Sandeep Gupta vs ITO, Ward-2(3)

“…..9. Ground No. 4 relates to addition u/s 68 made by the AO on account of bogus claim of LTCG.

10.

I have perused the written sub missions filed by the Ld. AR of the appellant as well as the order of AO. Before getting into the facts of the case, it's important to understand the broader concepts and the context of transactions in penny stocks. There is no doubt about the modus operandi of the penny stocks in general. In an economy where, unaccounted income is a big menace, there are always efforts by the tax evaders to bring their unaccounted income back to their books of account without paying any tax on the same. Routing the unaccounted income back to the books of account disguised as long-term capital gain is one of such methods widely used by the tax evaders since the introduction of section 10(38) of the Income Tax Act, 1961 with effect from 01.04.2005 which totally exempted the long-term capital gain on shares without any kind of condition other than that the shares should be transacted through recognized stock exchange and that securities transaction tax should be chargeable on such sale. The shares on which this LTCG is shown are usually the Penny Stocks whose prices can be easily manipulated by few unscrupulous brokers in connivance with entry operators to provide the beneficiaries with tax exempt long-term capital gain/short term capital loss. 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 and this helps the operator to keep a control on the price movement of the shares. The method is most prevalent and perhaps also one of the most organized ones to convert the unexplained money to the accounted income without paying any tax on the same.

11.

Now coming back to the facts of the instant case, as per the appellant, he had purchased 13200 shares of M/s Basukinath Coal Pvt. Ltd. offline in cash for Rs.2,01,102/- during the F.Y. 2005-06, however, no proof for purchase of these shares was submitted to the AO. The appellant filed copy of order of Hon'ble High Court of Kolkata, dated 06.01.2006 regarding merger of M/s Basukinath Coal Pvt. Ltd. with M/s Blue Print Securities Ltd. The appellant sold 43600 shares of M/s Blue Prints Securities for a total of Rs. 1,32,20,636/-in parts during the period 21.05.2008 to 26.06.2008 through stock exchange with payment of ST after getting these shares dematerialized on 05.02.2008. These facts have been discussed in detail by the AO in the assessment order. After thoroughly perusing the assessment order framed by the AO, I find that all the relevant issues have been addressed by the AO in the assessment order. However, before I conclude it shall be pertinent to point out the following issues:

a)

During the assessment proceedings, the appellant was confronted with all the material available with the AO. However, he failed to provide any proof of purchase of shares of M/s Basukinath Coal Pvt. Ltd.

b)

It has been established that M/s Blue Print Securities Ltd. is a paper concern controlled and managed by Sh. Parveen Aggarwal (an established entry operator) from Kolkata.

c)

The entities to whom the shares are sold by the appellant have also been found to be dummy concern controlled and managed by Kolkata based entry operators.

d)

The financials of M/s Blue Print Securities Ltd. reveal that movement of the price of its scrip is abrupt and not based upon any realistic parameter.

e)

During the appellate proceedings, the appellant has failed to counter the observations and facts cited by the AO in para 8 of the assessment order.

12.

It shall also be pertinent to point out that the issue of penny stock and bogus LTCG is a relatively new issue and there are not many judgements on this issue. However, there are some judicial decisions in favor of revenue. In the case of Sanjay imalchand Jain L/H Shantidevi Bimalchand Jain Vs ITO Ward-4(2), Nagpur (I.T.A.No. 61/Nag/2013). The Hon'ble ITAT, Nagpur found and held as under:

The facts of the case clearly indicate that the assessee has indulged in penny stock transaction. The assessee is a senior citizen. On purported advice of an Income-tax Consultant, she purchased shares of two penny stock Calcutta based companies at Rs.5.50 per share and Rs.4/-per share respectively in 2003. Both the companies had no standing and the AO found their existence of dubious characters. Both Purportedly merged with other company, namely, Khoobsuret Ltd. and the assessee received shares in Khoobsurat Ltd. in lieu of her shares in earlier companies. The assessee was able to sell the shares at the price of Rs.486.55 and R.485.65 respectively in 2005. The purchase by the assessee of shares of two unknown companies whose details were not at all known by the assessee can by no stretch of imagination be said to be an investment transaction. The company whose shares rose from Rs.5/- to Rs.485/- within extremely short span has no worthwhile position and balance sheet and is not at all dividend paying company. The broker company through which the shares were sold did not respond to AO's letter regarding the names and address and bank account of the person who purchased the shares sold by the assessee. In these circumstances it is a clear case where the assessee had indulged in bogus and dubious share transaction meant to account for the bogus and undisclosed income in the garb of long term capital gain.

