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TMI Blog2020 (3) TMI 1169X X X X Extracts X X X X X X X X Extracts X X X X ..... - - - Dated:- 5-3-2020 - Shri Sandeep Gosain, Judicial Member And Shri Amarjit Singh, Accountant Member For the Appellant : None For the Respondent : Shri R.A. Dhyani, Addl.CIT ORDER PER SHRI SANDEEP GOSAIN, JUDICIAL MEMBER : The captioned appeal has been filed at the instance of the Assessee against the order of the Commissioner of Income Tax (Appeals) 5, Ahmedabad [CIT(A) in short] vide appeal no.CIT(A)- 5/ITO.Wd.5(2)(1)/262/2016-17 dated 12/03/2018 arising in the assessment order passed under s.143(3) of the Income Tax Act, 1961(hereinafter referred to as the Act ) dated 26/12/2016 relevant to Assessment Year (AY) 2014-15. 2. The assessee has raised the following grounds of appeal:- 1. The learned Commissioner of Income Tax (Appeals) has erred in confirming the addition of ₹ 15,06,889/- made by the Assessing Officer treating the Long term capital gain on sale of shares of Alang Gases Ltd. including cost thereof as alleged Unexplained cash credits u/s.68 of the I.T. Act, 1961 and thereby erred in disallowing exemptions claimed by the Appellant u/s.l0(38) of the I.T. Act, 1961. 2. The learned Commissioner of Income Tax (Appeals) has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the order of the ld.CIT(A), now the Assessee is in appeal before us on the grounds mentioned hereinabove. Although assessee has raised four grounds but all the four grounds raised by the assessee are interconnected, inter-related and relates to challenging the order of Ld.CIT(A) in confirming the addition made by the Assessing Officer on account of unexplained cash credits u/s.68 of the Act. 6. We have heard the Ld.DR and perused the material placed on record as well as the orders passed by the revenue authorities. In the instant case, we find that during the course of assessment proceedings, the assessee was asked to explain the impugned cash credits but even in spite of availing numerous opportunities, the assessee could not explain the impugned cash credit. Thus, additions were made by the Assessing Officer. After considering the submissions as well as the facts of the present case, we find that the CIT(A) has decided these issues in paragraph No. 4 of his order. However, operative portion is contained in paragraph Nos.4.3 to 4.11 which are reproduced hereunder: Decision: 4.3. I have carefully considered the Assessment Order and submission filed by the Appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on a stock exchange like BSE and has very low market Capitalization and are traded at a very low price. More often Entry giving Penny Operator companies do not do any real business activity. The unique feature of Entry giving penny stock company is tremendous jump and slump in the share prices in a short span of time. In fact in a typical technical analysis one may find that the fluctuation in share prices of entry giving company runs into thousands of percentage. Once the person A' having unaccounted income contacts the person 'E'(Entry Operator) the person 'E' gives person 'A' to invest certain amount in a company at a very low price. This purchase may happen through either stock exchange or preferential allotment wherein shares of 'P' (an entry giving penny stock company) will be bought by 'A'. It may also happen that 'E' will ask A' to buy shares of some other private limited company which will be subsequently merged with company 'P' and by virtue of this merger the shares of 'P' will automatically come to 'A'. Once the shares of 'P' will get credited to account of 'A' then the Entr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ual purchase has not happened. As companies are also involved in such transactions, back dated letter is given to assessee for allotment of shares and transfer of physical shares one year prior to sale of shares but in fact no such act has been carried out. These activities are carried out only at the time of Dematerialization of shares meaning thereby assessee is given physical shares when assessee gives such shares for Dematerialization but papers are artificially created such that shares were purchased by assessee one year prior to Dematerialization and shares were held by him. By adopting these various methods, assessee obtains bogus long term capital. 