Case Law Details
Sarika Bindal Vs ITO (ITAT Delhi)
Introduction: In a pivotal decision by the Income Tax Appellate Tribunal (ITAT) Delhi, in the case of Sarika Bindal vs. Income Tax Officer, it was held that capital gains arising from the sale of shares cannot be regarded as sham profits. This ruling came as a significant relief for taxpayers, especially in the light of additions made under section 69A of the Income Tax Act, 1961, challenging the legitimacy of Long Term Capital Gains (LTCG) on share sales. The tribunal’s order, dated 13.12.2023, delves into the complexities surrounding the treatment of capital gains in the context of alleged accommodation entries and underscores the necessity of substantiating tax evasion claims with concrete evidence.
Detailed Analysis: The crux of the dispute centered around the denial of exemption of LTCG claimed under section 10(38) of the Act and the subsequent additions of Rs.51,41,219/- as LTCG under section 69A, alongside an additional Rs.1,02,824/- for unexplained transaction expenses under section 69C by the Assessing Officer (AO). The AO’s skepticism was primarily fueled by an investigation report from Kolkata, which outlined a general modus operandi for inflating the prices of penny stocks to launder money as exempt income through exaggerated capital gains.
However, the ITAT’s examination of the facts and evidence presented by Sarika Bindal painted a different picture. The tribunal noted that the transactions were supported by documentary evidence, including the demat account transactions and banking channel records, affirming the genuineness of the share purchase and sale. Furthermore, the tribunal highlighted the financial stability and business operations of CCL International Ltd., the company whose shares were transacted, which contradicted the AO’s classification of the company’s shares as penny stocks used for generating sham profits.
The ITAT also referenced several judicial precedents supporting the legitimacy of capital gains from share sales, emphasizing that a mere abnormal increase in share prices is not sufficient grounds for dismissing LTCG claims as accommodation entries. The tribunal’s decision was reinforced by comparing the case with similar scenarios where the ITAT and various High Courts have ruled in favor of the taxpayers, establishing a consistent judicial stance on the issue.
Conclusion: The ITAT Delhi’s ruling in Sarika Bindal vs. ITO marks a crucial juncture in the interpretation and application of tax laws concerning capital gains from share sales. By setting aside the additions made under sections 69A and 69C of the Income Tax Act, the tribunal not only provided relief to Sarika Bindal but also laid down a significant precedent for similar cases. This judgment underscores the importance of distinguishing between genuine investment activities and tax evasion schemes, ensuring that taxpayers are not unjustly penalized for lawful capital gains. Moreover, it reinforces the principle that the burden of proof lies with the tax authorities to establish any allegations of sham transactions, thereby protecting the rights and interests of taxpayers against baseless accusations.
FULL TEXT OF THE ORDER OF ITAT DELHI
The captioned appeal has been filed at the instance of the assessee against the first appellate order of the learned Commissioner of Income Tax (Appeals) – 31, New Delhi (‘CIT(A)’ in short) dated 29.03.2019 arising from the assessment order dated 26.12.2017 passed by the Assessing Officer (AO) under Section 143(3) of the Income Tax Act, 1961 (the Act) concerning Assessment Year 2015-16.
2. As per the grounds of appeal, the assessee has challenged denial of exemption of Long Term Capital Gain (LTCG) claimed under section 10(38) of the Act and additions of Rs.51,41,219/- on account of LTCG under section 69A of the Act. The assessee has also challenged addition of Rs.1,02,824/- on account of unexplained transaction expense under section 69C of the Act.
3. Briefly stated, the assessee, an individual, filed her return of income declaring total income at Rs.10,64,770/- for the A.Y. 2015-16 in question. The return filed by the assessee was subjected to scrutiny assessment. In the course of scrutiny assessment.
3.1 The Assessing Officer inter alia observed that assessee has declared exempt income derived by way of Long Term Capital Gains (LTCG) under section 10(38) of the Act on account of sale of shares of CCL International Ltd.. On enquiry by the AO, the assessee submitted that she has purchased 10,000 shares @ Rs.40 per share of CCL International Ltd. at a purchase cost of Rs.4,00,000/- from M/s. Sai Securities as per sale note/bill dated 28.03.2013 issued by the broker. The payment towards purchase of shares was made on 06.08.2013 and 14.08.2013 through banking channel. The shares were transferred in the demat account maintained by the assessee with Depository Participant (DP) namely Religare Broking Limited. 2,500 shares were transferred in the demat account on 04.07.2013 and other 7,500 shares on 16.11.2013. A demat account showing availability of shares before sale of shares were submitted before the AO. The assessee sold 9,700 shares between 25.11.2014 to 12.01.2015 and thus claimed Long Term Capital Gain on account of holding of shares in physical form and demat form put together for more than one year. The sale consideration aggregating to Rs.51,06,739/- were received through banking channel for the shares sold at an average rate of 526.47 per share. The Assessing Officer however, observed that LTCG claimed as exempt income is only an accommodation entry to lounder the unaccounted income of the assessee and introduced it as exempt income in the form of LTCG.
