ITO, Ward-3(3)(2), Ahmedabad V. M/s.Gokuldham Enterprise LLP, Ahmedabad

ITA 675/AHD/2018

AI Insights

The case revolves around an appeal by the Revenue against the CIT(A)'s decision to delete the addition made by the AO concerning long term capital gains amounting to Rs.8,90,28,838 claimed by the assessee under section 10(38) of the Income Tax Act. The AO had initially disallowed the exemption, suspecting the transactions to be manipulated to book illegitimate gains. However, the CIT(A) reversed this decision based on a final SEBI order that cleared the scrip involved from any manipulation charges. The Tribunal found that the entire case by the AO relied on an interim SEBI order, which was later superseded by the final order, and thus upheld the CIT(A)'s decision.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 133520 (ITAT-AHMEDABAD)
• Duration Of Justice: 4 year(s) 9 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-01-2023
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 25-12-2022
• Assessment Year: 2014-2015
• Appeal Filed On: 15-03-2018
• Other Referred Cases: Swati Bajaj Vs CIT[2022] 139 taxmann.com 352 (Calcutta), DCIT Vs. Prakash Chand Sharma in ITA No.780/JP/2019 dated 18.11.2020
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Capital asset; Principle of natural justice; Capital Gains
• Section: 113; 13

Judgement Text

आयकर अपीलीय अिधकरण आयकर अपीलीय अिधकरणआयकर अपीलीय अिधकरण आयकर अपीलीय अिधकरण, अहमदाबाद 瀈यायपीठ अहमदाबाद 瀈यायपीठअहमदाबाद 瀈यायपीठ अहमदाबाद 瀈यायपीठ ‘B’ अहमदाबाद। अहमदाबाद।अहमदाबाद। अहमदाबाद। IN THE INCOME TAX APPELLATE TRIBUNAL “B” BENCH, AHMEDABAD BEFORE SMT.ANNAPURNA GUPTA, ACCOUNTANT MEMBER AND SHRI SIDDHARTHA NAUTIYAL, JUDICIAL MEMBER ITA No.675/Ahd/2018 Assessment Year : 2014-15 ITO, Ward-3(3)(2) Ahmedabad. Vs. M/s.Gokuldham Enterprise LLP 4, Royal Crescent, Thaltej Road Ahmedabad. PAN : AALFG 1236 F (Applicant) (Responent) Assesseeby : Shri M.K. Patel, AR Revenue by : Shri Sudhendu Das, CIT-DR स ु नवाई क तार ख/D a t e o f H e a r i n g : 2 6 / 1 2 / 2 0 2 2 घोषणा क तार ख /D a t e o f P r o n o u n c e m e n t : 1 1 / 0 1 / 2 0 2 3 आदेश/O R D E R PERANNAPURNA GUPTA, ACCOUNTANT MEMBER Present appeal has been filed by the Revenue against order passed by the ld.Commissioner of Income Tax(Appeals)-3, Ahmedabad [hereinafter referred to as “Ld.CIT(A)”]under section 250(6) of the Income Tax Act, 1961 ("the Act" for short) dated 8.3.2019 pertaining to the Asst.Year 2014-15. 2. The grounds raised in the appeal are as under: “1. Ld.CIT(A) has erred in law and on facts in deleting the addition made by the AO on account of disallowance of exemption of Rs.8,90,28,838/- claimed by the assessee u/s. 10(38) of the Income Tax Act. 2. Ld.CIT(A) has erred in law and on facts in considering the report of the SEBI without going to the depth of the investigation report of the income tax wing. Ld.CIT(A) has erred in law and on facts in not considering the remand report furnished by the AO wherein it is categorically mentioned by ITA No.675/Ahd/2018 2 the AO that the assessee has skillfully manipulated the long term capital gain. On the facts and in the circumstances of the case, the Ld. CIT(A) ought to have upheld the additions made by the AO. 3. It is, therefore, prayed that the order of the Ld. CIT(A) may be set aside and that of the Assessing Officer be restored.” 3. The ld.DR began by pointing out that the sole grievance of the Revenue against order passed by the ld.CIT(A) in the present case was with regards to deletion of addition made by the Assessing Officer (AO) on account of long term capital gain finding it to be bogus transaction and a mechanism devised by the assessee to book its illegitimate gains without paying anytax thereon byclaiming it as exempt long term capital gains under section 10(38) of the Act. The ld.DR stated that the solitary basis with the ld.CIT(A) for deleting the addition made by the AO was his finding that the AO’s case holding the transaction oflong term capital gain to be bogus rested entirely on the interim order of the SEBI in the case of the scrip dealt with in by the assessee, finding it to be manipulated and bogus transaction. The ld.DR pointed out that the ld.CIT(A) found that subsequently the SEBI had passed a final order acquitting the company to which the scrip related of all these charges and on this basis alone he had deleted the addition made by the AO. 4. The ld.DR contended that his arguments against the deletion were as under: i) That the addition made by the AO rested not only on interim report of the SEBI, but there were facts, pointed out by the AO ,demonstrating unreasonably high price at which the scrip were sold ,which had not been explained by the assessee ; ITA No.675/Ahd/2018 3 ii) That in many cases, the department had found these transactions of long term capital gains to be bogus on merits without referring to any of order of the SEBI on scrip being trade therein; iii) That the ld.CIT(A) had not dealt with the merits of the case and had deleted the addition solely on the basis that the SEBI had since then reversed itsinterim-order, which had made allegations of these transactions being manipulated so as to benefit the shareholders exiting from holding the same; iv) In identical facts and circumstances, where shares were found to have been trade at astronomically high prices, the Hon’ble Calcutta High Court had held the transactions to be bogus despite all evidentiary pleadings of the assessee including documents evidencing purchases and sale of shares through brokers in DEMAT account being filed by the assessee. He referred to the decision of the Hon’ble Calcutta High Court in the case of Swati Bajaj Vs CIT[2022] 139 taxmann.com 352 (Calcutta) in this regard He contended that all ingredients of the share transactions noted by the Hon’ble High Court in the said cases were there in the present case also, and therefore, the said decision applied squarely to the facts of the present case. He further pointed out that Hon’ble High Court in the said case had held thatthe onus was on the assessee to justify high increase in price, which in the present case the assessee had not justified by the financial statements of the company whose shares were being transacted in. ITA No.675/Ahd/2018 4 5. The ld.counsel for the assessee, on the other hand, countered all the arguments of the ld.DR stating that – i) The matter of investigation by SEBI in the final order passed in the scrip dealt with in by the assessee was, whether the price of shares had been manipulated so as to benefit shareholders who were exiting their holding so as to bring in their illegitimate claims by way of exempting long term capital gain, and though the interim order indicted the company, whose shares were dealt with by the assessee, as being manipulated by the said parties, the final order absolved the company of all these charges. That the case of the department was also the same that the prices of the shares transacted were manipulated. That therefore, the final order of the SEBI was very relevant to the issue on hand and the ld.CIT(A) therefore had not erred in relying upon this final orderfor deleting the addition made. ii) He further pointed out that identical issue relating to the same scrip as dealt with by the assessee in the present case, of M/s.Mishka Finance& Trading Ltd., was dealt with by the ITAT, Jaipur Bench in the case of DCIT Vs. Prakash Chand Sharma in ITA No.780/JP/2019 dated 18.11.2020 wherein relying upon same final order of the SEBI, absolving the company of all charges of fraudulent manipulation in the prices of scrip, the ITAT had deleted the addition made on account of bogus long term capital gains. The facts being identical to the ITA No.675/Ahd/2018 5 present case, the issue was squarely covered by the said decision, he contended. Copy of the order of the ITAT was placed before us. iii) That the decision of Hon’ble Calcutta High Court was distinguishable on facts since no SEBI report/order in the said caseswas considered by the Hon’ble high Court while upholding the addition made on account of bogus long term capital gains. iv) That the order passed by the SEBI cannot be brushed aside lightly being a statutory regulatory body established by the government for regulating the securities market and protecting the interest of investors. 