Penny Stock – On Oct 24, 2018 KOLKATA TRIBUNAL held that Addition made u/s 68 solely on the basis of general report of the investigation wing, Kolkata and accordingly the action of the ld AO was based purely on surmises and suspicions. There is no finding by the ld AO that the transactions were between related parties. Further the concerned scrip was not suspended by SEBI either at the time of transaction of allotment of shares to the assessee or sale of shares by the assessee.
INCOME TAX OFFICER vs. STUTI WELFARE TRUST
A T VARKEY, JM & M. BALAGANESH, AM.
I.T.A No. 1508/Kol/2017
Oct 24, 2018
(2018) 54 CCH 0119 KolTrib
Legislation Referred to
Case pertains to
Asst. Year 2014-15
Tribunal found that the ld CITA had given a categorical finding in his appellate order that the concerned scrip was not suspended by SEBI either at the time of transaction of allotment of shares to the assessee or sale of shares by the assessee. He also observed that the ld AO had disallowed the claim of the assessee and treated the long term capital gain as unexplained cash credit solely on the basis of general report of the investigation wing, Kolkata and accordingly the action of the ld AO was based purely on surmises and suspicions. There is no finding by the ld AO that the transactions were between related parties. (Para 7.3)
In the case of VIVEK MEHTA (ITA No. 894 OF 2010) order dated 14.11.2011 vide Page 2 Para 3 held as under: “On the basis of the documents produced by the assessee in appeal, the Commissioner of Income Tax (Appeal) recorded a finding of fact that there was a genuine transaction of purchase of shares by the assessee on 16.3.2001 and sale thereof on 21.3.2002. The transactions of sale and purchase were as per the valuation prevalent in the Stocks Exchange. Such finding of fact has been recorded on the basis of evidence produced on record. The Tribunal has affirmed such finding. Such finding of fact is sought to be disputed in the present appeal. Tribunal did not find that the finding of fact recorded by the Commissioner of Income Tax in appeal, gives give rise to any question(s) of law as sought to be raised in the present appeal. Hence, the present appeal is dismissed.” (Para 7)
Cases Referred to
PCIT vs Sh Hitesh Gandhi in ITA No. 18 of 2017 dated 16.2.2017
Mukesh R Marolia vs Additional CIT reported in (2006) 6 SOT 247 (Mum.) dated 15.12.2005
CIT vs Mukesh R Marolia in ITA No. 456 of 2007 dated 7.9.2011
Sanjay Bimalchand Jain L/H Shantidevi Bimalchand Jain vs PCIT, Nagpur & Another in ITA No. 18 / 2017 dated 10.4.2017
CIT vs Dhanrajgirji Raja Narasingirji reported in 91 ITR 544 (SC)
PCIT (Central), Ludhiana vs Prem Pal Gandhi in ITA No. 95 of 2017 dated 18.1.2018
Navneet Agarwal, L/H of Later Kiran Agarwal vs ITO in ITA No. 2281/Kol/2017 dated 20.7.2018
CIT(Central), Kolkata vs. Daulat Ram Rawatmull reported in 87 ITR 349
Umacharan Shah & Bros. Vs. CIT 37 ITR 271
Lalchand Bhagat Ambica Ram vs. CIT (1959) 37 ITR 288 (SC)
CIT vs. Bhagwati Prasad Agarwal in I.T.A. No. 22/Kol/2009 dated 29.04.2009 at para 2
M.P. v. Chintaman Sadashiva Vaishampayan AIR 1961 SC 1623
Union of India v. T.R. Varma, AIR 1957 SC 882
Meenglas Tea Estate v. Workmen, AIR 1963 SC 1719
M/s. Kesoram Cotton Mills Ltd. v. Gangadhar and Ors., AIR 1964 SC 708
New India Assurance Co. Ltd. v. Nusli NevilleWadia and Anr. AIR 2008 SC 876
Rachpal Singh and Ors. v. Gurmit Singh and Ors. AIR 2009 SC 2448
Biecco Lawrie and Anr. v. State of West Bengal and Anr. AIR 2010 SC 142
State of Uttar Pradesh v. Saroj Kumar Sinha AIR 2010 SC 3131
Lakshman Exports Ltd. v. Collector of Central Excise (2005) 10 SCC 634
Rajiv Arora v. Union of India and Ors. AIR 2009 SC 1100
Altaf Hussain, Addl. CIT Sr. DR for the Assessee.: Manish Tiwari, FCA for the Revenue
M. BALAGANESH, AM.
1. This appeal by the Revenue arises out of the order of the Learned Commissioner of Income Tax (Appeals)-9, Kolkata [in short the ld CIT(A)] in Appeal No. 347/CIT(A)-9/Wd-32(4)/2016-17/Kol dated 28.03.2017 against the order passed by the ITO, Ward-32(4), Kolkata [in short the ld AO] under section 143(3) of the Income Tax Act, 1961 (in short “the Act”) dated 26.12.2016 for the Assessment Year 2014-15.
2. The only issue to be decided in all these appeals is as to whether the ld CITA was justified in upholding the addition made towards long term capital gains on sale of shares in the facts and circumstances of the case.
3. The brief facts of this issue is that the assessee is an Association of Persons (AOP) and had filed its return of income for the Asst Year 2014-15 on 31.7.2014 declaring total income of Rs 5,22,940/-. It derived income from commodity trading, long term capital gains on account of sale of shares, dividend income on investments in shares and received interest income from non-convertible debentures and deposits. The assessee claimed exempt income u/s 10(38) of the Act on account of long term capital gains (LTCG in short) of Rs 95,20,445/- on sale of listed equity shares of Sharp Trading & Finance Ltd (STFL in short) which was also subjected to Securities Transaction Tax (STT) and transactions routed through recognized stock exchange. The ld AO observed that the assessee applied for 10000 shares of Rs 10 each of M/s Trinity Tradelink Ltd totaling to Rs 1,00,000/- paid directly to the company by the assessee. The 10000 shares were allotted to the assessee on 10.2.2012. The payment made by the assessee at the time of application of shares was Rs 1,00,000/- vide Account Payee Cheque No. 107169 dated 19.1.2012 drawn on Punjab National Bank, Brabourne Road Branch and the cheque got cleared in assessee’s bank on 25.1.2012. The source of this fund was out of redemption of units of Reliance Money Manager Fund. On allotment of 10000 shares to assessee vide allotment advice dated 10.2.2012, share certificates were issued to the assessee bearing distinctive numbers 005555951 to 005565950 vide share certificate no. 0001167 to 0001168. Pursuant to the scheme of demerger between Omnitech Petroleum Limited and Trinity Tradelink Limited, the assessee was allotted 10000 shares of Sharp Trading & Finance Ltd (STFL) on 5.2.2014. These shares were duly dematted by the assessee with the depository participant M/s Stewart & Mackertich Wealth Management Limited on 5.2.2014. Later these shares were sold in the recognized stock exchange (i.e open market) through a registered share broker on various dates on 19.2.2014, 21.2.2014 and 3.3.2014, relevant to Asst Year 2014-15 for Rs 96,20,445/- and LTCG thereon was worked out at Rs 95,20,445/-. The details of the same are as under:-
Sl. No. Name of Script DOP D.O. Sale Nos. Purchase Cost Sale Cost LTCG
1 Sharp Trading & Finance Ltd. 10.02.2012 19.02.2014 3000 30000.00 2870009.00 2840009.00
2 Sharp Trading & Finance Ltd. 10.02.2012 21.02.2014 3000 30000.00 2854728.00 2824728.00
3 Sharp Trading & Finance Ltd. 10.02.2012 03.03.2014 4000 40000.00 3895708.00 3855708.00
Total Long Term Capital Gains 9520445.00
4. The ld AO sought to treat the LTCG reported by the assessee as bogus as according to him, the scrip did not justify such a huge increase in its sale price and that the increase in share price thereon was only artificial and due to price rigging carried out by some persons in the market. He observed that the financials of the said company (i.e STFL) did not justify such a huge increase in share prices and that prices have been artificially rigged upwards by some entry operators. He found that the returns obtained by the assessee, though from the open market, appears to be unrealistic and beyond human probabilities. Accordingly he held that the LTCG claimed as exempt in the sum of Rs 95,20,445/- as bogus and added the same as unexplained cash credit u/s 68 of the Act and added the same to the total income of the assessee. This addition was deleted by the ld CITA. Aggrieved, the revenue is in appeal before us.
5. The ld AR placed reliance on the primary documents evidencing the purchase and sale of equity shares of Trinity Tradelink Limited (pre-merger) and STFL (post merger). He argued that the shares were sold by the assessee based on the prevailing market prices in the stock exchange in the open market on which the assessee does not have any control. He argued that there is no evidence brought on record by the revenue to prove that the concerned scrip was involved in artificial price rigging at the behest and connivance of assessee together with his broker and the stock exchange and some entry operators. He argued that the Hon’ble Punjab & Haryana High Court (Chandigarh Bench) in the case of PCIT vs Sh Hitesh Gandhi in ITA No. 18 of 2017 dated 16.2.2017 on the aspect of huge increase in share sale price had observed in the similar circumstances and decided in favour of the assessee. He placed reliance on the coordinate bench decision of Mumbai Tribunal in the case of Mukesh R Marolia vs Additional CIT reported in (2006) 6 SOT 247 (Mum.) dated 15.12.2005 wherein it was held as under:-
10.7 Therefore, we find that the explanations of the assessee seems to have been rejected by the assessing authority more on the ground of presumption than on factual ground. The presumption is so compelling that comparatively a small amount of investment made by the assessee during the previous year period relevant to the assessment years 1999-2000 and 2000-01 have grown into a very sizable amount ultimately yielding a fabulous sum of Rs. 1,41,08,484 which was used by the assessee for the purchase of the flat at Colaba. The sequence of the events and ultimate realization of money is quite amazing. That itself is a provocation for the Assessing Officer to jump into a conclusion that the transactions were bogus. But, whatever it may be, an assessment has to be completed on the basis of records and materials available before the assessing authority. Personal knowledge and excitement on events, should not lead the Assessing Officer to a state of affairs where salient evidences are overlooked. In the present case, howsoever unbelievable it might be, every transaction of the assessee has been accounted, documented and supported. Even the evidences collected from the concerned parties have been ultimately turned in favour of the assessee. Therefore, it is, very difficult to brush aside the contentions of the assessee that he had purchased shares and he had sold shares and ultimately he had purchased a flat utilizing the sale proceeds of those shares.
This decision of Mumbai Tribunal was approved by the Hon’ble Bombay High Court in the case of CIT vs Mukesh R Marolia in ITA No. 456 of 2007 dated 7.9.2011 wherein it was held as under:-
6. Similarly, the sale of the said shares for Rs 1,41,08,484/- through two Brokers namely, M/s Richmond Securities Pvt Ltd and M/s Scorpio Management Consultants Pvt Ltd cannot be disputed, because the fact that the Assessee has received the said amount is not in dispute. It is neither the case of the Revenue that the shares in question are still lying with the Assessee nor it is the case of the Revenue that the amounts received by the Assessee on sale of the shares is more than what is declared by the Assessee. Though there is some discrepancy in the statement of the Director of M/s Richmond Securities Pvt Ltd, regarding the sale transaction, the Tribunal relying on the statement of the employee of M/s Richmond Securities Pvt Ltd held that the sale transaction was genuine.
7. In these circumstances, the decision of the ITAT in holding that the purchase and sale of shares are genuine and therefore, the Assessing Officer was not justified in holding that the amount of Rs 1,41,08,484/- represented unexplained investment under section 69 of the Income Tax Act, 1961 cannot be faulted.
8. In the result, we see no merit in this Appeal and the same is dismissed with no order as to costs.
The ld AR also placed on record the evidence for dismissal of Special Leave Petition (SLP) of the Revenue by the Hon’ble Apex Court in SLP No. 20146/2012 dated 27.1.2014 against the decision of the Hon’ble Bombay High Court supra.
