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Exemption u/s 10(38) on LTCG cannot be denied based solely on report of Investigation Wing & without independent application of mind by AO, where relevant material evidence like contract notes & bank statements are available with Revenue: ITAT

2019-TIOL-1541-ITAT-KOL

IN THE INCOME TAX APPELLATE TRIBUNAL
BENCH ‘C’ KOLKATA

ITA No.161/Kol/2019
Assessment Year: 2015-16

SMT APARNA MISRA
PAN NO: ATZPM4600N

Vs

INCOME TAX OFFICER
WARD – 23(4), KOLKATA

A T Varkey, JM & A L Saini, AM

Date of Hearing: June 10, 2019
Date of Decision: July 01, 2019

Appellant Rep by: Shri Akkal Dudhwewala, ACA
Respondent Rep by: 
Shri Satyajit Mondal, Addl CIT, Sr. DR

Income Tax – Section 10(38).

Keywords – Sale of shares – Claim of exemption – Long Term Capital Gain.

THE assessee filed return for relevant AY. During assessment the AO noted that assessee had claimed Long Term Capital Gain (LTCG) of Rs. 39,19,157/- on sale of shares of M/s. GCM Securities Ltd. and claimed exemption u/s 10(38) of the Act. The AO noted that the assessee initially purchased 6400 shares of M/s. GCM Securities Ltd. @ Rs. 18.75 per share for a sum of Rs. 1,20,000/- on 20.03.2013 and thereafter sold the shares for an amount of Rs.40,39,156/- and claimed the benefit of exemption u/s 10(38) in respect of the long term capital gain so derived of Rs. 39,19,157/-. The AO, thereafter, had erroneously dealt with the scrips of M/s. Kailash Auto Finance Ltd. (M/s. KAFL) and investigation report/studies of department in the case of M/s. KAFL and hence denied the exemption claimed u/s 10(38) in respect of the long term capital gain earned on sale of shares of M/s GCM Securities Limited. Aggrieved assessee filed appeal before the CIT(A) who confirm the same. Aggrieved the assessee filed appeal before Tribunal

On appeal, Tribunal held that,

Whether benefit of exemption u/s 10(38) in respect of the LTCG is to be denied solely on the basis of the report of the investigation wing without application of mind by AO on information received specially when material evidences like Contract Notes, Demat statements and bank statements are provided to Revenue – NO: ITAT

++ since the purchase and sale transactions are supported and evidenced by confirmations, Contract Notes, Demat statements and bank statements etc.,, the same could not be treated as bogus simply on the basis of some report of the Investigation Wing and/or the orders of SEBI in case of entirely different scrip. Moreover it was submitted before by AR that the CIT(A) was not justified in taking an adverse view against the assessee on the ground of abnormal price rise of the shares. The AR referred to the various judgments in support of this contention wherein under similar facts of the case it was held that the AO was not justified in refusing to allow the benefit under section 10(38) of the Act and to assess the sale proceeds of shares as undisclosed income of the assessee under section 68 of the Act. It was further noted that the DR except relying heavily on the orders of the lower authorities could not bring to our attention any material to show that the documents placed were sham, bogus or there was any factual infirmity therein. The DR also could not controvert the AR’s submissions that the disallowance was made solely on the basis of the report of the Investigation Wing in the shares of M/s KAFL. The DR could not bring to attention any material or evidence from which one could infer that the transactions in shares of M/s GCM Securities Limited were either manipulated or sham or that any enquiry was conducted either by the Investigation Wing or by the AO in respect of assessee’s transactions in shares of M/s GCM Securities Limited. Thus it was hold that both the lower authorities were not justified in not allowing the assessee’s claim for exemption u/s 10(38) amounting to Rs. 39,19,157/-in respect of the profit derived by the appellant on sale of 6400 shares of M/s GCM Securities Limited. It was decided to set aside the order of CIT(A) and direct the AO not to treat the long term capital gain as bogus and delete the consequential addition. In the result, the appeal of the assessee is allowed.

Assessee’s appeal allowed

ORDER

Per: A T Varkey:

This is appeal preferred by the assessee against the order of Ld. CIT(A) – 6, Kolkata dated 16.11.2018 for Assessment Year 2015-16.

2. The main grievance of the assessee is against the action of the Ld. CIT(A) in not allowing the claim for exemption u/s 10(38) amounting to Rs. 39,19,157/-in respect of sale of shares of M/s. GCM Securities Ltd.

