Harish Kumar HUF Vs ITO (ITAT Chennai)
In this case, the assessee had purchased the shares of penny stocks companies at lesser amount and within a year sold such shares at much higher amount and the assessee had not tendered cogent evidence to explain as to how shares in an unknown company had jumped on higher amount in no time and also failed to provide details of persons who purchased the said shares, as the said transactions were attempt to hedge undisclosed income as long term capital gains. In this connection, in the case of Sanjay Bimalchand Jain v. PCIT, in ITA No. 18/2017, the Nagpur Bench of the Hon’ble High Court of Judicature at Bombay has laid down the law that if the assessee has not tendered cogent evidence to explain as to how the shares in an unknown company had jumped to such an higher amount in no time when the fantastic sale price was not at all possible as there was no economic or financial basis to justify the price rise and if the assessee had indulged in a dubious share transaction meant to account for the undisclosed income in the garb of long term capital gain, such gain has to be assessed as undisclosed credit under section 68 of the Act. In view of the law laid down by the Hon’ble High Court of Bombay, we find that the Assessing Officer has rightly withdrawn the amount of ₹.20,45,457/- which has been claimed by the assessee as exempt under section 10(38) of the Act and assessed the entire sale consideration of ₹.21 ,58,650/- under section 68 of the Act.
FULL TEXT OF THE ITAT JUDGEMENT
This appeal filed by the assessee is directed against the order of the ld. Commissioner of Income Tax (Appeals) 5, Chennai, dated 28.09.2018 relevant to the assessment year 2013-14. The only effective ground raised in the appeal of the assessee is that the ld. CIT(A) has erred in confirming the addition made under section 68 of the Income Tax Act, 1961 [“Act” in short].
2. Brief facts of the case are that the assessee has filed return of income for the assessment year 2013-14 on 19.03.2014 declaring income of ₹. 4,96,580/-. The assessee has long term capital gain and has shown the same under Schedule E1 during the previous year and has shown security transaction tax claiming exemption under section 10(38) of the Act of ₹. 20,45,457/-. The return filed by the assessee was processed under section 143(1) of the Act. As per investigation carried out by the Investigation Wing of the Department in certain cases, it has come to light that large scale manipulation has been done in market price of shares of certain companies listed on the Bombay Stock Exchange by a group of persons acting as a syndicate for the purpose of providing entries of tax exempt bogus long term capital gains to large number of persons (beneficiaries) in lieu of unaccounted cash in order to convert black money into white without payment of income tax. On going through the details given by the investigation wing, the Assessing Officer noticed that the name of Harish Kumar HUF with PAN AADHH6741J is also mentioned in the statement list of clients to whom bogus long term capital gain has been facilitated for the sale of shares of scrip Blue Circle of M/s. Blue Circle Services Ltd. for ₹.21,58,650/- for the financial year 2012-13. Accordingly, the return income filed by the assessee was reopened under section 147 of the Act and notice under section 148 of the Act dated 09.09.2016 was issued and served on the assessee. The case was reopened with the reason that the income of ₹.20,45,457/- for the assessment year 2013-14 has escaped assessment as assessee was one of the beneficiaries who was provided bogus long term capital gains through Private Limited Shell companies/listed penny stock companies. Accordingly, notices under sections 143(2) and 142(1) of the Act were duly served on the assessee. After considering the submissions of the assessee, the report of the Investigation Wing of the Department, confession given on oath under section 131 of the Act by the brokers/promoters/ operators, SEBI’s direction to BSE to suspend trading 331 shell companies stocks, the Assessing Officer concluded that the assessee has been facilitated accommodation entries to bring in his own unaccounted money in the guise of long term gain and thus, the amount of ₹.20,45,457/- claimed as exempt under section 10(38) of the Act has been withdrawn and the entire sale consideration of ₹.21 ,58,650/- was assessed under section 68 of the Act under the head “income from other sources”. On appeal, by following various case law, the ld. CIT(A) confirmed the unexplained income under section 68 of the Act.
