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Exemption u/s 10(38) merits being allowed where assessee holds shares for more than 12 months; profits arising from their sale is taxable as LTCG: ITAT

2019-TIOL-1638-ITAT-KOL

IN THE INCOME TAX APPELLATE TRIBUNAL
BENCH ‘C’ KOLKATA

ITA No. 70/Kol/2019
Assessment Year: 2014-15

SMT ANITA AGARWAL
PAN NO:AEQPA8009M

Vs

INCOME TAX OFFICER
WARD – 34(3), KOLKATA

A T Varkey, JM & A L Saini, AM

Date of Hearing: June 10, 2019
Date of Decision: July 03, 2019

Appellant Rep by: Shri Subash Agarwal, Adv.
Respondent Rep by: 
Shri Satyajit Mondal, Addl. CIT, Sr. DR

Income Tax – Sections 10(38) & 69C

Keywords – Long term capital gain

The assessee had filed its return for the relevant AY. During the course of the assessment proceedings, the AO noted that the assessee has claimed exempt income u/s 10(38) by way of LTCG from sale of shares named M/s. KAFL through stock exchange. The AO in order to verify the genuineness of the claim, issued statutory notices u/s 142(1) etc. The AO after acknowledging receipt of the documents took aid of the report of the Investigation Wing relating to certain brokers misuse of stock exchange platform for sale of penny stocks to avoid legitimate taxes. Further, the AO noted that the assessee had purchased shares of M/s. Panchshul Marketing Ltd. which were demerged with shares of M/s. KAFL. However, the AO noted that the scrip of M/s. KAFL was suspended by SEBI for irregularly committed during transactions. Therefore, taking into consideration the department’s investigation report, SEBI action and lack of credentials of M/s. KAFL he was pleased to disallow the LTCG claim of the assessee and made an addition as undisclosed commission expenses u/s 69C. On appeal, the CIT(A) also confirmed the order of AO.

On appeal, the Tribunal held that,

Whether assessee is entitled for exemption u/s 10(38) if shares are held by him for more than 12 months and the profit arising out of it is to be assessed as LTCG – YES: ITAT

++ the AO / CIT(A) has not made any negative/adverse remarks or finding against the documents produced before the AO. However, they have brushed aside these documents and has relied heavily upon the general investigation report of the department, which has not found any wrong doing on the part of the assessee or her broker who sold the shares. Tribunal noted that the suspension by SEBI of transaction of scrips of M/s. KAFL has been later lifted. Therefore, in the light of the supporting documents the assessee’s claim for LTCG has to be allowed. Further placing reliance on the decision of the coordinate bench in the case of Manish Kumar Baid v. ACIT wherein the Tribunal held “….the transactions relating to LTCG were genuine and not the accommodation entries as alleged by the AO. Consequently the addition u/s 69C is hereby directed to be deleted….” respectfully following the order of the coordinate bench decision and the documents filed by the assessee this Tribunal allow the claim of LTCG of the assessee and delete the addition made u/s 69C of commission expenses;

++ further it is also to be noted in the present case the transaction of purchase of shares of M/s. Panchshul Marketing Ltd. took place directly between the parties and not through stock exchange. Therefore, the date of contract of sale as declared by the parties shall be treated as the date of transfer provided it is followed up by actual delivery of shares and the transfer deeds. According to the documents filed before the Tribunal since the actual delivery of shares took place along with transfer deeds/contract bills, so that date should be considered the date of transfer. Thus, Tribunal note that assessee held the shares of M/s. Panchshul on March 30, 2012 which was later merged with M/s. KAFL and scrips of M/s KAFL was sold on August 16, 2013 – August 28, 2013, so the assessee was holding the shares in question for more than 12 months. Therefore, the claim of assessee for LTCG is valid in the eyes of law.

Assessee’s appeal allowed

ORDER

Per: A T Varkey:

This is appeal preferred by the assessee against the order of Ld. CIT(A) – 10, Kolkata dated 26.12.2018 for Assessment Year 2014-15.

