Ayushi Jain Vs ITO (ITAT Kolkata)
In a significant ruling by the Income Tax Appellate Tribunal (ITAT) in Kolkata, the case of Ayushi Jain vs. Income Tax Officer (ITO) sheds light on the scrutiny of long-term capital gains (LTCG) and the treatment of investments deemed as bogus by tax authorities. This article delves into the intricate details of the case, the arguments presented by both parties, and the final verdict, providing valuable insights for taxpayers and professionals alike.
Introduction; The appeal filed by Ayushi Jain against the order of the Commissioner of Income Tax (Appeals) – 6, Kolkata, for the Assessment Year 2015-16, brings to the fore the complexities involved in claiming LTCG on share sales. The core issue revolves around the addition of Rs. 11,78,596, which was claimed as LTCG from the sale of shares of Kappac Pharma Ltd. (KPL), being treated as bogus by the Assessing Officer (AO) under Section 68 of the Income Tax Act, 1961.
Background of the Case: Ayushi Jain declared a total income of Rs. 4,70,650 for the Assessment Year 2015-16. Upon scrutiny, the AO raised questions regarding the LTCG claimed on the sale of 5000 units of KPL shares, which were deemed exempt under Section 10(38) of the Act. The AO’s skepticism was fueled by an investigation report suggesting manipulation by penny stock companies to facilitate tax exemptions on bogus LTCG.
Despite Ayushi Jain’s contestation and request for investigation reports, the AO observed a “bell-shaped pattern” in the trading results, indicative of manipulative practices, leading to the disallowance of the LTCG claim.
The Income Tax Appellate Tribunal (ITAT) in Kolkata’s ruling on Ayushi Jain vs. Income Tax Officer (ITO) represents a pivotal moment in the assessment of long-term capital gains and the validation of share transactions. The case centered around the addition of Rs. 11,78,596 as bogus LTCG, which Ayushi Jain claimed from the sale of shares of Kappac Pharma Ltd. (KPL). The Assessing Officer (AO) challenged these gains under Section 68 of the Income Tax Act, 1961, branding them as fictitious. However, the Tribunal’s thorough examination led to a contrasting conclusion.
Reasoning Behind the Tribunal’s Decision
i. Examination of Transaction Authenticity: The Tribunal meticulously reviewed the transaction details, including the purchase and sale of KPL shares. It was established that Jain had purchased 5,000 units of KPL shares in 2012 at a total cost of Rs. 75,000, and these were sold during the Assessment Year 2015-16, claiming LTCG. The transactions were executed through a registered broker of the Calcutta Stock Exchange, substantiated by contract notes, bank statements reflecting the sale proceeds, and Demat account statements.
ii. Transparency and Compliance with SEBI Regulations: A critical aspect of the Tribunal’s analysis was the emphasis on the regulated nature of stock exchange transactions. It noted that stock exchanges operate under strict guidelines where transactions are electronically logged, ensuring transparency and compliance with the Securities and Exchange Board of India (SEBI). This environment makes it highly improbable for the alleged manipulation of share prices or the facilitation of bogus LTCG, as suggested by the AO.
iii. Rejection of AO’s Allegations: The AO’s allegations were primarily based on an investigation report indicating manipulation by penny stock companies. However, the Tribunal found these allegations to be speculative, lacking direct evidence against Jain. It pointed out the absence of incriminating material linking Jain or her broker to the supposed manipulation scheme. The reliance on generalizations rather than specific evidence against the assessee was deemed insufficient grounds for the addition under Section 68.
iv. Judicial Precedents and Legal Principles: The Tribunal underscored several judicial precedents emphasizing that the onus of proof lies on the tax department to establish any transaction as bogus. It cited landmark judgments, including those by the Supreme Court, which held that no addition could be made solely based on suspicion, conjectures, or surmises without concrete evidence disproving the authenticity of the documents provided by the assessee.
v. Principle of Natural Justice: A significant part of the Tribunal’s reasoning revolved around the principles of natural justice. It criticized the AO’s failure to provide Jain with an opportunity to cross-examine the statements or reports used against her. This omission was highlighted as a violation of natural justice principles, further weakening the department’s position.
Implications of the Tribunal’s Ruling: The Tribunal’s decision in Ayushi Jain vs. ITO is a reaffirmation of the legal safeguards designed to protect taxpayers from arbitrary and baseless accusations. It sets a precedent emphasizing the necessity for the tax department to substantiate allegations of bogus LTCG with concrete evidence. For taxpayers, it underscores the importance of maintaining transparent and well-documented transactions, especially when dealing with investments in shares.
