MR.BHAVIN VAGHASIA(LEGAL HEIR OF LATE KANUBHAI VAGHASIA), MUMBAI V. INCOME TAX OFFICER, WARD-2(2), KALYAN

ITA 2584/MUM/2018

AI Insights

The case revolves around the appeal by Bhavin Vaghasia, the legal heir of the late Shri Kanubhai Vaghasia, against the order of the Commissioner of Income Tax (Appeals) which upheld the addition of INR 86,12,600 as unexplained income under Section 68 of the Income Tax Act, 1961. The addition was initially made by the Income Tax Officer, who treated the transactions involving the sale of shares of Sunrise Asian Ltd as bogus, alleging that they were part of a scheme to introduce unaccounted money into the books as tax-exempt capital gains. The Tribunal examined the evidence, including SEBI orders and investigation reports, and found that the transactions were genuine, supported by proper documentation and conducted through recognized stock exchanges.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 113436 (ITAT-MUMBAI)
• Duration Of Justice: 5 year(s) 1 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-06-2023
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 30-03-2023
• Assessment Year: 2014-2015
• Appeal Filed On: 24-04-2018
• Other Referred Cases: Narayan Ganesh Dastane vs Sucheta Narayan Dastane, CIT Vs. Durga Prasad More
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: MERGER
• Keywords: Income from undisclosed sources; Share purchase agreement; Cost of acquisition; Capital receipt; Capital Gains
• Section: 131; 68; 132; 143(3); 142(1); 250; 143(2); 22

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL "B" BENCH, MUMBAI SHRI B.R. BASKARAN, ACCOUNTANT MEMBER SHRI RAHUL CHAUDHARY, JUDICIAL MEMBER ITA No. 2584/MUM/2018 (Assessment Year: 2014-15) Bhavin Vaghasia, (Legal Heir of Late Sh. Kanubhai Vaghasia), 6 Om Akruti Co-op. Housing Society Ltd., Manpada Road, Nr. K.D. Agarwal Hall Lane, Dombivali (E) - 421201 [PAN: AAJPV8488L] Income Tax Officer, Ward-2(2), Kalyan .................. Vs ................ Appellant Respondent Appearances For the Appellant/Assessee For the Respondent/Department : : Ms. Hiral Sejpal Shri Chetan M. Kacha Shri Soumendu Kumar Dash Date Conclusion of hearing Pronouncement of order : : 31.03.2023 16.06.2023 O R D E R Per Rahul Chaudhary, Judicial Member: 1. By way of the present appeal the Legal Representative, being legal heir of the deceased individual-assessee, has challenged the order, dated 25/01/2018, passed by the Ld. Commissioner of Income Tax (Appeals)-3, Thane [hereinafter referred to as „the CIT(A)‟] for the Assessment Year 2014-15, whereby the Ld. CIT(A) had dismissed the appeal against the Assessment Order, dated 30/12/2016, passed under Section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as „the Act‟). 2. The Assessee has raised the following grounds of appeal: ITA. No. 2584/Mum/2018 Assessment Year: 2014-15 2 “Ground No. 1 1.1 On the facts and circumstances of the case and in law, the Hon'ble Commissioner of Income Tax (Appeals)-3 Thane ['the CIT(A)'], erred in disallowing the exemption claimed by the Appellant u/s 10(38) as Long Term Capital Gain and thereby confirming the addition made by the Income Tax Officer, Ward 2(2), Kalyan ('the AO') amounting to Rs.86,12,600/- u/s 68 of the Act. 1.2 The Hon'ble CIT(A) further erred in: - not giving an opportunity to cross examine - solely relying on the findings of the investigation team and not considering all evidences filed - concluding that the entire transaction was a sham 1.3 In the aforesaid legal and factual matrix, the appellant prays that the AO be directed to allow the exemption u/s 10(38) of Long Term Capital Gain amounting to Rs..86,12,600/- as claimed.” 3. The Assessee has also raised the following additional grounds of appeal, vide letter, dated 02/09/2020: ”1. On the facts and circumstances of the case and in law, the Income Tax officer, Ward 2(2), ('the ITO') erred in making the addition under Section 68 of the Income-tax Act, 1961 ('the Act') without obtaining an explanation from the deceased assessee. 2. The Appellant further submits that u/s 68 of the Act, it is the assessee who has to furnish an explanation and the same responsibility cannot be cast on the legal heir of the assessee. 3. The Appellant prays that the addition is invalid and be deleted.” 4. The Assessee (i.e. Late Shri Kanubhai Haribhai Vaghasia), an individual, passed away on 05/12/2016 during the pendency of the ITA. No. 2584/Mum/2018 Assessment Year: 2014-15 3 assessment proceedings. The present appeal has been preferred by the legal heir of the Assessee (i.e. Shri Bhavin Vaghasia) [hereinafter referred to as „the Legal Heir‟]. 5. During the previous year relevant to the Assessment Year 2014-15, the Assessee had two proprietary concerns. He was engaged in the business of trading in chemicals through proprietary concern operating under the name and style of M/s Aries Enterprises. The Assessee was also registered as a sub-broker (affiliated with Mangal Keshav Securities Limited) registered with Securities & Exchange Board of India (SEBI) and was carrying out proprietary businesses under the name and style of M/s Equity Research & Investment wherein the Assessee earned commission income/brokerage. The Assessee was also a partner in „Maharashtra Chem Trade‟ and made personal investment in shares and securities. 