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The Commissioner Of Income Tax, Jamshedpur v. Arun Kumar Agarwal (Huf)
Structured Summary of the Provided Opinion
Factual and Procedural Background
These tax appeals arise from an order of the Income Tax Appellate Tribunal (I.T.A.T.) dated 29.4.2010, in which the I.T.A.T. dismissed the appeals filed by the Revenue and upheld separate orders of the Commissioner of Income Tax (Appeals) (CIT(A)), Jamshedpur dated 8.5.2009. The CIT(A) had set aside the Assessing Officer's (A.O.'s) orders and held that the income declared by the assessees under the heading "Long Term Capital Gain" was correctly declared.
The factual matrix common to the appeals is that each assessee claimed long-term capital gains on sale of shares allegedly purchased more than 12 months prior to sale. The A.O. examined individual cases but relied significantly on an enquiry report prepared by the Securities & Exchange Board of India (SEBI), prepared under Section 11B and Section 11(4) (represented in the text as "Section 11 B and 114 of the Security & Exchange Board of India Act, 1992") which had observed unusual price rises and prima facie violations of SEBI regulations. SEBI's enquiry recorded findings against eleven stock brokers and resulted in suspension of trading by the Kolkata Stock Exchange for those brokers.
The A.O., referring to SEBI's report (including specific attention to transactions in companies such as M/s Srinidhi Trading Ltd. and M/s Ahilya Commercial Pvt. Ltd.), concluded that several purchases and sales of shares were not genuine and were sham transactions. The A.O. did not conduct further enquiries (for example, by interrogating brokers) after receiving contract notes and other documents submitted by the assessees.
On appeal, the CIT(A) reviewed each case individually. The CIT(A) found, in many instances, documentary support for the purchases (entries in balance sheets for several years, bank payments and bank statements, demat account statements, and contract notes). The CIT(A) concluded that the A.O.'s conclusions rested on suspicion raised by SEBI's report and conjecture rather than on case-specific inquiry and evidence. The I.T.A.T. subsequently dismissed the Revenue's appeals, upholding the CIT(A)'s findings that the assessees were entitled to long-term capital gains treatment. The present opinion concludes by dismissing the Revenue's appeals.
Legal Issues Presented
- Whether the share purchase-sale transactions entered into by the assessees were genuine (entitling them to long-term capital gains treatment) or sham transactions as held by the Assessing Officer.
- Whether reliance by the Assessing Officer on a SEBI enquiry report (which recorded prima facie findings against certain brokers) without holding further individualized enquiries was sufficient to treat the assessees' transactions as sham.
- Whether the I.T.A.T. committed an error of law in deciding multiple appeals by a common order rather than issuing separate reasoned orders for each appeal.
- Who bears the burden of proof on recording or disproving exemption/entitlement (specifically, the onus on the assessee to show holding period and genuineness of transactions as raised by the appellant relying on the cited Rajasthan decision).
Arguments of the Parties
Appellant / Revenue's Arguments
- The I.T.A.T. erred in disposing of all appeals by a single common order instead of issuing separate orders with distinct facts and reasons for each appeal; because the transactions varied between assessees, separate consideration could have led to remand in some or all cases.
- In particular appeals (for example, Tax Appeal No. 04 of 2011 and Tax Appeal No. 10 of 2011), certain share transactions (e.g., in Niharika India Ltd.) were not proved.
- Counsel relied on the principle that an exemption clause must be strictly construed and may not be extended beyond its clear language (citing Kota Co-operative Marketing Society Limited v. C.I.T., 2007 ITR 608 (Rajasthan)). The submission was that while the overall burden may lie on the Revenue to show assessable income, the onus of showing that income is exempt lies on the assessee (including proof of requisite holding period to claim long-term capital gains).
- Even where transactions appear to be by cheque, authorities are permitted to "look behind" the transactions to assess motive and reality; sudden and improbable share price spikes (for instance from Rs. 3 to Rs. 55 or Rs. 5 to Rs. 55, or Rs. 9 to Rs. 160 in short intervals) make it highly improbable that apparent transactions are genuine.