Conclusion: The Tribunal’s analysis and ruling in the Ayushi Jain vs. ITO case offer a comprehensive insight into the legal scrutiny applied to cases of alleged bogus LTCG. By dissecting the Tribunal’s reasoning, this article aims to provide readers with a clear understanding of the evidentiary standards and legal principles that govern the assessment of such claims. The verdict not only serves as a guide for taxpayers and professionals navigating the complexities of tax law but also as a reminder of the judiciary’s role in upholding the principles of fairness and justice in the tax system.
FULL TEXT OF THE ORDER OF ITAT KOLKATA
This is an appeal preferred by the assessee against the order of Ld. CIT(A) – 6, Kolkata dated 02.11.2018 for Assessment Year 2015-16.
2. The main grievance of the assessee is against the action of the Ld. CIT(A) in confirming the action of AO by treating Rs. 11,78,596/- which the assessee claimed as Long Term Capital Gain on sale of shares of M/s. Kappac Pharma Ltd. (herein after M/s. KPL) as bogus and added u/s 68 of the Income Tax Act, 1961 (herein after referred to as the ‘Act’)
3. Brief facts of the case as noted by the AO is that the assessee had declared total income of Rs. 4,70,650/- thereafter the case was selected for scrutiny under CASS. The AO noted that the assessee had purchased scrip of M/s. Kappa Pharma Ltd. of 5000 units which were sold during AY 200 15-16 and claimed long term capital gain of Rs. 11,78,596/- which the assessee claimed as exempt u/s 10(3 8) of the Act. Thereafter, the AO issued show cause notice (SCN) to the assessee wherein the AO raised the doubts about the claim of the Since according to the AO the investigation report of the department states that 84 penny stock companies in active connivance of 32 share broking entities were involved in pre-planned LTCG/STCL for beneficiaries like assessee by which transactions, the beneficiaries / assessee’s ill gotten money is converted LTCL and have claimed exemption from tax. Thereafter, the AO took the aid of a chart to show the price fluctuation. Though the assessee contested the allegation made by the AO in the show cause notice and asked for the reports of the Investigation Wing, the AO did not dealt with it and was of the opinion that the assessee is silent regarding the bell shaped pattern emerging from the trading result of the scrip and thereafter he discussed the modus operandi adopted by unscrupulous brokers hand in blow with the penny stock companies to convert the black money white of beneficiaries like assessee. Thereafter, the AO disallowed the claim of the assessee and made an addition of Rs. 11,78,596/- u/s 68 of the Act which was challenged by the assessee unsuccessfully before the Ld. CIT(A). Aggrieved the assessee is before me.
4. Assailing the decision of the Ld. CIT(A), the ld. AR pointed out that similar issue regarding LTCG claim on sale of M/s. Kappac Pharma Ltd. was before this Tribunal and the Tribunal was pleased to allow the claim in the case of Usha Singhania in ITA No. 1495/Kol/2018 dated 1st February, 2019. According to the ld. AR all documents to prove the purchase and sale of shares of M/s. KPL were furnished by the assessee however the AO / CIT(A) has discarded the same without finding any faults to those documents, has erroneously made the addition which needs to be deleted.
5. Per contra the ld. DR vehemently supported the order of the Ld. CIT(A) and drew our attention to page 2 to 4 of the assessment order and urged before us that the claim of assessee was bogus and, therefore, it was rightly disallowed by the authorities below and we should not interfere with the same and cited case law, which we will discuss infra.
6. Having heard both the parties and after carefully perusing the record, it is noted that the assessee had purchased 5000 numbers of shares of M/s. Kappac Pharma Ltd. (M/s. KPL) on 10.07.20 12 at a total cost of Rs.75,000/- from M/s. Sannidhya Tradelink Pvt. Ltd. [Copy of purchase bill is found placed in the paper book at page no.8.] We note that the payment was made through an account payee cheque and copy of the bank statement evidencing the payment made to M/s. Sannidhya Tradelink Pvt. Ltd. for such share purchase found placed is in the paper book at page no.10. Thereafter in this assessment year, the assessee sold the shares at a consideration of Rs. 12,53,750/- through M/s. Spartek Financiers & Investment Pvt. Ltd. which is a registered broker of the Calcutta Stock Exchange and has also been registered by SEBI as is evident from the contract note and claimed long term capital gains of Rs.1 1,78,750/-. Copy of contract notes in connection with sale of shares (Page 11 of Paper book) the bank statement (HDFC) reflecting the receipt of sale consideration is found placed at page 12 of paper book, and Demat statement is found in the paper book at page no. 13.
7. From the perusal of above documents it is noted that the aforesaid transaction happened in the stock exchange electronically, whereby it is common knowledge that only the share brokers registered with SEBI can enter in to a transaction on the stock exchange/electronic platform and transaction of purchase and sale takes place in a fraction of time from anywhere in India on behalf of brokers’ clients or on brokers own account. As per common knowledge on the subject, all such activity or purchase and sale on the platform of the stock exchange are logged on real time basis and that it is not possible to sell/purchase the shares of any company on the stock exchange in variance to the prevailing market price at any point of time. Hence, the assumption is that assessee neither knows the buyer nor it would be able to know the identity of the persons who has sold the shares at the time of purchase of the shares and purchaser of the shares at the time of sale of the shares at the stock exchange.
