Rajasthan High Court - Jodhpur
Jawari Lal Lunia vs Union Of India on 5 February, 2022
Bench: Akil Kureshi, Madan Gopal Vyas
HIGH COURT OF JUDICATURE FOR RAJASTHAN AT
JODHPUR
D.B. Civil Writ Petition No. 11647/2021
Jawari Lal Lunia S/o Sh. Ghevar Chand, Aged About 73 Years, B-
32, Shastri Nagar, Jodhpur, Rajasthan 342003
----Petitioner
Versus
1. Union Of India, Through Secretary Finance, Ministry Of
Finance, North Block, Nee Delhi - 110001
2. Principal Chief Commissioner Of Income Tax (NaFAC),
North Block, New Delhi 110001.
3. Additional/joint/deputy/assistant Commissioner/Income
Tax Officer, National Faceless Assessment Centre, North
Block, New Delhi 110001.
4. Deputy/Assistant Commissioner Of Income Tax, Circle-1,
Aaykar Bhawan, Paota, Jodhpur.
----Respondents
For Petitioner(s), : Mr. Sharad Kothari
through V.C.
For Respondent(s), : Mr. K.K. Bissa
through V.C.
HON'BLE THE CHIEF JUSTICE MR. AKIL KURESHI
HON'BLE MR. JUSTICE MADAN GOPAL VYAS
Order
05/02/2022
By the Court: (Per Akil Kureshi, CJ):
1. The petitioner has challenged the notice of re-assessment dated 13.02.2020 issued by the assessing officer to reopen the assessment of the petitioner for the assessment year 2015-2016.
2. Brief facts are as under:
The petitioner assessee is an individual and is engaged in the business of handicrafts. For the assessment year 2015-2016, the petitioner had filed return of income tax on 18.09.2015 declaring (Downloaded on 09/02/2022 at 08:55:00 PM) (2 of 13) [CW-11647/2021] gross total income of Rs.86.03 lacs (rounded off). The return filed by the petitioner was accepted under Section 143 of the Income Tax Act, 1961 (hereinafter referred to as the 'Act') without scrutiny of the return. For reopening of the assessment, the assessing officer issued the impugned notice. In order to issue the notice, the assessing officer had recorded detailed reasons. The reasons read as under:
"Reasons for the belief that income has escaped assessment
1. Brief details of information collected/ received by the AO During the searches conducted by the department, it is discovered that various syndicates have arranged accommodation entry of bogus LTCG, bogus STGC, bogus Long/Short Term Capital Loss through trading of shares of Penny stocks. The modus operandi found is that the investors/beneficiaries hold these shares for one year or so and then sell it to one of the shell private limited companies of the operator. The price of the shares are manipulated by regular trading by set of people. These facts were confirmed by the stake holders viz. Operators/Syndicate members/Brokers which were providing accommodation entries in statements recorded during action u/s 133A/131 of the IT. Act. It has been categorically accepted by them that such penny stock companies are the conduit for converting untaxed money brought on record by paying no taxes in the garb of exempted income. One such company detected is Life Line Drugs & Pharma Limited (Scrip Code - 506113) which is a listed penny stock company. It has very small capital base but its market capitalization is multifold to its capital base.
As per information available in the case of said assessee, it is noticed total that the assessee has sold 1,08,000 shares of Life Line Drugs & Pharma Limited (Scrip Code 506113) for a total sale consideration of Rs 2,54,47,000/- during F.Y. 2014-15. It is also observed that the assessee has claimed an exempt income of Rs.3,43,94,500/- u/s 10(38) of the Income Tax Act, 1961 in his return of income for A.Y. 2015-16. Out of the said exempt income, amount of Rs. 2,47,99,000/- was earned only from trading in shares of Life Line (Downloaded on 09/02/2022 at 08:55:00 PM) (3 of 13) [CW-11647/2021] Drugs & Pharma Limited. The details of share sold by the assessee, which is as under:
2. Analysis of information collected/received The scrip "Life Line Drugs & Pharma Limited" has been identified as one of the penny stocks that were the part of the "Penny Stock Manipulation Scam" based on a series of detailed investigation carried out by the department by which it was proved that a scheme was hatched by various players to obtain/provide accommodation entry of bogus LTCG/STCG or bogus Long/Short Term Capital Loss through manipulation of stock market.
