Amit Bhaskarrao Sanap, Aurangabad V. Assistant Commissioner of Income-tax, Circle -3, , Aurangabad

ITA 78/PUN/2019

• Counselvise Citation: [2022] 104 COUNSELVISE.COM (IT) 0175 (ITAT-PUNE)
• Duration Of Justice: 3 year(s) 9 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-10-2022
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 24-07-2022
• Assessment Year: 2015-2016
• Appeal Filed On: 16-01-2019
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: S P WALIMBE; ARVIND
• Keywords: Unexplained investment; Income from undisclosed sources; Accommodation entries; Benefit of exemption; Retraction; Penny stocks; Capital Gains; Bogus
• Section: 68; 56; 133A; 12A; 250; 20

Judgement Text

आयकर अपीलीय अिधकरण “ए” Ɋायपीठ पुणेमŐ। IN THE INCOME TAX APPELLATE TRIBUNAL “A” BENCH, PUNE BEFORE SHRI PARTHA SARATHI CHAUDHURY, JUDICIAL MEMBER AND DR. DIPAK P. RIPOTE, ACCOUNTANT MEMBER आयकर अपील सं. / ITA No.78/PUN/2019 िनधाᭅरण वषᭅ / Assessment Year : 2015-16 Amit Bhaskarrao Sanap, A-2, N-4, CIDCO, Aurangabad, Maharashtra – 431001. PAN: AUIPS 4177 L Vs The Assistant Commissioner of Income Tax, Circle-3, Aurangabad. Appellant/ Assessee Respondent /Revenue Assessee by None. Revenue by Shri S P Walimbe & Shri Arvind Desai – DR Date of hearing 25/07/2022 Date of pronouncement 19/10/2022 आदेश/ ORDER PER DR. DIPAK P. RIPOTE, AM: This appeal filed by the Assessee is directed against the order of ld.Commissioner of Income Tax(Appeals)-2, Aurangabad, dated 13.11.2018 for the A.Y. 2015-16. The assessee has raised the following grounds of appeal: “1. The order of the learned commissioner (A), Aurangabad confirming the addition of Rs.1,93.17.241/- made by the A.O. in computing the income U/s 56 instead of exempt U s. 10(38) of the Act of the appellant is contrary to law and facts of the case. 2. On the facts and in the prevailing circumstances of the case and in law, the Id. A.O is not justified in disallowing exemption claimed u/s. 10(38) of Rs. 1.93.17.241and treating it as income ITA No.78/PUN/2019 for A.Y. 2015-16 Amit Bhaskarrao Sanap Vs. ACIT, Circle-3, (A) 2 from other sources u/s.56 of the 1 T Act. without any cogent reasons and bringing any evidence on record in support to his contentions. Thus. A.O's finding may please be vacated and due exemption u/s. 10(38) may please be allowed and said addition may please be deleted. 3. The Hon'ble C1T (A) has erred in ignoring the "Affidavit" filed by the appellant. At the time of recording of statement before DDIT (Inv). the appellant was under mistaken belief of facts and was wrongly advised by his counsel regarding his statement. The transactions arc genuine and the assessce wishes to rightly claim the exemption U/s 10(38) and has thus filed the Affidavit to retract his statement. 4. The A.O. has erred in quoting case laws which do not apply to the appellant's case. The appellant had sold the shares through a registered stock broker and paid STT on the sale. This is evident from the contract notes. The Hon'ble CIT (A) has described in its order vide Pg. No. 28 Paragraph No. 4.3 that a contract note is just an "internal" document and cannot be relied upon. If that is the case, any document produced by the appellant can be considered internal and easily get rejected. This is absurd. Even the A.O. could not produce any document to show that the transaction carried out by the appellant are not genuine. Hence we urge your honour to consider our submission and give us relief. 5. The A.O. has not considered the detailed submission made by the assessce regarding the purchase, dematerialization and sale of shares. In its order the Hon'ble CIT (A) has raised doubts on the period of holding of shares, dematerialization, purchase, etc. Whereas supporting for each event was submitted. We request your honour to kindly consider the same and oblige. Further the CIT (A) has stated in its order, that it is impossible for the assessce to have the knowledge to invest in stock market. The appellant is a lawyer ITA No.78/PUN/2019 for A.Y. 2015-16 Amit Bhaskarrao Sanap Vs. ACIT, Circle-3, (A) 3 and has interest in various partnership concerns. Me also has large shareholdings and investments as is evident from his balance sheet. Hence the contention of the CIT (A) that the appellant cannot have the know ledge/expcrience in stock market is totally wrong. The I lon'ble CIT (A) has stated various case laws in support of its judgment. But the facts of each law are different compared to this case. Hence blindly basing the judgment on those decisions is not correct, flic lest of human probability cannot be applied in each and every case to ascertain the genuineness ol a particular transaction and that too when all the evidences submitted support the genuineness of the transaction. 6. The A.O. had no direct evidence to prove that the share prices were rigged and the same is mentioned in the order of CIT (A). Hence it cannot make assumption that the transaction is non- genuine. There are many scripts which outperform the Sensex. The contention of the A.O. that if a script is outperforming the Sensex, which is a benchmark index, is not genuine, will make half of the scripts on the stock exchanges non-genuine. Thus this contention of the A.O. is not correct and I urge your honour to delete the addition. 7. It is humbly prayed that the reliefs as prayed and such other and further reliefs as may be justified by the facts and circumstances of the case and as may meet the ends of justice, may please be granted.” 2. Brief facts of the case are that the assessee had filed return of income on 28/9/2015 declaring income of Rs.2,03,13,760/-. In the return of Income , the assessee had shown Long Term Capital gain from sale of Share and claimed it to be taxable at the rate of 10%. The assessee had shown LTCG from sale of P S I T Infrastructure ITA No.78/PUN/2019 for A.Y. 2015-16 Amit Bhaskarrao Sanap Vs. ACIT, Circle-3, (A) 4 and Services Ltd (PSIT)and Mahavir Advanced remedies Ltd (MARL) at Rs.1,93,17,241/-. In the return of Income the assessee had not claimed exemption u/s 10(38) of the Act for the LTCG of Rs.1,93,17,241/-.During the assessment proceedings the Assessee claimed exemption u/s 10(38) for LTCG of Rs.1,93,17,241/-. The Assessing Officer (AO) rejected the claim of exemption u/s 10(38) following Hon’ble SC decision in Goetz India Ltd 284 ITR 323. However, in the assessment order the AO held that the scrips P S I T Infrastructure and Services Ltd (PSIT) and Mahavir Advanced remedies Ltd(MARL) were penny stocks, tainted scrips utilized for the purpose of accommodation entries. Therefore, the AO held that LTCG of Rs.1,93,17,241/- as bogus and added the amount u/s.56 of the Act. Aggrieved by the order of the AO the assessee filed appeal before, the Commissioner of Income Tax (appeal). The Ld.CIT(A) upheld the order of the AO. Aggrieved by the order of the Ld.CIT(A) the assessee filed an appeal before this tribunal. 