Shri Vijayrattan Balkrishan Mittal Vs DCIT (ITAT Mumbai)
The issue for consideration before us is whether in such cases, the legal evidence produced by the assessee has to guide our decision in the matter or the general observations based on statements, probabilities, human behavior and discovery of the modus operandi adopted in earning alleged bogus LTCG and STCG, that have surfaced during investigations, should guide the authorities in arriving at a conclusion as to whether the claim is genuine or not. An alleged scam might have taken place on LTCG etc. But it has to be established in each case, by the parry alleging so, that this assessee in question was part of this scam. The chain of events and the live link of the assessee’s action giving his involvement in the scam should be established. The allegation implies that cash was paid by the assessee and in return the assessee received LTCG, which is exempt from income tax, by way of cheque through banking channels. This allegation that cash had changed hands has to be proved with evidence, by the revenue. Evidence gathered by the Director Investigation’s office by way of statements recorded etc. has to also be brought on recording each case, when such a statement, evidence etc. is relied upon by the revenue to make any additions. Opportunity of cross examination has to be provided to the assessee, if the AO relies on any statements or third party as evidence to make an addition. If any material or evidence is sought to be relied upon by the AO, he has to confront the assessee with such material. The claim of the assessee cannot be rejected based on mere conjectures unverified by evidence under the pretentious garb of preponderance of human probabilities and theory of human behavior by the department.
It is well settled that evidence collected from third parties cannot be used against an assessee unless this evidence is put before him and he is given an opportunity to controvert the In this case, the AO relies only on a report as the basis for the addition. The evidence based on which the DDIT report is prepared is not brought on record by the AO nor is it put before the assessee. The submissions of the assessee that he is just an investor and as he received some tips and he chose to invest based on these market tips and had taken a calculated risk and had gained in the process and that he is not party to the scam etc., has to be controverted by the revenue with evidence when a person claims that he has done these transactions in a bona fide manner, one cannot reject this submission based on surmises and conjectures. As the report of investigation wing suggests, there are many beneficiaries of LTCG. Each case has to be assessed based on principles of legal import laid down by the Courts of law.
In our view, just the modus operandi, generalisation, preponderance of human probabilities cannot be the only basis for rejecting the claim of the assessee. Unless specific evidence is brought on record to controvert the validity and correctness of the documentary evidences produced, the same cannot be rejected by the assessee. The Hon’ble Supreme Court in the case of Omar Salay Mohamed Sait v. CIT [1959] 37 ITR 151 (SC) had held that no addition can be made on the basis of surmises, suspicion and conjectures. In the case of CIT v. Daulat Ram Rawatmull [1973] 87 ITR 349 (SC) (SC) the Hon’ble Supreme Court held that, the onus to prove that the apparent is not 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 legal evidences, which would directly prove the fact of bogusness or establish circumstance unerringly and reasonably raising interference to that effect. The Hon’ble Supreme Court in the case of Umacharan Shaw & Bros. v. CIT (1959) [1959] 37 ITR 271 (SC) held that suspicion however strong, cannot take the place of evidence. In this connection we refer to the general view on the topic of conveyance of immovable properties. The rates/sale prices are at variance with the circle rates fixed by the Registration authorities of the Government in most cases and the general impression is that cash would have changed hands. The courts have laid down that judicial notice of such notorious facts cannot be taken based on generalisation. Courts of law are bound to go by evidence.
