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2023 (7) TMI 843
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.... u/s 68 of the Act by the AO on account of bogus LTCG claimed by the assessee to the tune of Rs. 4,65,83,341/-. 3. Whether on the facts and circumstances of the case and in law, the ld. CIT(A) was justified in deleting the addition made of Rs. 29,86,956/- u/s 69C of the Act by the AO on account of commission paid towards availing bogus LTCG Rs. 4,65,83,341/-'' 2.1 Brief facts of the case are that the assessee had filed his e-return of income on 30-09-2014 declaring total income at Rs. 59,22,990/-. The case of the assessee was selected for scrutiny and Notice u/s 143(2) of the Act was issued on 31-082015 and was duly served upon the assessee. Thereafter, notices 142(1) alongwith detailed questionnaire were issued from time to time. In compliance of the notices, Shri Rajeev Bafna, CA represented the case of the assessee and furnished desired details before the AO. In this case the AO noted that the assessee derives income from salary, House Property, share of profit from Partnership firms, capital gains, dividend and income from other sources. From the documents /paper submitted by the assessee, the AO found that the assessee during the year under consideration has shown ....
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....ogus LTCG/STCG with nil taxes or taxes at nominal rates. There have also been cases of claims of huge bogus losses on account of trading in such penny stock companies. The AO noted from the reports of the Investigation Wings that Coordinated actions u/s 132(1) & 133 of the Act, 1961 were carried out by the Investigation Wing of Kolkata, Mumbai, New Delhi and other units of the country. Statements of certain individuals relating to such bogus entry providers/ beneficiaries were recorded u/s 132(4) and u/s 131 of the Act and thus Investigation Wing unearthed LTCG/STCG/STCL/Loss entry of over Rs. 38,000 Crores. Thus the Investigation finally identified 84 of such penny stock companies which were involved in the pool of entry providers' syndicate wherein M/s. Midland Polymers Ltd is found to be one of such penny stock companies. In view of the above information and credible evidences, a show cause letter dated 18-11-2016 was issued by the AO to the assessee giving detailed discussions at para 3.1( sub-para (2) to(8). For the sake of convenience and brevity of the issue, the sub-para 6 to 8 of AO's order is reproduced as under:- ''6. In view of the above detailed discussion in ....
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....ding in penny stock bogus company. Looking to such credible evidence on this issue, I estimate an amount equivalent to 6% of the bogus Long Term Capital Gain entry, which comes to Rs. 29,89,956/- (calculated on the sale proceeds shown at Rs. 4,98,32,608/-) as commission paid by you in lieu of entry of bogus Long Term Capital Gain of Rs. 4,65,83,341/-. Therefore, an addition of Rs. 29,89,956/- on this count is proposed to be added to your total income for the year under consideration u/s 69C of the Income Tax Act, 1961 being unexplained expenditure incurred by way of commission paid to arrange bogus entry of Long Term Capital Gains. 8. In view of above, you are requested to show cause as to why exemption claimed u/s 10(38) towards Long Term Capital Gains of Rs. 4,65,83,341/- be denied and why it should not be added u/s 68 to the total income. Further, explain as to why an amount of Rs. 29,89,956/- be added u/s 69C to your total income being unexplained expenditure incurred by way of commission paid to arrange bogus entry of Long Term Capital Gains. In response to the show cause letter and also the note sheet entry dated 30-11-2016, the assessee has submitted wri....
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....nformation available for financial market and of any companies easily. 2. The activities and administration of a registered limited company is governed by the companies act in India. All the annual accounts, director report, change in management and directors are filed on registered portal of MCA-21. 3. The MIDLAND Polymers was incorporated financial details of Midlan Polymers and plant and reasons for buying this share has already have been explained exhaustively in previous hearing in writing. 8. The Show cause notice is heavily relied upon the investigation by the I.T. Department in Delhi, Kolkata & Mumbai acting in tandem to manipulate the price of share of certain companies, and how share prices are rigged. On Page 5 of the show cause notice, it is mentioned that statement of three entities has been recorded viz 01. Shri Manoj Kumar Agarwal Kolkatta 02. Shri Pawan Kumar Kayan Kolkatta 03. Shri Harshvardhan Kayan Kolkatta Which admitted that shares of Midland Polymers are rigged and show cause notice also mentioned that SEBI, passed some orders on the issue of manipulation of shares pursuing LTCG/STCG. The ....
