TaxTMI 
TaxTMI 
2024 (7) TMI 1612
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.... 3. After reopening the assessment u/s. 148 of the Income Tax Act, notices were issued u/s. 143(2) and 142(1) of the Act. After providing the reasons for reopening the assessment, the Learned Authorised Representative ('Ld. AR' for short) of assessee Mr. Rajesh Sanghvi, CA of M/s. Rajesh Sanghvi & Co. filed objections for reopening and the same were disposed off by the AO. Subsequently, the assessee was asked to furnish the required information and the AO says that the details were filed. 4. The Ld. AO says that the assessee, an individual, claimed that he derived income from long term capital gains of Rs. 51,74,772/- on sale of shares of Splash Media & Infra Company, during this year and claimed this income as exempt u/s. 10(38) of the Act. From the assessment order, page 3, it is seen that the assessee purchased 5000 shares on 13.5.2009 @ Rs. 47.22 and paid sale consideration of Rs. 2,36,116/-. Later on, the assessee claims to have received bonus shares in the ratio of 3:1 and the shareholding of assessee became 20,000 (Twenty thousand) shares. Out of this 20,000 shares, 2000 shares were sold on 8.6.2010 at the value of Rs. 14,91,647/-. Further, the assessee claimed that on....
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...., in this route, the beneficiaries of LTCG are allotted shares of a private limited company which is subsequently amalgamated with a listed penny stock and the beneficiaries receive shares of the listed penny stock exchange of the shares of private limited company. The shares in some cases were acquired through stock exchange. These shares were then split and bonus shares were issued to increase the volume. 6.4 Thereafter, the prices of the shares of the penny stock, companies are rigged and are raised through circular trading. This is managed by the "operator" of the scrip. An "Operator" is a person who wish to take entry of bogus LTCG/STCL in their books and arranges the same through the scrip of penny stock companies. The Operator manages many paper/bogus companies and uses them to do circular transactions to rig the price of the shares. The shares of these penny stock companies, although listed on exchange, are always closely held and are controlled by the promoter of the Penny Stock Company and the Operator who is arranging for the bogus LTCG/Loss. This is due to the fact that the general public is not interested in these shares as these companies have no credentials ....
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....ere as the assessee claimed to have sold and got huge profit of Rs. 51 lakhs during this year which was claimed as exempt. There is no payment of excise duty, no materials were purchased for all the 5 years analysed by Ld. AO- 2 years prior to A.Y. 2012-13 and 2 year subsequent to A.Y. 2012-13 and concerned assessment year, the company of M/s. Splash Media & Infra Ltd. has not spent on power and fuel and there are no finance and administrative costs. The Ld. Assessing Officer, at page 9 of the assessment order has mentioned that the EPS of the company is a meagre 0.07. Roughly, the financials of the company are the same for all the 5 years is almost the same. The Ld. AO gave the share price data of this company on the floor of stock exchange at pages 10,11,12. From this table, it can be seen that on June 9th of 2009, the price of scrip jumped to Rs. 429/- on December 09, 2009. Next month, it came down to Rs. 182/-, and again in June 2010, the price went up to Rs. 700/- to Rs. 182, in January 2011 it drastically came down to Rs. 75/-, in December 2011, the price came down to Rs. 20/-, in December 2012 price is Rs. 14/-, in December 2013 the price came down to Rs. 3.32 and in Decembe....
