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Vasantraj Birawat v. Cit
Structured Summary of the Tribunal Order (Birawat group appeals)
Factual and Procedural Background
A series of income-tax appeals were filed by members of the Birawat family (referred to collectively as "these assessees") challenging orders of the Commissioner of Income-tax (Appeals) for the assessment years shown in the cause list. The Department conducted search-and-seizure operations at premises associated with the Birawat group under section 132 of the Income-tax Act, 1961. Consequent assessments were framed mainly under section 153A of the Act (and in two cases under section 153C).
The assessees had declared long-term capital gains on sale of shares in their returns. The Assessing Officer (AO) disbelieved the purchases and treated the entire sale proceeds as "income from other sources" (rejecting the long-term capital gains claim). The AO relied in large measure on information from the Investigation Wing, including a sworn statement of one Shri Narendra R. Shah admitting issuance of bogus purchase bills for certain penny-stock companies. The AO also drew adverse inferences because a sub-broker (M/s. Amizara Securities and Finance P. Ltd. — AFSL) was not produced and because shares had been credited to the assessees' demat accounts shortly before sale.
The AO further made an addition equal to 5% of gross sale proceeds as unexplained money. The assessees appealed to the Commissioner of Income-tax (Appeals), who confirmed the AO's view, relying on the reported modus operandi for engineering bogus capital gains (including a SEBI report). The assessees then appealed to the Tribunal.
Legal Issues Presented
- Whether the Assessing Officer and the first appellate authority were justified in rejecting the assessees' claim of long-term capital gains and treating the entire sale proceeds as income from other sources given the materials on record.
- Whether the Assessing Officer was justified in computing period of holding for determining long-term character from the date of demat credit rather than from the date of purchase (broker contract note), as contended by the assessees.
- Whether the AO could draw adverse inference because the sub-broker AFSL was not produced when assessees had explained that the broker had vacated its office and had given last-known address.
- Whether the Assessing Officer was justified in adding 5% of gross sale proceeds as unexplained income.
- Whether the AO could rely on the statement of Shri Narendra R. Shah (recorded by the Investigation Wing prior to the search) without providing the assessees an opportunity to cross-examine or without independent corroboration.
Arguments of the Parties
Assessees' (Appellants') Arguments — summarized
- No incriminating material was found in the search to show the declared long-term capital gains were bogus.
- Each assessee was examined separately and none admitted that the transactions were bogus.
- The AO relied primarily on the statement of Shri Narendra R. Shah recorded before the search; assessees requested cross-examination of Shri Shah but were not permitted to do so.
- The assessees dealt with sub-broker M/s. AFSL for purchases and sold through other brokers (e.g., M/s. Yogesh/M/s. Niche) that had no connection to AFSL or to Shri Narendra R. Shah; therefore Shah's statement does not implicate them.
- The assessees contended that the AO drew impermissible inferences linking them to Narendra R. Shah on mere surmise and conjecture, while no enquiry was made with alleged operators named by Shah.
- With respect to Suryadeep Salt Refinery & Chemicals Works Ltd., the assessees said the transfers were effected by the sub-broker and that the AO should not have rejected their documents solely on the basis of a company director's letter; they also complained about lack of opportunity to cross-examine that director.
- They relied on prior case law (listed in the record) to support the proposition that purchases should be accepted where sales are genuine and that transactions cannot be declared non-genuine merely because brokers fail to appear.
- Assessees contended the holding period should be computed from the broker's contract note (per CBDT Instruction No. 704 and Tribunal case law including Max Telecom), not from the date of demat credit.
- The assessees argued there was no evidence that prices were not arm's-length, no evidence of conversion of unaccounted cash into accounted money, and that books/accounts were not rejected by the AO.
Revenue's (Departmental) Arguments — summarized
- The Investigation Wing's information and Narendra R. Shah's admission showed bogus purchase bills were issued in respect of Interlink Financial Services Ltd. and Database/ Data Finance Ltd., using names of brokers such as T.H. Vakil and G.R. Pandya.
- The shares reported by the assessees were actually transferred to their demat accounts from accounts of AFSL and T.H. Vakil; this, combined with Shah's admission, showed the assessees did not genuinely purchase the shares.
- Enquiries with the company Suryadeep Salt Refinery & Chemicals Works Ltd. established that the assessees' names did not appear in company records and no transfer requests were found.
- The assessees failed to produce AFSL before the AO despite being asked (and therefore the claim of purchase through AFSL was disbelieved).
- The assessees did not have demat accounts on the claimed purchase dates; dematerialisation procedures (per Department) require production of purchase bills and related documents, which were not produced.
- The assessees admitted in replies to questions that they had not entered purchase details in books and, in some statements, undertook to declare amounts as income if details could not be traced.
- The Department relied on prior decisions (listed in the record) to contend that such receipts could be assessed as income u/s 68 and related provisions.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For (as stated in the opinion) | Application by the Court (how the tribunal treated or referenced the precedent) |
|---|---|---|
| CIT v. Emerald Commercial Ltd. [2001] 250 ITR 539/[2002] 120 Taxman 282 (Cal.) | Cited by the assessees to support the contention that transactions cannot be regarded as non-genuine merely because brokers do not present themselves before the AO. | The precedent was cited by the assessees; the Tribunal's written order records the citation but does not state it expressly rested its decision on this single precedent. The Tribunal did accept the general principle that absence of a broker alone does not automatically render purchases bogus in the circumstances of this case. |
| Commissioner Of Income-Tax v. Currency Investment Co. Ltd. [2000] 241 ITR 494/[2001] 117 Taxman 522 (Cal.) | Cited by the assessees to support the argument that broker non-production does not render transactions automatically bogus. | The Tribunal recorded the citation as part of the assessees' reliance; it did not indicate exclusive reliance on the case but treated the cited principle as part of the assessees' argument which the Tribunal found merit in. |
| Commissioner Of Income-Tax v. Carbo Industrial Holdings Ltd. [2000] 244 ITR 422/116 Taxman 159 (Cal.) | Cited by the assessees in support of the proposition that non-production of brokers does not conclusively prove transactions bogus. | The Tribunal noted the citation. The order does not state that the Tribunal's conclusion turned specifically on this precedent, but the Tribunal's reasoning aligned with the general legal stance reflected by the citation. |
| CIT v. Janki Textiles & Industries Ltd. [2003] 264 ITR 579/132 Taxman 231 (Gauhati) | Cited by the assessees as supporting authority for the same line of argument regarding broker non-production and genuineness of transactions. | The citation was recorded in the assessees' submissions. The Tribunal did not single out this decision for specific analysis but considered the overall reliance as part of the appellants' submissions which the Tribunal found persuasive on the facts. |
| Balaji Textile Industries (P.) Ltd. v. Third ITO [1994] 49 ITD 177 (Bom.) | Cited by the assessees to contend that purchases should be considered genuine where sales are shown to be genuine. | The Tribunal recorded the citation as part of the assessees' authorities; the Tribunal's fact-based reasoning (that sale through recognized stock-exchange brokers supported genuineness) is consistent with the cited principle but the Tribunal did not state it decided solely on this precedent. |
| Income Tax - I v. Nangalia Fabrics Private Limited [2014] 220 Taxman 17 (Mag.)/[2013] 40 taxmann.com 206 (Guj.) | Cited by the assessees to support the proposition that purchases are to be treated as genuine if sales are genuine. | The Tribunal noted the citation among authorities relied upon by the assessees; the order does not indicate direct reliance beyond treating the submissions as reinforcing the assessees' factual position. |
| ITO v. Surana Traders [2005] 92 ITD 212 (Mum.) | Cited by the assessees for the proposition that where sales are genuine, purchase claims are to be accepted. | The Tribunal recorded the authority as cited by the assessees; the Tribunal's acceptance that shares were sold through recognized brokers and its conclusion on genuineness is consistent with the principle, though no detailed precedent-specific analysis is recorded. |
| Udhavdas Kewalram v. CIT [1967] 66 ITR 462 (SC) | Cited (by assessees) to support the general principle that books/accounts should ordinarily be accepted until disproved by the Department. | The Tribunal recorded the Supreme Court authorities relied upon by the assessees to argue that apparent transactions should be treated as real until shown otherwise. The Tribunal's approach — requiring independent evidence before disbelieving the assessees' documentary claims — is consistent with this line of authorities. |
| Omar Salay Mohamed Sait v. Commissioner Of Income Tax, Madras [1959] 37 ITR 151 (SC) | Cited by the assessees as another Supreme Court authority on the acceptance of accounts until disproved. | The Tribunal recorded the citation and its decision reflects the general caution against rejecting taxpayer's books and documents without adequate independent materials to disprove them. |
| Dhakeswari Cotton Mills Ltd. v. CIT [1954] 26 ITR 775 (SC) | Cited by the assessees as supporting authority for accepting accounts until shown otherwise. | The Tribunal noted the citation; its reliance on the broader principle is manifest in its requirement for independent corroboration before concluding purchases were bogus. |
| Sumati Dayal v. Commissioner Of Income Tax, Bangalore [1995] 214 ITR 801/80 Taxman 89 (SC) | Cited by the assessees to support the proposition that the apparent should be treated as real until shown otherwise. | The Tribunal recorded the citation and applied the underlying reasoning in concluding that the Department had not produced credible material to disprove the assessees' claim of long-term capital gains. |