- Generally, the Revenue argued that the lower authorities had erred in holding the transactions to be genuine and that the I.T.A.T.'s common decision may have been inappropriate given the factual differences.
Assessees' Arguments
- The CIT(A) and I.T.A.T. carefully considered the facts of each case; the facts as recorded by the CIT(A) were not disputed by the Revenue except to allege that transactions were sham.
- The assessees had disclosed the shares in earlier returns and balance sheets for several years; books of account were never questioned for genuineness by the Revenue.
- Transactions were supported by documentary evidence: bank payments reflected in bank statements, contract notes, demat account statements, and disclosure of bank account numbers; these documents were discarded by the A.O. without adequate reason or further inquiry.
- The I.T.A.T. did not err in disposing of the appeals together because the matters were argued together and the I.T.A.T. upheld the CIT(A)'s reasoned findings; detailed repetition of those reasons in each I.T.A.T. order was not necessary where concurrence with the lower appellate authority was clear from the record.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Kota Co-operative Marketing Society Limited v. C.I.T., 2007 ITR 608 (Rajasthan) | Principle that exemption clauses must be construed strictly and that the onus to show how income is exempt lies on the assessee; used to support the proposition that assessee must prove requisite holding period for long-term capital gain exemption. | This precedent was cited by learned counsel for the appellant. The opinion records that the appellant relied on this judgment, but the court's reasoning in the provided opinion does not explicitly adopt or apply this precedent as the basis for its final decision. |
Court's Reasoning and Analysis
The court's analysis proceeded in the following steps, reflecting the material contained in the opinion:
- Assessment of A.O.'s reliance on SEBI report: The court observed that the Assessing Officer was strongly influenced by the SEBI enquiry report which recorded prima facie involvement of some stock brokers in unfair trade practices and unusual share-price movements. The SEBI report identified certain brokers and companies (for example, M/s Srinidhi Trading Ltd. and M/s Ahilya Commercial Pvt. Ltd.) as subjects of inquiry.
- Distinction between suspicion and conclusive proof: The court emphasized that while the SEBI report could legitimately raise suspicion about dealings in certain shares or about particular brokers, suspicion based on the report alone does not warrant treating every purchaser who dealt through those brokers as complicit in sham transactions. The mere fact that a broker was implicated does not automatically render every transaction through that broker invalid.
- Requirement of case-specific enquiry and evidence: The court held that where suspicion arises from a regulatory enquiry, the A.O. had an obligation to conduct further inquiry specific to each assessee's transactions (for example, verifying contract notes, interrogating brokers, tracing funds). The A.O. did not undertake such targeted enquiries after receiving contract notes and other material from the assessees; the court found that failure significant.
- Evaluation of the assessees' documentary evidence: The court noted that many assessees had shown the contested shares in their balance sheets for several years, had bank payment records, demat account entries and contract notes. In at least one detailed example (Tax Appeal No. 14 of 2011), the CIT(A) had verified bank payments, demat account statements, and balance-sheet disclosures showing purchase prior to the subsequent price rise. The court accepted that such evidence could demonstrate bona fides.
- Temporal considerations undermining inference of sham: The court considered the timing of purchases relative to later price surges. It observed that in some cases shares were acquired years before the later unexplained price rise, which made it implausible to infer that the purchases were sham transactions entered into years earlier in anticipation of a later upswing.
- Burden and onus issues: While the appellant argued that the assessee bears onus to prove exemption (including holding period), the court's decision focused on the factual sufficiency of proof presented by assessees and the lack of further inquiry by the A.O. The court indicated that the SEBI report raising suspicion did not relieve the A.O. of the obligation to examine relevant documentary evidence and to conduct enquiries before declaring transactions sham.
- Conclusion from combined assessment: Considering that the CIT(A) had examined each case and accepted documentary proof in many instances, and given the absence of case-specific enquiries by the A.O., the court found no fault with the CIT(A)'s findings or the I.T.A.T.'s concurrence. The I.T.A.T.'s common order was not treated as a reversible error where the CIT(A)'s separate reasons supported the high-level decision.
