by any person and assessee's contention that such transaction is genuine and credible and arguing to accept such contention would only make decision of judicial authorities fallacy. 20.4 The Hon'ble Supreme Court observed that the Tribunal placed reliance on the decision of Delhi High Court in the case of Nipun Builders and Developers Pvt. Ltd. in ITA No. 120 of 2012 dated 07.01.2013 wherein the Delhi High Court held that it is the duty of Tribunal to scratch surface and probe documentary evidence in depth, in the light of conduct of assessee and other surrounding circumstances in order to see whether assessee is liable ....
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....ts and another vs. UOI and another 262 ITR 269 (Del) (FB). 24. In the light of the law laid down by the Hon'ble Supreme Court in Padmasundara Rao's case (supra) and applied by the Hon'ble Delhi High Court in its Full Bench decision in J.T.(India) Exports (supra), let us look into the fact situation of the assessee's case viz. a viz. the cases relied upon by the assessee. 24.1 In Smt. Krishna Devi's case (supra) the assessee had purchased the shares of the company online. The shares were dematerialised and sales were routed through Demat account. But in the case of the assessee before us, the assessee purchased shares of unlisted company offline directly through private preferential allotment, not reported in the stock exchange and on the day of allotment itself, the company issued bonus shares in 1:1 ratio. The shares were listed on BSE platform later on. The facts of the assessee's case being different from those of Smt. Krishna Devi's case, the decision of Hon'ble Delhi High Court in Smt. Krishna Devi's case cannot render any assistance to the assessee. Moreover, the Hon'ble Supreme Court has issued notice in SLP filed by the revenue in Pr. CIT vs. Krishna Devi (2022) 287 Taxma....
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....he investment in shares was made online by making payment through banking channels whereas the assessee under consideration before us had purchased shares of unlisted entity directly offline through private preferential allotment and on the day of allotment itself the said company had issued bonus shares in 1:1 ratio. Therefore, in our opinion, reliance on the decision of the Tribunal in Smt. Shivani Gupta's case (supra) is misplaced. 24.4 In Mukesh Mittal's case (supra) the CIT(Appeals) had followed the rule of preponderance of probability. The Tribunal, however followed the decision of Hon'ble Delhi High Court in Krishna Devi (supra) among others and held that the assessee has successfully discharged onus cast upon him by provisions of section 68 and such discharge is purely a question of fact. Even at the risk of repetition, we state that the facts in Krishna Devi's case were altogether different from the facts of the assessee's case at hand in which the assessee had purchased shares in question off market whereas in Krishna Devi's case the shares were purchased online which were reported to the Stock Exchange. The assessee before us has not been able to discharge the onus of p....
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....tion was confirmed. 25.3 Sanjay Kaul vs. ITO (2020) 181 ITD 146/82 ITR (Trib) 441(Delhi): in this case the assessee claimed short term capital loss on sale of shares. The AO received an information from Dy. Director (Inv.) wherein he referred to general practice followed by certain companies, brokers and operators for providing bogus long term/short term capital loss and the assessee was also one of the beneficiary. The AO had pointed out that the assessee could not explain why he invested in such scrip without knowing financial performance of the company. The assessee could not rebut those adverse findings by the AO and therefore, he made addition under section 68 of the Act. The CIT(Appeals) endorsed the findings of the AO. On appeal by the assessee, the Tribunal held that on facts, short term capital loss claimed by the assessee was not genuine and therefore, the AO was justified in treating the same as unexplained under section 68 and in making the impugned addition. 25.4 Sannat Kumar vs. ACIT (2020) 122 taxmann.com 75 (Delhi- Trib): in this case the assessee purchased shares of CSL @ Rs. 10/- per share and after one year sold the same at Rs. 476/- to Rs. 503/- per share. The....
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..... This concept can be mentioned to be one of "working backward'". This is one of the modes of causing an investigation, considering its magnitude. The approach of the department cannot therefore be faulted. 26.2 The Hon'ble Calcutta High Court observed further that the court sit in judgment over the methodology adopted by the department as no taxpayer is entitled to any benefit which shall not accrue to him under the provisions of the Act. If any dubious methodology has been adopted for the purpose of availing certain benefit not admissible under law, the same will not come within the ambit of tax planning, but shall be a case of tax avoidance by adopting illegal methods. Therefore, the department was justified in proceeding to take up the cases, not only within the jurisdiction of the state of West Bengal but other state as well. 26.3 The Hon'ble Calcutta High Court observed that the assessee is lawfully bound to prove the huge long term capital gain claims to be genuine. If there is information and data available of unreasonable rise in the price of shares of penny stock companies over a short period of time, the genuinity of such steep rise in the prices of shares needs to be ....