Whether facts that when share transfer of listed Co is concluded within merely four days, and Co directly corresponds with shareholder, offers sufficient grounds to question genuineness of transactions - YES: ITAT

THE issues before the Bench are - Whether it leads to prima facie evidence against the assessee, when he has failed to provide satisfactory explanation of the source of a particular income; Whether the facts when share transfer of a listed company is concluded within merely four days, and the company directly corresponds with the shareholder, offers sufficient grounds to question the genuineness of such transaction; Whether the mere fact that shares purchased have been sent for dematerilazation by the assessee, proves the genuineness of the same, even though they were transacted offline and not on the floors of a stock exchange and Whether the rule of estoppel under the Evidence Act can be invoked, when the assessee has retracted at the
time of filing return, from his earlier stand taken during the search and seizure proceedings. And the verdict goes against the assessee.

Facts of the case

The assessee filed return of income which was taken up for scrutiny. The AO observed that the assessee had shown long term capital gains ("LTCG") from two scrips namely M/s. Shalimar Agro Products & M/s. G.Tech Info Training Ltd. and was asked to justify the bonafide of these transactions. The assessee explained that he had purchased shares of Shalimar Agro Products on 24.4.2002 at a cost of Rs. 1,09,500 as per contract note. The assessee claimed that the transaction was done through broker M/s. Shreenidhi Stock & Broking Pvt. Ltd., with whom assessee had a credit balance from which the purchase cost of shares was adjusted. It was further explained that the assessee purchased 40,000 shares of M/s. G.Tech Info. on 13.5.2002, which was done through Sanjay R. Shah as the assessee had earned speculation profit by transacting through the same broker Shri Sanjay R. Shah. The purchase cost of 40,000 shares was adjusted against the amount due from Shri Sanjay R. Shah. Both these transactions were done off line i.e. not on the floor of BSE/NSE and in both these transactions, physical delivery of shares were taken. The shares of M/s. Shalimar Agro Product were sent to Action Financial Services (I) Ltd., which was registered with NSDL, for dematerialization of 5.5.2003. Similarly, shares of M/s. G.Tec. Info were sent for dematerialization with the same depository on 19.7.2003. Shares of M/s. Shalimar were demated on 28.5.2003 and shares of M/s. G.Tec were demated on 28.7.2003.

The AO issued summons u/s. 131 to Sanjay R. Shah asking him to produce the details of transaction relating to the sale of share of M/s. G.Tec. Info to the assessee, to which he denied to have made any transaction with the assessee or his family member and group concern nor there was any speculation gains arising to the assessee or his family members. The AO verified the transaction with M/s. Shreenidhi Stock & Broking Pvt. Ltd., in response to which the broker explained that the purchase consideration of shares was adjusted against the old credit balance lying to the credit of the assessee’s account as on 31.3.2002. The said broker showed his inability to give further evidence/documents stating that the transaction pertains to the period prior to 31.3.2002 for which period the broking firm has destroyed all the physical record. The AO observed that the said broker could not furnish the name of the persons from whom he has purchased shares for the assessee.

After providing opportunity of hearing to the assessee the AO finally held that the LTCG was bogus and treated the entire sales realization as unexplained money. The AO further held that the assessee must have paid certain fees for obtaining these bogus LTCG and a sum of 5% of the total sale consideration was also added to his income as unexplained expenditure. The concluded that no actual purchases were ever made and only backdating of purchases were done so that the unaccounted cash is brought into the accounts in the form of sale proceeds of shares.

On appeal, the CIT(A) upheld the order of the AO. Aggrieved, the assessee filed an appeal before the Tribunal.

The Counsel for the assessee submitted that the purchase of shares were fully supported by contract notes and have been routed through demat account of the assessee. The Counsel argued that just because the purchase transactions have been done "off market" and the delivery of shares have been taken in physical form cannot justify the allegation that the purchases were bogus or have been backdated. The Counsel further argued that the AO never confronted the assessee with the denial of the broker Shri Sanjay R. Shah who stated that he has not entered into any transaction with the assessee or his family members.

Having heard the parties, the Tribunal held that,

++ it is a settled law that in all cases in which a receipt is sought to be taxed as income, the burden lies on the department to prove that it is within the taxing provision and if a receipt is in the nature of income, the burden of proving that it is not taxable because it falls within the exemption provided by the Act lies upon the assessee. But in view of section 68 of the I.T. Act 1961, where any sum is found credited in the books of an assessee for any previous year, it may be charged to income tax as the income of the assessee of that previous year if the explanation offered by the assessee about the nature and source thereof is, in the opinion of the AO, not satisfactory. In such a case, there is prima facie evidence against the assessee, vis-à-vis the receipt of money and if he fails to rebut the said evidence, it can be used against him by holding that it was a receipt of income nature. While considering the explanation of the assessee, the department cannot, however, act unreasonably;

