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2018 (4) TMI 701

3A to 153D of the Act and not u/s.143(3) - Held that:- Relevant para in the assessment order relied by the ld.A.R, for buttressing this argument hardly suggest that the assessment done on the assessee was pursuant to a search. Just because an investigation was done by the investigation Department of the Department, based on some leads they might have had, reports of which were used against the assessee, would not ipso facto mean that the assessment was pursuant to any search. There is nothing whatsoever on record to suggest that the assessment was based on materials unearthed during a search. - As already mentioned rules of justice do require that the reports of investigation wing, relied on bythe ld. Assessing Officer, as well as the statement recorded from Mr.Sunil Dokania are put to the assessee and its explanation sought, before deciding whether these are relevant in the assessment of the assessee. I also find the SEBI through its order dated 21.09.2017(supra) did vacate its interim exparte order dated 29th March, 2016 restraining 244 entities, inter alia including M/s.Kailash Auto Finance Ltd., from buying, selling or dealing in securities. - Thus the question whether .....

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h Auto Finance Ltd., was received in lieu of the shares held by him in M/s.PML, on merger of the latter with the former. Assessee also submitted that the gains of 9,40,273/- claimed as exempt u/s.10(38) of the Act, arose on sale of the shares of M/s.Kailash Auto Finance Ltd., on 22.03.2014 through a recognized stock exchange and through recognized stock broker. Further, as per the assessee, the period of holding of the shares was more than 12 months and hence, he was eligible for claiming exemption u/s.10(38) of the Act, on the capital gains arising from sale of such shares. Assessee also pointed out that the transaction had suffered Securities Transactions Tax (STT). 3. However, the ld. Assessing Officer was not impressed by the above reply. According to him, investigation carried out by the Revenue had revealed an organized Racket of generating bogus entries for sale of shares facilitating a claim of exemption given to long term capital gains under the Act. As per the ld.A.O., the modus operandi adopted was to buy shares of what was called Penny Stock Companies at very nominal price through off-line transaction. Such Penny Stock Company, as per ld. Assessing Officer, either got m .....

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h Auto Finance Ltd., which resulted in an unjustified increase in the value of its shares. The finding of the SEBI, in its order dated 29.03.2016 which has been considered by the ld. Assessing Officer is reproduced hereunder:- (r) Considering the operating performance and net profit of CPAL and PML in the year of incorporation 2010-11 and F.Y 2011- 12, it was noted that despite having weak operating results during the said F.Ys. CPAL and PML had issued bonus shares in an unrealistic and disproportionate ratio (viz.1:55 and 1: 65 respectively) (s) From the bank statement of the aforesaid primary allottees of CPAL and PML for the period, of December 2010 to June 2011, it was observed that same funds were being chrned among CPAL, PML and their respective primary allottees. Further, from the annual report of 2010-11 of CPAL and PML it was observed that these companies, in concert with their primary allottees had developed a mechanism by virtue of which CPAL, PML and their primary allottees made book entries of purported investment in each others equity shares. Accordingly, there was no infusion of cash in respect of private placement by CPAL and PML but it resulted in generation of fic .....

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ails, their bank statements, off-market transactions amongst them and the Information available on the website of the MCA, it was observed that these entities were connected to each other. 7.5 The order of the SEBI further analysed the transfer of funds from some of the promoter/promoter related entitles of Kailash Auto to the entities of Kailash Auto Group I and Kailash Auto Group II immediately after receipt of funds in the above manner, the entities of Kailash Auto Group I and Kailash Auto Group II traded in this scrip only through purchase transactions from beneficiaries In Patch II and created substantial traded volume during this period. These entities had transferred these funds, directly /indirectly to trading members through whom they had traded in this script end other scripts involving transactions for the purpose of alleged bogus long term capital gains tax exemption. Considering the income of these entities as shown in their KYC documents and the volume of their transactions it was noted that their transaction were riot commensurate with their disclosed income. Thus, it was observed that such fund transactions between promoter/promoter related entities of Kailash Auto .....

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dation entry in form of bogus LTCG/STCG/STCL was provided through the scrips of Kailash Auto to various clients. Sir, these scrips are controlled and managed by me. No actual business activities are carried out by these companies. Q. 13. Please state who are Directors of Kailash Auto Finance Limited. Ans. Sir. Mr.Dipan Patel Jesingbhai. Vanita Mansukh Parmar. Babalu Prasad Keshari. Deepak Kunjbihari Dave. Probir Kumar and Vidisha Gehani are Directors in Kailash Auto Finance Limited. However, they are only dummy directors and company is controlled and managed by me. Q. 14. It is seen that these directors have their residential addresses at Gujrat, Maharashtra, Jharkhand and Kolkata. Please explain the reason for selecting dummy directors from various part of India. Ans. Sir. accommodation entry in form of LTCG in the scrips of Kallash Auto was provided to various beneficiaries of India so by appointing directors from various part it is easier for us to access various beneficiaries from that part. Q.15. Please explain the modus operandi of getting bogus long term capital gain through Scrips controlled and managed by you. Ans. Generally beneficiaries approached to the broker/entry ope .....

