Shri Deepak Nagar Vs ACIT (ITAT Delhi)
Conclusion: Addition under section 68 on account of bogus capital gains from penny stocks was not justified as AO had not conducted any independent and separate enquiry to prove that the transactions carried out by the assessee were not genuine or that the documents were not authentic and assessee had successfully discharged the onus cast upon him by provisions of section 68.
Held:
Assessee was a habitual investor and a qualified professional and had shown exempt income on account of LTCG from transactions on which Securities Transaction Tax was paid. AO held that assessee had entered into pre-designed modes of transactions and invested in the shares of E Ltd. just to convert his unaccounted cash in the guise of long term capital gain and so, total long term capital gain was treated as assessee’s income from undisclosed sources denying claim of exemption as Long Term Capital Gain. It was held from the assessment order, it was apparent that AO had not conducted any independent and separate enquiry in the case of assessee. Even the statement recorded by the Investigation Wing had not been got confirmed or corroborated by the person during the assessment proceedings. Since assessee had successfully discharged the onus cast upon him by provisions of section 68, therefore, AO to accept LTCG declared as such.
FULL TEXT OF THE ITAT JUDGEMENT
With this appeal, the assessee has challenged the correctness of the order of the CIT(A)-27, New Delhi dated 25.03.2019 pertaining to A.Y 2015-16.
2. The sum and substance of the grievance of the assessee is that the ld. CIT(A) wrongly confirmed the disallowance of exemption of Long Term Capital Gain [LTCG] u/s 10(38) of the Income-tax Act, 1961 [hereinafter referred to as ‘the Act’] amounting to Rs. 11,93,55,564/-and by doing so, the CIT(A) erred in confirming the assessment, which is solely based on the information received from the DIT [INV], Kolkata and statements recorded u/s 131 of the alleged operators.
3. Facts emanating from the assessment records reveal that during the year under consideration return, of income was filed on 31.10.2015, declaring income at Rs. 37,73,650/-. The return was selected for scrutiny assessment and accordingly, statutory notices were issued and served upon the assessee. The assessee is a Chartered Accountant providing professional services and was also working as a Director in few companies. During the course of scrutiny assessment proceedings, the Assessing Officer noticed that the assessee has shown exempt income of Rs. 11,93,55,564/- on account of LTCG from transactions on which Securities Transaction Tax was paid. The assessee was asked to give details of capital gains alongwith complete details of shares sold/purchased by him in respect of each company.
4. In his reply, the assessee explained that he was allotted 2,50,000 equity shares of Malti Textile Mills Ltd at a price of Rs. 12/- per share on 13.02.2013. In the meanwhile, the name of the company Malti Textile Mills Ltd was changed to Effingo Textiles & Trading Ltd [ETTL] and one share of the face value of Rs. 10/- of the company was sub divided into 10 shares of Re. 1/- each on 27.09.2013. Accordingly, 2,50,000 shares of Malti Textiles Mills Ltd became 25 lakh shares of ETTL. The assessee sold 14,40,500 shares on various dates through recognised stock exchange on which he earned LTCG of Rs. 11,93,55,564/-. With these factual details, the assessee also furnished copies of the following documents:
a) Proof of payment for acquisition of shares
b) Copy of board resolution passed by the invitee company approving preferential allotment of shares
c) Approval letter from BSE/SEBI for preferential allotment of shares
d) Copy of share certificate
e) D-mat account statement
f) Proof of payment of “Securities Transaction Tax
g) Proof of receipt of sale consideration in bank.”
5. Instead of examining the details furnished by the assessee, supported by documentary evidences, the Assessing Officer was simply carried away with the report of the DIT, INV, Kolkata in which large scale manipulations in the capital market on Bombay Stock Exchange trade stocks, Directorate of Income tax [INV], Kolkata who had conducted several searches and surveys on entry operators as a part of its exercise to unravel the modus operandi of the entry operators providing LTCG on penny stocks was given.
6. As mentioned elsewhere, the Assessing Officer was simply carried away with this report and observed that as the name of the company ETTL found place in the said report, the assessee was required to show cause as to why LTCG of Rs. 11.94 crores should not be treated as bogus and added back to his total income as per provisions of section 68 being unexplained credits.
7. The assessee filed reply which reads as under:
“This is in relation to the captioned matter, wherein your goodself has asked us show cause as to why the long term capital gain of Rs. 11,90,79,561/- on the sale of shares of M/’s Effingo Textile & Trading Ltd (formerly called Mold Textile Mills Ltd., referred as Investee Company) should not be treated as the bogus and added to total income of the assessee. ”
1. In this regard it is respectfully submitted that the Assessee was allotted 2,50,000 equity shares of the Investee Company at a price of Rs. 12/- per share on 13thFebruary, 2013 on preferential basis. The payment of Rs. 30,00,000/- for the allotment of shares was made through banking channels. Details of payment had already been submitted in earlier replies.
2. During the year under review, after holding the shares for more than a year, part of the share holding was sold on various dates though normal banking channels on Recognized Stock Exchange and long term capital gain of Rs. 11,90,79,561/- was earned after payment of Securities Transaction Tax (“STT”). This gain was claimed as exempt under section 10(38) of the Act.