2. The main grievance of the assessee is against the action of the Ld. CIT(A) in confirming the addition of Rs. 15,25,000/- made by the AO invoking section 68 in respect of sale proceeds relating to sale scrips of M/s. Kailash Auto Finance Ltd. (KAFL) as well as against the confirmation of addition of Rs. 45,750/- made by AO on account of alleged commission expenses for earning the bogus Long Term Capital Gain.

3. Brief facts of the case as noted by the AO is that the assessee has claimed exempt income u/s 10(38) by way of Long Term Capital Gain from sale of shares named M/s. Kailash Auto Finance Ltd. (KAFL) through stock exchange. The AO in order to verify the genuineness of the claim, issued statutory notices u/s 142(1) etc. on the assessee pursuant to the same, the AR of the assessee appeared and filed copies of unaudited account, copy of bill of purchase of shares, contract notes for sale of shares, bank statements and the details of income from Long Term Capital Gain. The AO after acknowledging receipt of the aforesaid documents, however, took aid of the report of the Investigation Wing of the department relating to certain brokers misuse of stock exchange platform for sale of penny stocks to avoid legitimate taxes. The AO thereafter discussed about the investigation report wherein the name of 84 penny stock have been identified and dealt with. The AO discussed the modus operandi and states how the stocks after being bought for a very low price after being held for 12 months and thereafter the prices are artificially jacked up and sold with the assistance of certain unscrupulous brokers in stock exchange in a pre planned manner. According to the AO the SEBI after enquiry have taken note of this nefarious practice. Thereafter the AO issued a notice to the assessee dated 24.08.2016 therein the AO brings to the notice of the assessee his apprehensions about the assessee’s claim of LTCG and asked 21 questions which is reproduced in page 3 to 5 of his order. The AO acknowledges that the assessee replied to his questions but has answered in a general way to his 21 questions. The answer of the assessee has also been reproduced at page 5 of his order which is as under:

“We are submitting the following:

1.Bank statement of HDFC Bank account for the F.Y. 2013-14, Savings Account 00181000092536.

1. Transaction statement of depository account for F.Y. 2013-14 HDFC Bank Ltd. IN301549 client id 15999677.

2. Details of ledger of the share broker for the F.Y. 2013-14 of Baljit Securities Pvt. Ltd.

3. Transaction statement of depository account at share broker for F.Y. 2013-14 CDSL client id 120430000002820.

4. All the contract notes relating to the F.Y. 2013-14 of the share broker Baljit Securities Pvt. Ltd.

5. Profit & Loss Account & Balance Sheet for the F.Y. 2013-14.

6. A detailed scrip wise profit and loss for F.Y. 2013-14 both short term & long term capital gain is provided.

4. Thereafter, the AO took note of the facts that the assessee had purchased 40000 shares of M/s. Panchshul Marketing Ltd. for Rs. 40,000/- as on 07.06.2012 and thereafter the shares of M/s. Kailash Auto Finance Ltd. was demerged with M/s. Panchshul Marketing Ltd. According to the AO after coming into effect the scheme of arrangement, the assessee received 40000 shares of the demerged company were converted to 40000 shares of M/s. Kailash Auto Finance Ltd. (KAFL) and the said 40000 shares were sold for Rs. 15,25,000/- during the period from 16.08.2013 to 28.08.2013 in 3 phases giving rise to profit of Rs. 14,81,950/- which the assessee claimed as exempt from tax u/s 10(38) of the Act. However, the AO notes that the scrip of M/s. Kailash Auto Finance Ltd. was suspended by SEBI for irregularly committed during transactions and thereafter the AO again issued a notice dated 15.11.2016 which has been reproduced from page 6 to 9 of the assessment order. According to the AO, the assessee did not care to reply for his last notice and, therefore, taking into consideration the department’s investigation report, SEBI action and lack of credentials of M/s. Kailash Auto Finance Ltd. was pleased to disallow the LTCG claim of the assessee and made an addition of Rs. 14,81,950/- and an amount of Rs. 45,750/- i.e. 3% of Rs. 15,25,000/- was added as undisclosed commission expenses u/s 69C of the Act. Aggrieved the assessee preferred an appeal before the Ld. CIT(A) who was pleased to confirm the same. Aggrieved the assessee is before us.

