TaxTMI 
TaxTMI 
2024 (2) TMI 1617
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.... 3. Without prejudice to the generality of grounds of appeal no. 1 & 2 above, on facts and circumstances of the case of the appellant and in law learned CIT (Appeals) has erred in not appreciating that the addition of Rs 2,30,01,500/- as unexplained cash credit u/s 68 of the Act and of Rs.5,75,037/- unexplained expenditure u/s 69C of Act is on existent facts. 4. Without prejudice to the generality of grounds of appeal no. 1 & 2 above, on facts and circumstances of the case of the appellant and in law learned CIT (Appeals) has erred in not appreciating that the addition of Rs 2,30,01,500/- as unexplained cash credit u/s 68 of the Act and of Rs.5,75,037/- unexplained expenditure u/s 69C of Act has been made by assessing officer without bringing on the appellants assessment records any material in support of facts alleged by him. 5. Without prejudice to the generality of grounds of appeal no. 1 & 2 above, on facts and circumstances of the case of the appellant and in law learned CIT (Appeals) has erred in not appreciating that the addition of Rs 2,30,01,500/- as unexplained cash credit u/s 68 of the Act and of Rs.5,75,037/- unexplained expenditure u/s 69C of Act....
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....e route of preferential allotment (private placement) or off-market transactions. In another route, the beneficiaries of long-term capital gain were allotted shares of a private limited company, which was subsequently amalgamated /merged with a listed 'Penny' stock company and the beneficiaries received shares of listed 'Penny' stock in exchange of shares of private limited company. In some cases, shares acquired through stock exchange were split and bonus shares were issued to increase the volume. Under the second step, the prices of the shares of the 'Penny' stock companies were rigged through circular trading. This process was managed by a group of operators for a period exceeding one year. Under the third step, when the shares prices had been sufficiently rigged to a high level, the beneficiaries would sell their shares at the high/inflated price on the stock exchange, which will be purchased by a set of operators, named as exit providers. The sale would result an exorbitant amount of capital gain in the hands of beneficiaries, which was exempted from tax under section 10(38) of the Act. Under the fourth step, after sale of shares by the beneficiaries, p....
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.... in the name of dummy persons, who are either employees or relatives of entry operators. Investigation Wing, Kolkata has gone to even the registered offices of many such cash depositing firms, but as expected there was no existence found for any such persons/firms. Almost all such accounts were opened with fake addresses. Role of banking authorities is also highly questionable here. 14.4 Same is true, in the case of Paper/ Jamakharchi/ bogus Clients also. Though they are registered as a client with share brokers, and Brokers maintains KYC for such bogus clients also, but these clients does not exists at their given registered address. In many cases it was found that such client companies are missing, or existing nowhere. Even the person of share broker could not find its clients. When share brokers were confronted with this, they either accepted that such clients are bogus or they failed to make any reasonable explanation." 2.2 In the case, the assessee had purchased 45,000 shares through 'preferential' allotment at Rs.50 per share against payment of Rs.22,50,000/- though cheque dated 26/05/2011. The shares were transferred into assessee's 'D-mat' ac....
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....hese shares bought at high value for small value resulting in artificial loss. 11.3 The financial health of the company is taken out from the data available in public domain and which is used by the investors is as follows: FY Share capital Gross Turnover Expenses PAT Earnings Per Share 2009-10 5.00 2.43 2.6 0.04. 0.08 2010-11 5.00 1.25 1.37 -0.07 -0.01 2011-12 8.18 3.06 3.01 0.03 0.00 2012-13 8.18 13.66 13.61 0.03 0.00 2013-14 8.18 15.72 15.72 -0.45 -0.06 2014-15 20.44 8.71 12.76 -4.05 -0.19 11.4 Thus, it is clear that the net worth of the above company is negligible. Even though the net worth of the company and the business activity of the company is negligible the share prices have been artificially rigged by the group of operators including Shri Anil Agarwal of Mumbai to accommodate beneficiaries seeking long term capital gain and losses. No prudent businessman and particularly trader or investor in stock will invest in such penny scrip which is defunct and inoperative." 2.4 For verification of the shares purchased by the exit provid....
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.... 2.6 For verification of the preferential allotment of shares to the assessee, the Assessing Officer issued notice under section 133(6) of the Act to the company M/s Essar (India) Ltd, calling for details is provided in para 16.4 of the assessment order, however the notice returned back with the postal remark the 'receiver refused'. 2.7 In background of the above facts, the Assessing Officer issued a final show cause notice to the assessee as why the alleged sale consideration of shares of 'Essar(India) Ltd' might not be treated as unexplained cash credit in terms of section 68 of the Act. After considering submission of the assessee, the learned Assessing Officer concluded as under: 16.6 All the indicators mentioned in Paras above, point to only one thing that the shares prices are being manipulated and they are not in response to normal market demand. Such type of companies and the trend of price movement is a classic example of manipulation of penny stock shares by accommodation entry providers. How the share prices are manipulated by hawala operators in case of such small companies is a fact well known and that need not be separately discussed her....
