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TMI Blog2024 (7) TMI 1612X X X X Extracts X X X X X X X X Extracts X X X X ..... 148 of the Income Tax Act, notices were issued u/s. 143(2) and 142(1) of the Act. After providing the reasons for reopening the assessment, the Learned Authorised Representative ('Ld. AR' for short) of assessee Mr. Rajesh Sanghvi, CA of M/s. Rajesh Sanghvi & Co. filed objections for reopening and the same were disposed off by the AO. Subsequently, the assessee was asked to furnish the required information and the AO says that the details were filed. 4. The Ld. AO says that the assessee, an individual, claimed that he derived income from long term capital gains of Rs. 51,74,772/- on sale of shares of Splash Media & Infra Company, during this year and claimed this income as exempt u/s. 10(38) of the Act. From the assessment order, page 3, it is seen that the assessee purchased 5000 shares on 13.5.2009 @ Rs. 47.22 and paid sale consideration of Rs. 2,36,116/-. Later on, the assessee claims to have received bonus shares in the ratio of 3:1 and the shareholding of assessee became 20,000 (Twenty thousand) shares. Out of this 20,000 shares, 2000 shares were sold on 8.6.2010 at the value of Rs. 14,91,647/-. Further, the assessee claimed that on 31.7.2010, there was split of shares of Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of a private limited company which is subsequently amalgamated with a listed penny stock and the beneficiaries receive shares of the listed penny stock exchange of the shares of private limited company. The shares in some cases were acquired through stock exchange. These shares were then split and bonus shares were issued to increase the volume. 6.4 Thereafter, the prices of the shares of the penny stock, companies are rigged and are raised through circular trading. This is managed by the "operator" of the scrip. An "Operator" is a person who wish to take entry of bogus LTCG/STCL in their books and arranges the same through the scrip of penny stock companies. The Operator manages many paper/bogus companies and uses them to do circular transactions to rig the price of the shares. The shares of these penny stock companies, although listed on exchange, are always closely held and are controlled by the promoter of the Penny Stock Company and the Operator who is arranging for the bogus LTCG/Loss. This is due to the fact that the general public is not interested in these shares as these companies have no credentials and this helps the operator to keep a control on the price movement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing this year which was claimed as exempt. There is no payment of excise duty, no materials were purchased for all the 5 years analysed by Ld. AO- 2 years prior to A.Y. 2012-13 and 2 year subsequent to A.Y. 2012-13 and concerned assessment year, the company of M/s. Splash Media & Infra Ltd. has not spent on power and fuel and there are no finance and administrative costs. The Ld. Assessing Officer, at page 9 of the assessment order has mentioned that the EPS of the company is a meagre 0.07. Roughly, the financials of the company are the same for all the 5 years is almost the same. The Ld. AO gave the share price data of this company on the floor of stock exchange at pages 10,11,12. From this table, it can be seen that on June 9th of 2009, the price of scrip jumped to Rs. 429/- on December 09, 2009. Next month, it came down to Rs. 182/-, and again in June 2010, the price went up to Rs. 700/- to Rs. 182, in January 2011 it drastically came down to Rs. 75/-, in December 2011, the price came down to Rs. 20/-, in December 2012 price is Rs. 14/-, in December 2013 the price came down to Rs. 3.32 and in December 2014 the price of share is mere Rs. 1.35/-. Thus, the Ld. AO has concluded tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... discussed above created the demand against the supply from the sellers (beneficiaries of bogus LTCG/STCG). In the whole process, the principle of price discovery was kept aside and the market lost its purpose. It is evident from the above analysis that the exit providers provided a hugely profitable exit to the sellers. This could be only possible if the sellers and exit providers were hand in glove with each other." 