5. The ld. AR assailing the decision of the Ld. CIT(A) brought to our notice that the issue whether the scrip of M/s. Kailash Auto Finance Ltd. was bogus or not was tested by the coordinate bench of this Tribunal in several cases and has been held to be a genuine transaction and drew our attention to the coordinate bench of this Tribunal in the case of Manish Kumar Baid and Mahendra Kumar Baid vs ACIT ITA No. 1236/Kol/2017 dated 18.08.2007 and contended that the issue is no longer res integra. According to the ld. AR, the AO has made the addition based on suspicion and conjectures. According to the ld. AR, the assessee has discharged its onus by producing all the documents to prove the transactions to be genuine and the AO has not been able to point out any mistake in the documents and without doing so, he cannot based on a general report of the Investigation Wing cannot make the disallowance. It was also brought to our notice that the SEBI order suspending M/s. Kailash Auto Finance Ltd. from trading has also been lifted which has also been taken note of by the Tribunal in various decisions. Therefore, he want us to allow the assessee’s claim of LTCG on sale of shares of M/s. Kailash Auto Finance Ltd. and also to delete the addition based on notional commission paid purportedly to the brokers. The ld. DR vehemently supported the order of the Ld. CIT(A) and drew our attention to the investigation report of the department and the fact that the SEBI has suspended the transaction of M/s. Kailash Auto Finance Ltd. and according to him the claim was bogus and the AO rightly held to be bogus transaction and denied the claim and added the commission given to the broker and he does not want us to interfere with the orders of the authorities below.

6. We have heard both the parties and also perused the records. The fact narrated above is not reported for the sake of brevity. However, we note that the assessee in order to claim the LTCG on sale of shares of M/s. Kailash Auto Finance Ltd. has produced the following documents from which we find the following facts:

i. From a perusal of the purchase bill issued by M/s. Sanskrit Vincom Pvt. Ltd. dated 30.03.2012 to assessee in respect of sale of 40000 shares of M/s. Punchshul Marketing Pvt. Ltd. @ Rs. 1 per share which is found placed at page 8 of the Paper Book, we note that assessee purchased this scrips on 30.03.2012 and not as statted by AO as 07.06.2012.

ii. From a perusal of Bank statement showing purchase of shares is found placed at page 9 of the Paper Book from which we find that on 30.03.2012 an amount of Rs. 40,000/- was paid by cheque to M/s. Sanskrit Vincom Pvt. Ltd.

iii. We also note that letter of amalgamation is found placed at page 10 of the Paper Book informing the assessee about the scheme of arrangement and merger of Panchshul Marketing Pvt. Ltd. with the M/s. Kailash Auto Finance Ltd. dated 06.08.2013 wherein assessee was allotted 40000 shares of M/s. KAFL.

iv. Our attention was drawn to Demat statement placed at page 15 and 16 of the Paper Book from which we note that the M/s. KAFL shares after the scheme of arrangement has been deposited with the HDFC Bank Depository from 22.07.2013 and later sold on 13.08.2013, 19.08.2013 and 26.08.2013 total 40000 shares.

v. We note from perusal of the contract notes in connection with the sale of shares is found placed at page 11 to 13 of the Paper Book that scrips of M/s. KAFL was sold on 13.08.2013, 19.08.2013 and on 26.08.2013 which fact is corroborated from the Demat Statement of HDFC Depository details found placed at page 15 of paper book.

vi. Bank statement is found placed at page 14 of the Paper Book which reveals that sale consideration was received through banking channel.

With the aforesaid documents, the assessee claimed to have sold the scrip of M/s. KAFL through Bombay Stock Exchange after paying STT.