7.

In this regard I may gainfully refer to the decision of Hon'ble jurisdictional High Court in the case of Major Metals Ltd. vs. Union of India and others in Writ Petition No. 397 of 2011 vide order dated 22nd February, 2012. The Hon'ble jurisdictional High Court in this case has held that a company cannot command disproportionate and huge share premium and such receipt of bogus share application money even though through banking channel can be held to be assessee's undisclosed income received in the garb of unjustified share application money. In the present case I find that there is no justification whatsoever that the shares of an unknown company of Rs.5/- can be sold within two years' time at Rs.485/-without there being any reason on record. This unexplained spurt in the value of unknown company shares is beyond preponderance of probability. It has been held by Hon'ble Apex Court in the case of Durga Prasad Mor and Sumati Dayal that the test of human probabilities have also to be applied by the authorities below. In the case of Sumati Dayal 214ITR801, it was held that during the year 1970-71 (pertaining to the assessment year 1971-72) between April 6, 1970, and March 20, 1971, the appellant claims to have won in horse race a total amount of Rs.3,11,831/- on 13 occasions out of which ten winnings were from jackpots and three were from treble events. Similarly in the year 1971-72, the appellant won races on two occasions and both times the winning were from a jackpot. These receipts were tested on the touch stone of human probability and it was found that apparent was not real. That it was contrary to statistical theory and experience of the frequencies and probabilities. The exceptional luck enjoyed by the assessee was held to be beyond preponderance of probability. Hence the Hon'ble Apex Court has affirmed the view that it would not be unreasonable to infer that the appellant had not really participated in any of the races except to the extent of purchasing the winning tickets after the events presumably with unaccounted funds.

8.

When the present case is examined on the touch stone of above case law, it is clear that these transactions of the assessee can by no stretch of imagination be considered as investment transactions. They are only make-believe transaction. Hence, I do not find any infirmity in the revenue taxing

the receipt in this regard. 9. The entire amount of the so-called receipt of share sales could well also be treated as unexplained credit u/s 68 of the I.T. Act as it has all the ingredients of attracting the rigours of the said section. Section 68 of the I.T. Act provides that where any sum is found credited in the books of the assessee maintained for any previous year and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not in the opinion of the AO satisfactory, the sum so credited may be charged to incometaxas income of the assessee of that year. In the present case the assessee's explanation that the said receipt is on account of investment in shares whereby share of Rs.5/- of unknown company has jumped to Rs.485/- in no time has been totally rejected by the authorities below. The assessee has not at all been able to adduce cogent evidences in this regard. There is no economic or financial justification for the sale price of these shares. The so called purchaser of these shares has not been identified despite efforts of the AO. The broker company through which shares were sold did not respond to queries in this regard. Hence the fantastic sale price realisation is not at all humanly probably, as there is no economic or financial basis, that o share of little known company would jump from Rs. 5/- to 485/-, In these circumstances, I do not find any infirmity in the orders of the authorities below. Accordingly, I affirm the same and decide the issue against the assessee.

13.

Subsequently, Hon'ble High Court, Bombay also decided this case in favour of the revenue. In Sanjay Bimalchand Jain L/H ShantideviBimalchand Jain Vs PCIT (ITA No.18/2017) Bombay High Court (Nagpur Bench) 2017-LL-0410-80 (date of order 10.04.2017) held:The assessee had purchased shares of two penny stocks of Kolkata based companies i.e.. 8000 shares at the rate of Rs.5.50 per share on 08.08.2003 and 4000 shares at the rate of Rs.4/per share on 05.08.2003. The assessee sold 2200 shares at an exorbitant rate of Rs.486.55 per share on 07.06.2005 and 800 shares on 20.06.2005 at the rate of Rs.485.65. the authorities held that the assessee had not tendered cogent evidence to explain as to how the shares in an unknown company worth Rs.5/had jumped to Rs.485/in no time. Addition confirmed.