3. No one appeared on-behalf of the assessee. It was observed that on 24/05/2022 also no one appeared on-behalf of the assessee for hearing. No adjournment letters were filed. Therefore, we heard the Ld.DR, perused the records and heard the appeal. 4. The assessee had purchased 25000 shares at Rs.10 per share of M/s Swift IT Infrastructure & Services Ltd in FY 2012-13. There after due to merger shares of Parag Shilp Investments Ltd were ITA No.78/PUN/2019 for A.Y. 2015-16 Amit Bhaskarrao Sanap Vs. ACIT, Circle-3, (A) 5 allotted to share holders of Swift IT Infrastructure & Services Ltd . The Parag Shilp Investments Ltd became P S IT Infrastructure & Services Ltd (PSIT). During FY 2012-13, assessee purchased 49400 shares for Rs.2,50,000/- of Indo-American Advanced Pharmaceutical Ltd which subsequently changed its name to Mahavir Advanced Remedies Ltd (MARL) . During FY 2014-15 assessee sold part of the shares of these two companies for a consideration of Rs.1,95,97891/- and shown LTCG of Rs.1,93,17,241/-. The share price of PSIT increased 91 times within 16 months and share price of MARL increased 52 times within 14 months. The share price of both these shares have increased many folds in short span of time and then again decreased substantially which has been demonstrated by the AO through graphs in the assessment order. The details of Profit for five years of both these companies have been mentioned by the AO in the Assessment order. 5. The relevant paragraphs of the assessment are reproduced here under : Quote, “ 12.1 Statement of Shri Sajjau Kedia recorded on 13.06.2014: He has stated that he is chairman and director of PS IT but only for namesake and this company is completely managed by Mr. Jagdish Purohit who manipulates the share prices of the company and manage to convert black money of the person who wants it in form of Long-Term Capital Gain. He has explained the `Modus Operandi' of providing accommodation of long-term capital gain as under: ITA No.78/PUN/2019 for A.Y. 2015-16 Amit Bhaskarrao Sanap Vs. ACIT, Circle-3, (A) 6 "The people, who want to convert their black money into Long Term Capital Gain, contact to Mr. Jagdish Purohit. Then Mr. Jagdish Purohit make them purchase the shares of above mentioned two companies from the parties controlled and managed by him on very nominal price. These purchase transactions are done either through registered stock exchange or off market. Then Mr.Jagdish Purohit manipulates the price of these shares on the stock exchange through controlled transaction of these shares during all the time. When desired time period (12 month) and desired price are achieved. Mr. Jagdish Purohit again makes arrangement to purchase those shares from shareholders on very high price high through his managed share purchasers. In this way initial share purchaser earn huge exempted LTCG on share sale but it is bogus LTCG because eqppl amount to LTCG along with additional commission is paid by them (initial purchaser) in cash (black money) to Mr. Jagdish Purohit.” 12.2 Statement of Shri Anil Kr. Khemka recorded on 30/03/2015: He has explained the `Modus Operandi' of providing accommodation of long term capital gain as under:. "Generally, there are few companies engaged in providing accommodation entries in the form of long term capital gains who used to allot preferential shares of these listed companies to beneficiaries, to whom entry of long term capital gain has to be provided. After holding these shares for one year, clients used to sell such shares on very higher rtes. Such shares are bought from beneficiary clients by our companies mentioned at question no. 14. When party / beneficiary, come to us for having accommodation entry, we used to get cash from them, get it deposited in various bank accounts and hen finally, we used to transfer it to party / beneficiaries bank account. For doing so, e used to get a commission income in cash from party @ 0.10 paisa per 100 Rupees of cheque amount. Our companies buy the shares ITA No.78/PUN/2019 for A.Y. 2015-16 Amit Bhaskarrao Sanap Vs. ACIT, Circle-3, (A) 7 afterthe prices of scripts are raised through artificial; synchronized trading." 12.3 Further, it has been observed that Shri Anil Khemka has identified the script of PS IT as one of the script involved in providing LTCG accommodation entry. 12.4 Statement of Shri SubilataHaldar recorded on 31/12/2014: He has also described a similar modus o9erandi of providing accommodation entry of bogus LTCG. He has also admitted that he has given accommodation entries in various scripts including PS IT. 13. Further, the Investigation Wing at Aurangabad has informed that during the course of investigation on 02/09/2015, in his statement recorded u/s 131 of the Income Tax Act, the . assessee has discussed the income received from sale of spares of PS IT and Mahavir as his additional income, He had also committed to revise his return of income and pay the taxes accordingly. However, the assessee retracted from his declaration subsequently and didn't revise his return of Income. 14. Further, the Ministry of Corporate Affairs has identified PS IT as a suspected shell company and accordingly, SEBI has initiated enquiry in this matter and has also restricted trading in shares of PS IT Also, abnormalities in the trade pattern vis-a-vis financials of Mahavir has also been observed by the BSE and it has suspended trading in shares of Mahavir vide notice dated 01.01.2015. 