Sale of shares cannot be treated as bogus if material recorded proves genuineness: ITAT Mumbai

Hema Ramesh Jain Vs ITO (ITAT Mumbai)

ITAT Mumbai held that addition u/s. 68 of the Income Tax Act by treating transaction of sale of shares of Sunrise Asian as a bogus penny stock unsustainable as material on records supports genuineness of the transactions.

Facts- The case of the assessee was selected for scrutiny. AO observed that the assessee had shown income from Capital Gains & other sources and claimed LTCG on sale of shares of the scrip Sunrise Asian.

According to the AO, the scrip M/s. Sunrise was a penny-stock. AO was of the opinion that the assessee’s LTCG was part of an organized scam/circular trading and by doing so, the assessee was evading tax, launder money by becoming beneficiary of that organized scam. And thus, he was of the opinion that LTCG claim of the assessee to the tune of Rs.23,88,825/- which was claimed as exempt income u/s 10(38) of the Act cannot be allowed. According to AO, entire transaction giving rise to the capital gains are merely fictitious bogus accommodation entries through which unaccounted money of the assessee has been converted into accounted money. Therefore, the entire sales consideration of shares of Rs.25,12,020/- was added by AO as income of the assessee.

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

Conclusion- CIT(A) has stated that the Appellant being very new to trading in penny stock and the earning of such huge income by a person not known to such type of trading is against human probabilities. This is factually incorrect as the Assessee has been registered as subbroker with SEBI and has been making personal investments since 2007.

Held that the material on record supports the case of the Assessee/Legal Heir that transactions of sale of shares of Sunrise Asian were genuine transactions undertaken during normal course by the Assessee who had knowledge of the stock-market and had been making investments in shares since many years. Accordingly, the claim of exemption under Section 10(38) of the Act is allowed in respect of capital gains arising from sale of shares of Sunrise Asian during the previous year relevant to the Assessment Year 2014-15.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

This is an appeal preferred by the assessee against the order of the Ld. Commissioner of Income Tax (Appeals)/(NFAC), Delhi dated 08.08.2023 for the assessment year 2014-15.

2. The main grievance of the assessee is against the action of the Ld. CIT(A) upholding the disallowance made by AO regarding the claim of Long Term Capital Gain (LTCG) of Rs.23,37,135/- and taxing the entire sale consideration of Rs.25,12,020/- on sale of shares of M/s. Sunrise Asian Ltd. (hereinafter “M/s. Sunrise”).

3. Brief facts are that the assessee an individual had filed her return of income for AY. 2014-15 on 28.02.2015 declaring total income of Rs.9,91,970/-. Later, the case of the assessee was selected for scrutiny. And the AO observed that the assessee’s source of income were from weaving of cloth by the aid of power looms for private parties, contract income; and had declared her income u/s 44AD of the Income Tax Act, 1961 (hereinafter “the Act”). Apart from the above source of income, the AO noted that the assessee had shown income from Capital Gains & other sources and claimed LTCG on sale of shares of the scrip Sunrise Asian as per the following summary: –

4. The AO noted from the details submitted by the assessee that assessee had purchased 5000 shares of M/s. Conart Trader’s Ltd. @ Rs.20/- per share from M/s. Santoshima Tradelinks Ltd and that payment of the same was made on 18.09.2011 through banking channels. And this company later on merged with M/s. Sunrise Asian Ltd. (hereinafter referred to as “Sunrise”) and as per the scheme of merger under section 391 to 394 of the Companies Act, 1956 and approved by Hon’ble Bombay High Court as notified by Bombay Stock Exchange (BSE) on 25.04.2013, the 20,000 shares were then sold on various dates in 2013 for total consideration of Rs.25,12,020/-. According to the AO, the scrip M/s. Sunrise was a penny-stock and for coming to such a conclusion he referred to the investigation report prepared by Investigation Wing of the Department (Kolkata) wherein the modus-operandi of persons like assessee had indulged in converting their unaccounted money by way of transacting in penny- stock (M/s. Sunrise in this case) and claimed bogus LTCG. The AO referred to the statement given by Shri Vipul Vidur Bhatt recorded u/s 132(4) of the Act wherein he admitted (during the course of search in his premise) that prices of acquisition and sale of M/s. Sunrise shares were manipulated. And thereafter, the AO was of the opinion that the assessee’s LTCG was part of an organized scam/circular trading and by doing so, the assessee was evading tax, launder money by becoming beneficiary of that organized scam. And thus, he was of the opinion that LTCG claim of the assessee to the tune of Rs.23,88,825/-which was claimed as exempt income u/s 10(38) of the Act cannot be allowed. According to him, the entire transaction giving rise to the capital gains are merely fictitious bogus accommodation entries through which unaccounted money of the assessee has been converted into accounted money in the garb of LTCG arising on account of purchase and sale of shares of M/s. Sunrise. Therefore, the entire sales consideration of shares of Rs.25,12,020/- was added by AO as income of the assessee. Aggrieved, the assessee preferred an appeal before the Ld. CIT(A) who was pleased to dismiss the appeal of the assessee. Aggrieved, the assessee is before us.

