Case Law Details
Suman Saraf Vs ITO (ITAT Kolkata)
ITAT Kolkata held that invoking revisionary proceedings justified as AO failed to conduct the enquiry about the bogus transactions inspite of the report of the Investigation Wing containing the list of 84 companies found to be penny stock companies available in the Income Tax Portal.
Facts- After completion of scrutiny assessment, PCIT called for the assessment records and observed that during the year, the assesese has claimed exemption u/s. 10(38) of the Act at Rs.51,99,603/- on account of LTCG from sale of shares of CCL International Limited. He further obesrved that as per the Departmental Information, CCL International Limited is a penny stock company, whose share prices have been rigged/manipulated to generate bogus long-term capital gain with a view to evade tax and claim exemption. He further observed that AO failed to utilise the evidence furnished by the Investigation Wing of the Department and did not carry out any enquiry in regard to the said transaction.
The ld. PCIT accordingly issued a show-cause notice u/s. 263 of the Act for the above said reasons and carried out revisionary proceedings. Ld. PCIT held the assessment order as erroneous and prejudicial to the interest of revenue and set aside the said assessment order for being framed afresh considering the finding in the impugned order. Aggrieved, the assessee is now in appeal before this Tribunal.
Conclusion- We find that such kind of transactions of earning long-term capital gain from penny stock companies have been held to be bogus. It is also not in dispute that ld. Asseessing Officer has not conducted any enquiry about the said transaction even when the report of the Investigation Wing containing the list of 84 companies found to be penny stock companies was available in the Income Tax Portal, which the ld. Assessing Officer needs to refer while framing the assessment. Under these given facts and circumstances, we are of the considered view that ld. PCIT was justified in invoking the revisionary proceedings holding the assessment order dated 05.05.2017 as erroneous as well as prejudicial to the interest of revenue and also directing the ld. Assesisng Officer to frame the assessment afresh considering the observation in the impugned order. Therefore, the grounds raised by the assessee are dismissed.
FULL TEXT OF THE ORDER OF ITAT KOLKATA
This appeal filed by the assessee is against the order of ld. Principal Commissioner of Income Tax-15, Kolkata dated 22.06.2020 passed under section 263 of the Income Tax Act, 1961.
2. The Registry has pointed out that appeal is time-barred by 247 days, but it is to be observed that the impugned order was passed on 22.06.2020 after the COVID period started and the appeal has been filed before the Tribunal in May, 2022. The period of limitation is being excluded by the Hon’ble Supreme Court in its order, passed time to time in suo motu Writ Petition No. 3 of 2020. The directions have been issued by the Hon’ble Court and have been extended from time to time and if the COVID period is being excluded keeping in view the Hon’ble Supreme Court’s order, then there is no substantial delay in filing the appeal on the part of the assessee. Therefore, we condone the delay and proceed to decide the appeal on merit.
3. The assessee has raised the following ground of appeal:-
“That under the facts and in the circumstances of the case, the ld. PCIT, Kolkata-15 erred in treating the LTCG of Rs.51,99,603/- claimed on the sale of shares of CCL International Limited to be bogus and therefore, setting aside the order dated 25.05.2017 u/s 143(3) of the Income Tax Act, 1961 passed by the AO holding the same to be erroneous so far as it was prejudicial to the interest of revenue in terms of section 263 of the Income Tax Act,1961. This order, so passed, is bad in law and therefore need to be quashed”.
4. Brief facts of the case are that the assessee is an individual. Income of Rs.9,99,300/- declared in the e-return was filed on 11.08.2015 for assessment year 2015-16. The case was selected for scrutiny assessment through CASS and assessment under section 143(3) of the Act was framed on 05.05.2017. Income was assessed at Rs.11,38,026/- after making disallowance under section 14A of the Act at Rs.78,726/- and addition on account of drawing at Rs.60,000/-. Subsequently, ld. PCIT called for the assessment records and observed that during the year, the assesese has claimed exemption under section 10(38) of the Act at Rs.51,99,603/- on account of long term capital gain from sale of shares of CCL International Limited. He further obesrved that as per the Departmental Information, CCL International Limited is a penny stock company, whose share prices have been rigged/manipulated to generate bogus long-term capital gain with a view to evade tax and claim exemption. He further observed that the ld. Assessing Officer failed to utilise the evidence furnished by the Investigation Wing of the Department and did not carry out any enquiry in regard to the said transaction. The ld. PCIT accordingly issued a show-cause notice under section 263 of the Act for the above said reasons and carried out revisionary proceedings. Submissions made by the assessee were considered but not found acceptable and ld. PCIT came to a conclusion that on examination of the records, it is found that ld. Assessing Officer has not even kept the Directorate of Income Tax (Investigation) report in the file and did not make any proper enquiry on the said transactions, wherein in a short period of time, the share prices jumped from Rs.85/- per share to Rs.450/- per share, which were not supported by good financials. Accordingly ld. PCIT held the assessment order as erroneous and prejudicial to the interest of revenue and set aside the said assessment order for being framed afresh considering the finding in the impugned order.
