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TMI Blog2018 (10) TMI 1649X X X X Extracts X X X X X X X X Extracts X X X X ..... of Assessing Officer without properly considering the fact and circumstances of the case, arguments of the appellant and the law applicable. 2.3 In any case and without prejudice, the orders passed by the authorities below being contrary to binding dictum of the jurisdictional High Court are bad in law and are liable to be quashed. 3.1 The Assessing Officer had in any case, erred in assessing the Long-Term Capital Gain earned on sale of shares (exempt 10(38) of the Act) under the head income from Business on the ground that the appellant had dealt in penny stock and the learned Commissioner of Income tax (Appeals) has erred in dismissing the relevant ground without giving any finding. The action of authorities below has no support in law; is contrary to facts and evidence available and therefore deserves to be rejected. 3.2 The Assessing Officer had erred in holding that the provisions of Section 28 of Income-tax Act, 1961 are applicable. There being no adventure in the nature of trade and in fact the gain having been duly explained, makes the addition wholly erroneous and liable to be deleted. 3.3 In any case and without prejudice, the Authorities below have erred in not a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o earned long-term capital gain on sale of shares and has claimed exemption on it under section 38 of the Income Tax Act. The AO has noticed that assessee has claimed long-term capital gain of Rs. 42,46,000/- on sale of shares of the scrip of Mahavir Advanced Remedies. It was also noticed that though the scrips were listed on the stock market and could be purchased through the stock market but the assessee did not purchase it directly from the stock market and has purchased off line through an intermediary. This quantum of huge long-term capital gain was found suspicious and detailed investigation was undertaken. The AO took cognizance of BSE websites, money control website, taxmann, internet as well as investigation wing report and the findings of the SEBI. Having made detailed study/examination of the explanations and evidences placed on record by the assessee, the AO came to the conclusion that the financial worth of the company is very meagre and not at all worth to be invested in. The company has no fixed assets nor sale or purchase to operate. Relying upon the report of the investigation wing, SEBI report and findings/observations of the SIT, the AO has concluded that exempti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are selected to implement the bogus gain/loss. Based on this study it is seen that many beneficiaries have converted unaccounted money to accounted by resorting to this route. The assessee earned long-term capital gain in the current year and claimed it as exempt u/s. 10(38) of the Act. Data obtained from various sources was thoroughly verified and analysis was done as per share market fundamentals. After analysis and due examination of records, it is found that long-term capital gain of Rs. 42,46,000/-shown in the return as the sale of shares of MAHAVIR ADVANCED REMEDIES LTD (MARL for short) was a prearranged method employed by the assessee in connivance with operators to evade taxes. The assessee in her statement of income has purported to have purchased 12,500 shares of MARL on 22/2/2013 a total purchase cost of Rs. 100000/- @ Rs. 8/-per share. The consideration for purchase of these shares was by transfer of funds from M/s. Sri Lakshminarayana Rice Mills to her account, in which entity the assessee has a stake. This purchase was through an entity M/s. Global Enterprises, Mumbai (10000 shares) and M/s. Eager Corporation, Mumbai (2500 shares). However, nowhere it has been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . It is worthwhile to note here that this sale has been done offline. Hence, from the above it can be seen that the assessee has come to acquire the shares through a dubious means, lacking transparency which shows a mala fide intention. Announcement of change in name of the company from Indo American Advanced Pharmaceuticals Ltd and increase in number of shares by the company 18/02/2013 Purchase of shares as per invoice submitted by assessee 27/02/2013 Offline Sale of shares by Koteeswara Rao & Vijayalakshmi B 13/06/2013 Date of transfer of shares to assessee as per share certificate 24/08/2013 Subsequently the assessee has opened demat account with M/s. Crosseas Capital Services Private Limited. It is seen that the assessee has sold the shares when it reached its peak and not before or after that, which goes to say that she (or any person acting on her behalf) knew beforehand about the movement of the share price of the company. Later the assessee sold these shares on various dates during the F. Y. 2014-15 relevant to the concerned A.Y 2015-16 for a sale consideration of Rs. 43,46,000/-. The sale of shares have been done through the stock broking firm, Anand Rathi Shar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng under a different name. This act of the Company raises more suspicion on the trading of the scrip during the period under consideration. From the financials available, it can be seen that the financial worth of the company is very meagre and not at all worth to be invested in. Indeed, perusal of the financials indicates very poor financial condition and no profits on operations earned by the company. It can be seen that the company has no fixed assets nor sale or purchase to operate. When such is the condition of the condition, it is highly doubtful that any sane person would invest his/her money in it. (i) Further, it is gathered that the scrip was suspended by BSE. (ii) The price movement of the shares and the date-wise number of trades as collected from BSE during the period of phenomenal price rise was mentioned was by the AO. The analysis shows the phenomenal price rise that has occurred in the shares of MAHAVIR ADVANCED REMEDIES LTD. (v) This abnormal price rise is also highlighted by the overall percentage increase in the SENSEX during the period when the shares saw phenomenal price rise. Normally, the SENSEX is a benchmark of the average price movement in any s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iscussion clearly establishes the fact that the price of the shares of MAHAVIR ADVANCED REMEDIES LTD were rigged in a pre-planned systematic manner by conducting limited trades and with miniscule volume. At this juncture, it is worthwhile and useful to mention that the M/s. MAHAVIR ADVANCED REMEDIES LTD have been found involved in fraudulent practices by the Securities and Exchange Board of India. It is the finding of SEBI that this syndicate of people acts as accommodation entry