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TMI Blog2019 (7) TMI 867X X X X Extracts X X X X X X X X Extracts X X X X ..... g to the issue under consideration before me is identical and therefore the facts for the AY 2014-15 will be dealt with and the result will be followed for the AY 2015-16. Brief facts for AY 2014- 15 related to this issue is that the assessee has filed his return of income for AY 2014-15 declaring total income of Rs. 7,10,390/-. Later the return was processed on 22.04.2015 under Section (hereinafter referred to as 'U/s') 143(1) of the Act. Thereafter the AO notes that the case was selected for scrutiny under Cass in AST module and thereafter he issued statutory notices. According to AO from a perusal of the documents it was found that the assessee had purchased Scrip of M/s Smart Champs I.T. Infra Ltd. on 26.07.2011 of thousand shares for Rs. 1,00,000/-. Later on this private limited company was merged into M/s Cressanda Solutions Ltd. (hereinafter referred to as 'M/s CSL') and subsequently, the face value was changed to Rs. 1 per share meaning thereby 1,00,000/- share of M/s CSL was allotted to assessee. Out of this 32,500/- shares were sold on different dates during the financial year under consideration for a total amount of Rs. 17,65,705/- by which transaction the assessee rece ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er having carefully gone through it he has kept it on record. Thereafter the AO observes that assessee stated earlier that while purchasing the shares, no broker was involved and that the purchase consideration by mode of cheque was directly issued in favour of the company and that the company issued share certificates directly to the assessee. Further, the AO notes that the assessee had not submitted any purchase bill. So he could not verify the purchase claimed to have been made by the assessee. Further, he notes that assessee is silent regarding the bell shape structure of trading of the scrip and the sale of the same at a rigged value almost fifty times of its purchase price within a span of around two and a half years is unbelievable. Therefore, he treated the claim of the assessee as fictitious and made the addition of Rs. 14,08,205/- for AY 2014-15 and or the same scrip sold in the next assessment year and the LTCG claimed of Rs. 36,21,880/- for AY 2015-16 was added back. Aggrieved, the assessee preferred an appeal before the Ld. CIT(A) who was pleased to dismiss the appeals. Aggrieved by the action of the Ld. CIT(A), the assessee has preferred both the appeals before me. 5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that there was any extraordinary event which could have been instrumental in the rise of the shares. According to Ld. DR, the price of share of M/s. Smart Champs IT and Infra Ltd. which assessee purchased for Rs. 10/- each was also a paper company, which was later amalgamated with M/s. Cressenda Solutions Ltd. was also a penny stock company which had no financial worth-mentioning. So, according to Ld. DR, it is against the human probability that shares could have traded at such a high value earning the assessee huge profit. And the ld. D.R. heavily relied upon the decision of the Hon'ble Bombay High Court in the case of Bimalchand Jain in Tax Appeal No. 18 of 2017 to support the orders of lower authorities. According to Ld. DR, Investigation Wing of Kolkata has clearly unraveled the modus operandi followed by these unscrupulous persons/brokers which was systematically carried out with transactions supported by documents cannot be therefore, accepted and, therefore, he does not want us to interfere with the order of Ld. CIT(A). 7. I have heard rival submissions and gone through the facts and circumstances of the case. I note that the appellant had purchased 10,000 (Ten thousand) s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... k statement, Share Certificate of M/s Smart Champ IT and Infra Ltd., contract notes for sale of shares, earlier year's Balance Sheet as on 31.03.2014 showing the same being reflected as investments etc. We note that during assessment proceedings when the AO expressed doubts about the genuiness of his claim based on the Investigation Report of the Investigation Wing, the assessee requested for a copy of the Investigation Report of the Investigation Wing, which was not furnished to the assessee. It was also brought to the notice of the AO that the assessee an individual was not related in any manner to the promoters or the directors of the company in question or to any person to whom the shares have been sold. The assessee contested the AO's view that M/s. Cressenda Solutions Ltd. was a penny stock company and its stocks were artificially rigged to benefit the assessee. Though the assessee filed all the documents in support of its claim for LTCG, the AO & Ld. CIT(A) without finding any fault with the documents filed have negated the claim based only on human probability and the Investigation Report that too which was not furnished to assessee. According to us, the non-furnishing of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of most of the Directors were recorded on oath and part of the said report. Later, he stated that M/s Cressenda Solution Ltd. is one of the 84 scrips which were identified by the 'Directorate of Investigation', as involved in the scheme of bogus LTCG/STCG and that the name and PAN no. of the assessee is part of list of beneficiaries identified by the Directorate. Thereafter, he discussed the "Modus Operandi" of these companies and held that the total sale consideration earned by the assessee is to be added as unexplained cash credit as these are sale of bogus shares. 