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Pr.CIT , V Kolkata Vs. SWATI BAJAJ – VERY RELEVANT AND VITAL SURVEILLANCE MEASURES OF STOCK EXCHANGES AND SEBI NOT BROUGHT TO NOTICE OF HIGH COURT LEADING TO WRONG CONCLUSION OF PRICE RIGGING AND MANIPULATION BY INVESTORS. |
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Pr.CIT , V Kolkata Vs. SWATI BAJAJ – VERY RELEVANT AND VITAL SURVEILLANCE MEASURES OF STOCK EXCHANGES AND SEBI NOT BROUGHT TO NOTICE OF HIGH COURT LEADING TO WRONG CONCLUSION OF PRICE RIGGING AND MANIPULATION BY INVESTORS. |
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Judgment under study: From judgment: About type of assesses from paragraph 99 at page 144 of PDF document: We say human probabilities to be the relevant factor as on account of the fact that the assessees are of individuals or Hindu Undivided Families and the trading has been done in the name of the individual assessee or by the Karta of the HUF. None of the assessee before us have been shown to big time investor. This is evident from the income details of the assessee which has been culled out by the respective assessing officers. We also find that Word ‘Manipulative’ find place at 9 places in paragraph 13 , 68 ,73, 97, and 99: Phrase “Manipulative practices” – find mention at two places in paragraph 68 and 99 of judgment. Those paragraphs are reproduced in this write-up later on with highlights added by author for analysis. Observation of author: Whether in view of assesses not being big time investors, was it possible for them to indulge into malpractices of price rigging , as alleged by tax authorities. Particularly in view of surveillance measures applied from time to time by stock exchanges and / or SEBI. The scrips in which various assesses has earned LTCG are mostly in trade to trade segments in which transactions are to be settled by actual delivery. Therefore, price rigging by speculative practices was not possible. In such scrips price variations allowed are also limited ranging between 2-5 % and in exceptional circumstances exceeding 5% and up to 10 % for limited period with a view to achieve reasonable prices at which trades can be carried out. We can say that in view of nature of assesses , their size of business, trading or investing activities, and nature of ‘not highly organized persons’ , and scrips being in cash segment and trade to trade segments only, it was not possible for them to indulge into practices of price rigging for introducing unaccounted capital through exempted long-term capital gains. This aspect was not pressed before honorable High Court. This aspect was also not placed and explained before Tribunals at time of hearing of cases and in any case it does not find any meaningful discussions in any of judgments of Tribunals also ( so far reading by author goes) Reading of various judgments referred in case of Swati Bajaj and above referred paragraphs in judgment in case of Swati Bajaj, indicate that tax authorities have presumed adoption of ‘manipulated practices’ by assesses, which was not at all possible considering size and nature of assesses – respondent before the high Court. However, this aspect has not been argued by counsels and has not been considered at all in the judgment. A note about various surveillance measures adopted from time to time according to which it is not possible for investors, traders , share brokers to resort to pricing rigging as alleged by tax authorities. Summary: Price rigging is not possible in case of price rigging which is artificial, the Stock Exchanges and SEBI are expected to and in fact they do take action almost on real time basis and in any case within a reasonable time. Main ,measures for surveillance of price movement at Stock Exchanges are: Grouping of scrips - according to which several factors are applied for price fluctuations allowed, settlement on gross or net basis, speculation or not etc. Margins required, Circuit filters – price movement allowed from time to time on daily and periodical basis. Price and volume movement. Exposure limits of brokers scrip wise and overall basis. Settlement periods. Reporting of trades is on real time basis. And many more measures can be taken as per circumstances from time to time in case of any security or group or class of securities. Therefore, it is not possible for a small shareholder or even brokers to control prices of shares or price rigging as alleged by tax authorities. These measures are taken on regular basis by stock exchange and /or SEBI and in accordance with applicable guidelines from time to time. For details of such measures the following article dt. 23.10.2004 is an important compilation and covers information from BSE, NSE and SEBI: Source : https://www.moneycontrol.com/mccode/news/lp_news_detail.php?autono=1196&classic=true Moneycontrol » News » Legal Pundits » Capital Markets » Listing Surveillance at BSE Published on Sat, Oct 23, 2004 | Source : Legal Pundits.com Surveillance at BSE The main objective of the Surveillance function of the Exchange is to promote market integrity in two ways, first, by monitoring price and volume movements (volatility) as well as by detecting potential market abuses at a nascent stage, with a view to minimizing the ability of the market participants, both in Cash and Derivative market, to influence the price of the scrip/ series in the absence of any meaningful information, and second, by managing default risk by taking necessary actions timely. All the instruments traded in the equity segment of Cash and Derivative market come under the Surveillance umbrella of BSE. Surveillance activities at the Exchange are divided broadly into two major segments, namely, price monitoring and position monitoring. Price monitoring is manly related to the price movement/ abnormal fluctuation in prices or volumes etc. whereas the position monitoring relates mainly to abnormal positions of members, etc. in order to manage default risk. Market Abuse