8. It is noted that the A.O’s allegation of conversion of unaccounted money in the form of alleged bogus long term capital gains is not based on any incriminating materials directly against the assessee and her broker. We note that the A.O/ld. CIT(A) has made the addition on the basis of suspicion and conjectures which they could not have done without at least finding fault with the document produced by the assessee.
9. For that proposition of law we rely on the decision of the Hon’ble Supreme Court in Lalchand Bhagat Ambica Ram vs. CIT [1959] 37 ITR 288 (SC) wherein it relied on its earlier judgment rendered in the case of Omar Salav Mohamed Sait [1959] 37 ITR 151 (SC) where in their Lordships have held that no addition can be made on the basis of surmises, suspicion and conjectures.
10. Further in the case of CIT(Central) Calcutta vs. Daulat Ram Rawatmull (87 ITR 349) the Hon’ble Supreme Court has held that the onus to prove that the apparent is not the real is on the party who claim it to be so. The burden of proving a transaction to be bogus has to be strictly discharged by adducing legal evidences of a character, which would either directly prove the fact of bogus/fictitious or establish circumstances unerringly and reasonably raising an inference to that effect. Further, the A.O. in the assessment order relied upon the purported statements of various alleged operators on the basis of which the A.O. had drawn adverse inference in the instant case. It is noted that nowhere any of them has ever named the assessee/broker in the alleged manipulation. Further, the A.O. did not provide any opportunity to cross examine the said persons. It is a well-settled principle of law that no credence can be given to the statement/report of any person given behind the back of the assessee unless a copy of the same is furnished to the assessee and an opportunity to cross examine the third person is afforded to the assessee. In this regard, reliance placed upon the following judgments:
(i) Andman Timber Industries vs. CCE – [2015] 62 com 3 (SC),
(ii) P.S. Abdul Majeed vs. Agricultural Income-tax and Sale Tax Officer and Others 209 ITR 821 (Ker.),
(iii) CIT vs. Eastern Commercial Enterprises 210 ITR 103 (Cal),
(iv) CIT vs. Ajnara India Ltd. (2011) 49 DTR 273 (Del-Trib),
(v) Calcutta High Court in S.M. Bothra & Sons (HUF) vs ITO (2011 62 DTR(Cal) 234,
(vi) Delhi High Court in CIT vs Rajesh Kumar (2008) 306 ITR 27.
11. I have already noted that the assessee has conducted all the transactions through a recognized share broker and received and made the payments through account payee cheques. It is submitted that the genuine transactions cannot be and should not be treated as ingenuine merely on arbitrary view of suspicion as held in the following cases:
(i) CIT vs. Carbo Industries Holdings Ltd. 244 ITR 422 (Cal)
(ii) CIT vs. Emerald Commercial Ltd. 250 ITR 539 (Cal)
(iii) Manish Kumar Baid vs. ACIT, order dated 18.08.2017; ITANo. 1236-1237/K/12
(iv) Vasudha Jain vs. ITO, ITA No. 1018/K/2018, order dated 15.02.2019
(v) Prakasho Devi Saria vs. ITO, ITA No. 2360/K/2017, order dated 17.05.2019
(vi) CIT vs. Bhagwati Prasad Agarwal (Calcutta High court); ITA No.22 of 2009, dated 29.04.09.
12. It is noted that the A.O has nowhere in the assessment order referred to any material which can prove the complicity of assessee in the alleged accommodation entry operation. In the light of the documents furnished by the assessee, the authorities below were not justified in invoking the provisions of section 68 of the Act in regard to the sale proceeds of shares. There is no evidence on record to disbelieve that the shares sold through registered share and stock broker. The assessee had produced all evidences to explain the source of the amounts received by the assessee from the brokers. Thus the A.O/CIT(A) was not justified in assessing the sale proceeds of shares as undisclosed income. In the light of the aforesaid documents filed before us and A.O/Ld. CIT(A) and it is noted that similar issue was before the Tribunal in the case of M/s Usha Singhania in ITA No. 1495/Kol/2018 wherein long term capital gain on sale of M/s KPL was allowed by this Tribunal vide order dated 1st February 2019 wherein the Tribunal held as under:
“5. After hearing both sides, I find that in a number of cases this bench of the Tribunal and Jurisdictional Calcutta High Court has consistently held that, decision in all such cases should be based on evidence and not on generalization, human probabilities, suspicion, conjectures and surmises. In all cases additions were deleted. Some of the cases were, detailed finding have been given on this issue, are listed below:-
