Landmark Judgment: Scam has taken place in some penny stocks does not mean that all transactions in penny stocks can be regarded as bogus

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Landmark Judgment: Scam has taken place in some penny stocks does not mean that all transactions in penny stocks can be regarded as bogus

Key Observation: 

 Bogus LTCG from penny stocks: The fact that a scam has taken place in some penny stocks does not mean that all transactions in penny stocks can be regarded as bogus. In deciding whether the claim is genuine or not, the authorities have to be guided by the legal evidence and not on general observations based on statements, probabilities, human behavior, modus operandi etc. The AO has to show with evidence the chain of events and live link of the assessee’s involvement in the scam including that he paid cash and in return received exempt LTCG gains (Sanjay Bimalchand Jain 89 TM 196 (Bom) distinguished) 

आयकर अपीलीय अधिकरण “E” न्यायपीठ म ुंबई में।
IN THE INCOME TAX APPELLATE TRIBUNAL “E” BENCH, MUMBAI
श्री महावीर स िंह, न्याययक दस्य एविं श्री राजेश कुमार लेखा दस्य के मक्ष।
BEFORE SRI MAHAVIR SINGH, JM AND SRI RAJESH KUMAR, AM
आयकर अपील िं/ ITA No. 3429/Mum/2019
(यिर्ाारण बर्ा / Assessment Year 2012-13)
आयकर अपील िं/ ITA No. 3428/Mum/2019
(यिर्ाारण बर्ा / Assessment Year 2013-14)
आयकर अपील िं/ ITA No. 3427/Mum/2019
(यिर्ाारण बर्ा / Assessment Year 2014-15) Shri Vijayrattan Balkrishan Mittal A-403, Meghdoot Apt., Raheja Township, Malad East, Mumbai-400 097 स्थायी लेखा िं /PAN – AKAPM9809R
……………. Appellant
/ अपीलाथी
v/s
Dy. Commissioner of Income Tax Central Circle-8(1), 6th Floor, Room No. 679 Aayakar Bhavan, M.K. Road, Mumbai-400 020
…………….Respondent
/ प्रत्यथााी
आयकर अपील िं/ ITA No. 3311/Mum/2019
(यिर्ाारण बर्ा / Assessment Year 2012-13)
आयकर अपील िं/ ITA No. 3312/Mum/2019
(यिर्ाारण बर्ा / Assessment Year 2013-14)
आयकर अपील िं/ ITA No. 3313/Mum/2019
/ Assessment Year 2014-15)
/ ITA No. 3314/Mum/2019
(/ Assessment Year 2015-16) Smt. Pooja Mahendra Mittal A-403, Meghdoot Apt., Raheja Township, Malad East, Mumbai-400 097 स्थायी लेखा िं /PAN – ACHPB0564H
……………. Appellant
/ अपीलाथी
v/s
Dy. Commissioner of Income Tax Central Circle-8(1), Aayakar Bhavan, M.K. Road, Mumbai-400 020
…………….Respondent
/ प्रत्यथााी
आयकर अपील िं/ ITA No. 3426/Mum/2019
(यिर्ाारण बर्ा / Assessment Year 2013-14) Shri Mahendra B. Mittal HUF A-403, Maghdoot Apt., Raheja Township, Malad East, Mumba-400 097 स्थायी लेखा िं /PAN – AADHM8670B
……………. Appellant
/ अपीलाथी
v/s
Dy. Commissioner of Income Tax Central Circle-8(1), 6th Floor, Room No. 679 Aayakar Bhavan, M.K. Road, Mumbai-400 020
…………….Respondent
/ प्रत्यथााी
आयकर अपील िं/ ITA No. 3264/Mum/2019
(यिर्ाारण बर्ा / Assessment Year 2012-13)
आयकर अपील िं/ ITA No. 3247/Mum/2019

(यिर्ाारण बर्ा / Assessment Year 2013-14)
आयकर अपील िं/ ITA No. 3265/Mum/2019
(यिर्ाारण बर्ा / Assessment Year 2014-15)
आयकर अपील िं/ ITA No. 3248/Mum/2019
(यिर्ाारण बर्ा / Assessment Year 2015-16) Shri Mahendra Balkrishan Mittal A-403, Meghdoot Apt., Raheja Township, Malad East, Mumbai-400 097 स्थायी लेखा िं /PAN – AEBPM1654H
……………. Appellant
/ अपीलाथी
v/s
Dy. Commissioner of Income Tax Central Circle-8(1), 6th Floor, M.K. Road, Mumbai-400 020
…………….Respondent
/ प्रत्यथााी
अपीलाथाी की ओर े / Appellant by
:
Shri Madhur Agarwal,
Jay Bhansali, ARs
प्रत्यथाी की ओर े / Respondent by
:
Shri R. Manjunatha Swamy, CIT DR
ुिवाई की तारीख / Date of hearing:
27.08.2019
घोर्णा की तारीख / Date of pronouncement :
01.10.2019
AadoSa / O R D E R
महावीर स ुंह, न्याययक दस्य/
PER MAHAVIR SINGH, JM:
These twelve appeals of different assessees are arising out of the orders of Commissioner of Income Tax (Appeals)-50, Mumbai in Appeal Nos. CIT(A)-50/10032 ,10263, 10264,10265, 10266, 10267,10268,10270,10271,10273/2017-18, 2018-19 of even date 28.03.2019. The Assessments were framed by the Dy. Commissioner of Income Tax (Central Circle)-8(1), Mumbai (in short DCIT/ITO/ AO) for AYs 2012-13,2013-14, 2014-15, 2015-16 of even dated 22.12.2017, under section 143(3) read with section 153A of the Income-tax Act, 1961 (hereinafter ‘the Act’).
2. The first common issue in these appeals of four different assessee’s is as regards to the order of CIT(A) confirming the action of the AO in treating transactions of sale of shares of listed companies as bogus thereby making addition under section 68 of the Act being sale proceed of such transactions treating the same as unexplained income under section 68 of the Act. Consequently, also on second interconnected issue, the CIT(A) confirmed the action of the AO in making addition on the basis of presumption that the assessee has paid commission for alleged accommodation entries of long term capital gain and added the same under section 69C of the Act. For this, all these assessee’s have raised identical grounds and the facts and circumstances in all the cases are also identical. Both, the learned counsel for the assessee’s as well as leaned CIT DR fairly stated that facts on merits in all these appeals are same. Hence, only one appeal was argued and all will be adjudicate accordingly. The lead appeal on merits is ITA No. 3248/Mum/2019 for the AY 2015-16 and the grounds raised are the following ground Nos. 2 to 4: –
“2. a. The AO/ CIT(A) erred in law and facts in treating the transaction of sale of shares of listed company as bogus and thereupon making an addition of Rs. 14,19,36,826/- under section 68 of the Act, being the sale proceeds of such transaction, treating the same as unexplained income. The reasons given are wrong, contrary to facts of the case and against the provision of law;
b. The CIT(A) erred in upholding the action of the AO in making an addition of Rs. 14,19,36,826/- under section 68 of the Act, being the sale proceeds of sale of shares of a listed company through recognized stock exchange even when the identity and nature of the source of the said credit were explained and proved. The reasons given are in the realm of assumption and presumption upon which no addition is sustainable:
c. The AO/ CIT(A) erred in law and facts in relying on certain data, information from BSE. findings of the general investigation in unrelated cases and also third party statements without, establishing connection or involvement to or of the Appellant that too without allowing the Appellant any opportunity to cross examine those parties/ information:
d. The AO CIT(A) failed to appreciate that nowhere do the information and statements. identify the Appellant as a beneficiary of the alleged accommodation entries:
e. The AO/ CIT(A) erred in law and facts in treating the transaction of sale of shares of listed company as bogus and undisclosed income merely the suspicion and assumption that the prices of the shares of listed company were manipulated and appreciation in the value was very high even when the market regulator, SEBI, has not found any manipulation or involvement of appellant;
f. The AO/ CIT(A) erred in making addition u/s 68 of the Act disregarding the final orders passed by SEBI, related to share transactions of listed company on the stock exchange and the fact that the said order nowhere alleged the involvement of appellant or his broker as the beneficiary of the alleged scheme.
g. Without the prejudice, the CIT(A) failed to appreciate that Rs. 14,16,80,449/- has been credited to the Appellant’s account being sale proceeds of shares as against the addition of Rs. 14,19,36,826/-.
