2022 (3) TMI 829 - AT - Income Tax

Reopening of assessment u/s 147 - Addition u/s 68 - bogus LTCG - bogus share transaction - HELD THAT - Capital markets regulator SEBI imposed a total penalty of ₹ 40 lakh on five entities and three individuals for indulging in fraudulent trading activities in the scrip of Esteem Bio Organic Food Processing Ltd. An amount of ₹ 5 lakh each has been imposed on them. The entities and individuals are collectively referred to as noticees. An investigation was conducted by the regulator in the shares of Esteem Bio Organic Food Processing during the February 7, 2013 and July 31, 2015 period. As found that a set of connected entities were pushing up the price of the scrip through unusual trades in such a manner so as to make a positive contribution to the Last Traded Price (LTP) and establishing New High Price (NHP). The observations and finding of fact arrived by the SEBI clearly proves that the scrips of M/s Esteem Bio Organic Food Processing Ltd. where manipulated in stock exchange and fraudulent scheme was deployed by the said company right from year January 2013 during the period which the assessee had entered into the transaction. This fact itself nails the finding of the AO which has discussed in detail and also by the ld. CIT(A). It is immaterial that order of the SEBI came in 2018 because the SEBI has analysed the entire trading of shares from year 2013 and found that not only the prices of the scrips of the said company were rigged but also were involved in fraudulent activities, which led to completely debarred its trading in the stock exchange. This order of SEBI clearly implicates, the entire transaction of purchase and sale of shares and goes to prove that the transaction was not genuine and corroborates the findings of the enquiry conducted by the Income Tax Department. All these enquiries conclusively proved that the trades have been manipulated and the gains or the losses made by the beneficiaries cannot be said to be genuine. We hold that the transactions in the present appeal are yet another example of the constant use of the deception of stock market transaction to bring unaccounted money into banking channels. This device of stock transactions of unworthy stocks with no profits continues to plague the legitimate economy of our country. As seen from the facts narrated above, the transactions herein clearly do not inspire confidence as being genuine and are shrouded in mystery, as to why the so-called transactions lead to exorbitant returns which are made tax free. The Hon ble Calcutta High Court in the case of CIT Vs Korlav Trading Company Ltd. 1998 (2) TMI 104 - CALCUTTA HIGH COURT and CIT Vs Precision finance P. Ltd. 1993 (6) TMI 17 - CALCUTTA HIGH COURT had observed and held that mere filing of confirmation and transaction through the banking channel is not enough to prove the genuineness. The facts have been examined holistically with reference to enquiries and the entire operation of the stocks, method of investment, regularity of the investments, enquiries conducted by SEBI, evidences produced by the assessee to support the claim. While we examine the enormous evidences, we find that the only evidence submitted by the assessee was that the amounts have been received by cheque and hence the genunity of the transactions have proved beyond doubt. On going through the entire facts and circumstances of the case, it can be concluded based on the following snap shot that transactions entered by the assessee are not genuine. A tangible and reliable information has been available with the AO to initiate proceedings u/s 148 of the Act. Proper reasons have been recorded before issue of the notice. The reasons recorded are related to the information received 4. The information received and the reasons recorded pertain to escapement of income. Assessing Officer had reasons to believe based on the information received which have been duly recorded. Assessing Officer has right jurisdiction to issue the notice and the same has been duly served as per the requirements of the Income Tax Act. There has been live nexus between the information received, reasons to believe and the reasons recorded. What is required for issue of notices, the prima facie reasons to believe as per the ratio laid down by the Hon ble Supreme Court. The Hon ble Apex Court has also held that formation of belief by the Assessing Officer is within the realm of subjective satisfaction. In the instant case, the approval given u/s 151(1) cannot be faulted in accordance with the judgment of Hon ble High Court (HP) 2017 (1) TMI 517 - HIMACHAL PRADESH HIGH COURT wherein it was held that the Court is satisfied that by recording in his own writing the words Yes, I am satisfied , the mandate of Section 151(1) of the Act as far as the approval of the Addl. CIT was concerned, stood fulfilled.There has been an independent application of mind that the Assessing Officer which deciphered from the reasons recorded by the Assessing Officer. The price of shares has been risen from ₹ 26.50 to ₹ 392.00 (average) any span of 13 months.The company had no profit/ meager profit to demand such price.The assessee is not a regular trader investing in the stock market transactions. In the entire period of 5 years, there was only highest spurt for the smallest period wherein the sale took place in the entire period between 2010 to 2015 as depicted in the graph above showing typical bell shape.The shares were purchased of market from private party. No iota of due diligence viz. the advisor, the analysis of fundamentals, the profits, the assets undertaken by the assessee. The order of the SEBI dated13.03.2019 and 22.12.2020 proving the manipulation in trading of the scrips. The undeniable proof of involvement of the broker ISF Securities found by the SEBI. Order dated 23.12.2020 of Metropolitan Stock Exchange enquiry indicting the involvement of operation in the case of M/s Esteem Bio Organic Food Processing Ltd. Levy of penalty by SEBI in fraudulent trading activities in the scrip of Esteem Bio Organic Food Processing Ltd. Hence, we find no merit on the arguments of ld. AR on the issue of reopening of the case u/s 148 of the I.T. Act as well as on merits of the issue. In the result, the appeal of the assessee is dismissed. In the result, the appeal of the assessee dismissed.

