Addition u/s 68 sustained as genuineness of transaction in shares not proved

Meenu Ajay Pathak Vs ITO (ITAT Mumbai)

ITAT Mumbai held that addition of unexplained investment u/s 68 sustained as genuineness of transaction in shares not proved. Further, SEBI also found manipulative trade executed in entities to whom shares were sold by the assessee.

Facts- During the year, the assessee has shown exempted long-term capital gain of Rs.86,03,271, in the return of income filed by her on the sale of scrips of M/s Sunrise Asian Ltd.

During the assessment proceedings, AO considered the information received from the Investigation Wing as well as the statement recorded, during the course of survey and search proceedings, of Mr. Vipul Vidur Bhatt, who has admitted to having controlled the affairs of M/s Sunrise Asian Ltd and also admitted to the fact that the scrips have been used of providing accommodation entries of bogus long term capital gain.

Accordingly, AO passed order u/s. 143(3) of the Act and treated M/s Sunrise Asian Ltd. to be merely a paper company and rejected the claim of the assessee of exemption of long term capital gains in transaction in scrips of the aforesaid company. AO treated the entire amount of Rs. 89,06,550, received by the assessee towards the sale of shares of M/s Sunrise Asian Ltd. as unexplained cash credit u/s. 68 of the Act and added the same to the total income of the assessee. AO also made an addition of Rs. 1,78,131, i.e. 2% of the total traded value as commission being paid for availing the accommodation entry, and made an addition u/s. 69C of the Act.

CIT(A) dismissed the appeal. Being aggrieved, assessee has preferred the present appeal.

Conclusion- Held that the SEBI found the manipulative trade executed by Sunrise Asian Ltd., as well as the entities to whom these shares were sold by the assessee. Though, the assessee was not part of the investigation conducted by SEBI, however, the same does not absolve her from proving the genuineness of the transaction in shares of Sunrise Asian Ltd. under section 68 of the Act.

Not only Sunrise Asian Ltd but the exit providers were also found to be involved in manipulative trade practices by the SEBI. Further, Mr. Vipul Vidur Bhatt in his statement had admitted and confirmed that all the entities controlled and managed by him are mere bogus paper companies and he is involved in providing accommodation entry on a commission basis. Thus, not only Sunrise Asian Ltd but Conart Traders Ltd, whose shares were initially purchased by the assessee in physical form, were found to be belonging to Mr. Vipul Vidur Bhatt in the present case. Accordingly, we find no infirmity in the findings of the AO, which were confirmed by the learned CIT(A) vide impugned order.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

The present appeal has been filed by the assessee challenging the impugned order dated 01/12/2022 passed under section 250 of the Income Tax Act, 1961 (“the Act”) by the learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi [“learned CIT(A)”], for the assessment year 2015-16.

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

“1. The Ld. National Faceless Appeal Centre (NFAC) Delhi [hereinafter referred to as the “Ld. CIT(A)”] erred in passing the order dated 01.12.2022 upholding the action of the Ld. Income Tax Officer – 32(2)(3), Mumbai [hereinafter referred to as ‘Ld. A.O.’] in determining the total income of the Appellant at Rs.1,05,45,670/- as against returned income of Rs.14,60,990/- without appreciating the facts and circumstances of the case. Thus, the order dated 01.12.2022 passed by Ld. CIT(A) is bad in law and the same may be quashed.

2. Appellate Order passed without providing the Appellant an appropriate opportunity of being heard is bad in law

i. The Ld. CIT(A) erred in passing the impugned order dated 01.12.2022 under section 250 of the Act without providing the Appellant an appropriate opportunity of being heard through physical / video conferencing inspite of specific request made by the Appellant during the course of appellate proceedings. Thus, the impugned appellate order is passed in gross violation of principles of natural justice and the same may be quashed and set aside.

