Deepak Valji Karia Vs ITO (ITAT Mumbai)
ITAT held that assessment order passed u/s. 143(3) of the Act by the Assessing Officer is bad in law and has to be quashed as the Assessing Officer has failed to provide the copies of statements on which he relied on for making assessments and also for not providing cross examination of those persons inspite of specific request made by the assessee. Thus, we quash the assessment orders passed u/s. 143(3) of the Act on this ground.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
1. This appeal is filed by the assessee against order of the Learned Commissioner of Income Tax (Appeals)–26, Mumbai [hereinafter in short “Ld.CIT(A)”] dated 14.08.2020 for the A.Y. 2015-16.
2. The brief facts of the case are, the assessee is an individual deriving income from Partnership Firm, commission and brokerage. The assessee filed his return of income for A.Y.2015-16 on 30.09.2015 declaring total income at ₹.14,76,480/-. The case was selected for complete scrutiny, statutory notices u/s 143(2) and 142(1) were issued and served on the assessee. In response, the AR of the assessee filed the relevant information as called for. A statement u/s 131 of the Act was recorded from the assessee and Shri Dharmendra Karia (brother of the assessee). The assessment was completed u/s 143(3) of the Act on 29.12.2017 determining total income at Rs.13,04,82,190/-.
3. During assessment proceedings, Assessing Officer noticed that assessee had declared long term capital gain on sale of Shares of Parasrampuria Credit and Investment Limited (PCIL), now it is known as MaaJagdambe Trade Links Ltd (MJTL) during the year and claimed exemption u/s 10(38) of the Act. The quantum of claim made by the assessee made the Assessing Officer to make the detailed investigation. The Assessing Officer heavily relied on the investigation made by the Investigation Wing, Kolkata, discussed in detail on the aspects of making profit by the various operators, the modus operandi etc., in his order, it is general in nature not specific to the assessee. He also investigated with the share broker who had dealt with the shares sold by the assessee.
4. Coming to the specific enquiry made in the case of assessee, Assessing Officer observed that PCIL is one of the scrips identified by the Kolkata Investigation Wing and it was being used to provide accommodation entries to the beneficiaries. Therefore, he heavily relied on the findings of the Investigation wing, further he observed that the assessee and his brother family has invested in this scrips and they sold 1250000 shares each (4 members) of MJTL. AO also observed that the assessee is not conversant with the share transactions, complete ignorance clearly indicate that the reality of transactions in the scrip of PCIL were not the same and actually an accommodation entry. It was submitted by the assessee that his elder brother was authorised person to look after the share transactions on his behalf. AO observed in his order that purchase of such huge shares in the company which has no fixed deposits, incurred loss of ₹.7.18 lakhs, defaulted repayment of secured loans, suspended the trading by BSE w.e.f 5.2.2001 till 2.5.2012 due to non-payment of Annual listing fees, no trades were executed during the period 3.5.2012 to assessee’s purchase date. Assessing Officer observed that with the above facts on record, still assessee and his family members preferred to invest in the above scrips, shows that it is predetermined move to bring hack unaccounted money. Therefore, these facts were considered as direct evidences which fortified that the LTCG was an arranged one after collaboration with certain operators. He has also discussed the market price of the scrips when the assessee invested and subsequent increase in the price of the scrips in his order, which has grown several times and assessee has made 4914% of returns on investment. According to the Assessing Officer, these are jacking up of prices by the operators, with the ulterior motive to make the high profit to the investors of this scripts. He brought on record various circumstantial evidences and heavily relied on the BSE report on the exit providers, especially on the PCIL scrips. He has analysed the BSE report and statement of Shri Vipul Vidur Bhatt, who had controlled the various companies, which was involved in the price rigging transactions, in his order. In short, Assessing Officer has summarized his findings in the following points: –
“3.13 Finally, after having discussed the issue in detail, the AO has concluded as under:
“(a) As evident from the sworn statement, the appellant in whose name huge LTCG was claimed knew nothing about the transaction in the scrip of MJTL.
(b) The appellant deposed in his sworn statement that various details regarding transactions in the scrip of MJTL were available with Mr. Dharmendra Karia, However, Mr. Dharmendra Karia did remember that he started business as sugar trader and later on shifted his business towards builders and developers in early 1990s. He also deposed that he had made approx. 100 buildings in Mumbai and Navi Mumbai. But when he was asked about the transaction in the scrips of MJTL, he submitted that he did not remember most of the details.
