Vivek Suresh Agrawal-HUF, Ahmedbad V. The ITO, Ward-3(3)(15), Ahmedabad

ITA 70/AHD/2019

• Counselvise Citation: [2022] 106 COUNSELVISE.COM (IT) 3939 (ITAT-AHMEDABAD)
• Duration Of Justice: 3 year(s) 5 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-06-2022
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: A
• Assessment Year: 2015-2016
• Appeal Filed On: 20-01-2019
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Keywords: Unexplained cash credit; Accommodation entries; Tax effect; Penny stocks; Capital Gains; Bogus
• Section: 68

Judgement Text

THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD “A” BENCH Before: Shri Waseem Ahmed, Accountant Member And Shri Siddhartha Nautiyal, Judicial Member Vivek Suresh Agrawal- HUF, 21, Vivek Vila, Sarthi-III, Nr. Goyal In tercity, Drive-in-Road, Th altej, Ah medabad -3 80052 PAN: AAF HV1039 M (Appellant) Vs ITO, Ward-3(3)(15), Ah med abad (Resp ondent) Asses see b y : None Revenue by : Shri S udhendu Das, Sr. D. R. Date of hearing : 18-05 -2 022 Date of pronouncement : 24-06 -2 022 आदेश/ORDER PER : SIDDHARTHA NAUTIYAL, JUDICIAL MEMBER:- This is an appeal filed by the assessee against the order of the ld. Commissioner of Income Tax (Appeals)-3, Ahmedabad in Appeal no. CIT(A)-3/ITO Wd. 3(3)(15)/267/2017-18 vide order dated 08/11/2018 passed for the assessment year 2015-16. ITA No. 70/Ahd/2019 Assessment Year 2015-16 I.T.A No. 70/Ahd/2019 A.Y. 2015-16 Page No. Vivek Suresh Agrawal-HUF vs. ITO 2 2. The assessee has taken the following grounds of appeal:- “1. The learned CIT(A) has erred in passing ex-party order and thereby has erred in passing the order confirming the addition of Rs. 51,62,206 made in the assessment order, which is nothing but ex-party order. 2. The learned CIT(A) has erred in passing the order without appearance of AR in spite of several notices and therefore the order is passed ex-party and the CIT(A) has passed the order deciding the appeal against the assessee and thereby has erred in confirming the addition of Rs. 51,62,206 being the LTCG claimed as exemption. Total Tax Effect Rs. 17,03,527/-“ 3. The brief facts of the case are that on 19-03-2013, the assessee purchased 1,50,000 shares of Kailash Auto Finance Ltd at the price of 2 per share. The shares were sold by the assessee on 09-09-2014, 10-09-2014 and 12-09-2014 at the total sale value of 51,62,206/-thus making capital gains of 48,62,206/-within a period of 18 months i.e. the value of shares increased to 17 times within 18 months. The assessee claimed exemption from payment of taxes on the above LTCG. The AO observed that from the website of BSE India that the share transactions of Kailash Auto Finance Ltd have been suspended as a surveillance measure on a 08-08-2016. The AO further observed that the shares of Kailash Auto Finance Ltd. were purchased in physical form on 19-03-2013 from a Kolkata-based company. The shares were then converted into demat format. The AO observed that the assessee has invested in shares of this company alone and has not invested in shares of any other company. In such facts, when the assessee is I.T.A No. 70/Ahd/2019 A.Y. 2015-16 Page No. Vivek Suresh Agrawal-HUF vs. ITO 3 not a regular trading in shares, then it is surprising how he earned a phenomenal return of 17 times within a short period of time, which is extremely unusual. The assessee has entered into a sham transaction with full knowledge of it, so as to convert unaccounted money into accounted money in the guise of capital gains. Accordingly, the AO held that the purchase and sale of shares of Kailash Auto Finance Ltd which is a penny stock company was a sham transaction and accordingly he disallowed the assessee’s LTCG exemption claim of 48, 62, 206/- as bogus. 4. In appeal, despite several opportunities and notices issued to the assessee, none appeared on behalf of the assessee to present the case before Ld. CIT(Appeals). The below chart tabulates the opportunities given to the assessee and that he did not cause appearance before first appellate authority despite several opportunities: Sr. No Date of Notice Date of service of notice Date of hearing fixed Remarks 1 11/07/2018 By RPAD 19/07/2018 Nobody attended or filed any written submission. 2 18.07.2018 By RPAD Adjournment letter dated 16.07.2018. Adjourned to 23.08.2018 3 23.08.2018 Adjourned to 05.09.2018 4. 