Case Law Details
Sabbirali Alimiya Saiyed Vs ITO (ITAT Ahmedabad)
ITAT Ahmedabad held that addition u/s 68 alleging bogus capital gain simply on the basis of some report finding unearthed in case of third party without cogent material is unsustainable
Facts-
The assessee during the year claimed exempted long term capital gain of ₹ 2,54,86,714/- on sale of 7,60,003 shares of M/s Alpha Graphics India Ltd (M/s AGIL).
The AO observed that the assessee has purchased 5 lakh shares of M/s AGIL dated 20th June 2011 @ ₹ 12 per share having face value of ₹ 10 per share which were dematerialized dated 16th November 2011. Thereafter, one share of M/s AGIL got splitted into 2 shares dated 15th June 2012 at face value of ₹ 5 per share. However, the price of shares of M/s AGIL increased (Rs. 39.7/-) unprecedentedly in a short period which was not supported by the financial performance or any extra ordinary event. Further, in the investigation carried out by the Directorate of Investigation wing of Kolkata Income Tax, it was revealed that the shares of M/s AGIL were manipulated by the broker such as M/s Anand Rathi Shares & Stock Brokers Limited for providing accommodation entry by way of bogus capital gain. Therefore, the AO vide SCN dated 20th December 2016 purposed to treat the capital gain declared by the assessee as bogus and unexplained money under section 68 of the Act.
Conclusion-
There was no dispute raised by the Revenue with respect to the facts that the payments are received through account payee cheques; shares were sold through stock exchange after payment of STT; the assessee is not a party in the alleged rigging up the prices of the shares. He has no nexus or any relation with the company, its directors or entry operators who accepted to the modus operandi.
Held that the capital gain earned by the assessee cannot held bogus merely on the basis of some report finding unearthed in case of third party/parties unless cogent material brought against particular assessee are brought on record. Therefore, we set aside the finding of the learned CIT(A) and direct the AO to delete the addition made by him. Hence the grounds of assessee appeal is allowed.
FULL TEXT OF THE ORDER OF ITAT AHMEDABAD
The captioned appeal has been filed at the instance of the Assessee against the order of the Learned Commissioner of Income Tax (Appeals)-3, Vadodara, dated 16/02/2018 arising in the matter of assessment order passed under s. 143(3) of the Income Tax Act, 1961 (here-in-after referred to as “the Act”) relevant to the Assessment Year 2014-15.
2. The assessee has raised the following grounds of appeal:
1. The Ld. CIT(A)-3, Vadodara has erred in law and in facts in upholding the action o f the Ld.A.O. that-
a) The transaction of purchase of shares of Alpha Graphics India Ltd. (AGIL) being off-market is not genuine.
b) The sale of such shares, though from dematerialized account, does not establish the genuineness of the transaction even when STT is paid.
c) The capital gain arising on the sale of shares of AGIL amounting to Rs. 2,54,86,714/- is in genuine and represents unexplained credit u/s. 68 of the I.T. Act.
2. The Ld. CIT(A)-3, Vadodara has further erred in law and in facts in relying on certain enquiries made by him u/s.133(6), the outcome of which is never confronted to the appellant.
3. The Ld. CIT(A)-3, Vadodara has further erred in law and in facts in the finding that the appellant has not furnished the information sought by him vide letter dated 15.01.2018 even when such details / information is already on record.
4. The appellant pleads that the Ld. CIT(A) ought to have accepted that the income of Rs. 2,54,86,714/- as disclosed by the appellant being the income from Long Term Capita l Gains is genuine and exempt u/s. 10(38) of the I.T.Act.
5. Your appellant craves liberty to add, alter, amend, substitute or withdraw any of the ground of appeal hereinabove contained.
3. The only issue raised by the assessee is that the learned CIT-A erred in holding that the capital gain of ₹ 2,54,86,714/- as bogus and therefore the exemption under 10(38) is not available. Further, the amount of capital gain was wrongly treated as unexplained cash credit under section 68 of the Act.
