Addition u/s 68 sustained for LTCG exemption from bogus co. share

Zeeshan Azizmohmed Shaikh Vs ITO (ITAT Mumbai)

Both SEBI and BSE corroborated the fact that Kailash Auto Finance Ltd was not a genuine company – LTCG exemption u/s 10(38) denied – addition u/s 68 sustained

Facts- The assessee is an individual and is engaged in the business of trading in paper. The assessee filed its return of income declaring a total income of Rs. 10,57,900. During the course of assessment proceedings, it was observed that the assessee has sold 1,27,000 shares of Kailash Auto Finance Limited for trade value of Rs. 50,11,000 (including commission paid for transaction) during the year under consideration. It was further observed that LTCG of Rs. 48,59,287 arising out of the above transaction have been claimed as exempt under section 10(38) of the Act. In order to verify the genuineness of the activities/business of Kailash Auto Finance Limited, notices u/s 133(6) of the Act were issued to SEBI/ROC/BSE, Mumbai requesting authorities to intimate about any action pending/initiated against the said company. In reply, the SEBI vide its letter dated 01/11/2016 intimated the AO that Kailash Auto Finance Limited has been barred / suspended / blacklisted from trading at BSE and has also been penalised. It was further informed that vide its order dated 17/03/2015 SEBI has found that the prices were artificially rigged by the directors and other related persons to provide the accommodation entry of bogus LTCG and STCL to the beneficiaries. As assessee was one of the beneficiary, who had earned LTCG to the tune of Rs. 48,59,287 from the sale of shares of Kailash Auto Finance Limited, the assessee was asked to show cause as to why the said claim and commission paid for the transaction be not treated as undisclosed income and added to total income of the assessee.

AO vide order dated 28/12/2016 passed under section 143(3) of the Act held that financial transactions undertaken by the assessee as sham and the entire edifice was only a colourable device used to evade tax. AO further held that the assessee’s claim of earning huge tax-exempt gains fails the test of both genuineness and human probabilities as laid down by the Hon’ble Supreme Court in Sumati Dayal v/s CIT: 214 ITR 801 and CIT v. Durga Prasad More [1971] 82 ITR 540. Thus, AO disallowed the exemption claimed by the assessee under section 10(38) in respect of LTCG and added the same as unexplained cash credit under section 68 of the Act. Similarly, the commission of Rs. 24,713 paid by the assessee in respect of the aforesaid transaction was also disallowed and added to the total income of the assessee.

CIT (A) confirmed the order. Hence, the assessee is before ITAT.

Conclusion- Held that it was informed by the SEBI that Kailash Auto Finance Ltd was indulging in the activities which were in contravention of SEBI Act and Rules. Both the aforesaid findings by two independent authorities corroborated the fact that Kailash Auto Finance Ltd was not a genuine company and was involved in activities to provide bogus long term capital gains to various beneficiaries.

In view of the above, we find no infirmity in the order passed by the learned CIT(A), inter-alia, upholding the addition made by the Assessing Officer under section 68 of the Act in respect of the long term capital gains claimed as exempt by the assessee and also the commission of Rs. 24,713 paid by the assessee in respect of the said transaction.

FULL TEXT OF THE ORDER OF ITAT DELHI

The present appeal has been filed by the assessee challenging the impugned order dated 03.10.2017, passed under section 250 of the Income Tax Act, 1961 (“the Act”) by the learned Commissioner of Income Tax (Appeals)–3, Thane [“learned CIT(A)”], for the assessment year 2014– 15.

2. The assessee has raised following grounds in its appeal:–

“01 The order of assessment is contrary to the facts and prejudicial to the assessee.

02. On appreciation of the facts and circumstances of the case and law, the additions made by the Learned Assessing Officer and confirmed by the Learned Commissioner of Income Tax (Appeals) are contrary to law and based on erroneous understanding of the facts.

