Sachin Chirania, Mumbai V. The Income Tax Officer, Ward - 30(3)(5), Mumbai

ITA 4508/MUM/2023

• Counselvise Citation: [2024] 101 COUNSELVISE.COM (IT) 6846 (ITAT-MUMBAI)
• Duration Of Justice: 5 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-05-2024
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: SMC
• Next Hearing Date: 14-05-2024
• Assessment Year: 2011-2012
• Appeal Filed On: 11-12-2023
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: HIMANSHU KUMAR
• Keywords: Unexplained cash credit; Penny stocks; Capital Gains; Bogus
• Section: 147; 68; 148; 271(1)(c); 133(6); 250

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH “SMC”, MUMBAI BEFORE SHRI NARENDER KUMAR CHOUDHRY, JUDICIAL MEMBER AND SMT. RENU JAUHARI, ACCOUNTANT MEMBER ITA No.4508/M/2023 Assessment Year: 2011-12 Shri Sachin Chirania, 301, Sona Chambers, 507/509 JSS Road, Chira Bazar, Marine Lines – East, Mumbai – 400 002 PAN: ABXPC0141L Vs. The Income Tax Officer, C-13, Pratyakshakar Bhavan, Bandra Kurla Complex, Bandra – East, Mumbai – 400 051 (Appellant) (Respondent) Present for: Assessee by : Ms. Ritu Kamal Kishor, A.R. Revenue by : Shri Himanshu Kumar, D.R. Date of Hearing : 15 . 05 . 2024 Date of Pronouncement : 30.05.2024 O R D E R Per : Narender Kumar Choudhry, Judicial Member: This appeal has been preferred by the assessee against the order dated 02.11.2023, impugned herein, passed by the National Faceless Appeal Center (NFAC)/Ld. Commissioner of Income Tax (Appeals) (in short Ld. Commissioner) under section 250 of the Income Tax Act, 1961 (in short ‘the Act’) for the A.Y. 2011-12. ITA No.4508/M/2023 Shri Sachin Chirania 2 2. In the instant case, on the basis of investigation carried out by the Investigation Directorate, Kolkata who conducted investigation into 84 penny stocks including M/s. NCL Research & Financial Services Ltd., the case of the assessee was reopened under section 147 of the Act and consequently notice dated 30.09.2016 under section 148 read with section 147 of the Act was issued to the assessee. In response the assessee filed its return of income on 18.10.2016 by declaring the total income of Rs.5,55,996/- as declared by filing its original return of income on 31.03.2012. 2.1 On perusing the computation of the income filed by the assessee the Assessing Officer (AO) observed that the assessee has earned income from salary, business, capital gain and from other sources. The AO further observed that the assessee had purchased 15000 shares on 02.04.2008 @ 2.25 per share through off market from M/s. VRP Financial Services Ltd., Navi Mumbai and sold the said shares in parts i.e. 2500 on 19.10.2010 on a consideration of Rs.4,50,799/- and consequently earned LTCG of Rs.4,45,174/- and 12,500 on 22.10.2010 on a consideration of Rs.22,70,372/- and consequently earned LTCG to the tune of Rs.22,42,247/-. In effect the assessee had purchased 15000 shares on a consideration of Rs.33,750/- on 02.04.2008 and sold the same on a consideration of Rs.27,21,171/- on 19.10.2010 and 22.10.2010 and consequently earned total LTCG of Rs.26,87,421/- and claimed as exempt under section 10(38) of the Act. 2.2 Therefore, in order to verify, the AO issued the notice to M/s. VRP Financial Services Ltd. from whom the assessee had purchased the above shares and called for various details, however, M/s. VRP Financial Services Ltd. has not filed any information. Thereafter, the AO also issued notices under section 133(6) of the Act to the purchasers of the shares calling for details of the shares, sale/purchase with the assessee during the year under consideration, D-Mat account ITA No.4508/M/2023 Shri Sachin Chirania 3 details, period of holding of shares, source of funds and return of income. The AO only received the reply from two persons/purchasers who refused to identify the assessee as well as transactions. The notices sent to the assessee remained un-replied with. Therefore, the AO, by considering the investigation carried out by the Investigation Wing at Kolkata and financials of the scrip i.e. M/s. NCL Research & Financial Services Ltd. and reply/documents filed by the assessee and various judgments referred to by the assessee and the AO himself, ultimately disallowed the LTCG of Rs.26,87,421/- which was claimed exempt under section 10(38) of the Act by concluding as under: “16. Findings and conclusion 16.1 The submissions made by