ITAT Mumbai held Gain on Sale of Penny Shares as bogus

The Brief facts of the case are that assessee is engaged in the business of running a fast food and juice centre in Iraniwadi in Kandivali (W) under the name and style of Bhagvwati Juice Centre. Specific information was received from Addl. CIT (Inv.) , Unit-V, Mumbai that the assessee is indulging in non-genuine and bogus capital gains from the transactions of purchase and sale of shares of M/s Shiv Om Investment & Consultancy Ltd., a Kolkatta based company. It was also mentioned in the information received by the Revenue that M/s Shiv Om Investment & Consultancy Ltd. quoted at the Kolkatta Stock Exchange was only a penny stock company and for the purpose of showing the holding period of more than 12 months, M/s Badri Prasad & Sons and other Kolkatta based brokers have issued pre-dated contract notes on the dates prior to July, 2004 for the sale of shares of this company at the rate of Rs. 4/- to Rs.4.50 per share to the various persons. It was also mentioned that assessee has purchased 4000 shares of M/s Shiv Om Investments on 11^th May, 2004 for a consideration of Rs. 4,080/- and out of the same, 1000 shares were sold on 16^th May, 2006 and 2500 shares were sold on 27^th January, 2006 for a total consideration of Rs. 6,89,750/-. Thus, the Revenue has reason to believe that income chargeable to tax has escaped assessment in the case of the assessee and the assessment was re-opened by issue of notice u/s 148 of the Act dated 7^th April, 2008 was issued and served upon the assessee on 1st May, 2008 , i.e. within a period of 4 years from the end of assessment year. In reply, the assessee vide letter dated 27^th October, 2009 has submitted that original return filed on 5^th June, 2006 may be treated as a return filed in response to the notice u/s 148 of the Act. The A.O. noticed that assessment in the case of the assessee for the assessment year 2005-06 i.e. the year in which the alleged shares were claimed to be purchased by the assessee was completed on 24^th December, 2009 u/s 143(3) r.w.s. 147 of the Act wherein it was clearly proved that the assessee’s claim of purchase of alleged 4000 shares of M/s Shiv Om Investments and Consultancy Limited on 11^th May, 2004 for a consideration of Rs. 4,080/- was bogus and was only a paper transaction.

The relevant portion of the assessment order dated 24.12.2009 passed by the AO u/s 143(3) r.w.s. 147 of the Act for the assessment year 2005-06 is reproduced below:–

“BOGUS PURCHASE OF SHARES: As mentioned earlier, in this case specific information was received from Addl.DIT (Inv.), Unit-V, Mumbai that assessee is indulged in bogus/non-genuine long term capital gain from the transactions of alleged purchase and sale of shares of M/s Shiv Om Investments. Further, in the said information it was also mentioned that assessee has purchased 4000 shares of M/s Shiv Om Investments on 11.05.2004 for a consideration of Rs. 4,080/ – and out of the same, 1000 shares were sold on 16.05.2006 and 2500 shares were sold on 27.1.2006 for a total consideration of Rs.6,89, 750/-. From this, it is quite apparent that assessee has purchased the alleged share for Rs.4 per share in May’2004 and sold the same for Rs. 197 per share in January’2006 (i.e. 2500 shares were sold on 27.01.2006 for Rs. 197/- per share) which means that the value of the scrip has gone to 49 times of its purchase within a short period time which is quite unusual and unbelievable.

5.1 In view of the above specific and concrete information received, vide this office notice u/s 142(1) of the I.T.Act-1961, dated 04.08.2009 assessee was required furnish the details of investment made in shares along with all documentary evidences. In reply, assessee’s AR vide letter dated 27.10.2009 has submitted that assessee has purchased 4000 shares of Shiv Om Investments in May’2004 for Rs.4,080/-. In support of this purchase, assessee has enclosed a copy of bill issued by M/s Badri Prasad & Sons, dated 11.05.2004. On going through the said broker bill, it is clearly seen that the vital columns in the said broker bill such as Order No., Trade No. & Trade Time were left blank. Without these details, this bill cannot be held as genuine. This clearly fortifies information received in the case of the assessee that said bill issued M/s Badri Prasad & Sons is nothing but a bogus bill.