3. Addition by treating the term capital gain as unexplained investment under section 68 of the Act unjustified – Rs.89.06.550/-

i. The Ld. CIT(A) erred in upholding the action of Ld. A.O. in making addition of Rs.89,06,550/- treating the long-term capital gain as unexplained cash Gen credit under section 68 of the Act without appreciating the fact and circumstances of the case in proper perspective. Hence, the addition of Rs.89,06,550/- under section 68 of the Act is unjustified and the same may be deleted.

ii. The Ld. CIT(A) failed to appreciate that the Appellant has furnished all relevant documentary evidences to prove the genuineness of long term capital gains earned during the relevant year under consideration. Hence, the Appellant has discharged the primary onus cast upon her under the provisions of section 68 of the Act. Thus, the addition of Rs.89,06,550/- under section 68 of the Act is against the provisions of law and the same may be deleted.

iii. The Ld. CIT(A) further erred in treating the long term capital gains as unexplained cash credit relying on the statement of some persons with whom the Appellant has no transaction at all and the Ld. A.O. has not even provided an opportunity to cross examine them to rebut the allegations levelled against her. Thus, the impugned addition is made against the principles of natural justice and the same may be deleted.

4. Ad-hoc addition of alleged payment of commission invoking the provisions of section 69C of the Act unjustified-Rs.1,78,131/-

i. The Ld. CIT(A) erred in confirming the action of Ld. A.O. in making ad-hoc addition of Rs.1,78,131/- under section 69C of the Act without appreciating the facts and circumstances of the case. Hence, the addition of Rs.1,78,131/- under section 69C of the Act is unjustified and the same may be deleted.

ii. The Ld. CIT(A) failed to appreciate that the Appellant has not paid any commission as alleged by Ld. A.O. in the assessment order. The addition is made merely on conjecture and surmises without having any corroborative evidence available with the Ld. A.O. to justify the same. Hence, the ad-hoc addition of alleged two percent commission amounting to Rs.1,78,131/- under section 69C of the Act is unjustified and the same may be deleted.

5. The Appellant denies any liability to pay interest under section 234A, 234B and 234C of the Act. Hence, the same are not leviable.

6. The Appellant craves leave to add, alter, amend, delete, rescind or withdraw any of the grounds of appeal mentioned hereinabove.”

3. The brief facts of the case as emanating from the record are: The assessee is an individual and during the year under consideration has shown income from other sources only in the form of interest. For the year under consideration, the assessee e-filed her return of income on 30/01/2016, declaring a total income of Rs.14,60,990. The return filed by the assessee was selected for scrutiny and statutory notices under section 143(2) as well as section 142(1) of the Act were issued and served on the assessee. During the year, the assessee has shown exempted long-term capital gain of Rs.86,03,271, in the return of income filed by her on the sale of scrips of M/s Sunrise Asian Ltd. During the assessment proceedings, the Assessing Officer (“AO”) considered the information received from the Investigation Wing as well as the statement recorded, during the course of survey and search proceedings, of Mr. Vipul Vidur Bhatt, who has admitted to having controlled the affairs of M/s Sunrise Asian Ltd and also admitted to the fact that the scrips have been used of providing accommodation entries of bogus long term capital gain. The AO also took into consideration the trade data downloaded from the system that shares of M/s Sunrise Asian Ltd sold by the assessee have been picked up by the entities who are mostly entities of Mr. Vipul Vidur Bhatt and their names figure in the list of entities divulged by him before the investigation authorities. The AO also took into consideration the statement of the assessee, her father-in-law, and the person who advised them to transact in the shares of M/s Sunrise Asian Ltd. Accordingly, the AO vide order dated 19/12/2017, passed under section 143(3) of the Act treated M/s Sunrise Asian Ltd. to be merely a paper company and rejected the claim of the assessee of exemption of long term capital gains in transaction in scrips of the aforesaid company. The AO treated the entire amount of Rs. 89,06,550, received by the assessee towards the sale of shares of M/s Sunrise Asian Ltd. as unexplained cash credit under section 68 of the Act and added the same to the total income of the assessee. The AO also made an addition of Rs. 1,78,131, i.e. 2% of the total traded value as commission being paid for availing the accommodation entry, and made an addition under section 69C of the Act.

4. The learned CIT(A), vide impugned order, dismissed the appeal filed by the assessee placing reliance upon the decision of Hon’ble Calcutta High Court in Pr. CIT v/s Swati Bajaj, [2022] 446 ITR 56. Being aggrieved, the assessee is in appeal before us.

