Sudha Eashwar Vs ITO (ITAT Chennai)
The assesse is claiming exemption by way of long term capital gains claimed by it to be earned on sale and purchase of Turbotech Engineering Ltd. by invoking provisions of Section 10(38) of the 1961 Act and onus is on the assessee to prove that these gains are genuine and assessee is entitled for exemption. The AO has not only relied upon investigations carried by other government agencies but has also conducted independent inquiries with BSE which also revealed that the prices of the shares of Turbotech Engineering Ltd. were rigged / manipulated with an intent to defraud revenue. The financials of said company M/s Turbotech Engineering Limited wherein there is no turnover/income earned and no expenses incurred by said company for last five years also does not support price variation of Rs. 19.65 per share to Rs. 518 per share within previous year 2013-14 relevant to ay: 2014-15, which clearly points to manipulation and rigging in share price of Turbotech Engineering Ltd. with malafide intention to defraud revenue. It is unbelievable that assessee having never dealt in share market will earn a yield / return of 12500% per annum within 2 years on her first dealing in stock market which also happened to be last dealing undertaken by assessee in stock market. The claim of the assessee that purchase of shares hares was made in cash in November 2011 and that the DMAT of the shares of said company Turbotech Engineering Ltd. in assessee’s DMAT account was credited after around one and half year in March 2013 just 6-8 months prior to sale clearly point to one and one irresistible conclusion that long term capital gains earned by assessee was bogus. This conclusion remains unshaken even if we eschew investigation conducted by other government agencies. Thus, there is no need to forward statements recorded or material collected by other government agencies in this case as even without these material collected by other government agencies, liability to tax can be fastened against assessee and hence there is no need to allow cross examination as liability to tax can be fastened on assessee in this case without relying on material collected by other government agencies. In this case, the AO himself has conducted inquiries which clearly points to one and only irresistible conclusion that these gains earned by assessee were bogus and sham transactions to convert her unaccounted money into legitimate money through circuitous route of sale and purchase of listed shares of M/s Turbotech Engineering Limited which is a penny stock and the assessee is trying to take advantage of exemption provision as enshrined u/s 10(38) of the 1961 Act. The onus was on assessee to prove that long term capital gains claimed by her as an exempt income u/s 10(38) of the 1961 Act were genuine gains and assessee was entitled for claiming exemption u/s 10(38) of the 1961 Act, keeping in view decision of Constitution Bench of Hon’ble Supreme Court in the case of Commissioner of Customs ( Import), Mumbai v. Dilip Kumar and Company & Ors. in Civil Appeal No. 3327 of 2007, judgment dated 30.07.2018 Keeping in view entire factual matrix of the case, we are of the considered view that long term capital gains earned by assessee to the tune of Rs. 39,77,886/- on purchase and sale of shares of M/s Turbotech Engineering Ltd. are bogus/sham gains and authorities below have rightly denied exemption claimed by assessee u/s 10(38) of the 1961 Act.
FULL TEXT OF THE ITAT JUDGEMENT
This appeal filed by assessee is directed against appellate Order dated 28.06.2019 passed by learned Commissioner of Income Tax (Appeals)-7, Chennai (hereinafter called “the CIT(A)”), in ITA No.231 (T-14)/CIT(A)-7/2 016-1 7 for assessment Year (ay) 2014-15, the appellate proceedings before learned CIT(A) had arisen from assessment order dated 31.12.2016 passed by learned Assessing Officer (hereinafter called “the AO”) for assessment year 2014-15 5 u/s.143(3) of the Income-tax Act, 1961 (hereinafter called “the Act”).
2. The grounds of appeal raised by assessee in memo of appeal filed with the Income-Tax Appellate Tribunal, Chennai (hereinafter called “the Tribunal”) reads as under:-
“1. The order of the Ld. Commissioner of Income-Tax (Appeals) is against law as well as facts. The action of the CIT (A) in dismissing the appeal is unjustified, arbitrary and against law.
2. The learned Commissioner of Income Tax (Appeals) has erred to notice or adjudicate the issue that the Assessing Officer (A. O) had made the additions without even stating under which provisions of the Income Tax Act, 1961 he made those additions. Such non-mentioning the section invoked renders the assessment order bad in law.
3. The Ld. CIT (A) has completely erred against facts when she held that there is no violation of Natural justice as according to CIT (A) giving a show cause notice is sufficient compliance of “Natural Justice”. The fact is that the A.O has neither furnished the copy of the statement recorded from a third party implicating the Appellant herein and nor the appellant was given an opportunity to cross examine the person who is purported to have given a statement implicating the appellant. This is a clear violation of Principle of Natural justice and this ground was never considered by the Ld. CIT (A) while passing the order on Appeal.
4. The Appellant submits that she was not given any opportunity to rebut the evidence, if any, gathered at the back of the Appellant. It is imperative that the Appellant shall be furnished with such information and should have been granted an opportunity to cross-examine the person who is purported to have given a statement implicating the Appellant. This violates the provisions of natural justice and on this factor alone, the order of the Assessing Officer deserved to be quashed.