3. On being aggrieved, the assessee is in appeal before the Tribunal. When the appeal was taken up for hearing, none appeared on behalf of the assessee or any adjournment petition filed by the assessee despite noting the next date of hearing by making endorsement in the order sheet. Hence, we proceed to decide the appeal on merits after hearing the ld. DR.
4. We have heard the ld. DR, perused the materials available on record and gone through the orders of authorities below. It was the submission before the Assessing Officer that the assessee purchased 2700 shares @ ₹.39.10 per share of Blue Circle Services Ltd. on 20.04.2011 through M/s. Badri Prasad & Sons for ₹.1 ,05,972/-. On 21.10.2011, the said shares of Blue Circle Services Ltd. @ ₹.10/- each have been subdivided into ten equity shares of ₹.1/each and on 10.08.2012, the share broker M/s. Badri Prasad & Sons have transferred the subdivided share of 27000 equity shares of ₹. 1/- each [due to split in 1:10 ratio] into assessee’s demated account. On 14.08.2012, the assessee sold 27000 equity shares of Blue Circle Services Ltd. through the share broking firm M/s. Sugal & Damani Shares Brokers Ltd. for ₹.21 ,51 ,428.69. Accordingly, the assessee claimed exemption under section 10(38) of the Act towards long term capital gains of ₹.20,45,457/- and the same is reflected in Schedule E1 of assessee’s return of income. With this backdrop, the assessee was requested through notice under section 142(1) of the Act to furnish the following details:
1. It is seen that you have sold shares of M/s. Blue Circle Services which is a penny stock company resulting in bogus long term capital gain of ₹.20,45,457/-.
2. Details of shares purchased along with bills, cash receipt from the selling company, copy of share certificate, stock holding list and transaction statement, sales contracts, etc.
3. Name and address of the broker through whom purchased and other details relating to the sale of shares.
4. Profit and loss account and balance sheet, along with schedules, statement of income.
5. Complete set of return of income as filed, VAT returns, Audit Report and sales books along with bills and receipts, etc.
6. Copy of bank accounts and Analysis of bank statements.
7. Name, address, PAN and loan confirmations from the loan creditors and sundry creditors, etc.
8. Name and address of sundry debtors.
9. Rate of interest received and paid
10. Any other details.
The assessee was given final show-cause letter dated 14.11.2017 as to why the amount of ₹.20,45,457/-, which was claimed as exempt under section 10(38) of the Act should not be treated as not genuine and withdrawn and the entire sale consideration of ₹.21 ,58,650/- treated as income under the head ‘income from other sources’ being bogus long term capital gain under section 68 of the Act and taxed accordingly. The reply of the assessee to the show-cause notice reads as under:
“The Assessee is a HUF bearing the PAN Number AADHH6741J. The Assessee filed the return of the income for A. Y. 2012-13 on 02/03/2013 admitting an income of Rs.299,060/- including Long Term Capital Gains on the sale of listed shares of Rs.17,82,211/- which was exempt by virtue of Section 10(38) of the Income Tax Act.
The Assessing Officer, in the show cause notice dated 14/11/2017, has wrongly alleged that the Assessee has indulged in bogus transactions and has colluded with share brokers to earn capital gains. The Assessee submits that this is pure conjecture and is facts and the established principles of law.
The Assessee had, based on advice received, purchased shares in Blue Circle Services Limited on 20/04/2011. Subsequently, the Assessee had sold the shares on 1 4/08/2012. As these shares had been held by the Assessee for over 12 months, it was a long term capital asset and had earned Long Term Capital Gains of Rs. 20,45,457/-. The transactions are complete in all aspects and have been executed through contract notes and are duly reflected in the demat account statement of the Assessee, confirming the shares are in its name. This is also duly reflected in the financial statements and the bank statements of the assessee (this has been made available to the ITO vide our letters dated 10/10/2017 and 24/10/2017). It is also submitted that the share has been sold at the rate as traded on the registered stock exchange.
