Mr. Sanjiv Shroff Vs ACIT (ITAT Kolkata)
Conclusion: When the nature and source of the money is explained with all supporting documents the question of treating the said gain as unexplained cash credit under section 68 of the Act cannot arise unless the AO is able to find fault/infirmity with the same.
The transactions were all through account payee cheques and reflected in the books of accounts. The purchase of shares and the sale of shares were also reflected in Demat account statements. The sale of shares suffered STT, brokerage etc. In the facts and circumstances of the case, it cannot be held that the transactions were bogus.
Facts:
Assessee purchased 1 Lakh shares of M/s. Careful at face value of Re. 1. M/s. Careful got amalgamated into KAFL and assessee were allotted 1 Lakh shares of KAFL. Shares were sold at INR 37,60,405 and assessee claimed exemption u/s 10(38).
AO contended that the price movement of the scrip in 18 months raised doubt in mind and the profit earned was beyond human probabilities. AO treated the transaction as bogus and made addition u/s 68.
Held:
The fact of holding the shares of M/s. KAFL in the D-mat account cannot be disputed. Further, the Assessing Officer has not even disputed the existence of the D-mat account and shares credited in the D-mat account of the assessee. Therefore, once, the holding of shares is D-mat account cannot be disputed then the transaction cannot be held as bogus.
The AO has not disputed the sale of shares from the D-mat account of the assessee and the sale consideration was directly credited to the bank account of the assessee, therefore, once the assessee produced all relevant evidence to substantiate the transaction of purchase, dematerialization and sale of shares then, in the absence of any contrary material brought on record the same cannot be held as bogus transaction.
When AO has not brought any material on record to show that the assessee has paid over and above the purchase consideration as claimed and evident from the bank account then, in the absence of any evidence it cannot be held that the assessee has introduced his own unaccounted money by way of bogus long term capital gain.
FULL TEXT OF THE ITAT JUDGEMENT
The three appeals i.e. ITA Nos.1197, 1054 & 1198/Kol/2018 of the Assessee’s belonging to the same family, arise out of the independent orders of the Learned Commissioner of Income Tax (Appeals) -10, Kolkata for AY 2014-15 dated 19.04.2018. As the issues involved are identical in all the appeals, they are taken up together and disposed off by this common order for the sake of convenience. Therefore, the appeal of Shri Sanjiv Shroff in ITA No.1 197/Kol/2018 are taken up for adjudication and the decision rendered thereon would apply to all the appeals also, except with variance in figures.
2. Though the assessee had raised several grounds of appeal the main issue is as to whether on the facts and circumstances of the case, the ld CITA was justified in upholding the addition made by the AO u/s 68 of the Act in respect of sale proceeds of shares of M/s Kailash Auto Finance Limited (KAFL) treating the same as income from undisclosed sources after rejecting the assessee’s claim of Long Term Capital Gains (LTCG) on sale of those shares.
3. The brief facts of the issue as has been recorded by the AO in the Assessment Order are that the assessee claimed long term capital gains from sale of shares of M/s. Kailash Auto Finance Limited (KAFL). The AO noted that the assessee had purchased 1,00,000 shares of M/s. Careful Projects Advisory Limited (CPAL) at a face value of 1 each in for a total consideration of Rs. 1,00,000/- which company (CPAL) later got amalgamated with M/s. KAFL by virtue of an order of Hon’ble Allahabad High Court and in pursuance to such amalgamation, the assessee was allotted 1,00,000 shares of KAFL of the face value of Rs. 1 each. The said shares were later sold through a broker named M/s. Ratnabali Capital Markets Ltd. on different dates falling within the previous year 2013-14 corresponding to the Asst Year 2014-15 at a price of Rs.37,60,405/-., which according to assessee, resulted in Long Term Capital Gains and so the assessee claimed exemption u/s 10(3 8) of the Act.