But in the present case, we noted that the assessing officer has been guided by the report of the investigation wing prepared with respect to bogus capital gains transactions. The assessing officer has not brought out any part of the investigation wing report in which the assessee has been investigated and /or found to be a pan of any arrangement for the purpose of generating bogus long term capital gains. Nothing has been brought on record to show that the persons investigated, including entry operators or stock brokers, have named that the assessee was in collusion with them. In absence of such findings how is it possible to link their wrong doings with the assessee. In fact, the investigation wing is a separate department which has not been assigned assessment work and has been delegated the work of only making Investigation. The Act has vested widest powers on this wing. It is the duty of the investigation wing to conduct proper and detailed inquiry in any matter where there is allegation of tax evasion and after making proper inquiry and collecting proper evidences the matter would be sent to the assessment wing to assess the income as per law. We find no such action executed by investigation wing against the assessee. In absence of any findings specifically against the assessee in the investigation wing report, the assessee cannot be held to be guilty or linked to the wrong acts of the persons investigated. In this case, the AO at best could have considered the investigation report as a starting point of Investigation. The report only Informed the AO that some persons may have misused the scrip: for the purpose of collusive transactions. The AO was duty bound to make inquiry from all concerned parties relating to the transactions and then to collect evidences that the transaction entered into by the assessee was also a collusive transaction. However, the AO has not brought on record any evidence to prove that the transactions entered by the assessee which are otherwise supported by proper third party documents are collusive transactions.
FULL TEXT OF THE ITAT JUDGEMENT
These twelve appeals of different assessees are arising out of the orders of Commissioner of Income Tax (Appeals)-50, Mumbai in Appeal Nos. CIT(A)-50/10032 ,10263, 10264,10265, 10266, 10267,10268,10270,10271,10273/2017-18, 2018-19 of even date 28.03.2019. The Assessments were framed by the Dy. Commissioner of Income Tax (Central Circle)-8(1), Mumbai (in short DCIT/ITO/ AO) for AYs 2012-13,2013-14, 2014-15, 2015- 16 of even dated 22.12.2017, under section 143(3) read with section 153A of the Income-tax Act, 1961 (hereinafter ‘the Act’).
2. The first common issue in these appeals of four different assessee’s is as regards to the order of CIT(A) confirming the action of the AO in treating transactions of sale of shares of listed companies as bogus thereby making addition under section 68 of the Act being sale proceed of such transactions treating the same as unexplained income under section 68 of the Act. Consequently, also on second interconnected issue, the CIT(A) confirmed the action of the AO in making addition on the basis of presumption that the assessee has paid commission for alleged accommodation entries of long term capital gain and added the same under section 69C of the Act. For this, all these assessee’s have raised identical grounds and the facts and circumstances in all the cases are also identical. Both, the learned counsel for the assessee’s as well as leaned CIT DR fairly stated that facts on merits in all these appeals are same. Hence, only one appeal was argued and all will be adjudicate accordingly. The lead appeal on merits is ITA No. 3248/Mum/2019 for the AY 20 15-16 and the grounds raised are the following ground Nos. 2 to 4: –
“2. a. The AO/ CIT(A) erred in law and facts in treating the transaction of sale of shares of listed company as bogus and thereupon making an addition of Ps. 14,19,36,826/- under section 68 of the Act, being the sale proceeds of such transaction, treating the same as unexplained income. The reasons given are wrong, contrary to facts of the case and against the provision of law;
b. The CIT(A) erred in upholding the action of the AO in making an addition of 14,19,36,826/- under section 68 of the Act, being the sale proceeds of sale of shares of a listed company through recognized stock exchange even when the identity and nature of the source of the said credit were explained and proved. The reasons given are in the realm of assumption and presumption upon which no addition is sustainable:
c. The AO/ CIT(A) erred in law and facts in relying on certain data, information from BSE. findings of the general investigation in unrelated cases and also third party statements without, establishing connection or involvement to or of the Appellant that too without allowing the Appellant any opportunity to cross examine those parties/ information:
d. The AO CIT(A) failed to appreciate that nowhere do the information and identify the Appellant as a beneficiary of the alleged accommodation entries:
e. The AO/ CIT(A) erred in law and facts in treating the transaction of sale of shares of listed company as bogus and undisclosed income merely the suspicion and assumption that the prices of the shares of listed company were manipulated and appreciation in the value was very high even when the market regulator, SEBI, has not found any manipulation or involvement of appellant;
f. The AO/ CIT(A) erred in making addition u/s 68 of the Act disregarding the final orders passed by SEBI, related to share transactions of listed company on the stock exchange and the fact that the said order nowhere alleged the involvement of appellant or his broker as the beneficiary of the alleged scheme.
g. Without the prejudice, the CIT(A) failed to appreciate that Ps. 14,16,80,449/- has been credited to the Appellant’s account being sale proceeds of shares as against the addition of Ps. 14,19,36,826/-.