9. The Ld. AO at pages 16,17 and 18 of the assessment order, has reproduced the most specific and relevant question and answers of statements of Shri Anil Agarwal, Shri Raj Kumar Kedia, Mr. Deepak Agarwal and Mr. Anuj Agarwal. Mr. Anil Agarwal who controls and manages the Splash Media Company, in his statement dated 12.4.2015 has mentioned that the clients who purchase and sell shares at highest rate through stock exchange do the same only to obtain bogus LTCG and Short Term Capital Loss (STCL) as both of them would be beneficiaries. Mrs. Raj Kumar Kedia, in his statement dated 13.6.2014 has stated that most of companies dealt by him are paper companies and Splash Media is one amongst them. These companies are controlled and managed by various accommodation/entry ope ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he impugned assessee only. Ld. AO gave the example of Mr. Mukesh Prnthviram Chouhan, another buyer of huge chunk of shares from our assessee under similar circumstances, and hence concluded that the transactions are collusive in nature between buyer and seller. 12. On page 25, para 11 of assessment order, Ld. AO has stated that Mr. Anil Agarwal, Mr. Raj Kumar Kedia, Shri Deepak Agarwal and Mrs. Anuj Agarwal etc. have been found involved in fraudulent practices by the Securities and Exchange Board of India and in its findings, it was mentioned that these people act as syndicate for accommodation/entry entires who chose particular scrips and rig its prices to provide bogus capital gains/capital loss to various beneficiaries. The SEBI has restrained these persons from trading in market and these findings of SEBI were upheld by Securities Appellate Tribunal (SAT). 13. At para 14, page 28 of the assessment order, the Ld. AO has observed that receipt of bonus shares and splitting the shares have all occurred as per the modus operandi of the scheme to increase the volume of shares. So that the desired amount of bogus LTCG can be booked into the account of beneficiary i.e., the impugned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ating him to deny the benefit of LTCG. The Ld. CIT(A) relied on 3 decisions of Hon'ble ITAT, on the above lines and allowed the appeal of the assessee. 16. Aggrieved by the order of the Ld. CIT(A) who deleted the additions made by the AO, the Revenue instituted an appeal with the following grounds of appeal :- 1. "On the facts and the circumstances of the case and in law the Ld. CIT(A) on ground no.1 & 2 has not appreciated the facts of the case and modus operandi as a detailed investigation has been carried out by the Investigation Wing in the scrip of M/s. Splash Media & Infra Ltd where the assessee name has been surfaced and a detailed finding has been given by the Investigation Wing." 2. "On the facts and the circumstances of the case and in law the LD. CIT (A) has not appreciated the facts that in such penny scrip, trading transactions of purchase and sales are not effected for commercial purpose but to create artificial gains and complete the cycle of circular trading with a view to evade taxes." . 3."On the facts and the circumstances of the case and in law the LD. CIT (A) erred in getting the facts that transaction of shares of such penny scrip are not governed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a) All the share purchases and sales are done through bank accounts. b) The assessee has produced the contract notes of broker in proof of purchase and sale of shares. c) The transactions were done through registered brokers and through stock exchange. d) The AO's allegation that unaccounted cash was introduced/routed through is baseless. e) The assessee was not given opportunity to cross-examine the parties whose statements were mentioned in assessment order and relied upon by AO to make huge addition. f) The assessee is not a party to any manipulation of share price. g) The Kolkata Investigation Directorate has not mentioned the name of assessee anywhere that he is a party to any manipulation of share rice. h) There is no basis for making addition u/s. 68 as the transaction is accounted for in his books. i) The addition u/s. 69C is uncalled for because he has not paid for any commission to any party and no proof was adduced by the Department to make this addition also. j) The Ld. AR filed a paper book which contained several cases-law for the proposition that the additions u/s. 68 and 69C cannot be sustained under similar circumstances. Decision of B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cted to adjudicate the matter on merits. Accordingly, now the Ld. CIT(A) adjudicated the matter again in favour of assessee and against the Revenue stating that the share transactions were done on the floor of stock exchange, through banking channels, proper broker contract notes were filed and no cross-examination opportunity was granted to assessee and held the transaction was genuine. But, the Ld. CIT(A) has missed out several crucial facts mentioned by Ld. AO in his assessment order, mainly the weak financial fundamentals of company and astronomical rise in the price of scrip, statements recorded by Investigation