5. We have considered the submissions of both sides and perused the material available on record. The assessee had purchased 35,000 shares of M/s Conart Trading Private Limited on 22/10/2011, for consideration of Rs.7 lakhs, and subsequently, M/s Conart Trading Private Limited was merged into M/s Sunrise Asian Ltd. Consequent to the merger, the assessee was allotted 35,000 shares of M/s Sunrise Asian Ltd. The assessee sold 8250 shares of M/s Sunrise Asian Ltd. in the financial year 2013-14 for a consideration of Rs. 41,19,427, resulting in a capital gain of Rs. 39,54,435. Subsequently, the assessee sold 18,000 shares during the relevant financial year for a consideration of Rs. 89,06,550, which resulted in a capital gain of Rs.85,46,550.

6. During the assessment proceedings, upon perusal of the record, the AO observed that the assessee has not shown substantial trading activity or investment in shares of listed companies in her return of income. It was further observed that the assessee has not traded in any other listed share other than M/s Sunrise Asian Ltd. On the basis of the Demat account, the AO noted that the assessee is very inactive as far as other shares are concerned. However, when it comes to M/s Sunrise Asian Ltd. the assessee has sold 18,000 shares for a gain of Rs. 85,46,550, which works out to 2361% return on investment in a span of 2 years, which clearly defies all the establish economic factors and laws. In order to ascertain the genuineness of the transaction and also understand the rationale behind the decision-making ability and understanding of share trading, summons under section 131 of the Act were issued to the assessee. In response thereto, the assessee filed a letter in the office requesting to treat the statement recorded by the preceding officer as a statement given in response to the aforesaid summons. From the statements, the AO noted that the assessee does not have any knowledge about the share market and she has never made any investments in any of the shares directly and her father-in-law has made investments in the shares on behalf. Since the assessee was not aware of the investments in M/s Sunrise Asian Ltd. and is dependent upon the investment decision of her father-in-law, therefore, in order to ascertain the genuineness of the investments, summons under section 131 of the Act were issued to her father-in-law and the statement was recorded on the same day itself. From the statement of the father-in-law, the AO observed that he has also acted on the advice of one Mr. Pankaj Dhoot. From the statement recorded of Mr. Pankaj Dhoot under section 131 of the Act, it was observed that he also possesses very minimal knowledge about the share market and has no knowledge about the nature of business carried out by M/s Sunrise Asian Ltd., its directors, its financial, such as turnover, profits, EPS, future contracts, etc. It was further observed that Mr. Pankaj Dhoot relied upon the input given by one Mr. Kamlesh Sanghvi. From the investigation carried out by the Income Tax Department, it was revealed that Mr. Kamlesh Sanghvi is a conduit and has been named as the main hawala operator for providing accommodation entries and operating as the purchaser of shares of beneficiaries who wanted to book the capital gains. In this regard, the AO referred to the depositions made before the Income Tax authorities with regard to the nature of business carried out by Mr. Kamlesh Sanghvi.

7. The AO also noticed that the DGIT (Investigation), Kolkata Directorate had undertaken an investigation into 84 penny stocks including M/s Sunrise Asian Ltd., and has given detailed findings indicating bogus long-term capital gains/short-term capital gain entries claim by a large no. of beneficiaries. The AO by referring to the statement of Mr. Vipul Vidur Bhatt recorded during the search and seizure action under section 132 of the Act, wherein he admitted that he is an entity operator and is engaged in the business of providing accommodation entries to various beneficiaries for commission through the various entities floated, operated, manage and controlled by him. The AO noted that in the said statement Mr. Vipul Vidur Bhatt admitted that M/s Sunrise Asian Ltd. is a company acquired by him for providing accommodation entries of bogus long-term capital gain. In the said statement, Mr. Vipul Vidur Bhatt also admitted that he had managed the amalgamation of M/s Sunrise Asian Ltd. with M/s Conart Traders Ltd., and thereafter the shareholders of M/s Conart Traders Ltd were allotted shares of M/s Sunrise Asian Ltd. in the swap ratio of 1:1. It was further admitted that once the amalgamation was done, the price of shares of M/s Sunrise Asian Ltd. was rigged and increased through circular trading, thereafter the beneficiaries of bogus long term capital gains were asked to sell the shares of M/s Sunrise Asian Ltd. The relevant portion of the aforesaid statement, noted on page 29 of the assessment order, is reproduced as under:-

“Q.22 Please explain in detail the entire modus operandi of providing bogus long term accommodation entry in scripts of M/s. Sunrise Asian Limited.