Holding and Implications
Final Holding: These appeals are dismissed.
Direct effect on the parties: The court upheld the I.T.A.T.'s dismissal of the Revenue's appeals and thereby upheld the CIT(A)'s orders setting aside the A.O.'s determination of sham transactions. As a result, the assessees' classification of the impugned receipts as long-term capital gains, in the cases where the CIT(A) found adequate evidence of bona fide transactions, remains sustained.
Broader implications: The opinion emphasizes that regulatory findings (such as a SEBI enquiry indicating prima facie unfair trade practices) may raise suspicion, but do not automatically convert otherwise documented transactions of third-party purchasers into sham dealings without individualized inquiry. The decision in the provided opinion does not purport to establish a novel legal principle or override statutory burden rules; rather, it requires that the Assessing Officer undertake further fact-specific inquiry before condemning transactions as sham. The opinion does not state that a new precedent has been laid down beyond the reasoning recorded herein.
Note: This summary is derived exclusively from the text of the provided opinion. No information beyond that opinion has been added.
Heard the counsel for the parties.
2. These bunch of Tax Appeals are arising out of the order passed by the I.T.A.T Dated 29.4.2010 whereby the I.T.A.T has dismissed the appeals of the Revenue and upheld all the separate orders passed by the Commissioner of Income Tax (CIT) (Appeals) whereby the CIT (Appeals), Jamshedpur vide order dated 8.5.2009 set aside the order passed by the A.O and held that the income declared by the assessee under the heading ‘Long Term Capital Gain’ is correct declaration given by the assessees.
3. The brief facts of the case are that all theses assessees submitted their Returns of income and therein they claimed that they purchased certain shares of various companies and those shares were sold after a period of 12 months, and therefore, the share transactions of all the assessees resulted into a long term capital gain only. The Assessing Officer examined each and individual case of the assessee, however, substantially in all the orders, the Assessing Officer took note of the fact that the Securities & Exchange Board of India (SEBI) finding unusual rise in the share of some of the companies was of the opinion that there may be a prima facie case of violation of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Security Market) Regulation, 2003 and ordered a detailed enquiry under Section 11 B and 114 of the Security & Exchange Board of India Act, 1992. In the enquiry, findings were recorded against eleven Stock Brokers and their trading was suspended by the Kolkata Stock Exchange from buying and selling the securities. The Assessing Officer in detail considered the report of the SEBI and referred the case of one of the Company Srinidhi Trading Ltd. whose shares had market value Rs. 9.02 as on 11.3.2004 which reached to Rs. 160.10 as on 29.8.2005 In the SEBI's enquiry report that was one of the case whereby it has been held that it may be result of the bogus dealings by these brokers. After giving detailed facts of the enquiry report in all the orders and particularly with respect to the above company, M/s Srinidhi Trading Ltd. and M/s Ahilya Commercial Pvt. Ltd., Kolkata and their share dealings running in crores of rupees, the Assessing Officer has observed that in the facts and circumstances of transactions of all these assesses are identical to the cases surveyed and investigated by the D.I.T(Inv.), Kolkata. Thus, the modus operandi adopted by the Brokers of the assessee is also identical with one adopted by M/s Ahilya Commercial Pvt. Ltd. On the basis of this, the Assessing Officer held that the transaction of the purchase of the shares and sale thereof is not genuine and is a sham transaction. We may again mention here that the Assessing Officer considered the facts of each case separately in its separate order for each assesses.
