THE PRINCIPAL COMMISSIONER OF INCOME TAX VADODARA V. SANDIPKUMAR PARSOTTAMBHAI PATEL

R/TAX APPEAL NO. 520 of 2022

AI Insights

The case revolves around the allegations by the Income Tax Department that Sandipkumar Parsottambhai Patel had claimed bogus long-term capital gains (LTCG) from the sale of shares, which were actually part of a scheme to convert unaccounted money into white. The Assessing Officer (AO) initially added the LTCG to the assessee's income and disallowed related commission expenses, citing that the transactions were sham and involved entry operators. However, the CIT(A) and subsequently the ITAT found that the assessee had provided sufficient evidence of genuine transactions, including contract notes, bank statements, and demat account details, which were not disproven by the AO. The High Court, upon reviewing the materials and findings of the lower authorities, concurred with the ITAT's decision, emphasizing that the revenue's allegations were based on suspicion and conjecture rather than concrete evidence.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 361540 (HC-GUJARAT)
• Appeal Type: High Court cases
• Pronouncement Date: 07-03-2023
• Appeal Filed By: Department
• Assessment Year: 2013-2014
• Other Referred Cases: Sumati Dayal vs. CIT, M/s Alipine Investments vs. ITA No.620 of 2008
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Assessee Lawyers: VARUN PATEL
• Keywords: Bogus LTCG; Capital Gain; Entry Operator; Income escaped assessment; Reassessment proceedings
• Section: 147; 148; 143(3); 68; 69C; 10(38); 260-A

Judgement Text

"C/TAXAP/520/2022 ORDER DATED: 07/03/2023 IN THE HIGH COURT OF GUJARAT AT AHMEDABAD R/TAX APPEAL NO. 520 of 2022 With R/TAX APPEAL NO. 521 of 2022 ========================================================== THE PRINCIPAL COMMISSIONER OF INCOME TAX VADODARA Versus SANDIPKUMAR PARSOTTAMBHAI PATEL ========================================================== Appearance: MR.VARUN K.PATEL(3802) for the Appellant(s) No. 1 for the Opponent(s) No. 1 ========================================================== CORAM:HONOURABLE MR. JUSTICE N.V.ANJARIA and HONOURABLE MR. JUSTICE NIRAL R. MEHTA Date : 07/03/2023 ORAL ORDER (PER : HONOURABLE MR. JUSTICE NIRAL R. MEHTA) These Tax Appeals under Section 260-A of the Income Tax Act, 1961 (for short ‘the Act, 1961’) are at the instance of revenue and are directed against the order of the Income Tax Appellate Tribunal, Surat dated 29.11.2021 in ITA No.8/SRT/2019 and 9/SRT/2019 for the Assessment Year 2013-14 and 2014-15 respectively. Since both these Appeals involve similar issues, they are being disposed of by this common order, by treating Tax Appeal No.520 of 2022 as lead matter. 2. The revenue has proposed the following questions of law for the consideration of this Court : “(a) Whether on the facts and in the circumstances of the case, learned ITAT has erred in law and on Page 1 of 9 Downloaded on : Tue Jun 03 16:03:56 IST 2025 Uploaded by V.J. SATWARA(HC00170) on Mon Mar 20 2023 2023:GUJHC:15350-DB NEUTRAL CITATION C/TAXAP/520/2022 ORDER DATED: 07/03/2023 facts in quashing the reassessment proceedings under Section 147 without considering the fact that at the stage of issuance of notice u/s.148, the assessing officer had sufficient tangible material at his command to form a bonafide belief that the income of the assessee has escaped assessment for AY 2013-14? (b) Whether on the facts and in the circumstances of the case, learned ITAT has erred in law and on facts in not deciding the case on merits i.e. without appreciating the facts of the case and the cogent material and circumstantial evidences gathered by the Assessing Officer during the case of assessment proceedings ?” 3. We have heard Mr.Vaun K. Patel, learned Standing Counsel appearing for the revenue and have perused the material produced on record in detail. We have also perused the order dated 29.11.2021 passed by the ITAT, the assessment order dated 28.12.2017 passed under Section 143(3) r/w Section 147 of the Act of 1961 passed by Income- Tax Officer, Ward-2(3), Bharuch as also the order dated 30.8.2018 passed in CIT(A)-Vadodara-3/10389/2017-18 by the CIT(A), Vadodara-3. 