Jaiprakash P Surana, Pune V. ITO, Ward 11(4), Pune, Pune

ITA 886/PUN/2009

• Counselvise Citation: [2010] 135 COUNSELVISE.COM (IT) 3107 (ITAT-PUNE)
• Duration Of Justice: 1 year(s) 4 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-11-2010
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2005-2006
• Appeal Filed On: 28-07-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: KRISHNA MURARI
• Assessee Lawyers: NILESH KHANDELWAL
• Keywords: Capital asset; Corroborative evidences; Penny stocks
• Section: 69C

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B, PUNE BEFORE SHRI I.C. SUDHIR AND SHRI D. KARUNAKARA RAO ITA NO. 886 & 887/PN/09 (ASSTT. YEAR 2005-06 & 2006 -07) JAYPRAKASH P. SURANA SHAH KHANDELWAL JAIN & ASSOCIATES CHARTERED ACCOUNTANTS 1 ST FLOOR ALANKAR CINEMA BLDG., PUNE-411001 PAN NO. ADWPS 9383B .... APPELLANT VS. ITO, WARD 11(4) PUNE . RESPONDENT APPELLANT BY : SHRI NILESH KHANDELWAL RESPONDENT BY : SHRI KRISHNA MURARI ORDER PER D. KARUNAKARA RAO AM THESE TWO APPEALS ARE FILED BY THE ASSESSEE AGAINST THE ORDER OF THE CIT(A)-I, PUNE IDENTICALLY DATED 22-06-2009. 2. AT THE VERY OUTSET, REFERRING TO THE GROUNDS OF THE APPEAL IN BOTH THE APPEALS, LD. COUNSEL FOR THE ASSESSEE STATED THAT THE ISSUE D EALS WITH THE CHARGEABILITY OF THE PROFITS ON SALE OF THE PENNY STOCKS UNDER THE HEAD CAPITAL GAINS. AO IS OF THE OPINION, IMPUGNED TRANSACTIONS ARE BOGUS AND THEREFORE, THE PROFITS ARE BOGUS AND ARE TAXABLE U/S 69C OF THE INCOME TAX ACT. THE A.O H ELD THE SAME AS INCOME FROM OTHER SOURCES. RELYING ON A ORDER PASSED BY THE UNDERSIG NED IN THE CASE OF SMT. SUNANDA JAYPRAKASH SURANA BEARING ITA NO. 1310/PN/08 F OR THE A.Y 2005-06 DATED 20-08-2010, LD. COUNSEL STATED THAT THE TRIBUNAL HEL D THAT SUCH INCOME EARNED OUT OF THE SALE OF PENNY STOCK HAS TO BE TAXED UNDER THE HEAD CAPITAL GAINS . IN THIS REGARD, THE FACT OF RELYING ON THE FINDING OF THE TRIBU NAL IN ANOTHER CASE IN THE CASE OF SMT. SUREKHA B. MUNDADA ITA NO. 1332/PN/2008 WAS MENTIONED BY THE COUNSEL. ITA NOS.886 & 887/PN/09 A.Y. 2005-06 & 2006-07 PAGE 2 OF 4 3. FURTHER, REGARDING THE OTHER ADDITION U.S. 69C, LD. COUNSEL ARGUED THAT THE SAID AMOUNT WAS AN UNCLAIMED EXPENDITURE AND WAS DIS ALLOWED BY THE A.O MERELY BASED ON THE SURMISES. AS PER THE AO, THE SAID AMOUNT S ARE SAID TO BE THE ONES INCURRED IN CONNECTION WITH THE SERVICES RENDERED FOR PURP OSE OF THE IMPUGNED TRANSACTIONS RELATING TO THE PENNY STOCKS. LD. COUNS EL ALSO MENTIONED THAT THIS ISSUE IS ALSO COVERED BY THE ORDER OF THE TRIBUNAL IN THE CAS E OF SMT. SUNANDA JAYPRAKASH SURANA (SUPRA). ON THE OTHER HAND, LD. DR FOR THE REVEN UE RELIED ON THE ORDERS OF THE REVENUE. 