4. The facts in brief are that the assessee in the present case is an individual and engaged in the business of real estate consultant and broking. The assessee during the year claimed exempted long term capital gain of ₹ 2,54,86,714/- on sale of 7,60,003 shares of M/s Alpha Graphics India Ltd (here-in-after refereed as M/s AGIL).
4.1 The AO observed that the assessee has purchased 5 lakh shares of M/s AGIL dated 20th June 2011 @ ₹ 12 per share having face value of ₹ 10 per share which were dematerialized dated 16th November 2011. Thereafter, one share of M/s AGIL got splitted into 2 shares dated 15th June 2012 at face value of ₹ 5 per share. However, the price of shares of M/s AGIL increased (Rs. 39.7/-) unprecedentedly in a short period which was not supported by the financial performance or any extra ordinary event. Further, in the investigation carried out by the Directorate of Investigation wing of Kolkata Income Tax, it was revealed that the shares of M/s AGIL were manipulated by the broker such as M/s Anand Rathi Shares & Stock Brokers Limited for providing accommodation entry by way of bogus capital gain. Therefore, the AO vide SCN dated 20th December 2016 purposed to treat the capital gain declared by the assessee as bogus and unexplained money under section 68 of the Act.
4.2 The assessee in in response to such show cause notice made a detailed reply vide letter dated 27th December 2016 and furnished in support of his claim being long-term capital gain the following documents:
a. Source of investment made.
b. Contract note for purchase and sale of shares.
c. Bank statement reflecting payment and receipt of sale of shares.
d. DEMAT statement to prove delivery of shares.
e. Ledger copy of share broker account (Nirmal Bank Securities Pvt. Ltd.)
f. Copy of share certificate.
g. Stock split letter from BSE.
h. Year wise holding statement of DP along with transaction and holding statement from NSDL and DP.
4.3 Based on the above documents, the assessee contended that he has discharged his onus cast under section 68 of the Act by furnishing the details with respect to the identity of the party, genuineness of the transactions and sources of the funds received on the sale of shares.
4.4 The assessee regarding the statement of Shri Sanjay Vora- of M/s Anand Rathi Shares & Stock Brokers Limited recorded under section 131 of the Act dated 08-04-2015, contended that such a statement was taken behind the back and the opportunity of cross examination was not provided which is against the principle of natural justice. Therefore, no credence can be attributed to such a statement while deciding the issue on hand. The assessee also contended that he has sold the shares through the involvement of his broker namely M/s Nirmal Bang Securities Pvt. Ltd. who has not been questioned by the Revenue. As such the assessee has no connection of whatsoever with Shri Sanjay Vora (Anand Rathi Share & Stock Brokers Ltd.) as far as the purchase and sale of shares made by him.
4.5 The transactions for the purchase and sale of the shares were carried out through the banking channel which explains the source of investments. On the sale of the shares on exchange through the brokers, the STT was duly paid. All the transactions relating to the purchase and sale of shares were carried out in good faith and he had no role of whatsoever in the alleged manipulation of the price of the shares. Likewise, there has not been brought any evidence by the Revenue against the assessee or his broker alleging the involvement in the manipulation of the prices of the shares.
4.6 The underperformance of the company namely M/s AGIL in the last few years cannot be a reason to draw an inference that the capital gain earned on the sale of shares through the stock exchange by the assessee was bogus in nature. Likewise, the transaction of sale and purchase of the shares of M/s AGIL was not representing the penny stock. It is because when the assessee acquired the shares the prize of the share was ranging between Rs. 18 to 19 and similarly at the time of sale the average price was of ₹ 39.70 per share between 10th December 2013 to 20th December 2013 which has gone as high as ₹ 56 per share during the period of 3 to 4 years in 2010 to 2014.
4.7 The statement of sale/purchase of the shares of the company i.e. M/s AGIL was having average turnover of ₹ 30 to 40 lacs approximately per month and its peak reached to ₹ 7,97,13,380/- per month on BSE. Thus the observation of the AO that there was negligible trade and there being no buyer at all in the market was wrong. The assessee in support of his contention has also attached the extract obtained from the BSE reflecting the sale/ purchase of the shares of the company.