2.1 MODUS OPERANDI M/s Life Line Drugs & Pharma Limited is an old already listed company. the entire shareholding of which is bought by the syndicate to provide LTCG entries. These types of companies are generally dormant company with no business and with accumulated losses. The same can be seen in M/s Life Line Drugs & Pharma Limited.
There are three categories of individuals who are involved in the transactions:
i) Syndicate Members.
They are the promoters of the Penny Stock companies who own the initial shareholding mostly in the name of paper companies either in a fresh IPO or Purchased from the shareholders of a dormant company. They are usually a group of 4-5 individuals who also referred to as Syndicate Members and are sometimes also referred to as Operators. Their nominees are directors of the Penny Stock companies which are indirectly controlled by them through such dummy directors. The whole operation is managed by them. They get the net commission income from the transactions. Their name however, seldom appears in the actual transactions.
ii) The Brokers They are registered brokers through whom shares are traded both online and off-line. They are fully aware of the nature of transactions and get paid a commission over and above their normal brokerage.
Some of the big broking houses are also indulging in such transactions mostly through sub-brokers. This company has given a large number of terminals to sub- brokers who are dealing into this type of transactions.
iii) The Entry Operators.
They are individuals who control a large number of paper/shell companies which are used for routing cash for the transactions as well as buying and selling shares during the process of price rigging. They work for (Downloaded on 09/02/2022 at 08:55:00 PM) (4 of 13) [CW-11647/2021] commission to be paid by the Syndicate Members. To cut cost sometimes in smaller operations, the same group perform more than one function.
2.2 The Transaction The transaction involves three legs.
(i) Purchase of share by the beneficiary: In this the beneficiary is sold a fixed number of shares at a nominal rate, The price and the number of shares to be purchased are decided on the basis of the booking taken and the value up to which price would be rigged. This leg of the transaction mostly is off-line. This is done to save on STT using the loophole in Section 10(38) of the IT Act which places restriction of trading by payment of STT on sale of shares and not on purchase.
ii) Price rigging: After the shares have been purchased by the beneficiaries, the syndicate members starts rigging the price gradually through the brokers. In these transactions the volume is almost negligible. Two fixed brokers who are in league with the Syndicate buy shares at a fixed time and at a fixed price. These low volume transactions are managed through paper companies of entry operators.
iii) Final sale by the beneficiary: This is done after the beneficiary has already held the share for one year. The period of holding may be a little more to match the amount of booking with the final rate. The beneficiary is contacted either by the Syndicate member or the Broker (Middle man) through whom the initial booking was done. The beneficiary provides the required amount of cash which is routed through some of the paper companies of the entry operator and is finally parked in one company which will buy the share from the beneficiary.
In fact this modus operandi can be well understood through pictorial. Depiction of the scheme (bell shaped pattern)
3. Enquiries made by the AO as sequel to information collected/received The scrip "Life Line Drugs & Pharma Limited" has been identified as one of the penny stocks that were the part of the "Penny Stock Manipulation Scam" based on a series of detailed investigation carried out by the department by which it was proved that a scheme was hatched by various players to obtain/provide accommodation entry of bogus LTCG/STCG or bogus Long/Short Term Capital Loss through manipulation of stock market.
(Downloaded on 09/02/2022 at 08:55:00 PM)(5 of 13) [CW-11647/2021] Pursuant to the detection of a huge rise in the traded volumes and/or price of the shares of certain companies including M/s Life Line Drugs Pharma Limited (now known as Arihant Multi Commercial Ltd.) for the period January 10, 2013 to May 30, 2015 to ascertain whether there was any violation of the provisions of the SEBI Act, 1992 and SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulation, 2003 (hereinafter referred to as "PFUTP Regulation"), Securities and Exchange Board of India hereinafter referred to as 'SEBI initiated investigation relating to buying, selling or dealing in the shares of certain scrips to ascertain whether there was any violation of the provisions of the Securities and Exchange Board of India Act, 1992. Vide order no. WTM/AB/EFD-I/DRA-1/14/2019-20, SEBI passed interim orders under sections 11(1), 11(4) and 11B of the Securities and Exchange Board of India Act, 1992 banning trading in some penny stocks including M/s Lifeline Drugs and Pharma Limited (Now known as Arihant Multi Commercial Limited) restrained certain market entities from accessing securities market on the basis of its investigation suspecting evasion.