5. Increase and decrease in market rates of shares on stock exchange always based on market forces and are determined on the basis of so many factors. It is not within the power of appellant to manipulate the rates of shares on stock exchange. Merely because there is, a sharp increase in the rates of shares, no adverse inference could be drawn only on the basis of mere suspicion and in absence of any direct or cogent evidence. It cannot be inferred that the Appellant has manipulated the share price merely because it moved up sharply. The AO has to produce material/evidence to show that the assessee/ brokers did price rigging/manipulation of shares. The AO must also show that the relevant evidence produced by the assessee in the form of bills, contract notes, demat statement, bank account etc to prove the genuineness of the transactions are false, fictitious or bogus.
6. 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 evidence. In this case, the AO relies only on a report as the basis for the addition. The evidence based on which the report is prepared is not brought on record by the AO nor is it put before the assessee.
7. The appellant submits that neither the CIT (A) nor the A.O has failed to adduce any evidence that there was an accommodation of cash being converted into mainstream income. The A.O’s order was purely based on suspicion and surmises and based the port made against a set of stack(sic. stock) brokers. The AO nt investigation nor has he gathered any evidence against the department’s investigation report made against a set of stack (sic. stock) brokers. The assessing officer has not made any independent investigation nor has he gathered any evidence against the appellant to hold that the impugned share sales are not genuine. On the contrary the Appellant has produced the evidence for holding the shares in physical form earlier and then dematerialized the shares later and sold through a recognized stock exchange and the sale proceeds were received through proper banning(sic. banking) channels. Such chain of transactions cannot be held as “Bogus” or “sham” merely on suspicion or surmises by the AO.
8. The appellant submits that the recording of the statement from any person which is used as evidence in any proceedings under this act is not a conclusive proof of evidence by itself. The appellant has the right to cross-examine the person who has given this statement. This injustice has been ignored by not allowing cross-examining the person whose statement has been relied before dismissing the appeal by the Hon. CIT (A).
9. That having regard to the facts and circumstances of the case, Ld. CIT(A) has erred in law and on facts in confirming the action of AO in charging interest u/s.234B, 234C and 234D of the Act.
10. That the appellant craves the leave to add, modify, amend or delete any of the grounds of appeal at the time of hearing and all the above grounds are without prejudice to each other. The appellant prays that on the above grounds, the Hon. Income-tax Appellate tribunal may kindly delete the additions and pass such as they deem fit.”
3. Before we proceed further, it is pertinent to mention at this stage that assessee filed stay petition bearing SP No. 268/Chny/2019 arising out of appeal in ITA No. 2342/Chny/2019 for ay: 2014-15 with tribunal seeking stay of outstanding demand of income-tax and interest thereon, which stay petition was disposed off by Chennai-tribunal on 13.09.2019. When the stay petition filed by assessee came up for hearing before the Bench on 13.09.2019 , the learned counsel for assessee Mr. S. Mohan, FCA and Ms Lekha, FCA were present before the Bench and argued for grant of stay of outstanding demand of income-tax and interest thereon. After hearing both the parties and keeping in view facts and circumstances of the case as discussed in order dated 13.09.2019 passed by the Bench disposing off stay petition , the Bench was pleased to grant early hearing of the appeal in ITA No. 2342/Chny/2019 for ay: 2014-15 wherein date of early hearing was fixed by Bench before regular Bench on 09th October 2019 which date of hearing of the of the appeal was announced by the Bench in open court in the presence of both the rival parties and the same was duly noted by both the rival parties. It was made clear in the order dated 13.09.2019 disposing off stay petition that no fresh notice of hearing will be issued to both the rival parties as the date of hearing was announced in open court in the presence of both the parties which date was duly noted by both the rival parties . The Revenue on its part although objected to grant of stay of outstanding demand of tax and interest but did not raise any objection to grant of early hearing of the appeal announced by the Bench for 09.10.2019. The Bench while disposing off stay petition was pleased to place a condition for grant of early hearing of appeal that assessee will not seek adjournment when appeal will come up for hearing before the Bench unless for genuine and bonafide reasons. When , now this assessee’s appeal in ITA no. 2324/Chny/2019 for ay: 2014-15 came up for hearing before the Bench on 09.10.2019 , the assessee and/or its learned counsel did not appear before the Bench nor any application for adjournment is moved by assessee and/or its learned counsel before the Bench. The learned DR on its part has strenuously argued for confirming the orders passed by authorities below. Now, with this back ground when conditions imposed in the order passed by the Bench on 13.09.2019 disposing of stay petition are blatantly infringed/violated , the Bench decided to proceed to adjudicate this appeal filed by assessee in ITA no. 2342/Chny/2019 for ay: 2014-15 after hearing learned DR and in the absence of the assessee.
