Bogus Capital Gain By Sale Of Shares, Assessee Not A Beneficiary, ITAT Deletes Addition

The Ahmedabad Bench of Income Tax Appellate Tribunal (ITAT) has deleted the addition on account of bogus capital gain by the sale of shares of a penny stock company in the absence of incriminating material.

The bench of Siddhartha Nautiyal (Judicial Member) and Waseem Ahmed (Accountant Member) has held that no material has been brought on record to suggest that the assessee was involved in any price rigging and that the case of the assessee has not been mentioned in the list of beneficiaries by the persons whose statements were recorded.

The assessee is an individual engaged in the activities of investment in and sale of shares and mutual funds, portfolio management schemes, and dealing in futures and options. During the year under consideration, the assessee submitted his return of income, declaring total income at Rs. 1,16,46,980/-. The case of the assessee was selected for scrutiny, and a survey under Section 133A was conducted on the group cases of the assessee on June 18, 2015. During the course of assessment proceedings and further as a result of the findings of the survey proceedings and post-survey inquiries, the Assessing Officer observed that the assessee had sold shares of M/s Asianlak Capital and Finance Ltd, which was later changed to M/s Global Infratech Finance Ltd. The assessee had sold 15,33,500 shares for a total consideration of Rs. 9,67,73,500/-, and after deducting the cost of purchase of Rs. 23,00,250/-, long-term capital gains of Rs.

The respondent or assessee is an individual engaged in the activities of investment in and sale of shares and mutual funds, portfolio management schemes, and dealing in futures and options.

The case of the assessee was selected for scrutiny. The Assessing Officer observed that the assessee had sold shares of M/s Asianlak Capital and Finance Ltd, which was later changed to M/s Global Infratech Finance Ltd. The assessee had sold 15,33,500 shares for a total consideration of Rs. 9,67,73,500, and after deducting the cost of purchase of Rs. 23,00,250, long-term capital gains of Rs. 9,44,73,350 were claimed as exempt.

The AO was of the view that M/s Global Infratech Finance Ltd. was involved in providing bogus long-term capital gain entries through listed penny stocks on the Bombay Stock Exchange. During the course of the assessment, the Assessing Officer observed that the assessee purchased 1,75,000 shares of M/s Asianlak Capital and Finance Ltd. at a rate of Rs. 15 per share during the financial year 2012. Subsequently, the name of the company was changed to M/s Global Infratech Finance Ltd., and the face value of the shares was split from Rs. 10 to Rs. 1 on December 14, 2012, and the assessee received 17,50,000 shares. The assessee sold 15,33,500 shares of M/s Global Infratech Finance Ltd.

The Assessing Officer observed that the price of the company rose from Rs. 7.99 to Rs. 57.20 in 80 trading days only during the period 25.06.2012 to 12.12.2012, and on splitting of the shares in the ratio of 1:10, the market price fell to Rs. 5.80 on 13.12.2012 and again rose to Rs. 75.85 on 05.06.2013 in 117 trading days. The huge price rise and returns on investment provided by M/s Global Infratech Finance Ltd. were without any financial basis and were manipulated to provide bogus long-term capital gains entries to various beneficiaries.

The statements of the accommodation entry provider, the close associate of an accommodation entry provided, and the share brokers were recorded on various dates, who admitted involvement in the business of providing accommodation entries on long-term capital gains by using the listed company M/s Global Infratech Finance Ltd.

During the course of the survey, the statement of the assessee was also recorded on oath. On being asked various questions to justify the reason for such a huge investment in a penny stock company earning meagre profits, he stated that he had invested in this stock on the advice of his late father and took the risk in spite of being aware that the financial status of the company, M/s Global Infratech Finance Ltd., was not up to par. Accordingly, the AO added a sum of Rs. 9,44,73,250 to the total income of the assessee as bogus long-term capital gains.

The CIT (A) allowed the appeal of the assessee on the ground that the assessee had invested in the shares on the advice of his late father. The CIT (Appeals) held that the Assessing Officer has not brought on record any evidence of the involvement of the assessee in share rigging so far as the investment in M/s Global Infratech Finance Ltd. is concerned. The purchase of shares was made by the assessee through banking channels, and the purchase and sale of shares have been duly accounted for.

The department contended that the assessee earned LTCG on the sale of shares, and the AO denied the claim and made additions under Section 68 on the ground that the assessee invested in shares of penny stock companies, which provided bogus LTCG. Since the assessee failed to establish the genuineness of the rise in the price of shares within a short period of time, additions made under Section 68 were justified.

The assessee contended that nothing has been brought on record by the Department to prove that the assessee was involved in price rigging of the instant share or that any form of cash had flown back to the assessee, so as to treat the instant gains made by the assessee as bogus long-term capital gains.

The tribunal held that the Assessing Officer has not brought any material to support his finding that there has been collusion or connivance between the broker and the assessee for the introduction of his own unaccounted money. Despite the assessee’s specific request, no opportunity for cross-examination was provided to the assessee on the basis of whose statements reliance has been placed to hold that the sale of shares was sham or bogus.

Counsel For Appellant: S. N. Soparkar

Counsel For Respondent: Darsi Suman Ratnam

Case Title: Deputy Commissioner of Income Tax Versus Shri Rajnikant Prabhudas Mandavia

Case No.: I.T.A. Nos. 401&402/Ahd/2019

Click Here To Read The Order