Vijay K Patel-HUF, Ahmedabad V. ITO, Ward-4(2)(5), Ahmedabad

ITA 313/AHD/2019

• Counselvise Citation: [2022] 106 COUNSELVISE.COM (IT) 9368 (ITAT-AHMEDABAD)
• Duration Of Justice: 3 year(s) 3 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-06-2022
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Assessment Year: 2015-2016
• Appeal Filed On: 28-02-2019
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: V.K. SINGH
• Keywords: Opportunity of cross examination; Question of law; Accommodation entries; Penny stocks; Set aside; Capital Gains; Bogus
• Section: 68; 12; 143(3); 142(1); 143(1); 143(2); 20

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL “C” BENCH, AHMEDABAD BEFORE SHRI WASEEM AHMED, ACCOUNTANT MEMBER & Ms. MADHUMITA ROY, JUDICIAL MEMBER I .T .A . N o . 3 1 3/ A h d /2 0 1 9 ( A s s e s s me nt Y ea r : 20 1 5- 16 ) Vij a y K . Pa te l- H U F C / o K et a n H . Sh a h , A d v oca te - 5 12 , Ti me s S qu a r e- I , O p p. R a m B a ug B u ng alo w , T h a lt ej Sh ilaj R o ad , Tha lt ej , A h m e da ba d-3 8 0 05 9 V s . I T O War d - 4 ( 2) ( 5 ) , A h me da ba d [ P AN N o. A A DH V 5 39 8H ] (Appellant) .. (Respondent) Assessee by : Shri Ketan Shah, A.R. Revenue by : Shri V. K. Singh, Sr. DR D a t e of H ea r i ng 27.04.2022 D a t e of P r o no u n ce me nt 08.06.2022 O R D E R PER Ms. MADHUMITA ROY - JM: The instant appeal filed by the assessee is directed against the order dated 16.01.2019 passed by the Commissioner of Income Tax (Appeals)-4, Ahmedabad arising out of the order dated 26.12.2017 passed by the ITO, Ward-4(2)(5), Ahmedabad under Section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as “the Act”) for A.Y. 2015-16. 2. We have heard the rival submissions made by the respective parties and we have also perused the relevant materials available on record. 3. The sole issue raised by the assessee herein is against the addition of Rs. 73,48,101/- under Section 68 of the Act as bogus long term capital gain. ITA No. 313/Ahd/2019 Vijay K. Patel-HUF vs. ITO Asst.Year –2015-16 - 2 - 4. At the time of hearing of the instant appeal the Ld. Counsel appearing for the assessee submitted before us that the issue is squarely covered in favour of the assessee by and under the judgment dated 29.10.2021 passed by the Coordinate Bench in ITA No. 280/Ahd/2019 for A.Y. 2015-16. 5. On the other hand, though the Ld. DR relied upon the order passed by the authorities below and has not been able to controvert the submission made by the Ld. A.R. 6. The brief facts leading to the case is this that the assessee an individual filed its return of income on 14.12.2015 declaring total income at Rs. 3,33,580/- which was processed under Section 143(1) and finalized on 19.01.2016 upon accepting the returned income. Subsequently the case was selected for scrutiny under CASS and notice under Section 143(2) of the Act was issued on 29.07.2016 followed a fresh notice under Section 143(2) dated 09.09.2016 due to transfer of the case to the office of the ITO, Ward- 3(2)(5), Ahmedabad and a further notice under Section 142(1) of the Act alongwith a questionnaire for necessary compliance. 7. After going through the reason for scrutiny selection and the information made available it was prima facie noticed by the AO that the assessee has indulged in bogus long term capital gain of Rs. 73,48.101/- which was claimed under Section 10(38) of the Act. Show-cause was issued as to why the long term capital gain claimed by the assessee should not be disallowed treating it as unexplained income under Section 68 r.w.s. 115BBE of the Act and why the same should not be added to the income of ITA No. 313/Ahd/2019 Vijay K. Patel-HUF vs. ITO Asst.Year –2015-16 - 3 - the assessee treating the shares of Lifeline Drugs & Pharma Ltd. as penny stocks. 8. It appears that the assessee had shown long term capital gain in respect of sale of shares of Lifeline Drugs & Pharma Ltd. to the tune of Rs. 73,48,101/-. In fact, the said shares numbering 2850 were stated to have been purchased on 01.04.2013 for a consideration of Rs. 1,03,618/- with a purchase value of Rs. 36.30 per shares before the splitting of these 2850 shares into 28500. The said 28500 shares were ultimately sold at Rs. 261.84 per share on 25.08.2014 i.e. during the F.Y. 2014-15 for a net sale consideration of Rs. 74,51,719/-. In sum and substance the share of Lifeline Drugs and Pharma Ltd. was purchased @3.63 per shares (average price before splitting the shares) in the F.Y. 2013-14 and was sold at the average rate of Rs. 261.84 per shares in the F.Y. 2014-15. 