4. In Appeal, the C.I.T(Appeals), Jamshedpur also considered the facts of the each case separately by giving reference of the purchase of shares by the assessees and sale thereof. In most of the cases, the C.I.T (Appeals) found that the purchase of the shares were shown by the assessees in their Balance Sheet of the last five years and genuineness of the Books of Accounts was never questioned. In one of the case, for example, in the Tax Appeal No. 14 of 2011, before us, there is a transaction of shares of the same company namely M/s Srinidhi Trading Ltd. for which it has been noticed that the shares of this company having market value Rs. 9.02 on 9.3.2004 jumped to Rs. 160 as on 31.3.2006 and before that on 29.8.2005 to Rs. 159.53 The C.I.T (Appeals) considering the facts of this assessee found that the assessee purchased the shares of the said company, but, purchase transaction is supported by the documents and the payment was made through the Bank and it is verified well from the Bank Statement and from the Bank Account number of EXIS Bank Ltd. The shares remained in the possession of the assessee. The fact of shares remaining in possession of the assessee is verifiable from the Statement of assessee's D. MAT account number which has been given in the order. The shares is disclosed in the Balance Sheet as on 31.3.2004 and 31.6.2005 The shares were sold in the financial year 2006-07. The sale transaction was also verifiable. We have given this one of the example because of the reason that the Assessing Officer in all the cases gave instances of the transaction of this one company namely M/s Srinidhi Trading Ltd. from the report of the SEBI. So far as other assessees are concerned, even if they have not dealt with shares of the M/s Srinidhi Trading Ltd. or through M/s Ahilya Commercial Pvt. Ltd. or any tinted Broker, transaction of those assessees were also declared sham transaction by the Assessing Officer merely on the basis that the transaction of these assessees are identical to the transaction of the shares of the companies whose share price fluctuated and there is steep rise in the share price. The Assessing Officer admittedly did not proceed to hold enquiry after the receipt of the contract note and other material document submitted by the assessees in these cases and did not enquire the matter from the Brokers from whom the assessees purchased the shares.
5. The CIT (Appeals) after considering the facts of the individual case by narrating the facts of the individual share transaction, held that the Assessing Officer merely on the basis of the presumptions and conjecture condemned the share transaction of the assessees and merely because some share brokers in Kolkata were found to be indulged in some wrong that does not mean that the all persons were party to illegal transaction. It is also admitted fact that when these assessee purchased the shares or sold the shares at that time, the brokers were duly enlisted brokers of the Stock Exchange. There is no averments, materials or findings on record to say that subsequently, if any of the broker was blacklisted by the SEBI or Stock Exchange, he was blacklisted because of the transactions of the assessees. Therefore, the report of the SEBI may cast suspicion of unfair trade practices whereby the brokers and some of the persons may have earned profits by dealing in the shares of particular companies, but, that individual's case was not the subject matter before the Assessing Officer. The Assessing Officer in the facts and circumstances could have valid reason to suspect the transactions, but upon such suspicion, he was under the obligation to hold the enquiry and could have decided the case according to the facts of the case as well as on the basis of the evidence and the averments on record.
6. One of the argument of learned counsel for the appellant is that, the I.T.A.T committed serious error of law in decided all the appeals by a common order and by not deciding the each individual appeal separately by separate order by giving separate facts and reasons for each of the appeal. Learned counsel for the Revenue submitted that all the transactions of the assessees were different, and therefore, if the I.T.A.T would have considered each of the appeals separately, it may have remanded either all the cases or some of the cases to reconsider the question of genuineness of the transactions carried out by the assessees.
7. Learned counsel for the appellant further submitted that in Tax Appeal No. 04 of 2011, Tax Appeal No. 10 of 2011, it has been shown that there was share transaction of one company namely Niharika India Ltd. whereas such transactions were not proved. Learned counsel for the appellant further submitted that, exemption clause under the statute has to be construed as such and cannot be extended beyond the clear language used in the Section and relied upon the judgment of Rajasthan High Court delivered in the case of Kota Co-operative Marketing Society Limited v. C.I.T reported in 2007 ITR 608 (Rajasthan). The learned counsel for the appellant submitted that though the burden is upon the Revenue to show that the receipt concerned and the income is liable to tax but onus of showing how income is exempted lies on the assessee. It is submitted that it was the duty of the assessee to show that the assessee held the shares in fact for more than 12 months immediately preceding the date of transfer then only he could have got the benefit of long term capital gain. Learned counsel for the appellant submitted that even in a case where it has been stated that the transactions are through the cheques and even if where the transactions looked like real transactions but the authorities are permitted to look behind the transactions and find out the motive behind the transactions. Learned counsel for the appellant also submitted that it is highly improbable that the share price of a worthless company gone from Rs. 3 to Rs. 55/- in a short span of time and mere payment by cheque and receipt of cheque does not render its transaction genuine. It is also submitted that sometimes accounts apparent may not be real.