3.2 The Assessing Officer extensively referred to Investigation Report issued by Directorate of Investigation, Kolkata explaining the modus operandi for rigging the prices of penny stocks abnormally high by involvement of multiple intermediaries and take advantage of tax provision to claim exempt income by significant jump in the share prices through such rigging. The Assessing Officer also made enquiries with Sai Securities by issuance of notice under section 133(6) of the Act. The enquiries however, could not be conducted due to non-service of notice on the ground of incomplete address. The Assessing Officer also observed that the assessee has not indulged in any other share purchase and sale transactions and unrealistic returns received of solitary investments is highly improbable based on the investigation report that these penny stock companies including CCL Ltd. are paper companies. The Assessing Officer held such transactions resulting in large capital gains to be highly implausible and the onus to support such claim of exemption was not discharged by the assessee.
3.3 Consequently, the Assessing Officer resorted to provision of section 69A of the Act and treated the Long Term Capital Gains arising from sale of CCL shares to be unaccounted income of the assessee to the extent of Rs.51,41,219/-. The Assessing Officer also invoked the provision of section 69C and added Rs.1,02,824/- towards unexplained transaction expense. The income returned at Rs.10,64,770/- was accordingly assessed at Rs.63,08,813/- by the Assessing Officer.
4. Aggrieved, the assessee preferred appeal before the CIT(A). The CIT(A) however, denied any relief to the assessee.
5. Further aggrieved, assessee preferred appeal before the Tribunal.
6. When the matter was called for hearing, the learned Counsel submitted at the outset that the Long Term Capital Gains claimed as exempt under section 10(38) of the Act is fully supportable by the documentary evidences placed before the lower authorities and the Revenue authorities have blindly relied upon the investigation report which primarily narrates general modus operandi. The learned Counsel pointed out that CCL International ltd. is a genuine company which is engaged in large scale civil construction work and is a profitable dividend paying company which is discernible from the financial statement placed on record. The learned Counsel further pointed out that the fixed asset based have also increased from 1.30 crore to Rs.23.91 crore in A.Y. 2010-11. CCL has cloaked a turnover of Rs. 72.96 cr and profit after tax 91 lakhs. The shares of CCL International Ltd. have neither been delisted nor suspended for trading on BSE till date nor the company has been under SEBI surveillance. The chart of monthly movements of share prices were also referred to submit that no adverse interference should be drawn in the facts of the case. The learned Counsel thereafter referred to the assessment order for A.Y. 2015-16 in the case of another assessee namely ‘Parth Yadav’ passed under section 147 r.w.s 144B of the Act order dated 27.05.2023 to submit that despite reopening of the assessment alleging escapement of income towards LTCG on sale of CCL Ltd in that case, the Assessing Officer found the transactions bonafide in the similar circumstances. The learned Counsel thus submitted that no adverse inference should be drawn by the AO in the case of the assessee.
6.1 Learned Counsel thereafter, referred to the judgment delivered by the jurisdictional High Court in the case of PCIT vs. Karuna Garg [ITA no. 477/2022 judgment dated 23.11.2022] to contend that mere astronomical increase in the share prices of a company which was not commensurate with the financial parameter of the said company is not a good ground for adverse inference. Reference was made to the judgment rendered in the case of PCIT vs. Prem Lal Gandhi 401 ITR 253 (P&H) where the Hon’ble Punjab and Haryana High Court held that despite purchases made in cash, the gains arising on sale of shares cannot be treated as sham having regard to the facts and the circumstances of that case. Reference was also made to the decisions rendered by the Co-ordinate Bench in the case of Trivikram Singh Toor vs. PCIT 142 taxmann.com 493 (Chandigarh) (2023) in favour of the assessee where gain on sale of scrip namely CCL Ltd. Itself was subject matter of consideration.