5. We have heard both the parties and perused the records. We note that the assessee is an individual contractor who derives income also from weaving of cloth by the aid of power looms for private parties and income from other source. It is noted that assessee is a regular investor in the share-market since year 2007 (refer page no. 4 of PB wherein list of holding of shares are given there from AY. 2012- 13 & 2013-14 and also refer to Page no. 12 -18C of PB. For the year under consideration, the assessee has filed her ROI on 28.02.2015 by declaring total income of Rs.9,91,970/- (Refer page no. 1-3 of PB). Assessee claimed LTCG of Rs.23,15,537/- (on sale of shares of M/s. Sunrise Asian Ltd. for a total consideration of Rs.24,59,000/- (Page no.4 of PB). Aggregate LTCG claim was to the tune of Rs.23,37,135/-. Regarding this claim of LTCG, it is noted that the assessee had purchased the shares of M/s. Conart Traders Ltd., on 18.09.2011 [which company was incorporated in the year 1994]; and the Ld. AR showed us that it had consistent track record of earning profit for recent past years. And book value of shares as per duly audited accounts as at 31.03.2011 works out to approx. Rs.22/- and corresponding EPS for FY. 2010-11 was Rs.1.90 and Rs.0.78 for FY. 2009-10. (Growth rate of 144% in EPS). [Refer Annual Audited Accounts F.Y. 2010-11 (Page no. 50-64 of PB)]. It was brought to our notice that the said company among other business was also in the same line of business in which assessee was familiar i.e. textile and fabric business (page no. 63 of PB) as well as trading in fabrics refer Notes on Accounts (Page no. 52-64 of PB). Later, M/s. Contart Traders amalgamated with M/s. Sunrise Asian Ltd. pursuant to Hon’ble High Court order dated 22.03.2013 w.e.f. 01.04.2012 (Refer page no. 67-97 & 153 to 183 of PB). The following chart would show the purchase date-wise, quantity wise:-

And Ld. AR drew our attention to Physical copy of Share Certificate of M/s Conart Traders Ltd (which was held in the name of M/s. Santoshima Tradelink) found kept at Page no. 65A of PB, from whom assessee purchased 5000 shares which fact is evident from the reverse side of the share certificate wherein it is noted that as per register Folio No. 633, the 5000 shares have been transferred in the name of assessee as on 22.11.2011. The purchase consideration of Rs.1 Lakh has been paid by assessee on 27.09.2011 to M/s. Santoshima which fact is evident from perusal of Bank Statement found kept at Page 66 of PB as well as debit note found placed at page 65 PB, and thereafter, assessee has transferred the shares of M/s. Conart Traders to Demat Account which fact is evident from Demat statement from 01.04.2013 to 31.03.2014: ( Refer Page 24-24 of PB) and Financial Data of M/s. Conart Traders as per Audited Annual Reports, which facts are seen from perusal of chart given below.

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Total Sale: Online on Bolt (Page no. 4 of PB)

6. Before us, the assessee has filed the annual report of M/s Sunrise Asian Ltd as on 31^st March 2013 (Refer pg 117 -152) and annual report as on 31^st March 2014 and 31^st March 2015. (Refer paper book No. II pg. 239-273 of PB). Further, we note that following relevant documents/details were filed before AO vide letter dated 23/09/2016 & 19/12/2016. (Refer page. 22 27 & 38-182 of PB).