03. On appreciation of the facts and circumstances of the case and law the Learned Commissioner of Income Tax (Appeals) has erred in confirming the action of the Learned Assessing Officer in not holding that the appellant had earned income out of sale of shares of M/s. Kailash Auto Finance Limited as genuine and eligible for exemption U/s. 10(38) of the Act. The action of the Learned Commissioner of Income Tax (Appeals) is contrary to the facts and law and deserves to be deleted.

04. On appreciation of the facts and circumstances of the case and law the Learned Commissioner of Income Tax (Appeals) has erred in confirming the action of the Learned Assessing Officer in disallowing Long Term Capital Gain of Rs. 48,59,287/- and commission expenses on the same to the tune of Rs. 24,713/-, being consideration received on sale of shares of M/s. Kailash Auto Finance Limited treating the same as unexplained cash credit U/s.68 of the Act. The addition was made solely based on the statement recorded on oath of the third parties and the appellant without any independent and tangible supporting evidences and deserves to be deleted.

05. On appreciation of the facts and circumstances of the case, the Learned Commissioner of Income Tax (Appeals) has erred in confirming the action of the Learned Assessing Officer in making addition on account of deemed dividend U/s. 2(22)(e) of the Act out of advance taken by the appellant to the tune of Rs. 28,53,251/- for business purposes. The action of the Learned Commissioner of Income Tax (Appeals) is contrary to the facts of the case and law and deserves to be deleted.

06. The appellant craves to add, amend, modify or alter the above grounds of appeal at any stage of appellate proceedings.

07. The appellant humbly prays that the appeal be allowed in toto.”

3. When the appeal was called for hearing, no one was present on behalf of the assessee to present the case. There is no application seeking adjournment either. On perusal of the record, it is observed that the appeal was listed for hearing on ten previous occasions and no one appeared for / on behalf of the assessee in any of the hearings. Therefore, we are proceeding to hear this appeal on the basis of submissions made by the learned Departmental Representative (“learned DR”) and the material available on record.

4. The first issue arising in present appeal is with regard to addition made under section 68 of the Act on account of long term capital gains claimed as exempt by the assessee.

5. The brief facts of the case pertaining to this issue, as emanating from the record are: The assessee is a individual and is engaged in the business of trading in paper. The assessee filed its return of income on 19/09/2014 declaring total income of Rs. 10,57,900. During the course of assessment proceedings, it was observed that the assessee has sold 1,27,000 shares of Kailash Auto Finance Limited for trade value of Rs. 50,11,000 (including commission paid for transaction) during the year under consideration. It was further observed that the long term capital gains of Rs. 48,59,287 arising out of the above transaction have been claimed as exempt under section 10(38) of the Act. In order to verify the genuineness of the activities/business of Kailash Auto Finance Limited, notices under section 133(6) of the Act were issued to SEBI/ROC/BSE, Mumbai requesting authorities to intimate about any action pending/initiated against the said company. In reply, the SEBI vide its letter dated 01/11/2016 intimated the Assessing Officer that Kailash Auto Finance Limited has been barred / suspended / blacklisted from trading at BSE and has also been penalised. It was further informed that vide its order dated 17/03/2015 SEBI has found that the prices were artificially rigged by the directors and other related persons to provide the accommodation entry of bogus long term capital gains and short term capital loss to the beneficiaries. As assessee was one of the beneficiary, who had earned long term capital gains to the tune of Rs. 48,59,287 from the sale of shares of Kailash Auto Finance Limited, the assessee was asked to show cause as to why the said claim and commission paid for the transaction be not treated as undisclosed income and added to total income of the assessee. In reply, the assessee submitted that the shares were purchased through payment by RTGS and sale was made online after paying Securities Transaction Tax, therefore sales transaction were genuine. The Assessing Officer vide order dated 28/12/2016 passed under section 143(3) of the Act, after referring to the investigation carried out by the Investigation Wing, Kolkata, inter-alia, on the activities of Kailash Auto Finance Limited, held that financial transactions undertaken by the assessee as sham and the entire edifice was only a colourable device used to evade tax. The Assessing Officer further held that the assessee’s claim of earning huge tax-exempt gains fails the test of both genuineness and human probabilities as laid down by the Hon’ble Supreme Court in Sumati Dayal v/s CIT: 214 ITR 801 and CIT v. Durga Prasad More [1971] 82 ITR 540. Thus, the Assessing Officer disallowed the exemption claimed by the assessee under section 10(38) in respect of long term capital gains and added the same as unexplained cash credit under section 68 of the Act. Similarly, the commission of Rs. 24,713 paid by the assessee in respect of the aforesaid transaction was also disallowed and added to the total income of the assessee.

