TaxTMI 
TaxTMI 
TaxTMI 
2024 (7) TMI 1718
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....ations, the Income Tax Department found certain incriminating material which shows that Mr. Shah was providing factitious entries to various persons based on which the beneficiaries claim false exemptions u/s. 10(38). It was also mentioned that Mr. Shah managed bogus LTCG during A.Y. 2011-12 and 2012-13 to many clients in the shares of M/s. Prraneta Industries Ltd. (PIL for short), formerly known as Aadhaar Venture Ltd., which is controlled by him. b) The assessee purchased shares of the company through stock exchange. The contract notes of broker which evidences the purchase and sale of shares was submitted to the Ld. AO. The concerned Demat account also was filed. The assessee has further mentioned that all the transactions were done through banking channels. c) A statement was recorded by Ld. AO and the assessee repeated the above averments before Ld. AO. d) But, the assessee could not say how the share price of M/s PIL went up by seven times within a period of slightly more than a year despite the fact the company's financial fundamentals were weak and the profit of the company are negligible which is paramount for increase in share price. e)....
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.... assessee and operator. k) The Ld. AO, has opined that the assessee is not able to prove the unusual rise and fall of shares to be natural and is based on the market forces. It is evident that such share transactions were closed circuit transactions and clearly structured ones. l) the Ld. AO further stated at para 10 as follows :- "10. The facts and circumstances of the case, as recorded above, clearly suggest that the revenue cannot take or accept such makebelieve transactions, as presented by the assessee. As mentioned above, the jamakarchi companies and the group entities are directly involved in jacking up the prices of shares of the assessee to provide undue benefits to the assessee. Truth or genuineness of such transactions must prevail over the smoke screen, created by way of pre-meditated series of steps taken by the assessee, with a view to impart a color of genuineness and. character of commercial nature, to such share transactions. Needless to say that one has to look at the whole transactions and a series of steps taken to accomplish such share transactions, in an integrated manner, with a view to ascertaining the true nature and character of ....
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.... information from Mumbai Investigation Directorate that the assessee took accommodation entries from Mr. Shirish Chandrakant C. Shah with regard to bogus penny stock transactions. It was also mentioned that Ahmedabad Investigation Directorate conducted search and seizure operations and found that he was using several shell companies and manipulating shares of insignificant companies to give accommodation entries to various persons all-over the country, to claim bogus exemption u/s. 10(38) of the Act. So, the Ld. CIT (A) held that the reopening of assessment by Ld. AO is valid. 6. Before the Ld. CIT(A), the assessee further mentioned that he does not know Mr. Shirish Shah and purchased the shares through broker on stock exchange and paid consideration through cheque. Copies of Broker's contract notes relating to purchase and sale of shares on various dates alongwith details of rate at which shares were sold, were filed before the Ld. CIT(A). It was submitted by the assessee before the Ld. CIT (A) that section 68 is not applicable in his case the transactions are properly recorded in the books of account, all three ingredients of identity, creditworthiness and genuineness of trans....
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....e held as sham. As the facts and circumstances are same, the ratio laid down by Hon'ble High Court of Bombay is applied and the addition is confirmed. h) Thus, the Ld. CIT (A) confirmed the additions made by the Ld. AO after perusing all the material before him and after taking into consideration all the decisions available with him. 8. Aggrieved by the orders of Ld. AO and the Ld. CIT(A), the appellant filed further appeal before this Tribunal with the following grounds of appeal :- 1. The commissioner (Appeals) erred in not dealing with and disposing of the ground no.l regarding reopening of the assessment for which the assessee had filed detailed written submissions and relied on the decision of the Hon. High Court at Bombay. 2. The Commissioner (Appeals) erred in observing that the ground no.l is general in nature and therefore, the same required no separate adjudication. 3. The Commissioner (Appeals) failed to consider that the AO issued the notice u/s. 148 of the Act without taking the prior approval the Pr. C.I.T. u/s. 151(l) of the Act and therefore, the reopening of the assessment is bad in law and without jurisdiction. 4....
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....es on the floor of recognised stock exchange through a renowned broker in the normal course. It was argued that he does not know Mr. Shirish C. Shah. It was submitted that STT was paid and amount was received from broker by cheque. As the transactions were reflected in their books of account, the claim u/s. 10(38) is proper and submitted that the order of the Ld. CIT (A) should be reversed and addition of Ld. AO to be deleted. 10. Per contra, Ld. DR heavily relied on the orders of lower authorities, Ld. AO and the Ld. CIT (A) and submitted that the addition was properly made based on the information received from Investigation Wing of Income Tax Department. The transactions relating to LTCG claim u/s. 10(38) are sham and all documentary evidences were created to show that claim is genuine. In view of weak financial fundamentals of scrip of PIL, it was submitted that the price rise is abnormal and hence the addition made should be sustained. 11. As far as the reopening of the assessment, no adjudication is done here as the assessee filed "written submissions" on 10.10.2023 in which it was stated that the assessee is not pressing grounds regarding reopening of the assessment. H....
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....ars is reproduced by Ld. AO in the assessment order. From the Profit and Loss account, it is observed that, in 5 years, no materials were consumed, finance cost as "Zero", no fixed assets are seen and there is negligible depreciation, profit for 5 years is less than Rs. 4 crores, no taxes are paid, the EPS for all 5 latest years "Zero", there is no dividend history, receipts and payments are almost equal. With such weak financial fundamentals, the share price can never command such astronomical price increase by 900% in 12 to 13 months. Where direct evidence is not forthcoming, circumstantial evidence can be taken to deduce the actual happenings. Exactly, in these circumstances, Hon'ble Jurisdictional Bombay High Court has held in the case of Sanjay Bimal Chand Jain ITA No. 18/2017, as follows :- "Undisclosed income in the garb of LTCG has to be assessed as undisclosed credit u/s. 68 because "...........The authorities have recorded a clear finding of fact that the assessee had indulged in a dubious share transaction meant to account for the undisclosed income in the garb of long term capital gain. While so observing, the authorities held that the assessee ha....
