Addition u/s 68 unsustainable as assessee’s involved in price manipulation not established

Poornima Ramesh Shenoy Vs ITO (ITAT Mumbai)

ITAT Mumbai held that addition u/s 68 unsustainable as department failed to establish that assessee was involved in price manipulation even after purchasing and selling the shares on the stock exchange through SEBI registered stock.

Facts- The assessee is an individual and for the year under consideration filed the return of income on 13/04/2015, declaring a total income of Rs. 20,480/-. The return filed by the assessee was selected for scrutiny and statutory notices u/s. 143(2) as well as Section 142(1) of the Income Tax Act were issued and served on the assessee.

During the assessment proceedings, it was observed that the assessee has shown long-term capital gains of Rs. 5,47,190/- on the sale of shares of Pearl Agriculture Ltd. and Pearl Electronics Limited and claimed the same as exempt u/s. 10(38) of the Act.

AO vide order passed u/s. 143(3) of the Act by placing reliance upon the investigation carried out by the Directorate of Investigation, the financial position of the Companies in whose shares assessee had transacted and fluctuation in the share rates in a short span of time concluded that the assessee had earned long-term capital gains from the sale of penny stocks. Accordingly, the AO disallowed the exemption of long-term capital gains claimed u/s. 10(38) of the Act and made the addition of Rs. 5,47,190/- u/s. 68 of the Act.

CIT(A) dismissed the appeal. Being aggrieved, the present appeal is filed.

Conclusion- Held that it was specifically submitted that the assessee has never invested through preferential allotment and also disclosed the name and address of the broker, i.e. HDFC Securities Ltd. However, the AO without finding any fault with the evidence submitted by the assessee proceeded to treat the transaction as non-genuine and the long-term capital gains earned by the assessee as bogus. Further, we find that the SEBI vide its order dated 26/06/2020, had conducted an enquiry into the manipulation of the price of the scrip of Mystic Electronics Limited, by certain operators and the entities connected to such operators. From the perusal of the said order, which was furnished during the course of the hearing, we find that there is no allegation that the assessee has transacted with the alleged operators or their entities for earning the long-term capital gain of Rs.5,47,190. In the absence of any other allegation of the Revenue, we find no merits in the impugned order upholding the addition of Rs.5,47,190, made under section 68 of the Act and disallowing the exemption of long-term capital gains earned by the assessee. Accordingly, the grounds raised by the assessee are allowed.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

The present appeal has been filed by the assessee challenging the impugned order dated 16/12/2022, passed under section 250 of the Income Tax Act, 1961 (“the Act”) by the learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi [“learned CIT(A)”], for the assessment year 2014-15.

2. In this appeal, the assessee has raised the following grounds:-

2. On the facts and circumstances of the case, the learned CIT(A) has erred in confirming the AO’s action of taking the income at Rs.6,83,050/- against the declared income of Rs.1,35,860/- by disregarding the exempted income of Long Term Capital Gains of Rs.5,47,190/- under section 10(38).

3. On the facts and circumstances of the case, the reasons given by the learned CIT(A) for confirming the Assessing Officer’s action of taking the income at Rs.6,83,050/- as against income disclosed by the Assessee at Rs.1,35,860/- are insufficient and contrary to the facts and evidence on record.

4. On the facts and circumstances of the case, the learned CIT (A) erred in dismissing the appeal without appreciating the facts and evidence submitted by the Assessee.

5. On the facts and circumstances of the case, the Learned CIT(A) has erred in confirming the AO’s action of raising demand of Rs.2,39,480/-.

THE GROUNDS OF APPEAL are without prejudice to one another & the appellant Craves leave to add, to alter, to amend or to modify Grounds of Appeal.”

3. The only dispute raised by the assessee, in the present appeal, is against the disallowance of exemption of long-term capital gains claimed under section 10(38) of the Act and corresponding addition under section 68 of the Act.

