MINKAL K. DOSHI , MUMBAI V. ITO - 18(2)(2) , MUMBAI

ITA 1093/MUM/2020

AI Insights

The case revolves around an appeal by Minkal K. Doshi against the order of the Commissioner of Income Tax (Appeals)-29, Mumbai, which upheld the addition of Rs.24,66,000 made by the AO concerning LTCG claimed on the sale of shares of M/s. Greencrest. The AO had initially disallowed the LTCG, suspecting it to be a result of accommodation entries linked to penny stock transactions. The Tribunal, after examining the evidence and relying on precedents, concluded that the transactions were genuine and the gains were legitimate, thus reversing the CIT(A)'s decision.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 300075 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-02-2023
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: SMC
• Next Hearing Date: 28-11-2022
• Assessment Year: 2015-2016
• Appeal Filed On: 11-02-2020
• Other Referred Cases: Shyam R Pawar v DCIT, Mukesh Marolia v Addl. CIT-6, Indravadan Jain (HUF) v ITO, Arun Kumar Agarwal (HUF) v CIT
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Capital Gains; Bogus
• Section: 68; 143(1); 205

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL “SMC” BENCH, MUMBAI BEFORE SHRI ABY T. VARKEY, JM आयकर अपील सं/ I.T.A. No.1093/Mum/2020 (निर्धारण वर्ा / Assessment Years: 2015-16) Minkal K. Doshi Room No. 11/B, 5 th Floor, Pallanji House, 35, New Charni Road, Khetwadi, Mumbai-400004. बिधम/ Vs. ITO-18(2)(2) 3 rd Floor, Earnest House, Nariman Point, Mumbai- 400021. स्थधयी लेखध सं./जीआइआर सं./PAN/GIR No. : AIOPD7813N (अपीलार्थी /Appellant) .. (प्रत्यर्थी / Respondent) सुनवाई की तारीख / Date of Hearing: 29/11/2022 घोषणा की तारीख /Date of Pronouncement: 24/02/2023 आदेश / O R D E R PER ABY T. VARKEY, JM: This is an appeal preferred by the assessee against the order of the Ld. Commissioner of Income Tax (Appeals)-29, Mumbai dated 25.03.2019 for the assessment year 2015-16. 2. The main grievance of the assessee is against the action of the Ld. CIT(A) in upholding the addition of Rs.24,66,000/- made by the AO in respect of Long Term Capital Gain (LTCG) claimed of Rs.20,64,793/- being profit on sale of Rs.36,000/- shares of M/s. Greencrest (Earlier known as M/s. Marigold Glass Industries Ltd.) and claimed it as an exempt income u/s 10(38) of the Income Tax Act, 1961 (hereinafter “the Act”). 3. Brief facts are that the AO noted that the assessee had filed on 25.09.2015 return of income declaring total income of Rs.7,01,450/-. The return filed has been processed u/s 143(1) of the Act. Thereafter, Assessee by: Shri B. N. Rao Revenue by: Shri Nayana K. Kumar ITA No.1093/Mum/2020 A.Y. 2015-16 Minkal K Doshi 2 the return has been selected for scrutiny through CASS. The reason for selection for scrutiny was “suspicious sale transaction in shares and exempt long term capital gains shown in return (Penny Stock tab in ITS).’ The AO noted that the assessee claimed exemption u/s 10(38) of the Act for LTCG in respect of sale of shares to the extent of Rs.20,64,793/-. And that the share sold were of M/s. Greencrest (scrip code is 531737). On being asked by AO, the assessee replied vide his letter dated 31.08.2017 that he was allotted 1,50,000 shares of M/s. Marigold Glass Industries Ltd., for which the assessee had made payment of Rs.18,00,000/-. Subsequently the companies name got changed from M/s. Marigold Industries Ltd, to M/s. Greencrest Financial Services Ltd. Upon the name change, the shares were also split at Rs.1/- per share and the assessee got 15,00,000/- shares of the same after the split. In the computation of income filed along with the return of income, the assessee has claimed exemption u/s 10(38) of the Act as under: - Name of company Sale price and date of sale Purchase price and date of purchase No. of shares sold Exempt 10(38) M/s. Greencrest (Previously known as M/s. Marigold Industries Ltd.,) 24,58,602/- on 11.12.2014 4,32,000/- on 14.09.2012 36,000 24,58,602/- In order to prove the genuineness of the purchase and sale of the script in question, the assessee has furnished letter dated 31.08.2017 wherein he stated that he has purchased 1,50,000 shares of M/s. Greencrest which after split increased to 15,00,000. And that the assessee during the relevant financial year, sold only 36,000 equity shares (during the period for which he proportionately invested only Rs.5,40,235 but sold ITA No.1093/Mum/2020 A.Y. 2015-16 Minkal K Doshi 3 