4. The brief facts of the case are that assessee is an individual and partner in partnership firms. The assessee filed her return of income for impugned ay: 2014-15 on 29.07.2014 declaring total income of Rs. 4,99,910/-. The assessee’s case was selected by Revenue under CASS for framing scrutiny assessment u/s 143(3) read with Section 143(2) of the 1961 Act. The statutory notices u/s 143(2) as well notices u/s 142(1) of the 1961 Act were duly issued by AO and served on assessee. During the course of aforesaid scrutiny proceedings conducted by AO, it was observed by AO that assessee has claimed an exempt income to the tune of Rs. 39,77,886/- u/s.10(38) of the 1961 Act. The said exemption was claimed by assessee on sale of long term capital asset, being shares of M/s. Turbotech Engineering Ltd. . The AO observed that investigations were conducted by various regulatory and enforcement agencies of Government of India which indicated that said company namely M/s.Turbotech Engineering Ltd. was a company with little or no inherent value and its share prices were rigged and manipulated with an object of conversion of unaccounted income into apparently genuine income to claim exemption u/s.10(38) of 1961 Act. The assessee was show caused by AO as to why said income which was claimed as an exempt u/s 10(38) of the 1961 Act should not be treated as an unexplained income of the assessee. In its reply filed by assessee before the AO, the assessee submitted that income is exempt u/s 10(38) of the 1961 Act and therefore the same should not be brought to income-tax. The AO observed that assessee had purchased 15000 shares of M/s. Turbotech Engineering Ltd. from M/s. Shivani Tradecom Pvt. Ltd. vide share bill dated 22.11.2011 for Rs. 2/- per share. The AO observed that assessee is residing in Chennai while M/s.Shivani Tradecom Pvt. Ltd. from whom shares were purchased by assessee is registered at Mumbai and said company M/s.Shivani Tradecom Pvt. Ltd. is having little or no means. As per AO, the assessee was not able to explain as to how she being housewife/partner in two firms having no business activity could contact a company located in Mumbai and how she got information that M/s Shivani Tradecom Private Limited had shares to sell. Thus, the AO observed that the assesese could not explain reasons for investing good money in said company. The AO further observed that payment for aforesaid share purchase of Turbotech Engineering Limited did not took place through banking channel and payment for purchase of shares was made in cash as reflected in cash receipt issued by M/s Shivani Tradecom Private Limited vide their letter dated 24.11.2011. The AO also observed that these are alleged cash purchases , there is no proof of assessee having bought these shares on that particular date. The AO also observed that share transfer form is witnessed by a person named Mr. T.B.Patel residing at Ahmedabad. The AO observed that assessee could not explain as to how assessee who is based in Chennai has dealt with Mumbai based company namely M/s.Shivani Tradecom Pvt. Ltd. for purchasing these shares and as to how it is witnessed by a person located in Ahmedabad. The AO observed that assessee could not prove that all three parties namely assessee, the seller and witness were present at the same place at the same time when share transfer deed stood executed by all the three aforesaid persons. The assessing officer further observed that assessee has not furnished travel details to indicate that all three persons were in-fact present at the same place at the same time. The assessing officer observed that assessee has opened a DMAT account with ICICI securities on 26-10-2010 and another DMAT account with Integrated Enterprises India Limited on 24-9-2013. The assessing officer observed that aforesaid shares which were allegedly purchased on 22-11-2011 were dematerialized with ICICI Securities on 12-3-2013, i.e., nearly one and half years from the purchase of shares. The assessing officer observed that subsequently these shares were sold on 23-9-2013 and 22-11-2013 and assessee claimed exemption under section 10(38) of the 1961 Act on long-term capital gains arising on sale of said shares. The AO further observed that assessee has not furnished travel details to indicate that all three persons were in-fact present at the same place at the same time. The AO observed that assessee has opened a DMAT account with ICICI securities on 26.10.2010 and another DMAT account with Integrated Enterprises India Limited on 24.09.2013. The AO observed that aforesaid shares which were allegedly purchased on 22.11.2011 were dematerialized with ICICI Securities on 12.03.2013 i.e. nearly one and half years from the purchase of shares. The AO observed that subsequently these shares were sold on 23.09.2013 and 22.11.2013 and assessee claimed exemption u/s 10(38) of the 1961 Act on long term capital gains arising on sale of said shares. The AO observed that the above sequence of events clearly reveals that assessee has manipulated entire sequence of events related to alleged purchase of aforesaid shares to introduce unaccounted income as an exempt income. The AO called for information u/s.133(6) of the Act from Bombay Stock Exchange (in short “BSE”) regarding transactions carried out by assessee during the year under consideration. The BSE in response thereof submitted desired data’s to the AO from which AO observed that assessee has not dealt with any share through BSE during entire year under consideration. The AO observed that assessee has only dealt with shares of M/s.Turbotech Engineering Ltd. during the year under consideration. The AO also observed that it is beyond human probabilities to accept that assessee out of all listed securities in BSE has chosen to trade in only share of company namely M/s Turbotech Engineering Ltd. during the year under consideration. The AO further observed that BSE through a notice bearing number 20150101-24,dated 01.01.2015 has suspended under the directions of SEBI , as a surveillance measure, the trading in securities of M/s.Turbotech Engineering Ltd.(Scrip Code 504358) effective from 07.01.2015 until further notice. The AO brought on record key financial parameters of M/s.Turbotech Engineering Ltd. for 2011-12 to 2015-16 in its assessment order , which are re-produced hereunder:
