TMI Blog2021 (2) TMI 1338X X X X Extracts X X X X X X X X Extracts X X X X ..... ri Bharat Andhle, DR ORDER PER RAJESH KUMAR (A.M): The present appeal by the assessee has been preferred against the order dated 28.02.2019 of the Commissioner of Income Tax (Appeals) [hereinafter referred to as the CIT(A)] relevant to assessment year 2015-16. 2. The grounds raised by the assessee are as under: 1. The learned Commissioner (Appeals) erred in sustaining the addition made by the Assessing Officer of Rs.2,24,65,230 under section 68 in relation to sale of equity shares of Matra Kaushal Enterprise Limited. 2. The learned Commissioner (Appeals) erred in disallowing the exemption claimed under section 10(38) in relation to the long term capital gain earned on sale of equity shares of Matra Kaushal Enterprise Limited. 3. The learned Commissioner (Appeals) and AO failed to follow the principles of natural justice by not granting an opportunity to cross examine/confront the person on whose confession/statement or possession of material /evidence, they presumed that the share transaction is a bogus/sham transaction. The basic principles of natural justice have been violated. As regards addition of Rs.11,23,262 as unexplained expend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on long term capital gain on sale of shares: i. Evidence of purchase of shares Application of shares, allotment of shares, share certificates ii. Evidence of payment for purchase of share s made by account payee cheques, copy of bank statements iii. Copy of Demat statement reflecting purchase iv. Copy of Demat statement showing sale of shares v. Copies of contract note of sales of shares vi. Copy of bank statement reflecting sales receipt Finally, the AO, after rejecting the various contentions and submissions of the assessee and in a detailed finding recorded in the assessment order, came to the conclusion that the assessee has allegedly obtained long term capital gain by prearranged and well organized trading in the shares of M/s. Matra Kaushal Enterprises Ltd. and accordingly rejected the claim of the assessee under section 10(38) of the Act resulting into an addition of Rs.2,24,65,230/- to the income of the assessee in assessment framed under section 143(3) of the Act, 1961 dated 21.12.2017. 5. Aggrieved by the order of the AO, the assessee preferred an appeal before the Ld. CIT(A). In the appellate proceedings, the Ld. CIT(A) also d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng as exempt u/s.10(38) of the Act. This is clearly a tax evasion which is established from the above analysed facts and surrounding circumstances, human conduct and preponderance of probability. The A.O. has clearly established that the impugned transactions are not made for an investment i.e. the motive is not to derive income but to earn profit that too, by an arrangement. It is a manipulated transaction in collusion with broker/entry operator to claim exemption u/s.10(38) of the Act. This is in accordance with the ratio laid by the Hon'ble Apex Court in case of Sumati Dayal Vs. Commissioner of Income-Tax, 214 ITR 801(SC), that the apparent must be considered the real until it is shown that there are reasons to believe that the apparent is not the real and that the taxing authorities are entitled to look into the surrounding circumstances to find out the reality and the matter has to be considered by applying the test of human probabilities. ( CIT v. Durga Prasad More (1971) 82 ITR 540 SC (at pages 545, 547). Further, the Hon'ble Apex Court in Kale Khan Mohammad Hanif Vs Commissioner of Income-Tax, M.P. and Bhopal in 50 ITR 1 (SC) held that it is well established ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion report of directorate of investigation wing, Kolkata; ii) alleged bogus LTCG resulting from steep movement of share prices etc detailed in the assessment order.; iii) statements recorded by the directorate of investigation wing, Kolkata of various parties. The ld AR submits that in essence the entire addition is based on preponderance of possibilities, circumstantial evidences and not based on justifiable/clinching evidences, human conduct in general and not specific findings or allegations on the assessee. There are several judicial pronouncements of jurisdictional ITAT and High Courts wherein it has been categorically held that addition based on such general hypothesis cannot be made. 7.1. The ld AR also contended that during the course of assessment proceedings and appellate proceedings before CIT(A), the appellant filed all documents for establishing bonafide and genuineness of claim of exemption u/s 10(38) of the Act. Therefore, the denial of claim of exemption made by the Ld. AO ignoring the relevant and factual documentary evidences filed by the appellant is absolutely improper and against the principle of natural justice and equity. 