Ritin Lakhmani Vs PCIT (ITAT Kolkata)
In this case The ld. Pr. CIT has simply cut and pasted para 5 to para 5.12.3 and also para 6 from the orders he had passed u/s 263 of the Act from the order of the Pr. CIT passed u/s 263 of the Act in the case of M/s. Girish Tikmani & Others. Only in para 7, the quantum of addition, or the figures of addition have varied from case to case. This shows that the same general observations and reasons have been given by the ld. Pr. CIT in all cases where he took action u/s 263 of the Act, in cases where there was a claim of deduction u/s 10(38) of the Act on LTCG and where the claim was accepted by the AO.
Based on this “cut and paste” reasoning, the ld. Pr. CIT has directed the AO to make additions u/s 68 of the Act of the entire sale consideration received by each of the assessees on the sale of shares, as well as addition u/s 69C of the Act, of an assumed commission payment u/s 69C of the Act. No evidence is brought on record except for stating generalities. SIT recommendations were cited, but these do not have any reference to these assessees. This, in our view cannot be a ground for the Pr. CIT to give specific directions to the AO to make certain additions. The assessee is not confronted by any adverse material. No reference has been made to any specific adverse material. When the assessee is not confronted with any material no amount can be directed to be added by the ld. Pr. CIT, on the basis of suspicion, or material in the public domain on the general modus operandi adopted in such cases. It is necessary for the ld. Pr. CIT to have conducted his own enquiries, collected adverse material and confronted the assessee with such adverse material, consider the replied and only after following the principles of natural justice, he could have directed the additions in question against the assessee. Additions cannot be made based on general reasoning or some supposed material in the public domain which was never brought on record. Such direction is arbitrary and has to be struck down as bad in law.
The AO in this case has called for details and thereafter made enquiries with the parties by issuing notices u/s 133(6) of the Act. Only on receiving replies from third parties, the AO came to a conclusion that he could not find any discrepancy in the claim of the assessee for exemption u/s 10(38) of the Act. The Pr. CIT has not pointed out as to what was the deficiency in these enquiries of the AO and as to what are the further enquiries the AO should have done.
The ld. D/R had stated that orders were passed by various authorities including ITAT on this issue, and that decisions were in some cases in favour of the assessee and in some cases in favour of the Revenue. The AO had taken a possible view, after making his enquiries and admittedly this view is supported by some judicial decisions. The ld. Pr. CIT has not specified as to what was the nature of enquiry that the AO has failed to do, nor he has stated the extent of enquiry that was required to be done in such cases and when he has not conducted any enquiries himself, no addition can be directed based on “cut and paste” reasoning from orders of other assessees that additions should be made u/s 68 and 69C of the Act. In our view, such conclusion by the ld. Pr. CIT is not in accordance with law. It would have been another matter, had the ld. Pr. CIT restored the issue to the file of the ld. AO for fresh adjudication in accordance with law after giving the assessee adequate opportunity of being heard. This was not done.
In view of the above discussion and respectfully following the propositions of law laid down by the Kolkata ‘C’ Bench of the Tribunal in the case of M/s. Gitsh Tikmani, HUF and Others (supra), we hold that the order passed u/s 263 of the Act is bad in law in the cases of all the assessees before us. The directions for the additions as well as the order passed u/s 263 of the Act in all these cases are quashed.
FULL TEXT OF THE ITAT JUDGEMENT
All these appeals are filed by different assessees belonging to the same family and all the appeals are directed against the order of the Pr. Commissioner of the Income Tax-10, Kolkata (hereinafter the ‘Pr. CIT’) dated 11.12.2018 passed u/s 263 of the Income Tax Act, 1961 (hereinafter the ‘Act’), for the Assessment Year 2014-15.
2. Both the parties submitted that the issues arising in all these appeals and the facts are identical and that they can be heard together and disposed off by way of this common order.