15. Judicial Pronouncement on this issue: 15.1 While deciding on a similar issue in the favour of revenue in the case of Sanjay Bimalchand Jain L/H ShantideviBimalchand Jain Vs. The Pr. CIT, Nagpur, the Nagpur Bench of Hon'ble Bombay High Court has held that. ITA No.78/PUN/2019 for A.Y. 2015-16 Amit Bhaskarrao Sanap Vs. ACIT, Circle-3, (A) 8 "The authorities have recorded a clear finding of fact that the assessee has indulged in a dubious share transaction meant to account for the undisclosed income in the grab of long term capital gain. While so observing the authorities held that the assessee had not tendered cogent evidence explain how the shares in an unknown company worth Rs.5/- had jumped to Rs.485/ to no in time. The Income Tax Appellate Tribunal held that the fantastic sale price was not at all possible as there was no economic or financial basis as to how a share worth Rs.5/- of a Title known company would jump from Rs.5/- to Rs.485/-. The findings recorded by the authorities are pure findings of facts based on a proper appreciation of the material on record. While recording the said findings, the authorities have followed the tests laid down by the Hon'ble Supreme Court and this Court in several decisions." 15.2 This entire edifice through which the assessee claimed to have earned huge tax exempt gains within a very short span of time fails the tests of both genuineness and human probabilities. In the case of Sumati Dayal Vs CIT (214 ITR 801) the apex court propounded the principle of human probabilities and applying it in that case held that whether apparent is real is to be decided on the basis of incriminating circumstances. The supreme court even took note of the scheme of converting black money into white through the route of lottery winnings etc by stating that "In this context it would be relevant to mention that in order to give effect to the recommendations of the Direct Taxes Enquiry Committee (under the Chairmanship of Justice K.N. Wanchoo, retired Chief Justice of India) the definition of "income" in section 2(24) of the Act was amended with effect from April 1,1972 by the Finance Act, 1972 so as to include within its ambit, winnings from lotteries, cross word puzzles, races including horse races, card games and other games of any sort or from, gambling or betting of any form or nature whatsoever. The reason underlying the said amendment was that exemption from tax that was enjoyed in respect of such winnings had provided scope for ITA No.78/PUN/2019 for A.Y. 2015-16 Amit Bhaskarrao Sanap Vs. ACIT, Circle-3, (A) 9 conversion of "black" money into "white" income. "The apex court concluded that: "There is no dispute that the amounts were received by the appellant. from various race clubs on the basis of winning tickets presented by her. What is disputed is that they were really the winnings of the appellant from the races. This raises the question whether the apparent can be considered as real. As laid down by this Court, apparent must be considered real until it is shown that there are reasons to believe that the apparent is not the real and that the taxing authorities are entitled to look into the surrounding circumstances to find out the reality and the matter has to be considered by applying the test of human probabilities." 15.3 Reliance is also placed on the decision of the Apex court in the case of Durga Prasad More Vs CIT wherein the principle of human probabilities was relied upon by the court in deciding the case in favour of revenue. 15.4 At the cost of repeating it is reiterated that the humongous gains made by the assessee in penny scrip devoid of any fundamentals defies any logic or human probabilities and therefore cannot be genuine. 15.5 Here is it also pertinent to mention the objective of such edifice as employed by the assessee. It is evident from the outset that the assessee earned huge Long term Capital gains from these transaction which she claimed as exempt from taxation u/s 10(38). This entire edifice was basically a colourable device to give the colour of genuineness to these transactions through which she was successful in bringing back his own unaccounted cash into his books without the need to pay any taxes. Supreme Court in the case of McDowell Vs CTO has given strong verdict against any such arrangements by stating that "Colorable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honorable to avoid the payment of tax by resorting to dubious methods. It is the obligation of every citizen to pay the taxes ITA No.78/PUN/2019 for A.Y. 2015-16 Amit Bhaskarrao Sanap Vs. ACIT, Circle-3, (A) 10 honestly without resorting to subterfuges." In view of the Apex Court verdict, this entire arrangement is held as a mere colorable device devised with the aforementioned objectives. Further, it is pertinent to mention that two highly respected judges of the Supreme Court viz. Mr. Justice M. B. Shah (Retd.) and Dr. Justice Arijit Pasayat (Retd.) acting as chairman and vice chairman respectively of the 11 member Special Investigation Team (SIT) of the Hon'ble Supreme Court of India on Black Money has also pointed out the above mentioned modus oprendi in the Third SIT report on Black Money. The recommendations of the SIT on black money as contained in the third SIT report as given below deserve a look: Misuse of exemption on Long Term Capital gains tax for money laundering (Reference p. 82-84 of the Third SIT Report) This issue was deliberated by SIT during a series of meetings held on 7th January, 14th March, 08th April and 30th April, 2015. In this regard, it is pertinent to mention the observations of the Committee headed by Chairman, CBDT on "Measures to tackle Black Money in India and Abroad" which submitted its report in 2012 and which read as follows: "3.22 Investments are made in the secondary share markets with a view to capturing gains. In this market, out of nearly 8,000 listed companies, several scrips are not traded regularly. With the collusion of promoters, some brokers arrange for price(s) with purchase of such scrips at nominal costs, and sales at exorbitant prices, with a view to receiving money on sale as 'capital gain' when the long term gain is subjected to a 'nil' or nominal rate of tax. The