4. Upon perusal of the aforesaid record, it appears that Assessing Officer, during the course of assessment proceedings, noticed that penny share stock is controlled by group of people viz. promoters / operators / brokers. All Page 2 of 9 Downloaded on : Tue Jun 03 16:03:56 IST 2025 Uploaded by V.J. SATWARA(HC00170) on Mon Mar 20 2023 2023:GUJHC:15350-DB NEUTRAL CITATION C/TAXAP/520/2022 ORDER DATED: 07/03/2023 purchases of shares were arranged by them on assurance of booking bogus LTCG in favour of assessee. It was further noticed by the investigating wing that they have not only arranged the sale of shares to the assessee, but also arranged for sales of shares through their entities and by paying certain amount of commission to them. The entity from whom the share was purchased is an entry operator and controlled by a group of entry operators. Therefore, it was noticed that generation of LTCG through the process from purchase to receipt of cheque is totally arranged and actually, no capital gain arose, the assessee’s own cash has been routed through different entities and ultimately, reached to her hand by cheque in the disguise of sale proceeds in the said security. 4.1 In view of the aforesaid, the claim of long term capital gain under Section 10(38) came to be denied and the same is added to the total income of assessee under Section 68 of the IT Act. Accordingly, an amount of Rs.17,56,590/- to claim his exempt income by the assessee against the sale of scrip, namely, Global Securities Ltd. during the financial year 2012- 13 (AY 2013-14) is added to the total income under Section 68 of the IT Act. Further, the commission for getting accommodation entry for bogus LTCG, approximately 5%, which comes to Rs.87,290/- was also disallowed under Section 69C of the IT Act as unexplained expenditure. 5. The assessee, being aggrieved and dissatisfied by the aforesaid, approached CIT(A) -3, Vadodara by way of CIT(A)- Vadodara-3/10389/2017-18. The said Appeal came to be dismissed by the CIT(A)-3, Vadodara vide its order dated Page 3 of 9 Downloaded on : Tue Jun 03 16:03:56 IST 2025 Uploaded by V.J. SATWARA(HC00170) on Mon Mar 20 2023 2023:GUJHC:15350-DB NEUTRAL CITATION C/TAXAP/520/2022 ORDER DATED: 07/03/2023 30.8.2018, by observing inter alia as under : “5.1 I have considered the submissions of the learned Authorized Representative and the order of the Assessing Officer. During the course of assessment proceedings, the A.O. observed that the assessee declared Long Term Capital Gain on sale of shares at Rs. 17,56,592/- and claimed the same as exempt u/s 10(38) of the Act. Based upon the analysis from different sources as well as from the findings of the Investigation Wing that has carried out Search/Survey on the entry operators it was observed by him that entry in form of bogus LTCG through sale of penny stock claimed as exempt u/s. 10(38) of the Act was pre-arrange method adopted by the assessees to evade capital gain taxation. In the present case, the appellant has purchased 15,000 shares of M/s. Global Securities Ltd. on 01.11.2011 for Rs.18,750/-. The said 15,000 shares were sold between January, 2013 and February, 2013 for rates between Rs. 8.06/- to Rs. 156.50/- for a total consideration of Rs. 17.56,592/-. The main arguments of the Assessing Officer were that (i) the assessee was not in a position to give any satisfactory explanation regarding physical delivery of shares and transaction slips of transfer of shares either at the time of assessment proceedings or during the course of appellate proceedings (ii) Financial health of M/s. Global Securities Ltd. did not improve to an extent to have spiraled the price of shares many times within a short span of time and (iii) the findings of the investigation wing where the entry operators had accepted the modus operandi of providing bogus LTCG through purchase and sale of shares of few companies. 