3. Brief facts of the case as observed by the AO at Para 5.2 of the assessment order is that assessee has claimed Long Term Capital Gain (LTCG) of Rs. 39,19,157/- on sale of shares of M/s. GCM Securities Ltd. and claimed exemption u/s 10(38) of the Act. The AO noted that the assessee initially purchased 6400 shares of M/s. GCM Securities Ltd. @ Rs. 18.75 per share for a sum of Rs. 1,20,000/- on 20.03.2013 and thereafter sold the shares for an amount of Rs.40,39,156/- and claimed the benefit of exemption u/s 10(38) in respect of the long term capital gain so derived of Rs. 39,19,157/-. The AO, thereafter, strangely has not discussed about M/s. GCM Securities Ltd. (the shares purchased and sold by the assessee) however has erroneously dealt with the scrips of M/s. Kailash Auto Finance Ltd. (M/s. KAFL) and investigation report/studies of department in the case of M/s. KAFL and hence denied the exemption claimed u/s 10(38) in respect of the long term capital gain earned on sale of shares of M/s GCM Securities Limited. Aggrieved the assessee has preferred the appeal before the Ld. CIT(A) who was pleased to confirm the same. Aggrieved the assessee is before us.

4. We have heard rival submissions and gone through the facts and circumstances of the case. We note that the assessee has purchased 6400 number of shares of GCM Securities Ltd. The assessee has purchased shares of Rs.1,20,000/- (6400 x 18.75) vide Cheque No. 170916 dt. 20.03.2013 in the Initial Public Offer by the said company made in conformity with the provisions of the Companies Act, 1956 and SEBI regulations. The same transaction has been duly reflected in the assessee’s ICICI Bank Account no. 107001503576. A copy of bank account for the period from 01.04.2012 to 31.03.2013 is found placed at Page 5 to 11 of paper book. We therefore note that the shares in question were acquired by the assessee by way of subscription made for equity shares, which were offered for subscription to the public at large by issue of prospectus. It was thus not a case where the shares were acquired through private placement where there could be an allegation for manipulation. We further note that the assessee has sold the shares through stock-broker, M/s. Sosha Credit Private Limited, a Member of the Bombay Stock Exchange, SEBI Registration No. INB010783430 and Trading Code No. 3076. We note that the assessee has sold 6400 nos. of shares of GCM Security Ltd. The details of shares are as under:

DateName of Co.QuantityRateAmount (Rs.)Cotract Note No.Settlement No.
27.06.2014GCM Sec. Ltd.800571/-4,56,343.200016011415062
05.08.2014-do-1600609/-9,73,425.680002281415088
13.08.2014-do-1600641/-10,24,574.400007851415094
21.08.2014-do-1600655/-10,46,952.000140051415099
01.09.2014-do-400657/-2,62,537.200146201415105
15.09.2014-do-400689/-2,75,324.400158741415115
 TOTAL6400 40,39,156.88  

The copy of contract notes along with bank statement where sale proceed of shares has been deposited is found placed in the paper book Pages18 to 23. We also note that the assessee has sold the share after one year of time from the time of its purchase. Clause 38 [w.e.f. 01.10.2004] has been inserted in section 10 of the Act, which envisages that income arising out of transfer of Long Term Capital Asset being an equity share in a company on which STT is paid is exempt from tax. Since the equity shares of the company [GCM Securities Ltd] has been held by the assessee for more than a year and later sold on recognized stock exchange on which STT has been paid, the income becomes exempt u/s. 10(38) of the Act.