4.8 The assessee has sold part of the shares i.e. 7,60,003 against his holding of 10 lakh shares. Had the assessee been using the shares of M/s AGIL in order to generate the bogus long-term capital gain, then he would have sold his entire shareholdings.
4.9 However, the AO was not satisfied with the submission of the assessee in the light of certain facts observed during the assessment proceedings which are detailed as under:
a. In addition to the statement of Shri Sanjay Vora of M/s Anand Rathi share and Stock brokers, the statement of Shri Soumen Choudhury of M/s Gateway Financial Services Ltd was recorded under section 131 dated 10th February 2015 in connection with the survey proceedings under section 133A of the Act wherein it was accepted that the company namely M/s AGIL was used in penny stock transactions to provide bogus long-term capital gain to the beneficiaries.
b. As the company, M/s AGIL was indulged in penny stock transactions, the SEBI has suspended it as a part of surveillance measures.
c. The assessee has not sold his entire shareholdings for the reasons that SEBI initiated surveillance proceedings on the trading of the script of the company M/s AGIL due to abnormal rise in the price of the shares and huge trade volume during the period starting from January 2013. Furthermore, the assessee booked the required predetermined profit by selling only 75% of his holding.
d. The statements of Shri Soumen Chowdary and Shri Sanjay Vora has been used as an evidence that the company M/s AGIL was used to generate bogus share capital. In fact there were many surveys and search operations carried out at Kolkata, Mumbai and Delhi by the Directorate of Investigation of the Income Tax Department to unearth the parties involved in generating the bogus share capital gain for certain class of beneficiaries against the commission. As a result of these operations, many companies were brought on record which were used for generating the bogus transactions including the company M/s AGIL. Accordingly, it was not necessary to provide the opportunity of cross examination to the assessee.
e. The financial position of the company M/s AGIL was very weak and therefore no prudent businessman will make the investment in such company. However, the assessee has made the investments in such company and earned a huge amount of capital gain which shows that it was a prearranged investment in order to achieve some predetermined amount of profit under the garb of LTCG.
f. There was no detail furnished by the assessee for the purchase of the scripts of M/s AGIL such as how the shares were purchased and the mode of payment.
g. The off market transaction for the purchase of the shares carried out by the assessee was in violation of the guidelines issued by the SEBI vide circular number SMDRP/POLICY/CIR-21/99 dated 14th September 1999 where all the negotiated deals including cross deals banned.
h. The assessee was not the regular investor in the shares of the companies. Accordingly, a single transaction generating huge exempted long-term capital gain evidences that it was a manipulated transaction for converting his unaccounted money in accounting form.
4.10 Based on the above, the AO treated the sale proceeds shown by the assessee for Rs. 2,54,86,714/- against the sale of shares as cash credit under section 68 of the Act by observing as under:
“21. In view of the facts and circumstances discussed supra and circumstantial evidence available on record, it has been concluded that the transactions were sham transactions and aimed only to bring unaccounted money in the guise of exempted long term capita l gains and paper work has been got up and done merely to give a color of authenticity to the transaction and by creating a façade of legitimate transactions.
22. On perusal of the above submission made by the assessee, it is seen that the assessee squarely failed to substantiate genuineness of his claim of exempt Long Term Capital Gain of Rs.2,54,86,714/-. Hence in view of the discussion above from para 3 to 20 and show-cause dated 20.12.2016, it is evident that the transactions shown by the assessee in the shares of M/s. Alpha Graphics India Limited are noting but illegal and colorable device for the purpose of introducing his own unaccounted income from undisclosed sources by showing the amount received as exempt income from share trading without paying any tax. Therefore, Rs.2,54,86,714/- credited to assessee’s books o f accounts in exempt LTCG u/s.10(38) of the Act is added to the total income of the assessee. ”
5. Being aggrieved the assessee preferred to appeal to the learned CIT (A)
5.1 The assessee before the learned CIT (A) submitted that he purchased the share of M/s AGIL on preferential allotment basis and duly complied with the guideline of the SEBI and stock exchange with regard to offline purchase of shares. The assessee in support furnished copy of relevant guidelines issued by the SEBI. The assessee claimed that the payment for purchase of share was made through banking channel and during assessment proceeding, furnished copy of bank statement reflecting payments toward share purchase. Hence the AO’s finding that sources of payment for share was not proven is factually incorrect.