9. However, in response to the show-cause the assessee submitted the following documents as reflected from the order passed by the Ld. AO: “4.2 In response to the above show cause notice, the Authorized Representative of the assessee submitted the written reply on 20.12.2017 vide letter dated 18.12.2017 and 20.12.2017. The same is reproduced hereunder for easy reference: Submission vide letter dated 18.12.2017 Your notices dated 07.12.2017 for Asst. Year 2015-16 in the case of Vijay K. Patel-HUF- PAN No.: AADHV5398H- In reference to aforesaid matter, I have been instructed to submit as under: 1. In earlier submissions, we have submitted the following documents in support of the claim made by us. i. Income Tax Return for Asst. Year 2015-16 at page Nos. 1 to 4. ii. Copy of purchase invoice from Vijay Bhagwandas & Co. dated 01.04.2013 having SEBI registration number and clearing No.77, which ITA No. 313/Ahd/2019 Vijay K. Patel-HUF vs. ITO Asst.Year –2015-16 - 4 - included payment of STT as per Page 5. iii. That, the share transfer certificate from Vijay Bnagwandas Shah is at Page No.6. iv. That, pool holding certificate dated 05.04.2014 is at Page No.7, and therefore, the shares were in possession of Vijay Bhagwandas & Co. and has not been provided to us since it was mutually agreed to for pool holding account, and therefore, there is no question of any physical share certificate, which is at Page No.7. v. Detailed assessee’s account in the books of Vijay Bhagwandas & Co. is at Page No.8 for payment of Rs. 1,03,850/- for 2850 shares. vi. Trade Bull securities Pvt. Ltd. – Contract-cum-tax invoices are as per Page No.9 to 26, more particularly, page No.17 for Lifeline Drugs & Pharma. vii. Assessee’s bank account with Citibank is at Page Nos. 27 to 35 and Citibank ledger Account is at Page No.36. viii. Copy of cash book of the assessee for F.Y.2013-14 is at Page No.37, out of which cash has been given. ix. Details of SBI, PPF passbook are at Page Nos.38 to 44, out of which PPF has been deposited and claimed exemption.” 10. It is relevant to mention that the assessee purchased the shares of the said company from the stock broker M/s. Vijay Bhagwandas & Company. The assessee’s case before the authorities below is this that the claim of Long Term Capital Gain (LTCG) on the sale of listed securities was after the payment of the Securities Transaction Tax (STT). The AO was of the opinion on the basis of the report of Investigation Wing of Directorate of Kolkata, found that the scripts of this Lifeline Drugs & Pharma was used for providing LTCG to the beneficiaries which is bogus in nature and M/s. Vijay Bhagwan Das & Co. the stock broker herein was engaged in the activity of providing bogus/accommodation entry in the form of LTCG to the beneficiaries on the purchase and sale of the shares of the companies as above. The suspension of the trading of the shares of the said company made by SEBI by and under the order dated 28.04.2015 and 01.01.2015 was also taken into consideration by the Ld. AO alongwith the fact of inconsistency between the price rise of the shares of the aforesaid ITA No. 313/Ahd/2019 Vijay K. Patel-HUF vs. ITO Asst.Year –2015-16 - 5 - companies vis-à-vis financial performance therein in such short period of time. There was sudden hike on the trading of the scrips of these companies which suggests that the price was rigged up in the organized manner in order to extend the benefit to the beneficiaries by generating exempted Long Term Capital Gain in their hands as per the finding of the Ld. AO. The Ld. AO finally disallowed the claim of capital gain to the tune of Rs. 73,48,101/- treating it as bogus which was further confirmed by the Ld. CIT(A). 11. On this aspect we have considered the order passed by the Coordinate Bench in ITA No. 280/Ahd/2019 for A.Y. 2015-16 wherein in the identical situation the addition was deleted. The relevant observation made by the Coordinate Bench is reproduced hereinbelow: “6. The learned AR before us filed a two paper books running from pages 1 to 233 & 1 to 277 and contended that the assessee was not involved in reading of the price of the scripts. Likewise, there was no opportunity of cross-examination of the statements/details obtained by the investigation wing of Calcutta was provided. Thus, in the absence of such verification, there cannot be any addition to the total income of the assessee by treating the long-term capital gain as unexplained cash credit under section 68 of the Act. 7. On the contrary learned DR vehemently supported the order of the authorities below. 8. We have heard the rival contentions of both the parties and perused the materials available on record. In the present case the long term capital gain declared by the assessee on sale of shares of two companies namely M/s Life Line Drugs & Pharma Ltd (LLDP) and M/s Mahavir Advance Remedies Ltd (MARL) was treated as bogus and manipulated, leading to the addition by the AO under section 68 of the Act. The view of the AO was based on certain factors which have been elaborated in the preceding paragraph. Subsequently, the learned CIT (A) upheld the finding of the AO. 8.1 Indeed, the price of the share of LLDP was increased from ₹18 to ₹ 242 and share price of MARL was increased from Rs. 7.77/- to 348.7/- within just a period of 12 months which was not believed by the authorities below on the