Venu Gopal Karwa, Karimnagar V. Dy. Commissioner of Income Tax , Central Circle-1(2), Hyderabad

ITA 174/Hyd/2019

AI Insights

The case involves Shri Venu Gopal Karwa, who appealed against the order of the CIT (A) which upheld the additions made by the Assessing Officer regarding the denial of LTCG exemption under section 10(38) of the Income Tax Act. The Assessing Officer had disbelieved the LTCG claim on the grounds that the transactions were not genuine, citing a broader investigation into similar cases involving penny stocks. The Tribunal noted inconsistencies in the treatment of similar claims in previous assessment years and acknowledged the lack of specific actions under sections 147 or 263 for the assessment year in question. The Tribunal's decision to remand the issue back to the CIT (A) indicates a need for a detailed examination of the assessee's transactions and the applicability of the law.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 302951 (ITAT-HYDERABAD)
• Duration Of Justice: 4 year(s) 5 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-07-2023
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: DB-B
• Next Hearing Date: 24-07-2023
• Assessment Year: 2015-2016
• Appeal Filed On: 06-02-2019
• Other Referred Cases: Arun Kumar Goyal (HUF) vs. Income Tax Officer, Tarun Kumar Goyal and Arun Kumar Goyal vs. ACIT, CIT Vs Sanghamitra Bharali
• Laws Referred To: Income Tax Act
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: V GUNA SEKHAR REDDY
• Keywords: Gift; Revision of order; Sham transactions; Penny stocks; Capital Gains; Bogus
• Section: 147; 131; 68; 263; 69C; 143(3); 142(1); 133A; 2(22)(e); 143(2); 13

Judgement Text

ITA 174 of 2019 Venu Gopal Karwa Page 1 of 14 आयकर अपीलȣय अͬधकरण, हैदराबाद पीठ IN THE INCOME TAX APPELLATE TRIBUNAL Hyderabad ‘B‘ Bench, Hyderabad Before Shri R.K. Panda, Vice-President AND Shri Laliet Kumar, Judicial Member ITA No.174/Hyd/2019 Assessment Year: 2015-16 Shri Venu Gopal Karwa Karimnagar PAN:AAVPK2698B Vs. Dy. C. I. T. Central Circle 1(2) Hyderabad (Appellant) (Respondent) Assessee by : Shri V Guna Sekhar Reddy, CA Revenue by: Shri Jeevan Lal Lavidiya, CIT (DR) Date of hearing: 25/07/2023 Date of pronouncement: 31/07/2023 ORDER Per R.K. Panda, Vice-President This appeal filed by the assessee is directed against the order dated 30.10.2018 of the learned CIT (A)-11, Hyderabad, relating to A.Y.2015-16. 2. Facts of the case, in brief, are that the assessee is an individual and derives income from salary, hose property and other sources. He filed his return of income on 6.3.2016 belatedly declaring taxable income at Rs.47,71,060/-. The return was selected for complete scrutiny under CASS. Accordingly statutory notices u/s 143(2) and 142(1) were issued and served on the assessee to which the AR of the assessee appeared from time to time and furnished the requisite details. One of the CASS reasons ITA 174 of 2019 Venu Gopal Karwa Page 2 of 14 for selection of complete scrutiny is “Suspicious sale transaction in shares and exempt long term capital gain shown in return (penny stock tab in ITS)”. 3. During the course of assessement proceedings, the Assessing Officer noted that the Directorate of Investigation, Kolkata carried out a country-wide investigation to unearth the organized racket of generating bogus entries of Long-Term Capital Gains (LTCG) which is exempt from tax u/s 10(38) of the I.T. Act. The modus operandi adopted by the operators was to make the beneficiary buy some shares of a pre-determined penny stock company controlled by them. The shares are transferred to the beneficiary at a very nominal price mostly off-line through preferential allotment of off-line sale to save STT. The beneficiary holds the share for one year, the statutory period after which the LTCG is exempt u/s 10(38) of the Act. In the meantime, the operators rig the price of the stock and gradually raise its price many times, often 500 to 1000 times. After thoroughly discussing the modes operandi adopted by various persons, the Assessing Officer noted that the assessee is one such beneficiary who has taken the entry of Rs.15,02,783/- during the impugned A.Y 2015- 16. He noted that the family members of the assessee have also taken similar entries from the same source, the details of which are as under: Name A.Y LTCG claimed on sale of shares of M/s. Surabhi Chemicals & Investments (P) Ltd. Venugopal Karwa 2015-16 Rs.15,02,783 Bhagwandas Karwa 2015-16 Rs.38,92,360 Kushal Karwa 2015-16 Rs.42,38,990 Santosh Karwa 2015-16 Rs.42,41,083 Arjun Karwa 2015-16 Rs.42,76,178 Karhik Karwa 2015-16 Rs.47,75,582 Manju Karwa 2015-16 Rs.22,66,130 ITA 174 of 2019 Venu Gopal Karwa Page 3 of 14 4. From the details furnished by the assessee, the Assessing