3. The assessees are individuals and have e-filed their respective returns of income for the AY 2014-15. All these assessees have claimed that they have derived income from Long Term Capital Gains (hereinafter ‘LTCG’) (with STT) and had claimed exemption u/s 10(38) of the Act. These assessees had entered into share transactions through M/s. JRK Stock Broking Pvt. Ltd. The AO passed an order u/s 143(3) of the Act in all these cases and accepted the claim of the assessees for exemption u/s 10(38) of the Act. In this order the AO records that a letter u/s 133(6) of the Act was issued to M/s. JRK Stock Broking Pvt. Ltd., for verification of the transactions of sale of shares and that he had received a reply confirming the details filed by the assessee. The AO had concluded that he had not found anything adverse in the claim of the assessee for exemption u/s 10(38) of the Act.
3.1. The ld. Pr. CIT issued a show cause notice u/s 263 of the Act on 22.11.2018 proposing to revise the assessment order passed by the AO u/s 143(3) of the Act, on the ground that the AO should have treated the LTCG earned by the assessees as bogus credit and should have added back the entire credit u/s 68 of the Act, in view of the investigation conducted by the Directorate of Investigation, Kolkata, which had resulted in the unearthing of a huge syndicate of Entry Operators, stock brokers and money launderers involved in providing bogus accommodation entries of LTCG. The ld. Pr. CIT further mentions that it has come to light that, large scale manipulation has been done in the market price of shares of certain companies listed in the Bombay Stock Exchange by certain persons working as a syndicate, in order to provide entries of tax exempt bogus LTCG, to large number of persons, in lieu of unaccounted cash and that the basic object of this racket is to convert black money into white without payment of income tax.
3.2. The assessees replied on 29.11.2018 stating that the assessees had filed all necessary documents/evidences during the assessment proceedings to prove the genuineness of the transactions, in response to notice u/s 143(2) and 143(2)(i) of the Act before the AO. That the AO had made direct third party verification of the transactions by issuing notice u/s 133(6) of the Act and found nothing adverse. Hence the assumption that there was failure on the part of the AO to assess the income correctly is not correct. He relied on a number of case laws for the proposition that the claim for exemption u/s 10(38) of the Act has been correctly allowed. It was also claimed that there is no specific evidence or adverse material against the assessee which would implicate the assessee and that the allegations were general in nature. It was also argued that powers u/s 263 of the Act cannot be invoked under these facts and circumstances.
3.3. The ld. Pr. CIT considered these statements and for the detailed reasons given in his order rejected the contention of the assessees. He concluded as follows:
“6. Having regard to the facts and circumstances of the case and in the light of the aforesaid decisions of Hon’ble Supreme Court and Hon’ble High Court and in accordance with the amendment made to Section 263 of the Act with effect from 01.06.2015, I hold that the impugned assessment order dated 02.08.2016 passed by the A.O. is erroneous in so far as it is prejudicial to the interests of revenue. Therefore, after giving the assessee an opportunity of being heard, that the impugned assessment order dated 02.08.2016 is quashed with the directions given in this order separately.
7. Accordingly, in view of the facts and circumstances of the case as stated above, and also respectfully following the judgments cited above, particularly those in the cases of Sanjay Bimalchand Jain (supra), M/s. VamaSundari Investment (Delhi)(P) Ltd (supra) and N. K. Proteins (supra), I am of the considered view that it is deemed fit and appropriate in the interest of justice to add back the entire sale consideration of the bogus penny stock shares, amounting to Rs35,78,311 /-, as unexplained cash credit u/s 68 of the Act. Further, the quantum of unexplained expenditure on account of commission payment to the tune of Rs. 1,78,916/- is also liable to be added back u/s 69C of the Act. Accordingly, I direct the AO to reassess the income of the assessee for the relevant AY 2014-15 on the issue as discussed above.”
(Emphasis ours)
4. Aggrieved, the assessee is in appeal before us.
5. The ld. Counsel for the assessee, Mr. Subash Agarwal submitted that the order passed u/s 263 of the Act is bad in law, as the proceedings were initiated at the behest of the AO and not by the Pr. CIT, as required by the Act. He pointed out to para 2 & 3 of the order passed by the Pr. CIT u/s 263 of the Act, wherein it is clearly stated that the proposal for revision was received from the AO. He relied on the decision of this Bench of the Tribunal in the case of West Bengal National University of Juridical Science vs. CIT in ITA No. 2643/Kol/2019 order dated 30.09.2020 for the proposition that proceedings u/s 263 of the Act cannot be initiated at the instance of the AO.