A. Bank statement for purchase & sale.

B. Share Certificate from Sunrise Asian Ltd 21/02/2013.

C. Demate A/c – 31/03/2013 – 31/03/2014.

D. Contract Notes from broker.)

F. ITR for AY 2012-13 & 2013-14

G. According to Ld. AR, AO didn’t find any deficiency in the

primary documents filed by the assessee to prove the purchase and sale of shares which resulted in claim of LTCG. Rather, the AO at the fag end of assessment proceedings brought to the notice of assessee the statement of Shri Vipul Bhat on 22/12/2016 and passed the assessment order on 27.12.2016, which means assessee was given only one day to respond [i.e. 23.12.2016 and 24/12/2016 & 25/12/2016 being holidays since it was Sat & Sun]. According to Ld. AR despite that assessee submitted reply on 26/12/2016 and requested AO to provide opportunity for cross-examination of Shri Vipul Bhatt (Refer Pg. 184 – 185 of PB), the AO passed the assessment order. In this context, it was also pointed out by Ld. AR that AO while recording the statement of assessee u/s 131 of the Act, though questioned her regarding purchase/sale of shares of M/s Sunrise Asian Ltd, but no statement of Vipul Vidur Bhat was confronted nor any question raised with respect to any incriminating statements. (Refer pg. 29 -33 of PB). The Ld. AR pointed out that detailed investigation was conducted by SEBI in respect of transactions of this scrip and that there is no order/adverse view expressed by SEBI against assessee or against her broker. According to Ld. AR thus it can be seen that AO has drawn adverse view against the claim of LTCG only on the basis of general report of Investigation Wing, Kolkata wherein it is stated that scrip of M/s Sunrise Asian Ltd is a penny stock, and thus the AO erred in concluding that the assessee is beneficiary to claim exempt capital gain, without there being any iota of evidence of assessee/broker indulging in any wrong doing. The Ld. AR pointed out that assessee had purchased share at a price of Rs. 20 per share and sold when the average price was at Rs. 491/-only. Thus price rise in last 2 years was merely 24 times. Therefore, according to Ld. AR, the observation of AO to the effect that share prices rose to abnormal levels is not correct and is based on incorrect appreciation of facts. According to Ld. AR, nothing turns on the general-statement/information/modus-operandi adopted by some unscrupulous entity operators for making bogus claim of LTCG (as stated in investigation wing report/statement of Shri Vipul Bhat), which material is irrelevant to the facts of the case of assessee because no wrong-doing of assessee or her broker has been found mentioned in the general-statement/information/modus-operandi as noted by AO in the assessment order, and therefore the same cannot be used to draw adverse inference against the claim of LTCG. Further, the Ld. AR pointed out that the assesse had duly intimated about the purchase of shares, which fact was duly disclosed in return of income in prior years and relied on the enclosed demat holding statement of shares and ITR copies. In the light of the aforesaid submission and since there is no evidence to link the alleged entry operators with assessee (Shri Vipul Bhatt) the adverse inference drawn against the assessee is devoid of merits and therefore, the impugned action of Ld. CIT(A) confirming the action of AO is erroneous and need to deleted. The Ld. AR also relied on few case laws to support his contention which will be discussed (infra).

8. Per contra, the Ld. DR supporting the action of AO/Ld. CIT(A) contended that the investigation wing of the department has identified the scrip of M/s. Sunrise as a penny stock; and the action of assessee entering into synchronized trading of penny stock in active collusion with unscrupulous entry providers like Shri Vipul Bhatt has entered into a scam for converting their black money into white. Drawing our attention to the contents/modus-operandi resorted to by entry-operators for providing for providing bogus LTCG as stated in the investigation report (as noted by AO in the assessment order), the Ld. DR submitted that the AO rightly disbelieved the bogus claim of LTCG. He also submitted that the SEBI had also passed adverse order against the scrip; and Shri Vipul Bhatt has admitted that he was managing and controlling several concerns through which beneficiaries like assessee were given accommodation entry in the form of LTCG. In the facts and circumstances, he does not want us to interfere with the action of the Ld. CIT(A) and want us to uphold the action of the Ld. CIT(A).

9. We find that the assessee was a regular investor in shares and securities (Refer page no. 26 of PB) and that assessee has invested in several scrips including the scrip of M/s. Contort Traders which got amalgamated with M/s. Sunrise as per the order of the Hon’ble Bombay High Court in the year 2013; (22.03.2013) and thereafter the assessee has sold the shares through the Bombay Stock Exchange after remitting STT. And claimed LTCG on such transaction, which was denied by the AO on the strength of investigation report which identified scrip of M/s. Sunrise as a penny stock. The assessee in order to prove the transaction (purchase & sale of scrip of M/s. Sunrise) has filed the primary documents regarding purchase of shares of M/s Conart like debit-note, Share Certificate, proof of payment through bank, Demat statement, Hon’ble High Court order amalgamating M/s. Contart Traders with M/s. Sunrise; and fact of sale of scrips of M/s. Sunrise through Bombay Stock Exchange was proved by copy of contract of sale of scrip of M/s. Sunrise, proof of sale consideration received through banking channel, payment of STT, De-mat statement etc. Thus by producing the primary documents, assessee has proved the purchase of shares and the holding of shares have been proved by producing the copy of the Demat statement; and the event of sale of scrips of M/s. Sunrise has taken place through the electronic platform of Bombay Stock Exchange and proved by contract notes after remitting STT. Thus, proving the event of sales of scrip and it is found that the purchase/sale consideration has passed through banking channel.