7. We note that the AO / CIT(A) has not made any negative/adverse remarks or finding against the aforesaid documents produced before the AO. However, they have brushed aside these documents and has relied heavily upon the general investigation report of the department, which has not found any wrong doing on the part of the assessee or her broker who sold the shares. We note that the suspension by SEBI of transaction of scrips of M/s. KAFL has been later lifted. Therefore, in the light of the above supporting documents referred to in para 6 (supra) the assessee’s claim for LTCG has to be allowed. For doing so, we also rely on the decision of the coordinate bench in the case of Manish Kumar Baid (supra) wherein the Tribunal held as under:

“6. We have heard both the rival submissions and perused the materials available on record. We find lot of force in the arguments of the ld AR that the ld AO was not justified in rejecting the claim of the assessee on the basis of theory of surrounding circumstances, human conduct, and preponderance of probability without bringing on record any legal evidence against the assessee. We rely on the judgement of Special Bench of Mumbai Tribunal in the case of GTC Industries Ltd. (supra) for this proposition. The various facets of the arguments of the ld AR supra, with regard to impleading the assessee for drawing adverse inferences which remain unproved based on the evidences available on record, are not reiterated for the sake of brevity. The principles laid down in various case laws relied upon by the ld AR are also not reiterated for the sake of brevity. We find that the amalgamation of CPAL with KAFL has been approved by the order of Hon’ble High Court. The ld AO ought not to have questioned the validity of the amalgamation scheme approved by the Hon’ble High Court in May 2013 merely based on a statement given by a third party which has not been subject to cross -examination. Moroever, it is also pertinent to note that the assessee and / or the stock broker Ashita Stock Broking Ltd name is neither mentioned in the said statement as a person who had allegedly dealt with suspicious transactions nor they had been the beneficiaries of the transactions of shares of KAFL. Hence we hold that there is absolutely no adverse material to implicate the assessee to the entire gamut of unwarranted allegations leveled by the ld AO against the assessee, which in our considered opinion, has no legs to stand in the eyes of law.

We find that the ld DR could not controvert the arguments of the ld AR with contrary material evidences on record and merely relied on the orders of the lower authorities apart from placing the copy of SEBI’s interim order supra. We find that the SEBI’s orders relied on by the ld AO and referred to him as direct evidence against the assessee did not contain the name of the assessee and/or the name of Ashika Stock Broking Ltd. through whom the assessee sold the shares of KAFL as a beneficiary to the alleged accommodation entries provided by the related entities / promoters / brokers / entry operators. In the instant case, the shares of CPAL were purchased by the assessee way back on 20.12.2011 and pursuant to merger of CPAL with KAFL, the assessee was allotted equal number of shares in KAFL, which was sold by the assessee by exiting at the most opportune moment by making good profits in roder to have a good return on his investment. We find that the assessee and / or the broker Ashita Stock Broking Ltd was not the primary allottees of shares either in CPAL or in KAFL as could be evident from the SEBI’s order. We find that the SEBI order did mention the list of 246 beneficiaries of persons trading in shares of KAFL, wherein, the assessee and / or Ashita Stock Broking Ltd’s name is not reflected at all. Hence the allegation that the assessee and / or Ashita Stock Broking Ltd getting involved in price rigging of KAFL shares fails. We also find that even the SEBI’s order heavily relied upon by the ld AO clearly states that the company KAFL had performed very well during the year under appeal and the P/E ratio had increased substantially. Thus we hold that the said orders of SEBI is no evidence against the assessee, much less to speak of direct evidence. The enquiry by the Investigation Wing and/or the statements of several persons recorded by the Investigation Wing in connection with the alleged bogus transactions in the shares of KAFL also did not implicate the assessee and/or his broker. It is also a matter of record that the assessee furnished all evidences in the form of bills, contract notes, demat statements and the bank accounts to prove the genuineness of the transactions relating to purchase and sale of shares resulting in LTCG. These evidences were neither found by the ld AO to be false or fabricated. The facts of the case and the evidences in support of the assessee’s case clearly support the claim of the assessee that the transactions of the assessee were bonafide and genuine and therefore the ld AO was not justified in rejecting the assessee’s claim of exemption under section 10(38) of the Act. We also find that the various case laws of Hon’ble Jurisdictional High Court relied upon by the ld AR and findings given thereon would apply to the facts of the instant case. The ld DR was not able to furnish any contrary cases to this effect. Hence we hold that the ld AO was not justified in assessing the sale proceeds of shares of KAFL as undisclosed income of the assessee u/s 68 of the Act. We accordingly hold that the reframed question no. 1 raised hereinabove is decided in the negative and in favour of the assessee.