4. The brief facts of the case pertaining to this issue, as emanating from the record, are: The assessee is an individual and for the year under consideration filed the return of income on 13/04/2015, declaring a total income of Rs.20,480. The return filed by the assessee was selected for scrutiny and statutory notices under section 143(2) as well as section 142(1) of the Act were issued and served on the assessee. During the assessment proceedings, it was observed that the assessee has shown long-term capital gains of Rs.5,47,190, on the sale of shares of Pearl Agriculture Ltd. and Pearl Electronics Limited (which are now known as Mukta Agriculture Ltd. and Mystic Electronic Ltd.2, respectively) and claimed the same as exempt under section 10(38) of the Act. The Assessing Officer (“AO”) vide order dated 30/12/2016 passed under section 143(3) of the Act by placing reliance upon the investigation carried out by the Directorate of Investigation, Kolkata in relation to 84 penny stocks, the financial position of the Companies in whose shares assessee has transacted and fluctuation in the share rates in a short span of time concluded that the assessee has earned long-term capital gains from the sale of penny stocks. Accordingly, the AO disallowed the exemption of long-term capital gains claimed under section 10(38) of the Act and made the addition of Rs.5,47,190, under section 68 of the Act.

5. The learned CIT(A), vide impugned order, dismissed the appeal filed by the assessee, by observing as under:-

“5.1 I have carefully considered the assessment order and the submissions of the appellant. The ground No. 1 to 3 of appeal relate to addition of Rs.5,47.190/- as unexplained cash credits u/s 68 of the Act which has been claimed as exempt u/s.10(38) of the I.T. Act, 1961. Brief facts of the case are that during the year, the assessee has declared income of Rs.20,480/- by filing the ITR online on 13.04.2015. The appellant has also shown long term capital gains of Rs.5,47,190/- and claimed it as exempt u/s 10(38). The Assessing Officer made addition of the Long Term Capital Gain u/s 68 of the Act after taking into consideration the affairs of the assessee which was supported by the findings of investigations done by the Investigation wing at Kolkata. The AO relied on the ratio of certain case laws pertaining to penny stock cases.

5.2 During the hearing the appellant argued that the appellant has purchased 4162 shares of Nouveau Multimedia Ltd during Jan & Feb 2010. The payment for this purchase was made from the appellant’s A/c. Later on these shares got split in face value of Rs.1/-, the appellant was issued 41620 shares, out of which 655 shares were sold at Rs. 20/- per share. The company shares were again consolidated and shares of Rs. 1 were consolidated to face value of Rs.10/- The assessee was then holding 4096 shares. Thereafter, the Nouveau Multimedia Ltd. was demerged and the company got split into three new companies namely: Nouveau Ventures, Pearl Agriculture Ltd (Now Mukta Agriculture Ltd.) and Pearl Electronics Ltd.). On split of the company, the assessee got 4096 shares of Pearl Electronics (2294 shares) and Pearl Agriculture (2254 shares) which were subsequently sold during the year under consideration and the assessee earned Long term capital gains of Rs. 5,47,190/-. The appellant has submitted copy of purchase bill, share certificate, share transfer form, broker note copy, Demat a/c. ledger a/c and also the copy of bank account, to prove the genuineness of the transactions.

5.3 The main arguments of the appellant revolved around the facts that the shares were purchased during Jan and Feb 2010 through banking channel. Thereafter, these shares were sold after retaining for a period of more than3 years. through broker after STT payment and through banking channel. Hence, the purchase as well as sale of these shares has taken place in the normal course. The transaction satisfies all the conditions required for claiming the same as exempted u/s 10(38) of the IT, Act, hence, the claim has been correctly made.

5.4 The appellant argued that the decisions have made solely on the report of the Investigation Wing and the statement of the persons recorded during the survey and opportunity of cross examination has not been provided. The appellant has submitted that the addition in dispute was made and confirmed purely on presumptions, conjecture and surmises and therefore, deserve to be deleted. The appellant tried to explain the issue through certain case laws but the factual matrix is entirely against the appellant. The case laws cited by the appellant are on distinguished facts, hence, not applicable in the instant case. The landmark decision of the Hon’ble Supreme Court in the case of McDowell and Company Limited, 154 ITR 148 is squarely applicable in this case wherein it has been held that tax planning may be legitimate provided it is within the framework of the law and any colourable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by dubious methods.

