Rajesh Gupta HUF vs ACIT

“7.

We have considered the vial submissions of both the parties and perused the material available on record. It is not in dispute that assessee has purchased preferential shares in preceding A.Y. 2014-2015 in July, 2013. The A.O. did not doubt the purchase of shares by assessee through banking channel. The assessee, thereafter, credited these shares to the Demat Account in November, 2013 i.e., in preceding assessment year. According to the impugned orders the shares were locked in by the Order of the SEBI till 15.10.2014 and thereafter the assessee sold the shares through the registered broker of the BSE at the BSE. The assessee paid STT on these transactions. The shares sold through recognized stock exchange through the SEBI registered stock brokers which have not been doubted by the A.O. The sale proceeds were received through registered broker of the SEBI through banking channel and BSE has issued stamped contract note to show that transactions were traded online at BSE. It is also not in dispute that assessee has been regularly trading in shares in earlier years as well as in assessment year under appeal not only in respect of the impugned transactions, but, also traded in respect of other unlisted companies. Thus, the assessee is regularly trading in the shares. Whatever inquiry was conducted at Kolkata at the back of assessee was not confronted to assessee and assessee was never allowed to cross-examine to such statement, if recorded during the course of investigation by the Kolkata Wing. The statement recorded of Shri Devesh Upadhayaya and others have not been confronted to the assessee and no right of cross-examination have been given. Even it is not clarified how the statement of Shri Devesh Upadhayaya or other were incriminating in nature against the interest of assessee because they never made any allegation against the assessee. Therefore, such evidence would not be relevant for the purpose of deciding the case of assessee. The assessee admittedly filed copy of the bank statement, contract note for sale of shares, documents of purchase of shares and Demat Account to show assessee genuinely entered into transaction which have not been doubted by the A.Ο. The A.O. merely suspected the transactions of the assessee because of the modus operandi of some of the brokers of penny stock companies who indulge in sham transactions. The A.O. did not make any independent inquiry into the matter. No evidence was collected against the assessee directly or indirectly for her involvement in sham transactions. The A.O. did not bring any material on record to prove as to how the assessee was involved in sham transactions. The A.O. merely proceeded on the basis of the low financials of the company for low purchase price to come to the accommodation conclusion that transactions were entries and thus sham transactions. The conclusion drawn by the A.O. that there were conversion of the unaccounted money by taking sham long term capital gains in this manner is entirely suspicion of the A.Ο. which is unsupported by any material on record. The assessee has explained before the authorities below that increase in the share price of a particular company on the stock exchange is not merely dependent on its financials. There are many reasons and that it is not possible to sale/purchase the shares of any company on the stock exchange in variance to the prevailing market price at any point of time. Therefore, the mere fact that shares were sold on high price would not be a ground to allege that assessee has converted someone's unaccounted money through accommodation entry. The findings of the A.O. are merely based on conjectures and surmises without bringing any evidence on record. There is no other basis to doubt the transaction of the assessee for earning of long term capital gains which is exempt under Law. The ITAT, Delhi G-Bench, Delhi in the case of Shri Tapas Kumar Mallick, West Delhi vs., ACIT, Circle-32(1), New Delhi in ITA.No.8142/Del./2018 for the A.Y. 2015-2016 vide Order Dated 19.03.2021 considering identical issue in the light of recent Judgment of the Hon'ble Delhi High Court in the case of PCIT vs., Krishna Devi & Others Dated 15.01.2021 in paras 17 to 24 held as under:

"17.

A perusal of the assessment order clearly shows that the Assessing Officer was carried away by the report of the Investigation Wing and the exparte Ad-Interim order of the SEBI. It can be seen that the entire assessment order has been framed by the Assessing Officer without conducting any enquiry from the relevant parties or independent source or evidence but has merely relied upon the SEBI order without conducting any independent and separate enquiry in the case of the appellant.

18.

It is provided u/s 142(2) of the Act that for the purpose of obtaining full information in respect of income of loss of any person, the Assessing Officer may make such enquiry as he considers necessary.

19.

Similar facts were considered by the coordinate bench in the case of Smt. Karuna Garg ITA No. 1069 & 2772/DEL/2019, Smt Bindu Garg in ITA No. 1168 & 1169/DEL/2019, Smt Krishna Devi in ITA No. 1070/DEL/2019 and Har Dev Sahai Gupta in ITA No. 1264/DEL/2019. In these cases, the quarrel was in respect of scrip of M/s Esteem Bio Organic Food Processing Ltd, which is one of the four companies whose names are mentioned at Para 12 of this order.

20.

In these cases also since the exparte interim order of the SEBI dated 29.06.2015 has named 239 persons and names of the appellants did not find place in the said lists and on the given facts, all these appeals were decided in favour of the assessee and against the revenue and order of the coordinate bench has been upheld by the Hon'ble High Court of Delhi in ITA No. 125/2020, 130/2020 and 131/2020 vide order dated 15.01.2021. The relevant findings of the Hon'ble High Court of Delhi read as under:

"11.