7.2. The ld AR, while referring ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ismissing the appeal, the Hon be court has referred to observations of Delhi HC that what is evident is that the AO went by only the report received and did not make the necessary further enquiries such as into the bank accounts or other particulars available with him but rather based the entire findings on the report, which cannot be considered as primary material. The assessee had discharged the onus initially cast upon it by providing the basic details which were not suitably enquired into by the AO. 7.4. The ld AR submits that the Ld. AO placed reliance on statements of several third parties without providing opportunities for cross examination which is contrary to the decision of Hon ble Supreme Court in M/s Andaman Timber Industries V/s CCE (CA No.4228 of 2006) wherein it was held that not allowing the assessee to cross-examine the witnesses by the adjudicating authority whereas the statement of those witnesses were made the basis of the impugned order is a serious flaw which makes the order nullity in as much as it amounts to violation of principal of natural justice because of which the assessee was adversely affected. The whole basis of making the addition is third part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were being used only for providing accommodation entries. Statements of various entry operators, directors of companies were also recorded wherein they had accepted that these companies were being used for providing bogus Long Term Capital Gains. These facts have been elaborately discussed by the CIT(A), and also by the AO, which are the subject matter of the present appeal. 9. We have heard the rival submissions and perused the material on record. We find that in this case the assessee has purchased shares of M/s. M/s. Matra Kaushal Enterprises Ltd. in the preferential allotment for a consideration of Rs.4,59,000/- during the financial year 2012-13. These shares were transferred to the D-mat account of the assessee and thereafter split and sub divided in the ratio of 1:10 on 28.04.2014 meaning thereby that per one share of Rs.10 each the assessee was allotted 10 shares of Rs.1 each. We note that the assessee has invested in these shares by making a payment through account payee cheques from the regular bank account of the assessee and were held in D-Mat account and after being held for more than 12 months these shares were sold through the recognized stock exchange through the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ord to prove these allegations and similarly Ld. CIT(A) has reproduced the entire order of AO and upheld the same by holding that assessee was beneficiary of accommodation racket and doubted only the manifold increase in the share price by rejecting the facts on record and various evidencing and corroborating those facts. The assessee has furnished various documents as stated hereinabove to corroborate the claim under section 10(38) of the Act. We note that assessee has furnished all the details qua bank accounts, D-Mat and trading account, process of preferential allotment and the person to whom the investments were made and also the contract note qua the sale of shares on the recognized stock exchange through registered stock brokers. Pertinent to state that shares worth Rs. 50,000/- were still with the assessee as closing stocks. We also note that in the investigation carried out by the Directorate of Investigation Wing, Kolkata and also in the statements recorded of various individuals as stated hereinabove. We find that nowhere the assessee s name figured and no evidences were found during the course of search and the entire allegations were based upon the surmises and conjunc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... can not be sustained. The case of the assessee finds support from the decision of Hon ble Apex court in the case of Omar Salay Mohamed Sait V/s CIT (1959) 37 ITR 151. The Hon ble Apex Court in the case of Umacharan Shaw Bros. vs CIT (1959 37 ITR 271) has held that suspicion how so far strong could not take the character of legal evidence. 9.2 Thus we note that none of the parties alleged by the Revenue such as broker, operator, directors, exit providers etc. whose statements were recorded by the Directorate of Investigation Wing, Kolkata stated the name of the appellant/his family member. The case of the assessee is supported by a series of decisions as has been relied upon by the Ld. Counsel of the assessee during the appellate proceedings. In the case of Mukesh B. Sharma vs. ITO ITA No.6249/M/2018 A.Y. 2014-15 order dated 29.05.2019 the addition made under similar facts was deleted by the coordinate Bench by observing and holding as under: 6. We have heard the rival submissions. The primary facts stated hereinabove remain undisputed and hence the same are not reiterated for the sake of brevity. The assessee submitted the following details with regard to purchase of sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 31.3.2015 3836 lacs 76 acs 6.3. We find that the ld AO had placed reliance on certain statements recorded by the Investigation wing of Kolkata Income Tax Department during some survey proceedings conducted in third party cases. We find that in none of those statements, the name of the assessee or the name of the brokers through whom assessee had transacted were mentioned. We also find that there is no mention of any connivance on the part of the assessee with the share broker and stock exchange to launder the unaccounted monies of the assessee and bring it back in the form of sale proceeds of shares and claim exemption u/s 10(38) of the Act for the long term capital gains derived thereon. None of the parties on whom survey actions were conducted in Kolkata were related to assessee or the brokers in any manner whatsoever. We find that the various purchase and sale details together with the supporting evidences were not controverted by the revenue before us. Even the cross examination of the parties mentioned in the show cause notice issued to the assessee by the ld AO were sought by the assessee and the sam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The said show cause notice dated 1.3.2018 also stated that Notice Nos. 13 to 46 listed in the said notice which admittedly does not include the assessee or his brokers, to have sold the shares at inflated price and booked substantial profit. The said show cause notice dated 1.3.2018 also stated Notices Nos. 8 to 12 (which admittedly does not include the assessee or his brokers) were part of the manipulative scheme to make preferential allotment and manipulate the price, through, entities connected to company and promoter, to benefit promoter, promoter related entities and connected preferential allottees. It is not the case of the revenue that the assessee or his brokers were either the promoters of GIFL, or promoter related entities of GIFL or related to connected preferential allottees thereon. Hence it could be safely concluded that the SEBI had not found any adverse findings with regard to the assessee or his registered share brokers vis a vis GIFL. Hence there is absolutely no iota of evidence linking the assessee or the registered brokers to even remotely allege that they were involved in artificial rigging of price of scrips which were dealt by the assessee herein. 6. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cumstances, we hold that no addition could be made merely based on the statements recorded during survey. 6.6. One more excruciating factor which goes in favour of the assessee is that the assessee had sold only 883000 shares out of 2000000 shares held by him and the remaining shares were retained by the assessee. Hence the allegations leveled on the assessee that assessee had converted his unaccounted money in the form of long term capital gains claimed as exempt does not hold water . Even these 883000 shares were sold after holding the same for a substantial minimum period of 26 months by the assessee from the date of its purchase. Moreover, when the purchase of shares made by the assessee has been accepted as genuine which was done in Asst Year 2013-14, the sale of the very same shares in part in Asst Year 2014-15 in open market at prevailing market prices after suffering STT should not be doubted . None of the documents filed by the assessee with regard to purchase and sale of shares have been found to be deficient in any manner whatsoever by the revenue. From the turnover chart stated hereinabove, it could be seen that the revenue of GIFL had increased from Rs 191 lacs a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... proceedings on 19.12.2016, the gist of which is mentioned in page 31 of Assessment Order. We have gone through the same and we find that the assessee had stated before the ld AO that he had made investment in shares of GIFL without looking into the fundamentals of the said company and based on information given by a family friend. We have already seen the documentary evidences available on record wherein the assessee in response to an invitation letter issued by GIFL for making investment in preferential allotment basis, had issued account payee cheques and got the shares allotted in his name on preferential allotment basis. These facts have also been noted by SEBI in the second show cause notice dated 1.3.2018 which has been discussed hereinabove. Merely because the assessee himself is engaged in independent manufacturing business , it cannot be said that all his investment decisions would be prudent and would be done only after analyzing the entire fundamentals and financials of the investee company. It is in everybody s knowledge, that an investor would try to take calculated risks by investing his money on an unknown scrip based on certain information from friends, relatives, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o