5.2 In view of the same, vide this office letter dated 19.11.2009, assessee was requested to show cause as to why the purchase of these shares shall not be treated as non-genuine. Further, in the said letter, he was specifically required to furnish the following details:

(i) Your entire business activity is at Mumbai, why and through whom you have approached the Kolkatta share broker, M/s Badri Prasad & Sons through whom you have claimed to have purchased 4000 shares of Shiv Om

(ii) Details of payment made to purchase the above shares along with mode/proof of payment.

5.3 In reply to the above, assessee’s AR has submitted that investment in the shares of Shiv Om Investments and Consultancy Ltd. was made by the assessee in 2004 on the basis of advice given by his well-wisher. Further with regard to mode of payment, he has submitted that the purchase of these shares have been made in cash. However, no proof of such cash payment was substantiate with any kind of documentary evidences.

5.6 In view of the above discussion and after considering the submissions made by the assessee, the following discrepancies are noticed with regard to the purchase of these shares.

(i) The relevant columns in the purchase bill i.e. order No., Trade No., and Trade time are left blank.

(ii) No proof/source of payment for purchase of these shares is brought on record.

(iii) The purchase of the shares cannot be verifiable from the Calcutta Stock Exchange since the vital columns in the said broker bill such as Order No., Trade No. & Trade Time were left blank.

5.7 Further, before proceeding into the case, one has to look into the general modus operandi adopted by the assessees who indulge in converting their unaccounted “cash to accounted form through the route of capital gains. With the exemption/ reduction in tax on capital gains on shares, there is rampant practice of routing the unaccounted cash in the form of long term capital gains and claiming the same as exempt / concessional tax rate. The general modus operandi adopted by such type of assesses is as under:

(i) With the collusion of broker, shares are purchased of an unknown company with dubious background for miniscule consideration. For this purpose, the broker issues a fake brokerage note.

(ii) The counter party is/are usually not traceable and related to the broker and the broker undertakes off-market transactions to accommodate the assessee.

(iii) After a year, the shares are sold back by the assessee, in the meantime, the shares prices are rigged by the concerned broker to an abnormally high level.

(iv) The shares are now sold by the assessee and sale consideration is received. The sale consideration is in fact first paid by the assessee in cash to a trusted confidante of the broker. This cash consideration which is introduced in a banking channel by routing through a number of accounts, finally reaches the accounts of the broker. With this amount, the broker paid the consideration to the assessee.

(v) Thus the assessee’s own cash is introduced and comes back in the form of long term capital gain thereby claiming concessional tax rate.

(vi) The other typical characteristics of such transactions are as follows:

(a) The scrip invested in an obscure one in most cases. It is merely Shell Company with no activities whatsoever.

(b) The assessee himself will be unaware of the financial performance of the company in which he is invested.

(c) The shares are purchased at lower levels and sold at higher rates through the series of off-market transactions created by the broker with vested interest. The share prices are artificially rigged through off market transactions. This hike is not supported by the fundamentals of the company.

(d) The assessee uses the services of the broker only for these particular transactions. Also, the assessee otherwise is passive investor or does not invest in other scrips.

(e) The assessee has never met the broker and usually claims that the transactions are arranged through a different person.

5.8 Having seen the above modus operandi and the method in which these types of transactions are structured, the following facts emerges in the case of the assessee which are discussed in detail as under:

(A) PURCHASE OF SHARES IS AN OFF MARKET TRANSACTION:

From the modus operandi adopted by the assessee, it is seen that the purchase transaction has been done off market in physical form by paying cash. This has been carried out in a planned manner to capitalize the black money by taking exemption by claiming the same as long term capital gain.

(B) NOT IN CONFORMITY WITH SEBI GUIDELINES:

As evident from the above, assessee has purchased the share M/s Shiv Om in physical form and thereafter, the same have been converted into electronic mode. In such case off market transactions, as per SEBI guidelines, a broker cannot issue a brokerage note containing time stamp of stock exchange traded time even though the transactions are not routed through stock exchange and such transactions are off market transactions. SEBI had vide Circular No. SMDRP/Policy/CIT-21/99, dated 14th September’1 999 banned all negotiated deals including cross deals and all such deals are required to be executed only on the screens of exchanges in the price and order matching mechanism of the exchange just like any other normal trade. Thus from the above, it can be seen that such transactions are illegal, and are not in conformity with regulatory guidelines.