The Assessee further submits there exists no nexus between the Assessee end, either the broker or the company, other than that of a client of a broker and a shareholder of the company. The assessee is in no way concerned with the activity of the broker nor has any control over the same. It is submitted that the impugned information is opposed to facts, establishment principles of law and is pure conjecture. Additions cannot be made merely on the basis of presumption and suspicion, however strong it may appear, but needs to be corroborated by some evidence to establish a link that the assessee had brought back his unaccounted income in the form of LTCG.
The Assessee submits that all transactions are genuine transactions which were done on bonafide advice and belief. There were no malafide or malicious or malicious intentions in any of the transactions of the Assessee.
In the light of the above facts stated, the proofs, submitted to you and explanations provided it is prayed that having sold the shares after holding them for 1 year and 4 months, Long Term Capital Gains from the aforesaid sale be allowed. “
5. The Directorate of Investigation had undertaken the accommodation entry of Long Term Capital Gain (LTCG) investigation. A very large number of beneficiaries who have together taken huge amount bogus entries of L TCG were identified by the investigation wing. As a result of the investigation, 64811 beneficiaries involving bogus LTCG of nearly 38,000 crores have been identified.
6. The Assessing Officer observed that the information which leads to the conclusion that the transaction of purchase/sale of shares is an accommodated entry to earn LTCG and to claim the same as exempt under section 10(38) of the Income tax Act, after holding period of 12 months. The observations made by the Investigation Wing and SEBI are reproduced as under:
The Calcutta Stock Exchange Limited, is the biggest share broker in the list. It is clarified that Calcutta Stock Exchange as a broker is a set of many sub brokers. These sub brokers have taken BSE Terminal through Calcutta stock Exchange Ltd. Most of these sub brokers are involved in providing accommodation entry of LTCG, through floating Jamakharchi/bogus clients. It is further seen from the report that the Calcutta Stock Exchange as a broker, have traded in penny stocks/share of shell companies which include shares of M/s. Blue Circle Services Ltd also.
It is further submitted that the Securities and Exchange Board of India (SEBI) has in the recent past, passed some orders on the issue of manipulation of share market for providing accommodation entry of bogus LTCG. SEBI considering the inputs from income tax Department as well as from its own surveillance system and that of the stock exchanges has taken appropriate action in case of the suspected scrips. These actions include passing interim direction, suspending the trade, reducing the price band etc. SEBI has taken the issue of penny stocks being traded for bogus LTCG, very seriously. They have already been intimated about the earlier actions of the Directorate of Investigations, Kolkata, where entry operators had accepted their involvement in price manipulation of scripts and providing accommodation entry of LTCG/STCL in lieu of cash commission. The SEBI has passed several orders where it has shown that how bogus entities in connivance with the share brokers, are involved in dubious trading, just to launder money.
In nutshell, the investigation carried out by the department has proved that a scheme was hatched by various players to obtain/provide accommodation entry of bogus LTCG through manipulation of stock market.