On a perusal of the record, it is easily discernible that in the instant case, the AO had proceeded predominantly on the basis of the analysis of the financials of M/s Gold Line International Finvest Limited. His conclusion and findings against the Respondent are chiefly on the strength of the astounding 4849.2% jump in share prices of the aforesaid company within a span of two years, which is not supported by the financials. On an analysis of the data obtained from the websites, the AO observes that the quantum leap in the share price is not justified; the trade pattern of the aforesaid company did not move along with the sensex; and the financials of the company did not show any reason for the extraordinary performance of its stock. We have nothing adverse to comment on the above analysis, but are concerned with the axiomatic conclusion drawn by the AO that the Respondent had entered into an agreement to convert unaccounted money by claiming fictitious LTCG, which is exempt under Section 10(38), in a pre-planned manner to evade taxes. The AO extensively relied upon the search and survey operations conducted by the Investigation Wing of the Income Tax Department in Kolkata, Delhi, Mumbai and Ahmedabad on penny stocks, which sets out the modus operandi adopted in the business of providing entries of bogus LTCG. However, the reliance placed on the report, without further corroboration on the basis of cogent material, does not justify his conclusion that the transaction is bogus, sham and nothing other than a racket of accommodation entries. We do notice that the AO made an attempt to delve into the question of infusion of Respondent's unaccounted money, but he did not dig deeper. Notices issued under Sections 133(6)/131 of the Act were issued to M/s Gold Line International Finvest Limited, but nothing emerged from this effort. The payment for the shares in question was made by Sh. Salasar Trading Company. Notice was issued to this entity as well, but when the notices were returned unserved, the AO did not take the matter any further. He thereafter simply proceeded on the basis of the financials of the company to come to the conclusion that the transactions were accommodation entries, and thus, fictitious. The conclusion drawn by the AO, that there was an agreement to convert unaccounted money by taking fictitious LTCG in a pre-planned manner, is therefore entirely unsupported by any material on record. This finding is thus purely an assumption based on conjecture made by the AO. This flawed approach forms the reason for the learned ITAT to interfere with the findings of the lower tax authorities. The learned ITAT 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.

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 Order, we may only note that the said observations are general in nature and later in the order, the CIT(A) itself notes that the broker did not respond to the notices. Be that as it may, the CIT(A) has only approved the order of the AO, following the same reasoning, and relying upon the report of the Investigation Wing. Lastly, reliance placed by the Revenue on Suman Poddar v. ITO (supra) and Sumati Dayal v. CIT (supra) is of no assistance. Upon examining the judgment of Suman Poddar (supra) at length, we find that the decision therein was arrived at in light of the peculiar facts and circumstances demonstrated before the ITAT and the Court, such as, inter alia, lack of evidence produced by the Assessee therein to show actual sale of shares in that case. On such basis, the ITAT had returned the finding of fact against the Assessee, holding that the genuineness of share transaction was not established by him. However, this is quite different from the factual matrix at hand. Similarly, the case of Sumati Dayal v. CIT (supra) too turns on its own specific facts. The above-stated cases, thus, are of no assistance to the case sought to be canvassed by the Revenue.

13.

The learned ITAT, being the last fact-finding authority, on the basis of the evidence brought on record, has rightly come to the conclusion that the lower tax authorities are not able to sustain the addition without any cogent material on record. We thus find no perversity in the Impugned Order.

14.

In this view of the matter, no question of law, much less a substantial question of law arises for our consideration."

'Noticee nos. 2 and 3 (promoters of the Company) are directed to make a public offer through a merchant banker to acquire shares of the Company from public shareholders by paying them the value determined by the valuer in the manner prescribed in Regulation 23 of the SEBI (Delisting of Equity Shares) Regulations, 2009 and acquire the shares offered in response to the public offer, within three months from the date of this Order.

ii.

BSE to facilitate valuation of shares to be purchased as directed at (i) above, and compulsorily delist the Company, if the public shareholding reduces below the minimum level in view of aforesaid purchase.

iii.

The Noticee no. 1 is hereby restrained from accessing the securities market by issuing prospectus, offer document or advertisement soliciting money from the public in any manner for a period of 8 years.

iv.

Noticee no. 2 and 3 are hereby restrained from holding post of director, any managerial position or associating themselves in any capacity with any listed public company and with any public company which intends to raise money from the public, or with any intermediary registered with SEBI for a period of 3 years.

v.