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....as sure of the demand side absorbing the supply. In the present case, the exit providers discussed above created the demand against the supply from the sellers (beneficiaries of bogus LTCG/STCG). In the whole process, the principle of price discovery was kept aside and the market lost its purpose. It is evident from the above analysis that the exit providers provided a hugely profitable exit to the sellers. This could be only possible if the sellers and exit providers were hand in glove with each other." 9. The Ld. AO at pages 16,17 and 18 of the assessment order, has reproduced the most specific and relevant question and answers of statements of Shri Anil Agarwal, Shri Raj Kumar Kedia, Mr. Deepak Agarwal and Mr. Anuj Agarwal. Mr. Anil Agarwal who controls and manages the Splash Media Company, in his statement dated 12.4.2015 has mentioned that the clients who purchase and sell shares at highest rate through stock exchange do the same only to obtain bogus LTCG and Short Term Capital Loss (STCL) as both of them would be beneficiaries. Mrs. Raj Kumar Kedia, in his statement dated 13.6.2014 has stated that most of companies dealt by him are paper companies and Splash Media is one a....
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....a coincidence that same purchaser buys on different dates and he is always ready to buy from the impugned assessee only. Ld. AO gave the example of Mr. Mukesh Prnthviram Chouhan, another buyer of huge chunk of shares from our assessee under similar circumstances, and hence concluded that the transactions are collusive in nature between buyer and seller. 12. On page 25, para 11 of assessment order, Ld. AO has stated that Mr. Anil Agarwal, Mr. Raj Kumar Kedia, Shri Deepak Agarwal and Mrs. Anuj Agarwal etc. have been found involved in fraudulent practices by the Securities and Exchange Board of India and in its findings, it was mentioned that these people act as syndicate for accommodation/entry entires who chose particular scrips and rig its prices to provide bogus capital gains/capital loss to various beneficiaries. The SEBI has restrained these persons from trading in market and these findings of SEBI were upheld by Securities Appellate Tribunal (SAT). 13. At para 14, page 28 of the assessment order, the Ld. AO has observed that receipt of bonus shares and splitting the shares have all occurred as per the modus operandi of the scheme to increase the volume of shares. So that ....
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....supporting documents were filed in support of sale and purchase of shares. e) There is nothing specific to assessee incriminating him to deny the benefit of LTCG. The Ld. CIT(A) relied on 3 decisions of Hon'ble ITAT, on the above lines and allowed the appeal of the assessee. 16. Aggrieved by the order of the Ld. CIT(A) who deleted the additions made by the AO, the Revenue instituted an appeal with the following grounds of appeal :- 1. "On the facts and the circumstances of the case and in law the Ld. CIT(A) on ground no.1 & 2 has not appreciated the facts of the case and modus operandi as a detailed investigation has been carried out by the Investigation Wing in the scrip of M/s. Splash Media & Infra Ltd where the assessee name has been surfaced and a detailed finding has been given by the Investigation Wing." 2. "On the facts and the circumstances of the case and in law the LD. CIT (A) has not appreciated the facts that in such penny scrip, trading transactions of purchase and sales are not effected for commercial purpose but to create artificial gains and complete the cycle of circular trading with a view to evade taxes." . 3."On the fac....
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.... the additions were made based on the surmises and conjectures and there is no documentary proof that the assessee did anything illegal. His arguments are summed up as follows :- a) All the share purchases and sales are done through bank accounts. b) The assessee has produced the contract notes of broker in proof of purchase and sale of shares. c) The transactions were done through registered brokers and through stock exchange. d) The AO's allegation that unaccounted cash was introduced/routed through is baseless. e) The assessee was not given opportunity to cross-examine the parties whose statements were mentioned in assessment order and relied upon by AO to make huge addition. f) The assessee is not a party to any manipulation of share price. g) The Kolkata Investigation Directorate has not mentioned the name of assessee anywhere that he is a party to any manipulation of share rice. h) There is no basis for making addition u/s. 68 as the transaction is accounted for in his books. i) The addition u/s. 69C is uncalled for because he has not paid for any commission to any party and no proof was adduced ....