3. The AO/ CIT(A) erred in law and facts in making an addition of Ps. 42,58,104/- under section 69C of the Act on the presumption that commission @ 3% was paid for alleged accommodation entries of long term capital gain.
4. The AO/ CIT(A) erred in law and facts in passing the assessment order Solely on the basis of assumptions. presumptions. surmises and conjecture without any cogent material or evidence hence it is illegal and contrary to the principles of natural justice.”
3. Brief facts of the case are that the assessee filed his return i.e. original return of income on 28.08.2015 [wrongly mentioned by CIT(A) as 17.07.2014], whereas the correct date is written by the AO) for AY 20 15-16 declaring the total income of ₹ 45,80,790/-. A search and seizure action under section 132 of the Act was carried out by the Income Tax Department on 03.12.20 15 at the resident and office premises of the assessee and its group companies and other associates. Consequent to the search action under section 132 of the Act, a notice under section 153A of the Act was issued by the AO on 16.01.2017. In response to notice under section 153A of the Act, the assessee filed its return of income on 30.02.2017 declaring a total income of ₹ 47,38,420/-. The assessment was framed vide order dated 22.12.20 17 under section 143(3) read with section 153A of the Act on a total income of ₹ 15,10,08,650/-. The AO made addition under section 68 of the Act amounting to ₹ 14,19,36,826/- on account of unexplained cash credit under section 68 of the Act being sale proceed of transactions of sale of shares as bogus. Consequently, the AO also made addition of ₹ 42,58,104/- under section 69C of the Act being commission paid on accommodation entries paid by the assessee.
4. Brief Facts relating to this issue are that the assessee had applied for 1,50,000 equity shares of Rs. 10/- each of Pine Animation Limited (PAL) in the preferential issue of shares. The payment was made to PAL through an account payee cheque vide cheque no. 147952 dated 09.03.2013 of Axis Bank for Rs. 15,00,000/- which was debited in the assessee’s bank a/c on 13.03.2013. The assessee before AO and CIT(A) and also now before us filed copies of share application form, relevant bank statements showing payment and shares allotment advice. These are enclosed in Assessee Paper Book (APB) at page 73- 75. The company allotted 1,50,000 equity shares of Rs. 10/ each at par on 15.03.2013 and credited the shares to his demat account. The purchase of shares was duly disclosed in the balance sheet for the year ended 31st March, 2013 and after verification of all documents there is no observation of the AO relating to acquisition of shares of PAL and payment thereof in assessment order u/s 143(3) r.w.s. 153A for AY 2013-14. Subsequently, the shares were split into Re. 1/- per share by PAL on 21.05.2013. Copy of demat statement showing the allotment and split enclosed at page 192 of APB. Further, in FY 2014-15 (AY 2015-16) the assessee sold the above shares of PAL on BSE Platform through his regular broker M/s Geojit, who is registered with BSE and SEBI, the market regulator. The assessee has been dealing in shares through his broker Geojit for last 10 years. The assessee received sale proceeds of shares directly from his broker Geojit by credit to his Axis bank a/c on the date of settlement. Copies of contract notes along with summary and relevant bank statements showing the amount credited are enclosed in APB (Pages 77-186, pages 195-198 & Pages 188-190). Copies of broker’s ledger and Form 10DB is also enclosed (pages 199-215). The sale transactions of shares have suffered expenses like brokerage, service tax, STT, stamp duty, exchange and SEBI turnover charges, etc. which are specifically shown in the contract notes issued by the Broker.