6. We have heard rival contentions; we have also gone through the orders of the authorities below and also taken note of the decisions and documents to which our attention was drawn during the course of hearing. As is evident, the issue for adjudication before us is, whether long term capital gain returned by the assessee as exempt under section 10(38) of the Act amounting to Rs.8,90,23,838/- was genuine as claimed by the assessee or manipulated/ contrived so as to bring in illegitimate gains of the assessee without paying any taxes thereon, as claimed by the Revenue. 7. The facts relating to the long term capital gain of Rs.8,90,28,838/- earned by the assessee are that they related to 1805700shares of one Mishka Finance and Trading Limited (“MFTL” for short) sold by the assessee during the year for a price/value of Rs.9,12,18,266/-. The chronology of events leading to the ITA No.675/Ahd/2018 6 transaction of purchase and sale of the said shares as stated by the assessee to the authorities below and as reproduced both in the assessment order and appellate order are that : • on 5.9.2012 the assessee had applied for 25,000 equity shares of Pyramid Trading & Finance Ltd. (“PTFL” for short) at the rate of Rs.85/- per share including premium of Rs.75/- per share. • on 9.11.2012 Shares were allotted to the assessee on preferential basis in DEMAT form • on 19.11.2012 the shares were credited in the DEMAT account. • PTFL was a listed company and quoted/traded in Bombay Stock Exchange. The name of the PTFL was subsequently changed to “MFTL”. • on 14.2.2013 “MFTL” declared bonus in the ratio of 1:7 and the assessee got 175000 shares by way of bonus in the DEMAT account. • On 18.1.2014 the face value of Rs.10/- each share was split into face value of Re.1/- each and thus quantity of 2,00,000 shares become 20,00,000. • During the impugned year, the assessee sold 18,05,700 shares on various dates for total value of Rs.9,30,66,066/- earning long term capital gains thereon at Rs.8,90,34,398/- which was returned as exempt from taxation as per the provision of section 10(38) of the Act. 8. It is a fact on record that SEBI had passed interim order in relation to this scrip by “MFTL” holding that preferential allotees and promoters related entities had, with the aid of exit providers, misused the Exchange mechanism to exit at a higher price in order to book illegitimate gains with no payment of tax as long term capital ITA No.675/Ahd/2018 7 gain, as long term capital gain is exempt under section 10(38) of the Act. This order of the SEBI is reproduced at para 4.5 of the assessment order, and the AO ,referring to this order and taking note of the same, had held the transactions to be fraudulently manipulated by the assessee. It is also fact on record that the final order of the SEBI absolved this scrip from all these charges. The relevant portion of the final order of the SEBI absolving MFTL of charges of price manipulation with respect to the shares sold by the assessee specifically was pointed out at para-7& 10 of the order placed before us at PB page no.1 to 11, as under: “7. Upon completion of investigation by SEBI, it is noted that there are no adverse findings against the 104 entities mentioned at S.No.1-104 in Table No.2 with respect to their role in the price manipulation/prima facie violation for which interim order dated April 17, 2015 was passed and subsequently confirmed in the scrip of Mishka, warranting continuation of action under sections 11B and 11(4) of the SEBI Act of the violation of provisions of SEBI Act and PFUTP Regulations etc. Further with regard to 9 entities at S.No.105 to 113 in Table No.2, no adverse material was found in the Investigation Report with respect to prima facie violation found against them in Interim Order dated April 17, 2015 (which was subsequently confirmed) but the Investigation Report has brought out violation relating to disclosure under SEBI (Prohibition of Insider Trading) Regulations 1992 and SEBI (Substantial Acquisition of Shares And Takeovers) Regulations, 2011 warranting Adjudication Proceedings. The list of entities is as under: Table : 2 S N Name PAN 1 2 . . . 