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CaseIQ

Udit Kalra v. Income Tax Officer .

Income Tax Appellate Tribunal

Jan 8, 2019

Judgment

Subsequent
References

CaseIQ

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Tribunal Summary — Appeal by Assessee against CIT(A) order (AY 2014-15)

Factual and Procedural Background

The assessee filed a return of income on 25.7.2014 declaring total income of Rs. 7,71,040/-. The case was selected for scrutiny through CASS to examine suspected long term capital gains on shares (inputs from the Investigation Wing). Notices under section 143(2) and section 142(1) were issued (initial notice dated 18.9.2015; hearing notice dated 27.5.2016). The assessee declared long term capital gain (LTCG) of Rs. 27,20,457/- from sale of shares and claimed exemption under section 10(38) of the Income Tax Act, 1961.

The Assessing Officer (AO) held that the transactions were bogus / sham and part of accommodation entries and made an addition as unexplained cash credit under section 68. The assessment order dated 28.12.2016 under section 143(3) applied provisions of section 115BBE and taxed the amount at 30%, assessing total income at Rs. 35,39,500/-. The assessee appealed to the Commissioner of Income Tax (Appeals) [CIT(A)], who dismissed the appeal by order dated 25.8.2017. The assessee then appealed to the Income Tax Appellate Tribunal (the Tribunal), which delivered the impugned order on 08.01.2019.

Legal Issues Presented

Whether the additions made by the AO (and confirmed by the CIT(A)) treating the claimed LTCG as bogus/accommodation entries and adding it as unexplained cash credit u/s 68 were justified or were based on mere presumptions, conjecture and surmises.
Whether the assessee was entitled to exemption under section 10(38) for the claimed LTCG of Rs. 27,20,457/- (i.e., whether the shares were held for more than one year, sold on a recognised stock exchange, and whether STT was paid).
Whether the assessee was properly confronted with material/ statements used against him (including opportunity to cross-examine witnesses whose statements were relied upon), and whether failure to allow confrontation/cross-examination vitiated the assessment.

Arguments of the Parties

Appellant's Arguments (Assessee)

The additions were made purely on presumptions, conjecture and surmises and thus deserving deletion.
The assessee satisfied the requirements for exemption under section 10(38): the shares were held for more than one year, sold on a recognised stock exchange, and STT was paid; therefore the LTCG of Rs. 27,20,457/- cannot be denied.
The AO and CIT(A) failed to confront the assessee with material and statements used against him and did not allow cross-examination (specifically referenced a statement of Mr. Alok Harlalka); reliance was placed instead on another person’s statement (Sri Jai Kishan Poddar).
The assessee produced a Paper Book (pages 1–91) containing written submissions, show cause notice and reply, bank statement, and copies of multiple case law authorities in support of the claim (list of cases provided in the record).

Respondent's Arguments (Revenue / Departmental Representative)

The assessee did not substantiate his claim before the revenue authorities; the purchase was off-market in physical form by paying cash, and thereafter converted into electronic mode without following SEBI guidelines.
Purchase payments were made in cash rather than through normal banking channels and were therefore non-verifiable from authentic bank documents.
The assessee was not a regular investor in shares and failed to furnish proof of source for the purchase transactions; the transactions were against human probability.
The AO and CIT(A) case law support the additions; the Department relied inter alia on the Supreme Court decision in McDowell & Co. Ltd., 154 ITR 148.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
McDowell and Company Limited, 154 ITR 148 (Supreme Court)	That tax planning may be legitimate if within the framework of law and that colourable devices cannot be part of tax planning; it is wrong to encourage avoiding tax by dubious methods.	The Tribunal held that McDowell is squarely applicable to the facts, relied on its principle against colourable devices, and applied it in upholding the additions and denying the exemption claimed by the assessee.
CIT vs. Himani M. Valik (2013) 10 taxmann.com 326 (Gujarat)	This information was not available in the provided opinion.	Cited by the assessee in his Paper Book; the Tribunal found the case laws relied upon by the assessee to be on distinguishable facts and held them as not applicable.
CIT vs. Smt. Sumitra Devi (Rajasthan High Court) ITA No. 54/2012	This information was not available in the provided opinion.	Cited by the assessee; Tribunal regarded the assessee's cited authorities as distinguishable and not applicable to the instant facts.
ACIT vs. Shri Indravadan Jain (ITA No. 4861/Mum/2014) (ITAT Mumbai)	This information was not available in the provided opinion.	Cited by the assessee; Tribunal treated such citations as on distinguishable facts and not persuasive in the present case.
CIT vs. Shri Mukesh Ratilal Marolia (ITA No. 456/Mum/2007) (Mumbai High Court)	This information was not available in the provided opinion.	Cited by the assessee; the Tribunal found it distinguishable and did not apply it to allow relief to the assessee.
Km. Saumya Agarwal vs. ITO (2008) 174 Taxman 60 (Agra) (ITAT Agra)	This information was not available in the provided opinion.	Cited by the assessee; Tribunal observed the cited authorities were distinguishable and not applicable.
Meenu Goel vs. ITO (ITA No. 6235/Del/2017) (ITAT)	This information was not available in the provided opinion.	Cited by the assessee; Tribunal characterized the authorities relied upon by the assessee as on different facts and therefore not applicable.
Pr. CIT vs. Prem Pal Gandhi and Pr. CIT vs. Hitesh Gandhi (Punjab & Haryana High Court) ITA 18 of 2017 dated 16.2.2017	This information was not available in the provided opinion.	Cited by the assessee in his Paper Book; the Tribunal concluded the cases cited by the assessee were distinguishable and did not change the outcome.