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....ans or received back the cash loans with interest. 18. Findings and conclusion The submissions made by the assessee and reply to show cause is considered. The facts of the case, investigations made by various directorates, statements recorded during the assessment proceedings are considered. From the discussion in the preceding paras, it is concluded that long term capital gains booked by assessee in her books were pre-arranged method to evade taxes and launder money. Following are the findings and the reasons which substantiates the findings. a. Mode of acquisition of the shares: The assessee has claimed to have purchased the shares through preferential allotment. However, when letter was issued u/s. 133(6) of the Act, to Esaar India Ltd., calling for information regarding the assessee, the same was returned back by the postal authorities with the remark "receiver refused". b. Sale of shares and unusual rise in the price: Further the assessee has sold the 4,50,000 shares at the price of Rs 2,30,01,500/-, thus resulting the long term capital gain of Rs.2,06,99,474/-, which is 10 times the increase of the cost price, and as discussed the rise in s....
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....depending on the others being carried out. The true nature of such share transactions lacked commercial contents, being artificially structured transactions, entered into with the sole intent, to evade taxes. i. The assessee has done merely one transaction and no other transactions in shares were done. The assessee is taking shelter under the garb of religious restrictions. If a person earns profit at such a high rate, it is quiet obvious that he will always further invest in shares. 18.2 The facts and circumstances of the case, as recorded above, clearly suggest that the revenue cannot take or accept such make- believe transactions, as presented by 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 imparting a colour 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 such purchase and sale of shares....
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....challenging validity of the reassessment observing as under: "5. Ground No. 1 relate to issue of notice u/s. 148 of the Act without fresh tangible material, without independent application of mind and without having valid reason. It is to note that the AO got information which was vital about the bogus long term capital gain / long term capital loss and modus operandi of entry providers. The information was provided by the Pr.DIT(Investigations), Kolkata after thorough enquiries and investigations. The AO during the course of assessment proceedings the appellant was summoned u/s. 131 of the Act wherein she was not able to show any knowledge of the penny stock company its financial position or what are the activities of the company. Assessing Officer sought to reopen assessment in case of appellant on ground that appellant, during relevant period had purchased shares in the company ESSAR India at very low price and after that, price of these shares had risen phenomenally and they were sold at high price and in process, appellant had claimed long term capital gains. The Assessing Officer based on the information arrived at the reason that there had been price rigging and man....
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....ed in the absolute absence of any financial fundamental * * By selling his shares to entities which do not even exist and are of no means and could not have bought the shares from their own funds * Despite SEBI, the domain regulator finding that there was price rigging and manipulation in trading of the scrip * Assessee investing in limited scrips mentioned above whose financials were not strong. * Assessee not being a regular investor in Market." 8. In our opinion, the Assessing Officer had sufficient material at his command to form a belief that the income chargeable to tax has escaped assessment. There is a clear Officer and his link between the information available with the Assessing formation of belief that the income chargeable to tax has escaped assessment. 5.1 The decision of the Hon'ble High Court of Rajasthan is squarely applicable to the facts of the case under consideration. Further, reliance is also placed on the recent decision of Hon'ble High Court of Delhi in the case of Saroj Bhatia v. Principal Commissioner of Income- tax [2022] 145 taxmann.com 237 (Delhi). Respectfully, following the same, the Ground ....
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....tform and without any awareness of the corresponding buyer. It was further submitted that share price movement might be as a result of many factors including market sentiments, liquidity position of the market, general economic scenario etc. along with the fundamentals of the company. The assessee also relied on no. of decisions, which have been reproduced by the Ld. CIT(A) in the impugned order. 3.3. The Ld. CIT(A) however, noted that firstly, the prices of the stock of Essar (india) Ltd were nowhere linked to the financial of the company. Secondly, there had been price rigging and manipulation in the trading of scrip of Essar (India) Ltd and thirdly the assessee not being a regular investor and had earned long-term capital gain by investing in unknown company. The Ld. CIT(A) relied on the decision of the Hon'ble Calcutta High Court in the case of PCIT Vs Swati Bajaj (2022) 139 taxmann.com 352(Calcutta) and upheld the addition of Rs. 2,30,01,500/- as unexplained cash credit under section 68 of the Act and addition of Rs.5,75,037/- for estimated commission at the rate of 2.5% of sale value of the shares of Essar (India) Ltd as unexplained expenditure in terms of section 69C ....