it for Rs.26,08,353/-). However, the AO took note of the report of the investigation wing of Kolkata wherein it was stated that the scrip of M/s. Greencrest was a penny stock scrip which script code has been misused in connivance with the promoter, broker, entry operator and exit provider was providing accommodation entry to various beneficiary as Long Term Capital Gain/Short Term Capital Loss. In view of the findings of the Investigation wing, further verification was done. And since assessee had bought 1,50,000/- shares @ Rs.12/- per share in Sep, 2012 of a non-listed company for a consideration of Rs.18,00,000/- only and there was a huge gain made within a period of about two (2) years from purchase of shares, and the assessee had a stock of ten (10) times the shares purchased i.e. 15,00,000 shares out of which assessee sold 36,000 shares for a consideration of Rs.24,58,602/- which is almost fifty seven (57) times higher than the purchase price, it raised high suspicion about the claim of gain claimed by assessee. 4. According to the AO, the suspicious rise in the number of shares (by splitting) made him conduct deeper investigating about the un- usual gain made by assessee. Therefore, the AO has recorded the statement of the assessee on 12.12.2017 who stated that he was a Chartered Accountant by profession and (his statement has been reproduced from page no. 9 to 15 of the assessment order) and that he has been an investor for last 10 years and keeps a watch of the companies traded in stock-exchange through media reports; and has subscribed to the preferential issue of shares of M/s Green Crest ITA No.1093/Mum/2020 A.Y. 2015-16 Minkal K Doshi 4 Financials, formerly known as Meri Gold Glass Industries, because he thought that there was good opportunity of growth for this company and therefore he decided to invest in it. And that he has Demat account with M/s. Ashika Stock Broking Ltd and his client ID number A500M6448 and DP A/c no. is 1203450000656537 (answer to question no. 3 at page no. 9). The assessee also brought to the AO’s noticed that he has been an investor in many companies in the past like M/s Power Grid, M/s Adani Port, M/s Coal India and M/s Reliance Power etc. To question no. 47 as to whether he has to say any thing more, the assessee has submitted that the increase in price cannot be sole criteria for treating a genuine share transactions as penny shares transaction. According to him, the shares purchased and sold were in the regular primary market and secondary live market, through recognized stock exchange only. Shares were received in physical form/certificate, dematerialized and delivered in dematerialized form, from his regular Demat account and applicable STT was also paid on these transactions. And the payments were made and received in regular banking channel through the mode of Cheque, RTGS or NEFT. Hence he asserted that this scrip cannot be termed as penny share transaction and reiterated that the transaction in question are genuine investment transactions. However, the AO did not agree and was of the opinion that since the Investigation Wing has found that this scrip a penny stock and the entry operators Shri Devesh Upadhyaya and Mr. Jagdish Purohit has admitted of providing accommodation entry after receiving cash in the form of LTCG etc, the AO held as under: - ITA No.1093/Mum/2020 A.Y. 2015-16 Minkal K Doshi 5 “The value of consideration claimed is Rs.24,58,602/- whereas the cost of purchase paid by assessee is Rs. 4,32,000/- which is given by cheque to show the purchases as genuine purchases. The sale price received as accommodation entry is nothing but the return -of amount in lieu of cash that the assessee would have paid to hawala operators over and above Rs. 4,32,000/- paid by assessee by cheque at the time of purchase of penny stock in F.Y 2014-15. Therefore, a sum of Rs.24,58,602/- being difference between cost price and sale price would represent the value of cash which has been laundered in the form of bogus profit on sale of shares. It may also further be noted that as per the Assessee Information Report of the assessee obtained from the ITD system of the department shows that the total consideration of the transaction is Rs.24,66,000/- out of the sale of 36,000 shares. The difference of Rs.7,398/- is nothing but the transfer expenses expended by the assessee. This expense also needs to be added back in view of the modus operandi