principles of preponderance of human probabilities in the given facts and circumstances. The rise in the price of the scripts of a company, having no financial base/business ITA No. 313/Ahd/2019 Vijay K. Patel-HUF vs. ITO Asst.Year –2015-16 - 6 - activity/profitability certainly gives rise to the doubt about such increase in the price. But in our considered view, this cannot be sole criteria for reaching to the conclusion that the price were rigged up to generate the long-term capital gain which is exempted under section 10(38) of the Act. Such observation during the assessment proceedings provides reasons to investigate the matter in details and the same cannot take the place of the evidence. But in the case on hand there was no enquiry conducted by AO independently to establish that the assessee was involved in rigging of share price of the above scripts or assessee exchanged the cash for availing accommodation entry. Similarly, there was no complaint filed by any of the party either by the SEBI or the stock exchange about the assessee or brokers of the assessee that they were involved in the activity of rigging up the price of the shares. Similarly, the AO has not conducted an enquiry from the SEBI or BSE about the assessee whether he was engaged in the frivolous activities as alleged. 8.2 We also note that the AO has referred to the investigation carried out by the directorate of investigation wing of Kolkata wherein it was unearthed that the various broker have used the script of impugned companies for generating bogus long-term capital gain, eligible for exemption under section 10(38) of the Act. However, there was no information available on record whether the name of the assessee was appearing in the investigation carried out by the investigation wing of Kolkata or any other investigation carried out by the Income Tax Department. 8.3 The alleged scam might have taken place on generating LTCG to avoid the payment of tax. But it has to be established in each case, by the party alleging so, that the assessee in question was part of this scam. The chain of events and the live link of the assessee’s action that he was involved in the scam should be established based on cogent materials. The allegation as discussed above implies that cash was paid by the assessee and in return the assessee received LTCG, which is an income exempted from tax, by way of cheque through banking channels. This allegation that cash had changed hands, has to be proved with evidence, by the Revenue. 8.4 There is no dispute raised by the Revenue with respect to the following facts: (i) All the evidence of sale and purchase of shares, including contract notes were submitted. No fault with these documents has been found. (ii) The payments are received through account payee cheques on the sale of scripts. (iii) Transaction of sale is done through stock exchange after the payment of STT. The transactions have been confirmed by brokers. (iv) Inflow of shares is reflected in Demat account. Shares are transferred through Demat account. The assessee does not know the buyer. (v) There is no evidence that assessee has paid cash to purchase LTCG. (vi) The assessee is not a party in the alleged rigging up the prices of the shares. He has no nexus with the company, its directors or operators. He is not concerned with the activity of broker and has no control over the same. (vii) It may have got only incidental benefit of price rise. (viii) The purchase and sale of shares have been duly recognized by the concerned company. They are also reflected in the balance sheet of the assessee. ITA No. 313/Ahd/2019 Vijay K. Patel-HUF vs. ITO Asst.Year –2015-16 - 7 - (ix) The assessee invested in penny stocks which gave rise to huge capital gains in a short period, does not mean that the transaction is bogus as all the documents and evidences have been produced. (x) Opportunity of cross examination was not given which was essential for deciding the issue on hand. 8.5 In our view, just the modus operandi, generalisation, preponderance of human probabilities cannot be the only basis for rejecting the claim of the assessee. Unless specific evidence is brought on record to prove that the assessee was involved in the collusion with the entry operator/ stock brokers for such a scheme. In absence of such finding how it is possible to link others wrong doings with the assessee. Further the case laws relied by the AO are with regard to test of human probabilities which may be of greater impact but the same cannot used blindly to dispose of the evidence forwarded by the assessee especially without bringing any evidences from independent enquiry to corroborate the allegation. In holding so we draw support and guidance from the judgment of Hon’ble Delhi High court in case of Pr. CIT vs. Smt. Krishna Devi reported in 126 taxmann.com 80 where it was held as under: 11. On a perusal of the record, it is easily discernible that in the instant case, the AO had