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TMI Blog2025 (5) TMI 1161X X X X Extracts X X X X X X X X Extracts X X X X ..... olation of Natural Justice by Denying Cross-Examination The Assessing Officer failed to provide the Assessee an opportunity to cross examine witnesses or review the material evidence underlying the assessment. By relying on third-party statements and investigation reports without affording a fair hearing, the procedure violated principles of natural justice and relevant provisions under Section 250(6) of the Income Tax Act. This approach is inconsistent with judicial mandates, as seen in Parasmal Bhandari and Reena Kumari, warranting the deletion of the contested additions. 3. Arbitrary Addition of Fictitious Commission The addition of Rs. 4,01,680/- as commission for accommodation entries is unsupported by any documentary evidence or identification of a specific transaction. This presumption-based addition violates the requirements under Sections 37 and 69C, as the burden to prove such expenditure lies with the Revenue. Precedents such as Parasmal Bhandari and Reena Kumari confirm that unsupported presumptions cannot justify such an addition. Your Assessee reserves the right to add, alter or amend any grounds of appeal on or before the date of hearing of appeal. 2. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d not a normal one. On this issue, the counsel of the assessee filed an application for condonation of delay along with a photocopy of affidavit. It is observed that the affidavit filed before us is not in original and the same is merely a photocopy and this fact was duly conveyed to the counsel of the assessee during the hearing after an assurance that the same will be placed on record of the bench. But, till date this deficiency has not been removed and still the photocopy only is there on our record, which demonstrates the casual and unprofessional approach of the counsel of the assessee and bench has taken note of this with our finding on the same in the later part of this para. It is brought to our notice that the assessee's appeal before the Ld. CIT (A) was disposed of by an order dated: 27.07.2023 and the same was due for filing on 26.09.2023. But the same was filed before us on 04.02.2025, i.e. with a delay of 500 days. The assessee further submitted that she has not received order of the Ld. CIT (A) in physical form and the e-mail address furnished on the form no. 35 was not checked by the assessee/counsel. The e-mail address as furnished on the Form No. 35 was amitkjainba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d net worth of the company as well, to conclude that is could command such high premiums like blue chip companies. It was also found that during the period of astronomical rise of shares price of the scrip there was no corporate announcement or big order or any such news which could result into such frenzy in the script price. The price of scrip in secondary market mainly depends upon the EPS, the business health of a company or some new development in the company which promises bright future for the shareholders. In the instant case there were no such factors. It is pertinent to mention here that the company's share prices were on the higher side during the when assessee held shares whereas on examinations, it is detected that no such fundamentals had been existed which can act as a catalyst to boost the prices of shares. In such a high time, the revenue from operations was minimal as so the expenditure on Employee Cost, depreciation, other manufacturing activities etc. Even the company claimed meager depreciation amounts only. It only substantiate that the company was merely a paper company and the rise in share price were due to human intervention only. Conclusion: Therefo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in a penny stock i.e. M/s. HPC BIOSCIENCES LTD. whose fundamentals, had no support for the premium it commanded, was neither the result of a coincidence not of a genuine investment activity but were created through well planned and executed scheme in which the company, the brokers and the buyers and sellers of the scrip worked in tandem to achieve the predetermined objectives. 3.6. The modus operandi which was followed in this case and is followed in such type of cases, in brief was as follows: There is a person "B" (Beneficiary) who is in possession of unaccounted money and who wants to bring this unaccounted money into his books and at the same time this person also desires to avoid paying any tax whatsoever when this money is brought into the books. [In this case all those persons including the assessee, who were allotted shares were the Beneficiaries] Now this person "B" then approaches the Entry operators "O". Operator is a person who manages the overall scheme of the scam. An operator maintains a complex nexus of various paper/bogus entities and is also in control of some penny stock companies whose shares are listed on one or the other Stock Exchanges and mostly on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... capital gain introduced by the assessee as capital during the year.] 3.6.1 The modus operandi mentioned above is based on facts and has been deduced by various investigation wings of the income tax department, SEBI and other government agencies. SEBI in its orders in the case of M/s First Financial Services Ltd. (WTM/RKA/ISD/162/2014 dated 19/12/2014), M/s Moryo Industries Ltd. (WTM/RKA/140/150/2014 dated 04/12/2014), M/s Pine Animation Ltd. (WTM/RKA/ ISD/36/2015 dated 08/05/2015), M/s Redford Global Lad (WTM/KKA/ISD/143/2015 dated 09/11/2015), M/s. HPC BIOSCIENCES LTD.(WIM/RKA ISD/30/2015 dated 17/04/2015) etc. has spelt out this modus operandi and successfully established that entities involved in such schemes ate manipulating the markets to generate tax exempt LTCG The common finding of SEBI in all these cases was as follows: "It can reasonably be inferred that the allotees acting in concert with XYZ group have misused the stock exchange system to generate fictitious LTCG so as to context their unaccounted income into accounted one with no payment of taxes as LTCG is tax exempt. I prima facie find that the above modus operandi helped the concerned entities to avoid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he same are not tenable in view of the facts and modus operandi discussed above. 10. The basic aim of this was to route the unaccounted money of long-term capital gain beneficiaries into their account books in the garb of long-term capital gain. This nature of long-term capital gain was taken by selling the shares on the stock exchange and registering the process arising out of the sale of shares into the books of accounts for implementing this scheme shares of some penny stock companies were used. In this scheme the shares of the penny stock companies were acquired by the beneficiaries at very low price through the route of preferential allotment/IPO. These shares had lock in period of one year as per SEBI guidelines. In very few cases the shares were acquired through stock exchange. Thereafter the price of the shares of the penny stock companies were rigged' systematically and rose through circular trading this is managed by the operator of the scrip. The shares of these penny stock companies although registered on stock exchange but were always closely hold and are controlled by the promoters of the penny stock company and the operator who were arranging bogus Long Term Cap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y. It