MAHENDRA PARAKH, MUMBAI V. ACIT, CIRCL20(2), MUMBAI

ITA 1566/MUM/2023

AI Insights

The case revolves around an appeal by Mahendra Parakh against the order of the CIT(A)-2, Udaipur, which confirmed the addition of Rs. 20,06,535 as unexplained cash credit under section 68 of the Income Tax Act. The addition was initially made by the Assessing Officer based on suspicions that the capital gains declared from the sale of shares in Mishka Finance and Trading Limited were not genuine, labeling them as 'penny stocks'. The assessee argued that all transactions were conducted through proper channels and documented adequately. The Tribunal, referencing precedents from the Bombay High Court, found that the tax authorities had not substantiated their claims with adequate evidence linking the assessee to any wrongdoing.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 136557 (ITAT-MUMBAI)
• Duration Of Justice: 2 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-07-2023
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: SMC
• Next Hearing Date: 18-07-2023
• Assessment Year: 2014-2015
• Appeal Filed On: 07-05-2023
• Other Referred Cases: Shyam Power vs. Income Tax Department, PCIT vs. Ziauddin A Siddique
• Laws Referred To: Income Tax Act
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: NAGANATH B. PASALE
• Assessee Lawyers: SEBI
• Keywords: Question of law; Accommodation entries; Penny stocks; Capital Gains
• Section: 68

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL Mumbai “SMC” Bench, Mumbai. Before Shri B.R. Baskaran (AM) & Shri Narender Kumar Choudhry (JM) I.T.A. No. 1566/Mum/2023 (A.Y. 2014-15) Mahendra Parakh 59 Narpat Nagar Pal Road, Jodhpur Rajasthan-342005 PAN : AABPP6520D Vs. ACIT, Circle-20(2) Room No. 217, 2 nd Floor, Piramal Chambers Lalbagug Mumbai-400 012. (Appellant) (Respondent) Assessee by Shri Siddharth Kothari Department by Shri Naganath B. Pasale Date of Hearing 19.07.2023 Date of Pronouncement 26.07.2023 O R D E R Per B.R.Baskaran (AM) :- The assessee has filed this appeal challenging the order dated 31.3.2023 passed by the learned CIT(A)-2, Udaipur and it relates to A.Y. 2014-15. The assessee is aggrieved by the decision of the learned CIT(A) in confirming the addition of Rs. 20,06,535/- relating to the sale value of the shares sold by the assessee treating it as unexplained cash credit under section 68 of the Act. 2. The Learned AR appearing for the assessee submitted that the assessee filed his return of income for the year under consideration declaring a total income of Rs. 12,66,230/-. The same was taken up for the scrutiny. During the course of scrutiny proceedings, the Assessing Officer noticed that the assessee has declared long term capital gain of Rs. 19,91,535/- on sale of 40,000 shares of Mishka Finance and Trading Limited. The assessee had claimed the same as exempt under section 10(38) of the Act. The Assessing Officer noticed that the investigation wing of the Kolkata Directorate has Mahendra Parakh 2 identified certain stocks as Penny stocks, wherein long term capital gains/capital loss have been generated by manipulating the price of those shares. The Assessing Officer noticed that the Mishka Finance and Trading Limited has been identified as one of the penny stocks. On the basis of the report of the investigation wing, the Assessing Officer came to the conclusion that the capital gain declared by the assessee is not genuine. Accordingly, he proposed to assess the sale consideration of Rs. 20,06,535/- as income of the assessee under section 68 of the Act. In response to the notice of the Assessing Officer, the assessee submitted that he has purchased shares through a registered broker, dematerialized the same and sold it through the recognized stock exchange. It was further submitted that the transactions of purchase and sale were carried out through banking channel. Accordingly, the assessee contended that the capital gain declared by him cannot be considered as bogus in nature. The Assessing Officer did not accept the explanations of the assessee. Accordingly, he rejected the claim of the deduction under section 10(38) of the Act and assessed the entire sales proceeds of Rs. 20,06,535/- as income of the assessee under section 68 of the Act. The learned CIT(A) confirmed the same and hence the assessee has filed this appeal before the Tribunal. 3. Learned AR submitted that the assessee had initially purchased 500 shares of Mishka Finance and Trading Limited through SEBI registered broker M/s. Roomta Pricing Pvt. Ltd. on 15.1.2013. The payment for it was made by way of cheque. Thereafter the assessee received 3500 shares as bonus shares on 14.2.2013. Hence, the total holding of the assessee in the above said company is increased to 4000 shares. Thereafter the above said shares were split into the shares of smaller par value in the ratio of 1 : 10 on 18.1.2014. Accordingly the total holding of the assessee in the above said company rose to 40,000 shares. Thereafter, the assessee sold entire 40,000 shares through a broker named Joinder Capital Services Limited for a consideration of Rs. 20,06,535/- in March 2014 in the stock exchange by Mahendra Parakh 3 paying Security Transaction Tax. In this process, the assessee earned long term capital gains of Rs. 19,91,535/- from the above said sale. Since the shares were sold after holding them for more than one year, the assessee claimed the