5. Aggrieved, the assessee is now in appeal before this Tribunal.
6. Ld. Counsel for the assesese referring to the paper book containing 45 pages stated that the transactions of long-term capital gain were genuine, which is duly supproted by Contract Note of purchase of shares, transactions statement, relevant bank account. He pleaded that the transactions being genuine, the impugned proceedings deserve to be quashed.
7. On the other hand, ld. D.R. vehemently argued supporting the order of the ld. PCIT.
8. We have heard the rival submissions and perused the relevant record placed before us. Revisionary proceedings under section 263 of the Act are in challenge before us. During the year, the assesee has earned long-term capital gain from sale of equity shares of M/s. CCL International Limited and exemption under section 10(38) of the Act has been claimed. Directorate of Income Tax (Investigation), Kolkata unearthed a racket of penny stock companies, which are managed by entry operators and brokers, wherein share prices are rigged, abnormally high so as to provide accommoation entries in the form of bogus longterm capital gain to various beneficiaries. The investigation report mentioned the list of 84 companies, which were found to be penny stock companies and all these companies have poor financial, no regular business activity was carried out and the share prices increased abnormally with the help of entry operators and brokers. Recently Hon’ble Jurisdictional High Court in the case of Swati Bajaj & Others (2022) 139 taxmann.com 352(Cal.) pronounced on 14.06.2022 dealing with the similar facts and the issue relating to the penny stock companies decided against the assessee thereby confirming the addition under section 68 of the Act as well as confirming the revisionary proceedings under section 263 of the Act. The ratio laid down by the Hon’ble Jurisdictional High Court has been considered elaborately in the decision of the Coordinate Bench in the case of Shyam Sunder Bajaj in ITA No. 2552/KOL/2018 and others vide order dated 17th October, 2022 and after placing reliance on the judgment of Hon’ble Jurisdictional High Court in the case of Swati Bajaj & Others (2022) 139 taxmann.com 352(Cal.) pronounced on 14.06.2022, observed as under:-
“4. All the present cases were selected for scrutiny u/s. 143(3) through CASS and the issue in all of them for selection relates to ‘suspicious long term capital gain on shares’. In all the above appeals, according to the ld. AO, LTCG reported by the assessee in respective return was bogus and the entire transactions were done with the objective to introduce unaccounted money of the assessee in the books by using the route of LTCG which was exempt from tax u/s 10(38) of the Act, except in one case, where the assessee has booked trading loss on transaction of shares of two Companies, which have been treated as penny stock. Thus, ld. AO held that the said LTCG/loss are fabricated/engineered transactions by the respective assessees, sale of which falls under the category of penny stocks and the same were treated as bogus which were added in the total income by treating it as unexplained cash credit u/s. 68 of the Act. Ld. AO based his decision of treating the impugned transaction of sale of shares as bogus transaction by relying on the report of Investigation Wing of the Department wherein the Investigation Wing of the Department had studied the modus operandi of rigging the prices of penny stocks and generation of capital gain /trading loss there from. On appeal, ld. CIT(A) confirmed the action of the ld. AO. Aggrieved, assessees are in appeal before the Tribunal.
5. Recently on 14.06.2022, the Hon’ble jurisdictional High Court of Calcutta passed a judgment in the case of Swati Bajaj and others [2022] 139 taxmann.com 352 (Cal) dealing with set of cases with similar fact patterns as narrated above for the present appeals under consideration before us. Hon’ble jurisdictional High Court by taking the report of the Directorate of Investigation of the Department as the basis, gave its observations and findings, which are summarized hereunder.