such price rise. viii. Names of most of the LTCG companies are changed during the period of the scam. ix. Most of the companies split the face value of shares [this is probably done to avoid the eyes of market analysts]. x. The volume of trade jumps manifold immediately when the market prices of shares reach at optimum level so as to result in LTCG assured to the beneficiaries. This maximum is reached around the time when the initial allottees have held the shares for one year or little more and thus, their gain on sale of such shares would be eligible for exemption from Income Tax. xi. An analysis of share buyers of some of LTCG companies was done to see if there were common persons/entities involved in buying the bogus inflated shares. It was noted that there were many common buyers [which were paper companies]. xii. The prices of the shares fall very sharply after the shares of LTCG beneficiaries have been off loaded through the pre-arranged transactions on the Stock Exchange floor/portal to the Short Term Loss seekers or dummy paper entities. xiii. The shares of these companies are not available for buy/sell to any person outside the syndic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bench of the ITAT in a number of decisions have, on similar facts and circumstances of the case, decided the issue in favour of the assessee. We list some of these decisions:- Shri Gautam Kumar Pincha vs. ITO, ITA No. 569/Kol/2017, dt. 15/11/2017 ITO vs. Shri Shaleen khemani, ITA No. 1945/Kol/2014, dt. 18/10/2017 Mahendra Kumar Baid vs. ACIT, Circle-35; ITA No. 1237/Kol/2017; order dt. 18/08/2017 Kiran Kothari HUF vs. ITO, ITA No. 443/kol/2017, order dt. 15/11/2017 The Hon ble Jurisdictional High Court on similar facts, had in the following cases, upheld the claim of the assessee:- CIT vs. Shreyashi Ganguli (ITA No. 196 of 2012) (Cal HC) 2012 (9) TMI 1113 CIT vs. Rungta Properties Private Limited (ITA No. 105 of 2016) (Cal HC)dt. 08/05/2017 CIT vs. Bhagwati Prasad Agarwal (2009 TMI-34738 (Cal HC) in ITA No. 22 of 2009 dated 29.04.2009 11. Recently, the Kolkata C Bench of the Tribunal in the case of Navneet Agarwal,-vs- ITO, Ward-35(3), Kolkata; I.T.A. No. 2281/Kol/2017; Assessment Year: 2014-15, while dealing with identical issue of sale of shares of M/s. Cressenda Solutions Pvt. Ltd., decided the issue in favour of the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ased on mere conjectures unverified by evidence under the pretentious garb of preponderance of human probabilities and theory of human behavior by the department. 14. It is well settled that evidence collected from third parties cannot be used against an assessee unless this evidence is put before him and he is given an opportunity to controvert the evidence. In this case, the AO relies only on a report as the basis for the addition. The evidence based on which the DDIT report is prepared is not brought on record by the AO nor is it put before the assessee. The submission of the assessee that she is just an investor and as she received some tips and she chose to invest based on these market tips and had taken a calculated risk and had gained in the process and that she is not party to the scam etc., has to be controverted by the revenue with evidence. When a person claims that she has done these transactions in a bona fide and genuine manner and was benefitted, one cannot reject this submission based on surmises and conjectures. As the report of investigation wing suggests, there are more than 60,000 beneficiaries of LTCG. Each case has to be assessed based on legal principle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o assess the income as per law. We find no such action executed by investigation wing against the assessee. In absence of any finding specifically against the assessee in the investigation wing report, the assessee cannot be held to be guilty or linked to the wrong acts of the persons investigated. In this case, in our view, the Assessing Officer at best could have considered the investigation report as a starting point of investigation. The report only informed the assessing officer that some persons may have misused the script for the purpose of collusive transaction. The Assessing Officer was duty bound to make inquiry from all concerned parties relating to the transaction and then to collect evidences that the transaction entered into by the assessee was also a collusive transaction. We, however, find that the Assessing Officer has not brought on record any evidence to prove that the transactions entered by the assessee which are otherwise supported by proper third party documents are collusive transactions. 