3. The Modus Operandi listed out by the AO is summarized as follows: i. The initial allotment of shares to beneficiaries is generally done through preferential allotment. ii. The market price of shares of these companies rise to very high level within a span of one year. iii. The trading volume of shares during the period, in which manipulations are done to raise the market price, is extremely thin. iv. Most of the purported investors are returned their initial investment amount in cash. Only small amount is retained by the operator as security. Thus, an enquiry would reveal that most of the capital recei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... report of the investigating wing rejectedthe claim of the assessee that she had earned capital gains on the genuine sale of shares. He held that the receipt is an unexplained cash credit and made an addition u/s. 68 of the Act. Aggrieved the assessee carried the matter on appeal. 4. The First Appellate Authority had given his decision from page 41 of his order. His findings are summarized as follows: a) The AO had placed on record the entire gamut of finding and there is no further requirement for elaboration. b) There is direct evidence to clearly indicate that the entire transaction undertaken by the assesseewas merely an accommodation taken for the purpose of bogus longterm capital gains to claim exempt income. The authorities such as SEBI have after investigating such abnormal price increase of certain stocks, suspended certain scrips. c) The submissions of the assessee pointed out elaborate documentation such as: i) Application of shares. ii) Allotment of shares. iii) Share Certificates iv) Payment by cheques v) Filings before Registrar of Companies. vi) Proof of amalgamation of companies. vii) Copies of bank statement, viii) Bank contract notes. ix) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... man behavior and the theory of preponderance of probabilities. 7. On the findings of the Assessing Officer as well as Ld. CIT(A), he submitted as follows: a. As regards the allegation in respect of artificial rigging up of the price of shares, it is submitted that the ld. A.O. did not provide any documentary evidence of a live link and direct relation to such alleged rigging of prices with the assessee. Hence, no adverse inference could be drawn against the assessee in this regard. b. That the sale transactions in question had taken place in the stock exchange electronically, through a registered broker SKP Stock Broking Pvt. Ltd. (now Rely bulls Stock Broking Pvt. Ltd.). All such activity of purchase and sale on the platform of the stock exchange are logged in, on real time basis. It is not possible to sell / purchase the shares of any company on the stock exchange in variance to the prevailing market price at any point of time. Hence, the assessee cannot be, nor is supposed to be aware of and know the identity of the persons, who have sold the shares at the time of purchase of the shares by the assessee and purchaser of the shares at the time of sale of the said shares by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... being used as a vague and convenient medium for the department's conjectures. Blaming the assessee by vague observations and drawing an adverse inference without any admissible evidence on record, is bad in law, illegal, invalid and void-ab-initio. h. It is further submitted that investment in a company with weak fundamentals can be for several reasons such as professional advice, reasonable price per share, a foreseeable turnaround, past pricing and volume patterns and just market rumour about phenomenal movement in share price of a particular scrip. Moreover, the mere fact that the shares were sold at a high price cannot be termed as conclusive proof or a ground for an allegation that the assessee has converted some unaccounted money through accommodation entries as alleged by the A.O. in the assessment order. i. The Ld. A.O. in the assessment order relied upon the purported statements of various alleged operators on the basis of which the Ld. A.O. had drawn adverse inference in the instant case. It is worthy to note that nowhere any of them has ever named the assessee in the alleged manipulation. Further, the Ld. A.O. did not provide any opportunity to cross examine the sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has produced all the evidences required to prove his claim, the same cannot be accepted as these are organized and managed transactions. He took this bench through the modus operandi mentioned by the AO and submitted that in all cases where the shares of these companies are purchased and sold, additions have to be made, irrespective of the evidence produced as there are cases where manipulation has taken place. He reiterated each and every observation and finding of the ld. AO as well as the Ld. CIT(A) and prayed that the same be upheld. 10. After careful consideration of the rival submissions, perusal of the papers on record and order of the lowers authorities below, as well as case law cited, we hold as follows. 11. The assessee in this case has stated the following facts and produced the following documents as evidences: 1. The assessee had made an application for allotment of 50000 equity shares of "Smart champs IT and Infra Ltd." and she was allotted the share on 3rd December 2011 (copy of Application form, intimation of allotment and share certificate Paper Book at page 8 to 10). 