Market Intelligence Market Abuse Market abuse is a broad term, which includes abnormal price/ volume movement, artificial transactions, false or misleading impressions, insider trading, etc. In order to detect aberrant behaviour/ movement, it is necessary to know the normal market behaviour. The department uses various tools to determine normal and abnormal market behaviour. The necessary actions are initiated like imposition of special margin, reduction of circuit filters, trade to trade settlement, suspensions, de-activation of terminals, etc. to control abnormal market behaviour. The department carries out investigation, if necessary, based on the preliminary examination/ analysis and suitable actions are taken against members involved based on the investigation. The detailed explanation of the various Surveillance activities are as follows: Price Monitoring The functioning of the Price Monitoring is broadly divided into following activities:
On line Surveillance One of the most important tools of the Surveillance is the On-line Real Time Surveillance system which was commissioned on July 15, 1999 with main objectives of detecting potential market abuses at a nascent stage to reduce the ability of the market participants to unduly influence the price and volumes of the scrips traded at the Exchange, improve the risk management system and strengthen the self regulatory mechanism at the Exchange. The system has a facility to generate the alerts on-line, in real time, based on certain preset parameters like price and volume variations in scrips, members taking unduly large positions not commensurate with their financial position or having large concentrated position(s) in one or few scrips, etc. An alert is a measure of abnormal behaviour. An Alert occurs in the Surveillance system when a metric behaves significantly differently from its benchmark. The alerts generated by the system are analyzed and corrective action based on preliminary investigations is taken in such cases. The system also provides facility to access trades and orders of members. Off-Line Surveillance The Off-Line Surveillance system comprises of the various reports based on different parameters and scrutiny thereof.
The Surveillance actions or investigations are initiated in the scrips identified from the above-stated reports. Derivative Market Surveillance Areas of Focus
Investigations The department conducts in-depth investigations based on preliminary enquiries/ analysis made into trading of the scrip as also at the instance of SEBI. In case irregularities observed, necessary actions are initiated and/ or investigation case forwarded to SEBI, if necessary. Surveillance Actions
Special margins are imposed on scrips which have witnessed abnormal price/ volume movements. Special margin is imposed @ 25 % or 50 % as the case may be, on the client wise net outstanding purchase or sale position (or on both side) by the department.
The circuit filters are reduced in case of illiquid scrips or as a price containment measure in low volume scrips. The circuit filters are reduced to 10 % or 5 % or 2 % as the case may be, based on the criteria decided by the department. The detailed explanation of the Price Band and Circuit Breaker system are as follows: Scrip wise Price Bands The following table shows the circuit filter limit applicable to different category of the scrips, w.e.f, June 03, 2002.
Sr. No. Category Circuit filter limit Sr. No. Category Circuit filter limit Circuit Breakers In addition to the above-stated price bands on individual scrips, SEBI has decided to implement index based market wide circuit breakers system, w.e.f., July 02, 2001.The circuit breakers are applicable at three stages of the index movement either way at 10 %, 15 % and 20 %. These circuit breakers will bring about a coordinated trading halt in both Equity and Derivative market. The market wide circuit breakers can be triggered by movement of either BSE SENSEX or the NSE NIFTY, whichever is breached earlier. The percentage movement are calculated on the closing index value of the quarter. These percentages are translated into absolute points of index variation (rounded off to the nearest 25 points in case of SENSEX). At the end of each quarter, these absolute points of index variations are revised and made applicable for the next quarter. The absolute points of SENSEX variation triggering market wide circuit breaker for a specified time period for any day of the quarter is informed by the Exchange through Press Release from time to time.