Thus, the script is already proved to be penny stock in nature and SEBI has done substantial amount of work to investigate the persons and circumstances upon which the manipulations in the prices has been done in this script.
The undersigned has gathered the financials of the scrip. It is observed that there is constant cyclic rise and fall in the price of share. Snap shots of the rise and fall of both the scrips are reproduced hereunder:
The above graphs show the phenomenal price rise that has occurred in the shares of M/s Life Line Drugs & Pharma Limited mainly during the financial year 2013-
14. After that the share prices again rose between January 2014 to january 2015. Normally, the SENSEX is a benchmark of the average price movement in any share. Most of the stocks which have good market capitalization and are majorly held by public tend to follow the price movement of the SENSEX. The deviation in price movement vis-a-vis SENSEX is usually guided by the fundamentals of the company and the behaviour of individual investors. When the price increase in the shares of the scrip was compared with the movement in the SENSEX it was seen that there was no correlation.
It is also noticed that the statements of exit providers in the case controlled by sh. Devesh upadhyaya and sh. Bikash surekha was also recorded and they have also (Downloaded on 09/02/2022 at 08:55:00 PM) (6 of 13) [CW-11647/2021] stated that their accounts have been utilized by the others to give entries
4. Findings of the AO The information received has been carefully examined. As per the information reserved, scheme of providing entries by various scrips listed in NSE/BSE is being managed and operated by various entry operators. Evidences found during the search clearly manifest those accommodation entries against receipt of cash. The assessee [Jawari Lal Lunia] has traded in Lifeline Drugs and Pharma Limited (scrip code 506113) during the FY 2014-15 i.e. AY 2015-16 which was one of the said scrips. The assessee has purchased these hares in January 2013 when the prices of the share were very low after that the prices of these shares have risen phenomenally. When the assessee sold these shares the prices of these shares were very high.
Analysis of the financials of the company was also done and it was noticed that-
• The financial of M/s Life Line Drugs & Pharma Limited were very poor during the sudden upsurge in the script price.
• The business profile shows that the company was not engaged in any substantial activity. • The business profile shows that the company was not having strong fundamentals which could attract investors from all over India to invest in the company.
Thus, the assessee have earned a the (bogus) Long term capital Gain of Rs.2,47,99,000/ in the following circumstance:
• By investing in an unknown company • By being fortunate that the price of the scrip
decreased in the absolute absence of any financial fundamental • By selling his shares to entities which do not even exist and are of no means and could not have bought the shares from their own funds • Despite SEBI, the domain regulator finding that there was price rigging and manipulation in trading of the scrip • Assessee investing in limited scrips mentioned above whose financials were not strong. • Assessee not being a regular investor in Market.
As per CIB information available in the case of said assessee, it is noticed that the assessee has sold shares of "Life Line Drugs & Pharma Limited" during F.Y. 2014-15. The assessee has sold 1,08,000 shares of Life Line Drugs Pharma Limited (Scrip Code 506113) for a total sale consideration of Rs.2,54,47,000/ during F.Y. 2014-15. It is also observed that the assessee has (Downloaded on 09/02/2022 at 08:55:00 PM) (7 of 13) [CW-11647/2021] claimed exempt income of Rs.3,43,94,500/-u/s 10(38) of the Income Tax Act, 1961 in his return of income for A.Y. 2015-16. Out of the said exempt income, amount of Rs. 2,47,99,000/-was earned only from trading in shares of Life Line Drugs & Pharma Limited.