2. The payment for the allotment of shares was made through an account payee cheque (co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns which his exempt from income tax. All these observations are general in nature and are applied across the board to all the 60,000 or more assessees who fall in this category. Specific evidences produced by the assessee are not controverted by the revenue authorities. No evidence collected from third parties is confronted to the assesses. No opportunity of cross-examination of persons, on whose statements the revenue relies to make the addition, is provided to the assessee. The addition is made based on a report from the investigation wing. 13. The issue for consideration before us is whether, in such cases, the legal evidence produced by the assessee has to guide our decision in the matter or the general observations based on statements, probabilities, human behavior and discovery of the modus operandi adopted in earning alleged bogus LTCG and STCG, that have surfaced during investigations,should guide the authorities in arriving at a conclusion as to whether the claim in genuine or not. An alleged scam might have taken place on LTCG etc. But it has to be established in each case, by the party alleging so, that this assessee in quesitonwas part of this scam. The chain of eve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and correctness of the documentary evidences produced, the same cannot be rejected by the assessee. The Hon'ble Supreme Court in the case of Omar Salav Mohamed Sait reported in (1959) 37 ITR 151 (S C) had held that no addition can be made on the basis of surmises, suspicion and conjectures. In the case of CIT(Central), Kolkata vs. Daulat Ram Rawatmull reported in 87 ITR 349, the Hon'ble Supreme Court held that, the onus to prove that the apparent is not the real is on the party who claims it to be so. The burden of proving a transaction to be bogus has to be strictly discharged by adducing legal evidences, which would directly prove the fact of bogusness or establish circumstance unerringly and reasonably raising an interference to that effect. The Hon'ble Supreme Court in the case of Umacharan Shah & Bros. Vs. CIT 37 ITR 271 held that suspicion however strong, cannot take the place of evidence. In this connection we refer to the general view on the topic of conveyance of immovable properties. The rates/sale price are at variance with the circle rates fixed by the Registration authorities of the Government in most cases and the general impression is that cash would ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 17. The Hon'ble Supreme Court way back in the case of Lalchand Bhagat Ambica Ram vs. CIT [1959] 37 ITR 288 (SC) held that assessment could not be based on background of suspicion and in absence of any evidence to support the same. The Hon'ble Court held: "Adverting to the various probabilities which weighed with the Income-tax Officer we may observe that the notoriety for smuggling food grains and other commodities to Bengal by country boats acquired by Sahibgunj and the notoriety achieved by Dhulian as a great receiving centre for such commodities were merely a background of suspicion and the appellant could not be tarred with the same brush as every arhatdar and grain merchant who might have been indulging in smuggling operations, without an iota of evidence in that behalf. The cancellation of the food grain licence at Nawgachia and the prosecution of the appellant under the Defence of India Rules was also of no consequence inasmuch as the appellant was acquitted of the offence with which it had been charged and its licence also was restored. The mere possibility of the appellant earning considerable amounts in the year under consideration was a pure conjecture on the part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Courts of law.That cross-examination is one part of the principles of natural justice has been laid down in the following judgments: a) AyaaubkhanNoorkhan Pathan vs. The State of Maharashtra and Ors. "23. A Constitution Bench of this Court in State of M.P.v. Chintaman Sadashiva Vaishampayan AIR 1961 SC1623, held that the rules of natural justice, require that a party must be given the opportunity to adduce all relevant evidence upon which he relies, and further that, the evidence of the opposite party should be taken in his presence, and that he should be given the opportunity of cross-examining the witnesses examined by that party. Not providing the said opportunity to cross-examine witnesses, would violate the principles of natural justice. (See also: Union of India v. T.R. Varma, AIR 1957 SC 882; Meenglas TeaEstate v. Workmen, AIR 1963 SC 1719; M/s. KesoramCotton Mills Ltd. v. Gangadhar and Ors.,AIR 1964 SC708; New India Assurance Co. Ltd. v. Nusli Neville Wadia and Anr. AIR 2008 SC 876; Rachpal Singh and Ors. v. Gurmit Singh and Ors. AIR 2009 SC 2448;Biecco Lawrie and Anr. v. State of West Bengal and Anr. AIR 2010 SC 142; and State of Uttar Pradesh v.Saroj Kumar Si ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e exercised its jurisdiction of judicial review. 