5.2 With regard to the AO finding that the transaction of purchase of share is not in conformity with SEBI circular no. SMDRP/Policy/CIT-21/99, the assessee submitted that in the impugned circular the negotiated deal including cross deal is banned in connection of dealing in Government securities only. The assessee in support of his contention furnished the copy of impugned circular and highlighted the para 2.1 of the impugned circular where the term negotiated deal has been defined.
5.3 The assessee further submitted that the AO has relied upon the statement of certain person namely Shri Sanjay Vohra and Shri Soumen Chaudhry and reproduced the extract of their statement in assessment order. But on perusal of such extract nothing adverse can be concluded against him for the reason that the impugned statement is general and nothing has been stated with respect to the transaction carried out by him. Further the copy of their statement and request of cross examination has not been provided. Hence the same does not carry any evidentiary value.
5.4 He being not a regular investor in shares or financials of the M/s AGIL cannot be criteria to disbelief genuineness of the LTCG earned by him, especially in the circumstances where no evidence was brought by the Revenue on record suggesting that he was involved in any wrong doing. Further, the AO’s finding that the scripts of M/s AGIL were not traded is factually incorrect as there were huge transaction. In view of the above the assessee prayed before the ld. CIT (A) to allow his claim of exempt long term capital gain u/s 10(38) of the Act. However the learned CIT (A) disregarded the contentions and confirmed the order of the AO by observing as under:
“6.12 As has been mentioned supra, during the relevant year, the assessee earned income from sale of shares of M/s.Alpha Graphic India Ltd.(AGIL). The assessee claimed said amount as exempt section 10(38). It is evident from various details along with meticulous analysis that share transactions were not genuine. It was noted that the purchase of shares was off market purchase not reported in the stock exchange. Moreover, the purchase was through a back date contract note in cash and, there was no trial. It was also noted that the shares belonged to a penny stock company, with no credentials, and selling rates were artificially hiked, with no real buyers. The appellant in the month of June, 2011, was holding 5,00,000 shares of M/s. Alpha Graphic India Ltd. for Rs. 10/- each and paid premium Rs.2/- per share, having face value of Rs.23.40/- per share on 20.06.2011. Thereafter on 15.06.2012, the company had split the share into two equity share of Rs. 5/- each in place of Rs. 10/- per equity share earlier. So the holding of said shares become 10,000,00 shares of Rs. 5/-each. Further he had sold 7,60,003/- shares for Rs. 3,15,89,794/- on average price ranging from Rs. 38 to 41 per share out of 10,00,000/- shares through broker M/s Nirmal Bang Securities Limited through the platform of BSE and the assessee has credited an amount of Rs. 2,54,86,714/- in the form of exempt income u/s 10(38) of the Income Tax Act. As shall be evident the issue is essentially factual, revolving or centering around as to which of the two inferential findings are maintainable in law, i.e., in view of the surrounding facts and circumstances of the case. The only charge is qua the genuineness of the transaction/s, and which the appellant could not able to give any supporting documentary evidence as envisaged by the A.O that no details of physical delivery of shares and transactions slips. That genuineness could validly be tested on the ground or principle of preponderance of human probabilities, which could thus form a valid ground or parameter for determining the genuineness, stands since settled by the apex court in Sumati Dayal (supra), relied upon, wherein the apex court, in declaring the transaction as non-genuine, discarded a host of documentary evidences filed or relied upon by the assessee-appellant. That documentary evidence are not by themselves conclusive, and the truth of the matter or the documents could be determined on the basis of or on the anvil of the surrounding facts and circumstances of the case is well settled, by the Hon’ble Supreme Court in the case of Durga Prasad More (supra). What is relevant, more so where the genuineness of the transaction is in issue, is the truth of the document/s furnished in substantiation, as well as the substance of the transaction and not its form, and which is to be determined on the basis of and on the conspectus of the entirety of the facts and circumstances of the case.
