Income Tax Appellate Tribunal - Chennai
Sohanraj Praveen Kumar , Chennai vs Dcit Non Corporate Circle 2 , Chennai on 14 March, 2018
आयकर अपीलीय अिधकरण, 'सी' यायपीठ, चे ई
IN THE INCOME TAX APPELLATE TRIBUNAL , 'C' BENCH, CHENNAI
ी ए. मोहन अलंकामणी, लेखा सद य एवं ी धु वु आर.एल रे ी, याियक सद य के T सम
BEFORE SHRI A.MOHAN ALANKAMONY, ACCOUNTANT MEMBER
AND SHRI DUVVURU RL REDDY, JUDICIAL MEMBER
आयकरअपीलसं./I.T. A.No.1786/CHNY/2017
(िनधारणवष / Assessme nt Year: 2014-15)
Shri Sohanraj Praveen Kumar, Vs The DCIT,
17/38, Arcot Street, Non-Corporate Circle - 2,
T. Nagar, Chennai - 600 017. Chennai
PAN: AAJPP3671R
(अपीलाथ /Appellant) ( यथ /Respondent)
अपीलाथ क ओर से/ Appellant by : Shri Srinath Sridevan, Advocate
यथ क ओर से/Respondent by : Shri G.M. Dass, CIT
सुनवाई क तारीख/D at e of h ear i n g : 21.12.2017
घोषणा क तारीख /D at e of P r on o u ncem en t : 14.03.2018
आदेश / O R D E R
Per A. Mohan Alankamony, AM:-
The appeal by the assessee is directed against the order passed by the learned Commissioner of Income Tax (Appeals)-2, Chennai dated 31.05.2017 in ITA No.200/CIT(A)-2/2016-17 for the assessment year 2014-15 passed U/s.250(6) r.w.s. 143(3) of the Act.
2. The assessee has raised several grounds in his appeal, however the crux of the issue is that the Ld.CIT(A) has erred in confirming the order of the Ld.AO who had rejected the claim of exemption U/s.10(38) of the 2 ITA No.1786/CHNY/2017 Act on the long term capital gains earned by the assessee from the sale of shares of M/s. Risa International Ltd..
3. The brief facts of the case are that the assessee is an individual engaged in the business of jewelry and also partner in M/s. Diamond Creations, filed his return of income for the assessment year 2014-15 electronically on 08.11.2014 admitting total income of Rs.2,69,06,500/-. Thereafter the case was selected for scrutiny under CASS and notice U/s.143(2) of the Act was issued and served on the assessee on 29.08.2015. During the course of scrutiny assessment it was noticed by the Ld.AO that the assessee had made huge gains from trading in shares of M/s. Risa International Ltd. Further based on market information, survey was conducted at the business premises of the assessee on 19.07.2016 and statements were also recorded. In the course of scrutiny assessment proceedings it was revealed that the substantial increase in the capital of the assessee was due to the capital gain earned by the assessee which was claimed as exempt from tax U/s.10(38) of the Act. It was further observed that the assessee had acquired 7,50,000 shares of M/s. Risa International Ltd., by way of preferential allotment in the month of August 2012 for a consideration of Rs.75,00,000 at Rs.10 per share. These shares were initially in paper form and subsequently converted in to de-materialized form. Thereafter 3 ITA No.1786/CHNY/2017 the assessee sold the shares during the relevant assessment year earning profit of Rs.38,05,28,491/- and claimed exemption U/s.10(38) of the Act. The Ld.AO after examining the facts of the case and based on the information gathered from the survey made the following observations:-
i. The assessee did not have expertise or experience in share trading activity and has been dealing with illiquid shares which was spiked artificially.
ii. The investment made by the assessee in the shares of M/s. Risa International Ltd., was peculiar because he has stated that during a function he attended in Mumbai, he had gathered authentic information through Shri Abhinandan Jain about the shares of M/s. Risa International Ltd., which is bound to fetch substantial profit in short span of time.
iii. From the manner in which assessee had invested in the shares of M/s. Risa International Ltd., it was clear that his intention was to make gain only from the sale of those shares and had no intention to exploit dividend income. Thus the investment in the shares was only for business purpose and therefore the shares have to be held as business asset akin to be investment in the category of "AFS (available for sale)".4 ITA No.1786/CHNY/2017
iv. The trading activity of shares by the assessee was in the nature of trading in shares of penny stock companies.
v. On examining M/s. B. Lodha Securities Ltd., Mumbai, it was observed that the entire contract note related only to the sale of shares of M/s. Risa International Ltd.
vi. On gathering information from BSE, it was observed that one of the parties who purchased the shares of M/s. Risa International Ltd., from the assessee was M/s. Shallot Vincom Pvt. Ltd., Kolkatta. On examining, one of the director M/s. Shallot Vincom Pvt. Ltd., he had stated that he was also director in certain other companies and all those companies were formed to deal with shares of penny stocks, more precisely to provide accommodation entries mainly to the seller of the penny stock by purchasing the same in co-ordinated transaction through recognized stock exchange. He had further stated that one person name Shri Hemat Goelka induced and motivated him to form companies to provide accommodation of bogus profit to the beneficiaries in exchange of commission. Shri Prasanta Bose further confessed regarding his penny stock company operations and furnished statement before the Revenue which forms part of the assessment order in Annexure 'C'. 5 ITA No.1786/CHNY/2017 vii. The shares of M/s. Risa International Ltd., and certain other companies hit lower circuit on 28.03.2016 and thereafter the BSE decided to suspend their trading operation of those companies. viii. All the shares of M/s. Risa International Ltd., were allotted through preferential allotment route. The share prices of M/s. Risa International Ltd., rose to Rs.177.90 per share during March 2015 and thereafter shrunk to Rs.0.95 on 28.03.2016. This shows that the share transactions of M/s. Risa International Ltd., are fabricated.
ix. During the year of investment viz., financial year 2012-13, the net turnover reported by the company was minimal. But the stock prices shot out from Rs.0.10 per share to Rs.5.45 per share without any basis. This is highly improbable during the normal course unless shares are spiked artificially.
x. M/s. Risa International Ltd.'s shares were suspended from trading in BSE for not complying with the listing agreement. It was also penalized for not submitting its share holding pattern on corporate governance report.