5.1. The ld. Counsel for the assessee further submitted that the AO during the course of assessment proceedings had made detailed enquiries by issuing notices u/s 133(6) of the Act to the parties and only obtained confirmation and accepted the claim of the assessee. He submitted that all bills and other evidences were furnished before the AO during the course of original assessment proceedings and the AO after examining the same has taken a positive view and that on these facts the Pr. CIT was wrong in exercising his jurisdiction u/s 263 of the Act.
5.2. He referred to para 5.12.4 of the order of the Pr. CIT, at page 13 of his order and submitted that the Pr. CIT does not dispute that all details were filed before the AO and that some judgements on this issue were in favour of the assessee and that he is exercising his jurisdiction because the Revenue has not accepted such decisions and as same are yet not settled in higher courts of law.
5.3. He vehemently contended that the Pr. CIT has not spelt out in his order, what more the AO should have done during the course of scrutiny proceedings while passing the original assessment order. He submitted that observations and submissions were made by the Pr. CIT in his order without stating as to, what was the credible information received and whether such information and documents have any relation to the assessee and whether there was any proof that the assessee was involved in this scam or racket. He submitted that general observations and statements are made in all the cases, without any reference to any specific adverse material against the assessee.
5.4. Referring to the SIT Report, he submitted that certain directions were given to SEBI in this report and no action was taken against anyone by any authority. That the Pr. CIT has not brought out on record this SIT report, so as to enable the assessee to rebut the presumption being drawn by the Pr. CIT against him/her based on this SIT report. He distinguished the case laws cited by the Pr. CIT in his order. The ld. Counsel for the assessee relied on the decision of the ITAT ‘C’ Bench in ITA No. 01 to 05/Kol/2019 and 13 to 15/Kol/2019 order dated 20.09.2019 in the case of M/s. Girish Tikmani, HUF & Others and drew the attention of the Bench to page 3-11 of the order and submitted that the order of the Pr. CIT, in the case on hand, is identical, word to word, when compared from page 3 to 13 of this order. He submitted that this is just a cut & paste job being done by ld. Pr. CIT in every case which proves total non-application of mind. He vehemently contended that the ld. Pr. CIT clearly states that the transactions are suspicious but orders that the entire sale consideration be added by the AO u/s 68 of the Act. He submitted that it is well settled that additions cannot be made, based on suspicion. He submits that all these cases are covered by the order of the ITAT in the case of M/s. Girish Tikmani, HUF & Others (supra), both on facts and in law.
5.5. He submitted that there is no adverse material against the assessee and that the assessee was not confronted with any material or report of the Director General of Income Tax (Investigation) and additions directed to be made by the Pr. CIT was based only on suspicion and general statements and observations. He submitted that the order u/s 263 of the Act cannot be sustained under such circumstance.
5.6. The ld. Counsel for the assessee further submitted that, the Pr. CIT has not conducted any enquiries or investigations on its own nor he has specified as to what were the enquiries that were not done by the AO warrants direction of additions u/s 68 and u/s 69C of the Act. He prayed that the order u/s 263 of the Act be quashed.
6. The ld. D/R on the other hand vehemently controverted the submissions of the assessee. At the first instance he submitted that Pr. CIT has observed that certain decisions of ITAT are in favour of the assessee and such observations cannot be read as if the Pr. CIT having conceded the issue. He pointed out that a number of decisions on the issue on hand are against the assessee and in favour of the Revenue.