If a scrip is shifted on a Trade-to trade settlement basis, selling/ buying of shares in that scrip would result into giving/ taking delivery of shares at the gross level and no intra day/ settlement netting off/ square off facility would be permitted. The scrips which form part of 'Z group' are compulsorily settled on a trade to trade settlement basis. In addition to that Surveillance department transfers various scrips from time to time on a trade to trade settlement basis to contain the excessive volatility and / or abnormal volumes in the scrip.
The scrips are suspended by the Surveillance department in exceptional cases pending investigation or if the same scrip is suspended by any other Stock Exchange as a Surveillance action.
The department may issue verbal/ written warning to member/s when market manipulation in the scrip is suspected.
The department imposes penalty or deactivate BOLT terminals or suspend the member/s who are involved in market manipulation, based on the input/ evidence available from investigation report or as and when directed by SEBI. Rumour Verification The following steps are involved in Rumour verification process:
Pro-active Measures
Position Monitoring
The Surveillance Department closely monitors outstanding exposure of members on a daily basis. For this purpose, it has developed various off-line and on-line market monitoring reports. The reports are scrutinised to ascertain whether there is excessive purchase or sale position build up compared to the normal business of the member, whether there are concentrated purchases or sales, whether the purchases have been made by inactive or financially weak members and even the quality of scrips is considered to assess the quality of exposure. Based on analysis of the above factors and the margins already paid and the capital deposited by the member, ad-hoc margins / early pay-in calls are made, if required. Some members are even advised to reduce their outstanding exposure in the market. Trading restrictions are placed on their business as and when deemed fit. The department thus executes the Risk Management functions to avert possible payment default of members by taking timely corrective measures. The following key areas are examined to assess the market risk involved. Statement of Top 100 Purchasers/Sellers Statements of top 100 net purchasers and top 100 net sellers in case of A, B1, B2 and Z group of scrips are scrutinized, on a daily basis. This enables the Department to keep a watch on the exposure of the members, ascertain the quality of exposures, measure the risk vis-a-vis cover available by way of margins, capital etc. and initiate action such as imposition of ad-hoc margins, trading restriction etc. on the members. A detailed report on the net outstanding positions of top purchasers and top sellers with exposures in individual scrips above certain limit, margin cover available etc., is prepared on a daily basis. Concentrated Purchases/Sales The concentration in purchases/sales of a member in a few scrips could be considered risky. In case, such a situation is noticed, fundamentals of the scrips, their daily turnover, their nature of transactions is ascertained. Thereafter, based on the market risk perception appropriate surveillance actions are taken. Purchases/Sales of Scrips having Thin Trading Purchases/sales by members in scrips having thin trading is closely scrutinised as comparatively high market risk is involved in trading in such scrips. Details of trades in such scrips are called from the members to assess the market risk involved and decide on the appropriate surveillance action. Trading in B1, B2 and Z Group Scrips The Exchange has classified the scrips listed on the Exchange into 'A', 'B1', 'B2' and 'Z' groups. In view of the price manipulation witnessed in a few B1, B2 and Z group scrips and also as a risk management measure, the Exchange has prescribed Exposure limits in B1, B2 and Z group scrips in a single Rolling Settlement as given below: Exposure limit in B1 group of securities in a single rolling settlement is given below:
Permissible exposure limit in single scrip Members wishing to take position in excess of Rs 400 lakhs are required to obtain prior permission of the Surveillance Department and are subjected to payment of additional margin, as may be prescribed. Exposure limit in B2 group of securities in a single rolling settlement is given below:
Permissible exposure limit in single scrip Applicable rate of margin Members wishing to take position in excess of Rs 200 lakhs are required to obtain prior permission of the Surveillance Department and are subjected to payment of additional margin, as may be prescribed. Exposure limit in Z group of securities in a single rolling settlement is given below: The members are not allowed to have net outstanding purchase or sale position beyond Rs. 25 lakhs in a single scrip and all 'Z' group scrips beyond Rs. 100 lakhs in a single Rolling Settlement. The above limits are monitored on-line and exception reports are scrutinized for members exceeding the above limits. Pay-in liabilities of members above a threshold limit The pay-in liability of members above a certain threshold limit is monitored with respect to the pay-in amount of the members, the members capital, the margin cover available to the Exchange against the members pay-in liability, etc. In case of inadequate margin cover, the reasons of the pay-in are ascertained. If warranted, advance pay-in is called to ensure that pay-in is completed smoothly. Verification of Institutional Trade The institutional trades executed by the member-brokers are verified to ascertain the genuineness of trades. Snap Investigation The Department also carries out, wherever considered necessary, preliminary investigation of certain dealings to verify irregularities. Further actions, viz., referring the case for detailed investigations, referring the cases to the Disciplinary Action Committee (DAC) of the Exchange for taking disciplinary action against members, referring cases to the Scrutiny Committee of the Exchange to re-assess the financial soundness of the members etc., are taken depending on the findings of preliminary investigation. Market Intelligence The rumours floating in the market are verified with the data available with the Exchange. Newspapers, Television news channels and Reuters are referred to ascertain the national and global factors affecting the market sentiments. This enables the Exchange to avert market problems before it causes a serious damage. On assessment of the market risk, decisions to call ad-hoc margins / early pay-in, advising the member to limit his business, summoning him for explanation, placing trading restriction, deactivation of BOLT TWS, etc. are taken. Source : https://www.bseindia.com/static/markets/equity/EQReports/sur_Surveillance.html Date of download 24.10.2022 Surveillance The main objective of the surveillance function is to maintain market integrity by monitoring price and volume movements (volatility) as well as by detecting potential market abuses (fictitious/ artificial transactions, circular trading, false or misleading impressions, insider trading, etc.).
The function of On-line Surveillance is to monitor the market activity and undertake necessary surveillance actions inter-alia including price band monitoring and review, transferring securities on a trade-to-trade settlement basis, imposition of surveillance frameworks.
List of equity stocks on which dynamic price band are applied is attached. Reduction in Price Bands due to Surveillance Actions w.e.f 24/10/2022
Bottom of Form Trade-to-Trade
Criteria II
Criteria III
Quarterly Review for shifting securities to / from Trade to Trade:
Category B:
Category C:
Category D:
(*All Securities where the price variation is in positive direction will be considered)
Exemptions: https://www.bseindia.com/static/markets/equity/EQReports/sur_Surveillance.html#!#brand4 Offline surveillance: 1. Investigation
A consolidated list of entities debarred by Securities Exchange Board of India from trading in the securities market since January 2007 is for information and necessary compliance by trading members. From judgment in case of Swati Bajaj: Word ‘Manipulative’ find place at 9 places as follows in paragraph 13 , 68 ,73, 97, and 99: Phrase “Manipulative practices” – find mention at two places in paragraph 68 and 99 of judgment. Those paragraphs are reproduced below with highlights added by author for relevant portions and analysis: 13. Mr. Samarjit Roy Chowdhury, learned Senior Standing Counsel appearing for the Revenue in other appeals referred to an office memorandum issued by the Central Board dated 16th September, 2009 by which exemption was withdrawn in respect of appeals to be filed in penny stock cases, regardless of the monetary limit fixed in the earlier circular. It is submitted that this office memorandum carves out an exception from the applicability of the circular issued by the Board fixing monetary limits for filing appeals before the Courts. The learned Standing Counsel explained as to what is “penny stock” in the American concept and submitted that when the share price is less than one dollar it is referred to as a penny stock. So far as the Indian concept, “penny stocks” are shares which are traded at very low prices such as less than Rs. 100 per share. The learned Standing Counsel has drawn our attention to the assessment order passed in the case of the assessee, Dinesh Kumar Banshal which is the subject matter of ITAT No. 31 of 2020 and submitted that it is one of the well-drafted assessment orders dealing with all issues elaborately. The learned Standing Counsel has drawn our attention to the relevant paragraphs in the assessment order to emphasize this submission that the Assessing Officer has clearly brought out the machinations of fraudulent, manipulative and deceptive dealings by misusing the stock exchange system to generate bogus LTCG. It is pointed out that the stock brokers as well as the Director of M/s. Kailash Auto Finance Limited were examined on oath and they have accepted that rigging of prices of the shares have been done. Further, our attention has been drawn to the report of the special investigating team which has been extensively referred by the Assessing Officer. Further, the Assessing Officer has listed out the companies in which the stock brokers have made manipulative and deceptive dealings and Kailash Auto Finance Limited is one such company. The Assessing Officer has also elaborately discussed the various decisions and ultimately, completed the assessment and denied the claim for LTCG. The said order was affirmed by the CIT(A). However, the Tribunal by a common order in 9(sic.90) appeals, allowed the appeals following the decision in Mahavir Jhanwar, the correctness of which decision has been canvassed in the other appeals before this Court. It is further submitted that none of the findings