proceeded predominantly on the basis of the analysis of the financials of M/s Gold Line International Finvest Limited. His conclusion and findings against the Respondent are chiefly on the strength of the astounding 4849.2% jump in share prices of the aforesaid company within a span of two years, which is not supported by the financials. On an analysis of the data obtained from the websites, the AO observes that the quantum leap in the share price is not justified; the trade pattern of the aforesaid company did not move along with the sensex; and the financials of the company did not show any reason for the extraordinary performance of its stock. We have nothing adverse to comment on the above analysis, but are concerned with the axiomatic conclusion drawn by the AO that the Respondent had entered into an agreement to convert unaccounted money by claiming fictitious LTCG, which is exempt under section 10(38), in a preplanned manner to evade taxes. The AO extensively relied upon the search and survey operations conducted by the Investigation Wing of the Income-tax Department in Kolkata, Delhi, Mumbai and Ahmedabad on penny stocks, which sets out the modus operandi adopted in the business of providing entries of bogus LTCG. However, the reliance placed on the report, without further corroboration on the basis of cogent material, does not justify his conclusion that the transaction is bogus, sham and nothing other than a racket of accommodation entries. We do notice that the AO made an attempt to delve into the question of infusion of Respondent's unaccounted money, but he did not dig deeper. Notices issued under sections 133(6)/131 of the Act were issued to M/s Gold Line International Finvest Limited, but nothing emerged from this effort. The payment for the shares in question was made by Sh. Salasar Trading Company. Notice was issued to this entity as well, but when the notices were returned unserved, the AO did not take the matter any further. He thereafter simply proceeded on the basis of the financials of the company to come to the conclusion that the transactions were accommodation entries, and thus, fictitious. The conclusion drawn by the AO, that there was an agreement to convert unaccounted money by taking fictitious LTCG in a pre-planned manner, is therefore entirely unsupported by any material on record. ITA No. 313/Ahd/2019 Vijay K. Patel-HUF vs. ITO Asst.Year –2015-16 - 8 - This finding is thus purely an assumption based on conjecture made by the AO. This flawed approach forms the reason for the learned ITAT to interfere with the findings of the lower tax authorities. The learned ITAT after considering the entire conspectus of case and the evidence brought on record, held that the Respondent had successfully discharged the initial onus cast upon it under the provisions of Section 68 of the Act. It is recorded that "There is no dispute that the shares of the two companies were purchased online, the payments have been made through banking channel, and the shares were dematerialized and the sales have been routed from de- mat account and the consideration has been received through banking channels." The above noted factors, including the deficient enquiry conducted by the AO and the lack of any independent source or evidence to show that there was an agreement between the Respondent and any other party, prevailed upon the ITAT to take a different view. Before us, Mr. Hossain has not been able to point out any evidence whatsoever to allege that money changed hands between the Respondent and the broker or any other person, or further that some person provided the entry to convert unaccounted money for getting benefit of LTCG, as alleged. In the absence of any such material that could support the case put forth by the Appellant, the additions cannot be sustained. 12. Mr. Hossain's submissions relating to the startling spike in the share price and other factors may be enough to show circumstances that might create suspicion; however the Court has to decide an issue on the basis of evidence and proof, and not on suspicion alone. The theory of human behavior and preponderance of probabilities cannot be cited as a basis to turn a blind eye to the evidence produced by the Respondent. 8.6 Respectfully following the judgment of Hon’ble Delhi High Court (Supra), we hold that in absence of any specific finding against the assessee in the investigation wing report, the assessee cannot be held to be guilty or linked to the wrong acts of the persons investigated as far as long term capital gain earned on sale of share of both companies is concern. 8.7 We also draw support and guidance from the judgment of Hon’ble Punjab and Haryana High Court in the case of PCIT Vs. Prem pal Gandhi reported in 94 Taxmann.com 156 wherein it was held as under: “the documents on which the Assessing Officer relied upon in the appeal were not put to the assessee during the assessment proceedings. The CIT (Appeals) nevertheless considered them in detail and found that there was no co-relation between the amounts sought to be added and the entries in those documents. This was on an appreciation of facts. There is nothing to indicate that the same was perverse or irrational. Accordingly, no question of law arises.” 