The scrip "Life Line Drugs & Pharma Limited" has been identified as one of the penny stocks that were the part of the "Penny Stock Manipulation Scam based on a series of detailed investigation carried out by the department by which it was proved that a scheme was hatched by various players to obtain/provide accommodation entry of bogus LTCG/STCG or bogus Long/Short Term Capital Loss through manipulation of stock market. Thus, it is clear that the said assessee is one of the beneficiaries of the "Penny Stock Manipulation Scam".
In view of the aforesaid facts, I am satisfied that income to the tune of Rs. 2,47,99,000/- in the case of said assessee Shri Jawari Lal Lunia for A.Y. 2015-16 has escaped assessment as per Explanation 2(b) given under section 147 of the Income Tax Act, 1961.
8. Basis of forming reason to believe and details of escapement of income The assessee has sold 1,08,000 shares of Life Line Drugs & Pharma Limited (Scrip Code 506113) for total sale consideration of a Rs.2,54,47,000/- during F.Y. 2014-15. It is also observed that the assessee has claimed an exempt income of Rs.3,43,94,500/- u/s 10(38) of the Income Tax Act, 1961 in his return of income for A.Y. 2015-16. Out of the said exempt income, amount of Rs. 2,47,99,000/- was earned only from trading in shares of Life Line Drugs & Pharma Limited.
The scrip "Life Line Drugs & Pharma Limited" has been identified as one of the penny stocks that were the part of the "Penny Stock Manipulation Scam" based on a series of detailed investigation carried out by the department by which it was proved that a scheme was hatched by various players to obtain/provide accommodation entry of bogus LTCG/STCG or bogus Long/Short Term Capital Loss through manipulation of stock market. Based on the discussion above, it is clear that the said assessee is one of the beneficiaries of the "Penny Stock Manipulation Scam".
Therefore, I am satisfied that as per the provisions of section 147 read with Explanation 2(b) given under the said section of the Income Tax Act, 1961, income of Rs. 2,47,99,000/- has escaped assessment for the A.Y. 2015-16. Hence, it is a fit case for reopening u/s 147/148 of the Income Tax Act as income chargeable (Downloaded on 09/02/2022 at 08:55:00 PM) (8 of 13) [CW-11647/2021] to tax has escaped assessment for the said A.Y. by reason of the failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for the said A.Y.
9. Escapement of income chargeable to tax in relation to any assets located outside India :- Nil
10. Finding of the AO on true and full disclosure of the material facts necessary for assessment under proviso to Section 147 As the assessee had made transactions of sale of shares of penny stock company i.e. "Life Line Drugs & Pharma Limited" during F.Y. 2014-15 which is involved in rigging of its share prices. Thus, it is clear that the income of Rs. 2,47,99,000/- which is said to have been earned by the assessee on the sale of shares of "Life Line Drugs & Pharma Limited" during the F.Y. 2014-15 and claimed as exempt income in the form of LTCG, is merely a way to route his income from undisclosed sources into books of accounts. This makes it clear that despite the fact that assessee has shown the income as exempt and shares has been shown as investment, it has not made true and full disclosure of the material facts necessary for assessment under proviso to section 147 of the Act.
11. Applicability of provisions of Section 147/151 to the facts of the case In this case a return of income was filed for the year under consideration but no scrutiny assessment u/s 143(3) of the Act was made. Accordingly, in this case the only requirement to initiate proceeding u/s 147 is reason to believe which has been recorded (refer paragraph).
It is pertinent to mention here that this case the assessee has filed return of income for the year under consideration but no assessment as stipulated u/s 2(40) of the Act was made and the return of income was only processed u/s 143(1) of the Act. In view of the above, provisions of clause (b) of explanation 2 of section 147 are applicable to facts of this case and the assessment year under consideration is deemed to be a case where income chargeable to tax has escaped assessment.
This case is within four years from the end of the assessment year under consideration. Hence necessary sanction to issue the notice u/s 148 has been obtained separately from Joint Commissioner of Income Tax as per provisions of section 151 of the Act."
