Case Law Details
Shailesh Chandak (HUF) Vs ITO (ITAT Surat)
ITAT Surat held that since the assessee failed to properly explain the source of credit it can safely be concluded that shares were penny stocks with sole purpose to route unaccounted money in the grab of share profit hence addition under section 68 sustained.
Facts- The case of the assessee was selected for scrutiny. It was found that the assessee had sold shares of Nouvea Global Ventures Ltd. (NGVL) amounting to Rs.3,64,478/-, Pearl Agricultural Ltd. (PAL) amounting to Rs.21,02,213/- and Pearl Electronics Ltd. (PEL) amounting to Rs.21,02,213/-, totalling to Rs.44,91,100/-. AO observed that share transactions related to these three companies are not genuine and they are only accommodation entries.
AO added Rs.44,91,100/-u/s 68 of the Act and a further sum of Rs.89,822/- as unexplained expenditure u/s 69C of the Act. The AO also taxed the same u/s 115BBE of the Act. The AO taxed Rs.44,91,100/- u/s 68 of the Act and after reducing the same, the business loss was determined at Rs.44,27,693/-. However, such business loss was not allowed to be set off or carried forward. The income from business of share trading was accordingly determined at Rs. Nil. The total assessed income was Rs.44,80,922/- as against returned income of Rs.1,39,030/-.
CIT(A) partly allowed the appeal. Being aggrieved, the present appeal is filed.
Conclusion- Held that it can be safely concluded that the impugned shares were penny stock with the sole purpose to route the unaccounted money in the garb of share profit. The decision of Hon’ble Supreme Court in the case of Durga Prasad More is also clearly applicable. Therefore, the addition made by the AO u/s 68 is sustained. Since, addition u/s 68 has been upheld, the expenditure incurred to earn the above sums are to be added u/s 69C as unexplained expenditure. No entry provider would work for free to convert unaccounted money as share profit and bestow such huge benefits to a party.
FULL TEXT OF THE ORDER OF ITAT SURAT
This appeal by the assessee emanates from the order passed under section 250 of the Income-tax Act, 1961 (in short, ‘the Act’) dated 12.02.2024 by the Learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi [in short, ‘CIT(A)’] for the assessment year (AY) 2014-15.
2. The grounds of appeal raised by the assessee are as under:
1) The learned CIT(A) grossly erred in confirming addition of Rs.44,91,100/-being sale price of Nouveau Global Ventures Ltd., Pearl Agricultural Ltd. and Pearl Electronics Ltd. as discussed in para 5.4.1 to 5.4.4 of the CIT(A) order.
2) The learned CIT(A) grossly erred in confirming addition of Rs.89,822/- being alleged commission on sale of shares Nouveau Global Ventures Ltd., Pearl Agricultural Ltd. and Pearl Electronics Ltd. as discussed in para 5.4.1 to 5.4.4 of the CIT(A) order.
3) The learned CIT(A) grossly erred in not appreciating the written submission and paper book filed on 07.02.2024 though the order was passed on 12.02.2024.
4) the learned CIT(A) grossly erred in appreciating the whole issue as if there is issue of LTCG exempt u/s 10(38) of the Act. The learned CIT(A) ought to have appreciated that there was business income on purchase and sales of shares during the year.
5) The appellant reserves right to add, alter and withdraw any grounds of appeal.”
3. Brief facts of the case are that the assessee filed its return of income for AY.2014-15 on 30.09.2014, declaring total income at Rs.1,39,030/-. The case was selected for scrutiny and various statutory and show cause notices were issued to the assessee. The assessee has shown income from business of share trading as well as income from other sources. It was found that the assessee had sold shares of Nouvea Global Ventures Ltd. (NGVL) amounting to Rs.3,64,478/-, Pearl Agricultural Ltd. (PAL) amounting to Rs.21,02,213/- and Pearl Electronics Ltd. (PEL) amounting to Rs.21,02,213/-, totalling to Rs.44,91,100/-. The Assessing Officer (in short, ‘AO’) observed that share transactions related to these three companies are not genuine and they are only accommodation entries. In response to the show cause notice, it was submitted by assessee that the assessee in its routine course of business purchased and sold shares of these companies and no accommodation entries were taken. The assessee also did not know any entry operator or provider. It was also stated that same type of transactions had also been made earlier years also. During the current assessment year, assessee earned profit in trading of above referred companies and incurred losses from other transactions of sales. It was requested to the AO that assessee is entitled for set off of losses if profit of shares was considered separately. It was also submitted that provisions of section 115BBE restricted set off w.e.f. 01.04.2017 which means that such type of set off allowed for the period prior to 01.04.2017. The AO in the assessment order observed that after search and survey operations in the premises of 32 broking entities, it was found that they were actively involved in providing accommodation entries. The names of above three companies are in the list of 84 scrips identified by the Department. The features of penny stocks have been discussed at para 6 to 8 of the assessment order. At para 9, the AO observed that assessee is one of the beneficiaries who has taken entry of bogus profit. The AO held that assessee has adopted merger method. The assessee has purchased share of NGVL in May, 2011 at average