3. The AO/ CIT(A) erred in law and facts in making an addition of Rs. 42,58,104/- under section 69C of the Act on the presumption that commission @ 3% was paid for alleged accommodation entries of long term capital gain.
4. The AO/ CIT(A) erred in law and facts in passing the assessment order Solely on the basis of assumptions. presumptions. surmises and conjecture without any cogent material or evidence hence it is illegal and contrary to the principles of natural justice.”
3. Brief facts of the case are that the assessee filed his return i.e. original return of income on 28.08.2015 [wrongly mentioned by CIT(A) as 17.07.2014], whereas the correct date is written by the AO) for AY 2015-16 declaring the total income of ₹ 45,80,790/-. A search and seizure action under section 132 of the Act was carried out by the Income Tax Department on 03.12.2015 at the resident and office premises of the assessee and its group companies and other associates. Consequent to the search action under section 132 of the Act, a notice under section 153A of the Act was issued by the AO on 16.01.2017. In response to notice under section 153A of the Act, the assessee filed its return of income on 30.02.2017 declaring a total income of ₹ 47,38,420/-. The assessment was framed vide order dated 22.12.2017 under section 143(3) read with section 153A of the Act on a total income of ₹ 15,10,08,650/-. The AO made addition under section 68 of the Act amounting to ₹ 14,19,36,826/- on account of unexplained cash credit under section 68 of the Act being sale proceed of transactions of sale of shares as bogus. Consequently, the AO also made addition of ₹ 42,58,104/- under section 69C of the Act being commission paid on accommodation entries paid by the assessee.
4. Brief Facts relating to this issue are that the assessee had applied for 1,50,000 equity shares of Rs. 10/- each of Pine Animation Limited (PAL) in the preferential issue of shares. The payment was made to PAL through an account payee cheque vide cheque no. 147952 dated 09.03.2013 of Axis Bank for Rs. 15,00,000/- which was debited in the assessee’s bank a/c on 13.03.2013. The assessee before AO and CIT(A) and also now before us filed copies of share application form, relevant bank statements showing payment and shares allotment advice. These are enclosed in Assessee Paper Book (APB) at page 73-75. The company allotted 1,50,000 equity shares of Rs. 10/ each at par on 15.03.2013 and credited the shares to his demat account. The purchase of shares was duly disclosed in the balance sheet for the year ended 31st March, 2013 and after verification of all documents there is no observation of the AO relating to acquisition of shares of PAL and payment thereof in assessment order u/s 143(3) r.w.s. 153A for AY 2013-14. Subsequently, the shares were split into Re. 1/- per share by PAL on 21.05.2013. Copy of demat statement showing the allotment and split enclosed at page 192 of APB. Further, in FY 2014-15 (AY 2015-16) the assessee sold the above shares of PAL on BSE Platform through his regular broker M/s Geojit, who is registered with BSE and SEBI, the market regulator. The assessee has been dealing in shares through his broker Geojit for last 10 years. The assessee received sale proceeds of shares directly from his broker Geojit by credit to his Axis bank a/c on the date of settlement. Copies of contract notes along with summary and relevant bank statements showing the amount credited are enclosed in APB (Pages 77-186, pages 195-198 & Pages 188-190). Copies of broker’s ledger and Form 10DB is also enclosed (pages 199-215). The sale transactions of shares have suffered expenses like brokerage, service tax, STT, stamp duty, exchange and SEBI turnover charges, etc. which are specifically shown in the contract notes issued by the Broker.

  1. The assessee during the year under consideration has earned long term capital gain (LTCG) amounting to ₹14,00,76,815/- on sale of shares of Pine Animation Ltd. (PAL) a company listed on Bombay Stock Exchange. The assessee had 15 lacs equity shares of PAL in earlier years and after holding more than one year sold those shares during the year of consideration for a sum of ₹14,16,80,449/-. The assessee sold these shares on BSE network and paid STT, service tax, stamp duty, etc. The assessee claimed this LTCG as exempt under section 10(38) of the Act. During the course of assessment proceedings, the AO required the assessee to prove his claim of LTCG on sale of shares of PAL vide letter dated 20.11.2017. The assessee filed various details in support of his claim but AO rejected relying on report of investigation wing and held that receipt of sale proceeds from BSE broker or clearing system is unexplained cash credit and made addition under section 68 of the Act. The AO has concluded his finding and which are summarized as under: –
    “i) The assessee has mainly traded in one script which is suspicious.
    ii) The assessee traded in single scrip and has made huge profits.
    iii) To prove genuineness, proof of physical transfer of shares, reasons to trade off-market when options to online market trading through demat account were available, trading pattern of market transactions for the last three years, have not been submitted by the assessee.
    iv) The assessee earned long term capital gain in the current year and claimed it as exempt u/s 10(38) of the Act. This quantum of huge long term capital gain was found suspicious and detailed investigation of this issue was undertaken. Various tools available were examined including ITD data, BSE data, money control website, taxman, court rulings, internet as well as investigation wing report and findings of the SEBI.
    v) Long term capital gains booked by assessee in his books were prearranged method to evade taxes and launder money. Following are the findings and the reasons which substantiates the findings.
    a) Mode of acquisition of the shares & period of holding: Mahendra Mittal was allotted 1,50,000 preference shares of M/s Pine Animation Ltd. at the rate of Rs. 10/- per share on 10.04.2013 vide allotment letter 10.04.2013. This shareholding increased to 15,00,000 number of shares after splitting of shares in the ratio of 1:10 as per the decision of the Board on 20.05.2013. The assessee sold all the shares of PAL between 02.04.2014 to 12.06.2014, thereby earning an exempt bogus LTCG.
    b) Unrealistic ‘return on Investments: It is seen that Assessee has sold shares of these three companies and have earned unbelievable returns. Normal returns on savings were around 7% for F.Y. 2014-15 and around 16% for BSE/Sensex. It is seen- that you have earned 9362% of returns on investments when sensex gold returns are far behind the strong performance of these three companies without having any supporting financial results itself is a circumstantial evidence to show that your LTCG is not genuine one.
    c) Findings of investigation wing: The findings of the Directorate of Investigation of Mumbai and Kolkata as discussed above have proved that Shri Narendra Shah and associated brokers, entry operators and the assessee had worked out an arrangement in which the shares were Acquired by the assessee, the share prices were rigged and then with the help of entry operators by routing the cash, shares were sold at high price to arrive at tax free capital gains.
    d) Analysis of transactions: Facts revealed that such trading transactions of purchase and sale of shares are not been effected, for commercial purpose but to create artificial gains, with a view to evade taxes –
    i) Transactions of shares were not governed by market factors prevalent at relevant time in such trade, but same were product of design and mutual connivance on part of assessee and the operators.
    ii) The assesses resorted to a preconceived scheme to procure long-term capital gains by way of price difference in share transactions not supported by market factors.
    iii) Cumulative events in such transactions of shares revealed that same were devoid of any commercial nature and fell in realm of not being bona fide and, hence, impugned long term capital gain is not allowable.
    iv) The order of SEBI referred above has also given the similar finding that the prices of the shares were determined artificial by manipulations and cannot be a product of market factors and commercial principals.
    v) Failure of Assessee to discharge his onus: The assessee has not been ‘able to prove the unusual rise and fall of share prices to be natural and based on the market forces. It is evident that such share transactions were closed circuit transactions and clearly structured one.
    vi) Ignorance of the assessee about shares and penny stock companies: Assessee has failed to show of having any knowledge about the shares traded and ‘having any knowledge about the fundamentals off the penny stock companies.