Wing of Kolkata, existence of exit providers and shell companies, collusion between the operators, notices given to buyers of shares returned either unserved or there is no response from them, all India scam of misuse of Section 10(38) of Income Tax Act, collating the circumstantial evidence which leads to manipulation of share price in detail etc. He has not given any decision on all these direct and indirect evidences and based on peripheral documents submitted by assessee decided the issue in favour of the assessee. Thus, the Ld. CIT(A) has committed serious ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . b) The Ld. AO, brought lot of evidences -direct and indirect-in our impugned case. He has culled out the details of exit providers details, names of more than 70 shell companies utilised to route through the unaccounted money etc. which is absent in all these cases relied on by assessee. c) The Ld. AO, has demonstrated in the assessment order about price movement of scrip, the financial fundamentals of the company which shows that there is hardly any business and EPS is close to "Zeor" and the price claimed by the assessee cannot command such huge price in the normal course of share market. This aspect was not the subject matter of any of these 26 cases relied on by assessee. d) One of the case relied on by assessee, Shree Dilip B. Jiwarajka where Hon'ble ITAT passed order in favour of the assessee because the SEBI has revoked the orders passed against the operator of that scrip. But, in our impugned case, not only SEBI, even the Securities Appellate Tribunal (SAT) confirmed the order to demonstrate that the price of scrip was rigged, as mentioned by Ld. AO in the assessment order. e) In the case of PCIT Vs. Ziauddin A. Siddique, Hon'ble Bombay High Court (relied ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssed elsewhere in this order. j) The case of PCIT Vs. Kuntala Mahapatra, relied on by Ld. AR of assessee which was decided by Hon'ble Supreme Court, is not applicable here as in that case, only the SLP of Revenue was dismissed. But, in similar circumstances, Hon'ble Supreme Court dismissed SLP of assessee in Suman Poddar's case. k) In this case of Indravadan Jain, Hon'ble Bombay High Court, the assessee relied on the issue of penny stock u/s. 10(38) because no opportunity was provided to the assessee and assessee was not directly involved in price rigging of share price. In our case on hand, the Ld. AO gave several details in the assessment order regarding structured deals and pre-conceived orders in these shares, synchronized timings while buying on the floor of stock exchange, buying shares by same person from assessee, buyers of shares from our assessee were not responding to assessee etc. shows active involvement of assessee in artificially increasing the price of shares. Moreover, the Ld. AO did not make addition only based on the statements of operators of shares. He made the addition taking into all circumstances mentioned in the assessment order and thus the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were mentioned, the EPS ranges between 0.07 to 0.01, gross block of assets between Rs. 4 lakhs to Rs. 44 lakhs, no opening and closing stock, no work-inprogress, no sundry debtors and creditors in the profit and loss account and Balance-Sheet. With such weak fundamentals no share can command a price of Rs. 100/- (after adjusting bonus and split shares) in stock exchange, i.e. an appreciation of almost 2500% within a short span of less than 2 years. These facts amply prove that the share prices were manipulated to the advantage of assessee to claim false LTCG. When seeing from this background coupled with statements of operators, existence of more than 70 shell companies found during search and seizure operations, picture becomes clear that the transactions are tainted and a fraudulent claim u/s. 10(38) was made by the assessee. d) The Ld. AR of assessee did not controvert the findings of AO that the transactions are pre-conceived and structured, i.e. the purchasers and sellers have colluded to see that desired price is shown on the platform of stock exchange. Otherwise, it is impossible that such huge share holding was liquidated within very short span. The fact of collusion and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r Vivad Se Vishwas Scheme by withdrawing the claims of penny stock, pending in appeal at that time. Subsequent to this scam, the period of holding the share to claim long term capital gain and taxing the same were introduced in the Income Tax Act with suitable amendments. Central Board of Direct Tax has amended its circular and directed all Assessing Officers to file further appeals and contest the matter in ITAT and Courts, irrespective of monitory limits involved in the claims of assessee. 