TMI Blog2018 (10) TMI 1649X X X X Extracts X X X X X X X X Extracts X X X X ..... ng-term capital gain by adopting such method. Whatever judicial pronouncements are relied on, these are in those cases where the transactions are genuine - Decided against assessee. - IT Appeal No. 1723 (Bang.) of 2018 - - - Dated:- 12-10-2018 - Sunil Kumar Yadav, JUDICIAL MEMBR For the Appellant : Smt. Suman Lunkar, CA For the Respondent : Smt. Suman Lunkar, CA ORDER 1. This appeal is preferred on behalf of the assessee against the order of the CIT (A), inter alia, on following grounds: 1. The learned Assessing Officer had erred in passing the order in the manner passed by him and the learned Commissioner of Income tax (Appeals) has erred in confirming the same. The impugned orders being bad in law, void ab-initio are required to be quashed. 2.1 In any case the order passed in gross violation of the principles of natural justice and fair play, especially in the absence of the cross examinations of the persons whose averments are sought to be relied upon by the Assessing Officer while passing the order, makes the order totally bad in law and liable to be cancelled. 2.2 The learned Commissioner of Income tax (Appeals) has instead of quashing the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es the liability to pay interest. The interest having been levied erroneously is to be deleted. 8. In view of the above and other grounds to be adduced at the time of hearing, it is requested that the impugned order be quashed or at least the income from Long-Term Capital Gain earned on sale of shares as returned by the appellant be accepted, the assessment of Long-Term Capital Gain on sale of shares as Income from Business be deleted and the interest levied be also deleted. 2. Though various grounds are raised but they all relate to claim of long-term capital gain earned on sale of shares on which exemption under section 10(38) was claimed and the same was denied by the AO on the ground that appellant had dealt in Penny Stocks . The facts in brief relating to the controversies are that assessee has filed the return of income showing income of ₹ 13,46,720/-. On scrutiny, the AO suspected transaction in shares and he accordingly issued a notice under section 143(2) of the Act. From the statement of income, the AO noticed that main source of income of the assessee was from milling charges from the proprietary concern and the interest received from the family business c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ased it directly from the stock market, but offline, and through an intermediary. It is worthwhile to mention that the Department had done a detailed study on the bogus LTCG/STCL being claimed by many assessees by sale/purchase of shares of unknown companies which are hardly traded on the browses and which are called as Penny Stocks . A Penny Stock is a stock that trades at a relatively low price and market capitalization. These types of stocks are generally considered to be highly speculative and hence high risk because of their lack of liquidity, large bid-ask spreads, small capitalization and limited following and disclosure. As per the SEBI Regulations, the shares that are allotted through private placements, have a lock-in period of 1 year and therefore these shares can be sold by the allottees only after a period of one year from the date of allotment hereby qualifying for the benefit exempt LTCG. Thus the fact the beneficiaries subscribe for these shares through private placement is in itself a suspicious thing. No sane person would invest in these penny stock companies. The shares of these stocks are closely held as the general public is not interested in these stocks ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rva (India) Pvt Ltd, has intimated the assessee vide letter dt: 24/8/2013, about the transfer of shares of MAHAVIR ADVANCED REMEDIES LTD, to the assessee. As per this letter 2500 shares of MARL have been transferred to the assessee from Mr. BVS Koteswar Rao and 10, 000 shares have been transferred to the assessee from Smt. VIJAYALAKSHMI B. It may be noted that Mr. BVS Koteeswara Rao is the Managing Director of the company and Smt. Vijayalakshmi B is related to him. As per the share transfer certificate, the shares of MARL have been transferred to the assessee only on 24/8/2013 and the price of each equity share is priced at ₹ 10/- whereas the assessee has paid only ₹ 8/-. Sale of shares by BVS KOTEESWARA RAO and VIJAYALAKSHMI B : It is seen that as per the report submitted by Mr. Koteeswara Rao and Ms. Vijayalakshmi B to the SEBI under the SEBI (Prohibition of Insider Trading), Regulations, 1992, both Mr. BVS Koteeswara Rao and Ms. Vijayalakshmi B, have sold 304500 shares and 315600 shares respectively, of MARL on 13/06/2013 for a total sale consideration of ₹ 1827000/'- and ₹ 1893600/-, respectively. Going by this the sale price of each share work ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act, 1961, and seeking a response by 08/12/2017. In response to this the assessee has replied vide letter dt: nil, submitted on 27/12/2017, that the shares were purchased on the premise that it would give a good return. Further, she has submitted that there was no mala fide intention, but only had an intention to make profits. However, the assessee has once again not given any valid reason for the purchase and the mode of purchase. Hence, the reply of the assessee cannot be considered favourably. It is worth noting here that this office had written letter to the company, M/s. MAHAVIR ADVANCED REMEDIES LTD, vide dt: 02/11/2017, seeking details of shares sold/purchased offline by Mr. Koteeswara Rao and Smt. Vijayalakshmi B. Though letters were addressed to three different addresses as obtained from the company profile, the same were returned unserved. Also, emails sent to the email id- indoamerican-1234@,gmail.com were not responded to. Further, in respect of the company, it is gathered that it has changed its name from Indo American Advanced Pharmaceuticals Ltd to Mahavir Advanced Remedies Ltd, at its Extraordinary General Meeting held on 18/02/2013. The company in its 21st A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from the BSE, it is evident that during the period of price rigging, the volume of the shares traded as well as number of trades on each trading day was very low. Now the interesting factor to be noted here is that on all these days, there has been a constant rise in the price of the shares. A close look reveals that on most trading day, the percentage increase in pirce is in the range of 3% to 4 %. This percentage price rise on each day was just short of 5% which was the circuit limit for price rise as per the exchange guidelines in respect T type scrips. On some trading days, the percentage increase in look reveals that on most trading day, the percentage increase in price is in the range of 1.90% to 1.99% which again was just short of percentage