20 Gokuldham Enterprises LLP AALFG1236F . . . . ITA No.675/Ahd/2018 8 10. The revocation of the directions issued vide this order is only in respect of the entities mentioned at paragraph 7 of this order in the matter of Mishka pertaining to the period from February 14, 2013 to December 31 2014 in respect of the prima facie violations for which the confirmatory Order dated October 12, 2015, October 21, 2015, April 13, 2016, July 05, 2016 and August 26, 2016 were passed by SEBI. As regards remaining 13 entities in the scrip of Mishka, violations under SEBI Act and/or SCRA and/or PFUTP Regulations and other securities laws were observed and SEBI shall continue its proceedings against them. Hence, the directions issued vide order dated April 17, 2015 against remaining 13 entities shall continue.” 9. Having considered the above undisputed facts and on going through the orders of the authorities below we do not find anymerit in the contention of the Revenue that the Ld.CIT(A) had grossly erred in deleting the addition made b y the AO. 10. Taking up the first contention of the Revenue that the addition made by the AO was not solely on the basis of SEBI order in the case of the scrip traded in by the assessee, and the ld.CIT(A) had therefore erred in deleting the addition merely on the basis of final order of the SEBI absolving the scrip of all charges alleged in the interim order. We have gone through the assessment order, and we find that the entire case of the AO rested on interim order of the SEBI. With respect to any other aspect casting doubts and leading to the conclusion that the share prices were manipulated at an unreasonable price when sold, we do not find any discussion in the entire order on the same. There is only ashow cause notice issued by the AO to the assessee, dated 21.11.2016,where the AO mentions unreasonably high price of sale of these scrips. The same is reproduced in the assessment order as under: ITA No.675/Ahd/2018 9 ITA No.675/Ahd/2018 10 11. A perusal of this show cause notice reveals that except for mentioning the fact that the shares have been sold at a very high price, there is no discussion as to how the price was found to be unreasonable .There is no discussion of the financials of the scrip dealt with by the assessee; there is no absolutely no basis established on merits by the AO as to why sale of these shares were at suspiciously high price. In the assessment order, after the show cause, the only discussion is with regard to the interim order of the SEBI indicting the dealings in these shares with several fraudulent charges as reproduced above, and on the basis of this interim SEBI order alone, the AO has rejected all documentary evidences filed by the assessee, as not being of any assistance to the assessee to prove the genuineness of the transaction. The Ld.DR was unable to point out how the AO had made out a case of unreasonably high price of sale of shares of MFTL. ITA No.675/Ahd/2018 11 12. It is abundantly clear therefore that the entire case of the AO rested on interim order of the SEBI. The argument of the Ld DR to the contrary is therefore rejected. 13. Further, it is fact on record that in the final order, the SEBI had absolved this scrip of MFTL from all charges of its price being manipulated to enable exiting shareholders in introducing their illegitimate gains from being introduced without payment of taxes. The Revenue does not dispute the same. As rightly pointed out by the ld.counsel for the assessee, the specific purpose of the investigation, and both the interim and final orders of the SEBI was regarding manipulation of the price this scrip for providing accommodation entries to illegitimate gains of the share holders dealing in these scrip and final order of the SEBI has found all these charges to be baseless. The case of the Revenue in the present case also is the illegitimate gains being introduced by the assessee by way of fraudulent and manipulated share trading transaction. SEBI is astatutory body and its orders therefore cannot be simply brushed aside. The finding of the SEBI ,in this final order, that the scrip dealt by the assessee were not manipulated and not fraudulent, therefore carries a lot of weight and the ld.CIT(A) has rightly relied upon the same for deleting the addition made in the present case. His finding in this regard at para 4.2 are very relevant as reproduced hereinunder: “4.2 Decision: I have considered the facts mentioned in the assessment order and remand report of the AO and the submission of the appellant carefully. The