C) PAYMENT FOR PURCHASE MADE IN CASH:

The purchase payments were made in cash and not through the normal banking channel therefore the same were non-verifiable from the authentic supporting details such as bank accounts/documents. On one side, assessee is claiming that money is received through banking channel and so transaction is genuine, but what the assessee is not considering that, the starting point, i.e. payments for shares purchased is made through cash and any other mode which is not banking channel, even though assessee was having bank account why the purchases were not made by making payment through bank. Hence when the starting point itself is not genuine, how the whole transactions can be considered as genuine.

D) ASSESSEE NOT A REGULAR INVESTOR IN SHARES:

The assessee is not a regular investor in shares. Hence, it is quite surprising as to how he earned a phenomenal return of 49 times within a short span of period which is extremely unusual. The past records of the assessee for the preceding years show that the assessee has been hardly active in the stock market. This being the case, the assessee has entered into a sham transaction with the full knowledge of it, so as to convert unaccounted money into accounted money in the guise of capital gains.

E) NATURE OF TRANSACTION:

The nature of transaction itself looks suspicious from the manner it has been conducted i.e. the abnormal appreciation in the value of shares, the mode of payment for purchase of shares not doing the transaction through the normal share dealing procedures. The assessee has shown to have received sale proceeds through cheque whereas purchases were consciously made in cash in the aforesaid manner to facilitate manipulation of the purchase for assessee’s benefit.

F) PENNY SHARE:

The shares in which the assessee has claimed to have made a deal, are identified as Penny Shares by the investigation wing of the department because rates of these shares are not based on business results of the companies but same are fluctuated by insider’s trading from zero value (negligible price) to very high price and vice versa without any reason or basis to accommodate or generate bogus capital gain or loss.

5.9 In the instant case, all the above features are present in the transaction of shares made by the assessee. Moreover, there is also a specific information that assessee is indulged in non-genuine & bogus capital gain obtained from the transactions of purchase and sale of shares of MIs Shiv Om Investments & Consultancy Ltd., a Kolkatta based company. In this respect, it is also pertinent to mention that even assessee has failed to furnish the proof of payment for these transactions.

5.10. Subject to the above discussion, it is held that the so called purchase of shares is a fabricated transactions and hence the same are held as bogus.”

4. From the above, it was observed by the A.O. that the so called purchase of shares of M/s Shiv Om Investment and Consultancy Limited were fabricated transaction as held in the assessee’s own case for assessment year 2005-06. The A.O. observed that the payments for shares purchased were made through cash and not through banking channel. Thus, the A.O. came to the conclusion that the assessee’s claim of receipt of Rs. 4,92,750/- on alleged sale of shares purchased from M/s Shiv Om Investment and Consultancy Limited was not genuine and a fabricated transaction through which the unaccounted money has been converted into accounted money and the same has been treated as unexplained cash credits and brought to tax, vide assessment order dated 29.12.2009 passed u/s 143(3) read with Section 147 of the Act.

