Kalyan Nath

Kalyan Nath
Additional Commissioner,
Income Tax, Range-13, Kolkata
kalyan.nath@incometax.gov.in

More than 25 year of experience as an officer of Income Tax Department in various departments including Investigation, Central, Corporate, TDS and Transfer Pricing charges. Regular visiting faculty of DTRTI, Kolkata and Visiting Sr. DR of ITAT, Kolkata. Received appreciation letters for Contribution in TDS as well as DTRTI, Kolkata. He Was Member of contributors for “Investigation Manual” and TPO manual on “Financial Transactions”.

Executive Summary

The provision for exemption of long term capital gains from shares requiring payment of securities transaction tax has been taken advantage by unscrupulous tax evaders. An organised tax evasion involving the brokers of stock exchanges, taxpayers and their consultants, entry operators and exist operators was in action for quite some time. The Investigation Directorate, particularly the Kolkata wing found out the modus operandi of such activities and cases, popularly known as ‘penny stock cases’ are before the Assessing Officers. This article seeks to present the salient features of such transactions and the approach to be adopted by the Assessing Officers while completing such assessments. References have been made to useful revenue favourable cases laws with accompanying comments.”

Beware Of Stock Scams

The Long Term Capital Gains (LTCG) arising on sale of Equity Shares or Units of an Equity Oriented Mutual Fund on which Securities Transaction Tax (STT) is paid was exempt from income-tax under clause (38) of section 10 of the Income Tax Act 1961. This section was initially introduced vide Finance Act, 2004 with effect from AY 2005-­06, on the basis of the Kelkar Committee report to attract investments from Foreign Institutional Investors (FII).

However, Finance Act 2018 brought a radical change in taxation of long-term capital gains (LTCG) arising on transfer of equity shares of company, units of equity oriented mutual funds and units of business trust (‘specified capital asset’).

The amendment has withdrawn the exemption granted under section 10(38) of Income-tax Act, 1961 (‘ITA’) and introduced concessional 10% tax (plus applicable surcharge and cess) on LTCG exceeding Rs 1 lakh. Further, all gains arising on specified capital asset up to 31 January 2018 have been grandfathered.

Taking advantage of this beneficial provision of Act, several unscrupulous tax payers resorted to sham/bogus shares transaction to convert their unaccounted money into white money, in the garb of Long term capital gain.

The investigation department, specially the Kolkata wing unearthed the modus operandi of this huge scam after investigation into the affairs of number of Brokers, Entry Operators and Company owners etc.

Interested assesses purchased shares of companies having no net worth at a dart cheap rate (eg @ Rs. 2/share) in the beginning with the connivance of the scam operators. Therefore the share prices were manipulated in synchronised trading to achieve the desired price level (eg Rs. 1000/share). Then assesses were given opportunity to sell such shares through stock exchanges and in the process, book huge tax free long term capital gain.

The investigation into such organised scam, identified hundreds of such stocks used for bogus LTCG, nailed the brokers and their associates, Entry operators controlling hundreds of such stocks used for bogus LTCG, nailed the brokers and their associates, Entry operators controlling hundreds of shell companies and other entities to siphon the money through several or multiple layers

The common pattern in all such transactions are

1. Purchase of stock at rock bottom price

2. No Financial credibility of the company, whose shares are purchased by the investors.

3. Bell Pattern in share price movement i.e. once price target is achieved price falls back to minimum.

4. No rhyme or reason for sudden spurt of share price, defying Index or similar share price movements.

5. Promoters of shares are also not from any established groups, in fact they are of people of no means.

6.  Price escalation through synchronised trading within limited parties, mostly entities controlled by the entry operators.

7. Statement recorded during search or survey operations conducted by the investigation wing clearly established the fact that price of the shares are manipulated with the sole aim of providing bogus Capital Gain or Loss.

It is therefore very much important that Assessing Officers (henceforth referred to as AO) make all out effort to bring out maximum possible facts to prove that the LTCG/LTCL claimed by the assesses are in reality is a Sham/Bogus transaction.

Report of the Investigation Department along with the independent enquiry by the AO in this matter play a very important role to expose the misdeed of the assessees. A little research on the SEBI website also helps them to pin point the broker and/or, scrip, which were sometimes banned by SEBI for price manipulation or other irregularities.

The other most important part is to establish the involvement of the assessees in this scam/manipulative transaction. Some of the issues in this regard are discussed below.

1. Purchase of penny Stock (which may get merged with a listed company later). Cash Purchase, purchase from private parties outside the stock exchange.

2. Dematerialisation after several days of purchase.

3. The reason for investment in the unknown, financially weak company (even in unlisted shares). The common reply of the assessees is “advised by friend”, which proves that the assessee has no real reason to explain the transaction. Analysis of other financial transaction and/or investments of the assessees show that how prudent are other decisions excepting this penny stock.

4. As per investigation report, penny stock companies are closely held companies. Therefore to buy or sell these shares the counter party must be an entity of the entry operators. The statement of the entry operators and /or brokers can be matched with that of the seller or exit providers of the penny stocks.