10. The AO has disbelieved the claim of the assessee only on the basis of the investigation report of the department which identified the scrip of M/s. Sunrise as a penny stock. And after taking note of the contents of the investigation report (modus operandi) of unscrupulous entry operators, the AO was of the opinion that the assessee is a beneficiary of such modus operandi; and according to him, assessee has made bogus claim of LTCG, to convert her unaccounted income to white by bringing it into regular books (accounted income). However, we find that investigation report of department is a general-report, which has not spelled out any wrongdoing on the part of assessee or her broker. Therefore, the reliance made by AO on the general-report of investigation wing cannot be accepted. Likewise, the AO has also referred to the statement given by Shri Vipul Bhatt which also does not contain any direct testimony to incriminate the assessee or her broker (Anand Rathi share and stock broker Ltd) in any wrong-doing [wrongdoing as reported in the investigation report/modus-operandi]; Further, we note that department’s case is not that the name of assessee or her broker finds mention in the list of 83 entities/persons identified by SEBI as having acted in concert with M/s. Sunrise and its directors to manipulate the price as given in SEBI order dated 19.12.2014. It is not disputed that no action has been taken by SEBI against the assessee or her broker M/s. Anand Rathi. So the reliance placed by AO on SEBI order without linking it with assessee or her broker is irrelevant/misplaced and erroneous. Since there is no testimony which incriminate assessee or her broker, reliance made by AO to draw adverse view cannot be countenanced. We note that the AO has also referred to the SEBI report wherein according to him, the SEBI was pleased to suspend the trading of the scrip of M/s. Sunrise for certain period. But, nothing turns on it, because by suspending sale for some time, does not in any way link assessee or her broker with wrongdoing or connected to Shri Vipul Bhat. We find that similar action of the AO/Ld. CIT(A) came up before this Tribunal on similar facts and circumstances in the case of Bhavin Vaghasia v ITO (ITA. No.2584/Mum/2018 for AY. 2014-15) and the Tribunal vide order dated 16.06.2023 has allowed the claim of LTCG on sale of shares of M/s. Sunrise by taking note that in that case also assessee had purchased share of M/s. Contart Traders and after amalgamation with M/s. Sunrise, the scrips were sold in the same manner as done in the case of the assessee; and the AO in that case also denied claim of exempt income u/s 10(38)/LTCG on the same reasons as done in this case. And the Tribunal allowed the claim of assessee. Since the facts and circumstances are similar/identical, we rely on the ratio of the decision in the case of Bhavin Vaghasia (supra) and applying the same mutatis mutandis with the facts of the assessee’s case hold that the action of the AO cannot be sustained for the reason that there was no evidence to suggest that the assessee had indulged in any wrong doing for making the claim of LTCG/exemption u/s 10(38) of the Act. There is no evidence to suggest that the assessee had any link with Shri Vipul Bhatt; and note that the SEBI order has not made any adverse order against assessee/broker. And the AO has not found any infirmity of the primary documents filed by assessee to prove the purchase & sale of the shares. In such a scenario, we rely on the decision of the Tribunal in the case Bhavin Vaghasia (supra) and allow the appeal of the assessee on the same reason as given by this Tribunal in the case of Bhavin Vaghasia (supra) which is reproduced as under: –

“18. We have heard both the sides at length. The Learned Authorized Representative for Appellant reiterated the submission made before the Assessing Officer and the CIT(A) while the Learned Departmental Representative supported the order passed by the CIT(A) and placed reliance on the order passed by the Assessing Officer.

19. The stand of the Legal Heir, succinctly put, is that the LTCG earned by the Assessee were exempt from tax under Section 10(38) of the Act as the same have arisen on account of transaction of sale of personal investment by the Assessee in normal course. The Assessee has been making investment in shares for many years, purchasing shares as personal investment and selling the same on a price higher that purchase price to earn capital gains which were exempt from tax. There is no evidence to suggest that the Assessee had any transaction/relationship with the Operator, Broker, Exit Provider or persons named in the Investigation Report, SEBI Order and Statements relied upon by the Assessing Officer. The shares have been sold through stock exchange and therefore, the transaction and the LTCG are genuine.

20. On the other hand, the contention of the Revenue is that the transaction of purchase and sale of shares by the Assessee constitute bogus transactions undertaken to take unfair advantage of Section 10(38) of the Act which exempts LTCG from tax and to bringing into books of the Beneficiary (such as the Assessee) the unaccounted income of such beneficiaries by taking advantage of artificial hike in the quoted price of penny stocks (such as Sunrise Asian) occasion by synchronized trades on stock exchange by the Operator, Syndicate Member, Brokers and Exit Providers in collision with Beneficiaries. The Assessee had acquired shares of Sunrise Asian, a script identified as penny stock in the Investigation Report, in off-market transaction and the same were sold after some time at much higher price during the period identified in SEBI Order as the period within which the quoted price of penny stock – Sunrise Asian was manipulated. The Assessee had deployed a colorable device to introduce unaccounted income as LTCG and therefore, the Assessing Officer was justified in making addition under Section 68 of the Act.

21. We have given thoughtful consideration to the submission made by both the sides, perused the order passed by the CIT(A) and the Assessing Officer and considered the legal position.