5. The assessee during the year under consideration has earned long term capital gain (LTCG) amounting to ₹14,00,76,815/- on sale of shares of Pine Animation Ltd. (PAL) a company listed on Bombay Stock Exchange. The assessee had 15 lacs equity shares of PAL in earlier years and after holding more than one year sold those shares during the year of consideration for a sum of ₹14,16,80,449/-. The assessee sold these shares on BSE network and paid STT, service tax, stamp duty, etc. The assessee claimed this LTCG as exempt under section 10(38) of the Act. During the course of assessment proceedings, the AO required the assessee to prove his claim of LTCG on sale of shares of PAL vide letter dated 20.11.2017. The assessee filed various details in support of his claim but AO rejected relying on report of investigation wing and held that receipt of sale proceeds from BSE broker or clearing system is unexplained cash credit and made addition under section 68 of the Act. The AO has concluded his finding and which are summarized as under: –
“i) The assessee has mainly traded in one script which is suspicious.
ii) The assessee traded in single scrip and has made huge profits.
iii) To prove genuineness, proof of physical transfer of shares, reasons to trade off-market when options to online market trading through demat account were available, trading pattern of market transactions for the last three years, have not been submitted by the assessee.
iv) The assessee earned long term capital gain in the current year and claimed it as exempt u/s 10(38) of the This quantum of huge long term capital gain was found suspicious and detailed investigation of this issue was undertaken. Various tools available were examined including ITD data, BSE data, money control website, taxman, court rulings, internet as well as investigation wing report and findings of the SEBI.
v) Long term capital gains booked by assessee in his books were prearranged method to evade taxes and launder Following are the findings and the reasons which substantiates the findings.
a) Mode of acquisition of the shares & period of holding: Mahendra Mittal was allotted 1,50,000 preference shares of M/s Pine Animation Ltd. at the rate of Rs. 10/- per share on 10.04.2013 vide allotment letter 10.04.2013. This shareholding increased to 15,00,000 number of shares after splitting of shares in the ratio of 1:10 as per the decision of the Board on 20.05.2013. The assessee sold all the shares of PAL between 02.04.2014 to 06.20 14, thereby earning an exempt bogus LTCG.
b) Unrealistic ‘return on Investments: It is seen that Assessee has sold shares of these three companies and have earned unbelievable returns. Normal returns on savings were around 7% for F.Y. 2014-15 and around 16% for BSE/Sensex. It is seen- that you have earned 9362% of returns on investments when sensex gold returns are far behind the strong performance of these three companies without having any supporting financial results itself is a circumstantial evidence to show that your LTCG is not genuine one.
c) Findings of investigation wing: The findings of the Directorate of Investigation of Mumbai and Kolkata as discussed above have proved that Shri Narendra Shah and associated brokers, entry operators and the assessee had worked out an arrangement in which the shares were Acquired by the assessee, the share prices were rigged and then with the help of entry operators by routing the cash, shares were sold at high price to arrive at tax free capital gains.
d) Analysis of transactions: Facts revealed that such trading transactions of purchase and sale of shares are not been effected, for commercial purpose but to create artificial gains, with a view to evade taxes –
i) Transactions of shares were not governed by market factors prevalent at relevant time in such trade, but same were product of design and mutual connivance on part of assessee and the operators.
ii) The assesses resorted to a preconceived scheme to procure long-term capital gains by way of price difference in share transactions not supported by market factors.
iii) Cumulative events in such transactions of shares revealed that same were devoid of any commercial nature and fell in realm of not being bona fide and, hence, impugned long term capital gain is not allowable.
iv) The order of SEBI referred above has also given the similar finding that the prices of the shares were determined artificial by manipulations and cannot be a product of market factors and commercial
v) Failure of Assessee to discharge his onus: The assessee has not been ‘able to prove the unusual rise and fall of share prices to be natural and based on the market forces. It is evident that such share transactions were closed circuit transactions and clearly structured one.
vi) Ignorance of the assessee about shares and penny stock companies: Assessee has failed to show of having any knowledge about the shares traded and ‘having any knowledge about the fundamentals off the penny stock companies.