6. In appeal before the learned CIT(A), assessee submitted that the assessee had paid due Securities Transaction Tax at the time of sale of the securities on the Recognised Stock Exchange. The assessee further submitted that at the time when he bought/sold the said shares, dealing in such shares was absolutely legal and free from any malpractice. The learned CIT(A) vide impugned order dated 03/10/2017 dismissed appeal filed by the assessee on this issue on the basis of the report of SEBI and Directorate Of Investigation, Kolkata. Being aggrieved, the assessee is in appeal before us.

7. During the course of hearing, the learned DR vehemently relied upon the orders passed by the lower authorities.

8. We have considered the submissions and perused the material available on record. From the facts available on record, it is not in dispute that the assessee purchased and sold shares of Kailash Auto Finance Limited, the details of which are as under:

The long term capital gains earned by the assessee from the sale of shares was claimed as exempt under section 10(38) of the Act. In order to verify the genuineness of the transaction, the Assessing Officer issued notices under section 133(6) of the Act SEBI/ROC/BSE, Mumbai. The Assessing Officer also found that the Directorate of Investigation, Kolkata carried out a countrywide investigation to unearth the organised racket of generating bogus entries of long term capital gain, which is exempt from tax. The Investigation Wing, Kolkata also carried out the investigation about the role of brokers in this entire process. In the process, the statement of promoter of Kailash Auto Finance Limited was recorded under oath under section 131 of the Act. In the statement, the promoter explained the modus operandi and admitted that Kailash Auto Finance Ltd is a penny stock company and has provided bogus long term capital gains to various beneficiaries. Further, as noted above, SEBI also confirmed that Kailash Auto Finance Ltd has been barred suspended/blacklisted from trading at BSE and has also been penalised. It was also informed by the SEBI that Kailash Auto Finance Ltd was indulging in the activities which were in contravention of SEBI Act and Rules. Both the aforesaid findings by two independent authorities corroborated the fact that Kailash Auto Finance Ltd was not a genuine company and was involved in activities to provide bogus long term capital gains to various beneficiaries.

9. Further, the Assessing Officer noted that when the price increase in the shares was compared with the movement in the Sensex, it was observed that there was no correlation. While Sensex had shown almost no progress, the price of the shares moved phenomenally. Further, from the following data of Kailash Auto Finance Ltd from BSE, as noted by the Assessing Officer, it is clearly discernible that share price of Kailash Auto Finance Ltd increased from Rs. 10.5/share in closing of year 2012 to as high as Rs. 39.45/share in closing of year 2013. Further, in the year 2016 the price of shares has gone down to Rs. 0.64/share.

10. The sheer denial by the assessee, at the time of recording of his statement under section 131 of the Act, about any of the information in respect of the transaction also does not provide any basis to allow the claim of exemption under section 10(38) of the Act, in view of the details furnished by various independent bodies about the conduct of the company in whose shares the assessee had transacted and earned long term capital gains. Further, submission of the assessee before lower authorities that the transaction was made through RTGS on the Recognised Stock Exchange also does not prove that the company, whose shares were purchased by the assessee and later on sold, was not engaged in providing bogus long term capital gains to its beneficiaries and its shares were not penny stocks. In view of the above, we find no infirmity in the order passed by the learned CIT(A), inter-alia, upholding the addition made by the Assessing Officer under section 68 of the Act in respect of the long term capital gains claimed as exempt by the assessee and also the commission of Rs. 24,713 paid by the assessee in respect of the said transaction. As a result, ground Nos. 3 and 4 raised in assessee’s appeal are dismissed.