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....and held that reopening of assessment is invalid. On appeal before Hon'ble ITAT by Revenue, it was held that the assessment was validly reopened because there are enough materials before the AO to reopen the assessment and reversed the order and the Ld. CIT(A) was directed to adjudicate the matter on merits. Accordingly, now the Ld. CIT(A) adjudicated the matter again in favour of assessee and against the Revenue stating that the share transactions were done on the floor of stock exchange, through banking channels, proper broker contract notes were filed and no cross-examination opportunity was granted to assessee and held the transaction was genuine. But, the Ld. CIT(A) has missed out several crucial facts mentioned by Ld. AO in his assessment order, mainly the weak financial fundamentals of company and astronomical rise in the price of scrip, statements recorded by Investigation Wing of Kolkata, existence of exit providers and shell companies, collusion between the operators, notices given to buyers of shares returned either unserved or there is no response from them, all India scam of misuse of Section 10(38) of Income Tax Act, collating the circumstantial evidence ....
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....The assessee claims 45,000 shares were sold to Mr. Ravindra Satpal and received sale consideration of Rs. 11,60,288/- but this person neither responded to the notice of Ld. AO nor any Return of Income was filed by him. Thus, the Ld. AO did not totally depend only on the report of Kolkata Investigation Directorate while making addition. b) The Ld. AO, brought lot of evidences -direct and indirect-in our impugned case. He has culled out the details of exit providers details, names of more than 70 shell companies utilised to route through the unaccounted money etc. which is absent in all these cases relied on by assessee. c) The Ld. AO, has demonstrated in the assessment order about price movement of scrip, the financial fundamentals of the company which shows that there is hardly any business and EPS is close to "Zeor" and the price claimed by the assessee cannot command such huge price in the normal course of share market. This aspect was not the subject matter of any of these 26 cases relied on by assessee. d) One of the case relied on by assessee, Shree Dilip B. Jiwarajka where Hon'ble ITAT passed order in favour of the assessee because the SEBI has ....
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....- for a long time, and stayed there. Thus, this case is also distinguishable on facts. i) As far as the contention of not providing cross-examination of entry operators to the assessee, it was held by Hon'ble Supreme Court that right to cross-examination is not part of principles of natural justice and this will not vitiate the proceedings of assessment and the cases are discussed elsewhere in this order. j) The case of PCIT Vs. Kuntala Mahapatra, relied on by Ld. AR of assessee which was decided by Hon'ble Supreme Court, is not applicable here as in that case, only the SLP of Revenue was dismissed. But, in similar circumstances, Hon'ble Supreme Court dismissed SLP of assessee in Suman Poddar's case. k) In this case of Indravadan Jain, Hon'ble Bombay High Court, the assessee relied on the issue of penny stock u/s. 10(38) because no opportunity was provided to the assessee and assessee was not directly involved in price rigging of share price. In our case on hand, the Ld. AO gave several details in the assessment order regarding structured deals and pre-conceived orders in these shares, synchronized timings while buying on the floor of stoc....
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....ee at Rs. 4/- and claimed to have sold @ approximately Rs. 100/- (after adjusting bonus and split of shares). The total shareholding sold by assessee is 1,80,000 after considering the bonus and split. The Ld. AO in his tabular form has analysed the financials of company for 5 years which shows the total turnover is Rs. 8 crores for 5 years, net profit is Rs. 2 crores, no raw material was purchased, no power and fuel expenses were mentioned, the EPS ranges between 0.07 to 0.01, gross block of assets between Rs. 4 lakhs to Rs. 44 lakhs, no opening and closing stock, no work-inprogress, no sundry debtors and creditors in the profit and loss account and Balance-Sheet. With such weak fundamentals no share can command a price of Rs. 100/- (after adjusting bonus and split shares) in stock exchange, i.e. an appreciation of almost 2500% within a short span of less than 2 years. These facts amply prove that the share prices were manipulated to the advantage of assessee to claim false LTCG. When seeing from this background coupled with statements of operators, existence of more than 70 shell companies found during search and seizure operations, picture becomes clear that the transactions are ....
