ITAT Upholds Denial of Section 10(38) Exemption on SRK Industries Shares

Pankaj Agarwal & Sons (HUF) Vs ITO (ITAT Chennai)

The ITAT Chennai disposed of eight connected appeals involving identical issues for Assessment Year 2014-15 arising from orders passed by the Commissioner of Income Tax (Appeals). The principal dispute related to the denial of exemption under Section 10(38) of the Income-tax Act on long-term capital gains arising from the purchase and sale of equity shares of M/s. SRK Industries Ltd. The Assessing Officer had treated the transactions as sham and added the gains as unexplained cash credits under Section 68. The appeals also involved issues relating to computation of total income, incorrect computation of sale consideration in certain cases, denial of set-off of losses in one appeal, and levy of interest under Sections 234B and 234C. The Tribunal heard all appeals together and disposed of them by a common order.

The Assessing Officer, while completing the assessments under Section 143(3), concluded that the transactions in the shares of M/s. SRK Industries Ltd. were not genuine. The assessment relied upon findings of the Investigation Wing and SEBI, according to which the company lacked credibility, trading in its shares was manipulated through a syndicate of brokers and broking entities, and beneficiaries sold the shares after the prices had been artificially increased to claim exemption under Section 10(38). The Assessing Officer further recorded that brokers facilitating such transactions generally received commission in cash and that the price manipulation enabled beneficiaries to convert unaccounted money into exempt long-term capital gains. Relying on these findings and judicial precedents, the Assessing Officer rejected the exemption claimed under Section 10(38) and treated the gains as unexplained cash credits under Section 68.

The Commissioner of Income Tax (Appeals) confirmed the assessment after detailed consideration.

Before the Tribunal, the assessees contended that they had not been provided an opportunity to cross-examine the witnesses relied upon by the Revenue, that the investigation report of the Investigation Wing had not been furnished, and that adequate opportunity of hearing had not been provided. On this basis, they requested that the matters be remitted to the Assessing Officer for fresh consideration. The Revenue opposed the request and supported the orders of the lower authorities.

The Tribunal observed that the assessees had failed to substantiate before it that the share transactions were genuine and had also failed to controvert the findings recorded by the Assessing Officer and the Commissioner (Appeals). It further noted that the objections regarding denial of cross-examination, non-supply of the investigation report, and inadequate opportunity of hearing had not been raised before the lower authorities. Since both the Assessing Officer and the Commissioner (Appeals) had examined the issues in detail and there was no material before the Tribunal to interfere with their findings, it confirmed the orders of the Revenue authorities on the principal issue. Consequently, the challenge to the denial of exemption under Section 10(38) and the addition under Section 68 was rejected in all the appeals.

The Tribunal, however, found that certain grounds related only to computation of income. In the cases concerning the alleged incorrect adoption of total income and erroneous computation of the aggregate sale value of shares, it remitted the matters to the Assessing Officer for verification of the assessees’ claims and for passing orders in accordance with law. Similarly, in the appeal involving denial of the benefit of set-off of losses on sale of shares, the Tribunal observed that neither the Assessing Officer nor the Commissioner (Appeals) had discussed the issue in detail and therefore restored the matter to the Assessing Officer for fresh consideration.

With regard to interest under Sections 234B and 234C, the Tribunal held that the levy was consequential in nature.

Accordingly, the Tribunal partly allowed the appeals of Shri Ramkishan Agarwal, Smt. Sampatti Agarwal, Shri Rajnish Agarwal and Shri Pankaj Kumar Agarwal by remanding the computation-related issues to the Assessing Officer, while dismissing the appeals of M/s. Pankaj Agarwal & Sons (HUF), Smt. Mamta Agarwal, M/s. Rajnish Agarwal & Sons (HUF) and M/s. R.K. Agarwal & Sons (HUF).

FULL TEXT OF THE ORDER OF ITAT CHENNAI

These appeals by the assessees are directed against the orders passed by the learned Commissioner of Income Tax (Appeals)-12, Chennai as detailed herein below for the assessment year 2014-15 passed U/s.250(6) r.w.s.143(3) of the Act :-

Since the issues in all these appeals are identical, they have been taken up for hearing together and disposed off by this common order.

2. The assessees have raised several identical grounds in their appeals however the following grounds were argued before us at the time of hearing:-

(i) The Ld.CIT(A) has erred in confirming the addition made by the Ld.AO U/s.68 of the Act, by rejecting the assessees claim of exemption U/s.10(38) of the Act on the Long Term Capital Gains earned out of the purchase & sale of equity shares of the company M/s. SRK Industries Ltd., by holding that the transactions are sham and tailored to bring the unaccounted money as the legitimate gain in the guise of Long Term Capital Gain which is exempt U/s.10(38) of the Act.

ii. In the case of Shri Ramkishan Agarwal in ITA No.1416/Chny/2018 the assessee has raised the ground that the Ld.AO had erroneously adopted the total income as Rs.5,95,016/- as against Rs.5,25,690/- declared by the assessee in the return of income while computing the income of the assessee.

iii. The Ld.AO had erroneously computed the aggregate value of the sale of shares of M/s. SRK Industries Ltd., as follows while computing the Long Term Capital Gain:

iv. In the case of Rajnish Agarwal in ITA No.1419/Chny/2018 the assessee has raised the ground that the Ld.CIT(A) has erred in confirming the order of the Ld.AO who had not allowed the benefit of set-off of losses on the sale of shares amounting to Rs.6,01,730/- while computing the total income.

