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ITO Versus Shamim M. Bharwani Noor-E-Rehmant,

2015 (4) TMI 257 - ITAT MUMBAI

Unexplained cash credit u/s.68 - CIT(A) deleted the addition accepting the assessee’s explanation of the same as representing the sale proceeds of equity shares - Held that:- CIT(A) picks up one incident or aspect of the transaction at a time to note of it being backed by documentary evidence/s and, therefore, genuine. The approach is fallacious. Firstly, documentary evidences, in the face of unusual events, as prevailing in the instant case, and without any corroborative or circumstantial evide .....

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few months after its issue, only implies, if not price manipulation, trail blazing performance and/or great business prospects (with of course proven management record, so as to be able to translate that into reality), while even as much as the company’s business or industry or future program (all of which would be in public domain), is conspicuous by its absence, i.e., even years after the transaction/s. The company is, by all counts, a paper company, and its share transactions, managed. We, a .....

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ated 18.04.2011, allowing the Assessee s appeal contesting its assessment u/s.143(3) of the Income Tax Act, 1961 ( the Act hereinafter) for the assessment year (A.Y.) 2006-07 vide order dated 29.12.2008. 2. The sole issue arising in the instant appeal is the maintainability or otherwise in law of the addition by way of unexplained cash credit u/s.68 of the Act in the sum of ₹ 12,14,932/-, rejecting the assessee s explanation of the same as representing the sale proceeds of equity shares, s .....

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h is of essence. Further, the said transaction was not through the stock exchange, so that the same was not registered with it. In fact, the first trade in the said shares on the Calcutta Stock Exchange, with which the assessee s broker, S.K. Somani, was registered, was only on 03.03.2005, i.e., 10 months after the date of the assessee s purchase. The shares were in a nondescript company, with no financial and/or physical assets of value or reported earnings. The shares, purchased at an average .....

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owell & Co. Ltd. 154 ITR 148 (SC), besides by the Tribunal in the case of Asst. CIT vs. Som Nath Mani [2006] 100 TTJ 917 (Chd), he assessed the impugned credit of ₹ 12.15 lacs as unexplained income u/s. 68 of the Act. In appeal, the assessee however found favour with the ld. CIT(A). The purchase of shares was through a contract note issued by a registered broker, duly accounted for in his books of account, and could not be doubted merely because it was not through the online trading sy .....

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ansaction tax (STT) was paid on the impugned sale transaction/s, proved with documentary evidences and, accordingly, all the conditions of section 10(38), conferring exemption to the gains arising on the sale or transfer of shares, were fulfilled. The assessee s claim being allowed thus, the Revenue is in appeal before us. 4. We have heard the parties, and perused the material on record. 4.1 As shall be evident from the foregoing narration of events, the primary facts (and figures) of the case a .....

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e first appellate authority in view of the documentary evidences furnished by the assessee in support of his claims. That genuineness could validly be tested on the ground or principle of preponderance of human probabilities, which could thus form a valid ground or parameter for determining the genuineness, stands since settled by the apex court in Sumati Dayal (supra), relied upon by the Revenue, wherein the apex court, in declaring the transaction as non-genuine, discarded a host of documentar .....

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d in substantiation, as well as the substance of the transaction and not its form, and which is to be determined on the basis of and on the conspectus of the entirety of the facts and circumstances of the case. The issue before us is whether the documents furnished by the assessee, including averments made by him, or even his broker, satisfy the test of preponderance of human probabilities. In our view if the assessee has reasonably explained the intriguing facts and circumstances as pointed by .....

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s by the apex court in the matter: A. Govinda Rajulu Mudaliar v. CIT [1958] 34 ITR 807 (SC); Sreelekha Banerjee & Othrs. v. CIT [1963] 49 ITR 112 (SC); Kalekhan Mohammed Hanif v. CIT [1963] 50 ITR 1(SC); CIT v. Durga Prasad More [1971] 82 ITR 540 (SC); CIT v. Biju Patnaik [1986] 160 ITR 674 (SC); Sumati Dayal v. CIT [1995] 214 ITR 801 (SC); and CIT vs. P. Mohanakala &Others [2007] 291 ITR 278 (SC) We may further clarify that in proceeding with the matter, we have circumscribed the entire .....

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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.10(38) read with other relevant defining provisions of the Act. The first appella .....

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settlement period, which extends to generally one week or a fortnight, and which is to or from the SE, which aggregates the financial impact, i.e., the net result of all the transactions amongst all the brokers for the settlement period, acting as a collecting/disbursing agency. A single amount is thus either payable or receivable by each broker to or from the SE for a particular period, which is again numbered (i.e., as settlement number), and serves to settle the financial obligations to or cl .....