CONTENTION OF THE ASSESSEE

The ld. Counsel for the assessee submitted that addition of Rs. 4,92,750/- has been made u/s 68 of the Act towards sale of 2500 shares of Shiv Om Investment and Consultancy sold through stock exchange which was treated as unexplained cash credits in the hands of the assessee. The ld. Counsel for the assessee drew our attention to the assessment order and submitted that in the assessment year 2007-08 the Revenue has accepted the gain earned on the sale of shares as long term capital gain u/s 143(1) of the He submitted that the Revenue has reopened the assessment for the assessment year 2005-06 and treated the purchase of shares as bogus although no additions were made in monetary terms. The said assessment order has been placed in paper book page No. 42-52 filed with the Tribunal. The appellate order passed by the learned CIT(A) for assessment year 2005-06 has also been placed vide paper book page 53 to 55 and submitted that no additions were made for purchase although the same were treated as bogus and hence the assessee did not contested the findings of AO by treating the purchase of 4000 shares of Shiv Om Investment and Consultancy Limited as bogus and sham transaction. The ld. Counsel submitted that the assessee has not challenged the said findings as no addition was made by Revenue in the assessment year for 2005-06 on monetary terms and the assessee was not saddled with any liability to pay tax in the assessment year 2005-06 by holding of the Revenue by the said purchase of 4000 shares of Shiv Om Investment and Consultancy as bogus purchase. He submitted that the assessment for the assessment year 2007-08 the case was processed u/s 143(1) of the Act and the long term capital gain was accepted. The ld. Counsel submitted that the Revenue has treated the purchases of shares made from Shiv Om Investment and Consultancy Limited as bogus. He submitted that the company is active and the details from the Registrar of Companies, ROC Kolkatta has been filed and placed at paper book page 24 to show that M/s Shiv Om investment and Consultancy Ltd. is an existing company and an active company. The ld. Counsel submitted that the shares were traded through stock exchange. The list of directors are also placed on record. The ld. Counsel drew our attention to paper book page No. 16 to show that the share were purchased from Badri Prasad & Sons by the assessee and similarly the details of which are placed at paper book page 16 to 19 and contended that these are off market purchases form registered brokers. Similarly, it was submitted that the sale has been made in the month of January, 2006 and the amount has been received on 6th February, 2006 in the bank account of the assessee. The said bank account details were placed at paper book page 37 of paper book. The ld counsel submitted that in the case of his brother Mr. Nagesh M Pujari , the learned CIT(A) has dismissed the appeal of the assessee confirming the action of the AO in assessing the said gains as short term capital gains.The said appellate orders of the learned CIT(A) in the case of brother of the assessee is placed in paper book page 64- 69 of paper book.

CONTENTION OF THE REVENUE

The ld. D.R., on the other hand, submitted that specific information was received that the assessee has indulged in bogus transaction in shares. In the assessment year 2005-06 the transaction for purchase of 4000 shares has been treated as bogus whereas no addition has been made. The assessee has accepted the transactions for purchase of shares were bogus and it cannot be treated as genuine transaction. The payments of the purchases were made in cash. The A.O. has rightly held that the activities of the assessee were creating suspicious, hence, the authorities has rightly treated the transaction as undisclosed cash credits. For the assessment year 2007- 08, it was submitted by learned DR that no scrutiny assessment has been made u/s 143(3) of the Act.

In the rejoinder, the ld. Counsel for the assessee relied upon the decision of the Hyderabad Bench of this Tribunal in the case of ITO v. Smt. Aarti Mittal reported in [2014] 41 com 118 (Hyderabad – Trib).It is the submission of the assessee’s counsel that no enquiry has been made by the Revenue with stock exchange. It was submitted that the assessee filed balance sheet of Bhagvati Juice Centre along with the return of income filed with the Revenue for the assessment year 2005-06 which is at page 40 of the paper book and there is no requirement to disclose the purchase made on 11- 05-2004 in this balance sheet of business as personal balance sheet was not filed as there is no requirement to file the personal balance sheet with the Revenue along with return of income(page 38-41/PB). But, it was submitted that capital gains was duly declared in return of income filed with the Revenue for the impugned assessment year.