explained in herein above. Therefore a total sum of Rs.24,66,000/- (Rs.24,58,602/- + Rs.7,398/-) represents the unexplained investment made by assessee in cash to obtain the equivalent amount as bogus profit on sale of shares. Alternatively, it can also be concluded that the sum of Rs.24,66,000/ -represents income from other sources and not the income in the nature of capital gain.” 5. Aggrieved by the action of AO the assessee preferred an appeal before the Ld. CIT(A) who was pleased to dismiss the appeal of the assessee and aggrieved by the action of the Ld. CIT(A), the assessee is before this Tribunal. ITA No.1093/Mum/2020 A.Y. 2015-16 Minkal K Doshi 6 6. Having heard both the parties and after perusal of the records, it is noted that the assessee is a Chartered Accountant by profession and works in M/s. Shreepati Built Investment. And when summoned before the AO, he has submitted that he was a regular investor in shares like M/s. Power Grid, M/s. Adani Port, M/s. Coal India and M/s. Reliance Power etc. (supra). The assessee’s statement has been recorded by the AO which has been reproduced by the AO from page 8 to 14 of the assessment order; and that he was allotted preferential shares of M/s. Greencrest Financial Services Ltd. (earlier known as Marigold Glass Industries Ltd.) and to support the same had filed allotment advice from M/s. Marigold Glass Industries Ltd which is found placed at page no. 1 of the PB; and the bank account shows payment of Rs.18,00,000/-towards purchase of shares of the above company on 06.09.2012 (refer page no. 2 & 3 of the PB). The Ld. AR also brought to my notice that the Demat statement (CDSL statement for the period 01.12.2013 to 31.12.2013) shows holding of 150,000 equity shares of M/s. Marigold Glass Industries Ltd in Demat Format (refer page no. 4 to 5 of the PB). And the Ld. AR also brought to my notice CDSL statement for the period 01.03.2015 to 31.03.2015 showing holding of 14,64,000/- equity shares of M/s. Greencrest Financial Services Ltd. in Demat Format after sale of 36000 equity shares on 11.12.2014 (refer page no. 6 to 7 of the PB). The Ld. AR also brought to my notice contract note from Broker M/s. Ashika Stock Broking Ltd. for sale of 36,000 equity shares of M/s. Greencrest Financial Services Ltd. out of 15,00,000/- equity shares (refer page no. ITA No.1093/Mum/2020 A.Y. 2015-16 Minkal K Doshi 7 8 to 9 of the PB). The Ld. AR also brought to my notice the Bank statement showing receipt of Rs.25,65,533/- on 17.12.2014 against the sale of 36000/- equity shares (refer page no. 10 of the PB). Thus, the assessee has brought to my notice that the assessee has purchased for Rs.18,00,000/- Rs. 1,50,000/- shares of Marigold Glass Industries Ltd. And which fact has been reflected in his Demat Account and later which was split in to 15,00,000 shares and out of which assessee has sold 36,000 shares the same through its broker Ashika Stock Broking. And all transactions are supported by primary documents and the consideration have passed through the banking channel. It is noted that there was no adverse SEBI order against broker and the broker is still trading in the BSE. The Ld. AR brought to my notice that the assessee has no connection with Shri Devesh Upadhyaya and Shri Jagdish Purohit (entry operators at Kolkata). And according to him, just because few operators have done some nefarious activities, the assessee cannot be blamed and cannot be denied the gain LTCG merely on the basis of suspicion. Therefore, relying on the decision of the Hon’ble Bombay High Court and Co-ordinate bench decision of the Tribunal in similar cases (especially decision of the Hon’ble Mumbai Tribunal in the case of Shyam R Pawar v DCIT in ITA No. 5585/Mum/2011 dated 04.05.2012), wherein the Tribunal in that case noted that the shares were purchased by the assesse (Shyam R. Power), which continued to be with him till the end of the year. Further the assesse had sold the shares in first lot of 7500 on 19.02.200 for Rs. 10,00,000 and Rs.6,83,125 on 05.03.2003 and 06.03.2003 for a total ITA No.1093/Mum/2020 A.Y. 2015-16 Minkal K Doshi 8 consideration of Rs.9,10,025. Similarly the assesse sold 12,500 shares of Mantra Online Ltd. on 25.02.2003. Besides this, Demat account showed the transactions of credit of 20,000 shares of Mantra Online Ltd. on 31.01.2003 and sale of these shares on 20.02.2003 of 7,500 shares and on 22.02.2003 of 12,500 shares. And that assessee