11. The next issue arising in present appeal is with regard to addition made on account of deemed dividend under section 2(22)(e) of the Act.

12. The brief facts of the case pertaining to this issue, as emanating from the records are: During the assessment proceedings, upon perusal of balance sheet as on 31/03/2014, it was observed that under the head current liabilities, the assessee has claimed in advance of Rs. 28,53,251 received from M/s A.R. International Private Limited. As the assessee was a shareholder of this company having stake of his shares at 25.34% and transaction being covered under the provisions of section 2(22)(e) of the Act, the assessee was asked to furnish the copy of return of M/s A.R. International Private Limited for assessment year 2014 – 15. From the verification of the IT return and balance sheet as on 31/03/2014 of M/s A.R. International Private Limited, it was observed that an amount of Rs. 28,53,251 is shown under the head loans and advances paid to the assessee, as proprietor of A.H. Traders. Accordingly, the assessee was specifically asked to justify why the provisions of deemed dividend should not be attracted as the assessee has received advances from the company wherein he was holding 25.34% of shares. In the absence of any satisfactory explanation along with supporting documents justifying the advance received at Rs. 28,53,251, the Assessing Officer vide order dated 28/12/2016 passed under section 143(3) of the Act treated the said amount received by the assessee as deemed dividend and accordingly taxed the same in the hands of the assessee under section 2(22)(e) of the Act.

13. In appeal before the learned CIT(A), the assessee claimed that advances were received as business advances. However, the assessee failed to produce any documentary evidence in support of this submission. In view of the above, learned CIT(A) dismissed the appeal filed by the assessee on this issue. Being aggrieved, the assessee is in appeal before us.

14. During the course of hearing, learned DR vehemently relied upon the order passed by the lower authorities.

15. We have considered the submissions and perused the material available on record. Section 2(22)(e) of the Act reads as under:

“(e) any payment by a company, not being a company in which the public are substantially interested, of any sum (whether as representing a part of the assets of the company or otherwise) made after the 31st day of May, 1987, by way of advance or loan to a shareholder, being a person who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than ten per cent of the voting power, or to any concern in which such shareholder is a member or a partner and in which he has a substantial interest (hereafter in this clause referred to as the said concern) or any payment by any such company on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits;”

16. Thus, as per the provisions of aforesaid section, loan or advance paid by a company shall be considered as deemed dividend on fulfillment of following conditions (i) the company must be a company in which the public is not substantially interested; (ii) such a company has given advance or loan: (iii) such payment has been made to a shareholder: and (iv) such shares hold not less than 10% of the voting power. As is evident from the fact as available on record, it is not in dispute that the assessee is holding 25.34% of shares in M/s A.R. International Private Limited from which the assessee has received advance of Rs. 28,53,251. Further, it has not been claimed that the said company is a company in which the public is substantially interested. Thus, the basic conditions of section 2(22)(e) of the Act are satisfied in the present case. Further, such a payment for the purpose of section 2(22)(e) of the Act should be to the extent to which the company possesses accumulated profits. As noted by the Assessing Officer accumulated profit of the company was Rs. 34,92,721. Thus, in view of the above, we do not find any infirmity in the order passed by the learned CIT(A) affirming the addition on account of deemed dividend. As a result, ground No. 5 raised in assessee’s appeal is dismissed.

17. Other grounds raised in assessee’s appeal are general in nature and are accordingly dismissed in view of aforesaid findings.

18. In the result, appeal by the assessee is dismissed. Order pronounced in the open court on 24/05/2022