6.1. On the issue of the proposal being received from the AO for involving the power of revision u/s 263 of the Act by the Pr. CIT, he argued that it is for the assessee to furnish evidence that this proposal has emanated from the AO and that the Pr. CIT has not applied his mind independently based on examination of records. He drew the attention of the Bench to the show cause notice issued u/s 263 of the Act and submitted that the ld. Pr. CIT has clearly stated that on examination of records he has come to a conclusion that there is an error which is prejudicial to the interest of the Revenue, in the order passed u/s 143(3) of the Act. The ld. CIT(DR) vehemently contended that, penny stock scam is a well known scam and the entire country is aware of it and under those circumstances, orders passed by the authorities cannot be struck down on technical grounds. He submitted that in the case of West Bengal National University of Juridical Science (supra) the letter of the AO to the Pr. CIT was produced by the assessee and based on that evidence the Tribunal has come to a conclusion that the revisionary proceedings were initiated at the instance of the AO. He submitted that no such evidence was produced by the assessee in this case. He further submitted that Pr. CIT takes the assistance of all the AOs, specifically when there is a large scam and the AOs in these case were collecting information and passing on the information to the Pr. CIT and that the Pr. CIT has examined this information and record and then only the revision was initiated. That this was done only on the satisfaction of the Pr. CIT.
6.2. On merits he submitted that the modus operandi of the scam and the manner in which exemptions were claimed to convert black money into white, are in the public domain and that he need not specifically argue these matters on merits. He submitted that the AO while examination of the purchase bills produced before him has failed to know that there is a time gap between the purchase and the date of payment, and submitted that this is a highly suspicious circumstance. He submitted that the entire family has indulged in these penny stock transactions. Referring to the case of Ritin Lakhmani, he submitted that the purchase bill was dated 16.09.2011 and whereas the payment was made only on 24.03.2012 i.e. after 6 months. He referred to Circular No. SMDRP/POLICY/CIR-32/99 dated 14.09.1999 and submitted that off market transactions were banned by S.E.B.I. and that the assessee should not have accepted such off-market transactions. He further referred to the CBDT Circular No. 23/2019 dated 06.09.2019 for the proposition that, appeals can be filed in all penny stock matters before ITAT, High Court and Supreme Court irrespective of the monetary limits. He referred to the theory of preponderance of probabilities and submitted that the AO in this case has failed to properly examine the claims of the assessee and has granted exemption. He justified the directions of Pr. CIT requiring the AO to add the gross receipts in the consequential order to be passed u/s 143(3) of the Act.
7. In his reply, the ld. Counsel for the assessee submitted that the Hon’ble Supreme Court in the case of CIT vs. S. Nelliappan [1967] 66 ITR 722 (SC) held that a legal ground can be taken by any party at any stage of the case by way of argument. He submitted that in India, the head of the family decides transactions to be done by all the family members and hence it is not correct for the ld. D/R to find fault that all the members of the family have purchased and sold shares.
7.1. He further submitted that various judicial authorities including Tribunal have in numerous decisions held that off-market transactions are legal and have to be accepted. He further submitted that the CIT(D/R) is trying to make out a new case by pointing out to the purchase bills and the date of payment etc. when the AO and the Pr. CIT have not found fault or raised any suspicion on this issue. He submitted that the special Bench of Tribunal in the case of Mahindra and Mahindra Ltd. v. DCIT [2009] 313 ITR 263 (AT) (Mumbai) (SB) has held that CIT(D/R) cannot build up a new case for the Revenue, while defending an order. He prayed for relief.
8. Rival contentions heard. On a careful consideration of the facts and circumstances of the case, perusal of the papers on record and the case law cited, we hold as follows.
9. The first issue is whether the ld. Pr. CIT has invoked his powers u/s 263 of the Act, at the instance of the AO.
Paras 2 & 3 of the order passed u/s 263 of the Act read as follows:
“2. Subsequently, an error was detected in the assessment order and a proposal was received in this office for review of the impugned order u/s 263 of the Act.
3. On perusal of the said proposal of the AO along with the records, prima facie it transpired that the Assessing Officer, namely ITO, Ward-28(4), Kolkata (hereinafter, the AO) had apparently failed to take a logical action on the information available with him, and accordingly, the impugned assessment looked erroneous in so far as it was prejudicial to the interest of revenue. Thus, a show cause notice initiating proceedings u/s 263 of the Act was issued to the assessee vide letter No. PCIT-10/Kolkata/263/50/2018-19/5976 dated 22.11.2018 as ahead.”