7. As per the provisions of Act, any Capital Gain arising out of transfer of Long Term Capital Asset being an equity share in a company or a unit of an equity oriented fund, on which STT is paid, is exempt from taxation point of view. This means that if shares of any company are held for more than a period of 12 months and are then sold on any recognized Stock Exchange (on which STT is paid on the transactions), then the capital gain arising out of this transaction is exempt under section 10(38) of the Act. Since the minimum holding period is 12 months for becoming eligible for the definition of LTCG, the beneficiary with the help of the broker manipulates the date of purchase of shares. For such backdated purchases, the broker also issues backdated contract notes, bills, etc. to the assessee so as to give genuine colour to the otherwise bogus transactions. The back dating of purchases is done by the brokers by showing the purchases as off market deal. The crucial problem arises as to how to show payments for such back-dated purchase. This is done in either of the following two methods. The entire purchase price is paid in cash or, which is more subtle method. It may be mentioned that sometimes purchase price can also be paid by cheque, and yet the sale transactions of shares, resulting into LTCG, may be bogus. The reason being the rates of penny scrips are artificially hiked by the vested interests, said there are no real buyers for such scrips when rates are quoted very high in the market. Thus, even if the purchases are genuine in a given case, the sales of such penny scrips can be bogus because the market rates are manipulated. By the modus as stated above, the unaccounted money is laundered and brought into the books as capital gains on account of transactions in shares attracting either full tax exemption or concessional rates of taxation. For engineering such as bogus LTCG, the operator also charges – quite naturally -, a certain amount of commission/ service charges, which may range from 4% to 8%, depending upon the bargaining power of the operator and the beneficiary. These type of transactions usually occurs in the penny stock of the shares. The term penny stock is defined by US authorities and by Indian authorities also and generally, the stock whose floating capital in the market are below ₹.50 crores are being considered as a penny stock.
8. To jack up the price of M/s. Blue Circle Services Ltd and for easy manipulation of the share prices, the first step was splitting of the shares, by which one share was split into 10 shares. Then the price of the share was artificially rigged through ‘Circular Trading’ by ‘Operators’ and ‘Paper Companies’ and their associates. In this case, it is a direct evidence that share of M/s. Blue Circle Services Ltd. was artificially hiked to create non-genuine LTCG to the assessee along with other beneficiaries and therefore, SEBI has passed order u/s1 1(1), 11(4) & 11(e) of SEBI Act, 1992.
9. The Investigation wing of the Income Tax Department, Kolkata conducted inquiries into these dubious transactions of accommodating bogus LTCG, by artificially hiking the price of the shares of certain companies by circular trading controlled by certain ‘Operators’ and some “Paper Companies’. Based on the information passed on, SEBI also conducted investigation on to these rigging of share prices and found correct, and action were initiated against the persons and companies responsible.
10. The company, M/s. Blue Circle Services Ltd is one of such companies which provided bogus LTCG to parties. The financials of the company also does not support to the abnormal sky-rocketing of the share price, without having any awesome Profit/EB DITA margin/EPS/Bon us/Dividend etc. From the financial of M/s. Blue Circle Services Ltd, the Assessing Officer noticed that there is a pre-arranged trade pattern and unrealistic boost in the shares figures. The share price increased multi fold even without any semblance of any positive factor, which clearly shows that there was artificial rigging by circular trading of shares forming cartel as could be evidenced from the trading details verified by SEBI on BSE Exchange.
11. During the course of investigation, these ‘Operators’ and Directors of the ‘Paper Companies’ were questioned and statements were recorded on In these statements, they have submitted that these companies were plotted with the intention of providing bogus LTCG to required parties on a ‘commission’. They have also submitted that parties were approached and the money (in cash) received from such parties were routed through various bank accounts managed by these operators and paper-companies. Finally the same was paid back to the parties through banking channels, through Stock Exchange, as the price paid to the shares purchased from these parties through Stock Exchange (i.e., in the guise of the sale consideration received by the parties for the shares sold through Stock Exchange). (It is also to be noted that the shares sold by the parties were purchased by none other than these operators and their associates. No public interest was not at all there in the shares of the company)
12. Statements were also recorded from many of the brokers involved in these operations. Most of the persons have admitted that the scrip Blue Circle-508939 (also other scrips like Esaar India Ltd, Kailash Auto-511357, CCL-531 900, TUNI TEXTILE··531411, NCL RESEARCH-530557, SURABHI -512311, UNNO-519273, KAPPAC-506938) were used for arranging bogus LTCG & they have relaxed the KYC norms required for opening of account & they have also admitted that their clients are paper companies which in some cases not found as existent given on their address. Thus it is found that there is a group of persons working in tandem to provide arranged capital gain by receiving cash in lieu of it. They have confessed that as a broker they were actively engaged in providing entries in the form of LTCG in collusion with other operators. The confession by brokers is also a circumstantial evidence against the assessee that LTCG is arranged one.