This may not be exhaustive but the AO must examine fact of the each case of penny stock separately. The most important part is establishing the link of the assessee to these share scams. In most assessment order this vital link is missing. Based on enquiry the AO must bring on record the conduct or behavior, of the assessee, which a reasonable investor/trader will never do.

The cash trail of exit provider (the purchase of penny stock at high price) is also a good evidence for the revenue. The AOs are advised to read the investigation report thoroughly and relate it to the conduct of the assessee in investment. Every single point of irregularity must be brought on the record/order.

Recently in a number of cases the appellate authorities examined the penny stock modus operandi minutely and concluded that these are sham /bogus transactions and such outstanding profit in penny stock is against the human probability.

The Hon’ble Apex Court in Civil Appeal No.1969 of 2011 in the case of SEBI Vs. Rakhi Traders (P) Ltd (with Civil Appeal No.3174- 3177 of 2011 and Civil Appeal No.3180 of 2011) vide its order dated 08.02.18 observed as follows:

“considering the reversal transaction, quantum price and time and sale, parties being persistent in number of such huge transaction with huge price variations, it will be too naive to hold that the transactions are through screen based trading and hence anonymous. Such conclusion would be overlooking the prior meeting of minds involving synchronization of buy and sell order and not negotiated deals as per the Board’s Circular. The impugned transaction are manipulative/ deceptive device to create desired loss and/as profit. Such synchronized trading is violative of transparent norms of trading in securities…………….. ”

Although this observation is not in any Income tax case but squarely applicable in all penny stock cases.

The Hon’ble High Court, Delhi in the Udit Kalra vs- ITO, Ward-56(1), Delhi (ITA 220/2019 & CM No. 10774/2019) has examined the penny stock case thoroughly and observed..

“The main thrust of the assessee’s argument is that he was denied the right to cross-examination of the two individuals whose statements led to the inquiry and ultimate disallowance of the long term capital gain claim in the returns which are the subject matter of the present appeal.

This court has considered the submissions of the parties. Aside from the fact that the findings in this case are entirely concurrent A.O., CIT(A) and the ITAT have all consistently rendered adverse findings, what is intriguing is that the company (M/s Kappac Pharma Ltd.) had meagre resources and in fact reported consistent losses. In these circumstances, the astronomical growth of the value of company’s shares naturally excited the suspicions of the Revenue.

The company was even directed to be delisted from the stock exchange. Having regard to these circumstances and principally on the ground that the findings are entirely of fact, this court is of the opinion that no substantial question of law arises in the present appeal.

This appeal is accordingly dismissed.”

The Hon’ble ITAT, Delhi in this case (ITA No. 6717/ DEL/2017 [Assessment Year: 2014-15]) observed that ….

“5. I have heard both the parties and perused the records especially the impugned order. I find that the assessee is an individual and the amount of cash credit Rs. 27,68,457/-. However, on perusing the assessment order, I find that there was a specific information that assessee has indulged in non-genuine and bogus capital gain obtained from the transactions of purchase and sale of shares of M/s Kappac Pharma Ltd., a Mumbai based company.

It is noticed that the purchase transaction has been done off market in physical form by paying cash.

The assessee has purchased the share M/s Kappac Pharma Ltd. in physical form and thereafter, the same have been converted into electronic mode. 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 account/ documents. Assessee is not a regular investor in shares. The assessee has failed to furnish the proof of source for the purchase transactions.

Thus, the entire transactions are against human probability. Also considering the findings of the Investigation Wing, inquiries conducted in the case of assessee, brokers, operators and the entry providers and the nature of transaction entered into by the assessee the LTCG of Rs. 27,20,457/- claimed exempt u/s. 10(38) of the Act by the assessee cannot be allowed and the amount of Rs. 27,68,457/- received back as sales proceeds on sale of shares was required to be added back towards his taxable income under section 68 of the Act. The above amount of Rs. 27,68,457/- was deemed as income of the assessee u/s. 68 of the Act, over and above, the income already declared in ITR during AY 2014-15.

In view of above discussions, the landmark decision of the Hon’ble Supreme Court in the case of McDowell and Company Limited, 154 ITR 148 is squarely applicable in this case wherein it has been held that tax planning may be legitimate provided it is within the framework of the law and any colourable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by dubious methods. However, the case laws cited by the Ld. counsel for the assessee are on distinguished facts, hence, not applicable in the instant case. The assessee has not raised any legal ground and argued only on merit for which assessee has failed to substantiate his claim before the lower revenue authorities as well as before this Bench. In view of above discussions, I am of the considered opinion that Ld. CIT(A) has rightly confirmed the addition in dispute, which does not need any interference on my part, therefore, I uphold the action of the Ld. CIT(A) on the issue in dispute and reject the grounds raised by the Assessee.”

Therefore, both the Delhi High court and the ITAT concurred on the fact that whole transaction was a colourable device.