6. The ld DR on the other hand vehemently supported the share price movements in graphical form of the said scrip. He also placed reliance on the decision of Hon’ble Bombay High Court in the case of Sanjay Bimalchand Jain L/H Shantidevi Bimalchand Jain vs PCIT, Nagpur & Another in ITA No. 18 / 2017 dated 10.4.2017 which was decided in favour of the revenue with regard to the issue of huge increase in share sale prices. He also placed reliance on certain books authored by Mr Parag Parikh titled as ‘Value Investing and Behaviorial Finance (Insights into Indian Stock Market Realities)’ wherein the various human behaviour with regard to the time of purchase of scrip and exit from stock markets were listed out.
7. We have heard the rival submissions and perused the materials available on record including the paper book of the assessee. The only issue to be decided is whether the LTCG on sale of shares of STFL earned through sale in recognized stock exchange and subjected to payment of STT through a registered share broker, could be treated as genuine or not. We find that the assessee was allotted the shares of M/s Trinity Tradelink Ltd pursuant to application made by the assessee in that regard together with the cheque payment of Rs 1,00,000/-. The assessee was allotted 10000 shares by the said company directly on 10.2.2012 (relevant to Asst Year 2012-13) at face value of Rs 10 each. This purchase of shares were duly reflected in the books of accounts of the assessee along with other transactions. We find that the assessee had made total investments in shares to the tune of Rs 39,99,480/- and in mutual funds to the tune of Rs 83,15,000/- as on 31.3.2014
7.1. We find from the facts stated hereinabove that pursuant to the scheme of demerger between Omnitech Petroleum Limited and Trinity Tradelink Limited, the assessee was allotted 10000 shares of Sharp Trading & Finance Ltd (STFL) on 5.2.2014. These shares were duly dematted by the assessee with the depository participant M/s Stewart & Mackertich Wealth Management Limited on 5.2.2014.
7.2. We find that the assessee had sold these 10000 shares of STFL, through the share broker (M/s Anjaneya Stock Broking Ltd) who is registered with SEBI, on various dates in Asst Year 2014-15 and the said sale is evidenced by the following documents :-
a) Contract Notes issued by the registered share broker containing the number of shares sold, price at which it was sold, STT collected, brokerage collected, service tax collected, trade time, date of sale, settlement number, net amount payable to seller through the stock exchange ;
b) Delivery Instructions given by the assessee to the Depository Participant (DP) together with the broker’s confirmation of sale of shares by the assessee ;
c) Bank Statements of the assessee for the period 1.4.2013 to 31.3.2014 maintained with Punjab National Bank, Brabourne Road Branch wherein the sale proceeds of sale of shares on different dates were credited (enclosed in pages 43 to 45 of Paper Book)
d) Demat Statement of the assessee in respect of various scrips including the scrip involved herein containing the number of shares held in each scrip after each sale (enclosed in Pages 46 to 48 of Paper Book).
7.3. We find that the ld CITA had given a categorical finding in his appellate order that the concerned scrip was not suspended by SEBI either at the time of transaction of allotment of shares to the assessee or sale of shares by the assessee. He also observed that the ld AO had disallowed the claim of the assessee and treated the long term capital gain as unexplained cash credit solely on the basis of general report of the investigation wing, Kolkata and accordingly the action of the ld AO was based purely on surmises and suspicions. The ld CITA had also observed that the contention of the assessee that there was no enquiry by SEBI regarding shares of STFL that the prices of these shares were rigged is also correct since the ld AO has neither referred to any copy of such reports nor has he given any such reports to the assessee showing the transactions in these shares were rigged. No investigation has been carried out by the ld AO or by the investigation wing to bring on record any material to disbelieve the claim of the assessee. He observed that the ld AO had made academic discussion regarding the probability of the assessee having entered into transaction in collusion with operator of scrip with a view to claim bogus capital gains and get tax free income. There is no finding by the ld AO that the transactions were between related parties. The ld CITA further observed that the assessee vide its letter dated 9.11.2016 made a specific request before the ld AO to produce any documentary evidence of SEBI’s certification regarding price rigging by the company i.e STFL or Trinity Tradelink Ltd. The assessee also desired copes of evidences received by the ld AO or relied upon by the ld AO stated to have been received from Director of Investigation, Kolkata, based on which the allegation of bogus LTCG was made by the ld AO, but the ld AO never furnished any such evidence to the assessee. He also observed that the assessee had asked the ld AO to allow cross examination of those persons whose statements were relied upon by the investigation wing or by the ld AO. This was also denied by the ld AO, thereby violating the principles of natural justice. These findings of ld CITA were not controverted by the revenue before us.
7.4. With regard to the arguments of the ld DR that at the time of purchase of shares of Trinity Tradelink Limited by the assessee, the shares of STFL were very much available in the stock market and the assessee could have very well bought the shares of STFL from the open market. He need not have resorted to purchasing the shares of Trinity Tradelink Ltd and later on pursuant to demerger, get the shares in STFL. In this regard, we find from the materials available on record, that the assessee was not the director or promoter of either M/s Trinity Tradelink Ltd or STFL. Assessee was only a shareholder in Trinity Tradelink Ltd and pursuant to the demerger of that company with another company, the assessee was allotted shares in STFL, which cannot be faulted with by the revenue by mere surmise and conjecture and without bringing any evidence on record. Moreover, it is for the assessee to chose whether to buy a particular scrip and the department cannot step into the shoes of the assessee in this regard and participate in the business and investment decisions of the assessee. Reliance in this regard is placed on the decision of Hon’ble Apex Court in the case of CIT vs Dhanrajgirji Raja Narasingirji reported in 91 ITR 544 (SC). The next argument of the ld DR that the contract notes and demat statements are only evidences to prove that the transactions happened and got recorded in the stock exchange and that it does not give credence to the transaction per se. In this regard, we find that the transactions of purchase and sale of shares happen in the secondary market based on the prevailing market prices through the registered stock brokers in the concerned stock exchange. This is how the transactions happen across the world. For these events, the documents are furnished by the stock brokers in the form of contract notes, delivery instructions submitted by the parties for effecting the sale through the recognized stock exchange and transactions of movement of shares from one person to another are recorded in the respective demat statements issued by the concerned Depository Participant. These documents cannot be disbelieved as not giving any credence to the share transactions as they had happened in the open market. In any case, it is for the revenue to bring out any other extraneous material to prove that these documents are fabricated with the connivance of assessee, registered stock broker and recognized stock exchange. It cannot be brushed aside that these transactions in the open market had duly suffered STT which is also reflected in the contract notes issued by the stock broker and the revenue had already been enriched by the STT component. Hence it would not be proper for the ld DR to state that these documents cannot be relied upon.