6. The issue raised in the present appeal relates to sale of personal investments held by the Assessee in the shares of Sunrise Asian Ltd (formerly known as Akai Asian Limited). As on 01/04/2012, the Assessee held investments in shares aggregating to INR.28,47,999/-; during the relevant previous year the Assessee sold investments in the shares of Sunrise Asian Ltd (for short „Sunrise Asian‟) having cost of acquisition of INR.9,09,875/-; and therefore, the balance investment in shares stood at INR 19,38,124/- as on 31/03/2014. 7. According to the Assessee, the capital gains of INR 86,12,600/- arising from sale of shares of Sunrise Asian were exempt from tax under Section 10(38) of the Act and therefore, the same were not offered to tax. ITA. No. 2584/Mum/2018 Assessment Year: 2014-15 4 8. Accordingly, the Assessee filed return of income for the Assessment Year 2014-15 on 25/11/2014 declaring total income of INR 11,67,099/-. The case of the Assessee was selected for scrutiny through CASS for verification of low net profit from share broking business and mismatch in amount paid to related person under Section 40A(2)(b) of the Act. Notice under Section 143(2) of the Act was issued on 03/09/2015 on account of change of incumbent Assessing Officer, notice under Section 142(1) of the Act was issued calling upon the Assessee to furnish details/information. 9. In response, the Assessee filed letter, dated 22/08/2016 and 01/09/2016, providing various details/information to the Assessing Officer on 05/12/2016. 10. The Assessee passed away on 05/12/2016 and the Legal Heir intimated the fact of death of the Assessee to the Assessing Officer. The Assessing Officer issued summons to the Legal Heir on 22/12/2016 and his statement was recorded under Section 131 of the Act. During the course of recording the statement the Legal Heir was asked to provide explanation regarding the transactions of sale of shares of Sunrise Asian. However the Legal Heir expressed his inability to provide details/explanation. While recording statement of Legal Heir reference was also made by the Assessing Officer to information available with the Assessing Officer and the statements of Mr. Vipul Vidur Bhatt and Mr. Anil Agarwal. 11. On 27/12/2016, the Legal Heir filed letter seeking (a) Annual Information Report wherein sale of shares of Sunrise Asian for consideration of INR.89,42,206/- was reported, and (b) Report/Explanation about the verification done by the Assessing Officer and the basis on which the sale of shares were proposed to be treated as bogus. Further, vide the aforesaid letter, dated ITA. No. 2584/Mum/2018 Assessment Year: 2014-15 5 27/12/2016, the Legal Heir furnished the details of purchase of 18,000 shares of Conart Traders Ltd. along with copy of the order passed by the Hon‟ble Bombay High Court approving scheme between amalgamation Conart Traders Ltd., Santoshima Tradelinks Limited and Sunrise Asian under the provisions of Section 391 to 394 of the Companies Act, 1956 by virtue of which 1 share of Sunrise Asian was allotted for 1 share of Conart Traders Ltd. The Assessing Officer was also informed that on account of increase in the quoted price of shares of Sunrise Asian, the Assessee had sold the investment in share of Sunrise Asian through the broker ITI Financial Services with whom Appellant held a trading account. The aforesaid sale of shares of Sunrise Asian took place through stock exchange at the prevailing quoted price. 12. Thereafter, the Legal Heir also filed a letter, dated 29/12/2016, stating that the Legal Heir had intimated the Assessing Officer about the demise of the Assessee on 13/12/2016, however, the Assessing Officer issued summons to the Legal Heir on 22/12/2016 (i.e. just 9 days before the date of expiry of limitation for completing assessment). The Legal Heir cooperated and presented himself for recording statement under Section 131 of the Act. However, while recording the statement, the Assessing Officer made reference to the earlier statements given by Mr. Vipul Vidur Bhat and Mr. Sanjay Vora under Section 132 of the Act to contend that the entire transaction of purchase/sale of Sunrise Asian undertaken by the Assessee was bogus. However, copy of the statements was not provided to the Legal Heir till the time of recording of the statement. The Legal Heir was not able to answer the questions as he did not have time to understand the issue and was also not in proper frame of mind on account of sudden demise of his father. ITA. No. 2584/Mum/2018 Assessment Year: 2014-15 6 13. On 28/12/2016, statement of Mr. Sanjay Vora and Mr. Anil Agarwal were sent to email. However, the statement of Mr. Vipul Vidur Bhat was not provided. Therefore, the Legal Heir requested for a copy of the statement of Mr. Vipul Vidur Bhat and also time to file written submissions. 