30. The aforesaid discussion makes it evident that, not only should the opportunity of cross-examination be made available, but it should be one of effective cross-examination, so as to meet the requirement of the principles of natural justice. In the absence of such an opportunity, it cannot be held that the matter has been decided in accordance with law, as cross-examination is an integral part and parcel of the principles of natural justice." b) Andaman Timber Industries vs. Commissioner of C. Ex., Kolkata-II wherein it was held that: "4. We have heard Mr. Kavin Gulati, learned senior counsel appearing for the Assessee, and Mr. K.Radhakrishnan, learned senior counsel who appeared for the Revenue. 5. According to us, not allowing the Assessee to cross-examine the witnesses by the Adjudicating Authority though the statements of those witnesses were made the basis of the impugned order is a serious flaw which makes the order nullity inasmuch as it amounted to violation of principles of natural justice because of which the Assessee was adversely affected. It is to be borne in mind that the order of the Commissioner was based u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ice." 19. On similar facts where the revenue has alleged that the assessee has declared bogus LTCG, it was held as follows: a) The CALCUTTAHIGH COURT in the case of BLB CABLES &CONDUCTORS[ITA No. 78 of2017] dated19.06.2018. The High Court held vide Para 4.1: "............we find that all the transactions through the broker were duly recorded in the books of the assessee. The broker has also declared in its books of accounts and offered for taxation. In our view to hold a transaction as bogus, there has to be some concrete evidence where the transactions cannot be proved with the supportive evidence. Here in the case the transactions of the commodity exchanged have not only been explained but also substantiated from the confirmation of the party. Both the parties are confirming the transactions which have been duly supported with the books of accounts and bank transactions. The ld. AR has also submitted the board resolution for the trading of commodity transaction. The broker was expelled from the commodity exchange cannot be the criteria to hold the transaction as bogus. In view of above, we reverse the order of the lower authorities and allow the common grounds of assessee's ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment proceedings. The CIT (Appeals) nevertheless considered them in detail and found that there was no co-relation between the amounts sought to be added and the entries in those documents. This was on an appreciation of facts. There is nothing to indicate that the same was perverse or irrational. Accordingly, no question of law arises." d) The BENCH "D"OF KOLKATAITAT in the case of GAUTAM PINCHA[ITA No.569/Kol/2017]order dated 15.11.2017 held as under vide Page 12 Para 8.1: "In the light of the documents stated i.e. (I to xiv) in Para 6(supra) we find that there is absolutely no adverse material to implicate the assessee to have entered gamut of unfounded/unwarranted allegations leveled by the AO against the assessee, which in our considered opinion has no legs to stand and therefore has to fall. We take note that the ld. DR could not controvert the facts supported with material evidences which are on record and could only rely on the orders of the AO/CIT (A). We note that in the absence of material/evidence the allegations that the assessee/brokers got involved in price rigging/manipulation of shares must therefore also fail. At the cost of repetition, we note that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evidences were found by the AO nor by the ld. CIT(A) to be false or fictitious or bogus. The facts of the case and the evidence in support of the evidence clearly support the claim of the assessee that the transactions of the assessee were genuine and the authorities below was not justified in rejecting the claim of the assessee exempted u/s 10(38) of the Act on the basis of suspicion, surmises and conjectures. It is to be kept in mind that suspicion how so ever strong, cannot partake the character of legal evidence. It further held as follows: "We note that the ld. AR cited plethora of the case laws to bolster his claim which are not being repeated again since it has already been incorporated in the submissions of the ld. AR (supra) and have been duly considered to arrive at our conclusion. The ld. DR could not bring to our notice any case laws to support the impugned decision of the ld. CIT(A)/AO. In the aforesaid facts and circumstances of the case, we hold that the ld. CIT(A) was not justified in upholding the addition of sale proceeds of the shares as undisclosed income of the assessee u/s 68 of the Act. We therefore direct the AO to delete the addition." f) The BENCH " ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iwal and Co. never stated any of the authority that transactions in M/s RamkrishnaFincap Pvt. Ltd. On the floor of the stock exchange are ingenuine or mere accommodation entries. The CIT (A) after relying on the various decision of the coordinate bench, wherein on similar facts and circumstances, issue was decided in favour of the assessee, came to the conclusion that transaction entered by the assessee was genuine. Detailed finding recorded by CIT (A) at para 3 to 5 has not been controverted by the department by bringing any positive material on record. Accordingly, we do not find any reason to interfere in the findings of CIT (A)." h)The Hon'ble Punjab and Haryana High Court inthe case ofVIVEK MEHTA[ITA No. 894 OF2010] order dated 14.11.2011 vide Page 2 Para 3 held as under: "On the basis of the documents produced by the assessee in appeal, the Commissioner of Income Tax (Appeal) recorded a finding of fact that there was a genuine transaction of purchase of shares by the assessee on 16.3.2001 and sale thereof on 21.3.2002. The transactions of sale and purchase were as per the valuation prevalent in the Stocks Exchange. Such finding of fact has been recorded on the basis of ev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the addition in question." 