In the case of Smt.Tharakumari Vs. The Income Tax Officer, Non-Corporate Circle – 6, Chennai (Tax Case Appeal No. 128 of 2019), Hon’ble Madras High Court observed (vide its or der dated 11.02.19) ……

“6. Similarly the learned Tribunal has also held that the notice served upon the Assessee was returned unserved as is seen from paragraph No.5 of the order passed of the learned Tribunal. The Assessee seems to have filed a Miscellaneous Application before the learned Income Tax Appellate Tribunal for setting aside the ex-parte order and for condoning the delay in filing such Miscellaneous Application. These also came to be rejected by the learned CIT vide communication dated  31.08.2018. The relevant findings of the learned Tribunal from the impugned order are quoted below for ready reference:-

“7. We have perused the orders and heard the contention of the Id. Departmental Representative. Assessee had not brought in any evidence before the Id. Assessing Officer or Id. Commissioner of Income Tax (Appeals) to show that the statement given by Shri. Deepak Patwari on oath on  22.07.2013 before the Directorate of Income Tax (Inv) Kolkata was incorrect, except for saying that she had no knowledge about the said person. Nothing was forthcoming from the Assessee as to how she identified Luminaireire Technologies Limited for investment and how she sold its shares. Assessee failed to bring in any evidence to show that long term capital gains claimed by it was correct. In our opinion the lower authorities were justified in taking a view that such claim arise from sham transactions made through entry providers. We do not find any reason to interfere with the orders of the lower authorities.”

7. Thus it appears that while it was for the Assessee to appear and adduce the relevant evidence for the genuineness of the transaction of sale of the shares, the Assessee was not vigilant and co­operative enough and did not produce the relevant evidence before the authorities below and did not even appear before the appellate authorities concerned to contradict the case against her, as set up by the Revenue during the course of assessment proceedings. This has resulted in the impugned findings of facts against the Assessee about the nature of the transactions of sale of shares of a shell company as sham and the same being taxed as ‘undisclosed income’ under Section 68 of the Act. Thus these findings of facts, cannot be said to be perverse in any manner and therefore we do not find any substantial question of law to be arising under Section 260-A of the Act before this Court, requiring our further consideration in this case and hence the appeal filed by the Assessee is liable to be dismissed.”

Here the Hon’ble High court highlighted the facts that the assessee failed to explain the reason for purchase of penny stock, rebut the statement given by the entry operator etc. And concluded that no perversity on the fact that it was a sham transaction.

Recently, the Hon’ble Delhi High Court in the case of Suman Poddar Vs. ITO ITA 841/2019 (vide order dated 17.09.19) decided a penny stock case in favour of the revenue.

“7. Thus, Tribunal has in depth analyzed balance sheets and profit and loss accounts of Cressanda Solutions Ltd. which shows that astronomical increase in share price of said company which led to returns of 491% for Appellant, was completely unjustified. Pertinently, EPS of said company was Rs. 0.01/- as in March 2016, it was Rs. – 0.01/-as in March 2015 and -0.48/- as in March 2014. Similarly, other financials parameters of said company cannot justify price in excess of Rs. 500/- at which Appellant claims to have sold said shares to obtain Long Terms Capital Gains. It is not explained as to why anyone would purchase said shares at such high price.

Tribunal goes on to observe in impugned order as follows:

10. With such financials and affairs of business, purchase of share of face value Rs. 10/- at rate of Rs. 491/- by any person and assessee’s contention that such transaction is genuine and credible and arguing to accept such contention would only make decision of judicial authorities fallacy.