increase of 2% which was the circuit limit for price rise as per the exchange guidelines on those trading days. Thus, it is seen that the price of these shares have seen phenomenal rise and have been constantly traded near the circuit limit so as to avail maximum price rise without hitting and triggering the circuit limit, and thereby avoid surveillance by the Stock Exchange Regulator. This continuous price rise has been achieved ove ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee in MAHAVIR ADVANCED REMEDIES LTD were rigged and then with the help of entity operators by routing the cash, shares were sold at high price to arrive at tax free capital gains. D. Analysis of transactions: Facts revealed that such trading transactions of purchase and sale of shares are not been effected, for commercial purpose but to earn profits, with a mala fide intention to evade taxes, for the following reasons : - i. Transactions of shares were not governed, by market factors prevalent at relevant time in such trade, but same were the product of design and mutual connivance on the part of assessee and the dubious operators; ii. The assessee resorted to a preconceived scheme to procure long-term capital gains by way of price difference in share transactions not supported by market factors; iii. Cumulative events in such transactions of shares revealed that same were devoid of any commercial nature and thereby fell in realm of not being bona fide and, hence, the impugned long-term capital gain is not allowable; iv. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me'. 3. Aggrieved, assessee has preferred an appeal before the CIT (A) and placed all necessary evidences in the form of receipts, invoices and contract notes before the AO with the submission that transaction in shares is sufficiently explained and the AO has come to the conclusion on the basis of various extravenous materials. He has not brought anything on record to prove that the transaction was sham transaction. In support of his contention he has placed reliance upon the CBDT's Circular No. 704 dated 24.08.1995 with the submission that the period of holding of physical share has to be calculated from the date of contract note issued by the stockbroker and not from the date of demat. Accordingly, the period of holding is more than 12 months. 4. The CIT (A) re-examined the claim of the assessee and analysed the facts brought on record by the AO, the references to SEBI, the financial analysis of the scrips, the movement of shares price-wise and also the judicial pronouncement quoted by the assessee in the light of judgment of the Bombay High Court in the case of Sanjay Bimalchand Jain v. Pr. CIT dated 10.04.2017 and has finally confirmed the additions mad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has invited our attention to balance sheets as on 31.03.2013 and 31.03.2015 and the share certificates, demat account and the bank statements in order to establish the transaction in shares are genuine and the assessee has rightly claimed deduction under section 10(38) of the Act. The learned DR on the other hand has contended that a big scam in Kolkata has been surfaced during the course of investigation conducted by various agencies and it has been revealed that unaccounted money was converted into a long-term capital gain on which deduction under section 10(38) of the Act was claimed. The learned DR further contended that in such type of transactions, the decision should not be taken on the basis of contract notes and the rates quoted at the stock exchange. The financials of the company and its increase in the financial worth should also be examined. The reasons for the sharp increase in the share price should also be examined. In the instant case, the lower authorities have examined that no corporate announcement has been made by the Mahavir Advanced Remedies Ltd., which would have made a positive impact in the shares and which could support the phenomenal increase in the pric ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /-. The AO has also examined the report submitted by Mr. BVS Koteeswara Rao and Smt. Vijayalakshmi B. and noted that Mr. BVS Koteeswara Rao and Smt. Vijayalakshmi B. have sold 3,04,500 shares and 3,15,600 shares respectively of MARL on 13.06.2013 for a total sale consideration of ₹ 1827000/- and ₹ 1893600/- respectively. The AO further observed that on going by this sale price of each share works out to ₹ 6/- per share, which is almost half the price fixed by the company at its Extraordinary General Body Meeting held on 18.02.2013. It is also worthwhile to mention that sale has been done offline. The AO has also further observed in its order that there is a sharp rise in the price of the scrips which was not supported by its fundamentals or any other general factor. The AO carefully examined the findings of the investigation wing who has investigated the scam of penny stock and the dubious schemes through which unaccounted money of the beneficiaries moves into the books of account in the garb of long-term capital gain. This entry of long-term capital gain is taken by selling the shares on the exchange and registering the proceeds arising out of sale of shares into ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Deferred Tax Liabilities (Net) - CURRENT LIABILITIES Other Current Liabilities 90,000 5,000 6,34,991 7,60,82 Short-Term Provision - 90,000 5,000 6,34,991 7,60,82 TOTAL 8,80,08,000 8,65,46,000 71,10,392 1,04,06,82 ASSETS - NON-CURRENT ASSETS Fixed Assets Tangible Assets - 0 44,70,30 Non-Current Investments - - 6,00 0 44,76,30 CURRENT ASSETS ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... %. This percentage price rise on each day was just short of 5% which was the circuit limit for price rise as per the exchange guidelines in respect T type scrips. On some trading days, the percentage increase in price is in the range of 1.90% to 1.99% which again was just short of percentage increase of 2% which was the circuit limit for price rise as per the exchange guidelines in respect T type scrips. On some trading days, the percentage increase in price is in the range of 1.90% to 1.99% which again was just short of percentage increase of 2% which was the circuit limit for price rise as per the exchange guidelines on those trading days. Thus, it is seen that the price of these shares have seen phenomenal rise and have been constantly traded near the circuit limit so as to avail maximum price rise without hitting and triggering the circuit limit, and thereby avoid surveillance by the Stock Exchange Regulator. This continuous price rise has been achieved over a very thin volume and almost a single trade per day. During this period of price rise, no corporate announcement has been made by M/s. MAHAVIR ADVANCED REMEDIES LTD which would have made a positive impact on the sha ..... X X X X Extracts X X X X X X X X Extracts X X X X
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