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.... filing appeals in penny stock cases, even if the tax effect is less than the threshold fixed for filing appeals. h) Thus, from the cases relied on in this order, it can be seen that the scam of penny stocks had spread its wings from Delhi to Chennai and Gujarat to Gauhati, i.e., all over country, the Tribunals/ courts held the decisions in favour of Department, in some cases, SEBI/SAT have penalised the operators, thousands of assessees have opted for Vivad Se Vishwas Scheme by withdrawing the claims of penny stock, pending in appeal at that time. Subsequent to this scam, the period of holding the share to claim long term capital gain and taxing the same were introduced in the Income Tax Act with suitable amendments. Central Board of Direct Tax has amended its circular and directed all Assessing Officers to file further appeals and contest the matter in ITAT and Courts, irrespective of monitory limits involved in the claims of assessee. 25. Judicial pronouncements :- Following judicial decisions are relied upon to confirm the addition made by Ld. AO in the similar circumstances :- (1) Principal CIT Vs. Swati Bajaj 139 Taxman.com 352(Kol)(2022) : Almost all ....
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....see could not establish the prejudice caused to them for not giving opportunity to cross-examine them. (Paras 55 to 67 of Hon'ble High Court decision). Thus, not giving cross-examination opportunity did not and would not vitiate the proceedings as whatever information to be given to each assessee, was already given and necessary notices u/s. 143(2)/142(1) mentioned required particulars by the concerned Assessing Officers. Thus, full opportunity was afforded to the assessee, held by Hon'ble Kolkata High Court. The next argument of the assessee is that they were not implicated in the Investigation report also does not hold much water, it was held in the following words :- To reiterate, the assessee were not named in the report and when the assessee makes the claim of exemption, the onus of proof is on assessee to prove the genuineness. Unfortunately, the assessees are harping on the transactions done by them and by relying on the documents in their hands to contend that Department should prove the steep rise in the scrip is not genuine, which is incorrect. Another argument forwarded by the assessee is that section 68 is not applicable to th....
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....ies against the assessee, the entire capital gains demand has to be treated as fictitious and bogus more particularly when the assessee has not furnished cogent evidence to explain how the shares in an unknown company jumped up so fast and such fantastic sale price was not at all possible when there was no economic or financial basis to justify the price rise and therefore affirmed the order passed by the AO. Aggrieved by the order of the Ld. CIT(A), the assessee filed appeal to ITAT, and then the matter travelled to High Court and Hon'ble Kolkata High Court delivered a landmark judgement on the lines mentioned above. As the contentions and issues are similar to that of our impugned assessee, reliance is placed on this decision. (2) In the case of Sanjay Bimalchand Jain, 89 Taxman.com 196 (Bom), Hon'ble Bombay High Court held as follows :- "In this case, the assessee had purchased shares from the penny stock companies for a lower amount and within a year, sold such shares at higher amount and the assessee has not tendered cogent evidence to explain as to why shares in unknown company jumped to such a higher amount in no time and also failed to provide deta....
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....an be gathered from various circumstances coupled with preponderance of probabilities. At para 26, Hon'ble Supreme Court held "According to us, knowledge of who the 2nd party/client or the broker is not relevant at all. While the screen based trading system keeps the identity of parties anonymous, it will be too naïve to rest the final conclusions on said basis which overlooks a meeting of minds elsewhere. Direct proof of such meeting of minds elsewhere wound rarely forthcoming. The test would be is one of preponderance of probabilities............ In this case, Hon'ble Supreme Court dealt with the circumstances of synchronous trade of illiquid scrips (as mentioned by the AO in the assessment order in our case on hand also) and confirmed the order of Securities Appellate Tribunal w.r.t imposition of monetary penalties on brokers. The ratio laid down by Hon'ble Apex Court in this case is that, in similar circumstances, circumstantial evidence can be taken into account." (6) In the case of CIT Vs. Pushpa Malpani, Hon'ble Gujarat High Court, dismissed the Revenue's appeal in the case of Penny stock on the ground that the broker in question was no....
