TaxTMI 
TaxTMI 
2025 (3) TMI 1375
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....deration on 25.09.2013 declaring total income at Rs. 46,78,369/- after claiming deduction under Chapter VI-A for an amount of Rs. 1,24,266/-. The assessee has claimed exemption u/s 10(38) of the LTCG of an amount of Rs. 2,37,10,473/-, out of which the Assessing Officer alleged that an amount of Rs. 59,32,860/- have been claimed in an unacceptable way. The assessment was reopened by the Assessing Officer u/s 147 of the Act since the assessee is found to have entered into suspicious share transactions in the relevant year. Since the scrip 'NCL Research' has been found by the Assessing Officer to be a bogus scrip in the nature of a penny stock being manipulated for the purpose of providing bogus capital gains, he was of the opinion that the assessee was required to be assessed u/s 147 of the Act. Subsequently, Assessing Officer framed assessment u/s. 143(3) r.w.s. 147 of the Act by disallowing Rs. 59,32,860/- u/s 68 of the Act towards the claim of LTCG u/s 10(38) of Act, holding that the impugned gain on sale of shares was liable to be taxed. 4. Aggrieved by the order of the Assessing Officer, the assessee filed appeal before the Ld. CIT(A) who dismissed the appeal of the assessee. ....
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....o AY 2013-14. The original return of income declaring total income of Rs. 46,78,369 was processed u/s. 143(1). However, a notice u/s. 148 was issued on 26/03/2018, pursuant to which the present assessment came to be framed by making an addition of Rs. 59,52,860 u/s. 68 of the Act and determining the total taxable income at Rs. 1,06,11,229/-. 3. During the year under consideration, the assessee was serving as Joint Managing director of two public companies, viz., Asahi Songwon Colours Limited and Aksharchem India Ltd. The assessee derived income from Salary and also earned investment income by way of Capital Gains, Dividend and Interest. 4. During the course of the re-assessment proceedings, the assessee was served with a copy of the reasons recorded for reopening the assessment, wherein it was stated that as per the information provided by the investigation Department and the statement recorded of the related parties, it was found that the price of the penny stock NCL Research had been artificially manipulated on the stock exchange and raised in order to book bogus claim of Long Term Capital Gains. Thereafter, a Show- Cause Notice dated 12.10.2018 was served on the assessee cal....
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....e statements of various operators/ share brokers/members were recorded on oath, confirming that certain beneficiaries transacted in this script by way of bogus LTCG and claimed exemption u/s. 10(38). g. I wish to emphatically place on record that in the list of persons alleged to be penny stock operators/exit providers/share brokers/members, whose statements were recorded and the copies of the same was furnished to me in the form of a pen drive, nowhere does my name or the name of my broker Shree Naman Securities & Financial Services Pvt Ltd appear, either directly or indirectly. h. Under the circumstances, I fail to understand as to how there is any basis of forming reason to believe that I had entered into penny stock transactions and claimed the same as exempt income, thereby not offering the same to tax. As has been held by the Hon'ble Supreme Court, the Jurisdictional High Court and several other High Courts and Tribunals, "Suspicion, howsoever strong, cannot take the character of evidence. Where no specific evidence showing nexus of the assessee with the conversion of any unaccounted money into sale proceeds of shares is brought on record, an addition made merely on the b....
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....ted by the Tribunal observing as under: "Contention of the AR is considered. One of the main reasons for not accepting the genuineness of the transactions declared by the assessee that at the time of survey the assessee in his statement denied having made any transactions in shares. However, subsequently the facts came on record that the assessee had transacted not only in the shares which are disputed but shares of various other companies like Satyam Computers, HCL, IPCL, BPCL and Tata Tea etc. Regarding the transactions in question various details like copy of contract note regarding purchase and sale of shares of Limtex and Konark Commerce & Ind. Ltd., assessee's account with P.K. Agarwal & co. share broker, company's master details from registrar of companies, Kolkata were filed. Copy of depository a/c or demat account with Alankrit Assignment Ltd., a subsidiary of NSDL was also filed which shows that the transactions were made through demat a/c. When the relevant documents are available the fact of trans actions entered into cannot be denied simply on the ground that in his statement the assessee denied having made any transactions in shares. The payments and recei....
