ITAT Delhi upholds Addition of bogus LTCG from penny stock

Gyan Prakash Gupta Vs ITO (ITAT Delhi)

ITAT Delhi held that Long Term Capital Gain [LTCG] earned from transaction in penny stock is liable for addition. Accordingly, appeal of assessee dismissed and order of CIT(A) being well reasoned is upheld.

Facts- Vide the present appeal, the assessee has mainly contested the addition of Rs. 1,49,14,984/- which has been made on account of Bogus Long Term Capital Gain from penny stock HPC Bioscience Ltd.

Conclusion- Held that on perusal of the order sheets, it reveals that from the last several occasions, the assessee is not appearing on the date of hearing, despite issue of notices, hence, we are disposing of this appeal exparte qua assessee, after hearing the Ld. DR and perusing the records. We find that this a classic case of penny stock transaction. We further find that Ld. CIT(A) has passed a well reasoned order by taking care of each and every argument of the assessee. Hence, in our considered opinion, there is no need to interfere in the order of the Ld. CIT(A), therefore, we affirm the action of the ld. CIT(A) and accordingly, reject the grounds raised by the Assessee.

FULL TEXT OF THE ORDER OF ITAT DELHI

The Assessee has filed the instant Appeal against the Order of the Ld. CIT(Appeals), Guwahati-2, Guwahati dated 31.05.2019, relating to assessment year 2015-16. In this appeal, the assessee has raised as many as 21 grounds, however, the solitary ground in this appeal is Ground No. 1, which reads as under:-

“That on the facts and circumstances of the case, the ld. CIT(A)-2, Guwahati erred in upholding assessment concluded by Ld. Income Tax Officer, Ward 4(1), Guwahati, at Rs. 1,49,56,620/- instead of returned income of Rs. 41,630/- returned by the appellant.”

2. The brief facts of the case are that the addition of Rs. 1,49,14,984/- has been made on account of Bogus LTCG from penny stock. The details of the transaction leading to the aforesaid amount Rs. 1,49,14,984/- as culled out from the assessment order is as under:-

3. Against the aforesaid action of the AO, Assessee appealed before the Ld. CIT(A).

4. Upon assessee’s appeal, Ld. CIT(A) by passing an elaborate order, confirmed the addition, by holding as under:-

“Notwithstanding the above reasons for confirming the addition made by the AO, in this case, I note that the Appellant has claimed LTCG which the AO has found to have been earned/arisen from transactions in penny stocks.

I have carefully considered the facts of the case and decisions of the Hon’ble Courts. The Assessing Officer has shown the involvement of all the persons in the rigging of the price of the shares in which the appellant had invested. The relevant question is not on the legal formalities related to purchase and sale of the shares but its motive and design. The shares from whose investments, the Appellant has claimed the purported income are penny stocks and there was phenomenal increase in the price of these shares. Even more, the AO has held that the financials of these company do not support such disproportionate jump in the price of shares.

The Appellant has failed to rebut the findings of the revenue by showing any falsehood or contradiction in the findings of the Assessing Officer. The Assessing Officer has bared the whole design of the market operators from the point of selling of the shares of a paper company to the beneficiaries, rigging of the prices of the shares on the stock exchange, dematerialization of the shares and sales of the shares etc. In this case, the facts suggest non-genuineness of the transactions. None of the decisions by the Indian Courts support tax evasion clothed with the smoke-screen of subterfuge. The Assessing Officer has clearly brought out the facts revealing trivial substance of the company in which the Appellant has made the investment and the operations in the market by the interested parties to create the bubble in the form of astronomical growth in the prices of the shares, reaping the benefit at a suitable time and making exit by selling the shares. It is often seen that colourable devices come with more systematic forms giving impression of genuineness. The Appellant resorted to a well planned scheme for purchase and sale of shares in connivance with entry operators. Such transactions never happen in the natural course of market activities; they are rather driven by predetermined motives.

