AO cannot treat LTCG as Bogus merely on SEBI investigation report

Kiran Kumar Vs ACIT (ITAT Chennai)

The AO disallowed the exemption claimed u/s.10(38) solely based on the investigation report by SEBI pertaining to certain cases based from Kolkatta wherein share prices rigged substantially over a period of time. Merely on suspicion and surmises, this disallowance was made without any corroborative evidence. The AO failed to bring on record any evidence indicating bogus transactions. The essential requirements for a claim u/s. 10(38) are that; the income should arise from a sale of LTC Asset; that LTCA is an equity share in the company or unit of an equity oriented fund or unit of business trust; The transaction of sale entered comes on or after FA 2004 came into force; Such transaction is subject to Securities Transaction Tax. In this case, the genuineness of the transaction is not disputed by the lower authorities at all. All these transactions are through proper banking channels, Dematted and subjected to securities transaction tax. When the pre-requisite conditions imposed by the legislature stands complied in toto, the AO cannot proceed to treat the same as bogus and disallow the same solely based on the fact that the shares prices went up substantially. More importantly, said company Mahavir Remedies haven’t been termed as SHELL Company which involved in unlawful trading of scripts.

In this view of the matter and considering facts and circumstances of this case and also by following the judicial precedents of number of cases, we are of the considered view that the AO as well as the ld.CIT(A) were erred in holding that long term capital gain derived from transfer of equity shares of M/s. Mahavir Advanced Remedies Ltd., is bogus in nature, which is assessable as unexplained credit under the head ‘income from other sources’. Hence, we direct the AO to delete additions made towards long term capital gain derived from transfer of shares.

FULL TEXT OF THE ORDER OF ITAT CHENNAI

This appeal filed by the assessee is directed against order of the Commissioner of Income Tax (Appeals) 18, Chennai dated 14.11.2019 and pertains to assessment year 2015-16.

2. The assessee has raised the following grounds of appeal:-

1. The Commissioner of Income Tax (Appeals) has erred in upholding that, the order of the Assessing Officer which is without jurisdiction, and is contrary to law, facts and circumstances of the case and at any rate is opposed to the principles of equity, natural justice and fair play.

2. The Commissioner of Income Tax (Appeals) has erred in upholding the order of the Assessing Officer in adding a sum of Rs.20,00,00,000/- as undisclosed income of the appellant.

3. The Commissioner of Income Tax (Appeals) has failed to appreciate that the addition of Rs.20,00,00,000/- as undisclosed income is not warranted in the facts and circumstances of the case.

4. The Commissioner of Income Tax (Appeals) has failed to appreciate that at any rate, even assuming that the appellant offered Rs.20 Crores as undisclosed income, it can only be related to the company or the partnership firm as the case may be and cannot be added as undisclosed income in his individual capacity.

5. The Commissioner of Income Tax (Appeals) failed to appreciate that the statement recorded during the time of survey under Sec.133A does not have any evidentiary value.

6. The Commissioner of Income Tax (Appeals) ought to have deleted the addition of Rs.20 Crores made by the assessing officer in view of the binding orders of the CBDT circular F.No.286/2/2003-IT(lnv) dated 10.03.2003 and F.No.2861981201 3-IT (lnv. II) dated 18.12.2014.

7. The Commissioner of Income Tax (Appeals) erred in upholding an addition made merely on a statement said to have recorded under Sec 132(4) by invoking the principles of promissory estoppels which cannot be either applied to the facts of the present case or even to any proceedings under the Income Tax Act.

8. The Commissioner of Income Tax (Appeals) has erred in upholding the addition of the sum of Rs.76,19,00,000/- as deemed dividend u/s.2(22)(e) in the hands of the appellant.

9. The Commissioner of Income Tax (Appeals) has failed to appreciate that the provisions of section 2(22)(e) are not invocable in the facts and circumstances of the case.

10.The Commissioner of Income Tax (Appeals) has erred in upholding that, the conclusion of the Assessing Officer erred in concluding that the appellant had indirectly borrowed the funds of MIs. Lalithaa Jewellery Mart Pvt. Ltd. through the books of M/s. Infinity Jewellers and MIs. Mariyam Creations.

11 .The Commissioner of Income Tax (Appeals) has erred in upholding addition made by, the Assessing Officer made the addition u/s.2(22)(e) on mere conjectures and surmises.

12.The Commissioner of Income Tax (Appeals) has failed to appreciate that the funds were transferred for normal business transaction and hence cannot be treated as deemed dividend in the hands of the appellant u/s.2(22)(e). 13.The Commissioner of Income Tax (Appeals) has erred in upholding, the addition made by the Assessing Officer in adding the long term capital gains of Rs.16,24,68,072/- disallowing the exempt u/s.10(38) as undisclosed income from other sources.

14.The Commissioner of Income Tax (Appeals) has erred in upholding in rejection of the claim of exemption u/s 10(38) on the long term capital gains on sale of shares.

15.The Commissioner of Income Tax (Appeals) has failed to appreciate that all the conditions required for claiming exemption uIsl0(38) had been met by the appellant.

16.The Commissioner of Income Tax (Appeals) has erred in upholding , the addition made by the assessing officer had made the addition based on guesswork, conjectures and surmises.

17.The transactions being routed only through Bank channels in the properly recognized mode through the recognized stock brokers. Therefore the exemption under Sec.10(38) cannot be denied on mere suspicion in the absence of any proof.

18.The Commissioner of Income Tax (Appeals) erred in shifting the onus to the assessee to prove the negative as the transaction relating to the exemption under Sec10(38) is presumed to be real unless contrary is established by the Department, which onus the department has not discharged.

19.The Commissioner of Income Tax (Appeals) has erred in upholding the addition made by the Assessing Officer in adding the sum of Rs10,17,000/-towards excess jewellery found during the course of search.

20 .The Commissioner of Income Tax (Appeals) failed to appreciate that In the absence of any material being found during the time of search, the assessing officer erred in making additions ,made based on extraneous documents.

21.The Commissioner of Income Tax (Appeals) erred in upholding assessment order which was founded on the basis of the survey to make additions in block assessment.

22.The Commissioner of Income Tax (Appeals) erred in upholding the assessment order which is based only on suspicion and in the absence of any evidence being found as a result of such.

23. For that the appellant objects to the levy of interest under section 234B.

3. The brief facts of the case are that the assessee is the Proprietor of M/s. A.K.Exports (hereinafter ‘AKE’), who is engaged in the business of trading of gold jewellery and bullion through his business unit and derives salary from M/s. Lalithaa Jewellery Mart Pvt. Ltd., (hereinafter ‘LJM’). A survey operation u/s.132 of the Income Tax Act, 1961 (hereinafter the ‘Act’) was conducted in the case of M/s. BB Jewellers & Manufacturers on 12.03.2014, wherein certain loose sheets were found and impounded, which contains items of gold for which Shri M. Kiran Kumar had given acknowledgement. During the course of survey, a sworn statement from Shri D. Padmanabhan, a partner of the firm was recorded. In reply, to a specific question, he has stated that these items were gold bars and the weights were recorded in grams. Subsequently, a search operation u/s.132 of the Act, was conducted in the business premises of LJM on 02.09.2014, as a part of which, the residential premises of the assessee was also searched. Simultaneously, search was also conducted in the residence of Shri D.Padmanabhan, where certain loose sheets were found and seized, which contains certain payments made in cash to the tune of Rs.2,80,00,000/- during the financial year 2012-13. During the course of search, another issue, huge receipt of share application money, share premium by LJM from various investors / companies was noticed. During the course of search, these issues were confronted to Shri M. Kiran Kumar on 20.10.2014. Shri M. Kiran Kumar, deposed a sworn statement u/s.132(4) of the Act, on 20.10.2014 and questions were asked regarding various discrepancies relating to excess melting wastage claimed in the books, the loose sheets containing receipts of gold bars, the loose sheets showing advances or loans to various persons, the details of long term capital gain shown in the financial year 2011-12 and the additional share capital and premium allegedly received from several persons in LJM. Shri Kiran Kumar, in the sworn statement recorded u/s.132(4) of the Act, had maintained his stand that investments made in LJM are in order and the assessee company has fulfilled their liability in explaining the sources. The assessee has also explained the discrepancy regarding wastage claimed in the books of accounts for melting old gold jewellery. However, the Department has not accepted the claim of the assessee. Therefore, in order to buy peace with the Department and also unable to explain certain discrepancy at that point of time, he has offered a sum of Rs.30 crores as additional income for the assessment years 2014-15 & 2015-16.

4. The assessee has filed his return of income for the assessment year 2015-16 on 14.11.2015, but failed to disclose additional income of Rs.20 crores offered during the course of search, in the statement recorded u/s.132(4) of the Act. The AO based on the statement recorded and documents found during the course of survey in M/s. BB Jewellers & Manufacturers and statement recorded during the course of search, completed the assessment by making additions towards undisclosed income of Rs.20 crores offered/surrendered during the course of search in the statement recorded u/s.132(4) of the Act, deemed dividend of Rs.76,19,00,000/- u/s.2(22)(e) of the Act, disallowance of exemption claimed u/s.10(38) of the Act amounting to Rs.16,24,68,072/- and addition on excess jewellery found during the course of search for Rs.10,17,000/-. The AO has made additions towards undisclosed income of Rs.20 crores on the ground that although the assessee has surrendered undisclosed income during the course of search u/s.132(4) of the Act, for not explaining various discrepancies noticed in respect of excess wastage claimed on melting of old gold, loose sheets found during the course of search which contains cash payments made to various persons, but did not admit undisclosed income in the return of income. The AO have also made additions towards a sum of Rs.76,19,00,000/- as deemed dividend u/s.2(22)(e) of the Act, being the cumulative credit balance in the book of M/s. A.K. Exports and due to M/s. Infinity Jewellers and M/s. Mariyam Creations in the hands of the assessee, for the reasons that the assessee had indirectly borrowed funds from LJM through the books of M/s. Infinity Jewellers and M/s. Mariyam Creations, which are paper concerns. The AO had also made additions towards long term capital gains derived from sale of shares and claimed as exempt u/s.10(38) of the Act, to the tune of Rs.16.24 crores for the reason that the gains computed from sale of shares were unrealistic and the script was rigged in the market to derive undue benefit to the assessee. Similarly, the AO has made additions towards excess jewellery at Rs.10,17,000/-found during the course of search for the reason that no explanation was offered by the assessee.