Though the assessee has denied to have any knowledge about the shares traded and having any knowledge about the fundamentals of the penny stock companies but considering, the above findings and the fact that the transactions are arranged in such a manner to gain astronomical gains, doubts the claim of assessee
vii) Financial analysis of the penny stock companies: The net worth of the penny stock company is Even though the net worth of the company and the business activity of the company is negligible the share prices have been artificially rigged to unusual high.
ix) Order of the SEBI: SEBI order has been passed in the case of PAL vide dated 08.05.2015 which directs that the trading in the securities of shall he suspended till further directions. Vide this order, SEBI has noted that the shares of PAL have been manipulated and rigged thereafter the shares have been sold by the beneficiaries of bogus LTCG/STCG on the stock exchange to avail accommodation entry.
x) Cash trail in the accounts of the entry providers: The investigations in the fund flow analyzed in the accounts of the entry providers have established that the cash has been routed front various accounts to provide accommodations to assessee.
xi) Arranged transactions: The transactions entered by the assessee involve the series of preconceived steps, the performance of each of which is depending on the others being carried out. The true nature of such share transactions lacked commercial contents, being artificially structured transactions, entered into with the sole intent, to evade taxes.
xii) Non-compliance from exit providers: Further, notice under section 133(6) of the Act was issued to the exit providers to furnish details related to the above said transactions but no compliance was received from the said parties.
xiii) The income tax liability is ascertained on the basis of the material available on record, the surrounding circumstances, human conduct and preponderance of probabilities.
xiv) After considering the findings of the search/ survey, inquiries conducted in the case of assessee, brokers, operators and the entry providers and the nature of transaction entered into by the assessee the LTCG claimed exempt u/s 10(38) of the act by the assessee cannot be allowed and the amount received back as sales proceeds on sale of shares is required to added back towards his taxable income under section 68 of the Act.”
Aggrieved, against the order of the AO, assessee preferred the appeal before CIT(A).
6. The CIT(A) also confirmed the action of the AO by observing (the relevant paras are being reproduced) as under: –
“Details of the Penny Stock Transaction
12.0 During the year under consideration, the Appellant had claimed LTCG on the shares of PAL, as exempt u/s 10(38) of the Act. As per the details placed on record, the sale consideration of the shares of M/s Pine Animation Ltd. for the year under consideration is amounting to Rs.14,19,36,826.50/- and the same had been added back by the AO, as unexplained cash credit u/s 68 of the Act.
12.1 The facts are that the Appellant had got allotted 1,50,000 preference shares of PAL at the rate of Rs. 10/- per share on 10.04.2013, vide allotment letter dated 10.04.2013 of the said company. The Appellant had stated that it had paid an amount of Rs. 15,00,000/- on 13.03.2013 from it’s Axis Bank Account. This initial of shareholding of ₹ 1,50,000 preference shares of PAL of the Appellant had increased to 1 5,00,000 shares, after there was a splitting of shares in the ratio of 1:10, as per the decision of the Board of PAL on 20.05.2013.
12.2 Finally, the Appellant had sold the entire shareholding of 15,00,000 shares of M/s PAL between 02.04.2014 to 12.06.2014 on BSE through the broker namely M/s Geojit BNP Paribas Financial Services Ltd. for a consideration of ₹ 14,19,36,826.50/-.
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Share capital of PAL
24.0 The PAL share is listed on Bombay Stock Exchange with the Scrip ID 511421 formerly known as “Four K Animation Limited”. On September 30, 2012, PAL had a share capital of Rs. 3,00,00,000 comprising 30,00,000 equity shares of ₹10 each, with the promoters holding 9,27,400 shares i.e. 30.91% of the total share-holding.