| Cit (Central), Calcutta v. Daulat Ram Rawatmull [1973] 87 ITR 349 (SC) | Cited by the assessees for the same general principle regarding reliance on books/appearances unless rebutted. | The Tribunal recorded the citation and the Court's analysis accords with the theme that transactions should not be rejected on surmise when independent evidence is lacking. |
| CIT v. Karam Chand Thapar & Bros. (P.) Ltd. [1989] 176 ITR 535/43 Taxman 45 (SC) | Cited to underline the need to consider the totality of facts while completing assessments. | The Tribunal referred to the need to look at the totality of facts; the order reflects that approach in requiring corroborative material before adverse conclusions are drawn. |
| Max Telecom Ventures Ltd. v. Asstt. CIT [2008] 114 ITD 46 (Asr) | Cited by the assessees to support the contention that holding period should be reckoned from the broker's contract note and not from the date of demat credit. | The Tribunal expressly accepted the assessees' submission based on CBDT Instruction No. 704 and the cited Tribunal authority: it disagreed with the AO's approach of reckoning holding period from date of demat credit and held that the AO was wrong in doing so. |
| Arvind M. Karia v. ACIT [IT Appeal No. 7024 (Mum.) of 2010, dated 30-1-2013] | Cited by the Department as authority to support assessing sale proceeds as income (section 68-style reasoning). | The decision was cited by the Revenue; the Tribunal recorded the citation but did not base its conclusion on this authority. Instead, the Tribunal found that Department had not produced adequate independent material to disprove the assessees' claims. |
| Major Metals Ltd. v. Union of India [2013] 359 ITR 450/[2012] 207 Taxman 185/19 taxmann.com 176 (Bom.) | Cited by the Department in support of assessing disputed receipts as income. | The Tribunal recorded the citation; it did not rely on this precedent to uphold the additions and instead set aside the assessments for lack of credible material. |
| Luminant Investments (P.) Ltd. v. Dy. CIT [2014] 63 SOT 75/42 taxmann.com 14 (Mum.) | Cited by the Department as judicial support for assessing unexplained receipts. | The Tribunal recorded the authority as relied upon by the Department but reached its own conclusion on facts: that there was insufficient independent evidence to displace the assessees' claim of long-term capital gains. |
| CIT v. Murli Agro Products Ltd. [2014] 49 taxmann.com 172 (Bom.) | Cited by the assessees in support of a contention that, where assessments for years had already been completed (time-barred), additions could not be made in absence of incriminating material found in search. | The Tribunal noted this authority among the assessees' additional legal grounds but stated it was unnecessary to adjudicate those grounds because it had decided the main issues in favour of the assessees. |
| All Cargo Global Logistics Ltd. v. Dy. CIT [2012] 137 ITD 287/23 taxmann.com 103 (Mum.) (Special Bench) | Cited by the assessees on the question of whether completed assessments abate when search-based assessments are made and on related procedural points. | The Tribunal recorded the citation as part of the assessees' supplemental grounds but did not address these grounds on merit because it had allowed the appeals on the principal issues. |
Court's Reasoning and Analysis
The Tribunal carefully reviewed the factual matrix, the materials placed on record and the submissions of both sides. Its step-by-step reasoning, based on the text of the order, can be summarized as follows:
- The Tribunal noted the admitted fact that the search operations did not reveal any incriminating material to disprove the long-term capital gains declared by the assessees.
- The AO had placed heavy reliance on a statement recorded from Shri Narendra R. Shah (October 9, 2006) in which Shah admitted issuing bogus purchase bills for certain penny stocks. However, the Tribunal emphasized that Shah's statement also stated he had not purchased or sold shares on behalf of AFSL or the Birawat group prior to December 22, 2004 — and the assessees claimed purchases much earlier. Thus, Shah's statement did not directly establish that the assessees' claimed purchases were bogus.
- The Tribunal observed that the assessees had requested an opportunity to cross-examine Shri Narendra R. Shah, but this opportunity was not afforded; further, the operators Shah named were not examined. On those grounds the Tribunal held that Shah's statement should not have been accepted at face value without independent corroboration.
- The Tribunal examined the AO's adverse inference for non-production of the sub-broker AFSL. The assessees had furnished the last-known address and explained that AFSL had vacated the premises; the Tribunal found that the AO did not make adequate efforts to trace AFSL and therefore should not have drawn adverse inferences against assessees who had given reasons for non-production.
- On holding period, the Tribunal accepted the assessees' submission (supported by CBDT Instruction No. 704 and the Max Telecom decision) that the date of purchase for the purpose of computing holding period is to be reckoned from the broker's contract note and not from the date of demat credit. The Tribunal disagreed with the AO's approach of treating demat-credit date as date of purchase.
- The Tribunal criticized the AO for rejecting the assessees' documentary claims of purchase without conducting further enquiry or investigation; it found the AO had proceeded on presumptions, surmises and conjectures rather than bringing credible independent evidence to displace the assessees' records.