14. On 30/12/2016, the Assessing Officer completed the assessment under Section 143(3) of the Act and passed the Assessment Order in the name of „Late Shri Kanubhai Haribhai Vaghasia (through Legal Heir) Prop. M/s Aries Enterprises. The Assessing Officer assessed income at INR 97,79,700/- after making addition of INR.86,12,600/- under Section 68 of the Act under Section 68 of the Act denying LTCG exemption of claimed under Section 10(38) of the Act. While framing the assessment as aforesaid, the Assessing Officer relied upon the following: (a) Investigation Report of Directorate of Income Tax (Investigation), Kolkata in the case of „Project Bogus LTCG/STCG through BSE Listed Penny Stock‟ (For short „the Investigation Report‟). (b) Final Order, dated 06/09/2021, of Securities And Exchange Board of India, Mumbai under Section 19 read with Section 11(1), 11(4) and 11B of the Securities And Exchange Board of India Act, 1992 (For short „SEBI Order‟). (c) Statement of Mr. Vipul Vidur Bhat, the named Operator of the Script – Sunrise Asian, recorded under Section 132 of the Act by the Investigation Wing, Mumbai. (d) Stand Alone Balance Sheet of Sunrise Asian for the Financial Year 2010-11 to 2014-15. ITA. No. 2584/Mum/2018 Assessment Year: 2014-15 7 (e) Trading data of the Script – Sunrise Asian between 17/08/2011 and 09/03/2015 which included data regarding the volume of trades, number of shares traded, closing price etc. (f) Statement of Mr. Anil Agarwal, the named Exit Provider of the Script – Sunrise Asian, recorded under Section 132 of the Act by the Investigation Wing, Mumbai. (g) Order, dated 19/12/2014, passed by the Securities And Exchange Board of India, under Section 19 read with Section 11(1), 11(4) and 11B of the Securities And Exchange Board of India Act, 1992 in the matter of First Financial Services Limited (For short „SEBI Order, dated 19/12/2014‟) 15. Being aggrieved, the Legal Heir filed appeal before the CIT(A) challenging the addition of INR 86,12,600/- made by the Assessing Officer under Section 68 of the Act contending as under: (i) The statement of the „Operator‟ (i.e. Mr. Vipul Vidur Bhat), on which reliance was placed by the Assessing Officer, was not provided during the course of assessment or subsequently. It was contended that the Assessee neither knew Mr. Vipul Vidur Bhatt nor did he carry out any transaction with whom or his associates. The Assessee held D-Mat Account with Federal Bank and shares of Sunrise Asian were sold through broker (i.e. ITI Financial Services Ltd.) with whom the Assessee carried out his regular activity of buying/selling of shares. (ii) The Assessee was an investor holding investments in several companies and generally sold shares at a price ITA. No. 2584/Mum/2018 Assessment Year: 2014-15 8 higher than purchase price to earn return. During the relevant previous year also, the Assessee had sold shares at a higher price and earned capital gains. The shares which were quoted below the purchase price were not sold and the Assessee continued to hold the same as investment till the end of the relevant previous year. (iii) The Assessee did not have any relationship with M/s Comfort Securities Ltd. and had not carried out any transaction with or through Comfort Securities Ltd. The findings returned by the Assessing Officer that in the case of the Assessee had carried out any transaction with or through by M/s Comfort Securities Ltd. was disputed as being factually incorrect. (iv) The Assessee had sold shares through ITI Financial Services Ltd. The name of ITI Financial Services Ltd. was not mentioned in the report/order of SEBI relied upon by the Assessing Officer. Further, neither any summon were issued to ITI Financial Services Ltd nor any inquiry was conducted by the Assessing Officer to check the authenticity or otherwise of the transactions undertaken by the Assessee. (v) The Assessee did not have any transaction or relationship with First Financial Services Limited or Comfort Group. (vi) The Assessing Officer was not justified in concluding that the Legal Heir had provided explanation which was un- satisfactory. (vii) The findings returned by the Assessing Officer were incorrect in view of the following – (a) Off – market purchase of shares was not barred under law. The Assessee had made ITA. No. 2584/Mum/2018 Assessment Year: 2014-15 9 payment for purchase of shares through account payee cheque against issuance of proper allotment letter; (b) Apart from shares of Sunrise Asian, the Assessee had sold shares of other company as well at a price higher than the purchase price and the capital gains arising from the same were accepted; (c) the Assessing Officer had failed to correlate the transaction of sale of shares by the Assessee with the Operators/Brokers named in the reports/order of SEBI and/or Investigation Wing; (d) merely because Assessee has earned large amount of LTCG would not lead to a conclusion that the transactions undertaken by the Assessee was bogus; (e) The Assessee was not in control of the movement in the price of shares; (f) There was no evidence of arrangement between the Assessee and named operators, brokers and/or exit providers and the Assessing Officer had failed to establish any cash trail showing introduction of unaccounted income by the Assessee as LTCG; (g) The statements of Mr. Anil Agarwal and Mr. Sanjay Vora were not relevant to the case of the Assessee and the statement of Mr. Vipul Vidur Bhatt was not provided; and (h) The Assessee had the personal knowledge of the transaction and therefore, the legal heir of the Assessee pleaded ignorance at the time of recording statement under Section 131 of the Act; 16. However, the CIT(A) was not convinced and therefore, the appeal preferred by the Legal Heir was dismissed, vide order dated 25/01/2018. 