is thereafter the concerned Assessing Officers have been informed to consider as to the bonafideness and genuineness of the claims of LTCG/LTCL of the respective assessees qua the findings which emanated during the investigation conducted on the individuals who dealt with the penny stocks. Therefore, the assessments have commenced by the Assessing Officers calling upon the assessee to explain the genuineness of the claim of LTCG/LTCL made by them. In all the assessment orders, substantial portion of the investigation report has been noted in full. A careful reading of the same would show that the assessee has not been named in the report. If such be the case, unless and until the assessee shows and proves that she/he was prejudiced on account of such report/statement mere mentioning that non-furnishing of the report or non-availability of the person for cross examination cannot vitiate the proceedings. The assessees have miserably failed to prove the test of prejudice or that the test of fair hearing has not been satisfied in their individual cases. In all the cases, the assessees have been issued notices under sections 143(2) and 142(1) they have been directed to furnish the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be applied is the test of preponderance of probabilities to ascertain as to whether there has been violation of the provisions of the Income-tax Act. In such a circumstance, the conclusion has to be gathered from various circumstances like the volume from trade, period of persistence in trading in the particular scrips, particulars of buy and sell orders and the volume thereof and proximity of time between the two which are relevant factors. Therefore, the methodology adopted by the revenue cannot be faulted. [Para 69] A holistic approach is required to be made and the test of preponderance of probabilities have to be applied and while doing so, the court cannot lose sight of the fact that the shares of very little known companies with in-significant business had a steep rise in the share prices within the period of little over a year. The revenue was not privy to such peculiar trading activities as they appear to have been done through the various stock exchanges and it is only when the assessees made claim for a LTCG/STCL, the investigation commenced. As pointed out the investigation did not commence from the assessee but had commenced from the companies and the persons who ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t when a claim is made for LTCG or STCL, the onus is on the assessee to prove that credit worthiness of the companies whose shares the assessee has dealt with, the genuineness of the price rise which is undoubtedly alarming that to within a short span of time. [Para 73] While it may be true that assessees could have been regular investors, investors could or could not have been privy to the information or modus adopted. What is important is that it is the assessee who has to prove the claim to be genuine in terms of section 68. Therefore, the assessee cannot escape from the burden cast upon him and unfortunately in these cases the burden is heavy as the facts establish that the shares which were traded by the assessees had phenomenal and fanciful rise in price in a short span of time and more importantly after a period of 17 to 22 months, thereafter has been a steep fall which has led to huge claims of STCL. Therefore, unless and until the assessee discharges such burden of proof, the addition made by the Assessing Officer cannot be faulted. [Para 75] While proposing to invoke the power under section 263, the question as to whether the Commissioner was justified in invoking t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion except making the addition under section 68. In these cases the Assessing Officers missed an important point as to what is the nature of enquiry which he is required to do. The Assessing Officer merely went by the submission that the stock broker is a public sector company. Unfortunately this is not the manner in which the enquiry should have been conducted. The entire case before the revenue was the genuinity of the claim for LTCG/STCL and the basis was unhealthy and steep rise of the price of the shares of mostly the paper companies though listed before the stock exchanges their shares were very rarely traded and in the background of these facts the enquiry should have been conducted by the Assessing Officer. Therefore the assumption of jurisdiction under section 263 by the respective Commissioners was fully justified and is shown to be proper exercise of power. The Tribunal while interfering with the orders of the Commissioner once again posed a wrong question to it and failed to approach the matter in the proper perspective considering the backgrounds in which the power was invoked. The Tribunal brushed aside the surrounding circumstances which have led to such assessments ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Officers as well as the Commissioner (Appeals) have adopted an inferential process which is found to be a process which would be followed by a reasonable and prudent person. The Assessing Officers and the Commissioner (Appeals) have culled out proximate facts in each of the cases, took into consideration the surrounding circumstances which came to light after the investigation, assessed the conduct of the assessee, took note of the proximity of the time between the buy and sale operations and also the sudden and steep rise of the price of the shares of the companies when the general market trend was admittedly recessive and thereafter arrived at a conclusion which is a proper conclusion and in the absence of any satisfactory explanation by the assessee, the Assessing Officers were bound to make addition under section 68. [Para 99]" 13. In this case also the assessee does not have any history of investment in previous years and succeeding years. Despite of having opportunity to substantiate the transactions she failed to do the same for the reasons best known to her. A person first time enters into a transaction with large quantity of shares, and made a huge profit in that, despi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Similarly, the bank statements provided by the assessee to prove the genuineness of the transactions cannot be considered in view of the judgment of Hon'ble court in the case of Pratham Telecom India Pvt. Ltd., wherein, it was stated that bank statement is not sufficient enough to discharge the burden. Regarding the failure to accord the opportunity of cross examination, we rely on the judgment of Prem Castings Pvt. Ltd. Similarly, the Tribunal in the case of Udit Kalra, ITA No. 6717/Del/2017 for the assessment year 2014-15 has categorically held that when there was specific confirmation with the Revenue that the assessee has indulged in non-genuine and bogus capital gains obtained from the transactions of purchase and sale of shares, it can be a good reason to treat the transactions as bogus. The differences of the case of Udit kalra attempted by the Ld. AR do not add any credence to justify the transactions. The Investigation Wing has also conducted enquiries which proved that the assessee is also one of the beneficiaries of the transactions entered by the Companies through multiple layering of transactions and entries provided. Even the BSE listed this company as being used ..... X X X X Extracts X X X X X X X X Extracts X X X X
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