21.1. At the outset we would like to deal with contentions raised on behalf of Assessee/Legal Heir and the Revenue

21.2. We note that SEBI Order clearly records that the person acting in concert were able to manipulate the quoted price of shares listed on stock exchange to their advantage. The Investigation Report also records that the provisions of Section 10(38) of the Act were exploited by persons acting in concert (such as operators, brokers, syndicate members and exit providers) for abetting persons having unaccounted income to introduce the same in books through banking channels as capital receipts or tax exempt capital gains income with the help of shell companies or jamakharchi companies under control of the persons acting in concert. Securities & Exchange Board of India (SEBI), as a securities market regulator, has passed orders identifying and penalizing persons/concerns acting in concert indulging in price rigging through synchronized trading in shares through stock exchange trades. Therefore, we reject the contention that the mere fact that the sale transaction was undertaken through stock exchange and is supported by proper documentation would, by itself, lead to a conclusion that the transaction is genuine.

21.3. Similarly, we reject the contention of the Revenue that the fact that a script has been identified as penny stock would lead to an automatic conclusion that everyone holding penny stock is a person acting in concert with persons manipulating the quoted price of penny stock. Had that been the case, SEBI would have been required to penalize all persons undertaking trades with the period during which quoted price was manipulated. Therefore, the fact that the scrip traded is a penny stock coupled with the fact that the trade took place within the period in which quoted price was manipulated would not, by itself, lead to a conclusion that the purchase/sale transaction is bogus in case there are mitigating factors pointing at genuineness of the trade/transaction.

21.4. As rightly contended on behalf of Revenue that the bogus penny stock transactions are structured in a manner that there would be little direct evidence and therefore, the genuineness of such transactions would have to be adjudicated by testing the circumstantial evidence on the touchstone of preponderance of probabilities and by keeping in view the surrounding facts and circumstances of the case.

21.5. The belief regarding the existence of a fact may be founded on a balance of probabilities. A prudent person faced with conflicting probabilities concerning a fact-situation would act on the supposition that the fact exists, if on weighing the various probabilities such person finds that the preponderance is in favour of the existence of the particular fact. [Narayan Ganesh Dastane vs Sucheta Narayan Dastane : 1975 AIR 1534 (SC)]

21.6. Therefore, in case of penny stock transaction involving parties identified as tainted Operator, Syndicate Member, Broker, and/or Exit Operator by Investigation Wing, SEBI etc. the preponderance of probability that the transaction undertaken being tainted would be in favour of the Revenue and against an assessee claiming the transaction to be genuine, putting higher onus on such assessee to prove genuineness of the transaction.

21.7. In the case of CIT Vs. Durga Prasad More : 82 ITR 540 (SC) the Hon‟ble Supreme Court has observed as under:

“13. In stating that ………………………… Science has not yet invented any instrument to test the reliability of the evidence placed before a court or tribunal. Therefore, the courts and Tribunals have to judge the evidence before them by applying the test of human probabilities. Human minds may differ as to the reliability of a piece of evidence. But in that sphere the decision of the final fact finding authority is made conclusive by law.” (Emphasis Supplied)

22. Accordingly, we proceed to examine the surrounding facts and circumstances of the present case.

22.1 It is admitted position that Sunrise Asian is one of the penny stock companies listed on Bombay Stock Exchange (BSE) used for generating bogus LTCG. A perusal of the Assessment Order shows that the Assessing Officer has placed reliance on the Investigation Report while making the addition of INR 86,12,600/- under Section 68 of the Act by treating the transaction of sale of shares of Sunrise Asian as a bogus penny stock transaction.

22.2 According to the Investigation Report, penny stock transactions generally involved the following persons:

(i) Syndicate Members are generally promoters of penny stock companies owing initial share holding in the name of paper companies. We note that in Paragraph 1.2 B of the SEBI Order, the names of persons who were directors on the board of Sunrise Asian during the investigation period (i.e., 16/10/2012 to 30/09/2015) have been set out. The Assessment Order, however, does not contain any reference to the aforesaid persons.

(ii) Brokers/Sub-Brokers are SEBI registered brokers/sub-brokers through whom penny stock are traded offline and online.

We note that in paragraph 7.2 of Assessment Order, a reference has been made to SEBI Order, dated 19/12/2014, passed in the case of First Financial Services Limited wherein it has been stated that (a) the Comfort Group and Mr. Anil Agarwal shared close relationship with First Financial Services Limited, and (b) Comfort Group had also played key role in preferential allotment.

As per the Investigation Report, 22 brokers were covered under the investigation. The Assessment Order does not make a reference to any of the aforesaid brokers. However, the aforesaid list of 22 brokers contains the name of Comfort Securities Limited – a company forming part of Comfort Group controlled by Mr. Anil Agarwal.

(iii) Operator is person/entity that controls a large number of paper/shell companies which are used for routing cash as well as buying/selling shares during the price rigging period.

We note that in paragraph 5.2 of the Assessment Order, Mr. Vipul Vidur Bhat has been identified as Operator for Sunrise Asian on the basis of statement given by Mr. Vipul Vidur Bhatt, to Investigation Wing Mumbai during search proceedings under Section 132 of the Act.

In the SEBI Order passed in the case of Sunrise Asian, Mr. Vipul Vidur Bhatt is Noticee No. 26. and was barred from (a) accessing the securities market (b) buying/selling/dealing in shares (whether directly or indirectly) and (c) being otherwise associated with securities market for a period of 6 months.