xi. The investment of Rs.75,00,000/- made by the assessee in the shares of M/s. Risa International Ltd., was purposeless because there were no credentials worthy of mentioning unless the purpose is to garner tax free profits.6 ITA No.1786/CHNY/2017
xii. If the share price of M/s. Risa International Ltd., were genuine and not illiquid there were no reasons for such fluctuations in the share price.
xiii. A report on the enquiry carried out in the case of M/s. Risa International Ltd., by the BSE with the help of SEBI is placed in the files of the Revenue.
xiv. An independent investigation agency viz., "money life" had made research in the shares of M/s. Risa International Ltd., and they had observed that the shares of M/s. Risa International Ltd. was manipulated and spiked.
xv. Though the credentials and financials of M/s. Risa International Ltd., was unworthy and lacked identity in the market, the share prices were pumped and dumped during the share holding period of the assessee. This clearly shows that the transactions were fabricated to suit the purpose of the assessee. xvi. The assessee himself has confirmed his proximity with Shri Abhinandan Jain who is a whole-time director of M/s. Risa International Ltd., who had tipped him that the share price of M/s. Risa International Ltd., is bound to escalate in a short span of time. These facts establish that it was an insider trading in the stock exchange. The close proximity of the assessee with Shri 7 ITA No.1786/CHNY/2017 Abhinandan Jain also establishes the fact that there was collusion between them.
xvii. Though many of the notice U/s.131 of the Act sent to the buyers of the shares they were returned un-served, the assessee failed to co-operate with the department to produce the buyers of the shares or to prove that the shares of M/s. Risa International Ltd., are not spiked.
xviii. On examining the bank account of the buyers of the shares of M/s.
Risa International Ltd., it was found that the amount paid to the assessee was not accumulated in those bank accounts. The funds from identical persons were transferred to the buyers' account which was entirely transferred to the assessee's account subsequently. It was also observed that the unexplained funds were routed through layering of accounts which was finally deposited in the assessee's bank account. It was also observed that the relationship managers in most of the banks in order to achieve their target for opening new bank accounts encourage such activities without following KYC norms. Thus the gross violation in banking practice had helped in large scale tax evasion. xix. The assessee had purchased the shares of M/s. Risa International Ltd., at the rate of Rs.10 per share and thereafter sold the shares at Rs.600 per share. The increase in the price of the shares was 8 ITA No.1786/CHNY/2017 without any scientific basis and there was no necessity to purchase the shares at Rs.10 per share which was worthless unless the same was for booking profit under the guise of sale of shares for deriving benefit U/s.10(38) of the Act.
xx. All the investors who purchased the shares of M/s. Risa International Ltd., from the assessee did not possess the resources to invest and even otherwise they were party to manipulate transactions.
xxi. The transactions made by the assessee was unbelievable and the decision of the Hon'ble Apex Court in the case Durgaprasad & more reported in 82 ITR 540 and Sumathi Dayal Vs. CIT reported in 214 ITR 801 is applicable to the facts of the case of the assessee.
xxii. For the above stated reasons the assessee is not eligible to claim exemption U/s.10(38) of the Act with respect to the gain arising out of the sale of shares of M/s. Risa International Ltd., of Rs.38,05,28,490/- and even if the profit gained by the assessee is treated as business profit derived from share manipulation the same has to be taxed U/s.28 of the Act and therefore the assessee will be ineligible for claiming exemption U/s.10(38) of the Act. 9 ITA No.1786/CHNY/2017
4. On appeal the Ld.CIT(A) concurred with the view of the Ld.AO and further made the following observations in his order:-
(i) The assessee was extended with an opportunity to cross examine Shri Prasanta Bose, Director of Shallot Group of Companies, Kolkata who had disposed before the Ld.AO that the transactions involving M/s. Risa International Ltd., are fabricated. However he was unable to counter with the averments made by Shri Prasanta Bose.
(ii) The submissions of the Ld.AR that the findings of the Ld.AO placing reliance on the reports of SEBI, research findings of Money-life, graphs of share price movement, action by SEBI etc., is misplaced cannot be appreciated because the entire facts has to be seen in a holistic manner and not independently. If it is seen in such a composite manner, it is abundantly clear and substantiated beyond doubt that the transactions are bogus in nature.
(iii) The decisions relied by the Ld.AR does not apply to the case of the assessee because in those cases order was passed based on suspicion, without appropriate investigation and also without corroborative evidence. In the case of the assessee a proper investigation was conducted and the decision was based on corroborative evidences. The Ld.AO had not left any gaps or lacuna in the investigation conducted by him.10 ITA No.1786/CHNY/2017
(iv) As against the detail investigation made by the Ld.AO, the appellant has only one piece of evidence being that the financial transactions were routed through banking channels and the shares were traded through stock exchanges. Reliance was placed in the decision of the Hon'ble Madras High Court in the case CIT vs. Krishnaveni Ammal reported in 158 ITR 826 wherein it was held that "when there are other documentary evidence of corroborative value and same is within reach of assessee, judicial body cannot act on such interested testimony of assessee alone."
(v) The assessee has failed to discharge his onus in proving the fact and substantiating that the transaction adheres to natural course of event and human conduct.
(vi) No adequate reason is provided to explain the fluctuations of the price of the shares.
(vii) The shares of M/s. Risa International Ltd., were not ordinarily traded in the market and was bought and sold with the connivance of operators.
(viii) Merely because the financial transactions are routed through banking channels and the share transactions were through stock exchanges the same does not confer authenticity to the transaction. Genuineness of the transaction has to be conclusively 11 ITA No.1786/CHNY/2017 proved in all parameters. Reliance was placed in the case CIT vs. P. Mohanakala & other reported in 291 ITR 278.
(ix) When all adverse factors are viewed holistically there cannot be even an iota of doubt in classifying the transactions as manipulations. The nature of transactions points out that the profit in the hands of the assessee is actually his unexplained income which is reverted back to him in the guise of exempt income. Heavy reliance was placed in the decision of the Mumbai Bench of the Tribunal in the case ITO vs. Shamim N. Bharwani reported in 69 taxman.com 65. Reliance was also placed in the decision of the Hon'ble Punjab & Haryana High Court in the case Som Nath Maini vs. CIT reported in 30 ITR 414, decision of the Hon'ble Apex Court in the case Sumathi Dayal & Durga Prasad More. Reliance was also placed in the decision of Hon'ble Punjab & Haryana High Court in the case Faridabad vs. Om Prakash & Sons reported in 20 taxman.com 775.