6.13. In respect of the audit report of Alpha Graphic India Ltd., a letter calling of information u/s.133(6) was issued on 29.12.2017 to the auditor of the said company (as available on the web site of the company) to furnish certain details / documents regarding capital introduced by directors / partners / members of the company along with detailed analysis of the company’s financial strength and how the value of shares (earning per share) has been fixed. Also, further to provide the name and address of the operator / agents and other important persons the persons involved in fixing the share price. In response to the said notice the Auditor of the Company Shri O.P.Rathi, C.A has categorically refused that they have not audited the books of accounts of Alfa Graphics India Ltd and also not aware of the business of the company. Further, letter to M/s. O.P.Rathi & Co. has written on 15.01.2018 to further clarify that from the copy of Annual Report for the year 2011-12, 2012-13 ,2013-14 & 2014-15 , it was seen that certified Balance Sheet, P & L Account and Cash flow statement signed by Shri O.P.Rathi, C.A. Since, the auditor vehemently objected / denied that the books of accounts of the company have not been audited. However, without the Auditor’s knowledge the company has misused his name in all important documents with malign intention. Also, this office has written letter to the concerned A.O on 15.01.2018, to furnish copy of the return of Alpha Graphics India Ltd. for 6 years. Further, a letter dt.15.01.2018 written to the appellant certain details i.e.(i) Copy of share transfer form for purchase of the said shares in support of the bank statement (ii) to provide the date of clearance of cheque for the said purchases of the share. However, the appellant remained silent and not responded to the said letter.
The information in respect of AGIL was also requisitioned from the A.O of that company who vide his reply dated 05.02.2018 has furnished copy of returns of Alpha Graphics India Ltd. for A.Y.2012-13 to 2017-18. For A.Y.2012-13, the A.O has made addition on account of unexplained increase in share capital & increase in reserve & surplus of Rs.18.00 Crore, Amortization expenses debited in P & L Account of Rs.17,69,656/- and cash deposit of Rs.4,50,000/-. For A.Y.2014-15, the A.O has made addition on account of unsecured loans u/s.68 of the Act of Rs.1.49 Crore. The said company has actually not done any business and can be treated as a “Shell Company” when we consider the financial transaction of the same.
6.14 It needs to be appreciated that what is essentially under cloud, and being seriously doubted as to the genuineness, is the gain stated to arise on the transaction. It is the gain which is abnormal, i.e., both qua the scrip; its’ trading and, thus, its quantum, and unexplained, besides being tax exempt, and which is independent of its purchase. In fact, the A.O. states precisely that even assuming the purchase as genuine, the sales, given the high rates for such penny stocks, with no real buyers, are bogus. The incidental question that arises is the date when the shares were dematerialized by the company. This is as it clearly shows that the shares, issued being remitted to the transferee in the physical form were not converted into the D-mat form till then. This is relevant as the trading on the exchange, which only would make the share a listed share, gain on which is exempt u/s.10(38), could as per the guidelines only be in the D-mat form. The appellant speaks of having deposited STT, but, then, the question is whether the said payment would make a non-genuine transaction, genuine.
(i) the scrip is a penny stock, purchased at a low price, which is over a period of time ramped up by operators acting in benami names or name lenders. The purchases are off market purchases, and not reported on the exchange;
(ii) the purchase/s is back dated, i.e., per a back dated contract note, paid for in cash, so that there is no trail
(iii) the purchases are in the physical form, and dematerialized only subsequently; generally long after the purchase date, being back dated and, further, close to the date of sale; and
(iv) the investee is a penny stock company, with no credentials, and the sale rates artificially hiked, with no real buyers, so that the inference of the sales being bogus, is unmistakable.
6.15 The Assessing Officer, accordingly, treated the impugned transaction as not satisfactorily explained, and added the same u/s.68 of the Act. Reliance was placed in the case of Som Nath Maini (supra), also reproducing there-from, as well as in the case of Dy. CIT v. Housing Development & Finance Corpn. Ltd. [2006] 98 ITD 319 (Mum.), rendered applying the first principles and the legal propositions enunciated by the apex court per the decisions cited by the AO (supra). The tribunal in the case of Ziauddin A. Siddique [IT Appeal Nos. 4699 & 4700 (Mum.) of 2011, dated 25-4-2014] issued a finding of fact, of course on the basis of the material on record, as to circular trading, in case of a penny stock company, exposing or validating the modus operandi as stated to be adopted in the case of such stocks.”