14.

Thus, keeping in view the findings of Hon'ble ITAT, Nagpur and the decision of Hon'ble ITAT, Bombay in the above cited case, it has been understood that firstly, transactions in the nature of purchase of stocks of companies with no credentials cannot be treated as investment transaction. Secondly, there is no economic or financial justification for the sale price of these stocks. Therefore, in such circumstances, it can be safely educed that provisions of section 10(38) are being misused by tax evaders through bogus claims of LTCG and thereby converting their unexplained money to the accounted income.

15.

Followings judgements related to claim of bogus LTCG on penny stocks are also relevant to the instant case:

Chandan Gupta Vs CIT (2015] 54 taxmann.com 10 (Punjab & Haryana)/(2015] 229 Taxman 173 Hon'ble Punjab & Haryana High Court held that where assessee could not explain receipt of alleged share transactions profits credited in his bank accounts, then sale proceeds had to be added as income of assessee under section 68.

Usha Chandresh Shah Vs ITO [2014-TIOL-1459-ITAT-MUM] where Hon'ble ITAT Mumbai held that in this case the assessee could not produce the copies of share certificates and copies of share transfer forms. The transaction of purchase of shares could not be cross verified. The shares of the company was declared as "Penny Stock" by SEBI and the broker SanjuKabra, through whom the shares were sold by the assessee was indicted for manipulating the prices of penny stock shares. The tax authorities have rightly applied the test of human probabilities to examine the claim of purchase and sale of shares made by the assessee. The CIT(A) was justified in confirming the order of the AO by applying the test of human probabilities.

16.

The facts of the above cases squarely apply to the case of the appellant. Thus, in view of the facts of the case as enumerated by me in the previous pages and by the AO in the assessment order and on the strength of the above cited judicial decisions, 1 firmly conclude that the AO has rightly added amount of Rs.1,31,50,274/- to the income of the appellant treating the same as income of the assessee from unexplained credit u/s 68 of the Income Tax Act, 1961.

17.

At this juncture, it is pertinent to mention that in numerous judicial decisions it has been held that it is not necessary to establish that the money came back to the books of the assessee as 'entry' actually emanated from his coffers.

18.

This issue has been decided by the Hon'ble Delhi High Court in a recent decision dated 20.07.2012 in the case of Commissioner of Income-tax vs Independent Media (P.) Ltd.210 TAXMANN 14(Delhi)(2012). In this case, it was alleged by the Investigation Wing that the assessee-company received share capital from those persons who had given statements before Investigation Wing that they were entry providers giving accommodation entries after receiving cash and after charging their commission. Assessee furnished PAN of subscriber-companies, share application forms, board resolutions, copy of bank statement, pay orders, confirmation from subscribers, their income-tax returns, copies of their balance sheets, etc. However, it was held by the Hon. Court that if explanation adduced by assessee with regard to identity and creditworthiness of subscriber-companies and genuineness of transactions was not acceptable for valid reasons, Assessing Officer could make addition under Section 68 and for that purpose he would not be under any duty to further show or establish that monies emanated from coffers of assessee-company. The Hon. Court further observed that;

"We are unable to uphold the view of the Tribunal that it is incumbent upon the Assessing Officer, on the facts and circumstances of the case, to establish with the help of material on record that the share monies had come or emanated from the assessee's coffers. Section 68 of the Act casts no such burden upon the Assessing Officer. This aspect has been considered more than 50 years back by the Supreme Court in the case of A Govindarajulu Mudaliar v.CIT (1958] 34 ITR 807 where precisely the same argument was advanced before the Supreme Court on behalf of assessee. The argument was rejected by the Court."

19.