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....gh the sale consideration claimed to have been exceeded Rs. 10 lakhs. (11) In the case of Udit Kalra ITA No. 220/2009, Hon'ble Delhi High Court held that the company had meagre resources at disposal, negligible profit, but there was unusual and very high growth in the share price which does not support the same, the transaction was held to be sham. (12) In the case of NR Portfolio (P) Ltd. Vs. CIT ITA No. 1018/2011 dated 22.11.2013, Hon'ble Delhi High Court has held that even though the money was received through cheques, it was observed that the same did not reflect actual genuine business activity. The subscribers did not have their own profit making apparatus. It was held that the bank accounts did not reflect the creditworthiness and genuineness. In our case too, the buyers of shares did not respond to the notices issued by Ld. AO, not to speak of confirming the transaction. So, the contention of Ld. AR of the assessee that the transaction is through cheque, banking channels come to the rescue of assessee in terms of addition by AO. Moreover, the existence of Exit Providers and shell companies give rise to the thought of sham transaction. (13)....
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....hri Bhadresh Mansukhlal Dodhia Vs. ACIT Kalyan, ITA No. 5544/Mum/2018 dated 6.1.2021. * ITO-24(3)(1), Mumbai Vs. Arvind Kumar Jain HUF, Mumbai ITA No. 4862/Mum/2014 dated 18.9.2017 * Vijayrathan Balkishan Mittal Mumbai Vs. DCIT ITA No. 3428/Mum/2019 * Ratnakar M. Pujari Vs. ITO, Ward 25(3)(3), Mumbai * Dinesh Kumar Tulsiyan Vs. ITO ITA No. 813/Pune. (16) Hon'ble Supreme Court in the case of Pavan Kumar Vs. ITO (2018) 97 taxman.com 398(SC) has held that the credits introduced by assessee through banking channels were held to be sham because the assessee failed to produce the lenders before I.T. Department for verification. In the impugned case, the buyers of shares from our assessee have not responded to the notices issued by Ld. AO. (17) Shamim M. Bharwani Mumbai Vs. ITO-19(3)(4), Mumbai ITA No. 4906/Mum/2011 (A.Y. 2006-07), Hon'ble Mumbai ITAT : In this case, Hon'ble ITAT referred to the case of Ziauddin A. Siddique ITA No. 4699 and 4700/Mum, where the findings of the CIT(A) were reversed and held that, a penny stock company, Eltrol Ltd., exposing the modus operandi adopted by assessee, in the case of such stocks, t....
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....als of the company. Initial investment in the company of unknown credential and subsequent jump in the share prices of such a company, cannot be an accident or windfall but could be possible, because of manipulation in the share prices in a preplanned manner, as brought on record by the Assessing Officer. In view of the failure on the part of the assessee to discharge his burden of proof and explain nature and source of the transaction, in our opinion, the Ld. CIT(A) has rightly confirmed the addition in dispute, which does not require any interference on our part. We accordingly, uphold the action of the Ld. CIT(A) on the issue in dispute and dismiss the grounds raised by the assessee on this issue." (19) In the case of Rajkumar B. Agarwal vs. DCIT (ITAT Pune), Bench "B" ITA Nos. 1648 & 1649/PUN/15, it was held as follows :- "The assessee completed paper-trail by producing contract notes for purchase and sale of shares of PIL. Mere furnishing of contract notes etc. does not inspire any confidence in the light of facts. Test of human probability should be applied and apparent should be ignored to unearth the harsh reality (Sumati Dayal 214 ITR 801 (SC) & Durga Pra....
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....ad 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. Facts of the case only lead to the inference that these transactions are not genuine and make believe only to offset the loss incurred on the sale of jewellery declared under VDIS. In the totality of facts and circumstances of this case and material on record, we are of the considered view that the CIT(A) was not justified in deleting the impugned addition We accordingly set aside the order of the CIT(A)and restore that of the AO." ....