(Emphasis Ours)
10. A perusal of the above shows that it was the AO had detected an error in the assessment order and proposed to the Pr. CIT that the order passed u/s 143(3) of the Act passed by the AO be revised u/s 263 of the Act by the Pr. CIT. These two paragraphs do not state that the ld. Pr. CIT had on examination of the records initiated proceedings u/s 263 of the Act. The Pr. CIT has, after perusing the proposal of the AO, which was before him along with the record, came to a prima facie conclusion and initiated proceedings u/s 263 of the Act. Nowhere does the Pr. CIT state that he has examined the record.
11. Though in the show cause notice, the ld. Pr. CIT states that “on examination of records” errors were observed, the fact remains that a proposal from the AO along with the record was received and was perused (not examined) and the revisionary powers u/s 263 of the Act was initiated by the ld. Pr. CIT.
12. The proposition of law on such facts has been discussed and applied by the Kolkata ‘C’ Bench of the Tribunal in the case of M/s. Rupayan Udyog vs. Pr. CIT in ITA No. 1073/Kol/2012 for the AY 2005-06 order dated 28.11.2018. This judgement was followed by the Kolkata ‘A’ Bench of the Tribunal in the case of The West Bengal National University of Juridical Science vs. Commissioner of Income Tax (Exemption) in
ITA No. 2643/Kol/2019 for the AY 2016-17 order dated 30.09.2020. At para 8 & 9 it was held as follows:
“8. We first take up the legal issue. The Assessing Officer on 25/04/2019, made the following proposals:-
“In this case the return for the A.Y-2016-17 was assessed u/s. 143(3) of the I.T. Act, 1961 on a total income of Rs. Nil on 31.10.2018.
Later it was revealed that the assessee claimed set apart of fund u/s. 11 (2) of the Act for an amount of Rs. 17,04,30,176/-. However, the requisite Form-10 was not submitted online within the due date i.e. 17.10.2016.
In this case the delay in filing Form-10 was condoned by Ld. CIT(Exemption), Kolkata vide his order dated 20.11.2017. However, as per provisions of section 13(9) of the Act both the return of income and Form-10 are required to be submitted on or before the due date of filing return as prescribed u/s 139(1) of the Act.
In the instant case, the delay in filing Form-10 though was condoned by the Ld. CIT, the delay in filing return of income stands late. Hence the assessee is not eligible for the benefit of exemption u/s. 11(2) of the Act.
In view of the above, it is evident that the order passed u/s. 143(3) of the Act as above is erroneous in so far as it is prejudicial to the interest of revenue as per Section 13 (9) of the Act.
Under the circumstances I request your honour to kindly initiate proceeding u/s. 263 of the Act, 1961 for revising the aforesaid order passed u/s. 143(3) of the Act.”
8.1. The ld. CIT(E) initiated proceedings u/s 263 of the Act based on this proposal. The issue is whether such initiation of proceedings is valid in law.
8.2. The Kolkata ‘C Bench of the Tribunal in the case of M/s. Rupayan Udyog (supra) has held as follows:-
“So from a bare reading of sec. 263 of the Act reveals that the Commissioner may call for and examine the record of any proceeding under the Act and if he considers that any order passed therein by the AO is erroneous in so far as prejudicial to the interest of the revenue, he may after giving opportunity of being heard to the assessee pass orders as prescribed under the Act. So, the power vested in the CIT is that of revisional jurisdiction to interfere with the order of AO, if it is erroneous in so far as prejudicial to the revenue and, therefore, the power to exercise the revisional jurisdiction is vested only with the Pr. Commissioner/Commissioner if he considers the order of the AO to be erroneous in so far as prejudicial to the interest of the revenue. Therefore, this power is vested with the Pr. CIT/CIT to exercise revisional jurisdiction is only when he considers that the order passed by the AO is erroneous in so far as prejudicial to the interest of the revenue and that power cannot be usurped by the AO to trigger the revisional jurisdiction vested with the CIT as per the scheme of the Act which gives various power to various authorities to exercise and they have to exercise powers in their respective given sphere which is clearly ear-marked and spelled out by the statute. Here, we note that the AO who is empowered by the Act to assess a subject within a prescribed time period has first assessed the assessee and later after passage of time has taken up a proposal with the CIT to exercise his revisional jurisdiction cannot be countenanced for the simple reason that when in the first place the AO noticing that he failed to properly enquire before assessing the assessee within the time limit prescribed by the statute cannot be allowed to get fresh innings to reassess because it was his duty to enquire properly within the time limit prescribed by the statute. Therefore, the very invocation of revisional jurisdiction on the proposal of the AO itself is bad in law and for coming to such a decision we rely on the decision of the Tribunal in the case of Shantai Exim Ltd. Vs. CIT (2017) 88 taxmann.com 361 (Ahd. Trib.) and the decision of ITAT, Mumbai Bench in the case of Ashok Kumar Shivpuri Vs. CIT for AY 2008-09 dated 07.11.2014. Therefore, we find merit in the contention of the Ld. AR and we quash the very usurpation of jurisdiction u/s. 263 of the Act by the CIT. Therefore, the appeal filed by the assessee is allowed.”
