2023 (9) TMI 1699 - AT - Income Tax

Denial of exemption of capital gains u/s 10(38) - Addition u/s 68 - appellant had not discharged the onus of proving the genuineness of transactions of capital gains in respect of exemption u/s 10(38)/unsecured loans - bogus transaction by relying upon the investigation report by the Investigation Wing of the Department and the Securities Exchange Board of India (SEBI) - CIT(A) deleted addition HELD THAT - In a case involving identical facts of the case the Hon ble Calcutta High Court in the case of PCIT vs. Swati Bajaj 2022 (6) TMI 670 - CALCUTTA HIGH COURT after making reference to the decisions of Manish D. Jain 2020 (12) TMI 740 - MADRAS HIGH COURT and Prabha Jain 2021 (9) TMI 1004 - MADRAS HIGH COURT had confirmed the action of the Assessing Officer by holding that the Assessing Officer had cogently brought out the factual scenario to establish machinations of fraudulent manipulative and deceptive dealings and how the stock exchanges system was misused to generate bogus LTCG. Appellant deliberately withheld the information from the Assessing Officer as well as the NFAC which is within exclusive knowledge of appellant to establish the genuineness of transactions of purchase of shares of that company/unsecured loans. It is nothing but a fraud played by the appellant against the Assessing Officer as well as the NFAC who are quasi judicial authorities employed for execution of the provisions of the Income Tax Act. Therefore the principle of fraud can be squarely applied to the facts of the present case and principles of natural justice have no application. Applying the said doctrine we have no hesitation to hold that the transaction of purchase and sale of shares of S. K. Stock Dealers Pvt. Ltd. under consideration before us is void ab-initio this is nothing but sham make believe and colourful device adopted with excellent paper work with intention bringing the undisclosed income into books of account. As in the case of PCIT vs. Indravadan Jain HUF 2023 (7) TMI 1091 - BOMBAY HIGH COURT has no application to the facts of the present case inasmuch as the decision was premised on the fact that the shares were bought on the floor of listed exchange whereas in the present case the shares were bought through private preferential allotment. The Hon ble High Court simply dismissed the appeal preferred by the Revenue without framing any question of law which in our considered opinion does not constitute any precedential value. Hon ble High Court had not invoked the theory of doctrine of fraud . Therefore the decision of the Hon ble High cannot be termed as binding precedent. Equally other decisions relied upon by the ld. Counsel have no application inasmuch as the doctrine of fraud was not invoked by the respective High Courts or the Tribunals. NFAC had failed to examine the nature of transaction the NFAC had passed order in perfunctory manner. Therefore we reverse the order passed by the NFAC and restore the assessment order. Decided in favour of assessee.

Summary

The core legal questions considered in this appeal are:

1. Whether the transactions of purchase and sale of shares of S. K. Stock Dealers Pvt. Ltd. and the related claim for exemption of long-term capital gains under section 10(38) of the Income Tax Act, 1961 are genuine or constitute bogus accommodation entries.

2. Whether the unsecured loans received from various parties amounting to Rs.5.20 crores are genuine credits or unexplained cash credits liable to be added under section 68 of the Income Tax Act.

3. The applicability of the principle that "fraud vitiates everything" and whether the transactions in question can be held void ab initio on the ground of fraud, thereby justifying the additions made by the Assessing Officer.

4. The correctness of the National Faceless Appeal Centre's (NFAC) order deleting the additions made by the Assessing Officer and directing the Assessing Officer to delete the addition under section 68.

5. The relevance and binding nature of judicial precedents cited by the parties, including the applicability of the doctrine of fraud and the principle of natural justice in the context of the present facts.

Issue-wise Detailed Analysis

Issue 1 & 2: Genuineness of Share Transactions and Unsecured Loans

The relevant legal framework involves the provisions of sections 10(38) and 68 of the Income Tax Act, 1961. Section 10(38) exempts long-term capital gains arising from transfer of equity shares, subject to genuineness of such transactions. Section 68 empowers the Assessing Officer to treat unexplained cash credits as income if the assessee fails to satisfactorily explain the nature and source of such credits.