advantage for manipulative taxpayer is that he can launder such sale receipts through payment of no lax." ITA No.78/PUN/2019 for A.Y. 2015-16 Amit Bhaskarrao Sanap Vs. ACIT, Circle-3, (A) 11 SEBI has recently barred more than 250 entities, including individuals and companies, from the securities market for suspected tax evasion and laundering of black money through stock market platforms. In one such instance price of a scrip rose from Rs.10.20 to Rs. 489 in 150 trading days a rise of 4694%. The SIT obtained the background details of these cases and studied them. A typical pattern is observed to be followed in such cases: -A company with very poor financial fundaments in terms of past income or turnover is able to raise huge capital by preferential allotment of shares made to various entities. There is a sharp rise in price of scrip once the preferential allotment is done. This is normally achieved through circular trading of shares among a select group of companies. These groups of companies often have common promoters/directors. The scrips with thus artificially inflated price are offloaded through companies whose funding is provided by the same set of people who want to convert black money into white. There is an urgent need for having an effective preventive and punitive action in such matters to prevent recurrence of such instances. We recommend the following measures in this regard: -SEBI needs to have an effective monitoring mechanism to study such unusual rise of stock prices of Companies while such a rise is taking place. We understand that SEBI has a strong IT infrastructure which can generate red flags for such instances. Such red flags could be built upon trading volumes, entities which contribute to trading volume, Financial background of firms through their annual returns and any other indicators SEBI may develop. We believe that with ITA No.78/PUN/2019 for A.Y. 2015-16 Amit Bhaskarrao Sanap Vs. ACIT, Circle-3, (A) 12 effective and timely monitoring by SEBI a significant number of such instances can be checked in time. -Once such instances are detected, SEBI should invariably share this information with CBDT and FIU. -Barring such entities from securities market would not be of strong deterrence in itself. In case it is established, that stock platforms have been misused for taking LTCG benefits, prosecution should invariably be launched under relevant sections of SEBI Act, Section 12A read with section 24 of the Securities and Exchange Board of India Act 1992 for the predicate offences. -Enforcement Directorate should then be informed to take action under Prevention of Money Laundering Act for the predicate offences. 16 In his reply the assessee has mainly contended that since the purchase was made by cheque payment and shares were allotted to him by the company, it was a genuine transaction. Secondly, sale was made online after paying STT at the prevalent market rates; therefore sale transactions were also genuine. The contention of the assessee was examined. It is not the case of this office whether purchase of shares through preferential placement/merger did actually took place or shares were sold on the exchange at the prevalent market rates after paying STT or not. What this office has come to conclude on the basis of above analysis, documentary evidences, circumstantial evidences, human conduct and preponderance of probabilities is that What is apparent in this case is not real, that these financial transactions were sham ones and that this entire edifice was only a colorable device used to evade tax. ............ 19.1 Considering the findings of the Investigation wing of Income tax department, Findings of SEBI & inquiries conducted in the case of brokers, operators and the entry providers and the nature of transaction entered into ITA No.78/PUN/2019 for A.Y. 2015-16 Amit Bhaskarrao Sanap Vs. ACIT, Circle-3, (A) 13 by the assessee the LTCG of Rs.1,93,17,241/- claimed exempt u/s 10(38) of the act by the assessee cannot be allowed and the amount of Rs.1,93,17,241/ received back as sales proceeds on sale of shares is required to be added back towards he taxable income under section 56 of the act.” Unquote. 6. The Ld.CIT(A) have mentioned in para 5.1 and para 9 as under : Quote, “ 5.1 On careful consideration of facts & circumstances of the present case, I am not inclined to accept the arguments of the appellant. It is not in dispute that during the course of interrogation before DDIT (Inv.), Aurangabad on 02.09.2015, the appellant had admitted on oath in reply to question no.13 that he was withdrawing his claim of exemption U/s 10(38) in respect of sale of shares of M/s. PS IT Infrastructure & Services Ltd. and was ready to pay taxes on the same. He also promised to revise his return of income for AY 2014-15 shortly. However, in the return of income for AY 2015-16 filed on 28.09.2015, the appellant paid the taxes U/s 112 (sale of quoted securities) '@10% Notwithstanding the above events, the appellant also requested the AO to allow him exemption U/s 10(38) in respect of sale of shares during the course of assessment proceedings. In spite of any change in the facts & circumstances and without any fresh evidence/material, the appellant retracted from the said disclosure. The contract notes, purchase bills, banks statement showing payment and receipts were very much available with the appellant at the time of recording of his statement before DDIT(Inv.), Aurangabad. The appellant has thus miserably failed to show that such offer of withdrawal of claim of exemption U/s 10(38) was given by him under threat/coercion and mistaken belief of facts. Thus, the retraction of the appellant is in the nature of an after though only just to evade taxes. The appellant has filed an affidavit dated 20.01.2018 along with Form No.35 alleging that he had given the statement to the DDIT (Inv.), Aurangabad under strain of mind and misconception of facts & law. However, such a retraction has been made by the appellant after a ITA No.78/PUN/2019 for A.Y. 2015-16 Amit Bhaskarrao Sanap Vs. ACIT, Circle-3, (A) 14 lapse of almost three years. Reliance is placed on the decision in the case of T.S. Kumarasamy Vs. ACIT (65 ITD 