(x) The assessee had failed to obtain the financials of Shallot Group of Companies to prove that these companies are credit-worthy. This omission affirms the fact that the companies are only participants to layer the transactions for commission and are not actual investors.
(xi) The purpose of purchase and sale of the shares of M/s. Risa International Ltd., is only to exploit the price hike of the shares and 12 ITA No.1786/CHNY/2017 not earn dividend from such investments. Therefore, terming the investments as stock-in-trade of the appellant is most appropriate.
The inference drawn by the Assessing Officer from the Board's Instruction No.17 dated 26/11/2008 is in order. The shares of M/s. Risa International Ltd., were held by the appellant as AFS (Available For Sale) and therefore, the action of the Assessing Officer to tax it alternatively u/s.28 is appropriate. 4.1 Thereafter the Ld.CIT(A) confirmed the order of Ld.AO by observing as under:-
"7.4 From the elaborate discussion made, it is substantiated beyond doubt that the unexplained money of the assessee has been channelized through a layer of bank accounts and share transactions to revert back to the assessee as exempted LTCG. The credits to the capital account of the assessee by way of exempted LTCG is found to be the actual unexplained monies of the assessee and the explanation given as being obtained on sale of STT suffered stock exchange listed shares is proved to be not genuine. Therefore the Assessing Officer's action to treat the corresponding credit of Rs.38,05,28,490/- as unexplained credit and bringing it to tax under S.68 of the Act, is upheld."
5. The Ld.AR submitted before us that the assessee had invested in the shares of M/s. Risa International Ltd., after gaining authentic information through Shri Abhinandan Jain that the share price is bound to shoot up which is generally normal in share market. Therefore there is no illegality attached to the transaction by making such investment. There is also no 13 ITA No.1786/CHNY/2017 bar on the assessee as to how he should exploit gain from his investment that is either by way of sale of the shares or by earning dividend income. He further submitted that the entire shares acquired was based on the order of the Hon'ble High Court of Bombay dated 29.06.2012 in CP No.288/2012 and therefore the allegation of the Department that the assessee got shares by preferential allotment does not lead any negative inference. Further the shares were sold in the open share market through regulated stock exchange and the sale proceeds were realized through proper banking channel. He further argued stating that the assessee (black money holder) approached operators to convert black money into white money is totally baseless because there is no evidence to establish the same other than the mere statements of few individuals against the share of M/s. Risa International Ltd., and not the assessee. Moreover no evidence was produced by the Revenue to show that the assessee had advanced cash to the buyers of the shares from him. Further no evidence was produced by the Revenue to establish that the share prices were hiked. The Ld.AR further submitted stating that the shares of M/s. Risa International Ltd., was traded regularly in the stock market till date and the appropriate Government Regulatory Authorities has not pointed out any irregularities in those shares. He further argued stating that the purchasers of the shares from the assessee were not probed by the Revenue in order to 14 ITA No.1786/CHNY/2017 prove that they were men of meager means. All those individuals had proper bank accounts and therefore identifying those individuals was possible. However the Ld.Revenue Authorities without analyzing the entire issue has presumed that the assessee had infused his unexplained income in the guise of gain arising out of trading in shares. Further the Department had relied only on the SEBI report mentioned in page 6 of the assessment order however the same was not furnished to the assessee. In fact the report submitted by the SEBI was only an interim freeze order. Thereafter the order of suspension passed by SEBI dated 28.03.2016 was set aside by the Securities Appellate Tribunal in Appeal No.64 of 2016 vide order dated 30.03.2016. The Ld.AR further submitted that the records and statements of the alleged operators had only pointed out the trading activity of M/s. Shallot group of Companies with respect to the shares held by Ranka & family and there was no reference to the assessee Shri Praveen Kumar. The assessee had also furnished news articles and other particulars about M/s. Risa International Ltd's., expansion which increase the optimism in the purchase of the shares of the company (page 37 - volume 3 of the PB). Therefore the Ld.AR pleaded that the allegations made by the Department is only based on presumptions and assumptions and therefore cannot be sustained in law. Hence it was requested the addition made by the Revenue Authorities may be deleted. Further the 15 ITA No.1786/CHNY/2017 Ld.AR submitted that though the Revenue had vehemently discussed about the tainted shares of M/s. Risa International Pvt. Ltd., and the activities of the various other intermediaries there is no reference of the assessee in the involvement in the sham transaction. Therefore adverse inference cannot be made in the case of the assessee.
6. The Ld.DR on the other hand vehemently argued in support of the orders of the Ld.Revenue Authorities reiterating their findings, views etc., stated in their respective orders. The Ld.DR also placed reliance in the various statements recorded from individuals which forms part of the paper book submitted by the Revenue and pleaded that Orders of the Ld.Revenue Authorities may be upheld.
7. We have heard the rival submissions and carefully perused the materials before us. From the facts of the case, the allegations of the Ld. AO can be broadly summarized and analyzed as under:-
(i) The observation of the Ld.AO that assessee did not have expertized or experience in share trading activity will not lead to the presumption that the assessee is dealing with penny stock.
(ii) Normally in capital building activities of the company which do not enjoy substantial goodwill in the market, private placements are canvassed. Therefore one cannot arrive at a conclusion bluntly that the investment made by the assessee is peculiar. 16 ITA No.1786/CHNY/2017
(iii) The allegation of the Revenue that the assessee had invested in the shares of M/s. Risa International Ltd., only to make gain out of sale of those shares and no intention to exploit dividend income does not lead to the presumption that the assessee is indulging in sham transactions. Further classification of shares under AFS category is only applicable to banks recognized by RBI and not to an individual assessee.
(iv) The confession of one of the directors in M/s. Shallot Vincom Pvt.
