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LTCG claimed u/s 10(38) cannot be denied as being undisclosed income, based merely on suspicions & without allowing assessee the right to cross-examination: ITAT

2019-TIOL-1545-ITAT-KOL

IN THE INCOME TAX APPELLATE TRIBUNAL
BENCH ‘SMC’ KOLKATA

ITA No.1993/Kol/2018
Assessment Year: 2014-15

M/s NARENDRA KUMAR BANSAL (HUF)
PAN NO: AABHN4559A

Vs

INCOME TAX OFFICER, WD-44(3)
KOLKATA

A T Varkey, JM

Date of Hearing: March 20, 2019
Date of Decision: June 12, 2019

Appellant Rep by: Shri Subash Agarwal, Adv.
Respondent Rep by: 
Shri Rabin Choudhury, Addl. CIT, Sr. DR

Income Tax – Sections 10(38) & 68

Keywords – Long term capital gain – Undisclosed income

THE assessee had filed its return for the relevant AY. During the course of the assessment proceedings, the AO observed that the assessee has claimed LTCG on sale of shares named which was claimed exempt u/s 10(38). Thereafter, the AO issued notice to the party from whom the shares were claimed to have been purchased but the said letter was returned unserved and, therefore, according to AO, the genuinity of purchase of share was not proved. The AO had received information from the office of the DGIT (Inv.), Kolkata in respect of ‘Dissemination of intelligence regarding tax evasion by showing LTCG perpetrated through accommodation entry operators’. According to AO, in the light of the information received as well as detailed investigation made by SEBI. AO made an addition of a sum of Rs.18.75 lacs as undisclosed income. On appeal, the CIT(A) confirmed the addition.

On appeal, the Tribunal held that,

Whether claim of LTCG u/s 10(38) can be denied treating it undisclosed income, merely on the basis of suspicion and without giving opportunity to cross examine the assessee – NO: ITAT

++ it is not found by the AO that the assessee is not connected with M/s KAFL, the amalgamated company or their promoters, directors and any other person who exercises any control over KAFL or any so called entry operator. In the absence of any link between the assessee and the alleged admissions of the directors and brokers merely on suspicion adverse inference cannot be made against the assessee. It is noted that the transactions of sales happened through a recognized share broker and received and made the payments through account payee cheques. Merely on the basis of suspicion, transactions happened in recognizes stock exchange through recognized share broker cannot be treated as ingenuine;

++ the purported deposition has been made admittedly behind the back of assessee, there is not shred of evidence on record to prove the complicity of the assessee in the alleged modus operandi as suggested by AO, but neither the AO furnished a copy of those statements nor provided any opportunity to cross examine them was afforded to the assessee. So it cannot be used against the assessee to draw adverse inference. It is noted that the SEBI order has been revoked order dated September 21, 2017. Therefore, the AO was not justified in assessing the sale proceeds of shares as undisclosed income. So, taking note of the documents and the facts discussed and in view of the ratio in a similar case in the case of Manish Kumar Baid Vs. ACIT respectfully following the ratio of this case, this Tribunal reverse the orders of the lower authorities and allow the claim of assessee.

Assessee’s appeal allowed

Case followed:

Manish Kumar Baid Vs. ACIT, ITA Nos. 1236& 1237/Kol/2017

Rukmini Devi Manpria Vs. DCIT, ITA No.1724/Kol/2017

Jagmohan Agarwal Vs. ACIT – 2018-TIOL-2059-ITAT-KOL

ORDER

This appeal filed by assessee is against the order of Ld. CIT(A) – 13, Kolkata dated 01.08.2018 for AY 2014-15.

2. In this case the assessee has raised as many as four grounds of appeal but the sole issue involved in this appeal of assessee relates to confirming the addition of Long Term Capital Gain of Rs.18,75,000/- being gross sale consideration of shares claimed by the assessee.

