Abhishek Gupta v. ITO

Case snapshot

Sections / provisions: 68; 10(38); alleged Bogus Long Term Capital Gains; Penny Stocks

Questions before the Court / Tribunal

• ITAT Indore Upholds the Action of Revenue in holding LTCG earned from sale of shares of Turbotech Engineering Ltd. (TEL) as Bogus, The Hon. Tribunal followed the decision of Hon. Calcutta High Court rendered in case of PCIT vs. Swati Bajaj ITA No. 06/2022 Dated 14.06.2022
• What factual, statutory and procedural conditions control the relief?
• How does the operative order apply to the parties and the challenged proceeding?

Material facts and procedural background

Shri Abhishek Gupta, ITO –Ward-5(5) 303, Sangeeta Apartment Indore 66, Bhagwandeen Nagar, बनाम Indore /Vs. (Appellant / Assessee) (Respondent/ Revenue)

PAN: AGAPG4006E Assessee by Shri Shubhash Jain, AR Revenue by Shri R. S. Ambedkar / Shri Aditya Shukla, Sr. DR Date of Hearing 17.05.2022 / 21.07.2022 Date of Pronouncement 17.08.2022

1. This appeal filed by the assessee is directed against the order dated 29.11.2018 of learned Commissioner of Income-Tax (Appeals)-II, Indore [“Ld. CIT(A)”] in Appeal No. IT-10421/16-17/530, which in turn arises out of the order of assessment dated 22.12.2016 passed by the learned ITO, Ward-5(5), Indore [“Ld. AO”] u/s 143(3) of the Income-tax Act, 1961 [“the Act”] for the Assessment-Year 2014-15.

2. The assessee has raised following grounds:

3. On the fact and circumstances of the case the Learned CIT (A) erred in framing the order after observing as the statement of Appellant recorded during the Assessment Proceedings. And he denied of dealed of Shares of M/s Turbo Tech Engineers Ltd. Thus whole Appeal Order has been framed on warm facts. Hence bad in Law.

Appellant / assessee submissions

12. Per contra, Ld. DR placed heavy reliance on the observations and reasoning given by lower authorities and argued that the transactions done by assessee are only paper-transactions and the capital gain declared by the assessee is not a real profit but a bogus income arranged by assessee. According to Ld. DR, the assessee has arranged bogus capital gain to claim the benefit of section 10(38). During his arguments, the Ld. DR emphasized following vital aspects:

13. In rejoinder, the Ld. AR attempted to rebut the points emphasized by Ld. DR by drawing our attention to Page No. 117 of the Paper-Book where an affidavit dated 28.09.2016 filed before Ld. AO, is placed. Ld. AR submitted that in response to the summon issued by Ld. AO u/s 131, the assessee appeared but on the fixed date of hearing, the Ld. AO was not in office due to involvement in carrying out survey and the office of AO informed that new notice of hearing would be issued. Ld. AR submitted that the assessee has, however, filed the aforesaid affidavit to Ld. AO but the Ld. AO has ignored the affidavit. Referring to Point No. 4 of the affidavit, Ld. AR also pointed that the assessee has clearly averred in the affidavit that he purchased shares due to several messages being received on the mobile phones of family-members about good returns.

14. In response, the Ld. DR continued his insistence that the assessee has made non-compliance of the summon issued by Ld. AO u/s 131. Ld. DR contested that the affidavit nowhere contains any averment of the assessee to the effect that it was filed in compliance to the summon u/s 131 or that the Ld. AO was not available on the date of hearing fixed by summon and his office conveyed to fix a new date of hearing. Ld. DR submitted that had there Page 11 of 27

“Lastly, we have given our anxious consideration to the judgments relied upon by the learned counsel of the Respondent viz. SEBI vs. Kishore R. Ajmera [(2016) 6 SCC 368] and Dushyant N. Dalal vs. SEBI [(2017) 9 SCC 660]. Suffice it to hold that these cases are distinguishable on the facts of the present case, as the former is not a case of insider trading but that of Fradulent/Manipualtive Trade Practices; and the latter case relates to Interest Penalty rather than the subject matter at hand. Reliance placed on the case of Kishore R. Ajmera (supra) to show that presumption can be drawn on the basis of immediate and relevant facts is contrary to law already settled by this Court in the case of Chintalapati Srinivasa Raju (supra) where it is held that "a reasonable expectation to be in the know of things can only be based on reasonable inference drawn from foundational facts." It has further been held that merely because a person was related to the connected person cannot be itself be a foundational fact to draw an inference.”