5.2 The shares of M/s. Global Securities Ltd. were having market price of share at around Rs. 8.95/- in November, 2011 and the price was hiked to Rs. 8.06 to Rs. 1 56.50/-(Approx.) within span of 15 months. After that the price was fell down tremendously and purchase price of shares declared by the assessee were not in conformity with the rates prevailing on the respective dates, and the lowest and highest price quoted does not match with the purchase price shown by the assessee. It is evident that when at the time of booking of LTCG the share price tremendously on a higher side and thereby bogus gains. were booked those who have huge profit can avail LTCG to set off their profit. The entire process was managed by operator who works for commission, the beneficiary who wants loss, buys the share at a high rate form the beneficiary who is taking LTCG. The loss taking beneficiary pays cheque to the LTCG taking beneficiary and the cash provided by the LTCG beneficiary is returned to the loss taking beneficiary. These shares bought at high value for small value resulting in artificial gain. M/s. Global Securities Ltd. the trading activities of the said script were very less during the period prior to FY. 2012-13 and it was negligible trading were carried out during the period prior to 2012, wherein no buyers in Page 4 of 9 Downloaded on : Tue Jun 03 16:03:56 IST 2025 Uploaded by V.J. SATWARA(HC00170) on Mon Mar 20 2023 2023:GUJHC:15350-DB NEUTRAL CITATION C/TAXAP/520/2022 ORDER DATED: 07/03/2023 the market for the said script. There was no extraordinary event which could justify the huge price rise and huge trading volume. The SEBI after thorough investigation has certified that such transactions are rigged and are carried out to convert black money into white. That being so, the credit in the bank account of the assessee cannot be treated as explained and, therefore, liable to be added u/s 68 of the Act. The onus was, therefore, on the assessee to prove that either there was no such scheme and even if there was one, the benefit to the assessee was as a result of genuine transact ion. Thus, the assessee miserably failed to discharge this onus with any supporting documentary evidence and it is clearly proved that it was an entry of bogus long term capital gain by paying unaccounted income. 5.12 The assessee has not at all been able to adduce cogent evidences in this regard. There is no economic or financial justification for the sale price of these shares. The so called purchaser of these shares has not been identified despite efforts of the AO. The broker company through which shares were sold did not respond to queries in this regard. Hence the fantastic sale price realization is not at all humanly probable, as there is no economic or financial basis, that a share of little known company would jump abnormally. In these circumstances, I do not find any infirmity in the order of the AO. Accordingly I affirm the same and decide the issue against the assessee respectfully following the above decisions. Considering the facts of the case, I have no hesitation in holding that the transactions in purchase and sell of shares of M/s Global Securities Ltd. for Rs. 17.56,592/- were sham transactions intended to claim wrong exemption u/s 10(38) of the Income-tax Act and, therefore, I uphold the addition of Rs 17.56.592/- made by the Assessing Officer. This Ground of appeal (on merits) is also dismissed. 6.0 The next issue regarding payment of commission paid to the entry operator/ broker for arranging the bogus LTCG entry of Rs. 87,290/- The appellant has paid commission @ 5% to the entry operator / broker for purchase and sale of sham transactions to bring unaccounted money in the guise of exempted long term capital gains. Since, the commission amount paid on the bogus purchase and sale of penny stock scripts is an integral part of entire game plan, the action of the A.O. is upheld.” 6. Being aggrieved and dissatisfied by the aforesaid, the assessee approached the Income Tax Appellate Tribunal, Surat by way of ITA No.8 and 9/SRT/2019 for the Assessment Page 5 of 9 Downloaded on : Tue Jun 03 16:03:56 IST 2025 Uploaded by V.J. SATWARA(HC00170) on Mon Mar 20 2023 2023:GUJHC:15350-DB NEUTRAL CITATION C/TAXAP/520/2022 ORDER DATED: 07/03/2023 Year 2013-14 and 2014-15. The learned ITAT, Surat having considered the submissions, allowed the said Appeal by observing as under : “22. We note that all evidences of sales including contract notes were submitted by the assessee, as noted by us above. The Assessing officer has not found any fault in the documents, as noted by us above. The payments were received through account payee cheques and transaction were done through recognized stock exchange. The inflow of shares is reflected by way of physical share certificate and demat account. The shares were transferred through demat