4.7. It can be seen from financial data of the company which is available at public domain; no prudent person will invest in such companies. When there are large number of fundamental companies are available in the market, why appellant has chosen to invest in these types of shares clearly prove that appellant wishes to obtain exempt capital gain by obtaining accommodative entries. It is an established law that Income Tax proceedings fall in the domain of preponderance of probabilities, meaning that the action of assessee is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss. 4.10. With regard to observation of Appellant that entire transactions are supported by various documentary evidences, it is observed that shares in which Appellant has carried out transaction is penny stock, brokers have also confirmed that there are manipulative transactions in above scrip which is further supported by SEBI Order relied by AO, entire circumstantial evidences clearly suggest that Appellant has obtained accommodation entries. This issue and modus operandi in similar transaction is discussed by Mumbai ITAT in the case of ITO vs Shamim Bharwani 69 taxmann.com 65 as under: 4.1 As shall be evident from the foregoing narration of events, the primary facts (and figures) of the case are not in dispute, which (dispute) arises principally on account of the different inferences drawn from the same set of primary facts by the two Revenue authorities. The issue is, thus, essentially factual, revolving or centering around as to which of the two inferential findings are maintainable in law, i.e., in view of the surrounding facts and circumstances of the case. The Revenue's principal and the only charge is qua the genuineness of the transaction/s, and which has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 007] 291 ITR 278/161 Taxman 169 (SC) We may further clarify that in proceeding with the matter, we have circumscribed the entire material on record. 4.2 The assessee, to begin with, has nowhere explained as why the shares were purchased in cash, the source of which is ascribed to cash-in-hand, and not to any contemporaneous evidence, as cash withdrawn from bank on that or nearby dates. How was the cash, one may ask, transmitted from Mumbai, where the assessee is resident, to Kolkata, where the purchase stands made, and the broker, to whom it is paid, located? 4.3 Then, again, why was the transaction not carried through a recognized stock exchange (SE), mandatory in law, even as it was done through its registered member. This becomes relevant and significant for more than one reason. Firstly, it proves the time of the transaction, which is of essence inasmuch as it determines the holding period of the shares/asset, with reference to which, where over 12 months, exemption from tax to gains arising on transfer is granted by law per s.l0(38) read with other relevant defining provisions of the Act. The first appellate authority has in this regard mentioned the settle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns' and 'losses' in which the brokers, as operators, play a significant role, cannot therefore be decided with reference thereto or the statement by the broker, a related party. This, however, would be so only where there are strong factors or circumstances which cause serious doubt about the transaction. For example, how one may ask, were the shares transmitted to the assessee, located at Mumbai, who would have signed the transfer form? The broker or the assessee nowhere states the reason for carrying out the transaction in the manner done, i.e., off the market, which is not ordinarily permissible, and is subject to some legal constraints under Securities Contracts (Regulation) Act, 1956. Rather, how could he deal with the assessee, who is not his client! Then, again, why was it paid for in cash, for which there is no evidence, and neither has the broker been shown to accept cash in the ordinary course of his business. Why, for the persons trading therein, this would be an impediment to claim the cost of shares traded in, in view of the non obstante clause of s. 40A(3). The brokers are in fact required to maintain separate bank account for the funds received ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny eyebrow or doubt. The purchase gets doubted examined only for the reason that it represents a part of the overall transaction, which is considered by the Revenue as an artifice. In other words, proving the purchase would by itself not prove the transaction of gain, which stands impugned and, further, being at a minor sum has little bearing in the matter. In fact, the A.O. states precisely this (refer para 4.9(a) of his order), that even assuming the purchase as genuine, the sales, given the high rates for such penny stocks, with no real buyers, are bogus. Coming to the assessee's contention on merits, the letter dated 17.05.2004 supra inspires little confidence. It does not specify the name of the authorized signatory, the sign being otherwise not visible. It bears no serial number, even as it represents a communication, which a company or its secretarial department is required to make in the regular course of its business. It further does not bear any indication of the manner in which it is conveyed to the assessee, i.e., by hand, per post -ordinary or registered; per courier, etc., which is, again, a norm, besides establishing its date. Such remittances are generally throu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cting