the assessee and reply to show cause is considered but not acceptable as the undersigned has congent and concrete evidence such as Statement of Shri Pravin Agarwal, Finding of the SEBI order, report of the investigation wing, Kolkata, ITD data, BSE data, The facts of the case, investigations made by various directorates, statements recorded during the assessment proceedings all lead to conclusion that the transaction in shares are bogus.. From the discussion in the preceding paras it is concluded that long term capital gains booked by assessee in their books were pre- arranged method to evade taxes and launder money. Following are the findings and the reasons which substantiates this: a. Mode of acquisition of the shares: The assessee has purchased 15000 shares of M / s NCL Research & Financial Services Itd. for Rs 33 ,750/-.from VRP Financial Services Pvt. Ltd. But no confirmation or reply received in response to letter/s 133(6) b. Sale of shares and unusual rise in the price: Further the assessee has sold the 15000 shares at the price of Rs.27,21,171/- thus resulting the long term capital gain of Rs 26 ,87,421/., which is 80 times the increase of the cost price, and as discussed the rise in share prices is not holding to any commercial principles and market factors. c. Findings of Investigation wing: The findings of the Directorate of Investigation of Mumbai and Kolkata as discussed above have proved that Shri Anil Agarwal and associated brokers, entry operators and the assessee had ITA No.4508/M/2023 Shri Sachin Chirania 4 worked out an arrangement in which the shares were acquired by the assessee, the share prices were rigged and then with the help of entry operators by routing the cash, shares were sold at high price to arrive at tax free capital gains. d. Analysis of transactions: Facts revealed that such trading transactions of purchase and sale of shares are not been effected, for commercial purpose but to create artificial gains, with a view to evade taxes - i. Transactions of shares were not governed by market factors prevalent at relevant time in such trade, but same were product of design and mutual connivance on part of assessee and the operators. ii. The assessee resorted to a preconceived scheme to procure long- term capital gains by way of price difference in share transactions not supported by market factors. iii. Cumulative events in such transactions of shares revealed that same were devoid of any commercial nature and fell in realm of not being bona fide and, hence, impugned long term capital gain is not allowable. iv. The order of SEBI reffered above has also given the similar finding that the prices of the shares were determined artificial by manipulations and cannot be a product of market factors and commercial principals. e. Failure of Assessee to discharge his onus: The assessee has not been able to prove the unusal rise and fall of share prices to be natural and based on the market forces. It is evident that such share transactions were closed circuit transactions and clearly structured one. f. Financial analysis of the penny stock companies: The networth of the penny stock company is negligible. Even though the networth of the company and the business activity of the company is negligible the share prices have been artificially rigged to unusual high. g. Cash trail in the accounts of the entry providers: The investigations in the fund flow analysed in the accounts of the entry providers have established that the cash has been routed from various accounts to provide accomodations to assessee. ITA No.4508/M/2023 Shri Sachin Chirania 5 h. Arranged transactions: The transactions entered by the assessee involve the series of preconceived steps, the performance of each of which is depending on the others being carried out. The true nature of such share transactions lacked commercial contents, being artificially structured transactions, entered into with the sole intent, to evade taxes. i. Statement of Vijay J. Poddar director of NCL Research:- he himself admitted that shares of the company have been used to provide entry of bogus Long Term Capital Gain. 16.2 The facts and circumstances of the case, as recorded above, clearly suggest that the revenue cannot take or accept such make- believe transactions, as presented by the assessce. Truth or genuineness of such transactions must prevail over the smoke screen, created by way of pre- meditated series of steps taken by the assessee, with a view to imparting a colour of genuineness and character of commercial nature, to such share transactions. Needless to say that one has to look at the whole transactions and a series of steps taken to accomplish such share transactions, in an integrated manner, with a view to ascertaining the true nature and character of such purchase and sale of shares. 