7.5. We find that the Hon’ble Punjab & Haryana High Court (non-jurisdictional high court) in the case of PCIT (Central), Ludhiana vs Prem Pal Gandhi in ITA No. 95 of 2017 dated 18.1.2018 had in similar circumstances held the issue in favour of the assessee. We find that the ld DR also placed reliance on the decision of Hon’ble Bombay High Court in the case of Sanjay Bimalchand Jain L/H Shantidevi Bimalchand Jain vs PCIT, Nagpur & Another in ITA No. 18 / 2017 dated 10.4.2017 which is also a non-jurisdictional High Court decision. In these circumstances, the Hon’ble Apex Court in the case of Vegetable Products had held that when there are conflicting views on an issue for and against the assessee by the different non-jurisdictional high courts, the construction which favours the assessee should be followed. Accordingly, the decision of Hon’ble Punjab & Haryana High Court supra would have to be followed in the instant case before us.
7.6. We find that similar issue has been the subject matter of adjudication by this tribunal in the case of Navneet Agarwal, L/H of Later Kiran Agarwal vs ITO in ITA No. 2281/Kol/2017 dated 20.7.2018, wherein it was held as under:-
“10. After careful consideration of the rival submissions, perusal of the papers on record and order of the lowers authorities below, as well as case law cited, we hold as follows.
11. The assessee in this case has stated the following facts and produced the following documents as evidences:
1. The assessee had made an application for allotment of 50000 equity shares of “Smart champs IT and Infra Ltd.” and she was allotted the share on 3rd December 2011 (copy of Application form, intimation of allotment and share certificate Paper Book at page 8 to 10).
2. The payment for the allotment of shares was made through an account payee cheque (copy of the bank statement evidencing the source of money and payment made to “Smart Champs IT & Infra Ltd.” for such shares allotted is placed in the Paper Book at page no. 11).
3. Annual return no. 20B was filed with Registrar of companies by “Smart Champs IT & Infra Ltd” showing the assessee’s name as shareholder (copy of annual return no. 20B filed with Registrar of companies by “Smart Champs IT & Infra Ltd. “is placed in the Paper Book at page no. 12 to 18.)
4. The assessee lodged the said shares with the Depository M/s. Eureka Stock & Share Broking Services Ltd. with a Demat request on 11th February, 2012. The said shares were dematerialized on 31st March, 2012 (copy of demat request slip along with the transaction statement is placed in the paper book at page no. 19 to 21).
5. On 24.01.2013, the Hon’ble Bombay High Court approved the scheme of amalgamation of “Smart Champs IT and Infra Ltd.” with “Cressanda Solutions Ltd.” In accordance with the said scheme of amalgamation, the assessee was allotted 50000 equity shares of “M/s. Cressanda Solutions Ltd.” The demat shares are reflected in the transaction statement of the period from 1st November 2011 to 31st December, 2013 (A copy of the scheme of amalgamation along with copy of order of the Hon’ble Bombay High Court and a copy of the letter to this effect submitted by “Cressanda Solutions Ltd”. to Bombay Stock Exchange is placed in the Paper Book at page no 22 to 43.)
6. The assessee sold 50000 shares costing Rs. 500000/- through her broker “SKP Stock Broking Pvt. Ltd” which was a SEBI registered broker and earned a Long Term Capital Gain of Rs. 2,18,13,072/-. (Copy of the bank statement, brokers contract note together with the delivery instructions given to the DP and broker’s confirmation is also placed in the paper book at page no 44 to 65).
7. Copy of Form No. 10DB issued by the broker, in support of charging of S.T.T. in respect of the transactions appearing in the ledger is placed in the paper book at page no. 66.
8. The holding period of the said scrip is more than one year (above 500 days) through in order to get the benefit of claim of Long Term Capital Gain the holding period is required to be 365 days.
12. The assessing officer as well as the Ld. CIT(A) have rejected these evidences filed by the assessee by referring to “Modus Operandi” of persons for earning long term capital gains which his exempt from income tax. All these observations are general in nature and are applied across the board to all the 60,000 or more assessees who fall in this category. Specific evidences produced by the assessee are not controverted by the revenue authorities. No evidence collected from third parties is confronted to the assesses. No opportunity of cross-examination of persons, on whose statements the revenue relies to make the addition, is provided to the assessee. The addition is made based on a report from the investigation wing.
13. The issue for consideration before us is whether, in such cases, the legal evidence produced by the assessee has to guide our decision in the matter or the general observations based on statements, probabilities, human behavior and discovery of the modus operandi adopted in earning alleged bogus LTCG and STCG, that have surfaced during investigations, should guide the authorities in arriving at a conclusion as to whether the claim in genuine or not. An alleged scam might have taken place on LTCG etc. But it has to be established in each case, by the party alleging so, that this assessee in question was part of this scam. The chain of events and the live link of the assesee’s action giving her involvement in the scam should be established. The allegation imply that cash was paid by the assessee and in return the assessee received LTCG, which is income exempt from income tax, by way of cheque through Banking channels. This allegation that cash had changed hands, has to be proved with evidence, by the revenue. Evidence gathered by the Director Investigation’s office by way of statements recorded etc. has to also be brought on record in each case, when such a statement, evidence etc. is relied upon by the revenue to make any additions. Opportunity of cross examination has to be provided to the assesee, if the AO relies on any statements or third party as evidence to make an addition. If any material or evidence is sought to be relied upon by the AO, he has to confront the assessee with such material. The claim of the assessee cannot be rejected based on mere conjectures unverified by evidence under the pretentious garb of preponderance of human probabilities and theory of human behavior by the department.