6. Being aggrieved by the order of the learned CIT (A) the assessee is in appeal before us.
6.1 The learned AR before us filed a paper book running from pages 1 to 114 and summary of case laws and contended that the assessee was not involved in rigging up the price of the scripts. Likewise, there was no opportunity of cross-examination of the statements/details obtained by the investigation wing of Calcutta was provided. Thus, in the absence of such verification, there cannot be any addition to the total income of the assessee by treating the long-term capital gain as unexplained cash credit under section 68 of the Act.
6.2 On the contrary, learned DR vehemently supported the order of the authorities below.
7. We have heard the rival contentions of both the parties and perused the materials available on record. In the present case the long term capital gain declared by the assessee on sale shares M/s AGIL for ₹ 2,54,86,714/- was treated as bogus and manipulated, leading to the addition by the AO under section 68 of the Act. The view of the AO was based on certain factors which have been elaborated in the preceding paragraph. Subsequently, the learned CIT (A) upheld the finding of the AO.
7.1 Indeed, the price of the share of M/s AGIL was increased from ₹18 to ₹ 40 within a span of 27 months which was not believed by the authorities below on the principles of preponderance of human probabilities in the given facts and circumstances. The rise in the price of the scripts of a company, having no financial base/business activity/profitability certainly gives rise to the doubt about such increase in the price. But in our considered view, this cannot be a sole criteria for reaching to the conclusion that the price were rigged up to generate the long-term capital gain which is exempted under section 10(38) of the Act. Such observation during the assessment proceedings provides reasons to investigate the matter in detail and the same cannot take the place of the evidence. But in the case on hand there was no enquiry conducted either by the SEBI or the stock exchange with respect to rigging up of share price of M/s AGIL by the assessee or his broker. Similarly, there was no complaint filed by any of the party either to the SEBI or the stock exchange about the assessee or brokers impleading that they were involved in the activity of rigging up the price of the shares. Similarly, the AO has not conducted an enquiry from the SEBI or BSE about the assessee whether he was engaged in the frivolous activities as alleged.
7.2 We also note that the AO has referred to the investigation carried out by the investigation wing of Kolkata wherein it was unearthed that the certain broker or entry provider have accepted that they have used the script of the M/s AGIL to provide bogus exempted long term capital gain to certain class of beneficiaries in consideration of cash. However, there was no information available on record whether the name of the assessee was appearing in the investigation carried out by the investigation wing of Kolkata or any other investigation carried out by the Income Tax Department. It was also not brought any material that those broker or entry provider have taken the name of the assessee or provided their services either to the assessee or assessee broker.
7.3 The alleged scam might have taken place on generating LTCG to avoid the payment of tax. But it has to be established in each case, by the party alleging so, that this assessee in question was part of this arrangement. The chain of events and the live link of the assessee’s action that he was involved in such rigging up of share price should be established based on cogent materials. The allegation as discussed above implies that there was cash exchanged for taking exempted income by way of long term capital gain by way of cheque through banking channels. This allegation that cash had changed hands, has to be proved with evidence, by the Revenue.
7.4 We further note that authorities below have alleged that share purchase contract note was not provided. Similarly mode of payment for purchase of share was also not explained. In this regard we note the assessee vide letter dated 27th December 2016 before the AO has furnished following detail:
(a) Ledger account of investment in share of AGIL placed on page 40 to 42 of paper book.
(b) Share certificates of M/s AGIL were placed on page 43 of the paper book.
(c) Application for dematerialization of share of AGIL was placed on page 44 of paper book
(d) Bank statement showing transaction of purchase and sale of share of AGIL placed on page 68 to 82 of paper book.
7.5 Thus, we are of the view that finding of the authorities below to this extent is contrary to the facts on record. Likewise, the assessee has been able to produce the necessary document with regard to purchase of share through banking channel.