price of Rs.15.65 per share. Subsequently, NGVL was merged with PAL and PEL. Pursuant to the order by the Hon’ble High Court, assessee got 5597 shares of PAL and 5687 shares of PEL and 11015 shares of NGVL. The closing value of all these shares were Rs.16,10,212/-as at 31.03.2012. Subsequently, these shares were sold in the Month of February and March, 2014. Shares of NGVL were sold @ Rs.32 to Rs.40 per share, shares of PAL were sold in the price range of Rs.308 to Rs.380 per share and shares of PEL were sold in the price range of Rs.302 to Rs.482 per share. Thus, there is astronomical increase in price of the above scrips which were bought at nominal price of around Rs.15 per share. The AO has recorded that search and seizure action u/s 132 of the Act was carried out on Shri Dipak Patwari’s Destiny Security Limited Group wherein Dipak Patwari admitted that he earns commission for providing accommodation entries. These fact and other details have been discussed by AO at para 9.3 to 13 of the assessment order. At para 13, the AO has summarized the findings that some unscrupulous operators in the capital market were providing entries of LTCG / LTCL / Profit for a commission. The price of the scrips at peak was the result of rigging. The scheme was to convert black money into white and a large number of individuals availed benefits of such scheme and took entries of LTCG / LTCL / Profit. The assessee is one such beneficiary who had taken entry of bogus profit. The AO, therefore, issued show cause notice on 30.11.2016 which is extracted at para 14 of the assessment order. Reply of assessee is at para 16 of the order. The AO concluded that actual source of credit appearing in the bank account of assessee amounting to Rs.44,91,100/- is the unaccounted cash of the assessee. The explanation given by the assessee regarding nature of credit entries was not satisfactory. Further, he observed that the receipt of credit may be through banking channel but the source of credit is not properly explained. The AO relied on the decision in case of CIT vs. Durga Prasad More, (82 ITR 540), Kilick Nixon Ltd. vs. DCIT, in ITA No. 5518 of 2010 (Bom.) and held that tax authorities are entitled to look at surrounding circumstances to find out the reality and apply the test of human probabilities. The AO, therefore, added Rs.44,91,100/-u/s 68 of the Act and a further sum of Rs.89,822/- as unexplained expenditure u/s 69C of the Act. The AO also taxed the same u/s 115BBE of the Act. The AO taxed Rs.44,91,100/- u/s 68 of the Act and after reducing the same, the business loss was determined at Rs.44,27,693/-. However, such business loss was not allowed to be set off or carried forward. The income from business of share trading was accordingly determined at Rs. Nil. The total assessed income was Rs.44,80,922/- as against returned income of Rs.1,39,030/-.
4. Aggrieved by the order of AO, the assessee filed this appeal before CIT(A). The CIT(A) issued 6 notices which are at para 4 of the appellate order. There was no compliance to the said notices. Therefore, the CIT(A) adjudicated the appeal by considering grounds of appeal, statement of fact, the assessment order and other materials on record. He observed that the reason for hike in the prices of penny stock has not been substantiated with proper rationale. The above companies have no solid business background and are found to be paper companies merely engaged in layered routing of unaccounted sum, which certainly raises question regarding genuineness of the transactions. The onus was on the appellant to prove the same which has not been met. Hence, the ground was dismissed.
4.1 Regarding set off of losses, the appellant had pleaded that provision of not allowing any set off with income u/s 68 was effective from 01.04.2017. This view holds ground because of CBDT Circular No.19/2019, dated 19.06.2019. The AO has not brought any facts related to the genuineness of losses claimed on sale of remaining securities, hence, the CIT(A) allowed assessee’s the claim of set off of the losses. The appeal was partly allowed.
5. Aggrieved by the order of CIT(A), the assessee filed appeal before the Tribunal. The Learned Authorized Representative (Ld. AR) of the assessee has filed paper book and submitted that the appellant was in the business of trading in shares since last 2 to 3 years. The transactions of purchase and sale of shares are supported and verifiable with brokers invoices. They were transacted through account payee cheques. All these transactions were through stock exchange and were subjected to STT. The assessee is showing profit / loss on sale of shares as trading activity and not claiming exemption u/s 10(38) of the Act. There is no loss of revenue on account of alleged penny scrips. The Ld. AR relied on the decision of ITAT, Surat in case of Shilpaben Harishil Deliwala vs. ACIT, in ITA No.844/SRT/2023, dated 01.04.2024. The Ld. AR submitted that there is gross profit of Rs.28,38,809/- on account of the three alleged penny scrips and there was loss on other scrips of Rs.18,33,654/-. The AO ought to have taken gross profit of Rs.26,38,809/- and not the entire sales. The Ld. AR also argued that the undisclosed income has to be set off against loss of Rs.18,33,654/- which would result into gross income of Rs.8,04,151/-, which was already shown in the profit and loss account.
6. On the other hand, Learned Senior Departmental Representative (Ld. Sr. DR) of the revenue supported the order of lower authorities.