5.5 In this case, the AO has worked out the glaring facts, which cannot be ignored and which are clear indicative of the non-genuine nature of the transactions. The appellant could not satisfactorily explain how the investments in the absence of any evidence as to the financials, growth and operations of the company could earn such huge profit. The financials of the company proving that the entity is a penny stock company. Regarding the failure to accord the opportunity of cross examination, I rely on the judgment of Prem Castings Pvt. Ltd. Similarly, the Tribunal in the case of Udit Kalra, ITA No. 6717/Del/2017 for the assessment year 2014-15 has categorically held that when there was specific confirmation with the Revenue that the assessee has indulged in non-genuine and bogus capital gains obtained from the transactions of purchase and sale of shares, it can be a good reason to treat the transactions as bogus. The Investigation Wing has also conducted enquiries which proved that the appellant is also one of the beneficiaries of the transactions entered by the Companies through multiple layering of transactions and entries provided. Even the BSE listed this company as being used for generating bogus LTCG. On the facts of the case and judicial pronouncements will give rise to only conclusion that the entire activities of the appellant is a colourable device to obtain bogus capital gains. The Hon’ble High Court of Delhi in the case of Udit Kalra, ITA No. 220/2009 held that the company had meagre resources and astronomical growth of the value of the company’s shares only excited the suspicion of the Revenue and hence, treated the receipts of the sale of shares to be bogus. Hon’ble High Court has also dealt with the arguments of the assessee that he was denied the right of cross examination of the individuals whose statements led to the enquiry. Further, reliance is also placed on the orders of various Courts and Tribunals listed below.

> M.K. Rajeshwari vs. ITO in ITA No. 1723/Bang/2018, order dated 12.10.2018

> Abhimanyu Soin vs. ACIT in ITA No. 951/Chd/2016, order dated 18.04.2018 >Sanjay Bimalchand Jain vs. ITO 89 taxmann.com 196

> Dinesh Kumar Khandelwal, HUF vs. ITO in ITA No. 58 & 59/Nag/2015, order dated 24.08.2016

> Ratnakar M. Pujari vs. ITO in ITA No. 995/Mum/2012, order dated 03.08.2016

> Disha N. Lalwani vs. ITO in ITA No. 6398/Mum/2012, order dated 22.03.2017

> ITO vs. Shamim M. Bharwoni [2016] 69 taxmann.com 65

> Usha Chandresh Shah Vs ITO in ITA No. 6858/Mum/2011, order dated 26.09.2014

> CIT vs. Smt. Jasvinder Kaur 357 ITR 638.

5.6…..

5.7…..

5.8 So, the irresistible conclusion in this case is meticulous paper work by the appellant in making investment in unknown stock and then selling the same as per convenience of the broker and entry operator by rigging prices at astronomical rate shows that the AO has been compelled to examine the entire transactions in the light of the surrounding circumstances and has unearthed the bogus transaction of purchase and sale of shares which was not real and appellant has failed to dispel all the quarries raised by the AO to establish that the transaction in question was real and not beyond human probabilities.

5.9 Hence, keeping in view the overall facts and circumstances of the case that the profits earned by the appellant are a part of major scheme of the accommodation entries and keeping in view the ratio of the judgments quoted above, I am convinced with the findings of AO and don’t intend to interfere. In my opinion, the transaction is stage-managed to get benefit u/s.10(38) and the same is not permissible under the Act. In the circumstances, the addition made by AO u/s. 68 is hereby confirmed and ground No.1 to 3 of appeal are dismissed.”

Being aggrieved, the assessee is in appeal before us.