    Though the assessee has denied to have any knowledge about the shares traded and having any knowledge about the fundamentals of the penny stock companies but considering, the above findings and the fact that the transactions are arranged in such a manner to gain astronomical gains, doubts the claim of assessee
    vii) Financial analysis of the penny stock companies: The net worth of the penny stock company is negligible. Even though the net worth of the company and the business activity of the company is negligible the share prices have been artificially rigged to unusual high.
    ix) Order of the SEBI: SEBI order has been passed in the case of PAL vide dated 08.05.2015 which directs that the trading in the securities of shall he suspended till further directions. Vide this order, SEBI has noted that the shares of PAL have been manipulated and rigged thereafter the shares have been sold by the beneficiaries of bogus LTCG/STCG on the stock exchange to avail accommodation entry.
    x) Cash trail in the accounts of the entry providers: The investigations in the fund flow analyzed in the accounts of the entry providers have established that the cash has been routed front various accounts to provide accommodations to assessee.
    xi) Arranged transactions: The transactions entered by the assessee involve the series of preconceived steps, the performance of each of which is depending on the others being carried out. The true nature of such share transactions lacked commercial contents, being artificially structured transactions, entered into with the sole intent, to evade taxes.
    xii) Non-compliance from exit providers: Further, notice under section 133(6) of the Act was issued to the exit providers to furnish details related to the above said transactions but no compliance was received from the said parties.
    xiii) The income tax liability is ascertained on the basis of the material available on record, the surrounding circumstances, human conduct and preponderance of probabilities.
    xiv) After considering the findings of the search/ survey, inquiries conducted in the case of assessee, brokers, operators and the entry providers and the
    nature of transaction entered into by the assessee the LTCG claimed exempt u/s 10(38) of the act by the assessee cannot be allowed and the amount received back as sales proceeds on sale of shares is required to added back towards his taxable income under section 68 of the Act.”
    Aggrieved, against the order of the AO, assessee preferred the appeal before CIT(A).
    6. The CIT(A) also confirmed the action of the AO by observing (the relevant paras are being reproduced) as under: –
    “Details of the Penny Stock Transaction
    12.0 During the year under consideration, the Appellant had claimed LTCG on the shares of PAL, as exempt u/s 10(38) of the Act. As per the details placed on record, the sale consideration of the shares of M/s Pine Animation Ltd. for the year under consideration is amounting to Rs.14,19,36,826.50/- and the same had been added back by the AO, as unexplained cash credit u/s 68 of the Act.
    12.1 The facts are that the Appellant had got allotted 1,50,000 preference shares of PAL at the rate of Rs. 10/- per share on
    10.04.2013, vide allotment letter dated 10.04.2013 of the said company. The Appellant had stated that it had paid an amount of Rs. 15,00,000/- on 13.03.2013 from it’s Axis Bank Account. This initial of shareholding of ₹ 1,50,000 preference shares of PAL of the Appellant had increased to 15,00,000 shares, after there was a splitting of shares in the ratio of 1:10, as per the decision of the Board of PAL on 20.05.2013.
    12.2 Finally, the Appellant had sold the entire shareholding of 15,00,000 shares of M/s PAL between 02.04.2014 to 12.06.2014 on BSE through the broker namely M/s Geojit BNP Paribas Financial Services Ltd. for a consideration of ₹ 14,19,36,826.50/-.
    …………………….
    Share capital of PAL
    24.0 The PAL share is listed on Bombay Stock Exchange with the Scrip ID 511421 formerly known as “Four K Animation Limited”. On September 30, 2012, PAL
    had a share capital of Rs. 3,00,00,000 comprising 30,00,000 equity shares of ₹10 each, with the promoters holding 9,27,400 shares i.e. 30.91% of the total share-holding.
    24.1 On December 13, 2012, PAL made a preferential allotment of 1,50,00,000 equity shares at the price of ₹ 10 per share (hereinafter referred to as the “1st preferential allotment) to 49 entities. Thereafter, the promoters namely, M/s First Entertainment Private Limited and M/s Unique Image Production Pvt. Ltd. who were holding shares in the physical form, transferred their entire holdings i.e. 9,27,400 shares to 6 entities (hereinafter referred to as “Promoter related entities).
    24.2 Subsequently, on March 15, 2013, PAL made another preferential allotment of 97,00,000 equity shares at the price of Rs. 10 per share (hereinafter referred to as the “2 preferential allotment”) to 48 entities, which included 5 entities who were allotted shares in the 1″ preferential allotment.
    24.3 In total, PAL had allotted 2,47,00,000 equity shares to 92 entities. The equity shares allotted on preferential basis to aforesaid allottees were locked-in for a period of one year i.e. up to December 12, 2013 for the 1 preferential allotment and March 14, 2014 for the 2nd preferential allotment in terms of the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009.
    24.4 On May 20, 2013 the equity shares of PAL were split in the ratio of 1:10. Consequently, the paid up share capital of PAL increased to 27,70,00,000 comprising of 27,70,00,000 shares of Rs. 1 each, as on May 20, 2013.
    ……………….
    26.4 The Appellant’s statement was recorded during the course of search proceedings u/s. 132 of the Act, wherein he had stated that all his affairs related to share markets were managed by his father, Shri Balkrishan Mittal. The Appellant had contended that they had
    got some information about some scrips, where there were reasonable chances of getting good return in short terms. But the source of information, basis of information, documentary evidence in support of such a claim had not been furnished by the Appellant. Thus, the Appellant had only made general and vague observations on the issue of allotment of preference shares. Hence, the make believe story of the Appellant can’t be accepted in the absence of any documentary evidence.
    26.5 These contentions of the Appellant had also been brush aside by SEBI in it’s confirmatory order dated 2nd June 2016 and the relevant excerpt of the said order are reproduced hereunder, for ready reference: –
    “13. In the instant case, it is undisputed that trading in the scrip of Pine was suspended from November 09, 1998 till June 21, 2012 and during the financial year 2011-12, it had incurred a loss of ₹7,08,037 and thereafter earned a meagre profit of ₹15,60,007 during FY 2012-13. It does not appeal to reason that the Notices, who claim to be regular investors in the securities market, invested their hard-earned money in a company like Pine with such poor fundamentals and background without having any connection / relation with the promoters/directors of Pine. When asked during personal hearing, the Notices’ authorized representatives failed to give any plausible explanation as to how the company could make allotment to the Notices if they were not known to it or its promoters/directors and if they had no nexus/connection with them. I am unable to accept the explanation of the Notices that they invested in Pine to on the advice / tips of some random public sources. I note that the Notices have not been able to furnish any satisfactory documentary evidence to explain how they were approached by Pine for the preferential allotment, or in providing the details of the offer made by Pine to them and other details of communication between them and Pine in that regard. It is important to note that financing of a company by way of preferential allotment, as found in this case, pre-supposes a nexus and prior understanding amongst the issuer, its promoters/directors and the allottees.”