5.1. There are two category of cases dealt with by the Hon’ble High Court, viz. first category being those arising out of the order of Tribunal dated 26.06.2019 in which 90 appeals filed by the assessees were allowed and second category is of those cases where1 assessee has challenged the assumption of jurisdiction by CIT under section 263 of the Act. In the present set of appeals before us, we are concerned with the first category whose relevant observations and findings by the Hon’ble High Court are noted below:
a) From the assessment order passed in the case of the assessee Smt. Swati Bajaj, we find that the genesis of the issue commenced from an investigation report submitted by the Directorate of Income Tax, Investigation, Kolkata (DIT). The investigation report has been prepared by the Deputy Director of Income Tax, Investigation Unit -II and III, Kolkata. [para 43]
b) The assessee were conscious of the fact that they have not been named in the report, therefore made a vague and bold statement that the non-furnishing of report would vitiate the proceedings. Therefore, merely by mentioning that statements have not been furnished can in no manner advance the case of the assessee. If the report was available in the public domain as has been downloaded and produced by the revenue, nothing prevented the assessees who are ably defended by the Chartered Accountants and Advocates to download such reports and examine the same and thereafter put up their defence. Therefore, the based on such statements of violation of principles of natural justice the assessees have not made out any case. [para 65]
c) The test to be applied is the test of preponderance of probabilities to ascertain as to whether there has been violation of the provisions of the Income-tax Act. In such a circumstance, the conclusion has to be gathered from various circumstances like the volume from trade, period of persistence in trading in the particular scrips, particulars of buy and sell orders and the volume thereof and proximity of time between the two which are relevant factors. Therefore, the methodology adopted by the revenue cannot be faulted. [para 69]
d) Test of preponderance of probabilities have to be applied and while doing so, the court cannot loose sight of the fact that the shares of very little known companies with in-significant business had a steep rise in the share prices within the period of little over a year. [para 73]
e) The assessee was not named in the report and when the assessee makes the claim for exemption, the onus of proof is on the assessee to prove the genuinity. [para 73]
f) It is incorrect to argue that the assessees have been called upon to prove the negative in fact, it is the assessees duty to establish that the rise of the price of shares within a short period of time was a genuine move that those penny stocks companies had credit worthiness and coupled with genuinity and identity. [para 73]
g) The assessee cannot escape from the burden cast upon him and unfortunately in these cases the burden is heavy as the facts establish that the shares which were traded by the assessees had phenomenal and fanciful rise in price in a short span of time. [para 75]
h) The exercise that was required to be done by the Tribunal is to consider the totality of the circumstances because the transactions are shown to be very complex, the meeting of minds of the ‘players’ can never be established by direct evidence and therefore the surrounding circumstances was required to be taken note of by the Tribunal which exercise has not been done. [para 99]
i) The assessee had opportunity to prove that there was no manipulation at the other end and whatever gains the assessee has reaped was not tainted. This has not been proved or established by any of the assessee. [para 99]
j) The tribunal being the last fact finding authority was required to go deeper into the issue as the matter have manifested large scale scam. Thus, the orders of the tribunal are not only perfunctory but perverse as well. The exercise that was required to be done by the tribunal is to consider the totality of the circumstances because the transactions are shown to be very complex, the meeting of minds of the “players” can never be established by direct evidence and therefore the surrounding circumstances was required to be taken note of by the tribunal which exercise has not been done. [para 99]
k) In such factual scenario, the Assessing Officers as well as the Commissioner (Appeals) have adopted an inferential process which is found to be a process which would be followed by a reasonable and prudent person. The Assessing Officers and the Commissioner (Appeals) have culled out proximate facts in each of the cases, took into consideration the surrounding circumstances which came to light after the investigation, assessed the conduct of the assessee, took note of the proximity of the time between the buy and sale operations and also the sudden and steep rise of the price of the shares of the companies when the general market trend was admittedly recessive and thereafter arrived at a conclusion which is a proper conclusion. [para 99]
l) For all the above reasons, we hold that the Tribunal committed a serious error in setting aside the orders of the CIT(A) who had affirmed the orders of the Assessing Officer. [para 101]
m) In the result, these appeals are allowed and the substantial questions of law framed/suggested are answered in favour of the revenue and against the assessee restoring the orders passed by the respective Assessing Orders as affirmed by the CIT(A). [para 102]
6. In the context of factual matrix of the present appeals before us narrated above, the position of law as enunciated by the Hon’ble jurisdictional High Court of Calcutta in Swati Bajaj (supra) carrying force of binding nature on the issue under consideration for us, was confronted to the respective ld. Counsels of the assessee who appeared before us. Ld. Counsels were fair enough to state that issue involved in these appeals is squarely covered against the assessee by the said decision as the fact involved are identical to that which were before the Hon’ble High Court. For cases where none appeared before us on behalf of the assessee, the relevant factual matrix was captured with the assistance of Ld. Sr. DR / CIT DR (already narrated above). Since the matter is squarely covered by the decision of Hon’ble jurisdictional High Court of Calcutta in the case of Swati Bajaj & others (supra), we have taken up these also for adjudication ex parte, qua the assessee.
7. After hearing both the sides and taking into consideration the factual matrix of the cases before us vis-à-vis the decision of Hon’ble jurisdictional High Court of Calcutta in Swati Bajaj & others (supra), we respectfully following the said decision carrying the force of binding nature, being the jurisdictional High Court, dismiss the appeals of the assessee and restore the order of the respective ld. AO as affirmed by the respective ld. CIT(A)”.
9. On perusal of the above finding of this Tribunal considering the judgment of the Hon’ble Jurisdictional High Court in the case of Swati Bajaj & Others (supra), we find that such kind of transactions of earning long-term capital gain from penny stock companies have been held to be bogus. It is also not in dispute that ld. Asseessing Officer has not conducted any enquiry about the said transaction even when the report of the Investigation Wing containing the list of 84 companies found to be penny stock companies was available in the Income Tax Portal, which the ld. Assessing Officer needs to refer while framing the assessment. Under these given facts and circumstances, we are of the considered view that ld. PCIT was justified in invoking the revisionary proceedings holding the assessment order dated 05.05.2017 as erroneous as well as prejudicial to the interest of revenue and also directing the ld. Assesisng Officer to frame the assessment afresh considering the observation in the impugned order. Therefore, the grounds raised by the assessee are dismissed.
10. In the result, the appeal of the assessee is dismissed.
Order is pronounced in the open court on November 16, 2022
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