(c) Dharmendra Karia had made false deposition regarding sale of shares of MJTL through share broker M/s.Focus Shares & Securities Pvt. Ltd. It was thus evidently clear that the reality of the transactions was not such which was represented by the documents submitted by the appellant. Further, it also proved that there were deliberate attempts to hide the truth behind the transactions.
(d) The appellant and his family members had made investment in unknown scrips in respect of whom they did not know directors, nature of work and address of the company. As per statement of Mr. Dharmendra Karia, he did not even know as to whether M/s.PCIL was a profit making company or loss bearing. Such huge investment in an unknown company itself suggested that the appellant was having knowledge about the future occurrences.
(e) Isolated transactions by way of preferentia l purchase of shares were made by the appellant in respect of a little known company having no such financial record which could justify the Rs.1 crore investment made by the appellant and his family.
(f) There was no economic or financial justification for the sale price of these shares. Hence, the fantastic sale price realization was not at all humanly probable as there was no economic or financial basis.
(g) The appellant held shares of MJTL till it surged more than 4900%. This showed that the appellant was certain as to when he needed to offload the shares as the whole transaction was an arranged one. It was also proved by the fact that several exit providers were interlinked with each other. Further, the motive of the appellant was not to derive income by way of dividend etc. rather, to earn profit.
(h) The price of shares of MJTL was sky rocketed without having any awesome profit. All parameters essential for increase of price of shares were either not present or found unfavorable. Inspite of this, the share price had increased multi-fold, hence it was definitely due to artificial increase by circular trading of shares forming cartel.
(i) Some unscrupulous operators in the capital market were running a scheme of providing entries of LTCG for a commission.
(j) The financial result of the Penny Stocks used for the purpose clearly indicated that its quoted price at the peak was the result of rigging.
(k) Such schemes were prevalent for converting black money into white was common knowledge.
(I) A large number of individuals availed of the benefits of the scheme and took entries of LTCG amounting to thousands of crores.
(m) Many such individuals had voluntarily without any enquiry by any authority, withdrawn their claim and filed revised return in the Income Declaration Scheme, 2016,
(n) Several statements of brokers, operators, director of paper companies who bought these shares, directors of Penny stock companies all had confessed to such a scheme with detailed modus operandi which tallied with actual transaction.
(o) The appellant was one such beneficiary who had taken accommodation entry of LTCG
(p) Exactly similar entries had been taken by other family members of the appellant, the total amounting to several crores.
(q) Neither the appellant nor his family members had any knowledge about the basics of this stock.
(r) As the trading in these shares were at a predetermined time between pre-determined brokers at a predetermined price, there was virtually no scope of any genuine trades in share to buy or sell these shares. As private sales of these shares were made by the brokers with ab-initio mala fide intentions of providing accommodation entries in the nature of bogus LTCG/loss, there was no scope of any genuine person to acquire these scrips in off market transactions.
(s) Thus whoever had benefitted on large scale from transaction in these shares had transacted in accordance with the scheme and had admittedly converted his unaccounted cash equal to the sale proceeds of shares in to white in the guise of exemption under section 10(38) of the I.T. Act,
(t) The appellant declared transactions in his name but as per his statement, he knew very meagre details or knew nothing about the transaction in the shares of MJTL. This showed that a kind of benami transaction was being carried out.
(u) No proof was submitted as to whether any other share was held by the appellant till its value surged considerably.
(v) Despite extravagant increase in the share price of M/s.MJTL, it had not been justified as to why even part of the shares had not been sold by the appellant earlier.
(w) With so much evidence against the appellant, the onus was on the appellant to prove that his transactions were genuine and that he had not availed the benefit of the aforementioned scheme to convert black money into white.
(x) The findings of the Directorate of Investigation of Mumbai and Kolkata had proved various brokers as entry providers, the scrip of MJTL used for providing bogus LTCG and money trail in the case of paper companies. It was proved that the appellant had worked out an arrangement in which the shares were acquired by the appellant, 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.
(y) Facts revealed that such trading transactions of purchase and sale of shares had 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 appellant and the operators
ii. The appellant resorted to a pre-conceived 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 was not allowable.
iv. The shares of appellant had been purchased by same class of persons and in the general nature of trade, it was very difficult that the majority of share sold by a person was purchased by same class of persons even on different dates. The appellant had not been able to prove the unusual rise and fall of share prices to be natural and based on the market forces. It was evident that such share transactions were closed circuit transactions and clearly – structured one.