11. evidences put forth by Revenue regarding entry operation fairly leads to conclusion that assessee is one of beneficiaries of accommodation entry receipts in form of long-term capital gains. assessee has failed to prove that share transactions are genuine and could not furnish evidences regarding sale of shares except copies of contract notes, cheques received against overwhelming evidences collected by Revenue regarding operation of entire affairs of assessee. This cannot be case of intelligent investment or simple and straight case of tax planning to gain benefit of long-term capital gains. earnings @ 491% over period of 5 months is beyond human probability and defies business logic of any business enterprise dealing with share transactions. net worth of company is not known to assessee. Even brokers who coordinated transactions were also unknown to assessee. All these facts give credence to unreliability of entire transaction of shares giving rise to such capital gains. ratio laid down by Hon’ble Supreme Court in case of Sumati Dayal vs. CIT, 214 ITR 801 is squarely applicable to case. Though assessee has received amounts by way of account payee cheques, transactions cannot be treated as genume in presence of overwhelming evidences put forward by Revenue. fact that in spite of earning such steep profits, assessee never ventured to involve himself in any other transaction with broker cannot be mere coincidence of lack of interest. Reliance is placed on judgment in case of Nipun Builders and Developers Pvt. Ltd. (supra), where it was held that it is duty of Tribunal to scratch surface and probe documentary evidence in depth, in light of conduct of assessee and other surrounding circumstances in order to see whether assessee is liable to provisions of section 68 or not. In case of NR Portfolio, it was held that genuineness and credibility are deeper and obtrusive. Similarly, bank statements provided by assessee to prove genuineness of transactions cannot be considered in view of judgment of Hon’ble court in case of Pratham Telecom India Pvt. Ltd., wherein, it was stated that bank statement is not sufficient enough to discharge burden. Regarding failure to accord opportunity of cross examination, we rely on judgment of Prem Castings Pvt. Ltd. Similarly, Tribunal in case of Udit Kalra, ITA No. 6717/Del/2017 for assessment year 2014-15 has categorically held that when there was specific confirmation with Revenue that assessee has indulged in non-genuine and bogus capital gains obtained from transactions of purchase and sale of shares, it can be good reason to treat transactions as bogus. differences of case of Udit kalra attempted by Ld. AR does not add any credence to justify transactions. Investigation Wing has also conducted enquiries which proved that assessee is also one of beneficiaries of transactions entered by Companies through multiple layering of transactions and entries provided. Even BSE listed this company as being used for generating bogus LTCG. On facts of case and judicial pronouncements will give rise to only conclusion that entire activities of assessee is colourable device to obtain bogus capital gains. Hon’ble High Court of Delhi in case of Udit Kalra, ITA No. 220/2009 held that company had meager resources and astronomical growth of value of company’s shares only excited suspicion of Revenue and hence, treated receipts of sale of shares to be bogus. Hon ‘ble High Court has also dealt with arguments of assessee that he was denied right of cross examination of individuals whose statements led to enquiry. ld. AR argument that no question of law has been framed in case of Udit Kalra also does not make any tangible difference to decision of this case. Since additions have been confirmed based on enquiries by Revenue, taking into consideration ratio laid down by various High Courts and Hon’ble Supreme Court, our decision is equally applicable to receipts obtained from all three entities. Further, reliance is also placed on orders of various Courts and Tribunals listed below. MK. Rajeshwari vs. ITO in ITA No.17231Bangl2018, order dated 12.10.2018. Abhimanyu Soin vs. ACIT in ITA No. 9511Chdl2016, order dated 18.04.2018. Sanjay Bimalchand Jain vs. ITO 89 taxmann.com 196. Dinesh Kumar Khandelwal, HUF vs. ITO in ITA No. 58 & 591Nagl2015, order dated 24.08.2016. Ratnakar M Pujari vs. ITO in IT No. 9951Muml2012, order dated 03.08.2016. ITA 841/2019 Page 9 of 10 Disha N. Lalwani vs. ITO in ITA No. 6398 I Mum I 2012, order dated 22.03.2017. ITO vs. Shamim. M Bharwoni [2016] 69 taxmann.com 65. Usha Chandresh Shah Vs ITO in ITA No. 6858 I Mum I 2011, order dated 26.09.2014. CIT vs. Smt. Jasvinder Kaur 357 ITR 638.

12. facts as well as rationale given by Hon‘ble High Court are squarely applicable to case before us. Hence, keeping in view overall facts and circumstances of case that profits earned by assessee are part of major scheme of accommodation entries and keeping in view ratio of judgments quoted above, we, hereby decline to interfere in order of Ld. CIT(A). (emphasis supplied)

8. From above extract, it would be seen that Cressanda Solutions Ltd. was in fact identified by Bombay Stock Exchange as penny stock being used for obtaining bogus Long Term Capital Gain. NO evidence of actual sale except contract notes issued by share broker were produced by assessee. No question of law, therefore arises in present case and consistent finding of fact returned against Appellant are based on evidence on record.”

The Hon’ble High Court concluded after detailed discussion that such phenomenal rise in penny stock is nothing but bogus. Also Payments by cheques, Contract notes by the brokers etc cannot camouflage the bogus transaction in this case.

The Hon’ble Bombay High Court (Nagpur Bench) in the case of Sanjay Bimalchand Jain VS. ITO, Ward -4(2), Nagpur had examined a penny stock case (vide order dated 10/042017). And came to th e conclusion that abnormal price rise in penny stock meant to account for the undisclosed income in the garb of long term capital gain.

“(iii) On hearing the learned counsel for the assessee and on a perusal of the orders of the income tax authorities, it appears that there is no scope for interference with the said orders in this appeal. By referring to the aforesaid facts, which are narrated in the earlier part of this order, the authorities found that the assessee had made investment in two unknown companies of which the details were not known to her. It was held that the transaction of sale and purchase of shares of two penny stock companies, the merger of the two companies with another company, viz. Khoobsurat Limited did not qualify an investment and rather it was an adventure in the nature of trade. It was held by all the authorities that the motive of the investment made by the assessee was not to derive income but to earn profit. Both the brokers, i.e. the broker through whom the assessee purchased the shares and the broker through whom the shares were sold, were located at Kolkata and the assessee did not have an inkling as to what was going on in the whole transaction except paying a sum of Rs.65,000/in cash for the purchase of shares of the two penny stock companies. The authorities found that though the shares were purchased by the assessee at Rs.5.50 Ps. Per share and Rs.4/per share from the two companies in the year 2003, the assessee was able to sell the shares just within a years time at Rs.486.55 Ps and Rs.485.65 Ps per share. The broker through whom the shares were sold by the assessee did not respond to the assessing officer’s letter seeking the names, addresses and the bank accounts of the persons that had purchased the shares sold by the assessee.