4. WE HAVE HEAD BOTH THE PARTIES AND PERUSED THE IMPU GNED ORDERS IN THE CASES OF SMT. SUNANDA JAYPRAKASH SURANA AND SMT. SUREKHA B. MUNDADA. THE RELEVANT PARAS ARE REPRODUCED AS UNDER:- 2. AT THE VERY OUTSET, DURING THE TIME MEANT FOR THE COVERED CASES, THE LD COUNSEL FOR THE ASSESSEE STATED THAT THERE ARE TWO GROUNDS IN THE APPEAL AND GROUND NO. 1 RELATES TO TAXABILITY OF THE INCOME EARNED OUT OF SALE OF PENNY STOCK UNDER THE HEAD INCOME FROM CAPITAL GAINS AS CLAIMED BY THE ASSESSEE OR INCOME FROM THE OTHER SOURCES AS DECIDED BY THE A.O AND THE CIT(A). IN T HIS REGARD, THE LD COUNSEL BROUGHT TO OUR NOTICE AN ORDER OF THIS TRIBUNAL PASSED BY THE U NDERSIGNED MEMBERS OF THE BENCH VIDE ITA NO. 1332/PN/2008 FOR THE A.Y. 2005-06 IN THE CASE OF SMT. SUREKHA BHAGVATIPRASAD MUNDADA AND OTHERS. LD COUNSEL BROUGHT TO OUR NOTICE THE FACT THE TRIBUNAL HAS HELD THAT THE INCOME EARNED OUT OF SUCH PE NNY STOCK HAS TO BE TAXED UNDER THE HEAD CAPITAL GAINS IN VIEW OF THE FACT THAT IMPUGN ED PENNY STOCKS/SHARES ARE FINALLY FOUND CREDITED IN THE D-MAT ACCOUNT OF THE ASSE SSEE. IN THIS REGARD, LD COUNSEL READ OUT PARA 20 TO 22 OF THE SAID ORDER. WE HAVE P ERUSED THE SAME AND FOR THE SAKE OF COMPLETENESS OF THE ORDER, THE SAID PARAGRAPHS ARE REPRODUCED : 20. TO SUM UP , THE ASSESSEE CLAIMS THAT SHE EARNED LONG TERM CAPITAL GAIN WHIH ARE EXEMPT U/S 10(38) OF THE ACT. AS PER THE ASSESS EE, THE AO ERRONEOUSLY HELD THE SAME AS INCOME FROM OTHER SOURCES AND THE CIT(A) G RANTED PART RELIEF HOLDING THAT THE SAID GAINS CONSTITUTES SHORT TERM CAPITAL GAINS AND IN T HE PROCESS, HE CONSIDERED THE DATE OF TRANSFER OF IMPUGNED SHARE TO THE DMAT ACCOU NT OF THE ASSESSEE AS THE DATE FOR COUNTING THE PERIOD OF HOLDING OF THE SHARES. OTHERWISE, THE ASSESSEE ARGUES FOR REVERSAL OF THE ORDERS OF THE REVENUE AND PRAY FOR GRANT OF EXEMPTION U/S 10(38) IN RESPECT OF THE IMPUGNED CAPITAL GAINS. REVENUE CONTENDS FOR TAXATIO N OF THE SAID GAINS UNDER THE HEAD INCOME FROM OTHER SOURCES. 