Dhaval Shah,, Pune vs Assessee

Shri Dhaval Shah, S.No.69/1a/1a, Flat No.1101, S-2, Wing A-11, Ganga Satellite, Opp. Raheja Garden, Pune - 411040 .... Appellant

PAN: ACAPS4161L

Vs.

The Tax Recovery Officer & Assessing Officer, Range - 7, Pune .... Respondent

Appellant by : Smt. Deepa Khare Respondent by : Shri B.C. Malakar

Date of hearing : 10-02-2015 Date of pronouncement : 31-03-2015

ORDER

PER SUSHMA CHOWLA, JM:

This appeal filed by the assessee is against the order of CIT(A)-III, Pune,

dated 30.08.2013 relating to assessment year 2005-06 against order passed

under section 143(3) r.w.s. 147 of the Income Tax Act, 1961.

2. The assessee has raised the following grounds of appeal:-

1 . The Learned Assessing Officer has erred in making addition of Rs.21,96,546/- on account of Unexplained cash credit for Capital Gains on the basis statement of third party and evidence collected by the department without giving opportunity of being heard as well as cross examining the person concerned as per ratio of CIT Vs. Rajeshkumar (2008) 172 Taxman 74 (Del.)

2. The appellant craves right to add, alter, delete, modify or amend any change of all the above grounds of appeal before or during the course of hearing.

3. The only issue raised in the present appeal is in relation to the treatment

of the cash credit of Rs.21,96,546/-.

2 ITA No.2235/PN/2013 Shri Dhaval Shah

4. The brief facts of the case are that, during the year under consideration

the assessee had declared income from salary and income from other sources.

However, information was received from the Investigation Wing that there was

much manipulation in the purchase and sale of shares of Robinson Worldwide

Ltd., therefore, reasons were recorded under section 147 of the Act and notice

under section 148 of the Act was issued to the assessee. The assessee in reply,

stated that the return filed under section 139 of the Act be treated as return filed

under section 148 of the Act. The Assessing Officer vide para 4 of the

assessment order observed that during the course of search and seizure action

conducted by the Income-tax Department, Mumbai in the month of January, 2007

at the office and residential premises of several stock brokers and managers of

financial companies, it was found that there was much manipulations in the

purchase and sale of shares, in particular of shares of Robinson Worldwide Ltd.

The assessee was one of the beneficiaries, as per the information received by

Addl.DIT (Investigation) Wing-I, Pune. During the course of assessment

proceedings, the assessee was asked to furnish the details of purchase and sale

of shares along with further evidences. The Assessing Officer on the perusal of

details, noted that the assessee had shown purchases of 25,000 shares of

Robinson Worldwide Ltd. from G.R. Pandya Share Broking Ltd., Mumbai on

04.07.2003 for total consideration of Rs.98,781/- and all the shares were sold for

Rs.41,11,565/-. The assessee has shown the sale of entire shares during the

period 10.02.2005 to 25.02.2005 through Renassance Securities Ltd., Mumbai

and had claimed exemption from long term capital gains under section 10(38) of

the Act. The Assessing Officer further noted that search and seizure action were

conducted in the case of Naresh Saboo and Naresh Jain and other beneficiaries

in the scrip of Robinson Worldwide Ltd. Survey action was also conducted on

M/s. DPS Shares and Securities Ltd., who had issued bogus brokers note to the

beneficiaries and the same was admitted by the said concern. Further,

statement of Shri Sujal Shah, one of the brokers, was recorded on 18.01.2007, in 3 ITA No.2235/PN/2013 Shri Dhaval Shah

which he admitted that during the years 2003-04 and 2004-05, he issued off

market purchase bills in the year 2005-06. As against this, the assessee

submitted that he was holding D-mat account and through which, the

transactions of the shares were carried out. The Assessing Officer noted that the

assessee had opened D-mat account on 03.02.2005, whereas the shares had

been purchased in July, 2003 and D-mated on 03.02.2005. The D-mat account

was utilized only for the purpose of transactions in the scrip under consideration.

Further, the entire purchase price was paid in cash. The Assessing Officer was

of the view that D-mat of scrip shares was done after a long period because of

backdating of share purchase transactions and other stages. The Assessing

Officer thus, held that the assessee was involved in penny stock shares and the

long term capital gains shown by the assessee were not genuine and he held

that the assessee had introduced his unaccounted money through

accommodated transaction of purchase and sale of penny stock shares.