account and the assessee does not know the buyer. There is no evidence that assessee has paid cash in return of the receipt through cheque. In other words, there is no evidence that the cash was recycled. The assessee is not a party to alleged price rigging. He has no nexus with the company, its directors or operators. He is not concerned with the activity of broker and has no control over the same. Even there is no evidence that directors of company or broker were involved in price rigging. The Assessee has got only incidental benefit of price rise. The assessee invested in shares, which gave rise to capital gains in a short period, does not mean that the transaction is bogus, as all the documents and evidences have been produced before assessing officer. The shares were sold in piece meal on different date through recognized stock exchange at quoted price. 23. Regarding the statement of Shri Anil Khemka, alleged entry provider, which is reproduced in Assessment Order at Page 8, we note that said statement recorded neither implicate Sun & Shine Worldwide Ltd nor the broker Trade bulls Securities Pvt Ltd and nor the assessee. We note that physical delivery of shares is proved by the memorandum of transfer of shares stated in the share certificate being registered on 30.10.2012. Regarding the escalation of prices of shares of M/s Sun & Shine Worldwide Ltd., that is, the prices have increased by 140 times over the period of 17 months. At this juncture, it is submitted by ld Counsel that prices of shares are determined by the market forces and not solely on the basis of financial statements. 24. We also note that Assessing officer and CIT(A) has relied on the case of Sumati Dayal vs. CIT (214 ITR 801) (SC). We are of the view that said decision is not applicable to the assessee under consideration, as the assessee has successfully demonstrated with help of evidences on record to have made the transaction of purchase and sale of alleged shares. No single material was brought on record indicating name of any of the entry provider taking assessee's name or assessee's broker name. We note that assessee has submitted enough evidences such as: Page 6 of 9 Downloaded on : Tue Jun 03 16:03:56 IST 2025 Uploaded by V.J. SATWARA(HC00170) on Mon Mar 20 2023 2023:GUJHC:15350-DB NEUTRAL CITATION C/TAXAP/520/2022 ORDER DATED: 07/03/2023 (a) Ledger Account of Jainam Share Consultancy Securities Pvt. Ltd, (b) Contract Notes of Jainam Share Consultancy Securities Pvt. Ltd. (c) Relevant Bank Statement showing that all transactions were through banking channel. (d) Contra confirmation of broker M/s Corporate Commodity Broker Private Ltd. (e) Share Certificate, (f). Share Transfer Form, (g). Debit Note and (h) Cash Receipt etc. Therefore, addition in assessee's case cannot be made on generalization, human probabilities, suspicion, conjectures and surmises. 25. We note that assessee submitted before lower authorities the share brokers contract note in dicating name of the scrip which was traded on the stock exchange; quantity of equity shares sold; date and time on which such shares had been sold, rate at which sale was executed; stock exchange at which such share had been dealt with; amount of brokerage charged; amount of service tax charged; amount of Securities Transaction Tax charged; amount of BSE transaction charges paid; amount of stamp duty paid. Therefore, evidence with regard to source and purpose for which amount had been received and credited in the books has been submitted and which has not been found false, forged and fabricated. The Identity of the party is established from the contract note itself wherein it has been prominently stated that name of the Share Broker is Mrs. Tradebulls Securities Pvt Ltd and that they are member of the Bombay Stock Exchange Ltd. The Decial Account statement evidencing holding of equity shares of Company of which shares have been dealt with at Bombay Stock Exchange and also the quantity which has been sold and the date on which such quantity was sold. The demat account statement, contains BSE settlement number which is very much matching with settlement number appearing in the contract note issued by the share broker. The Bank statement evidencing receipt of funds from the Share Broker has already been furnished in the course of