- The Tribunal also noted that the shares were sold through recognized stock-exchange brokers (BSE) and accepted the submission that it would be difficult to sell shares in the absence of purchase. The Tribunal found force in the assessees' contention that, had the transactions been engineered as bogus, purchases and sales would likely have been routed through the same tainted channels.
- With reference to the sworn replies/statements (e.g., Uttamchand Birawat's answers), the Tribunal found that the Department's contention that the assessee had "confessed" did not find support in the record—the Tribunal concluded the Department's reliance on those answers was misplaced.
- On the cumulative assessment of evidence, the Tribunal held that the Department did not possess credible material sufficient to disprove or rebut the assessees' claim of long-term capital gains and therefore the AO's conclusion was not sustainable.
Holding and Implications
Core Ruling: All appeals filed by the assessees are allowed.
Direct consequences and directions contained in the order:
- The Tribunal set aside the orders of the Commissioner of Income-tax (Appeals) that had confirmed the AO's assessment treating gross sale proceeds as "income from other sources". The Tribunal directed the Assessing Officer to delete the assessment of gross sale receipts as income from other sources and to accept the long-term capital gains declared by the assessees for the years under consideration.
- Because the Tribunal accepted the declaration of long-term capital gains, it held that the AO's separate addition of 5% of gross sale receipts as unexplained income did not arise; the Tribunal directed the AO to delete that addition for all assessees and years under consideration.
- The Tribunal recorded that it was unnecessary to adjudicate several other legal grounds raised by the assessees (for example, technical challenges to notices under section 153A or 153C and time-bar arguments), since the main additions were set aside on merits.
Broader implications: The order is fact-specific. The Tribunal's decision turned on the absence of independent corroborative evidence by the Department to displace the assessees' documentary claims, the failure to afford cross-examination of a crucial declarant, and the correct legal position on computation of holding period (relying on CBDT instruction and Tribunal precedent). The opinion does not purport to lay down a new general precedent beyond its factual conclusions; it disposes of the appeals and directs deletion of the impugned additions.
Result: In consequence of the above findings, the Tribunal allowed all appeals of the assessees and directed the Assessing Officer to accept declared long-term capital gains and to delete the 5% unexplained income additions.
ORDER
1. All these assessees have filed these appeals challenging the orders passed by the learned Commissioner of Income-tax (Appeals) in their respective hands for the assessment years mentioned in the cause title against their respective names. Since the issues urged in these appeals are identical in nature and further since all the assessees belong to same family, all these appeals were heard together and they are being disposed of by this common order, for the sake of convenience.
2. All these assessees are aggrieved by the decision of the learned Commissioner of Income-tax (Appeals) in confirming the assessment of sale proceeds of shares declared by each of them as "income from other sources" by rejecting the claim of long-term capital gains.
3. The facts relating to the cases are stated in brief. All these assessees belong to "Birawat" group and all of them are family members. The Revenue carried out search and seizure operations in the residential premises of Birawat group under section 132 of the Income-tax Act, 1961. Consequent thereto, the present assessments were completed by the Assessing Officer under section 153A of the Act in the hands of the assessees cited above except in the cases of "Shweta K Birawat" and "Akshata Birawat", in whose hands the assessments were completed under section 153C of the Act. It is pertinent to note that the Department did not unearth any incriminating material during the course of search. All these assessees filed returns of income, wherein they, inter alia, declared income arising on sale of shares under the head "Capital gains".
4. The Assessing Officer noticed that the Investigation Wing of the Department has found that a person named Shri Narendra R Shah was using the names of two entities, viz., M/s. G.R. Pandya Share Broking Ltd. and M/s. T.H. Vakil Shares and Securities Pvt. Ltd., to issue bogus purchase bills relating to the shares of companies named "M/s. Interlink Financial Services Ltd." and "M/s. Data Finance Ltd.". The Investigation Wing also recorded a statement of Shri Narendra R Shah on October 9, 2006, wherein he confirmed the abovesaid fact. He also stated that he had issued bogus purchase bills on the instructions of Shri Paras Chalot and Shri Shirish Shah, both were called "operators".
5. The Assessing Officer noticed that the assessees herein have also purchased shares of M/s. Interlink financial services Ltd. They had received the shares in their respective demat accounts from other demat accounts, most of the times by transfer from demat accounts belonging to M/s. T.H. Vakil Shares and Securities Pvt. Ltd. and M/s. Amizara Securities and Finance P. Ltd. All these assessees had claimed to have purchased the shares in physical form from M/s. Amizara Securities and Finance P. Ltd. (a sub-broker). It was claimed that the physical share certificates were held by the abovesaid broker on behalf of the assessees, since at that point of time these assessees did not have any demat accounts. Subsequently, after opening the demat accounts in the name of the assessees, the shares were transferred from the demat account of the abovesaid sub-broker.