(iv) The authorities have recorded a clear finding of fact that the assessee had indulged in a dubious share transaction meant to account for the undisclosed income in the garb of long term capital gain. While so observing, the authorities held that the assessee had not tendered cogent evidence to explain as to how the shares in an unknown company worth Rs.5/had jumped to Rs.485/in no time. The Income Tax Appellate Tribunal held that the fantastic sale price was not at all possible as there was no economic or financial basis as to how a share worth Rs.5/of a little known company would jump from Rs.5/to Rs.485/. The findings recorded by the authorities are pure findings of facts based on a proper appreciation of the material on record. While recording the said findings, the authorities have followed the tests laid down by the Hon’ble Supreme Court and this Court in several decisions. The findings do not give rise to any substantial question of law. The judgments reported in (2012) 20 Taxman.com 529 (Bombay) (CIT Versus Jamnadevi Agrawal), (1957) 31 ITR 294 (Bombay) (Puranmal Radhakishan Versus CIT), (1970) 77 ITR 253 (SC) (Raja Bahadur Versus CIT) and (2015) 235 Taxman 1 (Bom) (CIT Versus Smt.Datta M. Shah) and relied on by the learned counsel for the assessee are distinguishable on facts and cannot be applied to the case in hand.”

In a few recent decisions,the Hon’ble ITAT, Delhi rejected the claim of exemption of long term capital gains of the assesses from penny stocks. After details discussion of the facts of the cases, the court opined that investigation reports and price movement of penny stocks clearly exposed bogus nature of these transactions. And assessees failed to explain the reason to invest in a such worthless companies.

The Hon’ble ITAT “G” bench, New Delhi in the case of Shri Sandeep Bhargava, Vs. ACIT, Circle-60(1), New Delhi, (ITA No.420/ Del/2019) vide its order dated 20/08/2019 decided …..

“5.10 In the case of M.K. Rajeshwari Vs. ITO (supra), the coordinate bench of the Tribunal has held that while dealing issue of long-term capital gain accrued to the assessee, one has to examine the financials of the company whose shares were inflated within a short period and after the sharp rise in the price of shares, it again comes down.

The coordinate bench of the Tribunal in the case of Shamim M. Bharwani (supra) held that where the assessee claimed income earned from sale of shares as exempt under section 10(38), in view of the fact that purchase transaction of said shares was not recorded in the stock exchange and moreover, selling rates were artificially high later on with no real buyers, Assessing Officer rightly rejected assessee’s claim and added amount in question to his taxable income under section 68 of the Act. 5.12 In the light of the ratio decidendi of the cases cited above, the contention of the assessee that the transaction leading to long-term capital gains are supported by documents such as sale and purchase invoices, bank statement etc., cannot be accepted in view of the facts and circumstances of the case brought on record by the Assessing Officer after proper examination of the material facts and taking into account corroborating evidences gathered by the Directorate of Income-tax (Investigation), Kolkata, involving a network of brokers and operators engaged in manipulation of market price of the shares of the shares of the HBC bioscience controlled and managed by such person with a purpose to provide accommodation entries in the form of long- term capital gains. The onus was on the assessee to prove the transaction leading to claim of long-term capital gain was a genuine transaction. The assessee failed to justify manifold increase in the prices of the share of ‘HBC bioscience’ despite weak financials of the company. Initial investment in the company of unknown credential and subsequent jump in the share prices of such a company, cannot be an accident or windfall but could be possible, because of manipulation in the share prices in a pre planned manner, as brought on record by the Assessing Officer. In view of the failure on the part of the assessee to discharge his burden of proof and explain nature and source of the transaction, in our opinion, the Ld. CIT(A) has rightly confirmed the addition in dispute, which does not require any interference on our part. We accordingly, uphold the action of the Ld. CIT(A) on the issue in dispute and dismiss the grounds raised by the assessee on this issue.”

Similar decisions were taken in the following case Satish Kishore Vs. ACIT, Circle-47(2), New Delhi, (ITA No.1704/Del/2019) vide its order dated 06/09/2019 by the same bench.

“6.1 Whereas, according to the Revenue Authorities, the circumstantial evidences establish that the transactions of the assessee are against human probabilities and are not genuine purchase and sale and those are only accommodation entries, thus nature and source of the amount credited against sale of shares is unexplained cash credit under section 68 of the Act. 6.2 The various circumstantial evidences brought on record by the Revenue Authorities, can be summarized as under:

i.  As against availability of listed share/securities for purchase through stock exchange, the assessee purchased unknown and unlisted share/securities that too through few brokers. It is not clear as how and from which sources, the assessee identified potential of those shares. The assessee himself claimed to be not a regular investor in shares and securities.

ii. The purchase of all the shares have been shown to be made in cash, without any supporting cash receipts from sellers of those shares.

iii. The shares claimed to have been purchased in physical form had been dematerialized only immediately prior to their sale on the stock exchanges.

iv.  At the time of the purchase the value of the shares was very low and after purchase by the assessee, the prices of the shares have gone astronomically, without any commensurate financial results of those companies.

v.  The shares have been sold within a small period as soon as after attaining peak value and thereafter share prices have come down again at their original level around purchase price.

vi. The shares have been sold through SMS Global Securities and VP Consultant Ltd. One of the entry operators, Sh Pwan Kayan from Kolkata in his statement on oath, has admitted that M/s. SMC Global Securities was part of accommodation entry syndicate providing accommodation entries.

vii.  The trading in most of the shares dealt by the assessee was suspended by the stock exchange due to abnormal behaviour of trading of shares.

