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TMI Blog2021 (12) TMI 1127X X X X Extracts X X X X X X X X Extracts X X X X ..... stulates that there must be a direct nexus or live link between the material coming to the notice of the Income-tax Officer and the formation of his belief that there has been escapement of the income of the assessee from assessment in the particular year. It is no doubt true that the court cannot go into the sufficiency or adequacy of the material and substitute its own opinion for that of the Income-tax Officer on the point as to whether action should be initiated for reopening assessment. The reason for the formation of the belief must be held in good faith and should not be a mere pretence. From our above analysis of reasons recorded in the assessee`s case under consideration, we note that the reasons recorded by the assessing officer falls in the zone of reason to suspect and not reason to believe , therefore we quash the reassessment proceedings. - Decided in favour of assessee. Addition u/s 68 - Bogus share transactions - penny stock purchases - HELD THAT:- We find that there is absolutely no adverse material to implicate the assessee to the entire gamut of unfounded/unwarranted allegations leveled by the AO against the assessee, which in our considered opinion has no legs t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the facts and circumstances of the case as well as law on the subject the learned assessing officer had erred in reopening the assessment u/s 147 by issuing notice u/s 148 of the I.T.Act, 1961. 2. On the facts and circumstances of the case as well as law on the subject, the learned Commissioner of income Tax (Appeals) has erred in confirming the action of the assessing officer in disallowing the exemption of ₹ 17,56,592/- claimed by assessee u/s 10(38) on account of Long Term Capital Gain and treating it as the accommodation entry and thereby making addition u/s 68 of the Act. 3. On the facts and circumstances of the case as well as law on the subject, the learned Commissioner of income Tax (Appeals) has erred in confirming the action of the Assessing Officer in making addition of ₹ 87,290/- on account of unexplained expenditure u/s 69C of the Act for commission payment for procuring the alleged accommodation entry." 4. Brief facts of the issue in dispute are stated as under. Assessee is an individual and his assessment was reopened under section 147/148 of the Act. The assessing officer received information from Investigation Wing of Kolkata, which had carried o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ers and the buyers and sellers of the scripts worked in tandem to achieve the predetermined objectives. Therefore, the claim of LTCG u/s 10(38) was denied by the assessing officer, and the amount of ₹ 17,56,592/- was added to the total income u/s 68 of the Act. 6. The assessing officer also observed that it was established by the Investigation Directorate, Kolkata that for getting accommodation entries for bogus LTCG, a commission of approximately 5% was given to the entry providers by the assessee. Therefore, a sum of ₹ 87,290/-( being 5% of ₹ 17,45,592/- claimed as LTCG), was disallowed u/s 69C of the Act as unexplained expenditure. 7. Aggrieved by the order passed by the Assessing Officer, the assessee carried the matter in appeal before Ld. CIT(A) who has confirmed the action of the Assessing Officer. Aggrieved by the order of Ld. CIT(A) the assessee is in appeal before us. 8. We note that assessee did not raise objections against the reasons recorded u/s 147 of the Act in the course of assessment proceedings. Further, the ground regarding the validity of assessment was not raised before Ld CIT(A) on the contrary same raised before the Tribunal in Form 36 f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 592/- on which STT has been paid which is claimed as exempt. This is one such case wherein the assessee has claimed that the Long Term Capital Gain amounting to ₹ 17,56,592/- arising out of sale of shares is exempt and the scrip name being Global Securities Ltd. Which is one of the companies utilized by Anand Rathi Share and Stock Brokers Ltd for providing bogus accommodation entries. The said fact was duly accepted before the Investigation Authorities, Kolkata Wing in the statement taken on oath u/s 131 of the I.T. Act. Of Shri Sanjay Vora, Regional Directsor, East Zone of M/s Anand Rathi Shares and Stock Brokers Ltd., during the course of Survey Operation u/s 133A of the Act. In view of the above facts, I have reason to believe that income to the extent of ₹ 17,56,592/- has escaped assessment for A.Y 2013-14 by reason of failure on the part of the assessee to disclose fully and truly all material facts necessary in the return of income. Hence, notice u/s 148 r/w/s/ 147 of the Income Tax Act, 1961 is to be issued for the assessment year 2013-14." 