Court's Reasoning and Analysis

The Tribunal reviewed the assessment record, the impugned orders and the submissions of both parties. The analysis and factual findings relied upon by the Tribunal were set out as follows:

The Tribunal noted specific factual material recorded in the assessment proceedings: the purchase transactions were carried out off-market in physical form by payment in cash; shares of M/s Kappac Pharma Ltd. were purchased physically and later converted into electronic mode.
The Tribunal emphasised that purchase payments were made in cash and not through normal banking channels, making the transactions non-verifiable from authentic bank documents. The assessee was not a regular investor and failed to furnish the proof of source for the purchase transactions.
The Tribunal took into account findings from the Investigation Wing and inquiries conducted into the assessee, brokers, operators and entry providers; on the basis of these inquiries and the nature of transactions, the Tribunal concluded that the claimed LTCG could not be accepted as genuine.
On the legal principle, the Tribunal relied on the Supreme Court decision in McDowell, observing that while legitimate tax planning is permitted, colourable devices cannot be sustained; the Tribunal found that principle applicable and that dubious methods to avoid tax cannot be permitted.
The Tribunal considered the case law submitted by the assessee but found those authorities were on distinguishable facts and therefore not applicable to the instant case.
Based on the factual findings and legal principle, the Tribunal concluded that the amount received (expressed in the order as Rs. 27,68,457/- in the reasoning) was to be treated as unexplained cash credit and deemed income under section 68 of the Act. The assessment had earlier applied section 115BBE to tax the amount at 30%.

Holding and Implications

DISMISSED — The Tribunal dismissed the assessee's appeal and upheld the order of the CIT(A).

Direct consequences as recorded in the opinion:

The Tribunal upheld the addition of the disputed amount to the assessee's income as unexplained cash credit under section 68.
The assessment treatment (application of section 115BBE at the prescribed rate and assessed total income at Rs. 35,39,500/- in the assessment order dated 28.12.2016) was maintained by the authorities below and not interfered with by the Tribunal.
The Tribunal applied the principle from McDowell to deny relief because the transactions were found to be colourable/dubious in the factual matrix of this case.

The opinion does not announce any novel legal principle; it applied established authority (McDowell) to the facts and expressly treated the case law relied upon by the assessee as distinguishable. The direct effect is the upholding of the revenue authorities' additions and assessment; the Tribunal did not set a new precedent beyond applying existing law.

Order pronounced on: 08.01.2019. Bench: H.S. Sidhu, Judicial Member. Appeal dismissed.

Show all summary ...