13. These persons, who were investigated, have admitted on oath under section 131 of the Act that bogus entry for LTCG was given for various penny stocks by way of arranged purchases and sales through the entities/persons under their control. The modus operandi of the transactions was to accept cash and arrange for issuing cheques after charging certain commission. The confession given on oath under section 131 of the Act by the brokers/ promoters/operators is also a circumstantial evidence against the assessee that the so called LTCG is arranged one. The SEBI has also asked various stock exchanges to suspend trading in many such scrips. In the instant case also SEBI has directed BSE to suspend trading in as much as 331 taxguru.in shell companies stocks, which includes the impugned scrips Blue Circle Services.
14. Under the above facts and circumstances and by following various decision, the Assessing Officer withdrawn the exemption claimed by the assessee under section 10(38) of the Act and the entire sale consideration of ₹.21 ,58,650/- was assessed under section 68 of the Act and taxed.
15. After considering the submissions of the assessee, the ld. CIT(A) observed that the shares of the assessee were purchased through off market and not through stock exchange. M/s. Blue Circle Services did not pay dividend or did not issue bonus shares during the period of holding of these shares by the assessee, corresponding to the increase in the price of the share of M/s. Blue Circle Services. During this period, there has been no corporate announcement by M/s. Blue Circle Services which suggests that the company is undertaking any substantial development activity and moreover, the assessee has not disputed the above facts. By following the decision of the Tribunal in the case of ITO v. Shamim M. Bharwani [2016] 69 taxmann.com 65 (Mumbai – Trib.) and by following the decision of the Hon’ble High Court of Bombay in the case of Sanjay Bimalchand Jain v. PCIT in [2018] 89 taxmann.com 196 (Bombay), the ld. CIT(A) confirmed the action of the Assessing Officer to treat the entire sale proceeds of the above mentioned penny stock as income under section 68 of the Act.
16. In this case, as per assessee, 2700 shares at ₹.39.20 of M/s. Blue Circle Services Limited were purchased from M/s. Badri Prasad & Sons on 20.04.2011 through off market, then the 27000 equity shares of Blue Circle (due to split in 1:10 ratio) is transferred into assessee’s account only on 10.08.2012 by M/s. Badri Prasad & Sons. There is no transfer certificate from M/s. Blue Circle Services Limited regarding the transfer but only a computer generated letter from M/s. Badri Prasad & Sons indicating the transfer of 27000 shares of Blue Circle into the assessee’s demat account. The Assessing Officer issued a letter to the seller M/s. Badri Prasad & Sons from whom the assessee had purchased the above shares and called for the following details:
a. “The assessee had purchased 2700 shares of M/s. Blue Circle Services Ltd. on 20.04.2011 and he had paid cash of ₹.1,05,840/- for the same. The said shares were split in 1: 10 ratio and on 10.08.2012. 27000 shares were transferred by you to the assessee. You are requested to submit the details as to how the amount was given to you for the purchase of the said Apart from your account copy, you are requested to submit the transaction statement, pool account and self account related to of M/s. Blue Circle Services Ltd.
b. The client ID of the assessee.
c. How many shares of the company has been purchased and sold by you during the period 2009-10 to 2015-16?
d. When did the assessee become your client? Give a copy of the client application form
e. Receipt of the same in your books of account.
f. The share ledger page related to the aforesaid company.”
However, the aforementioned letter was returned by the postal authorities as unserved. It is onus on the part of the assessee to prove the genuineness of the transaction. But, the assessee has not proved the genuineness of the transaction.
17. The assessee had sold a total of 27000 shares of M/s. Blue Circle Services Ltd in this year and from the broker notes for sale of shares given by M/s. Sugal & Damani Share Brokers Ltd, the trade pattern adopted is as under:
