Case Law Details
Tarachand Agrawal Vs ITO (ITAT Ahmedabad)
The appeal filed by the assessee, Tarachand Agrawal, was dismissed by the Income Tax Appellate Tribunal (ITAT) Ahmedabad. The case involved the addition of trading in penny stocks of a shell company, M/s. Vax Housing Finance Corporation Ltd., as the assessee was suspected of obtaining bogus long-term capital gains. The case was reopened under Section 147 of the Income Tax Act, and notices were duly served to the assessee. However, the assessee failed to comply with the notices and did not attend the hearings. The ITAT upheld the addition made by the Revenue due to the lack of assistance and non-appearance of the assessee during the appeal proceedings. The Revenue’s order was considered self-explanatory, reasoned, and found to be valid. As a result, the appeal filed by the assessee was deemed devoid of merit and dismissed.
Facts- On the basis of the information received from the DDIT(Inv.), Unit-6(2), Mumbai that the assessee had entered into trading of Penny Stock of M/s. Vax Housing Finance Corporation Ltd., which is a shell company and being used for getting bogus long term capital gain/loss to the traders, the case of the assessee was reopened u/s. 147 of the Act.
Accordingly, notice whereupon u/s. 148 of the Act upon the assessee on 29.03.2018, was duly served. However, no compliance was made to the statutory notices whereupon final show cause notice dated 19.11.2018 providing a further opportunity of being heard to the assessee were served for making compliance on 26.11.2018, which was duly served upon the assessee on 19.11.2018. As nothing was forthcoming from the assessee, an ex parte order under Section 144 r.w.s. 147 of the Act was passed.
Conclusion- Held that at the time of hearing of the appeal none appeared on behalf of the assessee. In fact, previously in very many occasion, though the matter was fixed for hearing, neither any adjournment has been sought for nor any representative appeared on behalf of the assessee before us. Hence, in the absence of any assistance rendered by the assessee, we do not find any reason to interfere with the order passed by the Revenue, which is self-explanatory and found to be a reasoned one. Thus, appeal filed by the assessee is found to be devoid of merit and hence, dismissed.
FULL TEXT OF THE ORDER OF ITAT AHMEDABAD
The instant appeal filed by the assessee is directed against the order dated 15.07.2019 passed by the Ld. Commissioner of Income Tax (Appeals)- 5, Ahmedabad arising out of the order dated 30.11.2018 passed by the ITO, Ward-5(3)(5), Ahmedabad under section 144 r.w.s. 147 of the Income Tax Act, 1961 (hereinafter referred as to ‘the Act’) for Assessment Year 2011-12.
2. We have heard the rival submissions made by the respective parties and we have also perused the relevant materials available on record.
3. The assessee challenged the addition on account of trading in Penny Stock of M/s. Vax Housing Finance Corporation Ltd.
4. On the basis of the information received from the DDIT(Inv.), Unit-6(2), Mumbai that the assessee had entered into trading of Penny Stock of M/s. Vax Housing Finance Corporation Ltd., which is a shell company and being used for getting bogus long term capital gain/loss to the traders, the case of the assessee was reopened under Section 147 of the Act. Notice whereupon under Section 148 of the Act upon the assessee on 29.03.2018, was duly served. However, no compliance was made to the statutory notices whereupon final show cause notice dated 19.11.2018 providing a further opportunity of being heard to the assessee were served for making compliance on 26.11.2018, which was duly served upon the assessee on 19.11.2018. As nothing was forthcoming from the assessee, an ex parte order under Section 144 r.w.s. 147 of the Act was passed. While passing order, the ACIT made following observation:
“5. I have carefully considered the Assessment Order and submission filed by the appellant. During the course of assessment proceedings, on verification of purchase & sale details provided by the appellant it is noticed by the AO that the assessee have not shown the transaction of M/s. Vax Finance Corporation Ltd which is a penny stock company. The assessee has made share transaction and booked bogus LTCG meant for the sale value of Rs. 65,51,852/-. On the basis of reports and finding of Investigation Directorate Kolkata, it was found that the transaction undertaken by the assessee of buying & selling the said shares is bogus and the assessee has not earned any genuine sale consideration but has managed to got its unaccounted income bogus capital gain and thereby introduced his unaccounted income in the books of account is in the garb of sale consideration which is ultimately taken into the capital account of the assessee.