Similar view was taken by the Kolkata Bench of the Tribunal in the following cases:
> M/s. Luxmi Township & Holding Ltd. vs. CIT; ITA No. 468/Kol/2019; Assessment Year 2014-15, order dt. 2014-15.
> Bangiya Gramm Vikash Bank vs. Pr. CIT in ITA No. 877/Kol/2015, Assessment Year 2010-11, order dt. 12/05/2017.
> Ambo Agro Products Ltd. vs. Pr. CIT, in ITA No. 676/Kol/2016, Assessment Year 2009-10, order dt. 19/05/2017.
9. Applying the proposition of law laid down in this regard in the case law referred above, to the facts of the case on hand, we have to hold that the order passed u/s 263 of the Act is bad in law for the reason that, the jurisdiction u/s 263 of the Act, was invoked by the ld. CIT(E) based on the proposals of the Assessing Officer. This is not permissible in law.”
13. Applying the propositions of law laid down in these case law to the facts of the case we have to uphold the contention of the assessee. As the initiation of the proceedings u/s 263 of the Act were based on the proposal of the AO and not on the examination of the record by the Pr. CIT, the order passed u/s 263 of the Act is vitiated. Even if the proposal had come from the AO, the ld. Pr. CIT should have independently examined the record.
14. We now take up the issue on merits. This Bench of the Tribunal in the case of M/s. Girish Tikmani, HUF and Others and Manisha Tikmani vs. ITO (supra) had adjudicated a case with identical facts. In fact, words and paragraphs written by the ld. Pr. CIT in those orders are, verbatim the same as the wording of the Pr. CIT in this order. For ready reference para 3 page 3 to 11 of that order where para 5 to 5.12.3 and para 6 of the 263 order were extracted, so that it can be compared with the paragraph numbers and words that are in this impugned order of the Pr. CIT.
“The same stand rejected in the PCIT’s order under challenge as follows:-
“5. The issue under consideration in this case is that as to whether the impugned transactions of purchase and sale of shares were indeed bogus in nature and accordingly whether the entire amount of sale consideration should have been added back or not.
5.1 From the records, it is seen that credible information was available in the custody of the AO from which it was clear that the assessee had adopted the practice of accepting accommodation entries and in turn entered into bogus transactions to the tune of RsS3,63,S18/-. As per above, during the previous year 2013- I 4, corresponding to AY 2014-15, the assessee had benefitted by trading and making manipulation. in the Scrips of “Unno Industries Ltd.” and claimed exemption u/s 10(38) of the Act.
5.2 On perusal of the assessment records, the following facts lead me to an inseparable conclusion that the transactions are not genuine and these connected parties have grossly misused the stock exchange system to generate bogus L TCG to aid and help beneficiaries to convert their unaccounted income into accounted one with no payment of taxes. The modus operandi, as emanating from the rep.ort of the Director General of Income Tax (Investigation),WB, Sikkim and NER, is reproduced ahead:
The Scheme
Entities involved in the transactions
There are three categories of individuals who are involved in the transactions
i) Syndicate Members.