    26.6 The Appellant had failed to substantiate the claim that it had made investment in preferential allotment of PAL, as a genuine investor. A stranger cannot make large investment in a preferential allotment merely on the basis of an advice or presentation without having any connection direct or indirect, and prior understanding with the company. Further all the Preferential Allottees were involved in a similar series of acts, starting from the preferential allotment of shares to their exit from the company. Further, the similar modus operandi adopted by almost all the Preferential Allottees is not a mere coincidence and leaves no doubt their involvement in the bogus LTCG Scam.
    Poor Financials of Pine Animation Ltd.
    27.0 A perusal of the audited accounts of PAL indicate its poor financial condition and razor thin profit for several years in continuity. Before the audited accounts of PAL are examined and commented upon in details, it is important to reproduce some of the important figures contained in the balance-sheets & profits and accounts for the years ending from March, 2011 to March 2015, as under: –
    Balance sheet (Figures in Rs. Cr.)
    Description
    Mar’ 15
    Mar’ 14
    Mar 13
    Mar’ 12
    Mar’ 11
    Total Share Capital
    27.70
    27.70
    27.70
    3.00
    3.00
    Reserves
    -1.40
    -1.91
    -2.50
    2.62
    -2.55
    Inventories
    21.78
    22.67
    16.34
    0.00
    0.00
    Loans and advances
    8.69
    9.58
    11.25
    0.06
    0.06
    Book value (Rs)
    0,95
    0.93
    9.10
    1.27
    1.51
    Profit & Loss Account (Figures in ₹ Cr.)
    Description
    12mths
    12mths
    12mths
    12mths
    12mths
    Operating Profit
    -0.02
    -0.53
    0.11
    -0.06
    0.03
    Earning Per
    0.02
    0.02
    0.06
    -0.24
    0.03
    0
    0
    0
    0
    0
    Book Value (Rs)
    0.95
    0.93
    9.1
    1.27
    1.51

27.1 A perusal of the above tabular data clearly shows that the Reserves of PAL for the period March Ending 2011 to March Ending 2015 had been always negative. Thus, PAL virtually had no Reserve & surplus continuously for the last so many years, which itself shows its precarious financial health.
27.2 Further, a perusal of the critical Balance-sheet figures of PAL reveals that the entire funds raised by way of share capital had been transferred out of the company through investments in shares reflected under the heading ‘Inventories’ and by way of advancing of ‘Loans and Advances’. Thus, no worthwhile business activity had been carried out by PAL continuously for several years. The financials of PM. itself clearly shows that it is a paper company with no real business activity.

27.3 The above tabular data also clearly shows that the operating profit of PAL is also negative or negligible for almost all the years. From the Annual Report for the F.Y. 2012-13 it was observed that for the F.Y. ending 2012, the EPS of PAL was negative (i.e. Rs. 0.24) and for the FY ended March 31, 2013, EPS was Rs. 0.15. For the current year under consideration the EPS was as low as 0.02. In conclusion, the Earning per Share (EPS) is also either negligible or negative for all the 5 years, tabulated above. As per the above data, no dividend had been declared for any of the 5 years. In-fact, there were no reserves available with the company to declare dividend to the shareholders. To sum up, the financials of PAL doesn’t inspire any confidence and no prudent person will invest in it’s shares unless and until the scrip oilers illegal & illegitimate gains by price manipulation.
27.4 As per the above data, the Book Value of the shares ranges from a minimum of Rs. 0.93 per share to a maximum of Rs. 9.10 per share. On the other hand, the appellant had sold the shares on BSE from Rs. 94.0 per share to Rs. 95.8 per share for the current year under consideration. The pre-arranged and pre-meditated nature of these transactions is apparent from the fact that the Book Value of the /share for the year under consideration was just Rs. 0.95 per share, as against the average ESE price of Rs. 95 per share. Thus, the BSE price of PAL is 100 times more than the Book Value of the share. All this clearly reveals that the share price of BSE had been highly manipulated upwards by the Operators and Exit Providers for the purpose of providing a golden exit to the beneficiaries, like the Appellant.
Poor Track Record of PAL Scrip on BSE
28.0 The material on record reveals that the scrip was earlier listed on BSE from March 25, 1994 and trading was suspended in the scrip w.e.f. November 09, 1998. Thus, the dubious nature of the PAL scrip was quite evident from the several undisputed historical facts. A prudent investor will never invest in such a suspicious nature of scrip, which had been found to be involved in manipulations on the Stock Exchange and hence, banned from trading.
28.1 However, the suspension of trading in the scrip was revoked w.e.f June 22, 2012 and soon after, PAL was able to raise substantial fund, through preferential allotment of shares. The sudden spurt in the activity and inflow of hinds in PAL, just after the suspension was revoked is not at all based on any real or genuine consideration, but for ulterior motives by interested parties.
28.2 In spite of the poor fundamentals, tarnished track record, exit by the promoters of the company etc., PAL was still able to raise funds aggregating to Rs. 24,70,00,000 from 92 entities at a premium of Rs. 10 per share within a short span of few months from the revocation of suspension. The preferential share investment in PAL by the 92 entities including the Appellant cannot be prima-fade termed as a rational investment behavior looking into the extremely poor fundamentals and track record of PAL.
Share Price not in consonance with the Fundamentals
29.0 Contrary to the extremely poor financials and dubious past, the share price of PAL had significantly moved upwards from April 2013 and had remained high till December 2014. During the period April 2013 to December 2014, when the share price of PAL had remained high, there was no material corporate announcement by the Board of PAL Thus, the high price of the scrip of PAL during the said period was neither supported by its fundamentals nor by any other genuine factor. No rational thinking person will dump it’s hard earned money in such a stock without being able to make illegal gains.
Extremely Thin Volume, during the Price Rise in the PAL Scrip

30.0 A perusal of the trading data of the PAL scrip for the period, when the scrip was zooming is also quite revealing. The general trend is that when the scrip price rises, the volume of trade in that scrip also increases. However, it is noted that during the steep price rise in the PAL scrip, the volumes had still remained extremely thin. This clearly reveals that the Operators were jacking up the prices on a daily basis by just executing a few trades on the Exchange Platform. Naturally, the beneficiaries who were holding the bulk of the shareholding were not interested in executing any transaction during this period, as they were fully aware that the price of the scrip is going to rise further.
30.1 To buttress the above observations, the data relating to the sharp price rise in the PAL scrip was examined. On May 22. 2013, the price of the scrip was Rs. 47.2 per share. However, in just 19 trading days, between May 22, 2013 to June 19, 2013, the price of the scrip jumped to Rs. 100.6. The average volume during the period was 62 shares, with 405 shares traded on May 28, 2013 being the he entire price rise was stage managed by certain Scrip Operator Entities. It was noticed that such entities by executing 1 or 2 trade(s) per day of meagre quantity were able to increase the price of the scrip in a significant manner.
30.2 Thus, it is highly surprisingly that none of the preferential allottee had come forward to sell the shares, during the price rise period. The fact that no preferential allottee had offloaded its PAL shareholding, though the share price of PAL was rising rapidly, is in itself a strong circumstantial residence about the prearranged transaction of LTCG. All the beneficiaries waited for the price rise to achieve the nadir and also waited for the completion of the one year lock in period, which as per the understanding with the Operators was bound to happen together for a sufficient period of time, though at a later stage. High Price of the Scrip, still Volumes Low
31.0 The LTCG Scam is evident from the fact that even when the price was quite high and plateaued, still none of the Beneficiary had offloaded his shareholding in PAL before the lock in period of 1 year was over. This is evident from the fact that during the period of June 20, 2013 to December 16, 2013, the price of the PAL. scrip had remained at a very high price level in a consistent manner. The price of PAL scrip was Rs. 100.6 on June 20, 2103 and was Rs. 91 on December 16, 2013. However, the volume continued to be insignificant, the highest being 200 shares on June 24, 2013 and the gross traded volume being 1254 shares. Also, the scrip traded only on 13 trading days during this period.
