|CORAM:||Pawan Singh (JM), Rajendra (AM)|
|CATCH WORDS:||bogus capital gains, Penny Stocks|
|DATE:||March 8, 2017 (Date of pronouncement)|
|DATE:||March 30, 2017 (Date of publication)|
|FILE:||Click here to download the file in pdf format|
|S. 68 bogus gains from penny stocks: If the AO relies upon the statement of a third party to make the addition, he is duty bound to provide a copy of the statement to the assessee and afford the opportunity of cross-examination. Failure to do so vitiates the assessment proceedings. A transaction evidenced by payment/receipt of share transaction value through banking channels, transfer of shares in and from the D-mat account, etc cannot be treated as a bogus transaction so as to attract s. 68|
(i) A search and seizure action u/s.132 of the Act was carried out in case of M/s. Mahasagar Securities Pvt.Ltd.(MSPL), Mukesh M. Chokshi (MMC) and Jayesh K. Sampat (JKS) were the Directors of the Mahasagar Group, one of the main companies of the group was M/s. Alliance Intermediaries and Network Pvt. Ltd. (Alliance).It was observed by the AO that MMC and Group concerns were engaged in the business of issuing fraudulent bills and providing bogus speculation profit/losses, that he had entered into transaction with Alliance to the tune of Rs.26.31 lakhs, that it had purchased shares of Karuna Cable Ltd. (KCL) through Alliance.The AO issued a show cause notice to the assessee on 07.12.2011 in that regard.In its reply,the assessee said that the shares were transferred through D-mat Account, that he had sold shares through stock exchange,that share transactions entered into were genuine,that he had paid money/received money through banking channels. The AO observed that the assessee had taken delivery of shares through off market and sold the shares through market,that he could manage the transaction through ‘touch and go’ technique. He asked the assessee as to why STCG should not be treated as undisclosed income of the assessee u/s.68 of the Act. In its reply the assessee argued that in the statements of MMC his name was not appearing.He asked for cross examination of MMC. As per the AO the DDIT (Inv.)had sent a list of persons who had purchased bogus bills or had claimed bogus profit/ loss,that in that list name of the assessee was appearing. The AO issued summons u/s. 131 of the Act to MMC.but he did not appear.Considering the ‘circumstantial evidences’ and ‘human probability’,the AO held that the transactions entered in by the assessee were not 100%genuine.Accordingly,he held that STCG of Rs.6.05 lakhs shown in the books of account was to be treated as undisclosed credit/income of the assessee u/s.68 of the Act.
(ii) Aggrieved by the order of the AO, the assessee preferred an appeal before the First Appellate Authority (FAA).Before him,the assessee challenged the re-opening stating that there was no tangible material to issue notice u/s.148 of the Act,that the assessee was not allowed cross examination of MMC. After considering the assessment order and submission of the assessee, the FAA held that the assessee had not produced any evidence to establish that cross examination of MMC was requested for,that no prejudice was caused to the assessee if opportunity of cross examination was not given, that Mukesh Chokshi had provided accommodation entries to large number of people,that the assessee was not justified in seeking the opportunity for cross examining MMC.Referring to the case of Kanwar Natwar Singh of Hon’ble Supreme Court and other cases he held that the argument of cross examination was raised with the sole object of obstructing the process of law,that the evidence available on record was sufficient to support the stand taken by the AO.With regard to the STCG, the FAA observed that the assessee had furnished copies of DMAT statement in support of purchase & sale of shares, that he had relied upon the cases of Prashant Joshi (324ITR154); Baijnath Agarwal (40SOT475); Jaffer Ali K Rattonsey (53SOT220).He held that MMC and the associate group concerns were providing bogus accommodation entries.He referred to statements recorded by the Officers of Investigation Wing during search proceedings.He observed that sale and transfer of shares were shown but purchases were not substantiated,that the sources of funds for purchases remained undisclosed,that the assessee had not made any genuine purchases of shares of KCL,that the purchase of shares of KCL was through Alliance,that assessee had sold the shares through other broker, that he could not have purchased the shares from Alliance, that the sales of shares was beyond doubt,that the genuineness of the transaction was not proved, that the D-mat statement produced by assessee showed that shares had been transferred from Alliance, that it was an accommodation entry.The FAA issued notice for enhancing the income and to treat it as unexplained cash credit.Finally, he held that sale proceeds of shares sold by the assessee amounting to Rs.32.34 lakhs,was to be treated as unexplained cash credit and that same was to be assessed in his hands under the head ‘income from other sources’.
On appeal by the assessee to the Tribunal HELD by the Tribunal allowing the appeal:
(iii) The assessee had purchased 1.74 lakhs shares of KCL for Rs.26.29 lakhs through Alliance,that he sold those shares for Rs.32.34 lakhs -through another broker, that he had shown profit of Rs.6.05 lakhs under the head capital gains, that transaction was through D mat account, that payment for purchasing the shares and the sales proceeds were made through banking channels, that the AO had treated the transaction as business income as against STCG, claimed by the assessee, that during the appellate proceedings, the FAA made enhanced the income of the assessee. We find that notice u/s. 148,in the matter was issued after four year and in the reasons recorded the AO has not mentioned as to how the failure on part of the assessee to disclose fully and truly the material facts led to under assessment and resultant escapement of income. Only on this ground the appeal filed by the assessee can be allowed. But, we would like to discuss the merits of the case also. The AO had relied upon the statement of MMC to make the addition. Thus, we had witness of the AO. It was his duty to provide the copy of the statement of MMC to the assessee and to afford the opportunity to cross examine him. The AO on request of the assessee had issued a summon to MMC, but he did not appear. Therefore, we do not understand how the FAA has observed that the assessee did not make any specific request for cross examination of MMC. It is also very strange that the FAA, being a judicial authority, has held that non providing opportunity of cross examination would not vitiate the assessment proceedings. If the AO/assessee wants to rely upon the statements of someone it is their duty to prove the truthfulness of such statements. Filing of affidavits/cross examination of the person making assertion can be means of verifying the genuineness of the statements. There can be other means also. But, the basic principles remain the same-person relying upon statement of someone has to prove it and especially when it is challenged by another party. We have not come across the statement of MMC where he has included the name of the assessee to whom he or the group concerns had issue fictitious bills or bills for claiming non-genuine profit/ loss.MMC has given a general statement disclosing broader outline of the transactions entered into by him and the group entities. He had never stated that all the transactions entered into by group were non genuine. His statement was a good lead to take the investigation further and make specific queries. But it was not done. Now, we are left with the general statement of MMC on side and on the other side are the facts like payment/receipt of share transaction value through banking channels, transfer of shares in and from the D-mat account, FAA’s finding that the sale was not in doubt, non observation of principle of natural justice by not providing cross examination of MMC. If all these facts and circumstances are weighed in the scale of reasoning, it would tilt in favour of the assessee. We are of the opinion that there was no justification on part of the FAA to direct the AO to tax the entire sale proceed of shares in the hands of the assessee during the year under consideration. Similarly, the AO was not justified to hold the STCG as business transaction. The assessee was not dealing in the shares and securities and the shares of KCL were held by him as investment and not as stock in trade. Here, we would like to refer to the case of Smt. Ananya Singh (supra).