3. Briefly stated facts as observed by the AO are that the assessee claimed long term capital gain of Rs. 18,18,520/- on sale of shares named M/s Kailash Auto Finance Ltd. (M/s. KAFL) which was claimed exempt u/s 10(38) of the Income Tax Act, 1961 (hereinafter referred to as the “Act”). The AO observed that the assessee sold 50000 shares of M/s KAFL for a gross sale consideration of Rs. 18,75,000/- through transactions dated 19.08.2013. According to AO, the assessee purchased 50000 shares @ Rs.1/- per share for a sum of Rs.50,000/- on 17-01-2012 of M/s Careful Projects Advisory Limited from M/s Jatadhari Marketing Pvt. Ltd. Subsequently, M/s. Careful Projects Advisory Limited was merged with M/s KAFL. Thereafter, the AO issued notice u/s 133(6) of the Act to the party from whom the shares were claimed to have been purchased but the said letter was returned unserved and, therefore, according to AO, the genuinity of purchase of share was not proved. In this case the AO had received information from the office of the DGIT (Inv.), WB, Sikkim & NER, Kolkata in respect of ‘Dissemination of intelligence regarding tax evasion by showing long term capital gains perpetrated through accommodation entry operators’. The said information was prepared after detail and thorough investigation and it contains (i) the BSE listed penny stock which have been used for generating bogus LTCG, (ii) list of share brokers, (iii) Modus Operandi and (iv) LTCG Summary in soft form containing total amount of sale by individual beneficiaries along with the PAN and address as given to the broker under KYC. On perusal of the aforesaid information, it was observed by the AO that the name, address and PAN of the assessee along with the name of the scrip that the assessee sold, features prominently in the soft form of the information so received. As such, a letter was issued to the appellant on 16.11.2016 requesting explanation/clarification on the issue involved. The AO asked clarification/explanation from the assessee that the scrip in which it has traded is not a blue chip company and is virtually unknown with unknown promoters / directors having nil or insignificant net worth. The company does not have established business worth mentioning during the year or one year before or one year afterward. Moreover, as per the information received from DGIT (Inv), Kolkata, Sikkim & NER as well as SEBI, the scrip in which assessee has claimed to have generated LTCG u/s. 10(38) of the Act, is a penny stock. It was further informed by the AO to the assessee that it has not purchased or sold any other share except the said transactions and the assessee had no history of share transaction. It was concluded by the AO that assessee has only made investment in this scrip anticipating a windfall which the assessee was liable to explain. A written reply was submitted by the assessee on 25.11.2016. After considering the reply of the assessee the AO concluded that the assessee has not purchased or sold any other share except the said transaction and he is not a regular share trader. The assessee has only made investment in this scrip anticipating a windfall and claimed a substantial amount of LTCG which is totally exempt u/s. 10(38) of the Act. According to AO, in the light of the information received from the DGIT (Inv.), as well as detailed investigation made by SEBI it transpires that the share transaction of the assessee is a kind of sham transaction to evade taxation and to channelize its fund from unexpected sources to a legitimate form of income. Hence, the claim of the assessee in respect of exempt income under the head LTCG, according to AO, is a bogus and therefore, a sum of Rs.18,75,000/- being gross sale consideration of shares as credited in the books of the assessee was added back to the total income of the assessee under the head undisclosed income. Aggrieved, assessee preferred an appeal before the Ld. CIT(A), who confirmed the action of AO and dismissed the ground of appeal of assessee. Aggrieved, assessee is in appeal before this Tribunal.

4. After having heard rival submissions and gone through the facts and circumstances of the case, it is noted by me that the assessee had purchased 50000 shares of M/s. Careful Projects Advisory Limited @ Rs.1/- per share for a sum of Rs.50,000/- on 17-01-2012 from M/s. Jatadhari Marketing Pvt. Ltd. This transaction was done through off market and payment was made through banking channel. (Copy of purchase bill and copy of bank statement evidencing payment are placed at page 8 and 10 of the paper book respectively.) M/s. Careful Projects Advisory Limited later on merged with M/s. KAFL by order of Hon’ble High Court at Allahabad. Thereafter 50000 shares were allotted to assessee of M/s. KAFL in place of 50000 shares of M/s. Careful Projects Advisory Ltd. through a scheme of arrangement vide letter dated 06.08.2013 which is found placed at paper book page 11. My attention was drawn by Ld. DR to the show cause notice issued by the AO, wherein the AO stated that many brokers have confessed that the assessee’s own money has been used in the shape of LTCG and the modus operandi has been explained by one Shri Sunil Dokania. At this juncture, it was pointed out by the Ld. AR that Shri Sunil Dokania nowhere stated that the assessee was a beneficiary and no statement of any broker was referred to by the AO in the assessment order indicating that assessee was involved any dubious/nefarious activity. It is noted that at page 4 of the assessment order, the AO has shown a chart which shows that though the shares started raising up, however, it was almost constant when it reached in the peak which means that for a very long time the shares were being traded at the peak rate. The only infirmity that the Ld. AR was candid enough to point out was that the letter sent u/s. 133(6) of the Act to the party from whom the shares were claimed to have been purchased [M/s Jatadhari Marketing Pvt. Ltd.] the said letter was returned unserved. It is noted by me that in the relevant year under consideration, the assessee sold the shares of M/s. KAFL at a consideration of Rs.18,75,000/- through M/s. Eureka Stock & Share Broking Services Ltd., which is a registered broker at the Bombay Stock Exchange on which STT was remitted, so the assessee claimed LTCG of Rs.18,18,521/- (copy of contract note and payment through account payee evidenced from contract note found placed at page 12 and Bank Statement at page 14 of the paper book). The Ld DR for the Revenue vehemently opposed the contentions of the assessee and took us through the AO’s order and Ld. CIT(A)’s order and submitted that scrips of M/s. KAFL was artificially rigged to provide LTCG to the assessee which cannot be allowed and supported the impugned order and relied on the order of Hon’ble Bombay High Court in the case of Binod Chand Jain in Tax Appeal No. 18 of 2017 and so he does not want us to interfere with the impugned order. After his arguments he has also filed a written submission which is as under:

“In this case purchase of the stock of Careful projects Advisory Ltd. was not an investment decision. Assessee never came out with any explanation as to why he choose to purchase this company’s share in large number and at a time involving substantial amount, and how that company was an investment destination and why.

The behaviour of the assessee with such stock from the decision of it’s purchase and the sequence of events that followed till its sale clearly shows that it was not an investment decision. Rather, assessee’s behaviour shows that such transaction was entered into with a pre-planned and pre-arranged manner where assessee was over confident about making huge gain for certain reason which assessee never disclosed. The fantastic rate of return from such transaction within the shortest period of time to ensure the gain as LTCG was just unbelievable, and same thing hardly happens in reality on a single attempt. So that was beyond of any human logic and possibility and for the.

In the instant case, the behaviour of the assessee regarding purchase of this stock found to be a dubious. It appears that the decision of such purchase was triggered by certain information in the possession of the assessee, or some arrangement and assessee just exploited such situation for making huge gain. So, the income arising out of such action should be considered as profit out of “an adventure in the nature of trade” and not from an investment.

Therefore, it is submitted that, if the appeal of the assessee is upheld by the Hon’ble Bench for any reason, this alternative ground is put up for favour of your consideration. The AO considered the transaction as bogus and added the entire LTCG income u/s 68, so there was no occasion at that time to take an alternate ground for addition. In view of that, such transaction at best may be considered as an “adventure in the nature of trade” .

In the case of Sanjay Bimalchand Jain[2018] 89 taxmann.com 196 = 2017-TIOL-2641-HC-MUM-IT(Bombay), the assessee purchased large number of shares of two penny stock companies at a nominal rate in large quantity which assessee claimed as an investment.

Considering the circumstances of that case the Assessing Officer did not accept the claim of the assessee and held that the transaction with a penny stock of an insignificant company, its subsequent the merger with a new company, and ultimate sale of the shares of the new company at such an higher profit within a short period of time falls in the ambit of an adventure in the nature of trade, and so, AO brought the aforesaid amount to tax under the head ‘business income’. On appeal, the Commissioner (Appeals), as well as, the Hon’ble Tribunal upheld the decision of the Assessing Officer. “

In view of the above it is submitted that assessee’s dealing with this stock may be considered as “an adventure in the nature of trade” and so, profit derives from such activity may kindly be considered as income from business or other sources.”

5. It is noted by me that the issue is no longer res integra. And it is noted that this Tribunal in the following cases have decided that the scrips of KAFL are not bogus and the LTCG claim of the assessee needs to be allowed:

i) Manish Kumar Baid Vs. ACIT, ITA Nos. 1236& 1237/Kol/2017 dated 18.08.2017

ii) Rukmini Devi Manpria Vs. DCIT, ITA No.1724/Kol/2017 dated 24.10.2018

iii) Jagmohan Agarwal Vs. ACIT, ITA No.604/Kol/2018 dated 05.09.2018 = 2018-TIOL-2059-ITAT-KOL.