(iv) Beneficiary being entities/persons who have taken benefit of LTCG exemption to bring back unaccounted income as capital receipt/gain. According to the Assessing Officer, in the present case the Assessee is the Beneficiary who has received back the unaccounted income as capital gains receipts.

(v) Exit Operator is one who buys the shares from the Beneficiary and pays consideration through banking channel.

In paragraph 6.2 of the Assessment Order, the Assessing Officer has concluded that the exit entry providers are M/s Comfort Securities Limited and Mr. Anil Agarwal key person of Comfort Group.

22.3 Further, according to the Investigation Report, bogus penny stock transactions involved the following stages

(i) Purchase/Acquisition – The beneficiaries acquire penny stock at a nominal rate which generally takes place as off-market transaction. The shares can be acquired by way of conventional method (i.e. purchase of share of listed company), or Merger Method (i.e. share of unlisted company acquired through off-market transaction – such as purchase or preferential allotment, are swapped for shares of listed company through a scheme of merger of unlisted company into a listed company)

We note that in the case before us, the Assessee acquired shares of Sunrise Asian under Merger Method. 18000 share of Conart Traders Limited were allotted to the Assessee for consideration of INR 3,60,000/- and under the scheme of merger, whereby Santoshima Tradelink Limited and Conart Traders Limited were merged into Sunrise Asian, the Assessee was allotted 1 share of Sunrise Asian for 1 share of Conart Traders Limited.

(ii) Price Rigging – After the purchase of script of penny stock companies by the beneficiaries, the Syndicate Members start rigging the price through brokers.

We note that the Assessing Officer has, in Paragraph 5. (II) – „Analysis of Script M/s Sunrise Asian Limited‟, analyzed the movement in the price of shares of Sunrise Asian between July 2012 and January 2014.

In SEBI Order, price rigging period has been divided into four patches and analyzed:

Patch 1 – Price Rise : 16/10/2012 to 28/06/2013

Patch 2 – Price Fall : 01/07/2013 to 07/05/2014

Patch 3 – Price Rise : 08/05/2014 to 11/12/2014

Patch 4 – Price Rise : 12/12/2014 to 13/04/2015

Net worth the Sunrise Asian during the period covered by Patch 1 to Patch 4 was negligible. However, despite this the quoted price of the shares was raised artificially.

(iii) Sale – After one year the Beneficiaries sell penny stocks to book LTCG (which was at the relevant time exempt from tax). At this stage the Beneficiary provides the required amount of cash which is routed through some of the paper companies of the Entry Operator and is finally parked in Exit Operator which buys the penny stock from the Beneficiary by issuance of cheques.

The Assessing Officer noted that the Assessee had sold shares of Sunrise Asian during 13th & 14th October, 1st November, and 19th & 24th December, 2013 falling with Patch – 2 above. It is admitted position that the sale proceeds were received through banking channel.

In paragraph 6.3 of the Assessment Order, the Assessing Officer had discussed about cash trail. It has been stated therein that Pushpanjali Commutate Private Limited, Kolkatta and Ranisati Dealer Private Limited, Kolkatta have helped in managing routing of cash.

23. On the basis of the above, the Assessing Officer concluded that following parties acted in collusion:

a) The Assessee – being the Beneficiary

b) Vipul Vidur Bhatt – being the Operator

c) Anil Agarwal and Comfort Group (M/s Comfort Securities Limited, Comfort Fincorp) – being operator, broker and/or exit provider

d) Pushpanjali Commotrade Private Limited, Kolkatta and Ranisati Dealer Private Limited, Kolkatta being companies managing routing of cash

23.1 Assessing Officer further concluded that with the help of the above parties, the Assessee acquired 18,000 shares of Sunrise Asian by Merger Method which and sold the same at artificially increased price in Patch 2 to earn tax exempt LTCG by way of pre-arranged transactions. Thus, introducing unaccounted income in the books as capital receipts/gains.

24. The contention of the Appellant is that the above conclusions drawn by the Assessing Officer are without any basis or material on record.

25. We have perused the SEBI Order, Investigation Report, SEBI Order, dated 19/12/2014 and the statement of Mr. Vipul Vidur Bhatt and Mr. Anil Agarwal. Sunrise Asian [Script Name: SUN ASIAN and Script Code: 506615] has been identified as 1 of the 84 penny stock in the Investigation Report at Serial No. 59 of the list of BSE listed penny stocks used for generation of LTCG.