188) (Madras ITAT), wherein the Honourable Tribunal held that ITOs are not police officers, they do not use unfair means or third-degree methods in recording statement on oath. Therefore, such statements and oaths cannot be retracted unless it is proved by legally acceptable evidence that such admission/confession or oath was not voluntarily tendered or was under coercion or duress. In the present case, no such evidence has been produced or even shown to have existed. The decision' of Hon'ble Punjab and Haryana High Court in the case of Rakesh Mahajan Vs. CIT (214 CTR 218) is also pertinent wherein it was held that "it is well settled that admissions constitute best piece of evidence because admission are self-harming statements made by the maker believing it to be based on truth. It is well known that no one will tell a lie especially harming one's own interest unless such a statement is true". The retraction made by the appellate is quite belated and same is also not supported by any cogent evidence. The Honorable Punjab & Haryana High Court had an occasion to deal with the same issue in the case of Navdeep Dhingra Vs. CIT (56 taxmann.com 75). During a survey U/s 133A of the Income Tax Act on the business premises of M/s. Oscar Remedies Pvt. Ltd. on 18.01.2006, the assessee who was admittedly a director, declared additional income of Rs.30 lakhs relatable to unaccounted investment towards construction of the premises of M/s Oscar Remedies Pvt. Ltd. This apart, the assessee declared additional amount of Rs.50 lakhs attributable to excess cash, unaccounted investment in building and unaccounted investment in machinery relating to the company. Subsequently the assessee retracted his admissions on 04.12.2008 almost two years after the admission and then also a few weeks before the passing of the assessment order on 26.12.2008. The retractions being highly belated and without reference to any material that could raise an inference that the statements were coerced or made under pressure. In these facts and circumstances, the Punjab &Haryana High Court held that the statements had been rightly relied by the revenue while ITA No.78/PUN/2019 for A.Y. 2015-16 Amit Bhaskarrao Sanap Vs. ACIT, Circle-3, (A) 15 making additions. The general allegations of coercion or pressure, cannot ensure the benefit to an assessee particularly where the retraction was belated. It was held that admissions are an integral part of assessments and as they are the best evidence of a fact, within the personal knowledge of an assessee may if the admission is voluntary and not extracted by coercion or force, be read against an assessee. The relevance of an admission admits to another exception namely if the admission is retracted within reasonable time and by assigning valid reasons. On the other hand, in the present case, the appellant has retracted from his admission after a lapse of almost three years. Reverting back to the present case, "Penny stocks" are shares of small public companies that trade at low prices. They may not be listed on a national exchange and fail to meet other specific criteria. They have a small market capitalization. These stocks are generally considered highly speculative carrying high risks because of their lack of liquidity, large bid-ask spreads and limited following and disclosure. In other words, such shares are highly illiquid and speculative Trading in penny is done by investors with a high tolerance for risk. Typically, penny stocks have a higher level of volatility, resulting in a higher potential reward and a higher level of risk. In brief, most penny stocks are high-risk investments with low trading volumes. The shares of penny stock are closely held as the general public is not interested in these stocks due to their poor financials. The operator chooses one of such penny stock for laundering black money of his clients. The promoters/ directors of such penny stock companies are paid some commission in cash and in turn, they allow the operator to manage the affairs of their companies. The operator generally issues the shares of penny stock companies through the route of preferential allotment i.e., private placement. As per the Securities and Exchange - board of India(Issue of capital and disclosure requirements) Regulations, 2009, the shares that are allotted through private placement have a lock in period of one year. Therefore, the shares can be sold by the allottees only after a period of one year from the date of allotment. ITA No.78/PUN/2019 for A.Y. 2015-16 Amit Bhaskarrao Sanap Vs. ACIT, Circle-3, (A) 16 This enables the beneficiary to claim the benefit of exemption U/s 10(38) of the Income Tax Act. The penny stock companies have no actual business transactions besides lack of financial credentials. It is not in dispute that a genuine trader or an investor would not take the risk of putting his or her money in these penny stock companies. It is further noticed that in the present case, the appellant had purchased 25000 shares of Swift IT Infrastructure Pvt. Ltd. in private placement. Such off-market transaction for purchase of shares was in violation of the established rule and the SEBI guidelines. Later on, the said company Swift IT Infrastructure Pvt. Ltd. merged with Parag-Shilpa Investment Co. Ltd. (later name changed to PS IT Infrastructure & Services Ltd.), as per scheme of merger approved by Mumbai High Court vide order dated 03.05.2013. The appellant had received 12,200 shares of Parag- Shilpa Investment Co. Ltd. on merger. There was a change in the name of existing company viz. Parag-Shilpa Investment Co. Ltd. to PS IT Infrastructure & Services Ltd. w.e.f. 12.08.2014. The shares of PS IT Infrastructure & Services Ltd. were split in the ratio of 1:10. The value per share was now Rs.1/- and the appellant was allotted 1,22,000 shares of PS IT Infrastructure & Services Ltd. The appellant had purchased shares of PS IT Infrastructure & Services Ltd. at the effective rate of Rs.0.48/- per share (considering that 25,000 shares @Rs.10 per share had increased to 1,22,000 shares @Rs.1 per share and sold these shares at the rate of Rs.67.20/- per share in September & October, 2014. M/s. PS IT Infrastructure & Services Ltd. had shown a loss of Rs.2 lakhs during the FY 2011-12 and loss of Rs.13 lakhs during the FY 2012-13 as per its annual report. Further the EPS (earning per share) of the scrip of PS IT Infrastructure &Services Ltd. was negative (Rs. - 4.3) during FY 2011-12 and only Rs.0.04 during FY 2012-13. Similarly, the appellant had purchased 50,000 shares of Indo American Advance Pharmaceuticals Ltd. on 21.06.2012 @Rs.5 per share. These shares were sold between July, 2014 to September, 2014 @Rs.352.57 per share. M/s. Mahavir Advanced Remedies Ltd. had shown a loss of Rs.31 lakhs during FY 2011-12 and loss of Rs.16 lakhs during FY 2012-13. From the annual ITA No.78/PUN/2019 for A.Y. 2015-16 Amit Bhaskarrao Sanap Vs. ACIT, Circle-3, (A) 17 report for FY 201112, the EPS (earning per share) was negative (Rs. - 0.63) during the FY2011-12and only Rs.0.13 during FY 2012-13. Thus, there was no parameter or any corporate announcement made by PS IT Infrastructure & Services Ltd. and Mahavir Advanced Remedies Ltd. which could support such a price rise within a short time. From the above facts, it is clear that increase in the share price of PS IT Infrastructure &Services Ltd. and Mahavir Advanced Remedies Ltd. was not backed up by any fundamentals and these were merely rigged. The movement of the price was abrupt and unrealistic and same was not based on any parameters. The Hon'ble Bangalore ITAT in the case of Smt. M. K. Rajeshwari, proprietor LaxminarayanaAgro Industries Vs. ITO in ITA No.1723/Bang/2018 dated 12.10.2018 for AY 2015-16 has decided the issue relating to long term capital gain in the scrip of Mahavir Advanced Remedies Ltd. in the favour of Revenue on the ground that it was a penny stock and its trading volume/share prices had been rigged by the entry providers. In this connection, reliance is placed on the modus operandi, observed by two highly respected judges of the Supreme Court namely Justice Mr. M B Shah (Retd.) and Justice Dr. Arijit Pasayat (Retd.), acting as Chairman and Vice Chairman of the 11-member Special Investigation Team (SIT), in their third SIT report. The relevant details of their observation are as under: "Misuse of exemption on long term capital gains tax for money laundering" (Reference page 82-84 of the third SIT report) This issue was deliberated by SIT during a series of meetings held on 7th January, 14th March, 08th, April and 30th April, 2015. In this regard, it is pertinent to mention the observations of the Committee headed by Chairman, CBDT on "Measures to tackle Black Money in India and Abroad " which submitted its report in 2012 and which read as follows: - "3.22 Investments are made in the secondary share markets with a view to capturing gains. In this market, out of nearly ITA No.78/PUN/2019 for A.Y. 2015-16 Amit Bhaskarrao Sanap Vs. ACIT, Circle-3, (A) 18 8,000 listed companies, several scrips are not traded regularly. With the collusion of promoters, some brokers arrange for prices with purchase of such scrips at nominal costs and sales at exorbitant prices with a view to receive money on sale as capital gains when the long term gain is subjected to a 'nip or nominal rate of tax. The advantage for manipulative taxpayer is that he can launder receipts through payment of no tax" SEBI has recently barred more than 250 entitles, including individuals and companies, from the securities market for suspected tax evasion and laundering of black money though stock market platforms. In one such instance price of a scrip rose from Rs. 10.20 to Rs. 489 in 150 trading days- a rise of 4694%. The SIT obtained the background details of these cases and studied them. A typical pattern is observed to be followed in such cases: i. A company with very poor financial fundaments in terms of past income or turnover is able to raise huge capital by preferential allotment of shares made to various entitles. ii. There is a sharp rise in price of scrip once the preferential allotment is done. This is normally achieved through circular trading of shares among a select group of companies. These groups of companies often have common promoters/directors. The scrips with thus artificially inflated price are offloaded through companies whose funding is provided by the same set of people who want to convert black money into white. There is urgent need for having an effective preventive and punitive action in such matters to prevent recurrence of ITA No.78/PUN/2019 for A.Y. 2015-16 Amit Bhaskarrao Sanap Vs. ACIT, Circle-3, (A) 19 such instance. We recommend the following measures in this regard: i. SEBI needs to have and effective monitoring mechanism to study such unusual rise of stock prices of companies while such a rise is taking place. We understand that SEBI has a strong IT infrastructure which can generate red flags for such instances. Such red flags could be built upon trading volumes, entitles which contribute to trading volume, financial background of firms through their annual returns and any other indicators SEBI may develop. We believe that with effective and timely monitoring by SEBI a significant number of such instances can be checked in time. Once such instances are detected, SEBI should invariably share this information with CBDT and FIU. ii. Barring such entitles from securities market would not be of strong deterrence in itself. In case it is established that stock platforms have been misused for taking LTCG benefits, prosecution should invariably be launched under relevant sections of SEBI Act, Section 12A read with section 24 of the securities and Exchange Board of India Act 1992 for the predicate offences. iii.) Enforcement Directorate should then be informed to take action under prevention of Money laundering Act for the predicate offences. Merely creating documents and routing the transactions through banking channels does not sacrosanct the unexplained transaction as genuine. Reliance is placed on the decision of the Hon'ble Supreme Court in the case of Lachminarayan MadanLa! Vs. CIT (86 ITR 439) wherein it was held that even if there was an agreement between the assessee and its agents for payments of certain amounts, assuming ITA No.78/PUN/2019 for A.Y. 2015-16 Amit