The Assessing Officer has dealt with the issue at length and has demonstrated that the truth behind the apparent has to be revealed. The payment through cheque and the receipt of the sale proceeds through bank cannot prove the genuineness of the transaction. Even the transaction through Stock Exchange cannot give strength to the fabricated devices. The Appellant cannot wash his/her hands from the gamut of the plans giving colour of genuine transactions. The manipulation was possible only by the beneficiary and its aides. It was highly improbable to get that much of capital gain by investing in a company which neither had substantive past nor a promising future. The whole of the case against the Assessee is that there was a well planned maneuvering to take the transactions look genuine. The question arises as to how a person can judge the growth of the company which has negligible presence in the market in terms of revenue or in terms of capital, It certainly hints at certain illegitimate planning having the garb of legal forms. No investigation is required to prove such a conspicuous fraudulent activity. The case was so glaring that even a lay man could easily judge the real facts of the case.

There are no comprehensible market forces or international trends responsible for huge fluctuation in the price of the shares of this company. Even the sensex was not so volatile during this period. There are no sentimental, national or international factors responsible for the so called growth. Arguments of the Appellant do not help because there are no apparent reasons of any kind which can give an iota of substance to the phenomenal rise of the value of the aforesaid penny stocks.

There may be absence of direct evidence that cash was introduced for obtaining the accommodation entry but circumstantial evidence is the evidence of various facts and if taken together, they may form a chain of circumstances leading to an inference or presumption of the existence of the principal fact. In the clandestine operations and transactions it is impossible to have direct evidence or demonstrative proof of every move. So the Assessing Officer cannot be expected to produce such evidences.

The Hon’ble Delhi High Court in their judgment dated 17th January, 2019 in the case of Pr. CIT-6, New Delhi vs. NDR Promoters Pvt, Ltd. in ITA No. 49/2018, while deciding the issue of cash credits in the form of share application money made certain observations on the make-believe transactions which are also applicable to the present facts of the case. The relevant part is extracted below:

“12. The present case would clearly fall in the category where the Assessing Officer had not kept quiet and had made inquiries and queried the respondent-assessee to examine the issue of genuineness of the transactions. The Tribunal unfortunately did not examine the said aspect and has ignored the following factual position:-

a. The shareholder companies, 5 in number, were all located at a common address I.e. 13/34, WEA, Fourth Floor, Main Arya Samaj Road, Karol Bagh, New Delhi.

b. The total investment made by these companies was Rs.1,51,00,000/, which was a substantial amount.

c. Evidence and material on bogus transactions found during the course of search of Tarun Goyal. Evidence and material that the companies were providing accommodation entries to beneficiaries was not considered.

d. The findings recorded as mentioned in the assessment order, which read as under:-

“1. From the finding of search, it is evident and undeniable that all the companies including the alleged shareholders companies belong to Sh, Tarun Goyal. This is enforced even more from the following:-

i. All the companies are operated from the office premises of Sh. Tarun Goyal,

ii. All the directors are either his employees or close relatives, Sh. Tarun Goyal could never produce the directors nor furnish their residential address.

iii. The statement of employees of Sh. Tarun Goyal is, on record, whereby they have clearly stated that they signed on the papers produced before them by Sh. Tarun Goyal. They do not know about the basic details of the companies like shareholding patterns, nature of business of these companies etc.

iv. The statement of auditors of Sh. Tarun Goyal is on record. They have stated to have never meet (sic) the directors of the companies and audited the accounts only on the directions of Sh. Tarun Goyal. As per the statement of auditors, the employees of Sh. Tarun Goyal were directors of the companies run by them, also they could not ascertain the so called shore capital subscribed by Sh. Tarun Goyal as documentary proof of the same was lacking.

v. During the course of search, all the passbooks, cheque books, PAN Cards etc. were always in possession of Sh. Tarun Goyal. On his directions all the employees signed all the documents.

vi. All the bank account opening forms appear to be in the handwriting of Sh. Tarun Goyal.

vii. All the books of accounts of all the companies have been retrieved from the computers/laptop of Sh. Tarun Goyal.

viii. Tarun Goyal has given letters for the release of bank accounts of companies put under restraints after search. No such application was rece/ved from so called directors of the companies.

ix. Tarun Goyal appears in all the scrutiny assessments as well as appeals of his companies himself before various income’ tax authorities. From verification carried out in respective wards/ circles where the above mentioned companies are assessed, it is’ evident that Sh. Tarun Goyal is appearing in all the income tax proceedings on behalf of all the companies. He is not charging any fees for appearing in these cases.

x. During the post search investigation it was revealed that besides, aiding and abetting the evasion of taxes, Sh. Tarun Goyal has been indulging in violation other provisions of the law of the land. This matter has also been taken up by REIC for multi-agency probe.”

e. The respondent-assessee did not have any business income in the year ending 31st March, 2007 and had income from other sources of Rs.16.38 lakhs in the year ending 31st March, 2008. The respondent-assessee had not incurred any expenditure in the year ending 31st March, 2007 and had incurred expenditure of Rs.12.17 lakhs in the year ending 31st March, 2008.

f. Shares of face value of Rs.10/- each were issued at a premium of Rs.40/- (total Rs.50/-).

g. The respondent-assessee had failed to produce Directors of the companies, though they had filed confirmations, and therefore, were in touch with the respondent-assessee. The respondent-assessee had also failed to produce the details and particulars with regard to issue of shares, notices etc. to the shareholders of AGM/EGM etc.

13. In view of the aforesaid factual position, we have no hesitation in holding that the transactions in question were clearly shown and make believe with excellent paper work to camouflage their bogus nature. Accordingly, the order passed by the Tribunal is clearly superficial and adopts a perfunctory approach and ignores evidence and material rejected to in the assessment order. The reasoning given is contrary to human probabilities, for in the normal course of conduct, no one will make investment of such huge amounts without being concerned about the return and safety of such investment.

14. Accordingly, the appeal is allowed. The substantial question of law framed above is accordingly answered in favour of the appellant-revenue and against the respondent-assessee. There would be no order as to costs.”

Clearly, the ratio laid down in the above judgment is also applicable to the facts of the instant case.

The Appellant failed to rebut the observations of the Assessing Officer stated above.

The Appellant rather beats about the bush to defend the present case. With respect to the circumstantial evidence and in the matter related to the discharge of onus of proof and the relevance of surrounding circumstances of the case, the relevant observations and findings of Hon’ble Supreme Court in the case of CIT vs. Durga Prasad More [82 ITR 540], are:

“That though an appellant’s statement must be considered real until it was shown that there were reasons to believe that the appellant was not the real, in a case where the party relied on self-serving recitals in the documents, it was for the party to establish the transfer of those recitals, the taxing authorities were entitled to look Into the surrounding circumstances to find out the reality of such recitals. Science has not yet invented any instrument to test the reliability of the evidence placed before a Court or Tribunal. Therefore, the Courts and the Tribunals have to judge the evidence before them by applying the test of human probability. Human minds, may differ as to the reliability of piece of evidence, but, in the sphere, the decision of the final fact finding authority is made conclusive by law.”

The above ratio laid down by the Hon’ble Supreme Court has been reiterated and applied by the Hon’ble Apex Court in the case of Sumati Dayal vs. CIT 214 ITR 801 (S.C). It is essential on the part of the Assessing Officer to look into the real nature of transaction and what happens in the real world and contextualize the same to such transactions in the real market situation. It is pertinent to state here, the wisdom of the Hon’ble Supreme Court in CIT vs. Arvinda Raju (TN) (1979) 120 TR 46 (S.C) wherein it was held that-

“One day, in our welfare state geared to social justice, this clever concept of avoidance as against ‘evasion’ may have to be exposed.”

I note that the Appellant has referred to a long list of judgments to buttress and bring home the contention, on account of one legal reason or the other that the purported Income was not camouflaged or prearranged but was a genuine and bonafide income.

I equally note that there is a long list of such judgments supporting the case of the revenue too. However, when I took and refer to these Judgments, I find that most of these judgments are of various Hon’ble Benches of ITAT, though a few of them have been rendered by Hon’ble High Courts. I deem it appropriate to restrict the adjudication based on the Judgments rendered in this regard by various Hon’ble High Courts.

In the case of Som Nath Maini vs. CIT, it was held/averred, as follows, by the Hon’ble Punjab and Haryana High Court:

“The assessee incurred capital loss on account of sale of gold jewellery and also had short-term capital gain of almost equal amount. The AO observed that short-term gain was not genuine inasmuch as the assessee had purchased 45,000 shares of M/s Ankur International Ltd, at varying rates from Rs. 2.06 to Rs. 3.1 per share and sold them within a short span of six-seven months at the rate varying from Rs. 47.75 paise to Rs. 55. These shares were purchased through a broker, Munish Arora & Co. and sold through another broker, M/s SK Sharma & Co. The AO was taken by surprise by the astronomical rise in share price of a company from Rs. 3 to Rs. 55 and started further enquiry. The AO after enquiry made addition to the income of the assessee, which was upheld by the CIT (A) as well as by the Tribunal.