16.3 Thus considering the findings of the search/ survey, inquiries conducted in the case of assessee, brokers, operators and the entry providers and the nature of transaction entered into by the asssessee the LTCG of Rs 26,87,421/- claimed exempt u/s 10(38) of the act by the assessee can not be allowed and the amount of Rs 27,23,895/- received back as sales proceeds on sale of shares is required to added back towards her taxable income under section 68 of the act. Penalty proceeding u / s 271(1)(c) is initiated for furnishing inaccurate particulars of income with a view to concealment of income.” 3. The assessee, being aggrieved, challenged the said addition before the Ld. Commissioner, who on the similar reasoning as given by the AO, affirmed the said addition/disallowance by dismissing the appeal of the assessee. The assessee, being aggrieved, is in appeal before us. 4. Having heard the parties and perusing the material available on record and giving thoughtful considerations to the peculiar facts and ITA No.4508/M/2023 Shri Sachin Chirania 6 circumstances of the case, we observe that the assessee had purchased 15,000 shares of M/s. NCL Research & Financial Services Ltd. on total consideration of Rs.33,750/- @ Rs.2.25 per share on 02.04.2008 through off market from broker M/s. VRP Financial Services Ltd., Navi Mumbai as appears from sale bill/purchase bill dated 02.04.2008. The assessee, subsequently in October 2008 as claimed by the Ld. Counsel Ms. Ritu Kamal Kishor, dematerialized the shares and thereafter, after the gap of more than 2.5 years sold the said shares in part on 19.10.2010 (2500 shares on a consideration of Rs.4,50,799/-) and 22.10.2010 (12500 shares on a consideration of Rs.22,70,372/-) on a total consideration of Rs.27,21,171/- and consequently earned total LTCG of Rs.26,87,421/- and claimed in its return of income filed originally. Admittedly the case of the Assessee was reopened after expiry of four years and there is nothing on record to suggest that the assessee has failed to disclose material facts fully and truly qua said claim of deduction under section 10(38) of the Act and therefore on this count itself the reopening under section 147 of the Act is liable to be quashed. 4.1 However, coming to the merits of the case, we observe that admittedly the assessee though purchased the shares as involved through off market from share broker M/s. VRP Financial Services Ltd., Navi Mumbai, however, subsequently got the same dematerialized and sold the same after the gap of 2.5 years on online platform/stock exchange and there is no specific allegation against the assessee neither any role is attributed to the assessee and/or the share broker namely M/s. VRP Financial Services Ltd., Navi Mumbai qua rigging of scrip involved and also there is no material available on record and it is also not the case of the Revenue Department that M/s. NCL Research & Financial Services Ltd. (scrip) has already been suspended by the SEBI and/or not in existence as on today. It is an admitted fact that the authorities below while making and affirming the addition in hand ITA No.4508/M/2023 Shri Sachin Chirania 7 mainly relied upon the investigation carried out by the Investigation Directorate at Kolkata and the financials of the M/s. NCL Research & Financial Services Ltd. It is also not in denial that the assessee has duly filed the relevant documents such as purchase note/bills, copy of bank statements, highlighting the payment made towards acquisition, computation of LTCG and contract notes for sale of shares of M/s. NCL Research & Financial Services Ltd. and copy of Form No.10DB showing details of Securities Transaction Tax (STT) collected by the broker from the assessee, ledger account of the assessee in the books of broker, Demat account statement for the period 01.04.2008 to 31.03.2011 etc. and it is also a fact that the AO has not doubted any of the documents filed