17. The Hon ble Supreme Court way back in the case of Lalchand Bhagat Ambica Ram vs. CIT [1959] 37 ITR 288 (SC) held that assessment could not be based on background ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... if the Tribunal took count of all these probabilities and without any rhyme or reason and merely by a rule of thumb, as it were, came to the conclusion that the possession of 150 high denomination notes of Rs. 1,000 each was satisfactorily explained by the appellant but not that of the balance of 141 high denomination notes of Rs. 1,000 each . The observations of the Hon ble Apex Court are equally applicable to the case of the assessee. In our view the assessing officer having failed to bring on record any material to prove that the transaction of the assessee was a collusive transaction could not have rejected the evidences submitted by the assessee. In fact in this case nothing has been found against the assessee with aid of any direct evidences or material against the assessee despite the matter being investigated by various wings of the Income Tax Department hence in our view under these circumstances nothing can be implicated against the assessee. 18. We now consider the various propositions of law laid down by the Courts of law. That cross-examination is one part of the principles of natural justice has been laid down in the following judgments: a) Ayaaubkha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ous statements of the witnesses proposed to be examined against him. Unless the said statements are provided to the government servant, he will not be able to conduct an effective and useful cross-examination. 29. In Rajiv Arora v. Union of India and Ors. AIR 2009 SC 1100, this Court held: Effective cross-examination could have been done as regards the correctness or otherwise of the report, if the contents of them were proved. The principles analogous to the provisions of the Indian Evidence Act as also the principles of natural justice demand that the maker of the report should be examined, save and except in cases where the facts are admitted or the witnesses are not available for cross-examination or similar situation. The High Court in its impugned judgment proceeded to consider the issue on a technical plea, namely, no prejudice has been caused to the Appellant by such non- examination. If the basic principles of law have not been complied with or there has been a gross violation of the principles of natural justice, the High Court should have exercised its jurisdiction of judicial review. 30. The aforesaid discussion makes it evident that, not only should the opp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... price list as maintained at the depot to determine the price for the purpose of levy of excise duty. Whether the goods were, in fact, sold to the said dealers/witnesses at the price which is mentioned in the price list itself could be the subject matter of cross-examination. Therefore, it was not for the Adjudicating Authority to presuppose as to what could be the subject matter of the cross- examination and make the remarks as mentioned above. We may also point out that on an earlier occasion when the matter came before this Court in Civil Appeal No. 2216 of 2000, order dated 17-3-2005 [2005 (187) E.L.T. A33 (S.C.)] was passed remitting the case back to the Tribunal with the directions to decide the appeal on merits giving its reasons for accepting or rejecting the submissions. 7. In view the above, we are of the opinion that if the testimony of these two witnesses is discredited, there was no material with the Department on the basis of which it could justify its action, as the statement of the aforesaid two witnesses was the only basis of issuing the show cause notice. 19. On similar facts where the revenue has alleged that the assessee has declared bogus LTCG, it w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase of PREM PAL GANDHI [ITA-95-2017 (O M)] dated 18.01.2018 at vide Page 3 Para 4 held as under: .. The Assessing Officer in both the cases added the appreciation to the assessee s income on the suspicion that these were fictitious transactions and that the appreciation actually represented the assessee s income from undisclosed sources. In ITA-18-2017 also the CIT (Appeals) and the Tribunal held that the Assessing Officer had not produced any evidence whatsoever in support of the suspicion. On the other hand, although the appreciation is very high, the shares were traded on the National Stock Exchange and the payments and receipts were routed through the bank. There was no evidence to indicate for instance that this was a closely held company and that the trading on the National Stock Exchange was manipulated in any manner. The Court also held the following vide Page 3 Para 5 the following: Question (iv) has been dealt with in detail by the CIT (Appeals) and the Tribunal. Firstly, the documents on which the Assessing Officer relied upon in the appeal were not put to the assessee during the assessment proceedings. The CIT (Appeals) nevertheless considered th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome of the assessee u/s 68 of the