17. Being aggrieved the Legal Heir has preferred the present appeal on the grounds/additional grounds reproduced in paragraph 2 and 3 ITA. No. 2584/Mum/2018 Assessment Year: 2014-15 10 above which are taken up hereinafter. 18. We have heard both the sides at length. The Learned Authorised Representative for Appellant reiterated the submission made before the Assessing Officer and the CIT(A) while the Learned Departmental Representative supported the order passed by the CIT(A) and placed reliance on the order passed by the Assessing Officer. 19. The stand of the Legal Heir, succinctly put, is that the LTCG earned by the Assessee were exempt from tax under Section 10(38) of the Act as the same have arisen on account of transaction of sale of personal investment by the Assessee in normal course. The Assessee has been making investment in shares for many years, purchasing shares as personal investment and selling the same on a price higher that purchase price to earn capital gains which were exempt from tax. There is no evidence to suggest that the Assessee had any transaction/relationship with the Operator, Broker, Exit Provider or persons named in the Investigation Report, SEBI Order and Statements relied upon by the Assessing Officer. The shares have been sold through stock exchange and therefore, the transaction and the LTCG are genuine. 20. On the other hand, the contention of the Revenue is that the transaction of purchase and sale of shares by the Assessee constitute bogus transactions undertaken to take unfair advantage of Section 10(38) of the Act which exempts LTCG from tax and to bringing into books of the Beneficiary (such as the Assessee) the unaccounted income of such beneficiaries by taking advantage of artificial hike in the quoted price of penny stocks (such as Sunrise Asian) occasion by synchronized trades on stock exchange by the Operator, Syndicate Member, Brokers and Exit Providers in collision ITA. No. 2584/Mum/2018 Assessment Year: 2014-15 11 with Beneficiaries. The Assessee had acquired shares of Sunrise Asian, a script identified as penny stock in the Investigation Report, in off-market transaction and the same were sold after some time at much higher price during the period identified in SEBI Order as the period within which the quoted price of penny stock – Sunrise Asian was manipulated. The Assessee had deployed a colorable device to introduce unaccounted income as LTCG and therefore, the Assessing Officer was justified in making addition under Section 68 of the Act. 21. We have given thoughtful consideration to the submission made by both the sides, perused the order passed by the CIT(A) and the Assessing Officer and considered the legal position. 21.1. At the outset we would like to deal with contentions raised on behalf of Assessee/Legal Heir and the Revenue 21.2. We note that SEBI Order clearly records that the person acting in concert were able to manipulate the quoted price of shares listed on stock exchange to their advantage. The Investigation Report also records that the provisions of Section 10(38) of the Act were exploited by persons acting in concert (such as operators, brokers, syndicate members and exit providers) for abetting persons having unaccounted income to introduce the same in books through banking channels as capital receipts or tax exempt capital gains income with the help of shell companies or jamakharchi companies under control of the persons acting in concert. Securities & Exchange Board of India (SEBI), as a securities market regulator, has passed orders identifying and penalizing persons/concerns acting in concert indulging in price rigging through synchronized trading in shares through stock exchange trades. Therefore, we reject the contention that the mere fact that the sale transaction ITA. No. 2584/Mum/2018 Assessment Year: 2014-15 12 was undertaken through stock exchange and is supported by proper documentation would, by itself, lead to a conclusion that the transaction is genuine. 21.3. Similarly, we reject the contention of the Revenue that the fact that a script has been identified as penny stock would lead to an automatic conclusion that everyone holding penny stock is a person acting in concert with persons manipulating the quoted price of penny stock. Had that been the case, SEBI would have been required to penalize all persons undertaking trades with the period during which quoted price was manipulated. Therefore, the fact that the scrip traded is a penny stock coupled with the fact that the trade took place within the period in which quoted price was manipulated would not, by itself, lead to a conclusion that the purchase/sale transaction is bogus in case there are mitigating factors pointing at genuineness of the trade/transaction. 