Officer noted that the assessee has purchased and sold shares of M/s. Surabhi Chemicals & Investments (P) Ltd, the details of which are as under: Scrip Purchased M/s. Surabhi Chemicals & Investments (P) Ltd No. of shares purchased 500 (these shares were split and bonus shares allotted. Total shares after split & bonus as on 1.4.2014 were 15,000) Date of purchase 31.03.2012 Amount paid Rs.1,00,000 Broker through whom purchased Akriti Advisory Services (P) Ltd Mumbai No. of shares sold 15,000 Amount received Rs.15,33,145 Broker through whom shares sold B. N. Rathi Securities Ltd 5. He noted that the assessee initially purchased 500 shares of M/s. Surabhi Chemicals & Investments Ltd., through M/s. Akriti Advisory Services P. Ltd., and it is a second purchase through stock exchange vide their bill dated 31.03.2012 for a consideration of Rs.1,00,000/-, Thus, each share was purchased at a cost of Rs.200/-. Later, on 14.08.2012, the company declared 9 bonus shares for every one share held by each shareholder. Accordingly, 4500 shares are received by the assessee for 500 shares held by him, Further, the company has reduced its share value of Rs. 10/- to Rs. 1/- per share by converting 1 share of Rs. 10/- into 10 shares of Rs. 1/- each. Accordingly, assessee has received 50,000 shares of RS. 1/- each for 500 shares held by him. The Assessing Officer noted an interesting part in bonus shares is that the financial credentials of M/s. Surabhi Chemicals & Investments Ltd., from financial years 2012-13 to 2014-15 are very weak in comparison with other reputed stocks. According to the Assessing Officer it is surprising ITA 174 of 2019 Venu Gopal Karwa Page 4 of 14 and highly unbelievable that within a short period the company had issued bonus shares in the ratio of "9 bonus shares for each one share”. Therefore, he was of the opinion that the exemption claimed under sec. 10(38) on account of Long-term capital gain on sale of shares is suspicious and shows that the same is a pre- arranged one. 6. In view of the above and after considering the statement recorded u/s 131 from Sri Vishal Diwan, Sri Rahul Diwan and Sri Siddharth Diwan of Kolkata on19.06.2015 recorded by the DDIT (Inv.) wherein they have stated that they have availed the pre-arranged bogus LTCG in the case of M/s Surabhi Chemicals & Investments (P) Ltd, the Assessing Officer disbelieved the claim of LTCG u/s 10(38) and made addition of the same by invoking the provisions of section 68 of the I.T. Act. Similarly, the Assessing Officer made addition of Rs.45,084/- being unexplained expenditure u/s 69C for arranging accommodation entry. The Assessing Officer in the assessment order also rejected the claim of the gift and made addition of Rs.14,03,490/- as income from other sources and made addition of Rs.1,00,000/- u/s 2(22)(e) of the I.T. Act, 1961. However, we are not concerned with the above 2 additions. Since the same is not in appeal before us. The Assessing Officer accordingly determined the total income of the assessee at Rs.78,22,417/-. 7. Before the learned CIT (A), the assessee challenged the additions made by the Assessing Officer of Rs.15,02,783/- u/s 68 and Rs.45,084/- u/s 69C of the I.T. Act but did not challenge the other additions. The learned CIT (A) dismissed the appeal filed by the assessee by observing as under: ITA 174 of 2019 Venu Gopal Karwa Page 5 of 14 ITA 174 of 2019 Venu Gopal Karwa Page 6 of 14 ITA 174 of 2019 Venu Gopal Karwa Page 7 of 14 ITA 174 of 2019 Venu Gopal Karwa Page 8 of 14 8. Aggrieved with such order of the learned CIT (A), the assessee is in appeal before the Tribunal by raising the following grounds: “1. The CIT (Appeals) is not justifiable in sustaining addition made by the A.O by treating the LTCG on shares as bogus and making an addition of Rs, 15,02,783/- u/s 68 based on the Investigation done by DDIT (Investigation) Kolkata on penny stocks. But for surveillance measure kept by the SEBI, investment in penny stocks cannot necessarily mean that all transactions are bogus specially when assessee maintained al! documentary evidences to discharge onus of the genuineness of the transaction. 2. The CIT (Appeals) is not justifiable on sustaining the addition of Rs. 45,084/ as brokerage paid u/s 69C based on general confession made by ITA 174 of 2019 Venu Gopal Karwa Page 9 of 14 third party without referring to assessees’ name. The CIT (Appeals) erred in guessing wildly that assessee paid brokerage @3% for arranging capital gain transaction. 3. The appellant craves leave for addition, modification, substitution or withdrawal of grounds of appeal.” 