(z) Appellant as well as his brother who had looked after the whole affairs of investment in the alleged share transactions, had failed to show of having any knowledge about the shares traded and having any knowledge about the fundamentals of the penny stock companies
(aa) The earning per share and profits for the relevant period were negligible and in contrast with the price rise of the share of the company which were unusually high.
(bb) The investigations carried out by various investigation directorate had revealed that in the accounts of the entry providers, the cash had been routed from various accounts to provide accommodations to appellant.
(cc) The transactions entered by the appellant involved the series of preconceived steps, the performance of each of which was dependent on the others being carried out. The true nature of such share transactions lacked commercial contents, being artificially structured transactions, entered into with the sold intent to evade taxes.
(dd) The appellant had failed to appreciate that how a company who had no substantial business was being traded at such a high value and increase in sale price. In the circumstances the modus operandi of price rigging had been established by the department through various action.
(ee) The appellant had failed to furnish the details/evidences about what acumen and foresight he had before purchasing about a no substantial means private limited company i.e.M/s.PCIL. The appellant had shown tremendous gain from investment in a jarnakhurchi company. Every prudent investor considering the nature of business, financial worth of the company makes investments. In the instant case, the appellant had no in depth knowledge of the share market.
(ff) A planned tax avoidance tool cannot be used to defraud the interest of revenue. At the initial stage of operating of company, it cannot be said that in future the company will misuse the activities by way of providing accommodation entries. When got involved in such racket, the revenue tax took real time action and caught all the connivance and beneficiaries. The tax planning of appellant by way of accommodation entry was tax avoidance took which could not be allowed.
(gg) When the appellant had purchased and sold shares however he did not know about the financial worth of the company whose shares had been sold at such a high price. He even did not know as to how he acquired the shares, to whom he met for purchase of off market shares, what due diligence he carried out before purchasing shares of private limited company which had not financial worth and appellant could not answer all these basic questions and in such questions, there were standard replies as from one friend’ but no name of friend was provided by the appellant or his brother, Mr. Dharmendra Karia.
(hh) The facts and circumstances of the case, clearly suggested that the revenue cannot take or accept such make-believe transactions as presented by the appellant. Truth or genuineness of such transactions must prevail over the smoke screen, created by way of pre-meditated series of steps taken by the appellant, with a view to imparting a colour of genuineness and character of commercial nature, to such share transactions.
(ii) Accordingly, the whole transaction was executed through colourable device with a view to evade taxes. ”
5. Assessing Officer relied on the following case law to make the additions: –
(i) SumatiDayal Vs. CIT (214 ITR 801) (SC).
(ii) Durga Prasad More Vs. CIT (82 ITR 540) (SC).
(iii) McDowell & Co. Ltd., Vs. CTO (154 ITR 148) (SC).
(iv) CIT vs. P. Mohankala & Others (291 ITR 278 (SC).
(v) Shamin M. Bharvani (ITA No.4906/Mum/2011) of Hon’ble ITAT, ‘E’ Bench, Mumbai.
(vi) Hersh Win Chadha Vs. DCIT (ITA No. 3088 to 3098 & 3107/Del/2005 of Hon’ble ITAT, Delhi.
6. Aggrieved assessee preferred an appeal before Ld CIT(A) and filed detailed submissions for each of the points discussed by the Assessing Officer. Ld.CIT(A) considered the detailed submissions of the assessee and in his order he acknowledged that assessee has invested along with his family members in the shares of MJTL and he also acknowledged that assessee has followed instruction of his brother to make investments. Further he analysed the SEBI report. The SEBI investigation was undertaken to investigate whether there was connection between the company and the entities which had been identified by the integrated surveillance department. SEBI has investigated all those peoples who are involved in manipulating the prices within the small group of persons. In the SEBI investigations the name of the assessee’s brother Shri Dharmendra Karia and his wife Smt Meena Deepak karia were included. After the investigations the SEBI has exonerated the charges of price manipulation in the case of the assessee’s brother and his wife. Ld.CIT(A) discussed all these issues in his report and he proceeded to dismiss the appeal filed by the assessee by accepting the reasons for making addition by the Assessing Officer. Even Ld.CIT(A) has not brought any direct link with the price manipulation by the assessee or family members directly or indirectly.
7. CIT(A) has rejected the submissions of the assessee on the issue of not giving proper opportunity for cross verification of the persons on whose statements the additions were made, the statement of share broker and also the improper notice was issued at the fag end of the assessment for giving opportunity for cross examination.