5. We note that before the AO the copies of contract notes, demat statement, broker’s ledger, bank statements etc. evidencing the sale of shares was duly submitted by the assessee. Thereafter the assessee was in receipt of a show cause notice dated 23.11.2017 requiring him to explain as to why the gain derived from sale of shares of M/s. GCM Securities Limited should not be treated as in-genuine. In reply thereof, the assessee furnished a detailed submission along with supporting documents. The AO, however did not accept the same and denied the benefit of exemption u/s 10(38) of the Act claimed in respect of the gain of Rs.39,43,416/- derived in the scrip of M/s GCM Securities Limited and added the same to his total income which action of AO cannot be countenanced for the simple reason that there is total non-application of mind. On careful scrutiny of the assessment order under appeal we note that in a very detailed and long assessment order running into 18 pages, the discussion is entirely centered around the investigation conducted by the Investigation Wing of the IT Department in the shares of M/s KAFL. We find the material/report of M/s. KAFL has been used extensively reproduced from page 4 to page 18 of assessment order to draw inference against the assessee when scrip of M/s. KAFL has nothing to do with that of assessee’s claim. We also note that even in the concluding findings of the assessment order, the assessee’s claim for exemption in respect of shares of M/s GCM Securities was rejected on the ground that the Investigation report proves that the transactions in shares of M/s KAFL was bogus. From plain reading of the assessment order therefore we find that except for making reference to the material/report of M/s. KAFL, the AO did not bring on record any tangible material on the basis of which he could hold that the appellant’s transaction in M/s GCM Securities Ltd was bogus or sham. We find that no enquiry let alone worthwhile enquiry was conducted by the AO before drawing adverse inference against the appellant. We also note that even though the shares were sold through registered stock broker no attempt to make enquiries from the said broker was made by the AO but based on suspicion & surmise prompted by the material/report of Investigation Wing in transactions of M/s. KAFL, the AO presumed that the appellant’s transactions in shares of M/s GCM Securities Limited was also bogus. We therefore find that there was no independent and objective application of mind by the AO in respect of the appellant’s transactions in the shares of GCM Securities Limited and the ultimate disallowance was prompted solely based on the facts discussed by the AO in respect of transactions in M/s KAFL shares.

6. We also find that in the appellate proceedings, the Ld. CIT(A) rejected the appellant’s claim for exemption u/s 10(38) only because in his opinion the increase in the share prices of M/s GCM Securities Limited was abnormal and that one of the Director of the company in question was Mr. Manish Baid who was a tainted person. Thus we note even at the first appellate stage there was no objective enquiry in respect of the contemporaneous transactional documents and evidences, which the appellant had furnished in support of her share transactions. From the paperbook filed we note that before the lower authorities as well as before us the assessee had filed requisite documents to substantiate the claim of exemption made u/s 10(38) upon sale of shares of M/s GCM Securities Limited. The assessee had furnished the following documents:

(i) Copy of Bank Statement;

(ii) Copy of DEMAT statement;

(iii) Confirmation from ICICI Bank upon allotment of shares in IPO;

(iv) The contract notes issued by share broker upon sale of shares;

(v) Ledger accounts of the share broker;

7. We note that the aforesaid documents filed by the assessee before the lower authorities in order to substantiate sale of listed shares has not been found to be false, fabricated and fictitious. The appellant had furnished the copies of contract notes, Demat statement, Bank Statement, broker’s ledger. The transactions in listed shares took place through a registered share broker, namely M/s. Sosha Credit Pvt. Ltd. The purchase of shares was acquired through public offer by way of direct subscription in Initial Public offering. The sale of shares took place on screen based trading platform of Bombay Stock Exchange. The transaction was settled by making/receiving payment by account payee cheques through proper banking channel. The assessee had paid securities transaction tax (STT) on sale of shares. The transaction took place at the price prevailing on stock exchange on respective transaction dates and there is no adverse finding by the lower authorities in respect to the documents produced by the assessee to substantiate the sale of M/s GCM Securities Limited.In the light of the documents filed as aforestated, the assessee has discharged the onus to prove the genuineness of the long-term capital gain derived on sale of shares. There is no evidence to show that the documents filed by the assessee before the AO are false and fabricated.

8. We also note that in the investigation report of the Department in the case of M/s KAFL much emphasis has been placed on the fact that the company’s financials as well as net worth did not at all justify the prices at which the shares were transacted on stock exchange. With reference to the financial results of M/s KAFL as well as making reference to the financial track record as well as dividend declaration history, it was opined that the prices at which the shares were transacted were unreal, fictitious or manipulated. At the time of hearing the Ld. AR placed before us the copy of the audited financial accounts of M/s GCM Securities Limited for the FY 2014-15. On scrutiny of these accounts we note that during the year under consideration the turnover of the assessee was Rs.3,31,90,405/-. It was also noted that the profit disclosed by the company for the FY 2014-15 was Rs.1,36,18,752/- which was more than 1266% in comparison to last year’s profit of Rs.10,75,155/-. In its Profit & Loss Account had made provision for tax of Rs.29,06,964/-. The Ld. AR also drew our attention to the Schedule 2.10, which contained details of investments held by the company, which primarily consisted of blue chip securities inter alia including Reliance Industries Limited, Power Grid Corporation of India Ltd, Tata Steel Limited, Bharti Airtel Limited, Coal India Ltd etc.. The fixed assets of the company were to the order of Rs.1,87,48,523/-. The Ld. AR finally drew our attention to the fact that during the financial year ended 31st March 2015, M/s GCM Securities Limited had proposed and paid interim dividend at the rate of 4% to its shareholders. From the foregoing facts and figures it cannot be said that M/s GCM Securities Limited was a company not having requisite financials as compared with the facts in the case of M/s KAFL. We therefore find sufficient merit in the ld. AR’s argument that merely because the share transactions of M/s KAFL were doubted by the Revenue authorities for lack of adequate financial results could not ipso facto be applied in the case of M/s GCM Securities Limited. We find that even though in the impugned order the AO referred to the financials of M/s GCM Securities Limited the figures discussed pertained to FYs 2013-14, 2012-13 & 2011-12 which had no bearing with the assessee’s transaction in shares during FY 2014-15 which were based on the price movements prevailing on the Bombay Stock Exchange during the relevant period. As is well known the price movements on the stock exchange are based on the financials of the company for the relevant period and are not influenced by the past financial results of the company. In view of these foregoing facts therefore we hold that no adverse inference could be drawn against the appellant.