Accordingly, an addition of Rs.41,11,565/- was made as unexplained cash credit

under section 68 of the Act.

5. The CIT(A) after considering the various reliances placed upon by the

learned Authorized Representative for the assessee and in turn, relying on the

ratio laid down by the Mumbai Bench of the Tribunal in Arvind M. Kariya Vs.

ACIT in ITA No.7024/Mum/2010, dated 30.01.2013, held as under:-

"7.6. In the present case the appellant has filed extracts of the cash book for the year ending 31.03.2004 (relevant for A.Y.2004-05) and the balance sheet for that year attached to the return of the income for the A.Y. 2004- 05 filed on 09.03.2005 to evidence the purchase of shares of Robinson Impex Ltd. To my mind, therefore, the facts become immediately distinguishable at the outset. The statement of the broker who had arranged the accommodation entries has not been rebutted. On the facts of the case, therefore, it is seen that the Assessing Officer has correctly held that the appellant has manipulated the purchase of shares in cash with the help of the broker. The delayed dematerialization of the shares is not generally the accepted practice in sharing trading and renders the entire regulatory system, put into place by SEBI and other regulatory authorities to prevent manipulation in the stock market by brokers and other unscrupulous persons, a failure. Therefore, I am in agreement with the Assessing Officer's view that, in fact there is no real purchase or sale of share at all. It is the broker who has manipulated the purchase cost in cash, arrange for the sale of shares by showing the holding period to be 4 ITA No.2235/PN/2013 Shri Dhaval Shah

more than 12 months and also arranged for the dematerialization of the shares just prior to sale in order to make the whole transaction appears genuine. The facts of the case are thus distinguishable from Mukesh Marolia's case (supra). The appellant has also placed reliance on Pune ITAT orders [n the cases of Shri Avinash Kantilal Jain (ITA no. 980/PN/2010) and Shri Ajay Shantilal Lalwani and Neelesh Shantilal Lalwani (145 TTJ 511) but these are also seen to be distinguishable.

7.7. The Bombay ITAT in the case of Arvind M. Kariya Vs. ACIT in ITA no. 7024/Mum/2010 dated 30.01.2013 was examining a similar case where it was held that the mere fact that shares purchased have been sent for dematerialization by the assessee, does not prove the genuineness of the same, even though they were transacted offline and not on the floors of a stock exchange. The ITAT held as under:-

18. "The assesses has placed strong reliance on the sale transaction which has been routed through Demat account and has been executed through BSE. There is no dispute that the sale consideration was received by the assessee from the sale of shares. What is disputed is that whether they were actually purchased on the purported date as claimed by the assessee. This raises the question whether the apparent can be considered as the real. As laid down by the Hon'ble Supreme Court in the case of CIT Vs Durga Prasad More 82 ITR 540 (2002-TlOL-877-SC-IT), the apparent must be considered as real only it is shown that thers are reasons to believe that the apparent is not the real and that too 'taxing authorities are entitled to look into the surround circumstances to find out the reality and the matter has to be considered by applying the test of human probability. For this preposition we draw support from the decision of the Hon'ble Supreme Court in the case of Sumati Dayal v/s CIT 214 ITR 0801 wherein in the Hon'ble Supreme Court has thus held:

"dismissing the appeal, that the Settlement Commission after considering the surrounding circumstances and applying the test of human probabilities had rightly concluded that the appellant's claim about the amount being her winnings from races was not genuine." Therefore, the present case has to be considered in the light of human probability. The transaction about purchases of shares in physical form of sum companies whose share prices have been rigged by some fraudulent operators cannot have any direct evidences. An inference about such a purchase connived with such companies have to be drawn on the basis of the circumstances available on the record. As pointed out, the shares have been transferred within 4 days of the date of purchases raises ample doubt about the credibility of the company. As pointed out in all probabilities, the company must have been involved in such fraudulent transactions. Post year 2000, it is improbable that any person would transact in shares by taking physical delivery of the shares. When many instances have been surfaced relating to bad delivery or bogus scrips, the regulatory authorities have made it compulsory to transact through Demat account.

19. Having regard to the circumstances and the conduct of the assessee as disclosed in his statement u/s. 132(4) of the Act as well as other material on record, inference could be reasonably 5 ITA No.2235/PN/2013 Shri Dhaval Shah

drawn that the shares purchased by the assesses have been backdated to give it a colour of Long term capital gain by showing the period of holding for more than 12 months.