We have also perused the evidences of purchases of shares by the assessee submitted in the paper book. On perusal of page 4 of the paper book we find that Shivam Trading Company has issued a debit note to the assessee for sale of 18,000 shares of Pawansut Holding Ltd., but in this debit note the serial numbers of the shares transferred to the assessee is not mentioned. Similarly, on page 5 of the paper book a copy of the debit note issued by Fair Finwiz is available, according to which assessee was sold 450 shares of Tarang Projects and Consultant Limited. Similar, debit notes have been filed by the assessee in the paper book to substantiate the purchase as genuine transaction. But the assessee has not filed any receipt of cash paid either to the brokers or to the companies.

When the documentary evidence containing contract notes of purchase, demat account, contract note of the sale and receipt of sale proceeds in bank account are seen vis-à-vis the observations of the AO on transactions, in our opinion, the documents are not sufficient to discharge the burden of proof that the purchase and sale transactions of the assessee were genuine. The onus was on the assessee to explain astronomical rise in prices of all the scrips purchased by him, that too without any financial rational. The assessee has failed to discharge his onus in this regard. Even if, we take into account the argument of the Ld. counsel of the assessee that in capital market the movement in the price of the shares/securities is not always connected with their fundamentals, it was not possible that prices of all the shares purchased by the assessee would go up and not even in the single case price of the share would come down. It may be possible that few scrip may go up, but in normal course it is not possible that prices of all the shares will go up without any corresponding profit or prospectus of the company. This feature of the transactions of the assessee itself is against the human probabilities. The assessee has not demonstrated of earning such huge profits from shares of any listed companies purchased from the stock exchange either in the earlier years or in the subsequent years and huge profit has been shown only from off- line purchases.

In the case of Sumati Dayal (supra), also the assessee shown winning from the horse races for most of the time and that too without any expert knowledge of horse races. During her statement to the Settlement Commission, the taxpayer had stated that she first started going to the races in 1969 and she won her first jackpot on 12/12/1969, the first day on which she went to the races. She also stated that she worked out the combination of winning horses on the basis of what her husband advised her but she used to add some horses on her own, she, however, knew nothing about the performance of those horses. Further, she suddenly lost interest in horse racing in 1972, when the race winning became taxable and given her exceptional winning streak in the earlier years. The Hon’ble Supreme Court in case held that income from winning horse races was against the human probability and inferred that the taxpayer had not really participated in any of the races except to the extent of purchasing the winning ticket after the event presumably with unaccounted funds. The facts and circumstances in the instant case are also identical and in normal circumstances it was not possible to earn a huge profit from investment in all the scrips purchased by the assessee, unless obtaining long-term capital gain through accommodation entry providers.

Regarding the contention of the Ld. counsel that assessee was not having any control over the buyer of the shares and it was a transaction in uncontrolled manner on the stock exchange, we note that the investigation carried out by the Department has brought the facts on record that the shares prices have been manipulated artificially, which purchased by a set of accommodation entry provider companies controlled by cartel of brokers, entry operator etc., thus, in such circumstances, to say that sale transactions on the stock exchange were made in uncontrolled manner, will be on only an idealistic view and away from the reality of the market. The Ld. Counsel has himself accepted this fact that such types of dubious practices were rampant during relevant period. The contention of the Ld. counsel that sale transaction of assessee is uncontrolled, cannot be accepted in the circumstances of the case where all share purchases have been made in physical form from off market and all such shares have been sold at astronomical prices without commensurate financials of the companies in the background of the fact the purchases of these shares have been made at high prices by accommodation entry operator and not genuine buyers. 6.7 The case laws relied upon by the assessee distinguishable on facts. In the case of Deepak Nagar (supra) nothing are adverse was observed by the SEBI about the scrip traded by the assessee but in the instant case, trading in most of the shares sold by the assessee was suspended during relevant period. The facts in the case of Mangi Lal Jain (supra) are also distinguishable as in the said case purchases were made by cheque and not through cash as in the instant case.

In the case of Udit Kalra (supra), the Hon’ble Delhi High Court upheld the addition in respect of the long-term capital gain claimed exempted under section 10(38) of the Act on the ground of impossibility of astronomical growth of the value of the company shares as against the consistent losses of the company. The relevant finding of the Hon’ble High Court is reproduced as under:

“The court has considered the submissions of the parties. Besides from the fact that the findings in this case are entirely concurrent – A.O., CIT(A) and the ITAT have all consistently rendered adverse findings – what is intriguing is that the company (M/s Kappac Pharma Ltd.) had meagre resources and in fact reported consistent losses. In these circumstances, the astronomical growth of the value of company’s shares naturally excited the suspicions of the Revenue. The company was even directed to be delisted from the stock exchange. Having regard to these circumstances and principally on the ground that the findings are entirely of fact, this court is of the opinion that no substantial question of law arises in the present appeal.”

In the case of Sanjay Bimal Chand Jain, L/H of Shantidevi Bimal Chand Jain (supra), the assessee had purchased shares of two penny stocks of Calcutta-based companies i.e. 8000 shares at the rate of Rs.5.50 per shares on 08/08/2003 and 4000 shares at the rate of Rs.4 per share on 05/08/2003. The assessee sold 2200 shares at an exorbitant rate of Rs.486.55 per shares on 07/06/2005 and 800 shares on 20/06/2005 at the rate of 485.65. The authorities held that the assessee had not tendered cogent evidence to explain as how the shares in an unknown company with worth Rs.5 had jumped to Rs.485 in no time. In view of the facts, the Hon’ble Bombay High Court confirmed the addition.