4. Learned counsel for the assessee submitted that the view taken by the Tribunal is perverse. The assessee having discharged the burden of proving the transactions of sole and purchase of the shares to be genuine, burden of proving that the said transactions were not genuine, was on the Department and in the absence of any material on record, holding the transactions to be not genuine, was not permissible. We are unable to accept the submission made. The burden of proving that income is subject to tax is on the Revenue but on the facts, to show that the transaction is genuine, burden is primarily on the assessee. The AO is to apply the test of human probabilities for deciding genuineness or otherwise of a particular transaction. Mere leading of evidence that the transaction was genuine, cannot be conclusive. Such evidence is required to be assessed by the AO in a reasonable way. Genuineness of the transaction can be rejected even if the assessee leads evidence which is not trustworthy, even if the Department does not lead any evidence on such an issue. In view of the above, we are of the view that the finding recorded by the Tribunal is a finding of fact and cannot be held to be perverse. No substantial question of law arises. The appeal is dismissed.”

In the above case, the relevant decision of Hon’ble ITAT Chandigarh in ACIT vs. Som Nath Maini [(2006) 100 TTJ Chd 917] is as under:

“6. After hearing the rival submissions, going through the orders of authorities below and paper book, we, find that M/s Ankur International Ltd., although it is a quoted company, its shares were not being transacted at Ludhiana Stock Exchange at, the relevant time. Shares have been purchased and sold through the brokers and payments have been received in cheque on different dates as per the statement of account of M/s S.K. Sharma & Co. Factual matrix of the case from start of the purchase of shares at the rate of Rs. 3 to the sale of shares at Rs. 55 in a short span of time and shares being not, quoted at Ludhiana Stock Exchange and the way in which different, instalment payments have been received from the brokers and non-availability of the records of the brokers and the shares remaining in the name of assessee even long after the sale of the shares does not stand the test of probabilities. As rightly pointed out by the learned Departmental Representative, these types of companies function in the capital market whose sale price is manipulated tp astronomical height only to create the artificial transaction in the form of capital gain. Surrounding circumstances differ from the normal shore market transactions in which they are ordinarily carried out. Taking all the steps together, final conclusion does not accord with the human probabilities. The Hon’ble Supreme Court in the case of CIT v. Durga Prasad More held as under:

“It is a story that does not accord with human probabilities. It is strange that High Court found fault with the Tribunal for not swallowing that story. If that story is found to be unbelievable as the Tribunal has found and in our opinion, rightly that the decisions remains that the consideration for the sale proceeded from the assessee and therefore, it must be assumed to be his money.

It is surprising that the High Court has found fault with the ITO for not examining the wife and the father-in-law of the assessee for proving the Department’s case. All that we can say is that the High Court has ignored the facts of life. It is unfortunate that, the High Court has taken a superficial view of the onus that lay on the Department.”

6. The learned CIT(A) only got swayed by the issuance of notice by the AO under Section 131 to both the brokers from whom shores were purchased and sold and came to the conclusion that share transactions were genuine overlooking the material gathered by the AO from the statements recorded of broker M/s S.K. Sharma & Co. and the other facts and circumstances that volume of transactions of Jaipur Stock Exchange is only 600 shares and 1000 shares. Payments have been received from the brokers only in instalments over a period of 6-7 months. It is true that when transactions are through cheques, It looks like real transaction but authorities are permitted to look behind the transactions and find out the motive behind transactions. Generally, it is expected that apparent is real but it is not sacrosanct. If facts and circumstances so warrant that it does not accord with the test of human probabilities, transactions have been held to be non-genuine, it is highly improbable that share price of a worthless company can go from Rs. 3 to Rs. 55 In a short span of time. Mere payment by cheque and receipt by cheque does not, render a transaction genuine. Capital gain tax was created to operate in a real world and not that of make belief. Facts of the case only lead to the inference that these transactions are not genuine and make believe only to offset the loss incurred on the sale of jewellery declared under VDIS, In the totality of facts and circumstances of this case and material on record, we are of the considered view that the CIT(A) was not justified in deleting the impugned addition. We, accordingly set aside the order of the CIT(A) and restore that of the AO.”