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....se of the both is to reduce the tax liability of the assessee. 3. Assessee is one of the beneficiaries as per the information provided on ITD system. The assessee has entered in the transactions of shares and securities of Essar (India) Ltd. during F.Y. 2012-13 and earn bogus LTCG / STCL amounting to Rs.2,30,01,500/- during the A.Y.2013-14. On perusal of the return of income, it is seen that the assessee has not offered the income related to the said transactions in his return of income for A.Y. 2013-14. 5. In view of above, I have reason to believe that income chargeable to tax to the extent of Rs. 2,30,01,500/- has escaped assessment for A. Y. 2013-14 in the case of the assessee within the meaning of section 147 of the I. T. Act, 1961. 6. Therefore notice us. 148 of the I.T. Act, 1961 may be issued if statutory approval by the Jt. Commissioner of Income Tax, -25(1), Mumbai is accorded." 5.1 Firstly, We find that Hon'ble Supreme Court in the case of ACIT vs Rajesh Jhaveri stock brokers (p) ltd (2007) 161 Taxman 316(SC) has held that for reopening of the assessment, there should be a relevant material, on which a reasonable person could make requis....
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....hat the petitioner had entered into the fictitious transactions and without carrying out any further investigation or an independent assessment connecting the petitioner to the particular transaction specified in the information. But in the case in hand, the assessment has been reopened on the basis of extensive investigation carried out by the Principal Director of Income-tax (investigation) having connection with the transaction carried out by the assessee. The learned CIT(A) has relied on the decision of Hon'ble High Court of Rajasthan in the case of Jawari lal Lunia (supra), wherein the assessment was reopened in similar circumstances. In view of above, we do not find any infirmity in the order of the Ld. CIT(A) and accordingly we uphold the finding of the Ld. CIT(A) on the issue in dispute. The ground No. one of the appeal of the assessee is accordingly rejected. 6. The ground nos. 2 to 7 of the appeal are related to merit of the addition made under section 68 of the Act amounting to Rs.2,30,01,500 and addition made under section 69C amounting to Rs.5,75,037/-. The learned counsel submitted that assessee has discharged its onus under section 68 and section 69C of the Ac....
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....rranged by the operators were available for purchase online. The term 'Penny stocks' is prevalent in global security market or western market, which refers to shares of small public companies that trade for less than one dollar per share, which further revised to include shares having value upto 5 dollars. The Cambridge business dictionary has defined the penny stock as a share with a very low value because it is considered a high-risk investment, for example in a company that is small, little known, or not very successful. The Hon'ble High Court of Calcutta in the case of Swati bajaj (supra) in para 100 has observed that 'Penny' stocks are shares that trade at a very low price, have very low market capitalization, are mostly illiquid, and are usually listed on a smaller exchange. Penny stocks in the Indian stock market can have prices below Rs 10/- or sometimes even upto Rs. 20/-. Those stocks are very speculative in nature and are considered highly risky because of lack of liquidity, smaller number of shareholders, and limited disclosure of information. 8.1 The investigation carried out by the Investigation wing of Income-tax Department, Kolkatta has referr....
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....tment of shares in preferential issue by dated 26/05/2011. Regarding the person who advised for purchase of the shares, the assessee in a statement recorded before the Assessing Officer submitted that he came to know the shares through his brother. The relevant statement, available on paper book page 81, is reproduced as under: "Q.14 Did anyone give advice regarding sell/purchase of shares? If so, How do you decide on the advice? Ans. I don't trade in shares. Q.15 Whom do you contact in case of any suggestions regarding sell/ purchase of shares? How do you know that person? What makes him qualified to advice you on the sell/ purchase of these shares? Ans. On account of religious restrictions I don't purchase or sell shares anymore. Q.16 How have you been allotted/ purchased these shares? Ans. I purchased these shares through preferential allotment. Q.17 Please state what does it mean by preferential allotment? How did you come to know about this term and when? Ans. A think it is an approved mechanism of SEBI for purchasing shares. Q.18 Did somebody contact you for preferential allotment in the ....
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....ne on advice of my brother. I did not make any attempt to contact company directors. Q.30 Did you receive quarterly performance statistics of the company from time to time? Ans. Yes, the post kept on coming. However, I never used to study them. Q.31 How often did you monitor the stock of the company in the time periods? Ans. No active monitoring was done." 8.3 We find that Hon'ble High Court of Calcutta in the case of Sawti bajaj (supra) has in para 99 of their order observed that the assessee cannot be heard to say that they had blindly followed advice of third-party and made the investment whereas selection of the shares to be purchased is a very complex issue and it requires personal knowledge and expertise as investment is not in a mutual fund. The Hon'ble High Court observed that in this background the human probability would assume significance. 8.4 In the case in hand, also the assessee invested in the shares of Essar (india) ltd for the first time without any knowledge of the share market. It is also not known how the assessee invested in a company situated at Kolkatta without carrying out any financial analysis of the compa....