8. Aggrieved assessee preferred an appeal before us raising following grounds in his appeal: –
“1. BECAUSE, the Ld. CIT(A) has erred in law and on facts in upholding the addition of Rs. 12,28,62,584/- u/s 68 of the Act, even though all material supporting the genuineness of the transaction was already on record.
2. BECAUSE, the Ld. CIT(A) has erred in law and on facts in failing to take cognizance of the facts that the shares in question were purchased in the period relating to AY 2013-14, which has not been doubted by the department, in that year.
3. BECAUSE, the Ld. CIT(A) has erred in law and on facts in denying the claim for exemption u/s 10(38) of the Act, while accepting that the paperwork for claim of exemption was in order.
4. BECAUSE, the Ld. CIT(A) has erred in law and on facts ignoring the categorical finding in SEBI report wherein the Appellant’s brother and wife are exonerated from the charge of price manipulation, in a transaction similar to the Appellant’s transaction in the present case.
5. BECAUSE, the Id. CIT(A) has erred in law and on facts in holding that there was no need for the AO to provide the report of the Investigation Wing to the Appellant, even on express request, although the AO has placed heavy reliance on the said report while confirming the impugned addition.
6. BECAUSE, the Ld. CIT(A) has erred in law and on facts in holding that there was no infirmity on the part of AO in failing to provide to the Appellant, an opportunity of cross examination of Shri.Vipul Vidhur Bhatt, even though his statement was reproduced in the assessment order and heavily relied upon while making addition.
7. BECAUSE, the Ld. CIT(A) has erred in law and on facts in denying that the Appellant was an unintended beneficiary of the long-term capital gain, without their being on record, any evidence to establish his complicity in any wrong doing.
8. BECAUSE, the Ld. CIT(A) has erred in law and on facts in presuming that 2.5% of the total sale consideration has been paid as commission (i.e. 2.5% of Rs. 12,28,62,584) and sustaining an addition of Rs. 30,71,564/- u/s 69C.”
9. At the time of hearing, Ld. AR made the submissions in detail and also filed the written submissions for the sake of brevity, written submissions are reproduced below: –
“2.1.1. The Assessee, aged 56 years, is assessed to tax since last more than 25 years. He is in the business of real estate and proprietor / partner / director of various concerns.
2.1.2 He is staying in a joint family, along with his family, his parents and the family of his brother with joint business in real estate development and consultancy. As per the family tradition, the share investments were looked after by the elder brother Shri Dharmendra Karia. Refer the submission of the Assessee before the A.O. as reproduced at Para 7 on Pg. 74 of the assessment order r.w. the statements of the Assessee (Q. 6, 7, 13 and [6 dt. 18.12.2017]) and of his brother Dharmendra (Q. 10, 15) as reproduced in the assessment order. This basic fact is admitted and undisputed.
2.1.3 The family was regular investor in shares since last many years. Refer Sr. No. 14 at Pg. 76 r.w. Sr. No. 14 at Pg. 83 of the assessment order.
2.1.4 he brother, Mr. Dharmendra Karia, is also a regular tax payer.
2.2 The share transaction
2.2.1 The Assessee, along with his brother and family members had subscribed preferential shares of Parshurampuria Credit & Investment Limited [PCIL’ — later on changed to Maa Jagdambe Tradelinks Limited (MJTU)] in second half of 2012 at par at Rs. 10 each (as per pricing formula of SEBI) (Refer Pg. 18 of the Paper Book [P.B.]). The payment of Rs. 25 lakhs was made by account payee cheque. In January 2014, the shares were split in the ratio of 1:5. The said company was established in 1985 and engaged in business of manufacturing and trading in textiles (Refer SEBI Report at Para 6 at Pg. 245 of P.B.) and its shares were listed in BSE in 1985. Most importantly, PCIL was listed in Bombay Stock Exchange at the time of this subscription.
2.2.2 The shares were subscribed on the offer made by the said company. Accordingly, the Letter of Allotment was issued in accordance with the allotment approved by BSE. Refer Allotment Advice of the company at Pg. 21 of the P.B.
2.2.3 All necessary evidences, like, Application, Letter of Allotment, Bank statements evidencing the payments, entry in Demat account, etc. were filed and remain undisputed. Pertinently, the purchase has not been disputed by the A.O.
2.2.4 The shares were sold on five occasions on 13.11.2014, 24.12.2014, 14.01.2015, 02.02.2015 and 02.03.2015 (Refer pg. 24 r.w. 25 to 230 of P.B.) (Wrongly mentioned by the A.O. as between the period 25.04.2014 to 01.06.2015 at para 6.8.2 at Pg. 55 of the assessment order) at the rate between 93.27 to 102.75.