The Hon'ble Court further referred that in the above case, Shri Venkataramalyer, J. speaking for the Court observed as under: -

"Now the contention of the appellant is that assuming that he had failed to establish the case put forward by him, it does not follow as a matter of law that the amounts in question were income received or accrued during the previous year, that it was the duty of the Department to adduce evidence to show from what source the income was derived and why it should be treated as concealed income. In the absence of such evidence, it is argued, the finding is erroneous. We are unable to agree. Whether a receipt is to be treated as income or not, must depend very largely of the facts and circumstances of each case. In the present case the receipts are shown in the account books of a firm of which the appellant and Govindaswamy Mudaliar were partners. When he was called upon to give explanation he put forward two explanations, one being a gift of Rs. 80,000/-and the other being receipt of Rs. 42,000/-from business of which he claimed to be the real owner. When both these explanations were rejected, as they have been it was clearly upon to the Income-tax Officer to hold that the income must be concealed income. There is ample authority for the position that where an assessee fails to prove satisfactorily the source and nature of certain amount of cash received during the accounting year, the Income-tax Officer is entitled to draw the inference that the receipt are of an assessable nature. The conclusion to which the Appellate Tribunal came appears to us to be amply warranted by the facts of the case. There is no ground for interfering with that finding, and these appeals are accordingly dismissed with costs."

20.

It shall be not out of place to examine the facts of the case from the perspective of "Test of human probability." In the cases of 'bogus long-term capital gain' from 'penny stocks' the theory of preponderance of human probability as pronounced by the Hon. Apex Court in the cases of CIT v. Durga Prasad More (1971] 82 ITR 540 and Sumati Dayal v. CIT (1995] 80 Taxman 89/214 ITR 801 (SC) is applicable. Hon. Supreme Court in CIT v. Durga Prasad More 1971] 82 ITR 540, at pages 545-547 made a reference to the test of human probabilities in the following fact situation: -

"...Now we shall proceed to examine the validity of those grounds that appealed to the learned judges. It is true that an apparent must be considered real until it is shown that there are reasons to believe that the apparent is not the real. In a case of the present kind a party who relies on a recital in a deed has to establish the truth of those recitals, otherwise it will be very easy to make self-serving statements in documents either executed or taken by a party and rely on those recitals. If all that an assessee who wants to evade tax is to have some recitals made in a document either executed by him or executed in his favour then the door will be left wide-open to evade tax. A little probing was sufficient in the present case to show that the apparent was not the real. The taxing authorities were not required to put on blinkers while looking at the documents produced before them. They were entitled to look into the surrounding circumstances to find out the reality of the recitals made in those documents.

Now, coming to the question of of onus, the law does not prescribe any quantitative test to find out whether the onus in a particular case has been discharged or not. It all depends on the facts and circumstances of each case. In some cases, the onus may be heavy whereas, in others, it may be nominal. There is nothing rigid about it. Herein the assessee was receiving some income. He says that it is not his income but his wife's income. His wife is supposed to have had two lakhs of rupees neither deposited in banks nor advanced to others but safely kept in her father's safe. Assessee is unable to say from what source she built-up that amount. Two lakhs before the year 1940 was undoubtedly a big sum. It was said that the said amount was just left in the hands of the father-in-law of the assessee. The Tribunal disbelieved the story, which is, prima facie, a fantastic story. It is a story that does not accord with human probabilities. It is strange that the High Court found fault with the Tribunal for not swallowing that story. If that story is found to be unbelievable as the Tribunal has found, and in our opinion rightly, then the position remains that the consideration for the sale proceeded from the assessee and, therefore, it must be assumed to be his money. It is surprising that the High Court has found fault with the Income-tax Officer for not examining the wife and the father-in-law of the assessee for proving the department's case. All that we can say is that the High Court has ignored the facts of life. It is unfortunate that the High Court has taken a superficial view of the onus that lay on the department.

*..Science has not yet invented any instrument to test the reliability of the evidence placed before a Court or Tribunal. Therefore, the Courts and Tribunals have to judge the evidence before them by applying the test of human probabilities. Human minds may differ as to the reliability of a piece of evidence. But, in that sphere, the decision of the final fact-finding authority is made conclusive by law." (p. 545)

21.