9. In this regard we may gainfully reference to the decision of the Hon’ble High Court of Punjab and Haryana in the case of Anupam Kapoor 299 ITR 179 wherein has held as under:-

“The Tribunal on the basis of the material on record, held that purchase contract note, contract note for sates, distinctive numbers of shares purchased and sold, copy of share certificates and the quotation of shares on the date of purchase and sale were sufficient material to show that the transaction was not bogus but a genuine transaction. The purchase of shares was made on 28th April, 1993 i.e.. asst. yr. 1993-94 and that assessment was accepted by the Department and there was no challenge to the purchase of shares in that year. It was also placed before the relevant AO as well as before the Tribunal that the sale proceeds have been accounted for in the accounts of the assessee and were received through account payee cheque. The Tribunal was right in rejecting the appeal of the Revenue by holding that the assessee was simply a shareholder of the company. He had made investment in a company in which he was neither a director nor was he in control of the company. The assessee had taken shares from the market, the shares were listed and the transaction took place through a registered broker of the stock exchange. There was no material before the AO, which could have lead to a conclusion that the transaction was simplicitier a device to camouflage activities, to defraud the Revenue. No such presumption could be drawn by the AO merely on surmises and conjectures. In the absence of any cogent material in this regard, having been placed on record, the AO could not have reopened the assessment. The assessee had made an investment in a company, evidence whereof was with the AO. –Therefore, the AO could not have added income, which was rightly deleted by the CIT(A) as well as the Tribunal. It is settled law that suspicion, howsoever strong cannot take the place of legal proof. Consequently, no question of law, much less a substantial question of law, arises for adjudication.– C. Vasantlal & Co. vs. CIT (1962) 45 ITR 206 (SC) = 2002-TIOL-917-SC-IT-LB, M.O. Thomakutty vs. CIT (.1958) 34 ITR 501 (Ker)) and Mukand Singh vs. Sales Tax Tribunal (1998) 107 STC 300 (Punjab) relied on; Umacharan Shaw & Bros. vs. CIT (1959) 37 ITR 271 (SC) = 2002-TIOL-891-SC-IT-LBApplied; Jaspal Singh vs. CIT (2006) 205 CTR (P & H) 624 = 2006-TIOL-512-HC-P&H-IT distinguished”

10. Useful reference in this regard may also be made to the following judgments of the Hon’ble jurisdictional Calcutta High Court involving similar facts as involved in the present case.

i) M/s Classic Growers Ltd. vs. CIT [ITA No. 129 of 2012] (Cal HC) – In this case the ld AO found that the formal evidences produced by the assessee to support huge losses claimed in the transactions of purchase and sale of shares were stage managed. The Hon’ble High Court held that the opinion of the AO that the assessee generated a sizeable amount of loss out of prearranged transactions so as to reduce the quantum of income liable for tax might have been the view expressed by the ld AO but he miserably failed to substantiate that. The High Court held that the transactions were at the prevailing price and therefore the suspicion of the AO was misplaced and not substantiated.

ii) CIT V. Lakshmangarh Estate & Trading Co. Limited [2013] 40 taxmann.com 439 (Cal) = 2013-TIOL-838-HC-KOL-IT– In this case the Hon’ble Calcutta High Court held that on the basis of a suspicion howsoever strong it is not possible to record any finding of fact. As a matter of fact suspicion can never take the place of proof. It was further held that in absence of any evidence on record, it is difficult if not impossible, to hold that the transactions of buying or selling of shares were colourable transactions or were resorted to with ulterior motive.