AO has disallowed the Long Term Capital Gains on the basis of report of the Security and Exchange Board of India (SEBI). It is alleged by the appellant that neither a copy of report was afforded to them nor any independent evidences gathered, therefore, there is gross denial of natural justice for want of cross examination as per law. The SEBI report on which the AO has placed reliance was only an interim report and there is no adverse findings in the final report. The appellant in no way was connected/ related with the Mishka or its promoters even remotely. The SEBI in its final report has nowhere mentioned anything incriminating against the appellant. ITA No.675/Ahd/2018 12 The facts of the case are that the appellant had applied for 25,000 equity shares of Pyramid Trading and Finance Ltd (PTFL) @ Rs 85/- per share including premium of Rs 751- per share on 05.09.2012. The shares were allotted to the appellant on preferential basis on 9.11.2012 in demat form and the shares were credited in appellant's demat account on 19.11.2012. The payment through cheque No.531602 drawn on Indian Overseas Bank of the appellant has been made for purchase of original shares on 20.09.2QJL2. The Pyramid Trading and Finance Ltd (PFTL) is a listed company and its shares are quoted on the Bombay Stock Exchange (BSE). The name of the PTFL was subsequently changed to Mishka Finance and Trading Ltd (MFTL). The MFTL declared bonus in the ratio of 1:7 and the appellant got 175000 shares by way of bonus in its demat account on 14.02.13. On 18.01.14 the face value of Rs 10/- each share was split into face value of Rs 1/- each and thus quantity of 200000 shares become 2000000 shares. The appellant purchased these shares for investment purpose and getting reflected in the balance sheet dated 31.03.2013. It is verified that even some portion of this investment continue to be there in the balance sheet dated 31.03.2014. During the financial year under consideration the appellant had sold 1,805,700 shares on various dates for total value of Rs 9,30,66,066/-. The net long term capital gains earned was Rs 8,90,34,398/-.These shares were sold through the member of the BSE namely Progressive Share Brokers (P) Ltd on the trading platform of the BSE. Even if the first sale of impugned share transaction to earn the profit is examined in the demat account, the appellant was holding the shares in their demat account for more than 12 months as the payment for purchase of share was made through cheque on 20.09.2012. I have perused the copies of brokers bills, copy of brokers ledger account, copy of demat statement, copy of STT certificate and copy of appellant's bank statement to conclude that the appellant has submitted credible explanation. The final report of SEBI has come out on 05.10.2017 wherein it has clearly stated in Para 7 of their report that: "Upon completion of investigation by SEBI, it is noted that there are no adverse findings against the 104 entities mentioned at S.No 1-104 in Table No. 2 with respect to their role in the price manipulation/prima facie violations for which Interim Order dated April 17, 2015 was passed and subsequently confirmed in the scrip of Mishka." A copy of this report was sent to AO as per Rule 46A and remand report dated 22.11.2017 has been received. In para-3 of remand report, the AO has simply mentioned that the share transaction has been skillfully manipulated to claim the exemption u/s. 10(38). In this connection, it is verified that the payment for purchase of shares was made through banking channel, shares were in demat account of the appellant for more than 12 months before they were sold through BOLT of BSE and the proceeds have been received through banking channel, STT has been paid. The main stand of the AO which was picked up from SEBI interim report has also been decimated by the final report of the SEBI itself. The relevant portion of para 8 of SEBI report dated 05.10.2017 is reproduced as under:: "8. Considering the fact that there are no adverse findings against the 104 entities mentioned at S.No. 1-104 in Table No,2 with respect to their role in the price manipulation/prima facie violations for which interim Order dated April 17, 2015 was passed and subsequently confirmed in the scrip