recorded by the Assessing Officer or the CIT(A) had been controverted by the learned Tribunal. In support of this contention, the learned Standing Counsel referred to the decision of the High Court of Delhi in CIT Versus Nipun Buliders & Developers Pvt. Ltd. dated 07.01.2013. This decision was pressed into service to explain the concept of burden of proof and upon whom the burden lay qua Section 68 of the Act. In the cases on hand, the assessee has not discharged the burden which has been cast upon them which was rightly noted by the Assessing Officer as well as the CIT(A) but erroneously reversed by the Tribunal. Reliance was placed on the decision of the Hon’ble Supreme Court in CIT, Bihar Versus S.P. Jain 23 for the proposition that if no cogent reasons has been given by the Tribunal, for rejecting the findings of the Assessing Officer and if the Tribunal failed to take into account the relevant materials on record and has based its findings on mere conjecture and surmises, the order of the Tribunal has to be interfered. 68. It is equally not in dispute that whatever information which was required to be made known to the assessee has been informed to the assessee by the assessing officer by issuance of a notice to each of the assesses to which they have responded by submitting their replies. Therefore, in the absence of any prejudice caused to the assessee on account of non-furnishing of the entire report, the assessees cannot be a heard to say that there has been violation of principles of natural justice and their right to defend themselves was in any manner affected. At this juncture, it would be of much relevance to refer to the decision in K. R. Ajmera. The question of law which arose for consideration before the Hon’ble Supreme Court was as to what is the degree of proof required to hold brokers/sub-brokers liable for fraudulent/manipulative practices under the SEBI Regulations and for violating the code of conduct of the SEBI (Stocks brokers and Sub-brokers) Regulations. It was pointed out that the code of conduct for stock brokers lays down that they shall maintain high standard of integrity, promptitude and fairness in the conduct of all investment business and shall act with due skill and care and diligence in the conduct of all investment business. The Code also enumerates different shades of duties of stock brokers towards the investor and those duties pertain to high standard of integrity that the stock broker is required to maintain in the conduct of his business. It was further pointed out that it is a fundamental principle of law that prove of an allegation levelled against a person may be in the form of direct substantive evidence or as in many cases such proof may have to be inferred by a logical process of reasoning from the totality of the attending facts and circumstances surrounding the allegations/ charges made and levelled. It was further held that direct evidence is a more certain basis to come to a conclusion yet in the absence thereof the courts cannot be helpless. It was further pointed out that it is the judicial duty to take note of the immediate and proximate facts and circumstances surrounding the events on which the charges/allegations are founded and to reach what would appear to the Court to be a reasonable conclusion therefrom. The test would always be that what inferential process that a reasonable/prudent man would adopt to arrive at a conclusion. The above tests laid down by the Hon’ble Supreme Court were applied to the facts of the case in K.R. Ajmera and it was noted that the scrips in which trading had been done wherefore illiquid scrips meaning thereby that such scrips though listed in the BSE were not a matter of every day buy and sell transactions. Further it was held that trading in such illiquid scrips is not impermissible yet voluminous trading over a period of time in such scrips is a fact that should attract the attention of a vigilant trader engaged in such trades. It was further pointed out that though proximity of time between the buy and sell orders may not be conclusive in an isolated case such an event in a situation where there is a huge volume and trading can reasonable point to some kind of a fraudulent/manipulative exercise with prior meeting of minds. Such meeting of minds so as to attract the liability of the brokers / sub-broker and may be between the brokers/sub-broker and the client or it could be between two brokers/subbrokers engaged in the buy and sell transactions. Further it was pointed out that when over a period of time such transactions have been made between the same set of brokers or a group of brokers a conclusion can be a reasonable reached that there is a concerted effort on the part of the brokers concerned to indulge in synchronized trade the consequences of which is large volumes of fictitious trading resulting in unnatural rise in hiking the price/value of the scrips. In the said case, it was argued that on a screenbased trading the identity of the second party to be a client or the broker is not known to the first party/client or broker. This argument was rejected as being irrelevant. It was pointed out that the screen-based identity system keeps the identity of the parties anonymous and it will be too naïve to rests the final conclusions on said basis which overlooks a meeting of minds elsewhere. Further it was held that direct proof of such meeting of mind elsewhere would rarely be forth coming and therefore the test is one of the preponderance of probabilities so far as the adjudication of a civil liability arising out of violation of the Act or to the Regulations. Further it was held that the conclusion has to be gathered from various circumstances like that volume of trade effected; the period of persistence in trading in particular scrips; the particulars of the buy and sell orders, namely, the volume thereof; the proximity of time between the two and such other relevant factors. 