31.1 The reason for such an unusual behavior of the shareholders of PAL gives a further insight into the Bogus LTCG Scan). It may be noted that the preferential allotment of shares to the various beneficiaries had been made by PAL on December 13, 2012 & March 15, 2013. To get the benefit of exemption from taxation of the LTCG, one had to hold the shares for at-least 1 year. So, till December 2013, none of the Beneficiaries, who were holding majority of the shares of PAL were eligible for exemption u/s 10(38) of the Act. This clearly shows that none of the Beneficiary was looking for only a good price for the PAL Scrip, but they were looking for a combination of good price with exemption from taxation.
31.2 The Operators of the Scrip have ensured the Beneficiaries that the price of the scrip will be maintained at high levels, till they become eligible for tax exemption. Further, the high price will be maintained for a sufficient time period, so that they are able to offload their shareholding. It is this assurance from the scrip operators that none of the Beneficiaries, who were holding a whopping 24,70,00,000 shares of PAL had offloaded their holding even during the period when the plateau of high price had been reached by the scrip.

31.3 The fact that none of the 92 preferential allottee had sold the PM. shares either during the price rise period or during the high price plateau period can’t he stated to be mere coincidence, but actually was a part of a larger design of the LTCG Scam.
Booking of LTCG by Beneficiaries
32.0 The offloading of the PAL scrip by the ‘Beneficiaries’ started from Dec 2013 & continued till Jan 2013, as the mandatory holding of the shares for 1 year for preferential allotment was over by then.
32.1 On December 17, 2013 the price of the scrip was Rs. 92.1 and the ‘Beneficiaries’ started offloading the PAL shares during this period. This offloading activity by the ‘Beneficiaries’ continued for around a year and after that finally, the stock started falling down. Thus, on January 30, 2015, the price of the scrip fell to just Rs. 38.5. During the period starting from December 17, 2013 to January 30, 2015, the scrip was traded
with an average volume of 2,74,922 shares per day and total volume of 7,36,79,112 shares were traded in 268 days. Thus, the volumes / during this period were extremely high and the Beneficiaries booked the LTCG during this period of time.
32.2 A graphical Presentation of the simultaneous high price & high volume movement in the scrip of PAL during the period December 17, 2013 to January 30, 2015 is represented, as below: –
(copy of above image is taken from CIT(A) order for AY 2015-16 in the case of Mahender B. Mittal)
32.3 In the above pictorial representation, the continuous line represents the closing price of the PAL scrip and the graph in the form of manhattans represent the volume in the PAL scrip.

32.4 Thus, alter the expiry of the lock-in period, the average volume increased astronomically by 4433 times. During this period, the trading volume of the shares increased to 274,922 shares per day from just 62 shares per day in the period prior to December 37, 2013.
32.5 Such high volumes in the PAL scrip was mainly on account of matched and synchronized transactions amongst the ‘Preferential Allottees’ and Exit Providers’. During the said period, it was observed that the ‘Exit Providers’ had acted as counter-parties to the sale transactions carried out by the ‘Beneficiaries’. Thus, the ‘Exit Providers’ have provided a very profitable exit to the ‘Preferential Allottees’ in a pre-arranged manner. The ‘Exit Providers’ were mainly entities floated by the ‘Scrip Operator’ / Promoter backed entities / Shell Companies / Accommodation Entry providing entities / Bogus Companies etc.
Beneficiaries Net Sellers & Exit Provider Net Buyers- during High Price & High Volume Period
33.0 During the period of December 37, 2013 to January 30. 2015, the ‘Beneficiaries’ were the net ‘Sellers’ and the ‘Exit Providers’ were the net ‘Purchasers’. This itself shows that the transactions of sale by beneficiaries was fixed with the Exit Providers, who had provided them with very lucrative and profitable exit. The data tabulated by SEBI regarding ‘Exit Providers’, as a result of investigation into the bogus LTCG Scheme had been tabulated in its order dated 08.05.2015 the same is reproduced hereunder: –
No. of shares sold
% of total allotted/ received shares
Shares purchased by Exit Providers from preferential allotees/ promoted related entities
Total No. of shares purchased by the Exit Providers
% volume of shares purchased by exist providers from preferential allotees/ Promoter related entities
Shares purchased by Exit Providers as % of market gross buy volume
Preferential allottees
5,23,08,076
21.18
Promoter related
50,78,455
54.76
entities
Exit Provider Group
2,82,65,949
3,47,34,934
81.38%
47.14%
Unrealistic return of 9362% reaped by the appellant
34.0 It had been noted that Preferential Shares of PAL had been allotted at a rate of Rs. 10 per share. The Appellant had got allotted 1,50,000 Preference Shares for an amount of Rs 15,00,000/-, which after split of 1:10 were finally sold at an amount of Rs. 14,19,36,826.50. Thus, the Appellant had got astronomical return on the investment made in PAL, which is worked, as under: –
(14,19,36,826.50 – Rs 15,00000) * 100 = 9362.45%
Rs. 15,00,000
34.1 It is clear that the Appellant along-with other ‘Beneficiaries’ had made a killing by getting a return of 9362.45% on the investment made for a period of one year. The unrealistic 9362% rate of return on investment for an year, itself proves the bogus and arranged nature of the LTCG transactions. Hence by taking into
the account the split of 1:10 in the scrip, it had been noted that the original share of Rs. 10 had been sold by the Appellant at an average price of Rs. 946.24 per 34.2 Such huge rate of return, obviously is not genuine but had been arranged by the Exit Providers, who had provided a lucrative exit to the Preferential Share allottees. This was only possible because the PAL management, promoters & directors, Preferential allottees, Promoter related entities and the Exit Providers were hand in glove with each other. In the whole process, the principle of price discovery was kept aside and the market lost its purpose.
34.3 It is now a proven fact on record that the Beneficiaries had routed their unaccounted money through the Exit Providers and claimed the same to be an exempt LTCG. The LTCG and the bumper return on investment earned by the Mittal Group in the PAL scrip is worked out below, for ready reference: –
s. N
Name of the
No. of shares
No of shares
Cost of shares
Gross sale value (In ₹)
Profit earned on the sale of
Return on Investmen
o
Beneficiary
allotted
sold
(In ₹)
shares (IN ₹)
t (In %)
1.
Mahendra B. Mittal
150000
1500000
1500000
141936826.5
14,04,36,826.5
9362%
2.
Pooja Mahendra Mittal
150000
1500000
1500000
142097414.5
14,05,97,414.5
9373%
No change in the overall shareholding, during the entire LTCG Scheme
35.0 I have noted that there was no change in the beneficial ownership of PAL, though substantial number of shares were traded on the Exchange Platform. The reason for this lies in the fact that both the buyers and sellers were part of the common group and were acting in concert to provide LTCG benefits to the Preferential Alottees and Promoter related entities. The share-holding at various points of time had been held by mainly these three broad groupings: –
Promoter related entities
35.1 Though, inter-se the percentage shareholding amongst the three grouping might have varied at various points of time, but as a whole these three groups only had held the entire shareholding of PAL. This is due to the fact that the entire cartel of LTCG Scam had never allowed the general public to trade in the shares of PAL.
…………………………………………………..