25. Judicial pronouncements :- Following judicial decisions are relied upon to confirm the addition made by Ld. AO in the similar circumstances :- (1) Principal CIT Vs. Swati Bajaj 139 Taxman.com 352(Kol)(2022) : Almost all the objections/grounds raised by the assessee against the addition made by Ld. AO are answered by the Kolkata High Court in this case. Heavy reliance is placed on this decision because it is the culmination of collective wisdom of 22 Advocates who argued this case on behalf assessees, 7 Advocates on behalf of the Revenue and more than 100 decisions of various Courts/Tribunals were cited by both parties - assessee and Revenue to forward their arguments for and against the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, held by Hon'ble Kolkata High Court. The next argument of the assessee is that they were not implicated in the Investigation report also does not hold much water, it was held in the following words :- To reiterate, the assessee were not named in the report and when the assessee makes the claim of exemption, the onus of proof is on assessee to prove the genuineness. Unfortunately, the assessees are harping on the transactions done by them and by relying on the documents in their hands to contend that Department should prove the steep rise in the scrip is not genuine, which is incorrect. Another argument forwarded by the assessee is that section 68 is not applicable to them because of the fact that transactions are done through bank, stock exchange, broker and reflected in books of account etc. The Hon'ble Kolkata High Court rebutted these arguments by saying that one of the key element to be satisfied for non-applicability of section 68 is "genuineness of transactions". Here the genuineness of transaction was attacked by Revenue on many counts - eg., statements of operators, astronomical rise of share price despite weak fundamentals of company, utilising 77 shell com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9;ble Kolkata High Court delivered a landmark judgement on the lines mentioned above. As the contentions and issues are similar to that of our impugned assessee, reliance is placed on this decision. (2) In the case of Sanjay Bimalchand Jain, 89 Taxman.com 196 (Bom), Hon'ble Bombay High Court held as follows :- "In this case, the assessee had purchased shares from the penny stock companies for a lower amount and within a year, sold such shares at higher amount and the assessee has not tendered cogent evidence to explain as to why shares in unknown company jumped to such a higher amount in no time and also failed to provide details of persons, who purchased the said shares, the transaction was held to be an attempt to hedge the undisclosed income as LTCG. It was also held that the assessee had indulged in a dubious share transaction meant to account for undisclosed income in the garb of long term capital gains and thus, exemption u/s. 10(38) could not be granted to the assessee". In this Hon'ble Jurisdictional High Court's case, the broker did not respond to the notices issued by the AO, whereas in our impugned case, the alleged buyers of shares did not respond to noti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Supreme Court dealt with the circumstances of synchronous trade of illiquid scrips (as mentioned by the AO in the assessment order in our case on hand also) and confirmed the order of Securities Appellate Tribunal w.r.t imposition of monetary penalties on brokers. The ratio laid down by Hon'ble Apex Court in this case is that, in similar circumstances, circumstantial evidence can be taken into account." (6) In the case of CIT Vs. Pushpa Malpani, Hon'ble Gujarat High Court, dismissed the Revenue's appeal in the case of Penny stock on the ground that the broker in question was not banned by SEBI. Conversely, in our case on hand, the AO, in the impugned assessment order has mentioned that the operators were banned from trading for a particular period. Hence, the addition made by the AO on this ground, is confirmed. (7) Similarly, in the case of SEBI Vs. Mega Corporation Ltd. 136 taxman.com 333, while dealing with a case of income earned through price manipulations of share, held that right to cross-examination of a person who gave a complaint, was rejected by Hon'ble Supreme Court. (8) In the case of PCIT Vs. NRA Iron and Steel (P) Ltd., 110 taxman.com 491, Hon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bers did not have their own profit making apparatus. It was held that the bank accounts did not reflect the creditworthiness and genuineness. In our case too, the buyers