6. In the sworn statement, Shri Narendra R Shah had stated that the demat account belonging to M/s. T.H. Vakil Shares and Securities P. Ltd. was opened on December 22, 2004, only. He also stated that he had not purchased any shares of M/s. Interlink Financial Services Ltd. on behalf of sub-broker M/s. Amizara Securities and Finance P. Ltd. or on behalf of Birawat group prior to the abovesaid date. He further stated that purchase bills were issued to the persons who wanted to generate artificial capital gains. He also confirmed that the bills were issued without executing any actual sale and purchase of the shares. Hence, the Assessing Officer took the view that the shares of Interlink Financial Services Ltd. were not actually purchased by these assessees, but they have obtained only accommodation bills.
7. These assessees had also purchased and sold shares of "M/s. Suryadeep Salt Refinery and Chemicals Works Ltd.". The Assessing Officer made enquiries with the abovesaid company. The director of the abovesaid company, vide his letter dated November 20, 2008, submitted that the names of these assessees do not find place in their records and further his company has not received any request from them for transfer of shares to their names. The shares of "M/s. Suryadeep Salt Refinery and Chemicals Works Ltd." were also seen purchased through the sub-broker, i.e., M/s. Amizara Securities and Finance P. Ltd.
8. Hence, the Assessing Officer asked these assessees to produce anybody from M/s. Amizara Securities and Finance P. Ltd. But, according to the Assessing Officer, these assessees did not produce the sub-broker.
9. With the facts mentioned above, the Assessing Officer came to the following conclusions :
"11. The picture that emerges is that M/s. T.H. Vakil Shares and Securities Pvt. Ltd. have confirmed that they never actually bought any shares on behalf of the assessees of this group and the so-called purchase bills attributable to them are bogus, as these bills were mere accommodation bills, not backed by any real transactions. M/s. Suryadeep Salt Refinery and Chemicals Works Ltd. have confirmed that none of the assessee's in this group ever held any shares in the company, M/s. Suryadeep Salt Refinery and Chemicals Works Ltd. The persons from M/s. Amizara Securities and Finance P. Ltd. were never produced. Thus, the purchases of aforesaid shares being bogus were confirmed. When purchases themselves are bogus, the logical inference is that the whole transaction involving supposed earning of long-term capital gains/short-term capital gains was bogus and engineered. It is also logical to infer that the assessee would have paid certain remuneration or fee or commission or any such amount for obtaining these bogus gains. As per information in possession of the Department, a sum of 5 per cent. of the total proceeds would have been paid."
10. The Assessing Officer also noticed that the shares of the abovesaid two companies and also that of other companies were found credited to the demat account of the assessees only few days prior to their respective sales. However, they had claimed to have purchased shares much earlier and thus claimed long-term capital gains on their sales. These assessees produced all the relevant documents to prove the claim of purchases before the Assessing Officer. However, the Assessing Officer disbelieved all those documents. These assessees also sought an opportunity to cross-verify Shri Narendra R Shah, on whose statement the Assessing Officer had placed much reliance. With regard to M/s. Amizara Securities and Finance P. Ltd. (sub-broker), these assessees furnished last known address of the sub-broker as 170/172, Kalba Devi, 3rd floor, Kalbadevi Road, Mumbai-400 002 and also stated that the sub-broker has vacated from the abovesaid address. Accordingly, these assessees furnished the reason for not producing M/s. Amizara Securities and Finance P. Ltd. (AFSL). It was also pointed out to the Assessing Officer that the search did not reveal any incriminating documents and further none of the members have stated that these share transactions are bogus in their respective statements taken from each of them separately. They further stated that they do not have any connection with M/s. T.H. Vakil Shares and Securities Pvt. Ltd. or with Shri Narendra R Shah. Accordingly they pleaded before the Assessing Officer that the capital gains declared by them are genuine transactions.
11. The Assessing Officer was not convinced with the submissions made by these assessees. Accordingly, the Assessing Officer came to the following conclusions:
12. Accordingly, the Assessing Officer assessed the entire amount of sale proceeds of shares as income of the assessees under the head "Income from other sources". It is pertinent to note that these assessees have also purchased and sold shares of other reputed companies like Aravind Mills, Mahindra and Mahindra, Oriental Bank, Telco, etc. However, the Assessing Officer assessed the sale proceeds relating to them also as income from other sources, since he held that the sub-broker AFSL had issued bogus bills. Further, the Assessing Officer recognised the date of purchase of shares as the date on which they were credited in the demat accounts and accordingly expressed the view that these assessees have not "held or possessed" shares for a period exceeding one year in order to claim the gains as long-term capital gains.