21. THE PARTIES HAVE ADVANCED THEIR COMMON ARGUMENTS IN RESPECT OF THE ABOVE REFERRED TWELVE APPEALS OF SIX EACH BELONGING TO ASSESS EE AND THE REVENUE. ON CONSIDERATION OF THE ARGUMENTS AND OUR DISCUSSION, WE U PHELD THE INVALIDITY OF THE CONTRACT NOTES AND THE UNSUPPORTED ENTRIES IN THE BOOKS OF ACCOUNTS IN THIS REGARD. THE PROCEEDINGS U/S 11B AND 11(4) OF SEBI ACT 1992 IN RES PECT OF THE BROKER CONTRIBUTES TO THE LACK OF CREDIBILITY TO THE ASSERTIONS MADE BY SRI R P SHAH THE BROKER AND THE CONFIRMATION GIVEN BY HIM. FURTHER ON THE ISSUE IF THE P URCHASE TRANSACTIONS IN QUESTION ARE EITHER THE CALCUTTA EXCHANGE OR OFF MARKET TRANSA CTIONS, IT IS NOW THE CHANGED POSITION THAT THE ASSESSEES COUNSEL ATTEMPTED TO MAK E IT A CASE OF OFF MARKET TRANSACTIONS AND IN OUR OPINION, THE SAME CONSTITUTES A N AFTERTHOUGHT WHICH IS NOT ENTERTAINED AT THIS STAGE WITH OUT SUPPORTING EVIDENCES. IT IS A SETTLED POSITION THAT WHEN DEDUCTION IS CLAIMED U/S 10(38) OF THE ACT BY THE ASSES SEE AND THEREFORE, THE ONUS IS ON THE ASSESSEE AND THE SAME IS NOT DISCHARGED. INSOFAR AS THE CIRCULAR NO 704 DT 8/4/95- IS CONCERNED, THAT IT HAS NOT APPLICATION TO THE CASE OF THE ASSESSEE WHERE THERE IS NO CLARITY ON IF THE TRANSACTIONS ARE OFF MARKET OR OTHERW ISE. THE LACK OF CREDIBILITY TO THE BROKERS DEALS, THE DATE APPEARING IN THE ALLEGED CONTRA CT NOTE HAVE TO BE IGNORED. ITA NOS.886 & 887/PN/09 A.Y. 2005-06 & 2006-07 PAGE 3 OF 4 FURTHER, WE FIND THAT THE IN THE CASES LIKE THIS, THE ON US IS ON THE ASSESSEE AS HELD IN THE CASE OF SHANTHILAL MUNNALAL (SUPRA). THIS DECISION ALSO PRO POSES THAT THE IMPUGNED PURCHASE TRANSACTIONS MUST BE TREATED AS NON GENUINE TRANSACTIONS UNDER THE FACTUAL MATRIX OF TAINTED BROKER, SOLITARY TRANSACTION AND ALSO THE PENNY STOCK. 22. EVEN WE ARE NOT PRIVY TO SUCH ORIGINALS OF THE CON TRACT NOTES AS THEY ARE NOT PART OF THE PAPER BOOK FILED BEFORE US. IN ANY CASE, WE HAVE GIVEN OUR FINDING ON THE CREDIBILITY OF THESE CONTRACTS NOTES AND THE SAME IS AGAINST THE ASSESSEE, HAVE ALSO EXAMINED THE FOLLOW UP ACTION CONSEQUENT TO THE SAID CONTRACT NOTE A ND FOUND THE SHARES WERE NEITHER TRANSFERRED TO THE ASSESSEE NOR THE PAYMENTS OF CON SIDERATION WAS MADE BY THE ASSESSEE TO THE BROKER IN A REASONABLE TIME PERIOD. TH ERE IS NO EVIDENCE TO SUBSTANTIATE THAT THERE IS SOME UNDERSTANDING BETWEEN THE BROKER AND THE ASSESSEE FOR SUCH INACTION TO GIVE EFFECT TO THE SAID CONTRACT N OTES. THAT MEANS THESE CONTRACT NOTES ARE AS GOOD AS DEAD ONES. IN ANY CASE, NOW THE ASSESSEE HAS DECIDED TO RESORT TO THE NEW LINE OF ARGUMENT, I.E. OFF MARKET TRANSAC TION. IN EFFECT, IN OUR OPINION, IT IS AS GOOD AS THE ASSESSEE STOPPED RELYING ON THE CONTR ACT NOTES. FURTHER, WE CONSIDERING THE FACT THAT THE ASSESSEES FAMILY IS FAIRLY ACQUAINTED WITH THE BROKER, WHO ENTERTAINED THE TELEPHONIC ORDERS OF THE ASSESSEE, THE ALLEGATION OF PROXIMITY OF SRI