(v) The assessees object to the levy of interest U/s.234B & 234C of the Act.

3. The brief facts in all these appeals are that the assessees cases were selected for scrutiny and orders were passed U/s.143(3) of the Act on 29.12.2016, wherein the Ld.AO treated the purchase and sale of shares of M/s. SRK Industries Ltd., as sham transaction and thereby the claim of exemption U/s.10(38) of the Act, with respect to the Long Term Capital Gain earned by the assessees on those transactions were denied and the same was treated as unexplained cash credit U/s.68 of the Act.

4. While doing so, the Ld.AO analyzing the issue in detail arrived at the conclusion that the following findings of the wing corroborates with the findings of the SEBI:-

(i) The company in which the assessees had purchased the equity shares had no creditability and no prudent investor would make such investment.

ii. As per the finding of the investigation report of the investigation wing, the members who participated in the trading of the scrip during mid-2013 to mid-2014 were part of the syndicate of brokers and brokering entities indulging in price rigging.

iii. The ultimate beneficiary of all the price manipulation is the beneficiaries like the assessees who sold the shares when the share price was sufficiently brought to a high level and could take the benefit of Section 10(38) of the Act.

iv. For facilitating such bogus entries, the brokers were paid commission in cash generally around 6% of the value of the transaction or Rs.0.50 to Rs.1/- for every Rs.100/- transacted.

v. But for the price rigging and manipulative actions of the brokers the assessee would not have earned such Long Term Capital Gain.

vi. The motive of the price manipulation is only to bring out their black money as legitimately earned Long Term Capital Gain for which exemption U/s.10(38) of the Act is available.

5. The Ld.AO further relied on the following decisions while deciding the cases against the assessees:-

i. The Hon’ble Apex Court in the case Sumathi Dayal reported in 214 ITR 801, it was held that “In our opinion, the majority opinion after considering surrounding circumstances and applying the test of human probabilities has rightly concluded that the appellant’s claim about the amount being her winning from races is not genuine. It cannot be said that the explanation offered by the appellant in respect of the said amounts has been rejected unreasonably and that the finding that the said amounts are income of the appellant from other sources is based on evidence.”

ii. The Hon’ble Apex Court in the case M/s. Durga Prasad More reported in 82 ITR 540, it was held that “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.”

iii. In the Landmark McDowell Vs. CTO case, the Hon’ble Apex Court had held “Colourable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by resorting to dubious methods. It is the obligation of every citizen to pay the taxes honestly without resorting to subterfuges.”

6. On appeal the Ld.CIT(A) confirmed the order of the Ld.AO after detailed deliberations.

7. Before us the Ld.AR submitted that the assessees were not provided with an opportunity to cross-examine the witness who were relied by the Revenue and further failed to furnish the investigation report of the intelligence wing of the Revenue before concluding the assessment. The Ld.AR further argued that the assessees were not provided with proper opportunity of being heard. It was therefore pleaded that the matter may be remitted back to the file of Ld.AO for fresh consideration. The Ld.DR strongly opposed to the submission of the Ld.AR and requested for confirming the orders of the Ld.Revenue Authorities.

8. We have heard the rival submissions and carefully perused the materials on record. At the outset we must say that the Ld.AR could not justify before us any of their claims made before the Ld.Revenue Authorities that the transaction was genuine. Further the Ld.AR could not successfully controvert to any of the findings of the Ld.Revenue Authorities before us which are against the assessees. Instead the Ld.AR has only come out with the plea that the assessees were not provided with opportunity of cross-examining the witness, the investigation report was not furnished and proper opportunity was not provided of being heard. However we find that all these arguments raised by the Ld.AR before us was never alleged before the Ld.Revenue Authorities when the matter was before them. In this situation we do not have any other option but to confirm the orders of the Ld.Revenue Authorities in the case of all the assessees because the Ld.AO as well as the Ld.CIT(A) have arrived at their respective decisions after considering the issues in the appeal in detail and there is nothing before us to disturb their findings. Accordingly we hereby confirm the Order of the Ld.Revenue Authorities on this issue. Thus the first ground raised by the assessees herein above in all the appeals are held against the assessees.

9. With respect to the Ground No. 2(ii) & 2(iii) raised by the assessees in the respective appeals, we find that the issue is with respect to computation of total income from the basic facts of those cases and therefore we hereby remit back the matter to the file of Ld.AO to verify the claim of the assessees and thereafter decide the matter in accordance with law and merit.

10. In the Ground No. 2(iv), the assessee has raised the issue that the Ld.AO has denied the benefit of set-off losses. Since we do not find any detailed discussion on the issue by the Ld.AO as well as the Ld.CIT(A), we remit back the matter to the file of Ld.AO for fresh consideration.

11. Levy of interest U/s.243B and 243C of the Act is consequential in nature and therefore this ground raised by the assessees is devoid of merits.

12. In the result the appeals of the assessees in ITA Nos.1416, 1418,1419 & 1420/Chny/2018 are partly allowed and the appeals of the assessees ITA Nos.1413, 1414, 1415 & 1417/Chny/2018 are dismissed.

Order pronounced on the 6^th December, 2018 at Chennai.