5. Being aggrieved by the assessment order, the assessee preferred an appeal before the CIT(A). Before the CIT(A), the assessee challenged additions made by the AO towards undisclosed income offered during the course of search, on the ground that AO was erred in making additions only on the basis of statements recorded during the course of search without reference to any incriminating material found during the course of search to suggest undisclosed income. The assessee has also challenged additions made towards deemed dividend in respect of amounts due to M/s. Infinity Jewellers and M/s. Mariyam Creations on the ground that these are genuine business transactions for purchase and sale of gold for which necessary evidences have been filed to prove that these does not come under the purview of provisions of section 2(22)(e) of the Act. The assessee had also challenged additions made towards long term capital gain derived from sale of shares on the ground that although the AO has alleged that the assessee is beneficiary of bogus long term capital gain derived from sale of penny stocks, but failed to link the transactions of the assessee with any alleged scam related to bogus long term capital gain.

6. The ld.CIT(A), however was not convinced with the explanation of the assessee and according to him, the reasons given by the AO for making additions towards undisclosed income was supported by statement recorded during the course of search, where the assessee has admitted/ surrendered undisclosed income for failure to offer explanation regarding various discrepancies noticed during the course of search. The ld.CIT(A) had extensively discussed the issue in light of concepts of Doctrine of promissory estoppels and Doctrine of legitimate expectations, to come to the conclusion that when one party by his words or conduct, made to the other a promise or assurance which was intended to affect the legal relations between them and to be acted on accordingly, then once the other party has taken him at his word and acted on it, the party who gave the promise or assurance cannot afterwards be allowed to revert to the previous legal relationship as if no such promise or assurance has been made by him. Accordingly, rejected the explanation of the assessee and confirmed additions made towards voluntary surrender of additional income of Rs.20 crores. The ld.CIT(A) has also taken support from the decision of the Hon’ble Jurisdictional High Court of Madras in the case of Shri B. Kishore Kumar vs. CIT, 52 taxmann.com 449 and held that ‘when there is a clear and categorical admission of undisclosed income by the assessee himself, then there is no necessity to scrutinize the documents. The ld.CIT(A) has also confirmed additions made by the AO towards deemed dividend u/s.2(22)(e) of the Act, that the assessee had drawn money indirectly from LJM in the guise of sales but infact, those payments are indirect advances to the assessee and hence, assessee being substantial share holder in the company, advances are liable to be treated as deemed dividend u/s.2(22)(e) of the Act. The ld.CIT(A) had also confirmed additions made towards disallowance of long term capital gain on the ground that on perusal of financial statements of M/s. Mahavir Advanced Remedies Ltd., it clearly reveals that the company whose script the assessee has claimed to have dealt in, does not have any financial fundamentals. Although, the company is not performing well in its business, the assessee has earned 303% profit on investments that do not have any correlation with sensex movement and gold market. Therefore, he opined that the sudden increase in share price of M/s. Mahavir Advanced Remedies Ltd., is not backed by any fundamentals or economic sense and accordingly opined that there is no error in the findings recorded by the AO to make additions towards long term capital gain. Similarly, the ld.CIT(A) confirmed addition made towards excess jewellery found during the course of search on the ground that the assessee did not offer any explanation / documents or evidences in support of his claim even during appellate proceedings. Aggrieved by the CIT(A)’s order, the assessee is in appeal before us.

7. The first issue that came up for our consideration from ground Nos.2 to 7 of assessee appeal is, addition towards undisclosed income of Rs.20 crores.

7.1 The ld.AR for the assessee submitted that the ld.CIT(A) has erred in upholding the order of the AO in adding a sum of Rs.20 crores as undisclosed income of the assessee without appreciating the fact that the addition of undisclosed income is not warranted in the facts and circumstances of the case. The ld.AR further submitted that the ld.CIT(A) has failed to appreciate that at any rate, even assuming that assessee offered undisclosed it can only be related to the company or the partnership firm, as the case may be and cannot be added as undisclosed income in his individual capacity. The ld.AR further submitted that the statement recorded during the course of survey in the case of M/s. BB Jewellers & Manufacturers does not have any evidentiary value because the sum mentioned in the loose sheets found during the course of survey on 12.03.2014, in the premises of Shri D. Padmanabhan, represents amounts advanced and since it had not been recorded in the books of LJM and the same was offered in different assessment years starting from assessment year 2012-13 to 2014-15. The ld.AR further submitted that the CIT(A) ought to have deleted the addition in view of the binding orders of the CBDT circular, where it was categorically clarified that during the course of search and survey, the Departmental officials should concentrate on gathering evidence instead of taking admission of undisclosed income. In this case, if you see the discrepancies found during the course of search, all discrepancies including excess wastage claimed on melting of old gold and loose sheets found during the course of survey is relating to LJM and the assessee does not have any connection in his individual capacity. Similarly, the issue of deemed dividend in respect of payments due to two partnership firms is also in connection with LJM. Therefore, based on those evidences no liability can be fastened on the assessee in his individual capacity.

7.2 The ld.AR for the assessee referring to various documents including statements recorded from Shri M. Kiran Kumar, the assessee during the course of search and post-search investigation, submitted that even during the course of search, the assessee has taken a stand that wastage claimed in the books of LJM was in accordance with trade practices. The ld.AR further submitted that the assessee further explained all discrepancies noticed during the course of search including loose sheets found during the course of search. Therefore, merely on the basis of statements recorded during the course of search u/s.132(4) of the Act, no additions can be made towards undisclosed income. In this regard, he relied upon the decision of the Hon’ble Supreme Court in the case of Pullangode Rubber Produce Co. Ltd., vs. State of Kerala, 91 ITR 18.

7.3 The ld. Senior Standing Counsel for the Revenue on the other hand strongly supporting order of the CIT(A), submitted that it is clear from the statement recorded during the course of search u/s.132(4) of the Act, the assessee under his individual capacity had admitted voluntarily a sum of Rs.20 crores for the assessment year 2015-16, which was not retracted by him either during the course of assessment proceedings or first appellate proceedings. During the second appellate proceeding, no new materials/evidences was brought on record to disturb the findings of the AO, which was confirmed by the CIT(A). The ld.DR further submitted that the ld.CIT(A) has relied upon the decision of the Hon’ble Jurisdictional High Court of Madras in the case of Shri B. Kishore Kumar, supra, which was upheld by the Hon’ble Supreme Court, where it was categorically held that when there is a clear and categorical admission of undisclosed income by the assessee himself what would constitute a good piece of evidence unless the assessee demonstrate with evidence that admission is incorrect. In this case, the assessee has admitted undisclosed income in his individual capacity, which was supported by the statement recorded during the course of search u/s.132(4) of the Act and such statements were recorded in light of various discrepancies noted in respect of loose sheets found during the course of search, excess wastage claim on melting of old gold, etc. Therefore, the admission of the assessee did not require any interference in the absence of any material or evidence or any retraction by the assessee.

7.4  We have heard both the parties, perused the materials available on record and gone through orders of the authorities below along with various case laws cited by both the parties. Admittedly, addition made towards undisclosed income was on the basis of 132(4) statement recorded during the course of search from the assessee. Although, the AO has assigned various reasons to come to the conclusion that there are enough materials, which suggest undisclosed income but nowhere, said materials were linked to admission taken during the course of search for undisclosed income. No doubt, statements recorded under various provisions of the Income Tax Act are a vital tool in the hands of the Income Tax Authorities in their thrust to establish certain factual and legal positions. Further, admission is an extremely important piece of evidence and it is admissible against its makers, but the fact remains is that the statement recorded during the course of search or survey is important piece of evidence if it is supported by corroborative evidence. In case, the contents recorded in the statement is not supported by corroborative evidences, solely on the basis of statement recorded during the course of search no adverse inference can be drawn against the assessee. It is a well settled principle of law that admission is an extremely important piece of evidence, but it cannot be said that is conclusive and it is open to the person who made the admission to show that it is incorrect and that the assessee should be given a proper opportunity to show that the books of account did not correctly disclose the correct state of facts. It is a well settled principle of law, as per various decisions of Hon’ble Supreme Court and High Court that it is open for the assessee who made the admission to show that it was incorrect. In fact, the CBDT has time and again clarified to the field officers that there should be focus and concentration on collection of evidences of income, which leads to information on what has not been disclosed or not likely to be disclosed before the Income-Tax Department. It was further clarified that while recording statement during the course of search & seizure and survey operation, no attempt should be made to obtain confession as to the undisclosed income. The Hon’ble Supreme Court in the case of Pullangode Rubber Produce Co. Ltd., vs. State of Kerala, supra, had very categorically held that admission is a piece of evidence but it does not conclusive to held the issue against the assessee. The court further held that it was open to the assessee, who made the admission to show that it was incorrect. The Hon’ble Gujarat High Court in the case of Chetnaben Shah v. ITO [2016] 288 CTR 579, held that “mere speculation cannot be a ground for addition. There must be a substance either in the form of documents or the like to arrive at a ground for addition of income”. Thus, sum and substance of the ratios laid down by the Hon’ble Courts are that even though, admission is a piece of evidence, but it is not conclusive and the Revenue authorities should gather information which suggest undisclosed income while making additions towards undisclosed income during the course of assessment proceedings.

7.5 In light of above legal background, if we examine the facts of the present case, we find that during the course of search, a statement was recorded from the assessee on 27.10.2014, where he has explained all discrepancies noticed during the course of search. He had also clarified statement given by Shri D. Padmanabhan and explained that Shri D. Padmanabhan is not aware of the financials or accounts of the company. He, further, clarified that there is no discrepancy in the accounts of the company regarding excessive wastage claim by the Department. Although, he has explained each and every discrepancy found during the course of search, but in order to buy peace of the Department, he offered undisclosed income of Rs.20 crores. In this context, the question before us is, whether the admission made by the assessee towards undisclosed income is supported by any evidenced collected during the course of search or mere admission to buy peace with the Department. On going through various papers filed by the assessee including statements recorded during the course of search, we find that whatever discrepancies noticed by the Department is neither belonging to the assessee nor connected in his individual capacity. Although, the AO has claimed that there is difference in wastage percentage of claim regarding melting of gold, when compared to industrial practice but such finding was not based on corroborative evidence. Further, the assessee has explained wastage claimed in the books of accounts LJM and claimed that whatever wastage recorded in the books is supported by necessary documents. In so far as, discrepancies noticed during the course of survey in the case of M/s. BB Jewellers & Manufacturers, it is to be noted that for the assessment year 2014-15, the assessee has filed return of income admitting additional income of Rs.2,42,73,722/-. The income was offered based on the elements of undisclosed income, which were discovered during the course of search. But, at the time of search, several issues were raised but due to the complicate nature of the business, the assessee found it difficult to offer adequate explanation to the queries raised and hence, offered an adhoc amount as undisclosed income. But, subsequently the issues raised during the course of search were analyzed and an amount was arrived at in respect of undisclosed income for the relevant assessment year. In so far as, mention of Rs.2.33 crores in the loose sheets found during the course of survey on 12.03.2014 in the premises of Shri D.Padmanabhan, the same represents amount advanced by LJM and the same was not recorded in the books of account of the company and hence an amount of Rs.2.33 crores has been offered as additional income for assessment year 2012-­13, 2013-14 & 2014-15. Another issue raised was, with respect to 483.5 grams of gold bars not recorded in the books of LJM. A doubt was expressed as to whether the unit of measurement is ‘grams’ or ‘kilograms’. However, it was finally clarified that the value of the gold bars was grams and the amount was arrived at Rs.12,08,750/-. Based on the same, the assessee has reckoned undisclosed income at Rs.2,42,73,722/- for different assessment years. Since, the undisclosed income was quantified and offered to tax for various assessment years, the question of attributing more income to the same item of incriminating materials for the impugned assessment year does not arise. The admission of Rs.20 crores was a statement made in the course of search proceedings and was only an estimate of the undisclosed income on adhoc basis. Therefore, in our considered view, the AO as well as the CIT(A) were erred in coming to the conclusion that undisclosed income admitted during the course of search / survey is supported by necessary evidences.