Ltd., Kolkatta, Shri Prasanta Bose only leads to a suspicion that the shares of M/s. Risa International Ltd., might be penny stock. In the confession statement (Annexure 'C' of assessment order), Shri Prasanta Bose had stated that his company M/s. Shallot Vincom Pvt. Ltd., had invested in the shares of M/s. Risa International Ltd., amounting to Rs.6,06,01,000/- from the funds received from entry operators viz., Mr. Vijay Kedia, Mr. Ashish Agarwal, Mr.N.M. Lohia, Mr.Pankaj Agarwal and Mr.Sachin Badani. He had also stated that the various companies in which he was director, was audited by Shri Sanjay Khandalwal & Co., Chartered Accountants, whom he does not know directly and the same was organized by Shri Vinod Gupta. He has also stated that the brokers with whom he had dealt with for purchase and sale of the penny stock shares were Sunil Kr. Kayan & Co., Sanjay Bansan, Yashwi Securities Pvt. Ltd., Motilal 17 ITA No.1786/CHNY/2017 Oswal Securities Pvt. Ltd., and Indianfoline. He has also stated that he do not know the beneficiaries of the purchasers because he had acted on the instructions of the agents of the entry operators, brokers, etc.. From para No.16 of the statement, it is observed that in the balance sheet of M/s. Shallot Vincom Pvt. Ltd., as on 31.03.2014 there was no stock with respect to the share of M/s. Risa International Ltd. Further Shri Prasanta Bose has made adverse remarks about certain chartered accountants who had organized merchant bankers and other participants having adequate knowledge about the requirements of SEBI/ Stock Exchanges and they had got the paper company listed. Thus from the statement of Shri Prasanta Bose dated 02.12.2016, it appears that various persons are involved in the transactions. However the Revenue has not made any investigation or brought the same to our notice to draw adverse inference against the assessee. Therefore the observations made by the Ld.AO only leads to an element of suspicion and not conclusive evidence. Moreover it is evident that the assessment order was passed by the Ld.AO hurriedly on 27.12.2016 based on the statements obtained from Shri Prasanta Bose on 02/12/16 ie., within a span of three weeks. In this situation we wonder as to how the assessment can stand only on the basis of statement made by Shri Prasanta Bose. 18 ITA No.1786/CHNY/2017
(v) The observation of the Ld.AO regarding the trading activity of shares by assessee was in the nature of trading in penny stock companies is not based on conclusive evidence but only based on the statements of certain individuals like Shri Prasanta Bose. Though the strong needle of suspicion ascends, it is obvious that assessment cannot be made based on mere surmises and conjectures when it adversely affects any individual.
(vi) We do not understand as to what adverse inference can be drawn from the observation of the Ld.AO that the entire contract note of M/s. Lodha Securities Ltd., related only to the sale of shares of M/s. Risa International Ltd.
(vii) Mr. Prasanta Bose had referred to one person name Shri Hemat Goelka who had induced and motivated him to form companies in order to provide accommodation of bogus profit to the beneficiaries in exchange of commission however the Ld.AO has not summoned Mr. Hemat Goelka and examined him in order to strengthen the statement of Mr. Prasanta Bose or brought to our notice regarding any such evidence.
(viii) With respect to the observation of the Ld.AO that the shares of M/s. Risa International Ltd., hit lower circuit on 28.03.2016 and thereafter BSE decided to suspend the trading operation has been explained by the assessee that such suspension order was set 19 ITA No.1786/CHNY/2017 aside by the Securities Appellate Tribunal in appeal No.64 of 2016 vide order dated 30.03.2016. This fact is neither disputed by the Revenue before us nor any documentary evidence produced before us on that regard. Therefore we fail to understand as to what adverse inference we can draw from the same.
(ix) Only based on the fact that the share price of M/s. Risa International Ltd., allotted through preferential allotment rose to Rs.177.9 per share during March 2015 and thereafter shrunk to Rs.0.95 on 28.03.2016, presumption cannot be made that the transactions are fabricated, though it can only lead to suspicion.
(x) Similarly adverse inference cannot be drawn only on the fact that share prices shot up in a short span of time from Rs.0.10 paise per share to Rs.5.45 per share during the financial year 2012-13.
(xi) The assessee has also explained its position with respect to suspension of shares of M/s. Risa International Ltd., in the BSE which the Revenue has not confronted before us.
(xii) Even if the assessee has made investment of Rs.75 lakhs in worthless shares of M/s. Risa International Ltd., merely based on presumptions it cannot be held that the assessee had made such investments to garner tax free profits.
(xiii) The fluctuation of the price of the shares alone will not lead to the conclusion that the transactions are not genuine.
20 ITA No.1786/CHNY/2017
(xiv) The report of the BSE with the help of SEBI is neither furnished to the assessee by the Revenue nor produced before us; therefore we cannot rely on the same.
(xv) Similarly the investigation report of 'money-life' is also not produced before us by the Revenue. Hence we cannot place reliance on the same.
(xvi) The manner in which the share prices were pumped and dumped and the individuals / persons who dealt in such operations along with the modus operandi are not vividly presented before us other than statements of few individuals. Therefore we cannot draw any adverse inference from the same.
(xvii) In the statement recorded from Shi Abhinandan Jain, chartered accountant who is one of the directors in M/s. Risa International Ltd., it is evident that the prices of the shares of M/s. Risa International Ltd., was inflated by Mr. Naresh Jain in connivance with other operators. However no investigation is made on that regard. Further it is evident that preferential allotment of shares in M/s. Risa International Ltd., was made after the approval of the scheme by the Hon'ble Mumbai High Court. Further it is apparent that the entire process was within the ambit of legal parameter because no adverse action is initiated against Shri Abhinandan Jain and if any penal action is taken against him the same is not 21 ITA No.1786/CHNY/2017 brought to our notice. Considering these facts even though it is presumed that there is an artificial spiking of shares of M/s. Risa International Ltd., there is no evidence to establish that the assessee had infused his unaccounted income in the garb of gain arising from the sale of the shares of M/s. Risa International Ltd. (xviii) The Ld.AO has observed that the buyers of the shares did not respond to the notice issued U/s.131 of the Act. It is an admitted fact that the buyers of the shares of M/s. Risa International Ltd., from the assessee through stock exchange are unknown to the assessee. In this situation, we do not understand as to how the assessee can be penalized if those persons do not respond to the notice issued by the Revenue U/s.131 of the Act. The Revenue was at liberty to locate those persons because their identity was known and well within reach.