9. The learned Counsel for the assessee strongly challenged the order of the learned CIT (A) in confirming the additions made by the Assessing Officer. The learned Counsel for the assessee referring to the written submission submitted that the assessee apart from trading in the shares of Surabhi Chemicals & Investments (P) Ltd has also traded in various other shares and thus is an investor. The exemption claimed on account of sale of part of shares of Surabhi Chemicals & Investments (P) Ltd which was claimed as exempt u/s 10(38) of the I.T. Act was accepted by the Assessing Officer in the order passed u/s 143(3) on 1.1.2016 for the preceding A.Y. The entire purchase was paid by cheque, reflected in the balance sheet for the financial year 2011-12 relevant to A.Y 2012-13, the shares were transferred to the credit of the Demat account of the assessee and thereafter the assessee got the bonus share in the ratio of 1:9. He submitted that when shares sold during the year were acquired in earlier years and since the Assessing Officer has not doubted the purchase of shares and claim of exemption u/s 10(38) was accepted by the Assessing Officer in the order passed u/s 143(3) on 1.1.2016 for the A.Y 2014-15 therefore, the lower authorities are not justified in disallowing the claim of deduction u/s 10(38) for the impugned A.Y. 10. Referring to the decision of the Coordinate Bench of the Tribunal in the case of Arun Kumar Goyal (HUF) vs. Income Tax Officer vide ITA No.2416/Hyd/2018, dated 29.6.2021 for the A.Y ITA 174 of 2019 Venu Gopal Karwa Page 10 of 14 2014-15, he submitted that the Tribunal has allowed the claim of LTCG exemption u/s 10(38) by observing that the findings of the lower authorities are purely based on assumptions and conjectures. Referring to the decision of the Coordinate Bench of the Tribunal in the case of Tarun Kumar Goyal and Arun Kumar Goyal vs. ACIT in ITA Nos. 456 to 458/Hyd/2020, dated 20.04.2021 for the A.Y 2014- 15 and 2016-17, he submitted that the Tribunal here also allowed the exemption claimed u/s 10(38) under identical circumstances. Relying on various other decisions, he submitted that under identical circumstances, the various benches of the Tribunal are allowing claim of exemption u/s 10(38) in respect of sale of shares of Surabhi Chemicals & Investments (P) Ltd. He accordingly submitted that the order of the learned CIT (A) be reversed and the addition be deleted. 11. The learned DR, on the other hand, heavily relied on the order of the Assessing Officer and the learned CIT (A). Referring to the following decision, he submitted that under identical circumstances, the claim of exemption u/s 10(38) has been rejected by the Tribunal which has been upheld by the High Court and the SLP has been dismissed by the Hon'ble Supreme Court. i) ITAT Delhi Bench in ITA No.1006/Del/2019 in the case of Suman Poddar. ii) Hon'ble Delhi High Court in ITA 841/2019 dated 17.9.2019 in the case of Suman Poddar iii) Hon'ble Supreme Court in the case of Suman Poddar (SLP No.26864/2019 dated 22.11.2019). He accordingly submitted that the order of the CIT (A) be upheld. ITA 174 of 2019 Venu Gopal Karwa Page 11 of 14 12. We have heard the rival arguments made by both sides, perused the orders of the Assessing Officer and the learned CIT (A) and the Paper Book filed by both sides. We have also considered the various decisions cited before us. We find the Assessing Officer in the instant case made addition of Rs.15,02,783/- u/s 68 of the I.T. Act by rejecting the claim of exemption u/s 10(38) on account of sale of 15000 shares of Surabhi Chemicals & Investments (P) Ltd on the ground that the transaction so entered into by the assessee is not genuine by recording the following: “10. Further, the transaction is found to be not genuine in view of the following observations and facts: (i) The financials of the penny stock M/s. Surabhi Chemicals & Investments Ltd., and movement of the price is abrupt, unrealistic and not based realistic parameters. The history of investment in shares by the assessee also generally reveals that he has not been dealing in shares on a regular basis. It has also been found that entries of LTCG have also been taken by other members of the assessee family. (ii) The purchase of these shares were claimed to be second purchase through stock exchange and were not a first transaction through recognized Stock Exchange. (iii) The apparent is true until and unless it is disproved. Therefore, human probabilities have also to be applied to comprehend the transactions and to see the real intention behind entering into these transactions. In the similar circumstances, the Honorable Gauhati High Court of CIT Vs Sanghamitra Bharali (361 ITR 481) had held that the capital had held that the capital gains are sham transactions entered only to give colour of genuineness and therefore, held that the capital gain