7.6 We further noted that although the AO has relied upon statement of the assessee given during the course of search, but Question Nos.4, 5 & 6 of the sworn statement recorded on 27.10.2014 referred to the transactions of the company LJM. Question No.7 which deals with old gold purchase also refers to the transactions of LJM. It is relevant to note that the assessee is only a wholesale dealer of gold and gold ornaments, whereas LJM is into retail business, which is running a number of showrooms in various places. The old jewellery is purchased during exchange only by LJM. The loss on old gold purchases for the financial year 2013-14 referred to in the said question also therefore refers to only the company LJM. Similarly, Question Nos.8, 9 & 10 also referred to transactions of LJM. Once again Question Nos.14, 15 & 16 refers to the transactions of the company. Only Question No.19 & 20 refers to the transaction of the assessee with Shri D. Padmanabhan. It is here that there is discrepancy of gold jewellery of 483.5 grams and also discrepancy of an amount of Rs.2,33,38,552/- and these two transactions refer to the assessee in his individual capacity. Thus, the statement recorded and the declaration given by the assessee can only relate to the transactions of LJM and not the assessee in his individual capacity. It is relevant to note that the assessee is deposing not only in his individual capacity but also the MD of LJM. The discrepancies pointed out in Question No.20 of sworn statement was already been quantified and offered to tax by the assessee in his return of income for assessment year 2014-15. Apart from sworn statement, there is no other corroborative evidence to prove said sum of Rs.20 crores as undisclosed income of the assessee. Therefore, in our considered view, the AO has misplaced his reliance on the statement recorded during the course of search to conclude that admission of undisclosed income is based on incriminating material founds during the course of search.

7.7 Further, it is a settled position of law that statement recorded U/s.132(4) of the Act is an important piece of evidence but reliability depends upon the facts of the case and particularly surrounding circumstances and in this case, the lower authorities reached to the conclusion on the basis of assumption resulting into fastening on the liability of the assessee on the basis of inadequate material coupled with statement recorded during the course of search. No doubt, statement of oath recorded U/s.132(4) of the Act is a piece of evidence, when there is incriminating material supporting the said admission. In the absence of any corroborative evidence, merely on the basis of admission in statement recorded U/s.132(4) of the Act, no liability can be fastened on the assessee. The AO has not brought on record any material and reasons for rejection of assessee contention by which the assessee has retracted from his admission. None of the authorities gave any reason as to why the AO did not proceed further to enquire into the unaccounted income as admitted by the assessee in the statement U/s.132(4) of the Act. This fact was also not taken care of and considered that in a case where there was a search operation, no assets or cash was recovered from the assessee in that situation which had permitted the assessee to make declaration of undisclosed income of Rs.30 Crores for two assessment years. In this case the AO as well as the ld. CIT(A) has gone only on the basis of statement of the assessee made u/s 132(4) of the Act, without any corroborative evidence which shows undisclosed income. In our view the addition made by the AO and Confirmed by the ld. CIT(A) is purely on suspicious and surmise manner, but not based on any evidence. In our considered view, suspicion however strong cannot take place of evidences which can be used against the assessee. This principle is supported by the decision of Hon’ble Supreme Court in the case of Umacharan Shaw & Bros vs. CIT(1959) 37 ITR 271(SC).

7.8 Coming back to the case law relied upon by the ld.CIT(A). The ld.CIT(A) has heavily relied upon the decision of Hon’ble High Court of Madras in the case of Kishore Kumar, which came to be confirmed by the Hon’ble Supreme Court. We have gone through the case law relied upon by the CIT(A) and found that in that case, there were print out statements found at the time of search, based on which the declaration was made. Under those facts in para 7 of the judgment, the Hon’ble High Court has upheld that “in that case on hand, loose sheets found during the search are not the sole basis for determining the tax liability but the printout statements of undisclosed income are not disputed by the assessee and in his sworn statement it is accepted.” Under those facts, the Hon’ble Court held that the undisclosed income was quantified on the basis of admission of the assessee coupled with evidences collected during the course of search. In this case, as explained by the assessee, the disclosure is only on adhoc offer without any specific reference to any material found at the time of search. Wherever, it is with reference to specific material that does not relate to this year. The declaration by the assessee itself being incorrect, therefore we are of the considered view that the additions made by the AO towards undisclosed income offered in the statement recorded during the course of search was neither based on any evidence collected during the course of search nor relates to the assessee. In fact, the assessee had agreed to offer additional income only to buy peace and from the fact that non­disclosure of income was not admitted in the return itself is a rebuttal of statement. Hence, we are of the considered view that the AO as well as the CIT(A) were completely erred in making additions towards undisclosed income on the basis of statements recorded during the course of search, even though, there is no evidence collected during the course of search which suggest undisclosed income for the relevant assessment year. Hence, we direct the AO to delete additions made towards undisclosed income of Rs. 20 crores.

8. The next issue that came up for our consideration from ground Nos.8 to 12 of assessee appeal is, addition towards credit balance in the books of M/s. AK Exports due to M/s. Infinity Jewellers and M/s. Mariyam Creations of Rs.76,19,00,000/- as deemed dividend u/s.2(22)(e) of the Act.

8.1 The fact with regard to the impugned dispute is that the assessee has invested in share application money / share premium of LJM. The assessee explained before the AO that one of the principal sources of funds is withdrawal from the proprietorship business run under the name and style of M/s. AK Exports. The proprietor concern M/s. AK Exports realized these amounts as payment for sales made to LJM. It was further noted that M/s. AK Exports is a debtor in the books of M/s. Infinity Jewellers and M/s. Mariyam Creations and the same time a creditor in the books of LJM. M/s. Infinity Jewellers and M/s. Mariyam Creations have balance due to LJM in their books. M/s. AK Exports is selling various items to LJM from which, they are drawing more than Rs.90 crores. During the impugned assessment year, the major creditors of M/s. AK Exports are M/s. Infinity Jewellers and M/s. Mariyam Creations, which have among themselves extended credit to the tune of Rs.76.19 crores. During the course of assessment proceedings, the assessee explained to the AO that these are independent entities doing business separate business and whatever transactions between the parties are normal business transactions of either payment for purchase ort sale of gold and gold jewellery.

8.2 The AO was not convinced with the explanation furnished by the assessee towards share application money invested in LJM and according to him, the assessee has circuitous transactions among certain firms with the motive of diverting funds of LJM to M/s. AK Exports, which in turn are ploughed back in the share application money / share premium of the company. According to the AO, the two concerns M/s. Infinity Jewellers and M/s. Mariyam Creations lack storage capacity to store expensive goods like gold and they do not have necessary manpower to carry out huge amount of turnover. The AO further was of the opinion that although, M/s. Infinity Jewellers and M/s. Mariyam Creations are engaged in the business of purchase and sale of gold and bullion but in fact, both are only paper concerns created for the purpose of circuitous transactions to divert the funds of LJM to the assessee, to explain sources for investment made in share application money of the company. In this background, the AO has concluded that all the aforementioned concerns are undertaken circuitous transactions with the motive of diverting funds of LJM to M/s. AK Exports, which in turn are ploughed back into the company in the form of share application money. Therefore, he opined that the assessee has indirectly borrowed funds of LJM through the books of M/s. Infinity Jewellers and M/s. Mariyam Creations and further, the assessee being a shareholder in LJM having shareholding of more than 10% must be held to have received deemed dividend as per the provisions of section 2(22)(e) of the Act. Accordingly, made addition of Rs.76,19,00,000/-, which is the cumulative credit balance in the books of M/s. AK Exports due to M/s. Infinity Jewellers and M/s. Mariyam Creations and treated as deemed dividend u/s.2(22)(e) of the Act.

8.3 The assessee carried the matter in appeal before the CIT(A) but could not succeed. The ld.CIT(A) for the reasons stated in his appellate order upheld the findings of the AO, on the ground that the assessee is involved in circuitous transactions among the group firms to divert funds of LJM to M/s. AK Exports, in turn the same has been rerouted to LJM in the form of share application money. Therefore, he opined that indirect loans and advances borrowed from the company amounts to deemed dividend as per the provisions of section 2(22)(e) of the Act.

8.4 The ld.AR for the assessee submitted that the ld.CIT(A) has erred in sustaining additions made by the AO towards deemed dividend amounting to Rs.76,19,00,000/- without appreciating the provisions of section 2(22)(e) of the Act, which is applicable to loans or advances drawn by a shareholder, who is having more than 10% beneficial shareholding in the company. The ld.AR further submitted that the ld.CIT(A) has erred in upholding the conclusion of the AO that the assessee had indirectly borrowed funds of the company through books of M/s. Infinity Jewellers and M/s. Mariyam Creations on mere conjectures and surmises without appreciating the fact that the funds were transferred in the normal course of business and for purchase and sales transactions, and hence, cannot be treated as dividend in the hands of the assessee u/s.2(22)(e) of the Act. The ld.AR further submitted that M/s. AK Exports is an independent proprietorship firm engaged in the business of purchase and sale of goods and in the process sold goods to LJM as a captive business unit. Similarly M/s. Infinity Jewellers and M/s. Mariyam Creations are two third party entities from whom M/s. AK Exports purchases gold and gold ornaments. Likewise, LJM is a separate entity engaged in retail sale of gold jewellery. All these concerns are operating independently at different locations and carried out their business activities in accordance with law, for which necessary compliances to statutory authorities were made. The AO and the ld.CIT(A), merely for the simple reason that the assessee is proprietor of M/s. AK Exports has propounded the theory that the amounts withdrawn are ploughed as share application money only on conjectures and surmises. Moreover, without appreciating the fact that the provisions of section 2(22)(e) of the Act, can be invoked only in case, where the director / shareholder of the company draws profit in the form of loans and advances to avoid payment of dividend distribution tax. But, normal commercial transactions undertaken by two different parties cannot be at any stretch of imagination considered as loans and advances, which comes under the ambit of deemed dividend as defined u/s.2(22)(e) of the Act.