25.1 In the Assessment Order, the Assessing Officer has identified Mr. Vipul Vidur Bhatt as an Operator. However, there is nothing on record to link the Assessee with Mr. Vipul Vidur Bhatt. The Assessing Officer seems to have drawn inference on the strength of the statement given by the Mr. Vipul Vidur Bhatt to the effect that the beneficiaries of bogus LTCG were allotted shares of Conart Traders Limited on preferential basis in 2011­12. Perusal of material placed on record shows that the Assessee did acquire shares of Conart Traders Limited by way of allotment in 2011-12. The Assessee has made payment of INR 3,60,000/-, through bank account, for allotment of 18,000 shares of Conart Traders Limited on 18/11/2011 and the shares were allotment to the Assessee of 15/01/2012. The Assessee has placed on record copy of relevant extract of bank statement (reflecting payment of INR 3,60,000/-) and copy of share certificate.

25.2 On 27/02/2013, the shares of Conart Traders Limited were converted from physical form to DMAT form and were credited to the DMAT account of the Assessee maintained with Federal Bank.

25.3 On 22/03/2013, the Hon‟ble Bombay High Court approved the scheme of Amalgamation of Santoshima Tradelinks Limited and Conart Traders Limited with Sunrise Asian and as a result, 18,000 shares of Sunrise Asian were acquired by the Assessee for 18,000 shares of Conart Traders Limited held by the Assessee by Merger Method.

25.4 During Patch 1 the quoted price of shares of Sunrise Asian rose tremendously. However, during Patch 1 the Assessee did not sell shares of Sunrise Asian. When the quoted price of shares of Sunrise Asia started to fall in Patch 2, the Assessee sold entire shareholding of 18,000 share in the following 6 trenches after holding the shares for a period of around 19 months:

25.5 All the sale transactions were undertaken through broker ITI Financial services Limited.

25.6 We note that in the Investigation Report the sub-brokers associated with Baba Bhoothnath Trade & Commerce Pvt. Ltd., Madhya Pradesh Stock Exchange Ltd., Religare Securities Ltd., Comfort Securities Ltd., Anand Rathi Share & Stock Brokers Ltd., SMC Global Securities Ltd. and the Calcutta Stock Exchange Ltd. have been identified as brokers/sub-brokers facilitated bogus LTCG transactions of Sunrise Asian. In the Assessment Order the name of Comfort Securities Ltd. comes up in paragraph 7.2 of the Assessment Order wherein reference has been made to SEBI Order, dated 19/12/2014, passed in the case of First Financial Services. A perusal of the aforesaid shows that the same had no relevance to trading in shares of Sunrise Asian. Further, ITI Financial Services Limited was the broker for the Assessee and its name does not find any mention in the Investigation Report and/or the SEBI Order.

25.7 The Assessing Officer has concluded that the Comfort Group and Mr. Anil Agarwal acted as exit providers. However, on perusal of the record we find that there is nothing on record which can form the basis of the aforesaid conclusion. On perusal of the SEBI Order, dated 19/12/2014, that Comfort Group and Anil Agarwal were acting for operators for penny stock scripts other than Sunrise Asian. The only link between Sunrise Asian and Comfort Group seems to be that one of the companies of Comfort Group (i.e. Comfort Securities Ltd.) acted as a Broker facilitating bogus LTCG trades. However, for the Assessee, ITI Financial Services Limited was the broker. Therefore, the sale transactions undertaken by the Assessee cannot be said to have any link with Comfort Securities Ltd. We note that in reply to question no. 26, Mr. Vipul Vidur Bhatt had stated that he will furnish a list on beneficiaries within 10 days. However, no reference to such list has been made in the Assessment Order. It is also not the case of the Revenue that the name of the Assessee finds mention in the list of 83 connected entities/persons identified by SEBI as having acted in concert with Sunrise Asian and its directors to manipulate the price in paragraph 7.31 of SEBI Order. It is pertinent to note that SEBI has not taken any action against the beneficiaries and has penalized the persons acting in concert being the Syndicate Members which includes the promoters/directors/key persons of listed companies and brokers/sub-brokers registered with SEBI.

25.8 Further, there is nothing on record to link Pushpanjali Commotrade Private Limited, Kolkatta and Ranisati Dealer Private Limited, Kolkatta with the Assessee or Sunrise Asian. We note the name of these companies do not feature anywhere else except for paragraph 6.3 of the Assessment Order where the Assessing Officer has analyzed cash trail and referred to the Investigation Report in this regard.

25.9 We note that the Assessing Officer and the CIT(A), both, had moved on incorrect premise that the Assessee was not involved in trading of shares or that the Assessee only dealt with script of Sunrise Asian. The Assessee has been registered as a sub-broker affiliated with Mangal Kseshav Securities limited since 2007. During the relevant previous year the Assessee has offered commission income from proprietorship Equity Research & Investment. A copy of the registration certificate, dated 04/05/2007 issued by SEBI showing that the Assessee is registered with SEBI as a sub-broker affiliated with Mangal Kseshav Securities limited has been placed on record. The Assessee has also been making personal investments in share market since 2007. The investments held by the Assessee as on 31/03/2012 were INR 28,47,999/- which stood reduced to INR 19,38,124/- as on 31/03/2014. The details of shares sold during the relevant previous year are as under:

Therefore, the Assessing Officer has, in Paragraph 5.2 of the Assessment Order, incorrectly stated that the Assessee has mainly traded in single script.