13. The Assessing Officer further held that these assessees would have spent 5 per cent. of the gross amount for obtaining accommodation bills for purchase and sale of shares. Accordingly he assessed 5 per cent. of the gross sale receipts as unexplained money in possession of the assessee.
14. These assessees carried the matters by filing appeals before the learned Commissioner of Income-tax (Appeals). The first appellate authority discussed in detail the modus operandi adopted for engineering bogus capital gains using penny stocks and also discussed about the order passed by SEBI. Accordingly, he upheld the decision of the Assessing Officer in assessing the gross receipts as income of these assessees under the head "Income from other sources". He also upheld the assessment of 5 per cent. of gross receipts as income of these assessees. Aggrieved, all these assessees have filed these appeals before us. It is pertinent to note that these assessees had also raised certain legal grounds before the learned Commissioner of Income-tax (Appeals), but they did not find favour with him.
15. We shall first consider the arguments advanced by both parties on merits. The contentions of the learned authorised representative were summarised as under :
16. The learned Departmental representative furnished his contentions by way of written submissions. For the sake of convenience, we have extracted the relevant points below :
17. In the rejoinder, the learned authorised representative submitted that these assessees have accounted for the purchase of shares in the books of account and they have never admitted that the gains arising on sale of shares may be assessed as income from other sources. He further submitted that the entire assessments have been framed on the basis of statement given by Shri Narendra R Shah, which was not confronted with the assessees. He further submitted that the statement was taken from Shri Narendra RShah prior to the date of search.
18. We have heard the rival contentions and perused the record. The admitted facts are that the search operations did not reveal any incriminating material, meaning thereby, no evidence was found during the course of search in order to doubt the veracity of the long-term capital gains declared by the assessees. We notice that the Assessing Officer has fully relied upon the information given by the Investigation Wing of the Department with regard to the alleged penny stocks and their price rigging. We have earlier noticed that the Investigation Wing has furnished the statement recorded from a person named Shri Narendra R Shah to the Assessing Officer and in that statement, he had admitted to have issued bogus purchase bills for purchase of shares in the companies of M/s. Interlink Financial Services Ltd. and M/s. Data Finance Ltd. The assessees herein had also purchased shares of M/s. Interlink Financial Services Ltd. through a sub-broker named M/s. AFSL. Since the assessees have purchased shares of M/s. Interlink Financial Services Ltd., the Assessing Officer as well as the learned Commissioner of Income-tax (Appeals) have taken the view the assessees have also purchased accommodation bills and accordingly declared bogus long-term capital gains. Accordingly, the tax authorities have taken the view that the assessees have introduced their unaccounted money in the form of long-term capital gains. Accordingly they have rejected the claim of long-term capital gains and assessed the gross receipts as income from other sources. It is pertinent to note that the tax authorities have assessed the sale proceeds arising on sale of other companies also as income from other sources, even though the shares of M/s. Interlink Financial Services Ltd. alone was found to fall in the category of penny stocks, whose prices were alleged to have been rigged.
19. Now the issue that requires examination is whether the evidences/materials available in the case of these assessees were sufficient to entertain the view so taken by the tax authorities, i.e., whether these assessees can be considered to have taken the accommodation bills with the intention of generating bogus long-term capital gains.
20. We have already noticed that the Assessing Officer has fully placed reliance on the statement given by Shri Narendra R Shah. Admittedly this statement was taken by the Investigation Wing on October 9, 2006, i.e., much prior to the date of search conducted on January 10, 2007, in the hands of these assessees. Though Shri Narendra R Shah has admitted to have given bogus bills in respect of shares of M/s. Interlink Financial Services Ltd., yet he has categorically stated that he has not purchased or sold shares of the abovesaid companies prior to December 22, 2004 (date of opening of demat account) on behalf of M/s. ASFL (sub-broker) or the Birawat group. He has further stated that he has not purchased or sold shares of M/s. Interlink Financial Services Ltd. prior to December 22, 2004. However, the claim of the assessees is that they have purchased the shares of M/s. Interlink Financial Services Ltd. were purchased much prior to December 22, 2004. Thus, even according to the statement of Shri Narendra RShah, he has not purchased the shares of M/s Interlink Financial Services Ltd. prior to December 22, 2004. It is nobody's case that the assessees have purchased the shares of the abovesaid company after December 22, 2004. Thus, we are of the view that, from the statement given by Shri Narendra RShah, it may not be possible to presume that the shares purchased by the assessees are bogus purchases, more particularly in view of the fact that the Department has not established that there was link between ShriNarendra R Shah and M/s. ASFL.