7. We have heard both the parties and perused the materials available on record. The AO has held that the shares of the three companies, namely NGVL, PAL and PEL were penny stocks having no fundamentals to attract such huge price. They were utilized by many persons for generating bogus LTCG / LTCL / Profit. The CIT(A) has duly supported the findings of the AO. The Ld. AR, on the other hand, has relied on the decisions in case of Shilpaben Harshil Deliwal (supra) to support case of assessee whereas the CIT(A) has relied on the decision of Hon’ble Calcutta High Court which is at para 5.4.3 of the appellate order. The CIT(A) held that reason for hike in the prices of the penny stock has not been substantiated. Looking at the financial details of these companies as discussed by the AO at pages 9 to 19 of assessment order, it is clear that the financial health of NVGL, PAL and PEL were not good. The operating profit was also very low in all three cases. The Ld. AR has not rebutted the findings given by AO that with such dismal financials, how a company could command such hike in the prices of its shares. This is not possible without rigging as held by the AO. Further, these shares have been thoroughly investigated by the Department and it was found that they are penny stocks which have been utilized by a number of beneficiaries for generating bogus long-term capital gain/long-term capital loss or bogus profit. This categorical finding of fact has not been rebutted by Ld. AR with cogent and corroborative evidences. The Hon’ble Bombay High Court in case of Sanjay Vimalchand Jain, Legal heir of Shantidevi Jain vs. PCIT, (2018) 89 taxmann.com 196 held that where assessee had purchased shares of penny stock companies at lesser amount and within a year sold such shares at much higher amount and the assessee had not tendered cogent evidence to explain as to how shares in an unknown company had jumped to such higher amount in no time and also failed to provide details of purchasers of said shares, the said transactions were attempt to hedge undisclosed income as LTCG. In case of Chandan Gupta vs. CIT, 54 taxmann.com 10 (P & H), the Hon’ble High Court held that where assessee could not explain receipt of alleged share transaction profits credited in his bank accounts, then sale proceeds had to be added as income of the assessee u/s 68 of the Act. In case of PCIT vs. Swati Bajaj, 446 ITR 56 (Cal.), the Hon’ble Calcutta High Court held that where assessee earned LTCG on sale of shares and AO denied said claim and made addition u/s 68 on ground that assessee invested in shares of penny stock companies which provided bogus LTCG, since assessee failed to establish genuineness of rise of price of shares within a short period of time, addition made u/s 68 were justified. The Hon’ble High Court examined several factors, including preponderance of probabilities, the trading volume, the persistence in trading, buy and sell orders, and the steep rise in share prices unaligned with the company’s’ financials. The Hon’ble High Court held that claim of LTCG was bogus, given the circumstances. The Tribunal also explained that the burden of proof was on assessee to establish the genuineness of transaction, and in absence of such evidence, the authorities were justified in treating the income as unexplained cash credit. The Hon’ble Calcutta High Court again in PCIT vs. Nandkishore Agarwala, 143 taxmann.com 402 (Cal.) held that where assessee had stage managed transactions of sale of shares with object to plough back his unaccounted income in the form of bogus LTCG and bogus exemption u/s 10(38), such exemption denied by AO by treating bogus LTCG in penny stock as unexplained cash credit u/s 68 was justified. The Hon’ble Supreme Court in case of Suman Poddar vs. ITO, (2019) 112 taxmann.com 330 (SC) dismissed the SLP where the Hon’ble High Court upheld Tribunal’s order holding that assessee’s claim for exemption u/s 10(38) could not be allowed because the share transactions were bogus as company ‘C’ whose shares were allegedly purchased was a penny stock. There is no reason as to why ratio of the above decisions shall not apply to the facts of the present case. The facts discussed and established by the AO conclusively proves that the shares on which the assessee transacted namely, NGVL, PAL and PEL were penny stocks. The paperwork in this kind of transaction are meticulously maintained so as to give the impression of genuine transactions. Both the seller and entry prover work in tandem to give colour of genuineness to such transactions. However, if the matter is analysed in depth with facts and figures and the surrounding circumstances, it is not difficult to find out that the apparent is not real. Therefore, in view of the facts narrated by the AO and sustained by CIT(A) and respectfully following the decision cited supra, it can be safely concluded that the impugned shares were penny stock with the sole purpose to route the unaccount money in the garb of share profit. The decision of Hon’ble Supreme Court in the case of Durga Prasad More (supra) is also clearly applicable. Therefore, the addition made by the AO u/s 68 is sustained.
7.1 The CIT(A) has allowed the loss of the remaining shares to be set off. Hence, no grievance could arise in respect of the trading of other shares by the assessee and set off and carry forward of such losses as per law.
8. Regarding the next ground in respect of addition of Rs.89,822/- u/s 69C of the Act, we do not find any infirmity. Since, addition u/s 68 has been upheld, the expenditure incurred to earn the above sums are to be added u/s 69C as unexplained expenditure. No entry provider would work for free to convert unaccounted money as share profit and bestow such huge benefits to a party. Accordingly, the ground is dismissed.
9. In the result, the appeal of the assessee is dismissed.
Order is pronounced in the open court on 25/11/2024.
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