2022 (9) TMI 843 - AT - Income Tax

Bogus purchases - penny stock purchases - HELD THAT - 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. 1993 (6) TMI 17 - CALCUTTA HIGH COURT We hold that the action of the assessee is nothing but pre-motivated and deliberate conduct done for converting the unaccounted money of the assessee under the guise of long term share transaction and that too without paying requisite tax on the same. This clearly amounts to tax evasion. In the present case also, it was beyond preponderance of probabilities that the fantastic sale price of a little known shares i.e. Mahavir Advanced Remedies Ltd., without any economic or financial basis to increase from Rs. 5/- to Rs. 282/- per share. The above increase is 56 times which is evident from the fact that by investing Rs. 2,35,000/- ( out of 50,000 shares 47,000 shares were sold) the assessee has got Rs. 1,32,48,345/- in a span of 28 months. There is no doubt that the capital gain was manipulated and bogus and was done to claim exemption u/s 10(38) of the Act. We therefore, do not find any reason to interfere with the findings of the ld. CIT(A) and the same is upheld. - Decided against assessee.

Summary

Issues Involved:
1. Non-appearance of the assessee.
2. Claim of long-term capital gain (LTCG) as exempt under Section 10(38) of the Income Tax Act.
3. Allegation of bogus LTCG through penny stock transactions.
4. Assessment of the genuineness of share transactions.
5. Application of Section 68 of the Income Tax Act regarding unexplained cash credits.
6. Examination of the modus operandi of share price rigging.
7. Retraction of the assessee from the initial statement.
8. Penalty proceedings under Section 271(1)(c) of the Income Tax Act.

Detailed Analysis:

1. Non-appearance of the Assessee:
At the hearing, the assessee did not appear, nor was any adjournment petition filed. This case had been adjourned multiple times due to the non-appearance of the assessee. The tribunal decided to proceed based on the submissions of the Departmental Representative (D.R) and the orders of the subordinate authorities.

2. Claim of Long-Term Capital Gain (LTCG) as Exempt under Section 10(38):
The assessee traded in shares and claimed LTCG on these transactions as taxable at 10%. However, during the assessment proceedings, the assessee made a fresh claim for exemption under Section 10(38) of the Income Tax Act, which was not tenable as per the Supreme Court's decision in Goetze (India) Ltd. Vs. CIT (284 ITR 323).

3. Allegation of Bogus LTCG through Penny Stock Transactions:
The shares traded by the assessee included those of M/s. Mahavir Advanced Remedies Ltd., identified by the Investigation Wing of the Income-tax Department as tainted and used for providing LTCG accommodation entries. The Assessing Officer (A.O) concluded that the entire arrangement was a colorable device to bring unaccounted cash into the books without paying taxes, referencing the Supreme Court's verdict in McDowell & Co. Ltd. Vs. CTO (1985) 154 ITR 148 (SC).

4. Assessment of the Genuineness of Share Transactions:
The A.O found that the share prices of Mahavir Advanced Remedies Ltd. were rigged and manipulated, leading to an abnormal price rise not backed by the company's fundamentals. The A.O noted that the transactions were pre-arranged to book LTCG through dubious methods.

5. Application of Section 68 of the Income Tax Act:
The A.O invoked Section 68, which deals with unexplained cash credits, and added the amount of Rs. 1,30,13,347/- to the assessee's taxable income. The section requires the assessee to prove the identity of the creditor, genuineness of the transaction, and creditworthiness, which the assessee failed to do.

6. Examination of the Modus Operandi of Share Price Rigging:
The A.O and CIT(A) examined the modus operandi of the penny stock scam, noting that the share prices were artificially inflated through limited trades and low volumes. The Investigation Wing's findings supported the conclusion that the transactions were part of a scheme to launder black money and evade taxes.

7. Retraction of the Assessee from the Initial Statement:
The assessee initially agreed to pay taxes on the LTCG but later retracted. The CIT(A) found no evidence that the initial statement was made under coercion or mistaken belief. The retraction was deemed an afterthought to evade taxes.

8. Penalty Proceedings under Section 271(1)(c):
The A.O initiated penalty proceedings under Section 271(1)(c) for furnishing inaccurate particulars of income and concealment of income. The CIT(A) upheld the findings, stating that the assessee failed to prove the genuineness of the LTCG claim.

Conclusion:
The tribunal upheld the findings of the CIT(A) and A.O, concluding that the assessee's actions amounted to tax evasion. The appeal was dismissed, and the addition of Rs. 1,30,13,347/- to the assessee's income under Section 68 was upheld. The tribunal found no reason to interfere with the findings of the subordinate authorities.