20. Needless to say that income tax proceedings are civil proceedings and the degree of proof required is by preponderance of probabilities, therefore applying the test of preponderance of probabilities and considering the entire sequence of events, the revenue authorities have rightly concluded that the assessee's claim about the long term capital gains from the sale of shares is not genuine.

21. Therefore, it cannot be said that the explanation offered by the assessee in respect of the sale consideration has been rejected unreasonably and that the findings that the said amounts are income of the assessee from other sources is not based on evidence. Accordingly, findings of the ld. CIT(A) are confirmed. Ground No.1 is dismissed".

7.8. In the appellant's case, the source of purchase of shares is by way of payment in cash. The appellant has placed on record that he does not remember the name of the person from G R Pandya Sharebroking Ltd, with whom he had transacted for purchase of the shares. He did not also remember the name of person from Renaissance Securities Ltd. with whom he had transacted for sale of shares. The value of the shares of Robinson Impex Ltd. which was purchased for Rs.3.90 in July, 2003 is seen to have jumped almost 50 times to Rs.145.25 at the time of its sale at Feb 2005, The demat account of the appellant was also opened only in Jan 2005 and the shares were dematted immediately thereafter in Feb, 2005. On examination of the demat account shows that the shares which were dematted on 3.2.2005 are sold through Renaissance Securities Ltd. on 11th, 15th, 17th, 21st and 26th Feb, 2005. At other place relating to the photocopy of the pages of appellant's demat account the shares are seen to have been sold through C.M. Mehta Securities Ltd. The purchase of the shares in cash, the holding by the appellant in physical format, the non recollection of the names of the persons with whom he has transected, the phenomenal growth in the shares of Robinson Word wide Ltd. which have been investigated and found by the Investigation agencies to be accommodation entries relating to penny stocks and the rejection by the appellant of the opportunity offered to cross examine the broker who admitted to providing off market accommodation entries all point to the fact that there is no genuine transaction relating to the purchase of the scrips in question. The entire transactions relating to the sale and purchase of shares have been arranged in order for the appellant to launder his unaccounted income into accounted income, Therefore, the alternative contention that the capital gains may be treated as short term capital gains cannot be accepted since it is found that there are no genuine share transactions at all. Consequently, original ground of appeal No.1 fails.

6. The assessee is in appeal against the order of CIT(A).

7. The learned Authorized Representative for the assessee pointed out that

during the course of search, statement was recorded of Naresh Saboo, who was

found to have given accommodation entries, but the name of the assessee was 6 ITA No.2235/PN/2013 Shri Dhaval Shah

not found in the list. Our attention was drawn to the share certificate placed at

page 20 of the Paper Book along with vouchers for payment of the purchase

price at pages 21 and 22 of the Paper Book and evidence of market value of

shares as on date of purchase placed at page 26 of the Paper Book. The

learned Authorized Representative for the assessee pointed out that the

investment was made by the assessee in assessment year 2004-05, which was

reflected in the balance sheet placed at page 14 of the Paper Book and further,

where the sale was not in dispute, there was no merit in the orders of the

authorities below. The learned Authorized Representative for the assessee

further contended that the Assessing Officer proceeded on the basis of search

proceedings of another broker, who was not connected to the assessee and

where the Assessing Officer had not pointed out any connection / nexus with the

assessee and where even opportunity of cross-examination was not given by the

Assessing Officer, there was no merit in the said addition. The learned

Authorized Representative for the assessee placed reliance on the ratio laid

down by Pune Bench of the Tribunal in Smt. Smita P. Patil & Ors. Vs. ACIT

(2014) 159 TTJ (Pune) 182 and pointed out that the shares purchased by the

assessee therein were also purchased through M/s. DPS Shares and Securities

Ltd., and the Tribunal had held that the transaction of purchase was genuine, in

turn relying on the ratio laid down by the Hon'ble Bombay High Court in Smt.