05.09.2018 Adjourned to 04.10.2018 5 04.10.2018 Adjourned to 25.10.2018 I.T.A No. 70/Ahd/2019 A.Y. 2015-16 Page No. Vivek Suresh Agrawal-HUF vs. ITO 4 5. The Ld. CIT(Appeals) accordingly on the basis of information available on record confirmed the order of the Ld. Assessing Officer by holding that the assessee has engaged in sham transaction and accordingly the LTCG is not made exempt in his hands. While passing the order, Ld. CIT(Appeals) the following observations: “3.5. The appellant in this case has, in order to take the accommodation entry and bogus long term capital entry through the trading of shares of penny stocks adopted the Modus Operandi of routing the unaccounted money in the garb of long term capital gain. This entry of LTCG is taken by selling the shares through stock exchange and registering the proceeds arising out it to the books of account as Long term capital gain and then claiming the LTCG exempt u/s 10(38) of the I.T. Act. In this scheme the shares of penny stock companies are acquired by the beneficiaries of LTCG at very low prices either through the route of the private placement or through off market transactions. Another route to acquire shares is through amalgamation or merger. There after the prices of shares of the penny stock company are rigged and are raised through circular trading. In this case also, the prices have gone many times up due to the rigging in spite of the lower credential of the company. This is managed by the operator of the scrip who is a person who is managing the overall affairs of this scheme and who as contacted the entities who wise to take entry of bogus LTCG in the books. 3.6. From the above facts it is evident that the appellant has purchased the penny stock in the form of shares of Kailash Auto Finance Ltd. for a meager price of Rs. 1/- per share and even though the company had no credential, the assessee has managed to sale his shares at the average price of Rs.41.80/- per share. Looking to the fact that In spite of having very low credential of the company, prices of the shares have shot up to 41 times more than the original I.T.A No. 70/Ahd/2019 A.Y. 2015-16 Page No. Vivek Suresh Agrawal-HUF vs. ITO 5 investment, which itself proves that there was rigging within the circuit created by the brokers and others. The offloading of shares by the promoters also indicates that the shares of the Kailash Auto Finance Ltd. were not worth for the price at which the shares were sold. The whole transactions of purchasing the shares at very meager price of Rs. 1/- and then rising the market value of the shares by creating the syndicate and by rigging the price at very high level is arranged to accommodation entry of bogus profit in the form of long term capital gain. 3.7. It can be seen from financial data of the company which is available at public domain; no prudent person will invest in such companies. When there are large number of fundamental companies are available in the market, why appellant has chosen to invest in these types of shares clearly prove that appellant wishes to obtain exempt capital gain by obtaining accommodative entries. It is an established law that Income Tax proceedings fall in the domain of preponderance of probabilities, meaning that the action of assessee is considered to be rational and well inform falling in the domain where probable choice are exercised. In Sumati Dayal Case Hon'ble Supreme Court has held that a man is considered as making rational decisions and the choices exercised by him falls under probable alternatives available before him. The financial analysis made herein above clearly prove that the decision of investment in nondescript penny stock is highly unlikely for a prudent investor and also that the quantum jump in stock prices of Kailash Auto Finance Ltd. The scrip in which Appellant has made the transaction is listed in penny stock by SEBI and no prudent person would invest in such type of shares. As discussed herein above, transactions of shares were not governed by market practices and initial payment was made in cash which prove that transactions are non-genuine and Appellant has resorted to preconceived scheme to procure long term capital gain by way of price difference in share transactions which is not support by market. The below table and chart clearly indicate that the company in which the assessee