assessment proceedings. The AO have not brought any material indicating that said amount proposed to be taxed has not been received from the Share Broker or the sum received is from the sources other than the sale consideration claimed against sale of shares. In view of these facts, we are of the view that addition should not be made under section 68 of the Act. 26. In the light of the documents and evidences submitted by the assessee, we find that there is absolutely no adverse material to implicate the assessee to the entire gamut of unfounded/unwarranted allegations leveled by the AO against the assessee, which in our considered opinion has no legs to stand and therefore has to fall. We take note that Id. DR could not controvert the facts which are supported with material evidences furnished by the assessee. We note that the allegations that the assessee/brokers got involved in price rigging/manipulation of shares must therefore consequently fail. At the cost of repetition, Page 7 of 9 Downloaded on : Tue Jun 03 16:03:56 IST 2025 Uploaded by V.J. SATWARA(HC00170) on Mon Mar 20 2023 2023:GUJHC:15350-DB NEUTRAL CITATION C/TAXAP/520/2022 ORDER DATED: 07/03/2023 we note that the assessee had furnished all relevant evidences in the form of bills, contract notes, demat statement and bank account to prove the genuineness of the transactions relevant to the purchase and sale of shares resulting in long term capital gain. Neither these evidences were found by the AO nor by the Id. CIT(A) to be false or fictitious or bogus. The facts of the case and the evidences clearly support the claim of the assessee that the transactions of the assessee were genuine and the authorities below was not justified in rejecting the claim of the assessee exempted u/s 10(38) of the Act on the basis of suspicion, surmises and conjectures. It is to be kept in mind that suspicion how so ever strong, cannot partake the character of legal evidence. In the aforesaid facts and circumstance, for allowing the appeal we rely on the decision of the Hon'ble Calcutta High Court in the case of M/s Alipine Investments in ITA No.620 of 2008 dated 26th August, 2008 where in the High Court held as follows: \"It appears that there was loss and the whole transactions were supported by the contract notes, bills and were carried out through recognized stock broker of the Calcutta Stock Exchange and all the bills were received from the share broker through account payee which are also filed in accordance with the assessment. It appears from the facts and materials placed before the Tribunal and after examining the same, the tribunal allowed the appeal by the assessee. In doing so the tribunal held that the transactions cannot be brushed a side on suspicion and surmises. However, it was held that the transactions of the shares are genuine. Therefore, we do not find that there is any reason to hold that there is no substantial question of law held in this matter. Hence the appeal being ITA No. 620/2008 is dismissed.\" 27. In the aforesaid facts and circumstances of the case, we hold that the Id.CIT(A) was not justified in upholding the addition of sale proceeds of the shares as undisclosed income of the assessee u/s 68 of the Act. We therefore delete the addition of Rs.33,15,263. 28. Since, we have deleted the main addition of Rs.33,15,263/-, therefore, the addition on account of commission payment of Rs.3,29,188, which is consequential in nature, and hence the same is here by deleted.” 7. Having regard to the aforesaid finding of facts recorded by the Tribunal, we are not inclined to interfere in this appeal. Page 8 of 9 Downloaded on : Tue Jun 03 16:03:56 IST 2025 Uploaded by V.J. SATWARA(HC00170) on Mon Mar 20 2023 2023:GUJHC:15350-DB NEUTRAL CITATION C/TAXAP/520/2022 ORDER DATED: 07/03/2023 8. We are of the considered opinion that question of law formulated by the Revenue is more on facts rather than on law. It cannot be said to be a substantial question of law. 9. In the result, this appeal fails and is hereby dismissed. In view of the aforesaid, the connected Tax Appeal No.521 of 2022 also stands dismissed. (N.V.ANJARIA, J) (NIRAL R. MEHTA,J) V.J. SATWARA Page 9 of 9 Downloaded on : Tue Jun 03 16:03:56 IST 2025 Uploaded by V.J. SATWARA(HC00170) on Mon Mar 20 2023 2023:GUJHC:15350-DB NEUTRAL CITATION "