36.5 On this particular aspect, it is made clear that the Revenue had never imputed the charge of price manipulation / volume manipulation on the Appellant. The charge on the Appellant is that it is one of the beneficiary of the bogus Long Term Capital Gain of the PAL scrip. The charge on the Appellant is that it had laundered it’s unaccounted money through bogus Long Term Capital Gain in PAL scrip. Thus, the Appellant had failed to appreciate that the non-violation of provisions of SEBI Act, SCRA, PFUTP regulations, etc. doesn’t absolve him from the charge of bringing his undisclosed income into books through bogus Long Term Capital Gain.
36.6 Further, on these contentions of the Appellant, it is stated that the appellant had not reproduced the Para 12 of the said order of SEBI, which is quite relevant in this context and the same Is reproduced hereunder, for ready reference: –
12. The revocation of the directions issued vide the abovementioned orders (at paragraph 11) is only in respect of the entities mentioned at paragraph 9 of this order in the matter of Pine Animation Limited. As regards remaining Regulations, etc., were observed and SEBI shall continue its proceedings against them. Hence, the directions issued vide orders dated July 05,2016, August 22, 2016 and June 02, 2017 against the remaining 62 entities shall continue.”
36.7 A perusal of the above Para 12 of the SEBI’s order makes it clear that the adverse orders passed against the remaining 62 entities shall continue. Hence, the investigations of SEBI into the trading transactions of PAL are still continuing. Hence, the reliance of the Appellant on the SEBI’s order dated 19.09.2017 is totally misplaced, as the SEBI’s order had not dealt at all with the issue of rouging of the unaccounted money into books of account by taking accommodation entry of bogus LTCG.
7. We have heard the rival contentions and gone through the facts and circumstances of the case.
8. Before us, the learned Counsel for the assessee Shri Madhur Aggarwal stated the fact that assessee purchased the shares of listed company and held them for more than one year. He sold his shares on Bombay stock exchange platform through his broker Geojit and STT was paid on sale transactions. Thus, all the conditions of Sec 10(38) of the Act are fully complied. Hence, assessee being eligible, rightly claimed exemption of Long Term Capital Gains under Section 10(38) of the Act. He stated that the AO nowhere in the assessment order pointed out nor discussed non fulfillment or non-compliance of any conditions of Section 10(38) of the Act. Hence, rejecting the claim under section 10 (38) of the Act without giving reasons is wrong and contrary to the provisions of law. He then stated that the CIT(A) also confirmed the action of the AO just on the basis of conjunctures and surmises. He assailed the orders of the lower authorities. He argued and pointed out that Section 10(38) of the Act was inserted by Finance Act 2 of 2004 providing for exemption to long-term capital gains arising on sale/ transfer or equality shares in listed company, or unit of an equity oriented fund provided such transactions have suffered securities transaction tax under the said Chapter. If shares of listed companies purchased are sold on the exchange platform within one year paying STT then gain or loss is treated as short term capital gain taxable at concessional rate of tax as per the provisions of Income Tax Act and if these shares are sold on stock exchange after holding for exceeding one year paying STT then resultant gain or loss is treated as long term gain/ loss which is exempt from tax u/s 10(38) of the Act.
9. He referred that to the order of the AO and that of the CIT(A) and stated that both the authorities did not accept the above referred evidences filed by the assessee in support of his claim and by relying on the general study report of the investigating wing rejected the claim and held that the entire transactions undertaken by the assessee were merely an accommodation entries taken for the purpose of securing bogus long term capital gains and to claim exempt income and consequently assessed the sale proceed as an unexplained cash credit under section 68 of the Act. The AO has referred to the findings in the general study report of the Investigation Wing of Kolkata and Mumbai, wherein it laid down the purported modus operandi of converting unaccounted money into exempt LTCG. It is stated that a person acquires shares of penny stocks trading at low price either through private placement or on merger of private limited company of which such person is a shareholder with a penny stock company. Thereafter unaccounted money flows to operator’s / exit providers who artificially raise the prices of penny stocks on stock exchange. Thereafter, the penny stocks are sold to earn huge exempt LTCG.
10. In regards to the present case the learned Counsel referred to the observations of AO regarding PAL script in his show cause notice:
“In the case of M/s Pine Animation Ltd, the Investigation Wing Mumbai has conducted a survey action on M/s Saraf Equity Services Pvt. Ltd. on 03.12.2015, an exit provider in script Pine Animation Ltd. During the course of survey proceedings, statement on oath of Shri. Mandar Dilip Naik, Director of M/s. Saraf Equity Services Pvt. Ltd. was recorded wherein he has stated that M/s. Saraf Equity Services Pvt. Ltd. has indulged in providing exit to the beneficiaries in collusion with operator for making bogus LTCG transactions for a commission of 1%.
Further, on verification of the script M/s Pine Animation Ltd. it is seen that the other exit providers i.e. Dhriti Traders Pvt. Ltd, Dream valley Trading Pvt. Ltd., Dwarka purl Constructions P Led, Olympia Sales Agencies P Ltd, Particle Industries P Led, Signet Vinimay P Ltd, Winall Vinimay P Ltd and Spice Merchants P Ltd have purchased shares of M/s Pine Animation Ltd to provide accommodation entry in the terms of LTCG. These entities are operated by entry operators whose statement has been recorded by the Investigation Wing wherein they have stated that they are an entry operator and is into the business of providing accommodation entries by managing and controlling various bogus entities, either directly or through his dummy directors.”
AO observed that the persons listed above in the notice have purchased the shares of PAL and are exit providers and entry operator and are in the business of providing accommodation entries and relied upon their statements viz. Anil Khemka, Sanjoy Dey & Mandar Naik (director of Saraf Equity). The relevant observations in the assessment order reads as under: –
Para 7.2: “The assessee has mainly traded in mainly in one script during the year which is suspicious”
Para 7.3: “As discussed above, the assessee traded in single scrip and has made huge profits.”
Para 9: “Further, a SEBI order has been passed in the case of Pine Animation Ltd order vide dated 08.05.2015 which directs that the trading in the securities of shall be suspended till further directions………..The shares are sold by the beneficiaries have been purchased by paper/ bogus entities (e)it providers)
Para 11.3: ……to prove genuineness, proof of physical transfer of shares, reasons to trade off-market when options to online market trading through demat account were available, trading pattern of market transactions for the last three years, have not been submitted to this office Submissions on above:
11. The learned Counsel argued that the findings of the Investigation Department are general in nature and it is basically a study report and not known which cases are investigated. As understood from the assessment order the assessee’s name or his transactions are not referred in such reports and the AO has not established any link between that report and assessee’s transactions. This is also fatal as reliance on such investigation report, without confronting the assessee with the same, renders the assessment bad in law. The Investigation in assessee’s case by way of search did not reveal any connection with the findings or evidences as referred to in such reports.
12. He stated that the statements of Anil Khemka & Sanjay Dey and Mandar Naik relied upon the AO does not establish that the assessee has paid any unaccounted money to these parties. None of the replies to the question posed indicate that they received any unaccounted money from the assessee or that they received or utilized the unaccounted money received from the assessee with reference to shares of PAL. It is also not established that they had any arrangement or dealings or relation with the assessee leave apart the alleged accommodation or exit provided who has not stated any dealing with them against the principles of natural justice. Further, as regards the parties listed by AO in the assessment order (abstract reproduced above) as exit providers and entry operators i.e. Dhriti Traders Pvt. Ltd., Dream valley Trading Pvt. Ltd, Dwarkapuri constructions P Ltd, Olympia Sales Agencies P Ltd, Particle Industries P Ltd, Signet Vinimay P Ltd, Winall Vinimay P Ltd, Spice Merchants P Ltd and Saraf Equity Services Pvt. Ltd., the assessee categorically denied the same and confirmed that, he did not know or had any relation with any of the above said parties and he never dealt with or had any business or personal relations with any of them. He further confirmed that as he did not know them, hence knowing their business or activities is out of question.