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ement between the brokers, carried out through the exchange acting as a nodal agency, so that the purchase transaction/s under reference may not be so construed inasmuch the same is admittedly off the market (exchange), which stands established by the Revenue through the communication per its letter to the AO in response to a notice u/s.133(6) by the Calcutta Stock Exchange. This aspect is in fact not disputed by the assessee. The same may not necessarily imply that the transaction is not genuin .....

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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 i .....

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s. 40A(3). The brokers are in fact required to maintain separate bank account for the funds received from or on behalf of the clients, so that the same do not merge with that of the broker himself. What is equally important is the date on which the shares were dematerialized. This is as no transaction could be carried out in listed shares, i.e., in the physical form, where the shares stand dematerialized by the company. Why were the shares sent for dematerialization only in May 2005, i.e., after .....

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n. The assessee states of having reported its purchase (of shares) on 06.05.2004, per his balance-sheet as at 31.03.2005, enclosing it along with his return of income for A.Y.2005-06 (PB pgs. 15, 16). The return of income, however, is filed only on 28.10.2005, which is even subsequent to the sale of shares on 12.07.2005, so that the said reporting of the transaction, which of course does not bear the date of purchase, is to no moment. The assessee relies on a communication from the company dated .....

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to be appreciated that what is essentially under cloud, and being seriously doubted as to the genuineness, is the gain stated to arise on the transaction. It is the gain which is abnormal, i.e., both qua the scrip; its trading and, thus, its quantum, and unexplained, besides being tax exempt, and which is independent of its purchase. The purchase of shares of a little known company of the face value of ₹ 10/- each at ₹ 21-22 would even otherwise hardly raise any eyebrow or doubt. Th .....

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y 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 t .....

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ing remitted to the transferee in the physical form on 17.05.2004, were not converted into the D-mat form till then. This is relevant as the trading on the exchange, which only would make the share a listed share, gain on which is exempt u/s.10(38), could as per the guidelines only be in the D-mat form. No wonder, the trading on the exchange in the said scrip commences only on 03.03.2005. The assessee speaks of having deposited STT, but, then, the question is whether the said payment would make .....

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ys earlier on 31.03.2004. The company reportedly has no standing either in the industry or in the market (i.e., for the goods or services it presumably deals in), or even in the trading circles, i.e., for shares. That apart, no material to establish its business activity, viz. it s annual reports, or of the companies under the same management/industry, etc., to exhibit its credentials in any manner, stands adduced by the assessee at any stage of the proceedings. Continuing further, how and on wh .....

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escript company at such high prices; no information qua which stands furnished at any stage, even as it is they who have apparently brought 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, rea .....

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whisper and, consequently, no information on record of the particular industry/s in which, if any, the said company operates, or its financials, much less future prospects, the information on all of which gets factored into and captured in what is called price , representing an equilibrium of the supply and demand forces. In fact, each of the other incidences, i.e., for a penny stock company, are exhibited in the present case, as pointed out by the AO per paras 4.8 and 4.9 of his order, as under .....

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ose to the date of sale; and d). the investee is a penny stock company, with no credentials, and the sale rates artificially hiked, with no real buyers, so that the inference of the sales being bogus, is unmistakable. 4.5 The assessee was show caused on all these parameters, seven in number, listed at para 4.11 (page 7) of the assessment order, to no satisfactory reply by the assessee and, in fact, at any stage. There is in fact no reply to the AO (refer para 4.14 (i) of the assessment order), w .....

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-from, as well as in the case of Housing Development and Finance Corporation Ltd. (ITA No.2913/Mum/1995 dated 12.09.2005), rendered applying the first principles and the legal propositions enunciated by the apex court per the decisions cited by the AO (supra). The tribunal in the case of Ziauddin A. Siddique (in ITA Nos. 4699 and 4700/Mum/2011 and others dated 25.04.2014) issued a finding of fact, of course on the basis of the material on record, as to circular trading, in case of a penny stock .....

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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 ld. 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 .....

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over the many attendant facts and incidents, the most vital, and on which we observe complete silence or absence of any explanation, is the absence of any credentials of the investee-company. The ld. CIT(A) picks up one incident or aspect of the transaction at a time to note of it being backed by documentary evidence/s and, therefore, genuine. The approach is fallacious. Firstly, documentary evidences, in the face of unusual events, as prevailing in the instant case, and without any corroborati .....

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