21. We notice that the assessees herein have asked for cross-examination of Shri Narendra R Shah, since the Assessing Officer has totally relied upon his statement. However, such an opportunity for cross-examination was not given to the assessees. Further, Shri Narendra R Shah has stated that he has issued accommodation bills at the instance of two operators, viz., ShriParas Chalot and Shri Shirish Shah. However, there is no information on record to the effect that these two operators were examined by the Department. Hence, we find merit in the contentions of the learned authorised representative that the statement given by Shri Narendra R Shah should not have been relied upon on the face of it, without corroborating the same with other independent evidences.
22. The claim of the assessees is that they have purchased the shares from M/s. ASFL. In this regard, the case of the assessees is that they have furnished all the relevant details to support the claim of purchase of shares. The Assessing Officer has rejected the claim of purchases, only for the reason that the assessees have failed to produce anybody from M/s ASFL. However, we notice that the assessees have tried to locate the abovesaid broker, but could not find it, since the broker had vacated its office. This fact, we notice, was brought to the notice of the Assessing Officer. However, we notice that the Assessing Officer did not take any further steps to trace M/s. ASFL. Under these set of facts, in our view, the Assessing Officer should not have drawn adverse inference against the assessees, when they have expressed their inability for the reasons stated above.
23. The Assessing Officer has taken the view that the assessees have opened the demat account only subsequently and the shares have come to their demat account from other demat accounts only few days prior to the date of sale. Accordingly, the Assessing Officer has expressed the view that the period of holding should be computed from the date on which the shares have come to the credit of demat accounts. However, the submissions of the assessees in this regard are that they had purchased the shares in physical form and the said shares were held by the sub-broker on their behalf. After the assessees have opened the demat accounts, the shares were transferred to their account by the sub-broker. The assessees have cited the Central Board of Direct Taxes circular to submit that the period of holding of shares should be computed on the basis of the broker's note for purchase of shares. Another observation made by the Assessing Officer was that the shares have come to the demat account of the assessees from M/s. T.H. Vakil Shares and Securities P. Ltd., a concern belonging to Shri Narendra R Shah. In this regard, the assessees have submitted that they, as investors, are not concerned about the demat accounts from which the shares have been received. Similarly, in the case of shares of M/s. Suryadeep Salt Refinery and Chemicals Ltd. also, these assessees have received shares through demat account. Hence the procedure for name transfer of physical shares shall not apply to it. Hence the letter written by the director of that company may not have much relevance.
24. In this regard, we find force in the submissions made by the assessees. As per the Central Board of Direct Taxes circular, referred to earlier, the date of purchase of shares should be recognised as the date on which the broker has issued the contract notes. Hence, we are unable to agree with the view taken by the Assessing Officer that the date of purchase should be considered as the date on which the shares were credited to the demat account. The undisputed fact remains that the assessees have opened the demat account only subsequent to the date of purchase of shares. Hence, in the absence of a demat account, one could have purchased the shares in physical form only. Though the assessee has furnished the details of purchases of shares, we notice that the Assessing Officer has rejected them without examining them. This approach of the Assessing Officer, in our view, was not appreciable at all. When the assessees are furnishing the necessary details available with them and if the Assessing Officer feels that they are not reliable then he should have conducted further investigation and brought any other material on record to disprove the claims put forth by the assessees. However, the Assessing Officer has taken adverse inferences against the assessees without causing further examination of the materials furnished by the assessees. Further, we are aware that there is no compulsion under any law that the shares should be held only in demat account form. As per the trade practice, in our knowledge, the broker is liable to deliver the shares which were purchased on behalf of the clients and in this connection only the broker contract notes are issued. We further notice that the submissions of the assessees that the shares were in the possession of the broker were also rejected without making further examination.
25. The learned Departmental representative, in his written submissions, has stated that the assessees have to produce purchase bills, payment details, service tax payment details, broker books of account at the time of dematerialisation. The said submissions do not appear to be correct as per the prevailing practice. For dematerialisation, to our knowledge, only the share certificates have to be furnished. However, in the instant case, the sub-broker has got the shares dematerialised the share certificates and then transferred them to the account of the assessees herein. We have already noticed that the Assessing Officer has not taken any steps or brought any material on record to show that the claim of purchase of shares in physical form from M/s. ASFL was wrong. In the absence of such an exercise, in our view, it may not be proper on their part to suspect the receipt of shares in demat account.
26. Another point, which is pertinent to note is that all these shares have been sold through another broker through BSE. Hence, there is merit in the contentions of the learned authorised representative that, in the absence of purchase of shares, it would not be possible to sell the shares. The learned authorised representative also submitted that, if it were bogus transactions, then both purchases and sales would have been routed through the same broker. Further, we notice that the Assessing Officer has assessed the sale proceeds realised on sale of shares of reputed companies also as income from other sources. The said action of the Assessing Officer would only show that he has proceeded to assess the gross receipts realised on sale of shares as income from other sources only on presumptions, surmises and conjectures without bringing any credible evidence on record to refute the claim of the assessee. We have already noticed that the learned Commissioner of Income-tax (Appeals) has upheld the assessment order on this issue, simply on the basis of SEBI report without ensuring that the assessees herein have also participated in the clandestine deals. Further the fact that the Revenue, during the course of search operations, did not unearth any evidence about existence of unaccounted money or any document to disprove the claim of earning of long-term capital gains would only go to prove that there was no evidence to suspect the claim of long-term capital gains declared by these assessees.