of Mishka warranting continuation of action under section 11B and 11(4) of the SEBI Act, I am of the considered view that the directions issued against them vide interim order dated April 17, 2015 which were confirmed vide Orders dated October 12, 2015, October 21, 2015, April 13, 2016, July 05, 2016 and August 26,2016, are liable to be revoked." ITA No.675/Ahd/2018 13 The perusal of list of entities mentioned therein indicates appellant's name at Sr.No.20, hence, the appellant has been absolved of any wrong doing. Consequently, the argument of the AO has fallen flat and there is no other independent finding to fasten the tax liability on the appellant. As per Section 10(38) of the Act any income arising from the transfer of a long term capital asset being an equity share in a company is exempt where- a) The transaction of sale of such equity share is entered into on or after the date on which Chapter VII of the Finance (No.2) Act, 2004 comes into force and b) Such transaction is chargeable to securities transaction tax (STT) under that chapter. The conditions to avail the benefit u/s.10(38) are fulfilled by the appellant, therefore, the claim of the appellant as per return of income is found to be in order. It is further mentioned that the appellant relied on the ratio of following case laws: i) CIT-I Vs. Maheshchandra G. Vakil [2013]40 taxmann.com 326 (Guj.HC) ii) CIT-I Vs. Himani M Vakil [2013]10 taxmann.com 326 (Gu. HC) iii) DCIT vs Sunita Khema in ITA nos 714 to 718/ kol/2011 (Kol. ITAT) iv) CIT Vs. Smt Sumitra Devi in ITA 54/2012 (Raj. HC) v) CIT Vs. Udit Narain Agarwal in ITA 560 of 2009 (All. HC) vi) ACIT Vs Shri RavindrakumarToshiwal in ITA nos 5302/Mum/2008 vii) TekchandRambhiya HUF in ITA nos 930/Mum/2012 viii) CIT vs. Jamnadevi (328 ITR 656) (Mum. HC) In addition to above case laws, the AR filed a copy of ITAT, Mumbai judgment in the case of ITO vs. Arvindkumar Jain HUF dated 18.09.2017 with the emphasis' that the facts of the case are exactly same wherein a relief to the appellant has been granted. I have perused the case laws (supra) and find support in the argument of appellant. In view of facts including facts mentioned in SEBI's final report and ratio laid down in the case laws (supra), the ground No.1 & 2 of appeal are allowed.” 14. We have also taken note of the decision of the ITAT, Jaipur Bench in an identical case of addition made of bogus long term capital gains arising in trading of shares of the same scrip as in the present case, i.e “MFTL”, wherein ITAT deleted the addition on the basis of the final order of the SEBI. The facts and circumstances of the caseare identical to the present case. The ld.DR was unable to point out any distinguishing fact, and therefore, the said decision is squarely applicable to the present case. The CIT(A) ‘s order deleting the addition of Rs.8,90,28,838/- in the present case is fortified by the said decision of the ITAT. ITA No.675/Ahd/2018 14 As for the decision of the Hon’ble Calcutta High court in the case of Swati Bajaj (supra), the Ld.Counsel for the assessee has rightly distinguished the same on facts pointing out that in those case there was no reference to any order of SEBI in the scrips traded in. That accordingly the Hon’ble High Court had dealt with the issue on merits referring to the financials of the scrips not supporting the high prices at which it were sold and accordingly holding that the assessee in such circumstances was required to establish the genuineness of the transactions. The Ld DR was unable to controvert the factual distinction pointed out by the Ld.Counsel for the assessee as above. We agree therefore, in the light of the factual distinction, that the decision of the Hon’ble Calcutta high court is not applicable in the present case. 15. In view of the above, we do not find any infirmity in the order of the Ld.CIT(A) deleting the addition made on account of alleged bogus long term capital gains of Rs.8,90,28,838/-. Accordingly, the grounds of the appeal of the Revenue are dismissed. 16. In the result, appeal of the Revenue is dismissed. Order pronounced in the Court on 11 th January, 2023 at Ahmedabad. Sd/- (SIDDHARTHA NAUTIYAL) JUDICIAL MEMBER Sd/- (ANNAPURNA GUPTA) ACCOUNTANT MEMBER Ahmedabad, dated 11/01/2023 vk*