Anraj Hiralal Shah (HUF) Vs ITO (ITAT Mumbai)
The assessee appealed against the order dated 04.05.2018 passed by the Commissioner of Income Tax (Appeals)-51, Mumbai for Assessment Year 2014-15, challenging the partial confirmation of additions relating to the sale of shares after rejection of the claim of long-term capital gains.
The assessee had filed the return declaring capital gains and income from other sources. It claimed exempt long-term capital gain of ₹8,40,497 under Section 10(38) arising from the sale of 2,200 shares of M/s Sunrise Asian Ltd. (formerly Santoshi Maa Tradelinks Ltd. before amalgamation). The shares were purchased in April 2012 for ₹1,33,430 and sold in May 2013 for ₹9,73,927.
The Assessing Officer reopened the assessment after receiving information from the Investigation Wing that trading in the shares of Sunrise Asian Ltd. was linked to suspicious long-term capital gains. The Assessing Officer also referred to the statement of one of the directors of Sunrise Asian Ltd., who had admitted that the prices of the company’s shares had been rigged. After discussing the alleged modus operandi adopted for generating exempt long-term capital gains through manipulated share prices, the Assessing Officer held that the assessee’s purchase and sale transactions were not genuine. Although the assessee explained that the shares had been purchased using speculation profits earned in the preceding financial year, the Assessing Officer disbelieved the contract notes relating to the speculation profits. Holding that the sale transactions were also doubtful due to the sharp rise in share prices, the Assessing Officer rejected the claim of capital gains, assessed the entire sale consideration of ₹9,73,927 as unexplained cash credit under Section 68, and further added 2% of the sale consideration as alleged expenditure incurred for obtaining accommodation entries.
The Commissioner (Appeals) granted partial relief by restricting the addition to the net gain earned by the assessee. The Commissioner (Appeals) also observed that the speculation profit had been earned through another broker, whereas the impugned shares were claimed to have been purchased through M/s Eden Financial Services Ltd.
Before the Tribunal, the assessee submitted that the observation of the Commissioner (Appeals) was factually incorrect since the financial statements for the earlier assessment year showed speculation profits earned through two brokers, one of them being M/s Eden Financial Services Ltd., from whom the shares had been purchased. It was further submitted that neither the broker through whom the shares were purchased nor the broker through whom they were sold had been identified as tainted brokers. The assessee also contended that the purchase of shares and the source of investment had been accepted in the preceding assessment year, the shares were credited to the demat account, and the sale was effected through the demat account. It was argued that the Assessing Officer had not established any connection between the assessee and the directors of Sunrise Asian Ltd. alleged to have rigged the share prices.
The Revenue contended that the Investigation Wing had unearthed a large-scale racket involving manipulation of share prices to generate exempt long-term capital gains and that Sunrise Asian Ltd. was one of the identified scrips. It was submitted that the directors of the company had admitted to price rigging and that the Commissioner (Appeals) had rightly sustained the addition.
The Tribunal observed that the assessee had purchased the shares through M/s Eden Financial Services Ltd. and sold them through Intime Equities Ltd., and that it was not the case of the Assessing Officer that either of these brokers had been identified as tainted brokers involved in fraudulent transactions. The Tribunal further noted that the speculation profit earned through M/s Eden Financial Services Ltd. in the immediately preceding year had been accepted by the Revenue and that the same amount had been utilised for purchasing the shares. The shares were reflected as investments in the balance sheet, their purchase had been accepted, and delivery of the shares stood established through the demat account.
The Tribunal found that the Assessing Officer had not produced any material to establish that the assessee was a participant in the alleged fraudulent price rigging. In the absence of evidence connecting the assessee with any bogus transaction or manipulation, the Tribunal held that the long-term capital gains declared by the assessee could not be doubted. Consequently, the addition made under Section 68 and the consequential addition towards alleged expenditure were held to be unsustainable.
The Tribunal set aside the order of the Commissioner (Appeals) on both issues, directed the Assessing Officer to delete both additions, and allowed the assessee’s appeal. The order was pronounced on 16.07.2019.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
The appeal of the assessee is directed against the order dated 04-052018 passed by Ld CIT(A)-51, Mumbai and it relates to the assessment year 2014-15. The assessee is aggrieved by the decision of Ld CIT(A) in partially confirming addition relating sale of shares made by the AO rejecting the claim of capital gains.