6. We have considered the submissions of both sides and perused the material available on record. As per the assessee, she is a housewife and used to invest small amounts in deposits or shares from her household savings. Further, she buys and sells shares in small quantities and does the transactions through HDFC Securities Ltd. The assessee purchased 4162 shares of Nouveau Multimedia Ltd having a face value of Rs.10, per share in January and February 2010. The shares then got split in face value of Re. 1 and the assessee got 41,620 shares of which 655 shares were sold at Rs.20, per share. The company shares were again consolidated and shares of Re. 1 were consolidated to a face value of Rs.10. The assessee was then holding 4,096 shares. Thereafter, Nouveau Multimedia Ltd was demerged and the company got split into 3 new companies namely, Nouveau Global Ventures, Pearl Agriculture Ltd. (now known as Mukta Agriculture Ltd.), and Pearl Electronics Limited (now known as Mystic Electronics Limited). On the split of the company, the assessee got 4,096 shares of Pearl Electronics (2294 shares) and Pearl Agriculture (2254 shares). These shares were sold during the year under consideration and the assessee earned long-term capital gains of Rs.5,47,190. As per the assessee, the shares of Nouveau Multimedia Ltd were issued to the assessee not by way of preferential allotment or an off-market transaction but the same were purchased based on various public announcements made by the company on the stock exchange website. Further, as per the assessee, these shares were purchased through its broker HDFC Securities Ltd. In this regard, the assessee has placed on record the contract note of HDFC Securities Ltd for the transaction in shares of Nouveau Multimedia Ltd on 15/01/2010, 06/02/2010, and 09/02/2010, forming part of the paper book from pages 23-36. From the perusal of the said statement issued by HDFC Securities Ltd, we find that the assessee has also transacted in shares of companies other than Nouveau Multimedia Ltd. Further, as per the contract note dated 27/04/2011, forming part of the paper book from page 36, we find that the assessee sold the shares of Nouveau Multimedia Ltd and other companies. The assessee has also placed on record the contract note of HDFC Securities Ltd for the transaction of sale of shares of Pearl Agriculture Ltd. and Pearl Electronics Limited on 20/09/2013, 24/09/2013, 26/09/2013, and 14/02/2014, forming part of the paper book from pages 37­41. From the perusal of the aforesaid contract note, we find that the assessee also transacted in shares of companies other than Nouveau Multimedia Ltd. The assessee has also placed on record the statement of the Demat account, which she held along with her brother, forming part of the paper book on pages 42-43 regarding the transaction in shares of Pearl Agriculture Ltd and Pearl Electronics Limited. We find that the assessee vide her submission dated 17/08/2016, specifically submitted before the AO that investment has also been made in Mothoot Finance Ltd. Further, the assessee specifically submitted that the purchase as well as the sale of shares, which are doubted by the Revenue are not a private placement/off-market transaction, rather the same was made on the stock exchange through the SEBI registered and reputed broker, namely HDFC Securities Ltd.

7. We find that the AO without commenting on any of the evidence submitted by the assessee placed reliance upon the report of the Investigation Wing, Kolkata, and the price fluctuation of shares of the entities in which the assessee has transacted. The findings of the Investigation Wing, as noted on pages 3-4 of the assessment order, appears to be mere general findings of the investigation without any adverse observation regarding the assessee or the scrips in which the assessee has transacted. Further, the Revenue has failed to prove as to how the said findings have any relevance to the present case. The price fluctuation of shares of the entities in which the assessee has transacted also does not support the case of the Revenue, as no material has been brought on record to show that the assessee was involved in such price manipulation even after purchasing and selling the shares on the stock exchange through a SEBI registered stock-broker.

8. It is pertinent to note that in the statement recorded of the Authorised Representative of the assessee during the assessment proceedings, it was specifically submitted that the assessee has never invested through preferential allotment and also disclosed the name and address of the broker, i.e. HDFC Securities Ltd. However, the AO without finding any fault with the evidence submitted by the assessee proceeded to treat the transaction as non-genuine and the long-term capital gains earned by the assessee as bogus. Further, we find that the SEBI vide its order dated 26/06/2020, had conducted an enquiry into the manipulation of the price of the scrip of Mystic Electronics Limited, by certain operators and the entities connected to such operators. From the perusal of the said order, which was furnished during the course of the hearing, we find that there is no allegation that the assessee has transacted with the alleged operators or their entities for earning the long-term capital gain of Rs.5,47,190. In the absence of any other allegation of the Revenue, we find no merits in the impugned order upholding the addition of Rs.5,47,190, made under section 68 of the Act and disallowing the exemption of long-term capital gains earned by the assessee. Accordingly, the grounds raised by the assessee are allowed.

9. In the result, the appeal by the assessee is allowed.

Order pronounced in the open Court on 23/08/2023