The Assessing Officer, relying on investigation reports from the Department's Investigation Wing and SEBI, found that the appellant's transactions relating to shares of S. K. Stock Dealers Pvt. Ltd. were bogus accommodation entries. The investigation revealed that the entry providers, Shri Navneet Kumar Singhania and Shri Beni Prasad Lahoti, admitted to providing accommodation entries through paper companies, including the company whose shares were transacted. The modus operandi involved creating sham transactions to generate bogus long-term capital gains and passing unsecured loans as accommodation entries.

Despite being furnished with statements and investigation reports, the appellant failed to substantiate the identity, creditworthiness, and genuineness of the parties and transactions. Consequently, the Assessing Officer invoked section 68 to add the sale proceeds and unsecured loans to the appellant's income as unexplained cash credits.

On appeal, the NFAC accepted the appellant's explanation and directed deletion of the additions. However, the Tribunal found that NFAC's order was perfunctory and failed to appreciate the investigation findings and the appellant's failure to rebut the same.

The Tribunal applied the legal principle that the burden lies on the assessee to prove the genuineness of such transactions and the identity and creditworthiness of lenders in case of unsecured loans. The failure to discharge this onus justifies the additions under section 68.

Issue 3: Application of the Doctrine of Fraud

The Tribunal relied on settled legal principles that fraud vitiates all judicial acts and transactions, rendering them void ab initio. The Supreme Court's decision in Friends Trading Co. vs. Union of India was cited, where it was held that exemption benefits availed on forged documents are void ab initio, and the limitation period does not apply in such cases. The principle that a party who secures a benefit by fraud cannot be allowed to enjoy its fruits was emphasized.

The Tribunal also referred to the Supreme Court's rulings in Smt. Badami vs. Bhali and other cases, reiterating that fraud and collusion vitiate even the most solemn proceedings and that courts must not be instruments of fraud.

Applying these principles, the Tribunal held that the appellant deliberately withheld information and engaged in sham transactions to bring undisclosed income into books of account. The transactions of purchase and sale of shares and unsecured loans were held to be fraudulent and void ab initio, justifying the additions made by the Assessing Officer.

Issue 4: Validity of NFAC's Order Deleting Additions

The NFAC's order was found to be lacking in detailed examination of the nature of transactions and the investigation reports. The Tribunal observed that NFAC passed the order in a perfunctory manner without properly applying the doctrine of fraud or appreciating the evidence on record. The Tribunal reversed the NFAC's order and restored the assessment order.

Issue 5: Precedents and Their Applicability

The Tribunal distinguished the decision of the Bombay High Court in PCIT vs. Indravadan Jain, HUF, noting that in that case shares were bought on the floor of a recognized stock exchange, whereas in the present case shares were acquired through private preferential allotment. The Bombay High Court did not invoke the doctrine of fraud in that case, and hence, it was held not to be a binding precedent applicable here.

Other decisions cited by the appellant were also found inapplicable as they did not consider the doctrine of fraud or the specific facts involving accommodation entries and bogus transactions.

Significant Holdings

"Fraud vitiates everything and even principle of natural justice have no application and such transaction is void ab initio."

"The appellant deliberately withheld the information from the Assessing Officer as well as the NFAC which is within exclusive knowledge of appellant to establish the genuineness of transactions of purchase of shares of that company/unsecured loans. It is nothing but a fraud played by the appellant against the Assessing Officer as well as the NFAC who are quasi judicial authorities employed for execution of the provisions of the Income Tax Act."

"The transaction of purchase and sale of shares of S. K. Stock Dealers Pvt. Ltd. under consideration before us is void ab-initio, this is nothing but sham, make believe and colourful device adopted with excellent paper work with intention bringing the undisclosed income into books of account."

"The NFAC had failed to examine the nature of transaction, the NFAC had passed order in perfunctory manner. Therefore, we reverse the order passed by the NFAC and restore the assessment order."

The Tribunal confirmed the addition of Rs.5.20 crores under section 68 of the Income Tax Act and rejected the appellant's claim for exemption under section 10(38), holding that the transactions were fraudulent and void ab initio. The appeal filed by the Revenue was allowed.