24.1 On December 13, 2012, PAL made a preferential allotment of 1,50,00,000 equity shares at the price of ₹ 10 per share (hereinafter referred to as the “1st preferential allotment) to 49 entities. Thereafter, the promoters namely, M/s First Entertainment Private Limited and M/s Unique Image Production Pvt. Ltd. who were holding shares in the physical form, transferred their entire holdings i.e. 9,27,400 shares to 6 entities (hereinafter referred to as “Promoter related entities).
24.2 Subsequently, on March 15, 2013, PAL made another preferential allotment of 97,00,000 equity shares at the price of Rs. 10 per share (hereinafter referred to as the “2 preferential allotment”) to 48 entities, which included 5 entities who were allotted shares in the 1″ preferential allotment.
24.3 In total, PAL had allotted 2,47,00,000 equity shares to 92 entities. The equity shares allotted on preferential basis to aforesaid allottees were locked-in for a period of one year i.e. up to December 12, 2013 for the 1 preferential allotment and March 14, 2014 for the 2nd preferential allotment in terms of the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009.
24.4 On May 20, 2013 the equity shares of PAL were split in the ratio of 1:10. Consequently, the paid up share capital of PAL increased to 27,70,00,000 comprising of 27,70,00,000 shares of Rs. 1 each, as on May 20, 2013.
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26.4 The Appellant’s statement was recorded during the course of search proceedings u/s. 132 of the Act, wherein he had stated that all his affairs related to share markets were managed by his father, Shri Balkrishan Mittal. The Appellant had contended that they had got some information about some scrips, where there were reasonable chances of getting good return in short terms. But the source of information, basis of information, documentary evidence in support of such a claim had not been furnished by the Appellant. Thus, the Appellant had only made general and vague observations on the issue of allotment of preference shares. Hence, the make believe story of the Appellant can’t be accepted in the absence of any documentary evidence.
26.5 These contentions of the Appellant had also been brush aside by SEBI in it’s confirmatory order dated 2nd June 2016 and the relevant excerpt of the said order are reproduced hereunder, for ready reference: –
“13. In the instant case, it is undisputed that trading in the scrip of Pine was suspended from November 09, 1998 till June 21, 2012 and during the financial year 2011-12, it had incurred a loss of ₹ 7,08,037 and thereafter earned a meagre profit of ₹15,60,007 during FY 2012-13. It does not appeal to reason that the Notices, who claim to be regular investors in the securities market, invested their hard-earned money in a company like Pine with such poor fundamentals and background without having any connection / relation with the promoters/directors of Pine. When asked during personal hearing, the Notices’ authorized representatives failed to give any plausible explanation as to how the company could make allotment to the Notices if they were not known to it or its promoters/directors and if they had no nexus/connection with them. I am unable to accept the explanation of the Notices that they invested in Pine to on the advice / tips of some random public sources. I note that the Notices have not been able to furnish any satisfactory documentary evidence to explain how they were approached by Pine for the preferential allotment, or in providing the details of the offer made by Pine to them and other details of communication between them and Pine in that regard. It is important to note that financing of a company by way of preferential allotment, as found in this case, presupposes a nexus and prior understanding amongst the issuer, its promoters/directors and the allottees.”
26.6 The Appellant had failed to substantiate the claim that it had made investment in preferential allotment of PAL, as a genuine investor. A stranger cannot make large investment in a preferential allotment merely on the basis of an advice or presentation without having any connection direct or indirect, and prior understanding with the company. Further all the Preferential Allottees were involved in a similar series of acts, starting from the preferential allotment of shares to their exit from the company. Further, the similar modus operandi adopted by almost all the Preferential Allottees is not a mere coincidence and leaves no doubt their involvement in the bogus LTCG Scam.
Poor Financials of Pine Animation Ltd.
27.0 A perusal of the audited accounts of PAL indicate its poor financial condition and razor thin profit for several years in continuity. Before the audited accounts of PAL are examined and commented upon in details, it is important to reproduce some of the important figures contained in the balance-sheets & profits and accounts for the years ending from March, 2011 to March 2015, as under: –