7.6 We also note that there was no dispute raised by the Revenue with respect to the following facts:
(i) The payments are received through account payee cheques.
(ii) Shares were sold through stock exchange after the payment of STT. The transactions have been confirmed by brokers.
(iii) Inflow of shares is reflected in Demat account. Shares are transferred through Demat account. The assessee does not know the buyer.
(iv) There is no evidence that assessee has paid cash to buyer or broker for booking LTCG and share was purchase by the predetermined buyer.
(v) The assessee is not a party in the alleged rigging up the prices of the shares. He has no nexus or any relation with the company, its directors or entry operators who accepted to the modus operandi.
(vi) The assessee may have got only incidental benefit of price rise.
(vii) The assessee invested in penny stocks which gave rise to huge capital gains in a short period, does not mean that the transaction is bogus as all the documents and evidences have been produced.
(viii) The opportunity of cross examination has not been extended to the assessee despite having the request from the assessee.
7.7 It is also important to note that the assessee was holding 10 lakh shares M/s AGIL. However, the assessee has sold only part of the holding i.e. 7,60,003 shares. The remaining shares are still with the assessee as investment. Had the assessee been involved in manipulating the prices or purchased with intention to book bogus exempted income, then he would have sold the entire shareholding. Thus the conduct of the assessee suggests that he was not involved in rigging or any wrongdoing. The case laws relied by the authorities below are distinguishable from the present facts of the case in so far there was SEBI enquiry conducted and found guilty of wrong practices but it is not so in the case on hand.
7.8 In our view, the income generated by the assessee cannot be held bogus only one the basis of the modus operandi, generalisation, and preponderance of human probabilities. In order to hold income earned by the assessee as bogus, specific evidence has to be brought on record by the Revenue to prove that the assessee was involved in the collusion with the entry operator/ stock brokers for such an arrangements. In absence of such finding, it is not justifiable to link the fact or the finding unearthed in case of some third party or parties with the transactions carried out by the assessee. Further the case laws relied by the AO are with regard to the test of human probabilities which may be of greater impact but the same cannot used blindly without disposing off the evidence forwarded by the assessee. In simple words, there were not brought any evidence from independent enquiry to corroborate the allegation. In holding so we draw support
and guidance from the judgment of Hon’ble Delhi High court in case of Pr. CIT vs. Smt. Krishna Devi reported in 126 taxmann.com 80 where it was held as under:
“11. On a perusal of the record, it is easily discernible that in the instant case, the AO had proceeded predominantly on the basis of the analysis of the financials o f M/s Gold Line International Finvest Limited. His conclusion and findings against the Respondent are chiefly on the strength of the astounding 4849.2% jump in share prices of the aforesaid company within a span of two years, which is not supported by the financials. On an analysis of the data obtained from the websites, the AO observes that the quantum leap in the share price is not justified; the trade pattern of the aforesaid company did not move along with the sensex; and the financials of the company did not show any reason for the extraordinary performance of its stock. We have nothing adverse to comment on the above analysis, but are concerned with the axiomatic conclusion drawn by the AO that the Respondent had entered into an agreement to convert unaccounted money by claiming fictitious LTCG, which is exempt under section 10(38), in a preplanned manner to evade taxes. The AO extensively relied upon the search and survey operations conducted by the Investigation Wing of the Income-tax Department in Kolkata, Delhi, Mumbai and Ahmedabad on penny stocks, which sets out the modus operandi adopted in the business of providing entries of bogus LTCG. However, the reliance placed on the report, without further corroboration on the basis of cogent material, does not justify his conclusion that the transaction is bogus, sham and nothing other than a racket of accommodation entries. We do notice that the AO made an attempt to delve into the question of infusion o f Respondent’s unaccounted money, but he did not dig deeper. Notices issued under sections 133(6)/131 of the Act were issued to M/s Gold Line Internationa l Finvest Limited, but nothing emerged from this effort. The payment for the shares in question was made by Sh. Salasar Trading Company. Notice was issued to this entity as well, but when the notices were returned unserved, the AO did not take the matter any further. He thereafter simply proceeded on the basis of the financials of the