has invested and claimed capital gain does not have any sound financials. The price movement of its shares is also abnormal which nowhere matches or relates to the performance of the company. Besides, the movement of the share price of Kailash Auto is totally in I.T.A No. 70/Ahd/2019 A.Y. 2015-16 Page No. Vivek Suresh Agrawal-HUF vs. ITO 6 variance with the movement of Sensex during the same period which is clearly seen in the below graph. xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx 3.8. With regard to observation of Appellant that entire transactions are supported by various documentary evidences, AO has not proved that cash has been received by Appellant at the time of purchase nor any further cash payment was made against alleged long term capital gain along with various decisions referred in submissions. It is observed that shares in which Appellant has carried out transaction is penny stock and entire circumstantial evidences clearly suggest that Appellant has obtained accommodation entries.” 6. The assessee is in appeal against us against the aforesaid order of Ld. CIT(Appeals). Before us, none appeared on behalf of the assessee despite several opportunities afforded to the assessee to present his case. The Ld. DR primarily relied upon the observations made by Ld. CIT(Appeals) and argued that in the instant facts, on the basis of circumstances on record, it is seen that such investment was clearly sham so as to claim bogus LTCG. Since the assessee remains un-cooperative, we are constrained to pass the order on merits on the basis of information available on record and the case put forth before us by the Ld. DR. In the present case, we are of the considered view, that the assessee has entered into a sham transaction so as to avail bogus LTCG on sale of penny stock company. Several circumstances point to this fact. Firstly, the company Kailash auto Finance Ltd has no credentials and despite that shares of the company rose by 41 times more than the original investment within a very short period of time. Secondly, the assessee has no past history of investment in shares and this is the only share in which he had invested i.e. in the company which has no I.T.A No. 70/Ahd/2019 A.Y. 2015-16 Page No. Vivek Suresh Agrawal-HUF vs. ITO 7 credentials (in fact in 2016, the share transactions of this company have been suspended as a surveillance measure) and surprisingly, on investment of rupees three lakhs, the assessee has made a phenomenal gain of 48,62,206/-within a period of 18 months. Thirdly, the financial analysis of the company’s share clearly proves that the decision of investment in this share is highly unlikely for a prudent investor and on preponderance of facts and circumstances, transactions in the instant share is not covered by market practices and the abnormal increase in price of the company does not match and is not related to the performance of the company thereby indicating that the transaction entered is sham. The Kolkata High Court in the case of the PCIT v. Swati Bajaj 2022] 139 taxmann.com 352 (Calcutta)[14-06- 2022]held that the genuinity of unreasonable rise in the price of the shares of penny stock over a short period needs to be established, and the onus is on the assessee to do so as mandated in Section 68 of the Act. That onus is not discharged by merely citing the opinions of an expert who issued a buy call on the penny stocks. Nor is it discharged by the assessee being a regular investor who has also earned profits from blue-chip stocks when the claim for long-term capital gains is limited to the profits from the sale of penny stocks which saw huge unreasonable price rises in just over a year. While passing the order, the High Court observed as under: •However, the assessee had an opportunity to prove that there was no manipulation at the other end and that whatever gains the assessee had reaped were not tainted. This has not been proved or established before us. Therefore, the assessing officers were well justified in concluding that the explanation offered by the assessee was not to their satisfaction. Thus, the assessee having not proved the I.T.A No. 70/Ahd/2019 A.Y. 2015-16 Page No. Vivek Suresh Agrawal-HUF vs. ITO 8 genuineness of the claim, the creditworthiness of the companies in which they had invested and the identity of the persons to whom the