Bhaskarrao Sanap Vs. ACIT, Circle-3, (A) 20 there was such payment, that did not bind the Income-Tax Officer to hold that the payment was made exclusively and wholly for the purposes of the assessee's business. In this case, the Supreme Court inter alia, observed as under: "Although there might be such an agreement in existence and the payments might have been made, it is still open to the Income-tax Officer to consider the relevant factors and determine for himself whether the commission said to have been paid is properly deductible. In this case absolutely no material on record has been brought by the assessee to suggest that the commission agents had procured any orders for the assessee. The production of bills or payments having been made by account-payee cheques cannot by itself show that the commission agents had procured any order for the assessee. No correspondence in this regard has been placed on record". In the above-mentioned case, the Hon'ble Supreme Court made it very clear that by creating documents and making payment through banking channel to give colour, did not sacrosanct/establish the genuineness of the transaction. Mere payment by account Payee Cheque is not sacrosanct and it will not make otherwise non- genuine transaction genuine as held by the Hon'ble Calcutta High Court in the case of CIT Vs. Precision Finance Pvt. Ltd. (208 ITR 465). There is no doubt about the modus operandi of the penny stocks in general and about the fact that the appellant is a beneficiary of bogus LTCG on penny stock. In an economy where unaccounted income is a -big menace, tax evaders make all efforts to bring their unaccounted income back to their books of account, without paying any tax on the same. Routing the unaccounted income back to the books of account under the guise of long-term capital gain is one of such methods, widely used by the tax evaders since the introduction of section 10(38) of the Income Tax Act, 1961, with effect from 01.04.2005. The shares on which this LTCG is shown are usually the penny stocks whose prices can be easily manipulated by ITA No.78/PUN/2019 for A.Y. 2015-16 Amit Bhaskarrao Sanap Vs. ACIT, Circle-3, (A) 21 few unscrupulous brokers in connivance with entry operators, to provide the beneficiaries with tax exempt long-term capital gain/short term capital loss. The shares of these penny stock companies, although listed on exchange, are always closely held and are controlled by the promoters/directors of the penny stock companies and the operators, who are arranging for the bogus LTCG. This is due to the fact that the general public is not interested in these shares as these companies have no credentials and this helps the operator to keep a control on the price movement of the shares. The method is most prevalent and perhaps also one of the most organized way to convert the unexplained money to the accounted income, without paying any tax on the same. The facts of the present case can be co-related to the facts in the case of Sanjay Bimalchand Jain L/H Shantidevi Bimaichand Jain Vs. ITO Ward-4(2), Nagpur in ITA No. 61/Nag/2013) wherein the Hon'ble ITAT, Nagpur decided the in favour of the department. Subsequently, Hon'ble Bombay High Court also decided the appeal in the case of Sanjay Bimalchand Jain, L/H Shantidevi Bimaichand Jain Vs PCIT in ITA No. 18 of 2017 in favour of the Revenue, by observing inter- alia as under: "The assessee had purchased shares of two penny stocks of Kolkata based companies i.e., 8000 shares at the rate of Rs.5.50/- per share on 08.08.2003 and 4000 shares at the rate of Rs.4/per share on 05.08.2003. The assessees old 2200 shares at an exorbitant rate of Rs.486.55/- per share on 07.06.2005 and 800 shares on 20.06.2005 at the rate of Rs.485.65/-. The broker through whom the shares were sold by the assessee did not respond to the assessing officer's letter seeking the names, addresses and the bank accounts of the persons that had purchased the shares sold by the assessee. The authorities have recorded a clear finding of fact that the assessee had indulged in a dubious share transaction meant to account for the undisclosed income in the garb of long term capital gain. The authorities held that the assessee had not ITA No.78/PUN/2019 for A.Y. 2015-16 Amit Bhaskarrao Sanap Vs. ACIT, Circle-3, (A) 22 tendered cogent evidence to explain as to how the shares in an unknown company worth Rs.5/- had jumped to Rs.485/- in no time. The Income Tax Appellate Tribunal held that the fantastic sale price was not at all possible as there was no economic or financial basis as to how a share worth Rs.5/- of a little-known company would jump from Rs.5/- to Rs.485/-. The findings recorded by the authorities are pure findings of facts based on a proper appreciation of the material on record. While recording the said findings, the authorities have followed the tests laid down by the Hon'ble Supreme Court and this Court in several decisions. The judgments reported in CIT Vs. Jamnadevi Agrawal [2012] 20 taxmann.com 529 (Bombay HC), PuranmalRadhakishan& Co. Vs. CIT [1957] 31 ITR 294 (Bombay HC), Raja Bahadur KamakhyaNarain Singh Vs. CIT [1970] 77 ITR 253 (SC) and CIT Vs. Smt. Datta Mahendra Shah [2015] 62 taxmann.com 325/235 Taxman 1 (Bombay HC) and relied on by the learned counsel for the assessee are distinguishable on facts and cannot be applied to the case in hand". Further the Hon'ble Bombay High Court in the case of Sanjay Bimal Chand Jain(supra) held that the manifold increase in price of the shares was not supported by economic or financial justification.......................... In the present case, it is beyond preponderance of probability that the fantastic sale price of a little know share i.e. PS Infrastructure & Services Ltd. without economic or financial basis, would increase from Rs.0.48% to Rs.67.27/- per share. The price increases is 140 times, which is evident from the fact that by investing Rs.1,19,057/- (out of 1,22,000 shares, only 58,100 shares sold) the appellant has got Rs.39,04,703/- in a span of sale price of a little known share i.e. Mahavir Advanced Remedies Ltd. without economic or financial basis, would increase from Rs.5/- to Rs.352.57/- per share. The price increase in 70 times , which is evident from the fact that by investing Rs.2,22,550/- (out of 50,000 shares, only 44,510 shares sold) the appellant has got Rs.1,56,93,186/- in a span of 28 months. There is no doubt that the ITA No.78/PUN/2019 for A.Y. 2015-16 Amit Bhaskarrao Sanap Vs. ACIT, Circle-3, (A) 23 capital gain was manipulated and bogus and was done only to claim exemptions u/s 10(38).Unquote”. 