had also filed bill along with contract notes from the two brokers which gave details of transactions with the exact time of transaction depicting trade time. This Tribunal noted that at no point of time, the department had been able to pin point that there was an accommodation of cash getting converted into regular payment. The revenue, in that case, had heavily relied on the discrepancy pointed out by CSE, regarding client code misuse, but at no point of time the revenue was able to prove that the sale of the impugned shares was bogus/sham. Even the details received from CSE did not mention that on the specified dates, the transaction as asserted by assessee did not take place. The Tribunal observed, that department failed to show that the payee brokers did not have funds to make payments to the assessee or that their existence was suspect or that the transaction was not genuine. It was noted by the Tribunal that although investigation was conducted by the department on brokers, M/s Prakash Nahata & Co. and Bubna Stock B. S. Ltd., and even found that cash was deposited in the account of Prakash Nahata & Co. in the bank and gave full summary of the details, nowhere did the name of that assessee figured in that list. The Tribunal therefore, noted that the burden was on the department to nail the assessee through proper evidence, that there was some cash ITA No.1093/Mum/2020 A.Y. 2015-16 Minkal K Doshi 9 transaction with these suspected brokers, on whom there was an investigation being conducted by the department. Based on these observations the addition made on account of bogus long-term capital gain was deleted by the Tribunal. Subsequently, this decision of the Tribunal was challenged by the revenue before the Hon'ble Bombay High Court in the case of CIT v. Shyam Pawar - 54 taxmann.com 108 (Bom.). The appeal of the Department was dismissed with the following observations of the court: “6. It is in that regard that we find that Mr. Gopal’s contentions are well founded. The Tribunal concluded that there was something more which was required, which would connect the present assessee to the transactions and which are attributed to the Promoters/Directors of the two companies. The Tribunal referred to the entire material and found that the investigation stopped at a particular point and was not carried forward by the Revenue. There are 1,30,000 shares of Bolton Properties Ltd. purchased by the assessee during the month of January 2003 and he continued to hold them till 31 March 2003. The present case related to 20,000 shares of Mantra Online Ltd. for the total consideration of Rs.25,93,150. These shares were sold and how they were sold, on what dates and for what consideration and the sums received by cheques have been referred extensively by the Tribunal in para 10. A copy of the DMAT account, placed at pages 36 and 37 of the appeal paper book before the Tribunal showed the credit of share transaction. The contract notes in Form-A with two brokers were available and which gave details of the transactions. The contract note is a system generated and prescribed by the Stock Exchange. From this material, in para ITA No.1093/Mum/2020 A.Y. 2015-16 Minkal K Doshi 10 11 the Tribunal concluded that this was not mere accommodation of cash and enabling it to be converted into accounted or regular payment. The discrepancy pointed out by the Calcutta Stock Exchange regarding client code has been referred to. But the Tribunal concluded that itself, is not enough to prove that the transactions in the impugned shares were bogus/sham. The details received from Stock Exchange have been relied upon and for the purposes of faulting the revenue in failing to discharge the basic onus. If the Tribunal proceeds on this line and concluded that inquiry was not carried forward and with a view to discharge the initial or basic onus, then such conclusion of the Tribunal cannot be termed as perverse. The conclusions as recorded in para 12 of the Tribunal’s order are not ‘vitiated by any error of law apparent on the fact of the record either.” 7. In an identical case, the addition on account of long term capital gain on sale of shares was deleted by holding it to be a genuine transaction in the case of Mukesh Marolia v. Addl. CIT-6 SOT 247 (Mum). Even in the said case, the AO had held that the long term capital gain shown by the assessee was unexplained since in the said case broker had confirmed in a statement before the AO that he never sold any shares to the assessee. However, taking note of the evidence as available on record, the Tribunal held that the AO had not disproved the genuineness of the transactions. The said decision of the Tribunal was later upheld by the Hon’ble Bombay High Court in the case of CIT v. Mukesh Marolia - ITA 456 of 2007 dated 07.09.2011. And the SLP against the said decision filed by the Department has also been ITA No.1093/Mum/2020 A.Y. 2015-16 Minkal K Doshi 11 dismissed by the Hon’ble Supreme Court in SLP (Civil) No. 20146/2012 dated 27.01.2014. 8. Reliance was also placed on the decision of this Mumbai Tribunal in the case of ITO v. Indravadan Jain (HUF) (ITA No, 4861/Mum/2014) dated 27.05.2016 wherein an identical issue was involved, and in the said case, the long term capital gains claimed by the assessee was denied by the AO and treated as unexplained cash credit u/s 68 of the Act on the basis of action taken by SEBI against the broker through whom the assessee had sold shares. The Tribunal after taking into consideration the facts involved held that action taken against the broker by SEBI cannot be a ground to treat the transaction of the assessee as non-genuine and upheld the action’ of Ld. CIT(A) in deleting the addition made by the AO. The relevant extract of the order is reproduced as under: “8. We have considered rival contentions and carefully gone through the orders of authorities below and found form the record that the AO has treated the share ' transaction as bogus on the plea that SEBI ins initiated investigation in respect of Ramkrishna Fincap Put. Ltd. The AO further stated that investigation revealed that transaction through M/s Basant Periwal and Co. on the floor of stock exchange was more than 83%. We found that as far as initiation of investigation of broker is concerned, the assessee is no way concerned with the activity of the broker. Detailed finding has been recorded by CIT(A) to the effect that assessee has made investment in shares which was purchased on the floor of stock exchange and not form M/s Basant Periwal and Co. Against purchases payment has been made by account payee cheque, ITA No.1093/Mum/2020 A.Y. 2015-16 Minkal K Doshi 12 delivery of shares were taken, contract of sale was also complete as per the Contract Act, therefore, the assessee is not concerned with any way of the broker. Nowhere the AO has alleged that the transaction by the assessee with these particular broker or share was bogus, merely because the investigation was done by SEBI against broker or his activity, assessee cannot be said to have entered into ingenuine transaction, insofar as assessee is not concerned with the activity of the broker and have no control over the same. We found that M/s Basant Periwal and Co. never stated any of the authority that transaction in M/s Ramkrishna Fincap Pvt. Ltd. on the floor of the stock exchange are ingenuine or mere accommodation entries. The CIT(A) after relying on the various decision of the coordinate bench wherein on similar facts and circumstances issue was decided in favour of the assessee came to the conclusion that transaction entered by the assessee was genuine. Detailed finding recorded by CIT (A) at para 3 to 5 has not been controverted by the department by bringing any positive material on record. Accordingly, we do not find any reason to interfere in the findings of CIT(A). Moreover, issue is also covered by the decision of jurisdictional High Court in the case of Shyam R. Pawar (supra), wherein under similar facts and circumstances, transactions in shares were held to be genuine and addition made by AO was deleted. Respectfully following the same vis-a-vis findings recorded by CIT(A) which are as per material on record, we do not find any reason to interfere in the order of CIT(A).” 9. In similar case, the issue was decided in favour of the assessee in the case of Commissioner of Income-tax, Jamshedpur vs. Arun Kumar Agarwal (HUF) 210 Taxman 205 (Jharkhand High Court). In this case, the AO on the basis of finding in the SEBI enquiry, ITA No.1093/Mum/2020 A.Y. 2015-16 Minkal K Doshi 13 consequent to which eleven stock brokers & their trading were suspended by the Kolkata Stock Exchange from buying & selling the securities ii) investigation by the CIT (Inv.) in the case where modus operandi adopted by the brokers of the assessee was also identical with one adopted by M/s Ahilya Commecial Pvt. Ltd., held that transaction of the purchase of the share and sale thereof is not genuine and is a sham transaction. Hon’ble Jharkhand High Court while dismissing the appeal of revenue held as under: “Even in a case where the share broker was found involved in unfair trade practice and was involved in lowering an rising of share price, and any person, who himself is not involved in that type of transaction, if purchased the share from that broker innocently and bonafidely and if he shows his bona fide in the transaction by showing relevant material, facts and circumstances & documents, then merely on the basis of the reason that share broker was involved in dealing in share of a particular company in collusion with other or in the manner of unfair trade practice against the norms of SEBI and stock exchange, then merely because of that fact a person who bonafidely entered into share transaction of that company through such broker then only by assumption such a transaction cannot be held to be a sham transaction.” 10. Hon'ble Jharkhand High Court further held as under: “It is not disputed by the revenue before us that the share of these assessee were already shown in the balance sheet submitted by the assessee, and therefore, in that situation, how the revenue condemning the transaction even on the ground of steep rise in the shares. If within a period of one year, the share ITA No.1093/Mum/2020 A.Y. 2015-16 Minkal K Doshi 14 price had risen from Rs.5 to 55 and from 9 to 160 and one person was holding the shares much prior to that start of rise of the share price, then how can it be inferred that such a transaction entered into a sham transaction few years ago and prepared for getting the benefit after few years when share will start rising steeply. In the present case even there was no reason for such suspicion when the shares purchased years before the unusual fluctuation in the share price. Hence, the appeal of department dismissed CIT(A) and ITAT while allowing the appeal held as under; It is also not in dispute that assessee disclosed the shares in their possession in earlier return and statement of accounts and they are duly entered into the books of the accounts of the assessee which was duly proved by the bank statement.” 11. I find that in the case at hand before me, relevant evidence were produced to suggest that the transactions (purchase and sale of shares) were undertaken and thereafter the same was reflected in the Demat Account; and the transactions have taken place through banking channel and through registered broker of Stock Exchange; and there is no evidence to disprove these relevant documents which support the claim of assessee (LTCG). Therefore, the claim of LTCG on the scrip under question cannot be disallowed based on general enquiry conducted by department unless the involvement of assessee is shown in the illegal activities, without which, the impugned action to disallow the claim of assessee cannot be sustained. 12. Further, I agree with the submission of the assessee that the assessee’’s case is distinguishable from the case of Sanjay Bimalchand ITA No.1093/Mum/2020 A.Y. 2015-16 Minkal K Doshi 15 Jain L/h Shantidevi B Jain v CIT of Mumbai High Court, Nagpur Bench in Income tax Appeal No. 18/2017. 13. Therefore, in view of the decisions of the jurisdictional High Court and other decisions of Tribunal, and in the factual back ground discussed (supra), I find that the addition of Rs.24,66,000/- under section 68 of the Act made by the AO is unsustainable and therefore direct the AO to delete the same and allow the LTCG income of Rs.24,58,602/- as exempt under section 10(38) of the Act. Assessee gets relief as afore-stated. And consequently the brokerage charge added of Rs 12,730/- is also deleted. Ground nos.1is allowed. 15. In the result, the appeal of the assessee is partly allowed. Order pronounced in the open court on this 24/02/2023. Sd/- (ABY T. VARKEY) JUDICIAL MEMBER मुंबई Mumbai; दिनांक Dated : 24/02/2023. Vijay Pal Singh, (Sr. PS) आदेश की प्रनिनलनि अग्रेनर्ि/Copy of the Order forwarded to : 1. अपीलार्थी / The Appellant 2. प्रत्यर्थी / The Respondent. 3. आयकर आयुक्त(अपील) / The CIT(A)- 4. आयकर आयुक्त / CIT 5. दवभागीय प्रदतदनदि, आयकर अपीलीय अदिकरण, मुंबई / DR, ITAT, Mumbai 6. गार्ड फाईल / Guard file. आदेशधिुसधर/ BY ORDER, सत्यादपत प्रदत //True Copy// उि/सहधयक िंजीकधर /(Dy./Asstt. Registrar) आयकर अिीलीय अनर्करण, मुंबई / ITAT, Mumbai