73. It is very rare and difficult to get direct information or evidence with regard to the prior meeting of minds of the persons involved in the manipulative activities of price rigging and insider trading. We can draw a parallel in cases of adulteration of food stuff, more than often action is initiated under the relevant Act after the adulteration takes place, the users of adulterated products get affected etc. Therefore, a holistic approach is required to be made and the test of preponderance of probabilities have to be applied and while doing so, we cannot loose sight of the fact that the shares of very little known companies with in-significant business had a steep rise in the share prices within the period of little over a year. The Income Tax department was not privy to such peculiar trading activities as they appear to have been done through the various stock exchanges and it is only when the assessees made claim for a LTCG/STCL, the investigation commenced. As pointed out the investigation did not commence from the assessee but had commenced from the companies and the persons who were involved in the trading of the shares of these companies which are all classified as penny stocks companies. Therefore, the argument of the assessee that the copy of the investigation report has not been furnished, the persons from whom statements have been recorded have not been produced for cross examination are all contention which has to necessarily fail for several reasons which we have set out in the proceedings paragraphs. To reiterate, the assessee we not named in the report and when the assessee makes the claim for exemption the onus of proof is on the assessee to prove the genuinity. Unfortunately, the assessees have been harping upon the transactions done by them and by relying upon the documents in their hands to contend that the transactions done were genuine. Unfortunately, the test of genuinity needs to be established otherwise, the assessees are lawfully bound to prove the huge LTCG claims to be genuine. In other words if there is information and data available of unreasonable rise in the price of the shares of these penny stock companies over a short period of time of little more than one year, the genuinity of such steep rise in the prices of shares needs to be established and the onus is on the assessee to do so as mandated in Section 68 of the Act. Thus, the assessees cannot be permitted to contend that the assessments were based on surmises and conjectures or presumptions or assumptions. The assessee does not and cannot dispute the fact that the shares of the companies which they have dealt with were insignificant in value prior to their trading. If such is the situation, it is the assessee who has to establish that the price rise was genuine and consequently they are entitled to claim LTCG on their transaction. Until and unless the initial burden cast upon the assessee is discharged, the onus does not shift to the revenue to prove otherwise. It is incorrect to argue that the assessees have been called upon to prove the negative in fact, it is the assessees duty to establish that the rise of the price of shares within a short period of time was a genuine move that those penny stocks companies had credit worthiness and coupled with genuinity and identity. The assesses cannot be heard to say that their claim has to be examined only based upon the documents produced by them namely bank details, the purchase/sell documents, the details of the D-Mat Account etc. The assesses have lost sight of an important fact that when a claim is made for LTCG or STCL, the onus is on the assessee to prove that credit worthiness of the companies whose shares the assessee has dealt with, the genuineness of the price rise which is undoubtedly alarming that to within a short span of time. The revenue had placed heavy reliance on the decision in McDowell to show that the claim of the assessee is not case of tax planning to be one of the tax avoidance by indulging in dubious methods. Mr. Bagaria had argued the rule in McDowell was considered in Azadi Bachao Andolan and Vodafone International and it is in the manner explained in these decisions the rule in McDowell needs to be applied. From paragraph 138 onwards the Hon’ble Supreme Court considered in detail as to why McDowell and what it says and what it does not say. The argument of Mr. Bagaria would primarily rests on as to what would mean by a sham transaction as a legal one and it is pointed out that all the parties thereto must have a common intention that the acts or documents are not to create the legal rights and obligations which they give the appearance of creating. Further by referring to the decision in Vodafone International, it is submitted that the revenue cannot start with the question as to whether the transaction was a tax deferment/avoidance but the revenue should apply the “look at” test to ascertain its true legal nature and that genuine strategic planning had not been abandoned. Further the