Ans. Sir, I acquired M/s. Sunrise Asian Limited from one Shri Vijay Bhalti during 2010-11, which was listed on BSE, however, the trading in the scripts was suspended by BSE. I had acquired this company for providing accommodation entries of bogus LTCG. After the acquisition. I got the company suspension revoked. Thereafter, I managed the amalgamation of two companies with Sunrise Asian Limited viz (1) M/s. Santoshima Tradelink Limited and (II) Conart Traders limited. Thereafter, the beneficiaries of bogus LTCG accommodation entries were allotted shares of (i) Santoshima Tradelink Limited (Formerly known as M/s. Santoshima Lease Finance and Investment (India) Limited) and (II) M/s. Conart Traders Limited on preferential basis, and thereafter, share holders of these companies were allotted shares of M/s. Sunrise Asian Limited in swap ratio of 1:1. Once this amalgamation was done, the price of the shares of M/s. Sunrise Asian Limited was rigged and increased through circular trading. Once the price of the shares was increased to a desired level, the beneficiaries of bogus LTCG were asked to sell the shares of M/s. Sunrise Asian Limited. For doing the same, unaccounted cash was taken from the beneficiaries and the same was routed into the accounts of some companies/firms/individuals managed and controlled by me and

8. We find that in the present case, the AO also issued notices under section 133(6) of the Act to the exit providers/purchases of shares from the assessee to ascertain their identity. However, either these notices were returned unserved or remained un-complied with. The AO, as noted on pages 30-35 of the assessment order, noted that these entities/persons are operated/utilised by Mr. Vipul Vidur Bhatt for circular trading. Further, though the shares of these penny stock companies were listed on the stock exchange, however, the same were closely held and controlled by Shri Vipul Vidur Bhatt. In this regard, the AO placed reliance upon the statement recorded under section 132(4) of Mr. Vipul Vidur Bhatt. In his statement, Mr. Vipul Vidur Bhatt admitted that all the entities were managed and controlled by him wholly, though on paper it was opened in the name of various persons. It was also claimed by Mr. Vipul Vidur Bhatt that he is an accommodation entry provider and has earned commission for doing the work of the entry provider. Further, as regards the request of the assessee to grant of the cross objection of Mr. Vipul Vidur Bhatt, the AO issued summons under section 131 of the Act to Mr. Vipul Vidur Bhatt on 12/12/2017, to attend the office on 15/12/2017, simultaneously a letter dated 13/12/2017, was also addressed to the assessee to be present for cross-examination. However, the assessee vide letter dated 14/12/2017, expressed her inability to attend the office at short notice.

9. Thus, from the above, it is discernible that in the present case, the AO conducted a thorough investigation of the share transaction undertaken by the assessee. As noted above, the AO not only examined the company whose shares were purchased by the assessee but also examined the identity of the purchaser/exit providers, who were also found to be closely related to Mr. Vipul Vidur Bhatt, who was the key person controlling and managing the affairs of M/s Sunrise Asian Ltd. Further, the AO has also examined the statements of assessee’s father-in-law and other individuals on whose alleged advice shares in M/s Sunrise Asian Ltd. were purchased by the assessee.

10. During the hearing, the learned Authorised Representative (“learned AR”) submitted that the learned CIT(A), NFAC passed the impugned order without providing an opportunity of being heard through physical/video conferencing to the assessee. From the perusal of the impugned order, we find that the learned CIT(A), NFAC has taken due note of the detailed written submissions filed by the assessee on 23/11/2022, which have been reproduced in the impugned order from pages 3-10. During the hearing, the learned AR also placed on record another written submission dated 28/09/2022 filed by the assessee before the learned CIT(A), NFAC, wherein the assessee made detailed submissions against the additions made by the AO. We find from the submission dated 28/09/2022, that the assessee made a conditional request before the learned CIT(A), NFAC, to grant an opportunity of being heard, if in case, the learned CIT(A), NFAC, wants to take an adverse view. The learned AR also placed on record acknowledgement of filing of submissions and case laws pursuant to notices dated 01/11/2022 and 14/11/2022, issued by the learned CIT(A), NFAC. Thus, we are of the considered view that when the assessee had filed multiple written submissions pursuant to notices issued by the learned CIT(A), NFAC, in such circumstances, it cannot be held that no appropriate opportunity of being heard was granted to the assessee. As regards the request of being heard through physical/video conferencing, we find that such a request was not made in lieu of filing the written submissions or to explain the complex facts, however, the same was sought only in a case the learned CIT(A), NFAC, takes an adverse view. During the hearing before us also, the assessee made similar arguments as were made before the lower authorities and no new argument was made. Therefore, in the peculiar facts of the present case wherein the assessee made multiple detailed submissions pursuant to various notices issued by the learned CIT(A), NFAC, it cannot be held that an appropriate opportunity of being heard was not provided to the assessee and there is a violation of principles of natural justice. In view of the aforesaid findings, we also do not find any merit in the reliance placed by the learned AR on the decision of the SMC Bench of the Tribunal in assessee’s own case for the preceding year, wherein the appeal was restored to the file of the learned CIT(A) for de novo adjudication, as in the present case adequate opportunity of being heard was duly provided to the assessee by the learned CIT(A), NFAC.