The Noticees, as mentioned below are hereby restrained and prohibited from buying, selling or otherwise dealing in the securities market, directly or indirectly in any manner whatsoever manner, for the period specified in their respective columns:

"3.3

The Tribunal confirmed the findings of the CIT(A) insofar as, it held in favour of the assessee. Findings of the Tribunal indicate that the assumption of the AO that the transaction carried out by the assessee are similar to the modus operandi of penny stock was misplaced. The Tribunal on facts observed thus:

"11.1...On analyzing the facts of the present case, we note that the AO on one hand has alleged that the entire transaction was bogus but on the other hand the AO himself has allowed the cost of acquisition against the sale of shares, meaning thereby, the purchase of the shares has been admitted as genuine. The transactions of purchase and sales go hand in hand. In simple words, sales is not possible without having the purchases. Thus, once purchases has been admitted as genuine, then corresponding sales cannot be doubted until and unless some adverse materials are brought on record. As such, we note that the AO in the present case has taken contradictory stand. On one hand, the AO is treating the entire transaction as sham transaction and on the other hand he's allowing the benefit of the cost of acquisition for the shares while determining the bogus long term capital gain....

11.2

It was alleged by the AO that the price of the share of M/s Shree Nath Commercial & Finance Ltd., increased in a short period of time which is not in commensurate to the financial performance of the company. The rise in the price of the scripts of a company, having no financial base/ business activity /profitability certainly gives rise to the doubt about such increase in the price. But in our considered view, this cannot be a sole criterion for reaching to the conclusion that the bogus long-term capital gain was generated which is exempted under section 10(38) of the Act. Such observation during the assessment proceedings provides reasons to investigate the matter in detail and the same cannot take the place of the evidence. But in the case on hand, there was no finding that the enquiry conducted either by the SEBI or the stock exchange with respect to rigging up of share price of M/s Shree Nath Commercial & Finance Ltd. Similarly, there was no finding with subsequent market price of the impugned scrip. We also note that there was no dispute raised by the Revenue with respect to the following facts:

1 Shares were purchased through broker on recognized stock exchange.

2.

Purchase consideration of share was made through cheque.

3.

Share was duly dematerialized in D-mat account.

4.

Shares were sold through stock exchange after the payment of STT. The transactions have been confirmed by brokers.

5.

The payments were received through ECS in the D-mat account.

6.

Inflow of shares are reflected in D-mat account. Shares are transferred through D-mat account and buyer are not known to the assessee.

7.

There is no evidence that the assessee has paid cash to the buyer or the broker or any other entry provider for booking LTCG and share were purchased by the determined buyer.

4.

Hence, the Tribunal held, and in our opinion rightly so that there was no evidence available on record suggesting that the assessee or his broker was involved in rigging up of the price of the script of Mis Shree Nath Commercial & Finance Ltd. The assessee had acted in good faith. The Tribunal, therefore, correctly held that the Assessing Officer had acted only on assumption which was misconceived. The CIT(A) order dismissing the revenue's appeal was confirmed. "

Section 28(i)of the Income-tax Act, 1961 - Business loss/deduction - Allowable as (Bogus purchases) - Assessment year 2012-13 - Additions were made to income of assessee on account of bogus loss incurred in penny stock which were deleted by Tribunal - Revenue submitted that order of Tribunal was ex facie erroneous, illegal and perverse because Tribunal deleted additions without appreciating that transaction was pre-arranged as well as sham and was carried out through penny scrip company - However, Tribunal had observed in impugned order that assessee was continuously dealing in share trading of various shares/scrips and said fact was not disputed -Further, Tribunal had observed that scrip of VAS was not black listed by SEBI at relevant point of time - Tribunal had also considered order passed by SEBI and nowhere in said order, scrip of VAS was blacklisted or was penny stock or sham and bogus scrips/shares - Tribunal had also observed that entire transaction of purchase and sale of scrips was through Stock Exchanges, through authorized brokers and payments made to brokers were reflected in bank account - Tribunal had therefore opined that merely on conjecture and surmises, Assessing Officer could not make disallowance - High Court by impugned order held that in view of observations made by Tribunal, issue involved was purely a question of fact, and no question of law, much less, substantial question of law arose for consideration - Whether since there was gross delay of 224 days in filing this special leave petition and reasons assigned for condonation of delay were not sufficient, application seeking condonation of delay was to be dismissed and consequently, special leave petition was to be dismissed - Held, yes [Paras 1 and 2] [In favour of assessee]

“10.

It is noted that the assesses has established its claim before the lower authorities, based upon the documents namely bank details, the purchase/sell documents, the details of the D-Mat Account etc. and that the appellant held the shares for a period of more than one year and sold them through recognized stock exchange and paid STT. Meaning thereby that the assesse has complied all the conditions of section 10(38) of Income Tax Act, 1961 to claim, long term capital gain of Rs. 65,01,278/-earned by the appellant was exempt as per provisions of section 10(38) of the Income Tax Act, 1961 and same has been duly declared in the income tax return of the assessee.