Summary

Issues Involved:
1. Jurisdictional Ground: Assessment is void ab initio.
2. Other grounds on merits qua addition of ?24,69,636.

Detailed Analysis:

1. Jurisdictional Ground: Assessment is void ab initio

1.1 Violation of Mandatory Jurisdictional Conditions:
The assessee contended that the assumption of jurisdiction under Section 148 by the Assessing Officer (AO) was in violation of mandatory jurisdictional conditions stipulated under the Act. The reasons recorded for reopening were based on borrowed satisfaction without independent application of mind. The reasons stated that the assessee had not filed a return of income, which was factually incorrect as the return was filed on 02/02/2015. The reasons did not narrate any tangible material to form a valid belief under Section 148.

1.2 Lack of Independent Verification:
The reasons recorded merely mentioned DIT information without corroboration by any independent material. The reopening was for verification and examination, which is not permissible under Section 148. The AO did not confront the assessee with any back material like the investigation wing report, thus invalidating the entire reopening process.

1.3 Invalid Approval and Notice:
The approval from the superior authority under the Act was not valid, and no valid notice under Section 143(2) was issued based on the return filed under Section 148 on 04/10/2018. Therefore, the orders of the AO and CIT(A) should be quashed.

1.4 Non-appreciation of Assessee's Submissions:
The CIT(A) erred in sustaining the AO's order without appreciating the submissions made by the assessee.

2. Other Grounds on Merits Qua Addition of ?24,69,636

2.1 Bogus Long Term Capital Gains (LTCG):
The AO added ?24,69,636, including ?23,52,034 as alleged bogus LTCG and ?1,17,602 as unexplained expenditure under Section 68. The assessee argued that the LTCG arose from share sales on the stock exchange after due payment of Securities Transaction Tax (STT) through a recognized stockbroker, with voluminous evidence of purchase and sale. The AO's addition was based on a stereotype narrative without contradicting the evidence provided.

2.2 Violation of Natural Justice:
The addition was made without confronting the assessee with any investigation wing report, relevant extracts, or statements recorded by the investigation wing. The assessee was not offered cross-examination of the revenue's witness, which violated the principles of natural justice.

2.3 Burden of Proof:
The CIT(A) erred in sustaining the addition without appreciating that the burden to prove the transaction as bogus remained undischarged by the revenue. The findings were contrary to the evidence provided by the assessee.

2.4 Modus Operandi Not Co-related:
The AO and CIT(A) erred in making the addition without appreciating that the modus operandi relied upon was not co-related to the facts of the present case. There was no evidence to show that the assessee inducted certain cash at the time of sale to certain identified brokers or middlemen.

2.5 Application of Section 68:
The AO applied Section 68 without due application of mind. The assessee had no economic capacity to generate the unaccounted income, and no incriminating material was brought on record. Section 68 does not apply to the sale of shares where no unexplained cash credit within the meaning of Section 68 can be said to have arisen.

2.6 Suspicion and Human Probabilities:
The CIT(A) sustained the addition based on "suspicion" and "human probabilities" without converting it into reliable and trustworthy material. The assessment order was passed based on "borrowed satisfaction" without any independent application of mind.

2.7 No Opportunity for Confrontation:
The CIT(A) erred in sustaining the addition without giving the assessee an opportunity to be confronted with the back material relied upon in the impugned orders, like the investigation wing report.

2.8 Identical Facts in Other Orders:
The CIT(A) erred in sustaining the addition without appreciating that in identical facts in various orders, relief had been granted to the assessee, accepting LTCG as genuine.

2.9 Statutory Status of Evidence:
The CIT(A) erred in sustaining the addition without appreciating the spirit of law contained in Section 10(38) and Section 43(5)(d), where statutory status is provided to evidence generated from the stock exchange system.

Conclusion:
The Tribunal upheld the reopening of the assessment under Section 148, finding that the AO had reasons to believe that income had escaped assessment. On merits, the Tribunal found that the transactions in question were not genuine and upheld the addition made by the AO. The appeal of the assessee was dismissed.