25.10 We note that in paragraph 5.0 (vii) of the order impugned, the CIT(A) has stated that the Appellant being very new to trading in penny stock and the earning of such huge income by a person not known to such type of trading is against human probabilities. This is factually incorrect as the Assessee has been registered as subbroker with SEBI and has been making personal investments since 2007. Further, apart from sale of share of Sunrise Asian, the Assessee had also sold share of other companies during the same period and earned a substantial return which have been accepted by the Revenue as genuine. The detail of the aforesaid sale transactions are as under:

25.11 Further, on perusal of paragraph 7.21 of the SEBI Order, we find that during Patch 2 (01/07/2013 to 07/05/2014) 62 connected entities listed in Table 8 of the SEBI Order had traded amongst themselves. The name of the Assessee does not find any mention in the aforesaid list. Mr. Vipul Vidur Bhatt – the operator of the script Sunrise Asian is listed at serial number 37 of the aforesaid list. However, the contention of the Revenue is that during Patch 2 the Assessee had sold shares to Comfort Group Companies (M/s Comfort Securities Limited, & Comfort Fincorp with Mr. Anil Agarwal as key person). The aforesaid list does not contain the name of the aforesaid Comfort Group Companies or Mr. Anil Agarwal.

25.12 We note that as per paragraph 7.31 of the SEBI Order 77 out of the 83 connected entities (Noticee Number 7-89) were counter parties to sale of shares of Sunrise Asian by 1059 entities/allottees for sale value transactions of INR 5,98,90,16,143/- constituting 57.08% of total sale value amount of INR 1049,09,71,861/-. Thus, even as per SEBI all transactions of sale of shares cannot be said to tainted transactions undertaken by parties acting in collusion with the operators, brokers and exit providers.

25.13 The test of human probabilities when applied to the above set of facts tilts the balance in favour of the Assessee. The preponderance is in favour of the Assessee as the circumstantial evidence and surrounding facts do not support the case of the Revenue as explained in hereinabove. There is no direct or indirect evidence linking Comfort Group Companies (i.e., Comfort Fincorp and Comfort Securities Limited), Mr. Anil Agarwal, Pushpanjali Commotrade Private Limited, Kolkatta and Ranisati Dealer Private Limited, Kolkatta with the Assessee. The Assessing Officer and CIT(A) had proceeded with the understanding that the Assessee was new to trading; he traded in single script and had not earned high returns on sale other investments. This understanding was incorrect and contrary to material on record. Even as per SEBI Order, not every shareholder who sold/purchased shares of Sunrise Asian through stock exchange during the Patch-2 was involved in share price manipulation or booking bogus LTCG.

26. In view of the above, we hold that the material on record supports the case of the Assessee/Legal Heir that transactions of sale of shares of Sunrise Asian were genuine transactions undertaken during normal course by the Assessee who had knowledge of the stock-market and had been making investments in shares since many years. Accordingly, the claim of exemption under Section 10(38) of the Act is allowed in respect of capital gains of INR 86,12,600/- arising from sale of shares of Sunrise Asian during the previous year relevant to the Assessment Year 2014-15. Ground No. 1.1 and 1.3 are allowed.

27. Before parting we would like to observe that the Assessing Officer had summoned the Legal Heir and recorded his statement wherein the Legal Heir had expressed ignorance about the transactions under consideration. The Assessing Officer had on the basis of the statement concluded that the no satisfactory explanation was furnished regarding the aforesaid transactions. In our view, the approach adopted by the Assessing Officer cannot be countenanced. It is likely that the Legal Heir may not have personal knowledge of the transactions undertaken by his father and therefore, the Assessing Officer must also take into consideration the documents/details placed on record. Having said as aforesaid, we are not convinced by the contention advanced on behalf of the Assessee/Legal Heir that the provisions of Section 68 cannot be attracted in case where the assessee has passed away as such assessee can no longer be asked to furnish an explanation which is pre-requisite for invoking Section 68 of the Act. However, since we have allowed Ground No. 1.1 and 1.3, the issue has become academic in nature and therefore, Ground No. 1.2 and Additional Grounds are dismissed as being infructuous.”

11. Since the facts and circumstances in the case of the assessee are also similar to the facts and issues in the case of Bhavin Vaghasia (supra), applying the ratio mutatis mutandis and following the principle of consistency, we allow the appeal of the assessee. And direct the AO to allow the LTCG claim of the assessee and delete the addition of Rs 25,12,070/-.

12. Since no submission was made by Ld AR regarding ground number 4 (disallowance of loss of Rs 5,39,000/- not claimed by assessee in ROI), and this ground has not been decided by Ld CIT(A). Since this ground has not been argued, it stands dismissed.

13. In the result, the appeal of the assessee is partly allowed.

Order pronounced in the open court on this 29/01/2024.