8.8 We also note that the co-ordinate bench Mumbai Tribunal in case of DCIT vs. M/s Jiana Investments bearing ITA No. 4286 to 4474/Mumbai/2019 where the assessee has loss on sale of Share of M/s MARL which was disallowed by the AO by holding the such script was penny stock and assessee employed operandi of penny stock and incurred losses to provide accommodation LTCG to beneficiaries. The AO in holding so relied upon the information received from the directorate of ITA No. 313/Ahd/2019 Vijay K. Patel-HUF vs. ITO Asst.Year –2015-16 - 9 - investigation wing. However the learned CIT(A) deleted the addition by observing that information received from investigation only a general modus operandi employed by the various entry operators but no evidences available that the particular assessee was involved in such scam. Without bringing cogent material establishing the assessee earned or incurred bogus gain or losses the AO cannot made addition merely on the basis of suspicion or assumption. The view taken by the learned CIT was confirmed by the Hon’ble bench of Mumbai ITAT. It is pertinent to mentioned that the script involve in the above case is also in the present case. Thus we also find support and guidance from the finding given in aforesaid case. 8.9 In view of the above discussion we hold that the capital gain earned by the assessee cannot held bogus merely on the basis of some report which was unearthed in case of third party/parties unless cogent material brought against particular assessee. Therefore we set aside the finding of the learned CIT(A) and direct the AO to delete the addition made by him. Hence the grounds of assessee appeal is allowed” 12. We find that in a number of cases the Ld. AO disallowed the claim of the assessee by holding these scrips as of penny stock and the modus operandi is nothing but to provide accommodation LTCG to beneficiaries relying upon the information received from the Directorate of Investigation Wing which was found to be general modus operandi employed by the various entry operators in most of the cases by the CIT(A). However, in none of the cases any evidence was available justifying the assessee involved in such scam. In the absence of any cogent material brought by the Revenue establishing the assessee earned or incurred bogus gain or losses only on the basis of suspicion or assumption addition made by the authorities below has been found to be not sustainable and, thus, deleted. We further find that the Coordinate Bench has followed the ratio laid down by different Judicial Forum including the judgment of Delhi High Court in the case of PCIT vs. Smt. Krishna Devi, reported in 126 taxmann.com 80 and the judgment passed by the Hon’ble Punjab and Haryana High Court in the case of PCIT vs. Prem Pal Gandhi, reported in 94 taxmann.com 156. The judgment passed by the Coordinate Bench of Mumbai Tribunal in the ITA No. 313/Ahd/2019 Vijay K. Patel-HUF vs. ITO Asst.Year –2015-16 - 10 - case of DCIT vs. M/s. Jiana Investments, reported in ITA No. 4286 to 4474/Mum/2019 were also duly considered. In the absence of any changed circumstances, respectfully relying upon the judgments passed by the Coordinate Bench we allow the appeal preferred by the assessee by deleting the addition made by the authorities below. Hence, assessee’s appeal is allowed. 13. In the result, the appeal preferred by the assessee is allowed. This Order pronounced in Open Court on 08/06/2022 Sd/- Sd/- (WASEEM AHMED) (Ms. MADHUMITA ROY) ACCOUNTANT MEMBER JUDICIAL MEMBER Ahmedabad; Dated 08/06/2022 TANMAY, Sr. PS TRUE COPY आदेश क त ल प अ े षत/Copy of the Order forwarded to : 1. अपीलाथ / The Appellant 2. यथ / The Respondent. 3. संबं धत आयकर आय ु त / Concerned CIT 4. आयकर आय ु त(अपील) / The CIT(A)- 5. वभागीय त न ध, आयकर अपील!य अ धकरण, अहमदाबाद / DR, ITAT, Ahmedabad 6. गाड' फाईल / Guard file. आदेशान ु सार/ BY ORDER, उप/सहायक पंजीकार (Dy./Asstt. Registrar) आयकर अपील य अ धकरण, अहमदाबाद / ITAT, Ahmedabad 1. Date of dictation 27.04.2022 2. Date on which the typed draft is placed before the Dictating Member 28.04.2022 3. Other Member..................... 4. Date on which the approved draft comes to the Sr.P.S./P.S 06 .06.2022 5. Date on which the fair order is placed before the Dictating Member for pronouncement .06.2022 6. Date on which the fair order comes back to the Sr.P.S./P.S 08.06.2022 7. Date on which the file goes to the Bench Clerk 08.06.2022 8. Date on which the file goes to the Head Clerk.......................................... 9. The date on which the file goes to the Assistant Registrar for signature on the order.......................... 10. Date of Despatch of the Order..........................................