5.1 To examine the genuineness of the transactions, the AO issued a show cause notice to the assessee and requested to furnish the details of purchase and sale of share, mode of purchase along with bank statement and copy of dematerialized statement. After considering the facts of the case and circumstantial evidence the reply filed by the assessee was rejected by the A. O.
5.2 It is noted that the Directorate of Investigation, Kolkata had undertaken the investigation on a much larger scale than earlier and as a result, they identified a very large number of beneficiaries took huge amount of bogus entries of LTCG. A detailed investigation report dt. 24-07-2015 named “Project bogus LTCG/STCL through BSE listed penny stocks” was made. The span of investigation can be gauged from the fact that they identified 64,811 beneficiaries involving bogus LTCG of nearly of 38,000 crore. As per the report, the illegal business of bogus LTCG involves three different personalities. The promoter of ‘Penny stock’ companies (also known as syndicate member), the share brokers & the entry operator who purchases the shares through paper companies by taking cash. Many a times the three categories of individuals perform overlapping roles and, at times, a single individual may perform all the three functions.
5.3 It is noticed that in the earlier investigations, the approach was to target the individuals and through them identify the penny stocks and beneficiaries. This method yielded results on a limited scale emanating only from individual / individuals targeted. However, keeping in mind the rampant nature and exponential growth of alleged illegal business in recent times and to cast the net wide, during Kolkata investigations, Department reversed the methodology of investigation.
5.4 It is further noted that the ‘Penny Stocks’ were first identified and then department started targeting the individuals who dealt in them. As a result, department was able to virtually uncover almost all Kolkata based operators in one investigation itself. It was an on-going process, which acquired the character of a project that continued for quite some time, unlike usual investigation which ends with the statement of the individual involved. As per the report the business of providing entries of bogus LTCG over the years has become much more organized and with economy of scale in full operation the stakes involved had become huge. Before the actual transaction starts taking place, there were brokers in different towns who contact prospective clients and took paper booking for entries. The commission to be paid to the operators was decided at this stage however, no money was paid. Once the booking is complete, the operators have a reasonably good idea of how much LTCG is to be provided along with the break-up of individual beneficiaries. This data is essential to decide which penny stock or companies to use for the job and which beneficiary to buy how many shares.
5.5 Broadly speaking there are two types of companies.
a) An old already listed company, the entire shareholding of which is bought by the syndicate to provide LTCG entries. These are generally dormant companies with no business and with accumulated losses.
b) A new company which is floated just for the purpose of giving LTCG Such new companies are often floated after the initial booking is complete and the capital base is decided keeping in mind the entries to be provided.
The entities involved in the transactions
a) Syndicate Members
They are the promoters of the Penny Stock companies who own the initial shareholding mostly in the name of paper companies either in a fresh IPO or purchased from the shareholders of a dormant company. They are usually a group of 4-5 individuals who are also referred to as Syndicate Members and are sometimes also referred to as Operators. Their nominees are directors of the Penny Stock companies which are indirectly controlled by them through such dummy directors. The whole operation is managed by them. They get the net commission income from the transactions. Their name however, seldom appear in the actual transactions.
b) The Brokers
These are registered brokers through whom shares are traded both online and offline. They are fully aware of the nature of transactions and get paid a commission over and above their normal brokerage. Some of the big broking houses are also indulging in such transactions mostly through sub-brokers. Even Calcutta Stock Exchange has registered itself as a broker with BSE and has given a large number of terminals to sub-brokers who are dealing into this type of transactions. In the said investigation, some of the sub-brokers of big broking houses like Anand Rathi, Religare Securities, SMC etc. were also uncovered. As a standard modus operand!, the brokers often compromise on KMC norms of the clients to help the Syndicate Members.
c) The Entry Operators
These are individuals who control a large number of paper/shell companies which are used for routing cash for the transactions as well as buying and selling shares during the process of price rigging. They work for commission to be paid by the Syndicate Members. To cut cost sometimes in smaller operations, the same group perform more than one function.