21.4. As rightly contended on behalf of Revenue that the bogus penny stock transactions are structured in a manner that there would be little direct evidence and therefore, the genuineness of such transactions would have to be adjudicated by testing the circumstantial evidence on the touchstone of preponderance of probabilities and by keeping in view the surrounding facts and circumstances of the case. 21.5. The belief regarding the existence of a fact may be founded on a balance of probabilities. A prudent person faced with conflicting probabilities concerning a fact-situation would act on the supposition that the fact exists, if on weighing the various probabilities such person finds that the preponderance is in favour of the existence of the particular fact. [Narayan Ganesh Dastane vs Sucheta Narayan Dastane : 1975 AIR 1534 (SC)] ITA. No. 2584/Mum/2018 Assessment Year: 2014-15 13 21.6. Therefore, in case of penny stock transaction involving parties identified as tainted Operator, Syndicate Member, Broker, and/or Exit Operator by Investigation Wing, SEBI etc. the preponderance of probability that the transaction undertaken being tainted would be in favour of the Revenue and against an assessee claiming the transaction to be genuine, putting higher onus on such assessee to prove genuineness of the transaction. 21.7. In the case of CIT Vs. Durga Prasad More : 82 ITR 540 (SC) the Hon‟ble Supreme Court has observed as under: “13. In stating that .........................Science has not yet invented any instrument to test the reliability of the evidence placed before a court or tribunal. Therefore, the courts and Tribunals have to judge the evidence before them by applying the test of human probabilities. Human minds may differ as to the reliability of a piece of evidence. But in that sphere the decision of the final fact finding authority is made conclusive by law.” (Emphasis Supplied) 22. Accordingly, we proceed to examine the surrounding facts and circumstances of the present case. 22.1 It is admitted position that Sunrise Asian is one of the penny stock companies listed on Bombay Stock Exchange (BSE) used for generating bogus LTCG. A perusal of the Assessment Order shows that the Assessing Officer has placed reliance on the Investigation Report while making the addition of INR 86,12,600/- under Section 68 of the Act by treating the transaction of sale of shares of Sunrise Asian as a bogus penny stock transaction. 22.2 According to the Investigation Report, penny stock transactions generally involved the following persons: (i) Syndicate Members are generally promoters of penny stock companies owing initial share holding in the name of paper companies. ITA. No. 2584/Mum/2018 Assessment Year: 2014-15 14 We note that in Paragraph 1.2 B of the SEBI Order, the names of persons who were directors on the board of Sunrise Asian during the investigation period (i.e., 16/10/2012 to 30/09/2015) have been set out. The Assessment Order, however, does not contain any reference to the aforesaid persons. (ii) Brokers/Sub-Brokers are SEBI registered brokers/sub-brokers through whom penny stock are traded offline and online. We note that in paragraph 7.2 of Assessment Order, a reference has been made to SEBI Order, dated 19/12/2014, passed in the case of First Financial Services Limited wherein it has been stated that (a) the Comfort Group and Mr. Anil Agarwal shared close relationship with First Financial Services Limited, and (b) Comfort Group had also played key role in preferential allotment. As per the Investigation Report, 22 brokers were covered under the investigation. The Assessment Order does not make a reference to any of the aforesaid brokers. However, the aforesaid list of 22 brokers contains the name of Comfort Securities Limited – a company forming part of Comfort Group controlled by Mr. Anil Agarwal. (iii) Operator is person/entity that controls a large number of paper/shell companies which are used for routing cash as well as buying/selling shares during the price rigging period. We note that in paragraph 5.2 of the Assessment Order, Mr. Vipul Vidur Bhat has been identified as Operator for Sunrise Asian on the basis of statement given by Mr. Vipul Vidur ITA. No. 2584/Mum/2018 Assessment Year: 2014-15 15 Bhatt, to Investigation Wing Mumbai during search proceedings under Section 132 of the Act. In the SEBI Order passed in the case of Sunrise Asian, Mr. Vipul Vidur Bhatt is Noticee No. 26. and was barred from (a) accessing the securities market (b) buying/selling/dealing in shares (whether directly or indirectly) and (c) being otherwise associated with securities market for a period of 6 months. (iv) Beneficiary being entities/persons who have taken benefit of LTCG exemption to bring back unaccounted income as capital receipt/gain. According to the Assessing Officer, in the present case the Assessee is the Beneficiary who has received back the unaccounted income as capital gains receipts. (v) Éxit Operator is one who buys the shares from the Beneficiary and pays consideration through banking channel. In paragraph 6.2 of the Assessment Order, the Assessing Officer has concluded that the exit entry providers are M/s Comfort Securities Limited and Mr. Anil Agarwal key person of Comfort Group. 22.3 Further, according to the Investigation Report, bogus penny stock transactions involved the following stages (i) Purchase/Acquisition – The beneficiaries acquire penny stock at a nominal rate which generally takes place as off-market transaction. The shares can be acquired by way of ITA. No. 2584/Mum/2018 Assessment Year: 2014-15 16 conventional method (i.e. purchase of share of listed company), or Merger Method (i.e. share of unlisted company acquired through off-market transaction - such as purchase or preferential allotment, are swapped for shares of listed company through a scheme of merger of unlisted company into a listed company) We note that in the case before us, the Assessee acquired shares of Sunrise Asian under Merger Method. 