Mere thin trade and unusually high gain not sufficient to treat the Long Term Capital Gain on Shares as bogus

ITAT held that when purchase and sale of shares were supported by proper contract notes , deliveries of shares were received through demat accounts maintained with various agencies, the shares were purchased and sold through recognized broker and the sale considerations were received by account payee cheques, the transactions cannot be treated as bogus and the income so disclosed was assessable as LTCG. We find that in the instant case, the addition has been made only on the basis of the suspicion that the difference in purchase and sale price of these shares is unusually high. The revenue had not brought any material on record to support its finding that there has been collusion/connivance between the broker and the assessee for the introduction of its unaccounted money.

AO is in directed to accept the claim of exemption of LTCG of the assessee arising out of sale of shares of G.K.Consultants Ltd and accordingly allow the ground raised by the assessee in this regard.

Relevant Extract of the Judgment

2.9. We have heard the rival submissions and perused the materials available on record including the paper book comprising of pages 1 to 32 filed by the assessee containing the relevant documents on the subject mentioned issue. At the outset, we find that the ld DR made a bald statement that the subject mentioned transaction was part of penny stock scam that cropped up in Kolkata in connivance with CSE ,wherein some brokers and certain scrip were suspended by SEBI, for which he sought time to produce evidence in this regard. In the subsequent hearing, the ld DR did not advance any argument by producing any evidence to prove his bald allegation on the subject mentioned transaction. In these circumstances, we find that the bald allegation raised by the ld DR that this transaction is part of the scam is hereby dismissed and rejected and we proceed to hear this case and the issue before us based on the materials available on record. We also find that it was never the case of the lower authorities that the subject mentioned transaction was part of any scam that cropped up in Kolkata. We find that the document relied upon by the revenue in terms of MCA data which is reflected in the annual report of G.K.Consultants Ltd (being a listed company) that trading of that share had happened in BSE in Oct and Nov 2004 at Rs. 6.60 and Rs 8.40 respectively. Apart from these two months, no trading had happened in BSE with respect to the subject mentioned scrip. Hence it could be safely concluded that this scrip was thinly traded in BSE and accordingly the assessee brought the shares from CSE where it was traded, through a registered share broker in Kolkata. We also find that the allegation of the ld AO that no other shares were held in the demat account opened with Citibank vide account no. 10398306 is factually incorrect as the assessee was holding the shares of other two reputed companies namely Reliance Industries Ltd and Organo Ltd also in the said demat account.

2.9.1. We find that the assessee had duly submitted the following documents :-

a) Contract note for purchase of shares in off market for which payment was made in cash. This is not in dispute as the issue before us is only on the treatment of sale consideration of sale of shares as to whether the same is to be considered as LTCG or unexplained cash

b) Contract Note for sale of shares through a registered stock broker with CSE.

c) Demat account reflecting the inflow of shares in demat account and outflow thereon pursuant to sale, which is the subject matter of dispute before us.

d) Payment of sale consideration received by the assessee through account payee cheque.

e) Shares were duly transferred from the demat account of the assessee to the demat account of the broker and thereafter to the ultimate buyer of the shares through a recognized stock

f) STT had been duly suffered on the sale transaction in the sum of Rs. 493/-. g) The Broker had confirmed the purchase and sale transactions before the ld AO by furnishing a letter in writing in response to summons issued to him u/s 131 of the Act.

2.9.2. We find that just because the broker does not appear before the ld AO in response to the summons u/s 131 of the Act , but had furnished the requisite details called for thereon, it cannot be automatically concluded that the transaction of the assessee with that broker as bogus and sham and assessee cannot be faulted with for the same. The statute provides unfettered powers to the ld AO for taking action for non-appearance of a person in response to summons u/s 131 of the Act which could have been exercised by the ld AO in the instant case instead of drawing an adverse inference on the transactions of the assessee. In this regard, we find that the reliance placed by the ld AR on the decision of the Hon ’ble Calcutta High Court in the case of CIT vs Cargo Industrial Holdings Ltd reported in (2001) 244 ITR 422 (Cal) is very well founded wherein it was held that :-

“Perusal of the details furnished revealed that the purchase and sale of the shares could not be accepted as having been transacted on the same date. Payment by account payee cheques had not been disputed. Merely because some broker failed to appear, the assessee should not be punished for the default of a broker, and also on mere suspicion the assessee ’s claim should not be denied.”

Similarly in another decision of the Hon ’ble Calcutta High Court in the case of CIT vs Emerald Commercial Ltd reported in (2002) 120 Taxman 282 dated 23.3.2001 , it was held that :-

“Admittedly the details of purchase and sale of shares were furnished. The payment and receipt were by account payee cheque. The identity of seller and purchaser was not in dispute. The disallowance was basically made on the ground that the assessee failed to produce the brokers for verification of the transaction. Following the view on a similar issue in the case of CIT vs Carbo Industrial Holdings Ltd (2000) 244 ITR 422 (Cal) , non-production of the share broker by the assessee did not disentitle it for claim of loss in a genuine transaction of shares, thus, the Tribunal’s finding was based on material and not perverse. The findings of the ITO and the Commissioner (Appeals) were based on presumption.”

2.9.3. We find that the revenue had made a remark that the subject mentioned shares of G.K.Consultants Ltd were bought by the assessee in off market which is against the rules framed by SEBI and others. We find from the Bye Laws of CSE placed on record in the paper book , that the said Bye Laws (vide Bye Law No. 9) permit purchase and sale of shares in off market. In any case, this is not relevant in as much as the issue before us is not on the purchase of shares but only the treatment of sale consideration received on sale of those shares.

2.9.4. We find that on verification by the ld AO with the Calcutta Stock Exchange Ltd regarding the purchase and sale of shares of G.K.Consultants Ltd by the assessee through the broker Mr Rajendra Prasad Shah, CSE had confirmed the fact that the share purchase and sale transactions of assessee had happened through the broker Mr Rajendra Prasad Shah on the said date but had only stated there was no trade vide Trade No. 1586. This alone would not automatically make the entire transaction as sham and bogus when other documents as stated supra prove the contrary.

2.9.5. We find that the similar issue had been adjudicated by the co-ordinate bench of this tribunal in the case of DCIT vs Sunita Khemka in ITA Nos. 714 to 718/Kol/2011 dated 28.10.2015 and in the case of ITO vs Rajkumar Agarwal in ITA No. 1330 (Kol) of 2007 dated 10.8.2007 wherein it was held that when purchase and sale of shares were supported by proper contract notes , deliveries of shares were received through demat accounts maintained with various agencies, the shares were purchased and sold through recognized broker and the sale considerations were received by account payee cheques, the transactions cannot be treated as bogus and the income so disclosed was assessable as LTCG. We find that in the instant case, the addition has been made only on the basis of the suspicion that the difference in purchase and sale price of these shares is unusually high. The revenue had not brought any material on record to support its finding that there has been collusion / connivance between the broker and the assessee for the introduction of its unaccounted money.

2.9.6. In view of the aforesaid facts and findings and the judicial precedents relied upon , we have no hesitation in directing the ld AO to accept the claim of exemption of LTCG of the assessee arising out of sale of shares of G.K.Consultants Ltd and accordingly allow the ground raised by the assessee in this regard.