RAJENDRA P SHAH, THE BROKER TO THE ASSESSEES FAMILY SHOULD BE ENTERTAINED AND THEREFORE, THERE MUST SOMETHING MORE THAN WHAT MEETS THE EYES AND MORE THAN WHAT APPEARS IN THE BOOKS OF ACCOUNTS OF THE BROKER AND T HE ASSESSEE. THEREFORE, THE RATIO DECIDENDI OF THE APEX COURT IN THE CASE OF SUMATI DAYAL (SUPRA) HAS SOME RELEVANCE TO THIS CASE. DURING THE HEARING, LD COUNSEL FOR THE ASSES SEE MENTIONED THAT THE IMPUGNED PURCHASE TRANSACTIONS ARE ENTERED IN HER BOOKS AS INVE STMENTS AND IN OUR OPINION, THE SAME CANNOT BE CONCLUSIVE PROOF CONSIDERING VARIOUS ABNO RMALITIES AND ALLEGATIONS INVOLVING THE SCRIP, BROKER, THE ASSESSEE AND THE ACT O F OTHER ASSESSEES WITH COMPARABLE PURCHASE TRANSACTIONS THROUGH THE SAME BROKER AND RE VISING OF THEIR INCOME OFFERING THEIR PROFITS ALLEGEDLY EARNED ON SALE OF SHARES. IT IS O BVIOUS THAT THE SAID BOOKS ARE WRITTEN UNDER THE GUIDANCE OF THE ASSESSEE AND THE EN TRIES ARE NOT ADEQUATELY SUBSTANTIATED BY WAY OF PROPER CONTRACT NOTES AND TH E CONTRACT NOTES THEMSELVES SUFFER FORM CREDIBILITY IN VIEW OF THE ABOVE DISCREDITS TOO. FURTH ER, WE HAVE OBSERVED THAT ORIGINALLY, THE CLAIM OF THE ASSESSEE /BROKER IS THAT THE IMPUGNED TRANSACTIONS ARE EFFECTED THROUGH THE EXCHANGE, WHICH WAS FOUND TO BE FALSE BY THE AO THROUGH HIS DIRECT ENQUIRIES WITH THE CALCUTTA EXCHANGE. A.O GATHERE D RELEVANT DETAILS FROM THE EXCHANGE TO DEMONSTRATE THAT THE PURCHASE TRANSACTIO N WAS NOT A RECORDED TRANSACTION IN THE CALCUTTA STOCK EXCHANGE. THIS IS SUPPORTED BY T HE FACT THAT THE SHARES ARE NEITHER TRANSFERRED TO THE ASSESSEE NOR THE RELEVANT PAYMENT S ARE MADE BY THE ASSESSEE TO THE BROKER IMMEDIATELY AFTER PLACING THE ORDER FOR PURCHASE OF SHARES AND TILL THE EXPIRY OF 18 MONTHS. THUS, IT IS AN UNDISPUTED FACT THAT THE AS SESSEE RECEIVED SALE CONSIDERATION AND THE SAME IS ENTERED THE BANK ACCOUNTS OF THE ASS ESSEES AND THE SAME IS RECEIVED INCIDENTAL TO THE INVESTMENT IN THE SHARES, CAPITAL ASSET S. THEREFORE, INCOME IF ANY GENERATED OUT THE SAME HAS TO BE CAPITAL GAINS MAY BE LONG TERM OR SHORT TERM AND IT CERTAINLY IS NOT INCOME FROM OTHER SOURCES. CONSIDERING T HE ABOVE, WE ARE OF THE CONSIDERED OPINION THAT THE IMPUGNED GAINS ARE RIGHTLY TRE ATED AS SHORT TERM CAPITAL GAINS AND THEREFORE, THE ASSESSEE IS NOT ENTITLED TO EXEMP TION U/S 10(38) OF THE ACT AS THE EXEMPTION IS AVAILABLE ONLY TO THE LONG TERM CAPITAL GAIN S. THEREFORE, THE ORDER OF THE CIT(A) DOES NOT CALL FOR INTERFERENCE. ACCORDINGLY, THE GROUNDS RAISED BY THE ASSESSEE ARE DISMISSED . CONSIDERING THE ABOVE NATURE OF THE ISSUE, WE ARE OF T HE OPINION, IN PRINCIPLE, THE ISSUE IS COVERED AND THEREFORE, THE IMPUGNED INCOME IS TAXABLE UNDER THE HEAD INCOME FROM CAPITAL GAINS AND NOT UNDER THE HEAD INCOME FROM OTHER SOURCES AND HENCE THE ASSESSEE IS ENTITLED TO RELIEF IN THIS REGARD. ACCORDINGLY, GROUND NO. 1 IS ALLOWED IN FAVOUR OF THE ASSESSEE. 