2. The facts of the case are that the assessee filed his return of income declaring capital gains and income from other sources. The assessee had declared long term capital gain of Rs.8,40,497/ and claimed the same as exempt u/s 10(38) of the Act. The assessee had sold 2200 shares of M/s Sunrise Asian Ltd (formerly Santoshi Maa Tradelinks Ltd before amalgamation) for a value of Rs.9,73,927/- in May, 2013. The assessee had purchased the above said shares in April 2012 for a consideration of Rs.1,33,430/-. The AO received information from investigation wing that the trading in shares of Sunrise Asian Ltd falls under the category of suspicious long term capital gains on shares. Accordingly he reopened the assessment of the year under consideration. One of the directors of M/s Sunrise Asian Ltd had admitted before the revenue that the prices of shares have been rigged. The AO, after discussing the modus operandi adopted for booking long term capital gain by rigging the prices, came to the conclusion that the transactions of purchase and sale made by the assessee are not genuine. The assessee submitted that he had earned speculation profit in the financial year relevant to the AY 2013-14 and used the same for purchase of shares. The AO disbelieved the contract notes relating to speculation profit. Since there was unusual rise in the prices of shares of M/s Sunrise Asian Ltd, the AO took the view that the genuineness of transactions of sale is also in doubt. Accordingly he rejected the claim of capital gains and assessed the net sale consideration of Rs.9,73,927/- as income of the assessee u/s 68 of the Act. The AO also added 2% of the sale consideration as expenses incurred by the assessee in procuring long term capital gain entries.
3. The Ld CIT(A) gave partial relief by sustaining addition to the extent of net gains made by the assessee. In addition to the reasoning given by the AO, the Ld CIT(A) also observed that the speculation profit was earned by the assessee from some other broker, while the shares were claimed to have been purchased from M/s Eden Financial Services Ltd.
4. The Ld A.R submitted following points:-
(a) The ld CIT(A) was not right in observing that the assessee had earned speculation profit from some other broker. Inviting our attention to the copies of financial statements furnished for AY 2013- 14, the Ld A.R submitted that the assessee has earned speculation profits from two brokers in that year, one of which is M/s Eden Financial Services Ltd, from whom the shares were purchased against the speculation profit.
b. The brokers from whom the assessee had purchased shares and through whom the assessee sold shares have not been identified as tainted brokers.
c. The purchase of shares and the source of purchases have been accepted by the assessing officer in the preceding year.
d. The shares have been received in d-mat account of the assessee and they have been sold through the d-mat account only.
Accordingly the Ld A.R submitted that the assessing officer has disbelieved the transactions for the reason that the there is huge jump in the prices of shares in view of alleged rigging of prices by the directors of the above said company. He submitted that the AO has not established any link between the assessee and the directors of the company. Accordingly he submitted that the assessee has purchased and sold the shares in the normal course. Accordingly he submitted that there is no reason to suspect the transactions of the assessee.
5. On the contrary, the Ld D.R submitted that the investigation wing of the department has unearthed huge racket of rigging of prices of the shares with the fraudulent motive of generating tax exempt capital gains. The revenue has identified suspicious share transactions and the shares of M/s Sunrise Asian Ltd were one of such shares. He submitted that the directors of the above said company has admitted the price rigging. Accordingly he submitted that the Ld CIT(A) was justified in confirming the addition.
6. The Ld A.R, in the rejoinder, submitted that the assessing officer has made the addition u/s 68 of the Act, while the assessee has offered the gain as long term capital gain. However, the AO has assessed entire sale consideration as income. He submitted that the Hon’ble Rajasthan High Court has upheld the order of Tribunal in deleting an identical addition in the case of CIT vs. Smt. Pooja Agarwal (D.B. Income tax Appeal No.385/2011 dated 11.09.2017), since the shares were transacted through Stock Exchange. He submitted that the assessee, in the instant case also, has transacted the purchase and sale transactions through stock exchange only. He further submitted that the assessee has purchased and sold shares of other companies also, which is evident from the d-mat statement.
7. I have heard rival contentions and perused the record. I notice that the AO has received information about suspicious share transactions and on the basis of the same; he has disbelieved the claim of long term capital gains. I notice that the assessee has purchased shares through a broker named M/s Eden Financial Services and sold shares through Intime Equities Ltd. Thus, I notice that the purchase and sale of shares have been carried out through two different brokers. It is not the case of the AO that both the share brokers referred above have been identified as tainted brokers involved in fraudulent transactions.
8. The assessee has earned speculation profit in the immediately preceding year through M/s Eden Financial Services also and the said profit has been used to purchase the shares of M/s Sunrise Asian Ltd. The assessee has offered the speculation profit for income tax purposes in the immediately preceding year and it has been accepted. Further the assessee has shown the purchase of impugned shares as investment in the Balance Sheet. Hence the purchase of shares has been accepted. Further the shares have been received in the D-mat account of the assessee and they have been sold through the D-mat account only. Hence the delivery of shares also stand proved. The AO has not brought any material on record to show that the assessee was part of fraudulent price rigging. Accordingly, in the absence of any evidence to implicate the assessee or to prove that the transactions are bogus, I am of the view that the capital gains declared by the assessee cannot be doubted with. In that view of the matter, the addition made towards expenses is not also sustainable.
9. Accordingly, I set aside the order passed by Ld CIT(A) on both the issues and direct the AO to delete both the additions.
10. In the result, the appeal of the assessee is allowed.
Order pronounced on 16-07-2019
