Farrah Marker vs. ITO (ITAT Mumbai)

DATE: April 27, 2016 (Date of pronouncement)
DATE: June 13, 2016 (Date of publication)
AY: 2005-06
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S. 10(38)/ 68: Long-term capital gains on sale of "penny" stocks cannot be treated as bogus & unexplained cash credit if the documentation is in order & there is no allegation of manipulation by SEBI or the BSE. Denial of right of cross-examination is a fatal flaw which renders the assessment order a nullity

The assessee declared long term capital gain (LTCG) of Rs. 93,00,012 on sale of listed equity shares and subjected to STT as exempt under section 10(38) of the Income-tax Act, 1961 (in short ‘the Act’). In the course of assessment proceedings, the AO observed that the shares of Shukun Constructions Ltd. are nothing but penny stock and that the assessee has back dated the purchase of the said shares in transactions to generate artificial gain. He required the assessee to substantiate her claim of exemption on the capital gain arising on the sale of the said shares. After considering the details, documents and submissions filed by the assessee in support of the claim of exemption from LTCG on sale of the said shares and discussion of available data on penny stocks, modus operandi generally adopted by interested persons to avail the arranged exemption of LTCG/STCG/ speculation profit/loss, stock price movement of the said company and on the basis of the statement recorded from one Shri Niraj Sanghvi, the AO concluded that the LTCG shown by the assessee on sale of the said shares of Shukun Constructions Ltd. is not a genuine transaction but a fabricated one. In that view of the matter, the AO, while concluding the assessment, treated the entire sale proceeds of the said shares amounting to Rs. 95,12,812 as unexplained cash credit under section 68 of the Act and brought the same to tax in the assessee’s hand. The CIT(A) dismissed the assessee’s appeal and upheld the addition made by the AO under section 68 of the Act. On appeal by the assessee HELD allowing the appeal:

(i) Documents pertaining to the purchase and sale of shares of M/s Shukun Constructions Ltd. such as contract notes of brokers, copies of physical share certificates, transfer of physical shares to the name of the assessee and consolidation by the company, the D-MAT account statement of the assessee with SHCIL confirming the said shares in the assessee’s name, bank statements and summary thereof and financial statements of the assessee, viz., Balance Sheet of earlier years showing that the fact of holding these shares were furnished before the AO from 16.07.2007 onwards, i.e. well before the assessment was concluded on 31.12.2007. It is also seen that the show cause notice issued by the AO to the assessee on 13.11.2007 as to why the transaction in the said shares be not treated as a bogus/arranged one was replied to by the assessee vide letter dated 21.11.2007 addressed to the AO. In our considered view, after an appreciation of the material on record, we find that no proper investigation has been carried out by the AO to controvert the material evidence brought on record by the assessee. Even the statement recorded on 31.12.2007 by the AO from one Sir Niraj Sanghvi, which was strongly relied upon by the AO, we find has no evidentiary or corroborative value as it is of a person who has no role in the said share purchase transactions. Further, the said statement, recorded on the day the order of assessment was concluded, i.e. 31.12.2007, was recorded behind the back of the assessee and neither copy of the same was given to the assessee for rebuttal, nor was the assessee allowed due opportunity to cross-examine Shri Niraj Sanghvi. It is seen from the record that no statement was recorded from Smt. Charu Sanghvi, Proprietor, Falgun Invest from whom the assessee purchased the said shares of M/s. Shukun Constructions Ltd. In this factual and legal matrix as discussed above, we find that the statement of Shri Niraj Sanghvi, which was so strongly relied upon to form the basis of the AO’s conclusion, is fatally flawed and has no corroboratory or evidentiary value since it was recorded behind the back of the assessee and was used to arrive at an adverse finding in respect of the assessee’s purchase of the ‘said shares’ without putting the assessee on notice by affording her opportunity of rebuttal of the statement and/or cross-examination of Niraj Sanghvi.

(ii) There is no evidence on record to show that any action or enquiry was carried out either by the SEBI or BSE in respect of the alleged manipulation or propping up of the price rate movement of the ‘said shares’ of Shukun Constructions Ltd., as has been assessed by the AO. The shares of Shukun Constructions Ltd. is listed on BSE and that the sale transaction of the ‘said shares’ by the assessee is at the rate quoted on the date of sale has been confirmed both by BSE and the concerned stock broker M/s. Khambatta Securities Ltd. It is strange that the AO has made the addition under section 68 of the Act treating the entire sale proceeds of the ‘said shares’ received by the assessee through regular banking channels from stock broker registered with SEBI, M/s. Khambatta Securities Ltd., which facts have been confirmed by the said stock broker. In our considered view, the assessee has discharged the onus required under section 68 of the Act as she has established the identity of the payer, source of funds received on sale of the same shares and the genuineness of the transaction.

(iii) The addition under section 68 of the Act in the case on hand, it appears, has been made only because the AO presumed that the purchases of the ‘said shares’ of M/s. Shukun Constructions Ltd. were not made on the date as disclosed by the assessee, but was backdated and an arranged transaction, and not because there was any irregularity in the sale of the said shares. We find from the material on record that the purchases of the said shares were duly disclosed under the head investment in the audited Balance Sheet as on 31.03.2004 relevant to A.Y. 2004-05. In this context we concur with the averments of the learned A.R. for the assessee that if there was any adverse material in respect of the purchases of the ‘said shares’, the AO ought to have or would have proceeded to initiate proceedings for reopening the assessment for A.Y. 2004-05 while concluding the assessment for A.Y. 2005-06, the year under consideration, on 31.12.2007 or thereafter till 31.03.2011, which he has not done.

Cases referred:

(i) ITAT, Chandigarh Bench, in the case of Somnath Mani (100 TTJ 917)

(ii) Andaman Timber Industries (2015) 281 CTR 214 (SC)

(iii) Jatin Chhadwa in ITA No. 8573/Mum/2010 dated 24.08.2012 for A.Y. 2005-06

(iv) Harkhchand K. Gada (HUF) & Others in ITA Nos. 1772 to 1775, 1788 & 1789/Mum/2010 dated 08.08.2012

(v) Judgement of the Hon’ble Bombay High Court in Mukesh R. Manolia in ITA No. 456 of 2007 dated 07.07.2011

(vi) Sharda Credit Pvt. Ltd. (ITA No. 3415/Mum/2007 dated 09.02.2009)

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