providers. They chose particular scrip and rig its prices to provide bogus capital gain and capital loss to various beneficiaries. Based upon its findings SEBI have restrained these persons from trading in market. The submissions made by the assessee during assessment proceedings are considered. The facts of the case and investigations made by various directorates are considered. From the discussion in the preceding paras it is concluded that long-term capital gains booked by assessee in his books were pre-arranged method to evade taxes and launder money. Following are the findings and the reasons which substantiates the findings:- A. Mode of acquisition of the shares: The assessee had purchased 12,5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r indulged in share transactions either before or after this particular transaction; vi. Financial analysis of the penny stock companies: The net worth of the penny stock company is negligible. Even though the net worth of the company and the business activity of the company is negligible the share prices have been artificially rigged to unusual high; vii. Order of the SEBI: SEBI has passed an order where the company is said to be indulging into share manipulations and hence it has barred this company from trade. The facts and circumstances of the case, as recorded above, clearly suggest that the revenue cannot take or accept such make-believe transactions, as presented by the assessee. Truth or genuineness of such transactions must prevail over the smokescreen, created by way of premeditated series of steps taken by the assessee, either directly or indirectly, with a view to imparting a colour of genuineness and character of commercial nature, to such share transactions. Needless to say, that one has to look at the whole transactions and series of steps taken to accomplish such share transactions, in an integrated manner, with a view to ascertaining the true nature and chara ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e undisclosed income in the garb of long-term capital gain. While so observing, the authorities held that the assessee had not tendered cogent evidence to explain as to how the shares in an unknown company worth Rs. 5/- had jumped to Rs. 485/- in no time. The Income Tax Appellate Tribunal held that the fantastic sale price was not at all possible as there was no economic or financial basis as to how a share worth Rs. 5/- of a little known company would jump from Rs. 5/- to Rs. 485/-. The findings recorded by the authorities are pure findings of facts based on a proper appreciation of the material on record. While recording the said findings, the authorities have followed the tests laid down by the Hon'ble Supreme Court and this Court in several decisions. The findings do not give rise to any substantial question of law In the case on hand also the scrips were of unknown or lesser known company, sale price was fantastic, there was no economic or financial basis to justify the price rise (poor financials as analysed by AO), share transactions were dubious (as held by various departments including SEBI investigation wing etc), the company did not qualify for investment, the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ower authorities in the light of rival submissions, I find that assessee has purchased 12500 shares of Mahavir Advanced Remedies Ltd., (MARL) on 22.02.2013 at a total purchase cost of Rs. 1,00,000/- at the rate of Rs. 8/- per share. The consideration for purchase of these shares was by transfer of funds from Lakshmi Narayana Rice Mills to her account in which the assessee has a stake. This purchase was through M/s. Global Enterprises and Eager Corporation, Mumbai. The assessee has made the payment to the aforesaid entity and not to the owner of the shares of MARL. As is evident from the receipts issued by M/s. Eager Corporation, Mumbai, the invoice indicates the share price at Rs. 8/- per share whereas the face value of the scrip itself is Rs. 10/- per share. It is also evident from the record that the MARL in its Extraordinary General Body Meeting held on 18.02.2013 has increased share capital from Rs. 5.5. crores to Rs. 15.5 crores by issue of 1,00,00,000 shares of Rs. 10/- each at a price of Rs. 11/- per equity share including premium of Rs. l/- per share to the non-promoters. The AO has also noted that 2500 shares of MARL have been transferred to the assessee from Mr. BVS Kotee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ares of the listed penny stock in exchange of the shares of private limited company. The modus operandi of conversion of unaccounted money in long-term capital gain was examined by the AO before coming to the conclusion. The AO has also examined the balance sheets of Mahavir Advanced Remedies Ltd., and the balalnce sheet and profit and loss account for the last 3 years was extracted in the assessment order. For the sake of reference, we extract the same hereunder: Mahavir Advanced Remedies Ltd. (Earlier known as Indo-American Advanced Pharmaceuticals Ltd.) BALANCE SHEET PARTICULARS AS ON 31/03/2014 31/03/2013 31/03/2012 31/03/2011 EQUITY AND LIABILITIES SHAREHOLDERS' FUNDS Sharer Capital 11,35,92,000 11,35,92,000 3,75,80,000 3,75,80,00 Reserves and Surplus (2,56,74,000) (2,70,51,000) (3,18,70,232) (2,86,99,63) 8,79,18,000 8,65,41,000 57,09,232 88,80,36 SHARE APPLICATION MONEY 7,65,633 7,65,63 LENDING ALLOTMENT NON-CURRENT LIABILITIES Deferred Tax Liabilities (Net) &nbs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... factor to be noted here is that on all these days, there has been a constant rise in the price of the shares. A close look reveals that on most trading day, the percentage increase in price is in the range of 3% to 4 %. This percentage price rise on each day was just short of 5% which was the circuit limit for price rise as per the exchange guidelines in respect T type scrips. On some trading days, the percentage increase in price is in the range of 1.90% to 1.99% which again was just short of percentage increase of 2% which was the circuit limit for price rise as per the exchange guidelines in respect T type scrips. On some trading days, the percentage increase in price is in the range of 1.90% to 1.99% which again was just short of percentage increase of 2% which was the circuit limit for price rise as per the exchange guidelines on those trading days. Thus, it is seen that the price of these shares have seen phenomenal rise and have been constantly traded near the circuit limit so as to avail maximum price rise without hitting and triggering the circuit limit, and thereby avoid surveillance by the Stock Exchange Regulator. This continuous price rise has been achieved over a v ..... X X X X Extracts X X X X X X X X Extracts X X X X
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