Surya Prakash Toshniwal HUF vs. ITO (ITAT Kolkata)

DATE: January 11, 2017 (Date of pronouncement)
DATE: January 14, 2017 (Date of publication)
AY: 2005-06
FILE: Click here to download the file in pdf format
Bogus capital gains from penny stocks: Long-term capital gains claimed exempt u/s 10(38) cannot be treated as bogus unexplained income if the paper work is in order. The fact that the Company whose shares were sold has violated SEBI norms and is not traceable does not mean that the assessee is at fault

The assessee purchased 5000 shares of M/s Rohon Financial and Securities Ltd. (RFSL for short) at a cost of Rs.50,250/- in aggregate on 26.12.2003. The same shares were sold to M/s Ahilya Commercial Pvt. Ltd. (ACPL for short) by assessee for Rs.14.97 lakhs on 14.01.2005 resulting capital gain of Rs.14,46,750/-. The AO observed that there was a sharp rise in price of shares of RFSL and accordingly the AO verified the transactions from the on-line portal of SEBI which revealed that ACPL was directed by SEBI not to buy, sale or deal in securities in any manner either directly or indirectly. It was also observed that ACPL has not filed financial statement before SEBI for the year ended on 31.03.2005. In view of the above, AO held that the transactions as bogus and accordingly he treated the same as income of assessee from undisclosed source. Aggrieved, assessee preferred an appeal before CIT(A) and submitted that the transactions for sale-purchase of share with RFSL was made through account payee cheques. The shares were sold after 13 months through on-line portal of Kolkata Stock Exchange without knowing details of buyer. Those transactions of purchase-sale are supported with the valid contract notes. The assessee further submitted that it cannot be penalized for non-filing of financial statement by ACPL. However the CIT(A) disregarded the claim of assessee and upheld the order of AO. On appeal by the assessee to the Tribunal HELD allowing the appeal:

(i) The assessee has shown income from long term capital gain for Rs.14,46,529.00 which was claimed as exempted income under section 10(38) of the Act. However, the assessing officer treated the same as income from other sources by holding such income as bogus and from undisclosed sources which was routed in the disguise of long term capital gain. The addition made by the AO was also upheld by the learned CIT(A). Now the issues before us arises for our adjudication so as to whether the long term capital gain income claimed by the assessee is bogus income in the aforesaid facts and circumstances. In the case on hand admittedly the shares were sold by the assessee after paying the Security Transaction Tax (STT). Similarly the purchase price of the shares and the sale price of the shares were reflecting on the Calcutta stock exchange as evident from page number 19 and 20 of the paper book. It is also not in dispute that the purchase and sale of the shares were routed through account payee cheques. The learned AR in support of his claim has also produced the contract notes for the purchase and sale of the shares which are placed on pages 12 and 13 of the paper book.

(ii) However we find that in spite of having all the aforesaid information the lower authorities have held the long term capital gain as bogus and from undisclosed sources on the basis of certain facts as revealed under:

1. The assessee in the present case is a HUF and the transaction was routed for both purchase and sale of the shares through an individual broker who happened to be the Karta of assessee i.e. HUF.

2. The shares were sold to M/s Ahilaya Commercial Private Limited (for short ACPL) but the financial statements of the company were not filed to the stock exchange. The assessee also failed to furnish the necessary details of ACPL to establish the genuineness of the transactions except that the transactions were routed through account payee cheques.

3. The SEBI has also directed to M/s ACPL not to carry out any transaction of purchase and sale of securities in any manner either directly or indirectly.

4. The assessee has also failed to submit the net worth of M/s RFL and ACPL to justify the amount of capital gain earned during the year.

(iii) On the analysis of the above facts we find that the lower authorities have not brought on record any concrete evidence for disallowing the long term capital gain of the assessee. The AO should have issued notices and summons to M/s RFL and ACPL under section 133(6) and 131 of the Act for the production of the necessary financial information before rejecting the claim of the assessee. We find that all the necessary information which were available with the assessee had been brought on record by the assessee before the lower authorities. In case ACPL has not filed the financial statements with the stock exchange then the assessee for the fault of ACPL cannot be held guilty under the income tax proceedings. The assessee in the instant case has made the transactions for the sale and purchase of the shares through a valid stock broker who was in existence at the relevant time with the stock exchange and this fact has not been doubted by the lower authorities. In view of the above we hold that the lower authorities had not brought on record sufficient reasons for disallowing the claim of the assessee.

(iv) In CIT versus Carbo Industrial Holdings Limited reported in 116taxman159 where the Hon’ble jurisdictional High Court has held as under : “If the share broker, even after issue of summons does not appear, for that reason, the claim of the assessee should not be denied, specially in the cases when the existence of broker is not in dispute, nor the payment is in dispute. Merely because some broker failed to appear, assessee should not be punished for the default of a broker and on mere suspicion the claim of assessee should not be denied.

(v) Similarly in CIT Vs. Emerald Commercial Ltd. reported in 120 taxman 282 it was observed as under : “Business income—Business loss—Loss on sale of shares—Details of purchase and sale of shares furnished—Payment and receipts were through account payee cheque—Identity of seller and purchaser not disputed—Claim for loss could not be disallowed on the mere ground that the assessee failed to produce the brokers for verification of the transaction—Finding of the Tribunal that the loss incurred by the assessee in the share dealings is genuine and is allowable was based on material and was not perverse—CIT vs. Carbo Industrial Holdings Ltd. (2000) 161 CTR (Cal) 282 : (2000) 244 ITR 422 (Cal) followed

(v) Respectfully following the aforesaid judgments we find that the proposition laid down by the Hon’ble Courts are applicable to the instant case on hand. The addition was made by the lower authorities on several grounds as discussed above but on analysis of the facts we find that there was no fault on the part of the assessee. Therefore we are inclined to reverse the order of lower authorities. Hence this ground of appeal of the assessee is allowed.

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