14. It is well settled that evidence collected from third parties cannot be used against an assessee unless this evidence is put before him and he is given an opportunity to controvert the evidence. In this case, the AO relies only on a report as the basis for the addition. The evidence based on which the DDIT report is prepared is not brought on record by the AO nor is it put before the assessee. The submission of the assessee that she is just an investor and as she received some tips and she chose to invest based on these market tips and had taken a calculated risk and had gained in the process and that she is not partyto the scam etc., has to be controverted by the revenue with evidence. When a person claims that she has done these transactions in a bona fide and genuine manner and was benefitted, one cannot reject this submission based on surmises and conjectures. As the report of investigation wing suggests, there are more than 60,000 beneficiaries of LTCG. Each case has to be assessed based on legal principles of legal import laid down by the Courts of law.
15. In our view, just the modus operandi, generalization, preponderance of human probabilities cannot be the only basis for rejecting the claim of the assessee. Unless specific evidence is brought on record to controvert the validity and correctness of the documentary evidences produced, the same cannot be rejected by the assessee. The Hon’ble Supreme Court in the case of Omar Salav Mohamed Sait reported in (1959) 37 ITR 151 (S C) had held that no addition can be made on the basis of surmises, suspicion and conjectures. In the case of CIT(Central), Kolkata vs. Daulat Ram Rawatmull reported in 87 ITR 349, the Hon’ble Supreme Court held that, the onus to prove that the apparent is not the real is on the party who claims it to be so. The burden of proving a transaction to be bogus has to be strictly discharged by adducing legal evidences, which would directly prove the fact of bogusness or establish circumstance unerringly and reasonably raising an interference to that effect. The Hon’ble Supreme Court in the case of Umacharan Shah & Bros. Vs. CIT 37 ITR 271 held that suspicion however strong, cannot take the place of evidence. In this connection we refer to the general view on the topic of conveyance of immovable properties. The rates/sale price are at variance with the circle rates fixed by the Registration authorities of the Government in most cases and the general impression is that cash would have changed hands. The courts have laid down that judicial notice of such notorious facts cannot be taken based on generalizations. Courts of law are bound to go by evidence.
16. We find that the assessing officer as well as the Ld. CIT(A) has been guided by the report of the investigation wing prepared with respect to bogus capital gains transactions. However, we do not find that the assessing officer as well as the Ld. CIT(A), have brought out any part of the investigation wing report in which the assessee has been investigated and /or found to be a part of any arrangement for the purpose of generating bogus long term capital gains. Nothing has been brought on record to show that the persons investigated, including entry operators or stock brokers, have named that the assessee was in collusion with them. In absence of such finding how is it possible to link their wrong doings with the assessee. In fact, the investigation wing is a separate department which has not been assigned assessment work and has been delegated the work of only making investigation. The Act has vested widest powers on this wing. It is the duty of the investigation wing to conduct proper and detailed inquiry in any matter where there is allegation of tax evasion and after making proper inquiry and collecting proper evidences the matter should be sent to the assessment wing to assess the income as per law. We find no such action executed by investigation wing against the assessee. In absence of any finding specifically against the assessee in the investigation wing report, the assessee cannot be held to be guilty or linked to the wrong acts of the persons investigated. In this case, in our view, the Assessing Officer at best could have considered the investigation report as a starting point of investigation. The report only informed the assessing officer that some persons may have misused the script for the purpose of collusive transaction. The Assessing Officer was duty bound to make inquiry from all concerned parties relating to the transaction and then to collect evidences that the transaction entered into by the assessee was also a collusive transaction. We, however, find that the Assessing Officer has not brought on record any evidence to prove that the transactions entered by the assessee which are otherwise supported by proper third party documents are collusive transactions.
17. The Hon’ble Supreme Court way back in the case of Lalchand Bhagat Ambica Ram vs. CIT (1959) 37 ITR 288 (SC) held that assessment could not be based on background of suspicion and in absence of any evidence to support the same. The Hon’ble Court held:
“Adverting to the various probabilities which weighed with the Income-tax Officer we may observe that the notoriety for smuggling food grains and other commodities to Bengal by country boats acquired by Sahibgunj and the notoriety achieved by Dhulian as a great receiving centre for such commodities were merely a background of suspicion and the appellant could not be tarred with the same brush as every arhatdar and grain merchant who might have been indulging in smuggling operations, without an iota of evidence in that behalf. The cancellation of the food grain licence at Nawgachia and the prosecution of the appellant under the Defence of India Rules was also of no consequence inasmuch as the appellant was acquitted of the offence with which it had been charged and its licence also was restored. The mere possibility of the appellant earning considerable amounts in the year under consideration was a pure conjecture on the part of the Income-tax Officer and the fact that the appellant indulged in speculation (in Kalai account) could not legitimately lead to the inference that the profit in a single transaction or in a chain of transactions could exceed the amounts, involved in the high denomination notes,—this also was a pure conjecture or surmise on the part of the Income-tax Officer. As regards the disclosed volume of business in the year under consideration in the head office and in branches the Income-tax Officer indulged in speculation when he talked of the possibility of the appellant earning a considerable sum as against which it showed a net loss of about Rs. 45,000. The Income-tax Officer indicated the probable source or sources from which the appellant could have earned a large amount in the sum of Rs. 2,91,000 but the conclusion which he arrived at in regard to the appellant having earned this large amount during the year and which according to him represented the secreted profits of the appellant in its business was the result of pure conjectures and surmises on his part and had no foundation in fact and was not proved against the appellant on the record of the proceedings. If the conclusion of the Income-tax Officer was thus either perverse or vitiated by suspicions, conjectures or surmises, the finding of the Tribunal was equally perverse or vitiated if the Tribunal took count of all these probabilities and without any rhyme or reason and merely by a rule of thumb, as it were, came to the conclusion that the possession of 150 high denomination notes of Rs. 1,000 each was satisfactorily explained by the appellant but not that of the balance of 141 high denomination notes of Rs. 1,000 each”.
The observations of the Hon’ble Apex Court are equally applicable to the case of the assessee. In our view, the assessing officer having failed to bring on record any material to prove that the transaction of the assessee was a collusive transaction could not have rejected the evidences submitted by the assessee. In fact, in this case nothing has been found against the assessee with aid of any direct evidences or material against the assessee despite the matter being investigated by various wings of the Income Tax Department hence in our view under these circumstances nothing can be implicated against the assessee.