18000 share of Conart Traders Limited were allotted to the Assessee for consideration of INR 3,60,000/- and under the scheme of merger, whereby Santoshima Tradelink Limited and Conart Traders Limited were merged into Sunrise Asian, the Assessee was allotted 1 share of Sunrise Asian for 1 share of Conart Traders Limited. (ii) Price Rigging – After the purchase of script of penny stock companies by the beneficiaries, the Syndicate Members start rigging the price through brokers. We note that the Assessing Officer has, in Paragraph 5. (II) – „Analysis of Script M/s Sunrise Asian Limited‟, analyzed the movement in the price of shares of Sunrise Asian between July 2012 and January 2014. In SEBI Order, price rigging period has been divided into four patches and analyzed: Patch 1 - Price Rise : 16/10/2012 to 28/06/2013 Patch 2 - Price Fall : 01/07/2013 to 07/05/2014 Patch 3 - Price Rise : 08/05/2014 to 11/12/2014 Patch 4 - Price Rise : 12/12/2014 to 13/04/2015 ITA. No. 2584/Mum/2018 Assessment Year: 2014-15 17 Net worth the Sunrise Asian during the period covered by Patch 1 to Patch 4 was negligible. However, despite this the quoted price of the shares was raised artificially. (iii) Sale - After one year the Beneficiaries sell penny stocks to book LTCG (which was at the relevant time exempt from tax). At this stage 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 Exit Operator which buys the penny stock from the Beneficiary by issuance of cheques The Assessing Officer noted that the Assessee had sold shares of Sunrise Asian during 13 th & 14 th October, 1 st November, and 19 th & 24 th December, 2013 falling with Patch – 2 above. It is admitted position that the sale proceeds were received through banking channel. In paragraph 6.3 of the Assessment Order, the Assessing Officer had discussed about cash trail. It has been stated therein that Pushpanjali Commotrade Private Limited, Kolkatta and Ranisati Dealer Private Limited, Kolkatta have helped in managing routing of cash. 23. On the basis of the above, the Assessing Officer concluded that following parties acted in collusion: (a) The Assessee - being the Beneficiary (b) Mr. Vipul Vidur Bhatt - being the Operator (c) Mr. Anil Agarwal and Comfort Group (M/s Comfort Securities Limited, Comfort Fincorp) – being operator, broker and/or exit provider ITA. No. 2584/Mum/2018 Assessment Year: 2014-15 18 (d) Pushpanjali Commotrade Private Limited, Kolkatta and Ranisati Dealer Private Limited, Kolkatta being companies managing routing of cash 23.1 Assessing Officer further concluded that with the help of the above parties, the Assessee acquired 18,000 shares of Sunrise Asian by Merger Method which and sold the same at artificially increased price in Patch 2 to earn tax exempt LTCG by way of pre-arranged transactions. Thus, introducing unaccounted income in the books as capital receipts/gains. 24. The contention of the Appellant is that the above conclusions drawn by the Assessing Officer are without any basis or material on record. 25. We have perused the SEBI Order, Investigation Report, SEBI Order, dated 19/12/2014 and the statement of Mr. Vipul Vidur Bhatt and Mr. Anil Agarwal. Sunrise Asian [Script Name: SUN ASIAN and Script Code: 506615] has been identified as 1 of the 84 penny stock in the Investigation Report at Serial No. 59 of the list of BSE listed penny stocks used for generation of LTCG. 25.1 In the Assessment Order, the Assessing Officer has identified Mr. Vipul Vidur Bhatt as an Operator. However, there is nothing on record to link the Assessee with Mr. Vipul Vidur Bhatt. The Assessing Officer seems to have drawn inference on the strength of the statement given by the Mr. Vipul Vidur Bhatt to the effect that the beneficiaries of bogus LTCG were allotted shares of Conart Traders Limited on preferential basis in 2011-12. Perusal of material placed on record shows that the Assessee did acquire shares of Conart Traders Limited by way of allotment in 2011-12. The Assessee has made payment of INR 3,60,000/-, through bank account, for allotment of 18,000 shares of Conart Traders Limited ITA. No. 2584/Mum/2018 Assessment Year: 2014-15 19 on 18/11/2011 and the shares were allotment to the Assessee of 15/01/2012. The Assessee has placed on record copy of relevant extract of bank statement (reflecting payment of INR 3,60,000/-) and copy of share certificate. 25.2 On 27/02/2013, the shares of Conart Traders Limited were converted from physical form to DMAT form and were credited to the DMAT account of the Assessee maintained with Federal Bank. 25.3 On 22/03/2013, the Hon‟ble Bombay High Court approved the scheme of Amalgamation of Santoshima Tradelinks Limited and Conart Traders Limited with Sunrise Asian and as a result, 18,000 shares of Sunrise Asian were acquired by the Assessee for 18,000 shares of Conart Traders Limited held by the Assessee by Merger Method. 25.4 During Patch 1 the quoted price of shares of Sunrise Asian rose tremendously. However, during Patch 1 the Assessee did not sell shares of Sunrise Asian. When the quoted price of shares of Sunrise Asia started to fall in Patch 2, the Assessee sold entire shareholding of 18,000 share in the following 6 trenches after holding the shares for a period of around 19 months: Date Number of Shares of Sunrise Asian Sold Sale Value (INR) 14/10/2013 2500 12,66,750 13/10/2023 5500 27,74,174 01/11/2013 2000 9,94,300 03/12/2013 5000 24,62,075 19/12/2013 2500 12,30,000 24/12/2013 500 2,45,300 Total Sale Consideration 89,72,599 Less: Cost of Acquisition 3,60,000 LTCG exempt under Section 10(38) 86,12,600 ITA. No. 2584/Mum/2018 Assessment Year: 2014-15 20 25.5 All the sale transactions were undertaken through broker ITI Financial services Limited. 