of shares did not respond to the notices issued by Ld. AO, not to speak of confirming the transaction. So, the contention of Ld. AR of the assessee that the transaction is through cheque, banking channels come to the rescue of assessee in terms of addition by AO. Moreover, the existence of Exit Providers and shell companies give rise to the thought of sham transaction. (13) In the case of Sanat Kumar Vs. ACIT Delhi, Circle 36(1), Hon'ble ITAT Delhi Bench has held that the so-called sale proceed of shares received and claimed as exempt u/s. 10(38) was held to be sham transaction because of huge price rise of shares at the time of sale despite the fact that company's profits are negligible and did not support such price rise. (14) In the case of Satish Kishore Vs. ITO Delhi, ITA No. 1704 of 2019 dated 6.8.2019, Hon'ble ITAT Delhi has held that the transactions of penny stock are manipulated ones to get arranged benefits to claim false exemption u/s. 10(38) because there is a cartel of brokers involved in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ers of shares from our assessee have not responded to the notices issued by Ld. AO. (17) Shamim M. Bharwani Mumbai Vs. ITO-19(3)(4), Mumbai ITA No. 4906/Mum/2011 (A.Y. 2006-07), Hon'ble Mumbai ITAT : In this case, Hon'ble ITAT referred to the case of Ziauddin A. Siddique ITA No. 4699 and 4700/Mum, where the findings of the CIT(A) were reversed and held that, a penny stock company, Eltrol Ltd., exposing the modus operandi adopted by assessee, in the case of such stocks, the price, de-horse any fundamentals or other factor, of paper companies being raked up on the exchange, so as to yield "gain" and then again, equally, without basis, grounded to yield "loss", both of which, i.e., "gain" and "loss" find ready customers or takers. The purpose is to evade tax. The Ld. CIT(A) wrongly dismissed the Revenue's case by glossing 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 investor-company. It was further held that the documentary evidence in the face of unusual events, as prevailing in the instant case, and without any corroborative evidence, cannot be regar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of Rajkumar B. Agarwal vs. DCIT (ITAT Pune), Bench "B" ITA Nos. 1648 & 1649/PUN/15, it was held as follows :- "The assessee completed paper-trail by producing contract notes for purchase and sale of shares of PIL. Mere furnishing of contract notes etc. does not inspire any confidence in the light of facts. Test of human probability should be applied and apparent should be ignored to unearth the harsh reality (Sumati Dayal 214 ITR 801 (SC) & Durga Prasad More 82 ITR 540 (SC) applied)". (20) In the case of Pooja Ajmani Vs. ITO (ITAT Delhi) April 25, 2019 ITA No. 5714/Del/2018, it was held as follows :- "10(38) Bogus Capital Gains From Penny Stocks : u/s. 101 of Evidence Act, 1972, the onus is on the assessee to prove that the LTCG is genuine. The assessee cannot on failure to establish a prima facie case, take advantage of the weakness in the AO's case. The jump in the share price of a company of unknown credentials cannot be an accident or windfall but is possible because of manipulations in a pre-planned manner by interested broker and entry operators. The LTCG transactions are a sham". (21) Abhimanyu Soin Vs. Asst, Cit, Circle VII, Ludhiana, ITAT, Chandigarh, Bench A, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rence that these transactions are not genuine and make believe only to offset the loss incurred on the sale of jewellery declared under VDIS. In the totality of facts and circumstances of this case and material on record, we are of the considered view that the CIT(A) was not justified in deleting the impugned addition We accordingly set aside the order of the CIT(A)and restore that of the AO." (24) Chennai ITAT in the case of Rajnish Agarwal Vs. ACIT has held that the penny stock of SRK Industries Ltd. is not having any financial strength of its own and the sale and purchase of these shares were held to be sham and LTCG u/s. 10(38) was denied to the assessee. (25) Similarly, in the cases decided by various Tribunals of the country as mentioned below also, have held that the penny stocks without financial fundaments to support the astronomical price rise of hundreds of times within short span of one to two years, are sham transactions and LTCG claim u/s. 10(38) was denied to them : a) Usha Chandresh Shah ITA No. 6858/Mum/2011, Mumbai b) Zakrullah Chaudhary ITA No. 669/PN/2012, Pune c) Chandan Gupta ITA No. 7024/Mum/2010, Mumbai d) Chandan Gupta ITA No. 550/Chd/2008 date ..... X X X X Extracts X X X X X X X X Extracts X X X X
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