13. He argued that the assessee has neither taken exit nor accommodation entries from any party for purchase or sale of shares of the company, nor has any evidence provided by AO nor statements of such persons revealed any dealing with the assessee. All transactions done by the assessee are through BSE and Bank account in the normal course. Even otherwise also the statement of the persons referred by the AO as exit or accommodation providers (Anil Khemka, Sanjay Dey & Mandar Naik) were not recorded in the presence of assessee nor has he been provided to cross examine them before using these statements against the assessee. Hence reliance on such statements made in back of assessee cannot be admissible as evidence and makes the assessment order invalid. In the present facts, the assessee at first was allotted shares through preferential issue by the Company. The allotment of shares by the Company was made after obtaining prior approval of BSE as per SEBI Issue of Capital and Disclosure Requirements Regulation, 2009. The sale of shares of PAL is through a reputed broker Geojit. All necessary supporting evidence have been submitted to establish the genuineness of the transactions. On investigation, the role of Geojit was not found to be suspicious or questionable. Therefore, reliance on the findings of the Investigation Wing in some other cases which bears no connection with the case of the assessee irrelevant.
14. It was contended further that there is no evidence that implicate the assessee to have entered into any arrangement with any operators /exit providers or involvement of unaccounted money. The assessee took strong objections to AO linking him or his transactions with so called alleged exit providers and accommodation entry providers without any evidence or involvement mentioned in such investigation reports and statements of such persons. The seamless process of transactions at BSE as explained hereafter does not identify and provide us the identity of persons who have purchased those shares sold by assessee. The assessee has ordered his broker to sell the shares of PAL who in turn sold the shares on BSE platform. The assessee/his broker were not aware about the buyers or their brokers who purchased the shares of PAL sold by the assessee. The allegation of AO in para 7.2 and 7.3 of the Assessment order that that the assessee mainly traded in one script (PAL) which is suspicious is completely incorrect and not supported by facts. During FY 2014-15 (AY 2015-16) the assessee also traded in following scripts:-
STCG:
a) ICICI Bank, b) Guj NRE, c) Gitanjali Gems, d) HFCL. E) Wondrella, f) Hind Motors, g) Tata Chem, h) Cr. Griev., i) Coal India, j) Unitech, k) Infosys, L) Tech Mahindra, m) HCL Techno
LTCG:
a) Pine animation, b) Sundaram Inv. C) Care rating, d) Kolte Patil, e) IDEA, f) Balmer Lawr, g) S. Clayton, h) GFL Finance, i) Sun Pharma
15. Further, the learned Counsel also narrated the fact that the assessee also incurred losses in few scripts out of the above. With regard to the observations of AO in Para 9 relating to suspicion for trading in PAL shares by SEBI vide ad-interim ex-parte order dated 08.05.2015, it was argued that the assessee and his wife along with more than 100 others entities were exonerated of all allegations as detailed in ad-interim ex-parte order for manipulation of price and volume of the script and also any arrangement by the assessee with the company or its promoters, exit providers, or SEBI Regulations etc. vide SEBI in its Final Order dated 19.09.2017.
16. The learned Counsel further narrated that the allegation of AO in para 11.3 that proof of physical transfer of shares, reasons for off market trading and trading pattern of market transactions for the last three years have not been submitted is also unfounded and contrary to the facts. The assessee during course of assessment submitted complete documents of preferential allotment of shares and trading in shares of seven years vide its reply dated 23.11.17. There was no physical transfer of shares during the year under appeal except one in which company has bought back shares of Sundram investment for Rs. 5,257/-. Therefore, observations regarding off market trading are absolutely wrong and contrary to the facts.
17. Ld Counsel for the assessee explained the process at Stock Exchange Network, which is filed in the shape of note as under: –
“> As per Stock Exchange Regulations, shares or securities of any of the listed companies who has signed listing agreement with SE are dealt on the stock exchange platform through a registered broker only. The purchase and sale transactions on the stock exchange (SE) platform are with the stock exchange and settled through the clearing system and payment is received from brokers or paid to brokers online to or by the exchange clearing system.
> When any customer orders the broker to sell any script, the stock broker sells the shares on trading system through the exchange terminal and generate contract note. On sale, the shares are delivered from the customer’s demat a/c to the stock broker’s demat a/c who in turn transfers the shares to stock exchange pool a/c, who on settlement day delivers to the buyer’s demat a/c. On the other side, the buyer pays the price as per contract note to his broker who pays to the SE who then transfers the amount to the seller’s broker on settlement day. Thus, the seller and the buyer or their brokers does not have direct relation nor dealing with each other. Nor they know the buying or selling parties or the brokers. The customers deal with their respective brokers and brokers deal with SE or the clearing system.

In nutshell, the buyer’s broker makes payment to SE and seller’s brokers deliver shares to the SE. Thereafter, settlement is done by clearing system and transfer of amounts online to seller’s brokers bank account and shares to buyer’s brokers demat account who in turn pays to the sellers and transfers shares to the demat account of the buyer. Hence sellers and buyers does not deal directly or come in contact nor their broker come in direct contact and neither of them know the contra party.
> The whole system of buying and selling of shares done on the stock exchange platform is faceless and SE platform deal with brokers only and parties deal with their brokers. For example, shares sold by X through its broker bought by ABCD broker for XYZ or vice a versa are not known to each other. Even the broker does not know, the shares sold by him are delivered to which brokers or which buyer. The broker can act only for the parties who are registered with him after necessary KYC and due diligence. Nobody can directly deal in shares on stock exchange.”

  1. Further, the learned Counsel stated that the assessee has sold these shares through his broker Geojit who is registered broker of Bombay Stock Exchange (BSE), National Stock Exchange (NSE) and other exchanges. The broker Geojit is an old and reputed share broker and is in this business for years. The assessee is dealing with it for more than 10 years and sold equity shares of PAL on BSE platform through his regular broker Geojit and delivered the shares from his demat account and received sale proceeds directly in his designated bank account as explained in the facts of the case. STT, brokerage, Stamp duty, SEBI and other charges were duly paid on transactions done on BSE platform. The AO has accepted all the documents filed by the assessee without any doubt on its authenticity or genuineness. The relevant documents and evidence of these transactions are also submitted before us. The broker Geojit also does not know to whom the shares were sold. Only SEBI or stock exchange knows who bought these shares and these authorities do not supply such information unless called by Government Authority. Therefore, the assessee or his broker did not have any record or knowledge of the purchasers at the time of sale. However, during the course of investigation by SEBI, the information was supplied by BSE to the assessee in the form of a CD to offer his reply on the ex-parte order issued by SEBI on 08.05.2015. From the CD, the assessee came to know that his shares of PAL were bought by 50 buyers through multiple brokers. The delivery of shares is given to Geojit by the assessee from his demat account. Copy of demat statement is already filed in assessee paper book before us. The broker in turn transfers the shares to BSE Clearing account. The sale proceeds of sale of shares is settled by exchange settlement system and directly credited to broker’s bank accounts by the BSE and the assessee received payment from Geojit i.e. directly into his designated hank account. Copy of bank statement is filed in assessee’s paper book (APB).
    19. Further, the assessee has no connection or nexus with the buyers as also the activities of the buyers. Even if the buyers are doubtful or of suspicious character that does not affect the transactions of sale of shares by the assessee through proper channel i.e. on the recognized stock exchange through the registered broker and payments were received. He argued that during search itself and in the course of investigation the department had made exhaustive survey and enquiry for these transactions from Geojit and other brokers and nothing incriminating was found against the assessee. The details, documents and third party evidences supporting the sale transactions and payments received have been filed by the assessee. The transactions were done at prices prevailing on the date of transaction and STT was paid on such transactions cleared through exchange clearance system.