revenue has to establish on the basis of facts and circumstances surrounding the transactions that the impugned transaction is a sham or tax avoidance. In this regard Mr. Bagaria also referred to the decision in the case of Hill Country Properties Limited Versus Goman Agro Farms Private Limited 90 and also the decision in IRC Versus Duke of Westminster 91 96. Mr. Roy Chowdhury had pointed out to the findings recorded by the assessing officer in the case of Dinesh Kumar Bansal which is the subject matter of ITAT NO. 31 of 2020 wherein the assessee had invested in Kailash Auto Finance. In his submission, the order of the assessing officer is a well written order and he had elaborately referred to the findings recorded by the assessing officer. On going through the said order, we find the assessing officer has 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. On going through the order, we agree with Mr. Roy Chowdhury that the order of the said assessing officer is a well- reasoned order. Further we note that there is also discussion on the various decisions by the assessing officer after recordings findings on facts which in our opinion is an appropriate method of referring to and relying upon the legal precedence. 99. While proposing to invoke the power under Section 263 of the Act, the question as to whether the Commissioner was justified in invoking the power under Section 263 has to be decided based on facts of each case. The assessee cannot be allowed to contend that the language employed in the orders passed by the Commissioner under Section 263 does not mention about how the assessments order was erroneous in so far as it is prejudicial to the interest of revenue. These words or phrases are contained in Section 263 of the Act. Merely because the Commissioner has not used these words or phrases occurring in Section 263 will not vitiate the assumption of jurisdiction. What is required to be seen is the content of the order and the discussion and findings rendered by the Commissioner. This is because the cardinal principle is that substance over form has to be preferred. The Commissioner while issuing the show cause notice had come to the prima facie conclusion that the assessing officer did not conduct an enquiry as required to justify such prima facie opinion. The Commissioner was required to set out as to why in his opinion the enquiry by the assessing officer was not proper or insufficient. On reading of the orders passed by the Commissioner under Section 263 which are the subject matter in ITAT No. 156 of 2021 and other similar matters, it is seen that the Commissioner has disclosed to the assessee as to why in his case the power under Section 263 has to be invoked. On reading of the orders passed by the Commissioner, we find that the order to be a reasoned order and there is nothing to conclude. The issue was pre-decided. The assessments orders which are subject matter of Section 263 action shows that an enquiry has not been conducted by the assessing officer in the manner it ought to have been conducted. We say so because, the officers of the income tax department were fully aware of the investigation which was done and the report been circulated and therefore at that stage that the officer had to take note of such report to put the assessee on notice and commenced an enquiry by calling upon the assessee to justify the genuineness of the claim of LTCG/STCL. The assessing officer turned a blind eye to the project investigation which was carried out by the department. The assessing officer lost sight of the fact that the enquiry did not commence from that of the assessee and more particularly the name of the assessee did not feature in the investigation report. Therefore the assessing officer was bound to cause an enquiry by calling upon the assessee to explain and justify the genuineness of the claim for exemption made by them. If the assesses has not established the genuinity at the “other end” the assessing officer would have no other operation except making the addition under Section 68 of the Act. We find that in these cases the assessing officers missed an important point as to what is the nature of enquiry which he is required to do. The assessing officer merely went by the submission that the stock broker is a public sector company. Unfortunately this is not the manner in which the enquiry should have been conducted. The entire case before the department was the genuinity of the claim for LTCG/STCL and the basis was unhealthy and steep rise of the price of the shares of mostly the paper companies though listed before the stock exchanges their shares were very rarely traded and in the background of these facts the enquiry should have been conducted by the assessing officer. Therefore we are of the clear view that the assumption of jurisdiction under Section 263 of the Act by the respective Commissioners was fully justified and are shown to be proper exercise of power. The tribunal while interfering with the orders of the Commissioner once again posed a wrong question to itself and failed to approach the matter in the proper perspective considering the backgrounds in which the power was invoked. The tribunal brushed aside the surrounding circumstances which have led to such assessments or orders under Section 263. The manipulative practice adopted by the stock brokers and entry operators was not even adverted to by the tribunal and the entire matter was dealt with in a very superficial