They are the promoters of the Penny Stock companies who own the initial share holding mostly in the name of paper companies either in afresh IPO or purchased from the shareholders of a dormant company. They are usually a group of 4-5 individuals who a/so referred to as Syndicate Members and are sometimes also referred to as Operators. Their nominees are directors of the Penny Stock companies which are indirectly controlled by them through such dummy directors. The whole operation is managed by them. They get the net commission income from the transactions. Their name, however. seldom appears in the actual transactions.
ii) The Brokers
They are registered brokers through whom shares are traded both online and off-line. They are fully aware of the nature of transactions and get paid a commission over and above their normal brokerage. Some of the big broking houses are also indulging in such transactions mostly through sub-brokers. The brokers often compromise on KYC norms of the clients to help the Syndicate Members. Even some very renowned brokers were involved in the process through their sub-brokers provided them large numbers of terminals through which these sham transactions took place.
iii) The Entry Operators.
They are individuals who control a large number of paper/shell companies which are used for routing cash for the transactions as well as buying and selling shares during the process of price rigging. They work for commission to be paid by the Syndicate Members. To cut costs sometimes in smaller operations, the same group performs more than one function.
The Transaction
The transaction involves three legs.
i) Purchase of shares by the beneficiary: In this the beneficiary sold a fixed number of shares at a nominal rate. The price and the number of shares to be purchased are decided on the basis of the booking taken and the value up to which price would be rigged This leg of the transaction mostly is off-line. This is done to save on SIT using the loophole in Section 10(38) of the IT Act which places restriction of trading by payment of SIT on sale of shares and not purchase.
ii) Price rigging: After the shares have beef) purchased by the beneficiaries, the syndicate members start rigging the price gradually through the brokers. In these transactions the volume is almost negligible. Two fixed brokers who are in league with the Syndicate buy shares at a fixed time and at a fixed price. These low volume transactions are managed through paper companies/HUF or dummy persons maintained and controlled by the entry operators.
iii) Final sale by the beneficiary: This is done after the beneficiary has already held the shares for one year. The period of holding may be a little more to match the amount of booking with the final rate. The beneficiary is contacted either by the Syndicate member or the Broker (Middle man) through whom the initial booking was done. The beneficiary provides the required amount of cash which is routed through some of the paper companies of the entry operator and is finally parked in one company which will buy the share from the beneficiary. When everything is ready a specific date and time as well as price is fixed by the operator on which the transaction is made. The paper company issues cheque to the beneficiary. The beneficiary claims the receipt as exempt income U/S 10(38) of the I. T.Act, 1961.
The above modus operandi has been confirmed by all entry operators in their statements at the time of proceedings U/S 132/133A/131 on various dates.
5.3 AII such penny stock companies were identified from the financial accounts of the companies, trading patterns of the scrips, statement of share brokers, statement of entry operators, statement of promoters of the companies and the post search/survey inquiries. The list contains the name of the scrip Unno Industries Ltd. having scrip code 519273which is the traded scrip in the instant case. Some common features of these companies, as specified in the said report, are:
Initial allotment of shares to beneficiaries is generally done through preferential allotment.
The market price of shares of these companies rise to very high level within a span of one year.
(3)The trading volume of shares during the period, in which manipulations are done to raise the market price, is extremely thin.
(4) Most of the purported investors are returned their initial investment amount in cash. Only small amount is retained by the operator as security.
(5) Most of these companies have no business at all. Few of the companies which have some business do not have the credentials to justify the sharp rise in Market Price of their shares.
(6)The sharp rise in market price of the shares of these entities is not supported by fundamentals of the company or any other genuine factors.
(7)An analysis in respect of persons involved in transactions apparently carried out in order to jack up the share prices has been done in respect of 84 companies. It has been noted that many common persons/entities were involved in trading in more than 1 LTCG companies during the period when the shares were made to rise which implies that they had contributed to such price rise.
Names of most of the LTCG companies are changed during the period of the seam.
Most of the companies split the face value of shares [this is probably done to avoid the eyes of market analysts.