(xix) The Ld.AO has further observed that the buyers of the shares of M/s. Risa International Ltd., did not accumulate funds in their accounts which was utilized for purchase of shares from the assessee. However the Ld.AO has not examined as to from where those individuals acquired funds and in what manner. Further the Ld.AO has not brought on record as to what are the KYC norms violated by the banks with respect to those individuals. 22 ITA No.1786/CHNY/2017 (xx) The Ld.AO has observed that the share prices of M/s. Risa International Ltd., was purchased by the assessee at Rs.0.10 per share and subsequently sold at Rs.600 per share and the increase in the price of the share was without any scientific basis, therefore he was of the view that the assessee had book profit under the guise of sale of share for deriving benefit U/s.10(38) of the Act. While arriving at such conclusion it is apparent that the Ld.AO has only relied on the statements of few individuals and has not made a thorough investigation on the entire modus operandi as to establish in what manner the shares were manipulated to reach at such high price.
(xxi) The Ld.AO has observed that the investor who purchased shares of M/s. Risa International Ltd., from the assessee did not possess resources to invest is not substantiated with evidence before us.
8. Further the findings of the Ld. CIT(A) can be broadly summarized and analyzed as under:-
(i) The Ld.CIT(A) has pointed out that when the assessee was provided with an opportunity to cross examine Shri Prasanta Bose, Director of Shallot Group of Companies, Kolkata, however he was not able to counter the averments made by him, is of no consequence, because there was no direct nexus between them. 23 ITA No.1786/CHNY/2017
(ii) Further it is apparent that the Ld.CIT(A)'s holistic view of the entire matter is only based on the partial investigation made by the Ld.AO on the issue.
(iii) The Ld.CIT(A) has further opined that the Ld.AO had not left any gaps of lacuna in the investigation conducted by him, however from the facts of the case it is apparent that the Ld.AO has not made any investigation other than interrogating few individuals when according to his own finding there were many individuals involved in the manipulative operations.
(iv) The Ld.CIT(A)'s reliance in the decision of the Hon'ble Madras High Court in the case CIT vs. Krishnaveni Ammal cited supra is not applicable to the case of the assessee because the details of the entire operations are not thoroughly investigated and conclusions are drawn only on the basis of the statements given by few individuals followed by surmises and conjectures.
(v) From the facts of the case it appears that the assessee has complied with all the legal parameters because other than the fact that the share prices increased substantially in a short span of time and the statement of few individuals there is nothing against the assessee which is brought to the notice before us.
(vi) The Ld.CIT(A) has further observed that there was no adequate reason to explain the fluctuation in the price of shares of M/s. Risa 24 ITA No.1786/CHNY/2017 International Pvt. Ltd. On this regard it is apparent from the paper book page No.248 filed by the Revenue that Mr. Abhinandan Jain in Question No.62 has stated the price of the stock was inflated by Mr. Naresh Jain in connivance with other operators. Further on interrogating Mr. Naresh Jain, he has explained the modus operandi for inflating the price of shares. However evidences are not before us to corroborate with the statement of Mr. Naresh Jain other than the statement recorded from Shri Hasmukh Bhai Manilal Shah and Shri Rajeshkumar Dubey.
(vii) Once the assessee has established that the entire transaction were made within the legal parameters the onus shifts on the Revenue to prove that the transactions are not genuine. Though the Revenue has gathered some information based on the statements of few individuals corroborative evidences to prove the statement of those individuals is not placed before us. Hence adverse conclusion cannot be reached against the assessee based on assumptions. Therefore the reliance placed by the Ld.CIT(A) in the case CIT vs. P. Mohanakala & Others cited supra is not applicable to the facts of the case of the assessee. Similarly the facts in the cases ITO vs. Shamim N Barwani, Somnath Mani vs. CIT, Sumathi Dayal and Durga Prasad More are not identical to the case of the assessee.25 ITA No.1786/CHNY/2017
9. On perusing the paper book filed by the Revenue at page No.134, 196, 234 in the assessment order of M/s. Shallot Vyapaar Pvt. Ltd., M/s. Shallot Tie-up Pvt. Ltd., and M/s. Shallot Vincom Pvt. Ltd., 2% of the total transaction of penny stock with respect to trading of shares of M/s. Risa International Pvt. Ltd., amounting to Rs.22,97,865/-, Rs.49,80,543/- and Rs.19,43,215/- aggregating to Rs.92,21,623/- is treated as the undisclosed income in the hands of the respective assessees being the commission earned in the transaction. However from the assessment order of Mr. Sohanraj Praveen Kumar it is apparent that he has sold share of M/s. Risa International Pvt. Ltd., for Rs.38,80,28,490/-. That shows that out of Rs.92,21,623/-, Rs.77,60,057/- (Rs.38,80,28,490 x 2/100) pertains to trading of shares by the assessee. Therefore it appears that almost the entire trading of shares of M/s. Risa International Pvt. Ltd., was that of the shares of M/s. Risa International Pvt. Ltd., held by the assessee. However the details of the shares of M/s. Risa International Pvt. Ltd., traded by other individuals are not brought on record. Further, in the statement of Shri Abhinandan Jain in page No.244 of the paper book of the Revenue it is mentioned that "consent letter was obtained from the prospective shareholders" which show that there were other individuals who were also allotted preferential shares. It is also evident from the statement at page No.243 of the paper book of the 26 ITA No.1786/CHNY/2017 Revenue that total preferential shares allotted was 3,14,00,000 equity shares at a price of Rs.10 per share with respect to 49 entities against which the assessee was allotted only 75,00,000 shares. What is the status of the rest of the shareholders is not on record before us. It is pertinent to mention that the other individuals, who dealt with the shares of M/s. Risa International Pvt. Ltd., will also stand in the same footing and the details of those cases are not before us. Further the Ld.AO has predominantly relied on the statement of Shri Abhinandan Suresh Jain dated 20.10.2016, Shri Naresh Manikchand Jain dated 20.10.2016, Shri Hasmukh Bhai Manilal Shah dated 20.10.2016 and few others and letter of Shri Rajeshkumar Dubey dated 26.11.2016 while concluding his assessment order on 27.12.2016. There were no further investigations made on the other individuals who are large in number while arriving at such conclusion. It is pertinent to mention that the persons from whom the Revenue has obtained statements are also assessed to tax on the admitted commission income of 2% of the turnover and if those individual had not admitted there was a threat of being taxed multifold. Hence statement made by the intermediaries does not have evidential value unless corroborated with other material evidence. There is also no finding as to how the assessee would have earned so much of undisclosed income which he has brought back as gain from sale of shares and from what source.