arising out of these transactions cannot be believed as genuine and upheld taxing the said amount as unaccounted income brought into the books in the guise of exempted capital gains. (iv) Even assuming that the purchase as genuine, the sales, given the high rates for such penny stocks, with no real buyers, are bogus. The evidentiary value of payment of STT cannot make a no genuine transaction, a genuine one. (v) The scrip is a penny stock, purchased at a low price, which is over a period of time ramped up by operators acting in benami names or name lenders.” ITA 174 of 2019 Venu Gopal Karwa Page 12 of 14 13. Further, the Assessing Officer has made addition of Rs.45,084/- being commission paid @ 3% for arranging capital gain. We find the learned CIT (A) upheld the action of the Assessing Officer, the reasons of which have already been reproduced in the preceding paragraph. It is the submission of the learned Counsel for the assessee that the assessee purchased 500 shares of M/s. Surabhi Chemicals & Investments (P) Ltd @ Rs.200/- per share from Akriti Advisory Services on 31.3.2012 and the payment was made by cheque. Further, the assessee was issued 9 fully paid-up bonus equity shares for every one fully paid up equity share of Rs.10/- each. The shares were subsequently split from one equity share of Rs.10/- each to 10 equity shares of Rs.1/- each. It is the submission of the learned Counsel for the assessee that during the financial year 2013-14 relevant to A.Y 2014-15 the assessee has sold 35,000 shares @ 58.70% and claimed exemption u/s 10(38) amounting to Rs.19,74,227.80 which has been accepted u/s 143(3) and therefore, denial of claim of exemption u/s 10(38) for the impugned A.Y for sale of part of the very shares is not justified. We find from the various details furnished by the assessee in the paper book that a survey u/s 133A of the I.T. Act was carried out in the case of Sri Venkatesh Granites (P) Ltd, Karimnagr and its Director including the assessee on 25.02.2014. The Assessing Officer in the order passed u/s 143(3) on 1.1.2016 for the A.Y 2014-15 has not made any addition on account of exemption claimed u/s 10(38) of the I.T. Act. A perusal of the assessment order shows that the assessee filed return of income on 31.3.2015 declaring total income of Rs.2,58,20,500/- including undisclosed income admitted during the course of survey of Rs.2,24,32,618/-. However, the order is silent on account of exemption u/s 10(38) of the I.T. Act. On being a pointed query raised by the Bench as to whether any action u/s 147 of u/s 263 has been ITA 174 of 2019 Venu Gopal Karwa Page 13 of 14 taken in respect of A.Y 2014-15 or not, the learned Counsel for the assessee expressed his inability to throw any light. We find the assessee during the impugned A.Y has sold a part of the shares of Surabhi Chemicals & Investments (P) Ltd and claimed exemption u/s 10(38) of the Act which was denied by the Assessing Officer and upheld by the learned CIT (A) and whereas in the preceding A.Y no such addition has been made by the Assessing Officer in the order u/s 143(3) and the learned Counsel for the assessee also could not throw any light regarding initiation of proceedings u/s 147 of 263 of the Act for the A.Y 2014-15 on the claim of exemption u/s 10(38) on account of sale of the shares of Surabhi Chemicals & Investments (P) Ltd. We further, find although the Assessing Officer at Para 3 of his order has mentioned that family members and relatives of the assessee have also taken entries from same source for claim of long- term capital gain on account of sale of shares of M/s. Surabhi Chemicals & Investments (P) Ltd, however, the order of the Assessing Officer as well as the learned CIT (A) is silent on the outcome of such claim of LTCG claimed as exempt u/s 10(38) in their hands. Therefore, considering the totality of the facts of the case and in the interest of justice, we deem it proper to restore the issue to the file of the learned CIT (A) with a direction to adjudicate the issue afresh in the light of our above observations. Needless to say, the learned CIT (A) shall give due opportunity of being heard to the assessee and decide the issue as per fact and law. We hold and direct accordingly. ITA 174 of 2019 Venu Gopal Karwa Page 14 of 14 14. In the result, appeal filed by the assessee is allowed for statistical purposes. Order pronounced in the Open Court on 31 st July, 2023. Sd/- Sd/- (LALIET KUMAR) JUDICIAL MEMBER (R.K. PANDA) VICE-PRESIDENT Hyderabad, dated 31 st July, 2023 Vinodan/sps Copy to: S.No Addresses 1 Shri Venu Gopal Karwa, 4-2-69/A Shastri Road, Karimnagar 505001 2 Dy.CIT, Central Circle 1(2) Hyderabad 3 Pr.CIT, Central, Hyderabad 4 DR, ITAT Hyderabad Benches 5 Guard File By Order