CIT vs. Mukesh Ratilal Marolia (Bombay High Court)

DATE: September 7, 2011 (Date of pronouncement)
DATE: June 13, 2016 (Date of publication)
AY: 2001-02
FILE: Click here to download the file in pdf format
S. 10(38)/ 69: Fact that a small amount invested in "penny" stocks gave rise to huge capital gains in a short period does not mean that the transaction is "bogus" if the documentation and evidences cannot be faulted

The assessee claimed that he had purchased 1,41,400 shares of M/s. Allan Industrial Gases Limited; 11,500 shares of Mobile Tele-communications Limited; 34,000 shares of Rashel Agro Tech Ltd., and 27,700 shares of Centil Agro Tech Ltd. The total number of shares thus purchased by the assessee was 2,19,600. The purchases were made through M/s. Rushab Investments, Radha Ashok and Anil Securities. The purchases were made during the period from February to August 1999 i.e., during the previous year periods relevant to the assessment years 1999-2000 and 2000-01. All the 2,14,600 shares were sold by the assessee during the period April 2000 to February 2001, which is the previous year relevant to the assessment year under appeal. The shares were sold through M/s. Richmond Securities Pvt. Ltd., and M/s. Scorpio Management. The assessing authority made enquiries regarding the bona fides of the purchase and sale of those shares. He had issued notice and summons to the concerned parties to explain the nature of transactions they had with the assessee. The Assessing Officer has discussed the details of the enquiries conducted by him in a detailed manner in the assessment order. As a result of the enquiries, Assessing Officer sought to disbelieve the purchase of shares recorded by the assessee. He treated the transactions as bogus and assessed the sale proceeds as unexplained investment u/s 69. This was upheld by the CIT(A). However, the Tribunal (2006) 6 SOT 247 (Mum) reversed the orders of the AO and CIT(A) and allowed the appeal on the following grounds:

(i) The books of account maintained by the assessee for both the years clearly reflected the purchase of those shares. The shares are reflected in the balance sheets filed by the assessee along with the returns of income for the assessment years 1999-2000 and 2000-01. Therefore, it is seen that as a prima facie evidence, the purchases of shares have been contemporaneously entered into the books of account of the assessee.

(ii) The assessee has been declaring agricultural income in his returns of income for the assessment years from 1990-91 to 2001-02. It is, very clear that the investment made by the assessee in shares during the previous periods relevant to the assessment years 1999-2000 and 2000-01 was supported by cash generated out of agricultural income. The above agricultural income have been considered in the respective assessments. Therefore, the contention of the assessing authority that the assessee had no sufficient resourcefulness to make investments in the shares is unfounded.

(iii) Purchase and sale of shares outside the floor of Stock Exchange is not an unlawful activity. Off-market transactions are not illegal. It is always possible for the parties to enter into transactions even without the help of brokers. Therefore, it is not possible to hold that the transactions reported by the assessee were quite sham on the legal proposition arrived at by the CIT(A) that off-market transactions are not permissible. The assessee has stated that the transactions were made with the help of professional mediators who are experts in off-market transactions.

(iv) When the transactions were off-market transactions, there is no relevance in seeking details of share transactions from Stock Exchanges. Such attempts would be futile. Stock Exchanges cannot give details of transactions entered into between the parties outside their floor. Therefore, the reliance placed by the assessing authority on the communications received from the Stock Exchanges that the particulars of share transactions entered into by the assessee were not available in their records, is out of place. There is no evidential value for such reliance placed by the assessing authority. The assessee had made it very clear that the transactions were not concluded on the floor of the Stock Exchange. The matter being so, there is no probative value for the negative replies solicited by the assessing authority from the respective Stock Exchanges. We are of the considered view that the materials collected by the assessing authority from the Stock Exchanges are not valid to dispel or disbelieve the contentions of the assessee.

(v) 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 over-looked. 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.

On appeal by the Department to the High Court HELD dismissing the appeal:

(a) The ITAT allowed the claim of the Assessee by recording that the purchase of shares were duly recorded in the books maintained by the Assessee. The ITAT has recorded a finding that the source of funds for acquisition of the shares was the agricultural income which was duly offered and assessed to tax in those Assessment Years. The Assessee has produced certificates from the aforesaid four companies to the effect that the shares were infact transferred to the name of the Assessee. In these circumstances, the decision of the ITAT in holding that the Assessee had purchased shares out of the funds duly disclosed by the Assessee cannot be faulted.

(b) 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. Richmand Securities Pvt. Ltd. regarding the sale transaction, the Tribunal relying on the statement of the employee of M/s. Richmand Securities Pvt. Ltd. held that the sale transaction was genuine.

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