The transaction involves three legs.
a) Purchase of share by the beneficiary
In this the beneficiary is sold a fixed number of shares at a nominal rate. The price and the number of shares to be purchased are decided on the basis of the booking taken and the value up to which price would be rigged. This leg of the transaction mostly is offline. This is done to save on STT using the loophole in Section 10(38) of the IT Act which places restriction of trading by payment of STT on sale of shares and not on purchase.
b) Price rigging
After the shares have been purchased by the beneficiaries, the syndicate members start rigging the price gradually through the brokers. In these transactions the volume is almost negligible. Two fixed brokers, who are in league with the Syndicate, buy shares at a fixed time and at a fixed price. These low volume transactions are managed through paper companies of entry operators.
c) Final sale by the beneficiary
This is done after the beneficiary has already held the shares for one year. The period of holding may be a little more to match the amount of booking with the final rate. The beneficiary is contacted either by the Syndicate member or the Broker (Middle man) through whom the initial booking was done. 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 one company which will buy the shares from the beneficiary. The paper company issues cheque to the beneficiary.
The above mentioned methodology is referred to as Conventional Method.”
5. Finally, the price of 105212 shares of M/s. Vax Housing Finance Corporation Ltd. of Rs.65,5 1,852/- was found to be Penny Stock, which has been used for beneficiaries i.e. sellers of the shares to launder money in the garb of long term capital gain while claiming tax exemption under Section 10(38) of the Act declared to be a sham transaction and the same was added to the total income of the assessee, which was, in turn, confirmed by the First Appellate Authority. Hence the instant appeal before us.
6. In appeal, the Ld. CIT(A) finally observed as follows:
“5.23 The ratio, laid down in the above decision of Hon ’ble Supreme Court and various HC and tribunals others, it is crystal clear that the apparent should be real. It is further held that the assessee has to prove the genuineness of the transaction beyond doubt. It is evident that in the appeal under consideration that the appellant could not established the genuineness of the transaction as there is no justification for purchase of share from unknown person and of the unknown company having no financial credentials. In present case Appellant was involved in buying the penny stock, which is similar to shell companies for which various investigations were already carried out by Kolkata Investigation Wing and SEBI Order referred supra hence long term capital in present case is nothing but preconceived scheme to convert the unaccounted money of the appellant. The entire sequence of transaction is sufficient to establish that the above share purchase and sales transaction were accommodation entry and sham transaction.
5.24 On the merits of the addition, the AO noted that the assessee was involved in the transaction in the script of Vax Housing Finance Corp. Ltd, a penny stock and that the company in which assessee has invested has been used by the beneficiaries to launder money in the garb of long term capital gain by claiming exemption u/s 10(38) of the Act. The source of investment made in Vax Housing Finance Corp. Ltd by the appellant was neither explained before the AO nor before the undersigned and therefore, the addition of Rs.65,51,852/- made to the total income of the appellant is confirmed. Ground of appeal is dismissed.”
7. We note that at the time of hearing of the appeal none appeared on behalf of the assessee. In fact, previously in very many occasion, though the matter was fixed for hearing, neither any adjournment has been sought for nor any representative appeared on behalf of the assessee before us. Hence, in the absence of any assistance rendered by the assessee, we do not find any reason to interfere with the order passed by the Revenue, which is self-explanatory and found to be a reasoned one. Thus, appeal filed by the assessee is found to be devoid of merit and hence, dismissed.
8. In the result, assessee’s appeal is dismissed.
This Order pronounced on 3 1/05/2023
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