4. However, the AO did not agree with the assessee’s claim of LTCG and exemption thereof claimed by the assessee. According to AO, it is unbelievable that the assessee can make a fantastic gain in a span of 18 months. According to AO, the price movement of the scrip in the span of 18 months raised doubts in his mind and that profit earned by the assessee were beyond human probabilities. The AO noticed that the company, M/s. CPAL, was incorporated on 18.09.2010 with authorized and paid up share capital of Rs. 1 lakh. The company increased its authorized share capital to Rs.34.50 lakhs and thereafter issued 330155 shares of the face value of Rs. 10 each at the premium of Rs.590 to different entities. The AO also observed that during the FY 2011-12, M/s. CPAL increased its authorised share capital to Rs.29 crores and then the shares of Rs. 10 each were split into 1:10 i.e. each shares of Rs. 10 into shares of Re. 1 each. The said company CPAL thereafter issued bonus shares to the existing equity shareholders in the ratio of 1:55. The AO suspected the issue of bonus shares in the unrealistic ratio of 1:55. He was of the opinion that the probable reasons were with a view to provide large amount of LTCG in the hands of beneficiaries after amalgamating the said company with KAFL. The AO concluded that CPAL was incorporated with a dubious plan and premeditated arrangement and artifice to increase number of shares therein through sham and non genuine transactions of its shares which resulted in fetching exorbitant and unrealistic considerations in the scheme of amalgamation. The AO referred to the statement of Shri Sunil Dokania recorded u/s 131 of the Act by the Investigation wing on 12.06.2015, wherein, Shri Dokania has explained the modus operandi of providing of LTCG in the scrip of KAFL. He stated that by way of amalgamation of CPAL with KAFL, the beneficiaries of LTCG got higher number of shares of KAFL as against shares of CPAL. Mr. Dokania, in the aforesaid statement, stated before the investigation wing that he had got equal amount of cash from the beneficiaries, deposited the same to various undisclosed proprietorship concerns, and finally transferred the same to bogus/shell companies, by layering through various accounts, who had ultimately purchased the shares sold by the beneficiaries. The AO has also relied upon another statement of Shri Sunil Dokania recorded u/s 131 by the Investigation wing on 6.3.20 13, in the case of Rashmi Group of Kolkata ; Statement of Shri Bidyoot Sarkar recorded on 8.4.2015 u/s 133A in the case of Religare Securities Limited; Statement of Shri Narendra Balasia recorded on oath u/s 133A in the case of SMC Global Securities Limited ; Statement of Shri Pradip Jain recorded on 3 1.3.2015 u/s 131 and the two Statements of Shri Amit Dalmia recorded by the Investigation wing on 31.3.2015 and 5.6.2015. The statements were annexed to the Assessment Order to come to a conclusion that the assessee was one of the beneficiaries of the transactions in shares of KAFL which resulted in bogus claim of exempt LTCG.
5. The AO, on the basis of movement of price of KAFL quoted in Bombay Stock Exchange during the period of September, 2013 to January, 2014 (the period of sale of shares of KAFL by the assessee), found that the price of shares had increased by 267%. The AO concluded that while Sensex showed almost no progress, price of shares of KAFL moved phenomenally. The AO also referred to the financials of KAFL during the Financial years 2011-12 to 20 15-16 and concluded that Earnings per share (EPS) during that period was either nil or negative but the value of shares was highly inflated. The AO observed that the prices of shares of KAFL were rigged by the entities connected to KAFL.
6. The AO referred to three separate orders passed by SEBI dated 29thMarch, 2016, 15th June, 2016 and 31st October, 2016 in support of his adverse conclusions drawn against the assessee that several entities related/connected to KAFL rigged the prices by 230% during the period of January, 2013 to June, 2013 (Patch-1), created artificial demand and thereafter provided exit to the beneficiaries during the period of July 2013 to November, 2014 (Patch-2). The said orders passed by SEBI contained list of related/connected parties of KAFL and also the list of beneficiaries. Some of these were restrained from accessing the securities market and buying, selling or dealing in The AO concluded that the in depth analysis done by SEBI in the three orders is direct evidence against the assessee to hold that the prices of KAFL were manipulated and artificially hiked to create non-genuine LTCG in the transactions of KAFL. The AO further concluded that confessions given on oath by the promoters/brokers/operators are the circumstantial evidence against the assessee that the LTCG was arranged one.