8.5 The learned senior standing counsel appeared for the Revenue submitted that the ld.AO as well as the ld.CIT(A) have brought out clear facts that M/s. Infinity Jewellers and M/s. Mariyam Creations are belonging to one person Shri Syed Aafaq Khurram and the transactions in gold and bullion is carried out with M/s. AK Exports, which is highly suspicious. The ld. senior standing counsel further submitted that from the facts brought out by the authorities, it is very clear that the assessee has indirectly borrowed funds of LJM through the books of M/s. Infinity Jewellers and M/s. Mariyam Creations, which are paper concerns. Since, the assessee holds more than 90% of the shareholdings of the company, the sum received were treated as deemed dividend, which is in accordance with law. Therefore, he submitted that there is no error in the findings recorded by the ld.CIT(A) to sustain additions made towards deemed dividend u/s.2(22)(e) of the Act.

8.6 We have heard both the parties, perused the materials available on record and gone through the orders of the authorities below. The provisions of section 2(22)(e) of the Act, deals with the cases where “Any payment by a company, not being a company in which public are not substantially interested, of any sum by way of loan or advance to a shareholder, being a person who is the beneficial owner of the shares, holding not less than 10% of the voting rights or to any concern in which such shareholder is a member or a partner and in which he has a substantial interest, then same shall be treated as deemed dividend. From the plain reading of provision of section 2(22)(e) of the Act, it is clear that any payment by a company by way of loans or advances to a shareholder or to any concern in which such shareholder is a member or partner holding not less than 10% of the voting rights shall be treated as deemed dividend u/s.2(22)(e) of the Act. It is a well settled principle of law by the decision of various courts that any payment by a company in the normal course of its business to a related concern in which shareholder is a member or partner does not come under the ambit of provisions of section 2(22)(e) of the Act. In fact, the Central Board of Direct Taxes in its Circular No.19 of 2017 dated 12.06.2017 had examined the issue and issued directions to its field officers while examining the issue of deemed dividend u/s.2(22)(e) of the Act, in light of the decisions of various courts and clarified that trade advance which are in the nature of commercial transactions would not fall within the ambit of the word advance u/s.2(22)(e) of the Act.

8.7 In this legal background, if we examine the facts of the present case as brought out by the ld.AO and the ld.CIT(A), we find that the AO has treated a sum of Rs.76,19,00,000/-, which is the cumulative credit balance in the books of M/s. AK Exports due to M/s. Infinity Jewellers and M/s. Mariyam Creations as deemed dividend u/s.2(22)(e) of the Act. As, we have already noted in previous paragraphs, M/s. AK Exports is an independent proprietorship concern of the assessee and engaged in purchase and sale of gold and bullion from various parties and sells to LJM as a captive jewellery unit, for which it had received payments for sale of gold and gold ornaments. Similarly, M/s. Infinity Jewellers and M/s. Mariyam Creations are two third parties from whom M/s. AK Exports purchases gold and gold ornaments for which it has pending payments against purchase of goods. Based on the above transactions, the Assessing Officer has propounded the theory of circuitous transactions among the concerns for diverting profit of LJM in the guise of payment for purchase and sales and ultimately the same has been rerouted to the company as share application money. The AO, to arrive at such conclusion has given his own reasons including the capacity of two partnership firms and their business model including the places from where they operate their business.

8.8 We have given our thoughtful considerations to the reasons given by the AO to reach to a conclusion that cumulative credit balance in the books of M/s. AK Exports due to M/s. Infinity Jewellers and M/s. Mariyam Creations, as diversion of funds from LJM and found that the AO has propounded a theory of circuitous transactions purely on conjectures and surmises, moreover without their being proper appreciation of facts. We further noted that both concerns are carrying out their business independently and are regularly filing VAT returns not only that they have also income tax assessee’s and filed return of income for the respective assessment years. In fact, these facts are not disputed by the AO. But, objection of the AO is that these concerns operate in a small place with no wherewithal to conduct business of such huge volume and also that there are no personnel employed by them for achieving these huge turnover. We ourselves do not subscribe to the reasons given by the AO, for the simple reason that what is dealt by these two concerns is gold and gold jewellery, whose value is high compared to the mass and weight of any other merchandise that the AO conceives of. It is not uncommon that huge volumes could be achieved when transaction in a few kilograms of primary gold or the gold ornaments. As clarified by the ld.AR for the assessee, in places like Mumbai, where there is a place constraint with small place, huge turnover in thousands of crores are achieved. Therefore, for this reason, the conclusion arrived at by the AO that these are not commercial transactions but circuitous transactions carried through group firms for diverting funds of the company to the Director is incorrect and unfounded under law.

8.9 We further noted that one another point made out by the AO is that there is no testing facility available for both these concerns. We find that the reason given by the AO is not acceptable because there is no requirement of having testing facility by each and every buyer and seller of gold and gold jewellery. Further, hall marking for 916 purity is done at the testing centre which is separate and certification is done by them. Purchase and sale of gold and gold ornaments by these two concerns is only after hall mark certification issued by the testing centre. Therefore, there is no necessity for testing by the assessee when purchase and sale of gold ornaments are already tested from a separate testing laboratory. Therefore, in our considered view, it is illogical for the AO to expect the testing facilities by the assessee or the two concerns M/s. Infinity Jewellers and M/s. Mariyam Creations.

8.10 The other reasons given by the AO to arrive at a conclusion that amount due in the books of M/s. AK Exports to two concerns is diverting of funds from LJM are that the company has funded a sum of Rs.36 crores to M/s. Infinity Jewellers and M/s. Mariyam Creations. The assessee has placed account copies of the concerns M/s. Infinity Jewellers and M/s. Mariyam Creations in the books of LJM. From the above, it could be seen that it is a continuing account, where huge purchase and sales inter se these concerns. Thus, it is very clear that it has a commercial transaction and account is running accounts. Further, the account copy of M/s. Mariyam Creations in the books of LJM for the period 01.04.2014 to 31.03.2015 is placed on record as per which the closing balance is only a sum of Rs.26.11 crores, whereas the AO has considered deemed dividend from this concern at Rs.46.18 crores. Thus, from the above, it is very clear that the AO’s action is founded on suspicions and surmises and without reference to actual facts and figures. We further noted that the account copy of LJM in the books of M/s. AK Exports is placed on record at pages 89 to 173 of paper-book. It could be seen that the total credits / debits in this account for the period of Rs.810 crores. There are huge purchases as well as sales effected to LJM. The transaction between the assessee and LJM are also pure commercial transactions. Thus, even assuming for the sake of arguments that the amounts had been paid directly by LJM to M/s. AK Exports, still it would only be a commercial transaction outside the scope of deemed dividend as explained by the CBDT in Circular No.19 of 2017 dated 12.06.2017. Therefore, we are of the considered view that the AO as well as the CIT(A) were erred in arriving at a conclusion that commercial transactions between these concerns are circuitous transactions for diverting funds of the company to the assessee to cover up source for share application money invested in the company.

8.11 We further noted that the AO himself accepted that amount received from M/s. Infinity Jewellers and M/s. Mariyam Creations had been invested by the assessee in the share capital / share application money of LJM. Thus, the money received from two concerns has not gone out for any benefit of the assessee. In fact, the money has been enjoyed by the company itself. Therefore, on this count also the addition made u/s.2(22)(e) of the Act, is not sustainable under law. Therefore, in our considered view, the AO has made addition only based on the formulated theory that the assessee avails the benefit in the nature of loans and advances in the capacity of shareholder. In order to consider any payment under the provisions of section 2(22)(e) of the Act, the first and foremost limb is that there should be some benefit arising out of the said transactions to the shareholder. In the present case, there is no personal benefit at all to the assessee. The AO himself accepts the fact that the funds were utilized during the course of business and therefore, this transaction at any point did not get out of the business circle at all. The provisions of section 2(22)(e) of the Act, is a deeming provision and should be construed strictly. It is an established fact that the said transaction took place during the course of business and there being no personal/individual benefit accrued to the assessee and hence section 2(22)(e) of the Act cannot be invoked. Had it been the case of the AO that the assessee had directly borrowed loans and advances from the company to his proprietorship concern, then the AO could have invoked the provisions of section 2(22)(e) of the Act. In this case, as rightly observed by the AO, the assessee has indirectly borrowed the funds of M/s. Infinity Jewellers and M/s. Mariyam Creations and that allegation of indirect benefit is only a formulative theory of circuitous transactions without there being any evidence to prove that these transactions are loans and advances giving benefit to the shareholder. Therefore, we are of the considered view that the AO as well as the CIT(A) were completely erred in coming to the conclusion that amount due in the books of M/s. AK Exports to M/s. Infinity Jewellers and M/s. Mariyam Creations is diversion of funds from LJM to the assessee and such transactions comes under the purview of deemed dividend u/s.2(22)(e) of the Act.

8.12 The assessee has relied upon plethora of judicial judgments in support of his arguments. The case law relied upon by the assessee are discussed as under:-

a) The Calcutta High Court in the case of Pradip Kumar Maihotra Vs CIT — 15 com 66 laid down factors for testing the transactions for applicability of Sec.2(22)(e) of the Act at Para 10;

After hearing the learned counsel for the parties and after going through the aforesaid provisions of the Act, we are of the opinion that the phrase “by way of advance or loan” appearing in sub-cl. (e) must be construed to mean those advances or loans which a shareholder enjoys for simply on account of 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; but if such loan or advance is given to such shareholder as a consequence of any further consideration which is beneficial to the company received from such a shareholder, in such case, such advance or loan cannot be said to a deemed dividend within the meaning of the Act.Thus, for gratuitous loan or advance given by a company to those classes of shareholders ou1a,n iinthepurwewo7s 2(22) but not to the cases where the loan or advance is given in return to an advantage conferred upon the company by such shareholder”.

b) Following the above rationale, the Calcutta High Court in the case of CIT Vs Gayatri Chakraborty — 407 ITR 730, at Para 7 held;

“7. Law on this point is clear. In the event transactions between a shareholder and a company in which the public are not substantially interested and the former has substantial stake, create mutual benefits and obilgations, then the provision of treating any sum received by the shareholder out of accumulated profits as deemed dividend would not apply. The company in the instant case fits the description conceived in the aforesaid provision to come within the ambit of Section 2(22)(e) of the Act. The controversy which falls for determination is whether the sum received by the assessee formed part of running current account giving rise to mutual obligations or the payment formed one-way traffic, assuming the character of loan or advance out of accumulated profit”. A Co-ordinate Bench of this Court in the case of Pradip Kumar Maihotra V. CIT (2011) 15 taxmann.com 66/203 Taxman 110/338 ITR 538(CaI) has laid down the factors for testing the transactions between a company and its shareholder in the fight of the aforesaid provision :—”….