3. GROUND NO. 2 RELATES TO THE ADDITION OF RS. 28,528/ - TOWARDS THE COMMISSION PAID BY THE ASSESSEE FOR HELPING THE ASSESSEE FOR SERV ICES CONNECTED TO THE IMPUGNED TRANSACTIONS RELATING TO THE PENNY STOCK . AT THE OUTSET, THE COUNSEL DEMONSTRATED THAT THERE IS NO EVIDENCE FOR SUCH INCURRING OF THE EXPENDIT URE BY THE ASSESSEE. IT IS MERELY ITA NOS.886 & 887/PN/09 A.Y. 2005-06 & 2006-07 PAGE 4 OF 4 A GUESS WORK THAT THE A.O ASSUMED THE PAYMENT OF TH E SAID COMMISSION. CIT(A) HAS NOT PASSED A DETAILED ORDER IN THIS REGARD WHILE CONFIRMING THE ADDITION. 4. WE HAVE PERUSED THE RELEVANT ORDERS OF THE REVENU E AND PERUSED THE MATERIAL AVAILABLE BEFORE US. IT IS AN ADMITTED POSITION THAT THE SAID AMOUNT WAS ARRIVED AT ON AD-HOC BASIS I.E. AT 2% OF THE TRANSACTIONAL VALUE. IN OUR OPINION, SUCH GUESS WORKS ARE NOT ENTERTAINABLE. THEREFORE, WE ARE OF THE OPINION TH AT THE ORDER OF THE CIT(A) IN THIS REGARD SHOULD BE DELETED. ACCORDINGLY, GROUND NO. 2 O F THE APPEAL IS ALLOWED . 5. FROM THE ABOVE, IT IS EVIDENT THAT IN PRINCIPLE TH E ISSUES ARE COVERED IN FAVOUR OF THE ASSESSEE. THE PROCEEDS ON SALE OF THE PENNY S TOCKS ARE CHARGEABLE TO TAX UNDER THE HEAD CAPITAL GAINS ONLY PROVIDED THE PENNY STOCKS IN QUESTION ARE ACTUALLY DELIVERY BASED. HOWEVER, IT IS NOT CLEAR AS ON WHETHE R THE SCRIPS IN QUESTIONARE DELIVERY BASED AND THE RESULTANT GAINS ARE SHORT TERM GA INS OR NOT. FOR THIS LIMITED PURPOSE, THE MATTER HAS TO BE REFERRED TO THE FILES OF THE A.O. THE A.O IS DIRECTED TO EXAMINE THE CORRECTNESS OF THE DATES, DELIVERY BASED O R OTHER WISE AND FOLLOW THE DECISION OF OURS EXTRACTED ABOVE FROM OUR ORDER IN THE CA SE OF SMT. SUNANDA JAYPRAKASH SURANA. ACCORDINGLY GROUNDS ARE ALLOWED IN FAVOUR OF THE ASSESSEE. 6. IN THE RESULT, APPEAL FILED BY THE ASSESSEE IS ALLOWED. ORDERS PRONOUNCED IN THE OPEN COURT ON 30 TH NOVEMBER, 2010. SD/- SD/- (I.C. SUDHIR) (D.KARUNAKARA RAO) JUDICIAL MEMBER ACCOUNTANT MEMBE R PUNE DATED THE 30 TH NOVEMBER, 2010 R COPY OF THE ORDER IS FORWARDED TO : 1. ASSESSEE 2. ITO, WARD 11(4), PUNE 3. CIT(A)-I, PUNE 3. CIT-I, PUNE 4. D.R. ITAT B BENCH BY ORDER ASSISTANT REGISTRAR I.T.A.T PUNE