6.2 The learned Counsel thereafter, submitted that department proceeded on gross misconception of facts. It cannot be case of Revenue that assessee has not purchased shares in the wake of dematerialisation of shares in the demat account and thereafter, transfer thereof on sale of shares. Both purchase and sale transactions have occurred through banking channel. The documentary evidences have been furnished in support of purchase and sale of shares and transfer of shares in demat form. Thus, the onus to prove that the apparent is not real is on the AO and wrongly shifted to the assessee. The AO has proceeded on conjecture and surmises merely because astronomical increase has happened in the share prices of CCL Ltd. which is not uncommon phenomena in capital market. A reference was made to the judgement rendered by the Hon’ble Delhi High Court in the case of PCIT vs. Krishna Devi to submit that startling spike in penny stock share prices cannot be regarded as a valid ground for a denial of LTCG exemption. In similar vain, reference was made to the Coordinate Bench judgment dated 16.12.2020 in the case of Achal Gupta and others vs. ITO (ITA No.501/LKW/2019)order dated 16-12-2020 to submit that claim of long term capital gains arising on sale of CCL Ltd. was duly accepted by the Tribunal in that case. Another reference was made to the decision delivered by the Hon’ble Delhi High Court in the case of PCIT vs. Reeshu Goel judgment dated 7/10/2019 involving accommodation entries in the scrip of CCL Ltd. wherein the Delhi High Court in that case affirmed the view of the Tribunal in favour of the assessee.
6.3 The learned Counsel thereafter, submitted that there are long line of judicial precedents to support the case of the assessee and thus the action of the Revenue is not justified in law and on facts, and thus requires to be reversed.
7. The learned DR for the Revenue on the other hand relied upon the orders of the lower authorities and also made reference to the judgment in the case of PCIT vs. Swati Bajaj (2022) 139 taxmann.com 352 Calcutta to assail the bonafide of Long Term Capital Gains claim. In rejoinder, the learned Counsel for the assessee referred to the judgment of the Co-ordinate Bench in ACIT vs. Priyanka Ankit Miglani (ITA No.2531/MUM/2021 and others order dated 21.03.2023) wherein the decision was rendered in favour of the assessee after taking note of the judgment delivered in the case of Swati Bajaj case.
8. We have carefully considered the rival submissions and perused the material available on record. The case law cited have also been taken into account. As pointed out on behalf of the assessee, the transaction of existence of purchase and sale of CCL Ltd. giving rise to LTCG claimed to be exempt under section 10(38) of the Act is fully corroborated by the documentary evidences. The shares have been credited in the demat account and transferred out of demat account at the time of sale. Both purchase and sale transactions are carried out through banking channel and by transfer of shares. The prima facie bonafides of existence of transaction executed cannot thus be doubted. It is not the case of the revenue that the capital gain arising to Assessee in not in the nature of LTCG. The case of revenue is that such transactions is an accommodation entry and thus sham. The abnormal increase in prices of share has led to suspicion on bonafides of transaction and was treated as accommodation entry of sham nature.
8.1 The Hon’ble Delhi High Court in the case of Karuna Garg as well as Krishna Devi has held that an astronomical increase in the share price of a company in itself is not a justifiable ground for holding the LTCG to be an accommodation entry.
8.2 As pointed out on behalf of the assessee large number of decisions pronounced by Co-ordinate benches holds the field in favour of the assessee in respect of same scrip of ‘CCL International Ltd.’.
8.3 Significantly, the Assessing Officer in another case namely ‘Parth Yadav’ has framed the reassessment order without making any additions on account of LTCG derived from sale of CCL Ltd. Shares despite reopening the assessment on such ground. Thus, the Revenue itself, in other case, broadly accepted the view point canvassed.
8.4 On the substratum of the company financials, the assessee has also demonstrated that CCL Ltd. is engaged in substantial business with significant turnover and fixed assets base.
8.5 In such backdrop, we are of the view that the addition is not justified based on conjecture and surmise and the assessee is discharged primary onus which lay upon it. The Revenue, on the other hand, could not dislodge the perception that apparent is not real.
8.6 In the light of factual matrix and case laws available on record, we see potency in the plea of the assessee that such capital gains arising on sale of shares cannot be regarded as sham profit and consequently, additions under s. 69A of the Act is not justified. The Assessing Officer has not provided anything on record to justify additions under section 69C of the Act either. The modus operandi spelt by itself is not a adequate ground to impeach the transactions. The judgment in Udit Kalra relied upon by revenue was rendered in the facts of that case and is quite distinguishable. In that case, the financial resources of the company [Kappac Pharma Ltd.] was quite meager and incurring consistent losses as opposed to the facts of the present case. Also, there was specific information that assessee was beneficiary of accommodation entry. Such facts led to adverse conclusion in that case in the setting of facts of that case.
8.7 In the light of delineations, we set aside the order of CIT(A) and direct the AO to delete the additions in question.
9. In the result, appeal of assessee is allowed.
Order was pronounced in the open court on 13.12.2023
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