The test of human probabilities has been emphasized in yet another decision of the Hon. Supreme Court in the case of Sumati Dayal v. CIT [1995] 80 Taxman 89/214 ITR 801(SC). It was held in this case that in view of Section 68, where any sum is found credited in the books of the assessee for any previous year, the same may be charged to income-tax as the income of the assessee of the previous year if the explanation offered by the assessee about the nature and source thereof, is, in the opinion of the Assessing Officer, not satisfactory. In such case there is prima facie evidence against the assessee, viz., the receipt of money, and if he fails to rebut the same, the said evidence being unrebutted can be used against him by holding that it is a receipt of an income nature.

22.

The reason this decision is so important while dealing with cases of 'bogus capital gain, is because it acknowledges that what is apparent may not be real and test of human probabilities has to be applied to understand if the apparent is real. Once the transaction fails to withstand the test of human probabilities, it has to be taken as an in-genuine transaction even if documentary evidences suggest otherwise. In this case, the assessee, a dealer in art pieces, had shown income from horse-race winnings in two consecutive accounting years. The assessing officer did not accept this and made addition under Section 68 which was confirmed by the Appellate Assistant Commissioner. Thereafter the assessee approached the Settlement Commission. The Settlement Commission also took the view that the claim of winnings in races was false and what were passed off as such winnings really represented the appellant's taxable income from some undisclosed sources. Hon. Supreme Court also agreed with the Settlement Commission saying that after considering the surrounding circumstances and applying the test of human probabilities the Commission had rightly concluded that the assessee's claim about the amount being her winnings from races was not genuine.

23.

In one of its special kinds, the test of human probability makes an interesting reading in an order of the jurisdictional Hon'ble High Court in the case of Som Nath Maini v. CIT [2008] 306 ITR 414 (Punj. &Har.). In this case, the assessee in his return declared loss from sale of gold jewellery and also declared a short--term capital gain from sale of shares so that the two almost match each other. This simple tax planning became ineffective after the Assessing Officer disbelieved the astronomical share price increase applying the test of human probability. The Assessing Officer observed that short-term capital gains were not genuine in as much as the assessee had purchased 45000 shares of Ankur International Ltd. at varying rates from Rs. 2.06 to Rs. 3.1 per share and sold them within a short span of six-seven months at the rate varying from Rs. 47.75 paisa to Rs. 55. Even though the two respective transactions for purchase and sale of shares were routed through two different brokers, yet the Assessing Officer did not believe the astronomical rise in share price of a company from Rs. 3 to Rs. 55 in a short-term. The assessee lost its case before the Tribunal. Confirming the order of the Tribunal, the Punjab and Haryana High Court held that the burden of proving that income is subject to tax is on the revenue but, on the facts, to show that the transaction is genuine, burden is primarily on the assessee. As per the Court, the Assessing Officer is to apply the test of human probabilities for deciding genuineness or otherwise of a particular transaction. Mere leading of the evidence that the transaction was genuine, cannot be conclusive. Genuineness of the transaction can be rejected in case the assessee leads evidence which is not trustworthy, and the department does not lead any evidence on such an issue.

24.

Thus, it is pertinent to also examine the facts of the case and the submission of the appellant from the perspective of Human Probabilities also. As per the appellant, he had purchased shares for Rs. 2,01,102/- in the F.Y. 2005-06 and sold them for a total of Rs.1,32,20,636/-in F.Y. 2008-09. Once the entire transaction is viewed from the perspective of human probabilities it defiantly fails on all counts.

25.

Thus, keeping in view the entire facts of the case with reasoning set out above and on the strength of the judicial decisions discussed by me in the previous pages, have no hesitation in upholding the order of the AO and dismissing the appeal of the appellant. With these comments, addition of Rs.1,31,50,274/- is confirmed and Ground No. 4 of the appeal of the appellant is dismissed.

26.

Ground No. 5. This ground deals with the fact that the AO has sought clarifications after the case has been discussed with the appellant. The AO is free to see clarifications from the appellant before the final assessment order u/s 143(3) is passed. It is not the case of the appellant that clarifications have been sought from the appellant after the order u/s 143(3) has been passed by the AO. Thus in view of these facts I find no merits in this ground of the appellant and the same is dismissed.”