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....ected to accept claim of short term capital gain as shown by the assessee ." In view of the above facts and circumstances of the case, we are of the considered opinion that the addition made by the AO is based on mere suspicion and surmises without any cogent material to show that the assessee has brought back his unaccounted income in the shape of long term capital gain. On the other hand, the assessee has brought all the relevant material to substantiate its claim that transactions of the purchase and sale of shares are genuine. Even otherwise the holding of the shares by the assessee at the time of allotment subsequent to the amalgamation/merger is not in doubt, therefore, the transaction cannot be held as bogus. Accordingly we delete the addition made by the AO on this account." (b) Ramprasad Agarwal vs ITO (2018) 100 Taxmann.com 172 (Mum. ITAT) "The Tribunal in the case of MeghraJ Singh Shekhawat v. Dy. CIT [IT Appeal Nos. 443 & 444 (JP) of 2017] noted that the Assessing Officer has not brought any material on record to show that the assessee has paid over and above purchase consideration as claimed and evident from the bank account and in the absence of any evidence it ....
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....ssessing Officer has, without leading any cogent evidence against the assessee, mechanically inflicted the addition relying on the provisions of Sec.68, which have no basis or justification for being invoked, as done by the Assessing Officer. 9. The assessee therefore prays in appeal before your Honour to direct the Assessing Officer to delete the entire addition of Rs. 59,32,860/-. The Ld. AR, therefore, urged that the addition made by the Assessing Officer and confirmed by the Ld. CIT(A) be deleted. 7. The Ld. DR, on the other hand, relied on the orders of the authorities below which have been studied extensively and used wherever necessary. 8. Heard both the parties and perused the material available on record. 8.1 On the facts of the case, we find that the assessee has sold shares of 'NCL Research' for Rs. 80,09,060/- through Shree Naman Securities and Finance Pvt Ltd, for the year under consideration, on which he had shown LTCG of Rs. 59,32,860/- and claimed as exempt u/s 10(38) of the Act. The Assessing Officer disallowed the same on the ground that the assessee had introduced unaccounted income under the guise of bogus/sham LTCG claim u/s 10(38) of the Act. We have con....
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....00 shares on 23.11.2012, 500 shares on 26.11.2012, 2250 shares on 27.11.2012 and 3250 shares in three days of the first week of Dec. 2012. Buying and selling of shares in a concerted way shows a direct connivance between operators and the assessee and proves the entire process is predetermined and synchronized. The company's financials, profit, dividend, earning per share etc. if not sole basis for increase in share price but at least is a paramount fact and in the instant case it is clear that all the criteria has given a go-away. Keeping in view the financials, we have no hesitation to say the scrawny financial parameters cannot command such a high rise of shares in such a small period. Mysterious are ways. In enigmatic ride the assessee has made 400% profit in a span of fat 13 months. This coupled with the investigation conducted by the Income Tax Department with the backing of the statements of the brokers, it can be said that the assessee cannot claim ignorance of the unfair trade practices took place in the Security Market with respect to this scrip. Submitting that the assessee is a passive beneficiary of the operation cannot absolve the accountability of the assessee to cla....
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....he appellant invested in NCL Research, which lacked financial credentials, and claimed LTCG exemption by selling the shares. g) The appellant sold all 10,000 shares immediately after the 12- month holding period to claim the exemption under section 10(38). h) The trades executed by the appellant were part of synchronized trading, indicating coordinated efforts to create bogus LTCG or LTCL. Specifically, the appellant made 14 trades between September and December 2C12, with one buyer party purchasing 888 shares in 6 trades, indicating pre-s rranged/pre- meditated transactions to book fake/look-genuine profits to claim exemption in the guise of LTCG u/s 10(38). i) An in-depth analysis has been made by the AO and elaborately discussed in the assessment order. 5.1 During the appellate proceedings the appellant reiterated the facts which were submitted before the A.O. The points raised by the appellant are summarized below: a) The Assessing Officer (AO) did not provide any evidence to suggest that the Long Term Capital Gains (LTCG) from the sale of NCL Research shares were sham or bogus. b) The shares were purchased in the previous year and sold through the Stock Exchange in....
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....nt point that cannot be missed here was income or the capacity of the persons involved who had purchased the shares which were sold by the appellant. For the sake of clarity, the same as listed by the A.O. is reproduced below: Name of company Sale date Pan of BUYERS Income as per ITR 2011-12 2012-13 2013-14 NCL Research 1 1.09.2012 AAECR2957A 9864 15447 125068 NCL Research 11.09.2012 AADCM5866 150211 0 - NCL Research 23.1 1.2012 AARHS2082R NA. . NA NA NCL Research 23.11.2012 AARHS2082R -do- -do- -do- NCL Research 26.11.2012 AAECK0200H 10810 14000 9625 NCL Research 27.11.2012 AAECG6112A Return not filed 3473 7485 NCL Research 27.11.2012 AAECG6112A -do- -do- -do- NCL Research 27.11.2012 AAECG6112A -do- - -do- NCL Research 04.12.2012 AACCJ1455B 4911 15921 10621 NCL Research 04.12.2012 AALCS9387E 12063 13572 2620 NCL Research 06.12.2012 AAECG6112A Return not filed 3473 7485 NCL Research 06.12.2012 AAECG6112A -do- -do- -do- NCL Research 06.12.2012 AAECK0200H 10810 14000 9625 NCL Research 07.12.2012 AAECG6112A Return not fi....