10. Learned Counsel for the assessee invited our attention to the order dated 07.01.2021, passed by the Division Bench ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wherein it was established that in large number of penny stock companies share prices were artificially raised/manipulated on the Stock Exchanges in order to book bogus claims of Long Term Capital Gain / Loss. The Information as per EFS / ITS data / penny stock reflects that the assessee has shown Long Term Capital Gain of ₹ 20,76,924/- on which STT has been paid which is claimed as exempt. This is one such case wherein the assessee has claimed that the Long Term Capital Gain amounting to ₹ 20,76,924/- arising out of sale of shares is exempt and the scrip name being Global Securities Ltd. which is one of the companies utilized by Anand Rathi Share and Stock Brokers Ltd. for providing bogus accommodation entries. This fact was duly accepted before the Investigation Authorities, Kolkata Wing in the statement taken on oath u/s.131 of the I.T.Act of Shri Sanjay Vora, Regional Director, East Zone of M/s.Anand Rathi Shares and Stock Brokers Ltd during the course of Survey Operation u/s.133A of the Act. In view of the proceedings conducted by the Investigation Wing, Kolkata and after perusal of the information received from the Investigation wing, Kolkata as well as availa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tatement taken on oath u/s.131 of the I.T.Act of Shri Sanjay Vora, Regional Director, East Zone of M/s.AnandRathi Shares and Stock Brokers Ltd during the course of Survey Operation u/s.133A of the Act." The statement taken on oath u/s.131 of the I.T.Act of Shri Sanjay Vora, Regional Director, East Zone of M/s.Anand Rathi Shares and Stock Brokers Ltd during the course of Survey Operation u/s.133A of the Act, does not contain the name of the assessee. The said statement does not relate to broker of assessee, moreover, the assessee did not sell shares through M/s Anand Rathi Share & Brokers but through Arcadia Share and Brokers Pvt. Ltd. Therefore, the said "reasons recorded" by the assessing officer are not directly related to the assessee under consideration. 22. We reproduce fourth para of the 'reasons recorded' for our convenience and analysis, as follows: "In view of the proceedings conducted by the Investigation Wing, Kolkata and after perusal of the information received from the Investigation wing, Kolkata as well as available data, I have reason to believe that income to the extent of ₹ 20,76,924/- has escaped assessment for A.Y. 2013-14 by reason of failure on the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or starting proceedings in the assessee`s case on which any belief could be founded of the nature contemplated by section 147 of the Act. Hence, the requirements of section 147 of the Act were not satisfied and, therefore, the reasons recorded by the assessing officer are not valid, for this reliance can be placed on the judgment of the Hon`ble Supreme Court in the case of Sheo Nath Singh Vs. ACIT, 82 ITR 147(SC) wherein it was held as follows: "All that have been found in the records are reports in Form "B" made in connection with starting of proceedings under section 34(1A), each report relating to a different assessment year. Items (7) and (8) of this Form relate to brief reasons for starting proceedings and whether the Central Board of Revenue was satisfied that it was a fit case for issue of notice. Against item (7) it is stated "reasons as per separate sheet attached". Against item (8), the Secretary of the Central Board of Revenue signed after writing "yes, satisfied". The reasons for starting the proceedings given in the separate sheet may be fully reproduced. "For the reasons hereinafter recorded I believe that income, profits and gai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the transactions were bogus. It was held that from the report submitted by the Income-tax Officer to the Commissioner it was clear that he could not have had reasons to believe that on account of the assessee's omission to disclose fully and truly all material facts, income chargeable to tax had escaped assessment. In our judgment, the law laid down by this court in the above case is fully applicable to the facts of the present case. There can be no manner of doubt that the words "reason to believe" suggest that the belief must be that of an honest and reasonable person based upon reasonable grounds and that the Income-tax Officer may act on direct or circumstantial evidence but not on mere suspicion, gossip or rumour. The Income-tax Officer would be acting without jurisdiction if the reason for his belief that the conditions are satisfied does not exist or is not material or relevant to the belief required by the section. The court can always examine this aspect though the declaration or sufficiency of the reasons for the belief cannot be investigated by the court. There is no material or fact which has been stated in the reasons for starting proceedings in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... broker - Guinness Securities Limited was WW/2647, modified client code was found to be WW/2108 and therefore, to verify the genuineness of the modification of the client code, by applying Lavenshtein Distance Analysis or digit edit analysis utility, distance was found to be 3 and therefore, it is believed that the code is not wrongly typed and it is termed as deliberate change and establishing non-genuineness and contrived nature of the code change. From the reasons recorded, it does not appear that verification of the material on record there is independent formation of opinion by the A.O. and that any income has escaped assessment due to any failure on the part of the assessee in not disclosing truly and correct facts/material necessary for assessment. From the reasons recorded, it appears that the impugned reopening proceedings are on the borrowed satisfaction. No independent opinion is formed. On the plain reading of the reasons recorded what emerges is that the A.O. on considering the information received from the Principal Director of Income Tax (Investigation), Ahmedabad, reassessment proceedings have been initiated on the ground that the income escaped assessment. However, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t nexus or live link between the material coming to the notice of the Income-tax Officer and the formation of his belief that there has