The volume of trade jumps manifold immediately when the market prices of shares reach at optimum level so as to result in LTCG assured to the beneficiaries. This maximum is reached around the time when the initial allottees have held the shares for one year or little more and, thus, their gain on sale of such shares would be eligible for exemption from Income Tax.
(11) An analysis of share buyers of some of LTCG companies was done to see if there were common persons/entities involved in buying the bogus inflated shares. It was noted that there were many common buyers [which were paper companies.
(12)The prices of the shares fall very sharply after the shares of LTCG beneficiaries have been off loaded through the pre-arranged transactions on the Stock Exchange floor/portal to the Short Term Loss seekers or dummy paper entities.
(13) The shares of these companies are not available for buy/sell to any person outside the syndicate. This is generally ensured by way of synchronized trading by the operators amongst themselves and/or by utilizing the mechanism of upper/lower circuit of the Exchange.
5.4 From the material available on record, it is proved beyond doubt that the alleged transactions and the scheme of colourable device mentioned in Para 5.lto 5.3 supra, is bogus and the entire sale consideration being bogus cash credit should have been added back U/S 68 of the Act and taxed at Maximum Marginal Rate. The benefit of (indexed) cost of acquisition should also not have been allowed to the assessee. In this regard, reference is made to the provisions of Sec 68 of the Act as reproduced below :
“Cash credits.
41. 68.42Where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation” about the nature and source thereof or the explanation offered by him is not, in the opinion ‘of the [Assessing] Officer, satisfactory, the sum so credited may be charged 10 income-tax as the income of the assessee of that previous year:
[Provided that where the assessee is a company (not being a company in which the public are substantially interested), and the sum so credited consists of share application money, share capital, share premium or any such amount by whatever name called, any explanation offered by such assessee-company shall be deemed to be not satisfactory,
the person, being a resident in whose name such credit is recorded in the books of such company also offers an explanation about the nature and source of such sum so credited; and
such explanation in the opinion of the Assessing Officer aforesaid has been found to be satisfactory:
Provided further that nothing contained in the first proviso shall apply if the person, in whose name the sum referred to therein is recorded, is a venture capital fund or a venture capital company as referred to in clause (23FB) of section 1 “
5.5 It is pertinent to mention here that two retired judges of the Supreme Court, Hon’ble Justice M. B. Shah (Retd.) and Hon’ble Justice Arijit Pasayat (Retd.) as Chairman and Vice Chairman respectively of the 11 member Special Investigation Team(SIT) of the Hon’ble Supreme Court of India on Black Money have pointed out the above mentioned modus operendi in the Third SIT report on Black Money. The recommendations of the SIT on black money as contained in the third SIT report as given below, deserve a look:
Press Information Bureau
Government of India
Ministry of Finance
24-July-2015 15:45 1ST
Recommendations o(SIT on Black Money as Contained in the Third SIT Report
Misuse of exemption on Long Term Capital gains tax/or money laundering
(Reference p. 82-84 of the Third SIT Report)
This issue was deliberated by SIT during a series of meetings held on 1″ January, 14′” March, 08th April and 3rd April. In this regard, it is pertinent to mention the observations of the Committee headed by Chairman, CBDT on “Measures to tackle Black Money in India and Abroad” which submitted its report in 2012 and which read as follows:-
“3.22 Investments are made in the secondary share markets with a view to capturing gains. In this market; out of nearly 8,000 listed companies, several scrips are not traded regularly. With the collusion of promoters, some brokers arrange for price(s) with purchase of such scrips at nominal costs, and sales at exorbitant prices, with a view to receiving money on sale as ‘capital gain’ when the long term gain is subjected to a ‘nil’ or nominal rate of tax. The advantage for manipulative taxpayer is that he can launder such sale receipts through payment of no tax. “
SEBI has recently barred more than 250 entities, including individuals and companies, from the securities market for suspected tar: evasion and laundering of black money through stock market platforms. In one such instance price of a scrip rose from ₹ 10.20 to ₹ 489 in 150 trading days – a rise of 4694%. The SIT obtained the background details of these cases and studied them. A typical pattern is observed to be followed in such cases.