Jamnadevi Agarwal 328 ITR 656 (Bom). Further reliance was placed on the

ratios laid down in the following cases:-

i) Avinash Kantilal Jain Vs. Addl.CIT (Pune) ITA No.980 & 1049/PN/2010, order dated 31.10.2012

ii) CIT Vs. Smt. Damayanti M Marolia in ITA No.154 of 2009, order dated 19.03.2009 (Bombay High Court)

iii) CIT Vs. Shri Mukesh Ratilal Marolia in ITA No.456 of 2007, order dated 07.09.2011 (Bombay High Court)

8. The learned Departmental Representative for the Revenue pointed out

that the shares were purchased in July, 2003, which were D-mated only in 7 ITA No.2235/PN/2013 Shri Dhaval Shah

October, 2005 i.e. immediately before sale of shares between the period

10.02.2005 to 25.02.2005. Further, reliance was placed on the observations of

CIT(A) in paras 7.5 and 7.8 of the appellate order.

9. We have heard the rival contentions and perused the record. The issue

arising in the present appeal is in relation to the sale transaction of shares of M/s.

Robinson Worldwide Ltd. The assessee had purchased 25,000 shares of M/s.

Robinson Worldwide Ltd. from G.R. Pandya Share Broking Ltd., Mumbai on

04.07.2003 for total consideration of Rs.98,731/-. The copies of contract notes of

G.R. Pandya Share Broking Ltd., Mumbai are placed on record, which reflects

the purchase of the said shares. The said shares were transferred in the name

of assessee as per the share certificate dated 17.10.2003. The copy of the said

share certificate is placed at page 20 of the Paper Book. The assessee had

made cash payments for the purchase of said shares and the copy of account of

assessee in the books of share broking company along with cash receipts are

placed at pages 21 and 22 of the Paper Book. The assessee further claims that

the said cash was drawn out of his books and the relevant entries of cash in

hand are also placed on record at page 23 of the Paper Book. The assessee

had purchased the said shares at the varying price between Rs.3.85p to

Rs.3.91p. In support of the rates prevalent on the date of purchase, the

assessee has placed on record the list issued by Bombay Stock Exchange,

which is placed on record at pages 26 onwards of the Paper Book. The

assessee had sold the said shares during the period 10.02.2005 to 25.02.2005

through Renassance Securities Ltd., Mumbai for total consideration of

Rs.41,11,565/-. The copy of the contract note for the sale of the shares is also

placed on record. The said shares were sold at price varying between Rs.145 to

Rs.177/-. The sale proceeds were received by way of cheques and were

deposited in the bank account of the assessee with Standard Chartered Bank

and confirmation of the said bank is placed at page 39 of the Paper Book. The

assessee had sold the said shares through D-mat account, which was opened on 8 ITA No.2235/PN/2013 Shri Dhaval Shah

03.02.2005, on which date, the shares were first dematerialized. The D-mat

account was opened after a gap from the date of purchase of the shares and this

created a doubt in the minds of authorities below that the assessee had

transacted in the shares in order to get the accommodation entries for artificial

dates. Further, the Assessing Officer had received information that there was

large scale manipulation in the purchase and sale of shares of M/s. Robinson

Worldwide Ltd. The Income-tax Department, Mumbai had conducted survey and

seizure actions at the offices and residential premises of several stock brokers

and managers of financial companies. During the course of survey action

conducted on M/s. DPS Shares and Securities Ltd. by the Directorate of

Investigation, Mumbai, the Director of brokerage firm admitted that during the

financial years, 2003-04, 2004-05 and 2005-06, bogus market purchase bills and

in some cases, sale bills had also been issued to the beneficiaries.

Accommodation bills were given to the beneficiaries as per the instructions of

one Shri Naresh Saboo and Naresh Jain. As per the investigation wing,

appellant was one of the beneficiaries and consequent thereto, the Assessing

Officer reopened assessment in the case of assessee.

10. The question which arises before us is the treatment of gain arising on the

said transaction of sale, purchase of shares is to be assessed under the head

income from long term capital gains as claimed by the assessee or under the

head income from other sources as determined by the authorities below. The

first aspect to be considered in the case of assessee is that though enquiries

were made in respect of several companies and brokers, but the name of broker

through whom the assessee had transacted in the shares of M/s. Robinson

Worldwide Ltd. does not appear in that said list. Further, the assessee has

produced complete evidence vis-à-vis the purchase of shares and the copy of

shares certificate evidencing transfer of shares in the name of assessee and

further sale transaction through brokers, against which the assessee received the

sale amount through cheque. In the totality of the above said facts and 9 ITA No.2235/PN/2013 Shri Dhaval Shah

circumstances, where the assessee has placed on record the complete evidence

of purchase and sale of shares, merely because the shares were D-matted

in February, 2005 and thereafter, were sold in the month of February, 2005 itself,