been escapement of the income of the assessee from assessment in the particular year. It is no doubt true that the court cannot go into the sufficiency or adequacy of the material and substitute its own opinion for that of the Income-tax Officer on the point as to whether action should be initiated for reopening assessment. The reason for the formation of the belief must be held in good faith and should not be a mere pretence. From our above analysis of reasons recorded in the assessee`s case under consideration, we note that the reasons recorded by the assessing officer falls in the zone of "reason to suspect" and not "reason to believe", therefore we quash the reassessment proceedings. As the reassessment itself is quashed, all other issues on merits of the additions, in the impugned assessment proceedings, are rendered academic and infructuous. 27. Before parting, we would like to mention that sanction for issue of notice under section 151 is in accordance with law, as the JCIT has gone through the facts and then approved i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at entry in form of bogus Long Term Capital Gain (LTCG) through sale of penny stock claimed as exempt u/s 10(38) of the Act was pre-arranged method adopted by the assessees to evade capital gain taxation. In the present case, the assessee has purchased 35,500 shares of M/s Sun and Shine Worldwide Ltd, on 30.10.2012 for ₹ 19,525/- . The said 35,500 shares sold between February, 2014 to March, 2014 at rates between ₹ 22.90/- and ₹ 25.25/- for a total consideration of ₹ 33,15,263/-. The Assessing Officer has discussed and explained the modus operendi in his assessment order in detail. The assessing officer, after duly considered the submissions of the assessee, had observed that: (i) the assessee was not in a position to give any satisfactory explanation regarding physical delivery of shares and transaction slips of transfer of shares either at the time of assessment proceedings or during the course of appellate proceedings. (ii) Financial health of M/s Sun and Shine Worldwide Ltd, did not improve to an extent to have spiraled the price of shares many times within a short span of time and, (iii) the findings of the investigation wing, where the entry oper ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing documentary evidence and it is clearly proved that it was an entry of bogus long term capital gain by paying unaccounted income. Therefore, ld DR prays the Bench that order passed by the assessing officer may be upheld. 20. We have heard both the parties and carefully gone through the submission put forth on behalf of the assessee along with the documents furnished and the case laws relied upon, and perused the fact of the case including the findings of the ld CIT(A) and other materials brought on record. We note that assessee purchased 35,500 shares of Sun & Shine Worldwide Ltd at ₹ 0.557- per share on 30.10.2012 from Corporate Commodity Brokers Pvt Ltd. The transaction is supported by the debit note receipt, delivery challan and share certificate duly transferred in assessee's name on 30.10.2012. Thereafter, the shares were sold on various dates for ₹ 33,11,404/- in February vide four contract notes. The average rate comes to ₹ 937- per share [₹ 33,11,404/ 35,500]. The assessee claimed Long Term Capital Gain of ₹ 33,15,263/- as exempt u/s 10(38) of the Act. The shares were sold through the broker Jainam Shara Consultancy Pvt Ltd and assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e share certificate being registered on 30.10.2012. Regarding the escalation of prices of shares of M/s. Sun & Shine Worldwide Ltd., that is, the prices have increased by 140 times over the period of 17 months. At this juncture, it is submitted by ld Counsel that prices of shares are determined by the market forces and not solely on the basis of financial statements. 24. We also note that Assessing officer and CIT(A) has relied on the case of Sumati Dayal vs. CIT (214 ITR 801) (SC). We are of the view that said decision is not applicable to the assessee under consideration, as the assessee has successfully demonstrated with help of evidences on record to have made the transaction of purchase and sale of alleged shares. No single material was brought on record indicating name of any of the entry provider taking assessee's name or assessee's broker name. We note that assessee has submitted enough evidences such as: (a) Ledger Account of Jainam Share Consultancy Securities Pvt. Ltd,(b) Contract Notes of Jainam Share Consultancy Securities Pvt. Ltd, (c ) Relevant Bank Statement showing that all transactions were through banking channel. (d) Contra confirmation of broker M/s Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . We take note that ld. DR could not controvert the facts which are supported with material evidences furnished by the assessee. We note that the allegations that the assessee/brokers got involved in price rigging/manipulation of shares must therefore consequently fail. At the cost of repetition, we note that the assessee had furnished all relevant evidences in the form of bills, contract notes, demat statement and bank account to prove the genuineness of the transactions relevant to the purchase and sale of shares resulting in long term capital gain. Neither these 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 evidences 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. In the aforesaid facts and circumstance, for allowing the appeal we rely on the decision of the Hon'ble Calcutta High Court in the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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