C) The Kerala High Court in the case of CIT Vs Malayala Manorama Co. Ltd — 405 ITR 595, at Para 25 held;

“25. From the above discussion, it is quite evident that the amounts under the disputed heads were being received by the Assessee from its Subsidiary Company only as part of regular business transactions, which was being accounted properly. The change in circumstance, as to the distribution of dailies/publications in the Gulf, causing the same to be transported through the Agent directly from Trivandrum to the Gulf, [instead of forwarding the same to Bombay, where the registered office of the Subsidiary Company is situated and then to have it transported from Mumbai to the Gulf, for distribution in the Gulf] was resulted because of the starting of direct flights from Trivandrum to Gulf, as pointed out by the Assessee. It was in this regard, that advance deposits were also effected by the Subsidiary Company and payments were being effected directly by the Assessee to the clearing and forwarding agent of the Subsidiary Company at Trivandrum, as per their instructions, which were being properly accounted. The payments effected by the Subsidiary Company and received by the Assessee, were as part of the regular business transactions and applying the law laid down in the judicial precedents cited above, it could not have been treated as ‘loan’ or ‘advances’, so as to make the disputed amounts as “deemed dividend”, as defined under Section 2(22)(e) of the Act. We are of the view that there is absolutely no basis for the challenge raised by the Revenue, with reference to the deduction under Section 80Q of the Act and the assessment, taking it as a “deemed dividend” under Section 2(22)(e) of the Act. The common question involved in the above cases is answered accordingly.

d) The Karnataka High Court in the case of CCIT Vs Sarva Equity (P) Ltd — 225 Taxmann 172 at Para 17 held;

“17. Section 2(22)(e) of the Act is designed to strike balance, i.e., advance or loan to a shareholder and that the word shareholder can mean only a registered shareholder. A beneficial owner of shares whose name does not appear in the Register of shareholders of the Company cannot be stated to be a shareholder. He may be beneficially entitled to the share but he is certainly not a shareholder. In other words, it is only the person whose name is entered in the Register of the shareholders of the Company as the holder of the shares who can be said to be a shareholder qua Company and not the person beneficially entitled to the shares. We are therefore, of the view that it is only where a loan is advanced by the Company to the registered shareholder and the other conditions set out in Section 2(22)(e) of the Act are satisfied, that amount of loan would be liable to be regarded as deemed dividend within the meaning of this section.

e) The lndore bench of the tribunal in Asian Business Connections (P) Ltd Vs. DCIT – 101 com 455, relying on the various decisions at Paras 36, 37 held at Para 39, which is extracted below;

“36. Similarly in the case of CIT v. Creative Dyeing & Printing (P.) Ltd. 120091 184 taxmann.com 483/318 ITR 476 (Delhi) Hon’ble High Court held “that the section 2(22)(e) can be applied to ‘loans or advances’ simplicitor and not to those transaction carried out in the course of business as such. In the course of carrying of business transaction between the company and the stockholder the company may be required to give advance in mutual interest. There is no legal bar in having such transaction. What is to be ascertained is what is the purpose of such advance. If the amount is given as an advance simplicitor or as such per se without any further application, receiving such advance may be treated as “deemed dividend” but if it is otherwise, the amount given cannot be branded as advance within the meaning of deemed dividend u/s. 2(22)(e). By granting advance if the business purpose of the company is served and which is not the sum, which it otherwise would have distributed as dividend, cannot be brought within the deeming provision of treating such Advance as deemed dividend”.

37. Hon’ble Kolkata High Court in the case of Gayatri Chakraborty (supra) has held that “law on this point is clear in the event transaction between a shareholder and a company in which the public were not substantially interested and the former had substantial stake, create mutual benefits and obligations, then the provision of treating any sum received by the shareholder out of accumulated profits as deemed dividend would not apply”.

39. In the light of the above judicial proceedings we observe that the revenue authorities should invoke provisions of Section 2(22)(e) of the Act only in case when loans ana advances are given to substantial shareholder in the garb of avoiding dividend distribution tax or with the intention to not to share the dividend with the non substantial shareholders. The statute has clearly identified various types of situations about the payments which are to be included in the category of dividend and has also excluded the payments under the circumstances where payments are given for business purposes, or as enumerated in the provision itself, then the deemed dividend provision should not be applied. Revenue authorities should refrain from using the provisions of Section 2(22)(e) of the Act as a tool for maximising the tax collection rather they should use the powers to keep a check of such distribution of accumulated reserves which are not for the ordinary course of business and are intentionally entered into for the benefit of substantial shareholders having more than 10% voting right without any clear indication of receiving the amount back to avoid the dividend distribution tax.

8.13 Coming back to the case laws relied upon by the ld. senior standing counsel for the Revenue. The ld. Counsel has relied upon the decision of the Jurisdictional High Court of Madras in the case of Bhagavathy Velan reported in [2019] 106 taxmann.com 67. We have gone through the case law relied upon by the ld. Counsel and found that the facts of this case is altogether different from the facts of present case, where the assessee was substantial shareholder of the company and the company has sold flat to the assessee and major portion of price remains unpaid at the end of the previous year. Under those facts, the Hon’ble High Court came to the conclusion that amount due to the company as an advance to the director falling within the mischief of section 2(22)(e) of the Act. In this case, the concern in which assessee is a proprietor is engaged in the business of buying and selling goods and has continuous transactions with the assessee company in the normal course of business. Therefore, we are of the considered view that the case law relied upon by the ld.DR is distinguishable on facts and hence not applicable to the facts of the present case.

8.14 In this view of the matter and considering facts and circumstances of this case and also by following the case laws discussed herein above, we are of the considered view that commercial transactions in the books of M/s. AK Exports due to M/s. Infinity Jewellers and M/s. Mariyam Creations cannot be considered as indirect borrowing from LJM to treat the same as deemed dividend u/s.2(22)(e) of the Act. Hence, we direct the ld.AO to delete the addition made towards deemed dividend u/s.2(22)(e) of the Act.

9. The next issue that came up for our consideration from ground Nos.13 to 18 of assessee appeal is addition towards disallowance of exemption claimed u/s.10(38) of the Act towards long term capital gain derived from transfer of equity shares of M/s. Mahavir Advanced Remedies Limited.

9.1 The fact with regard to the impugned dispute are that the assessee has acquired 6 lakhs equity shares of M/s. Indo American Advanced Pharmaceutical Limited [subsequently name changed to Mahavir Advanced Remedies Limited] at Rs.11/- per share in a private placement and on 04.03.2013 paid total consideration of Rs.66 lakhs through banking channel. The company has allotted shares on 23.04.2013. The shares has been subsequently converted in to demat account and sold in the financial year relevant to assessment year 2015-16. The assessee has computed long term capital gain of Rs. 16,24,68,072/- and claimed exempt u/s.10(38) of the Act. The AO was not convinced with the explanation furnished by the assessee and according to him, the assessee is one of the beneficiary of bogus long term capital gain derived from sale of penny stock shares. The AO further was of the opinion that the Directorate of Investigation, Kolkata carried out a country-wide investigation to unearth the organized racket of generating bogus entries of long term capital gains which is exempt from tax. According to the AO, the hike in share price of the company is unrealistic and that the assessee has earned 2613% of returns on investment when compared to sensex and gold returns are far behind during the relevant period. The AO has also analyzed the financials of M/s. Mahavir Advanced Remedies Ltd., before arriving at a conclusion that even though, the company’s financials are weak, but share price in stock exchange was sky rocketed. The AO has taken support from the trading details verified by SEBI on BSE exchange. Therefore, he was of the opinion that long term capital gain derived from transfer of equity shares of M/s. Mahavir Advanced Remedies Ltd., is nothing but unexplained credit and accordingly made additions towards long term capital gain to the taxable income.

9.2 The assessee preferred an appeal before the CIT(A) but could not succeed. The Ld. CIT(A) for the detailed reasons recorded in his appellate order confirmed the addition made by the AO by holding that long term capital gain derived from sale of equity shares is an arranged transaction between the assessee and the entry providers to claim the benefit of exemption provided u/s.10(38) of the Act, but not a genuine transaction of purchase and sale of shares. The ld.CIT(A) has discussed the issue in light of various judicial precedents including the decision of Hon’ble Supreme Court in the case of Mc Dowells reported in 154 ITR 148 to arrive to a conclusion that the assessee had adapted a colorable device to avoid tax payable to the exchequer by way of bogus long term capital gain. Accordingly, sustained additions made by the AO by holding that the transactions between the assessee and the company were mere accommodation entries to benefit the assessee by claiming exemption u/s.10(38) of the Act.

9.3 The ld.AR for the assessee submitted that the ld.CIT(A) has erred in upholding the addition made by the AO, towards long term capital gain as undisclosed income from other sources without appreciating the fact that the AO has never linked transactions of the assessee to any scam related to bogus long term capital gain, as alleged in the light of the investigation carried out by the Directorate of Investigation, Kolkata. The ld.AR further submitted that the ld.CIT(A) has failed to appreciate that all the conditions required for claiming exemption u/s.10(38) of the Act, had been met by the assessee. The AO has made addition based on the theory of preponderance of probability, purely on guess work, conjectures and surmises, but the findings recorded by the AO is neither supported by any evidence collected during the course of investigation by the Directorate of Investigation, Kolkata nor the details collected during the course of investigation was provided to the assessee for his comments. The AR further submitted that the assessee is a genuine investor in shares and securities, purchased the shares by making payment through proper banking channels through recognized stock exchange and the said shares had been sold through demat account. Therefore, exemption claimed u/s.10(38) of the Act, cannot be denied on mere suspicion in the absence of any proof.

9.4 The ld. senior standing counsel for the Department, on the other hand supporting the order of the ld.CIT(A) submitted that the AO as well as the CIT(A) had brought out clear facts to the effect that the key financials of M/s. Mahavir Advanced Remedies Ltd., does not have any financial fundamentals. Further, the company does not have awesome profit, EBIDTA margin, EPS, bonus, dividend etc. The assessee has earned 303% of profit on investments, although the book value of the shares of the company is negligible. The ld.DR further referring to various documents submitted that if you go through the financials of the company and compare with share price, it is really incomprehensible as to how unrealistic and astronomical price increase in the share price during the short span of time. Therefore, he submitted that there is no error in the findings recorded by the ld.AO and ld.CIT(A) to disallow the claim of exemption u/s.10(38) of the Act. In this regard, he relied upon plethora of judicial precedents including the decision of Hon’ble Jurisdictional High Court of Madras in Tax appeal No.198 of 2019 and the decision of Hon’ble Supreme Court in the case of Suman Poddar vs. ITO reported in [2019] 112 taxmann.com 330.

9.5 We have heard both the parties, perused the materials available on record and gone through the orders of the authorities below. We have carefully considered reasons given by the lower authorities to reach to a conclusion that long term capital gain derived from sale of equity shares of Mahavir Advanced Remedies Ltd., has unexplained income of the assessee and find that the reasons given by the AO and affirmed by the ld.CIT(A) is not based on any facts but purely on conjectures, suspicion and surmises. We further noted that the AO as well as the CIT(A) have gone on the wrong premises by assuming that the assessee is one of the beneficiary of organized rocket of bogus transactions of long term capital gain without any reference to information collected during the course of investigation carried out by the Directorate of Investigation, Kolkata and to the assessee. Although, the AO has extensively discussed the issue in light of modus operandi of the persons involved in the rocket of bogus long term capital gain but nowhere, he has referred to any piece of evidence collected during the course of investigation to the assessee and the company share in which assessee has dealt. No doubt, there should be an organized rocket of bogus long term capital gain but whether the assessee is a part of that organized rocket or not is relevant to decide the nature of income admitted by the assessee. If the AO is able to link the transactions of the assessee to the organized rocket with necessary evidences then the conclusion arrived at by the AO to hold the transaction as bogus is correct. In case, the AO gone on the basis of the theory of human probabilities or preponderance of probabilities without reference to any material then it is difficult to accept the reason given by the AO to hold that the transactions of long term capital gain is bogus.

9.6 In this case, on perusal of facts available on record, we find that all allegations made by the AO was successfully countered by the assessee with necessary evidence. Although the AO has stated that the assessee is not a regular investor in shares and stocks, but evidences filed before us clearly indicate that the assessee is a regular investor in shares which is evident from the fact that the assessee has made investments in shares of various companies including Global Capital Investment Ltd., Raj TV Ltd., and others, aggregating to Rs.31,82,41,606/-. The said investment has been disclosed in the schedule of loans and advances in the Balance Sheet for year ended 31.03.2013. Therefore, the allegation of the AO that the assessee is not a regular investor and has entered into a solitary transaction for the purpose of getting undue benefit of exemption u/s.10(38) of the Act, is incorrect.

9.7  The AO has also made another allegation that investigation carried out by the Directorate of Investigation, Kolkata had brought out a list of 87 companies, which were involved in bogus long term capital gains. The AO neither furnished the list of 87 companies in the assessment proceedings and it is not shown in, under which serial number this company appears in the said list. Further, the Departmental authorities having referred to a list of 331 shell companies which are involved in bogus long term capital gain, once again the list has not been furnished to prove that the name of the company in which the assessee invested also finds a place. Unless, the AO confronted with the information possessed by him to the assessee for his comments, no addition can be made only on the basis of some allegation that the assessee may be one of the beneficiary of the organized rocket of bogus long term capital gain. The ld.CIT(A) while confirming the addition stated that the assessee had not made any attempt to cross examine the persons whose statements have been relied upon by the AO. But, a bare look at the assessment order itself would show that no statement from any person had been referred. In fact, there is IOTA of reference to any incriminating material in the assessment order. Hence, the question of cross examination of any of the witness does not arise. Further, the AO as well as the CIT(A) had referred to investigation in the order of assessment in respect of companies situated in Kolkata. The AO has also mentioned that the assessee had not shown how he came in contact with such a company, which is far a place. But, the evidence placed before us shows that the authorities failed to note that the company is situated in Chennai and there is no link to any of Kolkata companies involved in the bogus long term capital gain scam. Since, the company situated in Chennai and also present for more than 21 years, the assessee felt that the prospect of pharmaceutical industry would be good and therefore invested in the company. Another important point to be considered is that the company was listed in the BSE on 26.06.2013 at Rs.7.77 per share. Unlike other companies as mentioned by the AO in the assessment order, this company was not previously listed as on the date of purchase of shares. The shares were purchased through private placement before the list and on the basis of optimism of the assessee with respect to the growth of pharmaceutical industry. The assessee had purchased the shares at a fair rate and not an unexplainable differential rate as alleged by the AO. In the assessment order, the AO has referred to the shares being sold at an average price of Rs.298 and in two tranches and further observed that the share price of the company went up to Rs.350/- in the stock market. Had it been a planned transaction in which the assessee was also a part, the shares would not have been sold at Rs.298/- rather, he would have waited for the peak to be reached. Therefore, we are of the considered view that the conclusion arrived at by the AO as well as the ld.CIT(A) is not based on any facts and figures but purely on conjectures, suspicion and surmises.

9.8 The AO and the CIT(A) has referred to number of cases wherein the denial of exemption had been upheld by the tribunal and / or the High Courts. In all those cases the shares had been acquired by giving cash for acquiring the shares. The very acquisition was disbelieved by the department. Here is a case where the acquisition of shares was through banking channels and it is not disputed by the Department. Moreover in all those cases decided by the Tribunal and the High Courts it has clearly come on record that the assessee’s in those cases have transacted through brokers who have confessed to having been part of an arrangement whereby the share prices were artificially hiked. It is not so in the present case. As submitted earlier there is no broker whose statement has been put against the assessee. Again, the investigations were in respect of Kolkata Companies and not in respect of this particular Company. The other reason in all those cases is that the investors were all in a different place and the investments were made in companies situated in Kolkata or a far off place without knowing anything about the Kolkata companies. That is not the case here. As explained earlier the company in which the assessee invested is situated very much in Chennai and is a Long-standing company and the assessee was optimistic of the industry in which the company was operating. The assessee has filed documents with respect to the transaction before the AO during the course of Assessment Proceedings. But, the AO totally ignored the genuine documents produced before him and passed the Assessment Order on a sweeping statement without any material evidence or fact on record. The AO has merely stated the modus operandi of how, the transaction took place without considering the facts of the present case. He had instead passed a general statement on the lines of suspicion and surmises without any vital material evidence against the Assessee. From the above, it is very clear that the observations of the AO in his assessment order on the basis of report of investigation wing, Kolkata is a general observation of modus operandi of certain brokers who are involved in alleged scam of LTCG, but it cannot be a conclusive evidence to draw an adverse inference against the assessee of having benefited from so called alleged scam. No doubt, an alleged scam may have taken place. But, it has to be seen whether the assessee is part of an alleged scam and he had any direct or indirect role in alleged scam. Unless, the evidences in the possession of the AO directly or indirectly linked to the assessee, it is difficult to implicate the assessee in the alleged scam. This is because, suspicion however strong, cannot take place of evidence as held by the Hon’ble Supreme Court in the case of Umacharan Shaw & Bros vs. CIT(1959) 37 ITR 271(SC). In our considered view, on the basis suspicion, modus operandi, preponderance of human probabilities, the claim of assessee cannot be discarded, unless specific evidences are brought on record to controvert voluminous evidences filed by the assessee. This view is fortified by the decision of Hon’ble Supreme Court in the case of Omar Salay Mohamed Sait vs. CIT (1959) 37 ITR 151(SC) where it was held that no addition can be made on the basis of suspicion and conjectures. In the case of CIT vs. Daulat Ram Rawatmull (1973) 87 ITR 349 (SC) it was held that the onus to prove that apparent is not real is on the person who claims it to be so.

9.9 The assessee has submitted some additional documents before the Ld. CIT(A) along with an application for admission of additional evidence under Rule 46A of the IT Rules (pages 399 to 440 of PB No.2). They are the details of the assessee’s shareholding as on 31 .03.2013 and 31.03.2014 issued by MK Global Financial Services Limited and the ledger account of the assessee in the books of Aryan Share and Stock Brokers Limited for the period 01.04.2014 to 31.03.2015 and MK Global Services Limited. The contract notes issued by the aforesaid share brokers are there in pages 404 to 434 of PB No. 2. The CIT(A) refused to admit these documents as additional evidence for the reason that there is no cause shown by the Assessee as to why these documents could not be placed before the AO. A Look at the Assessment Order would show that the proceedings were concluded on 30th December, 2016. The documents were called for by the AO only at fag end of the Assessment Proceedings and therefore they could not be placed before him at that point of time. It is however relevant to note that the AO has not disputed the purchase or the sale of the shares. Therefore, in effect even though the contract notes were not placed before the AO in the course of Assessment Proceedings the AO has accepted the purchase and sale of the shares. Thus, these documents are only support the statement already made by the Assessee in the course of the Assessment Proceedings which statement is not disputed by the AO.

9.10 The AO disallowed the exemption claimed u/s.10(38) solely based on the investigation report by SEBI pertaining to certain cases based from Kolkatta wherein share prices rigged substantially over a period of time. Merely on suspicion and surmises, this disallowance was made without any corroborative evidence. The AO failed to bring on record any evidence indicating bogus transactions. The essential requirements for a claim u/s. 10(38) are that; the income should arise from a sale of LTC Asset; that LTCA is an equity share in the company or unit of an equity oriented fund or unit of business trust; The transaction of sale entered comes on or after FA 2004 came into force; Such transaction is subject to Securities Transaction Tax. In this case, the genuineness of the transaction is not disputed by the lower authorities at all. All these transactions are through proper banking channels, Dematted and subjected to securities transaction tax. When the pre-requisite conditions imposed by the legislature stands complied in toto, the AO cannot proceed to treat the same as bogus and disallow the same solely based on the fact that the shares prices went up substantially. More importantly, said company Mahavir Remedies haven’t been termed as SHELL Company which involved in unlawful trading of scripts.

9.11 The assessee placed reliance on the following decisions;

a) The Delhi Tribunal in the case of Vidhi Maihotra Vs ITO- 101 com 361 at Para 8 held;

8. On perusal of the material placed on record, we find that in so far as purchase of shares is concerned the same has not been doubted, because AO while adding the long term capital gain has given the benefit of price paid for acquisition of shares. Shares were also purchased through account payee cheque duly reflected in the books and shown by the assessee in the earlier year. In fact assessee has purchased shares of Capital Projects Advisory Limited in the financial year 2011-12 and the said company was merged with MIs. Kailaish Auto Finance Ltd. vide amalgamation order dated 9.5.2013 passed by Hon’ble Allahabad High Court. Reliance has been placed by the authorities below on the statement of Shri Sunil Dokania. However, in his statement he has given list of certain scrips on which he has stated that these were paper companies used for providing accommodation entries. The said statement no doubt is quite incriminating to hold that scrips of MIs. Kailash Auto Finance Limited were used for purpose of accommodation entries, however such a statement cannot be the sole ground to implicate assessee and justify the additions especially when, nowhere assessee has been found to be beneficiary of any kind of accommodation entry in any inquiry by the Investigation Wing or any such material has been unearthed by the department. The assessee had duly shown the transaction in cheques right from purchase to sale of shares and all the transaction has been have been routed through DMAT account sold in the Bombay Stock Exchange as per quoted price as on that date. Before us it has also been brought on record that SEBI vide its order dated 21st September 2017 has revoked the ban on Kailash Auto Finance Ltd. Para 5 of the said order reads as under :— “Pursuant to the interim order, SEBI conducted a detailed investigation into the role of various entities in price manipulation in the scrip of Kailash Auto so as to ascertain the violation of securities laws. Upon completion of investigation by SEBI, investigation did not find any adverse evidence/adverse findings in respect of violation of provisions of the PFUTP Regulations in respect of the following 244 entities (against whom directions were issued vide the interim order and/or confirmatory orders) warranting continuation of action under section 11B/r/w 11 (4) of the Act. The details of the 244 entities are as follows.”

b) The Kolkatta Bench of the Tribunal in the case of Vipul Patel Vs ITO — 110 com 215 at Para 10 held;

“8. Coming back to the instant case, it is noted that the assessee had purchased 1,10,000 equity shares of Panchshul Marketing Ltd. on 16.08.2012 from MIs. Shivsakti Exports Pvt. Ltd. Later M/s. Panchshul Marketing Ltd. was merged with MIs. KAFL and there was change of management and control of M/s. KAFL Ltd. pursuant to scheme to arrangement sanctioned by the Hon’ble High Court at Allahabad. It is also noted that the purchase of aforesaid 1,10,000 equity of M/s. Panchshul Marketing Ltd. was made by account payee cheque of Dena Bank, vide cheque No……… .It is clarified that off market transaction has not been prohibited and if carried out legally cannot be held to be bogus only on this count……

10. The fact of holding the shares in the D-mat account cannot be disputed. Further, the Assessing Officer has not even disputed the existence of the D-mat account and shares credited in the D-mat account of the assessee. Therefore, once, the holding of shares is D-mat account cannot be disputed, then the transaction cannot be held as bogus. The AO has not disputed the sale of shares from the D-mat account of the assessee and the sale consideration was directly credited to the bank account of the assessee, therefore, once the assessee produced all relevant evidence to substantiate the transaction of purchase, dematerialization and sale of shares then, in the absence of any contrary material brought on record the same cannot be held as bogus transaction merely on the basis of report of Investigation Wing, Kolkata wherein there is a general statement of providing bogus long term capital gain transaction to the clients without stating anything about the transaction of allotment of shares by the company to the assessee.

C) The Jaipur Bench of the Tribunal in the case of Meghraj Singh Shekhawat Vs DCIT — 103 com 374 at Para 6 held;

“6 ……………. Similar in the case in hand the assessee has produced the relevant record to show the allotment of shares by the company on payment of consideration by cheque and therefore, it is not a case of payment of consideration by in cash. But the transaction is established from the evidence and record which cannot be manipulated as all the entries are part of the bank account of the assessee and the assessee dematerialized the shares in the D-mat account which is also an independent material and evidence cannot be manipulated. Therefore, the holding of the shares by the assessee cannot be doubted and the finding of the AO is based merely on the suspicion and surmises without any cogent material to show that the assessee has introduction his unaccounted income in the shape of long term capital gain. We find that the Id. CIT(A) has also referred to SEBI enquiry against the M/s Anand Rathi Share and Stock Brokers Ltd. However, we note that the said enquiry was regarding financial irregularities and use of fund belonging to the clients for the purpose other than, the purchase of shares on behalf of the clients. Therefore, the subject matter of the enquiry has no connection with the transaction of bogus long term capital gain. The decisions replied upon the Id. DR in case of Sanjay Bimalchand Jain (supra) is not applicable in the facts of the present case as the said decision is in respect penny stock purchase by the assessee from a persons who was found to be indulged in providing bogus capital gain entries whereas in the case of the assessee the shares were allotted to the assessee by the company at par of face value. Hence, in view of the facts and circumstances when we hold that the order of the Assessing Officer treating the long term capital gain as bogus and consequential addition made to the total income of the assessee is not sustainable. Hence, we delete the addition made by the AO on this account

d) The Kolkatta Bench of the Tribunal in the case of Navneet Agarwal Vs ITO — 97 com 76 at Para 11 held;

“11. The assessee in this case has stated the following facts and produced the following documents as evidences:

1. The assessee had made an application for allotment of 50000 equity shares of “Smart champs IT and Infra Ltd.” and she was allotted the share on 3rd December 2011 (copy of Application form, intimation of allotment and share certificate Paper Book at page 8 to 10).

2. The payment for the allotment of shares was made through an account payee cheque (copy of the bank statement evidencing the source of money and payment made to “Smart Champs IT & Infra Ltd.” for such shares allotted is placed in the Paper Book at page no. 11).

14. It is well settled that evidence collected from third parties cannot be used against an assessee unless this evidence is put before him and he is given an opportunity to controvert the evidence. In this case, the AO relies only on a report as the basis for the addition. The evidence based on which the DDIT report is prepared is not brought on record by the AO nor is it put before the assessee. The submission of the assessee that she is just an investor and as she received some tips and she chose to invest based on these market tips and had taken a calculated risk and had gained in the process and that she is not party to the scam etc., has to be controverted by the revenue with evidence. When a person claims that she has done these transactions in a bona fide and genuine manner and was benefitted, one cannot reject this submission based on surmises and conjectures. As the report of investigation wing suggests, there are more than 60,000 beneficiaries of LTCG. Each case has to be assessed based on legal principles of legal import laid down by the Courts of law.

15. In our view, just the modus operandi, generalisation, preponderance of human probabilities cannot be the only basis for rejecting the claim of the assessee. Unless specific evidence is brought on record to controvert the validity and correctness of the documentary evidences produced, the same cannot be rejected by the assessee”

e) The Ahmedabad Bench of the Tribunal in the case of Pratik Suryakant Shah Vs ITO —77 com 260 at Para 5 held;

“5. In response to the notice and the queries, the assessee filed a detailed reply explaining the nature of transactions including purchase and sale of shares. It was explained that the payments have been done through banking channels, the shares were transferred to the respective demat accounts and were sold from there.

6. The assessee also questioned the statement of Shri Mukesh Choksi and strongly contended that no adverse view should be taken merely on the strength of the statement of a third party whose statement has not been confronted to the assessee, nor any opportunity is given to cross-examine.

f) The Mumbai Bench of the Tribunal in the case of Ramprasad Agarwal Vs ITO — 100 com 172 at Paras 9 & 10 held;

“9 Similar in the case in hand the assessee has produced the relevant record to show the allotment of shares by the company on payment of consideration by cheque and therefore, it is not a case of payment of consideration by in cash. But the transaction is established from the evidence and record which cannot be manipulated as all the entries are part of the bank account of the assessee and the assessee dematerialized the shares in the 0-mat account which is also an independent material and evidence cannot be manipulated. Therefore, the holding of the shares by the assessee cannot be doubted and the finding of the AO is based merely on the suspicion and surmises without any cogent material to show that the assessee has introduction his unaccounted income in the shape of long term capital gain. We find that the Id. CIT(A) has also referred to SEBI enquiry against the M/s Anand Rathi Share and Stock Brokers Ltd. However, we note that the said enquiry was regarding financial Irregularities and use of fund belonging to the clients for the purpose other than, the purchase of shares on behalf of the clients. Therefore, the subject matter of the enquiry has no connection with the transaction of bogus long term capital gain. It is clear from the above that the facts of the case of the assessee are identical with the facts in the above case wherein the co-ordinate bench of the Tribunal has deleted the addition. We, therefore, respectfully following the same set aside the order of Ld. CIT(A) and direct the AO to not to treat the long term capital as bogus and delete the consequential addition.

g) The Delhi Bench of the Tribunal in the case of Smt. Karuna Garg Vs ITO — 109 com 403 at Para 20 held;

“20. 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.

26. There is no dispute that the statements which were relied by the Assessing Officer were not recorded by the Assessing Officer in the assessment proceedings but they were pre-existing statements recorded by the Investigation Wing and the same cannot be the sole basis of assessment without conducting proper enquiry and examination during the assessment proceedings itself. In our humble opinion, neither the Assessing Officer conducted any enquiry nor has brought any clinching evidences to disprove the evidences produced by the assessee. The report of Investigation Wing is much later than the dates of purchase / sale of shares and the order of the SEBI is also much later than the date of transactions transacted and nowhere SEBI has declared the transaction transacted at earlier dates as void.

30. Considering the vortex of evidences, we are of the considered view that the assessee has successfully discharged the onus cast upon him by provisions of section 68 of the Act as mentioned elsewhere, such discharge of onus is purely a question of fact and therefore the judicial decisions relied upon by the DR would do no good on the peculiar plethora of evidences in respect of the facts of the case in hand and hence the judicial decisions relied upon by both the sides, though perused, but not considered on the facts of the case in hand

h) The Kolkatta Bench of the Tribunal in the case of Smt. Madhu Killa Vs ACIT — 100 com 264 at Para 16 held;

“15 …. The assessee had purchased 25000 shares of MIs. NFGL on 13.06.2012 at a cost price of Rs. 128.25 per share and remitted Security Transaction Tax (STT) of Rs.4007.81 and at a total cost price of Rs.32, 16,000/- (see contract note placed at page 6 of paper book). Thus we find that the AO erred in finding that the assessee had made the purchase not through Stock Exchange but it was an off market transaction. We find that the assessee had purchased through registered broker M/s.M. Prasad & Co. who was registered stock broker of the Bombay Stock Exchange and on 13.06.2012 assessee purchased 25000 shares at Rs.28.25 per share on which STT was paid and the total transaction of Rs.32,21,213. 10 was paid through account payee cheque to the registered broker and the shares were deposited in the demat account (D. P. Stock HLDG Corp of India Ltd.)

16 …….. We also note from perusal of pages 20-23 of paper book which is the extract of pass book of assessee in Punjab National Bank wherein we note that assessee had received sale consideration through bank transaction and we verified the contract note of sale placed at. pages 7 to 17 and tallied the entries of sale consideration received by the assessee in her bank account and find it to be correct.

19. ………. We take note that the Id. DR could not controvert the facts supported with material evidences which are on record and could only rely on the orders of the AO/CIT(A). We note that in the absence of material/evidence the allegations that the assessee/brokers got involved in price rigging/manipulation of shares must therefore also fail. At the cost of repetition, we note that the assessee had furnished all relevant evidence in the form of bills, contract notes, demat statement and bank account to prove the genuineness of the transactions relevant to the purchase and sale of shares resulting in long term capital gain. These evidences were neither found by the AO nor by the Id. CIT(A) to be false or fictitious or bogus. The facts of the case and the evidence in support of the evidence clearly support the claim of the assessee that the transactions of the assessee were genuine and the authorities below was not justified in rejecting the claim of the assessee that income from LTCG is exempted u/s 10(38) of the Act.

i) The Hon’ble Jharkhand High Court in the case of CIT Vs Arun Kumar Agarwal (HUF) 26 com 113 held;

“10. We have considered the submissions of the learned counsel for the parties and we are of the considered opinion that the learned Assessing Officer was much influenced by the enquiry report which may has been brought on record by the efforts of the Assessing Officer and that enquiry report was prepared by the SEBI and from the observations made by the Assessing Officer himself, it/s clear that after getting that enquiry report, the SEB! prima fade found involvement of some of the share brokers in unfair trade practices. Even in a case where the share broker was found involved in unfair trade practice and was involved in lowering and rising of the share price, and any person, who himself is not involved in that type of transaction, if purchased the share from that broker innocently and bonafidely and if he show his bona tide in transaction by showing relevant material, facts and circumstances and documents, then merely on the basis of the reason that share broker was involved in dealing in the share of a particular company in collusion with others or in the manner of unfair trade practices against the norms of S.E.B.I and Stock Exchange, then merely because of that fact a person who bona fidely entered into share transaction of that company through such broker then only by mere assumption such transactions cannot be held to be a shame transaction. Fact of tinted broker may be relevant for suspicion but it alone necessarily does lead to conclusion of all transaction of that broker as tinted. In such circumstances, further enquiry is needed and that is for individual case, Such further enquiry was not conducted in that case”.

j) The Hyderabad Bench of the Tribunal in the case of ITO Vs Aarti Mittal — 149 lTD 0728, relying on Arun Kumar Agarwal (HUF) (supra) at Para 23 held;

We have heard both the parties and perused the material available on record. We have also gone through the written submissions filed by the parties and plethora of decisions relied upon by them in the course of hearing before us. The question before us relates to genuineness of the share transactions entered into by the assessees, and the justification for the assessing officer to making the impugned additions, treating such transactions as not genuine. The CIT(A) has passed elaborate orders and the ClT(A), as noted above, considering the absence of any positive corroborative evidence brought on record by the assessing officer to substantiate his allegation of the assessing officer as to the non-genuine nature of the transactions, concluded that the conclusions of the assessing officer are based on mere suspicion, surmises and conjectures and consequently, his orders cannot be sustained. We are in agreement with the detailed reasons discussed by the CIT(A) in the impugned order in support of his conclusions. The prescribed procedure, having been followed by the assessees from the stage of purchase till the shares are D-MA TTED there is hardly any room to doubt or suspect that the transactions in purchase are not genuine. In order to hold so, as observed by the CIT(A), the A.O. is required to bring in cogent evidence to prove that the purchases were not genuine. No such cogent evidence has been brought on record, but merely proceeded to arrive at his conclusions basing on mere surmise and suspicion that the purchase transactions are bogus On the basis of the report received from SEBI, upon enquiries got conducted that some of the brokers named above have been suspended for some act of omission and commission, the AO held that the transactions entered through these brokers are not genuine. But merely based on such a report, such transactions cannot be treated as sham merely for some discrepancies or adverse report by the SEBI. It is found that the AO has not brought out any material to establish the final outcome of the enquiry initiated by SEBI and specific shares purchased by the assessee in course of making investment. Therefore, it is not possible to take any adverse view on the basis of mere suspicion that SEBI had initiated some action and found the brokers violating the rules of SEBI

k) The Mumbai Bench of the Tribunal in the case of Farrah Marker Vs ITO in ITA No.380112011 at Para 3.4.8 held;

3.4.8 From the appreciation of the facts of the case, the material evidence placed on record by the assessee and in the light of the discussion of the factual and legal matrix of the case as discussed from para 3.1 to 3.4.7 of this order (supra), we are of the considered opinion that the authorities below, i.e. AOICIT(A) have made the addition under section 68 of the Act merely on presumptions, suspicions and surmises in respect of penny stocks; disregarding the direct evidences placed on record and furnished by the assessee in the form of brokers contract notes for purchases and sales of the ‘said shares’ of M/s. Shukun Constructions Ltd., copies of the physical share certificates and her D-MAT account statement establishing the holding of the shares in her name prior to the sale thereof; confirmation of the transactions of buying and selling of the ‘said shares’ by the respective stock brokers, receipt of sale proceeds through banking channels, etc. As observed earlier in this order, we are of the view that the statement recorded from Shri Niraj Sanghvi on 31.12.2007, the day the order of assessment was passed, would have no evidentiary or corroborative value to be the basis for coming to an adverse view in the case on hand, since it was recorded behind the assessee’s back, from a person who was not involved in the purchase of the said shares and also since the assessee was not afforded opportunity for rebuttal of the same and to cross-examine the said person”.

I) The Hon’ble Rajasthan High Court in the case of CIT Vs Sumitra Devi — 268 CTR 0351 at Paras 6 to 8 held;

6. Having given thoughtful consideration to the submissions made and having examined the record, we are clearly of the view that no substantial question of law is involved; and this appeal does not merit admission.

7. True it is that several suspicious circumstances were indicated by the AO but then, the findings as ultimately recorded by him had been based more on presumptions rather than on cogent proof. As found concurrently by the CIT(A) and the Tribunal, the AO had failed to show that the material documents placed on record by the assessee like broker’s note, contract note, relevant extract of cash book, copies of share certificate, de-mat statement etc. were false, fabricated or fictitious. The appellate authorities have rightly observed that the facts as noticed by the AO, like the notice under s, 133(6) to the company having been returned unserved, delayed payment to the brokers, and dematerialisation of shares just before the sale would lead to suspicion and call for detailed examination and verification but then, for these facts alone, the transaction could not be rejected altogether, particularly in absence of any cogent evidence to the contrary.

8. In an overall view of the matter, the finding as recorded by the appellate Authorities after a thorough consideration of the material on record that the transaction of purchase and sale of shares could not be treated as non-genuine, remains a justified finding on facts; and we are unable to find any substantial question of law worth consideration in this case.

m) The Hon’ble Jurisdictional Tnbunal in the case of Shri Nirav Kumar Mahendra Kumar Sapani Vs DCIT in ITA No.2033/2017, at Para 6 held;

“6. In the case of both the assessees, the CIT(Appeals) proceeded as if the assessees purchased the shares through off market. The material available on record clearly indicates that the shares were purchased and sold at the market rate through recognised broker of Security Exchange Board of India. When the assessees established the fact that the shares were purchased on the market rate through recognised broker, it cannot be said that the price of the shares were artificially hiked for earning higher income. The Revenue authorities cannot ignore the material available on record merely because somebody has provided accommodation entry to somebody. The assessment proceeding being a judicial proceeding, the authorities below cannot take into consideration the extraneous matter, which is not relevant to the issue arises for consideration. When the fact that the purchase and sale of shares through recognised stock broker is established and the shares were purchased and sold at market rate, this Tribunal is of the considered opinion that both the authorities below are not justified in disallowing the claim of the assessees. Accordingly, orders of both the authorities below are set aside and the additions made by the Assessing Officer in respect of both the assessees are deleted”.

9.12 In this view of the matter and considering facts and circumstances of this case and also by following the judicial precedents of number of cases, we are of the considered view that the AO as well as the ld.CIT(A) were erred in holding that long term capital gain derived from transfer of equity shares of M/s. Mahavir Advanced Remedies Ltd., is bogus in nature, which is assessable as unexplained credit under the head ‘income from other sources’. Hence, we direct the AO to delete additions made towards long term capital gain derived from transfer of shares.

10. The next issue that came up for our consideration from ground Nos. 19 to 22 of assessee appeal is addition towards unexplained jewellery of Rs.10,17,000/- u/s.69 of the Act.

10.1 The fact with regard to the impugned dispute is that during the course of search in the residential premises of the assessee, the jewellery found was inventoried and verified by an assessor. There was no discrepancy found with regard to the gold jewellery declared and found. The quantity of diamond found was 39.85 carats. The search team noticed that since the diamond declared in the wealth tax return was 18.5 carats, there is difference and accordingly the assessee was questioned on this and a statement was recorded on 10.10.2014. It was explained that the assessee’s wife brought some jewellery at the time of marriage, which was never verified by him. The AO, however was not convinced with the explanation of the assessee and accordingly treated the value of difference in diamond found during the course of search amounting to Rs.10,17,000/- and brought to tax u/s.69 of the Act.

10.2 The ld.AR for the assessee submitted that the ld.CIT(A) has erred in upholding the addition made by the AO towards excess jewellery found during the course of search without appreciating the fact that in absence of any material found during the course of search, the additions made by the AO is on extraneous documents, which is not correct. The ld.AR further submitted that the assessee has included the value of diamond embedded in the gold jewellery in the category of ‘gold’ itself, but only the polished diamonds lying separately was offered. The so called excess jewellery found compared to the total value of jewellery and diamond put together is too nominal and hence cannot be treated as unexplained investment.

10.3 The ld. senior standing counsel for the Revenue, on the other hand submitted that the assessee did not offer any explanation / documents / evidences in support of his claim, even during appellate proceedings and further, he has failed to file any evidence before the Tribunal. Therefore, the addition made by the AO is sustainable in law.

10.4 We have heard both the parties, perused the materials available on record and gone through the orders of the authorities below. It is an admitted fact that there was a difference in diamond jewellery found during the course of search, for which no proper explanation was offered by the assessee. Although, the assessee explained that his wife has brought some diamonds at their wedding but failed to substantiate his claim with necessary evidences. Therefore, we are of the considered view that there is no error in the findings recorded by the AO and affirmed by the CIT(A) to confirm addition towards unexplained jewellery amounting to Rs.10,17,000/-. Hence, we are inclined to uphold the findings of CIT(A) and reject the ground taken by the assessee.

11. In the result, appeal filed by the assessee is partly allowed.

Order pronounced in the court on 1^st March, 2021 at Chennai.