HELD BY ITAT

We have considered the rival contentions and also perused the material available on record including the case laws cited by the parties. We have observed that no scrutiny assessment has been framed for the impugned assessment year by the Revenue u/s 143(3) of the Act originally, while based on information received from Addl.CIT(Inv.), Unit-V, Mumbai that the assessee is indulging in non-genuine and bogus capital gains from transaction of sale and purchase of shares of M/s Shiv Om Investment and Consultancy Limited which was penny stock company and pre-dated contract notes were issued by the Brokers to manipulate and introduce long term capital gains in favour of the assessee which are exempt from tax u/s 10(38) of the Act leading to escapement of income from taxation , which led to issue of notice dated 07-04- 2008 u/s 148 of the Act which is within four years from the end of the relevant assessment year, the receipt of afore-stated information from Addl. CIT(Inv) in our considered view is fresh and tangible material which has live link and nexus with the formation of belief that the income of the assessee has escaped assessment, and keeping in view that the original assessment was not framed u/s 143(3) of the Act and no opinion was ever formed by the AO and hence there is no change of opinion keeping in view the ratio of decision of Hon’ble Supreme Court in the case of ACIT v. Rajesh Jhaveri Stock Brokers Private Limited (2007) 291 ITR 500(SC), we uphold the re-opening of the assessment u/s 147/148 of the Act. We have observed that the assessee has made purchases of 4000 shares of M/s Shiv Om Investment and Consultancy Limited for Rs.4,080/- on 11^th May, 2004 in the previous year relevant to the assessment year 2005-06. The said shares were purchased in off market transactions for which payments were made in cash. The said purchases have been treated as bogus and sham transactions by the Revenue as it is alleged that certain brokers have manipulated and issued pre-dated contract notes which even did not have details such as time of contract, trade number , transaction details etc and payments were also made in cash by the assessee against such sham and bogus purchase with the objective of introducing by manipulating tax free exempt long term capital gains u/s 10(38) of the Act leading to escapement of income from taxation , and the said findings of the AO with respect to bogus and sham purchases have become conclusive and final as the assessee has not challenged the findings of the learned AO made in the assessment order dated 24.12.2009 passed by the AO u/s 143(3) read with Section 147 of the Act in the first appeal filed with learned CIT(A) for the assessment year 2005-06 and hence the finding of the AO has attained finality. Since the said findings of the AO with respect to purchases of 4000 shares of M/s Shiv Om Investment and Consultancy Limited in assessment year 2005-06 have become conclusive having attained finality, the sales in consequence thereof the sham and bogus purchases cannot be accepted as genuine. The assessee has explained that the purchases were backed with contract notes of the brokers and payments were made in cash will not be of any help at this stage as the said finding of the AO treating the purchase of shares as sham and bogus in the assessment year 2005-06 has attained finality. Since, purchases are held to be bogus and sham which has attained finality, the sale in consequence thereof whereby payments are received through cheque or shares being sold through stock exchange are not of any help to the assessee for claiming the exemption as long term capital gains as the allegation of the Revenue is that the assessee has in collusion with the Brokers has manipulated and camouflaged the entire transactions of sale and purchase of shares in getting issued pre-dated contract notes for purchases of shares for which payments were also made for these purchase in cash and hence these purchases never existed at that relevant time . It is the allegation of the Revenue that the entire sale and purchase of shares were manipulated by the assessee in collusion with the brokers in order to earn tax free exempt long term capital gains on sales of shares u/s 10(38) of the Act whereby un­accounted cash of the assessee has been introduced in disguise in lieu of sale proceeds of shares. Keeping in view facts and circumstances of the case and as per our discussions and reasoning as set out above, we find no infirmity in the orders of the learned CIT(A) which we uphold and sustain. The assessee relied upon the decision of the ITAT , Hyderabad in the case of ITO v. Smt Aarti Mittal (2014) 41 taxmann.com 1 18(Hyd.-Trib) whereby the Tribunal has arrived at the decision that sale and purchase was genuine even though purchase was off-market transaction which was routed not through stock exchange but backed by physical delivery of shares which was later de-mated and under the circumstances the ITAT held the transactions as genuine in nature and the assessee claim was found to be in order , but in the instant case there is a conclusive and final finding of fact that purchases of shares were bogus and sham as was held by the Revenue in the assessment year 2005-06 which has not been dislodged so far as the assessee accepted the said findings which became conclusive, thus the facts in the instant case are distinguishable as against the relied upon case of the assessee in Smt Aarti Mittal(supra) on that ground itself. Similarly, contentions of the assessee that the Revenue has accepted the gains on sale of 1500 shares of M/ s Shiv Om Investment and Consultancy Limited in the succeeding assessment year 2007-08 as long term capital gains while processing of return u/s 143(1) of the Act is not of help to the assessee as every assessment year is separate assessment year and merely because the Revenue has not selected the case under scrutiny by issuing notice u/s 143(2) of the Act and framing detailed scrutiny u/s 143(3) of the Act instead chose to process the return u/s 143(1) of the Act without scrutiny will not entitle the assessee to get the well reasoned assessment orders and appellate orders of the learned CIT(A) dislodged in the absence of the cogent material and evidences to demolish the findings of the authorities below. The Revenue in the case of the assessee’s brother has also declared the purchase and sale of shares as bogus but brought to tax, gains arising from sale of shares as short term capital gains . This in our considered view, is also not of help as the Revenue in the instant case has come to the conclusive finding which attained finality that the transactions of purchase of shares are sham and bogus transactions camouflaged with an intention to evade taxes. We order accordingly.