Revenue / respondent submissions

The packaged judgment does not separately label the respondent's submissions in an independently extractable passage. No contention is inferred; read the full order.

Court / Tribunal analysis and reasoning

15. We have considered rival submissions, perused the material held on record and also considered various judicial decisions cited before us. At the outset, we observe that there are different decisions by Hon’ble Courts on both sides, some in favour of assessee and some in favour of revenue. While the Ld. AR places reliance on the decisions in assessee’s favour, the revenue relies upon the decisions in its favour. On a careful analysis we observe that in some decisions, the additions were made in the proceeding of section 153A/153C but the same were deleted there being no incriminating evidence. In some cases, the additions were deleted on the ground that the shares transacted by the assessee were not appearing in the Investigation-Report prepared by Investigation Wing, Kolkata of income-tax department. In some cases, the additions have been deleted because the assessee has not claimed any benefit of exemption u/s 10(38) or set-off of losses but the assessee has offered the profit from alleged transactions as normal income and paid legitimate tax. Yet in some cases, the additions have been deleted or confirmed on the basis of off-market transactions or transactions done in cash.…

12. We have heard the rival submissions and perused the orders of the lower authorities and materials available on record. We find that the transactions of the assessee of purchase of shares of M/s Esteem Bio and M/s Turbotech., holding of the shares for more than one year and the sale of shares through a registered share broker in a recognized Stock Exchange and payment of Securities Transaction Tax thereon, all were supported by documentary evidences which were placed before the lower authorities. The Revenue could not point out any specific defect with regards to the documents so submitted by assessee. In our considered view, effect of a transaction which is supported by documentary evidences cannot be brushed aside on suspicion or probabilities without pointing out any defect therein.

13. In the instant case, the Assessing Officer himself observed that the movement in price of shares of M/s Esteem Bio and M/s Turbotech were without any backing of financial performance of the said companies. In our considered view, the above factor at best was a pointer or cause for careful scrutiny of the transaction by the Assessing Officer but from it cannot be concluded that transactions were sham. It is a matter of common knowledge that prices of shares in the share market depends upon innumerable factors and perception of the investor and not alone on the financial performance of the company. Further, we also find from record that Ld. AO also didn't confront copies of statements recorded by Investigation Wing, Kolkata of Sh, Nikhil Jain, Sh. Sanjay Vora, Sh. Rakesh Somani, Sh. Anil Kumar Khemka and Sh. Bidyoot Sarkar to the appellant during assessment

report of the Investigation Wing and/or the orders of SEBI in case of entirely different scrip. Moreover it was submitted before us by Ld AR that the Ld. CIT(A) was not justified in taking an adverse view against the assessee on the ground of abnormal price rise of the shares. The Ld AR referred to the following judgments in support of this contention wherein under similar facts of the case it was held that the AO was not justified in refusing to allow the benefit under section 10(38) of the Act and to assess the sale proceeds of shares as undisclosed income of the assessee under section 68 of the Act. We note that in order to create a tax liability in a case of this nature, the AO has to prove and establish the cash trail and the allegations, particularly in respect of the appellant, which is yet to be proved in the instant case. Similar view has been pronounced by Hon’ble Delhi High Court in the case of Pr. CIT vs Jatin Investment (P) Ltd. (2017 (2) TMI 342 - DELHI HIGH COURT) wherein it was observed "A transaction cannot be treated as fraudulent if the appellant has furnished the documentary proof and proved the identity of the purchaser and no discrepancy is found. The AO has…

point out that there has been a unnatural rise in the price of the scrips of very little known companies. Furthermore, in all the cases, there were minimum of two brokers who have been involved in the transaction. It would be very difficult to gather direct proof of the meeting of minds of those brokers or sub-brokers or middlemen or entry operators and therefore, the test 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, in our considered view the methodology adopted by the department cannot be faulted.

74. In our considered view we need not travel thus far and wide to examine as to how and what is said and what is not said in McDowell Mr. Soumen Bhattacharya referred to the decision for the simple reason, to point out that tax planning may be legitimate provided it is within the frame work of law as colourable devices cannot be part of tax planning which cannot be encouraged. Therefore what we are required to see is whether the claim made by the assesees before us are legitimate and whether there was any colourable devices adopted in the process and these colourable devices may or may not be directly but indirectly attributable to the assessee. Therefore, we need not labour much to examine as to how rule in McDowell needs to be applied as we are required to examine the factual scenario from the cases on hand which appear to be quite unique not probably drawn the attention of the courts and the tribunal earlier.

Operative decision and relief

“During the year under consideration, the appellant had made some expenses in the form of brokerage. The said expenses were incurred by the appellant in respect of transactions of shares with a penny stock company. Hence, the AO had rightly added the said amount to the appellant’s income. The addition so made by the AO is hereby confirmed and accordingly, this ground of appeal is hereby dismissed.”

“23. We therefore in the light of above judgments which are squarely applicable in the issues raised in the instant appeals are of the considered view that the claim of Long Term Capital Gain made by the respective assessee(s) deserves to be allowed as they have entered into the transactions of purchase and sales duly supported by the documents which have not found to be incorrect. The conditions provided u/s 10(38) of the Act have been fulfilled by the assessee(s) namely Shivnarayan Sharma, Sapan Shaw, Prayank Jain, Govind Harinarayan Agrawal (HUF) and Manish Govind Agrawal (HUF) as they have sold the equity shares held in Demat account and transactions performed on a recognised stock exchange through registered broker at the price appearing on the exchange portal and at the point of time of sale of equity shares, companies were not marked as shell companies by SEBI and nor the trading of these scrips were suspended. The assessee also deserves to succeed on the legal ground as no opportunity was awarded to cross examination the third person which were allegedly found to be providing accommodation entries and therefore no addition was called for in the hands of the assessee…

“20. We therefore note that since the purchase and sale transactions are supported and evidenced by confirmations, Contract Notes, Demat statements and bank statements etc., the same could not be treated as bogus simply on the basis of some Page 15 of 27

24. In the result, this appeal of assessee is dismissed.

Ratio and legal principle

• The packaged judgment addresses ITAT Indore Upholds the Action of Revenue in holding LTCG earned from sale of shares of Turbotech Engineering Ltd. (TEL) as Bogus, The Hon. Tribunal followed the decision of Hon. Calcutta High Court rendered in case of PCIT vs. Swati Bajaj ITA No. 06/2022 Dated 14.06.2022. The precise proposition must be read with the Court/Tribunal's reasoning and operative directions.
• Reliance depends on matching the statutory version, jurisdiction, procedural stage and material evidence recorded in the judgment.

Why this judgment matters

This decision is relevant to practitioners and affected parties dealing with itat indore upholds the action of revenue in holding ltcg earned from sale of shares of turbotech engineering ltd. (tel) as bogus, the hon. tribunal followed the decision of hon. calcutta high court rendered in case of pcit vs. swati bajaj ita no. 06/2022 dated 14.06.2022 Its value lies in showing how the adjudicating forum connected the applicable rule to the proved facts and procedural posture.

Practitioner action points

• Match the statutory version, jurisdiction, procedural stage and decisive evidence before relying on the result.
• Verify current appellate, review and SLP history and any later amendment or controlling authority.
• Attach the complete judgment to the working paper or filing and cite the paragraph/page supporting the proposition.

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Section / provision impact

• 68 - apply the exact version considered in the judgment.
• 10(38) - apply the exact version considered in the judgment.
• alleged Bogus Long Term Capital Gains - apply the exact version considered in the judgment.
• Penny Stocks - apply the exact version considered in the judgment.

Case network

Similar issue / useful comparison

• SANJAY VRAJLAL KOTHARI V ITO 25(2)(3), MUMBAI - ITAT Mumbai - G Bench
• Ramachandra Kanu Mendadkar v. CIT(A) - ITAT Mumbai - D Bench
• ACIT v Ramlal Jewellers Pvt. Ltd. - ITAT Mumbai - D Bench

Different outcome / possible distinction

• ITO v. Hi-Link City Homes Pvt. Ltd. - Partly allowed
• Ajit Bapu Satam v. Dy. CIT - Allowed

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Source class: Sanitized local full-judgment copy; official primary replacement pending · Repository status: Published