by the assessee to substantiate his claim. Therefore it goes to show that the assessee has discharged its prima-facie onus casted upon him. 4.2 The Hon’ble Jurisdictional High Court in the case of Pr. Commissioner of Income Tax vs. Indravadan Jain HUF (2023) 156 taxmann.com 605 has also dealt with the identical issue as involved in the instant case and ultimately affirmed the deletion of the identical addition on account of disallowance of deduction claimed under section 10(38) of the Act by observing and holding as under: “3. Respondent had shown sale proceeds of shares in scrip Ramkrishna Fincap Ltd. (RFL) as long-term capital gain and claimed exemption under the Act. Respondent had claimed to have purchased this scrip at Rs.3.12/- per share in the year 2003 and sold the same in the year 2005 for Rs.155.04/- per share. It was A.O.'s case that investigation has revealed that the scrip was a penny stock and the capital gain declared was held to be accommodation entries. A broker Basant Periwal & Co. (the said broker) through whom these transactions have been effected had appeared and it was evident that the broker had indulged in price manipulation through synchronized and cross deal in scrip of RFL. SEBI had also passed an order regarding irregularities and synchronized trades carried out in the scrip of RFL by the said broker. In view thereof, respondent's case was reopened under section 148 of the Act. ITA No.4508/M/2023 Shri Sachin Chirania 8 4. The A.O. did not accept respondent's claim of long term capital gain and added the same in respondent's income under section 68 of the Act. While allowing the appeal filed by respondent, the CIT[A] deleted the addition made under section 68 of the Act. The CIT[A] has observed that the A.O. himself has stated that SEBI had conducted independent enquiry in the case of the said broker and in the scrip of RFL through whom respondent had made the said transaction and it was conclusively proved that it was the said broker who had inflated the price of the said scrip in RFL. The CIT[A] also did not find anything wrong in respondent doing only one transaction with the said broker in the scrip of RFL. The CIT[A] came to the conclusion that respondent brought 3000 shares of RFL, on the floor of Kolkata Stock Exchange through registered share broker. In pursuance of purchase of shares the said broker had raised invoice and purchase price was paid by cheque and respondent's bank account has been debited. The shares were also transferred into respondent's Demat account where it remained for more than one year. After a period of one year the shares were sold by the said broker on various dates in the Kolkata Stock Exchange. Pursuant to sale of shares the said broker had also issued contract notes cum bill for sale and these contract notes and bills were made available during the course of appellate proceedings. On the sale of shares respondent effected delivery of shares by way of Demat instructions slip and also received payment from Kolkata Stock Exchange. The cheque received was deposited in respondent's bank account. In view thereof, the CIT[A] found there was no reason to add the capital gains as unexplained cash credit under section 68 of the Act. The tribunal while dismissing the appeals filed by the Revenue also observed on facts that these shares were purchased by respondent on the floor of Stock Exchange and not from the said broker, deliveries were taken, contract notes were issued and shares were also sold on the floor of Stock Exchange. The ITAT therefore, in our view, rightly concluded that there was no merit in the appeal. 4.3 Hence considering the rival submissions and peculiar facts and circumstances of the case in totality and the relevant documents available on record and the decision rendered by Hon’ble jurisdictional High Court in the case referred to above, we are inclined to allow the claim of exemption sought under section 10(38) of the Act by the assessee. ITA No.4508/M/2023 Shri Sachin Chirania 9 5. In the result, the appeal filed by the assessee stands allowed. Order pronounced in the open court on 30.05.2024. Sd/- Sd/- (RENU JAUHARI) (NARENDER KUMAR CHOUDHRY) ACCOUNTANT MEMBER JUDICIAL MEMBER * Kishore, Sr. P.S. Copy to: The Appellant The Respondent The CIT, Concerned, Mumbai The DR Concerned Bench //True Copy// By Order Dy/Asstt. Registrar, ITAT, Mumbai.