Act. We, therefore, direct the AO to delete the addition. e) The BENCH D OF KOLKATA ITAT in the case of KIRAN KOTHARI HUF [ITA No. 443/Kol/2017] order dated 15.11.2017 held vide Para 9.3 held as under: .. We find that there is absolutely no adverse material to implicate the assessee to the entire gamut of unfounded/unwarranted allegations leveled by the AO against the assessee, which in our considered opinion has no legs to stand and therefore has to fall. We take note that the ld. DR could not controvert the facts which are supported with material evidences furnished by the assessee which are on record and could only rely on the orders of the AO/CIT(A). We note that the allegations that the assessee/brokers got involved in price rigging/manipulation of shares must therefore consequently fail. At the cost of repetition, we note that the assessee had furnished all relevant evidence in the form of bills, contract notes, demat statement and bank account to prove the genuineness of the transactions relevant to the purchase and sale of shares resulting in long term capital gain. Neither these evidences were found by the AO nor by the l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting the assessee s claim of exemption under section 10(38) of the Act. g) The BENCH H OF MUMBAI ITAT in the case of ARVIND KUMAR JAIN HUF [ITA No.4682/Mum/2014] order dated 18.09.2017 held as under vide Page 6 Para 8: We found that as far as initiation of investigation of broker is concerned, the assessee is no way concerned with the activity of the broker. Detailed finding has been recorded by CIT (A) to the effect that assessee has made investment in shares which was purchased on the floor of stock exchange and not from M/s Basant Periwal and Co. Against purchases payment has been made by account payee cheque, delivery of shares were taken, contract of sale was also complete as per the Contract Act, therefore, the assessee is not concerned with any way of the broker. Nowhere the AO has alleged that the transaction by the assessee with these particular broker or share was bogus, merely because the investigation was done by SEBI against broker or his activity, assessee cannot be said to have entered into ingenuine transaction, insofar as assessee is not concerned with the activity of the broker and have no control over the same. We found that M/s Basant Periwal a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o concurrent conclusion that the purchases already made by the assessee from Raj Impex were duly supported by bills and payments were made by Account Payee cheque. Raj Impex also confirmed the transactions. There was no evidence to show that the amount was recycled back to the assessee. Particularly, when it was found that the assessee the trader had also shown sales out of purchases made from Raj Impex which were also accepted by the Revenue, no question of law arises. 20. Applying the proposition of law laid down in the above judgments to the facts of this case we are bound to consider and rely on the evidence produced by the assessee in support of its claim and base our decision on such evidence and not on suspicion or preponderance of probabilities. No material was brought on record by the AO to controvert the evidence furnished by the assessee. Under these circumstances, we accept the evidence filed by the assessee and allow the claim that the income in question is Long Term Capital Gain from sale of shares and hence exempt from income tax. 12. Consistent with the view taken therein, as the facts and circumstances of this case are same as the facts and circumsta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the Assessee had purchased shares out of the funds duly disclosed by the Assessee cannot be faulted. 6. Similarly, the sale of the said shaers for Rs 1,41,08,484/- through two Brokers namely, M/s Richmond Securities Pvt Ltd and M/s Scorpio Management Consultants Pvt Ltd cannot be disputed, because the fact that the Assessee has received the said amount is not in dispute. It is neither the case of the Revenue that the shares in question are still lying with the Assesse nor it is the case of the Revenue that the amounts received by the Assessee on sale of the shares is more than what is declared by the Assessee. Though there is some discrepancy in the statement of the Director of M/s Richmand Securities Pvt Ltd regarding the sale transaction, the Tribunal relying on the statement of the employee of M/s Richmand Securities Pvt Ltd held that the sale transaction was genuine. 7. In these circumstances, the decision of the ITAT in holding that the purchase and sale of shares are genuine and therefore, the Assessing Officer was not justified in holding that the amount of Rs 1,41,08,484/- represented unexplained investment under section 69 of the Income Tax Act, 1961 cannot ..... X X X X Extracts X X X X X X X X Extracts X X X X
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