7. Before, us the assessee has not filed any document to rebut the findings of the AO and Ld.CIT(A). It is a fact that share prices of these two impugned shares increased many folds though there was no substantial increase in Sensex. These impugned stocks do not have strong balance sheet. When we have analyzed all the facts mentioned in the assessment order, CIT(A) order, DDIT (Inv) report, we agree with the lower authorities that the share price of these shares were manipulated to get benefit of exemption. 8. The Hon’ble Calcutta High Court in the case of PCIT Vs. Swati Bajaj [2022] 139 taxmann.com 352 (Calcutta) held as under after discussing elaborate facts : Quote, “We have held that there is no such requirement and that is the Court is empowered to examine the findings recorded by the assessing officer, or the CIT (A) to arrive at a conclusion. The assessees have been harping upon the opinion rendered by the financial experts, professionals in the said field the information which were available in the media etc. All these opinions are at best suggestions to an investor. The assessees cannot state that merely because an expert had issued a buy call or there was news in the media that a particular shares shows an upwards trend and it is good time for buying those shares. They jumped into the fray the assessees are to be reminded of the doctrine of "caveat emptor". The assessees cannot take shelter under the opinion given by the experts as it is not the expert who has indulged in the transaction but it is the assessee. Therefore by following such experts advice if the assessee gets into an "web" it is for him to extricate himself ITA No.78/PUN/2019 for A.Y. 2015-16 Amit Bhaskarrao Sanap Vs. ACIT, Circle-3, (A) 24 from the tangle and he cannot reach out to the expert to bail him out. The assessees cannot be heard to say that they had blindly followed advice of a third party and made the investment. Selection of shares to be purchased is a very complex issue, it requires personal knowledge and expertise as the investment is not in a mutual fund. None of the assessees before us have shown to have to made any risk analysis before making their investment in a "penny stock". If according to them they have blindly taken a decision to invest in insignificant companies they having done so at their own peril have to face the consequences. Thus, the conduct of the assessees before us probabilities the stand taken by the revenue, rightly the mind of the assessee as an investor was taken note to deny the claim for exemption. It is in this background that the human probabilities would assume significance. As observed earlier the doctrine of preponderance of probabilities could very well be applied in cases like the present one. We say human probabilities to be the relevant factor as on account of the fact that the assessees are of individuals or Hindu Undivided Families and the trading has been done in the name of the individual assessee or by the Karta of the HUF. None of the assessee before us have been shown to big time investor. This is evident from the income details of the assessee which has been culled out by the respective assessing officers. Assuming that the assessee is a regular investor as was submitted to us by the learned advocates for the assessees that in any manner cannot improve the situation as the claim for LTCG has been only restricted to the shares which were purchased and sold by the assessees in penny stocks companies. Therefore merely because the assessee had invested in other blue chit companies had earned profit or incurred loss cannot validate the tainted transactions. It has been established by the department that the rise of the prices of the shares was artificially done by the adopting manipulative practices. Consequently whatever resultant benefits which accrue from out of such manipulative practices are also to be treated as tainted. However, the assessee had opportunity to prove that there was no manipulation at the other end and whatever gains the assessee has reaped was not tainted. This has not been proved or established by any of the assessee before us. Therefore, the assessing officers were well justified in coming to a ITA No.78/PUN/2019 for A.Y. 2015-16 Amit Bhaskarrao Sanap Vs. ACIT, Circle-3, (A) 25 conclusion that the so called explanation offered by the assessee was not to their satisfaction. Thus, the assessee having not proved the 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 necessarily fail. In such factual scenario, the Assessing Officers as well as the CIT(A) have adopted an inferential process which we find to be a process which would be followed by a reasonable and prudent person. The Assessing Officers and the CIT(A) have 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. ” Unquote. 9. The facts mentioned in the case of Swati Bajaj are identical to the facts of the present case. Therefore, respectfully, following the Hon’ble Calcutta High Court, we uphold the order of the AO. Accordingly, grounds of appeal raised by the assessee are dismissed. 10. In the result, appeal of the Assessee is Dismissed. Order pronounced in the open Court on 19 th October, 2022. Sd/- Sd/- (PARTHA SARATHI CHAUDHURY) (DR. DIPAK P. RIPOTE) JUDICIAL MEMBER ACCOUNTANT MEMBER पुणे / Pune; ᳰदनांक / Dated : 19 th October, 2022/ SGR* ITA No.78/PUN/2019 for A.Y. 2015-16 Amit Bhaskarrao Sanap Vs. ACIT, Circle-3, (A) 26 आदेशकᳱᮧितिलिपअᮕेिषत / Copy of the Order forwarded to : 1. अपीलाथᱮ / The Appellant. 2. ᮧ᭜यथᱮ / The Respondent. 3. The CIT(A), concerned. 4. The Pr. CIT, concerned. 5. िवभागीयᮧितिनिध, आयकरअपीलीयअिधकरण, “ए” बᱶच, पुणे / DR, ITAT, “A” Bench, Pune. 6. गाडᭅफ़ाइल / Guard File. आदेशानुसार / BY ORDER, // TRUE COPY // Senior Private Secretary आयकर अपीलीय अिधकरण, पुणे/ITAT, Pune.