Case Law Details
PCIT Vs Indravadan Jain, HUF (Bombay High Court)
The Question before the Hon’ble High Court was ‘Whether addition u/s 68 of the Act for transaction made in penny stock was sustainable?’
The Hon’ble Bombay High Court upheld the decision of Hon’ble Mumbai Tribunal, wherein the Tribunal had held that since the shares were purchased on the floor of stock exchange and not from broker, payment was made through banking channel, deliverables were taken in DEMAT account where the shares remained for more than one year, contract notes were issued and the shares were also sold on stock exchange, the long-term capital gains claimed as exempt cannot be treated as accommodation entry.
Facts Of the Case: The Assessee had sold shares of Ramakrishna Fincap Ltd (RFL) and the long-term capital gains earned on the sale of said shares was claimed as exempt u/s 10(38) of the Act. The shares were purchased by the Assessee at Rs. 3.12/- per shares in the year 2003 and had sold the same in the year 2005 for Rs. 155.04/- per share.
The AO had during the course of investigation has revealed that the scrip was as penny stock and that the capital gains declared by the Assessee was held to be accommodation entries. A broker Basant Periwal & Co. through whom the Assessee had made transactions had appeared and it was evident that the broker had indulged in price manipulation through synchronized and cross deal in scrip RFL. SEBI had also passed an order regarding irregularities and synchronized trades carried out in scrip of RFL by the said broker. In view of the same, the Assessee’s case was reopened u/s 148 of the Act.
The learned AO did not accept the Assessee’s claim of long-term capital gain as exempt and held the same as accommodation entry and made addition u/s 68 of the Act.
During the course of appeals, the Hon’ble CIT (Appeals) observed that during the course of independent enquiry in the case of the said broker undertaken by SEBI, it was conclusively proved that it was the said broker who was involved in inflating the price of the said scrip. No evidence was brought on record to prove that the assessee was also involved in inflating the price of the scrip.
The Hon’ble CIT(A) came to the conclusion that the Assessee had bought 3000 shares of RFL on the floor of Kolkata Stock exchange through registered stock broker. In pursuance of purchase of shares the said broker had issued invoice and the Assessee had paid the purchase price through cheque. The shares were also transferred to Assessee’s Demat account and were held by the Assessee for more than 1 year. After one year the said shares were sold by the said broker on various date on the Kolkata Stock exchange. Pursuant to sale of shares, the broker had issued contract notice and bill for sale of shares and that the said contract notes and bills were also produced during the appellate proceedings. On sale of shares, the Assessee effected delivery of shares by way of Demat instruction slip and also received payment from Kolkata Stock Exchange. The cheque so received was deposited by the Assessee into his bank account.
In view of the above facts and documents, the Hon’ble CIT(A) found that there was no reason to add the capital gains as unexplained cash credit u/s 68 of the Act.
Further, the Hon’ble Mumbai Tribunal while disposing off the appeal of the Revenue also observed that the shares were purchased by the Assessee on the floor of stock exchange and not from the broker, deliveries were taken, contract notes were issued and that the share were also sold on stock exchange.
Held: Based on the facts of the case and documentary evidences placed on records, the High Court of Bombay held that the Hon’ble Tribunal had rightly concluded that there was no merits in the appeal of the Revenue.
From the above fact of the case, conclusion is drawn that in order to treat exempt long-term capital gain earned from sale of shares as accommodation entry under section 68, the Assessee’s direct involvement in price rigging of the scrip should be conclusively proved besides the broker’s involvement.
FULL TEXT OF THE JUDGMENT/ORDER OF BOMBAY HIGH COURT
1. This appeal is impugning an order dated 27th May 2016 passed by the Income Tax Appellate Tribunal (ITAT) rejecting two appeals that Revenue had filed against the order of Commissioner of Income Tax (Appeals) (CIT[A]) for Assessment Year 2005-06 in the matter of order passed under Section 143(3) read with Section 147 of the Income Tax Act, 1961 (the Act) against Respondent. Respondent though served is not present before us. Affidavit of service is also filed.
2. It was the case of Revenue before the ITAT that the CIT[A] was wrong in deleting the addition made by the Assessing Officer (A.O.) in respect of long term capital gain treated by A.O. as unexplained cash credit under Section 68 of the Act.
3. Respondent had shown sale proceeds of shares in scrip Ramkrishna Fincap Ltd. (RFL) as long term capital gain and claimed exemption under the Act. Respondent had claimed to have purchased this scrip at Rs.3.12/- per share in the year 2003 and sold the same in the year 2005 for Rs.155.04/- per share. It was A.O.’s case that investigation has revealed that the scrip was a penny stock and the capital gain declared was held to be accommodation entries. A broker Basant Periwal & Co. (the said broker) through whom these transactions have been effected had appeared and it was evident that the broker had indulged in price manipulation through synchronized and cross deal in scrip of RFL. SEBI had also passed an order regarding irregularities and synchronized trades carried out in the scrip of RFL by the said broker. In view thereof, respondent’s case was reopened under Section 148 of the Act.
4. The A.O. did not accept respondent’s claim of long term capital gain and added the same in respondent’s income under Section 68 of the Act. While allowing the appeal filed by respondent, the CIT[A] deleted the addition made under Section 68 of the Act. The CIT[A] has observed that the A.O. himself has stated that SEBI had conducted independent enquiry in the case of the said broker and in the scrip of RFL through whom respondent had made the said transaction and it was conclusively proved that it was the said broker who had inflated the price of the said scrip in RFL. The CIT[A] also did not find anything wrong in respondent doing only one transaction with the said broker in the scrip of RFL. The CIT[A] came to the conclusion that respondent brought 3000 shares of RFL, on the floor of Kolkata Stock Exchange through registered share broker. In pursuance of purchase of shares the said broker had raised invoice and purchase price was paid by cheque and respondent’s bank account has been debited. The shares were also transferred into respondent’s Demat account where it remained for more than one year. After a period of one year the shares were sold by the said broker on various dates in the Kolkata Stock Exchange. Pursuant to sale of shares the said broker had also issued contract notes cum bill for sale and these contract notes and bills were made available during the course of appellate proceedings. On the sale of shares respondent effected delivery of shares by way of Demat instructions slip and also received payment from Kolkata Stock Exchange. The cheque received was deposited in respondent’s bank account. In view thereof, the CIT[A] found there was no reason to add the capital gains as unexplained cash credit under Section 68 of the Act. The tribunal while dismissing the appeals filed by the Revenue also observed on facts that these shares were purchased by respondent on the floor of Stock Exchange and not from the said broker, deliveries were taken, contract notes were issued and shares were also sold on the floor of Stock Exchange. The ITAT therefore, in our view, rightly concluded that there was no merit in the appeal.
5. We also find no infirmity in the order passed by the ITAT and no substantial questions of law as proposed in the appeal arises.
6. Appeal dismissed.
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