2.2.5 The shares were sold through registered broker through online screen based mechanism of the recognized stock exchange, on which STT was duly paid by the Assessee. All necessary evidences like Broker’s note, Contract notes, Demat statement, Bank statements evidencing receipt, copy of ledger account of the Assessee in the books of broker, etc. were filed and remain undisputed.
2.2.6 Apart from the details as discussed above, the Assessee also filed details of source of purchase of the shares (Letter dated 05.09.2017) and also explanation regarding purchase of the shares (Letter dated 12.12.2017).
2.2.7 The Assessee declared long — term capital gains on sale of the shares and claimed exemption u/s 10(38) of the Act with respect thereto.
III. SURVEY OPERATION AGAINST THE ASSESSEE ON 13.09.2016
3.1 Very significantly, absolutely no incriminating material was found during course of the survey, much less indicating any undisclosed income, undisclosed expense or undisclosed investment.
3.2 Only statements of the Assessee and his brother were recorded, in which both denied involvement in any alleged price manipulation. No copy is provided to the Assessee. However, some statements reproduced in the assessment order.
IV. ASSESSMENT PROCEEDING
4.1 The Assessee filed various replies from time to time [Refer one reply dated 22.12.2017 at Pg. 73 to 80 of the assessment order]. To the admission of the A.O., there was full compliance to all the requirements and notices and no recourse was taken to section 144 and / or section 145 of the Act. Refer Para 2 of the assessment order.
4.2 The most important aspect is that a copy of none of the material / report / statement was provided to the Assessee nor the Assessee was confronted with the same. Further, no opportunity of cross — examination of any of the persons was provided to the Assessee. This was in spite of specific request in that regard made by the Assessee. Refer Para 12 & 13 of Letter dated 22.12.2017 at Pg. 75 of the assessment order. In the statement on oath before the Department officers, both — the Assessee as well as his brother — categorically denied having any connection with the allegation of wrong doings.
4.3 Otherwise also, no proper, effective and reasonable opportunity was provided to the Assessee. The show cause notice, running into 28 pages, was given only at the fag end of the limitation period on 18.12.2017 to which the Assessee managed to file exhaustive reply on 22.12.2017.
Without any further opportunity, the A.O. passed the assessment order on 27.12.2017.
IV. ASSESSMENT ORDER
5.1 At the outset, essentially the assessment order reproduces verbatim the show — cause notice.
5.2 The Assessing Officer [A.O] relied upon certain material, a note with respect of which is annexed which is at Part – B.
5.3 None of the documents and evidences placed on record by the Assessee are disputed / controverted. As against that, no cogent material brought on record to dispute the same.
5.4 Apart from merely relying upon the investigation report and general enquiry made, no independent inquiry made, including directly with the counter – parties or with the company. Even such enquiries were made behind the back of the Assessee. Most importantly, it appears that some enquiry was made with the broker [M/s. Focus Shares & Securities P. Ltd.], through whom the shares were sold. Refer Para 6.7 of the assessment order at Pg. 52 — 53. It is given to understand that the broker had supplied the requisite details as asked for and accordingly confirmed the transaction. However, this very vital evidence is conspicuous by its absence in the assessment order.
5.5 The most crucial aspect is that the A.O. emphatically refused to give any opportunity of cross — examination. Refer Sr. No. 12 & 13 at Pg. 81 — 82 of the assessment order. Importantly, he categorically mentioned that the statements were not the sole basis for reaching any judgement / for taking any adverse view in the case of the Assessee. He has referred a summons sent to the Assessee to remain present on 27.12.2017 (just two days prior to the date on which he passed the assessment order covering around 100 pages) and purportedly asking the Assessee to take cross — examination of certain Mumbai based parties. This is wrong and misleading. A bare perusal of the summons so issued (Annexure — ‘A’) would revea l that this was a simple summons sent u/s 131 of the Act directing the Assessee to remain present for his examination. There was not a whisper about any cross — examination.
5.6 A.O. relied upon various case laws, laying down general propositions.
VI. BEFORE CIT (A)
Refer: Statement of Facts, Grounds of Appeal and documents annexed along with Form 35. Among other, specific ground was raised challenging the action of the A.O. in refusing to provide the Assessee with a copy of the material /statements relied upon as well as to provide an opportunity to cross examine the concerned persons. (Ground 2.3). This aspect was also raised in the written submissions filed before the CIT (A). [Refer, for example, para 5.7 & 5.8 at page 22-3 and para 5.5 at page 34 of his order]
6.1 The Assessee filed exhaustive submissions and various evidences. [Page 1 to 10 of the P.B. and also page 20 to 27 & 30 to 36 of the order of CIT (A).]