This appeal by the assessee is preferred against the order of the Ld. Commissioner of Income Tax [Appeals]-17, New Delhi dated 25.8.2017 pertaining to assessment year 2014-15 on the following grounds:- i) That on the facts and in the circumstances of the case, the order passed by the Ld. CIT(A) is bad, both in the eye of law and on the facts. ii) The Ld. CIT(A) has erred in law and on facts in upholding the order passed by the Assessing Authority and confirming the additions. iii) The Ld. CIT(A) has erred in law and on facts in not appreciating the fact that additions to the income of the assessee were made purely on presumptions on conjecture and surmises and therefore deserve to be deleted. iv) The Ld. CIT(A) has erred in law and on facts in disallowing deduction claimed by the assessee u/s. 10(38) of the Income Tax Act for Rs. 27,20,457/-. The Ld. CIT(A) as well as AO has failed to appreciate that for claiming the benefit of exemption u/s. 10(38) of the Act three requirement needs to be fulfilled. (a) First the share should be held for more than 1 year. (b) Secondly it should be listed and sold on recognised stock exchange and (c) Thirdly on the said sale necessary security transaction tax (STT) has been paid. A perusal of the bills of purchase and sale shows that the shares have been held for more than 1 year, the same has been sold on recognised stock exchange and necessary STT has been paid to Govt. Treasury and therefore the exemption u/s. 10(38) of the Act cannot be denied in the circumstances of the case.

5. The Ld. CIT(A) and the AO has erred in law and on facts in not confronting the assessee with the material and statement used against him in the assessment order. On this ground also the additions made by the AO deserve to be deleted. It is submitted that the assessee was supplied with the copy of the statement of Mr. Alok Harlalka but was ever given opportunity to cross examine said Mr. Alok Harlalka inspite of his specific request. Surprisingly the AO has concluded the assessment relying on the statement of some Sri Jai Kishan Poddar instead of Mr. Alok Harlalka.

6. The appellant craves leave to add, amend or alter any or more grounds of appeal either before or at the time of the hearing of the appeal.

2. Brief facts of the case are that assessee filed his return of income on 25.7.2014 declaring a total income of Rs. 7,71,040/-. The case of the assessee was selected for scrutiny through CASS in order to examine suspicion long term capital gain on shares (inputs from investigation wing). Notice u/s. 143(2) of the Income Tax Act, 1961 (in short Act) was issued on 18.9.2015. Consequent on transfer of jurisdiction, the further notice u/s. 143(2) of the Act was issued to the assessee on various dates and again notice u/s. 142(1) issued for hearing on 27.5.2016. In compliance to the same the A.R. for the assessee appeared from time to time and furnished the information called for. During the year under consideration, the assessee has declared income earned from Long Term Capital Gain of Rs. 27,20,457/- on sale of shares during the year which has been claimed exempt u/s. 10(38) of the Act. AO held that the transactions was bogus or sham and nothing but a racket of accommodation entries, by way of long term capital gain exempt from tax, the amount of capital gains of Rs. 27,20,457/- claimed as LTCG exempt from tax was held to be not genuine and addition as made of the total cash credit of Rs. 27,20,457/- to the returned income of the assessee as per the provisions of section 68 of the Act and provision of section 115BBE of the Act are also applied and this amount is taxed @ 30% and accordingly, assessed the income of the assessee at Rs. 35,39,500/- vide order dated 28.12.2016 passed u/s. 143(3) of the Act. Against the assessment order, the Assessee appealed before the Ld. CIT(A) who vide his impugned order dated 25.8.20187 has dismissed the appeal of the assessee. Aggrieved with the order of the Ld. CIT(A), assessee appealed before the Tribunal.

3. During the hearing, Ld. counsel for the assessee has submitted that the addition in dispute was made and confirmed purely on presumptions, conjecture and surmises and therefore, deserve to be deleted. He further submitted that the authorities below have failed in disallowing deduction claimed by the assessee u/s. 10(38) of the Act for Rs. 27,20,457/-. He further submitted that the lower authorities also failed to appreciate that for claiming the benefit of exemption u/s. 10(38) of the Act three requirement needs to be fulfilled i.e. first the share should be held for more than 1 year, secondly it should be listed and sold on recognised stock exchange and thirdly on the said sale necessary security transaction tax (STT) has been paid. He further stated that in this case a perusal of the bills of purchase and sale shows that the shares have been held for more than 1 year, the same has been sold on recognised stock exchange and necessary STT has been paid to Govt. Treasury and therefore the exemption u/s. 10(38) of the Act cannot be denied in the circumstances of the case. Hence, he requested to cancel the orders of the authorities below and allow the appeal of the assessee. In support of his contention, he filed a Paper Book containing pages 1 to 91 in which he has attached the copy of written submissions/arguments; show cause notice dated 19.12.2016 issued by the AO; reply dated 26.12.2016 of the assessee to the shows cause notice dated 19.12.2016; copy of the bank statement of Axis Bank, East Patel Nagar, New Delhi; copy of judgment of High Court of Gujarat in case of CIT vs. Himani M. Valik (2013) 10 taxmann.com 326 (Gujarat); copy of judgment of Rajasthan High Court in case of CIT vs. Smt. Sumitra Devi in ITA No. 54/2012; copy of judgment of ITAT, Mumbai in case of ACIT vs. Shri Indravadan Jain ITA No. 4861/Mum/2014; copy of the judgement of Mumbai High Court in case of CIT vs. Shri Mukesh Ratilal Marolia, ITA no. 456/Mum/2007; decision of ITAT, Agra in case of Km. Saumya Agarwal vs. ITO (2008) 174 Taxman 60 (Agra); copy of ITAT decision in case of Meenu Goel vs. ITO in ITA No. 6235/Del/2017 and Judgement of Honble High Court of Punjab and Haryana in the case of Pr. CIT vs. Prem Pal Gandhi and Pr. CIT vs. Hitesh Gandhi in ITA 18 of 2017 dated 16.2.2017.

4. On the other hand, Ld. DR relied upon the orders of the authorities below. He further stated that assessee has not substantiated his claim before the revenue authorities. He submitted that the purchase transaction has been done off market in physical form by paying cash and assessee has purchased the shares M/s Kappac Pharma Ltd. in physical form and thereafter, the same have been converted into electronic mode and SEBI guidelines have been not adopted. It was further submitted that the purchase payments were made in cash and not through the normal banking channel therefore the same were non verifiable from the authentic supporting details such as bank accounts/documents. The assessee is not a regular investor in shares. Assessee has failed to furnish the proof of source for the purchase transactions. Thus, the entire transactions are against human probability. He further stated that the case laws relied upon by the AO as well as Ld. CIT(A) may be read as his arguments including the decision of the Honble Supreme Court of India in the case of Mc Dowell and Company Limited, 154 ITR 148.

5. I have heard both the parties and perused the records especially the impugned order. I find that the assessee is an individual and the amount of cash credit Rs. 27,68,457/-. However, on perusing the assessment order, I find that there was a specific information that assessee has indulged in non-genuine and bogus capital gain obtained from the transactions of purchase and sale of shares of M/s Kappac Pharma Ltd., a Mumbai based company. It is noticed that the purchase transaction has been done off market in physical form by paying cash. The assessee has purchased the share M/s Kappac Pharma Ltd. in physical form and thereafter, the same have been converted into electronic mode. The purchase payments were made in cash and not through the normal banking channel therefore the same were non- verifiable from the authentic supporting details such as bank account/ documents. Assessee is not a regular investor in shares. The assessee has failed to furnish the proof of source for the purchase transactions. Thus, the entire transactions are against human probability. Also considering the findings of the Investigation Wing, 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 of Rs. 27,20,457/- claimed exempt u/s. 10(38) of the Act by the assessee cannot be allowed and the amount of Rs. 27,68,457/- received back as sales proceeds on sale of shares was required to be added back towards his taxable income under section 68 of the Act. The above amount of Rs. 27,68,457/- was deemed as income of the assessee u/s. 68 of the Act, over and above, the income already declared in ITR during AY 2014-15. In view of above discussions, the landmark decision of the Honble Supreme Court in the case of McDowell and Company Limited, 154 ITR

148 is squarely applicable in this case wherein it has been held that tax planning may be legitimate provided it is within the framework of the law and any colourable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by dubious methods. However, the case laws cited by the Ld. counsel for the assessee are on distinguished facts, hence, not applicable in the instant case. The assessee has not raised any legal ground and argued only on merit for which assessee has failed to substantiate his claim before the lower revenue authorities as well as before this Bench. In view of above discussions, I am of the considered opinion that Ld. CIT(A) has rightly confirmed the addition in dispute, which does not need any interference on my part, therefore, I uphold the action of the Ld. CIT(A) on the issue in dispute and reject the grounds raised by the Assessee.

6. In the result, the Appeal of the Assessee is dismissed. The order pronounced on 08.01.2019. Sd/- [H.S. SIDHU] JUDICIAL MEMBER Dated: 08-01-2019 SR BHATNAGAR Copy forwarded to:

1. Appellant

2. Respondent

3. CIT

4. CIT(A) Asst. Registrar,

5. DR ITAT, New Delhi