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3. Learned counsel for the petitioner submitted that the reasons lack validity. There is no live link between the material available with the assessing officer to believe that the income chargeable to tax has escaped assessment. Under the circumstances, even though the original assessment was not accepted after scrutiny, notice for re-assessment should be quashed. In this context, reliance was placed on the decision of the Delhi High Court in the case of Principal Commissioner of Income Tax-12 vs. Krishna Devi and others, (2021) 431 ITR 361 (Delhi) and the decision of Bombay High Court in the case of South Yarra Holdings vs. Income Tax Officer, 16(1)(1)(4), Mumbai, (2019) 263 TAXMAN 594 (Bom.).
4. On the other hand, learned counsel for the revenue opposed the petition contending that the petitioner has not made out any case for interference. He relied on the decision of the Supreme Court in the case of Assistant Commissioner of Income Tax vs. Rajesh Jhaveri Stock Brokers P. Ltd., (2007) 291 ITR 500 (SC).
5. We may recall that in the present case, the return filed by the petitioner was accepted under Section 143(1) of the Act. This was done without scrutiny. Under such circumstances, the assessing officer had not formed any opinion and, therefore, the concept of change of opinion while seeking to reopen the assessment would not apply. In cases where the return of an assessee is accepted without scrutiny, the assessing officer enjoys a greater latitude to reopen the assessment. This aspect has been elaborated by the Supreme Court in the case of Rajesh Jhaveri Stock Brokers P. Ltd. (supra) and later on it was reiterated in the case of Deputy Commissioner of Income Tax and another (Downloaded on 09/02/2022 at 08:55:00 PM) (10 of 13) [CW-11647/2021] vs. Zuari Estate Development and Investment Company Limited, (2015) 15 SCC 248. In the case of Rajesh Jhaveri Stock Brokers P. Ltd. (supra), it was held and observed as under:
"16. Section 147 authorises and permits the Assessing Officer to assess or reassess income chargeable to tax if he has reason to believe that income for any assessment year has escaped assessment. The word reason in the phrase reason to believe would mean cause or justification. If the Assessing Officer has cause or justification to know or suppose that income had escaped assessment, it can be said to have reason to believe that an income had escaped assessment. The expression cannot be read to mean that the Assessing Officer should have finally ascertained the fact by legal evidence or conclusion. The function of the Assessing Officer is to administer the statute with solicitude for the public exchequer with an inbuilt idea of fairness to taxpayers. As observed by the Supreme Court in Central Provinces Manganese Ore Co. Ltd. v. ITO [1991 (191) ITR 662], for initiation of action under section 147(a)(as the provision stood at the relevant time) fulfillment of the two requisite conditions in that regard is essential. At that stage, the final outcome of the proceeding is not relevant. In other words, at the initiation stage, what is required is reason to believe, but not the established fact of escapement of income. At the stage of issue of notice, the only question is whether there was relevant material on which a reasonable person could have formed a requisite belief. Whether the materials would conclusively prove the escapement is not the concern at that stage. This is so because the formation of belief by the Assessing Officer is within the realm of subjective satisfaction (see ITO v. Selected Dalurband Coal Co. Pvt. Ltd. [1996 (217) ITR 597 (SC)]; Raymond Woollen Mills Ltd. v. ITO [1999 (236) ITR 34 (SC)].
17. The scope and effect of section 147 as substituted with effect from April 1, 1989, as also sections 148 to 152 are substantially different from the provisions as they stood prior to such substitution. Under the old provisions of section 147, separate clauses (a) and (b) laid down the circumstances under which income escaping assessment for the past assessment years could be assessed or reassessed. To confer jurisdiction under section 147(a) two conditions were required to be satisfied firstly the Assessing Officer must have reason to believe that income, profits or gains chargeable to income tax have escaped assessment, and secondly he must also have reason to believe that such escapement (Downloaded on 09/02/2022 at 08:55:00 PM) (11 of 13) [CW-11647/2021] has occurred by reason of either (i) omission or failure on the part of the assessee to disclose fully or truly all material facts necessary for his assessment of that year. Both these conditions were conditions precedent to be satisfied before the Assessing Officer could have jurisdiction to issue notice under section 148 read with section 147(a) But under the substituted section 147 existence of only the first condition suffices. In other words if the Assessing Officer for whatever reason has reason to believe that income has escaped assessment it confers jurisdiction to reopen the assessment. It is, however, to be noted that both the conditions must be fulfilled if the case falls within the ambit of the proviso to section 147. The case at hand is covered by the main provision and not the proviso.
