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2023 (5) TMI 876
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....o. 1(a) are that the assessee is an individual and derives income from 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 s....
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....d other individuals, the assessee had also taken entry of bogus long term capital 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.....
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....05.2015 was revoked by SEBI itself and that the statements of third party have not been confronted 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....
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.... section 10(38) of IT Act, 1961? 2. The company M/s HPC Biosciences Ltd, its promoter directors and other entities 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) Aft....
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....on 03.01.2013, the company issues bonus shares in 1:1 ratio. This happy co-incidence enabled assessee to acquire 20000 shares of M/s HPC Biosciences Ltd for mere Rs 5 per share. 3. Within 13 days of 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'b....
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....ompany i.e. M/s. HPC Biosciences Limited and that as per Investigation Report of Pr. DIT(Inv.) Kolkatta M/s. HPC Biosciences Limited has been identified as BSE listed stock which has been used for generating bogus long term capital gain. Vide show cause 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....
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....essing Officer, satisfactory, the sum so credited may be charged to income tax as the income of the assessee of that previous year. 13.1 In Roshan Di Hatti vs. CIT (1977) 107 ITR 938 (SC) the Hon'ble Supreme Court held that the law is well settled that the 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 ....
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....s of the entry operator and is finally parked in one company which will buy the share from the beneficiary. The paper company issues cheque to the beneficiary. 14.3 The Ld. AO was of the view that the assessee followed the same methodology. 14.4 The explanation which 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 ....
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....17 of his order, the Ld. AO stated that though the transaction undertaken by the assessee may seen to fulfil the legal requirement of section 10(38) of the Act, the same are sham transactions as the share prices of M/s. HPC Biosciences Limited were manipulated to raise the same exponentially. 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 purc....
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....s squarely to the facts of the case under consideration before us. 17. Pr. CIT vs. Nandkishore Agarwala (2022) 143 taxmann.com 402 (Cal): In this case also the assessee claimed long term capital gain arising on sale of shares as exempt. The AO made addition on account of unexplained long term capital 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....
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.... gain/loss highlighted the statement of the persons who claimed to have provided bogus capital gain/loss entry. The assessee was then asked to justify the investment in the relevant shares. The AO has pointed out these companies are not having any significant/real business as seen from the financial statement 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 B....
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....ce is placed. Judicial utterances are made in the setting of the facts of particular cases. Circumstantial flexibility, one additional or different fact may make a world of difference between conclusions in two cases. 23.1 The Hon'ble Delhi High Court applied the law laid down by the Hon'ble Supreme Court (supra) in it Full Bench decisions in the case of J.T (India) Exports 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....
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....case (supra) the Tribunal followed the decision of co-ordinate Bench in Tapas Kumar Mallick's case (supra) which was decided in the light of the decision of the Hon'ble Delhi High Court in the case of Smt. Krishna Devi (supra). We have observed in para 24.1 above that the case of the assessee before us is distinguishable on facts from the case of Smt. Krishna Devi (supra) in which the 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....
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..... The Revenue appealed before the Tribunal which noted that the purchase of shares was off market purchase not reported to the stock exchange and that the shares belonged to a penny stock company, with no credentials, and selling rates were artificially hiked, with no real buyers. On facts, the Tribunal held that inference of sales being bogus was unmistakable and consequently the impugned addition 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, shor....
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....which commences from the investor or the assessee as the case may be. On account of huge sums of money being claimed as long term capital gain/long term capital loss, a different approach/methodology was adopted by the department by commencing the investigation not from the individuals who traded with penny stocks but investigation has started targeting the individuals who dealt with those penny stocks. 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....