LTCG cannot be treated as bogus on the basis of some reports of the Investigation Wing [ITAT]

The three appeals i.e. ITA Nos.1197, 1054 & 1198/Kol/2018 of the Assessees belonging to the same family, arise out of the independent orders of the Learned Commissioner of Income Tax (Appeals) -10, Kolkata for AY 2014-15 dated 19.04.2018. As the issues involved are identical in all the appeals, they are taken up together and disposed off by this common order for the sake of convenience. Therefore, the appeal of Shri Sanjiv Shroff in ITA No.1197/Kol/2018 are taken up for adjudication and the decision rendered thereon would apply to all the appeals also, except with variance in figures.

2. Though the assessee had raised several grounds of appeal the main issue is as to whether on the facts and circumstances of the case, the ld CITA was justified in upholding the addition made by the AO u/s 68 of the Act in respect of sale proceeds of shares of M/s Kailash Auto Finance Limited (KAFL) treating the same as income from undisclosed sources after rejecting the assessees claim of Long Term Capital Gains (LTCG) on sale of those shares.

3. The brief facts of the issue as has been recorded by the AO in the Assessment Order are that the assessee claimed long term capital gains from sale of shares of M/s. Kailash Auto Finance Limited (KAFL). The AO noted that the assessee had purchased 1,00,000 shares of M/s. Careful Projects Advisory Limited (CPAL) at a face value of Rs.1 each in for a total consideration of Rs.1,00,000/- which company (CPAL) later got amalgamated with M/s. KAFL by virtue of an order of Honble Allahabad High Court and in pursuance to such amalgamation, the assessee was allotted 1,00,000 shares of KAFL of the face value of Rs.1 each. The said shares were later sold through a broker named M/s. Ratnabali Capital Markets Ltd. on different dates falling within the previous year 2013-14 corresponding to the Asst Year 2014-15 at a price of Rs.37,60,405/-., which according to assessee, resulted in Long Term Capital Gains and so the assessee claimed exemption u/s 10(38) of the Act.

4. However, the AO did not agree with the assessees claim of LTCG and exemption thereof claimed by the assessee. According to AO, it is unbelievable that the assessee can make a fantastic gain in a span of 18 months. According to AO, the price movement of the scrip in the span of 18 months raised doubts in his mind and that profit earned by the assessee were beyond human probabilities. The AO noticed that the company, M/s. CPAL, was incorporated on 18.09.2010 with authorized and paid up share capital of Rs.1 lakh. The company increased its authorized share capital to Rs.34.50 lakhs and thereafter issued 330155 shares of the face value of Rs.10 each at the premium of Rs.590 to different entities. The AO also observed that during the FY 2011-12, M/s. CPAL increased its authorised share capital to Rs.29 crores and then the shares of Rs.10 each were split into 1:10 i.e. each shares of Rs.10 into shares of Re.1 each. The said company CPAL thereafter issued bonus shares to the existing equity shareholders in the ratio of 1:55. The AO suspected the issue of bonus shares in the unrealistic ratio of 1:55. He was of the opinion that the probable reasons were with a view to provide large amount of LTCG in the hands of beneficiaries after amalgamating the said company with KAFL. The AO concluded that CPAL was incorporated with a dubious plan and premeditated arrangement and artifice to increase number of shares therein through sham and non genuine transactions of its shares which resulted in fetching exorbitant and unrealistic considerations in the scheme of amalgamation. The AO referred to the statement of Shri Sunil Dokania recorded u/s 131 of the Act by the Investigation wing on 12.06.2015, wherein, Shri Dokania has explained the modus operandi of providing of LTCG in the scrip of KAFL. He stated that by way of amalgamation of CPAL with KAFL, the beneficiaries of LTCG got higher number of shares of KAFL as against shares of CPAL. Mr. Dokania, in the aforesaid statement, stated before the investigation wing that he had got equal amount of cash from the beneficiaries, deposited the same to various undisclosed proprietorship concerns, and finally transferred the same to bogus/shell companies, by layering through various accounts, who had ultimately purchased the shares sold by the beneficiaries. The AO has also relied upon another statement of Shri Sunil Dokania recorded u/s 131 by the Investigation wing on 6.3.2013, in the case of Rashmi Group of Kolkata ; Statement of Shri Bidyoot Sarkar recorded on 8.4.2015 u/s 133A in the case of Religare Securities Limited; Statement of Shri Narendra Balasia recorded on oath u/s 133A in the case of SMC Global Securities Limited ; Statement of Shri Pradip Jain recorded on 31.3.2015 u/s 131 and the two Statements of Shri Amit Dalmia recorded by the Investigation wing on 31.3.2015 and 5.6.2015. The statements were annexed to the Assessment Order to come to a conclusion that the assessee was one of the beneficiaries of the transactions in shares of KAFL which resulted in bogus claim of exempt LTCG.

5. The AO, on the basis of movement of price of KAFL quoted in Bombay Stock Exchange during the period of September, 2013 to January, 2014 (the period of sale of shares of KAFL by the assessee), found that the price of shares had increased by 267%. The AO concluded that while Sensex showed almost no progress, price of shares of KAFL moved phenomenally. The AO also referred to the financials of KAFL during the Financial years 2011-12 to 2015-16 and concluded that Earnings per share (EPS) during that period was either nil or negative but the value of shares was highly inflated. The AO observed that the prices of shares of KAFL were rigged by the entities connected to KAFL.

6. The AO referred to three separate orders passed by SEBI dated 29th March, 2016, 15th June, 2016 and 31st October, 2016 in support of his adverse conclusions drawn against the assessee that several entities related/connected to KAFL rigged the prices by 230% during the period of January, 2013 to June, 2013 (Patch-1), created artificial demand and thereafter provided exit to the beneficiaries during the period of July 2013 to November, 2014 (Patch-2). The said orders passed by SEBI contained list of related/connected parties of KAFL and also the list of beneficiaries. Some of these were restrained from accessing the securities market and buying, selling or dealing in securities. The AO concluded that the in depth analysis done by SEBI in the three orders is direct evidence against the assessee to hold that the prices of KAFL were manipulated and artificially hiked to create non-genuine LTCG in the transactions of KAFL. The AO further concluded that confessions given on oath by the promoters/ brokers/ operators are the circumstantial evidence against the assessee that the LTCG was arranged one.

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