27 ITA No.1786/CHNY/20179.1 Further from the facts of the case, it is evident that the entire transactions are through recognized stock exchange and all the financial transactions are made through banking channels and the same is not in dispute. The Ld.AR had also affirmed that though SEBI had debarred the trading of shares of M/s. Risa International Pvt. Ltd., for a short-while due to technical reasons, the bar was lifted subsequently and the shares are being traded in the recognized stock exchange till date. This fact is also not disputed by the Ld.DR either. The finding of the Ld.AO that the company M/s. Risa International Pvt. Ltd., did not have any credentials worthy of mentioning only leads to a suspicion that the transactions are bogus. But it should be kept in mind that in commercial scenario various economic factors affect the price of shares which may not be physically visible. Therefore one cannot arrive at a conclusion only based on such suspicion. There are occasions where blue chip companies also manipulate the price of shares for various reasons which may be illegal but to initiate penal action there should be concrete finding with evidence on such illegal activities. Predominantly in the case of the assessee though various aspects points out that there may be some superfluous activities conducted by various persons in order to influence the price of shares of M/s. Risa International Pvt. Ltd., no concrete evidence is brought out to establish any illegality with respect to the transitions of the 28 ITA No.1786/CHNY/2017 assessee in particular. On query, the Ld.DR informed us that there is no criminal case, investigations by enforcement directorate or by CBI pending as on date with respect to the assessee or M/s. Risa International Pvt. Ltd. Moreover no irregularities are brought out by SEBI or any recognized stock exchange with respect to the trading in shares of M/s. Risa International Pvt. Ltd., in the case of the assessee in particular as affirmed by the Ld.AR as well as the Ld.DR before us. Further there is no finding by the Department as to how the assessee might have possessed/acquired such huge black money for conversion. The bank account trial with respect to the source of the amount invested by the so called dubious purchasers of shares from the assessee through stock exchange has not been thoroughly investigated by the Revenue to establish that those buyers are not genuine and they did not have sufficient source to invest in the shares of M/s. Risa International Pvt. Ltd., purchased from the assessee. Only a passing remark is made by the Revenue on that regard that the buyers of the shares from the assessee were men of meager means but no evidence is brought on record. In fact the need for such finding was dispensed with by the Revenue by merely stating that the funds were routed through layering of accounts and flouting of rules by the bankers not following KYC norms. Though the Ld.AO has explained how the penny stock works, he has not made any finding with corroborative evidence to establish that the 29 ITA No.1786/CHNY/2017 assessee's case falls under dealing with penny stock. The Ld.AO had also observed in his order that the assessee had failed to obtain financials and bank accounts of the buyers of the shares from the assessee to prove that they are credit worthy. We do not understand as to how the assessee will be able to get such particulars from strangers who had purchased shares of the assessee through recognized stock exchange. In fact the Revenue had all the opportunity to summon them and obtain the requisite particulars which they had grossly fails to exercise. The Ld.AO has also relied on the message propagated by "money life" but he has not made a finding as to how it is applicable in the case of the assessee. The Ld.AO has also pointed out about the bank accounts being opened by various individuals without following KYC norms. However the Ld.AO has not examined those individuals in order to establish his adverse finding on the assessee. The reference made by the Ld.AO with respect to asset classification by banking institutions viz., "available for sale (AFS)" and the relevant CBDT Circular No.17 dated 26.11.2008 is not applicable to the case of the assessee because the assessee is not a banking institution. Moreover the Ld.AO has not made any finding with respect to the modus operandi as to how such manipulations were made possible. He has only made a presumption that the transactions are dubious. It is pertinent to mention that the assessee would not be able to explain the entire activities of M/s. 30 ITA No.1786/CHNY/2017 Risa International Pvt. Ltd., or gather internal documents/information because M/s. Risa International Pvt. Ltd., is a third party as far as the assessee is concerned and he has no control over the company. Further he himself confessed that he indulged in such trading activity based on tips received from reliable sources. Though it appears that such quantum of raise and fall in the price of shares is not normally possible as in the case of M/s. Risa International Pvt. Ltd., it is essential to bring out some evidence to establish that there is some illegality in the transaction. Conclusions cannot be made merely on the basis of conjectures and surmises. The Ld.AO's grievance that the assessee had failed to obtain financials and bank accounts of the buyers of shares to prove they are credit-worthy is not appreciable, because it is obvious that the assessee cannot get such documents from unknown individuals who have purchased shares through recognized stock exchange. The observation of the Ld.AO that the assessee had purchased the shares only to obtain profit from sale of those shares and had no intention for earning dividend income also does not seem to be appropriate because any investor is at liberty to exploit gain from dealing with their investment in the best possible manner. In the case of the assessee though there is a strong needle of suspicion arising due to the unnatural fluctuation of the price of the shares of M/s. Risa International Pvt. Ltd., no clear cut evidence is brought forth by the Revenue in order to nail the assessee for penal 31 ITA No.1786/CHNY/2017 consequence. In these circumstances we do not find any merit in the Order of Ld.AO for making addition in the hands of the assessee U/s.68 of the Act with respect to the Long Term Capital Gain earned by him from the sale of shares of M/s. Risa International Pvt. Ltd., or treating the Long Term Capital Gain earned by the assessee as income from business or denying the benefit of Section 10(38) of the Act, and as well as with the Order of the Ld.CIT(A) who had sustained the addition made by the Ld.AO by agreeing with his view.