25.6 We note that in the Investigation Report the sub-brokers associated with Baba Bhoothnath Trade & Commerce Pvt. Ltd., Madhya Pradesh Stock Exchange Ltd., Religare Securities Ltd., Comfort Securities Ltd., Anand Rathi Share & Stock Brokers Ltd., SMC Global Securities Ltd. and the Calcutta Stock Exchange Ltd. have been identified as brokers/sub-brokers facilitated bogus LTCG transactions of Sunrise Asian. In the Assessment Order the name of Comfort Securities Ltd. comes up in paragraph 7.2 of the Assessment Order wherein reference has been made to SEBI Order, dated 19/12/2014, passed in the case of First Financial Services. A perusal of the aforesaid shows that the same had no relevance to trading in shares of Sunrise Asian. Further, ITI Financial Services Limited was the broker for the Assessee and its name does not find any mention in the Investigation Report and/or the SEBI Order. 25.7 The Assessing Officer has concluded that the Comfort Group and Mr. Anil Agarwal acted as exit providers. However, on perusal of the record we find that there is nothing on record which can form the basis of the aforesaid conclusion. On perusal of the SEBI Order, dated 19/12/2014, that Comfort Group and Anil Agarwal were acting for operators for penny stock scripts other than Sunrise Asian. The only link between Sunrise Asian and Confort Group seems to be that one of the companies of Comfort Group (i.e. Comfort Securities Ltd.) acted as a Broker facilitating bogus LTCG trades. However, for the Assessee, ITI Financial Services Limited was the broker. Therefore, the sale transactions undertaken by the Assessee cannot be said to have any link with Comfort Securities Ltd. We note that in reply to question no. 26, Mr. Vipul Vidur Bhatt had stated that he will furnish ITA. No. 2584/Mum/2018 Assessment Year: 2014-15 21 a list on beneficiaries within 10 days. However, no reference to such list has been made in the Assessment Order. It is also not the case of the Revenue that the name of the Assessee finds mention in the list of 83 connected entities/persons identified by SEBI as having acted in concert with Sunrise Asian and its directors to manipulate the price in paragraph 7.31 of SEBI Order. It is pertinent to note that SEBI has not taken any action against the beneficiaries and has penalized the persons acting in concert being the Syndicate Members which includes the promoters/directors/key persons of listed companies and brokers/sub-brokers registered with SEBI. 25.8 Further, there is nothing on record to link Pushpanjali Commotrade Private Limited, Kolkatta and Ranisati Dealer Private Limited, Kolkatta with the Assessee or Sunrise Asian. We note the name of these companies do not feature anywhere else except for paragraph 6.3 of the Assessment Order where the Assessing Officer has analyzed cash trail and referred to the Investigation Report in this regard. 25.9 We note that the Assessing Officer and the CIT(A), both, had moved on incorrect premise that the Assessee was not involved in trading of shares or that the Assessee only dealt with script of Sunrise Asian. The Assessee has been registered as a sub-broker affiliated with Mangal Kseshav Securities limited since 2007. During the relevant previous year the Assessee has offered commission income from proprietorship Equity Research & Investment. A copy of the registration certificate, dated 04/05/2007 issued by SEBI showing that the Assessee is registered with SEBI as a sub-broker affiliated with Mangal Kseshav Securities limited has been placed on record. The Assessee has also been making personal investments in share market since 2007. The investments held by the Assessee as on ITA. No. 2584/Mum/2018 Assessment Year: 2014-15 22 31/03/2012 were INR 28,47,999/- which stood reduced to INR 19,38,124/- as on 31/03/2014. The details of shares sold during the relevant previous year are as under: Sr. Name of Shares Date of Sale QTY Gain/(Loss) 1 Sun Asian 14/10/2013 2500 1,212,458.83 2 Bayer Cropscience Ltd. 14/10/2013 250 349,553.00 3 Natco Pharma Ltd. 14/10/2013 100 652,250.01 4 Sun Asian 15/10/2013 5500 2,654,777.44 5 Bayer Cropscience Ltd. 17/10/2013 100 140,279.21 6 Natco Pharma Ltd. 17/10/2013 500 156,722.22 7 PVR Limited 17/10/2013 500 77,670.22 8 Bayer Cropsience Ltd. 23/10/2013 200 278,803.36 9 Bayer Cropscience Ltd. 28/10/2013 200 291,758.39 10 Sun Asian 01/11/2013 2000 950,932.07 11 Sun Asian 03/12/2013 5000 2,353,734.83 12 Sun Asian 19/12/2013 2500 1,175,833.32 13 Sun Asian 24/12/2013 500 234,469.37 Total 10,529,242.27 Therefore, the Assessing Officer has, in Paragraph 5.2 of the Assessment Order, incorrectly stated that the Assessee has mainly traded in single script. 