transactions were done, have to fail necessarily. • In such a factual scenario, the Assessing Officers, as well as the CIT(A), have adopted an inferential process which is a process which would be followed by a reasonable and prudent person. The Assessing Officers and the CIT(A) had culled out proximate facts in each of the cases, took into consideration the surrounding circumstances which came to light after the investigation, assessed the conduct of the assessee, took note of the proximity of the time between the buy and sale operations and also the sudden and steep rise of the price of the shares of the companies when the general market trend was admittedly recessive and thereafter arrived at a conclusion which in our opinion is a proper conclusion and in the absence of any satisfactory explanation by the assessee, the Assessing Officers were bound to make addition under section 68 of the Act. 6.1 In the case of Smt. M.K. Rajeshwari v. ITO [2018] 99 taxmann.com 339 (Bangalore - Trib.), the Tribunal held that where assessee claimed exemption under section 10(38) in respect of capital gain arising from sale of shares, in view of fact that financial worth of said company was meagre and, moreover, there was abnormal rise in price of shares, it could be concluded that assessee introduced her own unaccounted money in garb of long term capital gain and, thus, claim raised by her was to be rejected. The Bombay High Court in the case of Sanjay Bimalchand Jain v. PCIT [2018] 89 taxmann.com 196 (Bombay) held that where I.T.A No. 70/Ahd/2019 A.Y. 2015-16 Page No. Vivek Suresh Agrawal-HUF vs. ITO 9 assessee had purchased shares of penny stocks companies at lesser amount and within a year sold such shares at much higher amount and assessee had not tendered cogent evidence to explain as to how shares in an unknown company had jumped to such higher amount in no time and also failed to provide details of person who purchased said shares, said transactions were attempt to hedge undisclosed income as Long term Capital gain. In the case of Satish Kishore v. ITO (2019) 110 Taxman.com 307 (Delhi Tribunal), the assessee, an individual, filed return of income claiming long-term capital gain on sale of shares as exempt under section 10(38). The Assessing Officer held amount so received as unexplained cash credit under section 68 and made addition on ground that assessee failed to discharge burden of proof and explain nature and source of transaction and huge profit in all shares traded by assessee against human probability. AO held that it was found that assessee failed to justify manifold increase in prices of shares despite weak financials of companies. Further, investigation carried out by Department had brought facts on record that share prices had been manipulated artificially, purchased by a set of accommodation entry provider companies controlled by cartel of brokers, entry operator, etc. Moreover, fact that prices of all shares purchased by assessee went up, that too without any corresponding profit or prospects of company, and not even in single case price of share came down, was against human probabilities and impugned year was an isolated year of such profits with no such profits made in earlier or subsequent years. In such circumstances, the Tribunal held that assessee failed to prove genuineness of transaction and long-term capital gain on sale of shares by assessee was an arranged affair to convert its own I.T.A No. 70/Ahd/2019 A.Y. 2015-16 Page No. Vivek Suresh Agrawal-HUF vs. ITO 10 unaccounted money and thus, exemption claimed under section 10(38) on sale of shares had rightly been disallowed. 6.2 In view of the above judicial precedents as applied in the assessee set of facts as discussed in the preceding paragraphs, we are of the considered view that the Ld. CIT(Appeals) has not erred in facts and in law in confirming the addition made in respect of LTCG claimed as exempt in the instant facts. 7. In the result, appeal of the assessee is dismissed. Order pronounced in the open court on 24-06-2022 Sd/- Sd/- (WASEEM AHMED) (SIDDHARTHA NAUTIYAL) ACCOUNTANT MEMBER JUDICIAL MEMBER Ahmedabad : Dated 24/06/2022 आदेश क त ल प अ े षत / Copy of Order Forwarded to:- 1. Assessee 2. Revenue 3. Concerned CIT 4. CIT (A) 5. DR, ITAT, Ahmedabad 6. Guard file. By order/ आदेश से, उप/सहायक पंजीकार आयकर अपील य अ धकरण, अहमदाबाद