In the case of MK Rajeshwari Vs. ITO (Supra), the coordinate bench of the Tribunal has held that while dealing the issue of long-term capital gain accrued to the assessee, one has to examine the financials of the company whose shares were inflated within a short period and after the sharp rise in the price of shares, it again comes down.

The coordinate bench of the Tribunal in the case of Shamim M. Bharwani (supra) held that, where the assessee claimed income earned from sale of shares is exempt under section 10(38), in view of the fact that purchase transaction of said shares was not recorded in the stock exchange and moreover, selling rates were artificially high later on with no real buyers, Assessing Officer rightly rejected assesses claim and added amount in question to his taxable income under section 68 of the Act.

As far as contention of the learned counsel that no opportunity of cross-examination of the statement of share brokers relied upon by the Assessing Officer is concerned, we find that the authorities have not merely relied on the statement of the relevant brokers, but also has taken into account other circumstantial evidences and the assessee was asked to justify the genuineness of the transactions, which the assessee has failed. In our opinion, the ratio in the case of M/s Andman Timber Industries (supra) is not applicable over the facts of the instant case.

In the light of the ratio laid down in cases cited above, the contention of the assessee that the transaction leading to long- term capital gains are supported by documents of sale and purchase, bank statement etc., cannot be accepted keeping in view of the facts and circumstances of the case brought on record by the Assessing Officer after proper examination of the material facts and taking into account the corroborating evidences. The onus was on the assessee to prove the transaction leading to claim of long-term capital gain was a genuine transaction. The assessee failed to justify manifold increase in the prices of the shares despite weak financials of the companies. Initial investment in the company of unknown credential and subsequent jump in the share prices of such a company, cannot be an accident or windfall but could be possible, because of manipulation in the share prices in a preplanned manner, as brought on record by the Assessing Officer. In view of the failure on the part of the assessee to discharge his burden of proof and explain nature and source of the transaction and huge profit in all shares traded by the assessee against the human probability, in our opinion, the Ld. CIT(A) has rightly confirmed the addition in dispute, which does not require any interference on our part, we uphold the action of the Ld. CIT(A) on the issue in dispute and dismiss the grounds raised by the assessee in the appeal. Accordingly, the appeal bearing ITA No. 1704/ Del/2019 is dismissed.

The facts and circumstances of the appeal in ITA No. 1705/Del/2019 are identical with the facts and circumstances of appeal in ITA No. 1704/ Del/2019, few except scrips traded by the assessee and Sh. Satish Kishore (ITA No. 1704/Del/2019) are different. Accordingly, following our finding in ITA No. ITA No.1704 /Del/2019 & ITA No. 1705/ Del/2019 1704/Del/2019, the grounds of appeal in ITA No. 1705/Del/2019 are also dismissed.”

The circumstantial evidences brought on record by the AOs as mentioned above go a long way to prove our case before the appellate authorities. The Hon’ble ITAT questioned the abnormal rise as well as the investment decision of the assessee. Moreover rejected the evidences produced by the assessee considering the investigation report on these penny stocks.

The AOs must investigate the exit operators and the syncronised trades, while booking the profit. Huge sum of money required to buy these penny stocks can only be invested by an entry operator, as no genuine investor would enter into penny stock at a high price.

It is found on investigation that sell and purchase instructions are fed simultaneously into the trading platform to complete the transaction and to avoid intervention by third party. IP addresses of the exit provider and the selling broker reveal the complete manipulation of transactions.

No. Order Name Authority Observation
1 Abhimanyu Soin Vs. Asst. Cit, Circle VII, Ludhiana. ITAT, Chandigarh, Bench A ITA NO 951/chd/2016 Hon’ble ITAT had disallowed the claim of exempt LTCG and had confirmed the addition made on the ground that the assessee could not prove the purchase of shares made in cash. Neither there was any further investment through that broker.And found the whole transaction is beyond human probability and business logic.
2. Smt. M. K. Rajeshwari,  Vs. The Income-tax Officer,  Raichur. ITAT, Banglore, SMC-C Branch TS-9007-ITAT- 2018(BANGALORE)-O After studying the financial worth and share price movement of the company, ITAT held that it was not worth investing in and upheld Revenune’s stand that unaccounted money was introduced in the form of long-term capital gains. Referring to the different views by ITAT in different jurisdictions, author signs off stating “It appears a solution will only be obtained when the Apex Court considers the matter and provides a judgement on the same, that can help resolve the issue pan-India.”
3 Ratnakar M Pujari Vs. ITO Ward 25(3)(3), Mumbai ITAT, D Bench, Mumbai  ITA. No.995/Mum/2012 The Hon’ble ITAT observed  “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”
4. Usha Chandresh Shah, Vs.  Income Tax Officer 19(1)(2), Mumbai ITAT, F Bench, Mumbai  ITA No. 6858/Mum/2011 The Hon’ble ITAT observed

“We further notice that the ld CIT(A) has placed reliance on the decision dated 04.1.2011 rendered by ITAT Delhi in the case of Haresh Win Chaddha Vs. DDIT, wherein the Tribunal has expressed the view that there is no presumption in law that the AO is supposed to discharge an impossible burden to assess the tax liability by direct evidence only and to establish the evasion beyond doubt as in criminal proceedings. Further it was held that the AO can assess on consideration of material available on record, surrounding circumstances, human conduct, preponderance of probabilities and nature of incriminating information / evidence available on record.”