8. Be that as it may, according to the learned counsel for the appellant both the lower authorities committed serious error of law in holding that the transaction is genuine and the assessees were entitled to long term capital gain benefit.
9. Learned counsel for the assessees submitted that a bare perusal of the reasons given in the two impugned orders, one passed by the C.I.T (Appeals) and another by the I.T.A.T will clearly reveal that the facts of the each case have been carefully considered by the C.I.T(Appeals) and the facts mentioned in the order have not been disputed by the Revenue in any manner except alleging that the transactions are being sham. It is also not in dispute that the assessees disclosed the shares in their possession in earlier return and statement of accounts and they are duly entered into the books of accounts of the accounts of the assessees and that was the position since last five years. It is submitted that even if the such transaction was there even that was duly proved by the Bank statement and by disclosure of Bank account number etc. The assessees produced the contract note of the transactions which were discarded by the Assessing Officer without any reason and without their being any evidence to rebut those contracts. It is also submitted that the I.T.A.T has not committed any mistake of fact or law in deciding all the appeals together because of the simple reason that all the appeals were argued as one case and all the facts of the individual assessee was duly considered by the first appellate authority and the I.T.A.T has decided the issues upholding the findings of the appellate authority and in concurring orders detail reasons may not be required to be given in much detail, if from the reasons given, the correctness in the decision of the second appellate authority can be found and in the case in hand, it finds support from the lower appellate authority's given reasons.
10. We have considered the submissions of the learned counsel for the parties and we are of the considered opinion that the learned Assessing Officer was much influenced by the enqiury report which may has been brought on record by the efforts of the Assessing Officer and that enquiry report was prepared by the SEBI and from the observations made by the Assessing Officer himself, it is clear that after getting that enquiry report, the SEBI prima facie found involvement of some of the share brokers in unfair trade practices. Even in a case where the share broker was found involved in unfair trade practice and was involved in lowering and rising of the share price, and any person, who himself is not involved in that type of transaction, if purchased the share from that broker innocently and bonafidely and if he show his bonafide in transaction by showing relevant material, facts and circumstances and documents, then merely on the basis of the reason that share broker was involved in dealing in the share of a particular company in collusion with others or in the manner of unfair trade practices against the norms of S.E.B.I and Stock Exchange, then merely because of that fact a person who bonafidely entered into share transaction of that company through such broker then only by mere assumption such transactions cannot be held to be a shame transaction. Fact of tinted broker may be relevant for suspicion but it alone necessarily does lead to conclusion of all transaction of that broker as tinted. In such circumstances, further enquiry is needed and that is for individual case. Such further enquiry was not conducted in that case.
11. At this juncture, it would be relevant to mention here that it is not disputed by the Revenue before us that the shares of these assessees were already shown in the earlier Balance Sheet submitted by the assessees, and therefore, in that situation, how the revenue condemned the transaction even on the ground of steep rise in the shares. If within a period of one year, the share price has risen from Rs. 5 to 55 and from 9 to 160 and one person was holding the shares much prior to that start of rise of the share, then how it can be inferred that such person entered into sham transaction few years ago and prepared for getting the benefit after few years when the share will start rising steeply. In present case even there was no reason for such suspicion when the shares were purchased years before the unusual fluctuation in the share price. Here in this case, we have given example of one of the Tax Appeal wherein the shares were purchased in the year 2004 and were sold in the year 2006, which is said to be one of the case wherein the gap in the purchase and sale of the shares was narrowest. In other cases as we have noticed from the various orders of the C.I.T(Appeals) that, the shares of some of the companies were purchased by the assessees even five years ago from the time of sale and those purchasers were already disclosed in the Balance Sheet of the assessee, then from any angle, it is proved that the assessees had held the shares much prior to 12 months of the sale of the shares.
12. Hence, these Appeals are dismissed.
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