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....m of exemption u/s 10(38) on LTCG was disallowed by the AO. It is pertinent to mention that the appellant has claimed exemption on LTCG of Rs. 2.37 Cr arising out of transactions in 8 scrips during the year. The AO on the basis of specific information in this regard and in-depth analysis based on reports and materials available before him, has only disallowed such exemptions on LTCG arising out of transactions in shares of NCL Research. Accordingly, such disallowance can't be attributed to any incorrect facts or misleading conclusions as alleged by the appellant. 5.3 To sum up: Is there price manipulation of shares of NCL Research? Answer to this question is yes as per report of DGIT (investigation), Kolkata and SEBI order. Is the promoters of NCL Research was involved in price manipulation? The answer is also yes as per their statement which includes the statement of Shri Vijay Jaydeo Poddar, Promoter & MD of M/s NCL Research. Does SEBI passed order on manipulation of share price of NCL Research? The answer is again yes, for a reference it is placed on record that one such order no. WTM/MPB/EFD1-DRA4/04/2019 dated 10.01-2Ql9uwas passed by SEBI u/s 11(1), 11(4) & 11B of SEBI Act ....
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.... the transactions entered by the assessee are not genuine so as to make him eligible for claim u/s 10(38) of the Income-tax Act, 1961. (i) Sumati Dayal v. CIT - (1995) 214 ITR 801 (SC) (ii) Durga Parsad More - 82 ITR 540 (SC) (iii) Mc. Dowell & Co. Ltd. - 154 ITR 148 (SC) (iv) Govinda Rajulu Mudaliar v. (1958) 34 ITR 807 (SC) (v) Sreelekha Banerjee & othrs. V. CIT (1963) 49 ITR 112 (SC) (vi) Kalekhan Mohammed Hanif v. CIT (1963) 50 ITR 1 (SC) (vii) CIT v. Biju Patnaik (1986) 160 ITR 674 (SC) 8.6 Further reference is also being made to the judgment of Hon'ble Calcutta High court in case of PCIT Vs. Swati Bajaj 139 Taxmann.com 352 (Kol)(2022) wherein it was held as under:- "55. The first argument on behalf of the assessee is that the copy of the investigation report was not furnished to them despite specific written request made on behalf of the assesses to furnish the copy of the report, the statements recorded and provide those persons from whom statements were recorded to be cross examined on behalf of the assessee. There is no dispute to the fact that the copy of the statement said to have been recorded during the course of investigation has not been furnishe....
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....n'ble Supreme Court pointed out a distinction between a case of no opportunity and a case of no adequate opportunity and while examining the latter case, it was held that the violation has to be examined from the stand point of prejudice, in other words the Court or the tribunal has to see whether in the totality of the circumstances, the delinquent officer/employee did or did not have a fair hearing and the orders to be made shall depend upon the answers to the said query. Further it was held that there may be a situation where interest of the state or public interest may call for curtailing of rule of audi alteram partem and in such a situation the Court may have to balance public/state interest with the requirements of natural justice and arrive at an appropriate decision. 57. In a very recent decision of the Hon'ble Supreme Court in M.J. James after referring to a catena of decisions on the point the Hon'ble Supreme Court pointed out that natural justice is a flexible tool in the hands of the judiciary to reach out in fit cases to remedy injustice. The breach of the audi alteram partem rule cannot by itself, without more lead to the conclusion that prejudice is th....
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.... need to consider as to whether and under what circumstances the right of cross examination can be demanded as a vested right. In Kishanlal Agarwalla, the Hon'ble Division Bench of this Court pointed out that no natural justice requires that there should be a kind of formal cross examination as it is a procedural justice, governed by the rules and regulations. Further it was held that so long as the party charged has a fair and reasonable opportunity would receive, comment and criticize the evidence, statements or records on which the charges is being against him, the demand and tests of natural justice are satisfied. 60. In Bakshi Ghulam Mohammad 89 the Hon'ble Supreme Court held that the right of hearing cannot include the right of cross examination and the right must depend upon the circumstances of each case and must also depend on the statute under which the allegations are being enquired into. 61. Having noted the above legal position, it goes without saying there is no vested right for the assessee to cross examine the persons who have not deposed anything against the assessee. The investigation report proceeds on a different perspective commencing from a differe....
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....hed and relevant sections of SEBI Act. Section 12A read with section 24 of the Securities Exchange Board of India Act 1992 are predicate offences. Enforcement Directorate should then be informed to take action under Prevention of Money Laundering Act for the predicate offences. 64. From the above it is seen that there is a discussion about the "modus operandi" adopted and the SIT opines that there is an urgent need for having an effective, preventive and punitive action in such matters to prevent recurrence of such instances. This is a relevant aspect to be borne in mind. 65. Thus, the report submitted by the investigation department cannot be thrown out on the grounds urged on behalf of the assessee's. The assesses have not been shown to be prejudiced on account of non-furnishing of the investigation report or non-production of the persons for cross examination as the assessee has not specifically indicated as to how he was prejudiced, coupled with the fact as admitted by the revenue, the statements do not indict the assessee. That apart, we have noted that the investigation has commenced targeting the individuals who dealt with the penny stocks and after examining the modus....
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....nothing prevented the assesses who are ably defended by Chartered Accountants and Advocates to download such reports and examine the same and thereafter put up their defence. Therefore, the based on such general statements of violation of principles of natural justice the assessee's have not made out any case. 66. While on this issue, it is important to take note of the decision in T. Takano. In the said case, the SEBI took a stand that the investigation report under Regulation 9 of the SEBI Regulations could also include sensitive information about the business affairs of various entities and persons concerned and if disclosed it would affect their privacy and the competitive position of other entities. While considering the correctness of the submissions made on behalf of the SEBI, the Hon'ble Supreme Court held that if the disclosure of the report would affect third party rights the onus then shifts to the appellant to prove that the information is necessary to defend the case appropriately. On facts it was found that the appellant therein did not sufficiently discharge his burden by proving that the non- disclosure of the information would affect his ability to defend him....
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....idence is a more certain basis to come to a conclusion yet in the absence thereof the courts cannot be helpless. It was further pointed out 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 the Court to be a reasonable conclusion therefrom. The test would always be that what inferential process that a reasonable/prudent man would adopt to arrive at a conclusion. The above tests laid down by the Hon'ble Supreme Court were applied to the facts of the case in K.R. Ajmera and it was noted that the scrips in which trading had been done wherefore illiquid scrips meaning thereby that such scrips though listed in the BSE were not a matter of every day buy and sell transactions. Further it was held that trading in such illiquid scrips is not impermissible yet voluminous trading over a period of time in such scrips is a fact that should attract the attention of a vigilant trader engaged in such trades. It was further pointed out that though proximity of time between the buy and sell orders may not be conclusive in an isolated case such an ev....
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....ragraph 30 of the said judgment. Therefore, we hold that the law laid down in K.R. Ajmera continues to be good law. 72. In the light of the above discussion, the only conclusion that can be arrived at is that the opinion can be formed and the decision can be taken by taking note of the surrounding 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 insignificant 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 t....
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....t those penny stocks companies had credit worthiness and coupled with genuinity and identity. The assesses cannot be heard to say that their claim has to be examined only based upon the documents produced by them namely bank details, the purchase/sell documents, the details of the D-Mat Account etc. The 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....
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....e facts establish that (2015) SCC Online Hyderabad 1021 (1936) AC 1 - House of Lords the shares which were traded by the assessee's had phenomenal and fanciful rise in price in a short span of time and more importantly after a period of 17 to 22 months, thereafter has been a steep fall which has led to huge claims of STCL. 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 assessee's. 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 circumsta....
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....gh Court, held that claim of genuineness of transactions can be rejected even if the assessee backs the same with evidence which is not trustworthy. Hon'ble Income Tax Appellate Tribunal - Chandigarh, in the case of Assistant Commissioner of Income Tax Vs. Som Nath Maini by placing reliance on the decision of Hon'ble Supreme Court in the case of Durga Prasad More (2002) 3 BOMLR 747, 2003 (1) MhLj 420 has observed as under :- "It is true that when transactions are through cheques, it looks like real transaction but authorities are permitted to look behind transactions and find out the motive behind transactions. Generally, it is expected that apparent is real but it is not sacrosanct. If facts and circumstances so warrant that it does not accord with the test of human probabilities, transactions have been held to be non-genuine, it is highly improbable that share price of a worthless company can go from Rs. 3 to Rs. 55 in a short span of time. Mere payment by cheque does not render a transaction genuine. Capital gain tax was created to operate in a real world and not that of make belief. ..... We accordingly set aside the order of the CIT(A)and restore that of the AO."....