prices on the SE. Who, one may ask, are the purchasers of such shares, i.e., in a nondescript company at such high prices; no information qua which stands furnished at any stage, even as it is they who have apparently bought the shares, supplying the credit to the assessee, which is being questioned and examined as to its genuineness u/s. 68 of the Act. All this definitely casts serious doubts on the genuineness of the sale price and, thus, the ensuing gain. This, in fact, is a classical feature of a penny stock, the price zooming for no apparent, economic or even technical, reasons. One could understand where the same is in sympathy with the market sentiment or some industry-wise favorable development, even as the share ostensibly trades, i.e., going by the market quote, at over 22 times its price obtaining two months earlier, implying, by correspondence, a jump in the market index to the same or similar extent, i.e., 2200%, over the same period, which is both unheard of - work as it does to, a growth rate of 13200% p.a., and, of course, not shown. There is again no whisper and, consequently, no information on record of the particular industry/s in which, if any, the said co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stock company, Eltrol Ltd., exposing or validating the modus operandi as stated to be adopted in the case of such stocks - the price, de-hors any fundamentals or other factors, of paper companies being raked up on the Exchange, so as to yield 'gain', and then again, equally without basis, grounded to yield 'loss', both of which, i.e., 'gain' and 'loss', find ready 'customers' or 'takers'. The purpose is to evade tax or to yield some tax benefit. True, this has not been established in the present case, but the features are strikingly same, with the impugned transaction bearing the same incidents, so that odds are loaded heavily against the genuineness of the transaction. The onus to establish the same, it is to be borne in mind, is on the assessee. The Id. CIT (A) has dismissed the same as merely suspicions. We are, however, unable to, for the reasons afore-stated, persuade ourselves to agree with him, each of the several incidents and, therefore, the questions arising, that impugn the genuineness in the present case, are based on admitted and undisputed facts. The issue, as clarified at the beginning of the discussion, being the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , and as would also be apparent, is guided solely by the facts and circumstances of the instant case, including the assessee's explanation in respect thereof. The reliance on case law, the facts of none of which were gone through at the time of hearing, even as the issue is principally factual, would thus be of no assistance to the assessee's case. We may though clarify that the Revenue having invoked the provision of s. 68, the burden to prove the credit transaction/s and, thus, its genuineness is on the assessee. It is therefore not necessary or incumbent on the Revenue to, i.e., for the purpose of application of sec.68, to either disprove or exhibit the transaction as sham or bogus, and its obligation only extends to show that the genuineness of the impugned credit transaction is doubtful or has not been satisfactorily proved by the assessee. 5. In the result, the Revenue's appeal is allowed. It is also observed that in the recent decision Hon'ble Ahmedabad ITAT in the case of Pavankumar M. Sanghavi v/s ITO 81 taxmann.com 308 has held that when Assessee received unsecured loan but could not produce lenders for verification and these lenders were found ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... garb of capital gains, income from which is exempt income. This is nothing but a colorful device adopted to avoid payment of tax which is not permissible as per law, in view of the decision of the MC Dowell Co. Ltd. Vs. CTO 154 ITR 148 (SC). The Hon. Supreme Court has held that the taxing authority is entitled and is indeed bound to determine the true legal relation resulting from transaction. If the parties have chosen to conceal by a device the legal relation, it is open to the taxing authorities to unravel the device and to determine the true character of the relationship. Moreover, the Hon'ble High Court of Delhi in a recent decision in the case of Commissioner of Income Tax Vs M/s. Abhinandan Investment Ltd.,dated 19.11.2015 (ITA 130/2001) has categorically explained the principle laid down by the Supreme Court in the case of MC Dowell Co and the same is fully applicable to the facts of penny stock cases. In present case Appellant has dealt in penny stock, which is similar to shell companies for which various investigations were already carried out by Calcutta Investigation Wing and SEBI Order referred supra hence long term capital in present case is also ..... X X X X Extracts X X X X X X X X Extracts X X X X
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