company to come to the conclusion that the transactions were accommodation entries, and thus, fictitious. The conclusion drawn by the AO, that there was an agreement to convert unaccounted money by taking fictitious LTCG in a pre-planned manner, is therefore entirely unsupported by any material on record. This finding is thus purely an assumption based on conjecture made by the AO. This flawed approach forms the reason for the learned ITAT to interfere with the findings of the lower tax authorities. The learned ITAT after considering the entire conspectus of case and the evidence brought on record, held that the Respondent had successfully discharged the initial onus cast upon it under the provisions of Section 68 of the Act. It is recorded that “There is no dispute that the shares of the two companies were purchased online, the payments have been made through banking channel, and the shares were dematerialized and the sales have been routed from de-mat account and the consideration has been received through banking channels.” The above noted factors, including the deficient enquiry conducted by the AO and the lack of any independent source or evidence to show that there was an agreement between the Respondent and any other party, prevailed upon the ITAT to take a different view. Before us, Mr. Hossain has not been able to point out any evidence whatsoever to allege that money changed hands between the Respondent and the broker or any other person, or further that some person provided the entry to convert unaccounted money for getting benefit of LTCG, as alleged. In the absence of any such material that could support the case put forth by the Appellant, the additions cannot be sustained.
12. Mr. Hossain’s submissions relating to the startling spike in the share price and other factors may be enough to show circumstances that might create suspicion; however the Court has to decide an issue on the basis of evidence and proof, and not on suspicion alone. The theory of human behavior and preponderance o f probabilities cannot be cited as a basis to turn a blind eye to the evidence produced by the Respondent. ”
7.9 Respectfully following the judgment of Hon’ble Delhi High Court (Supra), we hold that in absence of any specific finding against the assessee in the investigation wing report, the assessee cannot be held to be guilty or linked to the wrong acts of the persons investigated as far as long term capital gain earned on sale of share of M/s AGIL is concern.
7.10 We also note that this Tribunal in the case of Parasben Kasturchand Kochar Mehta Lodha & Co. Chartered Accountant vs. ITO bearing ITA No. 549/Ahd/2008 involving identical facts and circumstances has held as under:
“7. We have gone through the relevant record and impugned order and heard both the parties. Assessee submitted that he is a customer of ICICI Bank and having demat account of ICICI Securities Ltd. and he has purchased shares through ICICI Securities Ltd. and money has been paid through banking channel. Copies of bank statement and Demat account have been submitted before the lower authorities.
8. A.R. also drawn our attention towards the statement of Edelweiss Broking Ltd. through the said company shares were sold and also shown us copy of the Contract Note and all these details were furnished before the lower authorities. The assessee has earned long term capital gain from the sale of companies share i.e. Alpha Graphic India Ltd. and Blazon Marbles.
9. In our considered opinion, in such case assessee cannot be held that he earned Long Term Capital gain through bogus company when he has discharged his onus by placing al l the relevant details and some of the shares also remained in the account of the appellant after earning of the long term capital gain.
10. Ld. A.R. contention is that no statement of the Investigation Wing was given to the assessee which has any reference against the assessee.
11. In support of its contention, ld. A.R. also cited an order of Co-ordinate Bench in ITA No. 62/Ahd/2018 in the matter of Mohan Polyfab Pvt. Ltd. vs. ITO wherein ITAT has held that A.O. should have granted an opportunity to cross examine the person on whose statement notice was issued to the assessee for bogus long term capital gain. But in this case, neither statement was supplying to the assessee nor cross examination was allowed by the ld. A.O. Therefore, in our considered opinion, assessee has discharged his onus and no addition can be sustained in the hands of the assessee. “
7.11. In view of the above discussion we hold that the capital gain earned by the assessee cannot held bogus merely on the basis of some report finding unearthed in case of third party/parties unless cogent material brought against particular assessee are brought on record. Therefore, we set aside the finding of the learned CIT(A) and direct the AO to delete the addition made by him. Hence the grounds of assessee appeal is allowed.
8. In the result, the appeal of the assessee is allowed.
Order pronounced in the Court on 10/11/2021 at Ahmedabad.
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