18. We now consider the various propositions of law laid down by the Courts of law. That cross-examination is one part of the principles ofnatural justice has been laid down in the following judgments:
a) Ayaaubkhan Noorkhan Pathan vs. The State of Maharashtra and Ors.
“23. A Constitution Bench of this Court in State of M.P. v. Chintaman Sadashiva Vaishampayan AIR 1961 SC 1623, held that the rules of natural justice, require that a party must be given the opportunity to adduce all relevant evidence upon which he relies, and further that, the evidence of the opposite party should betaken in his presence, and that he should be given the opportunity of cross-examining the witnesses examined by that party. Not providing the said opportunity to cross-examine witnesses, would violate the principles of natural justice. (See also: Union of India v. T.R. Varma, AIR 1957 SC 882; Meenglas Tea Estate v. Workmen, AIR 1963 SC 1719; M/s. Kesoram Cotton Mills Ltd. v. Gangadhar and Ors., AIR 1964 SC 708; New India Assurance Co. Ltd. v. Nusli NevilleWadia and Anr. AIR 2008 SC 876; Rachpal Singh and Ors. v. Gurmit Singh and Ors. AIR 2009 SC 2448;Biecco Lawrie and Anr. v. State of West Bengal and Anr. AIR 2010 SC 142; and State of Uttar Pradesh v. Saroj Kumar Sinha AIR 2010 SC 3131).
24. In Lakshman Exports Ltd. v. Collector of Central Excise (2005) 10 SCC 634, this Court, while dealing with a case under the Central Excise Act, 1944,considered a similar issue i.e. permission with respect to the crossexamination of a witness. In the said case, the Assessee had specifically asked to be allowed to cross-examine the representatives of the firms concern, to establish that the goods in question had been accounted for in their books of accounts, and that excise duty had been paid. The Court held that such a request could not be turned down, as the denial of the right to cross-examine, would amount to a denial of the right to be heard i.e. audi alteram partem.
28. The meaning of providing a reasonable opportunity to show cause against an action proposed to be taken by the government, is that the government servant is afforded a reasonable opportunity to defend himself against the charges, on the basis of which an inquiry is held. The government servant should be given an opportunity to deny his guilt and establish his innocence. He can do so only when he is told what the charges against him are. He can therefore, do so by cross-examining the witnesses produced against him. The object of supplying statements is that, the government servant will be able to refer to the previous statements of the witnesses proposed to be examined against him. Unless the said statements are provided to the government servant, he will not be able to conduct an effective and useful crossexamination.
29. In Rajiv Arora v. Union of India and Ors. AIR 2009SC 1100, this Court held: Effective cross-examination could have been done as regards the correctness or otherwise of the report, if the contents of them were proved. The principles analogous to the provisions of the Indian Evidence Act as also the principles of natural justice demand that the maker of the report should be examined, save and except in cases where the facts are admitted or the witnesses are not available for cross-examination or similar situation. The High Court in its impugned judgment proceeded to consider the issue on a technical plea, namely, no prejudice has been caused to the Appellant by such non-examination. If the basic principles of law have not been complied with or there has been a gross violation of the principles of natural justice, the High Court should have exercised its jurisdiction of judicial review.
30. The aforesaid discussion makes it evident that, not only should the opportunity of cross-examination be made available, but it should be one of effective cross-examination, so as to meet the requirement of the principles of natural justice. In the absence of such an opportunity, it cannot be held that the matter has been decided in accordance with law, as cross-examination is an integral part and parcel of the principles of natural justice.”
b) Andaman Timber Industries vs. Commissioner of C. Ex., Kolkata-II wherein it was held that:
“4. We have heard Mr. Kavin Gulati, learned senior counsel appearing for the Assessee, and Mr. K. Radhakrishnan, learned senior counsel who appeared for the Revenue.
5. According to us, not allowing the Assessee to cross-examine the witnesses by the Adjudicating Authority though the statements of those witnesses were made the basis of the impugned order is a serious flaw which makes the order nullity inasmuch as it amounted to violation of principles of natural justice because of which the Assessee was adversely affected. It is to be borne in mind that the order of the Commissioner was based upon the statements given by the aforesaid two witnesses. Even when the Assessee disputed the correctness of the statements and wanted to cross-examine, the Adjudicating Authority did not grant this opportunity to the Assessee. It would be pertinent to note that in the impugned order passed by the Adjudicating Authority he has specifically mentioned that such an opportunity was sought by the Assessee. However, no such opportunity was granted and the aforesaid plea is not even dealt with by the Adjudicating Authority. As far as the Tribunal is concerned, we find that rejection of this plea is totally untenable. The Tribunal has simply stated that cross-examination of the said dealers could not have brought out any material which would not be in possession of the Appellant themselves to explain as to why their ex-factory prices remain static. It was not for the Tribunal to have guess work as to for what purposes the Appellant wanted to cross-examine those dealers and what extraction the Appellant wanted from them.
6. As mentioned above, the Appellant had contested the truthfulness of the statements of these two witnesses and wanted to discredit their testimony for which purpose it wanted to avail the opportunity of cross-examination. That apart, the Adjudicating Authority simply relied upon the price list as maintained at the depot to determine the price for the purpose of levy of excise duty. Whether the goods were, in fact, sold to the said dealers/witnesses at the price which is mentioned in the price list itself could be the subject matter of crossexamination. Therefore, it was not for the Adjudicating Authority to presuppose eas to what could be the subject matter of the cross-examination and make the remarks as mentioned above. We may also point out that on an earlier occasion when the matter came before this Court in Civil Appeal No. 2216 of 2000, order dated 17-3-2005 [2005 (187) E.L.T. A33 (S.C.)] was passed remitting the case back to the Tribunal with the directions to decide the appeal on merits giving its reasons for accepting or rejecting the submissions.
7. In view the above, we are of the opinion that if thetestimony of these two witnesses is discredited, there was no material with the Department on the basis of which it could justify its action, as the statement of the aforesaid two witnesses was the only basis of issuing the show cause notice.”