11. During the hearing, the learned AR also submitted that the assessee was not granted sufficient time to cross-examine Mr. Vipul Vidur Bhatt, on whose statement reliance has been placed by the AO. In this regard, by referring to the letter dated 14/12/2017, forming part of the paper book on pages 78-79, the learned AR submitted that the intimation dated 13/12/2017, regarding the cross-examination on 15/12/2017, was received by the assessee on 14/12/2017, and thus there was less than 24 hours for the assessee to cross-examine the witnesses. In this regard, the learned AR placed reliance upon the assessment order dated 30/12/2016, passed under section 143(3) of the Act for the assessment year 2014-15 in assessee’s own case and submitted that in the preceding year, the assessee was granted sufficient time to cross-examine Mr. Vipul Vidur Bhatt. From the perusal of the aforesaid assessment order for the assessment year 2014-15, at the outset, we find that in the preceding year, the AO relied on a similar statement recorded of Mr. Vipul Vidur Bhatt on which reliance has been placed in the year under consideration. Therefore, when the same statement of Mr. Vipul Vidur Bhatt has been relied on in both the assessment years by the AO, we find no basis in the plea of the assessee that sufficient time was not granted for cross-examining Mr. Vipul Vidur Bhatt in the year under consideration. In any case, we find that in the preceding year, despite the grant of sufficient time to the assessee, Mr. Vipul Vidur Bhatt did not comply with the summons issued under section 131 of the Act.

12. During the hearing, the learned Departmental Representative placed reliance on the final order dated 06/09/2021, passed by the SEBI. From the perusal of the aforesaid order, we note that the SEBI had barred Sunrise Asian Ltd and other entities to whom the assessee had sold the shares from accessing the securities market or buying, selling or otherwise dealing in the securities market, either directly or indirectly or be associated with the securities market in any manner for a period of 6 months to one year. Further, we find that the SEBI found the manipulative trade executed by Sunrise Asian Ltd., as well as the entities to whom these shares were sold by the assessee. Though, the assessee was not part of the investigation conducted by SEBI, however, the same does not absolve her from proving the genuineness of the transaction in shares of Sunrise Asian Ltd. under section 68 of the Act.

13. It is also the plea of the assessee that the payment for the acquisition of shares was made from the bank account and the shares were dematerialised and credited to the Demat account maintained by the assessee. It was further the submission of the assessee that during the year, the assessee sold the shares through the broker on BSE. However, as noted above, not only Sunrise Asian Ltd but the exit providers were also found to be involved in manipulative trade practices by the SEBI. Further, Mr. Vipul Vidur Bhatt in his statement had admitted and confirmed that all the entities controlled and managed by him are mere bogus paper companies and he is involved in providing accommodation entry on a commission basis. Thus, not only Sunrise Asian Ltd but Conart Traders Ltd, whose shares were initially purchased by the assessee in physical form, were found to be belonging to Mr. Vipul Vidur Bhatt in the present case. Accordingly, we find no infirmity in the findings of the AO, which were confirmed by the learned CIT(A) vide impugned order. Accordingly, in view of the aforesaid findings, grounds no. 2-4 raised in assessee’s appeal are dismissed.

14. Ground No. 1, is general in nature and in view of aforesaid findings needs no separate adjudication.

15. Ground No. 5, raised in assessee’s appeal pertaining to the levy of interest under sections 234A, 234B and 234C is consequential and therefore is accordingly dismissed.

16. In the result, the appeal by the assessee is dismissed.

Order pronounced in the open Court on 18/07/2023