11.

From the record, it is found that the addition made by the AO and upheld by the CIT(A) was solely based on the premise of alleged price rigging in the PMC Fin Corp script. However, this allegation is negated by the Securities Appellate Tribunal Mumbai, in its order dated August 28, 2023, by explicitly dismissed these allegations. The tribunal's ruling stated that there is no supporting material on record to substantiate the accusation of the company's involvement in price inflation. Moreover, the order emphasized that purchasing shares from the stock exchange platform is not unlawful, and continuous buying of shares at increased prices does not contravene any provisions of SEBI laws, particularly the PFUTP Regulations. (APB, Pgs. 76-88).

"Section 10(38) of the Income-tax Act, 1961-Capital gains Income arising from transfer of long term securities (Share dealings) - Assessment year 2013-14-Assessee had sold shares of SNCFL and earned long-term capital gains Assessing Officer issued a show cause notice alleging that transaction was a penny stock deal aimed at illegitimately claiming long-term capital gain exemption under section 10(38) -Assessing Officer treated purchase as bogus and added it to total income Commissioner (Appeals) examined all relevant documents provided by assessee, including bills of purchases, broker account copies, bills for sales, and bank statements and held that purchases were made through a recognized broker via cheque, establishing their genuineness and, thus, he directed Assessing Officer to delete addition of LTCG claimed as exempt under section 10(38) Tribunal upheld Commissioner (Appeals) decision stating that there was no evidence implicating assessee or broker in any wrongdoing related to SNCFL script - Whether in view of concurrent findings of fact that there was no evidence available on record suggesting that assessee or his broker was involved in rigging up of price of script of SNCFL, addition on account of LTCG claimed as exempt under section 10(38) had rightly been deleted - Held, yes [Paras 4 and 5] [In favour of assessee]"

"Section 68, read with section 10(38), of the Income-tax Act, 1961 Assessment year 2005-06 Assessee had claimed sale proceeds of shares as long-term capital gain (LTCG) exemption - However, Assessing Officer held that scrip was a penny stock and thus, he made addition of same under section 68 -Commissioner (Appeals) observed that shares were purchased on floor of stock exchange and not from broker, payment was made through banking channel, deliveries were taken in DEMAT account where shares remained for more than one year, contract notes were issued and shares were also sold on stock exchange and, accordingly, held that there was no reason to add capital gains as unexplained cash credit under section 68-Whether Tribunal had rightly concluded that there was no merit in appeal against Commissioner (Appeals) order Held, yes [Para 4) [In favour of assessee]"

15.

Recently, the Hon'ble Apex Court in the case of Pr. CIT v. Dipansu Mohapatra [2024] 160 taxmann.com 289/298 Taxman 194/463 ITR 681 (SC) dismissed against order of High Court that where assessee provided all details of purchase and sales of shares to AO along with contract notes for purchase and sale, demat account and bank statement and, furthermore no incriminating materials were found during survey conducted in premises of assessee, AO could not deny claim under section 10(38) merely by relying on statements of accommodation entry providers which were recorded much before date of survey.

16.

The Judgement of Hon'ble Kolcutta High Court in the case Pr. CIT v. Swati Bajaj [2022] 139 taxmann.com 352/288 Taxman 403/446 ITR 56 (Calcutta), relied by the department is not applicable to the facts of the present case and same is distinguished as under:

(a)

In the case of Swati Bajaj, the Script was of that Surabhi Chemicals and Investment Limited for a duration of 17 months whereas in the present case the script was of PMC Fin Corp. Ltd. being for duration of 4 Years. (APB, Pg. 176, Para 7)

(b)

In the case of Swati Bajaj, Investigation report was Available in public domain and substantiate portion has been reproduced in the order whereas in this case it was neither available nor provided to the appellant.

(c)

In the case of Swati Bajaj, Survey was conducted on broking entities and the brokers admitted that accommodation entries were provided but in the present case, the assessee has purchased the shares from RELIGARE SECURITIES Ltd. and there was no such survey or admission by the broker.

(d)

Number of beneficiaries Identified but No such identification provided to assessee (APB, Pg.83 para 9.6)

(e)

Price Rigging was established that Surabhi Chemical scrip were involved in artificial rigging of price to provide bogus LTCG whereas in the instant case, the order of adjudicating authority of SEBI was challenged before Security Appellate Tribunal Mumbai and it has been held by the Tribunal that buying shares from stock exchange is not a crime and does not violate any provisions of SEBI (APB, Pg 85, para 14)

17.

Considering the factual matrix of the case and judicial precedents, we hold that the decision of the Ld. CIT(A) is infirm and perverse to the fact on record. We hold that there was no reason to add capital gains as unexplained cash credit under section 68 of the Act. Accordingly, the addition of Rs. 66,56,020/- is deleted.”