6.2 Even during the remand proceeding, a written request was once again made on 22.02.2020 for a copy of the statement and an opportunity to cross – examine the concerned persons. Refer Para 5.5. at Pg. 34 of the order of CIT (A). This request was denied. Most importantly, even Ld. CIT (A) also refused to give opportunity of cross – examination. Refer Pg. 47 (7th line from top) of the order o f CIT (A).
6.3 Remand Report was obtained by CIT (A) [Para 4.2 at Pg. 27 to 30 of the order of CIT (A)]. A significant feature of Remand Report is that the A.O. has categorically accepted that “ however, the family members of the assessee have not been charged with fraudulent scheme of manipulation of price ……… ” [para 4 of the Report]
6.4 In response to the Remand Report, the Assessee gave very exhaustive para – wise reply [Para 4.3 – 4.4 at pages 30 to 36 of order of CIT (A)]. Among other, the Assessee gave example of very volatile price movement of the stock market. [Refer para 5.4 at page 33 of the order of CIT (A)]
6.5 Effectively, the Ld. CIT (A)’s decision starts from Pg.37, Para 5 onwards.
6.6 Effectively, the Ld. CIT (A) has relied upon the same material / argument made by the A.O. Refer Para C dealing with some of the observations of Ld. CIT (A).
6.7 As regards the investigation report of SEBI, first of all, his observations are based on selective reading of the SEBI report and therefore, misleading (Refer Note at Part C). In any case, what is significant is his final conclusion [Pg. 40, last part of para 5.1.3 of the order of CIT (A)], which is as under:
‘Thus, the exoneration from the charge of price manipulation does not in any way afford a stamp of genuineness to the trades carried out by Shri Dharmendra Karia or Smt. Meena Deepak Karia and by implication, the appellant himself ‘
7. SOME OBSERVATIONS
7.1 At the outset, it is not brought on record / made clear what action, if any, is taken by the Department against the persons named / the counter – parties / purchasers of the shares and what addition, if any, is made in their case. The Assessee understands that the entire purchase amount (corresponding to the sales of shares by the shareholders) has been added (on substantive basis) in the hands of the buyers of the shares. This clearly amounts to double addition which is not permissible under the law. The Assessee craves leave refer and rely to one such order of assessment u/s 143(3) r.w.s 153A in the case of Shipra Fabrics P. Ltd. which gets referred in the Assessee’s case at Sr. 31 at Pg. 57 of the assessment order.
7.2 In any case, most respectfully, the Assessee draws attention to the following aspects which highlights the biased and pre – determined approach while framing the assessment, apart from attempts to mislead. Some such examples are as under:
(i) First of all, in the assessment order it has not been acknowledged / brought to the knowledge the vital fact that the very same addition has been made, that too, on substantive basis, in the hands of the counter – parties / buyer of the shares.
(ii) Similarly, in the assessment order it has not been acknowledged / brought to the knowledge that the statement of Shri Vipul Bhatt – on which heavy reliance is placed – already stood retracted to the knowledge of the Department. The Assessee craves leave to refer and rely upon the same when produced.
(iii) In the assessment order, a serious allegation of the Assessee / Dharmendra not telling the truth on the aspect of the meetings with the share broker is not only made but repeated often and for which a part of the answer given by Dharmendra is reproduced (Refer Answer No. 11 at Para 6.7.1 at Pg. 52 r.w. Sr. No. 11 at Pg. 81 of the assessment order). However, on a bare perusal of the full answer given by Shri Dharmendra (Refer Answer 11 at Pg. 47 of the assessment order) would show an attempt to reproduce only a selected part of the said answer, in support of the allegation.
(iv) Even with respect to the same broker, in the assessment order, a reference is made to the summons u/s 133(6) having issued and a reply having received from the broker. Here also, only a selective part of the response is reproduced to make the allegation as referred in the earlier paragraph. However, the vital fact that in the said response, the broker had confirmed the transaction and given all details as asked for in the summons, is omitted. The Assessee craves leave to refer and rely upon a copy of the same when produced.