25.10 We note that in paragraph 5.0 (vii) of the order impugned, the CIT(A) has stated that the Appellant being very new to trading in penny stock and the earning of such huge income by a person not known to such type of trading is against human probabilities. This is factually incorrect as the Assessee has been registered as sub- broker with SEBI and has been making personal investments since 2007. Further, apart from sale of share of Sunrise Asian, the Assessee had also sold share of other companies during the same period and earned a substantial return which have been accepted by ITA. No. 2584/Mum/2018 Assessment Year: 2014-15 23 the Revenue as genuine. The detail of the aforesaid sale transactions are as under: Name of Shares Quantity Profit % Gains on Cost Bayer Cropscience Ltd 750 10,60,394 641.21% Natco Pharma Ltd. 600 8,08,972 366.88% 25.11 Further, on perusal of paragraph 7.21 of the SEBI Order, we find that during Patch 2 (01/07/2013 to 07/05/2014) 62 connected entities listed in Table 8 of the SEBI Order had traded amongst themselves. The name of the Assessee does not find any mention in the aforesaid list. Mr. Vipul Vidur Bhatt - the operator of the script Sunrise Asian is listed at serial number 37 of the aforesaid list. However, the contention of the Revenue is that during Patch 2 the Assessee had sold shares to Comfort Group Companies (M/s Comfort Securities Limited, & Comfort Fincorp with Mr. Anil Agarwal as key person). The aforesaid list does not contain the name of the aforesaid Comfort Group Companies or Mr. Anil Agarwal. 25.12 We note that as per paragraph 7.31 of the SEBI Order 77 out of the 83 connected entities (Noticee Number 7-89) were counter parties to sale of shares of Sunrise Asian by 1059 entities/allottees for sale value transactions of INR 5,98,90,16,143/- constituting 57.08% of total sale value amount of INR 1049,09,71,861/-. Thus, even as per SEBI all transactions of sale of shares cannot be said to tainted transactions undertaken by parties acting in collusion with the operators, brokers and exit providers. 25.13 The test of human probabilities when applied to the above set of facts tilts the balance in favour of the Assessee. The preponderance is in favour of the Assessee as the circumstantial evidence and surrounding facts do not support the case of the Revenue as ITA. No. 2584/Mum/2018 Assessment Year: 2014-15 24 explained in hereinabove. There is no direct or indirect evidence linking Comfort Group Companies (i.e., Comfort Fincorp and Comfort Securities Limited), Mr. Anil Agarwal, Pushpanjali Commotrade Private Limited, Kolkatta and Ranisati Dealer Private Limited, Kolkatta with the Assessee. The Assessing Officer and CIT(A) had proceeded with the understanding that the Assessee was new to trading; he traded in single script and had not earned high returns on sale other investments. This understanding was incorrect and contrary to material on record. Even as per SEBI Order, not every shareholder who sold/purchased shares of Sunrise Asian through stock exchange during the Patch-2 was involved in share price manipulation or booking bogus LTCG. 26. In view of the above, we hold that the material on record supports the case of the Assessee/Legal Heir that transactions of sale of shares of Sunrise Asian were genuine transactions undertaken during normal course by the Assessee who had knowledge of the stock-market and had been making investments in shares since many years. Accordingly, the claim of exemption under Section 10(38) of the Act is allowed in respect of capital gains of INR 86,12,600/- arising from sale of shares of Sunrise Asian during the previous year relevant to the Assessment Year 2014-15. Ground No. 1.1 and 1.3 are allowed. 27. Before parting we would like to observe that the Assessing Officer had summoned the Legal Heir and recorded his statement wherein the Legal Heir had expressed ignorance about the transactions under consideration. The Assessing Officer had on the basis of the statement concluded that the no satisfactory explanation was furnished regarding the aforesaid transactions. In our view, the approach adopted by the Assessing Officer cannot be countenanced. ITA. No. 2584/Mum/2018 Assessment Year: 2014-15 25 It is likely that the Legal Heir may not have personal knowledge of the transactions undertaken by his father and therefore, the Assessing Officer must also take into consideration the documents/details placed on record. Having said as aforesaid, we are not convinced by the contention advanced on behalf of the Assessee/Legal Heir that the provisions of Section 68 cannot be attracted in case where the assessee has passed away as such assessee can no longer be asked to furnish an explanation which is pre-requisite for invoking Section 68 of the Act. However, since we have allowed Ground No. 1.1 and 1.3, the issue has become academic in nature and therefore, Ground No. 1.2 and Additional Grounds are dismissed as being infructuous. In result the present appeal is allowed. Order pronounced on 16.06.2023 Sd/- Sd/- (B.R. Baskaran) Accountant Member (Rahul Chaudhary) Judicial Member म ुंबई Mumbai; दिन ुंक Dated : 16.06.2023 Alindra, PS ITA. No. 2584/Mum/2018 Assessment Year: 2014-15 26 आदेश की प्रतितिति अग्रेतिि/Copy of the Order forwarded to : 1. अपील र्थी / The Appellant 2. प्रत्यर्थी / The Respondent. 3. आयकर आय क्त(अपील) / The CIT(A)- 4. आयकर आय क्त / CIT 5. दिभ गीय प्रदिदनदि, आयकर अपीलीय अदिकरण, म ुंबई / DR, ITAT, Mumbai 6. ग र्ड फ ईल / Guard file. आिेश न स र/ BY ORDER, सत्य दपि प्रदि //True Copy// उप/सह यक पुंजीक र /(Dy./Asstt. Registrar) आयकर अपीलीय अदिकरण, म ुंबई / ITAT, Mumbai