Bogus Capital Gains and Accommodation Entries: Unraveling the Penny Stock Scam and Tax Evasion

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Deciphering Legal Judgments: A Comprehensive Analysis of Case Law

Reported as:

2022 (6) TMI 670 - CALCUTTA HIGH COURT

Introduction

This judgement deals with a complex issue involving alleged tax evasion through the generation of bogus long-term capital gains (LTCG) from trading in penny stocks. The case revolves around the assessees' claims of exemption from taxation on the LTCG earned from the sale of shares in certain companies. The revenue authorities, however, contended that the entire scheme was a colourable device to obtain bogus capital gains, and the transactions were part of a larger accommodation entry scam.

Arguments Presented

Revenue's Arguments

The revenue argued that the entire activities of the assessees were a colourable device to obtain bogus capital gains. They relied on various judicial pronouncements, including the Delhi High Court's decision in the case of UDIT KALRA Versus ITO WARD-50 (1) - 2019 (4) TMI 834 - DELHI HIGH COURT, where the astronomical growth in the value of a company's shares raised suspicions, leading the revenue to treat the receipts from the sale of shares as bogus.

The revenue also cited several orders and judgements from various courts and tribunals, including the Delhi High Court's decision in COMMISSIONER OF INCOME TAX Versus NIPUN BUILDERS & DEVELPERS PVT. LTD. - 2013 (1) TMI 238 - DELHI HIGH COURT, which discussed the burden of proof in cases arising u/s 68 of the Income Tax Act.

The revenue further argued that the assessing officers had conducted a thorough investigation and that the assessees had failed to establish the genuineness of the transactions, the creditworthiness of the companies, and the identity of the persons involved in the transactions.

Assessees' Arguments

The assessees argued that they were ordinary people who had made meagre investments and should not be branded as scamsters, especially when larger players in the market were left untouched or allowed to avail the benefits of the Vivad Se Vishwas Scheme.

They also contended that they had relied on the opinions of financial experts and professionals in the field, as well as information available in the media, when making their investment decisions.

Discussions and Findings of the Court

Doctrine of Preponderance of Probabilities

The court discussed the applicability of the doctrine of preponderance of probabilities in cases like the present one, where direct evidence may not be available, and the court must rely on surrounding circumstances and human probabilities.

Burden of Proof u/s 68

The court referred to the Delhi High Court's decision in CIT v. Nippun Builders and Development Private Limited, which clarified that the initial burden of proof lies with the assessee to establish the identity of the parties, their creditworthiness, and the genuineness of the transactions. The revenue is not required to prove that the assessee's own monies were brought back in the form of share application money.

Role of Assessing Officers and Tribunals

The court criticized the assessing officers for not conducting a proper enquiry and the tribunals for interfering with the orders of the CIT(A) and the Commissioner's orders u/s 263 of the Act in a perfunctory and superficial manner, without delving into the core issues.

Powers of the Court u/s 260A

The court emphasized its powers u/s 260A of the Act, which allows it to intervene if the Tribunal has misunderstood the statutory language, arrived at findings based on no evidence or inconsistent with evidence, or acted on irrelevant material or mere conjectures.

Reliance on Expert Opinions and Media Reports

The court rejected the assessees' reliance on expert opinions and media reports, stating that they cannot take shelter under such opinions and must exercise due diligence and personal expertise when making investment decisions, especially in penny stocks.

Modus Operandi of the Accommodation Entry Scam

The court discussed the modus operandi of the accommodation entry scam, involving entry operators, penny stock companies, and share brokers, and criticized the lack of uniform action taken by the Income Tax Department in such cases.

Analysis and Decision by the Court

The court concluded that the Tribunal had committed serious errors in setting aside the orders of the CIT(A), who had affirmed the orders of the Assessing Officers, and in interfering with the assumption of jurisdiction by the Commissioner u/s 263 of the Act.

The court held that the assessees had failed to prove the genuineness of the transactions, the creditworthiness of the companies, and the identity of the persons involved. The Assessing Officers and CIT(A) had adopted a reasonable and prudent approach in making the additions u/s 68 of the Act.

Consequently, the court allowed the appeals, answered the substantial questions of law in favor of the revenue, and restored the orders passed by the respective Assessing Officers, as affirmed by the CIT(A), and the orders passed by the CIT u/s 263 of the Act.

Doctrines or Legal Principles Discussed

The court discussed the following doctrines and legal principles:

Doctrine of Preponderance of Probabilities
Burden of Proof u/s 68 of the Income Tax Act
Powers of the Court u/s 260A of the Income Tax Act

Comprehensive Summary

The judgement dealt with a complex case involving alleged tax evasion through the generation of bogus long-term capital gains from trading in penny stocks. The revenue authorities contended that the entire scheme was a colourable device to obtain bogus capital gains, and the transactions were part of a larger accommodation entry scam.

The court discussed various legal principles, including the doctrine of preponderance of probabilities, the burden of proof u/s 68 of the Income Tax Act, and the powers of the court u/s 260A of the Act.

Ultimately, the court concluded that the assessees had failed to prove the genuineness of the transactions, the creditworthiness of the companies, and the identity of the persons involved. The Assessing Officers and CIT(A) had adopted a reasonable and prudent approach in making the additions u/s 68 of the Act.

Full Text:

2022 (6) TMI 670 - CALCUTTA HIGH COURT