    20. The learned Counsel further referred to SEBI Investigation in case of PAL. It was argued that in case of PAL, the whole time member of SEBI the market regulator, on a preliminary report of its surveillance department has passed ad interim ex-parte order no. WTM/RKA/ISD/36/2015 dated 08.05.2015 against PAL and 177 entities including assessee. However, despite no charge against the assessee, the whole time member of the SEBI confirmed the ex-parte order vide passing Confirmatory order no. WTM/RKA/ISD/61/2016 dated 02.06.2016. The assessee went in appeal before the Securities Appellate Tribunal against the confirmatory order of the SEBI. While the assessee’s appeal with SAT was at hearing stage, the investigation department of the SEBI completed investigation in PAL and passed final order vide order no. SEBI/WTM/MPB/EFD- I-DRA-III/28/09/2017 dated 19.09.2017. Relevant para no.9, 10, and 11 of SEBI order are reproduced herein below:
    “9) “Upon completion of investigation by SEBI, the following are noted as regards 14 entities who were identified as Preferential Allottees, Exit providers and LTP Contributors vide the interim order:
    SEBIs investigation did not find any adverse evidence against them to show any connection / nexus with PAL or its Promoters/ Directors or Promoter related entities or any role in price manipulation volume manipulation in the scrip of PAL. Hence, violation of provisions of SEBI Act, SCRA, PSUTP regulation, etc. were not observed in respect of the following 114 entities.
    ……..21. Mahendra B Mittal
    …….32. Pooja Mahendra Mittal
    and other 112 entities as per SEBI order
    10) “Considering the fact, that there are no adverse findings against the aforementioned 114 entities with respect to their role in the manipulation to the scrip of PAL, I am of the considered view that the directions issued against them vide interim order dt 08.05.2015 which were confirmed vide Orders dt. June 02, 2026, July 05, 2016, August 22, 2016 and June 02, 2017 need not be continued.”
    11) In view of the foregoing, I in exercise of the powers conferred upon me under Section 19 of SEBI Act, 1992 read with section 11, 11(4) and 11B of the SEBI Act, hereby revoke the Confirmatory Orders dt.02.06.2026, 05.07.2016, 22.08.2016 and 02.06.2017 qua aforesaid the 114 entities with immediate effect.”
  2. Thus, the SEBI’s final order dated 19.09.2017 clearly came to the conclusion that SEBI’s investigation did not find any adverse evidence against the 114 entities including the assessee and given finding that the assessee has no connection/nexus with PAL or its promoters/directors or promoters related entities nor any role in price manipulation, volume manipulation in the script of PAL. No violation of provisions of SEBI Act, SCRA, PFUTP regulation’s, etc. were observed in respect of 114 entities (including the assessee). The list of 114 entities referred in the SEBI Order also includes following alleged exit providers discussed in show cause notice and referred to in the assessment order as under: –
    Sr. No.
    Name of Exit Provider
    121
    Dhriti Traders PL
    127
    Dreamvalley Trading FL
    162
    Signet Vinimay PL
    165
    Spice Merchants FL
    172
    Winall Vinimay P L
    22. These alleged exit providers were also exonerated by the SEBI Order and the remaining alleged exit providers viz. 1) Dwarkapuri Constructions P Ltd., 2) Olympia Sales Agencies P Ltd. and 3) Particle Industries P Ltd. were neither referred in the SEBI ex-parte order dated 08.05.201 5 nor in the final order dated 19.09.2017 which goes to prove that neither the assessee nor the exit providers alleged by the AO were involved in any arrangement or accommodation and hence , allegations of AO are wrong and without any evidence. Copies of SEBI ad-interim ex-parte order dated 08.05.2015, confirmatory order dated 02.06.2016 and final order dated 19.09.2017 are enclosed at pages 217-277 of APB. Subsequently, the SAT disposed-off the appeal of the assessee as infructuous and passed order accordingly vide order no. nil dated 26.09.2017. Copy enclosed at pages 278-283 of APB.
    23. In view of the above the assessee has been exonerated by SEBI in the case of PAL stating that he had no nexus/ connection or collusion with the company, its directors, or promoters and was not involved in price manipulation & volume manipulation, etc. Further, the alleged exit providers for the script have not played any role in assessee’s transactions in the script as he has neither taken any accommodation nor entry or exit from any of the alleged parties.
    24. On the other hand, the learned CIT DR Shri Manjunatha Swami, argued that the entire transaction is bogus. He stated that he is relying on the elaborate order written by the AO and that of the CIT(A).
    25. We have noted that PAL made a preferential allotment of equity shares in the year 2013. The assessee on application for shares was allotted the same at Rs. 10 per share. The company had split the face value of its shares in 2013. Due to this, assessee received 15,00,000 shares against 1,50,000 shares allotted earlier. The assessee acquired the shares on the basis of guidance from his father and friends. The purchase and sale of shares was neither pre-planned nor under any arrangement with the company or any party related to it. The allotment of shares by PAL was made after obtaining prior approval of BSE as per SEBI Issue of Capital and Disclosure Requirements Regulation, 2009. We noted from the facts that as per the financials provided in the assessment order, it can be seen that the company had incurred a loss in FY 11-12 of Rs. 7 lakhs and has earned profit of 16 lakhs in FY 12-13. The fact that PAL was turned from loss making to profit earning itself demonstrates the fact that there was potential in PAL due to which the assessee purchased the shares. Further, the turnover, in the FY 2013-14 increased by 10 times as compared to the preceding previous FY and increase in the net profit after tax was almost around 4 times than that of the net profit recorded in the year of purchase. Moreover, the prices of the company were almost constant for a year. When the assessee thought that the prices had reached its peak, he slowly sold all the shares in a time span of 3 months. To prove the genuineness of the transactions, the assessee provided all the supporting evidences like, share application form, bank statement highlighting the transactions, contract notes, broker’s ledger, demat statement Form 10DB, SEBI’s final order, SAT Order, etc.
  3. However, the AO made addition under section 68 of the Act and CIT(A) confirmed the addition by ignoring all the facts and evidences and without providing any proof of assessee’s involvement in the manipulation of price or volume of the shares of the company or pointing out any defect or deficiency in the process of transactions or its eligibility to deduction u/s 10(38) of the Act. We noted that the AO in his Assessment Order in para 7 and 8 has exhaustively mentioned in detail the financials of PAL, preferential allotment of shares, price of PAL, Exit providers, etc. Following paras have been ditto /copied from SEBI ad-interim ex-parte order dated 08.05.2015. Although after Investigation, SEBI in its final order exonerated the assessee and the alleged exit providers but the AO failed to consider the SEBI final order in the assessment order. It means that the AO and CIT(A) also relied on the order of SEBI dated 08.05.2015 mainly for drawing inferences and deciding the issue on the basis of conjunctures and surmises and not on evidences.
    27. In view of the above, we noted that it is SEBI who monitors and regulates the stock exchanges & stock market and when their investigation did not reveal any price or volume manipulation by the assessee and these transactions are in the normal course through proper & legal channels. Then the allegations of the IT Department fall flat and denial of deduction u/s 10(38) of the Act is arbitrary and addition of sale proceeds of shares of PAL u/s 68 is against the provisions of Act. The assessee in his reply dated 20.11.2017 submitted to the AO that the allegations mentioned in paras of show cause notice are based entirely on SEBI ad-interim ex-parte order dated 08.05.2015 which was reversed after detailed investigation wherein SEBI has exonerated the assessee of all the allegations without any qualification.

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