9.2 Further on examining the decisions relied by the Ld. Revenue Authorities we do not find much strength in the same. They are briefly discussed herein below for reference:-
a) The Ld.AO has relied in the case Sumati Dayal vs. CIT reported in 214 ITR 801. In that case it was with respect to introduction of capital by consistently winning from horse races. Horse race is a game of chance and consistent winning from such game of chance, particularly winning by jackpots etc., is against the theory of human probabilities. However the case of the assessee it is with respect to purchase and sale of shares through recognized and regulated stock exchange. Hence the ratio laid down in the case cannot apply to the case of the assessee.32 ITA No.1786/CHNY/2017
b) The Ld.AO has heavily relied in the decision of the Mumbai Benches of the Tribunal in the case ITO vs. Shamim Bharwani reported in 69 Taxman.com 65 and has extracted the entire order. However it is pertinent to mention that in that case the shares were purchased off the market which was not reported in the recognized stock exchange. The purchase was through back dated contract note and paid by cash. The shares belong to penny stock company and there were no real buyers. The operators were acting in benami names or name lenders. The shares traded were of paper companies. The purchases were in physical form, and demated subsequently long after the purchase date, back dated close to the date of sale. From the above, it is evident that facts are not identical to case of the assessee. In the case of the assessee shares are allotted on preferential basis after obtaining permission from the Hon'ble High Court and subsequently traded through regulated stock exchanges. Further financial transactions were made through banking channels. The identity of the persons who traded in those shares are also known. Therefore the case relied by the Revenue is not applicable to the case of the assessee.
c) The decision of the Hon'ble Apex Court relied by the Revenue in the case CIT vs. Durga Prasad More reported in 82 ITR 540 neither 33 ITA No.1786/CHNY/2017 deal with share market transactions or identical to the facts in the case of the assessee.
d) Further the decision in the case CIT vs. Mohanakala by the Hon'ble Apex Court reported in 291 ITR 278 is not applicable to the case of the assessee because in that case the issue was with respect to addition made under the head cash credit U/s. 68 of the Act towards foreign gifts received from one common donor and the evidence indicated that the donor was to receive suitable compensation from the assessee though the money came by way of bank cheques and was paid through the process of banking transactions which was by itself of no consequence. But in the case of the assessee before us the issue is with respect to allotment of shares by the order of the Hon'ble High Court and sale of shares through regulated market such as stock exchange and the watch full eye of SEBI.
e) In the case CIT vs. Krishnaveni Ammal reported in 158 ITR 826, the Hon'ble Jurisdictional Madras High Court held that when there was information to effect that Multani Bankers had only indulging in hawala transactions by merely lending their names, the credit entries in the name of the various Multani Bankers appearing in the books of the assessee did not represent genuine transaction because though the assessee had stated that crossed checks are 34 ITA No.1786/CHNY/2017 available they were not produced before the Revenue. In the case of the assessee the issue is totally different.
f) In the case Somnath Maini vs. CIT reported in 306 ITR 414, the Hon'ble High Court of Punjab & Haryana had held that "The burden of proving that income is subject to tax is on the Revenue but on the facts, to show that the transaction is genuine, the burden is primarily on the assessee. The Assessing Officer is to apply the test of human probabilities for deciding the genuineness or otherwise of a particular transaction. Mere leading of evidence that the transaction was genuine, cannot be conclusive. Such evidence is required to be assessed by the Assessing Officer in a reasonable way. The genuineness of the transaction can be rejected even if the assessee leads evidence which is not trustworthy, even if the Department does not lead any evidence on such an issue." However in the case of the assessee the genuineness of the company M/s. Risa International Pvt. Ltd., which is a third party and not under the control of the assessee and whose shares are allotted after obtaining permission from the Hon'ble High Court and thereafter sold is the issue. Moreover the shares are traded through recognized stock exchange in the open market to unknown and unconnected persons. Therefore the ratio laid down by the Hon'ble High Court would not be strictly applicable in the case of the assessee.
9.3 The Ld.AR has relied in the following decisions which apparently support the case of the assessee:-
35 ITA No.1786/CHNY/2017
Bombay High Court in the case of Jamna Devi Aggarwal 236 CTR 32 (2010) Bombay High Court in the case of Mukesh Ratilal Marolia (2012) 80 CCH 0407 Gujarat High Court in the case of Maheshchandra G Vakil (2013) 40 Taxman 326 Ahmedabad ITAT in the case of Mahesh G Vakil ITA No.3104/Ahd./2009 Kolkata High Court in the case of Emerald Commercial Ltd (2002) 120 Taxman 282 Kolkata ITAT in the case of Sunita Khemka ITA No.714 to 718/Kol./2011 Kolkata ITAT in the case of Anil Khemka ITA No.901 to 905/Kol./2009 dated 28/01/2010.
In all the above mentioned cases, it has been uniformly held that when the transactions are routed through banking channels and the identity of the seller and the purchasers are established and when the transactions are covered through contract notes, demat accounts which shows transfer in and out of shares then there is no necessity to doubt the genuineness of the transactions.
9.4 From the above it is apparent that the decisions relied by the Ld. Revenue Authorities will not be strictly applicable to the case of the assessee and the decisions cited by the Ld.AR supports the claim of the assessee.
36 ITA No.1786/CHNY/20179.5 We do understand the genuine anxiety of the Revenue to tax the assessee due to the various unnatural happening of events, but as a Judicial body our hands are tied due to the lack of material evidence against the activities of the assessee and we cannot step into the shoes of the Revenue by making further investigations and enquiries to tie up the loose ends left out by the Revenue. From the materials produced before us there is nothing on record to establish that the transactions of purchase and sale of shares made by the assessee are dubious other than the fact that the share prices of M/s. Risa International Pvt Ltd., rose substantially without sound backing and the statements of few persons such as Shri Abhinandan Suresh Jain, Shri Naresh Manikchand Jain, Shri Prasanta Bose, Shri Bhupesh Rathode, Shri Hasmukh Bhai Manilal Shah, Shri Rajeshkumar Dubey and certain other individuals. At the same time it should be kept in mind that stock prices may raise due to certain hidden factors which may be not known to the public at large even with respect to blue chip companies. Further even if share prices are manipulated some evidence has to be gathered as to whether assessee's unaccounted money is brought in or public money is swapped. Hence conclusion cannot be bluntly made on the basis of surmises and conjectures in the case of any assessee when certain other material factors are in favour of the assessee. It appears that the 37 ITA No.1786/CHNY/2017 Revenue had issued summons to 44 individuals to whom the assessee had sold shares of M/s. Risa International Pvt Ltd., (Revenue's PB page 285-287) through stock exchange, however there is no finding about the outcome of those summons placed before us. Therefore no negative inference can be drawn against the assessee. Moreover assessee had sold his share of M/s. Risa International Ltd during the month of September 2013 at an average price of Rs.515/-per share. SEBI had suspended the trading on 31/03/2016 much later after the transitions made by the assessee. Further share price rose to as high as Rs.1425/- per share and remained near about Rs.500/- per share while as the assesse had sold his shares at an average price of Rs.515/-. (As gathered from the Revenue's finding in Revenue's PB page 6). In these circumstance we wonder as to what adverse finding can be drawn on the assessee when there is no adverse findings in the transitions made by the assessee in particular with cogent evidence other that assumptions and presumptions.