18. So long as the ingredients of section 147 are fulfilled, the Assessing Officer is free to initiate proceeding under section 147 and failure to take steps under section 143(3) will not render the Assessing Officer powerless to initiate reassessment proceedings even when intimation under section 143(1) had been issued.
19. Inevitable conclusion is that High Court has wrongly applied Adanis case [1999] 240 ITR 224 (Guj) which has no application to the case on the facts in view of the conceptual difference between Section 143(1) and Section 143(3) of the Act."
6. With this background, we may revert to the sole contention raised by the learned counsel for the petitioner, namely, that reasons recorded by the assessing officer are not reflecting the live link or connection for formation of the belief that the income chargeable to tax has escaped assessment. Here also taking recourse to the decision of the Supreme Court in the case of Rajesh Jhaveri Stock Brokers P. Ltd. (supra), we must remember that the requirement under the law is that the assessing officer has reason to believe. This term "reason to believe" cannot be equated with the final conclusion that eventually if the assessment is allowed, invariably the income which is escaped from assessment will be brought to tax. As long as the assessing officer has sufficient material demonstrating that (Downloaded on 09/02/2022 at 08:55:00 PM) (12 of 13) [CW-11647/2021] he had bona fide formed the belief that the income chargeable to tax has escaped assessment, requirement of the law would be satisfied.
7. In this context, if we peruse the detailed reasons recorded by the assessing officer, we find that he was having information indicating that certain operators, syndicate members and brokers were indulging in providing accommodation entries, often times creating penny stock companies and using them as conduit for converting untaxed income by bringing them on record by paying no tax claiming it to be long term capital gain, tax on sale of shares which was at the relevant time exempted. One such company found to be indulging in such activities was Life Line Drugs and Pharma Limited. The assessee, during the period relevant to the assessment year 2015-2016, had purchased shares in the said company at the very low price. After that, the price of these shares had risen phenomenally and they were sold at high price. In the process, the assessee had claimed a long term capital gain of Rs.2,47,99,000/-. The assessing officer, therefore, collected the available material with him and formed following belief:
"Analysis of the financials of the company was also done and it was noticed that-
• The financial of M/s Life Line Drugs & Pharma Limited were very poor during the sudden upsurge in the script price.
• The business profile shows that the company was not engaged in any substantial activity.
• The business profile shows that the company was not having strong fundamentals which could attract investors from all over India to invest in the company.
Thus, the assessee have earned a the (bogus) Long term capital Gain of Rs.2,47,99,000/ in the following circumstance:
• By investing in an unknown company
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• By being fortunate that the price of the scrip
decreased in the absolute absence of any financial fundamental • By selling his shares to entities which do not even exist and are of no means and could not have bought the shares from their own funds • Despite SEBI, the domain regulator finding that there was price rigging and manipulation in trading of the scrip • Assessee investing in limited scrips mentioned above whose financials were not strong.
• Assessee not being a regular investor in Market."
8. In our opinion, the assessing officer had sufficient material at his command to form a belief that the income chargeable to tax has escaped assessment. There is a clear link between the information available with the assessing officer and his formation of belief that the income chargeable to tax has escaped assessment. The judgments relied by the learned counsel for the petitioner rest on the individual facts. The decision of the Delhi High Court in the case of Krishna Devi (supra) was rendered after assessment order completed. Likewise, in the decision of the Bombay High Court in the case of South Yarra Holdings (supra), the original assessment was framed after scrutiny, which was sought to be reopened after the period of four years from the end of relevant assessment year. Entirely different considerations in such a situation would arise.
9. In the result, the petition is dismissed. Interim order stands vacated.
(MADAN GOPAL VYAS),J (AKIL KURESHI),CJ 47-MohitTak/-
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