iv) CIT V. Shreyashi Ganguli [ITA No. 196 of 2012] (Cal HC) – In this case the Hon’ble Calcutta High Court held that the Assessing Officer doubted the transactions since the selling broker was subjected to SEBI’s action. However the transactions were as per norms and suffered STT, brokerage, service tax, and cess. There is no iota of evidence over the transactions as it were reflected in demat account. The appeal filed by the revenue was dismissed.

v) CIT V. Rungta Properties Private Limited [ITA No. 105 of 2016] (Cal HC) = 2017-TIOL-1081-HC-KOL-IT –In this case the Hon’ble Calcutta High Court affirmed the decision of this tribunal, wherein, the tribunal allowed the appeal of the assessee where the AO did not accept the explanation of the assessee in respect of his transactions in alleged penny stocks. The Tribunal found that the AO disallowed the loss on trading of penny stock on the basis of some information received by him. However, it was also found that the AO did not doubt the genuineness of the documents submitted by the assessee. The Tribunal held that the AO’s conclusions are merely based on the information received by him. The appeal filed by the revenue was dismissed.

vi) CIT V. Andaman Timbers Industries Limited [ITA No. 721 of 2008] (Cal HC) – In this case the Hon’ble Calcutta High Court affirmed the decision of this Tribunal wherein the loss suffered by the Assessee was allowed since the AO failed to bring on record any evidence to suggest that the sale of shares by the Assessee were not genuine.

vii) CIT V. Bhagwati Prasad Agarwal [2009- TMI-34738 (Cal HC) in ITA No. 22 of 2009 dated 29.4.2009] – In this case the Assessee claimed exemption of income from Long Term Capital Gains. However, the AO, based on the information received by him from Calcutta Stock Exchange found that the transactions were not recorded thereat. He therefore held that the transactions were bogus. The Hon’ble Jurisdictional High Court, affirmed the decision of the Tribunal wherein it was found that the chain of transactions entered into by the assessee have been proved, accounted for, documented and supported by evidence. It was also found that the assessee produced the contract notes, details of demat accounts and produced documents showing all payments were received by the assessee through banks. On these facts, the appeal of the revenue was summarily dismissed by High Court.

11. We therefore note that since the purchase and sale transactions are supported and evidenced by confirmations, Contract Notes, Demat statements and bank statements etc.,, the same could not be treated as bogus simply on the basis of some report of the Investigation Wing and/or the orders of SEBI in case of entirely different scrip. Moreover it was submitted before us by ld AR that the Ld. CIT(A) was not justified in taking an adverse view against the assessee on the ground of abnormal price rise of the shares. The ld AR referred to the following judgments in support of this contention wherein under similar facts of the case it was held that the AO was not justified in refusing to allow the benefit under section 10(38) of the Act and to assess the sale proceeds of shares as undisclosed income of the assessee under section 68 of the Act :-

(i) ITO vs. Ashok Kumar Bansal – ITA No. 289/Agr/2009 (Agra ITAT)

(ii) ACIT vs. Amita Agarwal & Others – ITA Nos. 247/(Kol)/of 2011 (Kol ITAT)

(iii) Lalit Mohan Jalan (HUF) vs. ACIT – ITA No. 693/Kol/2009 (Kol ITAT)

(iv) Mukesh R. Marolia vs. Addl. CIT – [2006] 6 SOT 247 (Mum)

12. We further note that the ld. D.R. except relying heavily on the orders of the lower authorities could not bring to our attention any material to show that the documents placed before us were sham, bogus or there was any factual infirmity therein. The ld. D.R. also could not controvert the ld. A.R’s submissions that the disallowance was made solely on the basis of the report of the Investigation Wing in the shares of M/s KAFL. The ld. D.R. could not bring to our attention any material or evidence from which one could infer that the transactions in shares of M/s GCM Securities Limited were either manipulated or sham or that any enquiry was conducted either by the Investigation Wing or by the AO in respect of assessee’s transactions in shares of M/s GCM Securities Limited.

13. For the reasons set out in the foregoing therefore we hold that both the lower authorities were not justified in not allowing the appellant’s claim for exemption u/s 10(38) amounting to Rs. 39,19,157/-in respect of the profit derived by the appellant on sale of 6400 shares of M/s GCM Securities Limited. We accordingly set aside the order of Ld. CIT(A) and direct the AO not to treat the long term capital gain as bogus and delete the consequential addition.

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

(Order pronounced in the open court on 01.07.2019)

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