27. During the course of hearing, the learned Departmental representative submitted that the assessees have confessed about the non-accounting of purchases and further submitted that they have also agreed for the addition of gross sale proceeds as income from other sources. The learned Departmental representative also furnished a copy of sworn statement recorded from Shri Uttamchand Birawat under section 131 of the Act on April 23, 2007. Apparently, the learned Departmental representative is referring to the answer given to question No. 2 and question No. 11. The relevant questions and answers are extracted below, for the sake of convenience :
Question 2. You have stated several times that you shall submit the details of capital gains on account of transactions in shares. However, you have not yet submitted the said details such as name of the scrip, date of purchase, name and address of the purchase broker, number of shares, amount and similarly the details of sale, etc. Please explain.
Answer : As stated earlier, the necessary details called for are not readily available with us. We are trying to trace out these details and shall submit the same as soon as we are able to trace out the same. . .
Question 11. On similar lines narrated in question No. 10, the total long-term capital gains claimed by you and your family members on account of transactions shown of "A" or "B" group stocks of BSE works out to Rs. 3.08 crores, approx. As per facts mentioned above, the period of holding shown by you is bogus and accordingly the purchases shown by you are also not genuine. Hence the said long-term capital gains is artificial and bogus. Please explain.
Answer : As stated in my statements dated January 25, 2007, January 31, 2007 and April 5, 2007, I am trying to trace out the details of capital gains of Rs. 10,22,64,376 (which includes the above Rs. 3.08 crores) and shall submit the same. In case, I am unable to trace out and furnish the required details, I hereby undertake to declare the same as our income for the respective assessment years in the hands of respective assessees. Since I have voluntarily agreed to declare this income, if I fail to submit the details, I request the Department to grant immunity from penalty under section 271(1)(c) of the Income-tax Act.
A careful perusal of the abovesaid questions and answers would show that the view expressed by the learned Departmental representative does not appear to be correct.
28. In view of the foregoing discussions, we are of the considered view that there was no credible material with the Department to disprove the claim of long-term capital gains made by these assessees in their respective returns of income. Accordingly we set aside the orders of the learned Commissioner of Income-tax (Appeals) passed in the respective hands of the assessees herein on this issue and direct the Assessing Officer to delete the assessment of gross sale receipts as income from other sources in all the years under consideration and accordingly direct the Assessing Officer to accept the long-term capital gains declared by these assessees in all the years under consideration.
29. Since we have upheld the disclosure of long-term capital gains, the question of assessing 5 per cent. of the gross sale receipts as unaccounted income of the assessees does not arise. Accordingly, we set aside the orders of the learned Commissioner of Income-tax (Appeals) on this issue and direct the Assessing Officer to delete this addition in the hands of all the assessees in all the assessment years under consideration.
30. The assessees have also urged following legal grounds before us :
| Following cases in assessment year 2005-06 | I.T.A. No. | Date of filing return | |
| (a) Vasantraj A Birawat | I.T.A. No. 990/M/2010 | 31.10.2005 | |
| (b) Kiranraj U Birawat | I.T.A. No. 987/M/2010 | 31.10.2005 | |
| (c) Ankit Birawat | I.T.A. No. 978/M/2010 | 01.12.2005 | |
| (d) Chanchalaben Birawat | I.T.A. No. 972/M/2010 | 01.12.2005 | |
| (e) Kalaben Birawat | I.T.A. No. 974/M/2010 | 01.12.2005 | |
| (f) Avani Birawat | I.T.A. No. 968/M/2010 | 08.12.2005 | |
| (g) Veenaben Birawat | I.T.A. No. 980/M/2010 | 01.12.2005 | |
| (h) Uttamchand A Birawat (HUF) | I.T.A. No. 7399/M/2010 | 08.12.2005 | |
| (i) Kiranraj A Birawat (HUF) | I.T.A. No. 6946/M/2010 | 31.10.2005 | |
| (j) Vasantraj A Birawat (HUF) | I.T.A. No. 7400/M/2010 | 08.12.2005 | |
| (k) Shweta K Birawat | I.T.A. No. 976/M/2010 | 14.12.2005 |
31. We do not find it necessary to adjudicate the above said legal grounds, since we have decided the issue relating to the additions in favour of the assessee.
32. In the result, all the appeals filed by all the assessees are allowed.
RAHUL
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