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TMI Blog2018 (4) TMI 701X X X X Extracts X X X X X X X X Extracts X X X X ..... explanation sought, before deciding whether these are relevant in the assessment of the assessee. I also find the SEBI through its order dated 21.09.2017(supra) did vacate its interim exparte order dated 29th March, 2016 restraining 244 entities, inter alia including M/s.Kailash Auto Finance Ltd., from buying, selling or dealing in securities. Thus the question whether the transactions claimed by the assessee, as giving rise to the long term capital gains exempt from tax u/s.10(38) of the Act, were real or sham, requires a re-visit by the ld. Assessing Officer. I set aside the orders of the lower authorities and remit the issue back to the file of the ld. Assessing Officer for consideration afresh in accordance with. - I.T.A.No.2003/CHNY/2017, I.T.A.No.1721/CHNY/2017, .T.A.No.2293/CHNY/2017 And I.T.A.No.2748/CHNY/2017 - - - Dated:- 6-4-2018 - SHRI ABRAHAM P GEORGE, ACCOUNTANT MEMBER For The Appellant : Mr.T.Banusekar, C.A For The Respondent : Mr.B.Sagadevan, JCIT, D.R ORDER PER ABRAHAM P GEORGE, ACCOUNTANT MEMBER Assessees in these appeals assail denial of claim of exemption u/s.10(38) of the Income Tax Act, 1961 (in short the Act ), on the g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... estigation carried out by the Revenue had revealed an organized Racket of generating bogus entries for sale of shares facilitating a claim of exemption given to long term capital gains under the Act. As per the ld.A.O., the modus operandi adopted was to buy shares of what was called Penny Stock Companies at very nominal price through off-line transaction. Such Penny Stock Company, as per ld. Assessing Officer, either got merged with another company, through a scheme for amalgamation, which received approval from Hon ble High Court, or its prices were jacked up through artificial trading by its shareholders who were few in number. Further, as per the ld. Assessing Officer, Securities and Exchange Board of India (SEBI) had conducted enquiries with regard to such transactions undertaken by operators of Penny Stock Company and had also examined the money trail of the transactions. According to ld. Assessing Officer, in the case of M/s.Kailash Auto Finance Ltd., SEBI had passed an order on 29.03.2016, numbered as WTM/RKA/SD/42/2016, where the modus operandi of the amalgamation methodology and manipulation in the share price were clearly explained. According to ld. Assessing Officer, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ary allottees. Further, from the annual report of 2010-11 of CPAL and PML it was observed that these companies, in concert with their primary allottees had developed a mechanism by virtue of which CPAL, PML and their primary allottees made book entries of purported investment in each others equity shares. Accordingly, there was no infusion of cash in respect of private placement by CPAL and PML but it resulted in generation of fictitious share premium value in the books of accounts of CPAL and PML. ( t) This circulation of funds between CPAL PML and their primary allottees is briefly presented. ( u) It was noted that as a result of these private placements to the primary allottees of CPAL and PML on March 31 2011, CPAL and PML had purportedly raised share premium of ₹ 19,47,91,450/- and ₹ 23,24,61,000/-, respectively. This share premium was raised through the circulation of funds as mentioned hereinabove. Further CPAL and PML had issued bonus shares by using this fictitious share premium. After the issue of bonus share capital of CPAL and PML. ( v) As a result of the schemes of reduction in share capital of Kailash Auto and amalgamation of CPAL and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nds, directly /indirectly to trading members through whom they had traded in this script end other scripts involving transactions for the purpose of alleged bogus long term capital gains tax exemption. Considering the income of these entities as shown in their KYC documents and the volume of their transactions it was noted that their transaction were riot commensurate with their disclosed income. Thus, it was observed that such fund transactions between promoter/promoter related entities of Kailash Auto and the entities of Kailasi, Auto Group i and Kailash Auto Group II were primarily for the purchase of equity shares of Kailash Auto by them from beneficiaries who are also connected/related directly or indirectly with CPAL and PML. 5. For the reasons aforesaid, ld.A.O held that the entire process whereby each of the beneficiary, who received shares in the Penny Stock Company at very low price, made artificially inflated profits exceeding 3400% of their original investments on sale of such shares, and made a bogus claim for exemption u/s.10(38) of the Act was a sham. Ld. Assessing Officer took note of the sworn in statement recorded from one Mr.Sunil Dokania, Managing Director ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aged by me. Q. 14. It is seen that these directors have their residential addresses at Gujrat, Maharashtra, Jharkhand and Kolkata. Please explain the reason for selecting dummy directors from various part of India. Ans. Sir. accommodation entry in form of LTCG in the scrips of Kallash Auto was provided to various beneficiaries of India so by appointing directors from various part it is easier for us to access various beneficiaries from that part. Q.15. Please explain the modus operandi of getting bogus long term capital gain through Scrips controlled and managed by you. Ans. Generally beneficiaries approached to the broker/entry operators in search of generation of capital in an easier manner without paying any tax on it. Brokers identify the various bogus scrips to provide LTCG as the same is exempt from the tax. Kailash Auto is such scrips which is engaged in providing accommodation entry in form of LTCG/STCL to various beneficiaries, Beneficiaries are allotted the shares at nominal price and the price of the shares rise artificially by using loopholes of stock exchange mechanism and the shares were sold at desired level to various bogus entities. These bo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... recognized stock exchange, using a recognized stockbroker. Further contention was that the sale of equity shares having been done through a recognized stock exchange, it was not necessary and not possible to ascertain the source and identity of the purchaser of equity shares. As per the assessee, it had proved the transactions through sufficient documentary evidence and exemption u/s.10(38) of the Act could not have been denied. 7. However, the Ld.CIT(A) did not accept any of the above contentions. According to him, there was an artificial hiking of the selling price of the shares of M/s.Kailash Auto Finance Ltd. Ld.CIT(A) also relied on the decision of Mumbai Tribunal in the case of I.T.O Vs. Shamim M.Bharwani reported in (2016) 69 Taxmann.com 65 (Mum.). 8. Now, before us, ld.A.R strongly assailing the orders of authorities below submitted that the enquiry conducted by the SEBI and the investigation wing of the Department did not in any way show that the transactions done by the assessee was sham. As per the ld.A.R, the purchase of equity shares of M/s.PML was proved through transfer of such shares from the name of M/s.Sanskriti Vincom Pvt Ltd., to the assessee. According t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ritten submissions filed by AR carefully considered but not accepted for the following reasons: 6.1 The Directorate of Investigation, Kolkata, carried out a countrywide investigation to unearth the organized racket of generating bogus entries of Long Term Capital Gains (LTCG) which is exempt from tax. The modus operandi adopted by the operators was to make the beneficiary buy some shares of a pre-determined Penny stock company controlled by them. These shares are transferred to the beneficiary at a very nominal price mostly off-line, through preferential allotment or off-line sale, to save STT. The beneficiary (an Individual) holds the share for one year, the statutory period after which LTCG is exempt under section 10(38) of the Income tax Act, 1961. In the meantime, the prices of the shares of the penny stock companies are rigged and are raised through circular trading. This is managed by the operator of the scrip. 6.2 The Directorate of Investigation, Kolkata investigated transactions in 84 such penny stock shares quoted on BSE, including the shares of Kailash Auto Finance Ltd., and examined on oath a large number of brokers, directors of companies that finally purc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ney. As per ld.D.R, assessee could not show how he became aware of the availability of equity shares in M/s.PML when the said company was based in Kolkotta and its equity shares were not listed. Thus, as per ld.D.R, lower authorities were justified in disbelieving the series of transactions, which were all manufactured for evading tax. 13. I have considered the rival contentions and perused the orders of the authorities below. The ld. Assessing Officer as well as Ld.CIT(A) had relied on SEBI order dated 29.03.2016, in the case of M/s.Kailash Auto Finance Ltd.. It is true that in the above order, there is a detailed analysis of modus operandi adopted by about eleven numbers of companies, inter alia including M/s.Kailash Auto Finance Ltd. It also mentions how M/s.Kailash Auto Finance Ltd., had built up a huge share premium within a short time of its incorporation. SEBI had also analysed the financials of M/s.CPAN and M/s.PML, which were merged with M/s.Kailash Auto Finance Ltd.,and found that there was disproportionate issue of bonus shares by these two companies. Apart from the SEBI report, lower authorities had also relied on a statement obtained from Mr.Sunil Dokania on 12.06.2 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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