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....Hon'ble Supreme Court in the case of Shri Charan Singh versus Chandra Bhan Singh AIR 1988 SC 637 has clarified that the burden of proof relies on the party who substantially asserts the affirmative of the issue and not upon the party who denies it. It has been further held that the party cannot, on failure to establish a prima facie case, take advantage of the weakness of his adversary's case. The party must succeed by the strength of his own right and the clearness of his own proof. He cannot be heard to say that it was too difficult or virtually impossible to prove the matter in question. e) The Ld. AR has placed reliance on the Hon'ble Jurisdictional High Court's decisions of PCIT Vs. Indravadan Jain HUF and PCIT Vs. Ziauddin A Siddique for the proposition that where the transactions were done through stock exchange and banks, the claim of assessee should be accepted. But, in those cases, the fundamental financials of scrip, which is very important to determine the share price were not discussed and hence distinguishable. In the impugned case on hand, Ld. AO, extensively discussed the financials of scrip and demonstrated that the share can never command such....
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....s 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 the objections/grounds raised by the assessee against the addition made by Ld. AO were answered by the Kolkata High Court in this case. Heavy reliance is placed on this decision because it is the culmination of collective wisdom of 22 Advocates who argued this case on behalf assessees, 7 Advocates on behalf of the Revenue and more than 100 decisions of various Courts/Tribunals were cited by both parties - assessee and Revenue to forward their arguments for and against the additions made by the Income Tax Department as almost 90 appeals of various assessees were clubbed and heard as the issue is common in all these appeals - various penny stocks were used to manipulate the share price and claim exemption u/s. 10(38) of the Act. Several arguments were made and heard by Hon'ble High Court of Kolkata in this batch of cases. The Hon'ble High Court of Kolkata gave lot of importance to this case because it may create precedent to various other cases in the country as the report of DGIT(Inv) Kolkata found acco....
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....rtment 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 them because of the fact that transactions are done through bank, stock exchange, broker and reflected in books of account etc. The Hon'ble Kolkata High Court rebutted these arguments by saying that one of the key element to be satisfied for non-applicability of section 68 is "genuineness of transactions". Here the genuineness of transaction was attacked by Revenue on many counts - e.g., statements of operators, astronomical rise of share price despite weak fundamentals of company, utilising 77 shell companies to route the transactions etc. It was further held by Hon'ble Kolkata High Court in this regard as follows :- "The assessee cannot escape from the burden cast upon him and unfortunately in these cases, the burden is heavy as facts establish that the shares which were traded had phenomenal and fanciful rise and short fall in price in short span, which led to LTCG/STCL. Therefore, until the assessee discharges his burden of proof, the addition made by the AO cannot be fault....
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....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 details of persons, who purchased the said shares, the transaction was held to be an attempt to hedge the undisclosed income as LTCG. It was also held that the assessee had indulged in a dubious share transaction meant to account for undisclosed income in the garb of long term capital gains and thus, exemption u/s. 10(38) could not be granted to the assessee. In this Hon'ble Jurisdictional High Court's case, the broker did not respond to the notices issued by the AO, whereas in our impugned case, the alleged buyers of shares did not respond to notices issued by Ld. AO. As the circumstances are similar, addition made by the AO had to be confirmed. In this case of Mr. Sanjay Jain also, assessee was not afforded any right to cross-examination, and assessee claimed that the transactions were done through bank and stock exchange, but Hon'ble Bombay High Court still confirmed the addition made by the AO." (The price of the penny stock went up astronomically from Rs. 5 to Rs. 485/- as mentio....
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....n 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 not banned by SEBI. Conversely, in our case on hand, the AO, in the impugned assessment order has mentioned that the operators were banned from trading for a particular period. Hence, the addition made by the AO on this ground, is confirmed. (7) Similarly, in the case of SEBI Vs. Mega Corporation Ltd. 136 taxman.com 333, while dealing with a case of income earned through price manipulations of share, held that right to cross-examination of a person who gave a complaint, was rejected by Hon'ble Supreme Court. (8) In the case of Smt. Thara Kumari Vs. PCIT, Hon'ble Madras High Court upheld the addition made by the AO by disallowing the exemption claimed by assessee u/s. 10(38) because the price of scrip M/s. Luminaries Technologies Ltd., was artificially jacked up after referring to the report of Investigation Directorate of Kolkata. Similar is the scrip "Splash Media & Infra L....
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..... 10(38) of the Act. The scrip which skyrocketed was classified by SEBI as "Penny Stock" like that of our case. After taking into consideration all the contentions of transactions through banking channel, stock market cross-examination opportunity was not given were considered and it was held to be sham transaction. Similar decisions were rendered by the Coordinate Benches of Mumbai in the following cases too :- * Shri 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. (13) 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, it was held that, a penny stock company, Eltrol Ltd., exposing the modus operandi adopted by assessee, in the case of such stocks, the price, de-horse any fundamentals or other factor, of paper companies being raked ....
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....sequent 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." (15) 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 Prasad More 82 ITR 540 (SC) applied)". (16) In the case of Pooja Ajman....
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....ved 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." (20) Chennai ITAT in the case of Rajnish Aga....