From a perusal of the above judgment of the Hon’ble Punjab and Haryana High Court in the above mentioned case, it is clear that merely leading the evidence that the transaction was genuine, cannot be taken as conclusive. Such evidences are required to be assessed by the Assessing Officer in a reasonable way. Genuineness of the transaction can be rejected if the assessee leads evidence which is not trustworthy, even if the Department does not lead any evidence on such an issue. In the present case, prima facie, the appellant has tried to demonstrate that he has followed all the procedures required for a genuine transaction, but he miserably fails to satisfy the test of human probabilities as discussed by the Assessing Officer in detail in the assessment order.

In the case of CIT vs. P. Mohankala (15/05/2007), it was held/averred, as follows, by the Hon’ble Supreme Court:

“The question is what is the true nature and scope of Section 68 of the Act? When and in what circumstances Section 68 of the Act would come into play? That a bare reading of Section 68 suggests that there has to be credit of amounts in the books maintained by an assessee; such credit has to be of a sum during the previous year; and the assessee offers no explanation about the nature and source of such credit found in the books; or the explanation offered by the assessee in the opinion of the Assessing Officer is not satisfactory, it is only then the sum so credited may be charged to income-tax as the income of the assessee of that previous year. The expression “the assessee offers no explanation” means where the assessee offers no proper, reasonable and acceptable explanation as regards the sums found credited in the books maintained by the assessee. It is true the opinion of the Assessing Officer for not accepting the explanation offered by the assessee as not satisfactory is required to be based on proper appreciation of material and other attending circumstances available on record. The opinion of the Assessing Officer Is required to be formed objectively with reference to the material avallable on record. Application of mind is the sine qua non for forming the opinion.”

In the case of Sanjay Bimalchand Jain vs. Pr. CIT it was held/ averred, as follows, by the Hon’ble Bombay High Court:

“(iii) On hearing the learned counsel for the assessee and on a perusal of the orders of the Income tax authorities, it appears that there is no scope for interference with the said orders in this appeal. By referring to the aforesaid facts, which are narrated in the earlier part of this order, the authorities found that the assessee had made investment in two unknown companies of which the details were not known to her. It was held that the transaction of sale and purchase of shares of two penny stock companies, the merger of the two companies with another company, viz. Khoobsurat Limited did not qualify an Investment and rather it was an adventure in the nature of trade. It was held by all the authorities that the motive of the investment made by the assessee was not to derive income but to earn profit. Both the brokers, le, the broker through whom the assessee purchased the shares and the broker through whom the shares were sold, were located at Kolkata and the assessee did not have an inkling as to what was going on in the whole transaction except paying a sum of Rs.65,000/in cash-for the purchase of shares of the two penny stock companies. The authorities found that though the shares were purchased by the assessee at Rs.5.50 Ps. Per share and Rs.4/per share from the two companies in the year 2003, the assessee was able to sell the shares just within a years time at Rs.486.55 Ps and Rs.485.65 Ps per share. The broker through whom the shares were sold by the assessee seeking the names, addresses and the bank accounts of the persons that had purchased the shares sold by the assessee.

(iv) The authorities have recorded a clear finding of fact toot the assessee had indulged in a dubious shore transaction meant to account for the undisclosed income in the garb of long term capital gain. While so observing, the authorities held, that the assessee had not tendered cogent evidence to explain as to how the shares in to a unknown company worth Rs.5/had jumped to Rs.485/in no time. The Income Tax Appellate Tribunal held that the fantastic sale price was not at all possible as there was no economic or financial basis as to how a share worth Rs.5/of a little known company would jump from Rs.5/ to Rs.485/. The findings recorded by the authorities are pure findings of facts based on a proper appreciation of the material on record. While recording the said findings, the authorities have followed the tests laid down by the Hon’ble Supreme Court and this Court in several decisions. The findings do not give rise to any substantial question of low. The judgments reported in (2012) 20 Taxman.com 529 (Bombay) (CIT Versus Jamnadevi Agrawal), (1957) 31 ITR 294 (Bombay) (Puranmal Radhakishon Versus CIT), (1970) 77 ITR 253 (SC) (Raja Bahadur Versus CIT) and (2015) 235 Taxman 1 (Bom) (CIT Versus Smt. Datta M. Shah) and relied on by the learned counsel for the assessee are distinguishable on facts and cannot be applied to the case in hand.”