6. We note that similar issue arose in Manish Kumar Baid (supra) wherein the Tribunal allowed the claim of assessee in respect of LTCG from sale of scrips of M/s. KAFL has 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. I also note that the SEBI’s revocation order in the case of M/s. KAFL dated 21.09.2017 placed at pages 49 to 64 of paper book and only on the reason that the notice u/s. 133(6) was returned un-served on the seller i.e. M/s. Jatadhari Marketing Services Ltd.[entity which sold M/s Careful Projects Advisory Ltd] cannot be the sole ground to brush aside all the evidences/documents filed by the assessee. (Reliance is placed on the decision of Hon’ble Gujarat High Court in CIT Vs. Nagali Fabrics ltd. order dated 22.04.2013).

8. It is not found by the AO that the assessee is not connected with M/s Kailash Auto Finance Ltd. the amalgamated company or their promoters, directors and any other person who exercises any control over Kailash Auto Finance Ltd. / amalgamated company or any so called entry operator. In the absence of any link between the assessee and the alleged admissions of the directors and brokers merely on suspicion adverse inference cannot be made against the assessee. In this connection, reliance is placed on the decision of the Hon’ble Supreme Court in Lalchand Bhagat Ambica Ram vs CIT (1959) 37 ITR 288 (SC) = 2002-TIOL-1177-SC-IT-LB wherein it relied on its earlier judgement rendered in the case of Omar Salav Mohamed Sait (1959) 37 ITR 151 (SC) = 2002-TIOL-808-SC-IT where it was held that no addition can be made on the basis of surmises, suspicion and conjectures. Further, it the case of CIT (Central) Calcutta vs Daulat Ram Rawatmull (87 ITR 349) =2002-TIOL-1540-SC-IT the Hon’ble SC has held that the onus to prove that the apparent is not the real is on the party who claims it to be so. The burden of proving a transaction to be bogus has to be strictly discharged by adducing evidences which would either directly prove the fact of bogusness or establish circumstances unerringly and reasonably raising an interference to that effect. Though the AO refers to deposition made by some brokers which is nothing but general modus operandi but neither the AO furnished a copy of those statements nor provided any opportunity to cross examine them is afforded to the assessee, so it cannot be used against the assessee to draw adverse inference. In this regard, reliance is placed upon the following judgement: Andman Timber Industries vs CCE – (2015) 62 taxmann.com 3 (SC) = 2015-TIOL-255-SC-CX.

9. It is noted that the transactions of sales happened through a recognized share broker and received and made the payments through account payee cheques. Merely on the basis of suspicion, transactions happened in recognizes stock exchange through recognized share broker cannot be treated as ingenuine. Reliance is placed upon the following cases:

i. CIT vs Carbo Industries Holdings Ltd. 244 ITR 422 (Cal)

ii. CIT vs Emerald Commercial Ltd. 250 ITR 539 (Cal)

ii. CIT vs Bhagwati Prasad Agarwal (Calcutta High Court); ITA No. 22 of 2009, dated 29.04.2009.

10. Though purported deposition has been made admittedly behind the back of assessee, there is not shred of evidence on record to prove the complicity of the assessee in the alleged modus operandi as suggested by AO but neither the AO furnished a copy of those statements nor provided any opportunity to cross examine them was afforded to the assessee, so it cannot be used against the assessee to draw adverse inference. The AO has also nowhere in the assessment order referred to any material which can prove the complicity of assessee in the alleged accommodation entry operation. If the assessee has taken advantage of the price rise in an open manner through the transaction conducted in the official online system, no adverse inference can be drawn against the assessee. The AO has referred to a SEBI order (at page 2 of the assessment order) for drawing adverse inference. It is noted that the said SEBI order has been revoked vide another order dated 21.09.2017 (Copy found enclosed at page 49 to 64 of the compilation of judgments). As per the Ld. AR the AO/CIT(A) was not justified in invoking the provisions of section 68 of the Act in regard to the sale proceeds of shares. There is no evidence on record to disbelieve that the assessee sold shares through registered Stock Exchange and stock broker. The assessee produced all evidences to explain the source of the amounts received by the assessee from the brokers. The AO was not justified in assessing the sale proceeds of shares as undisclosed income. So, taking note of the documents referred to in para 4 (supra) and the facts discussed above and in view of the above ratio in a similar case in the case of M/s KAFL, I am respectfully following the same, cited supra, reverse the orders of the lower authorities and allow the claim of assessee.

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

(Order pronounced in the open court on 12.06.2019)

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