2021 (8) TMI 418 - AT - Income Tax

Bogus LTCG - penny stock purchases - HELD THAT - In view of the Investigation on done by the Investigation wing regarding the penny stocks syndicate and the assessee indulging in trading in penny stocks, the modus operandi is that the share of this penny stock companies although listed on exchange was always closely held and controlled by the promoters of penny stock companies and the operators syndicate arrange these bogus Gain/Loss. This is due to the fact that the general public is not interested in the shares as these companies have no credentials and this helps the operator to keep a control on the price movements of the shares. Once the period of 1 year has been passed and the shares prices have been sufficiently rigged, the beneficiary sell their share at the inflated prices through the stock exchange. Here the purchase is not mode by public but by the bogus entities managed and controlled by the promoters of the penny stock company or the operators who are to be referred to as exit providers. All these are sham transactions. It is therefore, revealed that large scale rigging of prices of the above scrip has taken place and it is on the watch list of the SEBI trade data. In this regard, summons was also issued to Sri Bharath M Jain, director of the assessee company on 14.12.2016, to appear before the undersigned and a sworn statement of Sri Bharath M. Jain was recorded u/s. 131 of the Income Tax Act, 1961 on 16/12/2016. AR admission that the above fact that such dubious tradings were rampant during the assessment year. However, it cannot lead to the conclusion that that the transactions of the assessee are not genuine. It cannot be accepted in the circumstances of the case that all scrips purchased by the assessee sold at astronomical loss were commensurate to the financials of the company. Thus it shows that it was only accommodation entries which is in operation in the market and the assessee is not a genuine buyer and seller of the shares - assessee has not justified the genuineness of the transaction. It is appropriate to come to the conclusion that the transactions undertaken by the assessee is fictitious transactions so as to take advantage of the sale. Appeal of the assessee is dismissed.

Summary

Issues:
- Assessment of loss on sale of shares
- Allegations of fictitious transactions
- Application of natural justice principles
- Liability to pay interest

Assessment of Loss on Sale of Shares:
The appellant, engaged in trading shares, declared a loss of ?1,07,413 in the assessment year 2014-15, including a loss of ?60,96,500 on the sale of shares of a specific company. The Assessing Officer (AO) added back this amount to the income, alleging the shares were accommodative entries and questioning the necessity of the sale. The CIT(Appeals) upheld the AO's decision. The appellant contended that the transaction was genuine, conducted through normal banking channels and Demat accounts, and was a business decision due to a fall in share prices. The appellant argued that the AO's doubts did not prove the transaction was fictitious, and the AO cannot dictate business decisions. The Tribunal noted the appellant's consistent losses in share dealings over previous years and found insufficient evidence to declare the loss as bogus.

Allegations of Fictitious Transactions:
The Department's Investigation Wing highlighted syndicates involved in bogus capital gains and losses through penny stock trading, including the company in question. The investigation revealed closely held penny stocks manipulated by operators to create artificial price movements, leading to inflated sales. The Tribunal acknowledged the dubious trading practices during the assessment year but determined that the appellant failed to prove the genuineness of the transactions. The Tribunal concluded that the appellant engaged in fictitious transactions to exploit the market, upholding the CIT(Appeals)'s decision to confirm the addition of the loss to the appellant's income.

Application of Natural Justice Principles:
The appellant raised concerns regarding the violation of natural justice principles in the CIT(Appeals)'s order. However, the Tribunal did not find substantial evidence to support these claims, focusing instead on the genuineness of the transactions and the appellant's failure to justify the losses incurred. The Tribunal emphasized the need for the appellant to demonstrate the legitimacy of the transactions, which the appellant failed to do, leading to the dismissal of the appeal.

Liability to Pay Interest:
The appellant also contested the liability to pay interest, claiming erroneous imposition. However, the Tribunal's decision to dismiss the appeal encompassed all aspects of the case, including the liability for interest. The Tribunal upheld the CIT(Appeals)'s decision regarding the addition of the loss on the sale of shares, leading to the rejection of the appellant's appeal in its entirety.