(v) With respect to another vital aspect of grant cross – examination, here also, this was never granted, contrary to what has been sought to be canvassed by the A.O. at 1st para at Pg. 82 of the assessment order. A bare perusal of the summons so issued as attached at Annexure – ‘A’ would show that no such opportunity was ever granted or even attempted to be granted. In any case, it should be noted that the date mentioned in the summons for the Assessee to appear was 27.12.2017, only two days prior to the date on which the A.O. passed and signed the assessment order running into almost 100 page ”
10. Ld. AR also filed a note on SEBI report which is reproduced below: –
“Note on SEBI Report dated 31.07.2018
1. Overview
1.1 At the outset, reference is invited to the relevant sections of the Act / Rules of the SEBI concerning coverage of the persons under such enquiry. More importantly are the relevant provisions of SEBI Act and Rules under which the investigation was ordered by the SEBI. Refer para 21 – 24 at page 11 to 13 of the SEBI Report annexed in the P.B. at Pg. 242 to 242 back.
As such, a bare perusal of these provisions will reveal that the scope of enquiry and the persons / entities covered are very wide. More particularly, it is not confined merely to the persons who had allegedly manipulated the price but include any person / entity who had purchased / sold shares in a fraudulent / manipulative manner. In other words, by virtue of this, not only the persons who manipulated the price but also the persons who, as party to such manipulation, buy and sells such script are also put on the same footing. Consequently, they are equally amenable for all the actions and the consequences under the SEBI Act and Rules. Under the circumstances, not proceeding against the Assessee and exonerating Dharmendra and Meena is a conclusive proof of their non – involvement in any wrong doings with respect to the sale transactions.
1.2 Further, the very starting point of the enquiry by the SEBI was the reference received from Investigation Wing of Income – tax Department, Kolkata and others, regarding alleged generation of bogus capital gains in the scrip of MJTL [Refer Para 2 at Pg. 237 (back) r.w. 244 (Para I) of P.B.].
1.3 The Investigation Wing of Department had also forwarded statements of various alleged accommodation entry providers, their associates, etc. The SEBI also had sought Report from BSE. It appears that the BSE Report had not made any adverse comment (Refer para 2, Pg. 244 – 5 of P.B).
1.4 Interestingly, in this Report, SEBI has dealt with this very source of its enquiry, that is, the report from Income Tax Investigation Wing, in only one small paragraph as under (Refer Para 4, Pg. 244 back of P.B.):
‘4. Reference regarding this scrip received from DIT
From the various reference letters received from DIT, it is observed that DIT has identified various penny stocks listed on BSE and alleged that promoter of ‘Penny Stock’ Companies, share brokers and entry operators who purchased shares through paper companies by taking cash are involved in the illegal business of providing bogus LTC&. Observations received from DIT with respect to this scrip is given below:
Ashok Kayan stated to DIT that Rahul Sharma was controller to Maa Jagdamba Tradelinks ltd which was used to provide LTC& to beneficiaries
No Individual named Rahul Sharma has traded in the scrip. DIT has provided only mobile number and name of Rahul Sharma. No connection on basis of phone number could be established between Rahul Sharma and entities who have traded in the scrip.” {Emphasis supplied}
As such, the very basis of the Report of the Investigation Wing was on factually erroneous premise. Consequently, not much credence was given, as it appears, by even SEBI to the Report shared by Income Tax Investigation Wing. It should be noted that in the Assessee’s case also, reliance is placed on the statements of the above two persons.
1.5 Nonetheless, SEBI made its own independent and in – depth investigation and analysis, with the coverage wider than the Income Department Report. This included, apart from other, analysing profile of the company, the financials of the company and the price & volume movements. This also included enquiries with BSE and seeking its Report. The examination also covered counter parties of the suspected entities. [Refer, for example, Para 1 1 (1), para 13 (7), (17), (18) of the Report]
2 General
As far as the allottees of preference shares are concerned – which included the case of the Assessee – the categorical findings of the SEBI are as under (Refer Pg.255, Para 16):
‘1. Company allotted 13725000 shares to 77 preferential allottees. 44 preferential allottees have sold shares In market. No connection could be established between preferential allottees and entities who manipulated the price. After stock spilt they sold 24841557 shares worth Rs. 237.75 crores.
2. Details of trades of preferential allottees are given in Annexure – 06. Details of counter parties to preferential allottees and promoter related entities are placed In Annexure – 07
3. It was observed that the top 10 net sellers by value during post-split period were preferential allottees of the company.
4. As this case has been referred by DIT, hence details of trades of these entities and list of their counterparts may be referred to DIT.’