5. Mrs Vidya Reddy Vs. ITO International Taxation, Ward-1(2), Chennai. ITAT, D Bench, Chennai  ITA No.126/Chny/2017 Hon’ble ITAT had disallowed the claim of exempt LTCG and had confirmed the addition made on the ground that the assessee has not placed any material before the lower authorities to prove that her transactions are genuine.
6. M/s. Pankaj Agarwal & Sons (HUF) Vs ITO, ward 10(3), Chennai ITAT, A Bench,
Chennai  ITA. No.1413/CHNY/2018
The Hon’ble ITAT observed

“Confirm the orders of the Ld.Revenue Authorities in the case of all the assessees because the Ld.AO as well as the Ld.CIT(A) have arrived at their respective decisions after considering the issues in the appeal in detail and there is nothing before us to disturb their findings.”.

7. Rajkumar B. Agarwal vs. DCIT (ITAT Pune) BENCH “B”, PUNE ITA Nos. 1648 & 1649/PUN/15 The assessee completed paper-trail by producing contract notes for purchase and sale of shares. of PIL. Mere furnishing of contract notes etc does not inspire any confidence in the light of facts. Test of human probability should be applied and apparent should be ignored to unearth the harsh reality (Sumati Dayal 214 ITR 801 (SC) & Durga Prasad More 82 ITR 540 (SC) applied)
8. M/s. Pankaj Agarwal & Sons (HUF), VS The Income Tax Officer, Non-Corporate Ward – 10(3), Chennai.

M/s. Rajnish Agarwal & Sons (HUF)

ITA. No.1413/CHNY/2018 IN THE INCOME TAX APPELLATE TRIBUNAL, ‘A’ BENCH, CHENNAI Plea that opportunity to cross-examine the witness was not given & investigation report was not furnished is not relevant if assessee unable to successfully controvert findings of the AO and such argument was never made before the lower authorities.
9. Shamim Imtiaz Hingora Vs ITO (ITAT Pune) Appeal Number: ITA Nos. 1875/PUN/2018 Date of Order: 01/03/2019 Though the AO did not find any mistake in the documentation furnished by the assessee, there is need for finding of fact on (i) the nature of the shares transactions; (ii) make-believe nature of paper work; (iii) Camouflage the bogus nature; and, (iv) the relevance of human probabilities etc (NDR Promoters 410 ITR 379 (Del) referred)
10. Shamim M Bharwani, Mumbai vs Department Of Income Tax on 27 March, 2015. I.T.A. No.4906/
Mum/2011.
Despite documentary evidence and broker’s confirmation, genuineness of penny stock transactions has to be determined on the basis of ‘preponderance of human probabilities’. If assessee is unable to explain ‘intriguing’ facts and circumstances, genuineness of transaction cannot be accepted.
11. Pooja Ajmani vs. ITO (ITAT Delhi) April 25, 2019  I.T.A.No.-5714/Del/2018 10(38) Bogus Capital Gains From Penny Stocks: U/s 101 of Evidence Act, 1972, the onus is on the assessee to prove that the LTCG is genuine. The assessee cannot, on failure to establish a prima facie case, take advantage of the weakness in the AO’s case. The jump in the share price of a company of unknown credentials cannot be an accident or windfall but is possible because of manipulations in a pre-planned manner by interested broker and entry operators. The LTCG transactions are a sham
12. Purviben Snehalbhai Panchhigar v. Assistant Commissioner of Income Tax [2019] 101 taxmann.com 393 (Gujarat).

SPECIAL CIVIL APPLICATION NO. 16725 OF 2018 OCTOBER 29, 2018

Where assessee filed his return claiming capital gain arising from sale of shares of company ‘T’ as exempt under section 10(38), in view of fact that said return was accepted under section 143(1) without scrutiny, AO was justified in initiating reassessment proceedings on basis of information received from Investigation Wing that company ‘T’ was a shell company and shares of said company were basically used for providing bogus claim of long-term or short-term capital gain.
13. SHRI SANAT KUMAR Vs. ACIT Circle 36(1)
Delhi.
ITAT Delhi E Bench ITA No.1881/Del./2018 Whether when entire transaction apparently appears to be bogus as it provides unimaginable appreciation in value of shares, then it would amount to evasion and initial transaction made through banking channel will not exonerate the purchaser – YES: ITAT

This contents of this article may be used by the Assessing Officers as a navigator to complete their cases. However, facts of each case may also have certain peculiarities which the officers have to factor in. Nevertheless, the case laws referred to will be useful to the officers to have the large picture of the organised tax evasion and the essential steps for completing a sustainable assessment case.

Source- Taxaloguue – Volume 1- Issue 2- OCT-Dec 2019 Issued by Directorate of Legal & Research -Central Board of Direct Taxes

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