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....ators, Promoters/Directors of the penny stock companies, Share Brokers etc., who were involved in the scam etc. The assessee was supplied with the plenty of material, including gist of statements of certain individuals recorded under oath by the Investigation wing of the department, with the show cause notice. However, the assessee failed to point out any flaw in the statements of these persons admitting the truth that share trading in scrip M/s Midland Polymers Limited was used for providing bogus LTCG/Short Term Capital Gains/Loss entries to certain beneficiaries. And also no comments have been offered on observations made on Centron Industrial Alliance Limited/ The AO at para 5.2 of his order noted that the transaction was just a cover to launder assessee's money and it is elaborately mentioned as under:- ''5.2 Moreover, following observations have also been made which prove that the transaction was just a cover to launder assessee's money, to give it a colour of genuineness. (i) the assessee has shown purchase of just 38000 shares of M/s Midland Polymers Limited and there were sub division in 1:10 ratio and bonus in 1:1 ratio. It has also shown purchase....
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.... arrangement of bogus entries of LTCG/STCG/Loss. They also admitted that they facilitate some entities in getting bogus LTCG/STCG/Loss entries of paper/shell penny stock companies by providing their terminal in lieu of commission. The case of Centron Industrial Alliance Limited is similar to that of M/s Midland Polymers Limited and that is why similar treatment is being given to this penny stock also. In this company also, shares were sub-divided, share price was rigged without any visible reason, very poor financial affairs of the company etc. (vii) Here it is reiterated that the bogus entry operator chooses one of such penny stocks for implementation of this scheme, which does not pose a good picture of its financial affairs before general investor. That is why its shares are closely held and are not traded among public in general. The promoters/directors of such penny stock company are paid cash commission and in return they allow the operator to manage the affairs of the company. The operator then shows issue of shares of these penny stock companies to the beneficiaries through the route of preferential allotment (Private Placement). Exactly it has happened in the case....
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.... under consideration. However, the AO asked the assessee to explain as to why the disallowance as specified u/s 14A read with Rule 8D be not made for the reason of investment made in the Equity instruments for earning exempt income. The reply of the assessee was examined by the AO but did not find acceptable. The AO noted that the assessee had debited interest amounting to Rs. 83,81,772/- and cost of managerial/ administrative expenses for making the above investment cannot be denied. Therefore ,the assessee is liable for disallowance u/s 14A of the Act in the light of the provisions of Rule 8D of the I.T. Rules and CBDT 's clarificatory Circular No.5 dated 11-02-2014. Hence the disallowance worked out as per the provisions of Rule 8D(2) of the I.T. Rules amounting to Rs. 9,12,493/- is treated das expenditure incurred in relation to exempt income which has been disallowed u/s 14A of the Act by the AO by adding to the t5otal income of the assessee. 2. Rs. 29,89,956/-. The Reply of the assessee on the issue of commission paid in lieu of bogus entry of LTCG had been considered by the AO but did not find tenable. According to the AO, the syndicate members which include promote....
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.... of own interest free fund. AO has not made out the case that investment had been made out of loans. In case of Maruti Udyog Ltd 92 ITD 119 (ITAT Delhi) it has been held that nexus "between borrowed funds and investment can be said to be established only where it is shown that interest free funds are not available with the assessee. In the case of ACIT Vs Dhampur Sugar Mill Pvt Ltd ITA 220 of 2014 Hon'ble Allahabad High Court has ruled that once it was duly established that no borrowed funds of which interest was paid had been invested for earning tax free income, no disallowance was permissible u/s 14A. In the case of CIT Vs HDFC Bank ITA No.330 of 2012 Hon'ble Bombay High Court has held that no disallowance u/s 14A can be made in respect of interest paid on borrowing if assessee's own funds and non interest bearing funds exceeds investment in tax free securities. Further if there are no exempt income during the year, no disallowance can be made as held in the case of CIT vs Holcim India Pvt Ltd 90CCH 081 (2014). Further the disallowance u/s 14A cannot exceed the amount of exempt income as held by the Delhi High Court in Joint Investment PV LR. Vs CIT, vide its judgmen....
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....the AO has come to this conclusion that assessee is linked. Even then while it is likely that M/s Midland may have been used for the purpose of proving buying and selling avenues to interested persons and earning artificial capital gains, but how the assessee is connected with this company has not been explained. In online trading. any persons can buy a share at the time of his choosing and sell it when he wishes. It is not that while buying or selling the assessee has been found colluding with any of operators in the share M/s Midland. It is also not that the assessee has been found to be exchanging cash to transfer the commission to be paid to operators. In online share trading, funds move from bank account to bank account. Unless direct evidence is found to link the assessee with M/s Midland or some of the operator controlling the share price, the transactions made by the assessee cannot be doubted and the capital gains cannot be treated as unexplained. Statement of Pawan Kumar Kayan was recorded during investigation and he has accepted having executed LTCG entries through his firms. Similar statement has also been given by Harshawardhan Kayan. Another person Manoj Kumar A....
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....l 4228/2006) honorable SC has held that not allowing The assessee to cross examine witness were made the basis of impugned order is a serious flaw which makes the order nullity in as much as it amounted to violation of principles of natural justice. In the case of Ashwini Gupta 322 ITR 396 addition made on the basis of statement of third was deleted by honourable Delhi HC as assessee was not allowed opportunity to cross examine. On similar facts, in the case of Manish Kumar Baid vs ACIT, Cir-35, Kolkata ITA No.1236/Kol/2017 honouable ITAT held that the enquiry by the Investigation Wing and / or the statements of several persons recorded by the Investigation Wing in connection with the alleged trasnsactions in the shares of KAFL also did not implicate the assessee and/or his bnroker. It is also a matter of record that the assessee fu9rnished all the evidences in the form of bills, contract notes, demat statements and the bank accounts to prove the genuineness of the transactions relating to purchse and sale of shares resulting in LTCG. These evidences were neither found by the ld AO to be false or fabricated. The facts of the case and the evidence in support of the assessee....
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....Copy of Statement of Transaction of B.Lodha Securities Ltd from 01.04.11 to 31.03.14 of assesse. 19-27 h. Copy of Sale Bills issued byB.Lodha Securities Ltd evidencing sale of 8,00,000 shares of CentronIndustrial Alliance Limited made between 07.02.14 to 26.0314. 28-36 i. Copy of Contract Notes issued by B.Lodha Securities Ltd evidencing sale of 8,00,000 shares of Centron Industrial Alliance Limited made between 07.02.14 to 26.0314. 37-60 j. Copy of Bank Statement of Oriental Bank of Commerce for the period 01.04.13 to 31.03.14 evidencing receipt of sale proceeds of shares of Centron Industrial Alliance Limited through banking channel. 62-66 For transaction in the scrip of MPL: a . Copy of Purchase Bills issued by B.Lodha Securities Ltdevidencing purchase of 39,000 shares of M/s Midland Polymers Limited between 06.07.11 and 22.08.11. 67-73 Copy of Contract Notes issued of B.Lodha Securities Ltd evidencing purchase of 39,000 shares of M/S Midland Polymers Limited between 06.07.11 and 22.08.11. 74-77 Copy of Bank Statement of Oriental Bank of Commerce for the period 01.04.11 to 17.03.12 evidencing purchase o....
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....ade any enquiry which he was duty bound to do in the present case (CIT(A) Page 17). iv. The allegation of rigging of prices is made yet there is no finding of involvement of the assessee in alleged rigging (CIT(A) Page 18). v. Allegation of brokers issuing fake contract notes remained unsubstantiated(CIT(A) Page 18). vi. AO admitted assessee being regular investor of shares (CIT(A) Page 19). vii. At the time of transactions undertaken by the assessee appellant, no enquiry was undertaken against these companies nor any report was available in public domain (CIT(A) Page 19). viii. The entire action of ld. AO is based on statements of certain persons without any reference to any documentary evidence or material. Under these circumstances such statements cannot be used against the assessee unless opportunity of cross examination is provided. Reliance was placed on the decision of Hon'ble Supreme Court in the case of Andaman Timber Industries (supra)(CIT(A) Page 20) [CLC 182-185]. ix. Various judgments of Jurisdictional High Court, Other High Courts, Jaipur ITAT, Other ITAT were relied upon wherein the addition, under identical facts....
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....ghed against the oral evidences. 3.10 Reports of Investigation Wings have not been confronted to the assessee. The assessee has not been provided with the opportunity to cross examine the persons whose statements have been relied upon.The assessee has also not been provided opportunity to cross examine the persons who have prepared the said report. It is submitted that if the information is gathered behind the back of the assessee and the same is acted upon then, as per the principles of natural justice,the assessee should be provided with such information and should be allowed opportunity of cross examination. 3.11 In the following decisions, under identical circumstances, various courts decided the matter in the favour of the assessee: Hon'ble Supreme Court a. PCIT vs Parasben Kasturchand Kochar [2021] 130 taxmann.com 177 (SC) [CLC 166-169] SLP filed against the decision of Hon'ble Gujarat High Court in the case of PCIT vs Parasben Kasturchand Kochar [2021] 130 taxmann.com 176 (Gujarat) was dismissed. Hon'ble Gujarat High Court held that there was no substantial question of law and upheld the finding of the Tribunal (in Para 4). Hon'bl....
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.... substantiating purchases through various documentation including purchase bills, transportation bills, confirmed copy of accounts and fact of payment through cheques, VAT Registration of sellers and their Income-tax Return - He held that purchases made by appellant was acceptable and disallowance was to be deleted - Tribunal dismissed revenue's appeal - High Court affirmed judgments of Commissioner (Appeals) and Tribunal being concurrent factual findings - Whether no substantial question of law arose from impugned order of Tribunal - Held, yes [Para 4] [In favour of assessee] Hon'ble Jurisdictional Rajasthan High Court a. PCIT vs Sanjay Chhabra D.B. ITA No. 22/2021 [CLC 142-145] It was submitted before the Hon'ble Court that the Tribunal erred in holding that the information and statements recorded by Investigation Wing could not be taken into consideration while making assessment as such material was not disclosed nor an opportunity was accorded for cross-examination of the assessee. It was submitted before the Hon'ble Court that Tribunal did not examine the case on touchstone of human probability. However, Hon'ble High Court upheld the order of the....
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.... suspicious circumstances as indicated by AO, however, the findings of AO were more on presumption rather than on cogent proof. Further, AO failed to show that documents placed on record by the assessee were false, fabricated or fictitious. e. CIT vs Pushpa Malpani [2012] 20 taxmann.com 597 (Rajasthan) [CLC 164-165] "...3. Upon hearing learned counsel for Revenue and perusing impugned order, we find that whether or not sale of shares and receipt of consideration thereof on appreciated value is essentially a question of fact. CIT(A) and Tribunal have both given reasons in support of their findings and have found that at the time of transactions, the broker in question was not banned by SEBI at the time of transaction and that assessee had produced copies of purchase bills, contract number share certificate, application for transfer of share certificate to demat account along with copies of holding statement in demat account, balance sheet as on 31st March, 2003, sale bill, bank account, demat account and official report and quotations of Calcutta Stock Exchange Association Ltd. on 23rd July, 2003. In our view, present appeal does not raise any question of law, much....
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....AT after considering the entire conspectus of case and the evidence brought on record, held that the Respondent had successfully discharged the initial onus cast upon it under the provisions of Section 68 of the Act. It is recorded that "There is no dispute that the shares of the two companies were purchased online, the payments have been made through banking channel, and the shares were dematerialized and the sales have been routed from de-mat account and the consideration has been received through banking channels." The above noted factors, including the deficient enquiry conducted by the AO and the lack of any independent source or evidence to show that there was an agreement between the Respondent and any other party, prevailed upon the ITAT to take a different view. Before us, Mr. Hossain has not been able to point out any evidence whatsoever to allege that money changed hands between the Respondent and the broker or any other person, or further that some person provided the entry to convert unaccounted money for getting benefit of LTCG, as alleged. In the absence of any such material that could support the case put forth by the Appellant, the additions cannot be sustained. ....
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....ata, the addition was held to be not sustainable as the same was based merely on suspicion. Hon'ble ITAT observed the following: * There was no direct allegation or admission of the person, whose statements were recorded, of providing accommodation entry to the assessee. * The chain of transaction and flow of money from one entity to another entity and finally to the assessee was not established. * Assessee produced all relevant evidences. * No link was found in the documents produced by the assessee and paper companies. * Except statements of persons AO has not brought on record any other material to controvert or disprove the evidences produced by the assessee. * No documentary evidence was either gathered or referred in these reports. Even if the reports are taken into consideration then they are nothing but narration of the statements of various persons during investigation. * CBDT issued Circular and directed the department to concentrate and focus on collecting documentary evidences disclosing undisclosed income instead of obtaining the statement and then support their claim merely on the basis of statement. ....
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....liance on the judgment of Hon'ble Calcutta High Court in the case of Swati Bajaj IA NO. GA/2/2022 IN ITAT/6/2022 is misplaced for the following legal and factual reasons: 1. The assessee is based in Rajasthan. All the Courts/Tribunals within the jurisdiction of Hon'ble Rajasthan High Court are bound by the decision of Hon'ble Rajasthan High Court. 2. Hon'ble Rajasthan High Court in the case of PCIT vs Sanjay Chhabra D.B. ITA No. 22/2021 [CLC 142-145] noted that prejudice is caused to the assessee when material used against him is not provided and opportunity of cross examination is not provided: It was submitted before the Hon'ble Court that the Tribunal erred in holding that the information and statements recorded by Investigation Wing could not be taken into consideration while making assessment as such material was not disclosed nor an opportunity was accorded for cross-examination of the assessee. It was submitted before the Hon'ble Court that Tribunal did not examine the case on touchstone of human probability. However, Hon'ble High Court upheld the order of the Tribunal. It was considered that prejudice was caused to the assessee as he should have b....
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....ajasthan High Court has held that in the said there were several suspicious circumstances as indicated by AO, however, the findings of AO were more on presumption rather than on cogent proof. Further, AO failed to show that documents placed on record by the assessee were false, fabricated or fictitious. 3.4 CIT vs Pushpa Malpani [2012] 20 taxmann.com 597 (Rajasthan) [CLC 164-165] "...3. Upon hearing learned counsel for Revenue and perusing impugned order, we find that whether or not sale of shares and receipt of consideration thereof on appreciated value is essentially a question of fact. CIT(A) and Tribunal have both given reasons in support of their findings and have found that at the time of transactions, the broker in question was not banned by SEBI at the time of transaction and that assessee had produced copies of purchase bills, contract number share certificate, application for transfer of share certificate to demat account along with copies of holding statement in demat account, balance sheet as on 31st March, 2003, sale bill, bank account, demat account and official report and quotations of Calcutta Stock Exchange Association Ltd. on 23rd July, 2003. In ....
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....lacing all the relevant details and some of the shares also remained in the account of the appellant after earning of the long term capital gain. 10. Learned A.R. contention is that no statement of the Investigation Wing was given to the assessee which has any reference against the assessee. 11. In support of its contention, learned A.R. also cited an order of Coordinate Bench in ITA No. 62/Ahd/2018 in the matter of Mohan Polyfab (P.) Ltd. v. ITO wherein ITAT has held that A.O. should have granted an opportunity to cross examine the person on whose statement notice was issued to the assessee for bogus long term capital gain. But in this case, neither statement was supplying to the assessee nor cross examination was allowed by the learned A.O. Therefore, in our considered opinion, assessee has discharged his onus and no addition can be sustained in the hands of the assessee." 6.2 CIT vs Odeon Builders (P.) Ltd [2019] 110 taxmann.com 64 (SC) [CLC 170171] Hon'ble Supreme Court held that if the addition was based on third party information gathered by Investigation wing then addition cannot be made unless such information is provided to the assessee ....
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....pportunity to cross-examine them" [Emphasis Supplied] 6.4 Andaman Timber Industries (CIVIL APPEAL NO. 4228 OF 2006) [CLC 182-185] "...not allowing the assessee to cross-examine the witnesses by the Adjudicating Authority though the statements of those witnesses were made the basis of the impugned order is a serious flaw which makes the order nullity inasmuch as it amounted to violation of principles of natural justice because of which the assessee was adversely affected" 7. It is submitted that the court cannot turn blind eye to the evidences unless proved wrong and decide on the basis of assumptions and presumptions. Reliance is placed on the decision of Hon'ble Delhi High Court in the case of PCIT vs Krishna Devi [2021] 126 taxmann.com 80 (Delhi) [CLC 172-181] wherein Hon'ble Delhi High Court categorically noted that the Court has to decide the issue on the basis of evidence and proof and not suspicion alone. The theory of human behavior and preponderance of probabilities cannot be cited as a basis to turn a blind eye to the evidence produced by the assessee. If the revenue has failed to bring evidence on record that money changed hands a....
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....noted factors, including the deficient enquiry conducted by the AO and the lack of any independent source or evidence to show that there was an agreement between the Respondent and any other party, prevailed upon the ITAT to take a different view. Before us, Mr. Hossain has not been able to point out any evidence whatsoever to allege that money changed hands between the Respondent and the broker or any other person, or further that some person provided the entry to convert unaccounted money for getting benefit of LTCG, as alleged. In the absence of any such material that could support the case put forth by the Appellant, the additions cannot be sustained. 12. Mr. Hossain's submissions relating to the startling spike in the share price and other factors may be enough to show circumstances that might create suspicion; however the Court has to decide an issue on the basis of evidence and proof, and not on suspicion alone. The theory of human behavior and preponderance of probabilities cannot be cited as a basis to turn a blind eye to the evidence produced by the Respondent. With regard to the claim that observations made by the CIT(A) were in conflict with the Impugned Or....
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....ct irrefutable evidences were made available to the ld. AO and, therefore, ignoring the direct evidences and jumping to circumstantial evidences is not justified even in reference to the decision of Hon'ble Calcutta High Court.'' 2.6 Apropos Ground No. 1 of the Department, we have heard both the parties and perused the materials available on record. In the present case, it is noted that AO had disallowed amount of Rs. 9,12,493 under Section 14A by invoking Rule 8D. It is noted by us that assessee had sufficient owned fund, as at the start and end of relevant previous year, for making investment for earning exempt income. Moreover, assessee, during the year under consideration, received dividend income only to the extent of Rs. 60,134 . Considering the factual position, the ld. CIT(A), NFAC restricted disallowance to the extent of dividend income of Rs. 60,134 earned by the assessee. The ld. CIT(A), NFAC has relied on number of decisions for the proposition that no disallowed under Section 14A can be made if the own fund of assessee are more than the investment made to earn exempt income. Also, ld. CIT(A), NFAC has relied on the decisions for the proposition that disallowan....
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....m bank account then in the absence of any contrary, material or evidences on record by AO, the transaction of purchase and sale of shares in question cannot be held to be bogus, merely on the basis information investigation wing. The AO has not made any adverse comment on the evidences, supporting the transactions furnished by the assesse before him during the course of assessment proceedings. The observations of AO for transaction to be bogus, is solely dependent on the report of the Investigation Wing, with no specific reference of the assessee's transactions in such report. The observation of AO, in the assessment order, cannot be substituted of any tangible material or evidence to show that, transaction of assessee is bogus being an accommodation entry. It is also noted by us that the investigation wing report, which has been made sole basis for making additions by AO, was not made available to the assessee at any point of time during the assessment proceedings. The AO, in the Show Cause Notice, referred to statement of directors/ entry providers who have operated as entry provider brokers. However, neither any documentary reference is made in the Show Cause Notice no....
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....is of suspicion cannot be made without converting the voluminous of evidences placed on record by the assessee. Before us the ld. AR relied upon the number of decisions of ITAT, Jaipur Bench, of the Hon'ble Rajasthan High Court and of other different Hon'ble High Courts (supra). During the course of hearing before us, ld. DR relied upon the decisions of Hon'ble Calcutta High Court in the case of Swati Bajaj and submitted that such case under identical legal position was decided against the assessee. Controverting the submissions, in this regard, Ld.AR before us placed on record a distinguishing note to distinguish legal and factual position of the present case with that of Swati Bajaj before on Hon'ble Calcutta High Court (supra). In the present case, the entire addition has been made by the AO on the basis of report of investigation wing and report of certain persons. No opportunity of cross verification was provided to the assessee. Under such circumstances, no addition can be made to the income of assessee, specifically when entire basis of addition is investigation report, which was never confronted to assessee, and statement of persons, who were neither examine....