++ all that we have to examine is whether the explanation given by the assessee is a reasonable explanation on the facts of the case and in the eyes of the law. It is not in dispute that the shares were purchased in physical form as is evidenced from the share certificate filed by the assessee. As per assessee’s own version, the shares of M/s. Shalimar Agro Products purchased on 26.4.2002, these shares were transferred physically in the name of the assessee on 30.4.2002 as per the letter of the company. Any person who has even a little bit knowledge of share transfer will agree that no company can send the share transferred in the name of the purchaser within 4 days from the date of purchase unless and until that company is hand in glove with the purchaser. Further, it is not understandable how a listed company is directly corresponding with the shareholders as every listed company has its own transfer agent/registrar who looks after the share transfers and matters relating to the shareholder. Surprisingly, in this case, the company has not only responded to the share transfer of the assessee but at the same time completed the share transfer within 4 days, when the registered office of the company is in New Delhi whereas the letters acknowledging the share transfer are from the administrative office located in Mumbai. Further, the shares of M/s. Shalimar Agro Products were purchased on 26.4.2002 but were sent for dematerialization on 5.5.2003, i.e., after more than one year from the date of purchase, which was demated on 28.5.2003 which means that the depository took 23 days to get the shares demated of a company which transferred the shares within 4 days of purchase. Similarly, in the scrips of M/s. G.Tech Info Training, the assessee has claimed to have paid purchase consideration out of speculation profit from a transaction done through the broker Shri Sanjay R. Shah, when the assessee has never done speculation in the stock market prior to or after this transaction. However, the same broker has categorically denied to have entered into any such transaction with the assessee or his family members;

++ it is the say of the assessee that the denial of Shri Sanjay R. Shah was never confronted to the assessee. However, the assessment order while issuing a showcase letter for completion of assessment of giving an opportunity to explain the transaction, the AO issued a letter highlihgting this issue;

++ this clearly contradicts the statement of the assessee that he was never given any opportunity so far as denial of broker Shri Sanjay R. Shah is concerned. It appears that the assessee has backdated the purchase of shares so that it can be given a colour of Long Term Capital gains by showing the holding period by more than 12 months. Therefore, when caught on the wrong foot at the time of search and seizure proceedings u/s. 132, the assessee admitted the wrong doing and offered capital gain as his income which has never been denied at any stage by the assessee. However, while filing the return of income, the assessee has offered Long term capital gains clearly retracting from his stand taken at the time of the statement u/s. 132(4) of the Act. It appears that the assessee offered income to get rid of the search party who believed in his statement and withdrew without making any further investigation. This is clearly against the rule of estoppel as provided under the evidence Act because believing on the truth of the statement made by the assessee, the department changed its position to its detriment. Therefore the assessee is estopped from denying from the truth of his statement earlier made. The CIT(A) has rightly invoked the provisions of Sec. 115 of the Evidence Act;

++ the assessee has placed strong reliance on the sale transaction which has been routed through Demat account and has been executed through BSE. There is no dispute that the sale consideration was received by the assessee from the sale of shares. What is disputed is that whether they were actually purchased on the purported date as claimed by the assessee. This raises the question whether the apparent can be considered as the real. As laid down by the Supreme Court in the case of CIT Vs Durga Prasad More, the apparent must be considered as real only it is shown that there are reasons to believe that the apparent is not the real and that too taxing authorities are entitled to look into the surrounding circumstances to find out the reality and the matter has to be considered by applying the test of human probability. For this preposition we draw support from the decision of the Supreme Court in the case of Sumati Dayal v/s CIT;

++ therefore, the present case has to be considered in the light of human probability. The transaction about purchases of shares in physical form of such companies whose share prices have been rigged by some fraudulent operators cannot have any direct evidences. An inference about such a purchase connived with such companies have to be drawn on the basis of the circumstances available on the record. As pointed out, the shares have been transferred within 4 days of the date of purchases raises ample doubt about the credibility of the company. As pointed out in all probabilities, the company must have been involved in such fraudulent transactions. Post year 2000, it is improbable that any person would transact in shares by taking physical delivery of the shares. When many instances have been surfaced relating to bad delivery or bogus scrips, the regulatory authorities have made it compulsory to transact through Demat account;

++ having regard to the circumstances and the conduct of the assessee as disclosed in his statement u/s. 132(4) of the Act as well as other material on record, inference could be reasonably drawn that the shares purchased by the assessee have been backdated to give it a colour of Long term capital gain by showing the period of holding for more than 12 months. Needless to say that income tax proceedings are civil proceedings and the degree of proof required is by preponderance of probabilities, therefore applying the test of preponderance of probabilities and considering the entire sequence of events, the Revenue authorities have rightly concluded that the assessee’s claim about the long term capital gains from the sale of shares is not genuine;

++ as we have decided ground No. 1 on preponderance of probabilities then taking a leaf out of our findings, there is no doubt that such transactions involve certain money paid to the operators/arrangers of such fraudulent capital gains. The Revenue authorities have reasonably calculated 5% of the sale consideration. Therefore, no interference is called for. Ground No. 2 is accordingly dismissed.