7. The AO also made enquiries from the Bombay Stock Exchange as to the counter party members who bought the shares of KAFL sold by the assessee through his share broker viz. M/s. Ashika Stock Broking Limited. The AO found that the buyers of the shares had weak financials and therefore he doubted the genuineness of the transactions. And the summons issued to the said parties came back un-served and/or no response was received thereon. The ld AO referred to his test check analysis of one of the buyer of shares sold by the assessee viz. M/s. Rajwanshi Promoters Private Limited and found that the source of funds for making investment by M/s. Rajwanshi Promoters Private Limited was the funds received from different entities and observed that the ultimate source was cash deposited in two bank accounts at 4th or 5th layers. On the basis of the said test check analysis, the AO doubted the genuineness of purchases transactions done by all the buyers in relation to shares sold by the assessee. The AO observed that the cash trail analysis prepared on sample basis strengthens the suspicions over the genuineness of the buyers of shares and further suspected that the unaccounted cash of the assessee was layered into the bank account of the exit providers.
8. The AO relying on the various decisions viz. Hersh Win Chaddha v. DCIT [ITA 3088 to 3098 & 3104/Del/2005], Sumati Dayal v. CIT 214 ITR 801 (SC), Durga Prasad More v. CIT, Mcdowell & Co. V. CTO, CIT v. P. Mohankala] observed that tax liabilities can be assessed by revenue authorities on consideration of material available on record, surrounding circumstances, human conduct, preponderance of probabilities and nature of incriminating information/evidence available on record. The AO ultimately concluded that in such clandestine operations and transactions, it is impossible to have direct evidence or demonstrative proof of every move.
9. The AO concluded that the assessee’s transactions resulting in LTCG on sale of shares of KAFL were bogus and that the assessee ploughed back his unaccounted money in the books of accounts which is assessable under section 68 of the Act.
10. On first appeal, the Ld. CIT(A) dismissed the grounds raised by the assessee against his claim of exemption u/s 10(3 8) of the Act and he also confirmed the additions made by the AO under section 68 of the Act. Aggrieved, the assessee is in appeal before
11. We have heard rival submissions and gone through the facts and circumstances of the case. At the time of hearing it was brought to our notice that this Tribunal in the following cases have decided that the scrips of M/s KAFL are not bogus and held that the LTCG claim of the assessee need to be allowed:
i) Manish Kumar Baid Vs. ACIT, ITA Nos. 1236& 1237/Kol/2017 dated 08.20 17
ii) Rukmini Devi Manpria Vs. DCIT, ITA No.1724/Kol/20 17 dated 24.10.2018
iii) Jagmohan Agarwal Vs. ACIT, ITA No.604/Kol/2018 dated 05.09.2018.
12. 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) 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 .
13. We note that similar issue arose in Manish Kumar B aid, (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.”
14. Coming back to the facts of the instant case before us, we note that the assessee had purchased 1,00,000 Equity shares of M/s. Careful Projects Advisory Limited on 13.02.2012 which shares were credited to its de mat account on 24.02.2012. The assessee had made payment for purchase of above shares by cheque no. 825565 dated 20.02.20 12 drawn on Andhra Bank, Kolkata Main Branch from his current account no.007011011003846. The shares were purchased from M/s. Needful Vincom Private Limited, off market. Later M/s. Careful Projects Advisory Limited was amalgamated with M/s. Kailash Auto Finance Limited by an order dated 21.05.2013 u/s. 391, 394 of the Companies Act, 1956 of Hon’ble High Court. By virtue of this amalgamation, the assessee was allotted 1,00,000 equity shares of M/s. Kailash Auto Finance Limited in lieu of 1,00,000 equity shares of M/s. Careful Projects Advisory Limited, as per order of the Hon’ble High Court. In view of this order, shares of M/s. Careful Projects Advisory Limited got extinguished and shares of M/s. Kailash Auto Finance Limited were allotted and were credited to assessee’s de mat account on 13.07.2013. Copy of their share bill dated 13.02.2012 is seen placed in the paper book. We note that copy of de mat account which was opened since 20.06.2011 till date was also produced before the authorities below. We note that shares of M/s. Kailash Auto Finance were listed at BSE. Copy of De mat statement clearly reflecting debit of such shares from the account is found attached. The above shares were debited to the assessee’s de mat account as under:
