Case Law Details
Archana Rajendra Malu Vs ITO (ITAT Pune)
Introduction: In a recent ruling, the Income Tax Appellate Tribunal (ITAT) Pune addressed a case involving Archana Rajendra Malu and the denial of tax exemption under Section 10(38) of the Income Tax Act due to her involvement in sham transactions with paper companies. The ITAT upheld the order of the Commissioner of Income Tax (Appeals) (CIT(A)) in this matter.
Detailed Analysis:
Background of the Case: Archana Rajendra Malu’s case involved an appeal against the common order dated 03-10-2018 passed by the Commissioner of Income Tax (Appeals)-2, Kolhapur (CIT(A)), for the assessment year 2015-16.
Key Grounds Raised by the Assessee: The primary issue for consideration was whether the CIT(A) was correct in confirming the addition made by the Assessing Officer (AO) under Section 68 of the Income Tax Act. The addition amounted to Rs. 1,35,63,573 and was related to the alleged receipt of bogus Long Term Capital Gains.
Analysis: The case revolved around organized activities involving the generation of bogus Long Term Capital Gains. The modus operandi used by operators was to manipulate the prices of penny stock companies and then sell shares to beneficiaries, who would later claim tax exemption under Section 10(38) of the Act. The AO argued that the shares of Green crest Financial Services Limited, which Archana Rajendra Malu had purchased, were manipulated, and she subsequently sold them to dummy paper companies, claiming exemption on the gains.
The AO relied on statements from individuals involved in the investigation, such as Shri Soumen Sen and Shri Anuj Agarwal, who admitted to providing bogus Long Term Capital Gain entries. They also mentioned Green crest Financial Services Limited as one of the companies used for such purposes.
During the assessment proceedings, the AO recorded a statement from Archana Rajendra Malu, where she claimed to have purchased the shares on the advice of friends.
The CIT(A) upheld the AO’s view that the transactions between the assessee and paper companies were suspicious and constituted sham transactions. Consequently, the exemption under Section 10(38) of the Act was denied. The CIT(A) relied on the decision of the Hon’ble High Court of Bombay at Nagpur Bench in the case of Sanjay Bimalchand Jain to support this view.
The CIT(A) discussed the transaction in detail and pointed out the significant price difference between the purchase and sale of shares, casting doubt on the genuineness of the transaction. The CIT(A) also highlighted that the company’s poor financial credentials and the admission of providing bogus LTCG entries by individuals involved added to the suspicion.
Archana Rajendra Malu failed to explain the price difference convincingly, and she did not challenge the statements of Shri Soumen Sen and Shri Anuj Agarwal, who had admitted to providing accommodation entries for Long Term Capital Gain.
Conclusion: The ITAT Pune upheld the decision of the CIT(A) to deny tax exemption under Section 10(38) of the Income Tax Act to Archana Rajendra Malu due to her involvement in transactions deemed to be sham. The tribunal found no infirmity in the CIT(A)’s order and concluded that the transactions between the assessee and paper companies were not genuine. This case underscores the importance of providing genuine documentation and evidence to support claims for tax exemptions and the consequences of engaging in sham transactions.
FULL TEXT OF THE ORDER OF ITAT PUNE
Both these two appeals by the different assessees against the common order dated 03-10-2018 passed by the Commissioner of Income Tax (Appeals)-2, Kolhapur [‘CIT(A)’] for assessment year 2015-16.
2. At the time of hearing, both the assessees filed letter dated 05-122022 seeking adjournment stating that they are engaging new counsel. We note that this appeal was filed in the year 2018 and was adjourned from time to time till today on the request made by the assessee, which is evident from docket order entries. The ld. DR submitted that the issue is covered against the assessee and prayed not to adjourn the case since it is old matter. On examination of docket order and grounds raised by the assessee in both the appeals, we find force in the arguments of ld. DR that the issues raised in the grounds of appeal are covered against the assessee and no purpose will serve in keeping the old appeal on covered matters, therefore, adjournment letters filed by the assessee in both the appeals are rejected and we proceed to hear both the appeals with the assistance of ld. DR and to pass order basing the material available on record.
3. Since, the issues raised in both the appeals are similar basing on the same identical facts, we proceed to hear both the appeals together and to pass a consolidated order for the sake of convenience. The ld. DR requested us to take up the appeal in ITA No. 1868/PUN/2018 for A.Y. 2015-16.
4. First, we shall take up appeal in ITA No. 1868/PUN/2018 for A.Y. 2015-16.
5. The assessee raised five grounds of appeal amongst which the only issue emanates for our consideration is as to whether the CIT(A) justified in confirming the addition made by the AO u/s. 68 of the Act of Rs.1,35,63,573/- on account of bogus Long Term Capital Gains.
6. Heard ld. DR and perused the material available on record. We note that the assessee is an individual derives income from farming and rents. The assessee claimed exemption of Long Term Capital Gains from the sale of shares of Green crest Financial Services Limited u/s. 10(38) of the Act. The statement of assessee was recorded u/s. 131 of the Act during the assessment proceedings.
7. According to the AO, the Directorate of Investigation, Kolkata conducted country-wide investigation to unearth the organized racket of generating bogus entries of Long Term Capital Gains. The modus operandi availed by the operators was to make the beneficiary buy some shares of a pre-determined penny stock company controlled by them. The said shares are transferred to the beneficiary at a very nominal price mostly off-line through preferential allotment or off-line sale. The beneficiary holds the share for one year and on its sale claims exemption u/s. 10(38) of the Act after one year. During the said period the operators rig the price of the stock and gradually rise its price many times to 500 to 1500 times. The said rig of price of the stock has been done through low volume transaction indulged in by the dummies of the operator at a pre-determined price. Further, according to the AO, when the price reaches the desired level the beneficiary who bought the shares at a nominal price, is asked to sell it to a dummy paper company of the operator. The unaccounted cash is provided by the beneficiary which is also routed through a few layers of paper companies by the operator and finally is parked with the dummy paper company that will buy the shares. The Securities and Exchange Board of India taken appropriate action in the suspect scrip’s involving manipulation of share market for providing accommodation entry of bogus Long Term Capital Gain.
8. The AO observed at para 6.1 of the assessment order that the shares of Green crest Financial Services Limited were jacked up by using technical method of splitting. It is noted the share price of the company hovered around Rs.7.26 per share in May, 2009 and jacked up to around Rs.264.30/- in June, 2014. It was split in ratio of 1:10 resulting into share price at Rs.26.90/- and went high at Rs.63.20/- in September, 2014. The AO held that daily trading details in shares of the said company Green crest Financial Services Limited was reaping of bogus Long Term Capital Gain during this period. We note that the assessee purchased 5,00,000 shares on 14-09-2012 for Rs.12/- and the same has been split to the ratio of 1:10 which according to AO the number of shares increased from 5,00,000 to 50,00,000. Further, it is noted that the assessee sold 2,00,000 shares for Rs.62.31/- on 18-09-2014 and 22,000 shares for Rs.63.11/- on 22-092014. The AO held that the assessee is the beneficiaries and taken the entry of Rs.1,35,63,573/- as exemption. We note that the AO reproduced the details of shares purchased by the assessee along with his family members vide para 6.3 of the assessment order.
9. We find a survey action was conducted on the premises of M/s. D.B. & Co., Kolkata u/s. 133A of the Act on 10-02-2015. According to the AO, the Accountant of the said company namely Shri Soumen Sen stated name of some accommodation entry provider in the form of bogus capital gain through BSE listed companies. The said Accountant further stated that the Green crest Financial Services Limited is one of the company used for providing bogus long term capital gain to various beneficiaries. We find the statement recorded u/s. 131 of the Act during the course of survey operations is reproduced by the AO in his order from pages 13 to 17. On an examination of the same, we note that the said Shri Soumen Sen submitted the details of scripts controlled at his office of 7, Lyons Range, 1st Floor, Room No. 17A, Kolkata-700001 amongst which we note the Green crest Financial Services Limited is one of them standing at Sl. No. 4 in Page No. 14 of the assessment order. Further, we note that the said Shri Soumen Sen also explained the modus operandi of Long Term Capital Gain/loss provided by the entry operator to the beneficiaries. He stated that the Long Term entry beneficiary approaches an entry operator who is having a listed company through some agent/mediator or directly. On the instruction of the said entry operator beneficiaries buys the shares of a listed paper company which is not doing any business or with a miniscule business activity at a very low price. Then price of the said shares of the listed company would be jacked up to a desired level with the concerted and regular buyer in response to the Q. No. 20 at page 14 of the assessment order.
10. Further, it is also noted that the Investigation Team examined Shri Anuj Agarwal u/s. 131 of the Act during the course of survey operation conducted at the office premise of Korp Securities Ltd., Martin Burn House, Kolkata-01 on 30-03-2015. On perusal of the statement which are reproduced by the AO from pages 15 to 17 of the assessment order, we note that he stated the many companies were created to provide accommodation entry in the form of LTCG in response to Q. No. 15 of his statement. Further, it is also noted that the party/beneficiary would give cash to the entry operator company and in turn the said cash deposited in various bank accounts. Finally, the said money is transferred to beneficiaries bank account for which they get commission in cash from the said beneficiaries @.50 paisa per 100 rupees of cheque amount. Further, he also given the names of listed companies scripts in which he has provided accommodation of Long Term Capital Gain in response to Q. No. 17. On an examination of the same list at page 17 of the assessment order, we note that the Green crest Financial Services Limited is standing at Sl. No. 6 in the said list. Therefore, it is clear the activities of entry operators in providing accommodation of Long Term Capital Gain to the parties i.e. the assessee as such take money from them and routed through buying/allotment of shares, splitting and selling in the stock exchange. The alleged Long Term Capital Gain will be transferred to assessee’s accounts through various banks by the entry provider. On a careful examination of the assessment order, we note that the assessee did not rebut the statements given by Shri Soumen Sen and Shri Anuj Agarwal. Moreover, that the said two persons clearly admitted that they have provided accommodation of Long Term Capital Gain to beneficiaries of Green crest Financial Services Limited. We note from Para 9.1 of the assessment order that a statement u/s. 131 of the Act recorded from the assessee, wherein, he stated that he purchased shares on the advice of his friends. It is pertinent to note that information gathered from the purchasers who bought shares from the assessee, the AO intimated the concerned jurisdictional AO’s of the said purchasers and on an enquiries the said jurisdictional AO’s found the said purchasers were also paper company, which clearly shows the transactions between the assessee and these paper companies are not genuine.
11. Coming to the impugned order, we find the CIT(A) justified in holding the view of AO that the transactions between the assessee and paper companies are suspicious sale transactions in shares and Long Term Capital Gain as claimed by the assessee is not allowable u/s. 10(38) of the Act. The CIT(A) primarily relied on the decision of Hon’ble High Court of Bombay at Nagpur Bench in the case of Sanjay Bimalchand Jain in Income Tax Appeal No. 18/2017 order dated 10-04-2017 in confirming the order of AO in making addition u/s. 68 of the Act. We find that the CIT(A) discussed the transaction in detail at Para 5.8 of the impugned order, wherein we completely agree with the reasoning recorded by the CIT(A) in holding the transaction entered by the assessee with paper companies a sham transaction and denial of exemption u/s. 10(38) of the Act is justified. The relevant portion at Para 5.8 of the impugned order is reproduced here-in-below :
“5.8 The ratio laid down in the above cases, is squarely applicable to the facts of the case before me. The appellant had bought impugned shares at significantly low price of Rs.1.2 per share, and sold them at a phenomenally high price of Rs.64 per share, which itself casts a serious doubt on the genuineness of the transaction, as the company, whose shares had been bought and sold in this manner, was not a promising company and had very poor financial credentials. Even during appellate proceedings, the appellant has not been able to explain the price difference, and has failed to demonstrate that the financial credentials of the said company had stabilized and the said company was financially sound at present. Lastly and most importantly, Shri Soumen Sen & Anuj Agarwal have admitted that Green crest was used to provide bogus LTCG entries. On being confronted with this statement, the appellant has simply feigned ignorance without explaining any falsity in those statements. The appellant did not ask for cross examination inspite of having the copies of their statements. All the facts narrated above, have an adverse bearing on the genuineness of the transactions undertaken by the appellant. It must be understood that it is not a case where it is alleged that transactions have not taken place. What is being doubted is the genuineness of the transactions that have taken place. In such a scenario, even if a transaction is established to have been conducted, it cannot be considered as genuine, until and unless the circumstances in which it was conducted are established to be beyond doubt. In the present case, the appellant has not been able to explain the adversity of circumstances narrated above. Accordingly, the transaction cannot be said to be genuine. I am therefore inclined to agree with the AO that the appellant has entered into a sham transaction. Accordingly the transactions made by the appellant resulting in humongous gains are also a sham transaction and the AO has rightly held them to be so. I therefore uphold the action of the AO in assessing Rs.1,35,63,573/- as unexplained cash credits u/s. 68 in the hands of the appellant.”
12. In the light of the above and with the discussion made by us here-in- above, we find no infirmity in the order of CIT(A) and it is justified. Thus, the grounds raised by the assessee are dismissed.
13. In the result, the appeal of assessee is dismissed.
ITA No. 1867/PUN/2018
14. We find that the issues raised in the appeal and the facts in ITA No. 1867/PUN/2018 are identical to ITA No. 1868/PUN/2018 except the variance in amount. Since, the facts in ITA No. 1867/PUN/2018 are similar to ITA No. 1868/PUN/2018, the findings given by us while deciding the appeal of assessee in ITA No. 1868/PUN/2018 would mutatis mutandis apply to ITA No. 1867/PUN/2018, as well. Accordingly, the appeal of assessee is dismissed.
15. In the result, both the appeals of assessee are dismissed.
Order pronounced in the open court on 05th January, 2023.