19. On similar facts where the revenue has alleged that the assessee has declared bogus LTCG, it was held as follows:
a) The CALCUTTA HIGH COURT in the case of BLBCABLES & CONDUCTORS (ITA No. 78 of 2017) dated 19.06.2018. The High Court held vide Para 4.1:
“…………we find that all the transactions through the broker were duly recorded in the books of the assessee. The broker has also declared in its books of accounts and offered for taxation. In our view to hold a transaction as bogus, there has to be some concrete evidence where the transactions cannot be proved with the supportive evidence. Here in the case the transactions of the commodity exchanged have not only been explained but also substantiated from the confirmation of the party. Both the parties are confirming the transactions which have been duly supported with the books of accounts and bank transactions. The ld. AR has also submitted the board resolution for the trading of commodity transaction. The broker was expelled from the commodity exchange cannot be the criteria to hold the transaction as bogus. In view of above, we reverse the order of the lower authorities and allow the common grounds of assessee’s appeal.” [quoted verbatim]
This is essentially a finding of the Tribunal on fact. No material has been shown to us who would negate the Tribunal’s finding that off market transactions are not prohibited. As regards veracity of the transactions, the Tribunal has come to its conclusion on analysis of relevant materials. That being the position, Tribunal having analyzed the set off acts in coming to its finding, we do not think there is any scope of interference with the order of the Tribunal in exercise of our jurisdiction under Section 260A of the Income Tax Act, 1961. No substantial question of law is involved in this appeal. The appeal and the stay petition, accordingly, shall stand dismissed.”
b) The JAIPUR ITAT in the case of VIVEK AGARWAL (ITA No. 292/JP/2017) order dated 06.04.2018 held as under vide Page 9 Para 3:
“We hold that the addition made by the AO is merely based on suspicion and surmises without any cogent material to controvert the evidence filed by the assessee in support of the claim. Further, the AO has also failed to establish that the assessee has brought back his unaccounted income in the shape of long term capital gain. Hence we delete the addition made by the AO on this account.”
c) The Hon’ble Punjab and Haryana High Court in the case of PREMPAL GANDHI [ITA-95-2017(O&M)] dated 18.01.2018 at vide Page 3 Para 4 held as under:
“….. The Assessing Officer in both the cases added the appreciation to the assessee’s’ income on the suspicion that these were fictitious transactions and that the appreciation actually represented the assessee’s’ income from undisclosed sources. In ITA-18-2017 also the CIT (Appeals) and the Tribunal held that the Assessing Officer had not produced any evidence whatsoever in support of the suspicion. On the other hand, although the appreciation is very high, the shares were traded on the National Stock Exchange and the payments and receipts were routed through the bank. There was no evidence to indicate for instance that this was a closely held company and that the trading on the National Stock Exchange was manipulated in any manner.”
The Court also held the following vide Page 3 Para 5 the following:
“Question (iv) has been dealt with in detail by the CIT (Appeals) and the Tribunal. Firstly, the documents on which the Assessing Officer relied upon in the appeal were not put to the assessee during the assessment proceedings. The CIT (Appeals) nevertheless considered them in detail and found that there was no co-relation between the amounts sought to be added and the entries in those documents. This was on an appreciation of facts. There is nothing to indicate that the same was perverse or irrational. Accordingly, no question of law arises.”
d) The BENCH “D”OF KOLKATA ITAT in the case of GAUTAM PINCHA (ITA No. 569/Kol/2017) order dated 15.11.2017 held as under vide Page 12 Para 8.1:
“In the light of the documents stated i.e. (I to xiv) in Para 6 (supra) we find that there is absolutely no adverse material to implicate the assessee to have entered gamut of unfounded/unwarranted allegations leveled by the AO against the assessee, which in our considered opinion has no legs to stand and therefore has to fall. We take note that the ld. DR could not controvert the facts supported with material evidences which are on record and could only rely on the orders of the AO/CIT (A). We note that in the absence of material/evidence the allegations that the assessee /brokers got involved in price rigging/manipulation of shares must therefore also fail. At the cost of repetition, we note that the assessee had furnished all relevant evidence in the form of bills, contract notes, demat statement and bank account to prove the genuineness of the transactions relevant to the purchase and sale of shares resulting in long term capital gain. These evidences were neither found by the AO nor by the ld. CIT (A) to be false or fictitious or bogus. The facts of the case and the evidence in support of the evidence clearly support the claim of the assessee that the transactions of the assessee were genuine and the authorities below was not justified in rejecting the claim of the assessee that income from LTCG is exempted u/s 10(38) of the Act.”
Further in Page 15 Para 8.5 of the judgment, it held:
“We note that the ld. AR cited plethora of the case laws to bolster his claim which are not being repeated again since it has already been incorporated in the submissions of the ld. AR (supra) and have been duly considered by us to arrive at our conclusion. The ld. DR could not bring to our notice any case laws to support the impugned decision of the ld. CIT (A)/AO. In the aforesaid facts and circumstances of the case, we hold that the ld. CIT (A) was not justified in upholding the addition of sale proceeds of the shares as undisclosed income of the assessee u/s 68 of the Act. We, therefore, direct the AO to delete the addition.”
e) The BENCH “D” OF KOLKATA ITAT in the case of KIRAN KOTHARI HUF (ITA No. 443/Kol/2017) order dated 15.11.2017 held vide Para 9.3 held as under:
“…….. We find that there is absolutely no adverse material to implicate the assessee to the entire gamut of unfounded/unwarranted allegations leveled by the AO against the assessee, which in our considered opinion has no legs to stand and therefore has to fall. We take note that the ld. DR could not controvert the facts which are supported with material evidences furnished by the assessee which are on record and could only rely on the orders of the AO/CIT(A). We note that the allegations that the assesse/brokers got involved in price rigging/manipulation of shares must therefore consequently fail. At the cost of repetition, we note that the assessee had furnished all relevant evidence in the form of bills, contract notes, demat statement and bank account to prove the genuineness of the transactions relevant to the purchase and sale of shares resulting in long term capital gain. Neither these evidences were found by the AO nor by the ld. CIT(A) to be false or fictitious or bogus. The facts of the case and the evidence in support of the evidence clearly support the claim of the assessee that the transactions of the assessee were genuine and the authorities below was not justified in rejecting the claim of the assessee exempted u/s 10(38) of the Act on the basis of suspicion, surmises and conjectures. It is to be kept in mind that suspicion how so ever strong, cannot partake the character of legal evidence.
It further held as follows:
“We note that the ld. AR cited plethora of the case laws to bolster his claim which are not being repeated again since it has already been incorporated in the submissions of the ld. AR (supra) and have been duly considered to arrive at our conclusion. The ld. DR could not bring to our notice any case laws to support the impugned decision of the ld. CIT(A)/AO. In the aforesaid facts and circumstances of the case, we hold that the ld. CIT(A) was not justified in upholding the addition of sale proceeds of the shares as undisclosed income of the assessee u/s 68 of the Act. We therefore direct the AO to delete the addition.”
f) The BENCH “A”OF KOLKATAITAT in the case of SHALEEN KHEMANI (ITA No. 1945/Kol/2014) order dated 18.10.2017 held as under vide Page 24 Para 9.3:
“We therefore hold that there is absolutely no adverse material to implicate the assessee to the entire gamut of unwarranted allegations leveled by the ld AO against the assessee, which in our considered opinion, has no legs to stand in the eyes of law. We find that the ld DR could not controvert the arguments of the ld AR with contrary material evidences on record and merely relied on the orders of the ld AO. We find that the allegation that the assessee and / or Brokers getting involved in price rigging of SOICL shares fails. It is also a matter of record that the assessee furnished all evidences in the form of bills, contract notes, demat statements and the bank accounts to prove the genuineness of the transactions relating to purchase and sale of shares resulting in LTCG. These evidences were neither found by the ld AO to be false or fabricated. The facts of the case and the evidences in support of the assessee’s case clearly support the claim of the assessee that the transactions of the assessee were bonafide and genuine and therefore the ld AO was not justified in rejecting the assessee’s claim of exemption under section 10(38) of the Act.”
g) The BENCH “H”OF MUMBAI ITAT in the case of ARVIND KUMAR JAIN HUF (ITA No. 4682/Mum/2014) order dated 18.09.2017 held as under vide Page 6 Para 8:
“……We found that as far as initiation of investigation of broker is concerned, the assessee is no way concerned with the activity of the broker. Detailed finding has been recorded by CIT (A) to the effect that assessee has made investment in shares which was purchased on the floor of stock exchange and not from M/s Basant Periwal and Co. Against purchases payment has been made by account payee cheque, delivery of shares were taken, contract of sale was also complete as per the Contract Act, therefore, the assessee is not concerned with any way of the broker. Nowhere the AO has alleged that the transaction by the assessee with these particular broker or share was bogus, merely because the investigation was done by SEBI against broker or his activity, assessee cannot be said to have entered into ingenuine transaction, insofar as assessee is not concerned with the activity of the broker and have no control over the same. We found that M/s Basant Periwal and Co. never stated any of the authority that transactions in M/s Ramkrishna Fincap Pvt. Ltd. On the floor of the stock exchange are ingenuine or mere accommodation entries. The CIT (A) after relying on the various decision of the coordinate bench, wherein on similar facts and circumstances, issue was decided in favour of the assessee, came to the conclusion that transaction entered by the assessee was genuine. Detailed finding recorded by CIT (A) at para 3 to 5 has not been controverted by the department by bringing any positive material on record. Accordingly, we do not find any reason to interfere in the findings of CIT (A).”
h) The Hon’ble Punjab and Haryana High Court in the case of VIVEK MEHTA (ITA No. 894 OF 2010) order dated 14.11.2011 vide Page 2 Para 3 held as under:
“On the basis of the documents produced by the assessee in appeal, the Commissioner of Income Tax (Appeal) recorded a finding of fact that there was a genuine transaction of purchase of shares by the assessee on 16.3.2001 and sale thereof on 21.3.2002. The transactions of sale and purchase were as per the valuation prevalent in the Stocks Exchange. Such finding of fact has been recorded on the basis of evidence produced on record. The Tribunal has affirmed such finding. Such finding of fact is sought to be disputed in the present appeal. We do not find that the finding of fact recorded by the Commissioner of Income Tax in appeal, gives give rise to any question(s) of law as sought to be raised in the present appeal. Hence, the present appeal is dismissed.”
i) The Hon’ble Jurisdictional Calcutta High Court in the case of CIT vs. Bhagwati Prasad Agarwal in I.T.A. No. 22/Kol/2009 dated 29.04.2009 at para 2 held as follows:
“The tribunal found that the chain of transaction entered into by the assessee have been proved, accounted for, documented and supported by evidence. The assessee produced before the Commissioner of Income Tax (Appeal) the contract notes, details of his Demat account and, also, produced documents showing that all payments were received by the assessee through bank.”
j) The Hon’ble Supreme Court in the case of PCIT vs. Teju Rohitkumar Kapadia order dated 04.05.2018 upheld the following proposition of law laid down by the Hon’ble Gujrat High Court as under:
“It can thus be seen that the appellate authority as well as the Tribunal came to concurrent conclusion that the purchases already made by the assessee from Raj Impex were duly supported by bills and payments were made by Account Payee cheque. Raj Impacts also confirmed the transactions. There was no evidence to show that the amount was recycled back to the assessee. Particularly, when it was found that the assessee the trader had also shown sales out of purchases made from Raj Impex which were also accepted by the Revenue, no question of law arises.”
20. Applying the proposition of law as laid down in the above-mentioned judgments to the facts of this case we are bound to consider and rely on the evidence produced by the assessee in support of its claim and base our decision on such evidence and not on suspicion or preponderance of probabilities. No material was brought on record by the AO to controvert the evidence furnished by the assessee. Under these circumstances, we accept the evidence filed by the assessee and allow the claim that the income in question is a bona fide Long Term Capital Gain arising from the sale of shares and hence exempt from income tax.
21.Under the circumstances and in view of the above discussion, we uphold the contentions of the assessee and delete the addition in question.
22. In the result, the appeal of the assessee is allowed.”
7.7. In view of the aforesaid observations and respectfully following the judicial precedents relied upon hereinabove, we hold that the ld CITA had rightly deleted the addition made u/s 68 of the Act in respect of LTCG on sale of shares. Accordingly, the grounds raised by the revenue are dismissed.
8. In the result, the appeal of the revenue is dismissed.
Order pronounced in the Court on 24.10.2018