In other words, the company had allotted shares to 77 preferential allottees (including the Assessee). Only 44 preferential allotees had sold shares in market. No connection could be established between the preferential allottees and entities who allegedly manipulated the price. This categorical finding, therefore, demolishes the very basis of the entire addition made by the A.O.
Importantly, the Report also categorically exonerates the company as well as the promoters of the company from any wrong doing and held that they had no role to play in this alleged manipulation (Refer Para 17 & 18 at Pg. 255 of P.B.).
This is very crucial as these factors also clearly contradict the allegation of penny stock transaction; being contrary to the usua l parameters of a penny stock scheme.
Thereafter, the Report has analysed in very detailed manner the transaction of purchase and sale in the script during the period 01.05.2013 to 31.07.2015. At the outset –
(i) The Assessee was neither named in the Report, nor accused of any wrong doing nor any adverse finding was made against the Assessee.
(ii) Further, even in the cases of Mr. Dharmendra and Ms. Meena, whose cases were subject to deep scrutiny, after due enquiry, no adverse inference was drawn against them and their transactions were, therefore, held to be genuine (Refer back of Pg. 253 (back) of P.B. with respect to Sr. No. 3 & 8)
(iii) After full scrutiny, effectively, the Report found only 6 entities and 3 unconnected entities as having indulged into manipulation of the price of the script and nobody else (Refer Para 19 at Pg. 255 of P.B.).
(iv) It is pertinent to observe that the Report covered the counter – parties also.
4. Three Patches of transactions
Essentially, the Report divides the transactions in three categories. Patch I – Period from 3 1.05.2013 to 08.01 .2014 (pre – split) Patch II – Period from 09.01.2014 to 19.05.2014 Patch III – Period from 20.05.2014 to 3 1.07.2015
4.1. Patch I
The Assessee’s purchases were before this period and which has not been suspected by the SEBI
4.2 Patch II
No sale by the Assessee was done in this period and, therefore, the same is not relevant for the Assessee.
4.3 Patch III
(i) Group 2, 3 and 4 have not traded as sellers. Only nine out of 17 entities of Group I traded.
5. Twenty – eight entities covered
5.1 SEBI formed 4 groups to examine on the basis of UP analysis. [Top 10 Contributors]. Refer Para 11.2 to 11.5 of the Report.
Group 1 (21 entities), Group 2 (2 entities), Group 3(2 entities) & Group 4(3 entities) Total of 28 entities.
The most crucial aspect is that the Assessee is not named in any of the lists.
Patch —I: LTP analysis were made of all 28 entities as Trading by group entities, UP contributor as buyer, Top 10 LTP contributors as buyer and no manipulative pattern was observed in trades. Top 10 sell LTP contributors were examined, analysed and only 9 entities from Group 1 violated PFUTP regulations. Even here, these parties had contributed only 69% of total trade. In any case, the charge was: Hence, it is concluded that these five entities created a misleading appearance of trading and price rise in the scrip by such trades whereas in actual, these five entities took turns and placed 57 orders and on 57 trading days with volume in small quantity of single digits and price above LTP and with each trade manipulated the scrip price as explained above.” [ Refer para 29 page 12 of Report]
Patch —II: Similarly, only same 9 entities from Group 1 found violating PFUTP regulations.
Patch —III: No adverse inference was drawn against any entity.
Apart from group entities, Top 10 sellers based on net negative UP contributors were also analysed and no adverse inference was drawn against them. (List included the Assessee’s brother and wife). Also top 10 buyers in negative UP contributors were analysed and no adverse inference was drawn against them.
Undisputedly, the Assessee had no direct or indirect connection with any of the entities mentioned in the Report, nor any material is brought on record to controvert this fact.
5.2 SAT in its order dated 24.08.202 1 further absolved 3 out of the above 9 entities.
5.3. In summary, the transaction undertaken by the Assessee are not found to be violative of any Act or Rules of the SEBI or part of any price manipulation scheme by the SEBI.
11. Ld. AR also filed a Comments by Ld. CIT(A) while rejecting claim of the Assessee, which is reproduced below: –
“Comments by Ld. CIT(A) while rejecting claim of the Assessee
A bare perusal of the comments of the CIT (A) on SEBI Report at para 5.1 and comparing the same to the SEBI Report would revea l that the Ld. CIT (A) has referred and considered selectively some patches of the SEBI Report, ignoring the macro and overall analysis of the Report.
1. There is concurrence of views of AO 0 & Assessee that the share price of MJTL were rigged. (5.1.1)