does not establish the case of authorities below, in view of the circumstantial

evidence produced by the assessee. In the totality of said evidences, we hold

that the assessee had purchased the said shares and also the company had

transferred the shares in the name of assessee as early as on 17.10.2003,

against which the purchase price was paid in cash, which is recorded in the

books of account of the share broker who is third party. Further, the said shares

were purchased in the financial year 2003-04 and were shown as investment in

the Balance Sheet as on 31.03.2003, copy of which is filed on record. These

shares were sold in the financial year 2004-05 establish the case of the assessee

in having transacted in the sale and purchase of the said shares. In the entirety

of the above said facts and circumstances, we hold that the gain arising on

transfer of shares is to be assessed as income from long term capital gain in the

hands of the assessee.

11. We further find support from the ratio laid down by the Hon'ble Bombay

High Court in CIT Vs. Shri Mukesh Ratilal Marolia in Income Tax Appeal No.456

of 2007, vide order dated 07.09.2011, wherein it was held as under:-

"5. On further Appeal, the ITAT by the impugned order allowed the claim of the Assessee by recording that the purchase of shares during the year 1999-2000 and 2000-2001 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 in-fact transferred to the name of the Assesses. 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 lie faulted.

6 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 10 ITA No.2235/PN/2013 Shri Dhaval Shah

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.

7 In these circumstances, the decision of the ITAT in holding that the purchase and sale of shares are genuine and therefore, the Assessing Officer was not justified in holding that the amount of Rs.1,41,08,484/- represented unexplained investment under Section 69 of the Income Tax Act, 1961 cannot be faulted.

8. In the result, we see no merit in this Appeal and the same is dismissed with no order as to costs."

12. The CIT(A) has given a finding in para 7.6 that the statement of broker,

who had arranged the accommodation entries has not been rebutted. However,

it is to be noted that the assessee had not purchased the shares from the said

broker i.e. M/s. DPS Shares and Securities Ltd., but had made the purchases

from another broker i.e. G.R. Pandya Share Broking Ltd., Mumbai. Further, no

evidence has been brought on record to establish that the assessee had

purchased the shares from M/s. DPS Shares and Securities Ltd. and in the

absence of the same, we find no merit in the allegations of authorities below that

the assessee had manipulated the purchase of shares in cash with the help of

broker.

13. The Pune Bench of the Tribunal in Smt. Smita P. Patil & Ors. Vs. ACIT

(supra) has held that merely because there was delay in converting physical

shares into electronic form i.e. D-mat, that could not be the criteria to hold that

the share transactions were arranged and camouflage, as in all cases the

assessee had recorded their share transactions in regular books of account prior

to date of search. It was further pointed out by the learned Authorized

Representative for the assessee that in the case of Smt. Smita P. Patil & Ors. Vs.

ACIT (supra), the transaction was with regard to purchase of shares of M/s. Fast

Track Entertainment Ltd., which in turn were purchased through the share broker

M/s. DPS Shares and Securities Ltd. and the Tribunal had accepted the said

transaction as genuine. Further, Pune Bench of the Tribunal in Smt. Smita P. 11 ITA No.2235/PN/2013 Shri Dhaval Shah

Patil & Ors. Vs. ACIT (supra), in similar circumstances had held that the

transaction of purchase and sale of shares of M/s. Fast Track Entertainment Ltd.

was a genuine transaction and the claim of long term capital gain was allowed in

the hands of the assessee therein. In the totality of the above said facts and

circumstances and the case laws, we find no merit in the order of CIT(A) and

reversing the same, we direct the Assessing Officer to compute the income in the

hands of the assessee under the head 'income from long term capital gains'.

Thus, the grounds of appeal raised by the assessee are allowed.

14. In the result, the appeal of the assessee is allowed.

Order pronounced on this 31st day of March, 2015.

Sd/- Sd/- (G.S. PANNU) (SUSHMA CHOWLA) ACCOUNTANT MEMBER JUDICIAL MEMBER

Pune, Dated: 31 st March, 2015 GCVSR

Copy of the order is forwarded to: - 1) The Assessee; 2) The Department; 3) The CIT(A)-III, Pune; 4) The CIT-III, Pune; 5) The DR "B" Bench, I.T.A.T., Pune; 6) Guard File. By Order //True Copy//

Assistant Registrar I.T.A.T., Pune