3. It is respectfully submitted that the Assessee has submitted following documents for substantiating the claim for the afore-said exemption vide its reply dated —.
a. Copy of application to the Investee Company for allotment of shares.
b. Copy of board resolution passed by the investee company approving allotment of shares.
c. Copy of share certificate.
d. Copy of Demat Account Statements.
e. Copy of application dated 5th January, 2013 by the investee company seeking approval for allotment of shares to the Assessee from the Bombay Stock Exchange C’RSE”) and letter dated 7th February, 2013 of the BSE granting the approval for the same, of Details regarding the computation of gain on the sale of
4. shares and the proof of receipts of the sales consideration in the bank account. However, your goodself seeks to disallow the afore-said claim of exemption claim on the basis of some allegations made against the company, of which the assessee held shares, on the basis of Investigation Report of Pr. DIT (Inv) Kolkata and financial results of the investee company.
5. Further, it is respectfully submitted that the Assessee has purchased the shares after approval from the BSE and sold the same on the recognized stock Exchange after following the relevant applicable laws. The Assessee is no manner has been alleged and punished merely because the assessee has been able to earn profits on sale of shares of a company, he cannot be saddled with the unwarranted adverse tax consequences for certain activities of the company. It is simple case of profit booking which any ordinary and prudent person would do when his investment yields and handsome return. Therefore, no. addition can be made merely on the basis of surmises and conjectures.
Also, pursuant to amendment in section 10(38) of the Income Tax Act, 1961, by Finance Bill 2017, CBDT had issued a notification no 43/2017/F. No. 370142/09/2017-TPL, clarifying that, the sale of shares through recognized stock exchange, where the acquisition was made through preferential allotment, duly approved by competent authority, irrespective of date of acquisition, is exempt u/s 10(38) of the Income Tax Act, 1961. Considering the notification issued, after all the investigations, as alleged by the AO, intention of law is clear, whereby, the capital gain under consideration is kept out of the taxability under the Income Tax Act 1961. Therefore, addition so proposed in show cause, is not justified and if made, is not in line with the intention of law. For your reference, copy of notification is enclosed.
Therefore, in view of the above facts, the Assessee has hereby discharged the initial burden of proof regarding the genuineness of the transaction and any addition, if made, on these facts would not be tenable. Reliance in this regard may be had to the decision of jurisdictional tribunal in the case of Income Tax Officer, Ward 20(1) vs. Naveen Gupta [2006] 5 SOT 94 (Delhi). Hence no change in characterization is warranted as the same would be unjust and untenable. ”
8. Reply of the assessee did not find any favour with the Assessing Officer who further observed as under:
“The above reply of the assessee was considered but not found in the light of the facts narrated in the report received from the DIT(Inv.), Kolkata and other information as available on records. The exhaustive report forwarded by the Directorate of Income Tax (Inv.), Kolkata clearly mentions that the prices of shares of certain companies including Effingo Textiles & Trading Limited were rigged artificially to provide bogus long term capital gain. All the features of the companies which were used for providing bogus long term capital gain as illustrated above, are clearly matching with the trend of the shares of Effingo Textiles & Trading also i.e. the trade pattern of the shares following bell shape, the company having hardly any business activity, splitting of shares taken place, the company does not having any history of dividend payouts etc. Actually, splitting of shares is proved to be the most effective way to camouflage the price of shares. After split of shares, the price of shares on the exchange goes down automatically in proportion with the ratio of split and one doesn’t see anything adverse happening in the script. So, this practice was also apparently adopted by this company to avoid any hype on such rise in the prices of the shares. It is further noted that the shares of the company were very thinly traded and gradually jacked to a desired level in a period of one year or so to provide desired amount to selected beneficiaries. The movement in the price of the shares was not backed by any fundamentals of the companies.
“7. The above set of facts and circumstances compelling to see the transactions entered into by the assessee in a larger frame of accommodation entry scam as reported by the Directorate of Income-tax (Inv.), Kolkata. Investments by the assessee in a company having no financial worth did not conform to normal behavior of an investor. In the present case what apparent does not appear real. In such a situation, view of Hon’ble Supreme Court in the case of CIT Vs. Durga Prasad More [1971] 82 ITR 540 (SC) are relevant which observed that the taxing authorities are entitled to look into the surrounding circumstances to find out the reality and the matter has to be considered by applying the test of human probabilities. The same view was also expressed by their lordships in the case of Sumati Dayal Vs. CIT (1995) 214 ITR 801(SC).
9. Hence, considering surrounding circumstances and applying the test of human probabilities coupled with the report of the Directorate of Investigation as discussed above, it is held that the assessee had entered into pre-designed modes of transactions and invested in the shares of Effingo Textiles & Trading Ltd. just to convert his unaccounted cash in the guise of long term capital gain and so, total long term capital gain amounting to Rs. 11,93,55,564 /- is treated as assessee’s income from undisclosed sources denying claim of exemption as Long Term Capital Gain. Accordingly, addition of Rs. 11,93,55,564/- is made to the total income of the assessee for the year under consideration being unexplained credits as per provisions of Sec. 68 of the Income-tax Act, 1961. Tax is tt/be charged on this amount as provided u/s. 115BBE of the I.T. Act, 1961
9. The assessee carried the matter before the CIT(A) but without any success.
10. While dismissing the appeal of the assessee, the CIT(A) observed as under:
“7.4 During the appellate proceedings the appellant has relied on the same set of evidences as in assessment proceedings. He has further argued that material had been collected at his back & no cross examination has been allowed to rebut the same. Another argument given by appellant is that no addition can be made on the basis of investigation report and mere statement without corroborative evidence cannot be the basis of addition. He has relied on many judicial pronouncements to justify his transactions & claim.
7.5 Let us set the context before moving towards the final decision on the issue.