In the case of Udit Kalra vs. ITO|2019 (4) TMI 834 – Delhi High Court; ITA 220/2019 & CM No. 10774/2019; Dated March 8, 2019], It was held/averred, as follows, by the Hon’ble Delhi High Court:

“The assessee is aggrieved by the concurrent findings of the tax authorities – including the lower appellate authorities rejecting its claim for a long term capital gain reported by it, to the tune of Rs.13,33,956/- and Rs. 14,34,501/- In respect of 4,000 shares of M/s Kappac Pharma Ltd. The assessee held those shares for approximately 19 months; the acquisition price was Rs.12/- per share whereas the market price of the shares at the time of their sole, was Rs.720/. It is contended that the assessee was not granted fair opportunity.

Mr. Rajesh Mahna, learned counsel appearing for the assessee relied upon the orders of the co-ordinate Bench of the tribunal, in respect of the same company i.e. M/s Kappac Pharma Ltd., and pointed out that the tax authority’s approach in this case was entirely erroneous and inconsistent.

The main thrust of the assessee’s argument is that he was denied the right to cross-examination of the two individuals whose statements led to the inquiry and ultimate disallowance of the long term capital gain claim in the returns which are the subject matter of the present appeal.

This court has considered the submissions of the parties. Aside from the fact thát the findings in this case are entirely concurrent – A.O., CIT(A) and the ITAT have all consistently rendered adverse findings — what is intriguing is that the company (M/s Kappac Pharma Ltd.) had meager resources and in fact reported consistent losses. In these circumstances the astronomical growth of the value of company’s shares naturally excited the suspicions of the Revenue. The company was even directed to be delisted from the stock exchange. Having regard to these circumstances and principally on the ground that the findings are entirely of fact, this court is of the opinion that no substantial question of law arises in the present appeal.

This appeal is accordingly dismissed.”

The Appellant has failed to substantiate the arguments in the light of the detailed discussion in this regard in the foregoing paras wherein it has been established that the Appellant introduced unaccounted money in the garb of Long Term Capital Gains.

It is reiterated that what matters to decide a particular case is not the form but its real content. The Assessing Officer has successfully lifted the veil from the artful design of the transactions. Accordingly, the addition made by the Assessing Officer is confirmed.

I further hold that based on information in the possession of the AO and as brought out by him on record, this is a case, where the purported evidences to prove the genuineness of transaction are themselves found to serve as a smoke screen to cover up the true nature of the transactions in the facts and circumstances of the case as it is revealed that purchase and sale of shares are arranged transactions to create bogus profit in the garb of tax exempt / concessional tax rate capital gain by well organised network of entry providers with the sole motive to account for the undisclosed income for a certain consideration or commission.

Thus, I have no hesitation to hold that the share transactions leading to Long Term Capital Gains by the Appellant are sham transactions entered into for the purpose of evading tax and that the ratio of the landmark decision of Hon’ble Supreme Court of India in the case of McDowell and Company Limited [1985 (4) TMI 64 – Supreme Court) 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.

As a result of the above discussion, all the above grounds of Appeal of the Appellant, as impugned herein are, hereby, dismissed.”

5. Against the aforesaid order of the Ld. CIT(A), assessee is in appeal before us.

6. None appeared on behalf of the assessee. On perusal of the order sheets, it reveals that from the last several occasions, the assessee is not appearing on the date of hearing, despite issue of notices, hence, we are disposing of this appeal exparte qua assessee, after hearing the Ld. DR and perusing the records. We find that this a classic case of penny stock transaction. We further find that Ld. CIT(A) has passed a well reasoned order by taking care of each and every argument of the assessee. Hence, in our considered opinion, there is no need to interfere in the order of the Ld. CIT(A), therefore, we affirm the action of the ld. CIT(A) and accordingly, reject the grounds raised by the Assessee.

7. In the result, the Assessee’s appeal is dismissed.

Order pronounced on 05/12/2024.