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s.Kailash Auto Finance Ltd., under the head income from other sources, relying on section 68 of the Act. 6. Aggrieved, assessee made in appeal before the Ld.CIT(A). It was argued by the assessee before the Ld.CIT(A) that the original purchase of equity shares of M/s.PML, though it was through offmarket transaction, payments were made only through bank. Contention of assessee before the Ld.CIT(A) was that all the transactions were done through bank. As per the assessee, sale of equity shares was through a recognized stock exchange, using a recognized stockbroker. Further contention was that the sale of equity shares having been done through a recognized stock exchange, it was not necessary and not possible to ascertain the source and identity of the purchaser of equity shares. As per the assessee, it had proved the transactions through sufficient documentary evidence and exemption u/s.10(38) of the Act could not have been denied. 7. However, the Ld.CIT(A) did not accept any of the above contentions. According to him, there was an artificial hiking of the selling price of the shares of M/s.Kailash Auto Finance Ltd. Ld.CIT(A) also relied on the decision of Mumbai Tribunal in the case .....

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ng of the Department, based on which lower authorities had reached an adverse finding was never put to the assessee. 11. Ld.A.R also pointed out that assessee has filed an additional ground assailing the assessment done u/s.143(3) of the Act. According to him, an assessment could not be done under section 143(3) of the Act when its genesis was a search u/s.132 of the Act. Reliance was placed on the following para appearing in the assessment order in support of this contnetion:- 6. The written submissions filed by AR carefully considered but not accepted for the following reasons: 6.1 The Directorate of Investigation, Kolkata, carried out a countrywide investigation to unearth the organized racket of generating bogus entries of Long Term Capital Gains (LTCG) which is exempt from tax. The modus operandi adopted by the operators was to make the beneficiary buy some shares of a pre-determined Penny stock company controlled by them. These shares are transferred to the beneficiary at a very nominal price mostly off-line, through preferential allotment or off-line sale, to save STT. The beneficiary (an Individual) holds the share for one year, the statutory period after which LTCG is exem .....

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trolled and managed by him, by means of share capital, share premium, long term capital gains, etc. Further, as per ld.D.R SEBI had in its order dated 29.03.2016 clearly brought out such modus operandi whereby prices of the shares of penny stock companies were jacked up and circular trading indulged in by entry operators, for inflating the price of the equity shares in an artificial manner, in the process, converting black money to white money. As per ld.D.R, assessee could not show how he became aware of the availability of equity shares in M/s.PML when the said company was based in Kolkotta and its equity shares were not listed. Thus, as per ld.D.R, lower authorities were justified in disbelieving the series of transactions, which were all manufactured for evading tax. 13. I have considered the rival contentions and perused the orders of the authorities below. The ld. Assessing Officer as well as Ld.CIT(A) had relied on SEBI order dated 29.03.2016, in the case of M/s.Kailash Auto Finance Ltd.. It is true that in the above order, there is a detailed analysis of modus operandi adopted by about eleven numbers of companies, inter alia including M/s.Kailash Auto Finance Ltd. It also m .....

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put to the assessee and its explanation sought, before deciding whether these are relevant in the assessment of the assessee. I also find the SEBI through its order dated 21.09.2017(supra) did vacate its interim exparte order dated 29th March, 2016 restraining 244 entities, inter alia including M/s.Kailash Auto Finance Ltd., from buying, selling or dealing in securities. 16. In the facts and circumstances of the case, I am of the opinion that the question whether the transactions claimed by the assessee, as giving rise to the long term capital gains exempt from tax u/s.10(38) of the Act, were real or sham, requires a re-visit by the ld. Assessing Officer. I set aside the orders of the lower authorities and remit the issue back to the file of the ld. Assessing Officer for consideration afresh in accordance with. 17. Similar directions are given in the case of the other assessees in appeal in ITA No.1721/CHNY/2017, 2293/CHNY/2017 and 2748/CHNY/2017,also, since in all these cases capital gains, which were claimed as exempt arose from sale of shares of M/s.Kailash Auto Finance Ltd. 18 In the result, appeals of all the assessees are allowed for statistical purposes. Order pronounced on .....

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