9. I note that in order to create a tax liability in a case of this nature, the AO has to prove and establish the cash trail and the allegations, particularly in respect of the appellant, which is yet to be proved in the instant case. Similar view has been pronounced by Hon'ble Delhi High Court in the case of Pr. CIT vs Jatin Investment (P) Ltd. wherein it was observed "A transaction cannot be treated as fraudulent if the appellant has furnished the documentary proof and proved the identity of the purchaser and no discrepancy is found. The AO has to exercise his powers u/s 131 & 133(6) of the Act to verify the genuineness of the claim and cannot proceed on surmises. The AO must establish that cash has changed hands. There is no material or evidence even to suggest that the cheques directly or indirectly emanated from the appellant so that it could be said that the appellants' own money was brought back in the guise of sale proceeds''. 10. In the case of CIT vs. Lavanya Land Pvt Ltd. the Hon'ble Bombay High Court ruled that the allegations made by the authorities have to be supported by actual cash passing hands or actually has changed hands. 11. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irst book is running in pages no. 1 to 88 and 2nd paper book is running in pages 1 to 34. Before us the ld. AR submitted that the order of the AO is silent about the date from which the broker was expelled. There is no law that the off market transactions should be informed to stock exchange. All the transactions are duly recorded in the accounts of both the parties and supported with the account payee cheques. The ld. AR has also submitted the IT return, ledger copy, letter to AO land PAN of the broker in support of his claim which is placed at pages 72 to 75 of the paper book. The ld. AR produced the purchase & sale contracts notes which are placed on pages 28 to 69 of the paper book. The purchase and sales registers were also submitted in the form of the paper book which is placed at pages 76 to 87. The Board resolution passed by the company for the transactions in commodity was placed at page 88 of the paper book. On the other hand the ld. DR relied in the order of the lower authorities. 4.1 From the aforesaid discussion we find that the assessee has incurred losses from the off market commodity transactions and the AO held such loss as bogus and inadmissible in the eyes of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... leged penny stocks. The Tribunal found that the AO disallowed the loss on trading of penny stock on the basis of some information received by him. However, it was also found that the AO did not doubt the genuineness of the documents submitted by the assessee. The Tribunal held that the AO's conclusions are merely based on the information received by him. The appeal filed by the revenue was dismissed. vi) CIT V. Andaman Timbers Industries Limited [ITA No. 721 of 2008] (Cal HC) - In this case the Hon'ble Calcutta High Court affirmed the decision of this Tribunal wherein the loss suffered by the Assessee was allowed since the AO failed to bring on record any evidence to suggest that the sale of shares by the Assessee were not genuine. vii) CIT V. Bhagwati Prasad Agarwal [2009- TMI-34738 (Cal HC) in ITA No. 22 of 2009 dated 29.4.2009] - In this case the Assessee claimed exemption of income from Long Term Capital Gains. However, the AO, based on the information received by him from Calcutta Stock Exchange found that the transactions were not recorded thereat. He therefore held that the transactions were bogus. The Hon'ble Jurisdictional High Court, affirmed the decision of the Tri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sh Kumar Baid ITA 1236/Kol/2017 (Kolkata ITAT) (xix) Mahendra Kumar Baid ITA 1237/Kol/2017 (Kolkata ITAT) 15. The ld AR also brought to my notice that once the assessee has furnished all evidences in support of the genuineness of the transactions, the onus to disprove the same is on revenue. He referred to the judgement of Hon'ble Supreme Court in the case of Krishnanand Agnihotri vs. The State of Madhya Pradesh [1977] 1 SCC 816 (SC). In this case the Hon'ble Apex Court held that the burden of showing that a particular transaction is benami and the appellant owner is not the real owner always rests on the person asserting it to be so and the burden has to be strictly discharged by adducing evidence of a definite character which would directly prove the fact of benami or establish circumstances unerringly and reasonably raising inference of that fact. The Hon'ble Apex Court further held that it is not enough to show circumstances which might create suspicion because the court cannot decide on the basis of suspicion. It has to act on legal grounds established by evidence. The ld AR submitted that similar view has been taken in the following judgments while deciding the issue relat ..... X X X X Extracts X X X X X X X X Extracts X X X X
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