above said long term capital gain as exempt u/s 10(38) of the Act. He further submitted that the SEBI has taken action on certain investors who had invested in the penny stocks. However, no such action has been taken upon the assessee by SEBI. 4. The Ld A.R further submitted that the assessee is a regular investor in the shares and during the year under consideration, he has sold shares of other companies like DCW Ltd, JSW Steel Ltd, Morepen Laboratories, Timex Watches Ltd etc. Accordingly, he submitted that the sale of shares of M/s Mishka Finance & Trading Co Ltd is not a case of isolated transaction. He submitted that the assessee has purchased shares of M/s Mishka Finance & Trading Co Ltd in the ordinary course of carrying on of his investment activities. Accordingly, he submitted that there is no reason to suspect long term capital gain declared by the assessee. 5. He also submitted that the Assessing Officer has merely placed reliance on the report given by the investigation wing and did not conduct any independent inquiry about the transactions carried out by the assessee. Accordingly, the Ld A.R contended that the AO has not disproved the transactions carried on by the assessee and hence he could not have made the addition u/s 68 of the Act. He submitted that the learned CIT(A) was also not justified in confirming the addition. 6. The Learned DR, on the contrary, supported the orders passed by the tax authorities. He submitted that the financial position of the Company Mishka Finance and Trading Limited does not justify the high shares price quoted in the stock exchange. Accordingly, he submitted that the tax Mahendra Parakh 4 authorities are justified in assessing the sale value of shares as unexplainex cash credit. 7. We heard rival contentions and perused the record. There is no dispute with regard to the facts that the assessee has purchased the shares through a broker by paying the consideration in cheque. The said shares after receipt of bonus shares and split were sold through a broker in a recognized stock exchange. The said shares have been held for more than one year. We further notice that the assessee has furnished all the documents in support of purchase and sale of shares. However, the AO did not examine those documents and find fault with them. On the contrary, the AO has relied upon the report given by the Investigation wing of Calcutta, wherein the shares of M/s Mishka Finance and Trading Ltd has been identified as penny stock. 8. We notice that the assessing officer has not found fault with any of the documents furnished by the assessee in support of purchase and sale of shares. The shares have entered and exited his demat account of the assessee. There is also no allegation made that the assessee was part of ring which indulged in the alleged price rigging. The AO has placed reliance on the report of Investigation wing to hold that the assessee has availed accommodation entries by way of long term capital gains. We notice that an identical case of allegations that the assessee has availed accommodation entries for bogus capital gains was examined by the Hon’ble jurisdictional Bombay High Court in the case of Shyam Power (2015) 55 taxman.com 108(Bom). The decision rendered by Hon’ble Bombay High Court in the above said case is extracted below:- “3. Mr.Sureshkumar seriously complained that such finding rendered concurrently should not have been interfered with by the Tribunal. In further Appeal, the Tribunal proceeded not by analyzing this material and concluding that findings of fact concurrently rendered by the Assessing Mahendra Parakh 5 Officer and the Commissioner are perverse. The Tribunal proceeded on the footing that onus was on the Department to nail the Assessee through a proper evidence and that there was some cash transaction through these suspected brokers, on whom there was an investigation conducted by the Department. Once the onus on the Department was discharged, according to Mr.Sureshkumr, by the Revenue-Department, then, such a finding by the Tribunal raises a substantial question of law. The Appeal, therefore, be admitted. 4. Mr.Gopal, learned Counsel appearing on behalf of the Assessee in each of these Appeals, invites our attention to the finding of the Tribunal. He submits that if this was nothing but an accommodation of cash or conversion of unaccounted money into accounted one, then, the evidence should have been complete. Change of circumstances ought to have, after the result of the investigation, connected the Assessee in some way or either with these brokers and the persons floating the two companies. It is only, after the Assessee who is supposed to dealing in shares and producing all the details including the DMAT account, the Exchange at Calcutta confirming the transaction, that the Appeal of the Assessee has been rightly allowed. The Tribunal has not merely interfered with the concurrent orders because another view was possible. It interfered because it was required to interfere with them as the Commissioner and the Assessing Officer failed to note some relevant and germane material. In these circumstances, he submits that the Appeals do not raise any substantial question of law and deserve to be dismissed. 5. We have perused the concurrent findings and on which heavy reliance is placed by Mr.Sureshkumar. While it is true that the Commissioner extensively referred to the correspondence and the contents of the report of the Investigation carried out in paras 20, 20.1, 20.2 and 21 of his order, what was important and vital for the purpose of the present case was whether the transactions in shares were genuine or sham and bogus. If the purchase and sale of shares are reflected in the Assessee's DMAT account, yet they are termed as arranged transactions and projected to be real, then, such conclusion which has been reached by the Commissioner and the Assessing Officer required a deeper scrutiny. It was also revealed during the course of inquiry by the Assessing Officer that the Calcutta Stock Exchange records showed that the shares were purchased for code numbers S003 and R121 of Sagar Trade Pvt Ltd. and Rockey Marketing Pvt. Ltd. respectively. Out of these two, only Rockey Marketing Pvt.Ltd. is listed in the appraisal report and it is stated to be involved in the modus-operandi. It is on this material that he holds that the transactions in sale and purchase of shares are doubtful and not genuine. In relation to Assessee's role in all this, all that the Commissioner observed is that the Assessee transacted through brokers at Calcutta, which itself raises doubt about the genuineness of the transactions and the financial result and performance of the Company was not such as would justify the increase in the share prices. Therefore, he reached the conclusion that certain operators and brokers devised the Mahendra Parakh 6 scheme to convert the unaccounted money of the Assessee to the accounted income and the present Assessee utilized the scheme. 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 & 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 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 face of the record either. 7. As a result of the above discussion, we do not find any substance in the contention of Mr.Sureshkumar that the Tribunal misdirected itself and in law. We hold that the Appeals do not raise any substantial question of law. They are accordingly dismissed. There would no order as to costs. 8. Even the additional question cannot be said to be substantial question of law, because it arises in the context of same transactions, dealings, same investigation and same charge or allegation of accommodation of unaccounted money being converted into accounted or regular as such. The relevant details pertaining to the shares were already on record. This question is also a fall out of the issue or question dealt with by the Tribunal and pertaining to the addition of Rs.25,93,150/-. Barring the figure of loss that is stated to have been taken, no distinguishable feature can be or could be placed on record. For the same reasons, even this additional question cannot be termed as substantial question of law.” Mahendra Parakh 7 9. The Hon’ble Jurisdictional High Court has considered an identical issue in yet another case of PCIT vs. Ziauddin A Siddique (Income tax Appeal No. 2012 of 2017 dated 4 th March, 2022) and relevant discussions made by Hon’ble Bombay High Court are extracted below:- “2. We have considered the impugned order with the assistance of learned counsels and we have no reason to interfere. There is a finding of fact by the Tribunal that the transaction of purchase and sale of shares of the alleged penny stock of shares of Ramkrishna Fincap Ltd (“RFL”) is done through stock exchange and through the registered Stock Brokers. The payments have been made through banking channels and even Security Transaction Tax (“STT”) has also been paid. The Assessing Officer also has not criticized the documentation involving the sale and purchase of shares. The Tribunal has also come to a finding that there is no allegation against the assessee that it has participated in any price rigging in the market on the shares of RFL. 3. Therefore we find nothing perverse in the order of the Tribunal. 4. Mr. Walve placed reliance on a judgement of the Apex Court in Principal Commissioner of Income tax (Central)-1 vs. NRA Iron & Steel (P) Ltd (2019)(103 taxmann.com 48)(SC) but that does not help the revenue in as much as the facts in that case were entirely different. 5. In our view, the Tribunal has not committed any perversity or applied incorrect principles to the given facts and when the facts and circumstances are properly analysed and correct test is applied to decide the issue at hand, then, we do not think that question as pressed raises any substantial question of law. 10. Accordingly, in the facts and circumstances of the case, we are of the view that the decision rendered by the jurisdictional Hon’ble Bombay High Court in the above said case of Shyam R Pawar (supra) and Ziauddin A Siddique (supra) are squarely applicable in the present case. Accordingly, we hold that the long term capital gains declared by the assessee cannot be doubted with. Accordingly, we set the order passed by Ld CIT(A) on the grounds raised on merits and direct the AO to delete the addition of long term capital gains. Mahendra Parakh 8 11. In the result, the appeal filed by the assessee is allowed. Pronounced in the open court on 26.7.2023. Sd/- Sd/- (Narender Kumar Choudhry) (B.R. Baskaran) Judicial Member Accountant Member Mumbai.; Dated : 26/07/2023 Copy of the Order forwarded to : 1. The Appellant 2. The Respondent 3. The CIT(A) 4. CIT 5. DR, ITAT, Mumbai. 6. Guard File. BY ORDER, //True Copy// (Assistant Registrar) PS ITAT, Mumbai