7. The next common issue in the appeals is against the addition of unexplained expenditure u/s 69C of the Act on the ground that the assessee must have incurred commission expenses @ 5% of the LTCG. The Ld. AR submitted that there is no evidence of incurring such expenditure. It was pleaded that no addition u/s 69C of the Act could be made unless it is found that the assessee incurred some expenditure which were not recorded in the books of accounts and the assessee failed to substantiate the source of such expenditure.

7.1. We have already held that the transactions relating to LTCG were genuine and not the accommodation entries as alleged by the ld AO. Consequently the addition u/s 69C of the Act is hereby directed to be deleted. We accordingly hold that the reframed question no. 2 raised hereinabove is decided in the negative and in favour of the assessee.”

Respectfully following the order of the coordinate bench decision and the documents filed by the assessee at para 6 (supra), we allow the claim of LTCG of the assessee and delete the addition made u/s 69C of commission expenses.

8. Before parting we would like to address the question which was raised by the Ld. DR whether assessee held the scrip for a period of 12 months, the ld. AR drew our attention to the Circular of CBDT No. 704 dated 28.04.1995 which is found placed at page 42 of the Paper Book which is as under:

“1. Under the provisions of clause (42A) of section 2 of the Income-tax Act, 1961, the share held in a company or any other security listed in a recognised stock exchange in India or units of the Unit Trust of India or units of a mutual fund specified u/s 10(23D) shall be regarded as short-term capital assets if they are held by an assessee for not more than 12 months immediately preceding the date of its transfer. Clarifications have been sought as to which date should be regarded as the date of transfer and also about the date from which the holding period of the securities should be reckoned. Clarifications have also been sought as to how the holding periods will be computed for the purposes of capital gains when the securities, purchased in several lots at different points of time and which are taken delivery of in one lot, are subsequently sold in parts and no correlation of the dates of purchase and sale is available.

2. When the securities are transacted through stock exchanges, it is the established procedure that the brokers first enter into contracts for purchase/sale of securities and thereafter, follow it up with delivery of shares, accompanies by transfer deeds duly signed by the registered holders. The seller is entitled to receive the consideration agreed to as on the date of contract. The Board are of the opinion that it is the date of broker’s note that should be treated as the date of transfer in cases of sale transactions of securities provided such transactions are followed up by delivery of shares and also the transfer deeds. Similarly, in respect of the purchasers of the securities, the holding period shall be reckoned from the date of the broker’s note for purchase on behalf of the investors.”

9. We note in the present case the transaction of purchase of shares of M/s. Panchshul Marketing Ltd. took place directly between the parties and not through stock exchange. Therefore, the date of contract of sale as declared by the parties shall be treated as the date of transfer provided it is followed up by actual delivery of shares and the transfer deeds. According to the documents filed before us since the actual delivery of shares took place along with transfer deeds/contract bills, so that date should be considered the date of transfer. Thus, we note that assessee held the shares of M/s. Panchshul on 30.03.2012 (page 8 & 9 of paper book) which was later merged with M/s. KAFL and scrips of M/s KAFL was sold on 16.08.2013 – 28.08.2013, so the assessee was holding the shares in question for more than 12 months. Therefore, the claim of assessee for LTCG is valid in the eyes of law.

10. In the result, the appeal of the assessee is allowed.

(Order pronounced in the open court on 03.07.2019)

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