manner without dwelling deep into the core of the issue. The tribunal being the last fact finding authority was required to go deeper into the issue as the matter have manifested large scale scam. Thus, the orders of the tribunal are not only perfunctory but perverse as well. The exercise that was required to be done by the tribunal is to consider the totality of the circumstances because the transactions are shown to be very complex, the meeting of minds of the “players” can never be established by direct evidence and therefore the surrounding circumstances was required to be taken note of by the tribunal which exercise has not been done. We have considered as to whether in such an event, should the matter be remanded to the tribunal for fresh consideration. We have held that there is no such requirement and that is the Court is empowered to examine the findings recorded by the assessing officer, or the CIT (A) to arrive at a conclusion. The assessees have been harping upon the opinion rendered by the financial experts, professionals in the said field the information which were available in the media etc. All these opinions are at best suggestions to an investor. The assessees cannot state that merely because an expert had issued a buy call or there was news in the media that a particular shares shows an upwards trend and it is good time for buying those shares. They jumped into the fray the assessees are to be reminded of the doctrine of “caveat emptor”. The assessees cannot take shelter under the opinion given by the experts as it is not the expert who has indulged in the transaction but it is the assessee. Therefore by following such experts advice if the assessee gets into an “web” it is for him to extricate himself from the tangle and he cannot reach out to the expert to bail him out. The assessees cannot be heard to say that they had blindly followed advice of a third party and made the investment. Selection of shares to be purchased is a very complex issue, it requires personal knowledge and expertise as the investment is not in a mutual fund. None of the assessees before us have shown to have to made any risk analysis before making their investment in a “penny stock”. If according to them they have blindly taken a decision to invest in insignificant companies they having done so at their own peril have to face the consequences. Thus, the conduct of the assessees before us probabilities the stand taken by the revenue, rightly the mind of the assessee as an investor was taken note to deny the claim for exemption. It is in this background that the human probabilities would assume significance. As observed earlier the doctrine of preponderance of probabilities could very well be applied in cases like the present one. We say human probabilities to be the relevant factor as on account of the fact that the assessees are of individuals or Hindu Undivided Families and the trading has been done in the name of the individual assessee or by the Karta of the HUF. None of the assessee before us have been shown to big time investor. This is evident from the income details of the assessee which has been culled out by the respective assessing officers. Assuming that the assessee is a regular investor as was submitted to us by the learned advocates for the assessees that in any manner cannot improve the situation as the claim for LTCG has been only restricted to the shares which were purchased and sold by the assessees in penny stocks companies. Therefore merely because the assessee had invested in other blue chip companies had earned profit or incurred loss cannot validate the tainted transactions. It has been established by the department that the rise of the prices of the shares was artificially done by the adopting manipulative practices. Consequently whatever resultant benefits which accrue from out of such manipulative practices are also to be treated as tainted. However, the assessee had opportunity to prove that there was no manipulation at the other end and whatever gains the assessee has reaped was not tainted. This has not been proved or established by any of the assessee before us. Therefore, the assessing officers were well justified in coming to a conclusion that the so called explanation offered by the assessee was not to their satisfaction. Thus, the assessee having not proved the genuineness of the claim, the creditworthiness of the companies in which they had invested and the identity of the persons to whom the transactions were done, have to necessarily fail. In such factual scenario, the Assessing Officers as well as the CIT(A) have adopted an inferential process which we find to be a process which would be followed by a reasonable and prudent person. The Assessing Officers and the CIT(A) have culled out proximate facts in each of the cases, took into consideration the surrounding circumstances which came to light after the investigation, assessed the conduct of the assessee, took note of the proximity of the time between the buy and sale operations and also the sudden and steep rise of the price of the shares of the companies when the general market trend was admittedly recessive and thereafter arrived at a conclusion which in our opinion is a proper conclusion and in the absence of any satisfactory explanation by the assessee, the Assessing Officers were bound to make addition under Section 68 of the Act.
By: DEV KUMAR KOTHARI - October 28, 2022
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