9.6 The Hon'ble Punjab & Haryana High Court in the case CIT vs. Anupam Kapoor reported in 299 ITR 179 in a somewhat similar situation has categorically stated that no presumption could be drawn by the Assessing Officer merely on surmises and conjectures. The gist of the decision and case is extracted herein below for reference:- 38 ITA No.1786/CHNY/2017
"The assessee's case was reopened on receipt of an intimation from the Deputy Director of Income-tax (Investigation) stating that the long-term capital gain declared by the assessee was false and the transaction was not genuine. In response to a notice under section 148 of the Income-tax Act, 1961, the assessee submitted his reply and furnished evidence in support of his claim of long-term capital gain. The Assessing Officer held that the assessee failed to lead evidence to support his claim of long-term capital gain and considered the amount of Rs.1,74,552 as unexplained credit and it was added in the income of the assessee. The Commissioner (Appeals) deleted the addition holding that the Assessing Officer had not discharged his onus and there was no material or evidence with the Assessing Officer to come to the conclusion that the transaction shown by the assessee was a bogus transaction. The Commissioner (Appeals) took the view that if a company was not available at the given address, it could not conclusively prove that the company was non-existent. The Tribunal took into consideration that the Assessing Officer had not dealt with all the documents placed before him and had simply presumed that the transaction was bogus and held that the purchase contract note, contract note for sales, distinctive numbers of shares purchased and sold, copy of the share certificates and the quotation of shares on the date of purchase and sale were sufficient material to show that the transaction was not bogus but a genuine transaction. On appeal:
Held, dismissing the appeal, that there was no material before the Assessing Officer, which could have led to a conclusion that the transaction was a device to camouflage activities to defraud the Revenue. No such presumption could be drawn by the Assessing Officer merely on surmises and conjectures. The Tribunal took into consideration that it was only on the basis of a presumption that the Assessing Officer concluded that the assessee had paid cash and purchased the cheque. In the absence of any cogent material in this regard, having been placed on record, the Assessing Officer could not have reopened the assessment. The assessee had made an investment in a company, evidence whereof was with the Assessing Officer. Therefore, the Assessing Officer could not have added the income, which was rightly deleted by the Commissioner (Appeals) as well as the Tribunal."39 ITA No.1786/CHNY/2017
9.7 In the case Omar Salay Mohamed Sait vs. CIT reported in 37 ITR 151, the Hon'ble Apex Court categorically held that "on no account whatever should the Tribunal base its findings on suspicions, conjectures or surmises: nor should it act on no evidence at all or on improper rejection of material and relevant evidence or partly on evidence and partly on suspicions, conjectures or surmises and if it does anything of the sort, its findings even though on questions of fact will be liable to be set aside by the court." 9.8 In the case Umacharan Shaw & Brothers vs. CIT reported in 37 ITR 271, the Hon'ble Apex Court held that where conclusion arrived at was due to suspicion which could not take the place of proof but based on many surmises and conjectures reliance cannot be placed. 9.9 Similar ratio was laid down by the Hon'ble Apex Court in the case Lalchand Bhagat Ambica Ram vs. CIT reported in 37 ITR 288. 9.10 In the case CIT vs. Carbo Industrial Holdings Ltd., reported in 224 ITR 422, the Hon'ble Calcutta High Court has held that when purchase and sale of shares are effected through share brokers, their particulars are furnished and the payment is made by account payee cheque the transaction cannot be doubted just because the brokers fail to appear before the Revenue even after issue of summons. Similar view 40 ITA No.1786/CHNY/2017 was upheld by the Hon'ble Calcutta High Court in the case CIT vs. Emerald Commercial Ltd. & another reported in 250 ITR 539. 9.11 In the case CIT vs. Prem Pal Gandhi, the Hon'ble Punjab & Haryana High Court held vide its recent order dated 18.01.2018 has held that:-
"the fact that the appreciation in the value of the shares is high does not justify the transactions being treated as fictitious and the capital gains being assessed as undisclosed income if (a) the shares are traded on the Stock Exchange, (b) the payments and receipts are routed through the bank, (c) there is no evidence to indicate it is a closely held company and (d) the trading on the Stock Exchange was manipulated in any manner."
9.12 Based on the above referred cases decided by the higher judiciary and discussions we hereby direct the Ld.AO to delete the addition made by invoking Section 68 of the Act and also to grant deduction U/s.10(38) of the Act by treating the gain arising out of the sale of shares as Long Term Capital Gain. Last but not the least, it is pertinent to mention about the argument advanced by the Ld.AR that though the Revenue had vehemently discussed about the tainted shares of M/s. Risa International Pvt. Ltd., and the activities of the various other intermediaries there is no reference about the assessee's involvement in particular in any sham transaction, could not be controverted by the Ld.DR with cogent materials.
41 ITA No.1786/CHNY/20179.13 We also make it clear that we have arrived at this decision in the case of the assessee alone based on the materials and facts presented before us and therefore it does not have any binding precedent value in similar other cases. We also make it clear that we have not arrived at any conclusion with respect to the standing/activities etc., of M/s. Risa International Pvt. Ltd., because we do not have sufficient materials to comment on the same.
10. In the result the appeal of the assessee is allowed.
Order pronounced on the 14th March, 2018 at Chennai.
Sd/- Sd/-
(धु वु आर.एल रे ी) (ए. मोहन अलंकामणी)
( Duvvuru RL Reddy ) ( A. Mohan Alankamony )
याियक सद य /Judicial Member लेखा सद य / Accountant Member
चे ई/Chennai,
दनांक/Dated 14th March,2018
RSR
आदेश क ितिलिप अ ेिषत/Copy to:
1. अपीलाथ /Appellant 2. यथ /Respondent 3. आयकर आयु (अपील)/CIT(A)
4. आयकर आयु /CIT 5. िवभागीय ितिनिध/DR 6. गाड फाईल/GF